Exhibit 99.1

 

The information provided in each Item contained in this Exhibit is presented only in connection with the reporting changes described in the accompanying Current Report on Form 8-K. It does not reflect information, developments, or events occurring after March 9, 2020, the date on which we filed our Form 10-K, and does not update the disclosures therein in any way other than as required to reflect Masthercell as discontinued operations and the consequential change in reportable segments. Accordingly, this Current Report on Form 8-K should be read in conjunction with our Form 10-K and subsequent filings with the SEC, including our Quarterly Reports on Form 10-Q.

 

   
   

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide information necessary to understand our audited consolidated financial statements for the fiscal years ended December 31, 2019 and November 30, 2018 and one month ended December 31, 2018 and highlight certain other information which, in the opinion of management, will enhance a reader’s understanding of our financial condition, changes in financial condition and results of operations. In particular, the discussion is intended to provide an analysis of significant trends and material changes in our financial position and the operating results of our business during the year ended December 31, 2019, as compared to the fiscal year ended November 30, 2018 and the one month ended December 31, 2018. This discussion should be read in conjunction with our consolidated financial statements for the fiscal years ended December 31, 2019 and November 30, 2018 and one-month period ended December 31, 2018 and related notes included elsewhere on this Form 8-K and in our forms on 10-K for the same periods. These historical financial statements may not be indicative of our future performance. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains numerous forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks described throughout this filing, particularly in “Item 1A. Risk Factors.”

 

Corporate Overview

 

We are a biotechnology company specializing in the development, manufacturing and provision of cell and gene therapies (“CGTs”) through point-of-care solutions. We have historically operated through two independent business platforms: (i) a point-of-care cell therapy (“POC”) platform and (ii) a Contract Development and Manufacturing Organization (“CDMO”) platform, which provided contract manufacturing and development services for biopharmaceutical companies (the “CDMO Business”). Through the POC platform, our aim is to further the development of CGTs, including Advanced Therapy Medicinal Products (“ATMPs”), through collaborations and in-licensing with other pre-clinical and clinical-stage biopharmaceutical companies and research and healthcare institutes to bring such ATMPs to patients. These therapies span a wide range of treatments including, but not limited to, cell-based immunotherapies, therapeutics for metabolic diseases, neurodegenerative diseases and tissue regeneration. We out-license these ATMPs, thus far primarily through joint venture (“JV’) agreements, with regional partners including pharmaceutical and biotech companies as well as research institutions and hospitals. These regional partners have cell therapies in clinical development and are to whom we also provide manufacturing know-how, assay services, licensing, regulatory assistance, pre-clinical studies, intellectual property services, and co-development services (collectively “POC Development Services”) to support their activity in order to reach patients in a point-of-care hospital setting. Currently, our POC Development Services constitute the entirety of our revenue from the POC platform. Through the CDMO platform, we had focused on providing contract manufacturing and development services for biopharmaceutical companies, the majority of which were via our subsidiary Masthercell Global Inc.

 

   
   

 

On February 2, 2020, we entered into a Stock Purchase Agreement (the “Purchase Agreement”) with GPP-II Masthercell LLC (“GPP” and together with the Company, the “Sellers”), Masthercell Global Inc. (“Masthercell”) and Catalent Pharma Solutions, Inc. (the “Buyer”). Pursuant to the terms and conditions of the Purchase Agreement, on February 10, 2020, the Sellers sold 100% of the outstanding equity interests of Masthercell to Buyer (the “Masthercell Sale”) for an aggregate nominal purchase price of $315 million, subject to customary adjustments. After accounting for GPP’s liquidation preference and equity stake in Masthercell as well as SFPI – FPIM’s interest in MaSTherCell S.A., distributions to Masthercell option holders and transaction costs, we received approximately $126.7 million. As a result, in the first quarter of 2020, we presented Masthercell as discontinued operations in our condensed consolidated financial statements. Accordingly, all prior periods have been recast to conform to this presentation. Our audited financial statements for the fiscal years ended December 31, 2019 and November 30, 2018 and one month ended December 31, 2018 and this Management’s Discussion and Analysis of Financial Condition and Results of Operations reflect the results of Masthercell as of and through December 31, 2019 as discontinued operations.

 

Our therapeutic development efforts in our POC business are focused on advancing breakthrough scientific achievements in ATMPs, and namely autologous therapies, which have a curative potential. We base our development on therapeutic collaborations and in-licensing with other pre-clinical and clinical-stage biopharma companies as well as direct collaboration with research and healthcare institutes. We are engaging in therapeutic collaborations and in-licensing with other academic centers and research centers in order to pursue emerging technologies of other ATMPs in cell and gene therapy in such areas including, but not limited to, cell-based immunotherapies, therapeutics for metabolic diseases, neurodegenerative diseases and tissue regeneration Each of these customers and collaborations represents a growth opportunity and future revenue potential as we out-license these ATMPs through regional partners to whom we also provide regulatory, pre-clinical and training services to support their activity in order to reach patients in a point-of-care hospital setting.

 

We carry out our POC business through three wholly-owned and separate subsidiaries. This corporate structure allows us to simplify the accounting treatment, minimize taxation and optimize local grant support. The subsidiaries related to this business are Orgenesis Maryland Inc., in the U.S., Orgenesis Belgium SRL (formerly Orgenesis SPRL), in the European Union and Orgenesis Ltd. in Israel.

 

During the periods covered by this report, we carried out our CDMO business through our subsidiaries Masthercell Global (of which we owned 62.2%), Atvio Biotech Ltd. (“Atvio”), an Israeli-based CDMO, and CureCell Co. Ltd. (“CureCell”), a Korea-based CDMO (of which we own 94.12%). Masthercell Global’s wholly owned subsidiaries, included MaSTherCell S.A., a Belgian-based entity (“MaSTherCell”) Cell Therapy Holdings S.A., a Belgian-based entity, and Masthercell U.S., LLC, a U.S.-based entity.

 

During the periods covered by this report, we operated our POC and CDMO businesses as two separate business segments. The Chief Executive Officer (“CEO”) is the Company’s chief operating decision-maker. Management has determined that effective from the first quarter of 2020, all of the Company’s continuing operations are in the point-of-care business via the Company’s CGT Biotech Platform. Therefore, no segment report has been presented.

 

   
   

 

Corporate History

 

We were incorporated in the state of Nevada on June 5, 2008 under the name Business Outsourcing Services, Inc. Effective August 31, 2011, we completed a merger with our subsidiary, Orgenesis Inc., a Nevada corporation, which was incorporated solely to effect a change in its name. As a result, we changed our name from “Business Outsourcing Services, Inc.” to “Orgenesis Inc.”

 

On October 11, 2011, we incorporated Orgenesis Ltd. as our wholly-owned subsidiary under the laws of Israel. On February 2, 2012, Orgenesis Ltd. signed and closed a definitive agreement to license from Tel Hashomer - Medical Research, Infrastructure and Services Ltd. (“THM”), a private company duly incorporated under the laws of Israel, patents and know-how related to the development of AIP (Autologous Insulin Producing) cells.

 

On November 6, 2014, we entered into an agreement with the shareholders of MaSTherCell S.A. to acquire MaSTherCell S.A. On March 2, 2015, we closed on the acquisition of MaSTherCell whereby it became a wholly-owned subsidiary of Orgenesis. Through MaSTherCell, we became engaged in the CDMO business.

 

On June 28, 2018, we, Masthercell Global, Great Point Partners, LLC, a manager of private equity funds focused on growing small to medium sized heath care companies (“Great Point”), and certain of Great Point’s affiliates, entered into a series of definitive strategic agreements intended to finance, strengthen and expand our CDMO business. In connection therewith, we, Masthercell Global and GPP-II Masthercell, LLC, a Delaware limited liability company (“GPP-II”) and an affiliate of Great Point, entered into a Stock Purchase Agreement (the “SPA”) pursuant to which GPP-II purchased 378,000 shares of newly designated Series A Preferred Stock of Masthercell Global (the “Masthercell Global Preferred Stock”), representing 37.8% of the issued and outstanding share capital of Masthercell Global, for cash consideration to be paid into Masthercell Global of up to $25 million, subject to certain adjustments (the “Consideration”). At such time, we held 622,000 shares of Masthercell Global’s Common Stock, representing 62.2% of the issued and outstanding equity share capital of Masthercell Global. An initial cash payment of $11.8 million of the Consideration was remitted at closing by GPP-II, with a follow up payment of $6,600,000 made in each of years 2018 and 2019, or an aggregate of $13.2 million (the “Future Payments”), if (a) Masthercell Global achieved specified EBITDA and revenues targets during each of these years, and (b) the Orgenesis’ shareholders approved certain provisions of the Stockholders’ Agreement referred to below on or before December 31, 2019. Both of these conditions were met and we received both milestone payments.

 

Contemporaneous with the execution of the SPA, we and Masthercell Global entered into a Contribution, Assignment and Assumption Agreement pursuant to which we contributed to Masthercell Global our assets relating to the CDMO Business (as defined below), including the CDMO subsidiaries (the “Corporate Reorganization”). In furtherance thereof, Masthercell Global, as our assignee, acquired all of the issued and outstanding share capital of Atvio, our Israel based CDMO partner since May 2016, and 94.12% of the share capital of CureCell, our Korea based CDMO partner since March 2016. We exercised the “call option” to which we were entitled under the joint venture agreements with each of these entities to purchase from the former shareholders their equity holding. The consideration for the outstanding share equity in each of Atvio and CureCell consisted solely of our common stock. In respect of the acquisition of Atvio, we issued to the former Atvio shareholders an aggregate of 83,965 shares of our common stock. In respect of the acquisition of CureCell, we issued to the former CureCell shareholders an aggregate of 202,846 shares of our common stock subject to a third-party valuation. Together with MaSTherCell S.A., Atvio and CureCell were directly held subsidiaries under Masthercell Global (collectively, the “Masthercell Global Subsidiaries”).

 

   
   

 

On August 7, 2019, we, Masthercell Global and GPP (the “Parties”) entered into a Transfer Agreement (the “Transfer Agreement”). As a result of the Transfer Agreement, Masthercell Global transferred all of its equity interests of Atvio and CureCell to us in exchange for one dollar ($1.00). The Transfer Agreement also contains agreements made with respect to certain intercompany loans. We accounted for the Transfer Agreement as a transaction with non-controlling interest.

 

Material Developments During Fiscal 2019

 

Institutional Review Board Approval

 

On April 29, 2019, we announced that we had received Institutional Review Board (IRB) approval to collect liver biopsies from patients at Rambam Medical Center located in Haifa, Israel for a planned study to confirm the suitability of liver cells for personalized cell replacement therapy for patients with insulin-dependent diabetes resulting from total or partial pancreatectomy. The liver cells are intended to be bio-banked for potential future clinical use.

 

The goal of the proposed study, entitled “Collection of Human Liver Biopsy and Whole Blood Samples from Type 1 Diabetes Mellitus (T1DM), Total or Partial Pancreatectomy Patients for Potential use as an Autologous Source for Insulin Producing Cells in Future Clinical Studies,” is to confirm the suitability of the liver cells for personalized cell replacement therapy, as well as eligibility of patients to participate in a future clinical study, as defined by successful Autologous Insulin Producing (AIP) cell production from their own liver biopsy. The secondary objective of the study is to evaluate patients’ immune response to AIPs based on the patient’s blood samples and followed by subcutaneous implantation into the patients’ arm which would represent the first human trial. We have developed a novel technology based on technology licensed from Tel Hashomer Medical Research Infrastructure and Services Ltd., utilizing liver cells as a source for AIP cells as replacement therapy for islet transplantation.

 

During the study, liver samples will be collected and then processed and stored in specialized, clinical grade, tissue banks for potential clinical use. The enrollment for the study’s 20 patients commenced in May 2019. The propagated cells will be maintained in a tissue bank and are intended to be utilized in a future clinical study, in which the cells will be transdifferentiated and administered back to the patients as a potential treatment. This personalized autologous process will be performed under our POC model in which the patient liver samples are processed, cryopreserved and potentially re-injected, all in the medical center under clinical grade/GMP level conditions.

 

   
   

 

Joint Venture Agreement with First Choice International Company, Inc.

 

On March 12, 2019, the Company and First Choice International Company, Inc. (“First Choice”) entered into a Joint Venture Agreement (the “JVA”) pursuant to which First Choice will collaborate with the Company to further the clinical development and commercialization of the Company’s cell regeneration and gene therapeutic products in Panama and Latin America countries (the “Territory”) and the Company will collaborate with First Choice to further the clinical development and commercialization of products to be introduced by First Choice, which will be offered for sale by the Company globally outside of the Territory. The parties intend to pursue the joint venture through a newly established company (hereinafter the “JV Company”) which the Company by itself, or together with a designee, will hold a 50% participating interest therein, with the remaining 50% participating interest being held by First Choice by itself, or together with a designee.

 

Pursuant to the terms of the JVA, the JV Company will initially be owned 100% by First Choice and, until such JV Company is established, all activities in the Territory will be carried out through First Choice. Upon the Company’s request, First Choice will transfer all activities, and results, data, information, material, IP, know-how, contracts, licenses, authorizations, permissions, grants, obligations and assets related to such activities to the JV Company. In addition, each party shall be required to exert best commercial efforts to carry out, in a timely and professional manner, its respective obligations according to a detailed work plan to be agreed upon by First Choice and Company within no later than sixty (60) days following the execution of the JVA.

 

Debt Financing Agreements

 

In April 2019, we entered into a convertible loan agreement with an offshore investor for an aggregate amount of $500 thousand into the U.S. Subsidiary. The investor, at its option, may convert the outstanding principal amount and accrued interest under this note into shares and three-year warrants to purchase shares of our common stock at a per share exercise price of $7.00; or into shares of the U.S. Subsidiary at a valuation of the U.S. Subsidiary of $50 million.

 

In May 2019, we entered into a private placement subscription agreement with a non-U.S. investor for $5 million. The lender shall be entitled, at any time prior to or no later than the maturity date, to convert the outstanding amount, into units of (1) shares of our common stock at a conversion price per share equal to $7.00 and (2) warrants to purchase an equal number of additional shares of our common stock at a price of $7.00 per share.

 

In June 2019, we entered into private placement subscription agreements with investors for an aggregate amount of $2 million. The lenders shall be entitled, at any time prior to or no later than the maturity date, to convert the outstanding amount, into units of (1) shares of our common stock at a conversion price per share equal to $7.00 and (2) warrants to purchase an equal number of additional shares of our common stock at a price of $7.00 per share.

 

   
   

 

In October 2019, we entered into a Private Placement Subscription Agreement and Convertible Credit Line Agreement (collectively, the “Credit Line Agreements”) with four non-U.S. investors (the “Lenders”), pursuant to which the Lenders furnished us access to us of an aggregate $5.0 million credit line (which consists of $1.25 million from each Lender) (collectively, the “Credit Line”). Pursuant to the Credit Line Agreements, we are entitled to draw down an aggregate of $1 million (consisting of $250,000 from each Lender) of the Credit Line in each of October 2019 and November 2019. In each of December 2019, January 2020 and February 2020, we were entitled to draw down an additional aggregate of $1 million (consisting of $250,000 from each Lender), until the total amount drawn down under the Credit Line reaches an aggregate of $5 million (consisting of $1.25 million from each Lender), subject to the approval of the Lenders.

 

Pursuant to the terms of the Credit Line Agreements and the Notes, the total loan amount, and all accrued but unpaid interest thereon, shall become due and payable on the second anniversary of the Effective Date (the “Maturity Date”). The Maturity Date may be extended by each Lender in its sole discretion and shall be in writing signed by us and the Lender. Interest on any amount that has been drawn down under the Credit Line accrues at a per annum rate of eight percent (8%). At any time prior to or on the Maturity Date, by providing written notice to us, each of the Lenders is entitled to convert its respective drawdown amounts and all accrued interest, into shares of our common stock at a conversion price equal to $7.00 per share.

 

Furthermore, upon the drawdown of $500 thousand from each Lender and, together with the other Lenders, a drawdown of an aggregate of $2 million under the Credit Line, the existing warrants of the Lenders to purchase shares of our common stock shall be amended to extend their exercise date to June 30, 2021 and we will issue to each of the Lenders warrants to purchase 50,000 shares of our common stock at an exercise price of $7.00 per share. The new warrants will be exercisable for three (3) years from the Effective Date. During October 2019, such drawdown was reached and the warrants were issued.

 

The lender shall be entitled, at any time prior to or no later than the maturity date, to convert the outstanding amount, into units of shares of our common stock at a conversion price per share equal to $7.00.

 

As of December 31, 2019, we had received $3.65 million from the Convertible Credit Line investment comprised of $1.15 million from one investor, $1 million from a second investor, and $750 thousand from two of the other lenders.

 

In December 2019, we entered into private placement subscription agreements with investors for an aggregate amount of $250 thousand. The lenders shall be entitled, at any time prior to or no later than the maturity date, to convert the outstanding amount, into units of shares of our common stock at a conversion price per share equal to $7.00.

 

FDA Approval for Orphan Drug Designation for AIP Cells

 

On June 11, 2019, the FDA granted Orphan Drug Designation for our AIP cells as a cell replacement therapy for the treatment of severe hypoglycemia-prone diabetes resulting from total pancreatectomy (“TP”) due to chronic pancreatitis. The incidence of diabetes following TP is 100%, resulting in immediate and lifelong insulin-dependence with the loss of both endogenous insulin secretion and that of the counter-regulatory hormone, glucagon. Glycemic control after TP is notoriously difficult with conventional insulin therapy due to complete insulin dependence and loss of glucagon-dependent counter-regulation. Patients with this condition experience both severe hyperglycemic and hypoglycemic episodes.

 

   
   

 

Other Developments and Agreements During Fiscal 2019

 

Joint Ventures, Collaborations and License Agreements During Fiscal 2019

 

On February 14, 2019, we entered into a joint venture agreement with Theracell Advanced Biotechnology, a corporation organized under the laws of Greece (“Theracell”), pursuant to which the parties will collaborate in the clinical development and commercialization of the Company’s products in Greece, Turkey, Cyprus and Balkan countries and the clinical development and commercialization of Theracell’s products worldwide. On February 14, 2019, we entered into a master service agreement with Theracell whereby, subject to mutually agreed timing and definition of the scope of services, we provide regulatory services, pre-clinical studies, intellectual property services, GMP process translation services and co-development services to Theracell during 2019. During the year ended December 31, 2019, we recognized POC development service revenue in the amount of $857 thousand.

 

On February 27, 2019, we entered into a collaboration agreement with Tarus Therapeutics Inc., a Delaware corporation (“Tarus”), in connection with the collaboration in the funding, development and commercialization of certain technologies, products and patents of Tarus in the areas of therapeutics for cancer and other diseases in the field of cell therapies and their combination with checkpoint inhibitors comprised of Adenosine Receptor Antagonists. The parties plan to enter into pre-clinical studies as part of the preparations to clinical studies submission during 2020.

 

On March 12, 2019, we entered into a joint venture agreement with First Choice International Company, Inc., a corporation organized under the laws of Delaware (“First Choice”), pursuant to which the parties will collaborate in the clinical development and commercialization of our products in Panama and certain other Latin American countries as agreed by the parties (the “Territory”) and the clinical development and commercialization of First Choice’s products worldwide (other than in the Territory).

 

Effective April 2, 2019, we and The Trustees of Columbia University in the City of New York, a New York corporation (“Columbia”), entered into a Sponsored Research Agreement (the “SRA”) whereby we will provide financial support for studying the utility of serological tumor marker for tumor dynamics monitoring. Under the terms of the SRA, we shall pay $300 thousand per year for three years, or for a total of $900 thousand, with payments of $150 thousand due every six months. Effective April 2, 2019, we and Columbia entered into an Exclusive License Agreement (the “Columbia License Agreement”) whereby Columbia granted to us an exclusive license to discover, develop, manufacture and sell product in the field of cancer therapy. In consideration of the licenses granted under the Columbia License Agreement, we shall pay to Columbia (i) a royalty of 5% of net sales of any patented product sold and (ii) 2.5% of net sales of other products. Tech transfer from Columbia to us has been completed. We are now working on the completion of all the IND enabling requirements in order to get into Phase I study in a year’s time under point-of-care centers.

 

   
   

 

On May 6, 2019, we entered into a joint venture agreement with KinerjaPay Corp., a Delaware corporation (“KinerjaPay”), pursuant to which the parties will collaborate in the clinical development and commercialization of our products in Singapore and the introduction of KinerjaPay products to be offered for sale by us globally outside Singapore.

 

On May 15, 2019, we entered into a Joint Venture Agreement with SBH Sciences, Inc., a Massachusetts corporation (“SBH”), for the establishment of a joint venture with SBH for the purpose of collaborating in the field of gene and cell therapy development, process and services of bio-exosome therapy products and services in the areas of diabetes, liver cells and skin applications, including wound healing.

 

In October 2019, we concluded a license agreement with Caerus Therapeutics Corporation (a related party), a Virginia company (“Caerus”), pursuant to which Caerus granted us, among others, an exclusive license to all Caerus IP relating to Advance Chemeric Antigen Vectors for Targeting Tumors for the development and/or commercialization of certain licensed products. In consideration for the license granted to us under this agreement, we shall pay Caerus feasibility fees, annual maintenance fees and royalties of sales of up to 5% and up to 18% of sub-license fees. Through this joint venture, the parties co-develop a novel CART and CAR-NK platform for the treatment of solid tumors. The development is at a pre-clinical stage.

 

On November 10, 2019, the Maryland Subsidiary and Broaden Bioscience and Technology Corp, a Delaware corporation (“Broaden”), entered into a joint venture agreement (the “Broaden JVA”) pursuant to which the parties will collaborate in the development and/or marketing, clinical development and commercialization of cell therapy products and the setting up of POC processing facilities in China and the Middle East.

 

On December 20, 2019, we and the Regents of the University of California (“University”) entered into a joint research agreement in the field of therapies and processing technologies according to an agreed upon work plan. According to the agreement, we will pay the University royalties of up to 5% (or up to 20% of sub-licensing sales) in the event of sales that includes certain types of University owned IP.

 

Change of Fiscal Year

 

On October 22, 2018, the Board of Directors of the Company approved a change in the Company’s fiscal year end from November 30 to December 31 of each year. This change to the calendar year reporting cycle began January 1, 2019. As a result of the change, the Company is reporting a December 2018 fiscal month transition period, which is separately reported in this Annual Report on Form 8-K for the calendar year ending December 31, 2019. Financial information for the year ended December 31, 2018 has not been included in this Form 8-K for the following reasons: (i) the year ended November 30, 2018 provides a meaningful comparison for the year ended December 31, 2019; (ii) there are no significant factors, seasonal or other, that would materially impact the comparability of information if the results for the year ended December 31, 2018 were presented in lieu of results for the year ended November 30, 2018; and (iii) it was not practicable or cost justified to prepare this information.

 

   
   

 

Results of Operations

 

Comparison of the Year Ended December 31, 2019 to the Year Ended November 30, 2018 and for the One Month Ended December 31, 2018.

 

Our financial results for the year ended December 31, 2019 are summarized as follows in comparison to the year ended November 30, 2018 and for the one month ended December 31,2018:

 

   Year Ended   One Month Ended 
   December 31,   November 30,   December 31, 
   2019   2018   2018 
   (in thousands) 
Revenues  $2,629   $1,174   $102 
Revenues from related party   1,270    -    - 
Research and development expenses and Research and development service expenses, net   14,014    9,144    1,640 
Amortization of intangible assets   430    188    38 
Selling, general and administrative expenses   11,451    10,107    985 
Other income   (21)   (4,530)   - 
Share in losses of associated company   -    731    - 
Financial expense, net   843    2,932    10 
Loss from continuing operation before income taxes  $22,818   $17,398   $2,571 

 

Revenues

 

Our revenues for the year ended December 31, 2019 were $3,899 thousand, as compared to $1,174 thousand for the year ended November 30, 2018, representing an increase of 232%. Revenues for the one month ended December 31, 2018 were $102 thousand. The increase in revenues for the year ended December 31, 2019 compared to the corresponding period in 2018 is attributable to POC services revenue which we recognized for the first time in 2019.

 

   
   

 

Expenses

 

Cost of Research and Development and Research and Development Services, net:

 

   Year Ended   One Month Ended 
   December 31,   November 30,   December 31, 
   2019   2018   2018 
   (in thousands) 
Salaries and related expenses  $3,064   $2,318   $219 
Stock-based compensation   776    720    59 
Professional fees and consulting services   3,419    2,720    248 
Lab expenses   3,229    3,394    1,135 
First Choice JVA, see Note 11   2,741    -    - 
Depreciation expenses, net   521    227    33 
Other research and development expenses   1,076    582    58 
Less – grant   (812)   (817)   (112)
Total  $14,014   $9,144   $1,640 

 

Research and development expenses for the year ended December 31, 2019 were $ 14,014 thousand, as compared to $ 9,144 thousand for the year ended November 30, 2018, representing an increase of 53%. Research and development expenses (net) for the one month ended December 31, 2018 were $1,640 thousand.

 

The increase in research and development expenses reflects management’s determination to move its trans-differentiation technology to the next stage towards clinical trials. In the fiscal year ended December 31, 2019, we continued to focus on combining the in vitro research to increase insulin production and secretion with pre-clinical studies aiming to evaluate the efficacy and safety of the product in rodents’ model. In addition, we evaluated new transplantation methods during this period. Sourcing of the starting material (liver sampling and cell collection) and upscaling of virus production and cell propagation using advanced technologies complement this effort with the target to establish start-to-end production capabilities.

 

The scope of research and development expenses was also expanded to the evaluation and development of new cell therapies related technologies in the field of immuno-oncology, liver pathologies and others. In furtherance of these developments, salaries and related expenses increased for the year ended December 31, 2019 compared to year ended November 30, 2018, primarily due to the expansion of our development team in Israel and Belgium. Included in the research and development expenses are research and development services expenses.

 

In addition, the increase in research and development, net expenses in the year ended December 31, 2019 is primarily attributable to the following:

 

(i) An increase in salaries and related expenses of $746 thousand, primarily attributable to an increase of activities and operational staff and the provision of research and development services.
   
(ii) An increase in professional fees and consulting services of $699 thousand related to the increased research and development activities.
   
(iii) The First Choice JVA (See Note 11 to Item 8 of this Annual Report on Form 8-K for further details).
   
(iv) An increase in other research and development expenses of $494 thousand, as a result of expenses related to new therapies and collaborations (See Note 11 to Item 8 of this Annual Report on Form 8-K for further details

 

   
   

 

Selling, General and Administrative Expenses

 

   Year Ended   One Month Ended 
   December 31,   November 30,   December 31, 
   2019   2018   2018 
   (in thousands) 
Salaries and related expenses  $2,332   $1,016   $225 
Stock-based compensation   1,855    3,279    288 
Accounting and legal fees   2,388    2,384    296 
Professional fees   1,553    1,465    37 
Rent and related expenses   214    145    16 
Business development   1,148    1,044    15 
Expenses related to collaboration with Theracell (see note 11)   689    -    - 
Depreciation expenses, net   113    7    - 
Other general and administrative expenses   1,159    767    108 
Total  $11,451   $10,107   $985 

 

Selling, general and administrative expenses for the year ended December 31, 2019 were $11,451 thousand, as compared to $10,107 thousand for the year ended November 30, 2018, representing an increase of 13%. Selling, general and administrative expenses for the one month ended December 31, 2018 were $985 thousand. The increase for the year ended December 30, 2019 is primarily attributable to:

 

(i) An increase in salaries and related expenses of $1,316 thousand, as a result of additional managerial appointments and increased salaries.
   
(ii) A decrease in stock-based compensation of $1,424 thousand.
   
(iii) Expenses related to the collaboration with Theracell (see note 11).

 

   
   

 

Financial Expenses, net

 

   Year Ended   One Month Ended 
   December 31,   November 30,   December 31, 
   2019   2018   2018 
   (in thousands) 
Decrease in fair value financial liabilities and assets measured at fair value  $63   $48   $- 
Stock-based compensation related to warrants granted debt holders   -    180    - 
Interest expense on convertible loans and loans   498    2,586    25 
Foreign exchange loss (income), net   395    122    (6)
Other expenses (income)   (113)   (4)   (9)
Total  $843   $2,932   $10 

 

Financial expenses, net for the year ended December 31, 2019 were $843 thousand, as compared to $2,932 thousand for the year ended November 30, 2018, representing a decrease of 71%. Financial expenses, net for the one month ended December 31, 2018 were $10 thousand. The decrease in 2019 financial expenses is primarily attributable to a decrease in Interest expense on convertible loans and loans of $2,088 thousand, most of which were converted in 2018.

 

Tax expenses (income)

 

   Year Ended   One Month Ended 
   December 31,   November 30,   December 31, 
   2019   2018   2018 
   (in thousands) 
Tax expenses (income)  $(229)  $152   $41 
Total  $(229)  $152   $41 

 

Tax income, net for the year ended December 31, 2019 was $229 thousand, as compared to tax expenses of $152 thousand for the year ended November 30, 2018. Tax expense for the one month ended December 31, 2018 was $41 thousand.

 

Discontinued operations

 

Discontinued operations relate to the Masthercell Business. The following table presents the financial results associated with the Masthercell Business operation as reflected in the Company’s Consolidated Comprehensive loss (in thousands):

 

   Year Ended   Year Ended   One-month Ended 
   December 31,   November 30,   December 31, 
OPERATIONS  2019   2018   2018 
Revenues  $31,053   $19,681   $1,910 
Cost of revenues   18,318    10,307    1,170 
Cost of research and development and research and development services, net   54    37    2 
Amortization of intangible assets   1,631    1,725    141 
Selling, general and administrative expenses   13,886    6,196    999 
Other (income) expenses, net   (207)   1,600    - 
Operating loss   2,629    184    402 
Financial expenses, net   31    185    17 
Loss before income taxes   2,660    369    419 
Tax expenses (income)   792    1,185    (124)
Net loss from discontinuing operation, net of tax  $3,452   $1,554   $295 

 

   
   

 

The increase in revenues is attributable to the extension of existing customer service contracts with biotechnology clients and from revenues generated from existing manufacturing agreements. Cost of revenues increased in line with the growth in revenues and employment of additional operational staff. Selling, general and administrative expenses increased as a result of additional managerial appointments, increased professional fees, additional rental space including in the USA, and an increase of business development expenses.

 

Working Capital

 

   As of 
   December 31,   December 31, 
   2019   2018 
   (in thousands) 
Current assets  $78,348   $28,058 
Current liabilities  $42,434   $17,161 
Working capital  $35,914   $10,897 

 

Current assets increased by $50,290 thousand between December 31, 2018 and December 31, 2019, which was primarily attributable to the following: (i) a decrease in cash and cash equivalents due the payment of operating expenses; (ii) an increase in accounts receivable as a result of POC services revenues, and (iii) an increase in discontinued operations current assets.

 

Current liabilities increased by $25,273 thousand between December 31, 2018 and December 31, 2019, which was primarily attributable to the following: (i) an increase in accounts payable and accrued expenses due to expanded operations, (ii) an increase in employees and related payables, and (iii) an increase in discontinued operations current liabilities.

 

   
   

 

Liquidity and Capital Resources

 

   Year Ended   One Month Ended 
   December 31,   November 30,   December 31, 
   2019   2018   2018 
   (in thousands) 
Net loss  $(26,041)  $(19,104)  $(2,907)
                
Net cash used in operating activities   (13,220)   (15,682)   (1,077)
Net cash used in investing activities   (13,778)   (6,268)   (592)
Net cash provided by financing activities   24,098    35,060    197 
Net change in cash and cash equivalents and restricted cash  $(2,900)  $13,110   $(1,472)

 

As mentioned in Note 22(d) to Item 8 of this Annual Report on Form 8-K, on February 2, 2020, we entered into a Stock Purchase Agreement (the “Purchase Agreement”) with GPP-II Masthercell LLC (“GPP” and together with us, the “Sellers”), Masthercell Global Inc. (“Masthercell”) and Catalent Pharma Solutions, Inc. (the “Buyer”). Pursuant to the terms and conditions of the Purchase Agreement, on February 10, 2020 the Sellers sold 100% of the outstanding equity interests of Masthercell to Buyer (the “Masthercell Sale”) for an aggregate nominal purchase price of $315 million, subject to customary adjustments. After accounting for GPP’s liquidation preference and equity stake in Masthercell as well as SFPI – FPIM’s interest in MaSTherCell S.A., distributions to Masthercell option holders and transaction costs, we received approximately $126.7 million, of which $7.2 million was used for the repayment of intercompany loans and payables.

 

During the year ended December 31, 2019, we funded our operations through various financing activities consisting of proceeds primarily from private placements of our equity securities, debt securities and equity-linked instruments in the net amount of approximately $ 11.4 million and $ 13.2 million from GPP. In addition, we generated cash flow through revenues from our POC services and the activities of MaSTherCell S.A, our Belgian Subsidiary.

 

Net cash used in operating activities for the year ended December 31, 2019 was approximately $13 million, as compared to net cash used in operating activities of approximately $16 million and 1 million for the year ended November 30, 2018 and for the one month ended December 31, 2018, respectively.

 

We expanded our pre-clinical studies in the U.S., Israel, Belgium and South Korea. The increase reflects management’s focus on moving our trans-differentiation technology with first indication in Type 1 Diabetes to the next stage towards clinical trials as well as investments in new collaborations and therapies.

 

Net cash used in investing activities for the year ended December 31, 2019 was approximately $14 million, as compared to net cash used in investing activities of approximately $6 million and 1 million for the year ended November 30, 2018 and for the one month ended December 31, 2018, respectively. Net cash used in investing activities was primarily for POC related activities and additions to fixed assets at our subsidiaries, MaSTherCell, CureCell and Atvio.

 

   
   

 

Liquidity and Capital Resources Outlook

 

We believe that the proceeds from the Masthercell Sale, as well as our business plan, will provide sufficient liquidity to fund our operating needs for at least the next 12 months. However, there are factors that can impact our ability to continue to fund our operating needs, including:

 

restrictions on our ability to expand sales volume from our POC business;
the need for us to continue to invest in operating activities to remain competitive or acquire other businesses and technologies and to complement our products, expand the breadth of our business, enhance our technical capabilities or otherwise offer growth opportunities.

 

On February 10, 2020, we received approximately $126.7 million net proceeds from the sale of Masthercell, of which $7.2 million was used for the repayment of intercompany loans and payables. In addition, on January 20, 2020, we entered into a Securities Purchase Agreement with certain investors pursuant to which we issued an aggregate of 2,200,000 shares of our common stock and warrants to purchase up to an aggregate of 1,000,000 shares of our common stock, which resulted in our receipt of gross proceeds of approximately $9.24 million before deducting related offering expenses.

 

Based on our current cash resources and commitments, we believe that we will be able to maintain our current planned POC development activities and expected level of expenditures for at least 12 months from the date of the issuance of the financial statements. Also, if there are further increases in operating costs in general and administrative expenses for facilities expansion, research and development, commercial and clinical activity or decreases in revenues from customers, we may decide to seek additional financing. In addition, additional funds may be necessary to finance some of our collaborations and joint ventures.

 

In December 2018, we entered into a Controlled Equity Offering Sales Agreement, or Sales Agreement, with Cantor Fitzgerald & Co., or Cantor, pursuant to which we may offer and sell, from time to time through Cantor, shares of our common stock having an aggregate offering price of up to $25.0 million. We will pay Cantor a commission rate equal to 3.0% of the aggregate gross proceeds from each sale. Shares sold under the Sales Agreement will be offered and sold pursuant to our Shelf Registration Statement on Form S-3 (Registration No. 333-223777) that was declared effective by the Securities and Exchange Commission on March 28, 2018, or the Shelf Registration Statement, and a prospectus supplement and accompanying base prospectus that we filed with the Securities and Exchange Commission on December 20, 2018. We have not yet sold any shares of our common stock pursuant to the Sales Agreement.

 

Critical Accounting Policies and Estimates

 

Our significant accounting policies are more fully described in the notes to our financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. We believe that the accounting policies below are critical for one to fully understand and evaluate our financial condition and results of operations.

 

   
   

 

Fair Value Measurement

 

The fair value measurement guidance 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 the valuation of an asset or liability. It establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under the fair value measurement guidance are described below:

 

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;

 

Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; or

 

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

We did not have any Level 1, 2 or 3 assets and liabilities as of December 31, 2019 and November 30, 2018.

 

Business Combination

 

We allocate the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon our estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. Acquired in-process backlog, customer relations, brand name and know how are recognized at fair value. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred. The allocation of the consideration transferred in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date. We include the results of operations of the business that we have acquired in our consolidated results prospectively from the date of acquisition.

 

If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognized in profit or loss.

 

   
   

 

Redeemable Non-controlling Interest (Discontinued Operations)

 

Non-controlling interests with embedded redemption features, whose settlement is not at our discretion, are considered redeemable non-controlling interest. Redeemable non-controlling interests are considered to be temporary equity and are therefore presented as a mezzanine section between liabilities and equity on our consolidated balance sheets. Subsequent adjustment of the amount presented in temporary equity is required only if our management estimates that it is probable that the instrument will become redeemable. Adjustments of redeemable non-controlling interest to its redemption value are recorded through additional paid-in capital.

 

Goodwill

 

Goodwill represents the excess of the purchase price of acquired business over the estimated fair value of the identifiable net assets acquired. Goodwill is not amortized but is tested for impairment at least annually (at December 31), at the reporting unit level or more frequently if events or changes in circumstances indicate that the asset might be impaired.

 

Commencing from the fourth quarter of 2019, we early adopted a new guidance which simplifies the test for goodwill impairment. Under the new guidance, the we perform our quantitative goodwill impairment test by comparing the fair value of its reporting unit with our carrying value. If the reporting unit’s carrying value is determined to be greater than its fair value, an impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit’s fair value. If the fair value of the reporting unit is determined to be greater than its carrying amount, the applicable goodwill is not impaired and no further testing is required.

 

Income Taxes

 

Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

 

In addition, our management performs an evaluation of all uncertain income tax positions taken or expected to be taken in the course of preparing our income tax returns to determine whether the income tax positions meet a “more likely than not” standard of being sustained under examination by the applicable taxing authorities. This evaluation is required to be performed for all open tax years, as defined by the various statutes of limitations, for federal and state purposes.

 

Impairment of Long-lived Assets

 

We will periodically evaluate the carrying value of long-lived assets to be held and used when events and circumstances warrant such a review and at least annually. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost to dispose.

 

   
   

 

Newly Issued and Recently Adopted Accounting Pronouncements

 

ASC 606 - Revenue from Contracts with Customers

 

On December 1, 2018, the Company adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and the related amendments (“New Revenue Standard”) to all contracts, using the modified retrospective method. The cumulative effect of initially applying the new revenue standard was immaterial.

 

Revenue Recognition Prior to the Adoption of the New Revenue Standard

 

Refer to Note 2 of item 8 of this form 8-K.

 

Revenue Recognition Following the Adoption of the New Revenue Standard

 

Our agreements are primarily service contracts that range in duration from a few months to one year. We recognize revenue when control of these services is transferred to the customer for an amount, referred to as the transaction price, which reflects the consideration to which we are expected to be entitled in exchange for those goods or services.

 

A contract with a customer exists only when:

 

the parties to the contract have approved it and are committed to perform their respective obligations;
we can identify each party’s rights regarding the distinct goods or services to be transferred (“performance obligations”);
we can determine the transaction price for the goods or services to be transferred; and
the contract has commercial substance and it is probable that we will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.

 

For the majority of our contracts, we receive non-refundable upfront payments. We do not adjust the promised amount of consideration for the effects of a significant financing component since we expect, at contract inception, that the period between the time of transfer of the promised goods or services to the customer and the time the customer pays for these goods or services to be generally one year or less. Our credit terms to customers are in average between thirty and ninety days.

 

We do not disclose the value of unsatisfied performance obligations for contracts with original expected duration of one year or less.

 

   
   

 

Disaggregation of Revenue

 

The following table disaggregates our revenues by major revenue streams.

 

  

Year Ended

December 31, 2019

  

Transition Period,

One-Month Ended
December 31, 2018

 
Revenue stream:          
           
Cell process development services  $790   $102 
POC development services   3,109    - 
Total  $3,899   $102 

 

Nature of Revenue Streams

 

We have two main revenue streams being cell process development services and from the second quarter of 2019, POC development services.

 

POC Development Services

 

Revenue recognized under contracts for POC development services may, in some contracts, represent multiple performance obligations (where promises to the customers are distinct) in circumstances in which the work packages are not interrelated or the customer is able to complete the services performed independently or by using our competitors.

 

For arrangements that include multiple performance obligations, the transaction price is allocated to the identified performance obligations based on their relative standalone selling prices.

 

We measure the revenue to be recognized over time on a contract by contract basis as services are provided.

 

Cell Process Development Services (mainly discontinued operations)

 

Revenue recognized under contracts for cell process development services may, in some contracts, represent multiple performance obligations (where promises to the customers are distinct) in circumstances in which the work packages and milestones are not interrelated or the customer is able to complete the services performed independently or by using our competitors. In other contracts when the above circumstances are not met, the promises are not considered distinct and the contract represents one performance obligation. All performance obligations are satisfied over time, as there is no alternative use to the services it performs, since, in nature, those services are unique to the customer, which retain the ownership of the intellectual property created through the process. Additionally, due to the non-refundable upfront payment the customer pays, together with the payment term and cancellation fine, it has a right to payment (which include a reasonable margin), at all times, for work completed to date, which is enforceable by law.

 

   
   

 

For arrangements that include multiple performance obligations, the transaction price is allocated to the identified performance obligations based on their relative standalone selling prices. For these contracts, the standalone selling prices are based on our normal pricing practices when sold separately with consideration of market conditions and other factors, including customer demographics and geographic location.

 

We measure the revenue to be recognized over time on a contract by contract basis, determining the use of either a cost-based input method or output method, depending on whichever best depicts the transfer of control over the life of the performance obligation.

 

Tech Transfer Services (discontinued operations)

 

Revenue recognized under contracts for tech transfer services are considered a single performance obligation, as all work packages (including data collection, GMP documentation, validation runs) and milestones are interrelated. Additionally, the customer is unable to complete services of work performed independently or by using our competitors. Revenue is recognized over time using a cost-based input method where progress on the performance obligation is measured by the proportion of actual costs incurred to the total costs expected to complete the contract.

 

Cell Manufacturing Services (discontinued operations)

 

Revenues from cell manufacturing services represent a single performance obligation which is recognized over time. The progress towards completion will continue to be measured on an output measure based on direct measurement of the value transferred to the customer (units produced).

 

Significant Judgement and Estimates

 

The cost-based and output methods of revenue recognition require us to make estimates of costs to complete our projects and the percentage of completeness on an ongoing basis. Significant judgment is required to evaluate assumptions related to these estimates. The effect of revisions to estimates related to the transaction price (including variable consideration relating to reimbursement on a cost-plus basis on certain expenses) or costs to complete a project are recorded in the period in which the estimate is revised.

 

Practical Expedients

 

As part of ASC 606, we have adopted several practical expedients including our determination that we need not adjust the promised amount of consideration for the effects of a significant financing component since we expect, at contract inception, that the period between when we transfer a promised service to the customer and when the customer pays for that service will be one year or less.

 

   
   

 

Reimbursed Expenses

 

We include reimbursed expenses in revenues and costs of revenue as we are primarily responsible for fulfilling the promise to provide the specified service, including the integration of the related services into a combined output to the customer, which are inseparable from the integrated service. These costs include such items as consumable, reagents, transportation and travel expenses, over which we have discretion in establishing prices.

 

Change Orders

 

Changes in the scope of work are common and can result in a change in transaction price, equipment used and payment terms. Change orders are evaluated on a contract-by-contract basis to determine if they should be accounted for as a new contract or as part of the existing contract. Generally, services from change orders are not distinct from the original performance obligation. As a result, the effect that the contract modification has on the contract revenue, and measure of progress, is recognized as an adjustment to revenue when they occur.

 

Costs of Revenue

 

Costs of revenue include (i) compensation and benefits for billable employees and personnel involved in production, data management and delivery, and the costs of acquiring and processing data for our information offerings; (ii) costs of staff directly involved with delivering services offerings and engagements; (iii) consumables used for the services; and (iv) other expenses directly related to service contracts such as courier fees, laboratory supplies, professional services and travel expenses.

 

Contract Assets and Liabilities

 

Contract assets are mainly comprised of trade receivables net of allowance for doubtful debts, which includes amounts billed and currently due from customers.

 

The activity for trade receivables is comprised of:

 

   Year Ended
December 31, 2019
 
Balance as of beginning of period  $129 
Additions   2,079 
Collections   (364)
Exchange rate differences   (13)
Balance as of end of period  $1,831 

 

The activity for contract liabilities is comprised of:

 

   Year Ended
December 31, 2019
 
Balance as of beginning of period  $56 
Adoption of ASC 606:   - 
Additions   1,126 
Realizations   (854)
Exchange rate differences   (3)
Balance as of end of period  $325 

 

   
   

 

ASU 2018-07 Stock based Compensation

 

In June 2018, the FASB issued ASU 2018-07, “Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” This guidance simplifies the accounting for non-employee share-based payment transactions. The amendments specify that ASC 718 applies to all share-based payment transactions in which a grantor acquires goods and services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606, “Revenue from Contracts with Customers.” This standard, adopted as of January 1, 2019, had no material impact on our consolidated financial statements for the year ended December 31, 2019.

 

ASC 842 - Leases

 

In February 2016, the FASB issued ASU 2016-02 “Leases” (the “new lease standard”). The guidance establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The guidance became effective on January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application.

 

The Company adopted the new lease standard and all the related amendments on January 1, 2019 and used the effective date as the Company’s date of initial application. Consequently, financial information was not updated and the disclosures required under the new standard are not provided for dates and periods before January 1, 2019.

 

For more information, see Notes 2 (t) and 10 of Item 8 on this form 8K.

 

Recently Issued Accounting Pronouncements, Not Yet Adopted

 

In June 2016, the FASB issued ASU 2016-13 “Financial Instruments—Credit Losses—Measurement of Credit Losses on Financial Instruments.” This guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance will be effective for Smaller Reporting Companies (SRCs, as defined by the SEC) for the fiscal year beginning on January 1, 2023, including interim periods within that year. We are currently evaluating this guidance to determine the impact it may have on our consolidated financial statements.

 

   
   

 

In November 2018, the FASB issued ASU 2018-18 “Collaborative Arrangements (Topic 808)—Clarifying the interaction between Topic 808 and Topic 606.” The amendments provide guidance on whether certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606. It also specifically (i) addresses when the participant should be considered a customer in the context of a unit of account, (ii) adds unit-of-account guidance in ASC 808 to align with guidance in ASC 606 and (iii) precludes presenting revenue from a collaborative arrangement together with revenue recognized under ASC 606 if the collaborative arrangement participant is not a customer. The guidance will be effective for fiscal years beginning after December 15, 2019. Early adoption is permitted and should be applied retrospectively. We are currently evaluating this guidance to determine the impact it may have on our consolidated financial statements.

 

In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes” (“the Update”). The amendments in this Update simplify the accounting for income taxes by removing the following exceptions in ASC 740: (1) exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items; (2) exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (3) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (4) exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

 

In addition, this Update also simplifies the accounting for income taxes in certain topics as follows: (1) requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax; (2) requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; (3) specifying that an entity can elect (rather than be required to) allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; and (4) requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

   
   

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

ORGENESIS INC.

CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2019

 

TABLE OF CONTENTS

 

  Page
   
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2
   
CONSOLIDATED FINANCIAL STATEMENTS:  
   
Consolidated Balance Sheets F-3
   
Consolidated Statements of Comprehensive Loss F-5
   
Consolidated Statements of Changes in Equity F-6
   
Consolidated Statements of Cash Flows F-9
   
Notes to Consolidated Financial Statements

F-10 to F-94

 

 F-1 
   

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and shareholders of Orgenesis Inc.:

 

Opinions on the Financial Statements and Internal Control over Financial Reporting

 

We have audited the accompanying consolidated balance sheets of Orgenesis Inc. and its subsidiaries (the “Company”) as of December 31, 2019 and December 31, 2018 and the related consolidated statements of comprehensive loss, changes in equity and cash flows for the years ended December 31, 2019 and November 30, 2018 and the one month period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and December 31, 2018, and the results of its operations and its cash flows for the years ended December 31, 2019 and November 30, 2018 and the one month period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

 

Change in Accounting Principle

 

As discussed in Note 2(u) to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.

 

Basis for Opinions

 

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting (not presented herein) appearing under Item 9A of the Company’s 2019 Annual Report on Form 10-K. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

 

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

Definition and Limitations of Internal Control over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ Kesselman & Kesselman

Certified Public Accountants (Isr.)

A member firm of PricewaterhouseCoopers International Limited

 

Tel-Aviv, Israel

March 9, 2020 except for the effects of discontinued operations and the change in reportable segments discussed in Notes 1 and 3, as to which the date is November 16, 2020

 

 

We have served as the Company’s auditor since 2012.

 

 F-2 
   

 

ORGENESIS INC.

CONSOLIDATED BALANCE SHEETS

(U.S. Dollars, in thousands)

 

   December 31, 
   2019   2018 
Assets          
CURRENT ASSETS:          
Cash and cash equivalents   107    2,790 
Restricted cash   467    387 
Accounts receivable, net   1,831    129 
Prepaid expenses and other receivables   382    454 
Grants receivable   204    441 
Inventory   136    171 
Current assets of discontinued operations, see note 3   75,221    23,686 
Total current assets   78,348    28,058 
NON CURRENT ASSETS:          
Deposits   299    57 
Loan to related party, see Note 11(e)   2,623    1,012 
Property, plants and equipment, net   2,305    2,145 
Intangible assets, net   3,348    3,906 
Operating lease right-of-use assets   725    - 
Goodwill   4,812    4,942 
Other assets   35    297 
Long-term assets of discontinued operations, see note 3   -    33,459 
Total non-current assets   14,147    45,818 
TOTAL ASSETS   92,495    73,876$

 

 F-3 
   

 

ORGENESIS INC.

CONSOLIDATED BALANCE SHEETS

(U.S. Dollars, in thousands)

 

   December 31, 
   2019   2018 
Liabilities and equity          
CURRENT LIABILITIES:          
Accounts payable   5,549    2,906 
Accrued expenses and other payables   1,615    933 
Employees and related payables   1,672    1,165 
Advance payments on account of grant   523    992 
Short-term loans and current maturities of long-term loans   391    269 
Contract liabilities   325    57 
Current maturities of operating leases   357    - 
Current maturities of convertible loans   416    382 
Current liabilities of discontinued operations, see note 3   31,586    10,457 
TOTAL CURRENT LIABILITIES   42,434    17,161 
           
LONG-TERM LIABILITIES:          
Non-current operating leases   455    - 
Convertible loans   12,143    1,214 
Retirement benefits obligation   41    280 
Deferred taxes   58    296 
Other long-term liabilities   331    297 
Long-term liabilities of discontinued operations, see note 3   -    3,654 
TOTAL LONG-TERM LIABILITIES   13,028    5,741 
TOTAL LIABILITIES   55,462    22,902 
COMMITMENTS          
REDEEMABLE NON-CONTROLLING INTEREST OF DISCONTINUED OPERATIONS, see note 3   30,955    24,224 
EQUITY:          
Common stock of $0.0001 par value, 145,833,334 shares authorized, 16,140,962 and 15,540,333 shares issued as of December 31, 2019 and December 31, 2018, respectively   2    2 
Additional paid-in capital   94,691    90,597 
Accumulated other comprehensive income   213    669 
Accumulated deficit   (89,429)   (65,163)
Equity attributable to Orgenesis Inc.   5,477    26,105 
Non-controlling interests   601    645 
TOTAL EQUITY   6,078    26,750 
TOTAL LIABILITIES AND EQUITY   92,495    73,876 

 

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

 

 F-4 
   

 

ORGENESIS INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(U.S. Dollars, in thousands, except share and per share amounts)

 

   Year ended   One month ended 
   December 31,   November 30,   December 31, 
   2019   2018   2018 
Revenues  $3,899   $1,174   $102 
Cost of research and development and research and development services, net   14,014    9,144    1,640 
Amortization of intangible assets   430    188    38 
Selling, general and administrative expenses   11,451    10,107    985 
Other income, net   (21)   (4,530)   - 
Operating loss   21,975    13,735    2,561 
Financial expenses, net   843    2,932    10 
Share in net loss of associated companies   -    731    - 
Loss from continuing operation before income taxes   22,818    17,398    2,571 
Tax expenses (income)   (229)   152    41 
Net loss from continuing operation   22,589    17,550    2,612 
Net loss from discontinued operations, net of tax   3,452    1,554    295 
Net loss   26,041    19,104    2,907 
Net income attributable to non-controlling interests (including redeemable) from continuing operation   (99)   (42)   (11)
Net income attributable to non-controlling interests (including redeemable) from discontinued operations   (1,821)   (771)   (152)
Net loss (income) attributable to Orgenesis Inc.  $24,121   $18,291   $2,744 
Loss per share:               
Basic from continuing operations  $1.41   $1.31   $0.17 
Basic from discontinued operations  $0.36   $0.12   $0.02 
Basic  $1.77   $1.43   $0.19 
                
Diluted from continuing operations  $1.41   $1.31   $0.17 
Diluted from discontinued operations  $0.36   $0.12   $0.02 
Diluted  $1.77   $1.43   $0.19 
Weighted average number of shares used in computation of Basic and Diluted loss per share:               
Basic   15,907,995    13,374,103    15,423,040 
Diluted   15,907,995    13,374,103    15,423,040 
                
Comprehensive loss (income):               
Net Loss from Continuing Operation  $22,589   $17,550   $2,612 
Net Loss from Discontinued Operations, Net of Tax   3,452    1,554    295 
Other Comprehensive (income) loss – Translation
adjustment
   456    1,000    (244)
Comprehensive loss   26,497    20,104    2,663 
Comprehensive income attributed to non-controlling interests (including redeemable)   (99)   (42)   (11)
Comprehensive income attributed to non-
controlling interests (including redeemable) from
discontinued operations
   (1,821)   (771)   (152)
Comprehensive loss attributed to Orgenesis Inc.  $24,577   $19,291   $2,500 

 

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

 

 F-5 
   

 

ORGENESIS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(U.S. Dollars, in thousands, except share amounts)

 

   Number   Par Value   Additional Paid-in Capital   Receipts on Account of Share to be Allotted   Accumulated Other Comprehensive Income (loss)   Accumulated
Deficit
  

 

Equity Attributable to Orgenesis Inc.

  

Non- Controlling

Interest

   Total 
BALANCE AT DECEMBER 1, 2017   9,872,659   $1   $55,334   $1,483   $1,425   $(44,120)  $14,123   $-   $14,123 
Changes during the Year ended November 30, 2018:                                             
Stock-based compensation to employees and directors             2,426                   2,426         2,426 
Stock-based compensation to service providers   315,198    *    1,938                   1,938         1,938 
Issuance of shares and warrants due to conversion of convertible loans and shares in escrow account   1,486,722    *    7,511                   7,511         7,511 
Issuance of shares related to acquisition of Atvio and CureCell   286,811    *    2,452                   2,452    299    2,751 
Issuance of warrants and Beneficial conversion feature of convertible loans             438                   438         438 
Issuance of shares and
warrants and receipts on account of shares to be allotted
   2,853,747    *    18,021    770              18,791         18,791 
Issuance of shares due to exercise of warrants   136,646         846                   846         846 
Adjustment to redemption value of redeemable non-controlling interest             (884)                  (884)        (884)
Comprehensive loss
for the year
                       (1,000)   (18,291)   (19,291)        (19,291)
BALANCE AT NOVEMBER 30, 2018     14,951,783   $1   $88,082   $2,253   $         425   $(62,411)  $28,350   $      299   $28,649 

 

*Represents an amount lower than $ 1 thousand

 

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

 

 F-6 
   

 

ORGENESIS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(U.S. Dollars, in thousands, except share amounts)

 

   Number   Par Value   Additional Paid-in Capital   Receipts on Account of Share to be Allotted   Accumulated Other Comprehensive Income (loss)   Accumulated Deficit   Equity Attributable to Orgenesis Inc.  

Non- Controlling

Interest

   Total 
BALANCE AT DECEMBER 1, 2018   14,951,783   $1   $88,082   $2,253   $425   $(62,411)  $28,350   $299   $28,649 
ASC 606 implementation                            (8)   (8)        (8)
Balance at December 1, 2018, adjusted   14,951,783   $1   $88,082   $2,253   $425   $(62,419)  $28,342   $299   $28,641 
Changes during the one month ended December 31, 2018:                                             
Stock-based compensation to
employees and directors
             274                   274    355    629 
Stock-based compensation to service providers   38,069    *    105                   105         105 
Beneficial conversion feature of convertible loans and warrants issued             63                   63         63 
Issuance of shares and
warrants and receipts on account of shares to be allotted
   550,481    1    2,253    (2,253)             1         1 
Adjustment to redemption value of redeemable non-controlling interest             (180)                  (180)        (180)
Comprehensive loss
for the period
                       244    (2,744)   (2,500)   (9)   (2,509)
BALANCE AT DECEMBER 31, 2018     15,540,333   $2   $90,597   $-   $             669   $(65,163)  $26,105   $     645   $  26,750 

 

*Represents an amount lower than $ 1 thousand

 

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

 

 F-7 
   

 

ORGENESIS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(U.S. Dollars, in thousands, except share amounts)

 

   Number   Par Value   Additional Paid-in Capital   Receipts on Account of Share to be Allotted   Accumulated Other Comprehensive Income (loss)   Accumulated Deficit  

 

Equity Attributable to Orgenesis Inc.

  

Non- Controlling

Interest

   Total 
BALANCE AT DECEMBER 31, 2018   15,540,333   $2   $90,597   $-   $669   $(65,163)  $26,105   $645   $26,750 
Changes during the Year ended December 31, 2019:                                             
Stock-based compensation to
employees and directors
             2,106                   2,106    58    2,164 
Stock-based compensation to
service providers
   75,629     *     893              -    893         893 
Stock-based compensation to strategic collaborations, (see note 11)   525,000     *     2,641                   2,641         2,641 
Issuance and modification of warrants and Beneficial conversion feature of convertible loans             515              (145)   370         370 
Transaction with non-controlling interest GPP (See Note 1)             2,034                   2,034         2,034 
Adjustment to redemption value of redeemable non-controlling interest             (4,095)                  (4,095)        (4,095)
Comprehensive loss
for the year
                       (456)   (24,121)   (24,577)   (102)   (24,679)
BALANCE AT DECEMBER 31, 2019     16,140,962   $    2   $94,691   $       -   $       213   $(89,429)  $5,477   $601   $6,078 

 

*Represents an amount lower than $ 1 thousand

 

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

 

 F-8 
   

 

ORGENESIS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (*)

(U.S. Dollars, in thousands)

 

   Year ended   One month ended 
   December 31,   November 30,   December 31, 
   2019   2018   2018 
CASH FLOWS FROM OPERATING ACTIVITIES:               
Net loss  $(26,041)  $(19,104)  $(2,907)
Adjustments required to reconcile net loss to net cash used in operating activities:               
Stock-based compensation   3,057    4,364    734 
Stock-based compensation for strategic collaborations   2,641    -    - 
Gain from sale of property, plants and equipment   (29)   -    - 
Share in losses of associated company   -    731    - 
Depreciation and amortization expenses   3,806    2,624    265 
Net gain on remeasurement of previously equity interest in Atvio and CureCell to acquisition date at fair value   -    (4,509)   - 
Change in fair value of warrants and embedded derivatives   -    26    - 
Net changes in operating leases   (339)   -    - 
Interest expense accrued on loans and convertible loans (including amortization of beneficial conversion feature)   387    2,564    12 
Changes in operating assets and liabilities:               
Decrease (increase) in accounts receivable, net   (5,308)   (2,901)   951 
Decrease (increase) in inventory   (414)   (931)   89 
Increase in other assets   (46)   (19)   (3)
Effect of exchange differences on inter-company balances   214    -    - 
Decrease (increase) in prepaid expenses, other accounts receivable   (112)   380    (213)
Change in related parties, net   -    (532)   - 
Increase (Decrease) in accounts payable   4,626    (796)   743 
Increase (decrease) in accrued expenses and other payable   271    428    (421)
Increase (decrease) in employee and related payables   474    (105)   45 
Increase (decrease) in contract liabilities   3,536    1,309    (181)
Change in advance payments and receivables on account of grant, net   (247)   (193)   (133)
Increase (decrease) in deferred taxes   304    982    (58)
Net cash used in operating activities  $(13,220)  $(15,682)  $(1,077)
CASH FLOWS FROM INVESTING ACTIVITIES:               
Sale of property, plants and equipment   79    -    - 
Purchase of property, plants and equipment   (12,129)   (5,556)   (535)
Long-term deposits   (228)   (15)   (57)
Increase in loan to JV with a related party (see Note 11 e)   (1,500)   (1,000)   - 
Acquisition of CureCell, net of cash acquired (see Note 4)   -    58    - 
Acquisition of Atvio, net of cash acquired (see Note 4)   -    245    - 
Net cash used in investing activities  $(13,778)  $(6,268)  $(592)
CASH FLOWS FROM FINANCING ACTIVITIES:               
Payment received from redeemable non-controlling interest related to GPP transaction (see note 3)   13,200    -    - 
Proceeds from issuance of shares and warrants (net of transaction costs)   -    17,392    - 
Redeemable non-controlling interest   -    14,058    - 
Proceeds from receipts on account of shares to be allotted   -    2,252    - 
Repayment of short and long-term debt and Finance Leases   (772)   (377)   (53)
Repayment of convertible loans and convertible bonds   -    (177)   - 
Proceeds from issuance of convertible loans (net of
transaction costs)
   11,400    1,912    250 
Proceeds from issuance of loans payable   270    -    - 
Net cash provided by financing activities  $24,098   $35,060   $197 
NET CHANGE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH  $(2,900)  $13,110   $(1,472)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND  $(58)  $(173)  $15 
CASH EQUIVALENTS               
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF YEAR  $14,999   $3,519   $16,456 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF YEAR  $12,041   $16,456   $14,999 
                
SUPPLEMENTAL DISCLOSURE OF CASH FLOW TRANSACTIONS:               
Interest paid in cash during the year  $157   $134   $15 
Income taxes, net of refunds paid in cash during the year  $156   $-   $- 
                
SUPPLEMENTAL NON-CASH FINANCING AND INVESTING ACTIVITIES               
Conversion of principal amount and accrued interest of convertible loans and bonds to common stock and warrants  $-   $7,511   $- 
Classification of loan receivable into services to be received from CureCell  $-   $836   $- 
Transaction costs of issuance of convertible loans  $546   $-   $- 
Receivable from GPP  $-   $6,600   $- 
Right-of-use assets obtained in exchange for new operating lease liabilities, net  $8,229   $-   $- 
Purchase of property, plant and equipment included in accounts payable  $1,584   $-   $- 
Finance Leases of property, plant and equipment  $355   $955   $- 

 

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

 

(*) See Note 3 for information regarding the discontinued operations.

 

 F-9 
   

 

ORGENESIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – DESCRIPTION OF BUSINESS

 

a. General

 

Orgenesis Inc., a Nevada corporation (the “Company”), is a biotechnology company specializing in the development, manufacturing and provision of cell and gene therapies (“CGTs”) through point-of-care solutions. The Company has historically operated through two independent business platforms: (i) a point-of-care cell therapy (“POC”) platform and (ii) a Contract Development and Manufacturing Organization (“CDMO”) platform, which provided contract manufacturing and development services for biopharmaceutical companies (the “CDMO Business”). Through the POC platform, the Company’s aim is to further the development of CGTs, including Advanced Therapy Medicinal Products (“ATMPs”), through collaborations and in-licensing with other pre-clinical and clinical-stage biopharmaceutical companies and research and healthcare institutes to bring such ATMPs to patients. These therapies span a wide range of treatments including, but not limited to, cell-based immunotherapies, therapeutics for metabolic diseases, neurodegenerative diseases and tissue regeneration. The Company out-licenses these ATMPs, thus far primarily through joint venture (“JV’) agreements, with regional partners including pharmaceutical and biotech companies as well as research institutions and hospitals. These regional partners have cell therapies in clinical development and are to whom we also provide manufacturing know-how, assay services, licensing, regulatory assistance, pre-clinical studies, intellectual property services, and co-development services (collectively “POC Development Services”) to support their activity in order to reach patients in a point-of-care hospital setting. Currently, the Company’s POC Development Services constitute the entirety of our revenue from the POC platform. Through the CDMO platform, we had focused on providing contract manufacturing and development services for biopharmaceutical companies, the majority of which were via our subsidiary Masthercell Global Inc. Masthercell Global Inc is a CDMO specialized in cell therapy development for advanced therapeutically products. The CDMO platform operated mainly through majority-owned Masthercell Global (which consists of the following two subsidiaries: MaSTherCell S.A. in Belgium (“MaSTherCell”), and Masthercell U.S., LLC in the United States (“Masthercell U.S.”) (collectively, the “Masthercell Global Subsidiaries”). Each of these subsidiaries had unique know-how and expertise for manufacturing in a multitude of cell types.

 

On February 2, 2020, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with GPP-II Masthercell LLC (“GPP” and together with the Company, the “Sellers”), Masthercell Global Inc. (“Masthercell”) and Catalent Pharma Solutions, Inc. (the “Buyer”). Pursuant to the terms and conditions of the Purchase Agreement, on February 10, 2020, the Sellers sold 100% of the outstanding equity interests of Masthercell to Buyer (the “Masthercell Sale”) for an aggregate nominal purchase price of $315 million, subject to customary adjustments. After accounting for GPP’s liquidation preference and equity stake in Masthercell as well as SFPI – FPIM’s interest in MaSTherCell S.A., distributions to Masthercell option holders and transaction costs, we received approximately $126.7 million. The Company determined that the Masthercell business met the criteria to be classified as a discontinued operation. As a result, we presented Masthercell as a discontinued operation in our condensed consolidated financial statements. Accordingly, all prior periods have been recast to conform to this presentation.

 

 F-10 
   

 

The Stock Purchase Agreement contains customary representations, warranties, and covenants of the Sellers and the Buyer. From the date of the Stock Purchase Agreement until the closing of the Sale, the Sellers were required to operate Masthercell’s business in the ordinary course and to comply with certain covenants regarding the operation of the business. Subject to certain limitations, the Company is required to indemnify the Buyer for losses resulting from breaches of certain representations and warranties made by the Company in the Stock Purchase Agreement.

 

The Company’s therapeutic development efforts in its POC business are focused on advancing breakthrough scientific achievements in ATMPs, and namely autologous therapies, which have a curative potential. It bases its development on therapeutic collaborations and in-licensing with other pre-clinical and clinical-stage biopharma companies as well as direct collaboration with research and healthcare institutes. It is engaging in therapeutic collaborations and in-licensing with other academic centers and research centers in order to pursue emerging technologies of other ATMPs in cell and gene therapy in such areas including, but not limited to, cell-based immunotherapies, therapeutics for metabolic diseases, neurodegenerative diseases and tissue regeneration Each of these customers and collaborations represents a growth opportunity and future revenue potential as it out-licenses these ATMPs through regional partners to whom it also provides regulatory, pre-clinical and training services to support their activity in order to reach patients in a point-of-care hospital setting.

 

The Company conducted the POC platform through its wholly-owned subsidiaries. The subsidiaries are as follows:

 

United States: Orgenesis Maryland Inc. (the “U.S. Subsidiary”) is the center of activity in North America currently focused on technology licensing, therapeutic collaborations and preparation for U.S. clinical trials.
   
European Union: Orgenesis Belgium SRL (which changed its name and statutory designation in August 2019 from Orgenesis SPRL) (the “Belgian Subsidiary”) is the center of activity in Europe currently focused on process development and preparation of European clinical trials.
   
Israel: Orgenesis Ltd. (the “Israeli Subsidiary”) is a research and technology center, as well as a provider of regulatory, clinical and pre-clinical services.

 

These consolidated financial statements include the accounts of Orgenesis Inc. and its subsidiaries, including the U.S. Subsidiary, the Belgian Subsidiary, the Israeli Subsidiary, Atvio, a wholly owned subsidiary incorporated in Israel which provides pre-clinical services, majority owned CureCell, (which has since changed its name to Orgenesis Korea company LTD) which provides pre-clinical services as well as Masthercell Global and its subsidiaries. The results of Masthercell Global and its subsidiaries are reflected as a discontinued operation.

 

 F-11 
   

 

The Chief Executive Officer (“CEO”) is the Company’s chief operating decision-maker. Through December 31, 2019, the Company reported two reportable segments namely the POC and CDMO segments. Following the Masthercell Sale, which comprised substantially all of the CDMO segment, management has concluded that all of the Company’s continuing operations are in the POC business and accordingly the financial statements reflect one reportable segment.

 

As used in this report and unless otherwise indicated, the term “Company” refers to Orgenesis Inc. and its subsidiaries (“Subsidiaries”). Unless otherwise specified, all amounts are expressed in United States Dollars.

 

Until March 13, 2018, the Company’s common shares were traded on OTC Market Group’s OTCQB, at which point the Company’s common stock began to be listed and traded on the Nasdaq Capital Market under the symbol “ORGS.”

 

 

b. Change in Fiscal Year End

 

On October 22, 2018, the Board of Directors of the Company approved a change in the Company’s fiscal year end from November 30 to December 31 of each year. This change to the calendar year reporting cycle became effective on January 1, 2019. As a result of the change, the Company is reporting a December 2018 fiscal month transition period, which is separately reported in these consolidated financial statements.

 

As permitted under SEC rules, prior-period financial statements have not been recast as management believes the year ended December 31, 2019 provides a meaningful comparison for year ended November 30, 2018 and recasting prior-period results is not practicable or cost justified.

 

c. Liquidity

 

As of December 31, 2019, the Company has accumulated losses of approximately $89 Million.

 

On February 10, 2020, the Company received approximately $126.7 million of which $7.2 million was used for the repayment of intercompany loans and payables from the Masthercell sale. In addition, on January 20, 2020, the Company, entered into a Securities Purchase Agreement with certain investors pursuant to which the Company received gross proceeds of approximately $9.240 million before deducting related offering expenses. (See note 22).

 

 F-12 
   

 

Based on its current cash resources and commitments, the Company believes it will be able to maintain its current planned development activities and expected level of expenditures for at least 12 months from the date of the issuance of the financial statements. Also, if there are further increases in operating costs in general and administrative expenses for facilities expansion, research and development, commercial and clinical activity or decreases in revenues from customers, the Company may decide to seek additional financing.

 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

 

a. Use of Estimates in the Preparation of Financial Statements

 

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the financial statement date and the reported expenses during the reporting periods. Actual results could differ from those estimates.

 

b. Business Combination

 

The Company allocates the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. Acquired in-process backlog, customer relations, brand name and know how are recognized at fair value. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred. The allocation of the consideration transferred in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date. The Company includes the results of operations of the business that it has acquired in its consolidated results prospectively from the date of acquisition.

 

If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquire is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognized in profit or loss.

 

c. Discontinued operations

 

Upon divestiture of a business, the Company classifies such business as a discontinued operation, if the divested business represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. For disposals other than by sale such as abandonment, the results of operations of a business would not be recorded as a discontinued operation until the period in which the business is actually abandoned.

 

The Masthercell Business divestiture qualifies as a discontinued operation and therefore have been presented as such.

 

 F-13 
   

 

The results of businesses that have qualified as discontinued operations have been presented as such for all reporting periods. Results of discontinued operations include all revenues and expenses directly derived from such businesses; general corporate overhead is not allocated to discontinued operations. Any loss or gain that arose from the divestiture of a business that qualifies as discontinued operations is included within the results of the discontinued operations. The Company included information regarding cash flows from discontinued operations (See Note 3)

 

d. Cash Equivalents

 

The Company considers all short term, highly liquid investments, which include short term bank deposits with original maturities of three months or less from the date of purchase, that are not restricted as to withdrawal or use and are readily convertible to known amounts of cash, to be cash equivalents.

 

e. Research and Development, net

 

Research and development expenses include costs directly attributable to the conduct of research and development activities, including the cost of salaries, stock-based compensation expenses, payroll taxes and other employees’ benefits, lab expenses, consumable equipment and consulting fees. All costs associated with research and developments are expensed as incurred. Participation from government departments and from research foundations for development of approved projects is recognized as a reduction of expense as the related costs are incurred.

 

f. Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its Subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

 

g. Non-Marketable Equity Investments

 

The Company’s investments in certain non-marketable equity securities in which it has the ability to exercise significant influence, but it does not control through variable interests or voting interests. These are accounted for under the equity method of accounting and presented as Investment in associates, net, in the Company’s consolidated balance sheets. Under the equity method, the Company recognizes its proportionate share of the comprehensive income or loss of the investee. The Company’s share of income and losses from equity method investments is included in share in losses of associated company.

 

The Company reviews its investments accounted for under the equity method for possible impairment, which generally involves an analysis of the facts and changes in circumstances influencing the investments.

 

 F-14 
   

 

h. Functional Currency

 

The currency of the primary economic environment in which the operations of the Company and part of its Subsidiaries are conducted is the U.S. dollar (“$” or “dollar”). The functional currency of the Belgian Subsidiaries is the Euro (“€” or “Euro”). The functional currency of CureCell is the Won (“KRW”). Most of the Company’s expenses are incurred in dollars, and the source of the Company’s financing has been provided in dollars. Thus, the functional currency of the Company and its other subsidiaries is the dollar. Transactions and balances originally denominated in dollars are presented at their original amounts. Balances in foreign currencies are translated into dollars using historical and current exchange rates for nonmonetary and monetary balances, respectively. For foreign transactions and other items reflected in the statements of operations, the following exchange rates are used: (1) for transactions – exchange rates at transaction dates or average rates and (2) for other items (derived from nonmonetary balance sheet items such as depreciation) – historical exchange rates. The resulting transaction gains or losses are recorded as financial income or expenses. The financial statements of the Belgian Subsidiaries and CureCell are included in the consolidated financial statements, translated into U.S. dollars. Assets and liabilities are translated at year-end exchange rates, while revenues and expenses are translated at yearly average exchange rates during the year. Differences resulting from translation of assets and liabilities are presented as other comprehensive income.

 

i. Inventory

 

The Company’s inventory consists of raw material for use for the services provided. The Company periodically evaluates the quantities on hand. Cost of the raw materials is determined using the weighted average cost method. The inventory is recorded at the lower of cost or net realizable value.

 

j. Property, plant and Equipment

 

Property, plant and equipment are recorded at cost and depreciated by the straight-line method over the estimated useful lives of the related assets.

 

Annual rates of depreciation are presented in the table below:

 

  

Weighted Average

Useful Life (Years)

 
Production facility   5-10 
Laboratory equipment   7 
Office equipment and computers   3-17 

 

k. Intangible assets

 

Intangible assets and their useful lives are as follows:

 

   Useful Life (Years)  

Amortization Recorded at

Comprehensive Loss Line Item

Customer Relationships   3-10   Amortization of intangible assets
Know-How   12   Amortization of intangible assets
Backlog   2   Amortization of intangible assets

 

 F-15 
   

 

Intangible assets are recorded at acquisition less accumulated amortization and impairment. Definite lived intangible assets are amortized over their estimated useful life using the straight-line method, which is determined by identifying the period over which the cash flows from the asset are expected to be generated.

 

l. Goodwill

 

Goodwill represents the excess of the purchase price of acquired business over the estimated fair value of the identifiable net assets acquired. Goodwill is not amortized but is tested for impairment at least annually (at December 31), at the reporting unit level or more frequently if events or changes in circumstances indicate that the asset might be impaired.

 

Commencing from January 1, 2019, the Company has early adopted a new guidance which simplifies the test for goodwill impairment. Under the new guidance, the Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company performs a qualitative assessment and concludes that it is more likely than not that the fair value of a reporting unit exceeds its carrying value, goodwill is not considered impaired and the impairment test is not required. However, if the Company concludes otherwise, it is then required to perform a quantitative assessment for goodwill impairment. Under the new guidance, the Company performs its quantitative goodwill impairment test by comparing the fair value of its reporting unit with its carrying value. If the reporting unit’s carrying value is determined to be greater than its fair value, an impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit’s fair value. If the fair value of the reporting unit is determined to be greater than its carrying amount, the applicable goodwill is not impaired and no further testing is required. The goodwill impairment valuation is considered as significant estimate.

 

There were no impairment charges in 2019 and 2018 and the month ended December 31, 2018, See note 6 for the Company’s goodwill impairment analysis.

 

m. Impairment of Long-lived Assets

 

The Company reviews its property, plants and equipment, intangible assets subject to amortization and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset class may not be recoverable. Indicators of potential impairment include: an adverse change in legal factors or in the business climate that could affect the value of the asset; an adverse change in the extent or manner in which the asset is used or is expected to be used, or in its physical condition; and current or forecasted operating or cash flow losses that demonstrate continuing losses associated with the use of the asset. If indicators of impairment are present, the asset is tested for recoverability by comparing the carrying value of the asset to the related estimated undiscounted future cash flows expected to be derived from the asset. If the expected cash flows are less than the carrying value of the asset, then the asset is considered to be impaired and its carrying value is written down to fair value, based on the related estimated discounted cash flows. There were no impairment charges in 2019 and 2018 and the month ended December 31, 2018.

 

 F-16 
   

 

n. Income Taxes

 

1) With respect to deferred taxes, income taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is recognized to the extent that it is more likely than not that the deferred taxes will not be realized in the foreseeable future.

 

2) The Company follows a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the available evidence indicates that it is more likely than not that the position will be sustained on examination. If this threshold is met, the second step is to measure the tax position as the largest amount that is greater than 50% likely of being realized upon ultimate settlement.

 

3) Taxes that would apply in the event of disposal of investment in Subsidiaries have not been taken into account in computing the deferred income taxes, as it is the Company’s intention to hold these investments and not realize them.

 

o. Stock-based Compensation

 

The Company accounts for employee stock-based compensation in accordance with the guidance of ASC Topic 718, Compensation - Stock Compensation, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their grant date fair values. The fair value of the equity instrument is charged to compensation expense and credited to additional paid in capital over the period during which services are rendered. The Company recorded stock-based compensation expenses using the straight line method. Forfeitures are recognized as they occur.

 

The Company adopted the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718) Improvements to Nonemployee Share-based Payments. This ASU was issued to simplify the accounting for share-based transactions by expanding the scope of Topic 718 from only being applicable to share-based payments to employees to also include share-based payment transactions for acquiring goods and services from nonemployees.

 

The Company adopted this guidance effective January 1, 2019, with no material impact on its consolidated financial statements.

 

p. Redeemable Non-controlling Interest

 

Non-controlling interests with embedded redemption features, whose settlement is not at the Company’s discretion, are considered redeemable non-controlling interest. Redeemable non-controlling interests are considered to be temporary equity and are therefore presented as a mezzanine section between liabilities and equity on the Company’s consolidated balance sheets. Subsequent adjustment of the amount presented in temporary equity is required only if the Company’s management estimates that it is probable that the instrument will become redeemable. Adjustments of redeemable non-controlling interest to its redemption value are recorded through additional paid-in capital.

 

 F-17 
   

 

q. Loss per Share of Common Stock

 

Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of shares of common stock outstanding for each period. Diluted net loss per share is based upon the weighted average number of common shares and of common shares equivalents outstanding when dilutive. Common share equivalents include: (i) outstanding stock options and warrants which are included under the treasury share method when dilutive, and (ii) common shares to be issued under the assumed conversion of the Company’s outstanding convertible loans and debt, which are included under the if-converted method when dilutive (See Note 14).

 

r. Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentration of credit risk consist of principally cash and cash equivalents, bank deposits and certain receivables. The Company held these instruments with highly rated financial institutions and the Company has not experienced any significant credit losses in these accounts and does not believe the Company is exposed to any significant credit risk on these instruments apart of accounts receivable. The Company performs ongoing credit evaluations of its customers for the purpose of determining the appropriate allowance for doubtful accounts. An appropriate allowance for doubtful accounts is included in the accounts and netted against accounts receivable. In the year ended December 31, 2019 the Company has not experienced any material credit losses in these accounts and does not believe it is exposed to significant credit risk on these instruments.

 

Bad debt allowance is created when objective evidence exists of inability to collect all sums owed it under the original terms of the debit balances. Material customer difficulties, the probability of their going bankrupt or undergoing economic reorganization and insolvency or material delays in payments are all considered indicative of reduced debtor balance value.

 

s. Beneficial Conversion Feature (“BCF”)

 

When the Company issues convertible debt, if the stock price is greater than the effective conversion price (after allocation of the total proceeds) on the measurement date, the conversion feature is considered “beneficial” to the holder. If there is no contingency, this difference is treated as issued equity and reduces the carrying value of the host debt; the discount is accreted as deemed interest on the debt (See Note 7).

 

t.Other Comprehensive Loss

 

Other comprehensive loss represents adjustments of foreign currency translation.

 

u.Newly issued and recently adopted Accounting Pronouncements

 

 F-18 
   

 

ASC 606 - Revenue from Contracts with Customers

 

On December 1, 2018, the Company adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and the related amendments (“New Revenue Standard”) to all contracts, using the modified retrospective method. The cumulative effect of initially applying the new revenue standard was immaterial.

 

Revenue Recognition Prior to the Adoption of the New Revenue Standard

 

The Company recognized revenue for services linked to cell process development and cell manufacturing services based on individual contracts in accordance with Accounting Standards Codification (“ASC”) 605, Revenue Recognition, when the following criteria have been met: persuasive evidence of an arrangement exists; delivery of the processed cells had occurred or the services that are milestones based had been provided; the price is fixed or determinable and collectability is reasonably assured. The Company determined that persuasive evidence of an arrangement exists based on written contracts that define the terms of the arrangements. In addition, the Company determined that services had been delivered in accordance with the arrangement. The Company assessed whether the fee was fixed or determinable based on the payment terms associated with the transaction and whether the sales price was subject to refund or adjustment. Service revenues were recognized as the services were provided. In addition, as part of the services, the Company recognized revenue based on use of consumables, which it received as reimbursement on a cost-plus basis on certain expenses.

 

Revenue Recognition Following the Adoption of the New Revenue Standard

 

The Company’s agreements are primarily service contracts that range in duration from a few months to one year. The Company recognizes revenue when control of these services is transferred to the customer for an amount, referred to as the transaction price, which reflects the consideration to which the Company is expected to be entitled in exchange for those goods or services.

 

A contract with a customer exists only when:

 

the parties to the contract have approved it and are committed to perform their respective obligations;
the Company can identify each party’s rights regarding the distinct goods or services to be transferred (“performance obligations”);
the Company can determine the transaction price for the goods or services to be transferred; and
the contract has commercial substance and it is probable that the Company will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.

 

For the majority of its contracts, the Company receives non-refundable upfront payments. The Company does not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between the time of transfer of the promised goods or services to the customer and the time the customer pays for these goods or services to be generally one year or less. The Company’s credit terms to customers are in average between thirty and ninety days.

 

 F-19 
   

 

The Company does not disclose the value of unsatisfied performance obligations for contracts with original expected duration of one year or less.

 

Nature of Revenue Streams

 

We have two main revenue streams being cell process development services and from the second quarter of 2019, POC development services.

 

Cell Process Development Services (mainly discontinued operations)

 

Revenue recognized under contracts for cell process development services may, in some contracts, represent multiple performance obligations (where promises to the customers are distinct) in circumstances in which the work packages and milestones are not interrelated or the customer is able to complete the services performed independently or by using competitors of the Company. In other contracts when the above circumstances are not met, the promises are not considered distinct and the contract represents one performance obligation. All performance obligations are satisfied over time, as there is no alternative use to the services it performs, since, in nature, those services are unique to the customer, which retain the ownership of the intellectual property created through the process. Additionally, due to the non-refundable upfront payment the customer pays, together with the payment term and cancellation fine, it has a right to payment (which include a reasonable margin), at all times, for work completed to date, which is enforceable by law.

 

For arrangements that include multiple performance obligations, the transaction price is allocated to the identified performance obligations based on their relative standalone selling prices. For these contracts, the standalone selling prices are based on the Company’s normal pricing practices when sold separately with consideration of market conditions and other factors, including customer demographics and geographic location.

 

The Company measures the revenue to be recognized over time on a contract by contract basis, determining the use of either a cost-based input method or output method, depending on whichever best depicts the transfer of control over the life of the performance obligation.

 

Tech Transfer Services (discontinued operations)

 

Revenue recognized under contracts for tech transfer services are considered a single performance obligation, as all work packages (including data collection, GMP documentation, validation runs) and milestones are interrelated. Additionally, the customer is unable to complete services of work performed independently or by using competitors of the Company. Revenue is recognized over time using a cost-based based input method where progress on the performance obligation is measured by the proportion of actual costs incurred to the total costs expected to complete the contract.

 

 F-20 
   

 

Cell Manufacturing Services (discontinued operations)

 

Revenues from cell manufacturing services represent a single performance obligation which is recognized over time. The progress towards completion will continue to be measured on an output measure based on direct measurement of the value transferred to the customer (units produced).

 

POC Development Services

 

Revenue recognized under contracts for POC development services may, in some contracts, represent multiple performance obligations (where promises to the customers are distinct) in circumstances in which the work packages are not interrelated or the customer is able to complete the services performed independently or by using competitors of the Company.

 

For arrangements that include multiple performance obligations, the transaction price is allocated to the identified performance obligations based on their relative standalone selling prices.

 

The Company measures the revenue to be recognized over time on a contract by contract basis as services are provided.

 

Significant Judgement and Estimates

 

The cost-based and output methods of revenue recognition require the Company to make estimates of costs to complete its projects and the percentage of completeness on an ongoing basis. Significant judgment is required to evaluate assumptions related to these estimates. The effect of revisions to estimates related to the transaction price (including variable consideration relating to reimbursement on a cost-plus basis on certain expenses) or costs to complete a project are recorded in the period in which the estimate is revised.

 

Practical Expedients

 

As part of ASC 606, the Company has adopted several practical expedients including the Company’s determination that it need not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between when the Company transfers a promised service to the customer and when the customer pays for that service will be one year or less.

 

Reimbursed Expenses

 

The Company includes reimbursed expenses in revenues and costs of revenue as the Company is primarily responsible for fulfilling the promise to provide the specified service, including the integration of the related services into a combined output to the customer, which are inseparable from the integrated service. These costs include such items as consumable, reagents, transportation and travel expenses, over which the Company has discretion in establishing prices.

 

 F-21 
   

 

Change Orders

 

Changes in the scope of work are common and can result in a change in transaction price, equipment used and payment terms. Change orders are evaluated on a contract-by-contract basis to determine if they should be accounted for as a new contract or as part of the existing contract. Generally, services from change orders are not distinct from the original performance obligation. As a result, the effect that the contract modification has on the contract revenue, and measure of progress, is recognized as an adjustment to revenue when they occur.

 

Costs of Revenue

 

Costs of revenue include (i) compensation and benefits for billable employees and personnel involved in production, data management and delivery, and the costs of acquiring and processing data for the Company’s information offerings; (ii) costs of staff directly involved with delivering services offerings and engagements; (iii) consumables used for the services; and (iv) other expenses directly related to service contracts such as courier fees, laboratory supplies, professional services and travel expenses.

 

ASU 2018-07 Stock based Compensation

 

In June 2018, the FASB issued ASU 2018-07, “Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” This guidance simplifies the accounting for non-employee share-based payment transactions. The amendments specify that ASC 718 applies to all share-based payment transactions in which a grantor acquires goods and services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606, “Revenue from Contracts with Customers.” This standard, adopted as of January 1, 2019, had no material impact on the Company’s consolidated financial statements for the year ended December 31, 2019.

 

ASC 842 - Leases

 

In February 2016, the FASB issued ASU 2016-02 “Leases” (the “new lease standard”). The guidance establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The guidance became effective on January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application.

 

The Company adopted the new lease standard and all the related amendments on January 1, 2019 and used the effective date as the Company’s date of initial application. Consequently, financial information was not updated and the disclosures required under the new standard are not provided for dates and periods before January 1, 2019.

 

For more information, see Note 9.

 

 F-22 
   

 

Recently issued accounting pronouncements, not yet adopted

 

In June 2016, the FASB issued ASU 2016-13“Financial Instruments—Credit Losses—Measurement of Credit Losses on Financial Instruments.” This guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance will be effective for Smaller Reporting Companies (SRCs, as defined by the SEC) for the fiscal year beginning on January 1, 2023, including interim periods within that year. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.

 

In November 2018, the FASB issued ASU 2018-18“Collaborative Arrangements (Topic 808)—Clarifying the interaction between Topic 808 and Topic 606.” The amendments provide guidance on whether certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606. It also specifically (i) addresses when the participant should be considered a customer in the context of a unit of account, (ii) adds unit-of-account guidance in ASC 808 to align with guidance in ASC 606 and (iii) precludes presenting revenue from a collaborative arrangement together with revenue recognized under ASC 606 if the collaborative arrangement participant is not a customer. The guidance will be effective for fiscal years beginning after December 15, 2019. Early adoption is permitted and should be applied retrospectively. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.

 

In December 2019, the FASB issued ASU 2019-12“Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes” (“the Update”). The amendments in this Update simplify the accounting for income taxes by removing the following exceptions in ASC 740: (1) exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items; (2) exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (3) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (4) exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

 

In addition, this Update also simplifies the accounting for income taxes in certain topics as follows: (1) requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax; (2) requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; (3) specifying that an entity can elect (rather than be required to) allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; and (4) requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.

 

 F-23 
   

 

NOTE 3 – DISCONTINUED OPERATIONS

 

On February 2, 2020, the Company entered into a Purchase Agreement with GPP, Masthercell and the Buyer. Pursuant to the terms and conditions of the Purchase Agreement, Sellers agreed to sell 100% of the outstanding equity interests of Masthercell to Buyer for an aggregate nominal purchase price of $315 million, subject to customary adjustments. The Company has determined that the Masthercell Business meets the criteria to be classified as discontinued operations.

 

On February 10, 2020, the Masthercell Sale was consummated in accordance with the terms of the Purchase Agreement. After accounting for GPP’s liquidation preference and equity stake in Masthercell, as well as SFPI – FPIM’s interest in MaSTherCell, distributions to Masthercell option holders and transaction costs, the Company received approximately $126.7 million at the closing of the Masthercell Sale, of which $7.2 million was used for the repayment of intercompany loans and payables, including $4.6 million of payables to MaSTherCell. Included in this amount is $1.5 million which was deposited into an escrow account in connection with potential adjustments based on working capital and indebtedness at closing. The escrow amount was transferred to the Company at the end of July 2020.

 

Due to the sale of the controlling interest in Masthercell, the Company retrospectively reclassified the assets and liabilities of these entities as assets and liabilities of discontinued operations and included the financial results of these entities as discontinued operations in the Company’s consolidated financial statements.

 

Discontinued operations relate to the Masthercell Business. The comprehensive loss and balance sheet for this operation are separately reported as discontinued operations for all periods presented.

 

The financial results of the Masthercell Business are presented as income (loss) from discontinued operations, net of income taxes on the Company’s consolidated statement of comprehensive loss. The following table presents the financial results associated with the Masthercell Business operation as reflected in the Company’s Consolidated Comprehensive loss (in thousands):

 

   Year Ended   Year Ended   One-month
Ended
 
  December 31,   November 30,   December 31, 
OPERATIONS  2019   2018   2018 
Revenues  $31,053   $19,681   $1,910 
Cost of revenues   18,318    10,307    1,170 
Cost of research and development and research and development services, net   54    37    2 
Amortization of intangible assets   1,631    1,725    141 
Selling, general and administrative expenses   13,886    6,196    999 
Other (income) expenses, net   (207)   1,600    - 
Operating loss   2,629    184    402 
Financial expenses, net   31    185    17 
Loss before income taxes   2,660    369    419 
Tax expenses (income)   792    1,185    (124)
Net loss from discontinuing operation, net of tax  $3,452   $1,554   $295 

 

 F-24 
   

 

The following table is a summary of the assets and liabilities of discontinued operations (in thousands):

 

   As of   As of 
  

December 31,

2019

  

December 31,

2018

 
Assets          
           
CURRENT ASSETS:          
Cash and cash equivalents  $11,281   $11,822 
Restricted cash   186    - 
Accounts receivable, net   6,654    3,097 
Prepaid expenses and other receivables   845    678 
GPP receivable, see note 3   -    6,600 
Grants receivable   1,979    - 
Inventory   1,907    1,489 
Deposits   326    - 
Property and equipment, net   22,149    - 
Intangible assets, net (mainly Know How)   10,858    - 
Operating lease right-of-use assets   8,860    - 
Goodwill   10,129    - 
Other assets   47    - 
TOTAL CURRENT ASSETS OF DISCONTINUED OPERATIONS  $75,221   $23,686 

 

   As of 
  

December 31,

2018

 
Assets     
      
NON CURRENT ASSETS:     
Deposits  $86 
Property and equipment, net   10,313 
Intangible assets, net (mainly Know How)   12,736 
Goodwill   10,324 
TOTAL LONG-TERM ASSETS OF DISCONTINUED OPERATIONS  $33,459 

 

 F-25 
   

 

   As of   As of 
  

December 31,

2019

  

December 31,

2018

 
CURRENT LIABILITIES:          
Accounts payable  $5,756   $1,677 
Accrued expenses and other payables   372    566 
Employees and related payables   2,047    1,887 
Advance payments on account of grant   2,227    611 
Short-term loans and current maturities of long- term loans   372    372 
Contract liabilities   8,301    5,118 
Current maturities of long-term finance leases   291    226 
Current maturities of operating leases   1,365    - 
Non-current operating leases   7,069    - 
Loans payable   1,230    - 
Deferred taxes   1,868    - 
Long-term finance leases   688    - 
TOTAL CURRENT LIABILITIES OF DISCONTINUED OPERATIONS  $31,586   $10,457 

 

   As of 
  

December 31,

2018

 
LONG-TERM LIABILITIES:     
Loans payable  $1,633 
Deferred taxes   1,360 
Long-term finance leases   661 
TOTAL LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS  $3,654 

 

Property, plants and equipment, net and right-of-use assets by geographical location were as follows:

 

   December 31, 
   2019   2018 
   (in thousands) 
United States  $16,707   $- 
Belgium  $14,302   $10,313 
Total  $31,009   $10,313 

 

 F-26 
   

 

The following table represents the components of the cash flows from discontinued operations (in thousands):

 

   Year Ended   Year Ended   One-Month
Ended
 
  

December 31,

2019

  

November 30,

2018

  

December 31,

2018

 
             
Net cash flows provided by (used in) operating activities  $(1,248)  $1,545   $495 
Net cash flows used in investing activities  $(11,621)  $(4,618)  $(452)
Net cash flows (used in) provided by financing activities  $12,570   $13,681   $(42)

 

Disaggregation of Revenue

 

The following table disaggregates the Company’s revenues by major revenue streams related to discontinued operations (in thousands):

 

   Year Ended   One-Month
Ended
 
  

December 31,

2019

  

December 31,

2018

 
Revenue stream:          
           
Cell process development services  $20,834   $1,546 
Tech transfer services   5,396    364 
Cell manufacturing services   4,823    - 
Total  $31,053   $1,910 

 

Redeemable Non-Controlling Interest of discontinued operations

 

a.Subscription and Shareholders Agreement with Belgian Sovereign Funds Société Fédérale de Participations et d’Investissement (“SFPI”).

 

On November 15, 2017, the Company, MaSTherCell and SFPI entered into a Subscription and Shareholders Agreement (“SFPI Agreement”) pursuant to which SFPI made an equity investment in MaSTherCell in the aggregate amount of Euro 5 million (approximately $5.9 million), for approximately 16.7% of MaSTherCell (SFPI received B-shares of MaSTherCell which have the same voting, dividend and other rights as the existing shares of MaSTherCell). The equity investment commitment included the conversion of the outstanding loan and accrued interest of Euro 1.07 million (approximately $1.18 million), previously made by SFPI to MaSTherCell. In November 2017, the initial subscription amount of Euro 2 million ($2.3 million) was paid by SFPI to MaSTherCell. The proceeds from the investment are to be used in accordance with the long-term business plan that was appended to the SFPI Agreement which includes, without limitation, expanding MaSTherCell’s facilities in Belgium with the addition of five new cGMP manufacturing cleanrooms. The agreement contains customary representations, warranties and covenants by MaSTherCell and the Company, in respect of which the Company has undertaken to indemnify SFPI for the consequences of any breach thereof by MaSTherCell or the Company.

 

 F-27 
   

 

Under the Agreement, SFPI has the right to appoint one member to the board of directors of MaSTherCell’s five-person board. In addition, the holders of the B-Shares have a right to, along with the Company, appoint an independent director who will serve as the chairman of the board of MaSTherCell for a renewable three-year term. The agreement provides that, under certain specified circumstances, SFPI is entitled to transfer its equity interest in MaSTherCell to the Company at a price equal to the total investment amount, plus a specified annual premium ranging from 10% to 25%, depending on the year following the subscription in which the put is exercised.

 

Under the terms of the agreement since the Company listed to Nasdaq, SFPI is entitled to convert its MaSTherCell equity interest (using an exchange rate of approximately $0.85), into shares of Common Stock of the Company based upon a conversion price of $6.24, the exercise period of the option is 3 years from the closing date of the SFPI Agreement. The $6.24 conversion price represents the price after the previous stock split of the Company.

 

Furthermore, under the agreement, the Company had the right to spin-off the CDMO business into a Subsidiary provided that the Subsidiary adhered to the terms of the agreement. In June 2018, the Company effectuated such a spin-off and consolidated the CDMO business into Masthercell Global and Masthercell Global adhered to the terms of this agreement. Also, the Company possesses a drag along right under the Agreement whereby if the Company transfers all or the majority of its shares in MaSTherCell, it can force SFPI to do the same. (See also Note 3(b)).

 

On June 13, 2018, SFPI paid MaSTherCell the remaining amount of Euro 1.9 million (approximately $2.3 million) to complete its subscription obligations under the agreement.

 

Due to the embedded redemption feature whose settlement is not at the Company discretion, the Company accounted for the investment made by SFPI as a redeemable non-controlling interest. As of December 31, 2019 and November 30, 2018, the SFPI investment was presented as redeemable non-controlling interest in the balance sheet, in the amount of $6.0 million and $5.8, respectively.

 

b.Stock Purchase Agreement and Stockholders’ Agreement with Great Point Partners, LLC (“GPP”)

 

On June 28, 2018, the Company, Masthercell Global GPP, and certain of GPP’s affiliates, entered into a series of definitive strategic agreements intended to finance, strengthen and expand Orgenesis’ CDMO business. In connection therewith, the Company, Masthercell Global and GPP-II Masthercell, LLC, a Delaware limited liability company (“GPP-II”) and an affiliate of GPP entered into Stock Purchase Agreement (the“SPA”) pursuant to which GPP-II purchased 378,000 shares of newly designated Series A Preferred Stock of Masthercell Global (the“Masthercell Global Preferred Stock”), representing 37.8% of the issued and outstanding share capital of Masthercell Global, for a cash consideration to be paid into Masthercell Global of up to $25 million, of which $13.2 million was subject to certain contingencies described below (the“Consideration”). An initial cash payment of $11.8 million of the Consideration was remitted at closing by GPP-II. $1.5 Million of the initial capital contributed to Masthercell Global was used to reimburse the investors for their fees and expenses incurred in conjunction with this transaction (net payment of $10.3 million). Under the terms of the SPA the follow up payments were to be in the amount of $6.6 million to be made in each of years 2018 and 2019 (the“Future Payments”), if (a) Masthercell Global achieved specified EBITDA and revenues targets during each of these years, and (b) the Orgenesis’ shareholders approved certain provisions of the SPA entered into by these parties. Such shareholder approval was obtained on October 23, 2018. Masthercell Global achieved the specified EBITDA and revenue targets in both 2018 and 2019, and the Company received an aggregate of $13.2 million from GPP in 2019.

 

 F-28 
   

 

In connection with the entry into the SPA as described above, each of the Company, Masthercell Global and GPP-II entered into the Masthercell Global Inc. Stockholders’ Agreement (the“Stockholders’ Agreement”) providing for certain restrictions on the disposition of Masthercell Global securities, the provisions of certain options and rights with respect to the management and operations of Masthercell Global, certain rights to GPP-II (including, without limitation, a tag along right, drag along right and certain protective provisions). After the earlier of the second anniversary of the closing or certain enumerated circumstances, GPP-II is entitled to effectuate a spinoff of Masthercell Global and the Masthercell Global Subsidiaries (the“Spinoff”).

 

The Spinoff is required to reflect a market value, provided that under certain conditions, such market valuation shall reflect a valuation of Masthercell Global and its Subsidiaries of at least $50 million. In addition, upon certain enumerated events described below, GPP-II is entitled, at its option, to put to the Company (or, at Company’s discretion, to Masthercell Global if Masthercell Global shall then have the funds available to consummate the transaction) its shares in Masthercell Global or, alternatively, purchase from the Company its share capital in Masthercell Global at a purchase price equal to the fair market value provided that the purchase price shall not be greater than three times the price per share of Masthercell Global Preferred Stock paid by GPP-II and shall not be less than the price per share of Masthercell Global Preferred Stock paid by GPP-II. GPP-II may exercise its put or call option upon the occurrence of any of the following: (i) there is an Activist Shareholder of the Company; (ii) the Chief Executive Officer and/or Chairman of the board of directors of the Company resigns or is replaced, removed, or terminated for any reason prior to June 28, 2023; (iii) there is a change of control event of the Company as defined in the Stockholders’ Agreement; or (iv) the industry expert director appointed to the board of directors of Masthercell Global is removed or replaced (or a new such director is appointed) without the prior written consent of GPP-II. Activist Shareholder shall mean any Person who acquires shares of capital stock of the Company who either: (x) acquires more than a majority of the voting power of the Company, (y) actively takes over and controls a majority of the board of directors of the Company, or (z) is required to file a Schedule 13D with respect to such Person’s ownership of the Company and has described a plan, proposal or intent to take action with respect to exerting significant pressure on the management of or directors of, the Company.

 

The Stockholders’ Agreement further provides that GPP-II is entitled, at any time, to convert its share capital in Masthercell Global for the Company’s common stock in an amount equal to the lesser of (a)(i) the fair market value of GPP-II’s shares of Masthercell Global Preferred Stock to be exchanged, divided by (ii) the average closing price per share of the Company’s Common Stock during the thirty day period ending on the date that GPP-II provides the exchange notice (the“Exchange Price”) and (b)(i) the fair market value of GPP-II’s shares of Masthercell Global Preferred Stock to be exchanged assuming a value of Masthercell Global equal to three and a half (3.5) times the revenue of Masthercell Global during the last twelve (12) complete calendar months immediately prior to the exchange divided by (ii) the Exchange Price; provided, that in no event will (A) the Exchange Price be less than a price per share that would result in Orgenesis Inc. having an enterprise value of less than $250 million and (B) the maximum number of shares of the Company’s Common Stock to be issued shall not exceed 2,704,247 shares, unless the Company obtains shareholder approval for the issuance of such greater amount of shares of the Company in accordance with the rules and regulations of the Nasdaq Stock Market.

 

 F-29 
   

 

Great Point and Masthercell Global entered into an advisory services agreement pursuant to which Great Point is to provide management services to Masthercell Global for which Great Point will be compensated at an annual base compensation equal to the greater of (i) $250 thousand per each 12 month period or (ii) 5% of the EBITDA for such 12 month period, payable in arrears in quarterly installments; provided, that these payments will (A) begin to accrue immediately, but shall not be paid in cash to Great Point until such time as Masthercell Global generates EBITDA of at least $2 million for any 12 month period or the sale of or change in control of Masthercell Global, and (B) shall not exceed an aggregate annual amount of $0.5 million. Such compensation accrues but is not owed to Great Point until the earlier of (i) Masthercell Global generating EBITDA of at least $2 million for any 12-month period following the date of the agreement or (ii) a Sale of the Company or Change of Control of the Company (as both terms are defined therein).

 

GPP and Masthercell Global entered into a transaction services agreement pursuant to which GPP is to provide certain brokerage services to Masthercell Global for which GPP will be entitled to a certain exit fee and transaction fee (as both terms are defined in the agreement), such fees not to be less than 2 percent of the applicable transaction value.

 

Each of the agreements described above terminated upon the sale of Masthercell Global on February 10, 2020.

 

Due to the embedded redemption feature whose settlement is not at the Company discretion, the Company had accounted for the investment made by GPP as a redeemable non-controlling interest.

 

NOTE 4- CORPORATE REORGANIZATION OF CURECELL AND ATVIO

 

Description of the Transactions

 

Contemporaneous with the execution of the SPA and the Stockholders’ Agreement (see Notes 3 and 12), the Company and Masthercell Global entered into a Contribution, Assignment and Assumption Agreement pursuant to which the Company contributed to Masthercell Global assets including: (i) all of the Company’s holdings in Masthercell Global Subsidiaries; (ii) the debt in the total amount of $2.3 million owed to the Company by Atvio and CureCell; (iii) the license agreement between the Company and MaSTherCell dated December 30, 2016; (v) the Joint Venture Agreement with Atvio dated May 10, 2016 (as amended on May 30, 2016); (vi) the SFPI Agreement and (vii) the Joint Venture Agreement between Orgenesis and CureCell dated March 14, 2016 (the“Corporate Reorganization”). See Note 12(b).

 

 F-30 
   

 

In furtherance thereof, Masthercell Global, as the Company assignee, acquired all of the issued and outstanding share capital of Atvio and 94.12% of the share capital of CureCell. The Company exercised the“call option” to which it was entitled under the joint venture agreements with each of these entities to purchase from the former shareholders their equity holding. The consideration for the outstanding share equity in each of Atvio and CureCell consisted solely of the Company Common Stock.

 

In respect of the acquisition of Atvio, the Company issued to the former Atvio shareholders an aggregate of 83,965 shares of Company’s Common Stock. In respect of the acquisition of CureCell, the Company issued the former CureCell shareholders an aggregate of 202,846 shares of the Company Common Stock. The exercise of the call options of CureCell and Atvio, pursuant to which the Company obtained effective control over such entities, was accounted for as a business combination. The results of operations of CureCell and Atvio have been included in the Company’s condensed consolidated statements of operations starting from June 28, 2018, the date on which the Company obtained effective control of CureCell and Atvio. Before the closing date Atvio and CureCell were associated companies, see Note 12. The net gain on remeasurement of the previously held equity interest in Atvio and CureCell to acquisition date fair value was $4.5 million.

 

CureCell

 

The following table summarizes the allocation of purchase price to the fair values of the assets acquired and liabilities assumed as of the transaction date:

 

Total assets acquired:     
Cash and cash equivalents  $58 
Property, plants and equipment, net   1,104 
Inventory   148 
Other assets   300 
Other Intangible assets (a)   3,933 
Goodwill (b)   3,950 
Total assets   9,493 
      
Total liabilities assumed:     
Deferred income from the Company and others   1,945 
Deferred taxes   80 
Fair value of convertible loan from the Company   892 
Non-controlling interests*   299 
Other liabilities   1,487 
Total liabilities   4,703 
Total consideration transferred  $4,790 
      
Fair value of 36.4% of shared issued *   1,853 
Acquisition date fair value of previously held equity interest   2,937 
Total consideration transferred  $4,790 

 

* Fair value of the consideration is based on the company’s market share price.