MEDGENICS, INC. AND ITS SUBSIDIARY

 (A Development Stage Company)

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

 

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 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 three month period ended March 31, 2013 of $3,679 and had a negative cash flow from operating activities of $2,800 during the three month period ended March 31, 2013. The accumulated deficit as of March 31, 2013 is $68,255. 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.

 

 

 

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.

 

 

 

NOTE 3:-      STOCKHOLDERS' EQUITY

 

A.              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 $188 in the three months ended March 31, 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.

 

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

Restricted shares		Three months ended March 31, 2013
Number of restricted shares as of  December 31, 2012		60,357
Vested		(35,000)
Granted		45,000
Number of restricted shares as of  March 31, 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. 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.   A summary of the Company's activity for options and warrants granted to employees and directors is as follows:

		Three months ended March 31, 2013
		Number of options and warrants		Weighted average exercise price		Weighted average remaining contractual terms (years)		Aggregate intrinsic value price
Outstanding at January 1, 2013		2,656,587		$             6.04
Granted		185,000		$             5.82
Forfeited		(3,571)		$             7.21
Exercised		(3,500)		$             3.64
Outstanding at March 31, 2013		2,834,516		$             6.03		5.08		$       3,146
Vested and expected to vest at March  31, 2013		2,774,118		$             5.98		5.04		$        3,124
Exercisable at March 31, 2013		1,626,558		$             4.50		3.94		$         2,722

 

As of March 31, 2013, there was $3,351 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted to employees. That cost is expected to be recognized over a weighted-average period of 2.0 years.

 

The aggregate intrinsic value represents the total intrinsic value (the difference between the Company's Common share fair value as of March 31, 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 March 31, 2013.

 

Calculation of aggregate intrinsic value is based on the share price of the Company's Common stock as of March 31, 2013 ($4.85 per share, as reported on the NYSE MKT).

 

 

B.      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 $462 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 13,000 shares for services received during the three month period ended March 31, 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.   A summary of the Company's activity for warrants and options granted to consultants is as follows:

		Three months ended March 31, 2013
		Number of options and warrants		Weighted average exercise price		Weighted average remaining contractual terms (years)		Aggregate intrinsic value price
Outstanding at January 1, 2013		521,904		$             7.29
Outstanding at March 31, 2013		521,904		$             7.29		4.57		$             73
Exercisable at March  31, 2013		419,908		$              7.20		3.54		$             73

 

As of March 31, 2013, there was $251 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 0.9 years.

 

Calculation of aggregate intrinsic value is based on the share price of the Company's Common stock as of March 31, 2013 ($4.85 per share, as reported on the NYSE MKT).

 

 

C.      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:

 

		Three months ended March 31,
		2013		2012
Research and development expenses	$	$             24		$           26
General and administrative expenses		1,431		96
		$       1,455		$          122

 

 

D.      Summary of options and warrants:

 

A summary of all the options and warrants outstanding as of March 31, 2013 is presented in the following table:

 

 

								As of March 31, 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				182,806					182,806				3.0
			2.66				75,000					25,000				8.8
			3.14				244,143					86,750				8.7
			3.64				32,200					2,200				8.3
			3.86				11,429					2,857				8.4
			4.85				110,000					-				10
			5.13				46,111					-				9.0
			5.31				23,280					23,280				0.2
			6.55				42,856					25,712				7.8
			7.25				75,000					-				9.8
			8.19				171,451					95,713				7.5
			9.25				18,000					-				9.5
			10.80				900,000					300,000				4.3
			14.50				20,000					-				9.3
							1,952,276					744,318
Granted to Consultants
			4.20				19,354					19,354				1.7
			5.13				15,280					-				9.0
			5.31				19,354					19,354				0.5
			6.65				31,780					19,068				7.7
			6.86				50,000					-				9.2
			8.19				38,136					25,424				7.5
			14.50				11,292					-				9.3
							185,196					83,200
Total Options							2,137,472					827,518

 

 

								As of March 31, 2013
Options / Warrants		Exercise  Price per  Share ($)				Options and  Warrants  Outstanding					Options and  Warrants  Exercisable				Weighted  Average  Remaining  Contractual Terms (in years)
Warrants:
Granted to Employees and Directors			2.49				882,240					882,240				3.0
Granted to Consultants			3.19				11,370					11,370				2.5
			4.01				50,000					50,000				3.3
			4.99				6,635					6,635				3.0
			5.57				67,230					67,230				0.7
			9.17				194,473					194,473				4.2
			11.16				7,000					7,000				4.3
							336,708					336,708
Granted to Investors
			0.0002				35,922					35,922				3.0
			2.49				22,950					22,950				3.0
			4.54				412,500					412,500				2.5
			4.99				57,291					57,291				3.0
			6.00				2,763,730					2,763,730				3.0
			6.78				3,220,000					3,220,000				4.9
			8.34				1,458,550					1,458,550				4.2
							7,970,943					7,970,943
Total Warrants							9,189,891					9,189,891
Total  Option and  Warrants							11,628,506					10,117,409

 

 

NOTE 4:-      FAIR VALUE MEASURMENTS

 

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 March 31, 2013 and December 31, 2012 using the Binomial pricing model with the following assumptions:

 

	March 31, 2013	December 31, 2012
Dividend yield	0%	0%
Expected volatility	77.5%	78.1%
Risk-free interest rate	0.3%	0.3%
Contractual life (in years)	2.5	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		(914)
Balance as of March 31, 2013 (unaudited)		1,017

 

 

NOTE 5:-      LOSS PER SHARE

 

Details in the computation of diluted loss per share:

		Three months ended March 31,
		2013				2012
		Weighted average number of shares		Loss		Weighted average number of shares		Loss
		15,222,268		$     3,679		9,753,725		$   2,712
For the computation of basic loss
Effect of potential dilutive common shares issuable upon exercise of warrants classified as liability		412,500		914 (**)		(*) -		(*) -
For the computation of diluted loss		15,634,768		$     4,593		9,753,725		$   2,712

 

(*)      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 9,264,499 and 6,287,832 for the three months ended March 31, 2013 and 2012, respectively.

 

 

NOTE 6:-      SUBSEQUENT EVENTS

 

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 expenses in the amount of $261 in March 2013.

 

 

- Ends -