ORGS Orgenesis Inc

ITEM 2. MANAGEMENT’S 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 Company’s management as well as estimates and assumptions made by Company’s 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 Company’s 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 Company’s business, industry, and the Company’s 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 our company from other cell therapy companies by our wholly-owned, Belgian-based CDMO subsidiary, MaSTherCell S.A., and a world-wide network of partners who have built a unique and fundamental base platform of know-how and expertise for a multitude of cell types manufacturing. 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.

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            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 outsourcing 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 $4 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 Company’s outstanding Common Stock. The investor’s right to designate the board designee is subject to the payment in full as provided in the definitive agreements of the remaining subscription proceeds.

            In January 2017, Servier appointed MaSTherCell for the development of its CAR-T cell therapy manufacturing platform. Under the master service agreement, MaSTherCell is developing a CAR-T cell therapy manufacturing platform, which will enable industrial and commercial manufacturing of Servier cell therapy products. This is a critical step in development of these products for later stage clinical trial. Servier selected MaSTherCell because of its leading global cell therapy CDMO position as well as its essential broad expertise in immunotherapy products. MaSTherCell has a track record of designing and delivering cost-effective cell therapy manufacturing platforms. MaSTherCell anticipates that it will complete the development of the initial CAR-T platform in 2018.

            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.

            In June 2017, CRISPR, a leader in gene-editing based therapeutics, and MaSTherCell signed a service agreement for the development and manufacturing of allogeneic CART-T cell therapies.

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            In September 2017, we fulfilled our obligation under the joint venture agreement with Atvio dated May 10, 2016, and remitted the balance of $54 thousand of the convertible loan in the aggregate amount of $1 million.

            As further discussed below, our subsidiary MaSTherCell S.A., had revenues of approximately $6.7 million during the nine months ended August 31, 2017 representing an increase of 49% over the same period last year.

            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.

Revenues

            All revenues were derived from our Belgian Subsidiary, MaSTherCell S.A. Manufacturing activities show a significant increase of revenues in line with the company’s Business Plan. It reflects market recognition in CDMO business expertise and the adequacy of the Company’s strategy with industry need. Revenues diversification by source in the CDMO segment together with a leading position in CAR-T cell therapy development and manufacturing strengthen MaSTherCell resilience.

            Our revenues for the three and nine months ended August 31, 2017 were $2,562 thousand and $6,712 thousand, respectively, as compared to $1,849 thousand and $4,501 thousand for the corresponding periods in 2016, representing an increase of 39% and 49% respectively, compared to the same period last year.

            The increase in revenues for each of the three and nine months ended August 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.

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Expenses

Cost of Revenues

            Cost of revenues for the three and nine months ended August 31, 2017 were $1,867 thousand and $4,900 thousand, respectively, as compared to $1,829 thousand and $5,237 thousand, respectively, during the same periods in 2016, representing an increase and decrease of 2% and 7%, respectively. The decrease in cost of revenues for the nine months period in 2017 as compared to the corresponding period in 2016 is primarily attributable to a decrease (i) in salaries and related expenses associated with an internal transformation program implemented in MaSTherCell in 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 laboratory managers to general manager positions in order to reflect the current period’s business activity.

Research and Development Expenses

            Research and Development Expenses for the three and nine months ended August 31, 2017 were $500 thousand and $1,906 thousand, respectively, as compared to $775 thousand and $1,663 thousand, respectively, for the same periods in 2016, representing a decrease of 35% and increase of 15%, respectively. The increase in research and development expenses in the nine months period in 2017 is primarily attributable to an increase in laboratory 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’s determination to move transdifferentiating technology with first indication to Diabetes Type I to the next the stage towards clinical studies.

Selling, General and Administrative Expenses

            Selling, general and administrative expenses for the three and nine months ended August 31, 2017 were $3,184 thousand and $7,887 thousand, respectively, as compared to $1,279 and $4,618 thousand, respectively, for the same periods in 2016, representing an increase of 149% and 71% respectively. The increase in selling, general and administrative expenses in each of three and nine month 2017 periods is primarily attributable in the following:

            The expenses incurred in Item (2) above [Corporate Governance] reflects our commitment to address material weaknesses in our internal controls. Our expenses under Item 4 above [Setting up a Global CDMO Network] reflects our mission to build a global 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, offering a unique response to industry challenges;

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            We apply a strict monitoring of the selling, general and administrative expenses and has implemented a shared services program in corporate functions to benefit from intra-group cost reduction and synergies.

            Financial expenses (income), net for the three months ended August 31, 2017, decreased by 454% or $2,606 thousand, compared to the same period in 2016. The decrease in financial expenses is mainly attributable to a decrease of $2.9 million in the change of the fair value of warrants due to the fact that, in the three months ended August 31, 2017, there was a strong impact of the decrease in the share price, which was $0.32 on August 31, 2017, as opposed to $0.59 on May 31, 2017.

            Financial expenses (income), net for the nine months ended August 31, 2017, increased by 331% or $2,133 thousand, compared to the same period in 2016. The increase in financial expenses is mainly attributable to an increase of $1.32 million in the Stock-based compensation related 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 and $1.3 million of stock-based compensation expenses related to restricted shares and warrants issued in accordance with the terms of the convertible loan agreements.

            Current assets increased by $1.5 million, which was primarily attributable to an increase of $1.7 million in accounts receivable and $0.9 increase in prepaid expenses and other receivables mainly due to increase in the convertible loan invested in CureCell which was invested in the equipment and construction of the Korean CDMO facility as part of our strategy to build up a global cell therapy development and manufacturing area.

            Current liabilities increased by $3 million, which was primarily attributable to an increase (i) of $1.7 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 (ii) of $3.7 million in deferred income due upfront paid by our new and old customers under new agreements signed in the CDMO segment. The increase in deferred income reflects the financial orthodoxy applied in the CDMO area. The increase was partly offset by a decrease (i) of $2.5 million due to repayments of loans and convertible bonds (ii) of $0.1 million in convertible bonds due to conversion.

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            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 August 31, 2017, we had negative working capital of $12 million, including cash and cash equivalents of $0.8 million.

            Net cash used in operating activities was approximately $3.4 million for the nine months ended August 31, 2017, as compared with net cash used in operating activities of approximately $3.1 million for the same period in 2016. We successfully expanded our global activity of the CDMO division while maintain the same level of cash used in operating activities as a result of the increased revenues at our subsidiary MaSTherCell, thereby significantly increasing gross profit and generating cash to pay our ongoing operating expenses.

            Net cash used in investing activities for the nine months ended August 31, 2017 was approximately $1.4 million as compared with approximately $ 1 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 joint venture with Atvio.

            During the nine months ended August 31, 2017, our financing activities consisted of the following:

            •        Closing on $4 million net of transaction costs in private placement equity offerings through the issuance of 7,786,788 million shares of common stock and three-year common stock purchase warrants for an additional 7,786,788 and 230,923 shares of our common stock exercisable at a per share exercise price of $0.52 or $0.65, respectively.

            •        Closing on $4.7 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 as of August 31, 207 into 10,030,917 shares of our common stock and 7,695,260 three-year warrants to purchase up to an additional 7,695,260 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 $12 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 2018. We intend to raise additional operating capital in order to further expand the scope of our operations and realize our multi- year 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.

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Going Concern

            The accompanying condensed consolidated financial statements have been prepared assuming that we will continue as a going concern. As of August 31, 2017, we have accumulated losses of approximately $41 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. Presently, we don’t not have sufficient cash to meet our requirements in the following twelve months. These factors raise substantial doubt about our ability to continue as a going concern. Our continuation as a going concern is dependent on our ability to obtain additional financing as may be required and ultimately to attain profitability. In the event that the remaining subscription proceeds from a private placement with an institutional investor referred to below, in the aggregate amount of $12 million (out of total committed amount $16 million) will not be paid periodically through August 2018, then we will need to raise significant funds in order to continue to meet our liquidity needs, realize our business plan and maintain operations. The Company’s current cash balance is 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 generate quality of earnings from its CDMO business and to secure funds through equity and/or debt instruments for its operations and business opportunities investments.

            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 our operating results. If we unable to obtain the necessary capital, we may have to cease operations.

            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 August 2017, we received, through MaSTherCell, proceeds of approximately $6.1 million in revenues and accounts receivable from customers and $9 million from the private placement to accredited investors of our equity and equity linked securities and convertible loans, out of which $3.5 million are from the institutional investor with whom we entered into definitive agreements in January 2017 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. In addition, from September 1, 2017 through October 16, 2017, we raised an additional $1.1 million from the proceeds of a private placement to certain accredited investors of our equity and equity linked securities and we received, through MaSTherCell, proceeds of approximately $1 million in accounts receivable from its customers.

Cash Requirements

            Our plan of operation during the next twelve months as of August 31, 2017 is to:

            We estimate that our operating resources, expenses and debt servicing for the next twelve months as of August 31, 2017 will be as follows:

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* The amount of cash resources include the subscription proceeds we are to receive on a periodic basis through August 2018 in the aggregate net amount of $11.4 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 Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.