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 June 30, 2013


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.) 

   
555 California Street, Suite 365, San Francisco, CA 94104
(Address of Principal Executive Offices) (Zip Code)

 

(415) 568-2245

(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 August 4, 2013, the registrant had 18,481,308 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 21
     
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 28
     
ITEM 4. Mine Safety Disclosures 29
     
ITEM 5. Other Information 29
     
ITEM 6. Exhibits 30
     
Signatures   31

 

2
 

 

PART I — FINANCIAL INFORMATION

ITEM 1 — Financial Statements

   

MEDGENICS, INC. AND ITS SUBSIDIARY

(A Development Stage Company)

 

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2013

 

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 - 8
   
Consolidated Statements of Cash Flows 9 - 10
   
Notes to the Interim Consolidated Financial Statements 11 - 20

 

3
 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

(A Development Stage Company)

CONSOLIDATED BALANCE SHEETS

 

U.S. dollars in thousands

 

    June 30,     December 31,  
    2013     2012     2012  
    (Unaudited)        
ASSETS                        
                         
CURRENT ASSETS:                        
                         
Cash and cash equivalents   $ 28,979     $ 9,040     $ 6,431  
Accounts receivable and prepaid expenses     1,818       1,702       539  
                         
Total current assets     30,797       10,742       6,970  
                         
LONG-TERM ASSETS:                        
                         
Restricted lease deposits     43       57       62  
Severance pay fund     243       264       283  
Property and equipment, net     410       407       352  
                   
Total long-term assets     696       728       697
                         
DEFERRED ISSUANCE EXPENSES     -       -       40  
                         
Total assets   $ 31,493     $ 11,470     $ 7,707  

 

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

 

4
 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

(A Development Stage Company)

CONSOLIDATED BALANCE SHEETS

 

U.S. dollars in thousands

 

    June 30,     December 31,  
    2013     2012     2012  
    (Unaudited)        
                   
LIABILITIES AND STOCKHOLDERS' EQUITY                        
                         
CURRENT LIABILITIES:                        
                         
Trade payables   $ 901     $ 917     $ 877  
Other accounts payable and accrued expenses     1,425       1,249       1,473  
                         
Total current liabilities     2,326       2,166       2,350  
                         
LONG-TERM LIABILITIES:                        
                         
Accrued severance pay     1,446       1,387       1,492  
Liability in respect of warrants     654       4,107       1,931  
                         
Total long-term liabilities     2,100       5,494       3,423  
                         
Total liabilities     4,426       7,660       5,773  
                         
STOCKHOLDERS' EQUITY:                        
                         
Common stock - $ 0.0001 par value; 100,000,000 shares authorized; 18,481,308, 11,746,251 and 12,307,808 shares issued and outstanding at June 30, 2013, June 30, 2012 and December 31, 2012, respectively     2       1       1  
Additional paid-in capital     97,419       62,972       66,509  
Deficit accumulated during the development stage     (70,354 )     (59,163 )     (64,576 )
                         
Total stockholders' equity     27,067       3,810       1,934  
                         
Total liabilities and stockholders' equity   $ 31,493     $ 11,470     $ 7,707  

 

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

 

5
 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

 

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

 

    Six months ended
June 30,
    Three months ended
June 30,
    Period
from
January 27,
2000
(inception)
through
June 30,
 
    2013     2012     2013     2012     2013  
    Unaudited  
                               
Research and development expenses   $ 4,104     $ 3,231     $ 2,073     $ 1,639     $ 41,733  
                                         
Less - Participation by the Office of the Chief Scientist     (1,218 )     (1,486 )     (1,218 )     (464 )     (8,267 )
U.S. Government grant     -       -       -       -       (244 )
Participation by third party     -       -       -       -       (1,067 )
                                         
Research and development expenses, net     2,886       1,745       855       1,175       32,155  
                                         
General and administrative expenses     4,134       4,133       1,588       2,774       37,729  
                                         
Other income:                                        
Excess amount of participation in research and development from third party     -       -       -       -       (2,904 )
                                         
Operating loss     (7,020 )     (5,878 )     (2,443 )     (3,949 )     (66,980 )
                                         
Financial expenses     (39 )     (3,773 )     (25 )     (2,972 )     (4,072 )
Financial income     1,286       1       371       17       369  
                                         
Loss before taxes on income     (5,773 )     (9,650 )     (2,097 )     (6,904 )     (70,683 )
                                         
Taxes on income     5       8       2       8       100  
                                         
Loss   $ (5,778 )   $ (9,658 )   $ (2,099 )   $ (6,912 )   $ (70,783 )
                                         
Basic loss per share   $ (0.34 )   $ (0.98 )   $ (0.11 )   $ (0.69 )        
                                         
Diluted loss per share   $ (0.42 )   $ (0.98 )   $ (0.11 )   $ (0.69 )        
                                         
Weighted average number of Common stock used in computing basic loss per share     16,850,657       9,893,072       18,410,951       10,032,760          
Weighted average number of Common stock used in computing diluted loss per share     16,895,741       9,893,072       18,410,951       10,032,760          

 

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

 

6
 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

 

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

 

    Common stock     Additional
paid-in
capital
    Deficit
accumulated
during the
development
stage
    Total
stockholders'
equity
 
    Shares     Amount                    
                               
Balance as of  December 31, 2011     9,722,725     $ 1     $ 52,501     $ (49,505 )   $ 2,997  
                                         
Stock based compensation related to issuance of restricted common stock, January 2012     35,000       (* )     55       -       55  
Issuance of Common stock to consultants at $ 4.84 and $ 8.79 per share, March and June 2012     30,000       (* )     204       -       204  
Issuance of Common stock and warrants at $ 4.90 per unit, net, June 2012     1,944,734       (* )     8,407       -       8,407  
Exercise of  options and warrants, January through June 2012     13,792       (* )     117       -       117  
Stock based compensation related to options and warrants  granted to consultants and employees     -       -       1,688       -       1,688  
Loss     -       -       -       (9,658 )     (9,658 )
                                         
Balance as of  June 30, 2012 (Unaudited)     11,746,251     $ 1     $ 62,972     $ (59,163 )   $ 3,810  

 

(*) 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

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

 

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

 

    Common stock     Additional
paid-in
capital
    Deficit
accumulated
during the
development
stage
    Total
stockholders'
equity
 
    Shares     Amount                    
                               
Balance as of  December 31, 2012     12,307,808     $ 1     $ 66,509     $ (64,576 )   $ 1,934  
                                         
Issuance of Common stock and warrants at $ 5.24 per share and $ 0.01 per warrant, net of issuance costs in the amount of $ 3,050     6,070,000       1       28,820       -       28,821  
Stock based compensation related to Common stock to consultants at $ 7.25 per share (**)     55,000       (*)       494       -       494  
Issuance and vesting of restricted common stock     45,000       (*)       274       -       274  
Exercise of  warrants and options     3,500       (*)       13       -       13  
Stock based compensation related to options and warrants granted to consultants and employees     -       -       1,309       -       1,309  
Loss     -       -       -       (5,778 )     (5,778 )
                                         
Balance as of  June 30, 2013 (unaudited)     18,481,308     $ 2     $ 97,419     $ (70,354 )   $ 27,067  

 

(*) Represents an amount lower than $1.

(**) Includes stock based compensation for an additional 25,000 shares which were not issued as of June 30, 2013.

 

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

 

8
 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

U.S. dollars in thousands

 

    Six months ended
June 30,
    Period from
January 27, 2000
(inception)
through
June 30,
 
    2013     2012     2013  
    Unaudited  
                   
CASH FLOWS FROM OPERATING ACTIVITIES:                        
                         
Loss   $ (5,778 )   $ (9,658 )   $ (70,783 )
                         
Adjustments to reconcile loss to net cash used in operating activities:                        
                         
Depreciation     84       72       1,310  
Loss from disposal of property and equipment     -       -       330  
Stock based compensation to employees and consultants     2,077       1,947       12,262  
Interest and amortization of beneficial conversion feature of convertible note     -       -       759  
Change in fair value of convertible debentures and warrants     (1,277 )     3,717       2,701  
Accrued severance pay, net     (6 )     54       1,203  
Exchange differences on a restricted lease deposit and on long term loan     1       -       2  
Increase in accounts receivable and prepaid expenses     (1,256 )     (580 )     (1,835 )
Increase in trade payables     24       15       1,505  
Increase (decrease)  in other accounts payable and accrued expenses     (48 )     93       1,972  
                         
Net cash used in operating activities     (6,179 )     (4,340 )     (50,574 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES:                        
                         
Purchase of property and equipment     (142 )     (45 )     (2,224 )
Proceeds from disposal of property and equipment     -       -       173  
Increase in restricted lease deposit     (5 )     (5 )     (65 )
                         
Net cash used in investing activities   $ (147 )   $ (50 )   $ (2,116 )

 

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

 

9
 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

(A Development Stage Company)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

U.S. dollars in thousands

 

    Six months ended
June 30,
    Period from
January 27, 2000
(inception)
through
June 30,
 
    2013     2012     2013  
    Unaudited  
CASH FLOWS FROM FINANCING ACTIVITIES:                        
                         
Proceeds from issuance of shares and warrants, net   $ 28,821     $ 8,407     $ 71,769  
Deferred issuance expenses     40       -       -  
Proceeds from exercise of options and warrants, net     13       28       2,735  
Repayment of a long-term loan     -       -       (73 )
Proceeds from long term loan     -       -       70  
Issuance of a convertible debenture and warrants     -       -       7,168  
                         
Net cash provided by financing activities     28,874       8,435       81,669  
                         
Increase  in cash and cash equivalents     22,548       4,045       28,979  
                         
Balance of cash and cash equivalents at the beginning of the period     6,431       4,995       -  
                         
Balance of cash and cash equivalents at the end of the period   $ 28,979     $ 9,040     $ 28,979  
                         
Supplemental disclosure of cash flow information:                        
                         
Cash paid during the period for:                        
                         
Interest   $ -     $ -     $ 242  
                         
Taxes   $ 5     $ 31     $ 153  
                         
Supplemental disclosure of non-cash flow information:                        
                         
Issuance expenses paid with shares   $ -     $ -     $ 310  
                         
Issuance of Common stock upon conversion of a convertible debenture   $ -     $ -     $ 8,430  
                         
Classification of liability in respect of warrants into equity due to the exercise of warrants   $ -     $ 89     $ 2,014  

 

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

 

10
 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

(A Development Stage Company)

 

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. (formerly Biogenics 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 and are thus considered development stage companies as defined in Accounting Standards Codification ("ASC") topic number 915, "Development Stage Entities" ("ASC 915").

 

On December 4, 2007 the Company's Common stock was admitted for trading on the AIM market of the London Stock Exchange.

 

On April 13, 2011 the Company completed an Initial Public Offering ("IPO") of its Common stock on the NYSE MKT (formerly NYSE Amex), raising $ 10,389 in net proceeds.

 

In February 2013, the Company closed an underwritten public offering of 5,600,000 shares of Common stock and Series 2013-A warrants to purchase up to an aggregate of 2,800,000 shares of Common stock. The shares and the warrants were sold together as a fixed combination, each consisting of one share of Common stock and a warrant to purchase one-half of a share of Common stock, at a price to the public of $ 5.25 per fixed combination. In March 2013, the underwriters exercised their option to purchase 470,000 shares of Common stock at $ 5.24 per share and 840,000 warrants to purchase 420,000 shares of Common stock at $ 0.01 per warrant. Gross proceeds were $ 31,871 or approximately $ 28,821 in net proceeds after deducting underwriting discounts and commissions of $ 2,550 and other offering costs of approximately $ 500.

 

b. The Company and the Subsidiary are in the development stage. As reflected in the accompanying financial statements, the Company incurred a loss for the six month period ended June 30, 2013 of $ 5,778 and had a negative cash flow from operating activities of $ 6,179 during the six month period ended June 30, 2013. The accumulated deficit as of June 30, 2013 is $ 70,354. The Company and the Subsidiary have not yet generated revenues from product sale. The Company previously generated income from partnering on development programs and expects to pursue its partnering activity. Management's plans also include seeking additional investments and commercial agreements to continue the operations of the Company and the Subsidiary.

 

The Company believes that the net proceeds of the underwritten public offering in February 2013, plus its existing cash and cash equivalents, should be sufficient to meet its operating and capital requirements through 2014.

 

11
 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

(A Development Stage Company)

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

NOTE 1:- GENERAL (CONT.)

  

c. In May 2013, the Subsidiary received approval for an additional Research and Development program from the Office of the Chief Scientist in Israel (“OCS”) for the period December 2012 through November 2013. The approval allows for a grant of up to approximately $2,000 based on research and development expenses, not funded by others, of up to $3,660. As of June 30, 2013, $1,218 has been recorded as grants receivable. In July 2013, subsequent to the balance sheet date, $65 has been received.

  

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 of America 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, 2012 ("2012 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 2012 Form 10-K, have been omitted.

 

12
 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

(A Development Stage Company)

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

NOTE 3:- STOCKHOLDERS' EQUITY

 

a. General:

 

In March 2013, the Compensation Committee of 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 3,855,802 shares of Common stock, subject to stockholder approval. The Company’s stockholders approved the amendment at the Company’s annual meeting of stockholders on April 30, 2013.

 

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

 

1. In January 2013, the Company granted 15,000 options and 7,000 shares of restricted Common stock to each of 5 non-executive Directors of the Company. These shares of Common stock are restricted in that they may not be disposed of and are not entitled to dividends. 50% of these shares were vested the day after the grant and 50% will vest one year from the grant date. All of the options are for a term of 10 years, vest in three equal installments and have an exercise price of $ 7.25. These options and shares of restricted Common stock were granted under the stock incentive plan. The fair value of these options and shares of restricted Common stock at the grant date was $ 4.449 per option and $ 7.50 per share. The Company recorded compensation expenses in the amount of $ 246 in the six months ended June 30, 2013.

 

2. In March 2013, the Company granted 10,000 shares of restricted Common stock to an employee. These shares are restricted in that they may not be disposed of and are not entitled to dividends. These restrictions will be removed in relation to 5,000 shares of Common stock on each of March 28, 2014 and March 28, 2015. The shares were issued under the stock incentive plan. The fair value of these shares of restricted Common stock at the grant date amounted to $ 49, and will be recognized as an expense using the straight line method.

 

13
 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

(A Development Stage Company)

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

NOTE 3:- STOCKHOLDERS' EQUITY (Cont.)

 

b. Issuance of stock options, warrants and restricted shares to employees and directors: (cont.)

 

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

 

Restricted shares   Six months ended
June 30, 2013
 
       
Number of restricted shares as of  December 31, 2012     60,357  
         
Vested     (35,000 )
Granted     45,000  
         
Number of restricted shares as of  June 30, 2013     70,357  

 

3. In March 2013, an employee exercised options to purchase 3,500 shares of Common Stock at $ 3.64 per share or an aggregate exercise price of $ 13.

 

4. In March 2013, the Company granted to employees of the Company options to purchase 110,000 shares of common stock exercisable at an exercise price of $ 4.85 per share. The options have a 10 year term and vest in four equal annual tranches. The options were granted under the stock incentive plan. The fair value of these options at the grant date was $ 290.

 

5. In March 2013, the Company announced the appointment of a new member of the Board of Directors effective March 15, 2013. In connection with the appointment, the new board member was awarded stock options covering up to 300,000 shares of the Company's common stock, at a per share exercise price of $ 4.99, subject to approval by the NYSE MKT of an additional listing application covering the issuance of the shares underlying such options. On April 12, 2013, prior to approval by the NYSE MKT of the additional listing application, the Compensation Committee of the Company's Board of Directors determined instead to issue such options under the Company's stock incentive plan. 100,000 shares underlying such options vested immediately upon issuance in April 2013 and the remaining underlying shares will vest equally on each of March 15, 2014 and March 15, 2015, subject to continuous service through each vesting date. The options may only be exercised for cash and will expire on March 15, 2018. The Company recorded related expenses in the amount of $ 322 in the six months ended June 30, 2013.

 

14
 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

(A Development Stage Company)

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

NOTE 3:- STOCKHOLDERS' EQUITY (Cont.)

 

b. Issuance of stock options, warrants and restricted shares to employees and directors: (cont.)

 

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

  

    Six months ended 
June 30, 2013
 
    Number of
options and
warrants
    Weighted
average
exercise price
    Weighted
average
remaining
contractual
terms (years)
    Aggregate
intrinsic value
price
 
                         
Outstanding at December 31, 2012     2,656,587     $ 6.04                  
                                 
Granted     485,000     $ 5.31                  
                                 
Expired/Forfeited     (28,994 )   $ 5.41                  
                                 
Exercised     (3,500 )   $ 3.64                  
                                 
Outstanding at June 30, 2013     3,109,093     $ 5.93     $ 4.85     $ 1,646  
                                 
Vested and expected to vest at  June 30, 2013     3,054,379     $ 5.92     $ 4.82     $ 1,637  
                                 
Exercisable at June  30, 2013     2,014,806     $ 5.46     $ 3.86     $ 1,481  

  

As of June 30, 2013, there was $ 2,829 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 1.7 years.

 

The aggregate intrinsic value represents the total intrinsic value (the difference between the Company's Common share fair value as of June 30, 2013 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2013.

 

Calculation of aggregate intrinsic value is based on the share price of the Company's Common stock as of June 30, 2013 ($ 3.80 per share, as reported on the NYSE MKT).

 

15
 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

(A Development Stage Company)

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

NOTE 3:- STOCKHOLDERS' EQUITY (Cont.)

 

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

 

1. In January 2013, the Company issued a total of 55,000 shares of Common stock to two consultants. Total compensation, measured as the grant date fair market value of the stock, amounted to $ 494 and was recorded as an operating expense in the Statement of Operations. As part of the agreement with the consultant, the Company has an obligation to issue an additional 25,000 shares for services received during the six month period ended June 30, 2013.

 

2. In March 2013, the Company approved the grant to two consultants of warrants to purchase a total of 25,000 shares at an exercise price of $ 4.99 per share. The warrants have a five year term and vested immediately upon issuance in April 2013. Total compensation amounted to $ 80 and was recorded as an operating expense in the Statement of Operations.

 

3. In June 2013, the Company entered into an agreement with a consultant for a period of 24 months. Under the terms of the agreement, the Company will issue warrants to purchase 100,000 shares at an exercise price at the market price of the issue, with a five year term and will be immediately exercisable upon issuance. Total compensation of $10 was recorded as an operating expense in the Statement of Operations.

 

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

 

    Six months ended 
June 30, 2013
 
    Number of
options and
warrants
    Weighted
average
exercise price
    Weighted
average
remaining
contractual
terms (years)
    Aggregate
intrinsic value
price
 
                         
Outstanding at December 31, 2012     521,904     $ 7.29                  
                                 
Granted     25,000     $ 4.99                  
                                 
Outstanding at June 30, 2013     546,904     $ 7.17     $ 4.34     $ 7  
                                 
Exercisable at June  30, 2013     466,667     $ 7.04     $ 3.63     $ 7  

 

16
 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

(A Development Stage Company)

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

NOTE 3:- STOCKHOLDERS' EQUITY (Cont.)

 

c. Issuance of shares, stock options and warrants to consultants: (cont.)

 

As of June 30, 2013, there was $ 382 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 one year.

 

Calculation of aggregate intrinsic value is based on the share price of the Company's Common stock as of June 30, 2013 ($ 3.80 per share, as reported on the NYSE MKT).

 

d. Compensation expenses:

 

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

 

    Six months ended
June 30,
    Three months ended
June 30,
 
    2013     2012     2013     2012  
                         
Research and development expenses   $ 66     $ 98     $ 42     $ 72  
General and administrative expenses     2,011       1,849       580       1,626  
                                 
    $ 2,077     $ 1,947     $ 622     $ 1,698  

 

17
 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

(A Development Stage Company)

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

NOTE 3:- STOCKHOLDERS' EQUITY (CONT.)

 

e. Summary of options and warrants:

 

A summary of all the options and warrants outstanding as of June 30, 2013 is presented in the following table:

 

    As of June 30, 2013  
Options / Warrants   Exercise
Price per
Share ($)
    Options and
Warrants
Outstanding
    Options and
Warrants
Exercisable
    Weighted
Average
Remaining
Contractual
Terms (in years)
 
                         
Options:                                
                                 
Granted to Employees and Directors     2.49-3.14       499,806       294,556       6.2  
      3.64-4.99       453,629       105,057       6.0  
      5.13-7.25       163,967       37,240       8.4  
      8.19-14.50       1,109,451       695,713       4.6  
              2,226,853       1,132,566          
                                 
Granted to Consultants                                
      4.20-5.34       53,988       43,801       3.0  
      6.65-8.19       119,916       61,158       7.8  
      14.50       11,292       -       8.6  
              185,196       104,959          
                                 
Total Options             2,412,049       1,237,525          
                                 
Warrants:                                
                                 
Granted to Employees and Directors     2.49       882,240       882,240       2.8  
                                 
Granted to Consultants     3.19-4.01       61,370       61,370       2.9  
      4.99       31,635       31,635       4.4  
      5.50       67,230       67,230       0.4  
      9.17-11.16       201,473       201,473       4.0  
              361,708       361,708          
                                 
Granted to Investors                                
      0.0002       35,922       35,922       2.8  
      2.49       22,950       22,950       2.8  
      4.54-6.00       3,233,521       3,233,521       2.7  
      6.78-8.34       4,678,550       4,678,550       4.4  
              7,970,943       7,970,943          
                                 
Total Warrants             9,214,891       9,214,891          
                                 
Total  Option and  Warrants             11,626,940       10,452,416          

 

18
 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

(A Development Stage Company)

 

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 will be remeasured at each reporting period until exercised or expired. Changes in the fair value of these warrants are reported in the statements of operations as financial income or expense.

 

The fair value of these warrants was estimated at June 30, 2013 and December 31, 2012 using the Binomial pricing model with the following assumptions:

 

    June 30, 
2013
    December 31,
2012
 
             
Dividend yield     0 %     0 %
Expected volatility     79.14 %     78.1 %
Risk-free interest rate     0.43 %     0.3 %
Contractual life (in years)     2.23       2.7  

 

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, 2011   $ 478  
         
Classification of liability in respect of warrants into equity due to the exercise of warrants     (883 )
Change in the fair value of liability in respect of warrants     2,336  
         
Balance as of December 31, 2012     1,931  
         
Change in the fair value of liability in respect of warrants     (1,277 )
         
Balance as of June 30, 2013 (unaudited)   $ 654  

 

19
 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

(A Development Stage Company)

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

NOTE 5:- LOSS PER SHARE

 

Details in the computation of diluted loss per share:

 

    Six months ended June 30,  
    2013     2012  
    Weighted
average
number of
shares
    Loss     Weighted
average
number of
shares
    Loss  
                                 
For the computation of basic loss     16,850,657     $ 5,778       9,893,072     $ 9,658  
                                 
Effect of potential dilutive common shares issuable upon exercise of warrants classified as liability     45,084     $ 1,277 (**)     - (*)     - (*)
                                 
For the computation of diluted loss     16,895,741     $ 7,055       9,893,072     $ 9,658  

 

    Three months ended June 30,  
    2013     2012  
    Weighted
Average
number of
shares
    Loss     Weighted
Average
number of
shares
    Loss  
                                 
For the computation of basic and diluted loss     18,410,951     $ 2,099       10,032,760     $ 6,912  

 

(*) 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 10,289,103 and 6,507,183 for the six months ended June 30, 2013 and 2012, respectively.

 

- - - - -

 

20
 

 

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, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” 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 management. 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, 2012, 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 medical technology and therapeutics company, developing an innovative and proprietary platform technology offering what we believe to be a novel approach for the $100+ billion protein therapeutics market. Our Biopump Platform Technology is designed to provide sustained protein therapy to treat a range of chronic diseases and conditions.

 

Since our inception on January 27, 2000, we have focused our efforts on research and development and clinical trials and have received no revenue from product sales.  We have funded our operations principally through equity and debt financings, participation from the Office of the Chief Scientist (OCS) in Israel and a collaborative agreement.  Our operations to date have been primarily limited to organizing and staffing our company, developing the Biopump Platform Technology and its applications, developing and initiating clinical trials for our product candidates, and improving and maintaining our patent portfolio.

 

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 have incurred net losses of approximately $5.78 million and $70.78 million for six month period ended June 30, 2013 and for the period from inception through June 30, 2013, respectively. As of June 30, 2013, we had stockholders’ equity of approximately $27.07 million.  We are unable to predict the extent of any future losses or when we will become profitable, if at all.

 

Although we have not yet generated revenues from product sales, we have generated income from partnering on development programs and we expect to continue to pursue partnering activity.

 

21
 

  

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, benefits, travel, and related costs 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. Through June 30, 2013, we incurred approximately $41.73 million in gross research and development expenses since our inception on January 27, 2000. 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 development of our two most advanced product candidates, the EPODURE Biopump and the INFRADURE Biopump, and 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 currently focusing on the development of EPODURE and INFRADURE, as well as the optimization of Biopump performance and, as a result, have scaled back our efforts in some areas including HEMODURE at this time.

 

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. Since our inception on January 27, 2000 through June 30, 2013, we spent approximately $37.73 million on general and administrative expense.

 

Other Income

 

We have not generated any product revenue since our inception, but, in connection with our first collaboration agreement, we received $3.97 million from Baxter Healthcare through December 31, 2011 of which $2.9 million was recognized as other income. To date, we have funded our operations primarily through equity and debt financings and funding from the Israeli OCS. If our product development efforts result in clinical success, regulatory approval and successful commercialization of any of our products, we would expect to generate revenue from sales or licenses of any such products.

 

Financial Income and Expense

 

Financial expense consists primarily of interest and amortization of beneficial conversion feature of convertible note, convertible debentures valuations, warrant valuations and interest incurred on debentures.

 

Financial income consists primarily of interest earned on our cash and cash equivalents and marketable securities.

  

22
 

  

Results of Operations for the Six Months Ended June 30, 2013 and 2012

 

Research and Development Expenses

 

Gross research and development expenses for the six months ended June 30, 2013 were $4.10 million, increasing from $3.23 million for the same period in 2012 due mainly to an increase in research and development personnel.

 

Research and development expenses, net for the six months ended June 30, 2013 were $2.89 million, increasing from $1.75 million for the same period in 2012. The increase in the research and development expenses, net was due to the participation by the OCS of $1.22 million in the six months ended June 30, 2013 as opposed to $1.49 million in the same period in 2012 and by the increase in the gross research and development expenses as explained above.

 

General and Administrative Expenses

 

General and administrative expenses for the six months ended June 30, 2013 were $4.13 million remaining constant as compared to the same period in 2012.

 

23
 

 

Financial Income and Expenses

 

Financial expenses for the six months ended June 30, 2013 were $0.04 million, decreasing from $3.77 million for the same period in 2012. This decrease of $3.73 million was mainly due to the change in valuation of the warrant liability.

 

Financial income for the six months ended June 30, 2013 was $1.29 million, increasing from a de minimis amount for the same period in 2012. The increase was primarily due to the change in valuation of the warrant liability.

 

Results of Operations for the Three Months Ended June 30, 2013 and 2012

 

Research and Development Expenses

 

Gross research and development expenses for the three months ended June 30, 2013 were $2.07 million, increasing from $1.64 million for the same period in 2012 due mainly to an increase in research and development personnel.

 

Research and development expenses, net for the three months ended June 30, 2013 were $0.86 million, decreasing from $1.18 million for the same period in 2012. The decrease in the research and development expenses, net was due to the participation by the OCS of $1.22 million in the three months ended June 30, 2012 as compare to $0.46 million in the same period in 2012 and by the increase in the gross research and development expenses as explained above.

 

General and Administrative Expenses

 

General and administrative expenses for the three months ended June 30, 2013 were $1.59 million, decreasing from $2.77 million for the same period in 2012 primarily due to decreased stock-based compensation expenses related to options and restricted shares granted to directors and consultants.

 

24
 

 

Financial Income and Expenses

 

Financial expenses for the three months ended June 30, 2013 were $0.03 million, decreasing from $2.97 million for the same period in 2012. This decrease was mainly due to the change in valuation of the warrant liability.

 

Financial income for the three months ended June 30, 2013 was $0.37 million, increasing from $0.02 million for the same period in 2012. This increase was primarily 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, debt issues and grants from the OCS and other third parties.

 

We recorded $8.27 million from inception through June 30, 2013 from the OCS in development grants of which nil was received during the six months ended June 30, 2013, and $0.07 million was received in July 2013, subsequent to the balance sheet date.

 

On February 13, 2013, we completed a registered public offering of 5,600,000 shares of common stock and 5,600,000 Series 2013-A warrants to purchase up to an aggregate of 2,800,000 shares of common stock. The shares of common stock and Series 2013-A warrants were sold together as a fixed combination, each consisting of one share of common stock and one Series 2013-A warrant to purchase 0.50 of a share of common stock, at a public offering price of $5.25 per combination, less the underwriting discounts and commissions payable by us, for net proceeds of approximately $26.55 million. We granted the underwriters the option to purchase, at the same price, an aggregate of up to an additional 840,000 shares of common stock and/or an additional 840,000 Series 2013-A warrants to purchase up to 420,000 shares of common stock as may be necessary to cover over-allotments made in connection with the offering. The underwriters exercised this option in March 2013 with respect to an additional 470,000 shares of common stock and an additional 840,000 Series 2013-A warrants to purchase up to 420,000 shares of common stock, for additional net proceeds of approximately $2.27 million.

 

On June 18, 2012, we completed a private placement transaction in which we issued an aggregate of 1,944,734 units with each unit consisting of one share of our common stock and a warrant to purchase 0.75 shares of our common stock. The warrants to purchase an aggregate of 1,458,550 shares of common stock were issued with an exercise price of $8.34 per share and became exercisable on December 15, 2012 (which, if all were exercised in full, would result in the issuance of 1,458,576 shares of common stock due to the rounding of fractional shares) and will expire on June 18, 2017. In addition, warrants to purchase 194,473 shares of our common stock having an exercise price of $9.17 per share were issued to the placement agent, became exercisable on December 18, 2012 and will expire on June 18, 2017. Each unit was sold for a purchase price of $4.90 for total gross proceeds of approximately $9.53 million, or approximately $8.41 million in net proceeds after deducting private placement fees of $0.95 million and other offering costs of $0.17 million.

 

Cash Flows

 

We had cash and cash equivalents of $28.98 million at June 30, 2013 and $6.43 million at December 31, 2012. The increase in our cash balance during the six months ended June 30, 2013 was primarily the result of our registered public offering of common stock and Series 2013-A warrants during the period.

 

25
 

 

Net cash used in operating activities of $6.18 million for the six months ended June 30, 2013 and $4.34 million for the six months ended June 30, 2012 primarily reflected our cash expenses for our operations.

 

Net cash used in investing activities of $0.15 million for the six months ended June 30, 2013 and $0.05 million for the six months ended June 30, 2012 relates mainly to our purchases of property and equipment.

 

Net cash provided by financing activities was $28.87 million and $8.44 million for the six months ended June 30, 2013 and 2012, respectively. Our cash flows from financing activities during the six months ended June 30, 2013 were primarily the result of our registered public offering of common stock and Series 2013-A warrants during the period. Our cash flows from financing activities during the six months ended June 30, 2012 were primarily proceeds from the private placement transaction in June 2012.

 

Funding Requirements

 

We expect to enter into licensing or other commercialization agreements for all or parts of applications of our Biopump Platform Technology to fund our continuing operations. If we are unable to enter into such agreements on terms acceptable to us, we will continue to incur losses from operations for the foreseeable future. We expect to incur increasing research and development expenses, including expenses related to the hiring of personnel and additional clinical trials, as we further develop the EPODURE Biopump, the INFRADURE Biopump and investigate additional applications of the Biopump. We expect that our general and administrative expenses will also increase as we expand our finance and administrative staff and add infrastructure. Our future capital requirements will depend on a number of factors, including 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 are pursuing, we believe that cash on hand, including the net proceeds we received from our public offering of common stock and Series 2013-A warrants during the three months ended March 31, 2013, will be sufficient to enable us to fund our operating expenses and capital expenditure requirements through 2014. 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; however, we do intend to seek licensing or other commercialization agreements for existing and new Biopump 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 over the next several quarters and years.

 

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 in the future. 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 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 will be remeasured at each reporting period until exercised or expired. The decrease in the fair value of the warrants during the six months ended June 30, 2013 of $1.28 million and the increase in the fair value of the warrants during the six months ended June 30, 2012 of $3.72 million are reported in the Statements of Operations as financial income and expenses, respectively.

 

We estimate the fair value of these warrants at the respective balance sheet dates using the Binomial option pricing model. We use 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 assumptions could differ significantly in the future, thus resulting in variability of the fair value which would impact the results of operations in the future.

 

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 six months ended June 30, 2013 and 2012, 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. Given the senior nature of the roles of our employees, directors and officers, we currently estimate that we will experience 5% annual forfeiture 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, 2012.

 

ITEM 3 — Quantitative and Qualitative Disclosures about Market Risk

 

Not required.

 

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 June 30, 2013, 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 June 30, 2013 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, 2012.

 

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

 

Recent Sales of Unregistered Securities

 

In the three months ended June 30, 2013, the following securities were sold by us without registration under the Securities Act in transactions which have not been previously described in a Current Report on Form 8-K. The securities described below were deemed exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act. There were no underwriters employed in connection with any of these transactions.

 

Warrants Issued

 

In April 2013, we issued warrants to purchase a total of 25,000 shares of Common stock with an exercise price of $4.99 per share to two consultants, initially approved in March 2013. The warrants have a five year term and vested immediately. Total compensation, measured at the grant date, amounted to $80,175 and was recorded as an operating expense in the Statement of Operations.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

None.

 

ITEM 3 — Defaults Upon Senior Securities

 

None.

 

28
 

 

ITEM 4 — Mine Safety Disclosures

 

Not applicable.

 

ITEM 5 — Other Information

 

None.

 

29
 

 

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   First Amendment of the Medgenics, Inc. Stock Incentive Plan (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 1, 2013 (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 (furnished herewith).

 

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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:  August 6, 2013 By: /s/ Andrew L. Pearlman
    Andrew L. Pearlman
    President and Chief Executive Officer
    (Principal Executive Officer)
     
     
Date:  August 6, 2013 By: /s/ Phyllis K. Bellin
    Phyllis K. Bellin
    Vice President – Administration
    (Principal Accounting and Financial Officer)

 

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