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EX-32.1 - EXHIBIT 32.1 - Aevi Genomic Medicine, Inc.v450847_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Aevi Genomic Medicine, Inc.v450847_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Aevi Genomic Medicine, Inc.v450847_ex31-1.htm

 

 

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 September 30, 2016

 

OR

 

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

 

For the transition period from to

 

Commission File Number: 001-35112

 

 

 Medgenics, Inc.
(Exact name of registrant as specified in its charter) 

 

 

Delaware
(State or other jurisdiction of
incorporation or organization)
98-0217544
(I.R.S. Employer
Identification No.)
   
435 Devon Park Drive, Suite 715
Wayne, Pennsylvania
(Address of Principal Executive Offices)
19087
(Zip Code)
   
(610) 254-4201
(Registrant’s telephone number, including area code)
   
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

 

 

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

 

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

 

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

 

 

Large accelerated filer

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

 

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

 

As of October 31, 2016, the registrant had 37,097,843 shares of common stock, $0.0001 par value, outstanding

 

 

 

  

MEDGENICS, INC.

CONTENTS

 

PART I - FINANCIAL INFORMATION 2
   
ITEM 1 - Financial Statements 2
   
ITEM 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations 14
   
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk 20
   
ITEM 4 - Controls and Procedures 20
   
PART II - OTHER INFORMATION 20
   
ITEM 1 - Legal Proceedings 20
   
ITEM 1A - Risk Factors 20
   
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds 20
   
ITEM 3 - Defaults Upon Senior Securities 21
   
ITEM 4 - Mine Safety Disclosures 21
   
ITEM 5 - Other Information 21
   
ITEM 6 - Exhibits 21

  

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

 

-i

 

  

MEDGENICS, INC. AND ITS SUBSIDIARY

 

PART I - FINANCIAL INFORMATION

 

ITEM 1 - Financial Statements

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

As of September 30, 2016

 

IN U.S. DOLLARS IN THOUSANDS

 

(Unaudited)

  

INDEX

 

  Page
   
Consolidated Balance Sheets 3
   
Consolidated Statements of Operations 4
   
Statements of Changes in Stockholders' Equity 5
   
Consolidated Statements of Cash Flows 6 - 7
   
Notes to the Interim Consolidated Financial Statements 8 - 13

 

-2-

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

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

 

   September 30,   December 31, 
   2016   2015 
   Unaudited     
ASSETS          
           
CURRENT ASSETS:          
           
Cash and cash equivalents  $47,257   $53,064 
Prepaid expenses and other current assets   589    747 
           
Total current assets   47,846    53,811 
           
LONG-TERM ASSETS:          
           
Restricted lease deposits   30    23 
Property and equipment, net   454    424 
           
Total long-term assets   484    447 
           
Total assets  $48,330   $54,258 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
CURRENT LIABILITIES:          
           
Trade payables  $618   $1,322 
Other accounts payable and accrued expenses   4,878    2,586 
           
Total current liabilities   5,496    3,908 
           
Total liabilities   5,496    3,908 
           
STOCKHOLDERS' EQUITY:          
           
Common stock - $0.0001 par value; 100,000,000 shares authorized; 37,106,343 shares issued and 37,097,843 shares outstanding at September 30, 2016; 32,869,217 shares issued and 32,860,717 shares outstanding at December 31, 2015   4    4 
Additional paid-in capital   214,381    188,476 
Accumulated deficit   (171,551)   (138,130)
           
Total stockholders' equity   42,834    50,350 
           
Total liabilities and stockholders' equity  $48,330   $54,258 

 

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

 

-3-

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

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

 

  

Nine months ended

September 30,

  

Three months ended

September 30,

 
   2016   2015   2016   2015 
   Unaudited 
                 
Research and development expenses  $23,417   $12,927   $7,725   $4,568 
                     
Less:                    
Participation by the Office of the Chief Scientist   (196)   (1,797)   (196)   (367)
                     
Research and development expenses, net   23,221    11,130    7,529    4,201 
                     
Non-recurring research and development expenses resulting from acquisition   -    8,170    -    8,170 
                     
General and administrative expenses   10,178    10,832    3,042    2,996 
                     
Operating loss   (33,399)   (30,132)   (10,571)   (15,367)
                     
Financial expenses   (10)   (1,431)   -    (1,192)
Financial income   4    45    14    44 
                     
Loss before taxes on income   (33,405)   (31,518)   (10,557)   (16,515)
                     
Taxes on income   16    11    13    6 
                     
Net loss  $         (33,421)  $(31,529)  $(10,570)  $(16,521)
                     
Basic loss per share  $(0.97)  $(1.27)  $(0.29)  $(0.66)
                     
Diluted loss per share  $(0.97)  $(1.30)  $(0.29)  $(0.66)
Weight average number of common stock used in computing basic loss per share   34,510,787    24,911,481    37,080,789    24,982,577 
Weight average number of common stock used in computing diluted loss per share   34,510,787    24,974,128    37,080,789    24,982,577 

 

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

 

-4-

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

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

 

   Common stock  

Additional

paid-in

capital

  

Accumulated

deficit

  

Total

stockholders'

equity

 
   Shares   Amount             
                     
Balance as of December 31, 2015   32,860,717   $4   $188,476   $(138,130)  $50,350 
Issuance of common stock at $5.50 per share, net   3,835,261    (*)   19,556    -    19,556 
Stock-based compensation related to options granted to consultants, directors and employees   -    -    6,187    -    6,187 
Exercise of  options and warrants   401,865    (*)   162    -    162 
Net loss   -    -    -    (33,421)   (33,421)
                          
Balance as of  September 30, 2016 (unaudited)   37,097,843   $4   $214,381   $(171,551)  $42,834 

 

(*) Represents an amount lower than $1.

 

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

 

-5-

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

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

 

   Nine months ended September 30, 
   2016   2015 
   Unaudited 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(33,421)  $(31,529)
Adjustments to reconcile loss to net cash used in operating activities:          
Depreciation   230    181 
Loss on disposal of property and equipment   -    18 
Stock-based compensation related to options and restricted shares granted to employees, directors and consultants   6,187    7,638 
Change in fair value of warrants classified as a liability   -    1,370 
Accrued severance pay   -    (103)
Changes in operating assets and liabilities:          
Prepaid expenses and other current assets   158    (780)
Trade payables   (704)   355 
Other accounts payable and accrued expenses   2,286    5,972 
Restricted lease deposits   (7)   - 
Net cash used in operating activities   (25,271)   (16,878)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property and equipment   (260)   (113)
Net cash used in investing activities  $(260)  $(113)

 

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

 

-6-

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

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

 

  

Nine months ended 

September 30,

 
   2016   2015 
   Unaudited 
CASH FLOWS FROM FINANCING ACTIVITIES:          
           
Proceeds from issuance of shares, net  $19,562   $- 
Proceeds from exercise of options and warrants   162    1,428 
           
Net cash provided by financing activities   19,724    1,428 
           
Decrease in cash and cash equivalents   (5,807)   (15,563)
           
Balance of cash and cash equivalents at the beginning of the period   53,064    33,288 
           
Balance of cash and cash equivalents at the end of the period  $47,257   $17,725 
           
Supplemental disclosure of cash flow information:          
           
Cash paid during the period for taxes  $16   $11 
           
Classification of liability in respect of warrants into equity due to exercise of warrants  $-   $1,982 
           
Supplemental disclosure of non-cash flow information:          
           
Deferred issuance costs  $-   $278 

 

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

 

-7-

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

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

 

NOTE 1:- GENERAL

 

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

 

    On October 20, 2016 the Company’s common stock ceased trading on the NYSE MKT and trading commenced on the NASDAQ stock market on October 21, 2016.

  

  b. As reflected in the accompanying financial statements, the Company incurred a net loss for the nine month period ended September 30, 2016 of $33,421 and had a negative cash flow from operating activities of $25,271 during the nine month period ended September 30, 2016. The accumulated deficit as of September 30, 2016 is $171,551. The Company and the Subsidiary have not yet generated revenues from product sale.
     
  c.

In June 2016, the Company entered into a Clinical Development and Option Agreement, or the Development and Option Agreement, with Kyowa Hakko Kirin Co., Ltd., or KHK, relating to the development and potential commercialization of KHK’s first-in-class anti-LIGHT monoclonal antibody, or the Antibody (MDGN-002). Under the Development and Option Agreement, the Company received an exclusive option for exclusive rights to develop and commercialize products containing the Antibody, or the Licensed Products, and to conduct various development activities with respect to the Antibody, including the conduct of a signal finding study testing the Antibody in Severe Pediatric Onset Inflammatory Bowel Disease, or the Study.

 

For a certain period of time after the completion of the Study, or the Exercise Period, the Company will have the option, or the Option, to obtain exclusive rights for the development and commercialization of the Antibody. If the Company exercises the Option, KHK will have 60 days to select one of two potential development and commercialization structures: a co-development/co-commercialization arrangement or a licensing arrangement.

     
    If, upon the Company’s exercise of the Option, KHK chooses to continue the collaboration as a co-development/co-commercialization arrangement, the Company will have the exclusive right to develop, manufacture and commercialize the Licensed Products in the United States and Canada.  The Company will be required to pay KHK an initial license fee in the low single-digit millions of dollars and may pay KHK up to an additional $18 million upon the achievement of certain regulatory milestones related to the Licensed Products. The parties will share the anticipated costs of development of the first Licensed Product in the Field in the United States, Canada and the European Union with the Company responsible for any costs in excess of an agreed cap.
     
   

If, upon the Company’s exercise of the Option, KHK chooses to continue the collaboration as a co-development/co-commercialization arrangement, the Company will have the exclusive right to develop, manufacture and commercialize the Licensed Products in the United States and Canada. The Company will be required to pay KHK an initial license fee in the low single-digit millions of dollars and may pay KHK up to an additional $18 million upon the achievement of certain regulatory milestones related to the Licensed Products. The parties will share the anticipated costs of development of the first Licensed Product for the treatment, prevention, and diagnosis of specified pediatric onset rare and orphan inflammatory diseases (including severe pediatric onset inflammatory bowel diseases such as Crohn’s disease and ulcerative colitis, or IBD) and other specified pediatric onset rare and orphan auto-immune diseases, or, collectively, the Field, in the United States, Canada and the European Union with the Company responsible for any costs in excess of an agreed cap. 

 

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

 

a.The accompanying unaudited interim financial statements of the Company, have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and the rules of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the audited financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2015 ("2015 Form 10-K") as filed with the SEC. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements that would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year as reported in the 2015 Form 10-K have been omitted.

 

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MEDGENICS, INC. AND ITS SUBSIDIARY

 

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

 

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

b.Recently issued accounting pronouncements:

 

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, or ASU 2014-15. ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern and to provide related disclosures in certain circumstances. The requirements of ASU 2014-15 will be effective for the annual financial statement period beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the impact that the adoption of the standards may have on our consolidated financial statements and additional changes may be identified.

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation, and includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The new standard is effective for our annual period ending after December 15, 2016, and for annual and interim periods thereafter, with early adoption permitted. We are currently evaluating the impact that the adoption of the standards may have on our consolidated financial statements and additional changes may be identified.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption. 

 

NOTE 3:- SEVERANCE PAY

 

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

 

In addition, all options granted to such executive under the Company’s stock incentive plan became fully vested and shall remain exercisable through the 24-month anniversary of the termination date. As a result of this termination, the non-cash equity compensation expense included in general and administrative expenses for the three and nine months ended September 30, 2016 is nil and $922, respectively.

 

-9-

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

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

 

NOTE 4:- STOCKHOLDERS' EQUITY

 

  a. Issuance of shares to investors:
     
    In June 2016, the Company completed an underwritten public offering of 3,835,261 shares of common stock, including 195,261 shares sold pursuant to the partial exercise of an option granted to the underwriters to purchase additional shares of common stock. The shares were offered to the public at a price of $5.50 per share.  Gross proceeds were $21,094 or approximately $19,556 in net proceeds after deducting underwriting discounts and commissions of $1,266 and other offering costs of approximately $272.
     
  b. Issuance of stock options and warrants to employees and directors:
     
    A summary of the Company's activity for options and warrants granted to employees and directors is as follows:

 

  

Nine months ended

September 30, 2016

 
  

Number of

options and

warrants

  

Weighted

average

exercise price

  

Weighted average

remaining contractual

terms (years)

  

Aggregate

intrinsic value

 
Outstanding at December 31, 2015   10,065,536   $5.78    6.48   $10,349 
                     
Granted   2,467,700   $4.63           
                     
Exercised   (889,440)  $2.58           
                     
Forfeited   (674,175)  $6.67           
                     
Outstanding at September 30, 2016   10,969,621   $5.79    6.41   $6,881 
                     
Vested and expected to vest at September 30, 2016   10,568,195   $5.80    6.31   $6,667 
                     
Exercisable at September 30, 2016   7,096,050   $5.91    5.02   $4,949 

 

Calculation of aggregate intrinsic value is based on the closing share price of the Company's common stock as reported on the NYSE MKT on September 30, 2016 ($5.57 per share).

 

As of September 30, 2016, there was $7,572 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 1.8 years.

 

-10-

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

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

 

NOTE 4:- STOCKHOLDERS' EQUITY (Cont.)

 

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

 

 The Company has granted stock options to certain R&D employees of the Company, which contain performance-based vesting criteria. Stock-based compensation expense associated with these performance-based stock options is recognized if the achievement of the performance condition is considered probable based on management’s best estimate .

 

  c. Issuance of options and warrants to consultants:

 

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

  

  

Nine months ended 

September 30, 2016

 
  

Number of

options and warrants

  

Weighted

average

exercise price

  

Weighted average

remaining contractual

terms (years)

  

Aggregate

intrinsic

value

 
Outstanding at December 31, 2015
   480,898   $6.65    2.67   $391 
                     
Exercised   (50,000)  $4.01           
Forfeited   (50,077)  $6.59           
                     
Outstanding at September 30, 2016   380,821   $7.01    1.50   $193 
                     
Exercisable at September 30, 2016   367,488   $7.08    1.44   $185 

  

    Calculation of aggregate intrinsic value is based on the closing share price of the Company's common stock as reported on the NYSE MKT on September 30, 2016 ($5.57 per share).
     
    As of September 30, 2016, there was $16 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. 

 

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

 

  

Nine months ended

September 30,

  

Three months ended

September 30,

 
   2016   2015   2016   2015 
                 
Research and development expenses  $2,197   $1,506   $711   $525 
General and administrative expenses   3,990    6,132    1,213    1,273 
                     
   $6,187   $7,638   $1,924   $1,798 

 

-11-

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

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

 

NOTE 4:- STOCKHOLDERS' EQUITY (Cont.)

 

  e.  Summary of shares to be issued upon exercise of options and warrants:
     
    A summary of shares to be issued upon exercise of all the options and warrants, segregated into ranges, as of September 30, 2016 is presented in the following table:

 

       As of September 30, 2016 
       Shares to be   Shares to be     
       issued upon   issued upon   Weighted average 
       exercise of   exercise of   remaining 
   Exercise   options and   options and   contractual terms 
   price per   warrants   warrants   of options and 
Options / Warrants  share ($)   outstanding   exercisable   warrants (in years) 
Options:                    
Granted to Employees and Directors                    
    2.66-3.14    193,000    193,000    5.2 
    3.64-4.99    5,165,229    3,353,436    6.1 
    5.07-7.37    4,400,527    2,419,766    7.4 
    8.09-10.80    1,210,865    1,129,848    2.0 
         10,969,621    7,096,050      
                     
Granted to Consultants   5.02-6.65    54,348    41,015    4.2 
                     
Total Shares to be Issued upon Exercise of Options        11,023,969    7,137,065      
                     
Warrants:                    
                     
Granted to Consultants   3.76-4.99    125,000    125,000    1.6 
    9.17-11.16    201,473    201,473    0.7 
         326,473    326,473      
                     
Granted to Investors   6.78-8.34    4,582,920    4,582,920    1.2 
                     
                     
Total Shares to be Issued upon Exercise of Warrants        4,909,393    4,909,393      
                     
Total Shares to be Issued upon Exercise of Options and Warrants        15,933,362    12,046,458      

 

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

 

-12-

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

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

 

NOTE 5:- LOSS PER SHARE

 

Details in the computation of diluted loss per share:

 

   Nine months ended September 30, 
   2016   2015 
  

Weighted

average

number of

shares

   Net loss  

Weighted

average

number of

shares

   Net loss 
                 
For the computation of basic loss   34,510,787   $33,421    24,911,481   $31,529 
                     
Effect of potential dilutive common shares issuable upon exercise of warrants classified as liability   -    -    62,647   $824(*)
                     
For the computation of diluted loss   34,510,787   $33,421    24,974,128   $32,353 

 

  (*) 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 16,811,804 and 17,897,262 for the nine months ended September 30, 2016 and 2015 respectively.

 

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ITEM 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “can,” “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “continues,” “anticipates,” “intends,” “seeks,” “targets,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to them. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015, and any updates to those risk factors included in Part II, Item 1A of this Quarterly Report on Form 10-Q. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

 

Overview

 

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

 

We have partnered with the Center for Applied Genomics, or CAG, at The Children’s Hospital of Philadelphia, or CHOP, to implement a genomics-medicine driven approach to drug development. CAG’s assets include a fully automated biorepository containing specimens from more than 75,000 pediatric patients and 150,000 of their relatives. The sample is highly enriched for rare and orphan diseases and the large majority of patients have been genotyped. Their phenotypes are recorded in a modern electronic health record that is linked to the genomics database. The patients have consented to anonymized use of their data for research and follow up contact if needed.

 

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

 

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

 

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

 

Our initial program arising out of our genomic medicine strategy is the development candidate NFC-1 (MDGN-001). Through our acquisition of neuroFix, LLC, or neuroFix, in September 2015, we acquired the rights to develop NFC-1, as well as the rights to certain data derived from a clinical trial and other studies of NFC-1. NFC-1 is a first-in-class, non-stimulant metabotropic glutamate receptor, or mGluR, neuromodulator that is being developed for the treatment of mGluR network mutation positive Attention Deficit Hyperactivity Disorder, or ADHD, as well as neuropsychiatric symptoms resulting from a related rare genetic disorder, 22q11.2 Deletion Syndrome. We intend to develop NFC-1 for the treatment of mGluR network mutation positive ADHD, or mGluR+ ADHD, and certain other neurological and neuropsychological indications. A Phase 2/3 trial for mGLuR+ ADHD is currently enrolling patients. A Phase 1b trial for the treatment of the psychiatric symptoms of 22q11.2 Deletion Syndrome is now recruiting and is expected to begin enrolling patients in the fourth quarter of 2016. A Phase 1b clinical trial of NFC-1 in adolescents with ADHD and disruptions in the mGluR gene network was completed in 2015, demonstrating the safety of NFC-1 and signaling potential efficacy in the adolescents treated.

 

Anti-LIGHT Monoclonal Antibody

 

Our second development program to come from the CHOP collaboration is for the development and potential commercialization of a first-in-class anti-LIGHT monoclonal antibody, or the Antibody (MDGN-002). In June 2016 we entered into the Development and Option Agreement with KHK. Under the Development and Option Agreement, we received an exclusive option for exclusive rights to develop and commercialize products containing the Antibody, or a Licensed Product, and to conduct various development activities with respect to the Antibody, including the conduct of a signal finding study testing the Antibody in Severe Pediatric Onset Inflammatory Bowel Disease, or the Study. The Study, expected to initiate in the fourth quarter of 2016, will be conducted under an existing investigational new drug application previously filed with the United States Food and Drug Administration by KHK and transferred to us pursuant to the Development and Option Agreement.

 

For a certain period of time after the completion of the Study, or the Exercise Period, we will have the option, or the Option, to obtain exclusive rights for the development and commercialization of the Antibody. If we exercise the Option, KHK will have 60 days to select one of two potential development and commercialization structures: a co-development/co-commercialization arrangement (Plan A) or a licensing arrangement (Plan B). Terms for both structures have been fully negotiated with the terms for each structure set forth in exhibits to the Development and Option Agreement.

 

Co-Development/Co-Commercialization Arrangement (Plan A)

 

Under the co-development/co-commercialization arrangement (Plan A), we will have the exclusive right to develop, manufacture and commercialize the Licensed Products in the Field in the United States and Canada. We will also be responsible for development and regulatory approval of the first Licensed Product in the European Union and then transferring such regulatory approval to KHK or its designee. We will be responsible for the manufacture of the Licensed Products for use by the parties in clinical trials as well as for commercialization in their respective fields and/or territories, with KHK purchasing the Licensed Products from us.

 

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We will be required to pay KHK an initial license fee in the low single-digit millions of dollars upon the co-development/co-commercialization arrangement becoming effective. We may pay KHK up to an additional $18 million upon the achievement of certain regulatory milestones related to the Licensed Products. The parties will share the anticipated costs of development of the first Licensed Product in the Field in the United States, Canada and the European Union with the Company responsible for any costs in excess of an agreed cap. The parties will split profits from our sales of Licensed Products in the United States and Canada equally. KHK will pay us low double-digit royalties for sales of Licensed Products outside the United States and Canada and outside the Field in the United States and Canada.

 

Licensing Arrangement (Plan B)

 

Under the licensing arrangement (Plan B), we will have the exclusive right to develop, manufacture and commercialize the Licensed Products in the Field in the United States, Canada and the European Union. We will be responsible for the manufacture of the Licensed Products for use by the parties in clinical trials as well as for commercialization in their respective fields and/or territories.

 

We will be required to pay KHK an initial license fee in the low single-digit millions of dollars upon the licensing arrangement becoming effective. We may pay KHK up to an additional $28 million upon the achievement of certain regulatory milestones related to the Licensed Products. The parties will split profits from our sales of Licensed Products in the United States, Canada and the European Union with us being entitled to approximately 74% of such profits and KHK being entitled to approximately 26% of such profits. KHK will pay us low double-digit royalties for sales of Licensed Products outside the United States, Canada and the European Union and outside the Field in the United States, Canada and the European Union. We will be responsible for costs of development of Licensed Products in the United States, Canada and the European Union. KHK will have the right to purchase the Licensed Products from us.

 

Financial Operations Overview

 

We have generated significant losses to date, and we expect to continue to generate losses as we progress towards the commercialization of our product candidates. We incurred net losses of approximately $33.42 million for the nine month period ended September 30, 2016. As of September 30, 2016, we had stockholders’ equity of approximately $42.83 million. As of September 30, 2016, we had cash and cash equivalents of $47.26 million, which we believe will provide funding for our operations at least through the first quarter of 2018. We are unable to predict the extent of any future losses or when we will become profitable, if at all.

 

Research and Development Expense

 

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

 

Conducting a significant amount of development is central to our business model. Product candidates in later-stage clinical development generally have higher development costs than those in earlier stages of development, primarily due to the significantly increased size and duration of the clinical trials. Research and development expenses will likely increase as we advance the development of NFC-1 (MDGN-001) and the Antibody (MDGN-002) and look to advance our earlier-stage research and development projects.

 

The process of conducting pre-clinical studies and clinical trials necessary to obtain regulatory approval is costly and time consuming. The probability of success for each product candidate and clinical trial may be affected by a variety of factors, including, among others, the quality of the product candidate’s early clinical data, investment in the program, competition, manufacturing capabilities and commercial viability. As a result of these uncertainties, together with the uncertainty associated with clinical trial enrollments and the risks inherent in the development process, we are unable to determine the duration and completion costs of current or future clinical stages of our product candidates or when, or to what extent, we will generate revenues from the commercialization and sale of any of our product candidates. Development timelines, probability of success and development costs vary widely. We are concurrently focusing on the development and potential commercialization of the Antibody (MDGN-002) under the Development and Option Agreement with KHK, advancing the development of NFC-1 (MDGN-001) and advancing our earlier-stage research and development projects, including a second-generation TARGT system and the application of TARGT in the central nervous system.

 

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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.

 

Results of Operations for the Nine Months Ended September 30, 2016 and 2015

 

Research and Development Expenses

 

Gross research and development expenses for the nine months ended September 30, 2016 were $23.42 million increasing from $12.93 million for the same period in 2015 mainly due to increased sub-contractor costs to advance our clinical activities related to NFC-1 (MDGN-001) program. Net research and development expenses for the nine months ended September 30, 2016 were $23.22 million, increasing from $11.13 million for the same period in 2015. The increase in net research and development expenses was due to the increase in gross research and development expenses as detailed above in addition to a decrease of $1.60 million in the amount of development grants received from the Israeli Office of the Chief Scientist, or the OCS.

 

Non-recurring research and development expenses of $8.17 million for the nine months ended September 30, 2015 were related to the neuroFix acquisition, which was accounted for as a purchase of an asset in accordance with ASC 805 and thus recorded as expense.

 

General and Administrative Expenses

 

General and administrative expenses for the nine months ended September 30, 2016 were $10.18 million, decreasing from $10.83 million for the same period in 2015 primarily due to a decrease in stock-based compensation expenses related to options granted to directors, which was offset in part by severance benefits recorded upon the termination of an officer.

 

Financial Income and Expenses

 

Financial income for the nine months ended September 30, 2016 and 2015 was de minimis.

 

Financial expenses for the nine months ended September 30, 2016 were de minimis, decreasing from $1.43 million for the same period in 2015. The $1.43 million of financial expenses in 2015 was mainly due to an increase in the valuation of our warrant liability. All warrants requiring revaluation were exercised in 2015, thus eliminating such liability in 2016.

 

Results of Operations for the Three Months Ended September 30, 2016 and 2015

 

Research and Development Expenses

 

Gross and net research and development expenses for the three months ended September 30, 2016 were $7.73 million and $7.53 million, respectively, increasing from $4.57 million and $4.20 million, respectively, for the same period in 2015 mainly due to increased sub-contractor costs to advance our clinical activities related to the NFC-1 (MDGN-001) program.

 

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Non-recurring research and development expenses of $8.17 million for the three months ended September 30, 2015 were related to the neuroFix acquisition, which was accounted for as a purchase of an asset in accordance with ASC 805 and thus recorded to expense.

 

General and Administrative Expenses

 

General and administrative expenses for the three months ended September 30, 2016 were $3.04 million, increasing slightly from $3.0 million for the same period in 2015.

 

Financial Income and Expenses

 

Financial income for the three months ended September 30, 2016 and 2015 was de minimis.

 

Financial expenses for the three months ended September 30, 2016 were de minimis, decreasing from $1.19 million for the same period in 2015. The $1.19 million of financial expenses in 2015 was mainly due to an increase in the valuation of our warrant liability. All warrants requiring revaluation were exercised in 2015, thus eliminating such liability in 2016.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

We have financed our operations primarily through a combination of equity issues, debt issues and grants from the OCS and other third parties.

 

We received $13.97 million from inception through September 30, 2016 from the OCS in development grants, $0.41 million of which was received during the nine months ended September 30, 2016.

 

In June 2016, we completed a registered public offering of 3,835,261 shares of common stock, which includes 195,261 shares sold pursuant to the partial exercise of the underwriters’ over-allotment option, at a price to the public of $5.50 per share. The net proceeds from this offering to us were approximately $19.56 million, after deducting underwriting discounts and commissions and offering expenses of $1.54 million.

 

Cash Flows

 

We had cash and cash equivalents of $47.26 million at September 30, 2016 and $53.06 million at December 31, 2015. The decrease in our cash balance during the nine months ended September 30, 2016 was primarily related to an increase in cash used in operating activities during the nine months ended September 30, 2016, which was offset by the net proceeds of the registered public offering of common stock during the period of $19.56 million.

 

Net cash used in operating activities of $25.27 million for the nine months ended September 30, 2016 and $16.88 million for the nine months ended September 30, 2015 primarily reflected our cash expenses for our operations.

 

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

 

Net cash provided by financing activities during the nine months ended September 30, 2016 was $19.72 million, primarily the result of net proceeds of the registered public offering of $19.57 million. Net cash provided by financing activities of $1.34 million during the nine months ended September 30, 2015 was the result of the exercise of options and warrants.

 

Funding Requirements

 

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

 

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Without taking into account any revenue we may receive as a result of licensing or other commercialization agreements, we believe that cash on hand, including the net proceeds we received from our public offerings of common stock in the fourth quarter of 2015 and the second quarter of 2016, will be sufficient to enable us to fund our operating expenses and capital expenditure requirements at least through the first quarter of 2018. We have based this estimate on assumptions that may prove to be wrong, and we could use our available resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials.

 

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

 

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

 

Critical Accounting Policies

 

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

 

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

 

Stock-Based Compensation

 

We account for stock options granted to employees and directors 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 requisite service period on a straight-line basis.

 

For the purpose of valuing options granted to our employees and directors during the nine months ended September 30, 2016 and 2015, we used the Binomial options pricing model. To determine the risk-free interest rate, we utilized the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected term of our awards. We estimated the expected life of the options granted based on anticipated exercises in the future periods assuming the success of our business model as currently forecast. The expected dividend yield reflects our current and expected future policy for dividends on our common stock. The expected stock price volatility for our stock options was calculated by examining historical volatilities for publicly traded industry peers as we do not have sufficient trading history for our common stock. We will continue to analyze the expected stock price volatility and expected term assumptions as more historical data for our common stock becomes available. We currently estimate that we will experience 8% forfeitures for those options currently outstanding.

 

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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, 2015.

 

ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk

 

There has been no significant change in our exposure to market risk during the nine months ended September 30, 2016. For a discussion of our exposure to market risk, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” contained in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

ITEM 4 - Controls and Procedures

 

Evaluation of disclosure controls and procedures

 

As required by Rule 13a-15(b) of the Exchange Act, 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 Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2016, the end of the period covered by this report.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1 - Legal Proceedings

 

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

 

ITEM 1A - Risk Factors

 

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

 

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

 

Recent Sales of Unregistered Securities

 

None

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

None

 

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ITEM 3 - Defaults Upon Senior Securities

 

None

 

ITEM 4 - Mine Safety Disclosures

 

Not applicable

 

ITEM 5 - Other Information

 

None

 

ITEM 6 - Exhibits

 

Exhibit No.   Description
     
3.1   Amended and Restated Certificate of Incorporation (previously filed as Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed November 5, 2010 (File No. 333-170425) and incorporated herein by reference).
     
3.2   Certificate of Amendment to Amended and Restated Certificate of Incorporation (previously filed as Exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed November 5, 2010 (File No. 333-170425) and incorporated herein by reference).
     
3.3   Certificate of Amendment to Amended and Restated Certificate of Incorporation dated as of February 14, 2011 (previously filed as Exhibit 4.3 to the Company’s Post-Effective Amendment No. 1 to Form S-1 on Form S-3 filed July 16, 2012 (File No. 333-170425) and incorporated herein by reference).
     
3.4   Second Amended and Restated By-Laws (previously filed as Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 and incorporated herein by reference).
     
31.1   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
     
31.2   Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
     
32.1   Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
     
101   Interactive Data File (filed herewith).

 

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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: November 3, 2016 By:   /s/ Michael F. Cola
    Michael F. Cola
President and Chief Executive Officer
(Principal Executive Officer)
   
Date: November 3, 2016 By:   /s/ Brian D. Piper
    Brian D. Piper
Chief Financial Officer
(Principal Financial Officer)