ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This
Form 10-Q and other reports filed by the Company from time to time with the U.S.
Securities and Exchange Commission (collectively, the Filings) contain or may
contain forward-looking statements and information that are based upon beliefs
of, and information currently available to, the Companys management as well as
estimates and assumptions made by Companys management. Readers are cautioned
not to place undue reliance on these forward-looking statements, which are only
predictions and speak only as of the date hereof. When used in the Filings, the
words anticipate, believe, estimate, expect, future, intend, plan,
or the negative of these terms and similar expressions as they relate to the
Company or the Companys management identify forward-looking statements. Such
statements reflect the current view of the Company with respect to future events
and are subject to risks, uncertainties, assumptions, and other factors,
including the risks relating to the Companys business, industry, and the
Companys operations and results of operations. Should one or more of these
risks or uncertainties materialize, or should the underlying assumptions prove
incorrect, actual results may differ significantly from those anticipated,
believed, estimated, expected, intended, or planned.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance, or achievements. Except as required by
applicable law, including the securities laws of the United States, the Company
does not intend to update any of the forward-looking statements to conform these
statements to actual results.
Our financial statements are prepared in accordance with accounting principles
generally accepted in the United States (GAAP). These accounting principles
require us to make certain estimates, judgments and assumptions. We believe that
the estimates, judgments and assumptions upon which we rely are reasonable based
upon information available to us at the time that these estimates, judgments and
assumptions are made. These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities as of the date of the financial
statements as well as the reported amounts of revenues and expenses during the
periods presented. Our financial statements would be affected to the extent
there are material differences between these estimates and actual results. The
following discussion should be read in conjunction with our financial statements
and notes thereto appearing elsewhere in this report.
Corporate Overview
Orgenesis
Inc. is among the first of a new breed of regenerative therapy companies with
expertise and unique experience in cell therapy development and manufacturing
for advanced medicinal products serving the regenerative medicine industry. In
addition, we are focused on developing a novel and proprietary cell therapy
trans-differentiation technologies for the treatment of diabetes with a revenue
generating contract development and manufacturing service business to serve the
regenerative medicine industry. Our vertically integrated manufacturing
capabilities are being used to serve to emerging technologies of other cell
therapy markets in such areas as cell-based cancer immunotherapies and
neurodegenerative diseases and also to optimize our abilities to scale-up our
technologies for clinical trials and eventual commercialization of our proposed
diabetes treatment. The combination of our own proprietary cell therapy
trans-differentiation technologies for the treatment of diabetes and a
revenue-generating contract development and manufacturing service business
provides us with unique capabilities and supports our business philosophy of
bringing to market significant life-improving medical treatments.
We
seek to differentiate ourself from other cell therapy companies by our
wholly-owned, Belgian-based CDMO subsidiary, MaSTherCell S.A., and a world-wide
network of partners in order to build a unique and fundamental base platform of
know-how and expertise for a multitude of cell types. The goal is to
industrialize cell therapy for fast, safe and cost-effective production in order
to provide rapid therapies for any market around the world. All these services
are already compliant with GMP requirements, ensuring identity, purity,
stability, potency and robustness of cell therapy products for clinical phase I,
II, III through commercialization. The goal is to become the premier service
provider in the regenerative medicine industry by leveraging the experience and
expertise of MaSTherCell as a recognized leader in cell therapy development and
manufacturing.
19
MaSTherCell
is developing premier technologies for other cell therapy companies such as
cell-based cancer immunotherapies and neoconservative diseases. Our vertical
integration responds to the main challenges faced by most biotechnology
companies such as cost of goods sold and logistics. Our global manufacturing
network is envisioned as offering a global one-stop-shop manufacturing and
logistics services and breakthrough technologies enabling promising therapies to
more rapidly reach the market at a fraction of the costs.
Masthercell
currently operates facilities qualified under cGMPs in Belgium. We acquired
MaSTherCell in March 2015. As the industry continues to mature and a growing
number of cell therapy companies approach commercialization, we believe that
MaSTherCell is well positioned to serve as an external manufacturing source for
cell therapy companies.
We
are leveraging the recognized expertise and experience in cell process
development and manufacturing of MaSTherCell, and our international global
network of CDMO joint ventures, to build a global and fully integrated
bio-pharmaceutical company in the cell therapy development and manufacturing
area. We target the international manufacturing market as a key priority through
joint-venture agreements that provide development capabilities, along with
manufacturing facilities and experienced staff.
Our cell therapy technology for diabetes is based on
the research work of Prof. Sarah Ferber, our Chief Science Officer and a
researcher at Tel Hashomer Medical Center, a leading medical hospital and
research center in Israel (THM), 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. Furthermore, those cells were found to be
resistant to autoimmune attack and to produce insulin in a glucose-sensitive
manner in relevant animal models. Our development for our cellular therapy
business (CTB), which is conducted through our Israeli subsidiary, calls for
conducting additional preclinical safety and efficacy studies with respect to
diabetes and other potential indications.
Significant Recent Corporate Highlights
Management
continues in its efforts to raise operating capital. In connection therewith, in
January 2017 we entered into definitive agreements with an institutional
investor for the private placement of units of our securities for aggregate
subscription proceeds to us of $16 million. The subscription proceeds are
payable on a periodic basis through August 2018. Each periodic payment of
subscription proceeds will be evidenced by our standard securities subscription
agreement. As of the date of this quarterly report on Form 10-Q, the investor
has remitted to us $2 million in subscription proceeds. Each unit is comprised
of one share of our common stock and a warrant to purchase an additional share
of common stock at a per share exercise price of $0.52. Pursuant to the
investment, the investor designated a director to serve on our board of
directors for an initial two-year period and thereafter so long as the investor
holds at least 10% of the Companys outstanding Common Stock. The investors
right to designate the board designee is subject to the payment in full as
provided in the definitive agreements of the remaining subscription proceeds.
On
February 13, 2017, we announced that our Belgian-based subsidiary, Orgenesis
SPRL, received the formal approval from the Walloon Region, Belgium (Service
Public of Wallonia, DG06) for a €12.3 million (approximately $12.8 million)
support program for the research and development of a potential cure for Type 1
Diabetes. The financial support was awarded to our Belgian subsidiary at 55% of
budgeted costs, or a total of €6.8 million (approximately $7 million).
As
further discussed below, our subsidiary MaSTherCell S.A., had revenues of
approximately $4.1 million during the six months ended May 31, 2017 representing
an increase of 55% over the same period last year.
In
May 2017, we improved the equity-debt ratio of our subsidiary MaSTherCell by
converting the loan advanced to it in the amount of $1.1 million (EUR 1 million)
into share capital of MaSTherCell.
While
we believe, the above developments position us to further our business
development efforts and realize our business plan, we can provide no assurance
that we will be successful in achieving our business plan.
20
Results of Operations
Comparison of the Three and Six Months Ended May 31, 2017 to
the Three and Six Months Ended May 31, 2016
Our
financial results for the three and six months ended May 31, 2017 are summarized
as follows in comparison to the three and six months ended May 31, 2016:
|
|
Three Months Ended May 31,
|
|
|
Six Months Ended May 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in
thousands)
|
|
Revenues
|
$
|
2,298
|
|
$
|
1,132
|
|
$
|
4,150
|
|
$
|
2,652
|
|
Cost of sales
|
|
1,128
|
|
|
1,964
|
|
|
3,033
|
|
|
3,444
|
|
Research and development expenses, net
|
|
665
|
|
|
486
|
|
|
1,406
|
|
|
887
|
|
Amortization of intangible assets
|
|
397
|
|
|
482
|
|
|
778
|
|
|
810
|
|
Selling, general and administrative
expenses
|
|
2,432
|
|
|
2,173
|
|
|
4,703
|
|
|
3,339
|
|
Financial expenses (income), net
|
|
(1,428
|
)
|
|
553
|
|
|
3,520
|
|
|
(1,219
|
)
|
Share in losses of associated company
|
|
107
|
|
|
|
|
|
196
|
|
|
|
|
Loss before income taxes
|
$
|
1,003
|
|
$
|
4,526
|
|
$
|
9,486
|
|
$
|
4,609
|
|
Revenues
All
revenues were derived from our Belgian Subsidiary, MaSTherCell S.A
Our
revenues for the three and six months ended May 31, 2017 were $2,298 thousand
and $4,150 thousand, respectively, as compared to $1,132 thousand and $2,652
thousand for the corresponding periods in 2016.
|
|
Three Months Ended May 31,
|
|
|
Six Months Ended May 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in
thousands)
|
|
|
(in
thousands)
|
|
Services
|
$
|
2,202
|
|
$
|
1,055
|
|
$
|
3,585
|
|
$
|
1,344
|
|
Goods
|
|
96
|
|
|
77
|
|
|
565
|
|
|
1,308
|
|
Total revenues
|
$
|
2,298
|
|
$
|
1,132
|
|
$
|
4,150
|
|
$
|
2,652
|
|
The
increase in revenues for each of the three and six months ended May 31,2017 is
attributable to an increase in the volume of the services provided by
MaSTherCell resulting from the extension by MaSTherCell of existing customer
service contracts and the entry into new customer service contracts with leading
biotech companies as well as from revenues generated from existing manufacturing
agreements.
Expenses
Cost of Sales
Cost of sales for the three and six months ended May 31, 2017 were $1,128 thousand and $3,033 thousand, respectively, a decrease of 43% and 12%, from $1,964 thousand and $3,444 thousand, respectively, during the same periods in 2016. The decrease in cost of sales in the 2017 periods is primarily atrributable to a decrease in salaries and related expenses associated with a transformation program implemented in MaSTherCell in the beginning of the second quarter to evolve from an organization based on project to a matrix organization supported by transversal departments focusing on value creation. As part of the program we changed the business positions of certain employees from laboratories managers to general manager positions in order to reflect the current period’s business activity a decrease (i) in raw material expenses due to change in nature of services provided by MaSTherCell in the 2017 periods, as we had much more development work compared to 2016 and had more production work and (ii) a decrease of depreciation and amortization expenses (net) due to fully amortized assets as of November 30, 2016 that are not amortized in the 2017 periods.
21
Research and Development Expenses
Research and Development Expenses for the three and six months ended May 31, 2017 were $665 thousand and $1,406 thousand, respectively, an increase of 37% and 59%, from $486 thousand and $887 thousand, respectively, in the same periods in 2016. The increase in research and development expenses in the 2017 periods is primarily atrributable to an increase in lab expenses resulting from an increase in our pre-clinical studies in the U.S., Israel and Belgium. The increase in Research and Development expenses is a reflection of management is determination to move transdifferentiating technology with first indication to Diabetes Type I to the next the stage towards clinical studies in 2018.
Selling, General and Administrative Expenses
Selling,
general and administrative expenses for the three and six months ended May 31,
2017 were $2,432 thousand and $4,703 thousand, respectively, an increase of 12%
and 41%, from $2,173 and $3,339 thousand, respectively, during the same periods
in 2016. The increase in selling, general and administrative expenses in the
2017 periods is primarily atrributable to an increase in (i) salaries and
related expenses resulting from the retention of new senior management at
MaSTherCell and new accounting staff in our financial department in Israel and
(ii) accounting and legal expenses associated with exploring new strategic
collaboration arrangements, new capital raising initiatives, repayment of bonds
issued by MaSTherCell and application of new patents under our CTB division
offset by (iii) a decrease in stock based compensation in the 2017 periods
attributable to the termination of the vesting period of options and shares
awarded to executives and consultants in 2016 (iv) stock-based compensation
expenses of new grants of options to employees during December 2016 and (v)
expenses related to a joint venture which primarily consisted of salary expenses
and set up related cost of the new production facility in Korea under our joint
venture with CureCell.
The
Company applies a strict monitoring of the SG&A expenses and has implemented
a shared services program in corporate functions to benefit from intra-group
cost reduction and synergies.
Financial Expenses (Income), net
|
|
Three Months Ended May 31,
|
|
|
Six Months Ended May 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in
thousands)
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in fair value of
warrants and financial liabilities measured at fair value
|
$
|
(2,946
|
)
|
$
|
347
|
|
$
|
1,006
|
|
$
|
(1,612
|
)
|
Stock-based compensation related to warrants granted to
bondholder and shares granted to creditor
|
|
1,084
|
|
|
-
|
|
|
1,624
|
|
|
-
|
|
Interest expense on loans and convertible
loans
|
|
298
|
|
|
176
|
|
|
687
|
|
|
359
|
|
Foreign exchange loss, net
|
|
131
|
|
|
32
|
|
|
194
|
|
|
39
|
|
Other expenses
|
|
5
|
|
|
(2
|
)
|
|
9
|
|
|
(5
|
)
|
Total
|
$
|
(1,428
|
)
|
$
|
553
|
|
$
|
3,520
|
|
$
|
(1,219
|
)
|
Financial expenses (income), net for the three months
ended May 31, 2017, decreased by 358% or $1,981 thousand, compared to the same period in 2016. The decrease in
financial expenses is mainly attributable to a decrease of $1.9 million in the
change of the fair value of warrants due to the fact that, in the three months
ended May 31, 2017, there was a strong impact of the decrease in the share
price, which was $0.59 on May 31, 2017, as opposed to $0.80 on February 28,
2017. In addition, there was a decrease of $0.9 million in the fair value of an
embedded derivative due to reimbursement of convertible loan in amount of $1.5
million.
Financial expenses (income), net for the six months
ended May 31, 2017, increased by 389% or $4,739 thousand, compared to the same period in 2016. The increase in
financial expenses is mainly attributable to an increase of $2.6 million in the
change of the fair value of warrants due to the fact that, in the six months
ended May 31, 2017, there was a strong impact of the increase in the
share price, which was $0.59 on May 31, 2017, as opposed to $0.39 on November
30, 2016. In the corresponding period there was an income of $1.6 million due to
the Company's updated assumptions related to the probabilities of activating the
anti-dilution mechanism of a derivative.
22
In
addition, part of the increase is attributable to $20 thousand of stock-based
compensation expenses related to 102,822 warrants granted to the remaining
bondholder in consideration of the extension of his bonds, $1.5 million thousand
of stock-based compensation expenses related to restricted shares and options
issued in accordance with a terms of the convertible loan agreements.
Working Capital Deficiency
|
|
May 31,
|
|
|
November 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in
thousands)
|
|
Current assets
|
$
|
6,110
|
|
$
|
4,205
|
|
Current liabilities
|
|
16,147
|
|
|
14,576
|
|
Working capital deficiency
|
$
|
(10,037
|
)
|
$
|
(10,371
|
)
|
Current
assets increased by $1.9 million, which was primarily attributable to an
increase of $1.7 million in accounts receivable and $0.6 increase in prepaid
expenses and other receivables mainly due to increase in the convertible loan
invested in CureCell.
Current
liabilities increased by $1.6 million, which was primarily attributable to an
increase of $1.9 million in advanced payments on account of grant in connection
with the new grant approved by the DGO6 to support a clinical study in Germany
and Belgium and an increase of $3 million in deferred income due to agreements
signed with new customers in the CDMO segment.
The
increase was partly offset by a decrease of $1 million in current maturities of
convertible loans and short-term loans and current maturities of long term loans
due to repayments of loans during the period ended May 31, 2017, a decrease of
$1.8 million in convertible bonds due to repayment and convertible bonds
conversion of $1.7 million and $0.1 million, respectively and a decrease of $0.3
in accounts payable, accrued expenses and other payables and employees and
related payables.
Liquidity and Financial Condition
|
|
Six Months Ended May 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in
thousands)
|
|
Net loss
|
$
|
(9,558
|
)
|
$
|
(3,667
|
)
|
Net cash used in operating activities
|
|
(1,777
|
)
|
|
(2,166
|
)
|
Net cash used in investing
activities
|
|
(902
|
)
|
|
(708
|
)
|
Net cash provided by (used in) financing
activities
|
|
2,354
|
|
|
(853
|
)
|
Decrease in cash and cash
equivalents
|
$
|
(325
|
)
|
$
|
(3,727
|
)
|
Since
inception, we have funded our operations primarily through the sale of our
securities and, more recently, through revenue generated from the activities of
MaSTherCell, our Belgian Subsidiary. As of May 31, 2017, we had negative working
capital of $10 million, including cash and cash equivalents of $0.7 million.
Net
cash used in operating activities was approximately $1.8 million for the six
months ended May 31, 2017, as compared with net cash used in operating
activities of approximately $2.2 million for the same period in 2016. Cash used
in operating activities for the six months ended May 31, 2017 was due to
expanding our global activity of the CDMO division which was partly offset due
to higher revenues at our subsidiary MaSTherCell, thereby significantly
increasing gross profit and generating cash to pay our ongoing operating
expenses.
23
Net
cash used in investing activities for the six months ended May 31, 2017 was
approximately $0.9 million as compared with approximately $ 0.7 million for the
same period in 2016. Net cash used in investing activities was primarily for
additions to fixed assets at our subsidiary Masthercell and investments in our
JV with Atvio.
During
the six months ended May 31, 2017, our financing activities consisted of the
following:
Closing on $2.8 million net of transaction costs in private placement equity
offerings through the issuance of 5,133,096 million shares of common stock and
three year common stock purchase warrants for an additional 4,902,174 and
230,923 shares of our common stock exercisable at a per share exercise price of
$0.52 or $0.65, respectively.
Closing on $3.5 million, in private placement debt offerings through the
issuance of $1,746,063 warrants and our convertible promissory notes with
maturity dates of between six and twenty four months, convertible into 7,592,930 shares
of our common stock and three-year warrants to purchase up to an additional
5,288,464 shares of our common stock at a per share exercise price of $0.52.
Liquidity & Capital Resources Outlook
Management believes that funds on hand, as well as the
subscription proceeds of $14 million that we anticipate receiving on a periodic
basis from June 2017 through August 2018 (out of a total of $16 million
subscription proceeds that we are to receive through such date), will allow us
to conduct operations as presently conducted through the end of year 2018. We
intend to raise additional operating capital in order to further expand the
scope of our operations and realize our business plan of future years and will
likely need to raise additional operating capital in fiscal 2019 in order to
maintain operations. Without additional sources of cash and/or the deferral,
reduction, or elimination of significant planned expenditures and debt
repayment, we may not have the cash resources to continue as a going concern
thereafter.
To meet our short and long-term liquidity needs, we
expect to use existing cash balances, cash from our revenue generating
activities and the subscription proceeds anticipated periodically through the
end of fiscal year 2018, as well as a variety of other means, including raising
capital through potential issuances of debt or equity securities in public or
private financings, partnerships and/or collaborations. In addition, we will
continue to seek, as appropriate, grants for expanding our facility in Belgium
and scientific and clinical studies from various governmental agencies and
foundations. There can be no assurance that additional financing will be
available when needed or, if available, that can be obtained on commercially
reasonable terms. If we will not be able to obtain the additional financing on a
timely basis as required, or generate significant material revenues from
operations, we will not be able to meet our other obligations as they become due
and will be forced to scale down or perhaps even cease our operations.
Going Concern
The
accompanying condensed consolidated financial statements have been prepared
assuming that we will continue as a going concern. As of May 31, 2017, we have
not achieved profitable operations, have accumulated losses of approximately $39
million (since inception) and have a working capital deficiency of $10 million.
Although we are now showing positive revenue and gross profit trends in our CDMO
division, we expect to incur further losses in the CTB division. Furthermore,
while proceeds from additional investments in the CDMO division are expected to
benefit our operations as as whole, we do expect to incur further losses in the
development of our business. These factors raise substantial doubt about our
ability to continue as a going concern. Management is in the process of
evaluating various financing alternatives for operations, as we will need to
finance future research and development activities and general and
administrative expenses through fund raising in the public or private equity
markets.
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 Companys
operating results. If the Company is unable to obtain the necessary capital, the
Company may have to cease operations.
24
We have been funding operations primarily from the
proceeds from private placements of our convertible debt and equity securities
and from revenues generated by MaSTherCell. From December 2016 through May 2017,
we received, through MaSTherCell, proceeds of approximately $5.22 million in
revenues and accounts receivable from customers and $4.1 million from the
private placement to accredited investors of our equity and equity linked
securities and convertible loans. In addition, in January 2017 we entered into
definitive agreements with an institutional investor for the private placement
of units of our securities for aggregate subscription proceeds of $16 million.
The subscription proceeds are payable on a periodic basis through August 2018.
During the six months ended May 31, 2017, $2 million was remitted by such
investor, and in June and July 2017, an additional $1 million was remitted. In
addition, between June 1, 2017 and July 24, 2017, we raised an additional $1
million from the proceeds of a private placement to certain accredited investors
of equity-linked securities.
Cash Requirements
Our
plan of operation during the next twelve months as of May 31, 2017 is to:
|
Continue our activities according
to the work plan approved by the DGO6;
|
|
Explore options for collaboration
and additional grants in the U.S.; and
|
|
Support our manufacturing activity
in Europe.
|
We
estimate that our operating resources and expenses for the next twelve months as
of May 31, 2017 will be as follows:
Resources
|
$
|
*31,521
|
|
Expenses
|
|
(27,266
|
)
|
Total
|
$
|
4,255
|
|
* The amount of cash resources include the subscription
proceeds we are to receive on a periodic basis through May 2018 in the
aggregate net amount of $10.5 million.
Future Financing
We
will require additional funds to implement our growth strategy for our business.
In addition, while we have received various grants that have enabled us to fund
our clinical developments, these funds are largely restricted for use for other
corporate operational and working capital purposes. We may raise the additional
funds required through equity financing, debt financing, or other sources, which
may result in further dilution in the equity ownership of our shares. There can
be no assurance that additional financing will be available when needed or, if
available, that can be obtained on commercially reasonable terms. If we will not
be able to obtain the additional financing on a timely basis as required, or
generate significant material revenues from operations, we will not be able to
meet our other obligations as they become due and will be forced to scale down
or perhaps even cease our operations.
Off-Balance Sheet Arrangements
The
Company has no off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on the Companys financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to stockholders.