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Medgenics Inc (MEDG)

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Thursday 20 February, 2014

Medgenics Inc

Medgenics Reports 2013 Financial Results

RNS Number : 5648A
Medgenics Inc
20 February 2014
 



 

 

 

Press Release

20 February 2014

 

 

Medgenics Reports 2013 Financial Results

 

Medgenics, Inc. (NYSE MKT: MDGN and AIM: MEDU, MEDG)(the "Company" or "Medgenics"), the developer of a novel platform technology for the sustained production and delivery of therapeutic proteins in patients using ex-vivo gene therapy and their own tissue for the treatment of rare and orphan diseases, today announced financial results for the fiscal year ended December 31, 2013 and the filing with the U.S. Securities and Exchange Commission ("SEC") of the Company's Annual Report on Form 10-K.

 

2013 and Recent Corporate Highlights

 

·     A new executive management team was appointed to reposition the company as a rare and orphan disease company and to accelerate the development of the Company's gene therapy platform and maximize the potential of the Company's technology assets. The new team includes:

President and Chief Executive Officer Michael Cola, formerly of Shire and Safeguard Scientifics.

Chief Financial Officer Dr. John Leaman, formerly of Shire and McKinsey & Company.

Global Head of Research & Development Dr. Garry Neil, formerly of Johnson & Johnson and Merck KGaA.

·    Medgenics welcomed to its Board of Directors, biopharmaceutical veteran and former Executive Chairman and Chief Executive Officer of Ovation Pharmaceuticals and the Pathogenesis Corporation and President of Baxter International, Wilbur "Bill" Gantz.

·    The Company announced a new corporate strategy focused on the treatment of orphan and rare diseases using the BiopumpTM technology.

·     Results were announced from a second generation viral vector and implantation protocol in a SCID mouse model that showed a 40-50 times increase in the amount of protein produced by the Biopump versus the first generation vector, and a duration of protein expression for greater than six months. Based upon these results, it has been decided to use the second generation viral vector in the Phase 1/2 EPODURE trial aimed to validate the Biopump platform's improved viability in clinical trials. This trial is expected to be initiated in the first half of 2014 with preliminary results expected in the second half of 2014. 

 

Management Discussion

 

"2013 has been an important transition year for us as we build a foundation and corporate strategy to position the Company for the future," stated Michael Cola, President and Chief Executive Officer of Medgenics. "Based on results to date, we've developed a second generation viral vector and Biopump™ protocol that shows more durable protein production in SCID mice, a model historically predictive of success in human clinical trials. We plan to utilize this new vector and protocol as we realign our research and development focus towards the orphan and rare disease market, where we feel the Biopump's attributes of continuous autologous protein/peptide production would be highly advantageous."

 

"Our objectives in 2014 will be twofold. First we plan to initiate the Phase 1/2 EPODURE™ trial for human proof-of-concept of the Biopump platform with the second-generation viral vector and protocol, and to replicate the SCID mouse results in humans. Secondly, we intend to obtain in-vitro and in-vivo preclinical data in human tummy-tuck tissue and SCID mice in several rare and orphan disease indications."

 

"To conclude, I am pleased to be executing this new strategy with a renowned Board of Directors led by Sol Barer, and the new management team we've assembled with the appointment of Garry Neil and John Leaman. I feel confident that with this team in place coupled with a strong balance sheet, we have the framework for a successful year."

 

2013 Financial Results

 

Medgenics reported a net loss of $17.13 million for the year ended December 31, 2013 or $0.97 basic loss per share and $1.06 diluted loss per share, compared with a net loss of $15.07 million or $1.37 per share for 2012.

 

Gross research and development expense for the year ended December 31, 2013 increased to $8.87 million from $7.19 million in 2012. The increase in expense was due to an increase in the use of materials and subcontractors in connection with human EPODURE clinical trials in Israel and preparation for human EPODURE clinical trials in the U.S., including ongoing method development, as well as an increase in research and development personnel.

 

Net research and development expense for the year ended December 31, 2013 was $7.30 million compared with $5.43 million in 2012. The increase was due to higher gross research and development expenses as detailed above, in addition to participation by the Office of the Chief Scientist of $1.57 million in 2013 compared with $1.76 million in 2012.

 

General and administrative expense for the year ended December 31, 2013 increased to $10.52 million from $7.20 million in 2012, primarily due to stock-based compensation expense related to equity granted to directors and executives upon their appointment in 2013, increased professional fees and increased activities in the U.S.

 

Financial expense for the year ended December 31, 2013 was $0.02 million, down from $2.43 million in 2012, mainly due to the change in valuation of the warrant liability due to the fluctuation in the market price of our common stock. Financial income for the year ended December 31, 2013 was $0.73 million, increasing from de minimis in 2012, which was primarily due to the change in valuation of the warrant liability.

 

As of December 31, 2013, the Company had $22.39 million in cash and cash equivalents, compared with $6.43 million as of December 31, 2012. Net cash used in operating activities during the year was $12.73 million compared with $8.62 million used in 2012.  During 2013 the Company received proceeds of $28.86 million from a registered public offering of common stock and warrants.

 

About Medgenics

 

Medgenics is developing and commercializing Biopump™, a proprietary tissue-based platform technology for the sustained production and delivery of therapeutic proteins using the patient's own tissue for the treatment of a range of chronic diseases including anemia and hepatitis, among others.  For more information, please visit www.medgenics.com.

 

 

 

Forward-looking Statements

 

This release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and as that term is defined in the Private Securities Litigation Reform Act of 1995, which include all statements other than statements of historical fact, including (without limitation) those regarding the Company's financial position, its development and business strategy, its product candidates and the plans and objectives of management for future operations. The Company intends that such forward-looking statements be subject to the safe harbors created by such laws. Forward-looking statements are sometimes identified by their use of the terms and phrases such as "estimate," "project," "intend," "forecast," "anticipate," "plan," "planning, "expect," "believe," "will," "will likely," "should," "could," "would," "may" or the negative of such terms and other comparable terminology. All such forward-looking statements are based on current expectations and are subject to risks and uncertainties. Should any of these risks or uncertainties materialize, or should any of the Company's assumptions prove incorrect, actual results may differ materially from those included within these forward-looking statements. Accordingly, no undue reliance should be placed on these forward-looking statements, which speak only as of the date made. The Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based. As a result of these factors, the events described in the forward-looking statements contained in this release may not occur.

 

 

For further information, contact:

Medgenics, Inc.

John Leaman, CFO

[email protected]

Abchurch Communications

Joanne Shears / Jamie Hooper / Harriet Rae

[email protected]abchurch-group.com

Phone: +44 207 398 7718

Oriel Securities (NOMAD & Broker)

Jonathan Senior / Giles Balleny

Phone: +44 207 710 7617

 

 

-ENDS-

 

 

 

 

 

-Tables to follow-

 

 



CONSOLIDATED BALANCE SHEETS

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

 





December 31,



Note


2012


2013








 ASSETS














 CURRENT ASSETS: 














 Cash and cash equivalents




$      6,431


$    22,390

 Accounts receivable and prepaid expenses


3


539


               202








 Total current assets 




6,970


22,592








 LONG-TERM ASSETS:














 Restricted lease deposits 


6(c)


62


42

 Severance pay fund




283


96

 Property and equipment, net


4


352


357

 Deferred issuance expenses




40


-








 Total long-term assets




737


495








 Total assets




$      7,707


$    23,087








 LIABILITIES AND STOCKHOLDERS' EQUITY














 CURRENT LIABILITIES:














 Trade payables




$          877


$      1,062

 Other accounts payable and accrued expenses 


5


1,473


1,952








 Total current liabilities 




2,350


3,014








 LONG-TERM LIABILITIES:














 Accrued severance pay




1,492


439

 Liability in respect of warrants 


11


1,931


1,211








 Total long-term liabilities




3,423


1,650








 Total liabilities




5,773


4,664








 COMMITMENTS AND CONTINGENCIES


6












 STOCKHOLDERS' EQUITY: 


7












 Common stock - $0.0001 par value; 100,000,000 shares authorized; 12,307,808 and 18,497,307 shares issued and outstanding at December 31, 2012 and 2013, respectively




1


2

 Additional paid-in capital 




66,509


100,126

 Deficit accumulated during the development stage




(64,576)


(81,705)








 Total stockholders' equity




1,934


18,423








 Total liabilities and stockholders' equity




$      7,707


$    23,087

 

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

 

CONSOLIDATED STATEMENTS OF LOSS

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

 





 

 

Year ended

December 31

 

 


Period from January 27, 2000 (inception) through December 31,



Note


2011


2012


2013


2013












 Research and development expenses




$     5,987 


$      7,187


$       8,870


$      46,499












 Less:











Participation by the Office of the Chief Scientist


2(l)


(860)


(1,756)


(1,573)


(8,622)

 U.S. Government Grant




-


-


-


(244)

Participation by third party


6(d)


(75)


-


-


(1,067)












 Research and development expenses, net




5,052


5,431


7,297


36,566












 General and administrative expenses




4,924


7,197


10,521


44,116












 Other income:











 Excess amount of participation in research and development from third party


6(d)


-


-


-


(2,904)












 Operating loss




(9,976)


(12,628)


(17,818)


(77,778)












 Financial expenses


9


(214)


(2,429)


(20)


(4,608)

 Financial income


9


2,097


5


726


364












 Loss before taxes on income




(8,093)


(15,052)


(17,112)


(82,022)












 Taxes on income


8(e)


3


19


17


112












 Loss




$    (8,096)


$  (15,071)


$      (17,129)


$     (82,134)












 Basic loss per share


12


$      (0.96)


$     (1.37)


$          (0.97)














 Diluted loss per share


12


$      (0.96)


$     (1.37)


$          (1.06)


 











 

 Weighted average number of shares of Common stock used in computing basic loss per share




8,447,908


11,023,881


17,629,436



 Weighted average number of shares of Common stock used in computing diluted loss per share




8,447,908


11,023,881


17,683,510



 

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

 


STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

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

 



Old Common stock


Series A Preferred stock


Additional paid-in capital


Deferred

stock compensation


Deficit accumulated during the development stage


Total stockholders' equity (deficit)

 



Shares


Amount


Shares


Amount









 


















Balance as of January 27, 2000 (inception)


-


$     -


-


$     -


$     -


$     -


$     -


$     -

 

Issuance of Old Common stock in  January and March 2000 at par value


59,133


(*)


-


-


-


-


-


(*)

 

Issuance of Old Common stock in August 2000 at $39.90 per share, net


12,512


  -


-


-


500


-


-


  500

 

Issuance of Old Common stock in respect of  license agreement in August 2000 at par value


26,884


  (*)


-


-


-


-


-


  (*)

 

Loss


-


-


-


-


-


-


(681)


(681)

 


















 

Balance as of December 31, 2000


98,529


 (*)


-


-


500


-


(681)


 (181)

 


















 

Stock split effected as stock dividend


-


 (*)


-


-


(*)


-


-


 -

 

Issuance of Preferred stock in January 2001 at $49.35 per share, net of issuance costs of $5


-


  -


3,957


(*)


195


-


-


  195

 

Issuance of Preferred stock in March and June 2001 at $58.45 per share, net of issuance costs of $192


-


  -


116,738


(*)


6,806


-


-


  6,806

 

Deferred stock compensation


-


-


-


-


248


(248)


-


-

 

Amortization of deferred stock compensation 


-


 -


-


-


-


41


-


 41

 

Stock based compensation  expense related to options to consultants


-


 -


-


-


511


-


-


 511

 

Loss


-


-


-


-


-


-


(3,244)


(3,244)

 


















 

 

Balance as of December 31, 2001


98,529


$     (*)


120,695


$     (*)


$    8,260


$     (207)


$     (3,925)


$      4,128   

 

 

(*)  Represents an amount lower than $1.

The accompanying notes are an integral part of the consolidated financial statement

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

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

 


Old Common

stock


Series A Preferred

stock


Series B Preferred

stock


Additional paid-in

capital


Deferred

stock compensation


Deficit accumulated during the development stage


Total stockholders' equity


Shares


Amount


Shares


Amount


Shares

Amount









 




















 

Balance as of December 31,  2001

98,529


$    (*)


120,695


$    (*)


 -

$    (*)


$   8,260


$    (207)


$    (3,925)


$    4,128

 




















 

Issuance of Preferred stock in October 2002 at   $68.95 per share, net of issuance costs of $89

-


  -


-


  -


  76,476

(*)


  5,264


  -


  -


  5,264

 

Deferred stock compensation 

-


-


-


-


-

-


64


(64)


-


-

 

Amortization of deferred stock compensation

-


 -


-


 -


 -

 -


 -


 67


 -


 67

 

Stock based compensation expenses related to options   to consultants

-


  -


-


  -


  -

  -


  371


  -


  -


  371

 

Loss

-


-


-


-


-

-


-


-


(5,049)


(5,049)

 




















 

Balance as of December 31, 2002

98,529


(*)


120,695


    (*)


 76,476

(*)


      13,959


(204)


(8,974)


        4,781

 




















 

Exercise of stock options

555


(*)


-


-


-

-


(*)


-


-


(*)

 

Issuance of Preferred stock in April and May 2003 at $70.00 per share, net of issuance costs of $97

-


  -


-


  -


30,485

(*)


2,037


-


-


2, 037

 

Deferred stock compensation

-


-


-


-


-

-


441


(441)


-


-

 

Amortization of deferred stock compensation

-


 -


-


 -


 -

 -


 -


 105


 -


 105

 

Stock based compensation expenses related to options to consultants

-


 -


-


 -


 -

 -


 475


 -


 -


 475

 

Loss

-


-


-


-


-

-


-


-


(5,038)


(5,038)

 




















 

Balance as of December 31, 2003

99,084


$    (*)


120,695


$     (*)


106,961

$    (*)


$   6,912


$     (540)


$ (14,012)


$     2,360

 

 

 (*)  Represents an amount lower than $1.

 

The accompanying notes are an integral part of the consolidated financial statement

 



STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

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

 

 

 


Old Common stock


Series A Preferred stock


Series B Preferred

stock


Additional paid-in capital


Deferred

stock compensation


Deficit accumulated during the development stage


Total stockholders' equity

(deficit)



Shares


Amount


Shares


Amount


Shares


Amount






























Balance as of December 31,  2003


99,084


$    (*)


120,695


$     (*)


106,961


$     (*)


$  16,912


$    (540)


$  (14,012)


$    2,360






















Exercise of stock options


364


(*)


-


-


-


-


(*)


-


-


(*)

Stock issued to service providers


952


(*)


-


-


-


-


10


-


-


10

 Amortization of deferred stock compensation


-


-


-


-


-


-


-


540


-


540

 Stock based compensation  expenses  related to options to consultants


-


-


-


-


-


-


347


-


-


347

Loss


-


-


-


-


-


-


-


-


(4,516)


(4,516)






















Balance as of December 31, 2004


100,400


(*)


120,695


(*)


106,961


(*)


17,269


-


(18,528)


(1,259)






















Loss


-


-


-


-


-


-


-


-


(776)


(776)






















Balance as of December 31, 2005


100,400


$   (*)


120,695


$     (*)


106,961


$    (*)


$ 17,269


$       -


$  (19,304)


$   (2,035)

 

(*)  Represents an amount lower than $1.

 

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

 



STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

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

 



Common stock


Old Common stock


Series A  Preferred stock


  Series B  Preferred stock


Additional paid-in

capital


Deficit accumulated during the development stage


Total stockholders' equity (deficit)



Shares


Amount


Shares


Amount


Shares


Amount


Shares


Amount






























Balance as of December 31, 2005


-


$     -


100,400


$   (*)


120,695


$    (*)


106,961


$     (*)


$    17,269


$    (19,304)


$     (2,035)
























Conversion of Old Common stock, Series A and Series B Preferred stock into Common stock


  282,452


(*)


(100,400)


(*)


(120,695)


(*)


(106,691)


(*)


(436)


436


-

Conversion of convertible Note into Common stock


342,368


(*)


-


-


-


-


-


-


1,795


-


1,795

Issuance of  Common stock as settlement of debt in March 2006


75,235


(*)


-


-


-


-


-


-


96


-


96

Issuance of Common stock and warrants in March, April and June  2006 ($2.49 per unit of 1 share and 2 warrants), net of issuance costs of $197


463,358


(*)


-


-


-


-


-


-


952


-


952

Issuance of Common stock and warrants in November and December 2006 ($4.10 per unit of 1 share and 1.25 warrants), net of issuance costs of $334


476,736


(*)


-


-


-


-


-


-


1,615


-


1,615

Stock based compensation expense related to options and warrants granted to consultants and employees


-


-


-


-


-


-


-


-


1,161


-


161

Loss


-


-


-


-


-


-


-


-


-


(2,599)


(2,599)
























Balance as of December 31, 2006


1,640,149


$    (*)


-


$      -


-


$      -


-


$     -


$    22,452


$    (21,467)


$         985
























 

 (*)  Represents an amount lower than $1.

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


STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

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

 



Common stock


Additional

paid-in

capital


Receipts on account of shares


Deficit

accumulated

during the

development

stage


Total

stockholders'

equity



Shares


Amount






















Balance as of December 31, 2006


1,640,149


$     (*)


$  22,452


-


$    (21,467)


$     985














Issuance of Common stock and warrants in January 2007 ($4.10 per unit of 1 share and 1.25 warrants), net of issuance costs of $17


 12,211 


(*)


33


-


-


33

Issuance of Common stock and warrants in May, July and August 2007 ($5.74 per unit of 1 share and 0.214 warrants), net of issuance costs of $416


218,498


(*)


835


-


-


835

Exercise of warrants in July 2007


 12,912


(*)


-


-


-


 (*)

Issuance of Common stock to consultant at fair value of $18 in August 2007, net


 3,492 


(*)


(*)


-


-


-

Beneficial conversion feature embedded in convertible note


-


-


511


-


-


511

Issuance of Common stock and warrants in December 2007 ($6.65 - $7.35 per unit of 1 share and 0.26 warrants), where applicable, net, related to the admission to AIM


 1,086,665


   1


4,497


-


-


4,498

Issuance cost due to obligation to issue 4,074 Common stock for consultant, net


-


-


(31)


-


-


(31)

Stock based compensation expense related to options and warrants granted to consultants and employees 


-


-


347


-


-


347

Loss


-


-


-


-


(3,851)


(3,851)














Balance as of December 31, 2007


2,973,927


   1


28,644


-


      (25,318)


    3,327

 

Cashless exercise of warrants in January 2008


70,343


(*)


(*)


-


-


-

Issuance of Common stock to consultant in April 2008


4,074


(*)


31


-


-


31

Exercise of warrants in December 2008


860


(*)


(*)


-


-


-

Stock based compensation related to options and warrants granted to consultants and employees


-


-


436


-


-


436

Receipts on account of stock in respect to exercise of warrants in January 2009


-


-


-


150


-


150

Dividend in respect of reduction in exercise price of certain  warrants


-


-


7


-


(7)


-

Loss


-


-


-


-


(4,992)


(4,992)














Balance as of December 31, 2008


3,049,204


             1


29,118


         150


    (30,317)


        (1,048)

 

 

Exercise of warrants in January and February 2009, net of issuance costs of $17


315,023


(*)


389


  (150)


-


239

Stock based compensation related to options granted to consultants and employees


-


-


520


-


-


520

Issuance of Common stock in October 2009, net at $3.35 per share, net of issuance costs of $59


126,285


(*)


364


-


-


364

Receipts on account of shares related to exercise of warrants in January 2010


-


-


-


25


-


25

Dividend in respect of reduction in exercise price of certain Warrants


-


-


3


-


(3)


-

Cumulative effect of reclassification of warrants from equity to  liability due to application of ASC 815-40


-


-


(871)


-


-


(871)

Loss


-


-


-


-


(6,942)


(6,942)














Balance as of December 31, 2009


3,490,512


$        1


$  29,523


$         25


$     (37,262)


$    (7,713)

 

(*)      Represents an amount lower than $1.

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



STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

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

 



Common stock


Additional

paid-in

capital


Receipts on account of shares


Deficit

accumulated

during the

development

stage


Total

stockholders'

equity

(deficit)



Shares


Amount






















Balance as of December 31, 2009


3,490,512


$    1


$  29,523


$     25


$   (37,262)


$ (7,713)














Exercise of options and warrants in January, May, September and  December


785,419


(*)


559


(25)


-


534

Stock based compensation related to issuance of options and warrants  to consultants and employees


-


-


1,834


-


-


1,834

Issuance of Common stock in February to consultants


32,142


(*)


141


-


-


141

Issuance of Common stock in March, net at $2.63 (GBP 1.75) per share, net of issuance costs of $135


407,800


(*)


943


-


-


943

Issuance of Common stock in May, net at $2.52 (GBP 1.75) per share, net of issuance costs of $87


477,934


(*)


1,115


-


-


1,115

Issuance of Common stock in May at $3.43   (GBP 2.28) per share


5,502


(*)


19


-


-


19

Issuance of Common stock in August and September to consultants


39,080


(*)


164


-


-


164

Stock based compensation related to the issuance of warrants in September to a consultant


-


-


36


-


-


36

Stock based compensation related to the issuance of restricted Common stock in December to a director


57,142


(*)


(*)


-


-


-

Loss


-


-


-


-


(4,147)


(4,147)














Balance as of  December 31, 2010


5,295,531


            1


   34,334


             -


             (41,409)


(7,074)

 

Issuance of Common stock at $4.54 per share and warrants at $0.46 per share, net of issuance costs of $2,826


2,624,100


(*)


10,389


-


-


10,389

Issuance of Common stock and warrants ($2.72 - $3.41 per unit of 1 share and 0.06 warrants) upon conversion of debentures


1,410,432


(*)


5,585


-


-


5,585

Stock based compensation related to the issuance of Common stock to a consultant


12,500


(*)


46


-


-


46

Stock based compensation related to the issuance of warrants to consultants


-


-


558


-


-


558

Exercise of options and warrants


380,162


(*)


1,194


-


-


1,194

Stock based compensation related to options and warrants granted to consultants and employees


-


-


395


-


-


395

Loss


-


-


-


-


(8,096)


(8,096)














Balance as of  December 31, 2011


9,722,725


$        1


$   52,501


$         -


$   (49,505)


$    2,997

(*)  Represents an amount lower than $1.

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



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, 2011


9,722,725


$    1


$ 52,501


$    (49,505)


$    2,997












Stock based compensation related to issuance of restricted Common stock to directors in January 2012


35,000


(*)


55


-


55

Stock based compensation related to issuance of Common stock to consultants in  March and June 2012


30,000


(*)


204


-


204

Issuance of Common stock and warrants ($4.90 per unit of 1 share and 0.75 warrants) in June 2012, net


1,944,734


(*)


8,407


-


8,407

Exercise of  options and warrants


575,349


(*)


2,594


-


2,594

Stock based compensation related to options and warrants  granted to consultants and employees


-


-


2,748


-


2,748

Loss


-


-


-


(15,071)


(15,071)












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


6,070,000


1


28,820


-


28,821

Stock based compensation related to the issuance of Common stock to consultants (**)


55,000


-


548


-


548

Stock based compensation related to the issuance and vesting of restricted Common stock to directors


45,000


-


388


-


388

Exercise of  warrants and options


19,499


-


13


-


13

Stock based compensation related to options and warrants granted to consultants and employees


-


-


3,848


-


3,848

Loss


-


-


-


(17,129)


(17,129)












Balance as of  December 31, 2013


18,497,307


$         2


$100,126


$ (81,705)


$  18,423

(*)         Represents an amount lower than $1.

(**)     Includes stock based compensation for an additional 25,000 shares which were not issued as of December 31, 2013.

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


CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

 



Year ended

December 31


Period from January 27, 2000 (inception) through December 31,

 



2011


2012


2013


2013

 

CASH FLOWS FROM OPERATING ACTIVITIES:









 










 

Loss


$  (8,096)


$ (15,071)


$    (17,129)


$     (82,134)

 










 

Adjustments to reconcile loss to net cash used in operating activities:









 










 

 Depreciation


98


145


177


1,403

 

 Loss from disposal of property and equipment


-


-


1


331

 

 Stock based compensation related to options, warrants, common shares and restricted shares granted to employees, directors and consultants


395


3,007


4,784


14,969

 

 Interest and amortization of beneficial conversion feature of convertible note


-


-


-


759

 

 Changes in fair value of convertible debentures and warrants


(1,936)


2,336


(720)


3,258

 

 Accrued severance pay, net


300


140


(416)


793

 

 Exchange differences on a restricted lease deposit









 

    and on a long-term loan


4


(5)


-


1

 










 

Change in operating assets and liabilities:









 

 Accounts receivable and prepaid expenses


533


543


360


(219)

 

 Trade payables


764


(26)


185


1,666

 

 Other accounts payable and  accrued expenses


(79)


317


29


2,049

 

 Restricted lease deposits


(10)


(5)


(3)


(63)

 










 

Net cash used in operating activities


(8,027)


(8,619)


(12,732)


(57,187)

 










 

CASH FLOWS FROM INVESTING ACTIVITIES:









 










 

 Purchase of property and equipment


(289)


(63)


(186)


(2,268)

 

 Proceeds from disposal of property and equipment


-


-


3


176

 










 

Net cash used in investing activities


$    (289)


$    (63)


$     (183)


$     (2,092)

 

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

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

 



Year ended


Period from January 27, 2000 (inception) through



December 31


December 31



2011


2012


2013


2013

CASH FLOWS FROM FINANCING ACTIVITIES:


















 Proceeds from issuance of shares and warrants, net


$  10,389


$    8,407


$      28,861


$       71,769

 Proceeds from exercise of options and warrants, net


63


1,711


13


2,735

 Repayment of a long-term loan


-


-


-


(73)

 Proceeds from long-term loan


-


-


-


70

 Issuance of convertible debentures and warrants


-


-


-


7,168










Net cash provided by financing activities


10,452


10,118


28,874


81,669










 Increase in cash and cash equivalents


2,136


1,436


15,959


22,390










Balance of cash and cash equivalents at the beginning of the period


2,859


4,995


6,431


-










Balance of cash and cash equivalents at the end of the period


$   4,995


$    6,431


$    22,390


$        22,390










Supplemental disclosure of cash flow information:


















Cash paid during the period for:


















Interest


$      49


$         -


$             -


$          242










Taxes


$        1


$      50


$          17


$          165










Supplemental disclosure of non-cash flow information:


















Issuance expenses paid with shares


$         -


$         -


$             -


$         310










Issuance of Common stock upon conversion of convertible debentures


$  5,585


$         -


$             -


$      8,430


 

Classification of liability in respect of warrants into equity due to the exercise of warrants


$  1,131


$     883


$             -


$      2,014

 

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



NOTES TO THE 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. (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").

 

         The Company's Common stock is traded on the NYSE MKT (formerly NYSE Amex) and on the AIM market of the London Stock Exchange ("AIM").

 

        

b.      The Company and the Subsidiary are in the development stage. As reflected in the accompanying consolidated financial statements, the Company incurred a loss of $17,129 during the year ended December 31, 2013 and has an accumulated deficit of $81,705 as of December 31, 2013. The Company and the Subsidiary have not yet generated revenues from product sale. In the past, the Company generated income from partnering on development programs and expects to expand 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 into the second quarter of 2015.

 

NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES

           

The consolidated financial statements are prepared in accordance with United States Generally  Accepted Accounting Principles ("U.S. GAAP"), applied on a consistent basis, as follows:

 

a.   Use of estimates:

 

         The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. The Company's management believes that the estimates and assumptions used are reasonable based upon information available at the time they are made. These estimates and assumptions can affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

b.   Financial statements in U.S. dollars:

 

The majority of the Company and the Subsidiary's research and development operations are currently conducted in Israel; however, it is anticipated that the majority of the Company's revenues will be generated outside Israel and will be denominated in U.S. dollars ("dollars"), and financing activities including equity transactions and cash investments, are made mainly in dollars. The Company's management believes that the dollar is the primary currency of the economic environment in which the Company and its Subsidiary operate. Thus, the functional and reporting currency of the Company and the Subsidiary is the dollar.

 

Accordingly, transactions and balances denominated in dollars are presented at their original amounts.  Non-dollar transactions and balances have been re-measured to dollars, in accordance with ASC 830, "Foreign Currency Matters" of the Financial Accounting Standards Board ("FASB"). All exchange gains and losses from re-measurement of monetary balance sheet items denominated in non-dollar currencies are reflected in the Statements of Loss as financial income or expenses, as appropriate.

 

c.   Principles of consolidation:        

 

The consolidated financial statements include the accounts of the Company and the Subsidiary. Intercompany transactions and balances have been eliminated upon consolidation.

 

d.   Cash equivalents:

 

The Company and the Subsidiary consider all highly liquid investments originally purchased with maturities of three months or less to be cash equivalents.

 

e.   Property and equipment:

 

Property and equipment are stated at cost net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. 

 

The annual rates of depreciation are as follows:


%



Furniture and office equipment

6 - 15 (mainly 15)

Computers and peripheral equipment

33

Laboratory equipment

15 - 33 (mainly 15)

Leasehold improvements

The shorter of term of the lease or the useful life of the asset

 

f.       Impairment of long-lived assets:

 

Long-lived assets are reviewed for impairment in accordance with ASC 360, "Property, Plant, and Equipment" ("ASC 360"), whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of the asset to the future undiscounted cash flows expected to be generated by the asset. If such an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. For the period from January 27, 2000 (inception) through December 31, 2013, no impairment losses have been identified. 

 

g.      Severance pay:

 

The Subsidiary's liability for severance pay is calculated pursuant to the Israeli severance pay law based on the most recent salary for the employees multiplied by the number of years of employment, as of the balance sheet date.  Employees are entitled to one month salary for each year of employment or a portion thereof. In addition, several employees are entitled to additional severance compensation as per their employment agreements. The Subsidiary's liability for all of its employees is fully provided by an accrual and is mainly funded by monthly deposits with insurance policies. 

 

The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israeli severance pay law or labor agreements. The value of the deposited funds is based on the cash surrender value of these policies and includes profits or losses as appropriate.  The value of these deposits is recorded as an asset in the Company's balance sheet.

 

 

As part of employment agreements, the Subsidiary and most of its employees agreed to the terms set forth in Section 14 of the Israeli Severance Pay Law, according to which amounts deposited in severance pay funds by the Subsidiary shall be the only severance payments released to the employee upon termination of employment, voluntarily or involuntarily. Accordingly, the financial statements do not include the severance pay fund and the severance pay accrual in connection with these employees.

 

Severance expenses for the years ended December 31, 2011, 2012 and 2013 and for the period from January 27, 2000 (inception) through December 31, 2013, amounted to $382, $318, $186 and $2,384, respectively.

 

h.   Income taxes:

 

The Company accounts for income taxes in accordance with ASC 740, "Income Taxes" ("ASC 740"). ASC 740 prescribes the use of the liability method whereby deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. As of December 31, 2013, a full valuation allowance was provided by the Company.

 

The Company also accounts for income taxes in accordance with ASC 740-10, "Accounting for Uncertainty in Income Taxes" ("ASC 740-10"). ASC 740-10 contains a two-step approach for recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740-10. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. As of December 31, 2012 and 2013, no liability has been recorded as a result of ASC 740-10.

 

i.           Accounting for stock based compensation:

 

The Company applies ASC 718, "Compensation-Stock Compensation" ("ASC 718") which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made to employees and directors.

 

The Company recognized compensation expenses for awards granted based on the straight line method over the requisite service period of each of the grants, net of estimated forfeitures.

 

In 2011, 2012 and 2013, the Company estimated the fair value of stock options granted to employees and directors using the Binominal options pricing model with the following assumptions:

 



2011


2012


2013








Dividend yield


0%


0%


0%

Expected volatility


75%


77%


78-83%

Risk-free interest rate


2.9%


1.7%


1.41-2.75%

Suboptimal exercise factor


1.5-2


1.5


1-1.5

Contractual life (years)


10


5-10


5-10

 

The Company uses historical data to estimate pre and post vesting exit rate within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. 

 

The suboptimal exercise factor represents the value of the underlying stock as a multiple of the exercise price of the option which, if achieved, results in exercise of the option.

 

The risk-free interest rate assumption is based on observed interest rates appropriate for the term of the Company's stock options.

 

The Company has historically not paid dividends and has no foreseeable plans to pay dividends.

 

The Company applies ASC 718 and ASC 505-50, "Equity-Based Payments to Non-Employees" ("ASC 505-50"), with respect to options issued to non-employees. ASC 718 requires the use of option valuation models to measure the fair value of the options. The fair value of these options was estimated at grant date and at the end of each reporting period, using the Binomial option pricing model with the following assumptions:

 

 



                    2011


2012


2013








Dividend yield


0%


0%


0%

Expected volatility


68%


80%


80-82%

Risk-free interest rate


1.7%


1.1%


2.7-3.0%

Contractual life (years)


1.1-9.7


2.4-9.9


8.3-9.8

 

 

j.        Loss per share:

 

Basic loss per share is computed based on the weighted average number of shares of Common stock outstanding during each year. Diluted loss per share is computed based on the weighted average number of shares of Common stock outstanding during each year, plus the dilutive effect of options, warrants and restricted shares considered to be outstanding during each year, in accordance with ASC 260, "Earnings Per Share" ("ASC 260").

         

k.       Research and development expenses, net:

 

All research and development expenses are charged to the Consolidated Statements of Loss as incurred. Grants from the Office of the Chief Scientist in Israel ("OCS") and the U.S. government and participation from third-parties related to such research and development expenses are offset against the expense at the later of when receipt is assured or the expenses are incurred.

 

l.        Grants and participation:

 

Royalty-bearing grants from the OCS for funding approved research and development projects are recognized at the time the Subsidiary is entitled to such grants, on the basis of the costs incurred, and are presented as a deduction from research and development expenses.

 

Participation from third parties in the Company's research and development operations was recognized at the time the Company was entitled to such participation from the third parties, and is presented as a deduction from the Company's research and development expenses.

 

The Company recognizes income in its Consolidated Statements of Loss as follows:

 

-         Participation from third party - in accordance with ASC 605-35 based on hours incurred assigned to the project. The excess of the recognized amount received from the Healthcare company over the amount of research and development expenses incurred during the period was recognized as other income within operating income.

 

-         Grants from the U.S. government's QTDP for funding approved research and development projects were recognized at the time the Company was entitled to such grants, on the basis of the costs incurred and are presented as a deduction from research and development expenses.

 

         In May 2013, the Subsidiary received approval for an additional Research and Development program from the OCS for the period December 2012 through November 2013. The approval allows for a grant of up to approximately $2,100 based on research and development expenses, not funded by others, of up to $3,780. As of December 31, 2013, $1,776 was received.

 

m.      Concentrations of credit risks:

 

Financial instruments that potentially subject the Company and the Subsidiary to concentrations of credit risk consist principally of cash and cash equivalents.

 

Cash and cash equivalents are invested in major banks and financial institutions in Israel and the United States. Such deposits in the United States may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Company's and the Subsidiary's investments are institutions with high credit standing and accordingly, minimal credit risk exists with respect to these investments.

 

The Company has no off-balance-sheet concentrations of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements.   

 

n.       Fair value of financial instruments:

 

The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are generally considered to be representative of their respective fair values because of the short-term nature of those instruments. The liability in respect of warrants is presented at fair value.

 

The Company applies ASC 820, "Fair Value Measurements and disclosures" ("ASC 820"). ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

 

As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

 

Level 1 Inputs-      Quoted prices for identical instruments in active markets.

 

Level 2 Inputs -    Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable.

 

Level 3 Inputs-      Valuation derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

The financial instruments carried at fair value on the Company's balance sheet as of December 31, 2012 and 2013 are warrants with down-round protection classified as a liability. See Note 11.

 

o.       Reclassifications:

 

Certain financial statement data for prior periods has been reclassified to conform to current year financial statement presentation.

 

NOTE 3:-      ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

 



December 31,



2012


2013






Grant receivable from the OCS


$      203


$            -

Government authorities


83


70

Prepaid expenses and other


253


132








$      539


$       202

 

 

NOTE 4:-      PROPERTY AND EQUIPMENT, NET

 

Composition of property and equipment is as follows:

 



December 31,



2012


2013

Cost:





Furniture and office equipment


$     119


$      122

Computers and peripheral equipment


65


98

Laboratory equipment


413


554

Leasehold improvements


356


360






Total cost


953


1,134











Total accumulated depreciation


601


777






Depreciated cost


$     352


$       357

 

Depreciation expenses for the years ended December 31, 2011, 2012 and 2013 and for the period from January 27, 2000 (inception) through December 31, 2013 amounted to $98, $145, $177 and $1,403, respectively.

 

 

NOTE 5:-      OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 



December 31,



2012


2013






Employees and payroll accruals 


$    1,063


$       1,506

Accrued expenses and others


410


446








$    1,473


$       1,952

 

 

NOTE 6:-      COMMITMENTS AND CONTINGENCIES

 

a.       License agreements:

 

1.       In 2005, the Company signed an agreement with Yissum Research and Development Company of the Hebrew University of Jerusalem ("Yissum"). According to the agreement, Yissum granted the Company a license of certain patents for commercial development, production, sub-license and marketing of products to be based on its know-how and research results. In consideration, the Company agreed to pay Yissum the following amounts:

 

a)       Three milestone payments totaling $400 were fully paid through April 2011.

 

(b)      Royalties at a rate of 5% of net sales of the product.

 

(c)      Sub-license fees at a rate of 9% of sublicense considerations.

 

The total aggregate payment of royalties and sub-license fees by the Company to Yissum shall not exceed $10,000. No payments of royalties or sub-license fees were paid through December 31, 2013.

 

2.       Pursuant to an agreement entered into in 2011, the Regents of the University of Michigan ("Michigan") have granted an exclusive worldwide license for patent rights relating to certain uses of variants of clotting Factor VIII. In consideration, the Company agreed to pay Michigan the following amounts:

 

a)       an initial license fee of $25 which was paid in 2011;

 

b)       an annual license fee in arrears of $10 rising to $50 following the grant by the Company of a sub-license or (if sooner) from the 6th anniversary of the effective date of the license agreement;

 

c)       staged milestone payments of $750 (in aggregate), of which $400 will be recoupable against royalties;

 

d)       royalties at an initial rate of 5% of net sales, reducing by a percentage point at predetermined thresholds to 2% upon cumulative net sales exceeding $50,000;

 

e)       sub-license fees at an initial rate of 6% of sub-licensing revenues, reducing by a percentage point at predetermined thresholds to 4% upon cumulative sub-licensing revenues exceeding $50,000; and

 

f)        patent maintenance costs.

 

The exclusive worldwide license is expected to expire in 2027 upon the expiration of the last to expire of the patent rights licensed. Total payments under the agreement amounted to $123, $42 and $39 in the years 2011, 2012 and 2013, respectively. 

 

b.       Chief Scientist:

 

Under agreements with the OCS in Israel regarding research and development projects, the Subsidiary is committed to pay royalties to the OCS at rates between 3.5% and 5% of the income resulting from this research and development, at an amount not to exceed the amount of the grants received by the Subsidiary as participation in the research and development program, plus interest at LIBOR. The obligation to pay these royalties is contingent on actual income and in the absence of such income no payment is required. As of December 31, 2013, the principal amount of the aggregate contingent liability was $8,622.

 

c.       Lease Agreement:

 

1.       The facilities of the Subsidiary are rented under an operating lease agreement for a period ending December 2014. Future minimum lease commitment under the existing non-cancelable operating lease agreement is approximately $67 for 2014.

 

As of December 31, 2013 the Subsidiary pledged a bank deposit which is used as a bank guarantee at an amount of $24 to secure its payments under the lease agreement.

 

2.       The offices of the Company are rented under an operating lease agreement and are cancelable by either party with 60 days' notice. Future minimum lease commitment under the existing operating lease agreement is $11.  The Company's previous offices were leased through January 2014 and an agreement was reached whereby the Company paid, in 2014, $9 as compensation for the remaining term of the lease.

 

3.       The Subsidiary leases vehicles under standard commercial operating leases. Future minimum lease commitments under various non-cancelable operating lease agreements in respect of motor vehicles are as follows:

 

Year






2014


$       113

2015


71

2016


15






$      199

 

As of December 31, 2013, the Subsidiary paid three months lease installments in advance which amounted to $33.

 

d.      In 2009, the Company signed a preclinical development agreement (the "Agreement"), with a major international healthcare company (the "Healthcare company") that is a market leader in the field of hemophilia. The Agreement included funding for preclinical development of the Company's BiopumpTM protein technology to produce and deliver the clotting protein Factor VIII for the sustained treatment of hemophilia.

 

         The Company recognized the proceeds as a reduction to research and development expenses in its Consolidated Statements of Loss based on hours incurred assigned to the project. The excess of the recognized amount received from the Healthcare company over the amount of research and development expenses incurred during the period for the Agreement was recognized as other income within operating income.

 

The Agreement expired in September 2011. The Company received all rights to the jointly developed intellectual property and is obligated to pay royalties to the Healthcare company at the rates between 5% and 10% of any future income arising from such intellectual property up to a maximum of ten times the total funds paid by the Healthcare company to the Company.

 

         Payments totaling $3,971 were received by the Company from the Healthcare company through 2011.

 

e.       In 2013, three executives joined the Company.  Per their employment agreements, if terminated without cause, these executives will be entitled to severance pay in the aggregate amount of $2,975.

 

 

NOTE 7:-     STOCKHOLDERS' EQUITY

 

a.       Common stock:

 

The Common stock confers upon the holders the right to receive notice to participate and vote in annual and special meetings of the stockholders of the Company and the right to receive dividends, if declared.

 

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

 

1.       On April 13, 2011 the Company completed the initial public offering in the United States of its Common stock on the NYSE MKT (formerly NYSE Amex). The Company issued 2,624,100 shares of Common stock, including 164,100 shares pursuant to the exercise of the underwriters' over-allotment option, at a price of $4.54 per share  and  warrants to purchase 2,829,000 shares, including 369,000 warrants  pursuant to the exercise of the underwriters' over-allotment option, at a price of $0.46 per warrant for total gross proceeds of $13,215 or $10,389 in net proceeds after deducting underwriting discounts and commissions of $1,454 and other offering costs of $1,372. These warrants, which were issued with an exercise price of $6.00 per share and will expire on April 12, 2016, are listed on the NYSE MKT.

 

2.       In June 2012, the Company completed a private placement transaction in which the Company issued 1,944,734 units with each unit consisting of one share of the Company's Common stock and a warrant to purchase 0.75 of one share of Common stock. The warrants to purchase 1,458,550 of Common stock were issued with an exercise price of $8.34 per share, first 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 Common stock having an exercise price of $9.17 per share were issued to the placement agent, first 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 $9,529 or $8,407 in net proceeds after deducting private placement fees of $953 and other offering costs of $169. 

 

3.       In February 2013, the Company completed 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 at a price to the public of $5.25 per fixed combination. Each combination consisted of one share of Common stock and a warrant to purchase one-half of a share of Common stock at an exercise price of $6.78 per share.  These warrants will expire on February 13, 2018.   In March 2013, the underwriters exercised their option and purchased 470,000 shares of Common stock at $5.24 per share and 840,000 warrants (to purchase up to an aggregate of 420,000 shares) 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. 

 

c.       Issuance of stock options warrants and restricted stock to employees and directors:

      

1.       In 2006, the Company adopted a stock incentive plan (the "stock incentive plan") according to which options, restricted stock and other awards related to Common stock of the Company may be granted to directors, employees and consultants (non-employees) of the Company and the Subsidiary, as determined by the Company's Board of Directors from time to time. The options outstanding are exercisable within a designated period from the date of grant and at an exercise price, each as determined by the Company's Board of Directors. The options outstanding to employees, directors and consultants will vest over a period of two to four years from the date of grant. Any option which is cancelled or forfeited before expiration becomes available for future grants.

 

 

In March 2013, 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 4,178,571 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.

 

In 2012 and 2013, the Company granted 4,100,000 stock options, outside the stock incentive plan, to directors and employees as inducement for joining the Company.

 

2.    In September 2013, upon the resignation of our former CEO, the Company caused his unvested options to become fully vested as of his separation date (September 13, 2013), and all options vested as of the separation date will be exercisable through the one-year anniversary of his separation date.  The Company recorded an additional expense in the amount of $120 in 2013.

 

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

 




Restricted shares


57,142



Number of shares of restricted stock as of December 31, 2010





Vested in 2011


-

Granted in 2011


-




Number of shares of restricted stock as of December 31, 2011


57,142




Vested in 2012


(31,785)

35,000

Granted in 2012





Number of shares of restricted stock as of December 31, 2012


60,357




Vested in 2013


(49,285)

Granted in 2013


45,000




Number of shares of restricted stock as of December 31, 2013


56,072

 

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

 



Number of

options and warrants


Weighted

average

exercise price


Weighted average remaining contractual terms (years)


Aggregate intrinsic

value



















Outstanding at December 31, 2010


1,878,141


$      4.13














Granted


347,714


$      3.73





Exercised


(112,932)


$      3.01





Forfeited


(34,135)


$      2.49














Outstanding at December 31,  2011


2,078,788


$      4.17


4.96


$       11










Granted


1,060,254


$    10.01





Exercised


(396,722)


$      7.22





Forfeited


(62,783)


$      5.40














Outstanding at December 31,  2012


2,679,537


$       6.01


              4.98


$    7,159










Granted


4,725,000


$       4.73





Exercised


(3,500)


$       3.64





Forfeited


(34,994)


$       5.45














Outstanding at December  31, 2013 


7,366,043


$      5.19


7.06


$    11,279










Vested and expected to vest, December 31, 2013


7,110,831


$      5.20


7.00


$   10,941










Exercisable at December  31, 2013 


2,344,424


$      5.50


3.26


$     4,596

 

 

The aggregate intrinsic value represents the total intrinsic value (the difference between the Company's Common stock fair value as of December 31, 2011, 2012 and 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 December 31, 2012 and 2013, respectively.

 

Calculation of aggregate intrinsic value is based on the closing share price of the Company's Common stock as reported on the NYSE MKT as of December 31, 2011 ($2.50 per share), December 31, 2012 ($7.44 per share) and December 31, 2013 ($5.99 per share), respectively.

 

The weighted average grant date fair value of options and warrants granted to employees and directors during the years ended December 31, 2011, 2012 and 2013 was $10.01, $3.73 and $4.73, respectively.

 

As of December 31, 2013, there was $9,860 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 2.0 years.

 

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

 

1.       In September 2011, the Company issued to a consultant 12,500 shares of Common stock in compensation for investor relation services. Total compensation, measured as the grant date fair market value of the stock, amounted to $46 and was recorded as an operating expense in the Consolidated Statement of Loss in 2011.

 

2.       In March 2012, the Company issued 30,000 shares of Common stock to a consultant. Total compensation, measured as the grant date fair market value of the stock, amounted to $204 and was recorded as an operating expense in the Consolidated Statement of Loss in 2012.

 

3.       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 $548 and was recorded as an operating expense in the Consolidated Statement of Loss in 2013. As part of the agreement with a consultant, the Company has an obligation to issue an additional 25,000 shares for services received during 2013.

 

 

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

 



Number of

warrants and options


Weighted

average

exercise price


Weighted average remaining contractual terms

( years)


Aggregate intrinsic

value price










Outstanding at December 31, 2010


558,292


$     5.04














Granted


249,446


$     4.93














Exercised


(183,684)


$     2.25














Forfeited


(83,716)


$     6.46














Outstanding at December 31, 2011


540,338


$     5.49


3.72


$          -










Granted


278,045


$     8.80














Exercised


(3,255)


$     5.34














Forfeited


(293,224)


$     5.43














Outstanding at December 31, 2012


521,904


$     7.29


             4.81


$      548










Granted


150,000


$     4.39














Expired


(25,000)


$     7.56














Exercised(*)


(67,230)


$     5.50














Outstanding at December  31, 2013  


579,674


$     6.72


4.75


$      433










Exercisable at December 31,  2013


507,389


$     6.71


 4.16


$      424

                                      

                                       (*) Exercised cashlessly upon which 9,499 shares of Common stock were issued.

 

The aggregate intrinsic value represents the total intrinsic value (the difference between the Company's Common stock fair value as of December 31, 2011, 2012 and 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 December 31, 2012 and 2013, respectively.

 

Calculation of aggregate intrinsic value is based on the closing share price of the Company's Common stock as reported on the NYSE MKT as of December 31, 2011 ($2.50 per share), December 31, 2012 ($7.44 per share) and December 31, 2013 ($5.99 per share), respectively.

 

The weighted average grant date fair value of options and warrants granted to consultants during the years ended December 31, 2011, 2012 and 2013 was $10.01, $3.73 and $4.39, respectively.

 

As of December 31, 2013, there was $440 of total unrecognized compensation cost related to share-based compensation arrangements granted to consultants. That cost is expected to be recognized over a weighted-average period of 1.1 years.

 

e.       Compensation expenses:

 

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

 



 

Year ended December 31,



              2011


2012


2013








Research and development expenses


$          78


$         225


$        450

General and administrative expenses


317


2,782


4,334










$        395


$      3,007


$     4,784

 

f.        Summary of options and warrants:

 

A summary of all the options and warrants outstanding, segregated into ranges, as of December 31, 2013 is presented in the following table:

 





As of December 31, 2013

Options / Warrants



Exercise

Price per

Share ($)




Options and

Warrants

Outstanding

Options and

Warrants

Exercisable



Weighted

Average

Remaining

Contractual

Terms (in years)

Granted to Employees and Directors



2.49-3.14




499,806

386,306



4.1




3.64-4.99




3,653,629

137,915



9.1




5.13-7.25



1,197,967

135,740



8.3




8.19-14.50



1,109,451

779,273



4.0








6,460,853

1,439,234


Granted to Consultants
















4.20-5.13




34,634


24,447



4.1

 




6.65-8.19




144,916


86,582



7.9

 




14.50




5,646


1,882



8.5

 








185,196


112,911




 













 

Total Options







6,646,049


1,552,145




 














 

Warrants:













 














 

Granted to Employees and Directors



2.49



905,190


905,190



2.2

 













 

Granted to Consultants



3.19-4.01



161,370


161,370



3.7

 




4.99



31,635


31,635



3.9

 




9.17-11.16



201,473


201,473



3.5

 







394,478


394,478




 













 

Granted to Investors



0.0002



35,922


35,922



2.2

 




4.54-6.00



3,233,521


3,233,521



2.2

 




6.78-8.34



 (*)7,885,550


(*)7,885,550



4.2

 







11,154,993


11,154,993




 













 

Total Warrants






12,454,661


12,454,661




 













 

Total  Options and  Warrants






19,100,710


14,006,806




 













 

 

 

(*) Includes 6,427,000 Warrants to purchase 3,213,500 shares of Common stock.

 

 

NOTE 8:-     TAXES ON INCOME

 

a.       Tax laws applicable to the Company and the Subsidiary:

 

1.       The Company is taxed under U.S. tax law.

 

2.       The Subsidiary is taxed under the Israeli income tax law.

 

          Results of the Subsidiary for tax purposes are measured and reflected in nominal NIS.       The difference between the rate of change in nominal NIS value and the rate of change in the NIS/U.S. dollar exchange rate causes a difference between taxable income or loss and the income or loss before taxes reflected in the financial statements. In accordance with ASC 740-10, the Company has not provided deferred income taxes on this difference between the reporting currency and the tax bases of assets and liabilities.

 

3.       The Law for the Encouragement of Capital Investments, 1959 (the "ECI Law"):

 

According to the ECI Law, the Subsidiary is entitled to various tax benefits by virtue of the "beneficiary enterprise" status granted to part of its enterprises, as implied by this ECI Law. The principal benefits by virtue of the ECI Law are tax benefits and reduced tax rates.

 

The Subsidiary has chosen the alternative track under the ECI Law. Under this track, the   Subsidiary is tax exempt for ten years within the benefit period on part of its taxable income.

 

The income qualifying for tax benefits under the alternative track is the taxable income of a company that has met certain conditions as determined by the ECI Law ("a beneficiary company"), and which is derived from an industrial enterprise. The ECI Law specifies the types of qualifying income that is entitled to tax benefits under the alternative track whereby income from an industrial enterprise includes, among others, revenues from the production and development of software products and revenues from industrial research and development activities performed for a foreign resident (and approved by the Head of the Administration of Industrial Research and Development).

 

The benefit period starts at the later of the year elected (2011) and the first year the Subsidiary earns taxable income provided that 12 years have not passed since the beginning of the year of election as allowed for companies in development area A. The Subsidiary is located in development area A.

 

If a dividend is distributed out of tax exempt profits, as above, the Subsidiary will become liable for tax at the rate applicable to its profits from the beneficiary enterprise in the year in which the income was earned, as if it was not under the alternative track. The Company currently does not have tax exempt profits as the period of benefits has not commenced yet.

 

The above benefits are conditional upon the fulfillment of the conditions stipulated by the ECI Law, regulations published thereunder and the letters of approval for the investments in the approved enterprises, as above. Non-compliance with the conditions may cancel all or part of the benefits and refund of the amount of the benefits, including interest. The Company's management believes that the Subsidiary is meeting the aforementioned conditions.

 

b.       Tax rates applicable to the Company and the Subsidiary:

 

1.       The Subsidiary:

      

The Israeli corporate tax rate was 24% in 2011 and 25% in 2012 and 2013.

 

On July 30, 2013, the Israeli Parliament (the Knesset) approved the second and third readings of the Economic Plan for 2013-2014 ("Amended Budget Law") which consists, among others, of fiscal changes whose main aim is to enhance long-term collection of taxes. These changes include, among others, raising the Israeli corporate tax rate from 25% to 26.5% commencing January 1, 2014.

 

2.       The Company:

 

The tax rates applicable to the Company whose place of incorporation is the U.S. are corporate (progressive) tax at the rate of up to 35%, excluding state tax, which rates depend on the state in which the Company conducts its business.

 

c.       Tax assessments:

      

The Company files income tax returns in the U.S. federal jurisdiction and state jurisdiction. The U.S. tax authorities have not conducted an examination in respect of the Company's U.S. federal income tax returns since inception. The Subsidiary has tax assessments, deemed final under the law, up to and including the year 2008.

 

d.       Carryforward losses for tax purposes:

 

As of December 31, 2013, the Company had U.S. federal net operating loss carryforward for income tax purposes in the amount of approximately $44,400. Net operating loss carryforward arising in taxable years beginning after January 2000 (inception date) can be carried forward and offset against taxable income for 20 years and expiring between 2020 and 2033. As of December 31, 2013 the Company had net operating loss carryforward for California state franchise tax purposes of approximately $42,900 which can be carried forward and offset against taxable income for 10-20 years, expiring between 2013 and 2033.  The Company does not currently have operations in California.

 

Utilization of U.S. net operating losses may be subject to substantial annual limitations due to the "change in ownership" provisions of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization.

 

The Subsidiary has accumulated losses for tax purposes as of December 31, 2013, in the amount of approximately $22,000, which may be carried forward and offset against taxable income and capital gain in the future for an indefinite period.

 

e.       Taxes on income included in the Consolidated Statements of Loss:

 

Taxes on income derive from tax prepayments on non-deductible expenses in Israel.

 

f.        Deferred income taxes: 

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows:

 



December 31,



2012


2013

Deferred tax assets:





Net operating loss carryforward


$   13,190


$   19,191

Allowances and reserves


526


497






Total deferred tax assets before valuation allowance


13,716


19,688






Valuation allowance


(13,716)