ORGS Orgenesis Inc

ORGENESIS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(U.S. Dollars in thousands, except share and loss per share amounts)
(Unaudited)

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

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

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

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ORGENESIS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine months Ended August 31, 2016 and 2015

NOTE 1 - GENERAL AND BASIS OF PRESENTATION

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

The Company is among the first of a new breed of regenerative therapy companies with expertise and unique experience in cell therapy development and manufacturing. It is building a fully-integrated biopharmaceutical company focused not only on developing its trans-differentiation technologies for diabetes and vertically integrating manufacturing that can optimize its abilities to scale-up its technologies for clinical trials and eventual commercialization, but also do the same for the technologies of other cell therapy markets in such areas as cell-based cancer immunotherapies and neurodegenerative diseases. This integrated approach supports its business philosophy of bringing to market significant life-improving medical treatments.

The Company’s cell therapy technology derives from published work of Prof. Sarah Ferber, our Chief Science Officer and a researcher at THM, a leading medical hospital and research center in Israel, who established a proof of concept that demonstrates the capacity to induce a shift in the developmental fate of cells from the liver and transdifferentiating (converting) them into “pancreatic beta cell-like” insulin-producing cells. Its development activities with respect to cell-derived and related therapies, which are conducted through the Israeli Subsidiary, have, to date, been limited to laboratory and preclinical testing.

The Company’s Belgian-based subsidiary, MaSTherCell, is a contract development manufacturing organization, or CDMO, specialized in cell therapy development for advanced medicinal products. MaSTherCell offers two types of services to its customers: (i) process and assay development services and (ii) Good Manufacturing Practices (GMP) contract manufacturing services.

The Company is leveraging the expertise and experience of MaSTherCell in cell process development and manufacturing capability in order to build a fully integrated bio-pharmaceutical company in the cell therapy development and manufacturing area.

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

Basis of Presentation

These unaudited condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with U.S. GAAP, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial statements. Accordingly, they do not contain all information and notes required by U.S. GAAP for annual financial statements. In the opinion of management, the unaudited condensed consolidated interim financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of the Company’s consolidated financial position as of August 31, 2016, and the consolidated statements of comprehensive loss for the three and nine months ended August 31, 2016 and 2015, and the changes in equity (capital deficiency) and cash flows for the nine months period ended August 31, 2016 and 2015. The results for the nine months ended August 31, 2016, are not necessarily indicative of the results to be expected for the year ending November 30, 2016. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended November 30, 2015.

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Going Concern

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of August 31, 2016, the Company had not achieved profitable operations, has accumulated losses of $27 million (since inception), has negative cash flows from operating activities, has a working deficiency of $9.6 million and expects to incur further losses in the development of its business. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company’s continuation as a going concern is dependent on its ability to obtain additional financing as may be required and ultimately to attain profitability. The Company needs to raise significant funds on an immediate basis in order to continue to meet its liquidity needs, realize its business plan and maintain operations. The Company’s current cash resources are not sufficient to support its operations as presently conducted or permit it to take advantage of business opportunities that may arise. Management of the Company is continuing its efforts to secure funds through equity and/or debt instruments for its operations.

The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. There can be no assurance that management will be successful in implementing a business plan or that the successful implementation of a business plan will actually improve the Company’s operating results. If the Company is unable to obtain the necessary capital, the Company may have to cease operations.

The Company has been funding its operations primarily from revenue and the proceeds from private placements of the Company’s convertible and equity securities. From December 2015 through August 2016, the Company received proceeds of approximately $4.4 million from customers, $1.5 million from a private placement to certain accredited investors of its unsecured equity stock and $1.3 million from the proceeds of convertible loans. In addition, after the period ended August 31, 2016, the Company raised an additional $50 thousand from convertible loans and received $1.2 million (1 million Euro) loan.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies adopted are consistent with those of the previous financial year except as described below.

Newly Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers . ASU 2014-09 will supersede most current revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue upon the transfer of goods or services to customers in an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for interim and annual periods beginning on or after December 15, 2016 (early adoption is not permitted). The guidance permits the use of either a retrospective or cumulative effect transition method. On July 9, 2015, the FASB decided to delay the effective date of the new revenue standard by one year, which resulted in the guidance being effective for interim and annual periods beginning on or after December 31, 2017. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. The Company is currently evaluating the impact of this standard.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” Continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. Prior to this, there was no guidance under U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this update provide that guidance. In doing so, the amendments reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term “substantial doubt”, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). For the period ended November 30, 2015, management evaluated the Company’s ability to continue as a going concern and concluded that substantial doubt has not been alleviated about the Company’s ability to continue as a going concern. While the Company continues to explore further significant sources of financing, management’s assessment was based on the uncertainty related to the availability, amount and nature of such financing over the next twelve months.

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In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities . The pronouncement requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. ASU 2016-01 requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. These changes become effective for the Company's fiscal year beginning January 1, 2018. The expected adoption method of ASU 2016-01 is being evaluated by the Company and the adoption is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-06, Contingent Put and Call Options in Debt Instruments (Topic 815), which requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met. One of those criteria is that the economic characteristics and risks of the embedded derivatives are not clearly and closely related to the economic characteristics and risks of the host contract (the “clearly and closely related” criterion). The amendments in this Update clarify what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. The amendments are an improvement to GAAP because they eliminate diversity in practice in assessing embedded contingent call (put) options in debt instruments. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted for all entities. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting , as part of its simplification initiative. The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early application is permitted for all entities. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

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In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update (“ASU”) 2016-15, Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments, which clarifies existing guidance related to accounting for cash receipts and cash payments and classification on the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

NOTE 3 – ACQUISITION OF MASTHERCELL

Description of the Transaction

The Company entered into a share exchange agreement dated November 3, 2014, as subsequently amended (the "Share Exchange Agreement" or "SEA"), with MaSTherCell SA, Cell Therapy Holding SA (collectively “MaSTherCell”). Pursuant to the Share Exchange Agreement, which closed on March 2, 2015 in exchange for all of the issued and outstanding shares of MaSTherCell, the Company issued to the former shareholders of MaSTherCell an aggregate of 42,401,724 shares (the “Consideration Shares”) of common stock at a price of $0.58 per share for an aggregate price of $24.6 million. Out of the Consideration Shares, 8,173,483 shares were allocated to the bondholders of MaSTherCell in case of conversion.

On November 12, 2015, the Company and MaSTherCell and each of the former shareholders of MaSTherCell (the “MaSTherCell Shareholders”), entered into an amendment (“Amendment No. 2”) to the Share Exchange Agreement. Under Amendment No. 2, the MaSTherCell Shareholders option to unwind the transaction as contained in the original Share Exchange Agreement (the “Unwind Option”) was extended to November 30, 2015. In addition the Company agreed to remit to MaSTherCell, by way of an equity investment, the sum of EUR 3.8 million by November 30, 2015 (the “Initial Investment”), to be followed by a subsequent equity investment by December 31, 2015 in MaSTherCell of EUR 1.2 million. The extended right of the MaSTherCell Shareholders to unwind the transaction could have been exercised by them only if the Company had not achieved the Post Closing Financing and/or completed the Initial Investment (as defined) by November 30, 2015.

In connection with the equity investment, on December 10, 2015, the Company agreed to invest EUR 2.2 million in MaSTherCell equity in addition to the Initial Investment, which additional amount becomes due upon the request of the MaSTherCell board of directors, of whom Company directors/officers currently represent a majority. The Company’s agreement represents an increase of EUR 1 million over the amount which the Company was previously obligated to invest in MaSTherCell under the Share Exchange Agreement as additional equity and replaces any funding obligation that the Company had under the SEA, as amended.

On December 10, 2015, the Company remitted to MaSTherCell the Initial Investment of € 3.8 million or $4.1 million (out of the original obligation for investment of €6 million), in compliance with its obligations as required under the Share Exchange Agreement. As a result, the Unwind Option was canceled and all the shares that were issued, have been reclassed from redeemable common stock into equity.

During the nine months ended August 31, 2016, the Company remitted to MaSTherCell an additional $1.5 million (€ 1.4 million), in compliance with its obligations.

NOTE 4 - SEGMENT INFORMATION

The Chief Executive Officer ("CEO") is the Company’s chief operating decision-maker ("CODM"). Following the acquisition of MaSTherCell, management has determined that there are two operating segments, based on the Company's organizational structure, its business activities and information reviewed by the CODM for the purposes of allocating resources and assessing performance.

CDMO

The CDMO activity is operated by MaSTherCell, which specializes in cell therapy development for advanced medicinal products. MaSTherCell is providing two types of services to its customers: (i) process and assay development services and (ii) GMP contract manufacturing services. The CDMO segment includes only the results of MaSTherCell.

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CTB

The Cellular Therapy Business (“CTB”) activity is based on the technology licensed by the Israeli Subsidiary, that demonstrates the capacity to induce a shift in the developmental fate of cells from the liver and differentiating (converting) them into “pancreatic beta cell-like” insulin producing cells for patients with Type 1 Diabetes. This segment is comprised of all entities aside from MaSTherCell.

The Company assesses the performance based on a measure of "Adjusted EBIT" (earnings before financial expenses and tax, and excluding share-based compensation expenses and non-recurring income or expenses). The measure of assets has not been disclosed for each segment.

Segment data for the nine months ended August 31, 2016 is as follows:

Segment data for the nine months ended August 31, 2015 is as follows:

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Segment data for the three months ended August 31, 2016 is as follows:

Segment data for the three months ended August 31, 2015 is as follows:

Geographic, Product and Customer Information

Substantially all of the Company's revenues and long lived assets are located in Belgium.

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Revenues from single customers from the CDMO segment that exceed 10% of total net revenues are:

NOTE 5 – CONVERTIBLE LOAN AGREEMENTS

(a)      During the year ended November 30, 2015 and 2014, the Company entered into six convertible loan agreements (out of which five during 2015) with new investors for a total amount of $1 million (the “Convertible Loans”), interest is calculated at 6% annually and was payable, along with the principal on or before the maturity date.

On April 27, 2016 and December 23, 2015, the holders of all the Convertible Loans and the Company agreed to convert the Convertible Loans and accrued interest into units of the Company’s common stock, each unit comprising one share of the Company’s common stock and one three-year warrant to purchase an additional share of the Company’s common stock at an exercise price of $0.52. Upon conversion of the Convertible Loans, the Company issued an aggregate of 1,976,330 shares of Common stock and three year warrants to purchase up to an additional 1,976,330 shares. Furthermore, in the event the Company issues any common shares or securities convertible into common shares in a private placement for cash at a price less than $0.52 (the “New Issuance Price”) on or before December 23, 2016, the Company will issue, for no additional consideration, additional common shares to subscribers, according to the mechanism defined in the agreements. This provision does not apply to issuance of shares under options, issuance of shares under existing rights to acquire shares, nor issuance of shares for non-cash consideration.

The Company allocated the principal amount of the convertible loans and the accrued interest thereon based on their fair value.

The table below presents the fair value of the instruments issued as of the conversion dates and the allocation of the proceeds (for the fair value as of August 31, 2016, see Note 10):

(b)       On April 27, 2016, the Company entered into an assignment and assumption of debt agreement with Nine Investments Ltd. (“Nine Investments”) and Admiral Ventures Inc. (“Admiral”). Pursuant to the terms of a Convertible Loan Agreement dated May 29, 2014, as amended on December 2014 (collectively, the "Loan Agreement"), Nine Investments agreed to assign and transfer to Admiral all of the Company’s obligations for the outstanding amount of the Loan Agreement. Additional amendments to the provisions of the Loan Agreement were included the following:

(1)       Extending the due date of the loan of $1.5 million through September 30, 2016;

(2)       The Company paid to Admiral an extension fee in the form of 288,461 units, each unit was comprised of one common share and one, three-year warrant for one common share at an exercise price of $0.52 per common share. The fair value of the warrants as of the grant date was $34 thousand. Using the Black-Scholes model, the shares were valued at the fair value of the Company’s common stock as of April 27, 2016, or $0.28; and

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(3)       The Company shall accrue additional interest totalling $55 thousand for the period from January 31, 2015 to December 31, 2015. In addition the interest rate shall be 12% per annum commencing from January 1, 2016.

The Company accounted for the above changes as an extinguishment of the old debt and issuance of a new debt. As a result, a loss of $229 thousand was recorded within financial expenses.

As of the date of the approval of these financial statements, the Company has not repaid any portion of the loan, and the Company is working on further extending the agreement upon mutually agreeable terms. No assurance can be given that the Company will be able to successfully extend the due date on commercially acceptable terms.

(c)       During the three months ended August 31, 2016 the Company entered into several unsecured convertible note agreements with accredited or offshore investors for an aggregate amount of $1.3 million. The loans bear an annual interest rate of 6% and mature in two years, unless converted earlier. Upon an occurrence of a default, the loans bear interest at a per annum rate of 12%

The entire principal amount under the notes and accrued interest shall automatically convert into “Units” (as defined below) upon the earlier to occur of any of the following: (i) the closing of an offering of equity securities of the Company with gross proceeds to the Company greater than $10 million (“Qualified Offering”) (ii) the trading of the Company’s common stock on the over-the counter market or an exchange at a weighted average price of at least $0.52 for fifty (50) consecutive trading days, or (iii) the listing of the Company’s Common Stock on a U.S. National Exchange (each a “Conversion Event”). Each $0.52 of principal amount and accrued interest due shall convert into (a “Unit”), consisting of one share of Common Stock and one three-year warrant exercisable into an additional share of common stock at a per share exercise price of $0.52, provided that, if more favorable to the holder, any principal amount and accrued interest due shall convert into securities on the same basis as such securities are sold in the Qualified Offering. At any time, the holder may convert the principal amount and accrued interest outstanding into Units as provided above. In addition, if a Conversion Event does not occur within 12 months of the issuance date hereof, then the holder, at its option, may convert the outstanding principal amount and accrued interest under this note into either (i) Units as provided above, or (ii) shares of the Company’s common stock at a per share conversion price of $0.40.

Since the stock price is greater than the effective conversion price on the measurement date, the conversion feature is considered "beneficial" to the holders and equal to $245 thousand. The 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.

The transaction costs were approximately $164 thousand, out of which $53 thousand as stock based compensation due to issuance of warrants. See also Note 8c.4).

NOTE 6 – COMMITMENTS

Collaboration Agreements

1)       On March 14, 2016, the Israel subsidiary, entered into a collaboration agreement with CureCell Co., Ltd. (“CureCell”), initially for the purpose of applying for a grant from the Korea Israel Industrial R&D Foundation ("Koril-RDF") for pre-clinical and clinical activities related to the commercialization of Orgenesis Ltd.’s AIP cell therapy product in Korea ("Koril Grant"). Subject to receiving the Koril Grant, the Parties agreed to carry out at their own expense their respective commitments under the work plan approved by Koril-RDF and any additional work plan to be agreed between the Israeli Subsidiary and CureCell. The Israeli Subsidiary will own sole rights to any intellectual property developed from the collaboration which is derived under the Israeli Subsidiary’s AIP cell therapy product, information licensed from THM. Subject to obtaining the requisite approval needed to commence commercialization in Korea, the Israel subsidiary has agreed to grant to CureCell, or a fully owned subsidiary thereof, under a separate sub-license agreement an exclusive sub-license to the intellectual property underlying the Company’s API product solely for commercialization of the Israel subsidiary products in Korea. As part of any such license, CureCell has agreed to pay annual license fees, ongoing royalties based on net sales generated by CureCell and its sublicensees, milestone payments and sublicense fees. Under the agreement, CureCell is entitled to share in the net profits derived by the Israeli Subsidiary from world - wide sales (except for sales in Korea) of any product developed as a result of the collaboration with CureCell. Additionally, CureCell was given the first right to obtain exclusive commercialization rights in Japan of the AIP product, subject to CureCell procuring all of the regulatory approvals required for commercialization in Japan.

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2)       On March 14, 2016, Orgenesis Inc. and CureCell Co., Ltd. (“CureCell”) entered into a Joint Venture Agreement (the “JVA”) pursuant to which the parties will collaborate in the contract development and manufacturing of cell therapy products in Korea. The parties intend to pursue the joint venture through a newly established Korean company (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 CureCell. Under the JVA, CureCell is to procure, at its sole expense, a GMP facility and appropriate staff in Korea for the manufacture of the cell therapy products. The Company will share with CureCell the Company’s know-how in the field of cell therapy manufacturing, which know-how will not include the intellectual property included in the license from the Tel Hashomer Hospital in Israel to the Israeli subsidiary. In addition, each party shall be required to perform its respective obligations according to a detailed work plan to be agreed upon by CureCell and Company within no later than 30 days following the execution of the JVA. Under the JVA, the Company and CureCell each undertook to remit, within two years of the execution of the JVA, $2 million to the JV Company, of which $1 million is to be in cash and the balance in an in-kind investment, the scope and valuation of which shall be preapproved in writing by CureCell and the Company. The Company’s funding will be made by way of a convertible loan to the JV Company or the joint venture (if the JV Company is not established). The JVA provides that, under certain specified conditions, the Company can require CureCell to sell to the Company its participating (including equity) interest in the JV Company in consideration for the issuance of the Company’s common stock based on the then valuation of the JV Company.

3)       On May 10, 2016 (the “Effective Date”), Orgenesis Inc. and Atvio Biotech Ltd., a newly formed Israeli company (“Atvio”) entered into a Joint Venture Agreement (the “JVA”) pursuant to which the parties agreed to collaborate in the contract development and manufacturing of cell and virus therapy products in the field of regenerative medicine in the State of Israel. The parties intend to pursue the joint venture through Atvio, in which the Company will have a 50% participating interest therein. Under the JVA, Atvio is to procure, at its sole expense, a GMP facility and appropriate staff in Israel. The Company will share with Atvio the Company’s know-how in the field of cell therapy manufacturing, which know-how will not include the intellectual property included in the license from the Tel Hashomer Hospital in Israel to the Israeli Subsidiary. The parties are to create a mutually agreeable work plan within 60 days following the execution of the JVA, detailing each party’s respective obligations. Subject to the adoption of a work plan acceptable to the Company, the Company shall remit to Atvio $1 million to defray the costs associated with the setting up and the maintenance of the GMP facility, all or part of which may be contributed by way of in kind services as agreed to in the work plan. The Company’s funding will be made by way of a convertible loan to Atvio, which shall be convertible at the Company’s option at any time into 50% of the then outstanding equity capital immediately following such conversion. In addition, within a year from the Effective Date the Company has the option to require the Atvio shareholders to transfer to the Company the entirety of their interest in Atvio for the consideration specified in the agreement. Within three years from the Effective Date, the Atvio shareholders shall have the option to require the Company to purchase from Atvios' shareholders their entire interest in Atvio for the consideration specified in the agreement. The activities of Atvio began after the period ended August 31, 2016. As of August 31, 2016, Atvio had immaterial setup costs.

Grants

1)       On April 2016, the Belgian Subsidiary received the formal approval from the Walloon Region, Belgium (Service Public of Wallonia, DGO6) for a budgeted EUR 1,304 thousand support program for the development of a potential cure for Type 1 Diabetes. The financial support is awarded to the Belgium subsidiary as a recoverable advance payment at 55% of budgeted costs, or for a total of EUR 717 thousand ($800 thousand). The grant will be paid to Orgenesis over the project period.

2)       On May 26, 2016, the Israeli Subsidiary entered into a pharma Cooperation and Project Funding Agreement (CPFA) with KORIL and CureCell. KORIL will give a conditional grant of up to $400 thousand each (according to terms defined in the agreement), for a joint research and development project for the use of Autologous Insulin Producing (AIP) Cells for the Treatment of Diabetes (the “Project”). The Project started on June 1, 2016. Upon the conclusion of product development, the grant shall be repaid at the yearly rate of 2.5% of gross sales. The grant will be used solely to finance the costs to conduct the research of the project during a period of 18 months starting on June 1, 2016. On June 2016, the Israeli Subsidiary received $160 thousand under the grant.

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NOTE 7 – EQUITY

The Company’s common shares are traded on the OTCQB Venture Market under the symbol “ORGS”.

During the nine months ended August 31, 2016, the Company entered into definitive agreements with accredited and other qualified investors relating to a private placement (the “Private Placement”) of (i) 2,860,578 shares of the Company’s common stock and (ii) three year warrants to purchase up to an additional 2,860,578 shares of the Company’s Common Stock at a per share exercise price of $0.52. The purchased securities were issued pursuant to subscription agreements between the Company and the purchasers for aggregate proceeds to the Company of $1,488 thousand. Furthermore, in certain events (according to terms defined in the agreements) the Company will issue, for no additional consideration, additional common shares to subscribers which total each Subscriber’s subscription proceeds divided by the New Issuance Price, minus the number of shares already issued to such subscriber (See also Note 10).

The Company allocated the proceeds from the private placement based on the fair value of the warrants and the price protection derivative components. The residual amount was allocated to the shares.

The table below presents the fair value of the instruments issued as of the closing dates and the allocation of the proceeds (for the fair value as of August 31, 2016, see Note 10):

NOTE 8 – STOCK BASED COMPENSATION

On April 27, 2016, the Company approved an aggregate of 1,104,950 stock options to the Company’s Chief Executive Officer that are exercisable at $0.0001 per share and an aggregate of 1,641,300 stock options to the Chief Executive Officer of the U.S. Subsidiary that are exercisable at $.0.28 per share. The options vested immediately with a fair value as of the date of grant of $622 thousand using the Black-Scholes valuation model.

On March 1, 2016 the Company entered into a consulting agreement for professional services for a period of one year. Under the terms of the agreement, the Company granted to a consultant 1 million options exercisable at $0.30 per share. The options shall vest quarterly over a period of one year, but shall immediately vest prior to such one-year period if there is an acquisition of 40% or more of the Company or upon funding of $5 million or more in financing. The fair value of those options as of the date of grant was $187 thousand using the Black-Scholes valuation model.

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1)       On March 1, 2016, the Company entered into a consulting agreement for professional services for a period of one year. Under the terms of the agreement, the Company agreed to grant the consultant 250 thousand shares of restricted common stock. The fair value of the Company’s common stock as of the date of grant was $0.30. In addition, the Company will pay a retainer fee of $10,000 per month, consisting of $5,000 cash per month and $5,000 shall be payable in shares of the Company’s common stock at a value equal to the price paid for the equity capital raise of at least $3 million (the “financing”). The cash fee per month and shares shall be issued upon completion of the financing. The fair value of the shares as of August 31, 2016, was $25 thousand.

2)       On April 27, 2016, the Company entered into a consulting agreement for professional services for a period of one year with two consultants. Under the terms of the agreements, the Company agreed to grant the consultants an aggregage of 1.2 million shares of restricted common stock that vested on grant date. The fair value of the Company’s common stock as of the date of grant was $0.28.

3)       On May 1, 2016, the Company entered into a consulting agreement for professional services for a period of one year. Under the terms of the agreement, the Company agreed to grant a consultant 1 million shares of restricted common stock, of which the first 350,000 shares will vest immediately, 350,000 shares are to vest 90 days following the agreement date and 300,000 shares are schedule to vest 180 following the agreement date. The fair value of the Company’s common stock as of the date of grant of the first tranche was $0.28. With respect to each subsequent tranche, the fair value of the Company’s common stock as of August 31, 2016, was $0.35.

4)       On August 9, 2016, the Company granted to three consultants 75,885 warrants each exercisable at $0.52 per share for three years. The fair value of those options as of the date of grant was $53 thousand using the Black-Scholes valuation model. The warrants were granted as a success fee with respect to the issuance of the convertible notes during the three months period ended August 31, 2016.

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Diluted loss per share does not include 16,954,564 shares underlying outstanding options, 20,971,190 shares issuable upon exercise of warrants, 800,000 shares due to stock-based compensation to service providers and 7,365,719 shares upon conversion of convertible notes for the nine and three months ended August 31, 2016, because the effect of their inclusion in the computation would be anti-dilutive.

Basic loss per share does not include 42,401,724 of redeemable common stock since the contingent criteria regarding the unwind option has not been met as of August 31, 2015.

Diluted loss per share as of August 31, 2015, does not include 42,401,724 redeemable common stock, 12,899,314 shares underlying outstanding options, 2,942,256 shares due to stock-based compensation to service providers, because the effect of their inclusion in the computation would be anti-dilutive.

NOTE 10 - FAIR VALUE PRESENTATION

The Company measures fair value and discloses fair value measurements for financial assets and liabilities. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The accounting standard establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible, and considers credit risk in its assessment of fair value.

As of August 31, 2016 and November 30, 2015, the Company’s liabilities that are measured at fair value and classified as level 3 fair value are as follows (in thousands):

(1)     The fair value of the warrants, price protection derivative and embedded derivatives is determined by using a Monte Carlo Simulation Model. This model, in contrast to a closed form model, such as the Black-Scholes Model, enables the Company to take into consideration the conversion price changes over the conversion period of the loan, and therefore is more appropriate in this case.

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(2)      The fair value of the convertible bonds described in Note 7 of the Annual Report is determined by using a binomial model for the valuation of the embedded derivative and the fair value of the bond was calculated based on the effective rate on the valuation date (6%). The binomial model used the forecast of the Company share price during the convertible bond's contractual term. Since the convertible bond is in Euro and the model is in USD, the Company has used the Euro/USD forward rates for each period. In order to solve for the embedded derivative fair value, the calculation was performed as follows:

The following table presents the assumptions that were used for the models as of August 31, 2016:

The fair value of the convertible bonds is equal to their principal amount and the aggregate accrued interest.

The following table presents the assumptions that were used for the models as of November 30, 2015:

The table below sets forth a summary of the changes in the fair value of the Company’s financial liabilities classified as Level 3 for the nine months ended August 31, 2016:

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There were no transfers to or from Level 3 during the three months ended August 31, 2016.

The Company has performed a sensitivity analysis of the results for the warrants fair value to changes in the assumptions for expected volatility with the following parameters:

The Company has performed a sensitivity analysis of the results for the price protection derivative fair value to changes in the assumptions expected volatility with the following parameters:

The Company has performed a sensitivity analysis of the results for the Embedded Derivative fair value to changes in the assumptions expected volatility with the following parameters:

(*) During the twelve months ended November 30, 2015, 1,826,718 warrants had expired. There were no transfers to or from Level 3 during the twelve months ended November 30, 2015.