Celyad SA Annual Report 2018

Plain-text annual report

A N N U A L R E P O R T 20 18 W W W . C E LYA D . C O M Contents 1. REPORT OF THE BOARD OF DIRECTORS TO THE SHAREHOLDERS FOR THE FINANCIAL YEAR ENDING 31 DECEMBER 2018 1.1. 1.2. 1.3. Highlights of 2018 Post balance sheet events Financial review of the year ending 31 December 2018 .................................................................................................................................... ............................................................................................................................................................................... ................................................................................................................................................................ ................................................................................................................ 6 6 7 7 1.3.1. Analysis of the consolidated income statement 1.3.2. Analysis of the consolidated statement of ﬁnancial position 1.3.3. Analysis of the consolidated net cash burn rate ............................................................................................ ........................................................................ Personnel Environment Risks and uncertainties Going concern Events and circumstances that could have a significant impact on the future ........................................................................................... ........................................................................................................................................................................................... ..................................................................................................................................................................................... .................................................................................................................................................................... .................................................................................................................................................................................. ....................................................................... 7 9 10 11 11 11 11 11 1.4. 1.5. 1.6. 1.7. 1.8. 2. CORPORATE GOVERNANCE General Board of Directors ................................................................................................................ .............................................................................................................................................................................................. ............................................................................................................................................................................ 2.1. 2.2. 12 12 12 ANNUAL REPORT 2018 2.3. 2.4. 2.5. 2.6. 2.7. 2.2.1. Composition of the Board of Directors 2.2.2. Director Independence 2.2.3. Role of the Board in Risk Oversight 2.2.4. Committees within the Board of Directors 2.2.5. Meetings of the Board and the committees ......................................................................................................... ................................................................................................................................. ............................................................................................................... .................................................................................................. ................................................................................................. ........................................................................................................................................................ .......... Executive Management Team Conflict of Interest of directors and members of the executive team and transactions with affiliated companies 12 16 17 17 18 19 22 2.4.1. General 2.4.2. Conﬂicts of interest of directors Existing conﬂicts of interest of members of the Board of Directors 2.4.3. Related Party Transactions 2.4.4. 2.4.5. Transactions with aﬃliates 2.4.6. Code of Business Conduct and Ethics 2.4.7. Market abuse regulations ........................................................................................................................................................... ................................................................................................................... .......................................................... ........................................................................................................................... ........................................................................................................................... ........................................................................................................... .............................................................................................................................. ......................................................................................................................................................... ....................................................................................................................................................................... Corporate Governance Code Remuneration report 22 22 22 23 23 23 24 24 24 Remuneration of the CEO Remuneration of the Executive Management Team 2.6.1. Director’s remuneration 2.6.2. 2.6.3. 2.6.4. Claw back provisions 2.6.5. Statutory Auditor ................................................................................................................................ ............................................................................................................................. .................................................................................... ...................................................................................................................................... ........................................................................................................................................... ............................................................................ Description of the principal risks associated to the activities of the Group 24 25 26 28 28 28 Risk Management 2.7.1. 2.7.2. Organization and values Risks analysis 2.7.3. Risks related to our ﬁnancial position and need for additional capital 2.7.4. 2.7.5. Audit activities 2.7.6. Controls, supervision and correctives actions .......................................................................................................................................... ................................................................................................................................ ................................................................................................................................................. ........................................................ ................................................................................................................................................ ............................................................................................. 28 28 29 29 52 52 3. SHARES AND SHAREHOLDERS Group structure Capital increase and issuance of shares 3.1. 3.2. 3.3. Warrants plans 3.4. 3.5. 3.6. ........................................................................................................... ................................................................................................................................................................................ ....................................................................................................................................... ................................................................................................................................................................................... .................................................................................................................................................................. ............................................................................................................................... ............................................................................................................................................................................... Changes in share capital Anti-takeover provisions under Belgian laws Financial service 54 54 54 55 56 56 57 4. CONSOLIDATED FINANCIAL STATEMENTS 58 58 Responsibility statement Statutory auditor’s report to the general meeting of shareholders of Celyad SA for the year ended 31 December 201859 64 Consolidated financial statements as at 31 December 2018 ......................................................................................... ................................................................................................................................................................ .................................................................................................... 4.1. 4.2. 4.3. 4.3.1. Consolidated statement of ﬁnancial position 4.3.2. Consolidated statement of comprehensive loss .............................................................................................. ......................................................................................... 64 65 2 5.34.1. Remuneration of key management 5.34.2. Transactions with non-executive directors 5.34.3. Transactions with shareholders ............................................................................................................ ............................................................................................... .................................................................................................................. ............................................................................................................................................ ........................................................... 114 115 115 115 116 5.35. Events after the balance sheet date 5.36. Statutory accounts as of 31 December 2018 and 2017 according to Belgian GAAP .............................................................................................................................................. ....................................................................................................................................... Income statement 5.36.1. Balance Sheet 5.36.2. 5.36.3. Notes 5.36.4. Summary of valuation rules SUPPLEMENT DATED 3 APRIL 2019 TO THE 2018 ANNUAL REPORT OF CELYAD SA ........................................................................................................................ .................................................................... 116 117 119 126 128 4.3.3. Consolidated statement of changes in equity 4.3.4. Consolidated statement of Cash ﬂows ............................................................................................. ........................................................................................................ 66 67 5. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS General information Basis of preparation and significant accounting policies ................................................................ ......................................................................................................................................................................... ............................................................................................................ 5.1. 5.2. 69 69 69 Basis of preparation Foreign currency translation Revenue Intangible assets Property, plant and equipment Leases Impairment of non-ﬁnancial assets 5.2.1. 5.2.2. Consolidation 5.2.3. 5.2.4. 5.2.5. Government Grants (Other income) 5.2.6. 5.2.7. 5.2.8. 5.2.9. 5.2.10. Cash and cash equivalents 5.2.11. Financial assets 5.2.12. Financial liabilities 5.2.13. Provisions Income Taxes 5.2.14. 5.2.15. Earnings (loss) per share ....................................................................................................................................... ................................................................................................................................................. ......................................................................................................................... .......................................................................................................................................................... ............................................................................................................. ............................................................................................................................................ ...................................................................................................................... ............................................................................................................................................................ .............................................................................................................. ............................................................................................................................ .............................................................................................................................................. .......................................................................................................................................... ....................................................................................................................................................... ................................................................................................................................................. ............................................................................................................................... ............................................................................................................................................................................ ............................................................................................................................. .................................................................................................................................................... .............................................................................................................................................................................. Risk Management Critical accounting estimates and judgments Operating segment information Intangible assets 69 71 72 72 73 74 75 75 76 76 76 77 78 79 80 80 81 83 84 5.3. 5.4. 5.5. 5.6. 5.6.1. 5.6.2. Intangible assets details and balance roll forward Impairment testing Property, plant and equipment Non-current trade receivables and other non-current assets Trade receivables other current assets 5.7. 5.8. 5.9. 5.10. Short-term investments 5.11. Cash and cash equivalents 5.12. Subsidiaries fully consolidated 5.13. Share Capital 5.14. Share-based payments 5.15. Post-employment benefits 5.16. Advances repayable 5.17. Trade payables and other current liabilities 5.18. Financial liabilities ........................................................................................ ........................................................................................................................................ ....................................................................................................................................................... .................................................................................................. ......................................................................................................................................... ................................................................................................................................................................ .............................................................................................................................................................. ........................................................................................................................................................ ..................................................................................................................................................................................... ................................................................................................................................................................... ............................................................................................................................................................. ......................................................................................................................................................................... ................................................................................................................................. ............................................................................................................................................................................ 84 85 86 87 88 88 89 89 89 93 96 98 100 101 5.18.1. Maturity analysis 5.18.2. Changes in liabilities arising from ﬁnancing activities .......................................................................................................................................... ................................................................................ .................................................................................................................................................................... 5.19. Financial instruments 101 101 102 Income taxes 5.19.1. Financial instruments not reported at fair value on balance sheet 5.19.2. Financial instruments reported at fair value on balance sheet ........................................................... .................................................................. .................................................................................................................................................................................. ............................................................................................................................................................................... ........................................................................................................................................................................................... ........................................................................................................................................ ......................................................................................................................................... .................................................................................................................................................... ......................................................................................................................................................... ........................................................................................................................................................ ........................................................................................................................ ............................................................................................................................................................................ ..................................................................................................................................................... ................................................................................................................................................................................. ................................................................................................................................................... ................................................................................................................................................................................ 5.20. 5.21. Other reserves 5.22. Revenue 5.23. Research and Development expenses 5.24. General and administrative expenses 5.25. Depreciation and amortisation 5.26. Employee benefit expenses 5.27. Other income and expenses 5.28. Non-recurring operating income and expenses 5.29. Operating leases 5.30. Finance income and expenses 5.31. Loss per share 5.32. Contingent assets and liabilities 5.33. Commitments 102 103 105 107 107 108 109 109 110 110 111 111 112 112 112 113 5.33.1. Corquest Inc 5.33.2. Celdara Medical LLC Milestones (formerly OnCyte LLC) ................................................................................................................................................ ........................................................................... .......................................................................................................................................................... 5.34. Related-party transactions 113 113 114 3 4 This Annual Financial Report contains all required information as per the Belgian Company Code. ANNUAL FINANCIAL REPORT 2018 LANGUAGE OF THE ANNUAL FINANCIAL REPORT 2018 Celyad publishes its Annual Report in French, according to Belgian law. The Company also provides an English translation. In case of diﬀerences in interpretation, the French version will prevail. AVAILABILITY OF THE ANNUAL FINANCIAL REPORT 2018 This document is available free of charge for the public and upon request to: Celyad SA Investor Relations Rue Edouard Belin 2, B-1435 Mont-Saint-Guibert, Belgium Tel: +32 10 394100 E-mail: investors@celyad.com An electronic version of this Report is available on the Company website, http://www.celyad.com/investors/regulated-information FORWARD LOOKING STATEMENTS In addition to historical facts or statements of current condition, this report contains forward-looking statements, including statements about the potential safety and feasibility of CYAD-01 cell therapy, including current and planned preclinical and clinical trials for Celyad’s product candidates; the clinical and commercial potential of these product candidates and the adequacy of Celyad’s ﬁnancial resources; Celyad’s intellectual property portfolio, including plans related thereto; Celyad’s expectations regarding its strategic collaborations and license agreements with third parties, including ONO, Novartis, Celdara Medical, and Dartmouth College, and the potential impact of such collaborations on Celyad’s future ﬁnancial condition; and Celyad’s expected cash burn, which reﬂect Celyad’s current expectations and projections about future events, and involve certain known and unknown risks, uncertainties and assumptions that could cause actual results or events to diﬀer materially from those expressed or implied by the forward-looking statements. These forward-looking statements are further qualiﬁed by important factors and risks, which could cause actual results to diﬀer materially from those in the forward-looking statements, including risks associated with conducting clinical trials; the risk that safety, bioactivity, feasibility and/or eﬃcacy demonstrated in earlier clinical trials or preclinical studies may not be replicated in subsequent trials or studies; risks associated with the timely submission and approval of anticipated regulatory ﬁlings; the successful initiation and completion of clinical trials, including its clinical trials for CYAD-01; risks associated with the satisfaction of regulatory and other requirements; risks associated with the actions of regulatory bodies and other governmental authorities; risks associated with obtaining, maintaining and protecting intellectual property, Celyad’s ability to enforce its patents against infringers and defend its patent portfolio against challenges from third parties; risks associated with competition from others developing products for similar uses; risks associated with Celyad’s ability to manage operating expenses; and risks associated with Celyad’s ability to obtain additional funding to support its business activities and establish and maintain strategic business alliances and business initiatives. A further list and description of these risks, uncertainties and other risks can be found in Celyad’s U.S. Securities and Exchange Commission (SEC) ﬁlings and reports, including in its Annual Report on Form 20-F ﬁled with the SEC on April 6, 2018 and subsequent ﬁlings and reports by Celyad. Given these uncertainties, the reader is advised not to place any undue reliance on such forward-looking statements. These forward-looking statements speak only as of the date of publication of this document. Celyad expressly disclaims any obligation to update any such forward-looking statements in this document to reﬂect any change in its expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based, unless required by law or regulation. . 5 1. REPORT OF THE BOARD OF DIRECTORS TO THE SHAREHOLDERS FOR THE FINANCIAL YEAR ENDING 31 DECEMBER 2018 Dear Shareholders, We are glad to present you our 2018 annual report related to Celyad consolidated ﬁnancial statements as of 31 December 2018 prepared in accordance with International Financing Reporting Standards (IFRS) as endorsed by the European Union. The companies included in the consolidated ﬁnancial statements are Celyad SA, Biological Manufacturing Services SA, Celyad Inc, Oncyte LLC and CorQuest Medical Inc. 1.1. Highlights of 2018 In 2018, Celyad continued to advance towards our goal of developing diﬀerentiated engineered chimeric antigen receptors T- cell (CAR-T) therapies for the treatment of cancer. We made steady clinical progress investigating our lead clinical candidate CYAD-01, an autologous CAR-T candidate based on the activating Natural Killer Group 2D (NKG2D) receptor, for the treatment of relapsed or refractory (r/r) acute myeloid leukemia (AML) and metastatic colorectal cancer (mCRC) and our ﬁrst- in-class non-gene edited allogeneic candidate CYAD-101 that co-expresses our NKG2D receptor with our proprietary T-cell inhibitory molecule (TIM) for the treatment of mCRC, which entered Phase 1 development in late 2018. Preliminary data reported from the CYAD-01 Phase 1 THINK (THerapeutic Immunotherapy with CAR-T NKG2D) trial for the treatment of both r/r AML and mCRC shows CYAD-01 is well-tolerated with encouraging clinical activity as a monotherapy without preconditioning chemotherapy. In addition, the data continue to validate the use of the full human NKG2D receptor in a CAR-T therapy targeting stress ligands on both hematological malignancies and solid tumors. In April, Celyad reported that an article, entitled “NKG2D-based Chimeric Antigen Receptor Therapy Induced Remission in a Relapsed/Refractory Acute Myeloid Leukemia Patient” authored by the trial investigators at the Moﬃtt Cancer Center and Research Institute and by the Company’s scientiﬁc team was published in the journal Haematologica. The case report detailed the ﬁrst ever reported complete morphologic remission with gene engineered T-cells in a r/r AML patient without preconditioning from the Phase 1 THINK trial. Data from the THINK trial were reported at several major medical conferences in 2018 including in November at the Society for Immunotherapy of Cancer (SITC) 33rd Annual Meeting and in December at the 60th Annual American Society of Hematology (ASH) meeting. At the ASH meeting, interim results from the trial were presented in an oral presentation that highlighted three out of eight (38%) patients with r/r AML treated with CYAD-01 without preconditioning chemotherapy and evaluable per protocol experienced a complete response (CRh/CRi). Operational highlights Clinical Developments in Oncology In late 2018, the THINK trial for hematological malignancies was amended to add a cohort to assess a more frequent dosing schedule of CYAD-01 without preconditioning chemotherapy for the treatment of r/r AML. The cohort (referred to as Cohort 10) will evaluate six injections of CYAD-01 without preconditioning over two months of administration. The ﬁrst cycle (induction) will include three injections of CYAD-01 separated by one-week intervals, while the the second cycle (consolidation) will include three injections of CYAD-01 separated by two-week intervals. All patients enrolled in the Cohort 10 will receive 1 billion cells per injection. In October, Celyad enrolled the ﬁrst patient in the DEPLETHINK Phase 1 trial. The open-label, dose-escalation trial will evaluate a single injection of CYAD-01 following treatment with the standard preconditioning regimen of cyclophosphamide (300 mg/m²) and ﬂudarabine (30 mg/m²), or CyFlu, in patients with r/r AML. In December 2018, Celyad reported initial data from Cohort 1 of the trial, in which the administration of CYAD-01 following CyFlu was well-tolerated, with no dose-limiting toxicity or treatment-related grade 3 or above adverse events observed. Regarding our solid tumor program for CYAD-01, the Company announced in May that successful injection of the ﬁrst patients in the SHRINK dose-esclation trial evaluating the safety and activity of CYAD-01 administered concurrently with FOLFOX chemotherapy in patients with mCRC. In November, Celyad reported concurrent treatment of CYAD-01 with FOLFOX chemotherapy in the ﬁrst cohort of the trial was well tolerated, with no occurrence of serious AEs (SAEs) nor increase of treatment-related AEs rate. While in February 2018, the THINK trial for the treatment of mCRC was amended to include a cohort known as THINK CyFlu to evaluate a single injection of CYAD-01 following treatment with CyFlu. Initial data from the cohort showed that treatment with CYAD-01 following CyFlu was well tolerated with no occurrence of SAEs nor an increase of treatment-related AEs rate. In addition, preliminary translational data suggest an improvement in the cell expansion of CYAD-01 induced by the CyFlu preconditioning. Lastly, in December 2018, Celyad initiated the open-label, dose esclation alloSHRINK trial evaluating the non-gene edited allogeneic CAR-T therapy, CYAD-101, administered concurrently with FOLFOX chemotherapy in the treatment of patients with unresectable mCRC. 6   Intellectual property Celyad’s U.S. Patent No. 9,181,527 relating to allogeneic human primary T-cells that are engineered to be TCR-deﬁcient and express a chimeric antigen receptor (CAR) is a seminal patent in the allogeneic CAR-T ﬁeld. It has been unsuccessfully challenged in the past, but it was no longer contested in 2018. Building on this critical asset, Celyad obtained several new patents in this portfolio, i.e. patents relating to allogeneic primary human T cells that are engineered to be T-Cell Receptor (TCR)-deﬁcient and to express a CAR, and methods of using those. In total, 4 new patents have been granted late 2017 and in 2018, meaning the total portfolio on allogeneic assets now amounts to seven US patents, and several more applications both in the US and abroad.This consolidates Celyad’s strong intellectual property (IP) position in the allogeneic CAR-T ﬁeld and strengthens the Celyad’s IP portfolio covering key elements in the allogeneic TCR-deﬁcient CAR-T cells production value chain. Corporate and financial highlights In 2018, Celyad successfully implemented a modiﬁed manufacturing process for CYAD-01, which includes the use of a monoclonal antibody (mAb) that inhibits NKG2D expression on the T cell surface during production. The mAb process resulted in a signiﬁcantly higher yield in cell numbers for the production of CYAD-01 and was utilized in all clinical trials in 2018 including THINK, DEPLETHINK and SHRINK as well as in the alloSHRINK trial for CYAD-101. In October, the Company announced an exclusive agreement with Horizon Discovery Group plc for the use of its shRNA technology to generate a novel, next-generation, non-gene-edited allogeneic platform for CAR-T therapies. Initial results reported in November from in vitro preclinical studies demonstrated the potential versatility of the shRNA technology given comparable knockdown of the TCR/CD3 complex in T cells as compared to T cells gene edited with CRISPR/Cas9. In May, Celyad successfully completed a global equity oﬀering with gross proceeds of approximately €46.1 million. At year- end 2018, the Company had cash, cash equivalents and short-term investments of €49.7 million which are expected to be suﬃcient to support the Company’s operating capital expenditure into mid-2020. 1.2. Post balance sheet events There were no subsequent events that occur between 2018 year-end and the date when the ﬁnancial statements have been authorised by the Board for issue. 1.3. Financial review of the year ending 31 December 2018 1.3.1. Analysis of the consolidated income statement Financial expenses Loss before taxes Income taxes Loss for the year [1] Basic and diluted loss per share (in €) (62) (4,454) (37,427) (56,396) 0 1 (37,427) (56,395) (3.36) (5.86) Total revenue amounts to €3.1 million for the year 2018. Revenue reported refer to: i) ii) the exclusive license agreement signed by the Group with Mesoblast Ltd., an Australian biotechnology company, focused on the development and commercialization of Celyad’s intellectual property rights related to C-CathEZ, an intra-myocardial injection catheter. This agreement involved a transaction amount split between upfront and contingent milestone payments. A total amount of €2.4 million qualiﬁed for top-line revenue recognition at 31 December 2018, out of which, €0.8 million has been settled at year-end. the non-clinical supply agreement concluded with ONO Pharmaceutical Co., Ltd. with respect to the product candidate development of CYAD-101 for their licensed territories. The agreement with ONO was time and material driven, involved performing cell production and animal experiments requested by ONO, and has been completed at year-end, generating a revenue of €0.7 million in 2018. As ONO decided to terminate the license and collaboration agreement for strategic and business reasons, there was no milestone payment received from ONO during the year 2018 with regards to advancement of CYAD-101 into the clinic. As a result, Celyad has recovered worldwide development and commercialization rights to CYAD-101. For the previous year, total revenue amounted to €3.5 million and corresponded to the non-refundable upfront payment received from Novartis, within the framework of the non-exclusive license agreement signed in May 2017. This upfront payment has been fully recognized upon receipt as there were no performance obligations nor subsequent deliverables associated to the payment. Cost of sales reported for the prior year 2017 corresponded to the technology inventor (Darthmouth College) sublicense fee on the upfront payment received from Novartis. The Research and Development expenses include pre-clinical, manufacturing, clinical, quality, intellectual property and regulatory expenses and other research and development expenses, which are aggregated and presented as a single line in our consolidated ﬁnancial statements. The table below sets forth the Group’s consolidated income statement, ending up with a €37.4 million net loss for the year ended 31 December 2018, and comparative information for the year 2017. Bottom-line, the R&D expenses show a year-over-year increase of €0.7 million. The increase reﬂects the organic growth of the Company’s operations, for both pre-clinical and clinical activities. (€'000) Revenue Cost of sales Gross profit Research and Development expenses General & Administrative expenses Other income Other expenses For the year ended 31 December, 2018 2017 3,115 3,540 - (515) 3,115 3,025 (23,577) (22,908) (10,387) (9,310) 1,078 2,630 (8,399) (41) Operating Loss before non-recurring items - REBIT (38,170) (26,604) Amendment of Celdara Medical and Dartmouth College agreements - (24,341) Write-oﬀ C-Cure and Corquest assets and derecognition of related liabilities - (1,932) Operating Loss - EBIT Financial income (38,170) (52,876) 804 933 The key projects driving the research and development expenses in 2018 included: • • the clinical studies conducted on company’s most advanced CAR-T product candidates, CYAD-01 and CYAD-101 (THINK, SHRINK, DEPLETHINK, alloSHRINK) ; the pre-clinical studies conducted on on company’s CAR-T product candidates in both autologous and allogeneic settings (CYAD-02, CYAD-03 and the development of our allogeneic platform, which evaluates multiple non-gene editing technologies) General and administrative expenses increased by €1.1 million at €10.4 million in 2018 as compared to €9.3 million in 2017. This increase relates primarily to the share-based payments expense associated to the vesting of the warrant plan issued mid-2017 (non-cash expense recorded in accordance with IFRS 2 standard). The Group’s other income is associated with grants received from the Regional government in the form of recoverable cash advances (RCAs), and to R&D tax credit income: • with respect to grant income, the Group posts a revenue in line with last year at €0.8 million; • with respect to R&D tax credit, the Company recognized prior year for the ﬁrst time a receivable on the amounts to collect from the federal government (€1.2 million income posted in 2017), including a one-oﬀ catch-up eﬀect. The decrease for the current year income is predicated on a R&D tax credit recorded (€0.3 million), which is restricted to a base increment in 2018. For the year 2018, the Group’s other expenses mainly refer to non-cash expenses relating to remeasurement required by IFRS: • the amortized cost remeasurement of the recoverable cash advances liability (non-cash expense of €1.0 million); 7 8 • the change in fair value of the contingent consideration and other ﬁnancial liabilities (non-cash expense of €5.6 million). The increase in these liabilities reﬂects both the advancement in 2018 to the allogeneic CAR-T NKG2D program (CYAD-101 product candidate) as well as the management’s higher estimate for overall future commercial revenue (risk-adjusted). The loss resulting from recurrent operations (REBIT) amounted to €38.2 million for the year 2018 versus €26.6 million for the year 2017, driven by non-cash expenses increasing by €8.2 million year-on-year (share-based payments and liabilities remeasurement impacts). For the previous year, the Group recognized non-recurring expenses related to the amendment of the agreements with Celdara Medical LLC and Dartmouth College and the write-oﬀ of the C-Cure and Corquest assets and liabilities (respectively for €24.3 million, €0.7 million and €1.2 million). No such non-recurring items are reported in the income statement of 2018. At year-end 2018, the loss from operations before ﬁnancial results and taxes (EBIT) amounted to €38.2 million versus €52.9 million in 2017. Financial result refers mainly to interest income on short-term investments (reported as ﬁnancial income) and foreign exchange diﬀerences. Due to the depreciation of the USD compared to EUR in the previous year, the Group recognized a loss on foreign exchange diﬀerences of €4.3 million for the year 2017. For the year 2018, the gain on foreign exchange diﬀerences amounts to €0.4 million, driving the improvement in our ﬁnancial net result of €4.3 million. As a result of the foregoing, the net loss for the ﬁnancial year 2018 amounts to €37.4 million versus a net loss of €56.4 million for the prior year. 1.3.2. Analysis of the consolidated statement of financial position The table below sets forth the Group’s consolidated balance sheet for the year ended 31 December 2018, and comparative information as at 31 December 2017. (€’000) NON-CURRENT ASSETS Intangible assets Property, Plant and Equipment Non-current trade receivables Other non-current assets CURRENT ASSETS Trade and Other Receivables Other current assets Short-term investments Cash and cash equivalents TOTAL ASSETS EQUITY Share Capital Share premium Other reserves Accumulated deﬁcit NON-CURRENT LIABILITIES Bank loans Finance leases Recoverable Cash advances (RCA's) As at 31 December, 2018 2017 42,607 41,232 36,164 36,508 3,014 3,290 1,743 - 1,687 1,434 51,692 36,394 367 233 1,585 2,255 9,197 10,653 40,542 23,253 94,299 77,626 55,589 47,535 41,553 34,337 206,149 170,297 25,667 23,322 (217,778) (180,421) 29,063 22,146 229 326 652 482 2,864 1,544 Contingent consideration and other ﬁnancial liabilities 25,187 19,583 Post employment beneﬁts Other non-current liabilities CURRENT LIABILITIES Bank loans Finance leases Recoverable Cash advances (RCA's) Trade payables Other current liabilities 131 204 - 7 9,647 7,945 281 209 484 427 276 226 5,916 4,800 2,690 2,282 TOTAL EQUITY AND LIABILITIES 94,299 77,626 Intangible assets net book value mainly refers to our IPR&D assets related to our oncological programs acquired in 2015 through the OnCyte business combination. Pursuant to IFRS, the Company does not capitalize research and development expenses until marketing authorization. Accordingly, all clinical, research and development spend related to the development of our CAR-T product candidates and allogeneic platform are accounted for as operating expenses for the year 2018. Non-current trade receivables (€1.7 million at 31 December 2018) refer to discounted and risk-adjusted milestone receivables, to be cashed in by the Group in accordance with the terms of the exclusive license agreement signed by the Group with Mesoblast Ltd. for C-CathEZ device development, as above-described. The Group’s treasury position capital raise occurred in May 2018, the treasury position went up by €15.8 million compared to prior year-end. amounts to €49.7 million at year-end. Taking into account €43.0 million net proceeds from 1 The capital and share premium increased by €43.0 million in 2018 as a result of the above-mentioned May 2018 capital raise. The advances repayable and the contingent consideration liabilities increase as a counter-part of non-cash ‘other expenses’ recorded in the income statement, as described above under section 1.3.1. The liability increase reﬂects both the advancement in 2018 to the allogeneic CAR-T NKG2D program (CYAD-101 product candidate) as well as the management’s higher estimate for overall future commercial revenue (risk-adjusted). 1.3.3. Analysis of the consolidated net cash burn rate‑ 2 The table below summarizes the net cash burn rate of the Group for the year 2018. CASH BURN RATE SUMMARY (€'000) Net cash used in operations For the year ended 31 December, 2018 2017 (27,249) (44,441) Cash expense for amendment of Celdara Medical and Darmouth College agreements - 13,276 Net cash used in operations, excluding non-recurring items (27,249) (31,165) Net cash (used in)/from investing activities (848) (857) Net cash (used in)/from ﬁnancing activities 43,928 605 Eﬀects of exchange rate changes 3 1,120 Net cash burned over the year, excluding non-recurring items 15,834 (30,297) 1 ‘Treasury position’ is an alternative performance measure determined by adding Short-term investments and Cash and cash equivalents from the statement of ﬁnancial position prepared in accordance with IFRS. 2 ‘Net cash burn rate’ is an alternative performance measure determined by the year-on-year net variance in the Group’s treasury position as above-deﬁned. 9 10 ' Non-recurring cash outs Net cash burned over the year - (18,383) 15,834 (48,680) 2. CORPORATE GOVERNANCE 2.1. General The net cash burn rate for the year is a net cash inﬂow amounting to €15.8 million, against a net cash outﬂow of €48.7 million for the prior year. The net variance in net cash used in operations is driven by favourable foreign exchange diﬀerences (the Group posts a €0.4 million income in this respect for the year 2018 against a loss of €4.3 million for the year 2017). The underlying R&D cash spend is in line with prior year. The bottom-line variance is explained: - - from a ﬁnancing activities perspective, by the net proceeds from May 2018 capital raise (amounting to €43.0 million); by the absence of any non-recurring items in 2018. The latter amounted to €18.4 million in the prior year, and referred to clinical development milestones payment and cash component relating to Celdara Medical LLC and Dartmouth College agreements’ amendment compensation settled in 2017. 1.4. Personnel At the end of 2018, the Group employs 96 FTE’s, within which 7 managers (senior leadership team members). 1.5. Environment All entities of the Group continue to hold the permits required by their activities and are in compliance with all applicable environmental rules. 1.6. Risks and uncertainties Reference is made to section 2.7 “Description of the principal risks associated to the activities of the Group “. 1.7. Going concern Management has prepared detailed budgets and cash ﬂow forecasts for the years 2019 and 2020. These forecasts reﬂect the strategy of the Group and include signiﬁcant expenses and cash outﬂows in relation to the development of selected research programs and pipeline of products candidates. Based on its current scope of activities, the Group estimates that its treasury position as of 31 December 2018 is suﬃcient to cover its cash requirements until mid-2020, therefore beyond the readouts of our clinical trials currently ongoing. After due consideration of the above, the Board of Directors determined that management has an appropriate basis to conclude on the business continuity over the next 12 months from balance sheet date, and hence it is appropriate to prepare the ﬁnancial statements on a going concern basis. 1.8. Events and circumstances that could have a signiﬁcant impact on the future We have not identiﬁed signiﬁcant events and circumstances that could have a signiﬁcant impact on the future in addition to the potential impact of risks described in section 7 of chapter 2: "Description of the principal risks associated to the activities of the Group". This section summarises the rules and principles on the basis of which the corporate governance of the Company has been organised pursuant to Belgian Company code (the “BCC”), the Company's articles of association, and the Company's corporate governance charter (the “Charter”) approved by the Board of Directors of 17 June 2013, as amended subsequently by resolutions of the Board of Directors of 12 June 2015 and 8 December 2016. The Charter has been adopted in accordance with the Belgian Corporate Governance Code (‘CGC’), which is available on the following website: http://www.corporategovernancecommittee.be/en/about-2009-code/2009-belgian-code-corporate- governance. The Charter is available on the Company’s website (www.celyad.com) under Investors/Corporate Governance tab. The Board of Directors intends to comply with the provisions of the CGC but believes that the size and the current state of development of the Company justiﬁes certain deviations. These deviations are further detailed hereinafter. The Charter includes the following main chapters: • Structure and organization; • Shareholder structure; • The Board : terms of reference; • Chairman of the Board; • Company Secretary; • Board committees; • Executive Management Team; and • Rules preventing market abuse. 2.2. Board of Directors 2.2.1. Composition of the Board of Directors As provided by Article 521 of the BCC, the Company is managed by a Board of Directors acting as a collegiate body. The Board of Directors' role is to pursue the long-term success of the Company by providing entrepreneurial leadership and enabling risks to be assessed and managed. The Board of Directors determines the Company's values and strategy, its risk preference and key policies. The Board of Directors ensures that the necessary leadership, ﬁnancial and human resources are in place for the Company to meet its objectives. The Company has opted for a one-tier governance structure. As provided by Article 522 of the Belgian Company Code, the Board of Directors is the ultimate decision-making body in the Company, except with respect to those areas that are reserved by law or by the Company's articles of association to the Shareholders Meeting. The Company's articles of association state that the number of directors of the Company, who may be natural persons or legal entities and who need not be shareholders, must be at least 5. At least half of the members of the Board of Directors must be non-executive directors and at least three of them must be independent directors. A meeting of the Board of Directors is validly constituted if at least half of its members are present in person or represented at the meeting. If this quorum is not met, a new board meeting may be convened by any director to deliberate and decide on the matters at the agenda of the board meeting for which a quorum was not met, provided that at least two members are present. Meetings of the Board of Directors are convened by the Chairman of the Board or the CFO or Chief Legal Oﬃcer, or by at least two directors, whenever the interest of the Company so requires. In principle, the Board of Directors will meet at least four times per year. The Chairman of the Board of Directors shall have a casting vote on matters submitted to the Board of Directors in the event of a tied vote. At the date of this Report, the Board of Directors consists of 8 members, one of which is an executive director (as a member of the Executive Management Team) and 7 of which are non-executive directors, including six independent directors. In accordance with the Art 96, §2 6° of the Belgian Company Code (hereafter “BCC”), it is the willingness of the Company to aim for, in a reasonable timeframe, that a third of the Board member are of diﬀerent sex, and actions were, are and will be taken in the short future to reach that objective. 11 12 Board Committee Membership Chairman of the Nomination and Remuneration Committee Name Michel Lussier Position Chairman LSS Consulting SPRL represented by its permanent representative Christian Homsy Executive Director Term 2020 2020 Serge Goblet Non-executive director 2020 Chris Buyse Independent director 2020 Chairman of the Nomination and Remuneration Committee Member of the Audit Committee Rudy Dekeyser Independent director 2020 Member of the Nomination and Remuneration Committee Member of the Audit Committee Debasish Roychowdhury Independent director 2019 Hilde Windels [1] Independent director 2022 Member of the Audit Committee Margo Roberts[2] Independent Director 2019 [1] [2] replacement of Toleﬁ SA on the same date. Hilde Windels has been appointed as Director of the Company on May 7, 2018 Toleﬁ SA has resigned from the Board of Directors on 1st August 2018 and Margo Roberts has been co-opted as Director of the Company in The following paragraphs contain brief biographies of each of the directors, or in case of legal entities being director, their permanent representatives, with an indication of other relevant mandates as member of administrative, management or supervisory bodies in other companies during the previous ﬁve years. Michel Lussier has served as Chairman of the board of directors of the Company since 2007 and is also a co-founder of the Company. Mr. Lussier founded Medpole Ltd, the North American satellite of MedPole SA, a European incubator for medical technology start-up companies located in Belgium, and serves as the Chief Executive Oﬃcer for the group. In this capacity, he is an advisor to Fjord Ventures, a Laguna Hills, California based medical technology accelerator / incubator. Mr. Lussier also serves as the Chief Executive Oﬃcer of Metronom Health Inc, an early stage medical device company founded by Fjord Ventures, developing a continuous glucose monitoring system. Prior to that, from 2002 to 2013, he worked for Volcano Corporation, where he served in a number of positions, most recently as President, Clinical and Scientiﬁc Aﬀairs from 2012 to 2013, and prior to that from 2007 to 2012, Group President, Advanced Imaging Systems, Global Clinical & Scientiﬁc Aﬀairs and General Management of Europe, Africa and the Middle East. Mr. Lussier obtained a Bachelor of Sciences degree in Electrical Engineering and Master’s degree in Biomedical Engineering at the University of Montreal. He also holds an MBA from INSEAD (European Institute of Business Administration), France. In addition to serving on our board of directors, he also serves on the boards of directors of several early stage medical devices companies. Christian Homsy (permanent representative of LSS consulting SPRL), is a founder of Celyad and has been serving as Chief Executive Oﬃcer (CEO). Christian Homsy obtained his Medical Doctorate at the University of Louvain and holds an MBA from the IMD in Lausanne (Switzerland). Christian gained his business experience in senior research and development, marketing, business development and sales positions at Guidant Corporation, a leading medical device company active in the treatment of cardiovascular disease. He was also founder of Guidant Institute for Therapy Development, a landmark facility for physician and health care professionals' education that gained international recognition and praise. Before starting Celyad, Christian Homsy was General Manager of Medpole, a European incubator dedicated to initiating the European operations for start-up companies in the medical device or biotechnology ﬁelds. He also holds a director mandate in Medpole SA. Serge Goblet has served as a member of the board of directors of the Company since 2008. He holds a Master Degree in Business and Consular Sciences from ICHEC, Belgium and has many years of international experience as director in Belgian and foreign companies. He is the managing director of TOLEFI SA, a Belgian holding company and holds director mandates in subsidiaries of TOLEFI. Chris Buyse has served as a member of the board of directors of the Company since 2008. He brings more than 30 years of international ﬁnancial expertise and experience in introducing best ﬁnancial management practices. He is currently Managing Director of FUND+, a fund that invests in innovative Belgian Life Sciences companies, Between August 2006 and June 2014, Mr. Buyse served as the Chief Financial Oﬃcer and board member of ThromboGenics NV, a leading biotech company that is listed on NYSE Euronext Brussels. Before joining ThromboGenics, he was the Chief Financial Oﬃcer of the Belgian biotech 13 company CropDesign, where he coordinated the acquisition by BASF in July 2006. Prior to joining CropDesign he was ﬁnancial manager of WorldCom/MCI Belux, a European subsidiary of one of the world’s largest telecommunication companies and he was also the Chief Financial Oﬃcer and interim Chief Executive Oﬃcer of Keyware Technologies. Mr. Buyse holds a Master Degree in applied economic sciences from the University of Antwerp and an MBA from Vlerick School of Management in Gent. He currently serves, in his own name or as permanent representative of a management company, as member of the board of directors of the following publicly and privately held companies: Iteos SA, Bioxodes SA, Bio Incubator NV, Immo David NV, Pinnacle Investments SA, CreaBuild NV, Soﬁa BVBA, Pienter-Jan BVBA, Life Sciences Research Partners VZW , Inventiva SA, The Francqui Foundation and Keyware Technologies NV. Rudy Dekeyser has served as a member of the board of directors of the Company since 2008. Since 2012 Rudy is managing partner of the LSP Health Economics Fund, a private equity fund investing in late stage European and North American health care companies. Prior to joining LSP, Rudy has been managing director of VIB (Flanders Institute for Biotechnology), where he was also responsible for the intellectual property portfolio, business development and new venture activities. He obtained a Ph.D. in molecular biology at the University Ghent. He holds non-executive director positions in Curetis AG, Sequana Medical AG and Remynd NV, and held non-executive director positions in Devgen NV, CropDesign NV, Ablynx NV, Actogenix NV, Pronota NV, Flandersbio VZW, Bioincubator Leuven NV, Multiplicom NV and Lumeon Inc. He is a co-founder of ASTP (the European associations of technology transfer managers) and Chairman of EMBLEM (EMBL’s business arm). Rudy has been advisor to several seed and venture capital funds and to multiple regional and international committees on innovation. Debasish Roychowdhury has served as a member of the board of directors of the Company since 2015. Debasish is a medical oncologist with over 15 years of comprehensive pharmaceutical industry experience and 14 years of patient care and academic research. In the pharmaceutical industry, Debasish held multiple positions of growing responsibility respectively at Eli Lilly, GSK and Sanoﬁ, with direct therapeutic area experience mostly in oncology and hematology. He is the co-founder of Partner Therapeutics, a commercial stage biotech. Based in Boston, Massachusetts, Debasish is now using his extensive experience and global network to advise companies, organizations, and institutions in the biomedical ﬁeld. Hilde Windels is CEO of Mycartis NV and member of its board of directors. Hilde brings 20 years of experience in biotech with a track record of business and corporate strategy, building and structuring organizations, private fundraising, mergers and acquisitions and public capital markets. Hilde has worked as CFO for several biotech companies, amongst those the Belgium based molecular Dx company Biocartis where she started as CFO in 2011. She transitioned to the co-CEO role in 2015 and CEO a.i. in 2017. She still serves as board member at Biocartis. In addition, Hilde is member of the boards of Erytech, MdxHealth and VIB. She holds a Masters in Economics (Commercial Engineer) from the University of Leuven (Belgium). Margo Roberts Dr. Margo Roberts, Ph.D. has more than three decades of biomedical research experience in both biotechnology and academia. Dr Roberts is currently Chief Scientist Oﬃcer at Lyell Immunotherapy. She serves also on the board of directors of Unity Biotechnology, a US public company focused on developing medicines that slow or reverse age- associated diseases, and on the board of directors of InsTIL Bio, a US start up company focused on developing Timor inﬁltrating lymphocyte (TIL) - based therapies for the treatment of cancer. Until July 2018, Dr. Roberts served as Senior Vice President of Discovery Research at Kite Pharma focusing on the development of next generation therapeutic approaches, including heading up Kite’s universal allogeneic T-cell programs. Prior that, in 2013, she was Chief Scientiﬁc Oﬃcer at Kite Pharma Inc., where she built a talented research organization that played an instrumental role in the successful development of Yescarta®, and the clinical advancement of additional CAR/TCR-engineered T-cell therapies. Prior to her tenure at Kite Pharma, Dr. Roberts was Principal Scientist and Director of Immune and Cell Therapy at Cell Genesys, Inc., where she led the development and application of CAR technology to T-cells and stem cells, culminating in the very ﬁrst CAR T-cell trial initiated in 1994. Dr. Roberts was also an associate professor at the University of Virginia, has authored over 30 scientiﬁc publications, and is the inventor on 13 issued US patents and three published US patent applications related to CAR technology and tumor vaccine therapies. Dr. Roberts received both her Bachelor of Science degree with honors and her Ph.D. degree from the University of Leeds in England. The following mandates have been exercised in other companies by the members of the board of directors: Name of the company Board Members MICHEL LUSSIER Biological Manufacturing Services SA iSTAR Medical Metronom health Inc Starting year of mandate Current Expired Bankrupt or liquidated (Y/ N) 2018 2014 2014 Yes Yes Yes 14 No No No No No No Metronom Health Europe SPRL Medpole SA MEL Management RUDY DEKEYSER Curetis NV Sequana Medical AG Remynd NV EMBLEM GmbH Lumeon Inc. R.A.D. Lifes sciences BVBA CHRIS BUYSE Fund+ NV Iteos therapeutics SA Bone Therapeutics SA Inventiva SA (Fr) CoBioRes NV Bioxodes SA Immo David NV CreaBuild NV Pinnacle Investments NV Keyware Technologies NV Bio Incubator NV Ogeda SA Thrombogenics NV Soﬁa BVBA Pienter Jan BVBA HILDE WINDELS MDx Health NV Mycartis NV Biocartis Group Erytech SA VIB BVBA Hilde Windels Ablynx NV Flanders Bio 2017 2002 2017 2014 2014 2010 2008 2018 2013 2015 2008 2008 2016 2014 2011 2005 2006 2007 2005 2008 2016 2006 1999 2010 2017 2017 2018 2014 2013 2001 2017 2010 Yes Yes Yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes No No No No No No No No No No No Expired on June 14, 2018 No No No No No No No No expired in 2017 expired in 2014 No No No No No No No No Expired 2018 Expired 2014 No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No MDx Health NV Devgen NV DEBASISH ROYCHOWDHURY Lytix Biopharma AS Radius Health Fund+ ImCheck Therapeutics Partner Therapeutics MARGO ROBERTS Unity Biotechnology InsTIL Bio SERGE GOBLET Toleﬁ SA Essege SA SG Holding SA CarBoBois SA Green Holding SA Ligne Plus Tecno Air System Linea Plus Toleﬁ Wellington BioWay Holding Green Real Estate Le Haras des Isas BSM Immo Immobilière Levasseur 2010 1999 2015 2015 2016 2018 2018 2018 2018 2014 2014 2014 2014 2014 2018 2015 2012 2014 2014 2014 2014 2016 2017 Expired 2011 Expired 2009 No No No No No No no no no no no no no no no no no no no no no yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes No No No No No No No No No No No No No No No No No No No No No No No 2.2.2. Director Independence The independence criteria of Article 526ter of the BCC can be summarized as follows: • • • the director has not been an executive member of the board of directors, member of the management board (“directiecomité / comité de direction”) (should such corporate body be created) or daily manager of the company (or an aﬃliate of the company, if any), during a term of ﬁve years prior to his or her election; the director has not been a non-executive director for more than three consecutive terms or during a period of more than 12 years; the director has not been a member of the managerial staﬀ of the company (or an aﬃliate of the company, if any) during a term of three years prior to his or her election; 15 16 • • • • • • the director does not receive and has not received any remuneration or other signiﬁcant ﬁnancial advantage from the company (or an aﬃliate of the company, if any), other than the proﬁt share (“tantièmes”) and remuneration received in his or her capacity as a non-executive director or as a member of the supervisory body; the director does not own any corporate rights that represent 10% or more of the share capital, of the corporate funds or of a category of its shares. If the director has corporate rights which represent less than 10%, then: o o o such rights, taken together with rights in the same company held by companies over which the director has control, may not represent 10% or more of the share capital, the corporate funds or of a category of its shares; or the disposal of these shares, or the exercise of the rights attached thereto, may not be subject to agreements or unilateral commitments entered into by the director. the independent director in any case cannot represent a shareholder who falls under the conditions set forth in this criterion; the director does not and, during the past ﬁnancial year, did not, have a signiﬁcant business relationship with the company (or an aﬃliate of the company, if any), either directly or as a partner, shareholder, member of the board of directors or member of the managerial staﬀ of a company or of a person that maintains such a relationship; the director is not and has not been at any time during the past three years, a partner or an employee of its current or former statutory auditor or of a company or person aﬃliated therewith; the director is not an executive director of another company in which an executive director of the company is a non-executive director or a member of the supervisory body, and has no other signiﬁcant ties with executive directors of the company through his or her involvement in other companies or bodies; the director’s spouse, unmarried legal partner and relatives (via birth or marriage) up to the second degree do not act as a member of the board of directors, member of the management board (“directiecomité / comité de direction”) (should such corporate body be created) or daily manager or member of the managerial staﬀ in the company (or an aﬃliate of the company, if any), and do not meet one of the criteria set out above. 2.2.3. Role of the Board in Risk Oversight The board of directors is primarily responsible for the oversight of its risk management activities and has delegated to the audit committee the responsibility to assist its board of directors in this task. While its board oversees its risk management, its management is responsible for day-to-day risk management processes. Its board of directors expects its management to consider risk and risk management in each business decision, to proactively develop and monitor risk management strategies and processes for day-to-day activities and to eﬀectively implement risk management strategies adopted by the board of directors. The Company believes this division of responsibilities is the most eﬀective approach for addressing the risks the Company face. 2.2.4. Committees within the Board of Directors 2.2.4.1. General Without prejudice to the role, responsibilities and functioning of the Executive Management Team as set out below under section “Executive Management Team”, the Board of Directors may set up specialised committees to analyse speciﬁc issues and advise the Board of Directors on those issues. Such committees are advisory bodies only and the decision-making remains the collegiate responsibility of the Board of Directors. The Board of Directors determines the terms of reference of each committee with respect to the organisation, procedures, policies and activities of the committee. 2.2.4.2. Audit Committee "Large" listed companies (as deﬁned in Article 526bis, § 3 of the BCC) are legally obliged to establish an audit committee within their board of directors. Although the Company does not currently qualify as a "large" company, the board of directors has established an audit committee on 6 March 2015. At the date of this report, the audit committee consists of 3 members: Chris Buyse, Rudy Dekeyser and Hilde Windels. The role of the audit committee is to ensure the eﬀectiveness of the internal control and risk management systems, the internal audit (if any) and its eﬀectiveness and the statutory audit of the annual and consolidated accounts, and to review and monitor the independence of the external auditor, in particular regarding the provision of additional services to the Company. The audit committee reports regularly to the board of directors on the exercise of its functions. The audit committee informs the board of directors about all areas in which action or improvement is necessary in its opinion and produces 17 recommendations concerning the necessary steps that need to be taken. The audit review and the reporting on that review cover the Company and its subsidiaries as a whole. The members of the audit committee are entitled to receive from the board of directors, executive committee and employees, all information which they need for the performance of their function. Each member of the audit committee shall exercise this right in consultation with the chairman of the audit committee. The audit committee’s duties and responsibilities to carry out its purposes include, among others: the ﬁnancial reporting, internal controls and risk management, and the internal and external audit process. These tasks are further described in the audit committee terms and conditions as set out in the Charter and in the Article 526bis of the Belgian Company Code. Chris Buyse has been nominated as Chairman of the committee, having the necessary expertise in accounting and audit matters. The Audit Committee holds a minimum of four meetings a year. 2.2.4.3. Nomination and Remuneration Committee "Large" listed companies (as deﬁned in Article 526quater, § 4 of the BCC) are legally obliged to establish a remuneration committee within their board of directors. Although the Company does not currently qualify as a "large" company, the Board of Directors has voluntarily set up a remuneration committee. As the remuneration committee also performs the task of a nomination committee, it is called the Nomination and Remuneration Committee. The Nomination and Remuneration Committee will consist of not less than three directors, or such greater number as determined by the Board of Directors at any time. All members must be non-executive directors and at least a majority of its members must be independent in accordance with Article 526ter of the BCC. The Nomination and Remuneration Committee must have the necessary expertise as regards the remuneration policy, and this condition is fulﬁlled if at least one member has had a higher education and has had at least three years of experience in personnel management or in the ﬁeld of remunerating directors and managers. The CEO has the right to attend the meetings of the Nomination and Remuneration Committee in an advisory and non- voting capacity on matters other than those concerning himself. The Nomination and Remuneration Committee will elect a chairman from amongst its members. The Chairman of the Nomination and Remuneration Committee is actually Michel Lussier. The role of the Nomination and Remuneration Committee is to assist the Board of Directors in all matters: • • • • • • • relating to the selection and recommendation of qualiﬁed candidates for membership of the Board of Directors; relating to the nomination of the CEO; relating to the nomination of the members of the Executive Management Team, other than the CEO, upon proposal by the CEO; relating to the remuneration of independent directors; relating to the remuneration of the CEO; relating to the remuneration of the members of the Executive Management Team, other than the CEO, upon proposal by the CEO; on which the Board of Directors or the Chairman of the Board of Directors requests the Nomination and Remuneration Committee's advice. Additionally, with regard to matters relating to remuneration, except for those areas that are reserved by law to the Board of Directors, the Nomination and Remuneration Committee will at least have the following tasks: • • preparing the remuneration report (which is to be included in the Board of Director’s corporate governance statement); and explaining its remuneration report at the Annual General Shareholders Meeting. It will report to the Board of Directors on the performance of these tasks on a regular basis. These tasks are further described in the terms of reference of the Nomination and Remuneration Committee as set out in the Charter. The Nomination and Remuneration Committee will meet at least twice per year, and whenever it deems it necessary to carry out its duties. The following directors are currently member of the Nomination and Remuneration Committee: Michel Lussier (Chairman), Chris Buyse and Rudy Dekeyser. 2.2.5. Meetings of the Board and the committees In 2018, the Board held 4 regular meetings and 2 meetings by telephone conference to discuss and decide on speciﬁc matters. 18 Board and committees – Dates and Attendance Board of Directors M. Lussier 22 Feb Present 22 Mar Present. 14 Jun Present 22 Aug Present 5 Oct Present 10 Dec Repres. LSS Consulting SPRL Present Present Present Repres. Present Present S. Goblet Repres. Repres. Present Present Present Present D. Roychowdhury Absent Present Present Absent Present Repres. R . Dekeyser H. Windels H. Spek C. Buyse M. Roberts TOLEFI SA Nomination and Remuneration Committee M. Lussier Chris Buyse Present Present. Present Present Present Present. N/A N/A Present Present Absent Repres. Present Present. N/A N/A N/A N/A Absent Present. Absent Present Present Absent. N/A N/A N/A Present Present Present Present Present Present N/A N/A N/A 8 Feb 1 Jun 13 Jul 17 Sept 18 sept 14 oct Present Present Present Present Present Present Present Present Present Present Present Present Hanspeter Spek Present N/A N/A N/A N/A N/A Rudy Dekeyser Present Present Present Present Present Present The Executive Management Team discusses and consults with the Board of Directors and advises the Board of Directors on the day-to-day management of the Company in accordance with the Company's values, strategy, general policy and budget, as determined by the Board of Directors. Each member of the Executive Management Team has been made individually responsible for certain aspects of the day-to- day management of the Company and its business (in the case of the CEO, by way of delegation by the Board of Directors; in the case of the other member of the Executive Management Team, by way of delegation by the CEO). The further tasks for which the Executive Management Team is responsible are described in greater detail in the terms of reference of the Executive Management Team as set out in the Charter. The members of the Executive Management Team are appointed and may be dismissed by the Board of Directors at any time. The Board of Directors appoints them following the recommendation of the Nomination and Remuneration Committee, which shall also assist the Board of Directors on the remuneration policy of the members of the Executive Management Team, and their individual remunerations. The remuneration, duration and conditions of dismissal of Executive Management Team members is governed by the contract entered into between the Company and each member of the Executive Management Team in respect of their function within the Company. In accordance with Shedule C, Section F, subsection 7 of the Charter, all contracts with members of the Executive Management Team entered into on or after 1 July 2009 must refer to the criteria to be taken into account when determining variable remuneration and contain speciﬁc provisions relating to early termination. In principle, the Executive Management Team meets every month. Additional meetings may be convened at any time by the Chairman of the Executive Management Team or at the request of two of its members. The Executive Management Team will constitute a quorum when all members have been invited and the majority of the members are present or represented at the meeting. Absent members may grant a power of attorney to another member of the Executive Management Team. Members may attend the meeting physically or by telephone or video conference. The absent members must be notiﬁed of the discussions in their absence by the Chairman (or the Company Secretary, if the Executive Management Team has appointed a Company Secretary from among its members). The members of the Executive Management Team must provide the Board of Directors with information in a timely manner, if possible in writing, on all facts and developments concerning the Company which the Board of Directors may need in order to function as required and to properly carry out its duties. The CEO (or, in the event that the CEO is not able to attend the Board of Directors' meeting, the CFO or, in the event that the CFO is not able to attend the Board of Directors' meeting, another representative of the Executive Management Team) must report at every ordinary meeting of the Board of Directors on the material deliberations of the previous meeting(s) of the Executive Management Team. LSS Consulting SPRL Invited Invited Invited Invited Invited Invited The current members of the Executive Management Team are listed in the table below. Audit Committee Ch. Buyse R. Dekeyser H. Windels (1) D. Roychowdhury (1) F. Petti (2) P. Jeanmart (2) 20 Mar Present Present N/A Present N/A Invited 21 Aug Present Present Present N/A N/A Invited 29 Nov Present Repres. Present N/A Invited N/A 20 Dec Present Present Present N/A Invited N/A Name Function Year of birth LSS Consulting SPRL, represented by Christian Homsy Chief Executive Oﬃcer Filippo Petti Chief Financial Oﬃcer KNCL SPRL, represented by Jean-Pierre Latere Chief Operating Oﬃcer NandaDevi SPRL, represented by Philippe Dechamps Chief Legal Oﬃcer MC Consult, represented by Philippe Nobels Global Head of Human Ressources ImXense SPRL, represented by Frederic Lehmann Vice President Clinical Development & Medical Aﬀairs 1958 1976 1975 1970 1966 1964 1965 [1] H. Windels has replaced D. Roychowdhury as member of the Audit Committee as of May 7, 2018 David Gilham Vice President Research & Development (2) Filippo Petti has joined the Company as CFO in replacement of Patrick Jeanmart as of September 1st, 2018. 2.3. Executive Management Team The Board of Directors has established an executive management team which does not constitute an executive committee (“directiecomité / comité de direction”) under Article 524bis of the BCC. The terms of service of the executive management team have been determined by the Board of Directors and are set out in the Charter. The Executive Management Team consists of the “Chief Executive Oﬃcer” (CEO, who is the chairman of the Executive Management team), the “Chief Financial Oﬃcer” (CFO), the “Chief Operating Oﬃcer”, the “Chief Legal Oﬃcer”, the “Vice President Clinical Development and Medical Aﬀairs”, the “Vice President Research & Development” and the Global Head of Human Ressources. PaJe SPRL, represented by Patrick Jeanmartt, has served as CFO of the Company until 31 August 2018. PaJe SPRL remained advisor of the Company through 31 December 2018 to ensure a smooth and eﬀective transition with Filippo Petti. The following paragraphs contain brief biographies of each of the members of the Executive Management Team or in case of legal entities being a member of the Executive Management Team or key manager, their permanent representatives. Christian Homsy (representative of LSS Consulting SPRL), CEO – reference is made to section “2.2.1. Composition of the Board of Directors”. Filippo Petti joined Celyad in September 2018 as the Chief Financial Oﬃcer. Prior to joining the Company, Mr. Petti worked in healthcare investment banking both at Wells Fargo Securities and William Blair & Company. Prior to his roles in investment banking, Filippo spent several years in equity research covering U.S. biotechnology companies both at William Blair & 19 20   Company and Wedbush Securities. He began his career as a research scientist at OSI Pharmaceuticals, Inc. focused on drug discovery and translational research before transitioning into corporate development with the company. Mr. Petti holds a Master of Business Administration from Cornell University, a Master of Science from St. John’s University and a Bachelor of Science from Syracuse University. Jean-Pierre Latere (representative of KNCL SPRL), has previously acted as Vice President of Regenerative Medicine and Medical Devices franchise. Since January 2017 he serves as Chief Operating Oﬃcer in charge of program management, manufacturing, quality, clinical operations and regulatory aﬀairs. He leads the eﬀort to further strengthen the organization as the Company grows as a leader in immuno-oncology. He started his career as a Research Associate at the Michigan State University in the US. Following that assignment, he moved to the Johnson & Johnson group where he held various positions, from Scientist to Senior Scientist. He then joined Celyad in 2008 as Project Manager Delivery System and left the company in 2012 in the position of Senior Director Business Development. Prior to joining Celyad, Jean-Pierre served as Beauty Care and Healthcare Market Global Leader at Dow Corning. Jean-Pierre holds a PhD in Chemistry from the University of Liège, Belgium. Philippe Dechamps (representative of NandaDevi SPRL), has served as Chief Legal Oﬃcer since September 2016. Philippe started his legal career as an associate in Brussels with the law ﬁrm Linklaters De Bandt from 1994 to 1998. He left private practice in 1998 and until 2003, he served as an in-house counsel at Solvay Group to assist the company in its turnaround through several M&A operations in Europe, India and Far-East Asia. In 2003, he took over the position of Legal Director at Guidant, the US company formerly active in the medical devices business before its acquisition by Boston Scientiﬁc and Abbott Laboratories in 2005. Within Abbott, Philippe took over responsibility for the legal aﬀairs of Abbott Vascular International outside of the United States. In 2008, Philippe joined Delhaize Group taking responsibility for the legal and government aﬀairs in Europe and Asia, before becoming Group General Counsel and Secretary to the Board of Directors in 2015. In this position, he piloted the legal strategy to merge Delhaize Group with Royal Ahold in July 2016. Since December 2018, Philippe is also member of the Board of Directors of Petserco SA, the holding company of the Tom&Co group. Philippe earned law degrees from the Université Catholique de Louvain (UCL) and Vrije Universiteit Brussel (VUB), and a Masters of Law (LL.M) from Harvard University. Philippe Nobels (representative of MC Consult SPRL) has served as Global Head of Human Ressources since October 2016. He started his career at Price Waterhouse (now PwC) as auditor in 1989. He also went in rotational assignment in Congo during 2 years on consulting missions for the World Bank. In 1995, he joined Fourcroy as plant controller. Then, he joined Dow Corning in 1997 where he held diﬀerent positions in Finance and Human Resources. He led the HR operations in Europe, became the HR manager for Dow Corning in Belgium, and HR Business Partner for the sales and marketing functions globally. As a member of the sales and marketing Leadership teams, he contributed to the company’s major transformation initiatives to increase organizational eﬀectiveness, employees’ engagement & performance as well as Business results. Philippe hold a Master Degree in Economics from the University of Namur. Frédéric Lehmann (representative of ImXense SPRL), has served as the Vice President Clinical Development & Medical Aﬀairs since July 2016 and prior to that he has served as the Vice President Immuno-Oncology since September 2015. Dr. Lehmann is a physician by training, specialized in hematology and oncology. Dr. Lehmann has extensive experience in oncology drug development spanning early to late phase, including clinical trial design, translational research, regulatory interactions, and clinical risk management. He started his academic career at the Ludwig Institute for Cancer Research in Brussels, followed by a position at the Institute Jules Bordet. He then moved to the European Organization for Research and Treatment of Cancer (EORTC) as Medical Advisor. Dr. Lehmann began his corporate career at GlaxoSmithKline, where he led the early worldwide clinical development program for the Company’s cancer vaccines and went on to lead the research and development incubator for cancer immunotherapeutics. David Gilham, has served as Vice President Research and Development since September 2016. Prior to joining the company, David was a Reader and Group Leader within the Manchester Cancer Research Centre at the University of Manchester, UK leading a research group of 15 scientists in the area of cellular immunotherapy. David obtained his Ph.D from the University of Dundee in 1998 in Molecular Pharmacology under the supervision of Professor Roland Wolf, OBE. After a short post-doctoral position at the University of Bristol, David moved to the University of Manchester with Professor Robert Hawkins to establish translational research activity in the ﬁeld of engineered cellular therapy. The group has carried out several clinical trials of CAR-T cells of which David has been Lead scientiﬁc advisor and led several European framework programs bringing together researchers from all over Europe (ATTACK and ATTRACT programs). In 2010, along with Professor Hawkins and other colleagues, David co-founded Cellular Therapeutics, a cell production company based in Manchester. He has published more than 60 peer reviewed articles and further book chapters and reviews. He has also sat on many review boards and charity grant committees and consulted for several biotechs and pharma concerning immune cell therapies. As of the date of this annual report, the list of company mandates hold by the Executive Management Team is as follows: Name of the company Christian Homsy Starting year of mandate Current Expired Bankrupt or liquidated (Y/N) Medpole SA LSS Consulting SPRL Miracor SA Biological Manufacturing Services SA Jean-Pierre Latere KNCL SPRL Frédéric Lehmann ImXsense SPRL David Gilham N/A Philippe Dechamps Nandadevi SPRL Petserco SA Biological Manufacturing Services SA Philippe Nobels MC CONSULT SPRL 2004 2014 2017 2018 2016 2015 2016 2018 2018 2016 Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No No No No No No No No No No No No No No No No No No No No 2.4. Conﬂict of Interest of directors and members of the executive team and transactions with aﬃliated companies 2.4.1. General Each director and member of the Executive Management Team is encouraged to arrange his or her personal and business aﬀairs so as to avoid direct and indirect conﬂicts of interest with the Company. The Company's Charter contains speciﬁc procedures to deal with potential conﬂicts. 2.4.2. Conflicts of interest of directors Article 523 of the BCC provides for a special procedure within the Board of Directors in the event of a possible personal ﬁnancial conﬂict of interest of one or more directors with one or more decisions or transactions to be adopted by the Board of Directors. In the event of a conﬂict of interest, the director concerned must inform his or her fellow directors of his or her conﬂict of interest before the Board of Directors deliberates and takes a decision in the matter concerned. Furthermore, the conﬂicted director may not participate in the deliberation and voting by the Board of Directors on the matter that gives rise to the potential conﬂict of interest. The minutes of the meeting of the Board of Directors must contain the relevant statements made by the conﬂicted director, as well as a description by the Board of Directors of the conﬂicting interests and the nature of the relevant decision or transaction to be adopted. The minutes must also contain a justiﬁcation by the Board of Directors for the decision or transaction adopted, and a description of the ﬁnancial consequences thereof for the company. The relevant minutes must be included in the (statutory) annual report of the Board of Directors. The conﬂicted director must notify the Statutory Auditor of the conﬂict. The Statutory Auditor must describe in its statutory annual audit report the ﬁnancial consequences of the decision or transaction that gave rise to the potential conﬂict. This procedure does not apply to decisions or transactions in the ordinary course of business at customary market conditions. 2.4.3. Existing conflicts of interest of members of the Board of Directors Except as reported hereinafter, as far as the Company is aware, none of the have a conﬂict of interest within the meaning of Article 523 of the BCC which has not been disclosed to the Board of Directors. Other than potential conﬂicts arising in respect of compensation-related matters, the Company does not foresee any other potential conﬂicts of interest in the near future. In 2018, certain members of the Board declared a conﬂict of interest. The following declaration were made in that respect (excerpt from the minutes of the Board meeting of October 5, 2018): 21 22 “The Board discussed the allocation of warrants to new Board members: • • Hilde Windels (10,000 warrants); Margo Roberts (10,000 warrants). The warrants will be issued under a new plan to be adopted in the 4th quarter of 2018. Each warrant will give the right to its owner to acquire one new share of the Company. The exercise price will be equal to the fair market value of the Company’s shares at the time of the oﬀer, this value corresponding either to the closing price of the share on the day before the date of the oﬀer or to the average closing price of the share during a period of 30 days before the oﬀer date. Furthermore, as allocated to non-employees, the exercise price shall not be below the average of the 30 calendar days preceding the date of issuance of the warrants. The article 523, paragraph 1, of the Company Code provides that “If a director has, directly or indirectly, a conﬂicting ﬁnancial interest in a decision or operation to be decided by the board of directors, he has to inform the other directors before the deliberation of the board of directors. His declaration, including the reasons for his conﬂicting ﬁnancial interest, must be recorded in the minutes of the board meeting that will take [...] the decision. The auditor must also be informed. (…) In listed companies, the concerned directors cannot deliberate nor vote on the concerned decisions”. Hilde Windels was absent of the meeting. Margo Roberts informed the other directors that she has a conﬂicting ﬁnancial interest in the decision proposed. The Chairman thanked Margo Roberts for her declaration. This declaration will be communicated to the statutory auditor of the Company and inserted in the annual report 2018 in accordance with Article 523 of the Company Code. The Board unanimously approved the allocation of 10,000 warrants to Hilde Windels. Margo Roberts left the meeting room and the Board unanimously approved the allocation of 10,000 warrants to Margo Roberts. Margo Roberts then came back in the meeting room.” 2.4.4. Related Party Transactions Currently, no related party transaction involving the Company’s Directors or senior executive management has been disclosed to the Company. 2.4.5. Transactions with affiliates Article 524 of the BCC provides for a special procedure that applies to intra-group or related party transactions with aﬃliates. The procedure will apply to decisions or transactions between the Company and aﬃliates of the Company that are not a subsidiary of the Company. It will also apply to decisions or transactions between any of the Company’s subsidiaries and such subsidiaries’ aﬃliates that are not a subsidiary of the Company. Prior to any such decision or transaction, the Board of Directors of the Company must appoint a special committee consisting of three independent directors, assisted by one or more independent experts. This committee must assess the business advantages and disadvantages of the decision or transaction for the Company. It must quantify the ﬁnancial consequences thereof and must determine whether or not the decision or transaction causes a disadvantage to the Company that is manifestly illegitimate in view of the Company’s policy. If the committee determines that the decision or transaction is not manifestly illegitimate but is of the opinion that it will prejudice the Company, it must clarify which advantages are taken into account in the decision or transaction to compensate the disadvantages. All these elements must be set out in the committee’s advice. The Board of Directors must then take a decision, taking into account the opinion of the committee. Any deviation from the committee’s advice must be explained. Directors who have a conﬂict of interest are not entitled to participate in the deliberation and vote. The committee’s advice and the decision of the Board of Directors must be communicated to the Company’s Statutory Auditor, who must render a separate opinion. The conclusion of the committee, an excerpt from the minutes of the Board of Directors and the opinion by the Statutory Auditor must be included in the (statutory) annual report of the Board of Directors. The procedure does not apply to decisions or transactions in the ordinary course of business at customary market conditions, and transactions or decisions with a value of less than 1% of the consolidated net assets of the Company. 2.4.6. Code of Business Conduct and Ethics In 2015, the Company adopted a Code of Business Conduct and Ethics, or the Code of Conduct, that is applicable to all of its employees, members of its executive management team and directors. It has been updated on 5 October 2018. The Code of Conduct is on its website at https://www.celyad.com/en/investors/corporate-governance. The audit committee of its board of directors is responsible for overseeing the Code of Conduct and is required to approve any waivers of the Code of Conduct for employees, members of its executive management team and directors. 2.4.7. Market abuse regulations On 17 June 2013, the Board of the Company deﬁned speciﬁc rules to prevent the illegal use of inside information by board members, shareholders, managers and employees or the appearance of such use (“the Market Abuse Policy”). The Market Abuse Policy has been amended by a resolution of the Board of Directors on 7 December 2017. These provisions and their compliance are primarily intended to protect the market. To ensure that the law is respected and to uphold the reputation of the Company, it is therefore necessary to take a number of preventive measures in the form of a code of conduct. The Policy applies to all Insiders. An Insider can be given access to inside information within the scope of the normal performance of his or her duties. The insider has the strict obligation to treat this information conﬁdentially and is not allowed to trade ﬁnancial instruments of the Company to which this inside information relates. In accordance with art 25bis §1 of the law of 2 August 2002 and the EU Regulation 596/2014 of 16 April 2014 on market abuse (the “MAR”), the Company has established a list of persons in the Company who, based on an employment or service agreement, have contracted with the Company and have during the course of their duties access to inside information directly or indirectly. This list is updated regularly and remains at the disposal of the FSMA for a period of 5 years. 2.5. Corporate Governance Code The Company's Board of Directors complies with the CGC. In particular: non-executive directors receive ﬁxed remuneration in consideration of their membership of the Board of Directors and their attendance at committee meetings of which they are members. In principle. Directors are not entitled to any variable remuneration, they will not receive any performance related remuneration. In accordance with the CGC, the Board of Directors of the Company will review its Charter from time to time and make such changes as it deems necessary and appropriate. The Charter, together with the Company’s articles of association, is available on the Company's website (www.celyad.com) and can be obtained free of charge at the registered oﬃce of the Company. The Charter has been updated by resolution of the Board of Directors on 5 October 2018. 2.6. Remuneration report 2.6.1. Director’s remuneration The remuneration of the Directors is determined by the shareholders’ meeting upon proposal of the Board of Directors on the basis of the recommendations made by the Nomination and Remuneration Committee. The Nomination and Remuneration Committee benchmarks Directors' compensation against peer companies to ensure that it is competitive. Remuneration is linked to the time committed to the Board of Directors and its various committees. The non-executive Directors receive a ﬁxed remuneration in consideration for their membership of the Board of Directors and their membership of the Committees (see below). Directors are not entitled to any variable compensation as deﬁned under Articles 96 §3 5° and 520bis of the BCC, as no performance criteria apply to the remuneration of non-executive directors. On the advice of the Nomination and Remuneration Committee, the Board of Directors may propose to the Shareholders Meeting to grant options or warrants in order to attract or retain non-executive directors with the most relevant skills, knowledge and expertise. The grant of stock base incentive schemes is not linked or subject to any performance criteria and, consequently, qualiﬁes as ﬁxed remuneration. It is the Board of Directors’ reasonable opinion, that the grant of warrants provides additional possibilities to attract or retain competent non-executive directors and to oﬀer them an attractive additional remuneration without the consequence that this additional remuneration weighs on the Company’s cash and ﬁnancial results. Furthermore, the grant of warrants is a commonly used method in the sector in which the Company operates. Without this possibility, the Company would be subject to a considerable disadvantage compared to competitors who do oﬀer warrants to their non-executive directors. The Board of Directors is of the opinion that the grant of options or warrants has no negative impact on the functioning of the non-executive directors. As of 31 December 2018, non-executive directors owned in total 135,000 Company warrants. Without prejudice to the powers granted by law to the Shareholders Meeting, the Board of Directors sets and, from time to time, revises the rules and the level of compensation for directors carrying out a special mandate or sitting on one of the committees and the rules for the reimbursement of directors' business-related out-of-pocket expenses. The remuneration of Directors will be disclosed to the Company's shareholders in accordance with applicable laws and regulations. The Directors' mandate may be terminated "ad nutum" (at any time) without any form of compensation. On 9 May 2016, the Shareholders Meeting approved a remuneration and compensation scheme for the non-executive directors. The remuneration package is made up of ﬁxed annual fee of €10,000 for non-executive directors, supplemented by a ﬁxed annual fee of €10,000 for the Chairman. The annual fee is supplemented by a €5,000 fee for any non-executive 23 24 directors covering the participation to the four ordinary Board of Directors’ meetings. Any participation to an extraordinary Board of Directors’ meetings gives right to a supplemental fee of €5,000. This remuneration package is also supplemented with a ﬁxed annual fee of €15,000 for membership of each committee of the Board of Directors, to be increased by €5,000 in case the relevant director chairs the Nomination and Remuneration Committee or the Audit Committee. Finally, an extraordinary fee of €3,000 is granted to non-executive directors in case of appointment of such directors, on request of the CEO and with prior approval of the Board of Directors, for speciﬁc missions requiring the presence of the concerned director. As part of the ﬁxed remuneration for non-executive directors, all directors may receive from time to time Company warrants subject to shareholders’ approval. As mentioned above, the grant of warrants to non-executive directors is not linked or subject to performance criteria. Directors are also entitled to the reimbursement of out-of-pocket expenses actually incurred as a result of participation in meetings of the Board of Directors. On 7 May 2018, the Shareholders Meeting approved the terms and conditions of a template of warrants plan to comply with in the event of an implementation of such plan in the next 12 months, upon proposal of the nomination and remuneration committee, with a vesting period of 3 years and for which the exercise price will be the lowest between (i) the average of the closing price of the share in the 30 days preceding the oﬀer and (ii) the last closing price of the share on the date preceding the oﬀer (notwithstanding that, regarding the beneﬁciaries who are not members of the personnel of the Company, the exercise price will have to be higher than the average closing price of the 30 days preceding the date of the issuance). More speciﬁcally, the Shareholders Meeting approved pursuant to the art. 556 of the BCC, the clause of anticipated vesting in the event of a change of control or a public oﬀering on the shares of the company. The Company does not envisage to amend the principles driving its remuneration policy in the near future and in particular in the coming two ﬁnancial years. As of 31 December 2018, there are no loans outstanding from the Company to any member of the Board of Directors. There are no employment or service agreements that provide for notice periods or indemnities between the Company and members of the Board of Directors who are not a member of the Executive Management Team. The following amounts detailed the 2018 remuneration of the Board of directors: Name Michel Lussier Debasish Roychowdhury Rudy Dekeyser Chris Buyse Hanspeter Spek Hilde Windels Margo Roberts Tolefi SA Serge Goblet Total Fees earned (€) Total outstanding warrants 73,000 36,750 73,000 60,000 16,250 36,750 23,000 38,000 356,750 20,000 20,000 20,000 20,000 25,000 10,000 10,000 10,000 135,000 2.6.2. Remuneration of the CEO In accordance with Article 96, §3 of the Belgian Company Code, this remuneration report includes the amount of the remuneration of, and any other beneﬁts granted to, the Company’s CEO, on a broken-down basis. In the ﬁnancial year 2018 Celyad paid €596,000 of remuneration in respect of the CEO, Mr Christian Homsy. This includes: • • a ﬁxed remuneration of €426,000; a variable component of €170,000. After the approval of the audited consolidated ﬁnancial statement by the Board and the shareholders, the variable component paid to the CEO (or to any other directors if any) cannot be recovered by the Company in case of false ﬁnancial data. This consists of a deviation from article 96 §3 11° which describes the potential right of recovery of the variable component by the Company in case of false ﬁnancial data. The CEO participates in diﬀerent warrant plans set in place by the Company and approved by its shareholders: • under Warrant plan of May 2010: 200 warrants at an exercise price of €22.44 per share vested over a period of 3 years; • • • • under Warrant plan of January 2013: 80,000 warrants at an exercise price of €4.52 per share vested over a period of 1 years. These warrants were exercised in 2014; under Warrant plan of May 2013: 112,000 warrants at an exercise price of €2.64 per share vested over a period of 3 years; Under Warrant plan of November 2015: 40,000 warrants at an exercise price of €34.65 per share vested over a period of 3 years; Under Warrant plan of June 2017: 40,000 warrants at an exercise price of €32.26 per share vested over a period of 3 years. In January 2017, the CEO exercised 112,000 warrants issued in May 2013. As of 31 December 2018, the CEO owned 80,000 warrants (plans of November 2015 and June 2017). 2.6.3. Remuneration of the Executive Management Team In addition to the CEO, the composition of the Executive Management Team as of 31 December 2018 is: • • • • • Filippo Petti, CFO; ImXense SPRL, represented by Frédéric Lehmann, Vice President Clinical Development & Medical Aﬀairs; NandaDevi SPRL, represented by Philippe Dechamps, Chief Legal Oﬃcer; David Gilham, Vice President Research & Development; KNCL SPRL, represented by Jean-Pierre Latere, Chief Operating Oﬃcer; • MC Consult SPRL, represented by Philippe Nobels, Global Head of Human Resources. PaJe SPRL, represented by Patrick Jeanmart, CFO, was member of the Executive Management Team until 31 August 2018 and was replaced by Filippo Petti in that position as of 1 September 2018. Georges Rawadi, Vice President Business Development & IP, was member of the Executive Management Team and left the Company on 23 March 2018. Carri Duncan, VP Corporate Development and Communication, has joined the Company on 1st October 2018 as member of the Executive Management Team and left on 12 December 2018. The remuneration of the members of the Executive Management Team is determined by the Board of Directors based on recommendations made by the Nomination and Remuneration Committee, further to a recommendation made by the CEO to the Nomination and Remuneration Committee (except where his own remuneration is concerned). The remuneration of the members of the Executive Management Team is designed to hire, retain and motivate high quality executive managers. The remuneration of the members of the Executive Management Team currently consists of the following elements: • Each member of the Executive Management Team is entitled to a basic ﬁxed compensation designed to ﬁt responsibilities, relevant experience and competences, in line with market rates for equivalent positions; • the Company pays each member of the Executive Management Team a variable compensation, dependent on speciﬁed individual, team and/or Company objectives which, in accordance with Article 520bis of the BCC, are pre-determined in an explicit decision by the Board of Directors. Such variable compensation is based on the Company’s performance and the individual performance of the Manager. The performance criteria are set and approved by the Board of Directors at the beginning of each calendar year; • Each member of the Executive Management Team currently participates in, and/or in the future may be oﬀered the possibility to participate in accordance with the recommendations set by the Nomination and Remuneration Committee, after the recommendation by the CEO to such committee (except in respect of his own remuneration) and after (in respect of future stock based incentive schemes) prior shareholders’ approval of the scheme itself by way of a resolution at the annual shareholders' meeting. Such stock-based incentive schemes are implemented on a case by case basis in order to motivate and retain the beneﬁciaries; in, a stock based incentive scheme, • Each member of the Executive Management Team is entitled to a number of fringe beneﬁts (to the exception, however, of those managers engaged on the basis of service agreements), which may include participating in a deﬁned contribution pension or retirement scheme, disability insurance and life insurance, a company car, and/ or a lump-sum expense allowance according to general Company policy. In accordance with Schedule C, Section F, subsection 7 of the Charter, any contractual arrangement entered into on or after 1 July 2009 regarding the remuneration of the CEO, any other member of the Executive Management Team, should specify that the amount of severance pay awarded in the event of early termination does not exceed 12 months' base and variable remuneration. Any such agreement (entered into on or after 1 July 2009) should also specify that the severance package does not take into account the variable remuneration and be limited to 12 months' base remuneration in the event that the 25 26 departing CEO or any other member of the Executive Management Team did not meet the performance criteria referred to in the agreement. In particular: • The CEO is engaged on the basis of a services agreement with eﬀective date on July 24, 2007 and with indeﬁnite term. The services agreement will automatically terminate in case of dismissal of the CEO. In case of dismissal for cause, no indemnity will be due to the CEO. In case of termination without cause, an indemnity of 12 months and a bonus equal to the average of the bonuses paid in respect of the previous ﬁnancial years will be due; • PaJe SPRL was engaged on the basis of a services agreement with eﬀective date on January 1, 2008 and with indeﬁnite term. This services agreement was terminated with eﬀect on August 31, 2018. PaJe SPRL continued to provide advisory services to the Company to assist the new CFO through a transition period which ended on December 31, 2018. A severance payment of €198,720 equivalent to 9 months of services and a bonus of €59,616 was paid to PaJe SPRL by the Company in compensation of the termination of the services agreement. • The CFO is engaged on the basis of an employment agreement with eﬀective date on September 3, 2018 and with indeﬁnite term. • ImXense SPRL is engaged on the basis of a services agreement with eﬀective date on August 4, 2015 and with indeﬁnite term. The Company can terminate the services agreement without cause with a notice period of six months, or with cause and without indemnity. The services agreement will terminate if ImXense SPRL resigns as Vice President Clinical Development & Medical Aﬀairs of the Company, with a notice period of three months. • KNCL SPRL is engaged on the basis of a services agreement with eﬀective date on December 7, 2015 and with indeﬁnite term. The Company can terminate the services agreement without cause with a notice period of six months, or with cause and without indemnity. The services agreement will terminate if KNCL SPRL resigns as Chief Operating Oﬃcer of the Company, with a notice period of three months. • NandaDevi SPRL is engaged on the basis of a services agreement with eﬀective date on September 1, 2016 and with indeﬁnite term. The Company can terminate the services agreement without cause with a notice period of ﬁve months (six months after September 1, 2019) and the payment of an ad-target bonus pro-rated to the termination date of the current year, or with cause and without indemnity. The services agreement will terminate if Nandadevi SPRL resigns as Chief Legal Oﬃcer of the Company, with a notice period of three months. • MC Consult SPRL is engaged on the basis of a services agreement with eﬀective date on January 3, 2017 and with indeﬁnite term. The Company can terminate the services agreement without cause with a notice period of ﬁve months (six months after January 3, 2020), or with cause and without indemnity. The services agreement will terminate if MC Consult SPRL resigns as Global Head of Human Ressources of the Company, with a notice period of two months. • The Vice President Research & Development is engaged on the basis of an employment agreement with eﬀective date on September 12, 2016 and with indeﬁnite term. The employment contract can be terminated by the Company without notice and without indemnity in case of gross misconduct. The total fees paid or due to the members of the Executive Management Team (excluding the CEO) was €2.6 million in 2018 (full company costs but excluding VAT and stock-based compensation) as further detailed in sections of the notes to the ﬁnancial statements. This includes: • • a ﬁxed remuneration of €1,729,000; a variable component of €914,000. Out of the ﬁxed compensation, the amounts paid by the Group on behalf of the members of the Executive Management Team for a group insurance and other advantages in kind amounted to €44,000. Over the course of 2018, the Executive Management Team (excluding the CEO) accepted 30,000 warrants oﬀered from the October 2018 plan. As of December 31, 2018, the Executive Management Team holds 179,000 warrants. The exercise prices vary from €17.60 to €36,11. All plans have a vesting scheme of 3 years. The following table detailed the warrants owned by the Executive Management Team (excluding the CEO) as of December 31, 2018 and the movements occurred in 2018: Name Filippo Petti ImXense SRPL Granted Forfeited Exercised Total outstanding 20,000 10,000 - - 27 - - 20,000 50,000 NandaDevi SPRL David Gilham KNCL SPRL MC Consult SPRL 0 0 0 0 Total 30,000 - - - - - - - - - - 40,000 16,000 23,000 30,000 179,000 2.6.4. Claw back provisions There are no provisions allowing the Company to reclaim any variable remuneration paid to the CEO or the other members of the Executive Management Team. 2.6.5. Statutory Auditor VCBA BDO Bedrijfsrevisoren – Réviseurs, organised and existing under the laws of Belgium, with registered oﬃce at The Corporate Village, Da Vincilaan 9, Box E.6, 1930 Zaventem, , represented by Bert Kegels, has been appointed as its statutory auditor on May 5, 2017 for a term of three years. Bert Kegels is a member of the Belgian Institute of Certiﬁed Auditors ("Institut des Réviseurs d'Entreprises "). The annual remuneration of the auditor for the performance of its three year mandate for the audit of its ﬁnancial statements (including the statutory ﬁnancial statements) amounts to €128k for the year 2018 (excluding VAT). 2.7. Description of the principal risks associated to the activities of the Group 2.7.1. Risk Management Risk management is embedded in the strategy of the Company and is of crucial importance for achieving the objectives set by the Board of Directors. The Board is responsible for assessing the risks associated with the activities of the Company and for evaluating the internal audit systems. The Board relies partially on the Executive Management Team to perform this assessment. The internal audit systems play a central role in managing the risks and the activities of the Company. To safeguard the proper implementation and execution of the strategies deﬁned by the Board, the Company has set up internal risk management and control systems. The internal audit system is based on the following pillars: • • • the compliance with and the training on the internal policies of the Company, including but not limited to the Code of Business Conduct, Standard Operating Procedures, or policies related to areas such as data protection, information systems, contract lifecycle, conﬂict of interest, gifts and gratuities, crisis management; the values of the Company; The monitoring of the legal environment with the support of external attorneys; • Ongoing risk analysis; • • audit activities performed by Quality Assurance and Finance departments; controls, supervision and corrective actions and measures. The purpose of these systems is to manage in an eﬀective and eﬃcient manner the signiﬁcant risks to which the Company is exposed. They are designed to ensure: • • the careful monitoring of the eﬀectiveness of the Company’s short term and long-term strategy; the Company’s sustainability by a constant evaluation of its performance (operations and cash). 2.7.2. Organization and values The Company’s organization and values as well as the legal environment surrounding the activities of the Company constitute the basis of all the internal audit components. It is determined by a composition of formal and informal rules on which the functioning of the Company relies. The organization encompasses the following elements: • • • Company’s Mission: “We bring breakthrough pioneering therapies to patient with life threatening diseases”; The Company’s values: All Together, Every Second Counts, Making the Impossible Possible, Passion and Fun, Quality; “The Company that all others aspire to be” is our credo; 28 • • • • • • Employees and consultants: the Company has been able to attract and retain motivated and dedicated qualiﬁed employees. Passion, pro-activity, open-mindness, commitment, trust and integrity are the essential traits of character of our team. All our employees and consultants are required to manage the Company’s ressourceswith due diligence, integrity and to act with the necessary common sense; Board of Directors, including the Remuneration and Nomination Committee and the Audit Committee. See section 5 for further information on the functioning of the Board and its Committees; Independent non-executive directors: the Company is supported by several independent directors. Their expertise and experience contribute to the Company’s eﬀective management; Chief Executive Oﬃcer, in charge of the day-to-day management, supported by the other member of the Executive Management Team; Internal set of procedures: The Company set up a Code of Business Conduct and Ethics and adopted internal rules and procedures which regulate the activities within the Company; External environment: The Company operates in a highly regulated environment (GMP, GCP, etc). Compliance with all these external rules and guidelines is of critical importance to the Company. The evaluation of the Company’s organization, values and compliance with legal environment is made regularly for the supervising bodies. 2.7.3. Risks analysis The Board of Directors decides on the Company’s strategy, risk appetite and its main policies. It is the task of the Board of Directors to strive for long-term success by procuring proper risk assessment and management. The Executive Management Team is responsible for the development of systems that identify, evaluate and monitor risks. The Company divides its objectives into four categories: • • • • strategic; operational; ﬁnancing; compliance with the rules, legislations and internal instructions. Once the objectives are set by the Board of Directors, those are transferred to all departments, services and staﬀ member within the Company. Regular assessments within the diﬀerent services and department are made along the year to ensure that these objectives are followed. At year end, the Executive Management Team performs an overall performance appraisal and initiates a performance review amongst the diﬀerent departments and services of the Company. Risk identiﬁcation consists in examining the factors that could inﬂuence the objectives put forward in each category. Internal or external factors may inﬂuence the realization of these objectives. • • internal factors: they are closely related to the internal organization and could have several causes (change in the group structure, staﬀ, ERP system); external factors: they can be the result of changes in the economic climate, regulations or competition. Besides the common risks associated to all industrial companies, the Executive Management Team has identiﬁed the following speciﬁc risk factors which are described here after. 2.7.4. Risks related to our financial position and need for additional capital The Company has incurred net losses in each period since our inception and anticipate that we will continue to incur net losses in the future. The Company is not proﬁtable and has incurred losses in each period since its inception. For the years ended December 31, 2018, 2017 and 2016, the Company incurred a loss for the year of €38,5 million, €56.4 million and €23.6 million, respectively. As of December 31, 2018, the Company had a retained loss of €218,6 million. The Company expects these losses to increase as it continues to incur signiﬁcant research and development and other expenses related to its ongoing operations, continues to advance its drug product candidates through pre-clinical studies and clinical trials, seek regulatory approvals for its drug product candidates, scale-up manufacturing capabilities and hire additional personnel to support the development of its drug product candidates and to enhance its operational, ﬁnancial and information management systems. The main assets of the Company are intellectual property rights concerning technologies that have not led to commercialization of any product. Celyad has never been proﬁtable and has never commercialized any (pharmaceutical) product. Even if the Company succeeds in commercializing one or more of its drug product candidates, it will continue to incur losses for the foreseeable future relating to its substantial research and development expenditures to develop its technologies. The Company anticipates that its expenses will increase substantially if and as the Company: • • • • • • • continues its research, pre-clinical and clinical development of its drug product candidates; expands the scope of therapeutic indications of its current clinical studies for its drug product candidates; initiates additional pre-clinical studies or additional clinical trials of existing drug product candidates or new drug product candidates; further develops the manufacturing process for its drug product candidates; changes or adds additional manufacturers or suppliers; seeks regulatory and marketing approvals for its drug product candidates that successfully complete clinical studies; establishes a sales, marketing and distribution infrastructure to commercialize any products for which the Company may obtain marketing approval, in the European Union and the United States; • makes milestone or other payments under any in-license agreements; • maintains, protects and expands its intellectual property portfolio. The Company may encounter unforeseen expenses, diﬃculties, complications, delays and other unknown factors that may adversely aﬀect its business. The size of its future net losses will depend, in part, on the rate of future growth of its expenses and its ability to generate revenue. Its prior losses and expected future losses have had and will continue to have an adverse eﬀect on its shareholders’ equity and working capital. Further, the net losses the Company incurs may ﬂuctuate signiﬁcantly from quarter to quarter and year to year, such that a period to period comparison of its results of operations may not be a good indication of its future performance. The Company may need substantial additional funding, which may not be available on acceptable terms when needed, if at all. The Company’s operations have required substantial amounts of cash since inception. The Company expects to continue to spend substantial amounts to continue the clinical development of its drug product candidates, including its ongoing and planned clinical trials for CAR-T NKG2D and any future drug product candidates. If approved, the Company will require signiﬁcant additional amounts in order to launch and commercialize our drug product candidates. As of December 31, 2018, we had cash and cash equivalents of €40.5 million and short-term investments of €9.2 million. The Company believes that such resources will be suﬃcient to fund its operations for at least the next 12 months from balance sheet date. However, changing circumstances may cause it to increase its spending signiﬁcantly faster than it currently anticipates, and the Company may need to spend more money than currently expected because of circumstances beyond its control. The Company may require additional capital for the further development and commercialization of its drug product candidates and may need to raise additional funds sooner if the Company chooses to expand more rapidly than it presently anticipates. The Company’s ability to raise additional funds will depend on ﬁnancial, economic and market conditions and other factors, over which it may have no or limited control, and the Company cannot guarantee that additional funds will be available to it when necessary on commercially acceptable terms, if at all. If the necessary funds are not available, the Company may need to seek funds through collaborations and licensing arrangements, which may require it to reduce or relinquish signiﬁcant rights to its research programmes and product candidates, to grant licences on its technologies to partners or third parties or enter into new collaboration agreements, the terms could be less favourable to the Company than those it might have obtained in a diﬀerent context. If adequate funds are not available on commercially acceptable terms when needed, the Company may be forced to delay, reduce or terminate the development or commercialisation of all or part of its research programmes or product candidates or it may be unable to take advantage of future business opportunities. 29 30 Raising additional capital may cause dilution to our existing shareholders, restrict our operations or require us to relinquish rights to our drug product candidates or technologies. The Company may seek additional funding through a combination of equity oﬀerings, debt ﬁnancings, collaborations and/or licensing arrangements. To the extent that the Company raises additional capital through the sale of equity or convertible debt securities, the shareholders will be diluted, and the terms may include liquidation or other preferences that adversely aﬀect your rights as a shareholder. The incurrence of indebtedness and/or the issuance of certain equity securities could result in increased ﬁxed payment obligations and could also result in certain additional restrictive covenants, such as limitations on its ability to incur additional debt and/or issue additional equity, limitations on its ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact its ability to conduct its business. In addition, issuance of additional equity securities, or the possibility of such issuance, may cause the market price of the Shares to decline. In the event that the Company enters into collaborations and/or licensing arrangements in order to raise capital, it may be required to accept unfavorable terms, including relinquishing or licensing to a third party on unfavorable otherwise would seek to develop or terms its rights to technologies or drug product candidates that the Company commercialize ourselves or potentially reserve for future potential arrangements when the Company might be able to achieve more favorable terms. We may be exposed to significant foreign exchange risk. We incur portions of our expenses, and may in the future derive revenues, in currencies other than the euro, in particular, the U.S. dollar. As a result, we are exposed to foreign currency exchange risk as our results of operations and cash ﬂows are subject to ﬂuctuations in foreign currency exchange rates. We currently do not engage in hedging transactions to protect against uncertainty in future exchange rates between particular foreign currencies and the euro. Therefore, for example, an increase in the value of the euro against the U.S. dollar could be expected to have a negative impact on our revenue and earnings growth as U.S. dollar revenue and earnings, if any, would be translated into euros at a reduced value. We cannot predict the impact of foreign currency ﬂuctuations, and foreign currency ﬂuctuations in the future may adversely aﬀect our ﬁnancial condition, results of operations and cash ﬂows. 2.7.4.1. Risk related to product development, regulatory approval and commercialization The Company is heavily dependent on the regulatory approval of CYAD-01 in the United States and Europe, and subsequent commercial success of CYAD-01, both of which may never occur. The Company is a clinical-stage biopharmaceutical company with no products approved by regulatory authorities or available for commercial sale. The Company may be unable to develop or commercialise a product, product candidate or research programme, or may cease some of its operations, which may have a material adverse eﬀect on the Company’s business. On December 22, 2017, the Company notiﬁed the Walloon Region of its decision not to pursue the exploitation of the C Cure programs and the research work ﬁnanced by recoverable loans from the Walloon Region. The Company has justiﬁed its decision by the intention to focus its strategy and resources on its immune-oncology programs and by the fact that it has not been successful to identify a partner to pursue the development of C Cure. The Company has generated limited revenue to date and does not expect to generate any revenue from product sales for the foreseeable future. As a result, its future success is currently dependent upon the regulatory approval and commercial success of CYAD-01 in one or more of the indications for which the Company intends to seek approval. The Company’s ability to generate revenues in the near term will depend on its ability to obtain regulatory approval and successfully commercialize CYAD-01 on its own in the United States, the ﬁrst country in which the Company intends to seek approval for CYAD-01. The Company may experience delays in obtaining regulatory approval in the United States for CYAD-01, if it is approved at all, and the price of its ordinary shares and/or ADSs may be negatively impacted. Even if the Company receives regulatory approval, the timing of the commercial launch of CYAD-01 in the United States is dependent upon a number of factors, including, but not limited to, hiring sales and marketing personnel, pricing and reimbursement timelines, the production of suﬃcient quantities of commercial drug product and implementation of marketing and distribution infrastructure. In addition, the Company has incurred and expect to continue to incur signiﬁcant expenses as the Company continues to pursue the approval of CYAD-01 in the United States, Europe and elsewhere. The Company plans to devote a substantial portion of its eﬀort and ﬁnancial resources in order to continue to grow its operational capabilities. This represents a signiﬁcant investment in the clinical and regulatory success of CYAD-01, which is uncertain. The success of CYAD-01, if approved, and revenue from commercial sales, will depend on several factors, including: • • • • execution of an eﬀective sales and marketing strategy for the commercialization of CYAD-01; acceptance by patients, the medical community and third-party payors; its success in educating physicians and patients about the beneﬁts, administration and use of CYAD-01; the incidence and prevalence of the indications for which its CYAD-01 drug product candidate is approved in those markets in which CYAD-01 is approved; 31 • • • the prevalence and severity of side eﬀects, if any, experienced by patients treated with CYAD-01; the availability, perceived advantages, cost, safety and eﬃcacy of alternative treatments, including potential alternate treatments that may currently be available or in development or may later be available or in development or approved by regulatory authorities; successful implementation of its manufacturing processes that the Company plans to include in a future biologics license applications and production of suﬃcient quantities of commercial drug product; • maintaining compliance with regulatory requirements, including current good manufacturing practices (cGMPs), good laboratory practices (GLP) and good clinical practices (GCPs); • obtaining and maintaining patent, trademark and trade secret protection and regulatory exclusivity and otherwise protecting its rights in its intellectual property portfolio. • The Company may also fail in its eﬀorts to develop and commercialize future drug product candidates, including CYAD-101 (the allogeneic version of its CYAD-01 drug product candidate). If this were to occur, the Company would continue to be heavily dependent on the regulatory approval and successful commercialization of CYAD-01, its development costs may increase and its ability to generate revenue or proﬁts, or to raise additional capital, could be impaired. The achievement of milestones (R&D, scientiﬁc, clinical, regulatory, business) will trigger payment obligations towards Celdara and Dartmouth, which will negatively impact Celyad’s proﬁtability. Its THINK trial is ongoing and not complete. Initial success in our ongoing clinical trial may not be indicative of results obtained when this trial is completed. Furthermore, success in early clinical trials may not be indicative of results obtained in later trials. Its clinical experience with its lead drug product candidate CYAD-01 is limited. The Company has treated a small number of patients as of the date of this report. In particular, the results of the CM-CS1 trial and the interim results of the THINK trial should not be relied upon as evidence that its ongoing or future clinical trials will succeed. Trial designs and results from previous or ongoing trials are not necessarily predictive of future clinical trial results, and initial or interim results may not continue or be conﬁrmed upon completion of the trial. These data, or other positive data, may not continue or occur for these patients or for any future patients in its ongoing or future clinical trials, and may not be repeated or observed in ongoing or future trials involving its drug product candidates. There is limited data concerning long-term safety and eﬃcacy following treatment with CYAD-01. Its drug product candidates may fail to show the desired safety and eﬃcacy in later stages of clinical development despite having successfully advanced through initial clinical trials. There can be no assurance that any of these trials will ultimately be successful or support further clinical advancement or regulatory approval of CYAD-01 or other drug product candidates. There is a high failure rate for drugs and biologics proceeding through clinical trials. A number of companies in the pharmaceutical and biotechnology industries have suﬀered signiﬁcant setbacks in later stage clinical trials even after achieving promising results in earlier stage clinical trials. Data obtained from preclinical and clinical activities are subject to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, regulatory delays or rejections may be encountered as a result of many factors, including changes in regulatory policy during the period of product development. In previous clinical trials involving T-cell based immunotherapies, some patients experienced serious adverse events. Our lead drug product candidate CYAD-01 may demonstrate a similar effect or have other properties that could halt its clinical development, prevent its regulatory approval, limit its commercial potential, or result in significant negative consequences. In previous and ongoing clinical trials involving CAR-T cell products by other companies or academic researchers, many patients experienced side eﬀects such as neurotoxicity and CRS, which have in some cases resulted in clinical holds in ongoing clinical trials of CAR-T drug product candidates. There have been life threatening events related to severe neurotoxicity and CRS, requiring intense medical intervention such as intubation or pressor support, and in several cases, resulted in death. Severe neurotoxicity is a condition that is currently deﬁned clinically by cerebral edema, confusion, drowsiness, speech impairment, tremors, seizures, or other central nervous system side eﬀects, when such side eﬀects are serious enough to lead to intensive care. In some cases, severe neurotoxicity was thought to be associated with the use of certain lymphodepletion preconditioning regimens used prior to the administration of the CAR-T cell products. CRS is a condition that is currently deﬁned clinically by certain symptoms related to the release of cytokines, which can include fever, chills, low blood pressure, when such side eﬀects are serious enough to lead to intensive care with mechanical ventilation or signiﬁcant vasopressor support. The exact cause or causes of CRS and severe neurotoxicity in connection with treatment of CAR-T cell products is not fully understood at this time. In addition, patients have experienced other adverse events in these studies, such as a reduction in the number of blood cells (in the form of neutropenia, thrombocytopenia, anemia or other cytopenias), febrile neutropenia, chemical laboratory abnormalities (including elevated liver enzymes), and renal failure. Undesirable side eﬀects caused by its CYAD-01 drug product candidate or other T-cell based immunotherapy drug product candidates, could cause the Company or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign regulatory authorities. Results of its trials could reveal a high and unacceptable severity and prevalence of side eﬀects or unexpected 32 characteristics. Treatment-related side eﬀects could also aﬀect patient recruitment or the ability of enrolled patients to complete the trials or result in potential product liability claims. In addition, these side eﬀects may not be appropriately recognized or managed by the treating medical staﬀ, as toxicities resulting from T-cell based immunotherapies are not normally encountered in the general patient population and by medical personnel. The Company expects to have to train medical personnel regarding its T-cell based immunotherapy drug product candidates to understand their side eﬀects for both its planned clinical trials and upon any commercialization of any T-cell based immunotherapy drug product candidates. Inadequate training in recognizing or managing the potential side eﬀects of T-cell based immunotherapy drug product candidates could result in patient deaths. Any of these occurrences could have a material adverse eﬀect on its business, ﬁnancial condition and prospects. CYAD-01 drug product candidate is a new approach to cancer treatment that presents significant challenges. The Company has concentrated its research and development eﬀorts on cell-based immunotherapy technology, and its future success is highly dependent on the successful development of cell-based immunotherapies in general and in particular its approach using NKG2D receptor ligands, an activating receptor of NK cells. The Company cannot be sure that its T-cell immunotherapy technologies will yield satisfactory products that are safe and eﬀective, scalable or proﬁtable. Its approach to cancer immunotherapy and cancer treatment generally poses a number of challenges, including: • obtaining regulatory approval from the FDA and other regulatory authorities that have very limited experience with the commercial development of genetically modiﬁed T-cell therapies for cancer; • developing and deploying consistent and reliable processes for engineering a patient’s T cells ex vivo and infusing the engineered T-cells back into the patient; • preconditioning patients with chemotherapy or other product treatments in conjunction with delivering each • of its drug product candidates, which may increase the risk of adverse side eﬀects; educating medical personnel regarding the potential side eﬀect proﬁle of each of its drug product candidates, such as the potential adverse side eﬀects related to cytokine release or neurotoxicity; • developing processes for the safe administration of these drug product candidates, including long-term • follow-up for all patients who receive its drug product candidates; sourcing clinical and, if approved, commercial supplies for the materials used to manufacture and process its drug product candidates; • developing a manufacturing process and distribution network with a cost of goods that allows for an attractive • return on investment; establishing sales and marketing capabilities after obtaining any regulatory approval to gain market acceptance, and obtaining adequate coverage, reimbursement, and pricing by third-party payors and government authorities; • developing therapies for types of cancers beyond those addressed by its current drug product candidates. Additionally, because its technology involves the genetic modiﬁcation of patient cells ex vivo using a virus, the Company is subject to many of the challenges and risks that gene therapies face, including: • Regulatory requirements governing gene and cell therapy products have changed frequently and may continue to change in the future. To date, only one product that involves the genetic modiﬁcation of patient cells has been approved in the United States and only one has been approved in the European Union; In the event of improper insertion of a gene sequence into a patient’s chromosome, genetically modiﬁed products could lead to lymphoma, leukaemia or other cancers, or other aberrantly functioning cells; • • Although its viral vectors are not able to replicate, there is a risk with the use of retroviral or lentiviral vectors that they could lead to new or reactivated pathogenic strains of virus or other infectious diseases; • The FDA recommends a 15-year follow-up observation period for all patients who receive treatment using gene therapies, and the Company may need to adopt such an observation period for its drug product candidates. Moreover, public perception of therapy safety issues, including adoption of new therapeutics or novel approaches to treatment, may adversely inﬂuence the willingness of subjects to participate in clinical trials, or if approved, of physicians to subscribe to the novel treatment mechanics. Physicians, hospitals and third-party payors often are slow to adopt new products, technologies and treatment practices that require additional upfront costs and training. Physicians may not be willing to undergo training to adopt this novel and personalized therapy, may decide the therapy is too complex to adopt without appropriate training and may choose not to administer the therapy. Based on these and other factors, hospitals and payors may decide that the beneﬁts of this new therapy do not or will not outweigh its costs. The Company has not yet finalized its clinical development program for CYAD-01 in AML and CRC. The FDA and comparable foreign regulators may not agree with its proposed protocols for these clinical trials, which could result in delays. The Company is still considering the clinical development program for CYAD-01 in AML and CRC. Prior to initiating new clinical trials for its drug product candidates, The Company is required to submit clinical trial protocols for these trials to the 33 FDA and comparable foreign regulators in other jurisdictions where the Company plans to undertake clinical trials. The Company may not reach agreement with these regulators, or there may be a delay in reaching agreement. These regulators may want to see additional clinical or preclinical data regarding its CYAD-01 drug product candidate before the Company initiates new clinical trials. Any of these decisions could have a material adverse eﬀect on its expected clinical and regulatory timelines, business, prospects, ﬁnancial condition and results of operations. The Company may encounter substantial delays in its clinical trials or may fail to demonstrate safety and efficacy to the satisfaction of applicable regulatory authorities. Before obtaining regulatory approval or marketing authorization from regulatory authorities for the sale of its drug product candidates, if at all, the Company must conduct extensive clinical trials to demonstrate the safety and eﬃcacy of the drug product candidates in humans. Clinical testing is expensive, time-consuming and uncertain as to outcome. The Company cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all. A failure of one or more clinical trials can occur at any stage of testing. Events that may prevent successful or timely completion of clinical development include: • delays in raising, or inability to raise, suﬃcient capital to fund the planned clinical trials; • delays in reaching a consensus with regulatory agencies on trial design; • • delays in reaching agreement on acceptable terms with prospective clinical research organizations, or CRO’s, identifying, recruiting and training suitable clinical investigators; and clinical trial sites; • delays in obtaining required Investigational Review Board, or IRB, approval at each clinical trial site; • delays in recruiting suitable patients to participate in its clinical trials; • delays due to changing standard of care for the diseases the Company is studying; • • adding new clinical trial sites; imposition of a clinical hold by regulatory agencies, after an inspection of its clinical trial operations or trial sites; failure by its CRO’s, other third parties or the Company to adhere to clinical trial requirements; catastrophic loss of drug product candidates due to shipping delays or delays in customs in connection with delivery to foreign countries for use in clinical trials; failure to perform in accordance with the FDA’s good clinical practices, or GCP’s, or applicable regulatory guidelines in other countries; • • • • delays in the testing, validation, manufacturing and delivery of its drug product candidates to the clinical sites; • delays in having patients complete participation in a trial or return for post-treatment follow-up; • • occurrence of serious adverse events associated with the drug product candidate that are viewed to outweigh clinical trial sites or patients dropping out of a trial; its potential beneﬁts; changes in regulatory requirements and guidance that require amending or submitting new clinical protocols. • Any inability to successfully complete pre-clinical and clinical development could result in additional costs to the Company or impair its ability to generate revenues from product sales, regulatory and commercialization milestones and royalties. Clinical trial delays could also shorten any periods during which the Company may have the exclusive right to commercialize its drug product candidates or allow its competitors to bring products to market before the Company does, which could impair its ability to successfully commercialize its drug product candidates and may harm its business and results of operations. If the results of its clinical trials are inconclusive or if there are safety concerns or adverse events associated with its drug product candidates, the Company may: • be delayed in obtaining marketing approval for its drug product candidates, if at all; • obtain approval for indications or patient populations that are not as broad as intended or desired; • obtain approval with labeling that includes signiﬁcant use or distribution restrictions or safety warnings; • • • • • be subject to changes in the way the product is administered; be required to perform additional clinical trials to support approval or be subject to additional post-marketing testing requirements; have regulatory authorities withdraw their approval of the product or impose restrictions on its distribution in the form of a risk evaluation and mitigations strategy, or REMS, plan; be subject to the addition of labeling statements, such as warnings or contraindications; be sued; 34 • experience damage to its reputation. Its drug product candidates could potentially cause other adverse events that have not yet been predicted. As described above, any of these events could prevent the Company from achieving or maintaining market acceptance of its drug product candidates and impair its ability to commercialize its products if they are ultimately approved by applicable regulatory authorities. The Company’s drug product candidates may cause undesirable side effects or have other properties that could halt their clinical development, prevent their regulatory approval, limit their commercial potential, or result in significant negative consequences. As with most biological drug products, use of its drug product candidates could be associated with side eﬀects or adverse events which can vary in severity from minor reactions to death and in frequency from infrequent to prevalent. Undesirable side eﬀects or unacceptable toxicities caused by its drug product candidates could cause the Company or regulatory authorities to interrupt, delay, or halt clinical trials. The FDA, EMA, or comparable foreign regulatory authorities could delay or deny approval of its drug product candidates for any or all targeted indications and negative side eﬀects could result in a more restrictive label for any product that is approved. Side eﬀects such as toxicity or other safety issues associated with the use of its drug product candidates could also require the Company or its collaborators to perform additional studies or halt development or sale of these drug product candidates. Treatment-related side eﬀects could also aﬀect patient recruitment or the ability of enrolled subjects to complete the trial, or could result in potential product liability claims. In addition, these side eﬀects may not be appropriately or timely recognized or managed by the treating medical staﬀ. Any of these occurrences may materially and adversely harm its business, ﬁnancial condition and prospects. Additionally, if one or more of its drug product candidates receives marketing approval, and the Company or others later identify undesirable side eﬀects caused by such products, including during any long-term follow-up observation period recommended or required for patients who receive treatment using its products, a number of potentially signiﬁcant negative consequences could result, including: • • • • • regulatory authorities may withdraw approvals of such product; regulatory authorities may require additional warnings on the label; the Company may be required to create a REMS plan which could include a medication guide outlining the risks of such side eﬀects for distribution to patients, a communication plan for healthcare providers, and/or other elements to assure safe use; the Company could be sued and held liable for harm caused to patients; its reputation may suﬀer. Any of the foregoing could prevent the Company from achieving or maintaining market acceptance of the particular drug product candidate, if approved, and could signiﬁcantly harm its business, results of operations, and prospects. If the Company encounters difficulties enrolling patients in its clinical trials, its clinical development activities could be delayed or otherwise adversely affected. The timely completion of clinical trials in accordance with their protocols depends, among other things, on its ability to enrol a suﬃcient number of patients who remain in the trial until its conclusion. The Company may experience diﬃculties in patient enrolment in its clinical trials for a variety of reasons, including: • • • • • • the size and nature of the patient population; the patient eligibility criteria deﬁned in the protocol; the size of the study population required for analysis of the trial’s primary endpoints; the proximity of patients to trial sites; the design of the trial; its ability to recruit clinical trial investigators with the appropriate competencies and experience; • • • • competing clinical trials for similar therapies; clinicians’ and patients’ perceptions as to the potential advantages and side eﬀects of the drug product candidate being studied in relation to other available therapies, including any new drugs or treatments that may be approved for the indications the Company is investigating; its ability to obtain and maintain patient consents; the risk that patients enrolled in clinical trials will not complete a clinical trial. In addition, its clinical trials will compete with other clinical trials for drug product candidates that are in the same therapeutic areas as its drug product candidates, and this competition will reduce the number and types of patients available to the Company, because some patients who might have opted to enrol in its trials may instead opt to enrol in a trial being conducted by one of its competitors. Because the number of qualiﬁed clinical investigators is limited, the Company expects to conduct some of its clinical trials at the same clinical trial sites that some of its competitors use, which will reduce the number of patients who are available for its clinical trials at such clinical trial sites. Moreover, because its drug product candidates represent a departure from more commonly used methods for ischemic HF and cancer treatment, potential patients and their doctors may be inclined to use conventional therapies, rather than enrol patients in its clinical trials. Even if the Company is able to enrol a suﬃcient number of patients in its clinical trials, delays in patient enrolment may result in increased costs or may aﬀect the timing or outcome of its clinical trials, which could prevent completion of these trials and adversely aﬀect its ability to advance the development of its drug product candidates. Clinical development is a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials as well as data from any interim analysis of ongoing clinical trials may not be predictive of future trial results. Clinical failure can occur at any stage of clinical development. Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. Although drug product candidates may demonstrate promising results in early clinical (human) trials and pre-clinical (animal) studies, they may not prove to be eﬀective in subsequent clinical trials. For example, testing on animals may occur under diﬀerent conditions than testing in humans and therefore the results of animal studies may not accurately predict human experience. Likewise, early clinical trials may not be predictive of eventual safety or eﬀectiveness results in larger-scale pivotal clinical trials. The results of pre-clinical studies and previous clinical trials as well as data from any interim analysis of ongoing clinical trials of its drug product candidates, as well as studies and trials of other products with similar mechanisms of action to its drug product candidates, may not be predictive of the results of ongoing or future clinical trials. Drug product candidates in later stages of clinical trials may fail to show the desired safety and eﬃcacy traits despite having progressed through pre-clinical studies and earlier clinical trials. In addition to the safety and eﬃcacy traits of any drug product candidate, clinical trial failures may result from a multitude of factors including ﬂaws in trial design, dose selection, placebo eﬀect and patient enrolment criteria. Based upon negative or inconclusive results, the Company or its collaborators may decide, or regulators may require it, to conduct additional clinical trials or pre-clinical studies. In addition, data obtained from trials and studies are susceptible to varying interpretations, and regulators may not interpret its data as favourably as the Company does, which may delay, limit or prevent regulatory approval. The regulatory approval processes of the FDA, EMA and other comparable regulatory authorities is lengthy, time-consuming, and inherently unpredictable, and the Company may experience significant delays in the clinical development and regulatory approval, if any, of its drug product candidates. The research, testing, manufacturing, labelling, approval, selling, import, export, marketing, and distribution of drug products, including biologics, are subject to extensive regulation by the FDA, EMA and other comparable regulatory authorities. The Company is not permitted to market any biological drug product in the United States until the Company receives a Biologics License Application, or BLA, from the FDA or a marketing authorization application, or MAA, from the EMA. the Company has not previously submitted a BLA to the FDA, MAA to the EMA, or similar approval ﬁlings to comparable foreign authorities. A BLA must include extensive pre-clinical and clinical data and supporting information to establish that the drug product candidate is safe, pure, and potent for each desired indication. The BLA must also include signiﬁcant information regarding the chemistry, manufacturing, and controls for the product, and the manufacturing facilities must complete a successful pre-license inspection. The Company expects the nature of its drug product candidates to create further challenges in obtaining regulatory approval. For example, the FDA and EMA have limited experience with commercial development of genetically modiﬁed T-cell therapies for cancer. The FDA may also require a panel of experts, referred to as an Advisory Committee, to deliberate on the adequacy of the safety and eﬃcacy data to support licensure. The opinion of the Advisory Committee, although not binding, may have a signiﬁcant impact on its ability to obtain licensure of the drug product candidates based on the completed clinical trials. Accordingly, the regulatory approval pathway for its drug product candidates may be uncertain, complex, expensive, and lengthy, and approval may not be obtained. 35 36 Obtaining and maintaining regulatory approval of its drug product candidates in one jurisdiction does not mean that the Company will be successful in obtaining regulatory approval of its drug product candidates in other jurisdictions. If the Company obtains and maintains regulatory approval of its drug product candidates in one jurisdiction, such approval does not guarantee that the Company will be able to obtain or maintain regulatory approval in any other jurisdiction, but a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative eﬀect on the regulatory approval process in others. For example, even if the FDA or EMA grants marketing approval of a drug product candidate, comparable regulatory authorities in foreign jurisdictions must also approve the manufacturing, marketing and promotion of the drug product candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods diﬀerent from those in the European Union or in the United States, including additional pre- clinical studies or clinical trials as clinical trials conducted in one jurisdiction may not be accepted by regulatory authorities in other jurisdictions. In many jurisdictions, a drug product candidate must be approved for reimbursement before it can be approved for sale in that jurisdiction. In some cases, the price that the Company intends to charge for its products is also subject to approval. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in signiﬁcant delays, diﬃculties and costs for the Company and could delay or prevent the introduction of its products in certain countries. If the Company fails to comply with the regulatory requirements in international markets and/or to receive applicable marketing approvals, its target market will be reduced and its ability to realize the full market potential of its drug product candidates will be harmed. Even if the Company obtains regulatory approval of our drug product candidates, the products may not gain market acceptance among physicians, patients, hospitals and others in the medical community. Its autologous engineered-cell therapies may not become broadly accepted by physicians, patients, hospitals, and others in the medical community. Numerous factors will inﬂuence whether its drug product candidates are accepted in the market, including: • the clinical indications for which its drug product candidates are approved; • physicians, hospitals, and patients considering its drug product candidates as a safe and eﬀective treatment; • • the potential and perceived advantages of its drug product candidates over alternative treatments; the prevalence and severity of any side eﬀects; • product labeling or product insert requirements of the FDA, EMA, or other regulatory authorities; • • • • • • • limitations or warnings contained in the labeling approved by the FDA or EMA; the timing of market introduction of its drug product candidates as well as competitive products; the cost of treatment in relation to alternative treatments; the availability of adequate coverage, reimbursement and pricing by third-party payors and government authorities; the willingness of patients to pay out-of-pocket in the absence of coverage by third-party payors and government authorities; relative convenience and ease of administration, including as compared to alternative treatments and competitive therapies; the eﬀectiveness of its sales and marketing eﬀorts. In addition, although the Company is not utilizing embryonic stem cells in its drug product candidates, adverse publicity due to the ethical and social controversies surrounding the therapeutic use of such technologies, and reported side eﬀects from any clinical trials using these technologies or the failure of such trials to demonstrate that these therapies are safe and eﬀective may limit market acceptance its drug product candidates due to the perceived similarity between its drug product candidates and these other therapies. If its drug product candidates are approved but fail to achieve market acceptance among physicians, patients, hospitals, or others in the medical community, the Company will not be able to generate signiﬁcant revenue. Even if its products achieve market acceptance, the Company may not be able to maintain that market acceptance over time if new products or technologies are introduced that are more favourably received than its products, are more cost eﬀective or render its products obsolete. Its drug product candidates are biologics, which are complex to manufacture, and the Company may encounter difficulties in production, particularly with respect to process development or scaling-out of its manufacturing capabilities. If the Company or any of its third-party manufacturers encounter such difficulties, its ability to provide supply of its drug product candidates for clinical trials or its products for patients, if approved, could be delayed or stopped, or the Company may be unable to maintain a commercially viable cost structure. Its drug product candidates are biologics and the process of manufacturing its products is complex, highly-regulated and subject to multiple risks. The manufacture of its drug product candidates involves complex processes, including harvesting cells from patients, selecting and expanding certain cell types, engineering or reprogramming the cells in a certain manner to create either cardiopoietic cells or CAR-T cells, expanding the cell population to obtain the desired dose, and ultimately infusing the cells back into a patient’s body. As a result of the complexities, the cost to manufacture its drug product candidates, is higher than traditional small molecule chemical compounds, and the manufacturing process is less reliable and is more diﬃcult to reproduce. Its manufacturing process is susceptible to product loss or failure due to logistical issues associated with the collection of blood cells, or starting material, from the patient, shipping such material to the manufacturing site, shipping the ﬁnal product back to the patient, and infusing the patient with the product, manufacturing issues associated with the diﬀerences in the manufacturing process, contamination, equipment or reagent failure, improper installation or operation of equipment, vendor or operator error, inconsistency in cell growth, and variability in product characteristics. Even minor deviations from normal manufacturing processes could result in reduced production yields, product defects, and other supply disruptions. Because some of its drug product candidates are manufactured for each particular patient, the Company is required to maintain a chain of identity with respect to materials as they move from the patient to the manufacturing facility, through the manufacturing process, and back to the patient. Maintaining such a chain of identity is diﬃcult and complex, and failure to do so could result in adverse patient outcomes, loss of product, or regulatory action including withdrawal of its products from the market. Further as drug product candidates are developed through pre-clinical to late stage clinical trials towards approval and commercialization, it is common that various aspects of the development program, such as manufacturing methods, are altered along the way in an eﬀort to optimize processes and results. Such changes carry the risk that they will not achieve these intended objectives, and any of these changes could cause its drug product candidates to perform diﬀerently and aﬀect the results of ongoing clinical trials or other future clinical trials. in patient starting materials, interruptions Although the Company is working, or will be working, to develop commercially viable processes for the manufacture of its drug product candidates, doing so is a diﬃcult and uncertain task, and there are risks associated with scaling to the level required for later-stage clinical trials and commercialization, including, among others, cost overruns, potential problems with process scale-out, process reproducibility, stability issues, lot consistency, and timely availability of reagents or raw materials. We may ultimately be unable to reduce the cost of goods for its drug product candidates to levels that will allow for an attractive return on investment if and when those drug product candidates are commercialized. In addition, the manufacturing process that the Company develops for its drug product candidates is subject to regulatory authorities’ approval process, and the Company will need to make sure that the Company or its contract manufacturers, or CMO’s, if any, are able to meet all regulatory authorities requirements on an ongoing basis. If the Company or its CMO’s are unable to reliably produce drug product candidates to speciﬁcations acceptable to the regulatory authorities, the Company may not obtain or maintain the approvals the Company needs to commercialize such drug product candidates. Even if the Company obtains regulatory approval for any of its drug product candidates, there is no assurance that either the Company or its CMO’s will be able to manufacture the approved product to speciﬁcations acceptable to the regulatory authorities, to produce it in suﬃcient quantities to meet the requirements for the potential launch of the product, or to meet potential future demand. Any of these challenges could have an adverse eﬀect on its business, ﬁnancial condition, results of operations and growth prospects. Nearly all aspects of the Company’s activities are subject to substantial regulation. No assurance can be given that any of the Company’s product candidates will fulfil regulatory compliance. Failure to comply with such regulations could result in delays, suspension, refusals, fines and withdrawal of approvals. The international pharmaceutical and medical technology industry is highly regulated by government bodies (hereinafter the “Competent Authorities”) that impose substantial requirements covering nearly all aspects of the Company’s activities notably on research and development, manufacturing, pre-clinical tests, clinical trials, labelling, marketing, sales, storage, record keeping, promotion and pricing of its research programmes and product candidates. Compliance with standards laid down by local Competent Authorities is required in each country where the Company, or any of its partners or licensees, 37 38 conducts said activities in whole or in part. The Competent Authorities notably include the European Medicine Agency (“EMA”) in the European Union and the Food and Drug Administration (“FDA”) in the United States. The Company may face significant competition and technological change which could limit or eliminate the market opportunity for its product candidates. There can be no assurance that product candidates of the Company will fulﬁl the criteria required to obtain necessary regulatory clearance to access the market. Also, at this time, the Company cannot guarantee or know the exact nature, precise timing and detailed costs of the eﬀorts that will be necessary to complete the remainder of the development of its research programmes and products candidates. The speciﬁc regulations and laws, as well as the time required to obtain Competent Authorities approvals, may vary from country to country, but the general regulatory procedures are similar in the European Union and the United States of America. Each Competent Authority may impose its own requirements, may discontinue an approval, may refuse to grant approval, or may require additional data before granting approval, notwithstanding that approval may have been granted by one or more other Competent Authorities. Competent Authority approval may be delayed, limited or denied for a number of reasons, most of which are beyond the Company’s control. Such reasons include the production process or site not meeting the applicable requirements for the manufacture of regulated products, or the products not meeting applicable requirements for safety or eﬃcacy during the clinical development stage or after marketing. No assurance can be given that clinical trials will be approved by Competent Authorities or that products will be approved for marketing by Competent Authorities in any pre-determined indication or intended use. Competent Authorities may disagree with the Company's interpretation of data submitted for their review. Even after obtaining approval for clinical trials or marketing, products will be subject to ongoing regulation and evaluation of their beneﬁt/safety or risk/performance ratio; a negative evaluation of the beneﬁt/safety or risk/ performance ratio could result in a potential use restriction and/or withdrawal of approval for one or more products. At any time Competent Authorities may require discontinuation or holding of clinical trials or require additional data prior to completing their review or may issue restricted authorisation or authorise products for clinical trials or marketing for narrower indications than requested or require further data or studies be conducted and submitted for their review. There can be no guarantee that such additional data or studies, if required, will corroborate earlier data. Research programmes and product candidates of the Company must undergo rigorous pre-clinical tests and clinical trials, the start, timing of completion, number and results of which are uncertain and could substantially delay or prevent the products from reaching the market. Pre-clinical tests and clinical trials are expensive and time-consuming and their results are uncertain. The Company, its collaborative partners or other third parties may not successfully complete the pre-clinical tests and clinical trials of the research programmes and product candidates. Failure to do so may delay or prevent the commercialisation of products. The Company cannot guarantee that its research programmes and product candidates will demonstrate suﬃcient safety or eﬃcacy or performance in its pre-clinical tests and clinical trials to obtain marketing authorisation in any given territory or at all, and the results from earlier pre-clinical tests and clinical trials may not accurately predict the results of later-stage pre- clinical tests and clinical trials. At any stage of development, based on a review of available pre-clinical and clinical data, the estimated costs of continued development, market assessments and other factors, the development of any of the Company's research programmes and product candidates may be suspended or discontinued. Clinical trials can be delayed for a variety of reasons, including, but not limited to, delays in obtaining regulatory approval to commence a trial, in reaching agreement on acceptable terms with prospective contract research organisations (CROs) and contract manufacturing organisations (CMO’s) and clinical trial sites, in obtaining ethics committee approval, in recruiting suitable patients to participate in a trial, in having patients complete a trial or return for follow-up, in adding new sites or in obtaining suﬃcient supplies of clinical trial materials or clinical sites dropping out of a trial and in the availability to the Company of appropriate clinical trial insurances. Such delays could result in increased costs and delay or jeopardise the Company's ability to obtain regulatory approval and commence product sales as currently contemplated. Many factors aﬀect patient enrolment, including, but not limited to, the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials, clinicians' and patients' perceptions as to the potential advantages of the product being studied in relation to other available therapies, including any new products that may be approved for the indications the Company is investigating and whether the clinical trial design involves comparison to placebo or standard of care. If the Company experiences lower than expected enrolment in the trials, the trials may not be completed as envisaged or may become more expensive to complete. The Company and its collaborative partners are, or may become subject to, numerous ongoing regulatory obligations, such as data protection, environmental, health and safety laws and restrictions on the experimental use of animals and/or human beings. The costs of compliance with applicable regulations, requirements or guidelines could be substantial, and failure to comply could result in sanctions, including ﬁnes, injunctions, civil penalties, denial of applications for marketing authorisation of its products, delays, suspension or withdrawal of approvals, licence revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could signiﬁcantly increase the Company's or its collaborative partners' costs or delay the development and commercialisation of its product candidates. The market for pharmaceutical products is highly competitive. The Company’s competitors include many established pharmaceutical, biotechnology, universities and other research or commercial institutions, many of which have substantially greater ﬁnancial, research and development resources than the Company. The ﬁelds in which the Company operates are characterised by rapid technological change and innovation. There can be no assurance that competitors of the Company are not currently developing or will not in the future develop technologies and products that are equally or more eﬀective and/or are more economical as any current or future technology or product of the Company. Competing products may gain faster or greater market acceptance than the Company’s products and medical advances or rapid technological development by competitors may result in the Company’s product candidates becoming non-competitive or obsolete before the Company is able to recover its research and development and commercialisation expenses. If the Company or its product candidates do not compete eﬀectively, it may have a material adverse eﬀect on the Company’s business. The future commercial success of the Company's product candidates will depend on the degree of market acceptance of its products among physicians, patients, healthcare payers and the medical community. The Company’s product candidates are at varying stages of development and the Company may never have a product that is commercially successful. Celyad has to date no product authorised for marketing yet. Due to the inherent risk in the development of pharmaceutical and medical device products, it is probable that not all of the product candidates in Celyad’ portfolio will successfully complete development and be marketed. The Company does not expect to be able to market any of its products for a number of years. Furthermore, when available on the market physicians may not prescribe the Company's products, which would prevent the Company from generating signiﬁcant revenues or becoming proﬁtable. Market acceptance of the Company's future products by physicians, patients and healthcare payers will depend on a number of factors, many of which are beyond the Company's control, including, but not limited to: • The wording of the product label; • Acceptance by physicians, patients and healthcare payers of each product as safe, eﬀective and cost- eﬀective; • Relative convenience, ease of use, ease of administration and other perceived advantages over alternative products; • Prevalence and severity of adverse events; • Limitations, precautions or warnings listed in the summary of product characteristics, patient information leaﬂet, package labeling or instructions for use; • The cost of treatment with the Company’s products in relation to alternative treatments; • The extent to which products are approved for inclusion and reimbursed on formularies of hospitals and managed care organizations; • Whether products are designated in the label and/or under physician treatment guidelines and/or under reimbursement guidelines as a ﬁrst-line therapy, or as a second-line, or third-line or last-line therapy. The price setting, the availability and level of adequate reimbursement by third parties, such as insurance companies, governmental and other healthcare payers is uncertain and may impede on the Company’s ability to generate sufficient operating margins to offset operating expenses. The Company’s commercial performance will depend in part on the conditions for setting the sales price of its products by the relevant public commissions and bodies and the conditions of their reimbursement by the health agencies or insurance companies in the countries where the Company intends to market its products. The current context of healthcare cost control and economic and ﬁnancial crisis that most countries are currently facing, coupled with the increase in health care budgets caused by the aging population creates extra pressure on health care spending in most if not all countries. Consequently, pressure on sales prices and reimbursement levels is intensifying owing in particular to: • Price controls imposed by many states; • The increasing reimbursement limitations of some products under budgetary policies; • The heightened diﬃculty in obtaining and maintaining a satisfactory reimbursement rate for medicines. Obtaining adequate pricing decisions that would generate return on the investment incurred for the development of the product candidates developed by the Company is therefore uncertain. The Company’s ability to manage its expenses and cost structure to adapt to increased pricing pressure is untested and uncertain. 39 40 All of these factors will have a direct impact on the Company’s ability to make proﬁts on the products in question. The partial/ no reimbursement policy of medicines could have a material adverse eﬀect on the business, prospects, ﬁnancial situation, earnings and growth of the Company. Changes in regulatory approval policies or enactment of additional regulatory approval requirements may delay or prevent the product candidates from being marketed. The regulatory clearance process is expensive and time consuming and the timing of marketing is diﬃcult to predict. Once marketed, products may be subject to post-authorisation safety studies or other pharmacovigilance or device vigilance activities or may be subject to limitations on their uses or may be withdrawn from the market for various reasons, including if they are shown to be unsafe or ineﬀective, or when used in a larger population that may be diﬀerent from the trial population studied prior to market introduction of the product. The Company's product candidates may become subject to changes in the regulatory framework or market conditions. Regulatory guidelines may change during the course of product development and review process, making the chosen development strategy suboptimal. Market conditions may change resulting in the emergence of new competitors or new treatment guidelines which may require alterations in the development strategy. These factors may result in signiﬁcant delays, increased trial costs, signiﬁcant changes in commercial assumptions or failure of the products to obtain marketing authorisation. The Company is subject to inspection and shall be subject to market surveillance by the FDA, EMA and other Competent Authorities for compliance with regulations that prohibit the promotion of the Company’s products for a purpose or indication other than those for which approval has been granted. While a product manufacturer may not promote a product for such “oﬀ label” use, doctors are allowed, in the exercise of their professional judgment in the practice of medicine, to use a product in ways not approved by Competent Authorities. Oﬀ- label marketing regulations are subject to varying evolving interpretations. Post-approval manufacturing and marketing of Company’s products may show diﬀerent safety and eﬃcacy proﬁles to those demonstrated in the data on which approval to test or market said products was based. Such circumstances could lead to the withdrawal or suspension of approval, which could have a material adverse eﬀect on the Company's business, ﬁnancial condition, operating results or cash ﬂows. In addition, Competent Authorities may not approve the labelling claims or advertisements that are necessary or desirable for the successful commercialisation of the Company's products. Competent Authorities have broad enforcement power, and a failure by the Company or its collaboration partners to comply with applicable regulatory requirements can, among other things, result in recalls or seizures of products, operating and production restrictions, withdrawals of previously approved marketing applications, total or partial suspension of regulatory approvals, refusal to approve pending applications, warning letters, injunctions, penalties, ﬁnes, civil proceedings, criminal prosecutions and imprisonment. 2.7.4.2. Risks related to the Company’s reliance on third parties The Company has obtained and will obtain significant funding from the Walloon Region. The terms of the agreements signed with the Region may hamper the Company to partner part or all its products. The Company contracted over the past year numerous funding agreements with the Walloon Region to partially ﬁnance its research and development programs. Under the terms of the agreements, the Company would need to obtain the consent of the Walloon Region for any out-licensing agreement or sale to a third party of any or all of its products, prototypes or installations which may reduce the Company’s ability to partner or sell part or all of its products. Furthermore, when the research and development programs partially ﬁnanced by the Company enter in “exploitation phase”, the Company has to start reimbursing the funding received. The Company may not be able to reimburse such funding under the terms of the agreements or such reimbursement may jeopardize the funding of its clinical and scientiﬁc activities. The agreements mentioned above are agreements from the Company. If the Company was not able to respect its obligations, it could be hold liable of a violation of its commitments. The Company relies and will continue to rely on collaborative partners regarding the development of its research programmes and product candidates. The Company is and expects to continue to be dependent on collaborations with partners relating to the development and commercialisation of its existing and future research programmes and product candidates. The Company had, has and will continue to have discussions on potential partnering opportunities with various pharmaceutical and medical device companies. If the Company fails to enter into or maintain collaborative agreements on reasonable terms or at all, the Company's ability to develop its existing or future research programmes and product candidates could be delayed, the commercial potential of its products could change and its costs of development and commercialisation could increase. The Company's dependence on collaborative partners subjects it to a number of risks, including, but not limited to, the following: • • • • • • the Company may not be able to control the amount or timing of resources that collaborative partners devote to the Company's research programs and product candidates; the Company may be required to relinquish signiﬁcant rights, including intellectual property, marketing and distribution rights; the Company relies on the information and data received from third parties regarding its research programs and product candidates and will not have control of the process conducted by the third party in gathering and composing such data and information. The Company may not have formal or appropriate guarantees from its contract parties with respect to the quality and the completeness of such data; a collaborative partner may develop a competing product either by itself or in collaboration with others, including one or more of the Company's competitors; the Company's collaborative partners' willingness or ability to complete their obligations under the Company's collaboration arrangements may be adversely aﬀected by business combinations or signiﬁcant changes in a collaborative partner’s business strategy; the Company may experience delays in, or increases in the costs of, the development of the Company's research programs and product candidates due to the termination or expiration of collaborative research and development arrangements. On November 27, 2018, Ono Pharmaceuticals Co., Ltd. notiﬁed the Company of its decision to terminate with immediate eﬀect the License and Collaboration Agreement dated July 11, 2016 between Ono Pharmaceuticals and the Company. The Company relies on third parties to conduct, supervise and monitor its clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, the Company may not be able to obtain regulatory approval for or commercialize its drug product candidates and its business could be substantially harmed. The Company relies on clinical research organizations, or CRO’s, and clinical trial sites to ensure its clinical trials are conducted properly and on time. While the Company will have agreements governing their activities, the Company will have limited inﬂuence over their actual performance. The Company will control only certain aspects of its CRO’s activities. Nevertheless, the Company will be responsible for ensuring that each of its clinical trials is conducted in accordance with the applicable protocol, legal, regulatory and scientiﬁc standards, and its reliance on the CRO’s does not relieve the Company of its regulatory responsibilities. The Company and its CRO’s are required to comply with the FDA’s GCP’s for conducting, recording and reporting the results of clinical trials to assure that the data and reported results are credible and accurate and that the rights, integrity and conﬁdentiality of clinical trial participants are protected. The FDA, the Competent Authorities of the Member States of the EEA, and comparable foreign regulatory authorities, enforce these GCP’s through periodic inspections of trial sponsors, principal investigators and clinical trial sites. If the Company or its CROs fail to comply with applicable GCP’s, the clinical data generated in its future clinical trials may be deemed unreliable and the FDA, the EMA, or other foreign regulatory authorities may require the Company to perform additional clinical trials before approving any marketing applications. Upon inspection, the FDA may determine that its clinical trials did not comply with GCP’s. In addition, its future clinical trials will require a suﬃcient number of test subjects to evaluate the safety and eﬀectiveness of its drug product candidates. Accordingly, if its CRO’s fail to comply with these regulations or fail to recruit a suﬃcient number of patients, the Company may be required to repeat such clinical trials, which would delay the regulatory approval process. Its CRO’s are not the Company’s employees, and the Company is therefore unable to directly monitor whether or not they devote suﬃcient time and resources to its clinical and pre-clinical programs. These CRO’s may also have relationships with 41 42 other commercial entities, including its competitors, for whom they may also be conducting clinical trials or other product development activities that could harm the Company’s competitive position. If its CRO’s do not successfully carry out their contractual duties or obligations, fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to the Company’s clinical protocols or regulatory requirements, or for any other reasons, the Company’s clinical trials may be extended, delayed or terminated, and the Company may not be able to obtain regulatory approval for, or successfully commercialize, its drug product candidates. If any such event were to occur, the Company’s ﬁnancial results and the commercial prospects for its drug product candidates would be harmed, its costs could increase, and its ability to generate revenues could be delayed. If any of the Company’s relationships with these third-party CRO’s terminate, the Company may not be able to enter into arrangements with alternative CRO’s or to do so on commercially reasonable terms. Further, switching or adding additional CRO’s involves additional costs and requires management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which could materially impact its ability to meet its desired clinical development timelines. Though the Company carefully manages its relationships with its CRO’s, there can be no assurance that the Company will not encounter challenges or delays in the future or that these delays or challenges will not have a material adverse impact on its business, ﬁnancial condition and prospects. Cell-based therapies rely on the availability of specialty raw materials, which may not be available to the Company on acceptable terms or at all. Engineered-cell therapies require many specialty raw materials, some of which are manufactured by small companies with limited resources and experience to support a commercial product. The suppliers may be ill-equipped to support the Company’s needs, especially in non-routine circumstances like an FDA inspection or medical crisis, such as widespread contamination. The Company also does not have contracts with many of these suppliers and may not be able to contract with them on acceptable terms or at all. Accordingly, the Company may experience delays in receiving key raw materials to support clinical or commercial manufacturing. In addition, some raw materials are currently available from a single supplier, or a small number of suppliers. The Company cannot be sure that these suppliers will remain in business, or that they will not be purchased by one of its competitors or another Company that is not interested in continuing to produce these materials for its intended purpose. 2.7.4.3. Risk related to the Company’s intellectual property The Company’s patents and other intellectual property rights portfolio is relatively young and may not adequately protect its research programmes and product candidates, which may impede the Company’s ability to compete effectively. The Company’s success will depend in part on the ability of the Company to obtain, maintain and enforce its patents and other intellectual property rights. The Company’s research programmes and product candidates are covered by several patent application families, which are either licensed to the Company or owned by the Company. Out of the numerous patent applications ﬁled by the Company, six national patents have been granted in Belgium and ﬁfteen national patents have been granted in the US, of which nine relate to the ﬁeld of immune-oncology. The Company cannot guarantee that it will be in a position in the future to develop new patentable inventions or that the Company or its licensors will be able to obtain or maintain these patent rights against patent oﬃces and other third-party challenges to their validity, scope and/or enforceability. We cannot guarantee that it will be in a position in the future to develop new patentable inventions or that we or our licensors will be able to obtain or maintain these patent rights against challenges to their validity, scope and/or enforceability. We cannot guarantee that it is or has been the ﬁrst to conceive an invention or to ﬁle a patent application on an invention, particularly given that patent applications are not published in most countries before 18-months after the date of ﬁling. Moreover, we may have little or no control over its licensors abilities’ to preventing the infringement of their patents or the misappropriation of their intellectual property. There can be no assurance that the technologies used in our research programs and product candidates are patentable, that pending or future applications will result in the grant to us or our licensors, that any patents will be of suﬃcient breadth to provide adequate and commercially meaningful protection against competitors with similar technologies or products, or that any patents granted to us or our licensors will not be successfully challenged, circumvented, invalidated or rendered unenforceable by third parties, enabling competitors to circumvent or use them and depriving us from the protection it would need against competitorsIf the Company or its licensors do not obtain patents in respect of their technologies or if the patents of the Company or its licensors are invalidated (for example, as a result of the discovery of prior art), third parties may use the technologies without payment to the Company. A third party’s ability to use unpatented technologies is enhanced by the fact that the published patent application contains a detailed description of the relevant technology. The Company cannot guarantee that third parties, contract parties or employees will not claim ownership rights over the patents or other intellectual property rights owned or held by the Company. The Company also relies on proprietary know-how to protect its research programmes and product candidates and Cardiopoiesis platform. Know-how is diﬃcult to maintain and protect. The Company uses reasonable eﬀorts to maintain its know-how, but it cannot assure that its partners, employees, consultants, advisors or other third parties will not wilfully or unintentionally disclose proprietary information to competitors. Furthermore, the Company’s competitors may independently develop equivalent knowledge and know-how, which could diminish or eliminate the Company’s competitive advantage. The enforcement of patents, know-how and other intellectual property is costly, time consuming and highly uncertain. The Company cannot guarantee that it will be successful in preventing the misappropriation of its patented inventions, know- how and other intellectual property rights and those of its licensors, and failure to do so could signiﬁcantly impair the ability of the Company to eﬀectively compete. As far as the Company is aware, its intellectual property has not been challenged otherwise than by patent oﬃces in the normal course of examination of its patent applications or misappropriated. The Company may infringe on the patents or intellectual property rights of others and may face patent litigation, which may be costly and time consuming. The Company’s success will depend in part on its ability to operate without infringing on or misappropriating the intellectual property rights of others. The Company cannot guarantee that its activities, or those of its licensors, will not infringe on the patents or other intellectual property rights owned by others. The Company may expend signiﬁcant time and eﬀort and may incur substantial costs in litigation if it is required to defend against patent or other intellectual property right suits brought against the Company or its licensors regardless of whether the claims have any merit. Additionally, the Company cannot predict whether it or its licensors will be successful in any litigation. If the Company or its licensors are found to infringe on the patents or other intellectual property rights of others, it may be subject to substantial claims for damages, which could materially impact the Company’s cash ﬂow and ﬁnancial position. The Company may also be required to cease development, use or sale of the relevant research programme, product candidate or process or it may be required to obtain a licence on the disputed rights, which may not be available on commercially reasonable terms, if at all. There can be no assurance that we are even aware of third party rights that may be alleged to be relevant to any particular product candidate, method, process or technology will uncover all relevant third party rights relating to such product, method, process or technology. The Company may spend signiﬁcant time and eﬀort and may incur substantial costs if required to defend against any infringement claims or to assert its intellectual property rights against third parties. The risk of such a procedure by a third party may increase in view of the Company making public announcement regarding one or more of its research programmes and product candidates. The Company may not be successful in defending its rights against such procedures or claims and may incur as a consequence thereof signiﬁcant losses, costs or delays in its intended commercialisation plans as a result thereof. The Company depends on intellectual property licensed from third parties and termination of any of these licenses could result in the loss of significant rights, which would harm its business. The Company is dependent on patents, know-how, and proprietary technology, both its own and licensed from others. We license technology from the Trustees of Dartmouth College, or Dartmouth College. Dartmouth College may terminate our license, if we fail to meet a milestone within the speciﬁed time period, unless we pay the corresponding milestone payment. Dartmouth College may terminate either the license in the event we default or breach any of the provisions of the applicable license, subject to 30 days’ prior notice and opportunity to cure. In addition, the license automatically terminates in the event we become insolvent, make an assignment for the beneﬁt of creditors or ﬁle, or have ﬁled against us, a petition in bankruptcy. Furthermore, Dartmouth College may terminate our license, after April 30, 2024, if we fail to meet the speciﬁed minimum net sales obligations for any year, unless we pay to Dartmouth College the royalties we would otherwise be obligated to pay had we met such minimum net sales obligation. Any termination of this license or any of our other licenses could result in the loss of signiﬁcant rights and could harm its ability to commercialize its drug product candidates. Disputes may also arise between the Company and its licensors regarding intellectual property subject to a license agreement, including those relating to: • • • • • the scope of rights granted under the license agreement and other interpretation-related issues; whether and the extent to which its technology and processes infringe on intellectual property of the licensor that is not subject to the license agreement; its right to sublicense patent and other rights to third parties under collaborative development relationships; the amount and timing of milestone and royalty payments; whether the Company is complying with its diligence obligations with respect to the use of the licensed technology in relation to its development and commercialization of its drug product candidates; 43 44 • the allocation of ownership of inventions and know-how resulting from the joint creation or use of intellectual property by the Company and its partners and by its licensors. If disputes over intellectual property that the Company has licensed prevent or impair its ability to maintain its current licensing arrangements on acceptable terms, the Company may be unable to successfully develop and commercialize the aﬀected drug product candidates. The Company is generally also subject to all of the same risks with respect to protection of intellectual property that the Company licenses as it is for intellectual property that the Company owns, which are described below. If the Company or its licensors fail to adequately protect this intellectual property, the Company’s ability to commercialize its products could suﬀer. The licenses of the Company may be terminated if it is unable to meet the payment obligations under the agreements (notably if the Company is unable to obtain additional ﬁnancing). The Company could be unsuccessful in obtaining or maintaining adequate patent protection for one or more of its drug product candidates. The patent application process is expensive and time-consuming, and the Company and its current or future licensors and licensees may not be able to apply for or prosecute patents on certain aspects of its drug product candidates or deliver technologies at a reasonable cost, in a timely fashion, or at all. It is also possible that the Company or its current licensors, or any future licensors or licensees, will fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on them. Therefore, its patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of its business. It is possible that defects of form in the preparation or ﬁling of its patents or patent applications may exist, or may arise in the future, such as with respect to proper priority claims, inventorship, claim scope or patent term adjustments. Under its existing license agreements with the Mayo Foundation for Medical Education and Research and the Trustees of Dartmouth College, the Company has the right, but not the obligation, to enforce its licensed patents. If its current licensors, or any future licensors or licensees, are not fully cooperative or disagree with the Company as to the prosecution, maintenance or enforcement of any patent rights, such patent rights could be compromised and the Company might not be able to prevent third parties from making, using, and selling competing products. If there are material defects in the form or preparation of its patents or patent applications, such patents or applications may be invalid and unenforceable. Moreover, its competitors may independently develop equivalent knowledge, methods, and know-how. Any of these outcomes could impair its ability to prevent competition from third parties, which may have an adverse impact on its business, ﬁnancial condition and operating results. Celyad currently has issued patents and patent applications directed to its drug product candidates and medical devices, and the Company anticipates that it will ﬁle additional patent applications in several jurisdictions, including several European Union countries and the United States, as appropriate. However, the Company cannot predict: • • if and when any patents will issue from patent applications; the degree and range of protection any issued patents will aﬀord the Company against competitors, including whether third parties will ﬁnd ways to invalidate or otherwise circumvent its patents; • whether others will apply for or obtain patents claiming aspects similar to those covered by its patents and patent applications; • whether the Company will need to initiate litigation or administrative proceedings to defend its patent rights, which may be costly whether the Company win or lose. Celyad cannot be certain, however, that the claims in its pending patent applications will be considered patentable by patent oﬃces in various countries, or that the claims in any of its issued patents will be considered valid and enforceable by local courts. The strength of patents in the biotechnology and pharmaceutical ﬁeld can be uncertain, and evaluating the scope of such patents involves complex legal and scientiﬁc analyses. The patent applications that the Company owns or in-licenses may fail to result in issued patents with claims that cover its drug product candidates or uses thereof in the European Union, in the United States or in other jurisdictions. Even if the patents do successfully issue, third parties may challenge the validity, enforceability, or scope thereof, which may result in such patents being narrowed, invalidated, or held unenforceable. Furthermore, even if they are unchallenged, its patents and patent applications may not adequately protect its intellectual property or prevent others from designing their products to avoid being covered by its claims. If the breadth or strength of protection provided by the patent applications the Company holds with respect to its drug product candidates is threatened, this could dissuade companies from collaborating with the Company to develop, and could threaten its ability to commercialize, its drug product candidates. Further, because patent applications in most countries are conﬁdential for a period of time after ﬁling, the Company cannot be certain that it was the ﬁrst to ﬁle any patent application related to its drug product candidates. 45 Patents have a limited lifespan. Various extensions may be available; however the life of a patent, and the protection it aﬀords, is limited. Further, the extensive period of time between patent ﬁling and regulatory approval for a drug product candidate limits the time during which the Company can market a drug product candidate under patent protection, which may particularly aﬀect the proﬁtability of its early-stage drug product candidates. If the Company encounters delays in its clinical trials, the period of time during which the Company could market its drug product candidates under patent protection would be reduced. Without patent protection for its drug product candidates, the Company may be open to competition from biosimilar versions of its drug product candidates. The Company may not be able to protect its intellectual property rights throughout the world. Filing, prosecuting and defending patents on drug product candidates in all countries throughout the world would be prohibitively expensive. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as laws in the European Union or the United States. Consequently, the Company may not be able to prevent third parties from practicing its inventions in all countries, or from selling or importing products made using its inventions in and into other jurisdictions. Competitors may use its technologies in jurisdictions where the Company has not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where the Company has patent protection but enforcement is not as strong. These products may compete with its products and its patents or other intellectual property rights may not be eﬀective or suﬃcient to prevent them from competing. Many companies have encountered signiﬁcant problems in protecting and defending intellectual property rights in a number of jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favour the enforcement of patents, trade secrets and other intellectual property protection, particularly those relating to biotechnology products, which could make it diﬃcult for the Company to stop the infringement of its patents or marketing of competing products in violation of its proprietary rights generally. Proceedings to enforce its patent rights in some jurisdictions could result in substantial costs and divert its eﬀorts and attention from other aspects of its business, could put its patents at risk of being invalidated or interpreted narrowly and its patent applications at risk of not issuing and could provoke third parties to assert claims against the Company. We may not prevail in any lawsuits that the Company initiates and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, its eﬀorts to enforce its intellectual property rights around the world may be inadequate to obtain a signiﬁcant commercial advantage from the intellectual property that the Company develops or licenses. The Company may be involved in lawsuits to protect or enforce its patents or the patents of its licensors, which could be expensive, time-consuming, and unsuccessful. Competitors may infringe its patents or the patents of its licensors. To cease such infringement or unauthorized use, the Company may be required to ﬁle patent infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding or a declaratory judgment action against the Company, a court may decide that one or more of its patents is not valid or is unenforceable or may refuse to stop the other party from using the technology at issue on the grounds that its patents do not cover the technology in question. An adverse result in any litigation or defense proceeding could put one or more of its patents at risk of being invalidated, held unenforceable, interpreted narrowly, or amended such that they do not cover its drug product candidates. Such results could also put its pending patent applications at risk of not issuing. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from its business. Interference or derivation proceedings provoked by third parties may be necessary to determine the priority of inventions with respect to, or the correct inventorship of, its patents or patent applications or those of its licensors. An unfavourable outcome could result in a loss of its current patent rights and could require the Company to cease using the related technology or to attempt to license rights to it from the prevailing party. Its business could be harmed if the prevailing party does not oﬀer the Company a license on commercially reasonable terms. Litigation, interference, or derivation proceedings may result in a decision adverse to its interests and, even if the Company is successful, may result in substantial costs and distract its management and other employees. Furthermore, because of the substantial amount of discovery required in some jurisdictions in connection with intellectual property litigation, there is a risk that some of its conﬁdential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse eﬀect on the price of its ordinary shares. Issued patents covering its drug product candidates could be found invalid or unenforceable if challenged in court or before relevant authority. If the Company or one of its licensing partners initiate legal proceedings against a third party to enforce a patent covering one of its drug product candidates, the defendant could counterclaim that the patent covering its drug product candidate is invalid or unenforceable. Third parties may also raise similar claims before administrative bodies, even outside the context of litigation. Such mechanisms include re-examination, inter partes review, post grant review, oppositions and derivation proceedings. Such proceedings could result in revocation or amendment to our or those of our licensing partners’ patents in such a way that the patent no longer covers and protects the relevant drug product candidate(s). The outcome following legal 46 assertions of invalidity and unenforceability is unpredictable. With respect to the validity of its patents, for example, the Company cannot be certain that there is no invalidating prior art of which the Company, its patent counsel, and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, the Company would lose at least part, and perhaps all, of the patent protection on its drug product candidates. Such a loss of patent protection could have a material adverse impact on its business. The Company may be subject to claims that its employees, consultants, or independent contractors have wrongfully used or disclosed confidential information of third parties. The Company has received conﬁdential and proprietary information from third parties. In addition, the Company employs individuals who were previously employed at other biotechnology or pharmaceutical companies. The Company may be subject to claims that the Company or its employees, consultants, or independent contractors have inadvertently or otherwise used or disclosed conﬁdential information of these third parties or its employees’ former employers. Litigation may be necessary to defend against these claims. Even if the Company is successful in defending against these claims, litigation could result in substantial cost and be a distraction to its management and employees. 2.7.4.4. Risks related to the Company’s organization, structure and operation Maintenance of high standards of manufacturing in accordance with Good Manufacturing Practices and other manufacturing regulations. Celyad and key third-party suppliers on which it relies currently or in the future must continuously adhere to (current) Good Manufacturing Practices and corresponding manufacturing regulations of Competent Authorities. In complying with these regulations, the Company and its third-party suppliers must expend signiﬁcant time, money and eﬀort in the areas of design and development, testing, production, record-keeping and quality control to assure that the products meet applicable speciﬁcations and other regulatory requirements. The failure to comply with these requirements could result in an enforcement action against the Company, including the seizure of products and shutting down of production. Any of these third-party suppliers and the Company also may be subject to audits by the Competent Authorities. If any of the Company’s third-party suppliers or the Company itself fails to comply with (current) Good Manufacturing Practices or other applicable manufacturing regulations, the Company’s ability to develop and commercialise the products could suﬀer signiﬁcant interruptions. The Company relies on a single manufacturing facility. The Company faces risks inherent in operating a single manufacturing facility, since any disruption, such as a ﬁre, natural hazards or vandalism could signiﬁcantly interrupt the Company’s manufacturing capability. The Company currently does not have alternative production plans in place or disaster-recovery facilities available. In case of a disruption, the Company will have to establish alternative manufacturing sources. This would require substantial capital on the part of the Company, which it may not be able to obtain on commercially acceptable terms or at all. Additionally, the Company would likely experience months or years of manufacturing delays as it builds or locates replacement facilities and seek and obtain necessary regulatory approvals. If this occurs, the Company will be unable to satisfy manufacturing needs on a timely basis, if at all. Also, operating any new facilities may be more expensive than operating the Company’s current facility. Further, business interruption insurance may not adequately compensate the Company for any losses that may occur and the Company would have to bear the additional cost of any disruption. For these reasons, a signiﬁcant disruptive event of the manufacturing facility could have drastic consequences, including placing the ﬁnancial stability of the Company at risk. The Company will need increased manufacturing capacity. The Company may not be able to expand the manufacturing capacity within the anticipated time frame or budget or may not be able to obtain the requisite regulatory approvals for the increase in manufacturing capacity on a timely basis, or at all. If the Company cannot obtain necessary approvals for this contemplated expansion in a timely manner, its ability to meet demand for its products would be adversely aﬀected. The Company may have diﬃculties in ﬁnding suitable locations or commercially acceptable terms for the leasing of such facilities. The Company may also have diﬃculties in ﬁnding a commercial partner for the construction of those facilities and/or partners for investing in the capital expenses related to the manufacturing plants. The Company will need to obtain GMP certiﬁcation of those plants for commercial products. Obtaining those certiﬁcates may be delayed or may not be granted. The Company is highly dependent on its key personnel, and if the Company is not successful in attracting, motivating and retaining highly qualified personnel, the Company may not be able to successfully implement its business strategy. Its ability to compete in the highly competitive biotechnology and pharmaceutical industries depends upon its ability to attract, motivate and retain highly qualiﬁed managerial, scientiﬁc and medical personnel. The Company is highly dependent on members of its Executive Management Team, particularly its chief executive oﬃcer, and its scientiﬁc and medical personnel. The loss of the services of any members of its Executive Management Team, other key employees, and other scientiﬁc and medical advisors, and its inability to ﬁnd suitable replacements, could result in delays in product development and harm its business. Competition for skilled personnel in the biotechnology and pharmaceutical industries is intense and the turnover rate can be high, which may limit the Company’s ability to hire and retain highly qualiﬁed personnel on acceptable terms or at all. To induce valuable employees to remain within the Company, in addition to salary and cash incentives, the Company has provided warrants that vest over time. The value to employees of these equity grants that vest over time may be signiﬁcantly aﬀected by movements in its share price that are beyond its control and may at any time be insuﬃcient to counteract more lucrative oﬀers from other companies. The Company does not maintain “key man” insurance policies on the lives of all of these individuals or the lives of any of its other employees. The Company has limited experience in sales, marketing and distribution. Given its stage in development, the Company has never marketed a product and has therefore limited experience in the ﬁelds of sales, marketing and distribution of therapies. As a consequence, the Company will have to acquire marketing skills and develop its own sales and marketing infrastructure and would need to incur additional expenses, mobilize management resources, implement new skills and take the time necessary to set up the appropriate organization and structure to market the relevant product(s), in accordance with applicable laws. While several managers of the Company have commercialized and launched high technology medical products there can be no assurance that the existing limited experience would be suﬃcient to eﬀectively commercialize any or all of the Company’s product candidates. The Company may not be able to attract qualiﬁed sales and marketing personnel on acceptable terms in the future and therefore may experience constraints that will impede the achievement of its commercial objectives. Such events could have a material adverse eﬀect on the Company’s business, prospects, ﬁnancial situation, earnings and growth. The Company will need to grow the size and capabilities of our organization, and the Company may experience difficulties in managing this growth. As of December 31, 2018, the Company had 90 employees and 7 senior managers, 2 being under employment contracts and 5 under management services agreements, most of whom are full-time. As the Company’s drug product candidates move into later stage clinical development and towards commercialization, the Company must add a signiﬁcant number of additional managerial, operational, sales, marketing, ﬁnancial, and other personnel. Future growth will impose signiﬁcant added responsibilities on members of management, including: • identifying, recruiting, integrating, maintaining, and motivating additional employees; • managing the Company’s internal development eﬀorts eﬀectively, including the clinical and FDA review process for its drug product candidates, while complying with its contractual obligations to contractors and other third parties; • improving its operational, ﬁnancial and management controls, reporting systems, and procedures. The Company’s future ﬁnancial performance and its ability to commercialize its drug product candidates will depend, in part, on its ability to eﬀectively manage any future growth, and its management may also have to divert a disproportionate amount of its attention away from day-to-day activities in order to devote a substantial amount of time to managing these growth activities. If the Company is not able to eﬀectively expand its organization by hiring new employees and expanding its groups of consultants and contractors, the Company may not be able to successfully implement the tasks necessary to further develop and commercialize our drug product candidates and, accordingly, may not achieve its research, development, and commercialization goals. If the Company engages in future acquisitions or strategic partnerships, this may increase its capital requirements, dilute its shareholders, cause it to incur debt or assume contingent liabilities, and subject it to other risks. The Company may evaluate various acquisitions and strategic partnerships, including licensing or acquiring complementary products, intellectual property rights, technologies, or businesses. Any potential acquisition or strategic partnership may entail numerous risks, including: • • increased operating expenses and cash requirements; the assumption of additional indebtedness or contingent liabilities; 47 48 • • • • • • the issuance of its equity securities; assimilation of operations, intellectual property and products of an acquired Company, including diﬃculties associated with integrating new personnel; the diversion of its management’s attention from its existing product programs and initiatives in pursuing such a strategic merger or acquisition; retention of key employees, the loss of key personnel, and uncertainties in its ability to maintain key business relationships; risks and uncertainties associated with the other party to such a transaction, including the prospects of that party and their existing products or drug product candidates and regulatory approvals; its inability to generate revenue from acquired technology and/or products suﬃcient to meet its objectives in undertaking the acquisition or even to oﬀset the associated acquisition and maintenance costs. In addition, if the Company undertakes acquisitions, the Company may issue dilutive securities, assume or incur debt obligations, incur large one-time expenses and acquire intangible assets that could result in signiﬁcant future amortisation expense. Moreover, the Company may not be able to locate suitable acquisition opportunities and this inability could impair its ability to grow or obtain access to technology or products that may be important to the development of its business. Failure to build its finance infrastructure and improve its accounting systems and controls could impair its ability to comply with the financial reporting and internal controls requirements for publicly traded companies. As a public company, the Company is operating in an increasingly demanding regulatory environment that requires it to comply with, among things, the Sarbanes-Oxley Act of 2002, as from December 31, 2016 and related rules and regulations of the Securities and Exchange Commission’s substantial disclosure requirements, accelerated reporting requirements and complex accounting rules. Company responsibilities required by the Sarbanes-Oxley Act include establishing corporate oversight and adequate internal control over ﬁnancial reporting and disclosure controls and procedures. Eﬀective internal controls are necessary for the Company to produce reliable ﬁnancial reports and are important to help prevent ﬁnancial fraud. The Company has limited accounting personnel and other resources to address its internal controls and procedures. Its independent registered public accounting ﬁrm has not conducted an audit of its internal control over ﬁnancial reporting. Its management may conclude that its internal control over ﬁnancial reporting is not eﬀective. Moreover, even if its management concludes that its internal control over ﬁnancial reporting is eﬀective, its independent registered public accounting ﬁrm, after conducting its own independent testing, may issue a report that is qualiﬁed if it is not satisﬁed with its internal controls or the level at which its controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements diﬀerently from the Company. In addition, after the Company becomes a public company, its reporting obligations may place a signiﬁcant strain on its management, operational and ﬁnancial resources and systems for the foreseeable future. The Company may be unable to timely complete its evaluation, testing and any required remediation. The Company’s international operations subject it to various risks, and its failure to manage these risks could adversely affect its results of operations. The Company faces signiﬁcant operational risks as a result of doing business internationally, such as: • ﬂuctuations in foreign currency exchange rates; • potentially adverse and/or unexpected tax consequences, including penalties due to the failure of tax planning or due to the challenge by tax authorities on the basis of transfer pricing and liabilities imposed from inconsistent enforcement; • potential changes to the accounting standards, which may inﬂuence its ﬁnancial situation and results; • becoming subject to the diﬀerent, complex and changing laws, regulations and court systems of multiple jurisdictions and compliance with a wide variety of foreign laws, treaties and regulations; reduced protection of, or signiﬁcant diﬃculties in enforcing, intellectual property rights in certain countries; • • diﬃculties in attracting and retaining qualiﬁed personnel; • • restrictions imposed by local labour practices and laws on the Company’s business and operations, including unilateral cancellation or modiﬁcation of contracts; rapid changes in global government, economic and political policies and conditions, political or civil unrest or instability, terrorism or epidemics and other similar outbreaks or events, and potential failure in conﬁdence of the Company’s suppliers or customers due to such changes or events; and tariﬀs, trade protection measures, import or export licensing requirements, trade embargoes and other trade barriers. 2.7.4.5. Risks related to the ownership of shares If securities or industry analysts do not publish research or publish inaccurate research or unfavourable research about its business, the price of the securities and trading volume could decline. The trading market for the securities depends in part on the research and reports that securities or industry analysts publish about the Company or its business. If no or few securities or industry analysts cover the Company, the trading price would be negatively impacted. If one or more of the analysts who covers the Company downgrades the securities or publishes incorrect or unfavourable research about its business, the price of the securities would likely decline. If one or more of these analysts eases coverage of the Company or fails to publish reports on the Company regularly, or downgrades the securities, demand for the securities could decrease, which could cause the price of the securities or trading volume to decline. The market price of the Shares could be negatively impacted by actual or anticipated sales of substantial numbers of Shares. Sales of a substantial number of Shares in the public markets, or the perception that such sales might occur, might cause the market price of the Shares to decline. The Company cannot make any prediction as to the eﬀect of any such sales or perception of potential sales on the market price of the Shares. A public market for our shares may not be sustained. The Company cannot guarantee the extent to which a liquid market for the Shares will be sustained. In the absence of such liquid market for the Shares, the price of the Shares could be inﬂuenced. The liquidity of the market for the Shares could be aﬀected by various causes, including the factors identiﬁed in the next risk factor (below) or by a reduced interest of investors in biotechnology sector. The market price of the shares may fluctuate widely in response to various factors. A number of factors may signiﬁcantly aﬀect the market price of the Shares. The main factors are changes in the operating results of the Company and its competitors, announcements of technological innovations or results concerning the product candidates, changes in earnings estimates by analysts. Other factors which could cause the price of the shares to ﬂuctuate or could inﬂuence the reputation of the Company include, amongst other things: • developments concerning intellectual property rights, including patents; • public information regarding actual or potential results relating to products and product candidates under • • • development by the Company’s competitors; actual or potential results relating to products and product candidates under development by the Company itself; regulatory and medicine pricing and reimbursement developments in Europe, the United States and other jurisdictions; any publicity derived from any business aﬀairs, contingencies, litigation or other proceedings, the Company’s assets (including the imposition of any lien), its management, or its signiﬁcant Shareholders or collaborative partners; • divergences in ﬁnancial results from stock market expectations; • changes in the general conditions in the pharmaceutical industry and general economic, ﬁnancial market and business conditions in the countries in which the Company operates. In addition, stock markets have from time to time experienced extreme price and volume volatility which, in addition to general economic, ﬁnancial and political conditions, could aﬀect the market price for the Shares regardless of the operating results or ﬁnancial condition of the Company. The Company has no present intention to pay dividends on its ordinary shares in the foreseeable future and, consequently, your only opportunity to achieve a return on your investment during that time is if the price of the securities increases. The Company has no present intention to pay dividends in the foreseeable future. Any recommendation by its board of directors to pay dividends will depend on many factors, including its ﬁnancial condition (including losses carried-forward), results of operations, legal requirements and other factors. Furthermore, pursuant to Belgian law, the calculation of amounts 49 50 available for distribution to shareholders, as dividends or otherwise, must be determined on the basis of its non-consolidated statutory accounts prepared in accordance with Belgian accounting rules. In addition, in accordance with Belgian law and its Articles of Association, the Company must allocate each year an amount of at least 5% of its annual net proﬁt under its non- consolidated statutory accounts to a legal reserve until the reserve equals 10% of its share capital. Therefore, the Company is unlikely to pay dividends or other distributions in the foreseeable future. If the price of the securities or the underlying ordinary shares declines before the Company pays dividends, investors will incur a loss on their investment, without the likelihood that this loss will be oﬀset in part or at all by potential future cash dividends. Takeover provisions in the national law of Belgium may make a takeover difficult. Public takeover bids on its shares and other voting securities, such as warrants or convertible bonds, if any, are subject to the Belgian Act of April 1, 2007 on public takeover bids, as amended and implemented by the Belgian Royal Decree of April 27, 2007, or Royal Decree, and to the supervision by the Belgian Financial Services and Markets Authority, or FSMA. Public takeover bids must be made for all of its voting securities, as well as for all other securities that entitle the holders thereof to the subscription to, the acquisition of or the conversion into voting securities. Prior to making a bid, a bidder must issue and disseminate a prospectus, which must be approved by the FSMA. The bidder must also obtain approval of the relevant competition authorities, where such approval is legally required for the acquisition of the Company. The Belgian Act of April 1, 2007 provides that a mandatory bid will be required to be launched for all of its outstanding shares and securities giving access to ordinary shares if a person, as a result of its own acquisition or the acquisition by persons acting in concert with it or by persons acting on their account, directly or indirectly holds more than 30% of the voting securities in a company that has its registered oﬃce in Belgium and of which at least part of the voting securities are traded on a regulated market or on a multilateral trading facility designated by the Royal Decree. The mere fact of exceeding the relevant threshold through the acquisition of one or more shares will give rise to a mandatory bid, irrespective of whether or not the price paid in the relevant transaction exceeds the current market price. There are several provisions of Belgian company law and certain other provisions of Belgian law, such as the obligation to disclose important shareholdings and merger control, that may apply to the Company and which may make an unfriendly tender oﬀer, merger, change in management or other change in control, more diﬃcult. These provisions could discourage potential takeover attempts that third parties may consider and thus deprive the shareholders of the opportunity to sell their shares at a premium (which is typically oﬀered in the framework of a takeover bid). The Company may be at an increased risk of securities class action litigation. Historically, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for the Company because biotechnology and biopharmaceutical companies have experienced signiﬁcant share price volatility in recent years. If the Company was to be sued, it could result in substantial costs and a diversion of management’s attention and resources, which could harm its business. Holders of the shares outside Belgium and France may not be able to exercise pre-emption rights (notice for non-Belgian resident investors). In the event of an increase in its share capital in cash, holders of shares are generally entitled to full pre-emption rights unless these rights are excluded or limited either by a resolution of the general meeting, or by a resolution of the board of directors (if the board of directors has been authorised by the general meeting in the articles of association to increase the share capital in that manner). Certain holders of shares outside Belgium or France may not be able to exercise pre-emption rights unless local securities laws have been complied with. In particular, U.S. holders of the shares may not be able to exercise pre- emption rights unless a registration statement under the Securities Act is declared eﬀective with respect to the shares issuable upon exercise of such rights or an exemption from the registration requirements is available. The Company does not intend to obtain a registration statement in the U.S. or to fulﬁl any requirement in other jurisdictions (other than Belgium and France) in order to allow shareholders in such jurisdictions to exercise their pre-emptive rights (to the extent not excluded or limited). Any future sale, purchase or exchange of shares may become subject to the Financial Transaction Tax. On February 14, 2013, the European Commission published a proposal (the Draft Directive) for a Directive for a common FTT (Foreign Trade Tax) in Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia (save for Estonia, the Participating Member States). However, Estonia has since then stated that it would not participate. Pursuant to the Draft Directive, the FTT will be payable on ﬁnancial transactions provided at least one party to the ﬁnancial transaction is established or deemed established in a Participating Member State and there is a ﬁnancial institution established or deemed established in a Participating Member State which is a party to the ﬁnancial transaction, or is acting in the name of a party to the transaction. The FTT shall, however, not apply to, among others, primary market transactions referred to in Article 5(c) of Regulation (EC) No 1287/2006, including the activity of underwriting and subsequent allocation of ﬁnancial instruments in the framework of their issue. The rates of the FTT will be ﬁxed by each Participating Member State but for transactions involving ﬁnancial instruments other than derivatives shall amount to at least 0.1% of the taxable amount. The taxable amount for such transactions shall in general be determined by reference to the consideration paid or owed in return for the transfer. The FTT will be payable by each ﬁnancial institution established or deemed established in a Participating Member State which is either a party to the ﬁnancial transaction or acting in the name of a party to the transaction or where the transaction has been carried out on its account. Where the FTT due has not been paid within the applicable time limits, each party to a ﬁnancial transaction, including persons other than ﬁnancial institutions, shall become jointly and severally liable for the payment of the FTT due. Investors should note, in particular, that following implementation of the Draft Directive, any future sale, purchase or exchange of shares will be subject to the FTT at a minimum rate of 0.1% provided the above-mentioned prerequisites are met. The investor may be liable to pay this charge or reimburse a ﬁnancial institution for the charge, and/or the charge may aﬀect the value of the Shares. The issuance of the new Shares by the Issuer should not be subject to the FTT. The Draft Directive is still subject to negotiation among the Participating Member States. It may therefore be altered prior to any implementation, the timing of which remains unclear. Additional EU Member States may decide to participate. Investors should consult their own tax advisers in relation to the consequences of the FTT associated with subscribing for, purchasing, holding and disposing of the Shares. The Company has been subject to an investigation by the Belgian Financial Services and Markets Authority. The Belgian Financial Services and Markets Authority, or the FSMA, opened an investigation against the Company on April 22, 2014. Such investigation was related to whether the Company had failed to timely disclose inside information to the market in relation to the IND clearance from the FDA for its CHART-2 Phase III heart-failure trial received on December 26, 2013 and reported on January 9, 2014. In April 2015, the Company notiﬁed the FSMA its agreement to settle its investigation by paying the proposed settlement amount of €175,000. Although such settlement does not provide for any admission of guilt on its part, the fact that the Company has entered into a settlement with the FSMA could cause investors to have a negative perception of its governance structure, which would have a material adverse eﬀect on its business. Further, any future allegations (based on other facts and circumstances) that the Company failed to comply with applicable securities laws, whether or not true, may subject it to ﬁnes, claims and/or sanctions, which could impair its ability to oﬀer its securities or restrict trading in its securities. The occurrence of any of the foregoing could have a material adverse eﬀect on the trading price of its securities and its business. 2.7.5. Audit activities Internal audit activities are performed by the departments of Finance, for all matters related to accounting and ﬁnancial information, and Quality Assurance for all matters related to the operational activities of the Company. As of the date of this report, there is not yet a dedicated internal audit function. In order to properly manage identiﬁed risks, the Company has set up the following audit measures: • • access and security systems at the premises and oﬃces; establishment, under the supervision of the Quality Assurance department, of a set of procedures covering all activities of the Company; • weekly modiﬁcations and updates of the existing procedures; • development of electronic approval system in the existing ERP system; • implementation of extra controls in the existing ERP system; • development of a monthly ﬁnancial reporting tool which allow a close monitoring of the ﬁnancial information and KPI’s; • updated Risks and Controls Matrix are in place for the internal controls processes (Entity Level, IT, Financial operations) . 2.7.6. Controls, supervision and correctives actions Controls are performed by all persons in charge of departments and services. When deviations are identiﬁed, there are reported to, depending of there relative importance, the head of department or the Executive Management Team. 51 52   The Executive Management Team supervises the implementation of internal audit and risk management, taking into consideration the recommendations of the Audit Committee. 3. SHARES AND SHAREHOLDERS The Executive Management Team is also in charge of proposing the Audit Committee corrective actions when identiﬁed. 3.1. Group structure External audit On May 5, 2017, the Annual Shareholder’s Meeting of Celyad SA engaged CVBA BDO Bedrijfsrevisoren – Réviseurs d’entreprises, represented by Bert Kegels. BDO’s mission includes the auditing of the statutory annual accounts, the consolidated annual accounts of the Company and its subsidiaries. The Company is also subject to ad hoc audit performed by the competent authorities to ensure compliance with GMP, GCP or other regulations. Its main business is conducted through the Company itself. In 2011, the Company incorporated Cardio3 Inc, a fully owned subsidiary, in the U.S. for the purposes of supporting its clinical and regulatory activities of the Group in the US. Cardio3 Inc became Celyad Inc on May 12, 2015. The growth of the activities of Celyad Inc. is associated to the development of the US clinical and regulatory activities of the Company in the US. On November 5, 2014, the Company acquired CorQuest Medical, Inc., a private U.S. company, for a single cash payment of €1.5 million and on-going earn-out royalty payments based on sales milestones. CorQuest Medical, Inc. is developing Heart XS, a new access route to the left atrium. The development of Heart XS and the activities of CorQuest Medical, Inc. have been on hold following the decision of the Company to abandon the development of its cardio business program (C Cure). On January 21, 2015, the Company purchased OnCyte, LLC, or OnCyte, a wholly-owned subsidiary of Celdara Medical, LLC, a privately-held U.S. biotechnology company for an upfront payment of $10.0 million, of which, $6.0 million was paid in cash and $4.0 million was paid in the form of 93,087 of its ordinary shares. Additional contingent payments with an estimated fair value of $42.0 million are payable upon the attainment of various clinical and sales milestones. As a result of this transaction the Company acquired its CAR-T cell drug product candidates and related technology, including technology licensed from the Trustees of Dartmouth College. OnCyte, LLC was the company holding the CAR-T Cell portfolio of clinical-stage immuno- oncology assets. In March 2018, the Company has dissolved OnCyte, and all the assets and liabilities of OnCyte, have been fully distributed to and assumed by the Company In May 1, 2016, the Company acquired Biological Manufacturing Services SA (BMS). BMS owns GMP laboratories. BMS rent its laboratories to the Company since 2009 and until April 30, 2016. Until the acquisition, BMS was considered as a related party to the Company. The Company does not exercise any activities through a branch oﬃce. The consolidation scope of Celyad Group as is as follows: Country of Incorporation and Place of Business Nature of Business Proportion of ordinary shares directly held by parent (%) Proportion ofordin ary shares heldby the group (%) Proportion of ordinary shares held by non- controlling interests (%) USA USA USA Biopharma 100% Biopharma 100% Medical Device 100% Belgium GMP laboratories 100% 100% 100 % 100% 100% 0% 0% 0% 0% Name Celyad Inc. OnCyte, LLC CorQuest Medical, Inc. Biological Manufacturing Services SA 3.2. Capital increase and issuance of shares On January 1, 2018, the share capital of the Company was represented by 9,867,844 shares. In 2018, Celyad has increased its capital following the exercise of Company warrants and the raising of funds through a contribution in cash subscribed in a private placement on 22 May. As of December 31, 2018, the share capital of the Company amounted to €41.552.614,57 and was represented by 11.942.344 shares. The par value is €3.48 per share. The evolution of the capital of the Company since its inception on July 24, 2007 is presented in the notes to the ﬁnancial statements. All shares are issued and fully paid up and are of the same class. Each share (i) entitles its holder to one vote at the Shareholders’ Meetings; (ii) represents an identical fraction of the capital and has the same rights and obligations and participates equally in the proﬁt of Celyad SA; and (iii) gives its holder a preferential subscription right to subscribe to new shares, convertible bonds or warrants in proportion to the part of the share capital represented by the shares already held. 53 54     The preferential subscription right can be restricted or cancelled by a resolution approved by the Shareholders’ Meeting, or by the Board of Directors subject to an authorization of the Shareholders’ Meeting, in accordance with the provisions of the Belgian Company Code and the Company’s articles of association. Further to the Initial Public Oﬀering (IPO) made on the Nasdaq on June 19, 2015, some shares of the Company are 959,556 ADS represented in the outstanding. form of American Depositary Shares (ADS). As of December 31, 2018, there were 3.3. Warrants plans The Company has created various incentive plans under which warrants were granted to its employees, consultants or directors (all warrants are together referred to as “Warrants”). This section provides an overview of the outstanding Warrants on the date hereof. Upon proposal of the Board of Directors, the extraordinary shareholders’ meeting approved the issuance of, in the aggregate, Warrants giving right to subscribe to shares as follows: • On September 26, 2008, (Warrants giving right to 90,000 shares). Of these 90,000 Warrants, 50,000 were oﬀered and accepted. None are outstanding on the date hereof; • on May 5, 2010 (Warrants giving right to 50,000 shares). Of these 50,000 Warrants (15,000 Warrants A, 5,000 Warrants B and 30,000 Warrants C), 12,710 Warrants A, 5,000 Warrants B and 21,700 Warrants C were accepted. None are outstanding on the date hereof; • on October 29, 2010 (Warrants giving right to 79,500 shares). Out of the 79,500 Warrants oﬀered, 61,050 Warrants were accepted by the beneﬁciaries and 766 Warrants are outstanding on the date hereof; • on January 31, 2013 (Warrants giving right to 140,000 shares). Out of the 140,000 Warrants, 120,000 were granted to certain members of the executive management team and a pool of 20,000 Warrants was created. The Warrants attributed to certain members of the executive management team were fully vested at December 31, 2013 and were all exercised in January 2014 and therefore converted into ordinary shares. The remaining 20,000 Warrants were not granted and therefore lapsed; • on May 6, 2013 (11 investor Warrants are attached to each Class B Share subscribed in the capital increase in cash which was decided on the same date, with each investor Warrant giving right to subscribe to one ordinary share – as a result, these Warrants give right to a maximum 2,433,618 ordinary shares); subject to the Warrants being oﬀered and accepted by the beneﬁciaries. On May 31, 2013, Warrants giving right to 2,409,176 ordinary shares were issued and accepted, which have all been exercised on the date hereof. • on May 6, 2013 (Warrants giving right to 266,241 ordinary shares). Out of the 266,241 Warrants oﬀered, 253,150 Warrants were accepted by the beneﬁciaries and 7,000 warrants are outstanding on the date hereof. • on June 11, 2013 (Over allotment Warrant giving right to a maximum number of shares equal to 15% of the new shares issued in the context of the U.S. initial public oﬀering, i.e. 207,225 shares). The over allotment Warrant was exercised on July 17, 2013; • on May 5, 2014 (Warrants giving right to 100,000 shares), a plan of 100,000 Warrants was approved. Warrants were oﬀered to Company’s new comers (employees, non-employees and directors) in several tranches. Out of the Warrants oﬀered, 94,400 warrants were accepted by the beneﬁciaries and 60,697 Warrants are outstanding on the date hereof. • on November 5, 2015 (Warrants giving right to 466,000 shares), a plan of 466,000 Warrants was approved. Warrants were oﬀered to Company’s new comers (employees, non-employees and directors) in several tranches. Out of the Warrants oﬀered, 343,550 warrants were accepted by the beneﬁciaries and 245,982 Warrants are outstanding on the date hereof. • on December 8, 2016 (Warrants giving right to 100,000 shares), a plan of 100,000 Warrants was approved. Warrants were oﬀered to Company’s new comers (employees, non-employees and directors) in two tranches. Out of the Warrants oﬀered, 45,000 warrants were accepted by the beneﬁciaries and 42,500 Warrants are outstanding on the date hereof. • on June 29, 2017 (Warrants giving right to 520,000 shares), a plan of 520,000 Warrants was approved. Warrants were oﬀered to Company’s new comers (employees, non-employees and directors) in several tranches. Out of Warrants are the Warrants oﬀered, outstanding on the date hereof. 334,400 warrants were accepted by the beneﬁciaries and 294,484 • on October 26, 2018 (Warrants giving rights to 700,000 shares), 700,000.00 Warrants have been issued in the framework of the authorised capital. 89,300 Warrants were accepted by the beneﬁciaries, out of which 84,300 Warrants are still outstanding on the date hereof. As a result, at of December 31, 2018 there are 731,229 Warrants outstanding which represent approximately 6.12% of the total number of all its issued and outstanding voting ﬁnancial instruments. 3.4. Changes in share capital In accordance with the Belgian Company Code, the Company may increase or decrease its capital by decision of the Extraordinary General Shareholders’ Meeting taken with a majority of 75% of the votes cast, at a meeting where at least 50% of the share capital of the Company is present or represented. If the attendance quorum of 50% is not met, a new Extraordinary General Shareholders’ Meeting must be convened at which the shareholders may decide on the agenda items, irrespective of the percentage of share capital present or represented at such meeting. There are in this respect no conditions imposed by the Company’s articles of association that are more stringent than those required by law. Within the framework of the powers granted to it under the authorized capital, the Board of Directors may also increase the Company’s capital as speciﬁed in its articles of association. 3.5. Anti-takeover provisions under Belgian laws Under Belgian law, public takeover bids for all the outstanding voting securities issued by the issuer are subject to the supervision of the FSMA. If the latter determines that a takeover violates Belgian law, it may lead to suspension of the exercise of the rights attached to any shares that were acquired in connection with the envisaged takeover. Pursuant to the Belgian law of April 1, 2007 on public takeovers, a mandatory takeover bid must be made when, as a result of its own acquisition or the acquisition by persons acting in concert with it, a person owns, directly or indirectly, more than 30% of the securities with voting rights in a company with registered oﬃce in Belgium whose securities are admitted to trading on a regulated or recognized market. The acquirer must oﬀer to all other shareholders the opportunity to sell their shares at the highest of (i) the highest price oﬀered by the acquirer for shares of the issuer during the 12 months preceding the announcement of the bid or (ii) the weighted average price of the shares on the most liquid market of the last 30 calendar days prior to the date on which the obligation of the acquirer to oﬀer the takeover of the shares of other shareholders starts. With respect to anti-takeover protection, Article 34 of the Royal Decree of November 14, 2007 requires the following information to be included in the annual report: • Capital Structure • The share capital of the Company is represented by ordinary shares. • Based on the transparency notiﬁcations received by the Company, the shareholders owning 5% or more of the Company’s shares on December 31, 2018 were TOLEFI SA (2,295,701 shares) and Victory Capital Management (600,700 shares). All shares are ordinary shares. Legal or statutory restrictions to the transfer of shares • • The articles of association of the Company do not contain any restriction on the transfer of the shares. • Holders of securities with special control rights • Not applicable to the Company. • Control mechanisms in case of an employee shareholding system • Not applicable to the Company. • • The articles of association of the Company do not contain any restriction on voting rights. • Shareholder agreements known to the Company and engendering restrictions to the transfer of shares and/or Legal or statutory restrictions to the exercise of voting rights the exercise of voting rights • The Company is not aware of the existence of any other shareholders’ agreements between its shareholders. • Appointment and replacement of directors The Chairman of the Board is in charge of the nomination procedure. The Board is responsible for proposing members for nomination to the shareholders’ meeting, in each case based on the recommendation of the Nomination & Remuneration Committee. For any new appointment to the Board, the skills, knowledge and experience already present and those needed on the Board will be evaluated and, in the light of that evaluation, a description of the role and skills, experience and knowledge needed will be prepared (a “proﬁle”). When dealing with a new appointment, the Chairman of the Board must ensure that, before considering the candidate, the Board has received suﬃcient information such as the candidate’s curriculum vitae, an assessment of the candidate based on the candidate’s initial interview, a list of the positions the candidate currently holds, and, if applicable, the necessary information for assessing the candidate’s independence. If a legal entity is appointed as a director, it is obliged to appoint, in accordance with the provisions of the Belgian Company Code, a natural person as a permanent representative, who may represent the legal entity in all its dealings with the Company. The legal entity director may not dismiss its permanent representative without simultaneously appointing a new representative. Any proposal for the appointment of a director by the shareholders’ meeting should include a recommendation from the Board based on the advice of the Nomination & Remuneration Committee. This provision also applies to shareholders’ proposals for 55 56 4. CONSOLIDATED FINANCIAL STATEMENTS 4.1. Responsibility statement We hereby certify that, to the best of our knowledge, the consolidated ﬁnancial statements as of 31 December 2018, prepared in accordance with the International Financial Reporting Standards, as adopted by the European Union, and the legal requirements applicable in Belgium, give a true and fair view of the assets, liabilities, ﬁnancial position and loss of the Group and the undertakings included in the consolidation taken as a whole, and that the management report includes a fair review of the development and the performance of the business and the position of the Group and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. March 28, 2019 on behalf of the Board of Directors, Michel Lussier Chairman LSS Consulting SPRL, represented by permanent representative Christian Homsy its CEO appointment. The proposal must specify the proposed term of the mandate, which must not exceed four years. It must be accompanied by relevant information on the candidate’s professional qualiﬁcations together with a list of the positions the candidate already holds. The Board will indicate whether the candidate satisﬁes the independence criteria. Outgoing directors will remain in oﬃce for as long as the shareholders’ meeting, for whatever reason, has not ﬁlled the vacancy. Appointments are generally made for a maximum term of four years. Outgoing directors will be eligible for re-election. However, when an independent director has served on the Board for three consecutive terms, he is in not eligible for a fourth term, as he cannot be an independent director of the Company for more than twelve years. Before proposing any director for re-election, the Board should take into account the evaluations made by the Nomination & Remuneration Committee. The mandates of those directors who are not re-appointed for a new term will terminate immediately after the shareholders’ meeting which decides on any re-appointment or appointment. The directors may be revoked by the shareholders’ meeting at any time. If at any time a vacancy is created on the board of directors, the remaining directors may temporarily appoint a director to the board to ﬁll the vacancy. Any director so appointed will hold oﬃce for the remainder of the term of appointment of the director that it replaces. The deﬁnitive appointment of the replacing director is added to the agenda of the following shareholders’ meeting. • Amendment of the articles of association Pursuant to the Belgian Company Code, any amendment to the articles of association such as an increase or decrease in the capital of the Company, and certain other matters such as the approval of the dissolution, merger or de-merger may only be authorized with the approval of at least 75% of the votes validly cast at an Extraordinary General Shareholders’ Meeting where at least 50% of the Company’s share capital is present or represented. If the attendance quorum of 50% is not met, a new Extraordinary General Shareholders’ Meeting must be convened at which the shareholders may decide on the agenda items, irrespective of the percentage of share capital present or represented at such meeting. • Powers of the Board of Directors The Board of Directors has the most extensive powers in order to perform all acts which are useful or necessary so as to complete the Company’s corporate purpose. The Board of Directors has the power to perform all acts which are not expressly assigned by law or by the articles of association to the shareholders’ meeting. The Board of Directors has to power to establish an audit committee and other committes, the powers of which it will determine. On June 29, 2017, an extraordinary shareholders meeting of the Company granted to the Board of Directors the power to increase the share capital in accordance with the articles 603 et sq. of the Belgian Company Code, in one or several times, for a maximum amount of 33.117.976,63 euros (excluding issue premium), for a period of 5 years as of the publication of the modiﬁcation to the articles of association of the company. Furthermore, in accordance with article 607 of the Belgian Company Code, the Board of Directors is empowered to proceed with a share capital increase even after receipt by the Company of a notiﬁcation by the FSMA of a takeover bid for the Company’s share, for a period of three years from June 29, 2017. When increasing the share capital within the limits of the authorized capital, the Board of Directors may, in the Company’s interest, restrict or cancel the shareholders’ preferential subscription rights, even if such restriction or cancellation is made for the beneﬁt of one or more speciﬁc persons other than the employees of the Company or its subsidiaries. The Board of Directors is not allowed to buy back shares. • Agreements on severance pay Reference is made to section 6 of chapter 2. 3.6. Financial service The ﬁnancial services for the shares are provided by BNP Paribas Security Services. Citibank N.A. is acting as depositary bank for the ADS issued by the Company. Citibank issued an ADS for every new shares issued at the IPO. 57 58 ' 4.2. Statutory auditor’s report to the general meeting of shareholders of Celyad SA for the year ended 31 December 2018 Given the high cash burn ratio that is inherent to the sector the Company is operating in, we consider ﬁnancial funding a key audit matter requiring high auditors’ attention. In the context of the statutory audit of the consolidated ﬁnancial statements of Celyad S.A. (the Company) and its subsidiaries (together referred to as 'the Group'), we hereby present our statutory auditor’s report. It includes our report on the audit of the consolidated ﬁnancial statements as well as our report on the other legal and regulatory requirements. These reports form part of an integrated whole and are indivisible. Procedures performed Our audit procedures included, among others, the following: We have been appointed as statutory auditor by the general meeting of May 5, 2017, following the proposal formulated by the board of directors issued upon recommendation of the audit committee. Our statutory auditor’s mandate expires on the date of the general meeting deliberating on the annual accounts closed on December 31, 2019. We have performed the statutory audit of the consolidated ﬁnancial statements of Celyad S.A. for two years. Report on the audit of the consolidated financial statements Unqualiﬁed opinion We have performed the statutory audit of the Group’s consolidated ﬁnancial statements, which comprise the consolidated statement of ﬁnancial position as at December 31, 2018, and the consolidated statement of proﬁt or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash ﬂows for the year then ended, and notes to the consolidated ﬁnancial statements, including a summary of signiﬁcant accounting policies and other explanatory information, and which is characterised by a consolidated statement of ﬁnancial position total of 94.299 (000) EUR and for which consolidated statement of proﬁt or loss and other comprehensive income shows a loss for the year of 38.551 (000) EUR. In our opinion, the consolidated ﬁnancial statements give a true and fair view of the Group’s net equity and ﬁnancial position as at December 31, 2018, as well as of its consolidated ﬁnancial performance and its consolidated cash ﬂows for the year then ended, in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and with the legal and regulatory requirements applicable in Belgium. Basis for unqualiﬁed opinion We conducted our audit in accordance with International Standards on Auditing (ISAs) as applicable in Belgium. Our responsibilities under those standards are further described in the 'Statutory auditor's responsibilities for the audit of the consolidated ﬁnancial statements' section in this report. We have complied with all the ethical requirements that are relevant to the audit of consolidated ﬁnancial statements in Belgium, including those concerning independence. We have obtained from the board of directors and company oﬃcials the explanations and information necessary for performing our audit. We believe that the audit evidence we have obtained is suﬃcient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most signiﬁcance in our audit of the consolidated ﬁnancial statements of the current year. These matters were addressed in the context of our audit of the consolidated accounts as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Financial funding Description of the matter • We obtained the business plan and the cash forecast for the year 2019 and 2020 and reviewed it for reasonableness; • We reconciled the business plan with the data used in the context of the Company’s impairment test and valuation of the contingent liability; • We challenged the assumptions underlying the business plan and cash forecast, especially with respect to the expected level of operating expenses and revenues; • We compared the total of expected revenues included in the budget and cash forecast with those expected from existing agreements. Revenue recognition Description of the matter Revenue recognition is the principle determining the accounting period in which revenues are recognized in accordance with the valuation rules as adopted by the company, in compliance with the appropriate ﬁnancial reporting framework, being the IFRS 15 as from January 1st, 2018. Given the signiﬁcant management estimates required within the revenue accounting, we consider this area as a key audit matter requiring high auditors’ attention. Procedures performed Our audit procedures included, among others, the following: • We performed a comprehensive analysis of each signiﬁcant revenue agreement with its underlying documentation; • We challenged the key management estimates with regards to the performance obligations of the Company and the allocation of the overall contract price to these obligations; • We reviewed the adequacy of the disclosures notes included in the ﬁnancial statements. Contingent consideration valuation Description of the matter As a result of the acquisition of OnCyte LLC in January 2015, the consolidated ﬁnancial statements include a contingent consideration towards Celdara Medical LLC. As disclosed in Note 5.19.2 of the consolidated ﬁnancial statements, this contingent liability is reported at fair value in the statement of ﬁnancial position. We consider this area a key audit matter requiring high auditors’ attention because of the fact that the valuation of the contingent consideration is complex, contains key judgmental areas and is strongly aﬀected by assumptions with regards to expected future cash ﬂows and market conditions. As described in Note 1.7 of the consolidated ﬁnancial statements, the Company has disclosed that based on its current scope of activities, the Group estimates that its treasury position as of 31 December 2018 (including short term investments) is suﬃcient to cover its cash requirements until mid-2020, so that there is no going concern issue at this moment. Procedures performed Our audit procedures included, among others, the following: 59 60 • We have analysed and reviewed the Company’s fair value calculation including the signiﬁcant underlying assumptions and checked whether an adequate valuation model was applied; • We have analysed the documentation prepared by the Company in relation with the signiﬁcant underlying assumptions as included in the updated business plan and have participated to the meeting in which management has explained and justiﬁed these assumptions to the audit committee; • We have analysed the consistency of the underlying data used in the valuation model and compared these with the data used in the context of the annual impairment test; • We have performed an assessment of the reasonableness of key assumptions, notably probabilities of success and forecasted sales level; • We have consulted a valuation expert in our ﬁrm to assess the methodology, clerical accuracy, long term growth rate and discount rate as applied; • We reviewed the completeness and adequacy of the disclosures as included in note 5.19.2 to the consolidated ﬁnancial statements. Intangible assets impairment Description of the matter As described in Note 5.6.2 of the consolidated ﬁnancial statements, the Group is required to annually test its intangible assets for impairment as they are mainly composed of “In-process Research and Development Costs” (“IPRD”). As reminder, these assets acquired in a business combination are subject to annual impairment testing until the projects are available for use. We consider this area a key audit matter requiring high auditors’ attention because of the potential signiﬁcant impact on the ﬁnancial statements and the fact that the impairment test contains key judgmental areas that are strongly aﬀected by assumptions. Procedures performed Our audit procedures included, among others, the following: • We have analysed internal and external information in order to identify potential impairment indicators; • We have analysed and reviewed the Company’s impairment model including the signiﬁcant underlying assumptions and checked whether an adequate valuation model was applied; • We have analysed the Company’s valuation applied in relation with the intragroup transfer of the intangible assets that were previously owned by Oncyte LLC, a 100% subsidiary of Celyad S.A. that was liquidated in the course of 2018; • We have analysed the consistency of the underlying data used in the impairment test and compared these with the data used in the valuation model applied in context of the valuation of the contingent liability; • We have consulted a valuation expert in our ﬁrm to assess the methodology, clerical accuracy, long term growth rate and discount rate as applied; • We reviewed the sensitivity analysis prepared by management to understand the eﬀect of a change in assumptions; • We considered all available information provided to us by the Company to assess potential additional factors that could trigger impairment; • We reviewed the completeness and adequacy of the disclosures in the consolidated ﬁnancial statements. Responsibilities of the board of directors for the consolidated ﬁnancial statements The board of directors is responsible for the preparation of consolidated ﬁnancial statements that give a true and fair view in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union and with the legal and regulatory provisions applicable in Belgium, and for such internal control as the board of directors determines is necessary to enable the preparation of consolidated ﬁnancial statements that are free from material misstatements, whether due to fraud or error. In preparing the consolidated ﬁnancial statements, the board of directors is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the board of directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Statutory auditor's responsibilities for the audit of the consolidated ﬁnancial statements Our objectives are to obtain reasonable assurance about whether the consolidated ﬁnancial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue a statutory auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but it is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to inﬂuence the economic decisions of users taken on the basis of these consolidated ﬁnancial statement. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated ﬁnancial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is suﬃcient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control ; • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the eﬀectiveness of the Group’s internal control ; • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the board of directors ; • Conclude on the appropriateness of the board of directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast signiﬁcant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our statutory auditor’s report to the related disclosures in the consolidated ﬁnancial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our statutory auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern ; • Evaluate the overall presentation, structure and content of the consolidated ﬁnancial statements and whether the consolidated ﬁnancial statements represent the underlying transactions and events in a manner that achieves fair presentation ; • Obtain suﬃcient appropriate audit evidence regarding the ﬁnancial information of the entities or business activities within the Group to express an opinion on the consolidated ﬁnancial statements. We are responsible for the management, the supervision and the performance of the Group audit. We assume full responsibility for the auditor’s opinion. We communicate with the Audit Committee regarding, among other matters, the planned scope and timing of the audit as well as signiﬁcant audit ﬁndings, including any signiﬁcant deﬁciencies in internal control identiﬁed during the audit. We also provide the Audit Committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence and, where applicable, related safeguards. From the matters communicated to the Audit Committee, we determine those matters that were of most signiﬁcance in the audit of the consolidated ﬁnancial statements of the current year, and are therefore the key audit matters. We describe these matters in our statutory auditor’s report unless law or regulation precludes public disclosure about the matter. 61 62 Report on other legal and regulatory requirements Responsibilities of the board of directors The board of directors is responsible for the preparation and the contents of the management report on the consolidated ﬁnancial statements and for the other information included in the annual report on the consolidated ﬁnancial statements. Responsibilities of the statutory auditor In the context of our mandate and in accordance with the Belgian standard (revised in 2018) that is supplementary to the International Standards on Auditing (ISA) as applicable in Belgium, it is our responsibility to verify, in all material aspects, the management report on the consolidated ﬁnancial statements and the other information included in the annual report on the consolidated ﬁnancial statements, as well as to report on these elements. Aspects related to the management report on the consolidated ﬁnancial statements and to the other information included in the annual report on the consolidated ﬁnancial statements In our opinion, after having performed speciﬁc procedures in relation to the management report, the management report is consistent with the consolidated ﬁnancial statements for the same same ﬁnancial year, and it is prepared in accordance with article 119 of the Company Code. In the context of our audit of the consolidated ﬁnancial statements, we are also responsible for considering, in particular based on the knowledge we have obtained during the audit, whether the management report on the consolidated ﬁnancial statements (chapter 1 of the annual report), and the other information included in the annual report on the consolidated ﬁnancial statements, namely the operational and ﬁnancial review by the Board of Directors (chapter 1.3 of the annual report) contain a material misstatement, i.e. information which is inadequately disclosed or otherwise misleading. Based on the procedures we have performed, there are no material misstatements we have to report to you. We do not not express any form of assurance whatsoever on the management report on the consolidated ﬁnancial statements nor on the other information contained in the annual report on the consolidated ﬁnancial statements. Statement concerning independence • Our audit ﬁrm, and our network, did not provide services which are incompatible with the statutory audit of consolidated ﬁnancial statements, and we remained independent of the Group throughout the course of our mandate. • The fees related to additional services which are compatible with the statutory audit as referred to in article 134 of the Company Code were duly itemised and valued in the notes to the consolidated ﬁnancial statements. Other statement • This report is in compliance with the contents of our additional report to the audit committee as referred to in article 11 of Regulation (EU) No 537/2014. 4.3. Consolidated ﬁnancial statements as at 31 December 2018 4.3.1. Consolidated statement of financial position (€’000) As at 31 December, Notes 2018 2017 NON-CURRENT ASSETS Intangible assets Property, Plant and Equipment Non-current trade receivables Other non-current assets CURRENT ASSETS Trade and Other Receivables Other current assets Short-term investments Cash and cash equivalents TOTAL ASSETS EQUITY Share Capital Share premium Other reserves Accumulated deﬁcit NON-CURRENT LIABILITIES Bank loans Finance leases Recoverable Cash advances (RCA's) Contingent consideration and other ﬁnancial liabilities Post employment beneﬁts Other non-current liabilities CURRENT LIABILITIES Bank loans Finance leases Recoverable Cash advances (RCA's) Trade payables Other current liabilities 5.6 5.7 5.8 5.8 5.9 5.9 5.10 5.11 5.13 5.13 5.21 5.18 5.18 5.16 5.19 5.15 5.18 5.18 5.16 5.17 5.17 42,607 41,232 36,164 36,508 3,014 3,290 1,743 - 1,687 1,434 51,692 36,394 367 233 1,585 2,255 9,197 10,653 40,542 23,253 94,299 77,626 55,589 47,535 41,553 34,337 206,149 170,297 25,667 23,322 (217,778) (180,421) 29,063 22,146 229 326 652 482 2,864 1,544 25,187 19,583 131 204 - 7 9,647 7,945 281 209 484 427 276 226 5,916 4,800 2,690 2,282 TOTAL EQUITY AND LIABILITIES 94,299 77,626 The accompanying disclosure notes form an integral part of these consolidated ﬁnancial statements. 63 64 4.3.2. Consolidated statement of comprehensive loss 4.3.3. Consolidated statement of changes in equity (€'000) Revenue Cost of sales Gross profit Research and Development expenses General & Administrative expenses Other income Other expenses Operating Loss before non-recurring items - REBIT Amendment of Celdara Medical and Dartmouth College agreements Write-oﬀ C-Cure and Corquest assets and derecognition of related liabilities Operating Loss - EBIT Financial income Financial expenses Loss before taxes Income taxes Loss for the year [1] Notes 5.22 5.23 5.24 5.27 5.27 5.28 5.28 5.30 5.30 For the year ended 31 December, 2018 2017 3,115 3,540 - (515) 3,115 3,025 (10,387) (9,310) 1,078 2,630 (8,399) (41) (38,170) (26,604) - (24,341) (€’000) Balance as at 1st January 2017 Share capital  (Note 5.13) Share premium (Note 5.13) Other reserves (Note 5.21) Accumulated deficit Total Equity 32,571 158,010 24,330 (124,026) 90,885 Capital increase resulting from Celdara and Dartmouth College agreements amendment 1,141 9,479 (23,577) (22,908) Exercise of warrants 625 Share-based payments 2,808 (239) Total transactions with owners, recognized directly in equity Loss for the year 1,766 12,287 (239) - 13,814 (56,395) (56,395) (769) (769) - (1,932) Currency Translation diﬀerences (38,170) (52,876) 804 933 (62) (4,454) Total comprehensive gain/(loss) for the year - - (769) (56,395) (57,164) Balance as at 31 December 2017 34,337 170,297 23,322 (180,421) 47,535 10,620 625 2,569 (37,427) (56,396) 5.20 0 1 (37,427) (56,395) Basic and diluted loss per share (in €) 5.31 (3.36) (5.86) Other comprehensive loss Items that will not be reclassified to profit and loss 70 - Remeasurements of post employment beneﬁt obligations, net of tax 70 - Items that may be subsequently reclassified to profit or loss (1,194) (769) Currency translation diﬀerences (1,194) (769) Other comprehensive income / (loss) for the year, net of tax (1,124) (769) Total comprehensive loss for the year (38,551) (57,164) Total comprehensive loss for the year attributable to Equity Holders [1] (38,551) (57,164) [1] For 2018 and 2017, the Group does not have any non-controlling interests and the losses for the year are fully attributable to owners of the parent. The accompanying disclosure notes form an integral part of these consolidated ﬁnancial statements. Balance as at 1st January 2018 Capital increase in cash Transaction costs associated with capital increases Exercice of warrants Share-based payments 34,337 170,297 23,322 (180,421) 47,535 7,204 38,937 (3,141) 12 56 3,539 46,140 (3,141) 12 3,595 Total transactions with owners, recognized directly in equity 7,215 35,851 3,539 - 46,606 Loss for the year Currency Translation diﬀerences Remeasurements of deﬁned beneﬁt obligation (37,427) (37,427) (1,194) (1,194) 70 70 Total comprehensive gain/(loss) for the year - - (1,194) (37,357) (38,551) Balance as at 31 December 2018 41,552 206,149 25,667 (217,778) 55,589 The accompanying disclosure notes form an integral part of these consolidated ﬁnancial statements. 65 66 4.3.4. Consolidated statement of Cash flows Repayments of ﬁnance leases and bank borrowings Proceeds from issuance of shares and exercise of warrants (€'000) For the year ended 31 December, Proceeds from RCA's & other grants Notes 2018 2017 Repayment of RCA's & other grants Cash Flow from operating activities Loss for the year 4.3.2 (37,427) (56,395) Cash expense for amendment of Celdara Medical and Dartmouth College agreements 5.28 - 13,276 Non-cash adjustments Non-Cash expense for amendment of Celdara Medical and Dartmouth College agreements 5.28 - 10,620 Net cash from/(used in) financing activities Net cash and cash equivalents at beginning of the year Change in Cash and cash equivalents Eﬀects of exchange rate changes on cash and cash equivalents Net cash and cash equivalents at the end of the year 5.18 5.13 5.18 5.18 5.11 (749) 43,011 1,187 (576) 625 1,376 (471) (1,364) 43,928 23,253 17,286 605 48,357 (26,224) 3 1,120 40,542 23,253 The accompanying disclosure notes form an integral part of these consolidated ﬁnancial statements. Intangibles - Amortization and impairment PP&E - Depreciation Upfront payment settled in shares Change in fair value of Contingent consideration and other ﬁnancial liabilities Remeasurement of Recoverable Cash Advances (RCA's) Grant income (RCA's and others) Share-based payment expense Post-employment beneﬁts Change in working capital Trade receivables, other (non-)current receivables Trade payables, other (non-)current liabilities 5.6 5.7 5.22 5.19 5.18 5.27 5.14 5.15 66 1,048 (843) 5,604 998 (768) 3,595 8,038 966 - (193) (5,356) (1,376) 2,569 - (3) (1,459) (832) 1,940 (2,482) Net cash used in operations, before non-recurring items (27,249) (31,165) Cash expense for amendment of Celdara Medical and Dartmouth College agreements 5.28 - (13,276) Net cash used in operations Cash Flow from investing activities Acquisition of Property, Plant & Equipment Acquisitions of Intangible assets Disposals of ﬁxed assets Contingent liability pay out Acquisition of short-term investments Proceeds from short-term investments Net cash from/(used in) investing activities Cash Flow from financing activities (27,249) (44,441) 5.7 5.6 5.7 (833) (932) (851) (7) 74 - 5.19 - (5,107) 5.10 5.10 (26,561) (10,749) 28,859 34,326 607 17,613 Proceeds from ﬁnance leases and bank borrowings 5.18 950 543 67 68 5. Notes to the consolidated financial statements 5.1. General information Celyad is a clinical-stage biopharmaceutical company focused on the development of engineered CAR-T cell-based therapies for the treatment of both hematological malignancies and solid tumors. The Company’s lead candidate, CYAD-01, is an investigational autologous CAR-T therapy which expresses the NKG2D receptor from natural killer (NK) cells that binds to eight stress-induced ligands expressed on tumor cells. CYAD-01 is currently being evaluated for safety and clinical activity in multiple dose-escalation Phase 1 clinical trials both as a monotherapy without preconditioning chemotherapy and following preconditioning chemotherapy for the treatment of patients with r/r AML and when concurrently administered with standard-of-care chemotherapy or preconditioning chemotherapy in mCRC patients. Celyad’s second clinical candidate, CYAD-101, is an investigational, non-gene edited allogeneic (donor derived) CAR-T therapy that co-expresses the NKG2D receptor of CYAD-01 and the novel inhibitory peptide TIM (Tcell receptor [TCR] Inhibiting Molecule). CYAD-101 is currently being evaluated for safety and clinical activity in a dose-esclation Phase 1 trial when concurrently administered with standard-of-care chemotherapy for the treatment of mCRC. Celyad SA was incorporated on July 24, 2007 under the name “Cardio3 BioSciences”. Celyad is a limited liability company (Société Anonyme) governed by Belgian law with its registered oﬃce at Axis Parc, Rue Edouard Belin 2, B-1435 Mont-Saint- Guibert, Belgium (company number 0891.118.115). The Company’s ordinary shares are listed on NYSE Euronext Brussels and NYSE Euronext Paris regulated markets and the Company’s American Depositary Shares (ADSs) are listed on the NASDAQ Global Market, all under the ticker symbol CYAD. The Company has three fully owned subsidiaries (together, the Group) located in Belgium (Biological Manufacturing Services SA) and in the United States (Celyad Inc. and Corquest Medical, Inc.). OnCyte LLC has been dissolved on March 8, 2018 and, as a result, all of its assets and liabilities were since then fully distributed to and assumed by Celyad SA. These consolidated ﬁnancial statements have been approved for issuance by the Company’s Board of Directors on March 28, 2019. These statements have been audited by BDO Réviseurs d’entreprises SCRL, the statutory auditor of the Company. The annual report is available to the public free of charge and upon request to the above-mentioned address or via the Company’s website (http://www.celyad.com/investors). 5.2. Basis of preparation and signiﬁcant accounting policies The year-end consolidated ﬁnancial statements of Celyad for the twelve months ended December 31, 2018 (the “year”) include Celyad SA and its subsidiaries. The signiﬁcant accounting policies used for preparing these consolidated ﬁnancial statements are explained below. 5.2.1. Basis of preparation The consolidated ﬁnancial statements have been prepared on a historical cost basis, except for : • Financial instruments – Fair value through proﬁt or loss • Contingent consideration and other ﬁnancial liabilities • Post-employment beneﬁts liability • Equity securities held as short-term investments at 31 December 2018 (see note 5.10) The policies have been consistently applied to all the years presented, unless otherwise stated. The consolidated ﬁnancial statements are presented in euro and all values are presented in thousands (€000) except when otherwise indicated. Amounts have been rounded oﬀ to the nearest thousand and in certain cases, this may result in minor discrepancies in the totals and sub totals disclosed in the ﬁnancial tables. - Statement of compliance The consolidated ﬁnancial statements of the Group have been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and Interpretations (collectively, IFRSs) as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union. The preparation of the consolidated ﬁnancial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, are areas where assumptions and estimates are signiﬁcant to the ﬁnancial statements. They are disclosed in note 5.4. Going concern The Group is pursuing a strategy to develop therapies to treat unmet medical needs in oncology. Management has prepared detailed budgets and cash ﬂow forecasts for the years 2019 and 2020. These forecasts reﬂect the strategy of the Group and include signiﬁcant expenses and cash outﬂows in relation to the development of selected research programs and product candidates. Based on its current scope of activities, the Group estimates that its treasury position as of 31 December 2018 is suﬃcient to cover its cash requirements until mid-2020, therefore beyond the readouts of our clinical trials currently ongoing. After due consideration of the above, the Board of Directors determined that management has an appropriate basis to conclude on the business continuity over the next 12 months from balance sheet date, and hence it is appropriate to prepare the ﬁnancial statements on a going concern basis. 3 Changes to accounting standards and interpretations The Group has applied the same accounting policies and methods of computation in its year-end consolidated ﬁnancial statements as prior year, except for those that relate to new standards and interpretations eﬀective for the ﬁrst time for periods beginning on (or after) 1 January 2018. The Group has adopted the following new standards that went into eﬀect on January 1, 2018: IFRS 9 Financial Instruments; and IFRS 15 Revenue from Contracts with Customers • • • Details of the impact of these two standards on the Group are given below. • IFRS 9 Financial Instruments (eﬀective for annual periods beginning on or after 1 January 2018) is the standard issued as part of a wider project to replace IAS 39. IFRS 9 introduces a logical approach for the classiﬁcation of ﬁnancial assets, which is driven by cash ﬂow characteristics and the business model in which an asset is held; deﬁnes a new expected-loss impairment model that will require more timely recognition of expected credit losses; and introduces a substantially-reformed model for hedge accounting, with enhanced disclosures about risk management activity. The new hedge accounting model represents a signiﬁcant overhaul of hedge accounting that aligns the accounting treatment with risk management activities. IFRS 9 also removes the volatility in proﬁt or loss that was caused by changes in the credit risk of liabilities elected to be measured at fair value. - Regarding the classiﬁcation and measurement of ﬁnancial assets, the impact is limited since the Group does not hold signiﬁcant equity or debt investments. Likewise, the impact in the Group of the new guidance on impairment of ﬁnancial assets is very limited considering the nature of ﬁnancial assets held and speciﬁcally the current low amount of trade receivables. The Group does not currently apply hedge accounting. There are no substantial changes to the measurement of ﬁnancial liabilities under the new guidance. - - - Considering all of the above and the characteristics of the ﬁnancial instruments held by the Company, management has analyzed the implications of the retrospective adoption on the required eﬀective date of this standard in accordance with IAS 8. The Company has concluded that the application of IFRS 9 does not have a signiﬁcant impact on the ﬁnancial statements. - • IFRS 15 Revenue from Contracts with Customers (eﬀective for annual periods beginning on or after 1 January 2018) is the new standard ruling revenue recognition. Its core principle requires to depict the transfer of goods or services to customers in amounts that reﬂect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The new standard also results in enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modiﬁcations) and improve guidance for multiple-element arrangements. The Group has applied the full retrospective transition approach. For the comparative year presented in the 2018 ﬁnancial statements, the most signiﬁcant revenue source of the Company was the license agreement signed with Novartis in May 2017. Management has analyzed the contract using the guidance under the new standard and has concluded that the adoption of IFRS 15 does not aﬀect the previous accounting treatment under IAS 18. In this respect, the licensing revenue relating to the Novartis agreement reported for the year ended December 31, 2017, has been concluded by management as follows: - - in accordance with ‘Licensing’ Application Guidance set forth in IFRS 15 - Appendix B, para. B52 until B63: it shall not be subject to any recognition restatement, as the agreement qualify as a ‘right-to-use’ license; in order to comply with ‘Principal vs. Agent’ guidance set forth in IFRS 15 Appendix B, para. B34 until B38: it shall not be subject to any presentation restatement, as both ‘revenue’ and ‘cost of licensing’ (expense) were alreay presented separately under IAS 18, evidencing properly that the Company is acting as a ‘Principal’ in this transaction. 69 70 3 ‘Treasury position’ is an alternative performance measure determined by adding Short-term investments and Cash and cash equivalents from the statement of ﬁnancial position prepared in accordance with IFRS. At 2018 year-end, IFRS 15 implementation has thus no revenue recognition or presentation impact on the Group’s ﬁnancial statements, for the comparative year presented. 5.2.3. Foreign currency translation Functional and presentation currency Except for IFRS 16 Leases, other new or amended standards and Interpretations issued by the IASB and the IFRIC that will apply for the ﬁrst time in future annual periods are not expected to have a material eﬀect on the Group as they are either not relevant to the Group’s activities or require accounting which is consistent with the Group’s current accounting policies. Details of IFRS 16 impact on the Group are given below: • IFRS 16 Leases is a new standard eﬀective for annual periods beginning on or after 1 January 2019. Therefore, the Group shall transition as of 1 January 2019 and will issue ﬁnancial statements prepared for the ﬁrst time in accordance with IFRS 16 at Half Year 2019. The standard replaces the existing lease accounting requirements and, in particular, represents a signiﬁcant change in the accounting and reporting of leases that were previously classiﬁed as ‘operating leases’ under IAS 17, with incremental assets and liabilities to be reported on the balance sheet and a diﬀerent recognition of lease costs. The Group will opt for the so-called ‘modiﬁed retrospective’ adoption method and therefore shall only restate lease contracts active at 1 January 2019. In addition, it has decided to measure right-of-use assets by reference to the measurement of the lease liability on that date. Accordingly, there will be no transiton impact on the Group’s opening equity for the year 2019. The Group has set up a project team, supported by an external advisor, to draw an inventory of lease contracts diﬀerentiating those in scope of IFRS 16 restatement from those excluded under low-value and short-term contracts exemptions allowed by IFRS 16. The Group has completed the process of capturing the relevant data needed under the new standard, in order to analyze the impact of adopting IFRS 16. In accordance with these preliminary data, the lease obligation to be recognized as of 1 January 2019 amounts to €2.2 million. IFRS 16 transition quantitative impact is discussed further under the disclosure note 5.29. 5.2.2. Consolidation Subsidiaries Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to aﬀect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date control ceases. Inter-company transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated. When necessary, amounts reported by subsidiaries have been adjusted to conform with the Group’s accounting policies. Business Combinations The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is measured at the aggregate of the fair values of the assets transferred, the liabilities incurred or assumed, and the equity interests issued by the Group at the date of the acquisition. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identiﬁable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Acquisition-related costs are expensed as incurred. Any contingent consideration to be transferred by the Group is recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognized in proﬁt or loss, in accordance with IFRS 9 if applicable. Contingent consideration that is classiﬁed as equity is not re-measured, and its subsequent settlement is accounted for within equity. Items included in the ﬁnancial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated ﬁnancial statements are presented in Euros, which is the Group’s presentation currency. Transactions and balances Foreign currency transactions (mainly USD) are translated into the functional currency using the applicable exchange rate on the transaction dates. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency spot rate of exchange ruling at the reporting date. Foreign currency exchange gains and losses arising from settling foreign currency transactions and from the retranslation of monetary assets and liabilities denominated in foreign currencies at the reporting date are recognised in the income statement. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as of the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. Group companies The results and ﬁnancial position of all group entities that have a functional currency diﬀerent from the presentation currency are translated into the presentation currency as follows: • Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that • balance sheet; Income and expenses for each income statement are translated at average exchange rate (unless this average is not a reasonable approximation of the cumulative eﬀect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and • All resulting translation diﬀerences are recognized in other comprehensive income. 5.2.4. Revenue So far, the main revenue generated by the Group relates to the sale of licenses. Licensing revenue Celyad enters into license and/or collaboration agreements with third-party biopharmaceutical partners. Revenue under these arrangements may include non-refundable upfront payments, product development milestone payments, commercial milestone payments and/or sales-based royalties payments. Upfront payments Licence fees representing non-refundable payments received at the time of signature of licence agreements are recognized as revenue upon signature of the licence agreements when the Company has no signiﬁcant future performance obligations and collectibility of the fees is assured. Milestone payments Milestone payments represent amounts received from our customers or collaborators, the receipt of which is dependent upon the achievement of certain scientiﬁc, regulatory, or commercial milestones. Under IFRS 15, milestone payments generally represent a form of variable consideration as the payments are likely to be contingent on the occurrence of future events. Milestone payments are estimated and included in the transaction price based on either the expected value (probability-weighted estimate) or most likely amount approach. The most likely amount is likely to be most predictive for milestone payments with a binary outcome (i.e., the company receives all or none of the milestone payment). Variable consideration is only recognized as revenue when the related performance obligation is satisﬁed, and the company determines that it is highly probable that there will not be a signiﬁcant reversal of cumulative revenue recognized in future periods. Royalty revenue Royalty revenues arise from our contractual entitlement to receive a percentage of product sales achieved by co-contracting parties. As our co-contrating partners currently have no products based on a Celyad-technology approved for sale, we have 71 72 not received any royalty revenue to date. Royalty revenues, if earned, will be recognized on an accrual basis in accordance with the terms of the contracts with our customers when sales occur and there is reasonable assurance that the receivables from outstanding royalties will be collected. Sales of goods (medical devices) Sales of medical devices are recognized when Celyad has transferred to the buyer the control of the promised goods (with control referring to the ability to direct the use of and obtain substantially all of the remaining beneﬁts of the medical device). Sales of medical devices generated by the Group until 2017 are associated with C-CathEZ, its proprietary catheter. 5.2.5. Government Grants (Other income) The Group’s grant income reported under ‘Other income’ in the consolidated income statement is generated from: (i) recoverable cash advances (RCAs) granted by the Regional government of Wallonia; (ii) R&D tax credits granted by the Belgian federal government; and (iii) grants received from the European Commission under the Seventh Framework Program (“FP7”). Government grants are recognised at their fair value where there is reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Once a government grant is recognized, any related contingent liability (or contingent asset) is treated in accordance with IAS 37. Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs that they are intended to compensate. Recoverable cash advances (RCAs) The Group receives grants from the Walloon Region in the form of recoverable cash advances (RCAs). RCAs are dedicated to support speciﬁc development programs. All RCA contracts, in essence, consist of three phases, i.e., the “research phase”, the “decision phase” and the “exploitation phase”. During the research phase, the Group receives funds from the Region based on statements of expenses. In accordance with IAS 20.10A and IFRS Interpretations Committee (IC)’s conclusion that contingently repayable cash received from a government to ﬁnance a research and development (R&D) project is a ﬁnancial liability under IAS 32, ‘Financial instruments; Presentation’, the RCAs are initially recognised as a ﬁnancial liability at fair value, determined as per IFRS 9/IAS 39. The beneﬁt (RCA grant component) consisting in the diﬀerence between the cash received (RCA proceeds) and the above- mentioned ﬁnancial liability’s fair value (RCA liability component) is treated as a government grant in accordance with IAS 20. The RCA grant component is recognized in proﬁt or loss on a systematic basis over the periods in which the entity recognizes the underlying R&D expenses subsidized by the RCA. The RCAs liability component (RCA ﬁnancial liability) is subsequently measured at amortized cost using the cumulative catch-up approach under which the carrying amount of the liability is adjusted to the present value of the future estimated cash ﬂows, discounted at the liability’s original eﬀective interest rate. The resulting adjustment is recognized within proﬁt or loss. At the end of the research phase, the Group should within a period of six months decide whether or not to exploit the results of the research phase (decision phase). The exploitation phase may have a duration of up to 10 years. In the event the Group decides to exploit the results under an RCA, the relevant RCA becomes contingently refundable, and the fair value of the RCA liability adjusted accordingly, if required. When the Group does not exploit (or ceases to exploit) the results under an RCA, it has to notify the Region of this decision. This decision is of the sole responsibility of the Group. The related liability is then discharged by the transfer of such results to the Region. Also, when the Group decides to renounce to its rights to patents which may result from the research, title to such patents will be transferred to the Region. In that case, the RCA liability is extinguished. R&D Tax credits Since 2013, the Company applies for R&D tax credit, a tax incentive measure for European SME’s set-up by the Belgian federal government. When capitalizing its R&D expenses under tax reporting framework, the Company may either i) get a reduction of its taxable income (at current income tax rate applicable) ; or ii) if no suﬃcient taxable income is available, apply for the refund of the unitilized tax credits, calculated on the R&D expenses amount for the year. Such settlement occurs at the earliest 5 ﬁnancial years after the tax credit application ﬁled by the Company. Considering that R&D tax credits are ultimately paid by the public authorities, the related beneﬁt is treated as a government grant under IAS 20 and booked into other income, in order to match the R&D expenses subsidized by the grant. Other government grants The Group has received and will continue to apply for grants from European (FP7) and Regional authorities. These grants are dedicated to partially ﬁnance early stage projects such as fundamental research, applied research, prototype design, etc. To date, all grants received are not associated to any conditions. As per contract, grants are paid upon submission by the Group of statement of expenses. The Company incurs project expenses ﬁrst and asks for partial refunding according to the terms of the contracts. These government grants are recognized in proﬁt or loss on a systematic basis over the periods in which the entity recognizes the underlying R&D expenses subsidized. 5.2.6. Intangible assets The following categories of intangible assets apply to the current Group operations: Separately acquired intangible assets Intangible assets acquired from third parties are recognised at cost, if and only if it is probable that future economic beneﬁts associated with the asset will ﬂow to the Group, and that the cost can be measured reliably. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses. The useful life of intangible assets is assessed as ﬁnite, except for Goodwill and IPRD assets (discussed below). They are amortised over the expected useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a ﬁnite useful life are reviewed at least at each ﬁnancial year end. Changes in the expected useful life or the expected pattern of consumption of future economic beneﬁts embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with ﬁnite lives is recognised in the income statement in the expense category consistent with the function of the intangible asset. Patents, Licences and Trademarks Licences for the use of intellectual property are granted for a period corresponding to the intellectual property of the assets licensed. Amortisation is calculated on a straight-line basis over this useful life. Patents and licences are amortized over the period corresponding to the IP protection and are assessed for impairment whenever there is an indication these assets may be impaired. Indication of impairment is related to the value of the patent demonstrated by the pre-clinical and clinical results of the technology. Software Software only concerns acquired computer software licences. Software is capitalised on the basis of the costs incurred to acquire and bring to use the speciﬁc software. These costs are amortised over their estimated useful lives of three to ﬁve years on a straight-line basis. Intangible assets acquired in a business combination Goodwill A goodwill is an asset representing the future economic beneﬁts arising from other assets acquired in a business combination that are not individually identiﬁed and separately recognised. Goodwill is measured as a residual at the acquisition date, as the excess of the fair value of the consideration transferred and the assets and liabilities recognised (in accordance with IFRS 3). Goodwill has an indeﬁnite useful life and is not amortized but tested for impairment at least annually or more frequently whenever events or changes in circumstances indicate that goodwill may be impaired, as set forth in IAS 36 (Impairment of Assets). Goodwill arising from business combinations is allocated to cash generating units, which are expected to receive future economic beneﬁts from synergies that are most likely to arise from the acquisition. These cash generating units form the basis of any future assessment of impairment of the carrying value of the acquired goodwill. In process research and development costs The In-process research and development costs (“IPRD”) acquired as part of a business combination are capitalized as an indeﬁnite-lived intangible asset until project has been completed or abandoned. In a business combination, IPRD is measured at fair value at the date of acquisition. Subsequent to initial recognition, it is reported at cost and is subject to annual impairment testing until the date the projects are available for use. At this moment, the IPRD will be amortized over its remaining useful economic life. Subsequent R&D expenditure can be capitalized as part of the IPRD only to the extent that IPRD is in development stage, i.e. when such expenditure meets the recognition criteria of IAS 38. In line with biotech industry practice, Celyad determines that ‘development stage’ under IAS 38 is reached when the product candidate gets regulatory approval (upon Phase III completion). Therefore, any R&D expenditure incurred between the acquisition date and the development stage should be treated as part of research phase and expensed periodically in the income statement. 73 74 Internally generated intangible assets Except qualifying development expenditure (discussed below), internally generated intangible assets are not capitalised. Expenditure is reﬂected in the income statement in the year in which the expenditure is incurred. Research and development costs Research costs are expensed as incurred. Development expenditures on an individual project are recognised as an intangible asset when the Group can demonstrate: a) b) c) d) e) f) the technical feasibility of completing the intangible asset so that it will be available for use or sale. its intention to complete the intangible asset and use or sell it. its ability to use or sell the intangible asset. how the intangible asset will generate probable future economic beneﬁts. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset. the availability of adequate technical, ﬁnancial and other resources to complete the development and to use or sell the intangible asset. its ability to measure reliably the expenditure attributable to the intangible asset during its development. For the industry in which the Group operates, the life science industry, criteria a) and d) tend to be the most diﬃcult to achieve. Experience shows that in the Biotechnology sector technical feasibility of completing the project is met when such project completes successfully Phase III of its development. For medical devices this is usually met at the moment of CE marking. Following initial recognition of the development expenditure as an asset, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Amortisation of the asset begins when development has been completed and the asset is available for use. It is amortised over the period of expected future beneﬁt. Amortisation is recorded in Research & Development expenses. During the period of development, the asset is tested for impairment annually, or earlier when an impairment indicator occurs. As of balance sheet date, only the development costs of C-Cathez have been capitalized and amortized over a period of 17 years which corresponds to the period over which the intellectual property is protected. 5.2.7. Property, plant and equipment From time to time, the Group may enter into sale and leaseback transactions. If the sale and leaseback transaction results in a ﬁnance lease, any excess of sales proceeds over the carrying amount is deferred and amortised over the lease term. If the transaction results in an operating lease and the transaction occurred at fair value, any proﬁt or loss is recognised immediately. 5.2.9. Impairment of non-financial assets The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s (CGU) fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inﬂows that are largely independent of those from other assets or group of assets. In assessing value in use, the estimated future cash ﬂows are discounted to their present value using a pre-tax discount rate that reﬂects current market assessments of the time value of money and the risks speciﬁc to the asset. In determining fair value less costs to sell, an appropriate valuation model is used based on the discounted cash-ﬂow model. For intangible assets under development (like IPRD), only the fair value less costs to sell reference is allowed in the impairment testing process. Where the carrying amount of an asset or CGU exceeds its recoverable amount, an impairment loss is immediately recognized as an expense and the asset carrying value is written down to its recoverable amount. An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the Group estimates the asset’s or cash- generating unit’s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the income statement unless the asset is carried at a revalued amount, in which case the reversal is treated as a revaluation increase. An impairment loss recognised on goodwill is however not reversed in a subsequent period. Plant and equipment is stated at cost, net of accumulated depreciation and/or accumulated impairment losses, if any. Repair and maintenance costs are recognised in the income statement as incurred. As of balance sheet date, the Group has two cash-generating units which consist of the development and commercialization activities on : Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows: • Land and buildings: 15 to 20 years • Plant and equipment: 5 to 15 years • Laboratory equipment: 3 to 5 years • Oﬃce furniture: 3 to 10 years • Leasehold improvements: 3 to 10 years (based on duration of oﬃce building lease) An item of property, plant and equipment and any signiﬁcant part initially recognised is derecognised upon disposal or when no future economic beneﬁts are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the diﬀerence between the net disposal proceeds and the carrying amount of the asset) is included in the income statement when the asset is derecognised. The assets’ residual values, useful lives and methods of depreciation are reviewed at each ﬁnancial year end, and adjusted prospectively, if applicable. 5.2.8. Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date: whether fulﬁlment of the arrangement is dependent on the use of a speciﬁc asset or assets or the arrangement conveys a right to use the asset. Finance leases, which transfer to the Group substantially all the risks and beneﬁts incidental to ownership of the leased item, are capitalised at the commencement of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between ﬁnance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in the income statement. Leased assets are depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term. • CYAD products candidate series based on CAR-T technology, for the immune-oncology segment; and • C-Cathez commercialized medical device, for the cardiology segment. Indicators of impairment used by the Group are the pre-clinical and clinical results obtained with the technology. 5.2.10. Cash and cash equivalents Cash and cash equivalents in the statement of ﬁnancial position comprise cash at banks and on hand and very short-term deposits with an original maturity of one month or less. Cash and cash equivalents are carried in the balance sheet at their nominal value. 5.2.11. Financial assets 5.2.11.1. Classification The Group classiﬁes its ﬁnancial assets in accordance with IFRS 9 categories for measurement purposes. The classiﬁcation depends on the purpose for which the ﬁnancial assets were acquired. Management determines the classiﬁcation of its ﬁnancial assets at initial recognition. ‘Amortised cost’ measurement category refers to loans and receivables which are non-derivative ﬁnancial assets, with ﬁxed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period which are classiﬁed as non-current assets. This measurement category comprises “cash and cash equivalents”, “short-term investments”, and relevant ﬁnancial assets within “(non-) current trade and other receivables” and “other (non-) current assets”. 5.2.11.2. Initial recognition and measurement All ﬁnancial assets are recognized initially at fair value plus or minus, in the case of a ﬁnancial asset not at fair value through proﬁt or loss, directly attributable transaction costs. 75 76 5.2.11.3. Subsequent measurement After initial measurement, ﬁnancial assets are subsequently measured at amortised cost using the eﬀective interest rate method (EIR), less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fee or costs that are an integral part of the EIR. The EIR amortisation is included in ﬁnance income in the income statement. The losses arising from impairment are recognised in the income statement. 5.2.11.4. Impairment of financial assets In relation to the impairment of ﬁnancial assets, IFRS 9 requires an expected credit loss model as opposed to an incurred credit loss model under IAS 39. The expected credit loss model requires the Group to account for expected credit losses and changes in those expected credit losses at each reporting date to reﬂect changes in credit risk since initial recognition of the ﬁnancial assets. In other words, it is no longer necessary for a credit event to have occurred before credit losses are recognised. Speciﬁcally, IFRS 9 requires the Group to recognise a loss allowance for expected credit losses on trade receivables and contract assets. In particular, IFRS 9 requires the Group to measure the loss allowance for a ﬁnancial instrument at an amount equal to the lifetime expected credit losses (ECL) if the credit risk on that ﬁnancial instrument has increased signiﬁcantly since initial impaired ﬁnancial asset. However, if the credit recognition, or if the ﬁnancial instrument is a purchased or originated credit risk on a ﬁnancial instrument has not increased signiﬁcantly since initial recognition (except for a purchased or originated impaired ﬁnancial asset), the Group is required to measure the loss allowance for that ﬁnancial instrument at an credit amount equal to 12 months ECL. IFRS 9 also requires a simpliﬁed approach for measuring the loss allowance at an amount equal to lifetime ECL for trade receivables, contract assets and lease receivables in certain circumstances. - - - Give the current nature and size of operations of the Group, these requirements mainly apply to the ﬁnancial assets reported under ‘non-current trade receivables’. The carrying value of these receivables (resulting from Mesoblast license agreement commented further under the disclosure note 5.22) take into account a discount rate equal to our partner’s incremental borrowing rate and, accordingly, is already credit risk-adjusted. We consider there is no signiﬁcant additional credit risk related to this receivable, which would not have been captured by discounting eﬀect, both at inception of the receivable and at the reporting date. As such, no additional ECL allowance per se has been recognized for this ﬁnancial asset or any other ﬁnancial asset. Give the nature and size of operations of the Group at prior year-end, there was no diﬀerence between the ending provision for impairment in accordance with IAS 39 and the opening loss allowance determined in accordance with IFRS 9 for all of the Group’s ﬁnancial instruments, as discussed in the disclosure note 5.2.1. 5.2.12. Financial liabilities 5.2.12.1. Classification liabilities include “bank leases”, “recoverable cash advances”, “contingent The Group’s ﬁnancial consideration and other ﬁnancial liabilities”, “trade payables” and relevant ﬁnancial liabilities within “Other (non-) current liabilities”. The Group classiﬁes and measures its ﬁnancial liabilities at ‘amortised cost’ using the eﬀective interest method, except “contingent consideration and other ﬁnancial liabilities” which are claissiﬁed and measured at ‘fair value through proﬁt or loss’. loans”, “ﬁnance 5.2.12.2. Initial recognition and measurement All ﬁnancial liabilities are recognized initially at fair value plus or minus, in the case of a ﬁnancial liabilities not at fair value through proﬁt or loss, directly attributable transaction costs 5.2.12.3. Subsequent measurement The subsequent measurement of ﬁnancial liabilities depends on their classiﬁcation as above-explained. In particular: Contingent consideration and other financial liabilities The contingent consideration and other ﬁnancial liabilities are recognized and measured at fair value at the acquisition date. After initial recognition, contingent consideration arrangements that are classiﬁed as liabilities are re-measured at fair value with changes in fair value recognized in proﬁt or loss in accordance with IFRS 3 and IFRS 9. Therefore, contingent payments will not be eligible for capitalization but will simply reduce the contingent consideration liability. Details regarding the valuation of the contingent consideration are disclosed in note 5.19.2. Recoverable Cash advances Recoverable cash advances granted by the Walloon Region are subsequently measured at amortized cost using the cumulative catch-up approach, as described in section 5.2.5 above. 5.2.12.4. Derecognition A ﬁnancial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing ﬁnancial liability is replaced by another from the same lender on substantially diﬀerent terms, or the terms of an existing liability are substantially modiﬁed, such an exchange or modiﬁcation is treated as a derecognition of the original liability and the recognition of a new liability, and the diﬀerence in the respective carrying amounts is recognised in the income statement. 5.2.13. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outﬂow of resources embodying economic beneﬁts will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. If the eﬀect of the time value of money is material, provisions are discounted using a current pre-tax rate that reﬂects, where appropriate, the risks speciﬁc to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a ﬁnance cost. 5.2.13.1. Employee benefits Post-employment plan The Group operates a pension plan which requires deﬁned contributions (DC) to be funded by the Group externally at a third- party insurance company. Under Belgian law, an employer must guarantee a minimum rate of return on the company’s contributions. Therefore, any pension plan (including DC plans) organized in Belgium is treated as deﬁned beneﬁt plans under IAS 19. At balance sheet date, the minimum rates of return guaranteed by the Group are as follows, in accordance with the law of 18 December 2015: • • 1.75% for the employer’s contributions paid as from 1 January 2016 (variable rate based on Governemental bond OLO rates, with a minimum of 1.75% and a maximum of 3.75%); 3.25% (ﬁxed rate) for the employer’s contributions paid until 31 December 2015. The cost of providing beneﬁts is determined using the projected unit credit (PUC) method, with actuarial valuations being carried out at the end of each annual reporting period, with the assistance of an independent actuarial ﬁrm. The liability recognized in the balance sheet in respect of the pension plans is the present value of the deﬁned beneﬁt obligation at the end of the reporting period less the fair value of plan assets. The present value of the deﬁned beneﬁt obligation is determined by discounting the estimated future cash outﬂows using interest rates of high-quality corporate bonds that are denominated in the currency in which the beneﬁts will be paid, and that have terms to maturity approximating to the terms of the related pension obligation. The current service cost of the deﬁned beneﬁt plan, recognized in the income statement as part of the operating costs, reﬂects the increase in the deﬁned beneﬁt obligation resulting from employee service in the current year, beneﬁt changes, curtailments and settlements. Past-service costs are recognized immediately in the income statement. The net interest cost is calculated by applying the discount rate to the net balance of the deﬁned beneﬁt obligation and the fair value of plan assets. This cost is included in the operating costs in the income statement. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to other comprehensive income in the period in which they arise. Short-term benefits Short-term employee beneﬁts are those expected to be settled wholly before twelve months after the end of the annual reporting period during which employee services are rendered, but do not include termination beneﬁts such as wages, salaries, proﬁt-sharing and bonuses and non-monetary beneﬁts paid to current employees. 77 78 The undiscounted amount of the beneﬁts expected to be paid in respect of services rendered by employees in an accounting period is recognised in that period. The expected cost of short-term compensated absences is recognised as the employees render services that increase their entitlement or, in the case of non-accumulating absences, when the absences occur, and includes any additional amounts the entity expects to pay as a result of unused entitlements at the end of the period. Share-based payments Certain employees, managers and members of the Board of Directors of the Group receive remuneration, as compensation for services rendered, in the form of share-based payments which are “equity-settled”. Measurement The cost of equity-settled share-based payments is measured by reference to the fair value at the date on which they are granted. The fair value is determined by using an appropriate pricing model, further details are given in note 5.14. Recognition The cost of equity-settled share-based payments is recorded as an expense, together with a corresponding increase in equity, over the period in which the service conditions are fulﬁlled. The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reﬂects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The estimate of warrants to vest is revised at each reporting date. The change in estimates will be recorded as an expense with a corresponding correction in equity. The expense or credit for a period accounted for in the income statement represents the movement in cumulative expense recognised as of the beginning and end of that period. Modification Where the terms of an equity-settled transaction award are modiﬁed, the minimum expense recognised is the expense as if the terms had not been modiﬁed, if the original terms of the award were met. An additional expense is recognised for any modiﬁcation that increases the total fair value of the share-based payment transaction, or is otherwise beneﬁcial to the employee as measured at the date of modiﬁcation. The incremental fair value granted is the diﬀerence between the fair value of the modiﬁed equity instrument and the original equity instrument, both estimated as at the date of the modiﬁcation. If the modiﬁcation occurs during the vesting period, the incremental fair value granted is included in the measurement of the amount recognized for services received over the period from the modiﬁcation date until the date when the modiﬁed equity instruments vest, in addition to the amount based on the grant date fair value of the original equity instruments, which is recognized over the remainder of the original vesting period. If the modiﬁcation occurs after vesting date, the incremental fair value granted is recognized immediately, or over the vesting period if the employee is required to complete an additional period of service before becoming unconditionally entitled to those modiﬁed equity instruments. Cancellation An equity-settled award can be forfeited with the departure of a beneﬁciary before the end of the vesting period, or cancelled and replaced by a new equity settled award. When an equity-settled award is forfeited, the previously recognised expense is oﬀset and credited in the income statement. When an equity-settled award is cancelled, the previously recognised expense is oﬀset and credited in the income statement. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modiﬁcation of the original award, as described in the previous paragraph. 5.2.14. Income Taxes Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. Deferred tax Deferred tax is provided using the liability method on temporary diﬀerences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for ﬁnancial reporting purposes. Deferred tax liabilities are recognised for all taxable temporary diﬀerences, except: • Where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, aﬀects neither the accounting proﬁt nor taxable proﬁt or loss; In respect of taxable temporary diﬀerences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary diﬀerences can be controlled and it is probable that the temporary diﬀerences will not reverse in the foreseeable future. • Deferred tax assets are recognised for all deductible temporary diﬀerences, carry forward of unused tax credits and unused tax losses (except if the deferred tax asset arises from the initial recognition of an asset or liability in a transaction other than a business combination and that, at the time of the transaction aﬀects neither accounting nor taxable proﬁt or loss), to the extent that it is probable that taxable proﬁt will be available against which the deductible temporary diﬀerences, and the carry forward of unused tax credits and unused tax losses can be utilised. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is not probable that suﬃcient taxable proﬁt will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable proﬁts will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax assets and deferred tax liabilities are oﬀset, if a legally enforceable right exists to set oﬀ current tax assets against current income tax liabilities and the deferred taxes relate to income taxes levied by the same taxation authority or either the same taxable entity or diﬀerent taxable entities where there is an intention to settle the balances on a net basis. 5.2.15. Earnings (loss) per share The basic net proﬁt/(loss) per share is calculated based on the weighted average number of shares outstanding during the period. The diluted net proﬁt/(loss) per share is calculated based on the weighted average number of shares outstanding including the dilutive eﬀect of potentially dilutive ordinary shares such as warrants and convertible debts. Potentially dilutive ordinary shares should be included in diluted earnings (loss) per share when and only when their conversion to ordinary shares would decrease the net proﬁt per share (or increase net loss per share). 5.3. Risk Management Financial risk factors Interest rate risk The interest rate risk is very limited as the Group has only a limited amount of ﬁnance leases and outstanding bank loans. So far, because of the immateriality of the exposure, the Group did not enter into any interest hedging arrangements. Credit risk Seen the limited amount of trade receivables due to the fact that sales to third parties are not signiﬁcant, credit risk arises mainly from cash and cash equivalents and deposits with banks and ﬁnancial institutions. The Group only works with international reputable commercial banks and ﬁnancial institutions. Foreign exchange risk The Group is exposed to foreign exchange risk as certain collaborations or supply agreements of raw materials are denominated in USD. Moreover, the Group has also investments in foreign operations, whose net assets are exposed to foreign currency translation risk (USD). So far, the Group did not enter into any currency hedging arrangements. At year-end, the foreign exchange risk exposure lied on the cash and short-term deposits denominated in USD. EUR/USD foreign (loss)/gain exposure +2% +1% -1% -2% 31 December 2018 (€0.2 million) (€0.1 million) +€0.1 million +€0.2 million 79 80 31 December 2017 (€0.7 million) (€0.3 million) +€0.3 million +€0.7 million A depreciation of 1% on the USD versus EUR would translate into an unrealized foreign exchange loss of €115k for the Group at 31 December 2018. Liquidity risk The Group monitors its risk to a shortage of funds using a recurring liquidity planning tool. The Group’s objective is to maintain a balance between continuity of funding and ﬂexibility through the use of bank deposit and ﬁnance leases. The Group is exposed to liabilities and contingent liabilities as a result of the RCAs it has received from the Walloon Government, as we are required to make exploitation decisions. We refer to note 5.18 for an analysis of the Group’s non-derivative ﬁnancial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash ﬂows. Capital management The Group’s objectives when managing capital are to safeguard Celyad’ ability to continue as a going concern in order to provide returns for shareholders and beneﬁts for other stakeholders and to maintain an adequate structure to limit to costs of capital. 5.4. Critical accounting estimates and judgments The preparation of the Group’s ﬁnancial statements requires management to make judgments, estimates and assumptions that aﬀect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the end of the reporting period. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability aﬀected in future periods. In the process of applying the Group’s accounting policies, management has made judgments and has used estimates and assumptions concerning the future. The resulting accounting estimates will, by deﬁnition, seldom equal the related actual results. The estimates and assumptions that have a signiﬁcant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next ﬁnancial year are addressed below. The management makes its judgment taking into account all information available about clinical status of the underlying projects at the reporting date and the legal analysis of each applicable contracts. Further details are contained in Note 5.22. Recoverable Cash Advances received from the Walloon Region As explained in note 5.2.5, accounting for RCAs requires initial recognition of the fair value of the loan received to determine the beneﬁt of the below-market rate of interest, which shall be measured as the diﬀerence between the initial carrying value of the loan and the proceeds received. Loans granted to entities in their early stages of operations, for which there is signiﬁcant uncertainty about whether any income will ultimately be generated and for which any income which will be generated will not arise until a number of years in the future, normally have high interest rates. Judgment is required to determine a rate which may apply to a loan granted on an open market basis. In accordance with the RCA agreements, the following two components are assessed when calculating estimated future cash ﬂows: • • 30% of the initial RCA, which is repayable when the company exploits the outcome of the research ﬁnanced; and a remaining amount, which is repayable based on a royalty percentage of future sales milestones. After initial recognition, RCA liabilities are measured at amortized cost using the cumulative catch up method requiring management to regularly revise its estimates of payments and to adjust the carrying amount of the ﬁnancial liability to reﬂect actual and revised estimated cash ﬂows. Measurement and impairment of non-financial assets With the exception of goodwill and certain intangible assets for which an annual impairment test is required, the Group is required to conduct impairment tests where there is an indication of impairment of an asset. Measuring the fair value of a non-ﬁnancial assets requires judgement and estimates by management. These estimates could change substantially over time as new facts emerge or new strategies are taken by the Group. Further details are contained in note 5.6.2. Business combinations In respect of acquired businesses by the Group, signiﬁcant judgement is made to determine whether these acquisitions are to be considered as an asset deal or as a business combination. Determining whether a particular set of assets and activities is a business should be based on whether the integrated set is capable of being conducted and managed as a business by a market participant. Moreover, managerial judgement is particularly involved in the recognition and fair value measurement of the acquired assets, liabilities, contingent liabilities and contingent consideration. In making this assessment management considers the underlying economic substance of the items concerned in addition to the contractual terms. Going Concern Contingent consideration and other financial liabilities When assessing going concern, the company’s Board of directors considers mainly the following factors: • • the treasury available at balance sheet date the cash burn projected in accordance with approved budget for next 12-month period as from the date of the balance sheet Revenue The recognition of revenue relating to license and collaboration agreements involves management estimates and requires judgement as to: (i) (ii) (iii) (iv) (v) (vi) classifying the license agreement (right-to-use or right-to-access license) in accordance with ‘Licensing’ Application Guidance set forth in IFRS 15; identifying the performance obligations comprised in the contract; estimating probability for (pre-)clinical development or commercial milestone achievement; determining the agreed variable considerations to be included in the transaction price taking into account the constraining limit of the “highly probable” criteria; allocating the transaction price according to the stand-alone selling price of each of the performance obligations; and estimating the ﬁnance component in the transaction price, based on the contract expected duration and discount rate. The Group records a liability for the estimated fair value of contingent consideration arising from business combinations. The estimated amounts are the expected payments, determined by considering the possible scenarios of forecast sales and other performance criteria, the amount to be paid under each scenario, and the probability of each scenario, which is then discounted to a net present value. The estimates could change substantially over time as new facts emerge and each scenario develops. Deferred Tax Assets Deferred tax assets for unused tax losses are recognised to the extent that it is probable that taxable proﬁt will be available against which the losses can be utilised. Signiﬁcant management judgment is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable proﬁts together with future tax planning strategies. Further details are contained in note 5.20. Share-based payment transactions The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the share option, volatility and dividend yield and making assumptions about them. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in note 5.14. 81 82 5.5. Operating segment information The chief operating decision-maker (CODM), who is responsible for making strategic decisions, allocating resources and assessing performance of the Group, has been identiﬁed as the Board of Directors. Since the acquisition of the oncological platform in 2015, the management and the CODM have determined that there are two operating segments, being: • • the cardiology segment, regrouping the Cardiopoiesis platform, the Corquest Medical, Inc. (Corquest) platform and C-Cathez; and the immuno-oncology segment regrouping all assets developed based on the CAR-T cell platform. Although the Group is currently active in Europe and in the US, no geographical ﬁnancial information is currently available given the fact that the core operations are currently still in a study phase. No disaggregated information on product level or geographical level or any other level currently exists and hence also not considered by the Board of Directors for assessing performance or allocating resources. CODM is not reviewing assets by segments, hence no segment information per assets is disclosed. At reporting date, all of the Group non-current assets are located in Belgium, except the leasehold improvements made in the oﬃces of Celyad Inc located in Boston, USA. € '000 Revenues Cost of Sales Gross Profit For the year ended 31 December 2018, Cardiology Immuno-oncology Corporate Group Total 2,399 716 - 3,115 - - - - 2,399 716 - 3,115 Research & Development expenses (375) (23,202) - (23,577) General & Administrative expenses - - (10,387) (10,387) Other Income and expenses (686) (6,765) 130 (7,321) Recurring operating profit (Loss) - REBIT 1,338 (29,251) (10,257) (38,170) Non-recurring operating (expenses)/income - - - - Operating Profit (Loss) - EBIT Net Financial Result Profit (Loss) before taxes Income Taxes 1,338 (29,251) (10,257) (38,170) - - 743 743 1,338 (29,251) (9,515) (37,427) - - - - Profit (Loss) for the year 2018 1,338 (29,251) (9,515) (37,427) In 2018, the Group entered into a license agreement with Mesoblast relating to the C-Cathez device, in the Cardiology segment, resulting in €2.4 million revenue recognized. See disclosure note 5.22. Since mid of 2016, the Company is fully focused on the development of its immuno-oncology platform. Therefore, in 2018, most of the R&D expenses were incurred in the immuno-oncology segment, in line with prior year. € '000 Revenues Cost of Sales Gross Profit For the year ended 31 December 2017, Cardiology Immuno-oncology Corporate Group Total 3,540 (515) 2,990 - 3,025 3,505 (515) 35 35 83 Research & Development expenses (2,881) (20,027) - (22,908) General & Administrative expenses Other operating Income & Charges - 1,070 - 151 (9,310) (9,310) 1,370 2,590 Recurring operating profit (Loss) - REBIT (1,776) (16,886) (7,940) (26,603) Non-recurring operating (expenses)/income (1,932) - (24,341) (26,273) Operating Profit (Loss) - EBIT (3,708) (16,886) (32,281) (52,876) Net Financial Result - - (3,518) (3,518) Profit (Loss) before taxes (3,708) (16,886) (35,799) (56,396) Income Taxes - - 1 1 Profit (Loss) for the year 2017 (3,708) (16,886) (35,798) (56,395) In 2017, there were some important non-recurring items impacting signiﬁcantly the consolidated income statement. See disclosure note 5.28. 5.6. Intangible assets 5.6.1. Intangible assets details and balance roll forward The change in intangible assets is broken down as follows, per class of assets: Goodwill In-process research and development Development costs Patents, licences, trademarks Software Total (€'000) Cost: At 1 January 2017 Additions Currency translation adjustments (126) (4,801) - - 1,040 0 39,655 0 1,084 0 13,337 0 202 55,318 0 3 0 (4,924) Divestiture At 31 December 2017 Additions 0 914 0 0 34,854 0 0 1,084 0 0 (93) (93) 13,337 877 111 55 50,300 932 Currency translation adjustments (31) (1,177) - - - (1,208) Divestiture At 31 December 2018 Accumulated amortisation At 1 January 2017 Amortisation charge Divestiture At 31 December 2017 Amortisation charge Divestiture 0 883 0 0 0 0 0 0 0 33,677 1,084 14,214 -2 164 -2 50,022 0 0 0 0 (279) (5,373) (100) (5,752) (66) (7,964) (7) (8,038) - - (3) (3) (345) (13,337) (110) (13,792) - - (66) (1) (0) (68) 0 0 0 0 2 2 Impairment (non-recurring loss) - - - - - - At 31 December 2018 0 0 (411) (13,338) (109) (13,858) Net book value Cost 914 34,854 1,084 13,337 111 50,300 84 Accumulated amortisation At 31 December 2017 Cost 0 914 883 0 (345) (13,337) (110) (13,792) 34,854 33,677 739 1,084 0 14,214 1 164 36,508 50,022 Accumulated amortisation - - (411) (13,338) (109) (13,858) At 31 December 2018 883 33,677 673 876 55 36,163 The capitalised development costs relate to the development of C-Cathez. Since May 2012 and the CE marking of C-Cathez, the development costs of C-Cathez are capitalized and amortized over the estimate residual intellectual property protection as of the CE marking (ie. until 2029). No other development costs have been capitalised up till now. All other programs (ao. C- Cure, CYAD-01, CYAD-02, CYAD-101…) related development costs have been assessed as not being eligible for capitalisation and have therefore been recognised in the income statement as research and development expenses. Software is amortized over a period of 3 to 5 years. Goodwill, In-process R&DPatents, Licenses and Trademarks relate to the following items: • Goodwill and In-process research and development resulted from the purchase price allocation exercise performed for the acquisition of Oncyte LLC in 2015. As of balance sheet date, Goodwill and In-Process Research and Development are not amortized but tested for impairment. • A licence, granted in August 2007 by Mayo Clinic (for an amount of €9.5 million) upon the Group’s inception and an extension to the licensed ﬁeld of use, granted on 29 October 2010 for a total amount of €2.3 million. The licence and its extension were amortised straight line over a period of 20 years, in accordance with the license term. A €6.0 million impairment loss has been recognised on the remaining net book value in the year ended 31 December 2017. • Patents acquired upon the acquisition of CorQuest LLC in November 2014. The fair value of these intellectual rights was then determined to be €1.5 million. These patents were amortised over 18 years, corresponding to the remaining intellectual property protection ﬁled for the ﬁrst patent application in 2012. A €1.2 million impairment loss has been recognised on the remaining net book value in the year ended 31 December 2017. • Exclusive Agreement for Horizon Discovery’s shRNA Platform to develop next-generation allogenic CAR-T Therapies acquired for $1.0 million end of December 2018. This patent is amortised over the remaining period of 10 years, corresponding to the remaining intellectual property protection of 20 years, ﬁled for the ﬁrst patent application in 2008. 5.6.2. Impairment testing Impairment testing is detailed below. Oncyte LLC goodwill and IPRD impairment test Goodwill and In-process research and development (IPRD) exclusively relate to the acquisition of the former entity Oncyte LLC (meanwhile liquidated into Celyad SA) which was acquired in 2015. Management performs an annual impairment test on goodwill and on 'indeﬁnite lived assets' that are not amortized in accordance with the accounting policies stated in notes 5.2.6 and 5.2.9. The impairment test has been performed at the level the immuno-oncology segment corresponding to the CGU to which the goodwill and the IPRD belong. The recoverable amount has been calculated based on the fair value less costs to sell model, which requires the use of assumptions. The calculations use cash ﬂow projections based on 12-year period business plan based on probability of success of CYAD-01 and CYAD-101 product candidates as well as extrapolations of projected cash ﬂows resulting from the future expected sales associated with CYAD-01 and CYAD-101. CGU recoverable value, determined accordingly, exceeds its carrying amount. Accordingly, no impairment loss was recognized neither on goodwill nor on the IPRD intangible assets at balance sheet date. Management’s key assumptions about projected cash ﬂows when determining fair value less costs to sell are as follows: • Discount rate (WACC) 13.9%, in line with industry standards for biotechnological companies and WACC used by Equity Research companies following the Group • • Sales revenue growth in the Terminal Value a decline of 25% of the estimated product revenue has been considered in the Terminal Value (for inﬁnite extrapolation purposes) Probabilities of Success (PoS) period based on Clinical Development Success Rates observed for the 2006-2015 determined by independent business intelligence consulting companies for hematologic and solid oncological diseases. Probability of our product candidates getting on the market used were in line with prior year and as follows: PoS Phase I Phase I to II Phase II to III Phase III to BLA BLA to Approval Cumulative PoS CYAD-01  CYAD-101 100% 63% 26% 45% 84% 6.4% The sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. The following table presents the sensitivity analyses of the recoverable amount of the CGU associated to the immuno-oncology operations: Sensitivity analysis Discount rate (WACC) Terminal Revenue Growth rate IImpact on model value -35% -30% -25% 13.9% 14.65% 15.4% -8% -5% Model Reference -16% -13% -9% -23% -20% -16% Even at the lower terminal revenue growth and higher discount rate, the recoverable value of the CGU exceeds its carrying amount at balance sheet date. C-Cure and Corquest impairment test Pursuant to prior year’s strategic decision to focus all the eﬀorts of the Group on the development of the immuno-oncology platform and the lack of strategic business development opportunities identiﬁed for the C-Cure (Mayo Licenses) and HeartXs (Corquest patents) technologies, these assets had been fully impaired as of 31 December 2017. CGU’s recoverable amounts being conﬁrmed to be zero at current year-end, the 100% impairment allowance has been carried forward at balance sheet date. 5.7. Property, plant and equipment (€’000) Cost: At 1 January 2017 Additions Equipment Furnitures Leasehold Total 3,999 465 2,947 7,410 823 - 129 952 Acquisition of BMS SA - - - - Disposals (281) (9) (9) (299) Currency translation adjustments (3) (11) (8) (23) At 31 December 2017 Additions Reclass BMS SA 4,537 445 3,059 8,041 564 10 260 833 (1,032) 24 1,007 (0) 85 86 Disposals (123) (154) (140) (417) Currency translation adjustments 1 4 8 13 At 31 December 2018 3,947 329 4,195 8,470 Accumulated depreciation: At 1 January 2017 (2,752) (184) (912) (3,847) Depreciation charge (note 5.25) (424) (56) (486) (966) Acquisition of BMS SA - - - - Currency translation adjustments Disposals At 31 December 2017 Reclass BMS SA 1 50 1 9 0 2 2 61 (3,126) (229) (1,395) (4,750) 786 (24) (761) (0) Depreciation charge (note 5.25) (529) (49) (469) (1,048) Disposals 117 93 133 343 Currency translation adjustments 0 (1) (1) (1) At 31 December 2018 (2,751) (211) (2,494) (5,456) Net book value Cost 4,537 445 3,059 8,041 Accumulated depreciation (3,126) (229) (1,395) (4,750) At 31 December 2017 Cost 1,412 3,947 215 328 1,664 4,195 3,290 8,470 At 31 December 2018 1,196 117 1,701 3,013 Property, Plant and Equipment is mainly composed of oﬃce furniture, leasehold improvements, and laboratory equipment. The acquisition of BMS in 2016 was accounted for as an asset deal. The fair value of the assets acquired is concentrated in one identiﬁable asset, i.e. the GMP laboratories. A reclass of BMS equipments to Leashold has been operated in 2018 without having any impact on the net book value. The diﬀerence between the purchase price and the net assets of BMS at the date of acquisition is then allocated entirely to the Property, Plant and Equipment. Finance leases Lease contracts considered as ﬁnance lease relate to some contracts with ﬁnancial institutions and relate to laboratory and oﬃce equipment. All ﬁnance leases have a maturity of three years. A key common feature is that they include a bargain option to purchase the leased asset at the end of the three-year-lease term. The total of future minimum lease payments at the end of the reporting period, and their present value reported on the balance sheet, are similar amounts. In May 2018, the Group has entered into an exclusive license agreement with Mesoblast. More details on the transaction and its revenue recognition pattern is set forth in disclosure note 5.22. (€'000) Deposits R&D Tax credit receivable Total As at 31 December, 2018 215 1,472 1,687 2017 273 1,161 1,434 The non-current assets refer to security deposits paid to the lessors of the building leased by the Group and to the Social Security administration. In 2017, the Company recognized for the ﬁrst time a receivable on the amounts to collect from the federal government as R&D tax credit (€1.2 million), including a one-oﬀ catch-up eﬀect. For the current year, a further R&D tax credit receivable has been recorded for the 2018 base increment (€0.3 million). 5.9. Trade receivables other current assets (€'000) Trade receivables Advance deposits Other trade receivables Prepaid expenses VAT receivable Income and other tax receivables Total Other current assets As at 31 December, 2018 2017 277 90 0 367 593 255 737 1,585 64 152 17 233 744 391 1,120 2,255 Impairment of receivables is assessed on an individual basis at the end of each accounting year. At balance sheet date, no receivable was overdue. There were no carrying amounts for trade and other receivables denominated in foreign currencies and no impairments were recorded. Trade receivables balance increase due to a non- clinical supply services agreement signed with Ono (€0.2 million receivable at year-end). See disclosure note 5.22. At 31 December 2017, income tax receivables include an open balance for two ﬁscal years (2017 and 2016), while only one (2018) at 31 December 2018. As of 31 December 2018, other trade receivables mainly decrease due to lower withholding tax to be received from our short-term deposits interests. Accumulated depreciation (2,751) (211) (2,494) (5,456) Total Trade and Other receivables 5.8. Non-current trade receivables and other non-current assets 5.10. Short-term investments (€'000) As at 31 December, (€'000) Non-current trade receivables Mesoblast licence agreement Total 2018 1,743 1,743 2017 0 0 Short-term cash deposits Investment in equity securities As at 31 December, 2018 2017 8,559 10,653 639 - 87 88 Total 9,197 10,653 Amounts recorded as short-term investments correspond to short-term cash deposits with ﬁxed interest rates. Short-term deposits are made for variable periods (from 1 to 12 months) depending on the short-term cash requirements of the Group. Interest is calculated at the respective short-term deposit rates. Mesoblast equity shares received in settlement of the upfront payment for the C-CathEZ licensing agreement (see disclosure note 5.22) are measured at fair value through proﬁt or loss. The fair value of these listed securities is based on public market prices. Accordingly, their carrying value has been marked-to-market value at 2018 year-end. 5.11. Cash and cash equivalents (€'000) Cash at bank and on hand Total Cash at banks earn interest at ﬂoating rates based on daily bank deposit rates. As at 31 December, 2018 2017 40,542 40,542 23,253 23,253 Total number of issued and outstanding shares 11,942,344 9,867,844 Total share capital (€'000) 41,552 34,337 As at 31 December, 2018 2017 As of 31 December 2018, the share capital amounts to €41,552k represented by 11,942,344 fully authorized and subscribed and paid-up shares with a nominal value of €3.48 per share. This number does not include warrants issued by the Company and granted to certain directors, employees and non-employees of the Company. History of the capital of the Company The Company has been incorporated on 24 July 2007 with a share capital of €62,500 by the issuance of 409,375 class A shares. On 31 August 2007, the Company has issued 261,732 class A shares to Mayo Clinic by way of a contribution in kind of the upfront fee that was due upon execution of the Mayo Licence for a total amount of €9,500,000. Round B Investors have participated in a capital increase of the Company by way of a contribution in kind of a convertible loan (€2,387,049) and a contribution in cash (€4,849,624 of which €1,949,624 uncalled) on 23 December 2008; 204,652 class B shares have been issued at the occasion of that capital increase. Since then, the capital is divided in 875,759 shares, of which 671,107 are class A shares and 204,652 are class B shares. The credit quality of cash and cash equivalents and short-term cash deposit balances may be categorised between A-1 and A+ based on Standard and Poor's rating at 31 December 2018. On 29 October 2010, the Company closed its third ﬁnancing round resulting in a capital increase totalling €12,100,809. The capital increase can be detailed as follows: 5.12. Subsidiaries fully consolidated The consolidation scope of Celyad Group is as follows, for both current and comparative years presented in these year-end ﬁnancial statements: Name Celyad Inc Oncyte LLC CorQuest Inc Country of Incorporation and Place of Business Nature of Business Proportion of ordinary  shares directly  held by parent (%) Proportion of ordinary shares held by the group (%) Proportion of ordinary shares held by non-controlling interests (%) USA USA USA Biopharma Biopharma Medical Device 100% 100% 100% 100% 100% 100% 100% 100% 0% 0% 0% 0% Biological Manufacturing Services SA Belgium GMP laboratories Biologicial Manufacturing Services SA (BMS) has been acquired in May 2016. BMS owns GMP laboratories. BMS rent its laboratories to Celyad SA since 2009 and until 30 April 2016. Until the acquisition, BMS had been treated as a related party to Celyad. Cardio3 Inc was incorporated in 2011 to support clinical and regulatory activities of the Group in the US. Cardio3 Inc was renamed in Celyad Inc in 2015. The growth of the activities of Celyad Inc is associated to the development of the US clinical and regulatory activities of the Group in the US. Corquest Inc has been acquired on 5 November 2014. Corquest Inc. is developing Heart XS, a new access route to the left atrium. Oncyte LLC had been acquired on 21 January 2015. It has been liquidated in March 2018. Oncyte LLC was the company hosting the CAR T-Cell portfolio of clinical and pre-clinical stage immuno-oncology IP assets, as disclosed in our previous annual reports. In 2018, as a result of the liquidation, these IP assets have been transferred to Celyad SA, without any impact on the Group’s operations. 5.13. Share Capital The number of shares issued is expressed in units. • • • • • • • capital increase in cash by certain existing investors for a total amount of €2,609,320.48 by the issuance of 73,793 class B shares at a price of €35.36 per share; capital increase in cash by certain existing investors for a total amount of €471,240 by the issuance of 21,000 class B shares at a price of €22.44 per share; capital increase in cash by certain new investors for a total amount of €399,921.60 by the issuance of 9,048 class B shares at a price of €44.20 per share; exercise of 12,300 warrants (“Warrants A”) granted to the Round C investors with total proceeds of €276,012 and issuance of 12,300 class B shares. The exercise price was €22.44 per Warrant A; contribution in kind by means of conversion of the loan C for a total amount of €3,255,524.48 (accrued interest included) by the issuance of 92,068 class B shares at a conversion price of €35.36 per share; contribution in kind by means of conversion of the loan D for a total amount of €2,018,879.20 (accrued interest included) by the issuance of 57,095 class B shares at a conversion price of €35.36 per share. The loan D is a convertible loan granted by certain investors to the Company on 14 October 2010 for a nominal amount of €2,010,000. contribution in kind of a payable towards Mayo Foundation for Medical Education and Research for a total amount of €3,069,911 by the issuance of 69,455 class B shares at a price of €44.20 per share. The payable towards Mayo Clinic was related to (i) research undertaken by Mayo Clinic in the years 2009 and 2010, (ii) delivery of certain materials, (iii) expansion of the Mayo Clinical Technology Licence Contract by way the Second Amendment dated 18 October 2010. On 5 May 2011, pursuant the decision of the Extraordinary General Meeting, the capital was reduced by an amount of €18,925,474 equivalent to the outstanding net loss as of 31 December 2010. On 31 May 2013, the Company closed its fourth ﬁnancing round, the ‘Round D ﬁnancing’. The convertible loans E, F, G and H previously recorded as ﬁnancial debt were converted in shares which led to an increase in equity for a total amount of €28,645k of which € 5,026k is accounted for as capital and € 6,988k as share premium. The remainder (€ 16,613k) is accounted for as other reserves. Furthermore, a contribution in cash by existing shareholders of the Company led to an increase in share capital and issue premium by an amount of €7,000k. At the Extraordinary Shareholders Meeting of 11 June 2013 all existing classes of shares of the Company have been converted into ordinary shares. Preferred shares have been converted at a 1 for 1 ratio and subsequently. On 5 July 2013, the Company completed its Initial Public Oﬀering. The Company issued 1,381,500 new shares at €16.65 per shares, corresponding to a total of €23,002k. On 15 July 2013, the over-allotment option was fully exercised for a total amount of €3,450k corresponding to 207,225 new shares. The total IPO proceeds amounted to €26,452k and the capital and the share premium of the Company increased 89 90 accordingly. The costs relating to the capital increases performed in 2013 amounted to €2.8 million and are presented in deduction of share premium. On 11 June 2013, the Extraordinary General Shareholders’ Meeting of Celyad SA authorized the Board of Directors to increase the share capital of the Company, in one or several times, and under certain conditions set forth in extenso in the articles of association. This authorization is valid for a period of ﬁve years starting on 26 July 2013 and until 26 July 2018. The Board of Directors may increase the share capital of the Company within the framework of the authorized capital for an amount of up to €21,413k. Over the course of 2014, the capital of the Company was increased in June 2014 by way of a capital increase of €25,000k represented by 568,180 new shares fully subscribed by Medisun International Limited. In 2014, the capital of the Company was also increased by way of exercise of Company warrants. Over four diﬀerent exercise periods, 139,415 warrants were exercised resulting in the issuance of 139,415 new shares. The capital and the share premium of the Company were therefore increased respectively by €488k and €500k. In January 2015, the shares of Oncyte LLC were contributed to the capital of the Company, resulting in a capital increase of €3,452k and the issuance of 93,087 new shares. In 2015, the Company conducted two fund raisings. A private placement was closed in March resulting in a capital increase of €31,745k represented by 713,380 new shares. The Company also completed an IPO on Nasdaq in June, resulting in a capital increase of €87,965k represented by 1,460,000 new shares. Also in 2015, the capital of the Company was also increased by way of exercise of Company warrants. Over three diﬀerent exercise periods, 6,749 warrants were exercised resulting in the issuance of 6,749 new shares. The capital and the share premium of the Company were therefore increased respectively by €23k and €196k. Over 2017 the capital of the Company was also increased by way of exercise of Company warrants. Over four diﬀerent exercise periods, 225,966 warrants were exercised resulting in the issuance of 225,966 new shares. The capital of the Company was therefore increased by €625k. In August 2017, pursuant to the amendment of the agreements with Celdara Medical LLC and Dartmouth College, the CAR-T technology inventors, the capital of the Company was increased by way of contribution in kind of a liability owed to Celdara Medical LLC. 328,275 new shares were issued at a price of €32.35 (being Celyad share’s average market price for the 30 days preceeding the transaction) and the capital and the share premium of the Company were therefore increased respectively by €1,141k and €9,479k without this had an impact on the cash and cash equivalents, explaining why such transaction is not disclosed in the consolidated statement of cashﬂows. In May 2018 the Company completed a global oﬀering of $54.4 million (€46.1 million), resulting in cash proceeds for an amount of €43.0 million net of bank fees and transaction costs. As of 31 December 2018, all shares issued have been fully paid. The following share issuances occurred since the incorporation of the Company: Category Transaction date Description Class A shares 24 July 2007 Company incorporation Class A shares 31 August 2007 Contribution in kind (upfront fee Mayo Licence) Class B shares 23 December 2008 Capital increase (Round B) Class B shares 23 December 2008 Contribution in kind (Loan B) Class B shares 28 October 2010 Contribution in cash Class B shares 28 October 2010 Contribution in kind (Loan C) Class B shares 28 October 2010 Contribution in kind (Loan D) Class B shares 28 October 2010 Contribution in cash Class B shares 28 October 2010 Exercise of warrants Class B shares 28 October 2010 Contribution in kind (Mayo receivable) # of shares Par value (in €) 409,375 261,732 137,150 67,502 21,000 92,068 57,095 73,793 12,300 69,455 0.15 36.30 35.36 35.36 22.44 35.36 35.36 35.36 22.44 44.20 Class B shares 28 October 2010 Contribution in cash Class B shares 31 May 2013 Contribution in kind (Loan E) Class B shares 31 May 2013 Contribution in kind (Loan F) Class B shares 31 May 2013 Contribution in kind (Loan G) Class B shares 31 May 2013 Contribution in kind (Loan H) Class B shares 31 May 2013 Contribution in cash Class B shares 4 June 2013 Conversion of warrants Ordinary shares 11 June 2013 Conversion of Class A and Class B shares in ordinary shares Ordinary shares 5 July 2013 Initial Public Oﬀering Ordinary shares 15 July 2013 Exercise of over-allotment option Ordinary shares 31 January 2014 Exercise of warrants issued in September 2008 Ordinary shares 31 January 2014 Exercise of warrants issued in May 2010 Ordinary shares 31 January 2014 Exercise of warrants issued in January 2013 Ordinary shares 30 April 2014 Exercise of warrants issued in September 2008 Ordinary shares 16 June 2014 Capital increase Ordinary shares 30 June 2014 Capital increase Ordinary shares 4 August 2014 Exercise of warrants issued in September 2008 Ordinary shares 4 August 2014 Exercise of warrants issued in October 2010 Ordinary shares 3 November 2014 Exercise of warrants issued in September 2008 Ordinary shares 21 January 2015 Contribution in kind (Celdara Medical LLC) Ordinary shares 7 February 2015 Exercice of warrant issued in May 2010 Ordinary shares 3 March 2015 Capital increase Ordinary shares 11 May 2015 Exercice of warrant issued in May 2010 Ordinary shares 24 June 2015 Capital increase Ordinary shares 4 August 2015 Exercice of warrant issued in May 2010 Ordinary shares 4 August 2015 Exercice of warrant issued in October 2010 Ordinary shares 1 february 2017 Exercice of warrant issued in May 2013 Ordinary shares 2 May 2017 Exercice of warrant issued in May 2013 Ordinary shares 1 August 2017 Exercice of warrant issued in May 2013 9,048 118,365 56,936 654,301 75,755 219,016 2,409,176 4,744,067 1,381,500 207,225 5,966 333 120,000 2,366 284,090 284,090 5,000 750 5,000 93,087 333 713,380 500 1,460,000 666 5,250 207,250 4,900 7,950 44.20 38.39 38.39 4.52 30.71 31.96 0.01 - 16.65 16.65 22.44 22.44 4.52 22.44 44.00 44.00 22.44 35.36 22.44 37.08 22.44 44.50 22.44 60.25 22.44 35.36 2.64 2.64 2.64 Ordinary shares 23 August 2017 Contribution in kind (Celdara Medical LLC) 328,275 32.35 Ordinary shares 9 November 2017 Exercice of warrant issued in May 2013 Ordinary shares 9 November 2017 Exercice of warrant issued in October 2010 Ordinary shares 7 February 2018 Exercice of warrant issued in May 2013 5,000 2.64 866 35.36 4,500 2.64 Ordinary shares 22 May 2018 Capital increase 2,070,000 22.29 (€000) 91 92 Date Nature of the transactions Balance as at January 1st, 2017 Share Capital Share premium Number of shares 32,571 158,010 9,313,603 Issue of shares related to exercise of warrants 625 225,966 05 May 2014 05 May 2017 05 May 2024 05 November 2015 05 November 2018 05 November 2025 08 December 2016 08 December 2019 08 December 2021 29 June 2017 29 June 2020 29 June 2022 Capital increase resulting from Celdara and Dartmouth College agreements amendment 1,141 9,479 328,275 26 October 2018 26 October 2021 26 October 2023 Share-based payments 2,808 Balance as at December 31, 2017 34,337 170,297 9,867,844 Issue of shares related to exercise of warrants 12 0 4,500 Warrants issued on 29 October 2010 60,697 245,982 42,500 294,484 84,300 731,229 36.69 33.27 22.46 31.50 21.16 60,697 253,065 45,000 308,434 674,962 Capital increase as a result of the global oﬀering 7,204 35,796 2,070,000 Share-based payments 56 Balance as at December 31, 2018 41,552 206,149 11,942,344 The total number of shares issued and outstanding as of 31 December 2018 totals 11,942,344 and are ordinary common shares. 5.14. Share-based payments The Company operates an equity-based compensation plan, whereby warrants are granted to directors, management and selected employees and non-employees. The warrants are accounted for as equity-settled share-based payment plans since the Company has no legal or constructive obligation to repurchase or settle the warrants in cash. Each warrant gives the beneﬁciaries the right to subscribe to one common share of the Company. The warrants are granted for free and have an exercise price equal to the lower of the average closing price of the Celyad share over the 30 days prior to the oﬀer, and the last closing price before the day of the oﬀer, as determined by the Board of Directors of the Company. At the Extraordinary Shareholders Meeting of 29 October 2010, a plan of 79,500 warrants was approved. Warrants were oﬀered to Company’s employees, non-employees and directors. Out of the 79,500 warrants oﬀered, 61,050 warrants were accepted by the beneﬁciaries and 766 warrants are outstanding on the date hereof. The 61,050 warrants were vested in equal tranches over a period of three years. The warrants become 100% vested after the third anniversary the issuance. The warrants that are vested can only be exercised at the end of the third calendar year following the issuance date, thus starting on 1 January 2014. The exercise price amounts to €35.36. Warrants not exercised within 10 years after issue become null and void. Warrants issued on 6 May 2013 At the Extraordinary Shareholders Meeting of 6 May 2013, a plan of 266,241 warrants was approved. Warrants were oﬀered to Company’s employees and management team. Out of the 266,241 warrants oﬀered, 253,150 warrants were accepted by the beneﬁciaries and 2,500 warrants are outstanding on the date hereof. The 253,150 warrants were vested in equal tranches over a period of three years. The warrants become 100% vested after the third anniversary the issuance. The warrants that are vested can only be exercised at the end of the third calendar year following the issuance date, thus starting on 1 January 2017. The exercise price amounts to €2.64. Warrants not exercised within 10 years after issue become null and void. Changes in the number of warrants outstanding and their related weighted average exercise prices are as follows: Warrants issued on 5 May 2014 2018 2017 Weighted average exercise price (in €) Number of warrants Weighted average exercise price (in €) Number of warrants Outstanding as at 1 January 31.76 674,962 Granted Forfeited Exercised Expired 23.09 111,600 28.79 50,833 2.64 4,500 - - At 31 December 30.71 731,229 There were 4,500 warrants exercised in 2018, that were issued in May 2013. Warrants outstanding at the end of the year have the following expiry date and exercise price: 20.92 30.37 28.50 2.77 22.44 31.76 571,444 367,100 31,817 225,966 5,799 674,962 Warrant plan issuance date Vesting date Expiry date Number of warrants outstanding as at 31 December, 2018 Number of warrants outstanding as at 31 December, 2017 Exercise price per share 29 October 2010 29 October 2013 29 October 2020 06 May 2013 06 May 2016 06 May 2023 766 2,500 766 7,000 35.36 2.64 At the Extraordinary Shareholders Meeting of 5 May 2014, a plan of 100,000 warrants was approved. Warrants were oﬀered to Company’s new comers (employees, non-employees and directors) in ﬁve diﬀerent tranches. Out of the warrants oﬀered, 94,400 warrants were accepted by the beneﬁciaries and 60,697 warrants are outstanding on the date hereof. The 100,000 warrants were vested in equal tranches over a period of three years. The warrants become 100% vested after the third anniversary the issuance. The warrants that are vested can only be exercised at the end of the third calendar year following the issuance date, thus starting on 1 January 2018. The exercise price of the diﬀerent tranches ranges from €33.49 to €45.05. Warrants not exercised within 10 years after issue become null and void. Warrants issued on 5 November 2015 At the Extraordinary Shareholders Meeting of 5 November 2015, a plan of 466,000 warrants was approved. Warrants were oﬀered to Company’s new comers (employees, non-employees and directors) in ﬁve diﬀerent tranches. Out of the warrants oﬀered, 343,550 warrants were accepted by the beneﬁciaries and 245,982 warrants are outstanding on the date hereof. Theses warrants vest in equal tranches over a period of three years. The warrants become 100% vested after the third anniversary of issuance. The warrants that are vested can only be exercised as from the end of the third calendar year following the issuance date, thus starting on 1 January 2019. The exercise price of the diﬀerent tranches ranges from €15.90 to €34.65. Warrants not exercised within 10 years after issue become null and void. 93 94 Warrants issued on 8 December 2016 5.15. Post-employment beneﬁts On 8 December 2016, the Board of Directors issued a new plan of 100,000 warrants. An equivalent number of warrants were cancelled from the remaining pool of warrants of the plan of 5 November 2015. Warrants were oﬀered to Company’s new comers (employees and non-employees) in two diﬀerent tranches. Out of the warrants oﬀered, 45,000 warrants were accepted by the beneﬁciaries and 42,500 warrants are outstanding on the date of the ﬁnancial statements. Theses warrants will vest in equal tranches over a period of three years. The warrants become 100% vested after the third anniversary of issuance. The warrants that are vested can only be exercised as from the end of the third calendar year following the issuance date, thus starting on 1 January 2020. The exercise price of the diﬀerent tranches ranges from €17.60 to €36.81. Warrants not exercised within 5 years after issue become null and void. Warrants issued on 29 June 2017 At the Extraordinary Shareholders Meeting of 29 June 2017, a plan of 520,000 warrants was approved. Warrants were oﬀered in diﬀerent tranches to beneﬁciaries (employees, non-employees and directors). Out of the warrants oﬀered, 312,100 warrants were accepted by the beneﬁciaries and 294,484 warrants are outstanding on the date hereof. Theses warrants will be vested in equal tranches over a period of three years. The warrants become 100% vested after the third anniversary of issuance. The warrants that are vested can only be exercised as from the end of the third calendar year following the issuance date, thus starting on 1 January 2021. The exercise price of the diﬀerent tranches ranges from €31.34 to €47.22. Warrants not exercised within 5 years after issue become null and void. Warrants issued on 26 October 2018 On 26 October 2018, the Board of Directors issued a new plan of 700,000 warrants. Warrants were oﬀered in diﬀerent tranches to beneﬁciaries (employees, non-employees and directors). Out of the warrants oﬀered, 89,300 warrants were accepted by the beneﬁciaries and 84,300 warrants are outstanding on the date of the ﬁnancial statements. Theses warrants will vest in equal tranches over a period of three years. The warrants become 100% vested after the third anniversary of issuance. The warrants that are vested can only be exercised as from the end of the third calendar year following the issuance date, thus starting on 1 January 2022. The exercise price of the diﬀerent tranches ranges from €21.16 to €22.04. Warrants not exercised within 5 years after issue become null and void. As a result, at 31 December 2018, there are 731,229 Warrants outstanding which represent approximately 6.12% of the total number of all its issued and outstanding voting ﬁnancial instruments. The fair value of the warrants has been determined at grant date based on the Black-Scholes formula. The variables, used in this model, are: Warrants issued on 29 October 2010 31 January 2013 06 May 2013 05 May 2014 05 Nov. 2015 08 Dec. 2016 29 June 2017 26 October 2018 Number of warrants issued 79,500 140,000 266,241 100,000 466,000 100,000 520,000 700,000 Number of warrants granted 61,050 120,000 253,150 94,400 343,550 45,000 334,400 89,300 Number of warrants not fully vested as of 31 December 2018 0 0 0 0 25,167 42,500 294,484 84,300 Average exercise price (in €) 35.36 4.52 2.64 36.69 33.27 22.46 31.50 21.16 Expected share value volatility 35.60% 35.60% 39.55% 67.73% 60.53% 61.03% 60.61% 58.82% Risk-free interest rate 3.21% 2.30% 2.06% 1.09% 0.26% -0.40% -0.23% -0.06% Average fair value (in €) Weighted average remaining contractual life 9.00 1.82 2.22 4.08 12.44 24.55 21.66 11.28 15.68 10.77 4.34 5.34 6.84 2.94 3.49 4.82 (€’000) Pension obligations Total As at 31 December, 2018 2017 131 131 204 204 The Group operates a pension plan which requires contributions to be made by the Group to an insurance company. The pension plan is a deﬁned contribution plan. However, because of the Belgian legislation applicable to 2nd pillar pension plans (so-called "Law Vandenbroucke"), all Belgian deﬁned contribution plans have to be accounted for under IFRS as deﬁned beneﬁt plans because of the minimum guaranteed returns on these plans. At the end of each year, Celyad is measuring and accounting for the potential impact of deﬁned beneﬁt accounting for these pension plans with a minimum ﬁxed guaranteed return. The contributions to the plan are determined as a percentage of the yearly salary. There are no employee contributions. The beneﬁt also includes a death in service beneﬁt. The amounts recognised in the balance sheet are determined as follows: (€'000) As at 31 December, Present value of funded obligations 1,838 1,705 2018 2017 Fair value of plan assets Deﬁcit of funded plans Total deﬁcit of deﬁned beneﬁt pension plans Liability in the balance sheet The change in the deﬁned beneﬁt liability over the year is as follows: (€'000) As at 1 January 2017 Current service cost Interest expense/(income) Remeasurements - Return on plan assets, excluding amounts included in interest expense/(income) - Actuarial (Gain)/loss due to change in actuarial assumptions - Actuarial (Gain)/Loss due to experience 204 204 204 204 201 6 411 (1,706) (1,500) 131 131 131 Present value of obligation Fair value of plan assets Total 1,509 201 32 1,742 - - 5 5 1,305 - 26 1,331 5 - - 5 (5) - 5 - The total net expense recognised in the income statement for the outstanding warrants totals €3.6 million for the year 2018 (€2.6 million for the prior year 2017). Employer contributions: Beneﬁts Paid (30) (30) (1) 206 (206) 95 96 (31) (31) - 5.16. Advances repayable 1,838 1,707 131 (30) (26) Total Current portion as at 31 December At 31 December 2017 1,704 1,499 204 As at 1 January 2018 Current service cost Interest expense/(income) Remeasurements 1,704 190 36 1,929 1,499 31 1,530 204 190 5 399 - Return on plan assets, excluding amounts included in interest expense/(income) 9 (9) - Actuarial (Gain)/loss due to change in actuarial assumptions - Actuarial (Gain)/Loss due to experience Employer contributions: Beneﬁts Paid At 31 December 2018 (58) (3) (58) (3) (61) 9. (70) 198 (198) The income statement charge included in operating proﬁt for post-employment beneﬁts amount to: (€'000) Current service cost Interest expense on DBO Expected return on plan assets Net periodic pension cost The re-measurements included in other comprehensive loss amount to: (€'000) Eﬀect of changes in actuarial assumptions Eﬀect of experience adjustments (Gain)/Loss on assets for the year Remeasurement of post-employment benefit obligations 2018 2017 190 36 201 32 195 207 2018 2017 (58) (3) - 5 (9) (5) (70) - Plan assets relate all to qualifying insurance policies. The signiﬁcant actuarial assumptions as per 31 December 2018 were as follows: Demographic assumptions (for both current and comparative years presented in these year-end ﬁnancial statements): • Mortality tables: mortality rates-5 year for the men and 5 year for the women • Withdrawal rate: 15% each year • Retirement age: 65 years Economic assumptions: • Yearly inﬂation rate: 1,8% • Yearly salary raise: 1,5% (above inﬂation) • Yearly discount rate: 2.2% If the discount rate would decrease with 0,5% then, the deﬁned beneﬁt obligation would increase with 5,5%. Reversely if the discount rate would increase with 0,5% then the deﬁned beneﬁt obligation would decrease with 3,5%. The above sensitivity analysis is based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the deﬁned beneﬁt obligation to signiﬁcant actuarial assumptions the same method (present value of the deﬁned beneﬁt obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as when calculating the pension liability recognised within the statement of ﬁnancial position. Through its deﬁned beneﬁt pension plan, the Group is exposed to several risks, the most signiﬁcant of which are detailed below: • Changes in discount rate: a decrease in discount rate will increase plan liabilities; • Inﬂation risk: the pension obligations are linked to inﬂation, and higher inﬂation will lead to higher liabilities. The majority of the plan’s assets are either unaﬀected by or loosely correlated with inﬂation, meaning that an increase in inﬂation will also increase the deﬁcit. The investment positions are managed by the insurance company within an asset-liability matching framework that has been developed to achieve long-term investments that are in line with the obligations under the pension schemes. Expected contributions to pension plans for next ﬁnancial year amount to €0.2 million. (€'000) Total Non-Current portion as at 1st January Total Non-Current portion as at 31 December Total Current portion as at 1st January As at December 31, 2018 2017 1,544 2,864 226 276 7,330 1,544 1,108 226 The Group receives government support in the form of recoverable cash advances from the Walloon Region in order to compensate the research and development costs incurred by the Group. Refer to note 5.2.5. At balance sheet date, the Company has been granted total recoverable cash advances amounting to €26.7 million. Out of this total amount : i) €23.7 million have been received to date ; ii) out of the active contracts, an amount of €1.4 million should be received in 2019 or later depending on the progress of the diﬀerent programs partially funded by the Region ; and iii) an amount of €1.5 million refer to contracts for which the exploitation has been abandoned (and thus will not be received). For further details, reference is made to the table below which shows (i) the year for which amounts under those agreements have been received and initially recognised on the balance sheet for the ﬁnancial liability and deferred grant income components and (ii) a description of the speciﬁc characteristics of those recoverable cash advances including repayment schedule and information on other outstanding advances. In 2019, we will be required to make exploitation decisions on our remaining outstanding RCA related to the CAR-T platform. (in €'000) Amounts received for the years ended 31 December Amounts to be received Id Project Contractual amount Prior years 2017 2018 Cumulated cashed in 2019 and beyond Status As at 31 December2018 Amount reimbursed (cumulative) 5160 5731 5914 5915 C-Cure 2,920 2,920 C-Cure 3,400 3,400 C-Cure C-Cathez 700 910 687 910 866 5951 Industrialization 1,470 6003 6230 C-Cure 1,729 1,715 C-Cure 1,084 1,084 - - - - - - - 2,920 3,400 687 910 866 1,715 1,084 - - - - - - - Abandoned Abandoned Abandoned Exploitation Abandoned Abandoned Abandoned 0 0 180 460 245 0 0 97 98 6363 C-Cure 1,140 1,126 6548 Industrialization 660 541 C-Cathez 1,020 1,020 Proteins 1,200 450 C-Cathez 2,500 2,500 C-Cure 2,467 2,220 CAR-T Cell 2,000 1,800 THINK 3,496 - 6633 6646 7027 7246 7502 7685 Total - - - - - 247 200 873 1,187 1,126 541 1,020 450 2,500 2,467 2,000 2,060 26,696 21,239 1,320 1,187 23,746 - - - - - - - 1,436 1,436 Abandoned 1,536 Abandoned Exploitation Abandoned Exploitation Abandoned Exploitation Research 0 204 450 250 0 0 0 3,325 Regarding active contracts (in exploitation status): The contract 5915 has the following speciﬁc characteristics: • • • • • • funding by the Region covers 70% of the budgeted project costs; certain activities have to be performed within the Region; in case of an outlicensing agreement or a sale to a third party, Celyad will have to pay 10% of the price received (excl. of VAT) to the Region; sales-independent reimbursements, sales-dependent reimbursements, and amounts due in case of an outlicensing agreement or a sale to a third party, are, in the aggregate, capped at 100% of the principal amount paid out by the Region; sales-dependent reimbursements payable in any given year can be set-oﬀ against sales-independent reimbursements already paid out during that year; the amount of sales-independent reimbursement and sales-dependant reimbursement may possibly be adapted in case of an outlicensing agreement, a sale to a third party or industrial use of a prototype or pilot installation, when obtaining the consent of the Walloon Region to proceed thereto. The other contracts have the following speciﬁc characteristics: • • • • • • • • funding by the Region covers from 45 to 70% of the budgeted project costs; certain activities have to be performed within the European Union; sales-independent reimbursements represent in the aggregate 30% of the principal amount; sales-dependent reimbursements range between 50% and 200% (including accrued interest) of the principal amount of the RCA depending on the actual outcome of the project compared to the outcome projected at the time of grant of the RCA (below or above projections); interests (at Euribor 1 year (as applicable on the ﬁrst day of the month in which the decision to grant the relevant RCA was made + 100 basis points) accrue as of the 1st day of the exploitation phase; the amount of sales-independent reimbursement and sales-dependant reimbursement may possibly be adapted in case of an outlicensing agreement, a sale to a third party or industrial use of a prototype or pilot installation, when obtaining the consent of the Region to proceed thereto. sales-independent reimbursements and sales-dependent reimbursements are, in the aggregate (including the accrued interests), capped at 200% of the principal amount paid out by the Region; in case of bankruptcy, the research results obtained by the Company under those contracts are expressed to be assumed by the Region by operation of law. The table below summarizes, in addition to the speciﬁc characteristics described above, certain terms and conditions for the recoverable cash advances: Contract number Research phase Percentage of total project costs Turnover- dependent reimbursement Turnover-independent reimbursement Interest rate accrual Amounts due in case of licensing (per year) resp. Sale (€’000) 5160 5731 01/05/05-30/04/08 01/05/08-31/10/09 70% 70% 0.18% 0.18% Consolidated with 6363 Consolidated with 6363 N/A N/A N/A N/A Contract number Research phase Percentage of total project costs Turnover- dependent reimbursement Turnover-independent reimbursement Interest rate accrual Amounts due in case of licensing (per year) resp. Sale (€’000) 5914 5915 5951 6003 6230 6363 6548 6633 6646 7027 7246 7502 7685 01/09/08-30/06/11 70% 5.00% 01/08/08-30/04/11 70% 5.00% 01/09/08-31/12/14 70% 5.00% 01/01/09-30/09/11 01/01/10-31/03/12 01/03/10-30/06/12 60% 60% 60% 0.18% 0.18% 0.18% 01/01/11-31/03/13 60% 0.01% 01/05/11-30/11/12 60% 0.27% 01/05/11-30/06/15 60% 0.01% 01/11/12-31/10/14 50% 0.33% 01/01/14-31/12/16 50% 0,05% €30k in 2012 and €70k each year after €40k in 2012 and €70k each year after €100k in 2014 and €150k each year after Consolidated with 6363 Consolidated with 6363 N/A N/A N/A N/A N/A From €103k to €514k starting in 2013 until 30% of advance is reached Starting on 01/01/13 From €15k to €29k starting in 2014 until 30% of advance is reached Starting on 01/10/13 From €10k to €51k starting in 2013 until 30% of advance is reached Starting on 01/06/13 From €12k to €60k starting in 2015 until 30% of advance is reached Starting on 01/01/16 From €25k to €125k starting in 2015 until 30% of advance is reached Starting on 01/01/15 From €30k to €148k starting in 2017 until 30% of advance is reached. Starting in 2017 10% with a minimum of 100/Y 10% with a minimum of 100/Y 10% with a minimum of 200/Y N/A N/A N/A N/A N/A N/A N/A N/A 01/12/15-30/11/18 45% 0.19% 1/01/2017-31/12/2019 45% 0.33% From €20k to €50k starting in 2019 until 30% is reached. Starting 2019 N/A From €35k to €70k starting in 2019 until 30% is reached. Starting 2020 N/A 5.17. Trade payables and other current liabilities (€'000) Total trade payables Other current liabilities Social security Payroll accruals and taxes Other current liabilities Total other current liabilities As at 31 December, 2018 2017 5,916 314 1,351 1,024 2,690 4,800 306 947 1,029 2,282 Trade payables are non-interest-bearing liabilities and are normally settled on a 90-day terms. Their increase is mainly attributable to clinical operations acceleration in the fourth quarter of 2018. The Other current liabilities include the short-term debts to employees and social welfare and tax agencies. 99 100 No discounting was performed to the extent that the amounts do not present payments terms longer than one year at the end of each ﬁnancial year presented. 5.18. Financial liabilities 5.18.1. Maturity analysis The table below analyses the Group’s non-derivative ﬁnancial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash ﬂows, except for advances repayable which are presented at amortised cost. Contingent consideration liability has not been disclosed in the table below, because as of balance sheet date, it does not meet the deﬁnition of a contractual obligation. Commitments relating to contingent consideration are detailed in the disclosure note 5.33. Financial liabilities reported as at 31 December 2018: FINANCE LEASES FINANCIAL LIABILITY ROLL FORWARD (€'000) Opening balance at 1 January New ﬁnance leases Installments Closing balance at 31 December The change in recoverable cash advance liability balances is detailed as follows: (€'000) As at 31 December, 2018 Bank loan Financial leases Total Less than one year One to five years More than five years (€'000) 510 281 229 - Opening balance at 1 January 1,136 484 652 - Repayments For the year ended 2018 2017 909 735 730 543 (503) (369) 1,136 909 For the year ended 2018 2017 1,770 8,438 (226) (1,233) Advances repayable 3,140 276 1,021 1,843 Proceeds - Liability component 598 Trade payables and other current liabilities 5,916 5,916 - - Remeasurement 998 (80) Total financial liabilities 10,702 6,957 1,902 1,843 Derecognition of liability (non-recurring gain) (5,356) Financial liabilities reported as at 31 December 2017: (€'000) As at 31 December, 2017 Bank loan Financial leases Total Less than one year One to five years More than five years 536 209 326 - 909 427 482 - Closing balance at 31 December 3,140 1,770 The change in the recoverable cash advances liability at balance sheet date reﬂects both the further proceeds cashed in during the year as well as the remeasurement of the liability at amortized cost, based on our updated business plan and sales forecast for our CAR-T product candidates. See disclosure note 5.28. The year-end balance also captures the repayments of contractual turnover independant lump sums to the Walloon Region (relating to C-CATHez agreements). As a consequence of Celyad’s notiﬁcation (in December 2017) to the Walloon Region not to exploit anymore C-Cure IP assets, RCA’s repayments have decreased over 2018. Advances repayable 1,770 226 660 884 Trade payables and other current liabilities 7,083 7,083 - - 5.19. Financial instruments Total financial liabilities 10,298 7,945 1,468 884 5.19.1. Financial instruments not reported at fair value on balance sheet The carrying and fair values of ﬁnancial instruments that are not reported at fair value in the consolidated ﬁnancial statements were as follows for the current and comparative periods: 5.18.2. Changes in liabilities arising from financing activities (€'000) The change in bank loans balances is detailed as follows: BANK LOANS FINANCIAL LIABILITY ROLL FORWARD (€'000) Opening balance at 1 January New bank loans Installments For the year ended 2018 2017 536 742 220 - (245) (207) Closing balance at 31 December 510 536 The change in ﬁnance lease liability balances is detailed as follows: 101 Financial Assets (‘Amortised cost’ category) within: Non-current Trade receivables Other non-current assets As at December 31, 2018 2017 1,743 - 215 273 Trade receivables and other current assets 367 233 Short-term investments Cash and cash equivalents Total 9,197 10,653 40,542 23,253 52,065 34,412 For the above-mentioned ﬁnancial assets, the carrying amount reported at balance sheet date is a reasonable approximation of their fair value. 102 (€'000) Financial Liabilities (‘Financial liabilities at amortized cost’ category) within: Bank loans Finance lease liabilities RCA’s liability As at December 31, 2018 2017 510 536 1,136 909 3,140 1,770 Trade payables and other current liabilities 5,916 4,800 Total 10,702 8,015 For the above-mentioned ﬁnancial liabilities, the carrying amount reported at balance sheet date is a reasonable approximation of their fair value. 5.19.2. Financial instruments reported at fair value on balance sheet Mesoblast equity shares received in settlement of the upfront payment for the C-CathEZ licensing agreement (see disclosure note 5.22) are reported at fair value in the statement of ﬁnancial position using Level 1 fair value measurement (listed securities based on public market prices). Contingent consideration and other ﬁnancial liabilities are reported at fair value in the statement of ﬁnancial position using Level 3 fair value measurements for which the Group developed unobservable inputs. (€'000) Assets Level I Level II Level III Total Investment in equity securities 639 - - 639 Total Assets Liabilities 639 - - 639 Contingent consideration and other ﬁnancial liabilities - - 25,187 Total Liabilities - - 25,187 25,187 25,187 The change in the balance is detailed as follows: CONTINGENT CONSIDERATION AND OTHER FINANCIAL LIABILITIES ROLL FORWARD (€'000) Total - Contingent consideration and Other financial liabilities at 31 December 25,187 19,583 The contingent consideration and other ﬁnancial liabilities refers to the acquisition of our immuno-oncology platform and corresponds to the fair value of the potential future payments due to Celdara Medical, LLC and Dartmouth College. The liability evolution reﬂects the development of our product candidates using CAR-T technology and their progress towards market approval in both autologous and allogeneic programs, as well as the update of our underlying business plans and revenue forecast. The liability increase at balance sheet date is due to the fair value adjustment at reporting date, driven by the addition of the milestone payments related to our allogeneic program (triggered by the IND ﬁling of our product candidate CYAD-101 in June 2018 and the ﬁrst patient infusion in the Alloshrink clinical study in November 2018). The contingent consideration liability captures the commitments disclosed under note 5.33.3. It does not include any amount for contingent consideration payable relating to any sub-licensing agreements entered into or to be entered into by Celyad for the reasons that: • • any contingent consideration payable would be due only when Celyad earns revenue from such sub-licensing agreements, and in an amount representing a fraction of that revenue; and the development of the underlying product candidates by the sub-licensees is not under Celyad’s control, making a reliable estimate of any future liability impossible. Contigent consideration liability sensitivity analysis A sensitivity analysis has been performed on the key assumptions driving the fair value of the contingent consideration liability. The main drivers are i) the discount rate (WACC), ii) the sales long-term growth rate in the terminal value and iii) the probabilities of success (PoS) for our product candidates to get commercialized. Cont. consideration (€ million) Impact (%) Cont. consideration (€ million) Impact (%) 9.9% 33.1 +31% -40% 23.9 -5% Discount rate (WACC) 11.9% 28.7 +14% 13.9% 25.2 - 15.9% 22.1 -12% Sales long-term growth rate in the terminal value -32.5% 24.4 -3% -25% 25.2 - -17.5% 26.3 +4% 17.9% 19.6 -22% -10% 28.2 +12% For the year ended 2018 2017 To determine the contingent consideration liability, we used the same probabilities of success than for impairment testing purposes (see note 5.6.2): Opening balance Contingent consideration at 1 January 15,549 28,179 Milestone payment Fair value adjustment Currency Translation Adjustment (5,341) 4,733 (4,225) (3,064) PoS Phase I Phase I to II Phase II to III Phase III to BLA BLA to Approval Cumulative PoS CYAD-01  CYAD-101 100% 63% 26% 45% 84% 6.4% Closing balance Contingent consideration at 31 December 20,282 15,549 Opening balance Other financial liabilities at 1 January Fair value adjustment 4,034 - 871 4,034 Closing balance Other financial liabilities at 31 December 4,905 4,034 103 104 In order to assess the sensitivity to this driver, we apply here an incremental probability factor to the bottom-line cumulative PoS disclosed below: DEFERRED TAX ASSETS AND LIABILITIES, PER TAX BASES (€'000) -20% 20.2 -20% Probabilities of Success -10% 22.7 -10% PoS model 25.2 - +10% 27.7 +10% +20% 30.2 +20% Cont. consideration (€ million) Impact (%) 5.20. Income taxes The Group reports income taxes in the income statement as detailed below: INCOME TAX EXPENSE IN PROFIT OR LOSS (€'000) Current tax (expense) / income Deferred tax (expense) / income For the year ended 31 December 2018 2017 0 1 For the year ended 31 December 2018 Assets Liabilities Net Intangibles assets Tangible assets 49 - 49 - (154) (154) Recoverable cash advances liability 633 - 633 Contingent consideration liability 6,297 - 6,297 Employee Beneﬁts liability 33 - 33 Other temporary diﬀerence - (436) (436) Tax-losses carried forward 46,858 - 46,858 - - - - - Unrecognised Gross Deferred Tax assets/(liabilities) 53,869 (590) 53,279 Total income tax expense in profit or loss 0 1 The Group has a history of losses, except for its tax entity Biological Manufacturing Services, which is eligible to a minor tax credit. The following table shows the reconciliation between the eﬀective and theoretical income tax at the nominal Belgian income tax rate of 29.58% for the year 2018 and 33.99% for the year 2017: EFFECTIVE INCOME TAX RECONCILIATION (€'000) Loss before tax Permanent differences Tax disallowed expenses Share-based payment Nominal tax rate Tax income at nominal taxe rate Deferred Tax assets not recognised Effective tax expense Eﬀective tax rate For the year ended 31 December 2018 2017 (75,416) (56,396) 269 221 3,595 2,569 29.58% 33.99% 21,165 18,220 (21,165) (18,219) 0 1 0% 0% As having not yet reached the commercialization step, the Group accumulates tax losses that are carried forward indeﬁnitely for oﬀset against future taxable proﬁts of the Group. Signiﬁcant uncertainty exists however surrounding the Group’s ability to realise taxable proﬁts in a foreseeable future. Therefore, the Group has not recognised any deferred tax income in its income statement. Unrecognized deferred tax assets and liabilities are detailed below by nature of temporary diﬀerences for the current year: Netting by tax entity (437) 437 - Unrecognised Net Deferred Tax assets/(liabilities) 53,432 (153) 53,279 Unrecognized deferred tax assets and liabilities are detailed below by nature of temporary diﬀerences for the prior year: (€'000) Intangibles assets Tangible assets For the year ended 31 December 2017 Assets Liabilities Net - (3,974) (3,974) - (215) (215) Recoverable cash advances liability 349 - 349 Contingent consideration liability 4,471 - 4,471 Employee Beneﬁts liability Other temporary diﬀerence Tax-losses carried forward 51 - 51 5 - 5 48,152 - 48,152 Unrecognised Gross Deferred Tax assets/(liabilities) 53,028 (4,189) 48,839 Netting by tax entity (3,974) 3,974 - Unrecognised Net Deferred Tax assets/(liabilities) 49,054 (215) 48,839 105 106 The Group’s main deductible tax base relates to tax losses carried forward, which have indeﬁnite term under both BE and US tax regimes applicable to our subsidiaries. In addition, the Group can beneﬁt from additional tax beneﬁts (like notional interest deduction in Belgium) which can be carried-forward until the taxation year 2020. The remaining temporary diﬀerences refer to diﬀerences between IFRS accounting policies and local tax reporting policies. The Group has not recognised any deferred tax asset on its balance sheet, for the same reason as explained above (uncertainty relating to taxable proﬁts in a foreseeable future). The change in the Group’s unrecognised deferred tax asset balance is detailed below: UNRECOGNISED DEFERRED TAX ASSET BALANCE ROLL FORWARD (€'000) Opening balance at 1 January Temporary diﬀerence creation or reversal Change in Tax-losses carried forward Foreign exchange rate eﬀect Change in BE tax rate applicable (34% > 25%) Change in US tax rate applicable (35% > 23%) For the year ended 2018 2017 48,839 39,370 5,734 (15,580) (1,294) 44,011 - (113) - (14,896) - (3,953) Closing balance at 31 December 53,279 48,839 The net increase in the balance relates to : i) an increase linked to the reversal of a temporary diﬀerence relating to intangible assets valuation and ii) a decrease linked to some tax losses used during the year. 5.21. Other reserves (€’000 ) Balance as at 1st January 2017 Vested share-based payments Share based payment reserve Convertible loan Currency Translation Difference Total 6,946 16,631 752 24,329 (239) (239) Currency Translation diﬀerences subsidiaries (769) (769) Balance as at 31 December 2017 Vested share-based payments 6,707 3,539 16,631 (17) 23,321 3,539 Currency Translation diﬀerences subsidiaries (1,194) (1,194) Balance as at 31 December 2018 10,246 16,631 (1,211) 25,666 5.22. Revenue (€'000) Out-licensing revenue For the year ended 31 December, 2018 2017 2,399 3,505 C-CathEZ sales Other revenue Total - 35 716 - 3,115 3,540 In May 2018, the Group has entered into an exclusive license agreement with Mesoblast, an Australian biotechnology company, to develop and commercialize Celyad’s intellectual property rights relating to C-Cathez, an intra-myocardial injection catheter. We have applied the 5-step model foreseen by IFRS 15 to determine revenue recognition pattern applicable to this contract as of 31 December 2018. Key judgements made in accordance with IFRS 15 were that the license agreement: ▪ ▪ ▪ ▪ ▪ is a distinct component of the Mesoblast agreement; refers to a ‘right-to-use’ type of license, ie. the right to use Celyad’s intellectual property as it exists at the point in time the license has been granted (May 2018). Revenue allocated to the transaction price is thus eligible for full revenue recognition for the year 2018 ; foresees a transaction price broken down between upfront (€0.8 million settled in shares) and contingent milestone payments (an additional amount of €2.2 million qualifying for recognition at 31 December 2018); features a ﬁnancing component (€0.5 million deferred ﬁnancial income to be deducted from the above), leading to a net out-licensing revenue reported of €2.4 million); further foresees variable consideration of up to $17.5 million related to future regulatory- and commercial-based milestones, which will not be recognized until it becomes highly probable that a signiﬁcant reversal in the amount of cumulative revenue recognised will not occur. The related receivable is reported for its discounted value (€1.7 million) under ‘Non-current trade receivables’, see note 5.8. There are no corresponding contract liabilities reported at balance sheet date, as no performance obligation was outstanding. For the previous year, the Group received a non-refundable upfront payment as a result of the Company entering into a non- exclusive license agreement with Novartis. This upfront payment was fully recognized upon receipt as relating to a right-to- use license (no performance obligation associated with the payment, other than granting the right to use the underlying intellectual property as from contract signing date). Other revenue refers to a non-clinical supply agreement concluded with ONO Pharmaceutical Co., Ltd (time & material type of contract). The revenue reported reﬂects the services delivered for the year, consisting in performing cell production and animal experiments requested by ONO. The related receivable open at year-end is reported under ‘Trade receivables’, see note 5.9. This agreement has been completed at year-end, without any performance obligation remaining outstanding. The Company does not expect to generate signiﬁcant revenue unless and until it receives regulatory approval for one of our drug product candidates. 5.23. Research and Development expenses (€'000) Salaries Share-based payments Travel and living Pre-clinical studies Clinical studies Raw materials & consumables Delivery systems Consulting fees External collaborations IP ﬁling and maintenance fees For the year ended 31 December, 2018 2017 7,902 1,264 466 2,945 3,656 2,770 117 1,663 110 397 7,007 862 359 1,995 3,023 1,825 430 1,522 885 513 107 108 Scale-up & automation Rent and utilities Depreciation and amortisation Other costs 23 651 848 765 1,892 371 1,488 735 5.26. Employee beneﬁt expenses (€'000) Total Research and Development expenses 23,577 22,908 Salaries, wages and fees R&D expenses show a net increase year-on-year, which reﬂects the organic growth of the Company’s operations, for both pre-clinical and clinical activities. The underlying operational staﬀ headcount increased by 15% compared to prior year. Scale-up and automation budget has been carried forward to 2019. The absence of amortisation expenses relating to C-Cure and Corquest assets (as a consequence of their full impairment recorded at year-end 2017) explains the lower level of depreciation & amortization expense compared to prior year. 5.24. General and administrative expenses Executive Management team compensation Share-based payments Social security Post employment beneﬁts Hospitalisation insurance Other beneﬁt expense Total Employee expenses For the year ended 31 December, 2018 2017 6,439 3,235 3,595 1,301 217 118 2 14,906 5,461 2,563 2,569 1,277 220 118 - 12,207 (€'000) Employee expenses Share-based payments Rent For the year ended 31 December, 2018 2017 3,312 2,630 2,331 1,707 Salaries, wages and fees expenses show a net increase year-on-year, which reﬂects the organic growth of the Company’s operations, for both pre-clinical and clinical activities. The underlying total staﬀ headcount increased by 10% compared to prior year. The increase in Share-based payments vesting cost (non-cash expenses) is driven by the full year vesting impact of the warrants distribution occurred prior year (warrant grant of mid-2017). Communication & Marketing 676 761 Consulting fees Travel & Living 2,192 2,227 253 211 Research & Development General and administrative staﬀ Post employment beneﬁts (3) - Total Headcount 1,097 1,053 Headcount For the year ended 31 December, 2018 2017 88.1 13.7 101.8 77.1 15.9 93.0 Depreciation Other 267 229 263 490 Total General and administration 10,387 9,308 Increase of G&A expenses by 11% mainly refers to the increase of the Share-based payments vesting cost (non-cash expenses), driven by the full year vesting impact of the warrants distribution occurred prior year (warrant grant of mid-2017). Employee expenses increase is driven by one-oﬀ costs incurred pursuant to changes in our Corporate organization chart. 5.25. Depreciation and amortisation (€'000) Depreciation of property, plant and equipment Amortisation of intangible assets Total depreciation and amortisation The absence of amortisation expenses relating to C-Cure and Corquest assets (as a consequence of their full impairment recorded at year-end 2017) drives the decrease in the amortisation expense compared to prior year. 1,048 68 1,115 966 748 1,714 5.27. Other income and expenses Other expenses mainly refer to the change in fair value of the contingent consideration and other ﬁnancial liabilities. See 5.19.2 for more information. Other income is mainly related to government grants received. For the government grants received in the form of recoverable cash advances (RCAs) we refer to note 5.16 for more information. (€'000) For the year ended December 31, 2018 2017 Remeasurement of contingent consideration 5,604 - Fair value adjustment on securities 182 - Other Total Other Expenses (€'000) 243 41 8,399 41 For the year ended December 31, 2018 2017 For the year ended 31 December, Clinical Development milestone payment 1,372 - 2018 2017 Remeasurement of RCA's 998 - 109 110 Grant income (RCA's) Grant income (Other) Remeasurement of RCA's 768 824 - 56 - 396 (€'000) Minimum rentals payable under operating leases - 31 December 2018 Remeasurement of contingent consideration - 193 IFRS 16 scope exemption (low-value and short-term) R&D tax credit Total Other Income 310 1,161 Minimum rentals payable under operating leases in IFRS 16 scope 1,078 2,630 Discounting eﬀect @ incremental borrowing rate In 2017, the Company recognized also for the ﬁrst time a receivable on the amounts to collect from the federal government as R&D tax credit (€1.2 million). See note 5.8. IFRS 16 lease obligation (discounted) - 1 January 2019 5.30. Finance income and expenses 5.28. Non-recurring operating income and expenses (€’000) 2,912 (237) 2,675 (443) 2,232 For the year ended 31 December, 2018 2017 Non-recurring operating income and expenses are deﬁned as one-oﬀ items, not directly related to the operational activities of the Company. No operations qualify for such a presentation for the year 2018. Interest ﬁnance leases 18 18 (€'000) For the year ended 31 December Interest on overdrafts and other ﬁnance costs 29 36 2018 2017 Interest on RCA’s 15 90 (24,341) Foreign Exchange diﬀerences - 4,309 Amendment of Celdara Medical and Dartmouth College agreements C-Cure IP asset impairment expense C-Cure RCA reversal income Corquest IP asset impairment expenses Write-oﬀ C-Cure and Corquest assets and derecognition of related liabilities Total Non-Recurring Operating expenses - - - - - - (6,045) 5,356 (1,244) (1,932) (26,273) In 2017, the Group had recognized non-recurring expenses related to the amendment of the agreements with Celdara Medical LLC and Dartmouth College (totalling €24.3 million, out of which an amount of €10.6 million was settled in shares, and thus a non-cash expense). The Group had also proceeded with the write-oﬀ of the C-Cure and Corquest assets and derecognition of related liabilities (for net expense amounts of €0.7 million and €1.2 million respectively). Finance expenses Interest income bank account Foreign Exchange diﬀerences Other ﬁnancial income Finance income Net Financial result 62 4,453 308 927 387 109 6 804 934 743 (3,519) In 2017, a signiﬁcant loss on exchange diﬀerences had been incurred due to the depreciation of the USD against EUR. Such a loss did not occur in 2018, explaining the improvement in our net ﬁnancial result. 5.29. Operating leases 5.31. Loss per share The Group has entered into various lease contracts for the purpose of renting buildings and equipment. These leases have an average life of three to ﬁve years with no renewal option included in the contracts. There are no restrictions placed upon the Group by entering into these leases. Operating lease expenses amounted to €1.0 million in 2018 and €0.9 million in 2017. The loss per share is calculated by dividing loss for the year by the weighted average number of ordinary shares outstanding during the period. As the Group is incurring net losses, outstanding warrants have an anti-dilutive eﬀect. As such, there is no diﬀerence between the basic and the diluted earnings per share. In case the warrants would be included in the calculation of the loss per share, this would decrease the loss per share. Future minimum rentals payable under non-cancellable operating leases as of 31 December are detailed as follows: (€’000) (€’000) Within one year After one year but no more than ﬁve years More than ﬁve years Total Operating leases As at 31 December, 2018 2017 708 1,672 533 2,912 857 2,014 888 3,759 As at 31 December, 2018 2017 Loss of the year attributable to Equity Holders (37,427) (56,395) Weighted average number of shares outstanding 11,142,244 9,627,601 Earnings per share (non-fully diluted) in € (3.36) (5.86) Outstanding warrants 731,229 674,962 5.32. Contingent assets and liabilities The table below underline the preliminary impact of IFRS 16 adoption on Celyad ﬁnancial statements, which consists in the recognition of an additional ﬁnancial liability, with a counterpart in tangible leased assets, for an amount of €2.2 million. IFRS 16 adoption details are discussed under note 5.2.1. 111 As described in note 5.2.5, the Group has to reimburse certain government grants received in the form of recoverable cash advances under certain conditions. For more information we refer to note 5.16. In 2019 and beyond, the Group will have to make exploitation decisions on the remaining RCA (agreements numbered 7685). 112 5.33. Commitments 5.33.1. Corquest Inc Based on the terms of the Share Purchase Agreement dated 5 November 2014, former shareholders of Corquest Inc will be entitled to an earn-out payment based on the net revenues generated by the Company, which revenues should be generated from the selling or divesting, in all or in part, of Proprietary Intellectual Property Rights of the Company to a third party. As from the 5 November 2014 date until the tenth anniversary of the Agreement, former shareholders of Corquest Inc are entitled to: • an Earn-Out royalty of 2% if Net Revenue are below or equal to 10 million euro • or an Earn-Out royalty of 4% if Net Revenue are higher than 10 million euro 5.33.2. Celdara Medical LLC Milestones (formerly OnCyte LLC) Based on the terms of the Asset Purchase Agreement dated 21 January 2015, as amended on 3 August 2017, Celdara Medical LLC is entitled to development and regulatory milestones, sales milestones and royalties based on the net sales generated by the Company from products candidate, whose level depend on whether or not the licensed asset from which the product candidate is derived was in clinical or preclinical stage upon in-licensing from Celadara. On the clinical assets (NKG2D), Celdara Medical will be entitled to the following development and regulatory milestones; $5 million upon enrolment of the ﬁrst patient of the second cohort of the Phase I trial 4 $6 million upon dosing the ﬁrst patient of a Phase II trial 5 $9 million upon dosing the ﬁrst patient of a Phase III trial $11 million upon ﬁling of the ﬁrst regulatory approval of CAR-T NKG2D $14 million upon CAR-T NKG2D approval for commercialization in the US On the other preclinical assets (TIM, B7H6, NKP30): $1.5 million upon an IND ﬁling to the FDA 6 $4 million upon dosing the ﬁrst patient of a Phase II trial $6 million upon dosing the ﬁrst patient of a Phase III trial $10 million upon ﬁling of the ﬁrst regulatory request for the product candidate $15 million upon product candidate approval for commercialization in the US Sales milestones will also be due to Celdara Medical and are dependent of cumulative net sales of products developed from licensed assets: $15 million when ﬁrst time cumulative worldwide net sales equal to or exceed $250 million $25 million when ﬁrst time cumulative worldwide net sales equal to or exceed $500 million $40 million when ﬁrst time cumulative worldwide net sales equal to or exceed $1 billion Company will make annual royalty payments to Celdara Medical on net sales of each product sold by the Company, its aﬃliates and sublicensees at the applicable rate set forth below: 5% of the net sales if cumulative worldwide annual net sales are less or equal to $250 million 6% of the net sales if cumulative worldwide annual net sales are greater than $250 million and less or equal to $500 million 7% of the net sales if cumulative worldwide annual net sales are greater than $500 million and less or equal to $1 billion 8% of the net sales if cumulative worldwide annual net sales are greater than $1 billion On all sublicensing revenues received, the Company will pay percentages ranging from 23% to 5% depending on the stage of development of the product sublicensed. On top of the amounts and percentages due to Celdara Medical LLC, the Company will owe to Dartmouth College an additional 2% royalties on its direct net sales. 4 5 6 Paid as of 31 December 2016 Paid as of 31 December 2017 Paid as of 31 December 2018, for TIM pre-clinical asset 113 In accordance with IFRS 3, these contingencies are recognised on balance sheet at year-end, on a risk-adjusted basis. See note 5.19.2. 5.34. Related-party transactions 5.34.1. Remuneration of key management Key management consists of the members of the Executive Management Team and the entities controlled by any of them. Number of EMT members 7 8 As at 31 December, 2018 2017 (€’000) Short term employee beneﬁts[1] Post employee beneﬁts Share-based compensation Other employment costs[2] Management fees Total benefits [1] Include salaries, social security, bonuses, lunch vouchers [2] Such as Company cars Number of warrants granted Number of warrants lapsed Cumulative outstanding warrants Exercised warrants Outstanding payables (in ‘000€) For the year ended 31 December 2018 2017 740 16 1,794 27 2,457 5,034 As at 31 December, 2018 2017 30,000 0 259,000 0 803 666 14 1,123 30 1,950 3,783 179,000 -15,225 306,500 168,000 461 114 5.34.2. Transactions with non-executive directors (€'000) Share-based compensation Management fees Total benefits Number of warrants granted Number of warrants lapsed Number of exercised warrants Cumulative outstanding warrants Outstanding payables (in ‘000€) Shares owned For the year ended 31 December, 2018 2017 420 485 357 387 776 872 As at 31 December, 2018 2017 20,000 60,000 - (2,904) - - 135,000 115,000 127 194 345,453 2,512,004 Decrease in shares owned by Company’s Directors is due to the resignation of Toleﬁ SA as Board member as of 1st August 2018, as described under note 2.2. 5.34.3. Transactions with shareholders There were no transactions with Company’s shareholders, for both current and prior years. 5.35. Events after the balance sheet date There were no subsequent events that occur between 2018 year-end and the date when the ﬁnancial statements have been authorised by the Board for issue. 5.36. Statutory accounts as of 31 December 2018 and 2017 according to Belgian GAAP This section contains selected ﬁnancial information, consisting of the balance sheet, income statement and certain notes, as derived from the statutory ﬁnancial statements of Celyad SA as of and for the year ended 31 December 2018 (including comparative information as of and for the year ended 31 December 2017). These ﬁnancial statements were prepared in accordance with the applicable accounting framework in Belgium and with the legal and regulatory requirements applicable to the ﬁnancial statements in Belgium and are ﬁled with the National Bank of Belgium. These statutory ﬁnancial statements were approved by the Shareholders’ Meeting on 6 May 2019 and the statutory auditor has issued an unqualiﬁed audit opinion with respect to these statutory ﬁnancial statements. The full set of the statutory ﬁnancial statements is available on the website of the National Bank of Belgium (www.nbb.be). 5.36.1. Balance Sheet (in €) ASSETS FIXED ASSETS II. Intangible fixed assets III. Tangible fixed assets Land and buildings Installations machinery and equipment Furniture and vehicles Leasing and similar rights Other ﬁxed assets Fixed assets under construction and advance payments IV. Financial fixed assets CURRENT ASSETS VI. Stocks and contracts in progress Goods purchase for resale VII. Amounts receivable within one year Trade debtors Others amounts receivable VIII. Amounts receivable more than one year Others amounts receivable IX. Investment X. Cash at bank and in hand XI. Deferred charges and accrued income TOTAL ASSETS CAPITAL AND RESERVES I. Capital Issued capital Uncalled capital (-) II. Share Premium 2018 2017 46,838,308 35,054,454 2,039,280 136,935 24,155 1,147,282 730,909 9,744,574 54,641,197 1,384,102 396,652 987,450 4,009,323 4,009,323 9,197,493 39,528,751 521,528 101,479,506 89,943,674 41,552,615 41,552,615 17,725,176 27,430 2,087,160 366,185 23,501 913,912 780,246 3,316 15,610,585 66,367,485 33,020,327 220,827 32,799,500 10,652,595 22,191,145 503,418 84,092,660 74,521,841 34,337,135 34,337,135 220,678,055 181,741,355 115 116 Income from current assets Income from ﬁnancial assets Other ﬁnancial income Financial charges (-) Interest on ﬁnancial debts Other ﬁnancial charges Non-recurring ﬁnancial charges 307,632 490,442 963,883 924,709 245,392 (2,673,713) (7,390,633) (16,798) (17,634) (2,656,915) (5,872,999) (1,500,000) Profit (loss) on ordinary activities before taxes (-) (34,739,670) (80,262,642) Profit (Loss) for the period before taxes (-) Income taxes (-) (+) 4,009,323 Profit (loss) for the period available for appropriation (30,730,347) (80,262,642) V. Accumulated profits (losses) PROVISIONS AND DEFERRED TAXES VII.A. Provisions for liabilities and charges CREDITORS VIII. Amounts payable after more than one year Credit institutions; leasing and other similar obligations Other ﬁnancial loans Other debts IX. Amounts payable within one year Current portion of amounts payable after one year Trade debts Suppliers Taxes; remunerations and social security costs Taxes Remunerations and social security costs Other amounts payable X. Accrued charges and deferred income TOTAL LIABILITIES 5.36.2. Income statement (in €) Operating income Turnover Capitalization of development costs Other operating income Non recurring operating income Operating charges Direct Material (172,286,995) (141,556,649) 11,535,831 2,166,342 770,142 1,396,200 9,369,032 945,705 5,800,067 5,800,067 2,455,758 852,516 1,603,243 167,502 458 9,570,819 1,863,358 801,158 1,062,200 7,704,984 846,660 4,758,090 4,758,090 2,099,603 846,516 1,253,087 557 2,477 101,479,506 84,092,660 2018 2017 22,677,279 1,567,308 18,598,125 2,509,614 2,232 23,978,005 3,940,057 16,824,786 3,213,162 (56,505,192) (98,020,081) (3,679,610) (2,406,004) Services and other goods (21,929,720) (18,948,282) Remuneration; social security and pensions (7,600,167) (6,911,155) Depreciation of and other amounts written oﬀ formations expenses; intangible and tangible ﬁxed assets (-) (22,250,470) (17,663,086) Write-downs on inventories, on orders in progress and on trade receivables (appropriations -; write-backs +) Provisions for liabilities and charges (appropriations -; use and write-backs +) (22,122) Other operating charges (-) (1,043,231) (841,841) Non recurring operating expenses (1,995) (51,227,625) Operating profit (loss) Financial income (33,827,914) (74,042,110) 1,761,957 1,170,101 117 118 5.36.3. Notes Statement of intangibles assets (in €) 2018 2017 Acquisition value at the end of the preceding period 92,582,712 75,851,006 Movements during the period Acquisitions, included produced ﬁxed assets 56,590,006 16,831,606 Sale, transfer and withdraw Acquisition value at the end of the period Depreciation and amounts written down at end of the preceding period 1,500 149,174,219 92,555,282 99,900 92,582,712 26,468,594 Statement of tangible fixed assets  (in €) LAND AND BUILDINGS Acquisition value at the end of the preceding period Movements during the period Acquisitions, included produced ﬁxed assets Acquisition value at the end of the period Depreciation and amounts written down at end of the preceding period Movements during the period Recorded Movements during the period Recorded Sale, transfer and withdraw Depreciation and amounts written down at the end of the period Net book value at the end of the period 21,562,982 66,086,688 Depreciation and amounts written down at end of the period 1,500 114,119,765 35,054,454 92,555,282 27,430 Net book value at the end of the period INSTALLATIONS, MACHINERY & EQUIPMENT Acquisition value at the end of the preceding period Movements during the period Acquisitions, included produced ﬁxed assets Sale, transfer and withdraw Acquisition value at the end of the period Depreciation and amounts written down at end of the preceding period Movements during the period Recorded Sale, transfer and withdraw Depreciation and amounts written down at end of the period Net book value at the end of the period FURNITURE AND VEHICLES 2018 2017 - - - - - - - - - - - - 1,314,115 1,249,303 97,508 275,316 1,136,307 947,930 65,920 14,478 999,372 136,935 269,773 204,961 1,314,115 863,042 90,822 5,934 947,930 366,185 Acquisition value at the end of the preceding period 1,120,260 1,195,365 Movements during the period Acquisitions, included produced ﬁxed assets Sale, transfer and withdraw Acquisition value at the end of the period Depreciation and amounts written down at end of the preceding period Movements during the period Recorded Sale, transfer and withdraw Depreciation and amounts written down at end of the period Net book value at the end of the period LEASING AND OTHER SIMILAR RIGHT 18,581 590,279 1,729,121 1,096,759 155,398 452,810 1,704,966 24,155 9,762 84,867 1,120,260 1,135,902 16,944 56,087 1,096,759 23,501 119 120 Acquisition value at the end of the preceding period 1,723,730 1,180,714 Movements during the period Acquisitions, included produced ﬁxed assets 729,654 543,016 Sale, transfer and withdraw Acquisition value at the end of the period Sale, transfer and withdraw Depreciation and amounts written down at end of the preceding Movements during the period Recorded Sale, transfer and withdraw Depreciation and amounts written down at end of the period Net book value at the end of the period Whereof: Land and buildings Installation, machinery & equipment Furniture and vehicles OTHER TANGIBLE ASSETS 894,332 1,559,052 809,818 348,872 (746,919) 411,771 1,147,282 1,017,681 129,601 1,723,730 453,973 355,845 809,818 913,912 692,447 221,465 Acquisition value at the end of the preceding period 1,079,843 1,080,457 Other investments and deposits (in €) Other Investments and deposits 2018 2017 Acquisition value at the end of the preceding period 267,059 303,987 Movements during the period Additions Reimbursments (-) Net book value at the end of the period Investment and deposits (in €) Less than one year More than one year 166,809 (227,611) (36,928) 206,256 267,059 2018 2017 8,558,952 10,652,595 Net book value at the end of the period 8,558,952 10,652,595 Movements during the period Acquisitions, included produced ﬁxed assets Sale, transfer and withdraw Acquisition value at the end of the period Depreciation and amounts written down at end of the preceding period Movements during the period Recorded Movements during the period Depreciation and amounts written down at end of the period Net book value at the end of the period FIXED ASSETS UNDER CONSTRUCTION AND ADVANCE PAYMENTS Acquisition value at the end of the preceding period Movements during the period Acquisitions, included produced ﬁxed assets 3,976 4,589 1,079,843 174,063 124,503 1,032 299,597 780,246 67,050 432 1,146,461 299,597 117,298 1,343 415,552 730,909 3316 Statement of capital 2018 (in €) Issued capital Structure of the capital Diﬀerent categories of shares Registered Dematerialized Unpaid capital Uncalled capital Capital called, but unpaid 5,461 Shareholders having yet to pay up in full Transfers from one heading to another (3,316) (2,145) Authorised unissued capital Acquisition value at the end of the period Depreciation and amounts written down at end of the preceding period Movements during the period Recorded Depreciation and amounts written down at end of the period Recorded Net book value at the end of the period 0 0 3,316 3,316 121 122 Amounts Number of shares 41,552,615 11,942,344 xxxxxxxxxxxxxxx xxxxxxxxxxxxxxx 72,314 11,870,030 xxxxxxxxxxxxxxx xxxxxxxxxxxxxxx 22,947,704 Amounts Number of shares 34,337,135 9,867,844 Operating results  (in €) Other operating income 2018 2017 Subsidies and recoverable cash advance received from the Walloon Region 2,281,025 2,634,754 Statement of capital 2017  (in €) Issued capital Structure of the capital Diﬀerent categories of shares Registered Dematerialized Unpaid capital Uncalled capital Capital called, but unpaid Shareholders having yet to pay up in full Authorised unissued capital Statement of amounts payable Analysis of amounts payable after more than one year Current portion of amounts initially payable after more than one year Amounts payable expiring over one year and before 5 years Amounts payable expiring over ﬁve year Analysis by current position of amounts initially payable after more than one year Leasing charges and similar Other debts (loans) Other debt Tax, wage and social amounts payable Taxes Non expired taxes payable Remuneration and social security xxxxxxxxxxxxxxx xxxxxxxxxxxxxxx 400,599 9,467,245 xxxxxxxxxxxxxxx xxxxxxxxxxxxxxx 30,166,964 945,705 1,541,342 625,000 1,135,738 1,976,309 846,172 1,608,158 255,200 909,315 1,800,215 (in €) 2018 2017 Operating charges Employees recorded in the personnel register Total number at the closing date Average number of employees calculated in full-time equivalents Number of actual worked hours Personnel costs Remuneration and direct social beneﬁts Employer’s social security contributions Employer’s premiums for extra statutory insurances Other personnel costs (+)/(-) Pensions Impairment of trade receivables On trade receivables Record Withdrawal Provisions for risks and charges Addition Use of and withdrawal Other operating charges Taxes related to operations Other charges 852,516 846,516 Total number at the closing date Hired temporary staff and persons placed at the enterprise’s disposal Average number calculated as full-time equivalents Other amounts payable related to remuneration and social security 1,603,243 1,253,087 Number of actual worked hours Charges to the enterprise Financial results (in €) Interest income Other ﬁnancial income Interest charges Foreign exchange diﬀerence Other ﬁnancial charges 123 124 85 83.5 75 71.1 138,455 115,159 4,965,658 1,307,535 1,057,693 269,280 1,908 1,041,324 1 0.2 908 32,987 2018 2017 798,074 963,882 16,798 2,433,844 223,072 4,458,432 1,349,665 870,368 232,690 84,765 62,643 732,874 108,967 4 3.7 1,882 72,199 924,709 245,392 17,634 5,750,337 122,662 Income and charge of exceptional size or incidence 5.36.4. Summary of valuation rules 2018 2017 Valuation rules are determined by the Board of Directors in accordance with the Royal Decree of 30 January 2001, executing Belgian Company Code and related to the annual accounts requirements for companies. (in €) Non-recurring income Non-recurring ﬁnancial income Non-recurring operating charges Non-recurring ﬁnancial charges Income tax (in €) Status of deferred taxes 2,232 1,995 51,227,625 1,500,000 2018 2017 Accumulated tax losses deductible from future taxable proﬁts 180,559,555 163,528,941 The total amount of value added tax and taxes borne by third parties (in €) 2018 2017 The total amount of value added tax and taxes borne by third parties The total amount of value added tax charged To the enterprise (deductible) By the enterprise Amounts retained on behalf of third parties Payroll withholding taxes 4,608,725 2,950,904 5,881,258 4,002,710 1,692,894 1,606,323 Financial relationship with Amount of direct and indirect remunerations and pensions, included in the income statement, as long as this disclosure does not concern exclusively or mainly, the situation of a single identifiable person (in €) To non-executive directors 2018 2017 356,750 387,250 Financial relationship with auditors (in €) Auditor’s fees Auditor’s special missions fees Fees for special missions executed by related parties to the Auditor 2018 2017 127,524 203,950 - 129,440 11,650 - Formation expenses are booked as intangible ﬁxed assets and amortised over 5 years. Intangible ﬁxed assets acquired from a third party or acquired through a contribution in kind are recorded at the acquisition value. Intangible ﬁxed assets not acquired from a third party are valued at their cost of production in such a way that they do not exceed a prudent estimation of their future economical use or their future return. Intangible assets developed internally are capitalized when perspectives of future return are probable and clearly identiﬁed. Clinical development expenses are capitalized when authorization to start a phase III trial of the related program is obtained. Development expenses of a medical device are capitalized when the device is CE marked. These intangible ﬁxed assets are – in principle – amortised prorate temporis over 5 years starting the year of the ﬁrst revenue generation associated with the related asset. Furniture and ﬁxtures are depreciated over 3, 5 or 10 years depending on the economical life of the assets. An impairment test is performed each year at year end on all tangible and intangible assets. Exceptional depreciation or amortisation expenses may result from such impairment analysis. Financial ﬁxed assets are booked at acquisition value. A write-oﬀ is accounted for when the ﬁnancial ﬁxed asset is permanently impaired. There is no inventory. Direct materials purchased are directly expensed taken into account their short lifetime. Amounts receivable are booked as asset at nominal value. Amounts receivable in foreign currencies are converted in EUR at the exchange rate at closing date. Negative exchange diﬀerences resulting from the conversion in EUR at the exchange rate at closing date are expensed; positive exchange diﬀerences are accounted for as deferred income. Amounts receivable are written-oﬀ when their realizable value is estimated to be lower than their carrying value. Bank deposits are valued at their acquisition value. Cash and cash equivalent are valued at nominal value. When the nominal value includes interests, these latter are accounted for through the balance sheet caption “deferred charges and accrued income”. A write-oﬀ is accounted for when their realizable value is estimated to be lower than their carrying value. Amount payables are booked at nominal value. Amount payables in foreign currencies are converted in EUR at the exchange rate at closing date. Negative exchange diﬀerences resulting from the conversion in EUR at the exchange rate at closing date are expensed; positive exchange diﬀerences are accounted for as deferred income. Recoverable cash advances contracted with the Region are booked as oﬀ balance sheet when Company notiﬁes the Region of its decision to exploit the outcome of the research and development program partially ﬁnanced by the Region. A debt will be recognized the ﬁrst year of revenue recognition for an amount equivalent to the funding received from the Region. Classiﬁcation between long term and short term is determined based on perspectives of revenue generation and reviewed on a yearly basis. 125 126 CELYAD CONTACT DETAILS Filippo Petti Chief Financial Oﬃcer Email: investors@celyad.com Anne Moore VP, Corporate Strategy Paper copy in French and English can be obtained free of charge via the Company’s registered oﬃce. CELYAD SA Axis Business Park Rue Edouard Belin 2 1435 Mont-Saint-Guibert Belgium Tel: +32 10 394100 RPM Nivelles – BE0891 118 115 E-mail; info@celyad.com Website : www.celyad.com SUPPLEMENT DATED 3 APRIL 2019 TO THE 2018 ANNUAL REPORT OF CELYAD SA This Supplement (the Supplement) to the 2018 Annual Report of Celyad dated 28 March 2019 (the Annual Report) has been issued on 3 April 2019. This Supplement is supplemental to, and should be read together with, the Annual Report. It is made available to shareholders, together with the Annual Report, on the website of the Company (www.celyad.com). To the best of the knowledge and belief of Celyad (having taken all reasonable enquiries) the information contained in this Supplement reﬂects the facts and does not omit anything likely to aﬀect the importance of such information. In order to provide an up-to-date overview of information with regards to recent events, the Annual Report is amended as described below. NEW INFORMATION On 28 March 2019, date of the approval of the Annual Report, Celyad published a press release relating to the appointment of Mr. Filippo Petti as Chief Executive Oﬃcer (CEO) of the Company eﬀective on 1st April 2019. As a consequence of this publication, Celyad decided to issue this Supplement in order to update the Annual Report before the 2019 annual shareholders’ meeting. The Annual Report is amended as described below: 1.2 Post balance sheet events (on page 7 of the Annual Report) On 28 March 2019 Celyad published a press release relating to the appointment of Mr. Filippo Petti as Chief Executive Oﬃcer (CEO) of the Company eﬀective on 1st April 2019. Dr. Christian Homsy, CEO of the Company since February 2008, will continue to serve as a member of Celyad’s Board of Directors and chair the Strategy Committee of the Board of Directors. Dr. Homsy will support Mr. Petti in his new function on an as needed basis further to a consulting agreement. The terms and conditions of the consulting agreement between Celyad and Dr. Homsy, and the termination of Dr. Homsy’s position as CEO of Celyad are in line with Celyad’s remuneration policy, corporate governance practices and contractual provisions. Mr. Petti is currently Celyad’s Chief Financial Oﬃcer (CFO) and will continue to serve as interim CFO until the Company appoints a permanent successor for the role. Copy of the press release: 127 128 Celyad Appoints Filippo Petti as Chief Executive Oﬃcer • Dr. Christian Homsy continues as non-executive director and chair of the Strategy Committee Mont-Saint-Guibert, Belgium, March 29, 2019- Celyad (Euronext Brussels and Paris, and Nasdaq: CYAD), a clinical-stage biopharmaceutical company focused on the development of CAR-T therapies, today announced the appointment of Filippo Petti as Chief Executive Oﬃcer (CEO) of Celyad eﬀective April 1, 2019. Mr. Petti is currently Celyad’s Chief Financial Oﬃcer (CFO), and will serve as interim CFO until the Company appoints a permanent successor for the role. Dr. Homsy will continue to serve as a member of Celyad’s Board of Directors and chair the newly created Strategy Committee of the Board of Directors. Dr. Homsy will support Mr. Petti in his new function on an as needed basis. Michel Lussier, Celyad’s Chairman commented “The Board is delighted to appoint Filippo to the role given his intimate knowledge and appreciation for Celyad’s pipeline, team and shareholders as the Company advances its CAR-T therapies to the next stage of development. Since he joined the Company, he has demonstrated that his experience combined with the vision of the Company should maximize value for all of our stakeholders including patients and shareholders." “I am honored to succeed Christian as Celyad’s next CEO and together with the Board, the senior leadership team, and all of our employees, look forward to advancing our promising CAR-T programs to deliver novel therapies to cancer patients,” said Mr. Petti. “The momentum we are building across our pipeline is truly exciting and should provide the Company with a tremendous opportunity as we enter our next phase of growth.” Mr Lussier added: “Christian’s vision and drive, combined with his commitment to serving the long-term interests of the Company, has helped Celyad develop a growing pipeline of CAR-T candidates. He continues to support an agile organization well-positioned for success. I’d like to thank him personally, and on behalf of the Board, for his tireless contribution to Celyad as CEO.” Dr. Homsy added: “I congratulate Filippo on his appointment and look forward to working with him in my new role. It has been an honor to lead the organization over the past 12 years making it a leader in cell therapy development and manufacturing. I am humbled by the talented people I have had the pleasure of working with since the inception of the Company. Today Celyad is an incredibly talented organization with exceptional vision and operational excellence. Together with the portfolio of groundbreaking technologies, I am very grateful to Celyad this will undoubtedly make Celyad a forefront player of the CAR-T ﬁeld. employees and to all the other stakeholders for making this journey possible.” Mr. Petti has nearly 20 years of work experience related to the biopharmaceutical industry. Prior to joining Celyad as CFO, Mr. Petti served as a healthcare investment banker at Wells Fargo Securities and William Blair & Company. Prior to his roles in investment banking, he worked in equity research, with a focus in oncology, both at William Blair & Company and Wedbush Securities. Mr. Petti began his career as a research scientist at OSI Pharmaceuticals, Inc., where he was involved in translational research studies focused on the EGFR inhibitor Tarceva® (erlotinib) before transitioning into corporate development with the company. Mr. Petti holds a Master of Business Administration from Cornell University, a Master of Science from St. John’s University and a Bachelor of Science from Syracuse University. 129 CELYAD AND THE STOCK EXCHANGE The Company is listed on Euronext Paris and Brussels since July 2013 and on Nasdaq since June 2016. Mnemo: CYAD ISIN:BE0974260896 PEA and PEA PME Eligibility. Total outstanding shares: 11,942,344 (as of 1 June 2018) MORE INFORMATION ON: www.celyad.com MORE INFORMATION FOR SHAREHOLDERS ON: www.celyad.com/investors CONTACT: investors@celyad.com @CELYADSA @CELYAD

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