UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: November 30, 2017
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________________ to __________________________
Commission file number 000-54329
ORGENESIS INC.
((Exact name of registrant as specified in its charter)
Nevada
State or other jurisdiction
of incorporation or organization
98-0583166
(I.R.S. Employer
Identification No.)
20271 Goldenrod Lane, Germantown, MD 20876
((Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (480) 659-6404
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common stock, par value $0.0001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer [ ]
Non-accelerated filer [ ]
(Do not check if a smaller reporting company)
Accelerated filer [ ]
Smaller reporting company [X]
Indicate by check mark whether the registrant is an emerging growth company as defined in in Rule 405 of the Securities Act of 1933
(§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b -2 of this chapter). [ ]
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The registrant had 10,273,644 shares of common stock outstanding as of February 28, 2018. The aggregate market value of the common
stock held by non-affiliates of the registrant as of May 31, 2017 was $41,903,396, as computed by reference to the closing price of such
common stock on OTCQB on such date.
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ORGENESIS INC.
2017 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
PART I
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
PART III
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
SIGNATURES
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FORWARD-LOOKING STATEMENTS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
The following discussion should be read in conjunction with the financial statements and related notes contained elsewhere in this
Form 10-K. Certain statements made in this discussion are "forward-looking statements" within the meaning of The Private Securities
Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties which could cause actual results to differ
materially from those contemplated in these forward-looking statements. Unless otherwise indicated or the context requires otherwise, the
words “we,” “us,” “our,” the “Company” or “our Company” or “Orgenesis” refer to Orgenesis Inc., a Nevada corporation, and our
subsidiaries, MaSTherCell, S.A. (“MaSTherCell”), Orgenesis SPRL (the “Belgian Subsidiary), Orgenesis Ltd. (the “Israeli Subsidiary”),
Orgenesis Maryland Inc. and Cell Therapy Holdings S.A. Forward-looking statements made in an annual report on Form 10-K include
statements about:
Corporate
•
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•
Our ability to achieve profitability;
our ability to increase revenues and raise sufficient capital or strategic business arrangements to expand our CDMO global network;
our ability to grow the size and capabilities of our organization through further collaboration and strategic alliances;
our ability to manage the growth of our CDMO business;
our ability to attract and retain key scientific or management personnel and to expand our management team;
the accuracy of estimates regarding expenses, future revenue, capital requirements, profitability, and needs for additional financing;
our belief that one of our principal competitive advantages is our cell trans-differentiation technology being developed by our Israeli
Subsidiary and being able to compete favorably and profitably as a Contract Development and Manufacturing Organization
(“CDMO”) in the regenerative medicine sector;
CDMO business
•
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our ability to grow the business of MaSTherCell, which we acquired in our fiscal year 2015, as our principal contract development
and manufacturing (CDMO) business;
our ability to attract and retain customers;
our ability to expand and maintain our CDMO business through strategic alliances, joint ventures and internal growth;
our ability to fund the operational and capital requirements of the global expansion of our CDMO business;
our expectations regarding our expenses and revenue, including our expectations that our research and development expenses and
selling, general and administrative expenses may increase in absolute dollars;
the successful integration of our clinical and CDMO strategy;
our ability to contract with third-party suppliers and manufacturers and their ability to perform adequately;
extensive industry regulation, and how that will continue to have a significant impact on our business, especially our product
development, manufacturing and distribution capabilities; and
Cellular Therapy business (“CT”)
•
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our ability to develop, through our Israeli Subsidiary and Belgian Subsidiary, to the clinical stage a new technology to
transdifferentiate liver cells into functional insulin-producing cells, thus enabling normal glucose regulated insulin secretion, via cell
therapy;
our belief that our diabetes-related treatment seems to be safer than other options;
expectations regarding the ability of our Israeli Subsidiary and our Belgian Subsidiary to obtain additional and maintain intellectual
property protection for our technology and therapies;
our ability to commercialize products in light of the intellectual property rights of others;
our ability to obtain funding necessary to start and complete such clinical trials;
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•
•
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our belief that Diabetes Mellitus will be one of the most challenging health problems in the 21st century and will have staggering
health, societal and economic impact;
our relationship with Tel Hashomer Medical Research Infrastructure and Services Ltd. (“THM”) and the risk that THM may cancel
the License Agreement;
expenditures not resulting in commercially successful products;
These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in
the section entitled “Risk Factors” set forth in this Annual Report on Form 10-K for the year ended November 30, 2017, any of which may
cause our company’s or our industry’s actual results, levels of activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks may
cause the Company’s or its industry’s actual results, levels of activity or performance to be materially different from any future results,
levels of activity or performance expressed or implied by these forward looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity or performance. Moreover, neither we nor any other person assumes responsibility for the accuracy and
completeness of these forward-looking statements. The company is under no duty to update any forward-looking statements after the date
of this report to conform these statements to actual results.
PART I
ITEM 1. BUSINESS
Business Overview
We are a service and research company in the field of the regenerative medicine industry with a focus on cell therapy development
and manufacturing for advanced medicinal products serving the regenerative medicine industry. In addition, we are focused on developing
novel and proprietary cell therapy trans-differentiation technologies for the treatment of diabetes.
A large number of diseases continue without adequate conventional therapies. Cell therapy has a unique therapeutic effect as it is
based on augmenting, repairing, replacing or regenerating organs and tissues - leveraging the human body's capacity to heal. It therefore
holds the promise to be able to cure diseases that present both a major health care and economic burden, such as cancer, diabetes and
cardiovascular diseases. But if the regenerative market is to realize its full potential, manufacturing and logistics need to be in place to
ensure these products' safety, potency and consistency at economically sustainable costs. We have built up our long term strategy on this
industry assessment.
Our vertically integrated manufacturing capabilities are being used to serve emerging technologies of cell therapy clients in such
areas as cell-based cancer immunotherapies and neurodegenerative diseases and also to optimize our abilities to scale-up our licensed and
proprietary technologies for clinical trials and eventual commercialization of our proposed diabetes treatment. Our hybrid business model
of combining our own proprietary cell therapy trans-differentiation technologies for the treatment of diabetes and a revenue-generating
contract development and manufacturing service business provides us with unique capabilities and supports our mission of accelerating the
development and ultimate marketing of breakthrough life-improving medical treatments.
We seek to differentiate our company from other cell therapy companies by our Belgian-based CDMO subsidiary, MaSTherCell,
and a world-wide network of Contract Development and Manufacturing Organizations (“CDMO”) joint venture partners who have built a
unique and fundamental base platform of know-how and expertise for manufacturing in a multitude of cell types. The goal is to industrialize
cell therapy for fast, safe and cost-effective production in order to provide rapid therapies for any market around the world. Our strategy is
to have all of our services compliant with GMP requirements, ensuring identity, purity, stability, potency and robustness of cell therapy
products for clinical phase I, II, III through commercialization.
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MaSTherCell currently operates facilities qualified under cGMPs in Belgium. We acquired MaSTherCell in March 2015. Formed in
2011 as a spin-off from the Université Libre de Bruxelles (“ULB”) and starting operational activities in 2013, we believe that MaSTherCell
has assembled a recognized team of experts and talents in the cell therapy industry and has attracted world-class customers. MaSTherCell is
developing technologies for other cell therapy companies such as cell-based cancer immunotherapies and neurodegenerative diseases. Our
vertical integration responds to the main challenges faced by most biotechnology companies such as cost of goods sold and logistics.
MaSTherCell has built its unique and disruptive value proposition by providing two types of services to its customers: (i) process
and assay development and optimization services and (ii) current Good Manufacturing Practices (cGMP) contract manufacturing services
as practiced in Europe. These services offer a double advantage to MaSTherCell’s customers. First, customers can continue allocating their
financial and human resources on their therapy offerings, while relying on a trusted partner for their production process development.
Second, it allows customers to leverage MaSTherCell’ s expertise in cell therapy manufacturing and all related aspects. As the industry
continues to mature and a growing number of cell therapy companies approach commercialization, we believe that MaSTherCell is well
positioned to serve as an external manufacturing source for cell therapy companies. Additionally, all of these capabilities offered to third-
parties will be mobilized for our internal development projects, allowing us to be in a position to bring new products to the patients faster
and in a cost-effective way.
Our trans-differentiation technologies for treating diabetes, which we will refer to as our cellular therapy (“CT”) business, is based
on a technology licensed by our Israeli Subsidiary that demonstrates the capacity to induce a shift in the developmental fate of cells from
the liver and transdifferentiating them into “pancreatic beta cell-like” Autologous Insulin Producing (“AIP”) cells for patients with Type 1
Diabetes. Moreover, those cells were found to be resistant to autoimmune attack and to produce insulin in a glucose-sensitive manner in
relevant animal models which significantly broadens the potential of the technology for other therapeutics areas. Our trans-differentiation
technology for diabetes is from the work of Prof. Sarah Ferber, our Chief Science Officer and a researcher at Tel Hashomer Medical
Research Infrastructure and Services Ltd. (“THM”) in Israel. Our development plan calls for conducting additional preclinical safety and
efficacy studies with respect to diabetes and other potential indications prior to initiating clinical trials. In parallel, we work on establishing
the GMP manufacturing process which development is already accomplished.
We operate our CDMO and the CT businesses as two separate business segments.
CDMO Business
Industry Background
Companies developing cell therapies need to make a decision early on in their approach to the transition from the lab to the clinic
regarding the manufacturing and production of the cells necessary for their respective treatments. Of the companies active in this market,
only a small number have established their own GMP manufacturing facilities due to the high costs and expertise required to develop and
maintain such production centers. In addition to the limitations imposed by limited number of trained personnel and high
infrastructure/operational costs, the industry faces a need for custom innovative process development and manufacturing solutions. Due to
the complexity and diversity of the industry, such solutions are often customized to the particular needs of the company and, accordingly, a
multidisciplinary team of engineers, cell therapy experts, cGMP and regulatory experts is required. Such a unique group of experts can
exist only in an organization that specializes in developing solutions and manufacturing cell therapies.
Companies can establish their own process and GMP manufacturing facility or engage a contract manufacturing organization for
each step. A contract manufacturing organization (CMO), sometimes called a contract development and manufacturing organization
(CDMO), is an entity that serves other companies in the pharmaceutical industry on a contract basis to provide comprehensive services
from cell therapy development through cell therapy manufacturing for and end-to-end solution. Due to the complexity, global outreach
needs, redundancy and operational costs of manufacturing biologics and cell therapies, the CDMO business is expanding. With more than
854 companies in the field of the regenerative medicine worldwide (versus 580 in 2015) and 934 clinical trials underway by the end of the
third quarter of 2017 (versus 486 in first quarter of 2015), we believe that the industry shows a rapid growth rate accompanied by a lack of
sufficient GMP manufacturing capacities (Source: Informa, 2015 and 2018). Over recent years, advances in the field of regenerative
medicine, including the growth of autologous CAR T-cell therapies, led to a significant increase in investment in the industry. As its name
implies, the backbone of CAR T-cell therapy is T-cells, often called the workhorses of the immune system because of their critical role in
orchestrating the immune response and killing cells infected by pathogens. The therapy requires drawing blood from patients and separating
out the T-cells. Next, using a disarmed virus, the T-cells are genetically engineered to produce receptors on their surface called chimeric
antigen receptors, or CARs. Treatments work by extracting a cancer patient’s T-cells, genetically modifying them outside the body to make
them more effective at hunting down and killing tumors, and then re-injecting them into the patient.
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Two landmark U.S. FDA approvals in CAR T-cell therapy significantly impacted the cell therapy industry. In August 2017,
Novartis’s CAR T-cell therapy, Kymriah, was approved for relapsed/refractory acute lymphoblastic leukemia for pediatric and young adult
patients, making it the first cell-base immunotherapy to move across the finish line in the United States. Furthermore, after Gilead's
acquisition of Kite Pharma, Inc. for $12 billion in 2017, Kite Pharma’s CAR T-cell therapy, Yescarta, was approved for adult patients with
relapsed/refractory large B cell lymphoma after two or more lines of systemic therapy (Source: Alliance for Regenerative Medicine). We
believe that these are the most concrete step towards building confidence and support for the future potential approvals of many more
cellular therapies that address a wide range of diseases.
The complexity of manufacturing individual cell therapy treatments poses a fundamental challenge for CAR T-cell therapy-based
companies as they enter the field, potentially casting a spotlight on improved large-scale manufacturing processes such as MaSTherCell's.
Manufacturing and delivery are more complex in CAR T than for a typical drug. In the U.S., only a few dozen specialized hospitals are
currently qualified to provide CAR T treatments, which require retrieving, processing and then returning immune cells to the patient, as
well as monitoring side effects. These factors provide real incentives for cell therapy companies to seek third-party partners, or contract
manufacturers, who possess technical, manufacturing, and regulatory expertise in cell therapy development and manufacturing such as cell
therapy CDMOs like MaSTherCell.
Our vertical integration of development and manufacturing and logistics services through MaSTherCell provide the basis for
generating a recurring revenue stream, as well as carefully managing our fixed cost structure to maximize optionality and drive down
production cost. We believe that operating our own manufacturing facility provides us with enhanced control of material supply for both
clinical trials and the commercial market, will enable the more rapid implementation of process changes, and will allow for better long-
term margins.
MaSTherCell’s Business
Our Belgian-based subsidiary, MaSTherCell, is a CDMO specialized in cell therapy development for advanced therapeutically
products. In the last decade, cell therapy medicinal products have gained significant importance, particularly in the fields of ex-vivo gene
therapy and immunotherapy. While academic and industrial research has led scientific development in the sector, industrialization and
manufacturing expertise remains insufficient. MaSTherCell plans to fill this gap by providing two types of services to its customers: (i)
process and assay development services and (ii) current Good Manufacturing Practices (cGMP) contract manufacturing services. These
services offer a double advantage to MaSTherCell's customers. First, customers can continue allocating their financial and human resources
on their product/therapy, while relying on a trusted partner for their process development/production. Second, it allows customers to benefit
from MaSTherCell's expertise in cell therapy manufacturing and all related aspects.
MaSTherCell continues to invest in its manufacturing capabilities to offer a “one-stop-shop” service to its customers from pre-
clinical up to commercial. This stems from the finding that these companies' processes have to be set up right from the start in order for
them to obtain approved products that have the simplest possible process and with the lowest possible cost of goods sold (COGS). Our
target customers are primarily cell therapy companies that are in clinical trials with the aim of accompanying them as their manufacturing
and logistic partner once their product candidates reach commercial stage.
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We devote significant resources to process development and manufacturing in order to optimize the safety and efficacy of our future
product candidates for our customers, as well as our cost of goods and time to market. This vertical integration of development,
manufacturing and logistics services through MaSTherCell aims to provide the basis for generating a recurring revenue stream, as well as
carefully managing our fixed cost structure, maximize optionality, and drive long-term cost of goods as low as possible. We believe that
operating our own manufacturing facility provides us with enhanced control of material supply for both clinical trials and the commercial
market, will enable the more rapid implementation of process changes, and will allow for better long-term margins.
MaSTherCell continues to invest resources to maintain best practices in quality service, quality control, quality assurance and
permanent staff training to uphold the highest standards to serve its customers. MaSTherCell has built-up a team of more than 92 industry
experts dedicated to support process development and manufacturing efforts in a fast, safe and cost-effective way. MaSTherCell's strategy is
to build long term relationships with its customers in order to help them bring highly potent cell therapy products faster to the market and in
cost-effective ways. To provide these services, MaSTherCell relies on a team of dedicated experts both from academic and industry
backgrounds. It operates through state-of-the-art facilities located approximately 40 minutes from Brussels, which have received the final
cGMP manufacturing authorization from the Belgian Drug Agency (AFMPS) in September 2013 and a renewal in October 2017 for cell-
based therapies manufacturing that was extended to gene therapies.
Third Party Investment in MaSTherCell
On November 15, 2017, we, MaSTherCell and the Belgian Sovereign Funds Société Fédérale de Participations et d'Investissement
(“SFPI”) entered into a Subscription and Shareholders Agreement (the “Agreement”) pursuant to which SFPI completed an equity
investment in MaSTherCell in the aggregate amount of €5million (approximately $5.9 million), for approximately 16.7% of MaSTherCell.
The equity investment included the conversion of the then outstanding loan of €1 million (approximately $1.1 million) plus accrued
interest in the approximate amount of €70 thousand (approximately $77,000), previously made by SFPI to MaSTherCell (the “Loan
Amount”).
Under the Agreement, an initial subscription amount of €2 million (approximately $2.3 million) has been paid and the outstanding
Loan Amount was converted. The balance of approximately €2 million is payable as needed by MaSTherCell and called in by the board of
directors of MaSTherCell. The proceeds of the investment will be used to expand MaSTherCell’s facilities in Belgium by the addition of
five new cGMP manufacturing cleanrooms. MaSTherCell expects that this expansion will position it as the European hub for the
Company’s continental activities and strengthen its leading position in cell and gene manufacturing. The state-of-the-art design enables
MaSTherCell to offer full flexibility for production and process development.
Under the Agreement, SFPI will be represented by one board member of the five board members of MaSTherCell. In addition, SFPI
is entitled to designate one independent board member to the MaSTherCell board who is acceptable to us. The Agreement provides that,
under certain specified circumstances where MaSTherCell breaches the terms of the Agreement, SFPI is entitled to put its equity interest in
MaSTherCell to us at a price equal to the subscription price paid by SFPI, plus a specified annual premium ranging from 10% to 25%,
depending on the year following the subscription in which the put is exercised. If the Company elects to terminate the Agreement before its
scheduled term of seven years (or to not renew the agreement upon its scheduled termination), SFPI is entitled to put its MaSTherCell
equity interest to us at fair market value (as determined by SFPI and the Company). Additionally, at any time during the first three years
following the investment, SFPI is entitled to exchange its equity interest in MaSTherCell into shares of common stock, at a rate equal to the
subscription price paid by SFPI divided by $6.24 (subject to adjustment for certain capital events, such as stock splits).
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Following the SFPI investment in MaSTherCell, in November 2017, MaSTherCell announced the expansion by 600m² of its facility
in Belgium with a dedicated, late-stage clinical and commercial cGMP unit, anticipated to be operational by the fourth quarter of 2018. This
new expansion will enable MaSTherCell to augment its commercial capabilities in Europe with five state-of-the-art advanced
manufacturing units and extended GMP-accredited quality control (QC) laboratories.
Our Growth Strategy
In light of the globalization of the industry in general and the therapeutics industry in particular, adding to that the high cost of
reaching market, developers of cell therapies see themselves as global organizations and build their models on global markets. As cell
therapies are based on living cells, they are limited in their ability to be centrally manufactured. An additional challenge for globalization is
the fact that the regulatory requirements for the therapies is not harmonized between jurisdictions, presenting additional operational
challenges.
Orgenesis is building up a leading international CDMO focusing on cell manufacturing and a strong pipeline of regenerative
medicine products. Capitalizing on MaSTherCell’s experience and expertise, we have established collaboration agreement for the CDMO
activity with the main focus, initially, in South Korea and Israel. The goal is a potential 50/50 partnership, which allows us the potential of
full ownership in the future.
We have leveraged the recognized quality expertise and experience in cell process development and manufacturing of
MaSTherCell, and our international joint ventures, in Israel and Korea, to build a global CDMO in the cell therapy development and
manufacturing area. We believe that cell therapy companies need to be global in order to truly succeed. We target the international
manufacturing market as a key priority through joint-venture agreements that provide development capabilities, along with manufacturing
facilities and experienced staff.
The main revenue drivers of our growth strategy on a global reach are the number of batches and the number of patients per
manufacturing batch. These parameters vary along the development cycle of the new treatments (starting from as few as 20 patients in
Phase I to thousands of patients when reaching commercialization). When a client reaches the commercial stage, their demand for
manufacturing substantially increases, while barriers preventing the client from switching to another manufacturing organization remain
extremely high. The difficulty in transferring CDMOs is a function of the tech transfer of such complex manufacturing processes being
extremely lengthy, requiring many months of training of highly specialized employees, while also possibly requiring new regulatory
approvals. Therefore, we believe we are well positioned to continue expanding our revenue for the following reasons:
(1)
(2)
(3)
A higher number of companies in later phases of clinical trials;
Therapy companies requiring higher manufacturing abilities concurrent with a global reach; and
An increasing need for the manufacturing scalability provided by a CDMO.
Our CDMO Partners Around the World
We have leveraged the experience and expertise of MaSTherCell to build out a global network of CDMO centers. We believe that
this international footprint will give a unique competitive advantage to MaSTherCell with harmonized manufacturing between the
respective regional footprints.
To date we have set up CDMO facilities in South Korea and set the basis for process development in Israel. These have been set up
as collaborative joint ventures where we have invested significant amounts as convertible loans. Under the arrangements, we have the
ability to convert our loans into 50% of the equity in the entities. The joint venture documents also allow us a call option on the equity
holdings of our partners such, if and when we determine to acquire ownership and control of these facilities.
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Korea
On March 14, 2016, we and CureCell Co., Ltd. (“CureCell”) entered into a Joint Venture Agreement (the “CureCell JVA”) pursuant
to which the parties are collaborating in the contract development and manufacturing of cell therapy products in Korea. Under the CureCell
JVA, CureCell has procured, at its sole expense, a GMP facility and appropriate staff in Korea for the manufacture of cell therapy products.
We shared with CureCell our knowhow in the field of cell therapy manufacturing, which know-how does not include the intellectual
property included in the license from the THM to our Israeli Subsidiary. The parties pursue the joint venture through CureCell (the “JV
Company”), with each party having 50% from the participating interest of the JV Company subject to the fulfillment by each party of his
obligations under the CureCell JVA.
Under the CureCell JVA, the Company and CureCell each undertook to remit, within two years of the execution of the CureCell
JVA, a minimum amount of $2 million to the JV Company, of which $1 million is to be in cash and the balance may be in an in-kind
investment, the scope and valuation of which shall be preapproved in writing by CureCell and the Company. The Company’s funding was
made by way of a convertible loan. The CureCell JVA provides that, under certain specified conditions, we can require CureCell to sell to
us its participating (including equity) interest in the JV Company in consideration for the issuance of our common stock based on the then
valuation of the JV Company. As of November 30, 2017, we remitted to CureCell $2.1 million.
Israel
On May 10, 2016, we and ATVIO Biotech Ltd., an Israeli company, (“ATVIO”) entered into a joint venture agreement pursuant to
which the we are collaborating in the contract development and manufacturing of cell and virus therapy products in the field of regenerative
medicine in Israel. We are pursuing the joint venture through ATVIO, in which we are holding a 50% participating interest therein, with the
remaining 50% participating interest being held by the other shareholders of ATVIO. To date, ATVIO has procured, at its sole expense, a
GMP facility and has been recruiting employees in Israel. Subject to the work plan that was approved by ATVIO and us, we have remitted
to ATVIO a total of $1 million to defray the costs associated with the setting up and the maintenance of the GMP facility. Our funding was
made by way of a convertible loan to ATVIO, which shall be convertible, at our option at any time, into 50% of the then outstanding equity
capital immediately following such conversion.
Our global manufacturing network is envisioned as offering a global one-stop-shop manufacturing and logistics services and
breakthrough technologies enabling promising therapies to more rapidly reach the market in a more cost-effective way.
On January 22, 2018 we announced a strategic organizational regrouping of our CDMO global manufacturing services offerings.
The planned CDMO regrouping will utilize the global MaSTherCell brand for its unique technology and innovation activity located in
Israel and serving the global cell & gene therapy markets. The primary purpose of the strategic regrouping is to create a more efficient
CDMO corporate organization that can optimally utilize resources and more efficiently broaden, streamline and harmonize the CDMO
service offerings on a global basis utilizing the quality and standards of MaSTherCell. In connection with this and in order to align our
CDMO activities, we plan to transfer to a newly formed and wholly-owned Delaware-based holding company, named MaSTherCell Global
Inc., our interests in MaSTherCell S.A., as well as in our joint venture partners in Israel and Korea. When successfully concluded, of which
no assurance can be provided, each of MaSTherCell S.A., At-Vio Biotech Ltd. and CureCell Co. Ltd., will be direct subsidiaries of
MaSTherCell Global Inc.
United States and Other Parts of the World
We are currently in advanced negotiations with a prospective strategic partner in the U.S. and will continue to explore discussions
with other strategic partners throughout the world to set up CDMO facilities in other geographic locations. While we expect to utilize
similar structures as our other joint venture partners, we can provide no assurance that such efforts will be successful in these other joint
venture endeavors.
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Our Competitive Advantages
We offer the following benefits to our CDMO clients:
We enable our clients to go faster to the market in a cost-effective way. MaSTherCell continues to invest in its manufacturing
capabilities to offer a “one-stop-shop” service to its customers from pre-clinical up to commercial. This stems from the finding that these
companies' processes have to be set up right from the start in order for them to obtain approved products that have the simplest possible
process and with the lowest possible cost of goods sold (COGS).
Quality. MaSTherCell works alongside its customers to transform the promises of their cell-based therapies into a robust and
scalable process, compliant with GMP requirements. Its stringent quality system is applied throughout the process and ensures identity,
purity, stability, potency and robustness of cell therapy products from clinical phase I, II, III to commercialization. MaSTherCell continues
to invest resources to maintain best practices in quality service, quality control, quality assurance and permanent staff training to uphold the
highest standards.
Transforming academic technology to clinical manufacturing . One of the major issues with moving cell therapy products from
“bench to manufacturing bedside” has been manufacturing bottlenecks. The heterogeneous nature of cell therapy products has introduced
manufacturing complexity and regulatory concerns, as well as scale-up complexities that are not present within traditional pharmaceutical
manufacturing. Over the years, MaSTherCell has developed experience and expertise necessary for transforming academic concepts into a
clinical manufacturing program to support all phases of clinical trials. This includes assessing the clinical efficiency of the laboratory
concept.
Access to a global network. Many companies developing autologous cell therapies envision using multiple manufacturing sites and
processing centers to distribute the workload and minimize the shipping distances for such time- sensitive products. Many cell therapy
products are fragile preparations that must be shipped and applied to a patient rapidly. This time pressure means that standard product-
release testing procedures are not feasible. In particular, sterility testing often cannot be completed before patient treatment. This unique
challenge in cell-therapy manufacturing requires tighter environmental and handling controls to greatly reduce any risk of sterility failure.
Biotechnology companies have to anticipate their success and the logistics to cure at point of care. Therefore, the setup of a global CDMO
meets this requirement and is the strategy behind our establishment of our CDMO facilities in Korea and Israel. To comply with anticipated
regulatory harmonization, we have also invested in our Quality and Management Systems (QMS) and to structure them in a way they could
be shared with either affiliated companies or business partners, and even with customers or prospects. South Korea, Israeli and European
requirements are essentially the same, allowing MaSTherCell to implement its QMS model in a quick and efficient way. This truly
international footprint will give a unique competitive advantage to MaSTherCell, thereby filling the gap of biotechnology companies’
requirement of “quality comparability” between the respective regional sites.
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Central continental locations to deal with key logistics challenges. With respect to this challenge, MaSTherCell has built up the
following:
•
•
•
Team of dedicated experts both from academic and industry backgrounds with a strong experience in cGMP dealing with not yet
harmonized regulatory requirements (EMA, FDA);
State-of-the-art facilities located next to airports; and
Multi-continental footprints to deal with therapies administration at or nearby point of care as many cell therapy products have a
short shelf life.
Providing value-added manufacturing capacity. One of the biggest challenges is developing reliable (quality) and robust
manufacturing processes for cell-based therapy products that ensure adequate product safety, potency, and consistency at an economically
viable cost. Additionally, manufacturing quality and comparability is at the heart of biotechnology companies’ challenges. MaSTherCell
has built-up a strong expertise to customize the production and manufacturing process to suit the particular needs of a given client. This
process facilitates a deep understanding of the client’s needs and facilitates a long term revenue generating relationship.
Competition in the CDMO Field
MaSTherCell competes with a number of companies both directly and indirectly. Key competitors include the following CMOs and
CDMOs: Lonza Group Ltd, Progenitor Cell Therapy (PCT) LLC (acquired by Hitachi), Pharmacell BV (acquired by Lonza), WuxiAppTec
(WuXi PharmaTech (Cayman) Inc.), Cognate Bioservices Inc., Apceth GmbH & Co. KG, Eufets GmbH, Fraunhofer Gesellschaft,
Cellforcure SASU, Cell Therapy Catapult Limited and Molmed S.p.A. MaSTherCell's services differ from these companies in two major
aspects:
•
•
Quality and expertise of its services: Clients identify the excellence of its facility, quality system, and people as a major
differentiating point compared to competitors; and
Flexible and tailored approach: MaSTherCell's philosophy is to build a true partnership with its clients and adapt itself to the clients’
needs, which entails no “off-the-shelf process” nor in-house technology platform, but a dedicated person in plant (of client), joint
steering committees on each project and dedicated project managers.
* Diagram above signifies “one-stop-shop service offering” from process development through quality manufacturing and logistics to point
of care.
MaSTherCell strengthens its leading position by its “one-stop-shop” service offering, from pre-clinical to commercial, with a clear
focus on COGS of manufacturing processes. This differentiation results in a price premium compared to other CMO’s as MaSTherCell
operates with a lean organization focused solely on cell therapy. Quality is a critical aspect of our industry, and we believe that
MaSTherCell has developed unique expertise in this field. We devote significant resources to process development and manufacturing in
order to optimize the safety and efficacy of our future product candidates for our customers, as well as our cost of goods and time to
market. Our goal is to carefully manage our fixed cost structure, maximize optionality, and drive long-term cost of goods as low as
possible. We believe that operating our own manufacturing facility, which provides us with enhanced control of material supply for both
clinical trials and the commercial market, will enable a more rapid implementation of process changes, and will allow for better long-term
margins.
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Finally, MaSTherCell is the only CDMO located in Belgium which logistically offers an ideal location given the high concentration
of companies active in cell therapy, including potential clients and companies with complementary know-how, products and services.
Cell Therapy Business
Background
Diabetes Mellitus (DM), or simply diabetes, is a metabolic disorder usually caused by a combination of hereditary and
environmental factors, and results in abnormally high blood sugar levels (hyperglycemia). Diabetes occurs as a result of impaired insulin
production by the pancreatic islet cells. The most common types of the disease are Type-1 Diabetes (T1D) and Type-2 Diabetes (T2D). In
T1D, the onset of the disease follows an autoimmune attack of β-cells that severely reduces β-cell mass. T1D usually has an early onset and
is sometimes also called juvenile diabetes. In T2D, the pathogenesis involves insulin resistance, insulin deficiency and enhanced
gluconeogenesis, while late progression stages eventually lead to β-cell failure and a significant reduction in β-cell function and mass. T2D
often occurs later in life and is sometimes called adult onset diabetes. Both T1D and late-stage T2D result in marked hypoinsulinemia,
reduction in β-cell function and mass and lead to severe secondary complications, such as myocardial infarcts, limb amputations,
neuropathies and nephropathies and even death. In both cases, patients become insulin-dependent, requiring either multiple insulin
injections per day or reliance on an insulin pump.
Diabetes is one of the most challenging health problems in the 21st Century, incurring staggering health, social, and economic
impact. Diabetes is currently the fourth or fifth leading cause of death in most developed countries. Diabetes has been declared an epidemic
in many developing and newly industrialized nations.
Cell therapy is the prevention or treatment of human disease by the administration of cells that have been selected, multiplied and
manipulated outside the body (ex vivo). To date, the most common type of cell therapy has been the replacement of mature, functioning
cells through blood and platelet transfusions. Since the 1970s, first bone marrow and then blood and umbilical cord-derived stem cells have
been used to restore bone marrow, as well as blood and immune system cells damaged by chemotherapy and radiation used to treat many
cancers. These types of cell therapies are standard of practice world-wide and are typically reimbursed by insurance. Various cell therapies
are in clinical development for an array of human diseases, including autoimmune, oncologic, neurologic and orthopedic diseases, among
other indications. Orgenesis, as well as other companies, are developing cell therapies that are designed to address cancers, ischemic repair
and immune modulation. While no assurances can be given regarding future medical developments, we believe that the field of cell therapy
holds the promise to address several medical conditions and minimize or ameliorate the pain and suffering from many common diseases
and/or from the process of aging.
Within the field of cell therapy, research and development using stem cells to treat a host of diseases and conditions has greatly
expanded. All living complex organisms start as a single cell that replicates, differentiates (matures) and perpetuates in an adult organism
throughout its lifetime. Stem cells (in either embryonic or adult forms) are primitive and undifferentiated cells that have the unique ability
to transform into or otherwise affect many different cells, such as white blood cells, nerve cells or heart muscle cells. Our technology
employs a molecular and cellular approach directed at converting liver cells into functional insulin-producing cells as a treatment for
diabetes. This new therapeutic approach does not use stem cells, but rather is focused on the use of autologous, fully mature, adult cells.
There are two general classes of cell therapies: allogeneic and autologous. In allogeneic procedures, cells collected from a person
(the donor) are transplanted into, or used to develop a treatment for another patient (the recipient) with or without modification. In cases
where the donor and the recipient are the same individual, these procedures are referred to as “autologous”.
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Our treatment for diabetes focuses on autologous cells that offer a low likelihood of rejection by the patient. We believe the long-
term benefits of this treatment can best be achieved with an autologous product. For our purposes in the treatment of diabetes, our cells are
derived from the liver or other adult tissue and are transdifferentiated to become adult Autologous Insulin Producing (“AIP”) cells.
Through our Israeli Subsidiary and our Belgian Subsidiary, our goal is to advance our AIP cell-based therapy into clinical
development. AIP cells utilize the technology of ‘cellular trans-differentiation’ to transform an autologous adult liver cell into a fully
functional and physiologically glucose-responsive insulin-producing cell. Treatment with AIP cells is expected to provide Type 1 Diabetes
patients with long-term insulin independence. Because AIP cells are autologous, this benefit should be achieved and maintained without the
need for concomitant immunosuppressive therapy.
Threats from Pancreas Islet Transplantation and Cell Therapies
To date, a significant portion of the amount invested in diabetes related research and development activities has been directed
toward prevention and lifestyle management rather than toward development of a cure. For some patients with severe and difficult to
control diabetes (hypoglycemic unawareness), islet transplants are considered. Pancreatic islets are the cells in the pancreas that produce
insulin. Scientists use enzymes to isolate the islets from the pancreas of a deceased donor. Because the islets are fragile, transplantation
must occur soon after they are removed. Typically, a patient receives at least 10,000 islet “equivalents” per kilogram of body weight,
extracted from pancreases obtained from different donors. Patients often require two separate transplants to achieve insulin independence.
Transplants are often performed by an interventional radiologist, who uses x-rays and ultrasound to guide placement of a catheter -
a small plastic tube - through the upper abdomen and into the portal vein of the liver. The islets are then infused slowly through the catheter
into the liver. The patient receives a local anesthetic and a sedative. In some cases, a surgeon may perform the transplant through a small
incision, using general anesthesia. Because the islets are obtained from cadavers that are unrelated to the patient, the patient needs to be
treated with drugs that inhibit the immune response so that the patient doesn’t reject the transplant. In the early days of islet transplantation,
the drugs were so powerful that they actually were toxic to the islets; improvements in the procedure are widely used and are now referred
to as the Edmonton Protocol.
Pancreatic islet transplantation (cadaver donors) is an allogeneic transplant, and, as in all allogeneic transplantations, there is a risk
for graft rejection and patients must receive lifelong immune suppressants. Though this technology has shown good results clinically, there
are several setbacks, such as patients being sensitive to recurrent T1D autoimmune attacks and a shortage in tissues available for islet cells
transplantation.
Pancreatic islet auto transplantation is a means of reducing the risk of brittle diabetes following total pancreatectomy. In 1977,
researchers at the University of Minnesota School of Medicine pioneered the first Total Pancreatectomy with Islet Autologous Transplant
(TP-IAT) for the treatment for induced diabetes post-surgery. At that time, islet cell isolation techniques, which had been pursued to treat
insulin-dependent diabetes via allotransplant, yielded variable results and raised uncertainty regarding the future efficacy of TP-IAT. Since
then, advances in isolation and purification have improved islet transplant outcomes, and the practice of TP-IAT has expanded. In the
United States, there are currently approximately 12 centers performing TP-IAT, with 1 to 2 centers annually establishing programs; there is
no available information on the worldwide use of this procedure.
TP-IAT has the distinct advantage of allowing patients the ability to avoid the significant postoperative complication of surgically
induced brittle diabetes. The severity of brittle diabetes, a condition in which a patient experiences both severe hyper and hypoglycemic
episodes, should not be underestimated; in one early series, 50% of late deaths after TP were secondary to iatrogenic hypoglycemic
episodes. Although total pancreatectomy in the era of modern endocrine and exocrine replacement therapy has witnessed improvements in
long-term morbidity and mortality, it remains one of the most morbid abdominal operations performed today.
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Our Solution
We are developing and bringing to clinical stage a technology that is based on the published work of Prof. Sarah Ferber, our Chief
Science Officer and a researcher at THM, that demonstrates the capacity to induce a shift in the developmental fate of cells from the liver
into “pancreatic beta cell-like” insulin-producing cells. Furthermore, those cells were found resistant to the autoimmune attack and able to
produce insulin in a glucose-sensitive manner. Our cell therapy business derives from a licensing agreement entered into as of February 2,
2012 by Orgenesis Ltd., our Israeli Subsidiary, and THM pursuant to which our Israeli Subsidiary was granted a worldwide royalty bearing
an exclusive license to certain information regarding a molecular and cellular approach directed at converting liver cells into functional
insulin-producing cells as a treatment for diabetes (the “License Agreement”). See “The THM License Agreement” for details relating to
this License Agreement.
Toward this goal, we are working to advance a unique product that combines cell-based therapy and regenerative medicine, (AIP)
cells, into clinical development. AIP cells utilize the technology of ‘cellular trans-differentiation’ to transform an autologous adult liver cell
into an adult, fully functional and physiologically glucose-responsive pancreatic-like insulin producing cell. Treatment with AIP cells is
expected to provide diabetes patients with long-term insulin independence. Our aim is to develop our AIP cell therapy in the treatment of
diabetes by essentially correcting malfunctioning organs with new functional tissues created from the patient’s own existing organs.
Because the AIP cells are autologous, this benefit should be achieved and maintained without the need for concomitant
immunosuppressive therapy. The procedure to generate AIP cells begins with liver tissue accessed via needle biopsy from a patient. The
liver tissue is then sent to a CDMO, such as MaSTherCell, where biopsied liver cells are isolated, expanded and trans-differentiated into
AIP cells. The final product is a solution of AIP cells, which are packaged in an infusion bag and sent back to the patient’s treating
physician where the cells are transplanted back into the patient’s liver via portal vein infusion. The entire process, from biopsy to
transplantation, is expected to take 5-6 weeks.
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Unique Benefits of AIP Cells
We believe that our singular focus on the acquisition, development, and commercialization of AIP cells may have many and
meaningful benefits over other technologies, including:
•
•
•
•
•
•
•
•
Physiologically glucose-responsive insulin production within one week of AIP cell transplantation;
Insulin-independence within one month;
Single course of therapy (~10-year insulin-independence);
No need for concomitant immunosuppressive therapy;
Return to (near) normal quality of life for patients;
Single liver biopsy supplies unlimited source of therapeutic tissue (bio-banking for future use if needed);
Highly controlled and tightly closed GMP systems; and
Quality Control of final product upon release and distribution
We are aware of no other company focused on development of AIP cells based on trans-differentiation. The pharmaceutical
industry is fragmented, and it is a competitive market. We compete with many pharmaceutical companies, both large and small and there
may be technologies in development of which we are not aware.
We believe our ability to further develop our AIP cells is augmented by the following:
IP Strength - Orgenesis has broad patent claims on its process and has both issued and pending patents in the U.S. and
internationally. The patent portfolio includes granted patent US 8119405, entitled “Methods of inducing regulated pancreatic hormone
production in non-pancreatic islet tissues,” which includes broad claims on trans-differentiating any mature, non-pancreatic cell type into an
islet cell phenotype. Importantly, the company’s IP portfolio is not dependent on processes owned by other companies, such as embryonic
stem cell technologies, production of endodermal intermediates or reprogramming (iPS) technologies. As a result, the company has both
freedom to operate and ability to obstruct competitors in developing autologous cells for treatment of diabetes.
Simplicity - There is no need for anti-rejection treatment or encapsulation. Using liver as pancreatic progenitor tissue allows the
diabetic patient to be the donor of his own insulin-producing tissue, thus allowing autologous implantations with no need for anti-rejection
therapy, which restricts the target population only to adult, severe diabetic patients. Moreover, drugs used for preventing the allo-
transplanted tissue rejection are deleterious to insulin producing cell function and to the patient.
Safety - the generated cells do not regress to pluripotency, and no adverse effects of uncontrolled cells proliferation occur. The cells
are already mature and can be inserted in to the patient following extensive quality assurance testing. Moreover, our cells transplanted in
rodents do not cause any adverse effects even following many weeks in the animals.
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Availability - Sufficient liver cells to treat a patient as well to store cells for additional future treatments may be generated. The cells
can be frozen and thawed, without losing the trans-differentiation capacity for up to 20 passages in culture. It is anticipated that a biopsy
from the diabetic patient's own liver is sufficient to generate enough insulin-producing cells to replace the entire cell function and control
blood glucose level. As opposed to islets that are non-dividing (i.e., post-mitotic), it is necessary to use stem cells to generate sufficient
numbers of cells that are then differentiated.
Future Product Candidates - Currently, liver cells are best suited for generating AIP cells. Future products may involve the use of
cell types other than liver that are more easily accessible from the diabetic patient or from unrelated donors. Additionally, other adult cells
(i.e. fibroblasts) may be studied for trans-differentiation into functional cells in diseases other than insulin-dependent disorders (i.e.
neurodegenerative).
The THM License Agreement
Our cell therapy business derives from a licensing agreement entered into as of February 2, 2012 by Orgenesis Ltd., our Israeli
Subsidiary, and THM pursuant to which our Israeli Subsidiary was granted a worldwide royalty bearing and exclusive license to certain
information regarding a molecular and cellular approach directed at converting liver cells into functional insulin producing cells as a
treatment for diabetes. By using therapeutic agents (i.e., PDX-1, and additional pancreatic transcription factors in an adenovirus-vector) that
efficiently convert a sub-population of liver cells into pancreatic islets phenotype and function, this approach allows the diabetic patient to
be the donor of his own therapeutic tissue. We believe that this provides major competitive advantage to the cell transformation technology
of our Israeli Subsidiary.
As consideration for the license, our Israeli Subsidiary has agreed to pay the following to THM:
1)
2)
3)
4)
A royalty of 3.5% of net sales;
16% of all sublicensing fees received;
An annual license fee of $15,000, which commenced on January 1, 2012 and is due once every year thereafter (the “Annual
Fee”). The Annual Fee is non-refundable, but it shall be credited each year due, against the royalty noted above, to the extent
that such are payable, during that year; and
Milestone payments as follows:
a)
b)
c)
d)
e)
$50,000 on the date of initiation of phase I clinical trials in human subjects;
$50,000 on the date of initiation of phase II clinical trials in human subjects;
$150,000 on the date of initiation of phase III clinical trials in human subjects;
$750,000 on the date of initiation of issuance of an approval for marketing of the first product by the FDA; and
$2,000,000, when worldwide net sales of products have reached the amount of $150,000,000 for the first time, (The
“Sales Milestone”).
As of November 30, 2017, our Israeli Subsidiary has not reached any of these milestones.
In the event of an acquisition of all of the issued and outstanding share capital of the Israeli Subsidiary or of the Company and/or
consolidation of the Israeli Subsidiary or the Company into or with another corporation (“Exit”), under the License Agreement, THM is
entitled to elect, at its sole option, whether to receive from the Company a one-time payment based, as applicable, on the value at the time
of the Exit of either 463,651 shares of common stock of the Company or the value of 1,000 ordinary shares of the Israeli Subsidiary at the
time of the Exit. If THM elects to receive the consideration as a result of an Exit, the royalty payments will cease.
If THM elects to not receive any consideration as a result of an Exit, THM is entitled under the License Agreement to continue to
receive all the rights and consideration it is entitled to pursuant to the License Agreement (including, without limitation, the exercise of the
rights pursuant to future Exit events), and any agreement relating to an Exit event shall be subject to the surviving entity’s and/or the
purchaser’s undertaking towards THM to perform all of the Israeli Subsidiary's obligations pursuant to the License Agreement.
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The Israeli Subsidiary agreed to submit to THM a commercially reasonable plan which shall include all research and development
activities as required for the development and manufacture of the products, including preclinical and clinical activities until an FDA or any
other equivalent regulatory authority’s approval for marketing and including all regulatory procedures required to obtain such approval for
each product candidate (a “Development Plan”), within 18 months from the date of the License Agreement. Under the License agreement,
the Israeli Subsidiary undertook to develop, manufacture, sell and market the products pursuant to the milestones and time-frame schedule
specified in the Development Plan. The Israeli Subsidiary submitted the Development Plan in May 2014.
Under the License Agreement, THM is entitled to terminate the License Agreement under certain conditions relating to a material
change in the business of our Israeli Subsidiary or a breach of any material obligation thereunder or to a bankruptcy event of our Israeli
Subsidiary. Under certain conditions, our Israeli Subsidiary may terminate the License Agreement and return the licensed information to
THM.
In 2016 and 2017, the Israeli Subsidiary entered into a research service agreement with the Licensor. According to the agreements,
the Israeli Subsidiary will perform a study at the facilities and use the equipment and personnel of the Sheba Medical Center, with annual
consideration of approximately $88 thousand and $131 thousand, respectively.
Marketing
Our plan is to market and sell AIP cellular therapy as a stand-alone product and to provide supporting education and services to
physicians and the healthcare providers that support them. In addition, we expect to provide appropriate and supportive services to the
distribution networks that make our product available to treating physicians and facilities. Once marketing authorization is granted, we plan
to market our product in North America, Europe and Asia.
As part of our long-term strategy, we will consider clinical development and commercialization collaborations and/or partnerships
with international companies involved in the diabetes therapeutic area.
Competition
Insulin therapy is used for Insulin-Dependent Diabetes Mellitus (IDDM) patients who are not controlled with oral medications,
although this therapy has well-known and well-characterized disadvantages. Weight gain is a common side effect of insulin therapy, which
is a risk factor for cardiovascular disease. Injection of insulin causes pain and inconvenience for patients. Patient compliance and
inconvenience of self-administering multiple daily insulin injections is also considered a disadvantage of this therapy. The most serious
adverse effect of insulin therapy is hypoglycemia.
The global diabetes market comprising the insulin, insulin analogues and other anti-diabetic drugs has been evolving rapidly.
Today’s overall diabetes market is dominated by a handful of participants such as Novo Nordisk A/S, Eli Lilly and Company, Sanofi-
Aventis, Takeda Pharmaceutical Company Limited, Pfizer Inc., Merck KgaA, and Bayer AG.
CT Subsidiaries and Collaboration Agreements
Subject to raising the necessary funding, we intend to advance our cell therapy business by furthering this licensed technology to a
clinical stage. We intend to devote significant resources to process development and manufacturing in order to optimize the safety and
efficacy of our future product candidates, as well as our cost of goods and time to market. Our goal is to carefully manage our fixed cost
structure, maximize optionality, and drive long-term cost of goods as low as possible. We believe that operating our own manufacturing
facility will provide the Company with enhanced control of material supply for both clinical trials and the commercial market, will enable
the more rapid implementation of process changes, and will allow for better long-term margins.
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We carry out our CT business through three wholly-owned and separate subsidiaries. This corporate structure allows us to simply
the accounting treatment, minimize taxation and optimize local grant support. Our CT subsidiaries are as follows:
•
•
•
United States: Orgenesis Maryland Inc. – This is the center of activity for North America currently focused on preparation for U.S.
clinical trials.
European Union: Orgenesis SPRL – This is the center of activity for Europe, currently focused on process development and
preparation of European clinical trials.
Israel: Orgenesis Ltd. – This is a research and technology center.
We have embarked on a strategy of collaborative arrangement with strategically situated third parties around the world. We believe
that these parties have the expertise, experience and strategic location to advance our clinical development business.
On March 14, 2016, our Israeli Subsidiary, entered into a collaboration agreement with CureCell Co., Ltd. (“CureCell”), initially for
the purpose of applying for a grant from the Korea Israel Industrial R&D Foundation (“KORIL”) for pre-clinical and clinical activities
related to the commercialization of our AIP cell therapy product in Korea (the “KORIL Grant”). Subject to receiving the KORIL Grant, the
parties agreed to carry out, at their own expense, their respective commitments under the work plan approved by KORIL and any
additional work plan to be agreed between the Israeli Subsidiary and CureCell. The Israeli Subsidiary will own sole rights to any
intellectual property developed from the collaboration which is derived under the Israeli Subsidiary’s AIP cell therapy product and
information licensed from THM. Subject to obtaining the requisite approval needed to commence commercialization in Korea, the Israeli
Subsidiary has agreed to grant to CureCell, or a fully owned subsidiary thereof, under a separate sub-license agreement an exclusive sub-
license to the intellectual property underlying the Company’s AIP product solely for commercialization of the Israeli Subsidiary’s products
in Korea. As part of any such license, CureCell has agreed to pay annual license fees, ongoing royalties based on net sales generated by
CureCell and its sublicensees, milestone payments and sublicense fees. Under the agreement, CureCell is entitled to share in the net profits
derived by the Israeli Subsidiary from world-wide sales (except for sales in Korea) of any product developed as a result of the collaboration
with CureCell. Additionally, CureCell was given the first right to obtain exclusive commercialization rights in Japan for adipose-derived
AIP product, subject to CureCell procuring all of the regulatory approvals required for commercialization in Japan. As of the date of this
filing, none of the requisite regulatory approvals for conducting clinical trials had been obtained.
Grant Funding
Walloon Region, Belgium, Direction Générale Opérationnelle de l'Economie, de l'Emploi & de la Recherche (“DGO6”)
On March 20, 2012, MaSTherCell was awarded an investment grant from the DGO6 for €1,421 thousand. This grant is related to
the investment in the production facility with a coverage of 32% of the investment planned. A first payment of €568 thousand was received
in August 2013. In December 2016, the DGO6 paid to MaSTherCell €669 thousand on account of the grant, and the remaining grant
amount has been declined.
On November 17, 2014, Our Belgian Subsidiary, received the formal approval from the DGO6 for a €2.015 thousand ($2.4 million)
support program for the research and development of a potential cure for Type 1 Diabetes. The financial support was composed of a €1,085
thousand (70% of budgeted costs) grant for the industrial research part of the research program and a further recoverable advance of €930
thousand (60% of budgeted costs) of the experimental development part of the research program. In December 2014, the Belgian
Subsidiary received advance payment on amount of €1,209 thousand under the grant. The grants are subject to certain conditions with
respect to the Belgian Subsidiary’s work in the Walloon Region. In addition, the DGO6 is also entitled to a royalty upon revenue being
generated from any commercial application of the technology. In 2017 we received from the DGO6 approval for Euro 1.8 million costs
invested in the project, out of which Euro 1,192 thousand was funded by the DGO6. During 2017 we repaid to the DGO6 the down
payments of €17 thousand. In addition, the final recoverable advance under this project is €150 thousand, out of which €15 thousand was
paid by the Belgian Subsidiary during 2017.
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On April 2016, our Belgian Subsidiary received the formal approval from DGO6 for a budgeted €1,304 thousand ($1,455 thousand)
support program for the development of a potential cure for Type 1 Diabetes. The financial support was awarded to our Belgian Subsidiary
as a recoverable advance payment at 55% of budgeted costs, or for a total of €717 thousand ($800 thousand). The grant will be paid over
the project period. On December 19, 2016, our Belgian Subsidiary received a first payment of €359 thousand ($374 thousand). In 2017, the
DGO6 approved a no cost extension for the program until August 31, 2017. The total expenses under the program through November 30,
2017 were €787 thousand ($900 thousand). In addition, the DGO6 is also entitled to a (i) revocable advance of €215 thousand ($250
thousand) and (ii) a royalty upon revenue being generated from any commercial application of the technology.
On October 8, 2016, our Belgian Subsidiary received the formal approval from the DGO6 for a budgeted €12.3 million ($12.8
million) support program for the GMP production of AIP cells for two clinical trials that will be performed in Germany and Belgium. The
project will be held during a period of three years commencing January 1, 2017. The financial support is awarded to our Belgian Subsidiary
at 55% of budgeted costs, a total of €6.8 million ($7 million). The grant will be paid over the project period. On December 19, 2016, our
Belgian Subsidiary received a first payment of €1.7 million ($1.8 million). The total expenses under the program through November 30,
2017 were €1,224 thousand ($1,451 thousand).
Israel-U.S Binational Industrial Research and Development Foundation (“BIRD”)
On September 9, 2015, our Israeli Subsidiary, entered into a pharma Cooperation and Project Funding Agreement (CPFA) with
BIRD and Pall Corporation, a U.S. company. BIRD will give a conditional grant of $400 thousand each (according to terms defined in the
agreement), for a joint research and development project for the use of our AIP cells for the treatment of diabetes (the “BIRD Project”). The
BIRD Project started on March 1, 2015. Upon the conclusion of product development, the grant shall be repaid at the rate of 5% of gross
sales. The grant will be used solely to finance the costs to conduct the research of the BIRD Project during a period of 18 months starting
on March 1, 2015 and up to the date the Israeli Subsidiary received $200 thousand under the grant. On July 28, 2016, BIRD approved an
extension until May 31, 2017 and the final report was submitted to BIRD. The total expenses under the program through November 30,
2017 were $717 thousand.
Korea Israel Industrial R&D Foundation (“KORIL”)
On May 26, 2016, our Israeli Subsidiary entered into a pharma Cooperation ad Project Funding Agreement (CPFA) with KORIL
and CureCell. KORIL will give a conditional grant of up to $400 thousand each (according to terms defined in the agreement), for a joint
research and development project for the use of AIP Cells for the Treatment of Diabetes (the “Project”). The Project started on June 1,
2016. Upon the conclusion of product development, the grant shall be repaid at the yearly rate of 2.5% of gross sales. The grant will be
used solely to finance the costs to conduct the research of the project during a period of 18 months starting on June 1, 2016. On June 2016,
we received $160 thousand under the grant. The total expenses under the program through November 30, 2017 were $368 thousand.
Maryland Technology Development Corporation
On June 30, 2014, our U.S. Subsidiary entered into a grant agreement with Maryland Technology Development Corporation
(“TEDCO”). TEDCO was created by the Maryland State Legislature in 1998 to facilitate the transfer and commercialization of technology
from Maryland’s research universities and federal labs into the marketplace and to assist in the creation and growth of technology-based
businesses in all regions of the State. TEDCO is an independent organization that strives to be Maryland’s lead source for entrepreneurial
business assistance and seed funding for the development of start-up companies in Maryland’s innovation economy. TEDCO administers
the Maryland Stem Cell Research Fund to promote State funded stem cell research and cures through financial assistance to public and
private entities within the State. Under the agreement, TEDCO has agreed to give the U.S. Subsidiary an amount not to exceed
approximately $406 thousand (the “TEDCO Grant”). The TEDCO Grant was used solely to finance the costs to conduct the research
project entitled AIP during a period of two years.
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On July 22, 2014 and September 21, 2015, the U.S subsidiary received an advance payment of $406 thousand on account of the grant. On
June 21, 2016, TEDCO approved an extension until June 30, 2017. Through November 30, 2017, the Company utilized $356 thousand.
Research and Development Expenditures
We incurred $3,326 and $2,637 thousand in research and development expenditures in the fiscal years ended November 30, 2017
and 2016, respectively, of which $848 thousand and $480 thousand was covered by grant funding.
Intellectual Property
We will be able to protect our technology and products from unauthorized use by third parties only to the extent it is covered by
valid and enforceable patents or is effectively maintained as trade secrets. Patents and other proprietary rights are thus an essential element
of our business.
Our success will depend in part on our ability to obtain and maintain proprietary protection for our product candidates, technology,
and know-how, to operate without infringing on the proprietary rights of others, and to prevent others from infringing it proprietary rights.
Our policy is to seek to protect our proprietary position by, among other methods, filing U.S. and foreign patent applications related to our
proprietary technology, inventions, and improvements that are important to the development of our business. We also rely on trade secrets,
know-how, continuing technological innovation, and in-licensing opportunities to develop and maintain our proprietary position.
We own or have exclusive rights to four (4) United States and seven (7) foreign issued patents, three (2) pending applications in the
United States, eleven (11) pending applications in foreign jurisdictions, including Europe, Australia, Brazil, Canada, China, Eurasia, Israel,
Japan, South Korea, Mexico, and Singapore, and one (1) international PCT patent application, relating to the trans-differentiation of cells
(including hepatic cells) to cells having pancreatic β-cell phenotype and function, and their use in the treatment of degenerative pancreatic
disorders including diabetes, pancreatic cancer, and pancreatitis.
Granted U.S. patents which are directed to methods of making trans-differentiated cells will expire between 2021 and 2024,
excluding any patent term extensions that might be available following the grant of marketing authorizations. Granted patents outside of
the United States directed to making trans-differentiated cells and their uses will expire between 2020 and 2024. We have pending patent
applications for methods of making our product, the product itself, and methods of using the product that, if issued, would expire in the
United States and in countries outside of the United States between 2034 and 2035, excluding any patent term adjustment that might be
available following the grant of the patent and any patent term extensions that might be available following the grant of marketing
authorizations. These pending patent applications are directed to the following specific compositions and methods: a method of producing a
transdifferentiated population of cells, a population of transdifferentiated cells, a method of treating a degenerative pancreatic disorder in a
subject in need, a method of isolating a population of cells that have an enriched capacity for transcription factor induced trans-
differentiation, an isolated population of cells having enriched trans-differentiation capacity, a method of increasing trans-differentiation
efficiency in a population of cells, a population of liver cells enriched for cells predisposed to trans-differentiation, and a method of
manufacturing a population of human insulin producing cells and the population of cells produced by the recited manufacturing method.
Government Regulation
We have not sought approval from the FDA for the AIP cells. Among all forms of cell therapy modalities, we believe that
autologous cell replacement therapy seems to be of the highest benefit. We believe that it seems to be safer than other options as it does not
alter the host genome but only alters the set of expressed epigenetic information that seems to be highly specific to the reprogramming
protocol. It provides an abundant source of therapeutic tissue, which is not rejected by the patient and does not have to be treated by
immune suppressants. It is highly ethical since no human organ donations or embryo-derived cells are needed. The proposed therapeutic
approach does not require cell bio-banking at birth, which is both expensive and cannot be used for patients born prior to 2000.
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Over the past decade, many studies published in leading scientific journals confirmed the capacity of reprogramming adult cells
from many of our mature organs to either alternate organs or to “stem like cells”. Most widely used autologous cell replacement protocols
are used for autologous implantation of bone marrow stem cells. This protocol is widely used in patients undergoing a massive
chemotherapy session that destroys their bone marrow cells. However, the stem cells used for cancer patients delineated above do not
require extensive manipulation and is regarded by FDA as “minimally manipulated”.
An additional autologous cell therapy approach already used in man is autologous chondrocyte implantation (ACI). In the United
States, Genzyme Corporation provides the only FDA approved ACI treatment called Carticel. The Carticel treatment is designated for
young, healthy patients with medium to large sized damage to cartilage. During an initial procedure, the patient’s own chondrocytes are
removed arthroscopically from a non-load-bearing area from either the intercondylar notch or the superior ridge of the medial or lateral
femoral condyles.
To aid us in our efforts to achieve the highest level of compliance with FDA requirements, we have looked to hire experts in the
field of pharmaceutical compliance.
Regulatory Process in the United States
Our product is subject to regulation as a biological product under the Public Health Service Act and the Food, Drug and Cosmetic
Act. The FDA generally requires the following steps for pre-market approval or licensure of a new biological product:
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Pre-clinical laboratory and animal tests conducted in compliance with the Good Laboratory Practice, or GLP, requirements to assess
a drug’s biological activity and to identify potential safety problems, and to characterize and document the product’s chemistry,
manufacturing controls, formulation, and stability;
Submission to FDA of an Investigational New Drug, or IND application, which must become effective before clinical testing in
humans can start;
Obtaining approval of Institutional Review Boards, or IRBs, of research institutions or other clinical sites to introduce a first human
biologic drug candidate into humans in clinical trials;
Conducting adequate and well-controlled human clinical trials to establish the safety and efficacy of the product for its intended
indication conducted in compliance with Good Clinical Practice, or GCP requirements;
Compliance with current Good Manufacturing Practices (cGMP) regulations and standards;
Submission to FDA of a Biologics License Application (BLA) for marketing that includes adequate results of pre-clinical testing and
clinical trials;
FDA reviews the marketing application in order to determine, among other things, whether the product is safe, effective and potent
for its intended uses; and
Obtaining FDA approval of the BLA, including inspection and approval of the product manufacturing facility as compliant with
cGMP requirements, prior to any commercial sale or shipment of the pharmaceutical agent. FDA may also require post marketing
testing and surveillance of approved products or place other conditions on the approvals.
In addition, prior to the general regulatory process of a new biologic products, we expect to pursue an Orphan Drug Designation for
treatment of Patients with Established Diabetes Mellitus (DM) Induced by Total pancreatectomy). The Orphan Drug Designation program
provides orphan status to drugs and biologics which are defined as those intended for the safe and effective treatment, diagnosis or
prevention of rare diseases/disorders that affect fewer than 200,000 people in the U.S. Orphan designation qualifies the sponsor of the drug
for various development incentives of the ODA, including tax credits for qualified clinical testing. A marketing application for a
prescription drug product that has received orphan designation is not subject to a prescription drug user fee unless the application includes
an indication for other than the rare disease or condition for which the drug was designated.
Obtaining Orphan drug designation will provide the following financial incentives:
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Tax Credits – 50% of clinical trials costs;
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Waiver of marketing application user fees – over $2 million; and
7-year Marketing Exclusivity if first approved.
Regulatory Process in Europe
The European Union (“EU”) has approved a regulation specific to cell and tissue therapy product, the Advanced Therapy Medicinal
Product (ATMP) regulation. For products such as our AIP cells that are regulated as an ATMP, the EU Directive requires:
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Compliance with current Good Manufacturing Practices, or cGMP regulations and standards, pre-clinical laboratory and animal
testing;
Filing a Clinical Trial Application (CTA) with the various member states or a centralized procedure;
Voluntary Harmonization Procedure (VHP), a procedure which makes it possible to obtain a coordinated assessment of an
application for a clinical trial that is to take place in several European countries;
Obtaining approval of Ethic Committees of research institutions or other clinical sites to introduce the AIP into humans in clinical
trials;
Adequate and well-controlled clinical trials to establish the safety and efficacy of the product for its intended use; and
Submission to EMEA for a Marketing Authorization (MA);
Review and approval of the MAA (Marketing Authorization Application).
As in the U.S., prior to the general regulatory process of a new biologic products, we will prosecute an Orphan Drug Designation for
treatment of Patients with Established Diabetes Mellitus (DM) Induced by Total pancreatectomy). In the EU, in order to be qualified, the
prevalence must be below 5 per 10,000 of the EU population, except where the expected return on investment is insufficient to justify the
investment.
Authorized orphan medicines benefit from ten years of protection from market competition with similar medicines with similar
indications once they are approved. Companies applying for designated orphan medicines pay reduced fees for regulatory activities. This
includes reduced fees for protocol assistance, marketing-authorization applications, inspections before authorization, applications for
changes to marketing authorizations made after approval, and reduced annual fees.
Clinical Trials
Typically, both in the U.S. and the EU, clinical testing involves a three-phase process, although the phases may overlap. In Phase I,
clinical trials are conducted with a small number of healthy volunteers or patients and are designed to provide information about product
safety and to evaluate the pattern of drug distribution and metabolism within the body. In Phase II, clinical trials are conducted with groups
of patients afflicted with a specific disease in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. In
some cases, an initial trial is conducted in diseased patients to assess both preliminary efficacy and preliminary safety and patterns of drug
metabolism and distribution, in which case it is referred to as a Phase I/II trial. Phase III clinical trials are generally large-scale, multi-
center, comparative trials conducted with patients afflicted with a target disease in order to provide statistically valid proof of efficacy, as
well as safety and potency. In some circumstances, FDA or EMA may require Phase IV or post-marketing trials if it feels that additional
information needs to be collected about the drug after it is on the market. During all phases of clinical development, regulatory agencies
require extensive monitoring and auditing of all clinical activities, clinical data, as well as clinical trial investigators. An agency may, at its
discretion, re-evaluate, alter, suspend, or terminate the testing based upon the data that have been accumulated to that point and its
assessment of the risk/benefit ratio to the patient. Monitoring all aspects of the study to minimize risks is a continuing process. All adverse
events must be reported to the FDA or EMA.
Employees
As of November 30, 2017, we had 103 full-time employees working at our Company and subsidiaries. In addition, we retain the
services of outside consultants for various functions including clinical work, finance, accounting and business development services. Most
of our senior management and professional employees have had prior experience in pharmaceutical or biotechnology companies. None of
our employees is covered by collective bargaining agreements. We believe that our relations with our employees are good.
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Subsidiaries
Orgenesis Inc. is a Nevada corporation, and our subsidiaries currently consist of MaSTherCell, S.A. (“MaSTherCell”), Orgenesis
SPRL (the “Belgian Subsidiary), Orgenesis Ltd. (the “Israeli Subsidiary”), Orgenesis Maryland Inc. and Cell Therapy Holdings S.A.
The corporate organization diagram below shows how we classify each subsidiary and each joint venture partner between its two
business units:
Corporate and Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports
are made available free of charge though our Internet website (http://www.orgenesis.com) as soon as practicable after such material is
electronically filed with, or furnished to, the Securities and Exchange Commission. Except as otherwise stated in these documents, the
information contained on our website or available by hyperlink from our website is not incorporated by reference into this report or any
other documents we file, with or furnish to, the Securities and Exchange Commission.
ITEM 1A. RISK FACTORS
An investment in our common stock involves a number of very significant risks. You should carefully consider the following risks
and uncertainties in addition to other information in this report in evaluating our company and its business before purchasing shares of our
company’s common stock. Our business, operating results and financial condition could be seriously harmed due to any of the following
risks. You could lose all or part of your investment due to any of these risks.
Risks Related to Our Company and Business
We will need to raise capital in order to realize our business plan, the failure of which could adversely impact our
operations.
We currently have sufficient resources for next 12 months from the date of issuance of these financial statements. Without adequate
funding or a significant increase in revenues, we may not be able to expand our global CDMO network, establish additional CDMO
facilities in the United States or other parts of the world, seek out strategic CDMO acquisitions or commence clinical trials for our diabetes
solution or respond to competitive pressures. As of November 30, 2017, we had available cash resources of $3.5 million.
Overall, we have funded our cash needs from inception through the date hereof with a series of debt and equity transactions, grants
from governmental agencies and, more recently, through cash flow from our revenue generating operations from MaSTherCell.
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We expect to continue to finance our operations, acquisitions and develop strategic relationships, primarily by issuing equity or
convertible debt securities, which could significantly reduce the percentage ownership of our existing stockholders. Furthermore, any
newly issued securities could have rights, preferences and privileges senior to those of our existing common stock. Moreover, any issuances
by us of equity securities may be at or below the prevailing market price of our common stock and in any event may have a dilutive impact
on your ownership interest, which could cause the market price of our common stock to decline. We may also issue securities in one or
more of our subsidiaries, and these securities may have rights or privileges senior to those of our common stock.
We may have difficulty obtaining additional funds as and when needed, and we may have to accept terms that would adversely
affect our stockholders. In addition, any adverse conditions in the credit and equity markets may adversely affect our ability to raise funds
when needed. Any failure to achieve adequate funding will delay our development programs and product launches and could lead to
abandonment of one or more of our development initiatives, as well as prevent us from responding to competitive pressures or take
advantage of unanticipated acquisition opportunities. Any additional equity financing will likely be dilutive to stockholders, and certain
types of equity financing, if available, may involve restrictive covenants or other provisions that would limit how we conduct our business
or finance our operations.
We have no history of profitability, have limited cash flow and, unless we increase revenues and cash flow or raise additional
capital, we may be unable to take advantage of any commercial opportunities that arise or expand CDMO operations, all of which
could adversely impact us.
For the fiscal year ended November 30, 2017 and as of the date of this report, we assessed our financial condition and concluded
that we have sufficient resources for the next 12 months from the date of the report. Our auditors agreed with our assessment, and the
auditor's report for the year ended November 30, 2017 does not include a going concern emphasis on the matter. However, management is
still required to assess our ability to continue as a going concern. We had a net loss of $12.4 million for the year ended November 30, 2017.
During the same period, cash used in operations was $3.8 million, the working capital deficiency and accumulated deficit as of November
30, 2017 was $9.6 million and $44.1 million, respectively. Management is unable to predict if and when we will be able to generate
significant positive cash flow or achieve profitability. Our plan regarding these matters is to strengthen our revenues and continue
improving the net results in the CDMO segment and to raise additional equity financing to allow us the ability to cover our cash flow
requirements into fiscal year 2019. There can be no assurances that we will be successful in increasing revenues, improving CDMO
segment results or that financing will be available or, if available, that such financing will be available under favorable terms. In the event
that we are unable to generate adequate revenues to cover expenses and cannot obtain additional financing into fiscal year 2019, we may
need to cut back or curtail our expansion plans.
As of November 30, 2017, we owed significant amounts of money under convertible loan agreements and, unless these
amounts are converted into common stock or we raise significant working capital, we may not be able to pay them when due.
As of November 30, 2017, we owed approximately $8.7 million in principal amount and accrued interest under convertible loan
agreements with third party lenders with varying maturity dates, the latest of which is August 22, 2019. The operative agreements provide
that the holders of these notes can voluntarily convert them into shares of our common stock at fixed pre-arranged rates. As of the date of
this filing, noteholders holding approximately $6.1 million of these convertible notes had agreed to convert all outstanding principal and
interest into units, consisting of one share of our common stock at $6.24 and a warrant for one share of common stock at an exercise price
of $6.24 per share. However, unless these balance of the outstanding amounts are converted (whether mandatorily or voluntarily) or we
raise sufficient working capital, we may not be able to repay these notes at their stated maturity. Non-payment of these amounts will entitle
the holders to take action to recovered payment, which may result in attachments or liens on our asset. Any of these developments will have
a material adverse effect on our business, financial condition and prospects.
We will need to grow the size and capabilities of our organization, and we may experience difficulties in managing this
growth.
As of November 30, 2017, we had 103 full-time employees. Of these employees, approximately 92 were employed by our
subsidiary, MaSTherCell. As our development and commercialization plans and strategies develop, we 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:
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identifying, recruiting, integrating, maintaining, and motivating additional employees;
managing our internal development efforts effectively, including the clinical and FDA review process for our product candidates,
while complying with our contractual obligations to contractors and other third parties; and
improving our operational, financial and management controls, reporting systems, and procedures.
In addition, as previously disclosed, our agreements with each of CureCell Co., Ltd. and Atvio Biotech Ltd., our Korea and Israel-
based CDMO partners, provide that we can obtain 50% equity ownership in these entities by converting advances made to them into 50%
of their outstanding equity capital and also that we can compel the underlying equity holders to transfer their equity holding to us for
consideration consisting of our equity shares, thereby allowing us to consolidate these entities into our corporate structure. This lack of
long-term experience working together may adversely impact our senior management team’s ability to effectively manage our business and
growth.
Our future financial performance and our ability to commercialize our product candidates will depend, in part, on our ability to
effectively manage any future growth, and our 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. This lack of long-term experience
working together may adversely impact our senior management team’s ability to effectively manage our business and growth.
We currently rely, and for the foreseeable future will continue to rely, in substantial part on certain independent organizations,
advisors and consultants to provide certain services. There can be no assurance that the services of these independent organizations,
advisors and consultants will continue to be available to us on a timely basis when needed, or that we can find qualified replacements. In
addition, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by
consultants is compromised for any reason, our clinical trials may be extended, delayed, or terminated, and we may not be able to obtain
regulatory approval of our product candidates or otherwise advance our business. There can be no assurance that we will be able to manage
our existing consultants or find other competent outside contractors and consultants on economically reasonable terms, if at all. If we are
not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and contractors, we may
not be able to successfully implement the tasks necessary to further develop and commercialize our product candidates and, accordingly,
may not achieve our research, development, and commercialization goals.
We depend on key personnel who would be difficult to replace, and our business plans will likely be harmed if we lose their
services or cannot hire additional qualified personnel.
Our success depends substantially on the efforts and abilities of our senior management and certain key personnel. The competition
for qualified management and key personnel, especially engineers, is intense. The loss of services of one or more of our key employees, or
the inability to hire, train, and retain key personnel, especially engineers and technical support personnel, could delay the development and
sale of our products, disrupt our business, and interfere with our ability to execute our business plan.
Currency exchange fluctuations may impact the results of our operations.
The provision of services by our subsidiary, MaSTherCell, are usually transacted in U.S. dollars and European currencies. Our
results of operations are affected by fluctuations in currency exchange rates in both sourcing and selling locations. Although we enter into
foreign currency exchange forward contracts from time to time to reduce our risk related to currency exchange fluctuation, our results of
operations may still be impacted by foreign currency exchange rates, primarily, the euro-to-U.S. dollar exchange rate. In recent years, the
euro-to-U.S. dollar exchange rate has been subject to substantial volatility which may continue, particularly in light of recent political events
regarding the European Union, or EU. Because we do not hedge against all of our foreign currency exposure, our business will continue to
be susceptible to foreign currency fluctuations.
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Any proposed internal corporate reorganization we may consider and decide to implement at a future date could be subject
to various risks and uncertainties and may involve significant time and attention, all of which could disrupt or adversely affect our
business.
Orgenesis is engaged in two separate businesses, the CDMO business and our trans-differentiation technologies to treat diabetes, or
what we call as out CT business. The CDMO business is spearheaded by our Belgian-based subsidiary, MaSTherCell, as well as various
CDMO joint ventures that we currently have in Korea and Israel. The CT business is carried out at the Israeli Subsidiary level, as well as
through Orgenesis SPRL, our Belgian Subsidiary, and Orgenesis Maryland Inc., a Maryland corporation. We may at some point in the
future consider and possibly implement a corporate reorganization or restructure of these two separate businesses segments, including
without limitation, third party asset transfer, merger or divestiture, spin-off or split-out. While we currently have no definitive plan for any
such action, we may, consider any such initiative if our Board of Directors deems it to be in the best interests of our company. Any such
initiative, however, will require significant time and attention from management, which may distract management from the operation of our
business and the execution of our other initiatives. Additionally, any such initiative may result in unforeseen and adverse tax consequences
to us or may result in significant changes to our shareholder base if we are no longer engaged in either one of these business segments. Any
such difficulties or developments could potentially have a material adverse effect on our financial condition, results of operations or cash
flow.
We have entered into collaborations and may form or seek collaborations or strategic alliances or enter into additional
licensing arrangements in the future, and we may not realize the benefits of such alliances or licensing arrangements.
We may form or seek strategic alliances, create joint ventures or collaborations, or enter into additional licensing arrangements with
third parties that we believe will complement or augment our development and commercialization efforts with respect to our product
candidates and any future product candidates that we may develop. Any of these relationships may require us to incur non-recurring and
other charges, increase our near and long-term expenditures, issue securities that dilute our existing stockholders, or disrupt our
management and business. In addition, we face significant competition in seeking appropriate strategic partners for which the negotiation
process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other
alternative arrangements for our product candidates because they may be deemed to be at too early of a stage of development for
collaborative effort and third parties may not view our product candidates as having the requisite potential to demonstrate safety and
efficacy. Further, collaborations involving our product candidates, such as our collaborations with third-party research institutions, are
subject to numerous risks, which may include the following:
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collaborators have significant discretion in determining the efforts and resources that they will apply to a collaboration;
collaborators may not pursue development and commercialization of our product candidates or may elect not to continue or renew
development or commercialization programs based on clinical trial results, changes in their strategic focus due to the acquisition of
competitive products, availability of funding, or other external factors, such as a business combination that diverts resources or
creates competing priorities;
collaborators may delay clinical trials, provide insufficient funding for a clinical trial, stop a clinical trial, abandon a product
candidate, repeat or conduct new clinical trials, or require a new formulation of a product candidate for clinical testing;
collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our
products or product candidates;
a collaborator with marketing and distribution rights to one or more products may not commit sufficient resources to their marketing
and distribution;
collaborators may not properly maintain or defend our intellectual property rights or may use our intellectual property or proprietary
information in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property or
proprietary information or expose us to potential liability;
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disputes may arise between us and a collaborator that cause the delay or termination of the research, development or
commercialization of our product candidates, or that result in costly litigation or arbitration that diverts management attention and
resources;
collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development or
commercialization of the applicable product candidates; and
collaborators may own or co-own intellectual property covering our products that results from our collaborating with them, and in
such cases, we would not have the exclusive right to commercialize such intellectual property.
As a result, if we enter into collaboration agreements and strategic partnerships or license our products or businesses, we may not be
able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company
culture, which could delay our timelines or otherwise adversely affect our business. We also cannot be certain that, following a strategic
transaction or license, we will achieve the revenue or specific net income that justifies such transaction. Any delays in entering into new
collaborations or strategic partnership agreements related to our product candidates could delay the development and commercialization of
our product candidates in certain geographies for certain indications, which would harm our business prospects, financial condition, and
results of operations.
Our success depends on our ability to protect our intellectual property and our proprietary technologies.
Our commercial success depends in part on our ability to obtain and maintain patent protection and trade secret protection for our
product candidates, proprietary technologies, and their uses as well as our ability to operate without infringing upon the proprietary rights
of others. We can provide no assurance that our patent applications or those of our licensors will result in additional patents being issued or
that issued patents will afford sufficient protection against competitors with similar technologies, nor can there be any assurance that the
patents issued will not be infringed, designed around or invalidated by third parties. Even issued patents may later be found unenforceable
or may be modified or revoked in proceedings instituted by third parties before various patent offices or in courts. The degree of future
protection for our proprietary rights is uncertain. Only limited protection may be available and may not adequately protect our rights or
permit us to gain or keep any competitive advantage. Composition-of-matter patents on the biological or chemical active pharmaceutical
ingredients are generally considered to offer the strongest protection of intellectual property and provide the broadest scope of patent
protection for pharmaceutical products, as such patents provide protection without regard to any method of use or any method of
manufacturing. While we have an issued patent in the United States with a claim for a composition directed to a vector comprising a
promoter linked to a pancreatic and duodenal homeobox 1 (PDX-1) polypeptide, and a carrier, we cannot be certain that the claim in our
issued patent will not be found invalid or unenforceable if challenged. We cannot be certain that the claims in our issued United States
methods of use patents will not be found invalid or unenforceable if challenged. We cannot be certain that the pending applications
covering composition-of-matter of our transdifferentiated cell populations will be considered patentable by the United States Patent and
Trademark Office (USPTO), and courts in the United States or by the patent offices and courts in foreign countries, nor can we be certain
that the claims in our issued patents will not be found invalid or unenforceable if challenged. Even if our patent applications covering
populations of transdifferentiated cells issue as patents, the patents protect a specific transdifferentiated cell product and may not be
enforced against competitors making and marketing a product that has the same activity. Method-of-use patents protect the use of a product
for the specified method or for treatment of a particular indication. This type of patents may not be enforced against competitors making
and marketing a product that has cells that may provide the same activity but is used for a method not included in the patent. Moreover,
even if competitors do not actively promote their product for our targeted indications, physicians may prescribe these products “off-label.”
Although off-label prescriptions may infringe or contribute to the infringement of method-of-use patents, the practice is common and such
infringement is difficult to prevent or prosecute.
We have exclusive rights to four (4) United States (US) patents, one of which is directed to a composition comprising a vector
comprising a promoter linked to PDX-1 and having a term of 2021, and the other three have a term of 2023 and are directed to methods of
inducing endogenous PDX-1 expression in a human differentiated primary non-pancreatic cell, inducing or enhancing a pancreatic islet cell
phenotype in non-pancreatic cells, and increasing PDX-1 induction in non-pancreatic primary cells. Further, we have exclusive rights to
four (4) foreign issued patents (1 in Europe (validated in Germany, France, Italy, and Great Britain) with a term of 2020; two (2) in
Australia with a term of 2020 and 2024; and one (1) in Canada with a term of 2020. We also have five (5) pending applications in the
United States, which if granted would have a term of 2034-2035; and twenty three (23) pending applications in foreign jurisdictions:
Europe, Australia, Brazil, Canada, China, Columbia, Eurasia, Israel, Japan, South Korea, Mexico, and Singapore which if they were to
grant would have a term of 2034-2035, which are directed to the trans-differentiation of cells (including hepatic cells) to cells having
pancreatic β-cell phenotype and function, and their use in the treatment of degenerative pancreatic disorders including diabetes, pancreatic
cancer, and pancreatitis.
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The patent application process is subject to numerous risks and uncertainties, and there can be no assurance that we or any of our
future development partners will be successful in protecting our product candidates by obtaining and defending patents. These risks and
uncertainties include the following:
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the USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee
payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or
lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an
event, competitors might be able to enter the market earlier than would otherwise have been the case;
patent applications may not result in any patents being issued;
patents that may be issued or in-licensed may be challenged, invalidated, modified, revoked, circumvented, found to be
unenforceable or otherwise may not provide any competitive advantage;
our competitors, many of whom have substantially greater resources and many of whom have made significant investments in
competing technologies, may seek or may have already obtained patents that will limit, interfere with or eliminate our ability to
make, use, and sell our potential product candidates;
there may be significant pressure on the U.S. government and international governmental bodies to limit the scope of patent
protection both inside and outside the United States for disease treatments that prove successful, as a matter of public policy
regarding worldwide health concerns; and
countries other than the United States may have patent laws less favorable to patentees than those upheld by U.S. courts, allowing
foreign competitors a better opportunity to create, develop and market competing product candidates.
In addition, we rely on the protection of our trade secrets and proprietary know-how. Although we have taken steps to protect our
trade secrets and unpatented know-how, including entering into confidentiality agreements with third parties, and confidential information
and inventions agreements with employees, consultants and advisors, we cannot provide any assurances that all such agreements have been
duly executed, and third parties may still obtain this information or may come upon this or similar information independently. Additionally,
if the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for
misappropriating its trade secrets. If any of these events occurs or if we otherwise lose protection for our trade secrets or proprietary know-
how, our business may be harmed.
If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit
commercialization of our product candidates.
We face an inherent risk of product liability as a result of the clinical testing of our product candidates and will face an even greater
risk if we commercialize any products. For example, we may be sued if our product candidates cause or are perceived to cause injury or are
found to be otherwise unsuitable during clinical testing, manufacturing, marketing or sale. Any such product liability claims may include
allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a
breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves
against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates.
Even a successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome,
liability claims may result in:
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injury to our reputation;
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withdrawal of clinical trial participants and inability to continue clinical trials;
initiation of investigations by regulators;
costs to defend the related litigation;
a diversion of management’s time and our resources;
substantial monetary awards to trial participants or patients;
product recalls, withdrawals or labeling, marketing or promotional restrictions;
loss of revenue;
exhaustion of any available insurance and our capital resources;
the inability to commercialize any product candidate; and
a decline in our share price.
Because our products have not reached clinical or commercial stage, we do not currently carry clinical trial or product liability
insurance. In the future, our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product
liability claims could prevent or inhibit the commercialization of products we develop, alone or with collaborators. Such insurance policies
may also have various exclusions, and we may be subject to a product liability claim for which we have no coverage.
It may be difficult to enforce a U.S. judgment against us, our officers and directors and the foreign persons named in this
Annual Report on Form 10-K in the United States or in foreign countries , or to assert U.S. securities laws claims in foreign
countries or serve process on our officers and directors and these experts.
While we are incorporated in the State of Nevada, currently a majority of our directors and executive officers are not residents of
the United States, and the foreign persons named in this Annual Report on Form 10-K are located in Israel and Belgium. The majority of
our assets are located outside the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce a
U.S. court judgment based upon the civil liability provisions of the U.S. federal securities laws against us or any of these persons in a U.S.
or foreign court, or to effect service of process upon these persons in the United States. Additionally, it may be difficult for an investor, or
any other person or entity, to assert U.S. securities law claims in original actions instituted in foreign countries in which we operate. Foreign
courts may refuse to hear a claim based on a violation of U.S. securities laws on the grounds that foreign countries are not necessary the
most appropriate forum in which to bring such a claim. Even if a foreign court agrees to hear a claim, it may determine that foreign law and
not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact,
which can be a time-consuming and costly process. Certain matters of procedure will also be governed by foreign countries law. There is
little binding case law in foreign countries addressing the matters described above.
Risks Related to Our CDMO Business
While there is an increasing number of product candidates in clinical trials with a smaller number that have reached
commercial production, cell therapy is a developing industry and a significant global market for manufacturing services may never
emerge.
Cell therapy is in its early stages and is still a developing area of research, with few cell therapy products approved for clinical use.
Many of the existing cellular therapy candidates are based on novel cell technologies that are inherently risky and may not be understood or
accepted by the marketplace, making it difficult for their own funding to enable them to continue their business. In addition to providing in-
house process development and manufacturing expertise for our own product candidates in development, MaSTherCell provides
development and manufacturing of cell and tissue-based therapeutic products in clinical and pre-clinical trials. The number of people who
may use cell or tissue-based therapies, and the demand for cell processing services, is difficult to forecast. If cell therapies under
development by us or by others to treat disease are not proven safe and effective, demonstrate unacceptable risks or side effects or, where
required, fail to receive regulatory approval, our manufacturing business will be significantly impaired. While the therapeutic application of
cells to treat serious diseases is currently being explored by a number of companies, to date there are only a handful of approved cell
therapy products in the U.S. Ultimately, our success in deriving revenue from manufacturing depends on the development and growth of a
broad and profitable global market for cell-, gene- and tissue-based therapies and services and our ability to capture a share of this market
through our global CDMO network.
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MaSTherCell's revenues may vary dramatically change from period to period making it difficult to forecast future results.
MaSTherCell recorded revenues of approximately $10 million for the year ended November 30, 2017, representing an increase of
58% over the same period last year. The nature and duration of MaSTherCell's and our joint venture CDMO partners’ contracts with
customers often involve regular renegotiation of the scope, level and price of the services we are providing. If our customers reduce the
level of their spending on research and development or are unsuccessful in attaining or retaining product sales due to market conditions,
reimbursement issues or other factors, our results of operations may be materially impacted. In addition, other factors, including the rate of
enrollment for clinical studies, will directly impact the level and timing of the products and services we deliver. As such, the levels of our
revenues and profitability can fluctuate significantly from one period to another and it can be difficult to forecast the level of future
revenues with any certainty. Furthermore, a dramatic change in our future revenue may result an impairment of our goodwill.
The loss of one or more of MaSTherCell’s major clients or a decline in demand from one or more of these clients could
harm MaSTherCell’s business.
MaSTherCell has a limited number of major clients that together account for a large percentage of the total revenues earned. Over
the past year, MaSTherCell has increased its client portfolio and diversified source of revenues, but there can be no assurance that such
clients will continue to use MaSTherCell’s services at the same level or at all. A reduction or delay in the use of MaSTherCell’s services,
including reductions or delays due to market, economic or competitive conditions, could have a material adverse effect on MaSTherCell’s
business, operating results and financial condition.
MaSTherCell’s business is subject to risks associated with a single manufacturing facility.
MaSTherCell’s contract manufacturing services are dependent upon a single fully operational facility located in Gosselies
(Belgium). A catastrophic loss of the use of all or a portion of MaSTherCell’s manufacturing facility due to accident, fire, explosion, labor
issues, weather conditions, other natural disaster or otherwise, whether short or long-term, could have a material adverse effect on
MaSTherCell’s customer relationships and financial results. While its global network partners offer alternative manufacturing sites as part
of a disaster recovery plan, this may require it to invest significant time and effort in tech transfer.
If MaSTherCell loses electrical power at its manufacturing facility, its business operations may be adversely affected.
If MaSTherCell loses electrical power at its manufacturing facility for more than a few hours, MaSTherCell would be unable to
continue its manufacturing operations for an extended period of time. Additionally, MaSTherCell does not have an alternative
manufacturing location located nearby. While MaSTherCell implemented remediation measures to address this risk by setting up a back-up
generator allowing it to provide for its manufacturing power consumption needs for a few hours and by being granted a priority access to
power in case of global power outage, in the industrial park in Belgium where its premises are located, these measures may not prevent a
significant disruption in MaSTherCell’s manufacturing operations which could materially and adversely affect its business operations
during an extended period of power outage.
The logistics associated with the distribution of materials produced by MaSTherCell for third parties and for us are
significant, complex and expensive and may negatively impact our ability to generate and meet future demand for our products and
improve profitability.
Current cell therapy products and product candidates, have a limited shelf life, in certain instances limited to less than 12 hours.
Thus, it is necessary to minimize the amount of time between when the cell product is extracted from a patient, arrives at our facility for
processing, and is returned for infusion in the patient. To do so, we need our cell therapy facilities to be located in major population centers
in which patients are likely to be located and within close proximity of major airports. In the future, it may be necessary to build new
facilities or invest into new technologies enabling final formulation at point of care, which would require a significant commitment of
capital and may not then be available to us. Even if we are able to establish such new facilities or technologies, we may experience
challenges in ensuring that they are compliant with cGMP standards, EMEA requirements, and/or applicable state or local regulations. We
cannot be certain that we would be able to recoup the costs of establishing a facility in a given market. Given these risks, we could choose
not to expand our cell processing and manufacturing services into new geographic markets which will limit our future growth prospects.
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Product liability and uninsured risks may adversely affect MaSTherCell’s continuing operations and damage its reputation.
MaSTherCell operates in an industry susceptible to significant product liability claims. MaSTherCell may be liable if it
manufactures any product that causes injury, illness, or death for intentional or gross fault on its part. In addition, product liability claims
may be brought against MaSTherCell’s clients, in which case MaSTherCell’s clients or others may seek contribution from MaSTherCell if
they incur any loss or expenses related to such claims. These claims may be brought by individuals seeking relief or by groups seeking to
represent a class. While MaSTherCell’s liability may be limited to instances where it was grossly negligent, nonetheless, the defense of
such claims may be costly and time-consuming, and could divert the attention of MaSTherCell’s management and technical personnel.
A breakdown or breach of MaSTherCell’s information technology systems could subject MaSTherCell to liability.
MaSTherCell relies upon its information technology systems and infrastructure for its business. The size and complexity of
MaSTherCell’s computer systems make it potentially vulnerable to breakdown and unauthorized intrusion. MaSTherCell could also
experience a business interruption, theft of confidential information, or reputational damage from industrial espionage attacks, malware or
other cyber-attacks, which may compromise MaSTherCell’s system infrastructure or lead to data leakage, either internally or at
MaSTherCell’s third-party providers.
Similarly, data privacy breaches by those who access MaSTherCell’s systems may pose a risk that sensitive data, including
intellectual property, trade secrets or personal information belonging to MaSTherCell or its employees, clients or other business partners,
may be exposed to unauthorized persons or to the public. Even if MaSTherCell runs regular IT security audits by third-parties, there can be
no assurance that MaSTherCell’s efforts to protect its data and information technology systems will prevent breakdowns or breaches in
MaSTherCell’s systems that could adversely affect its business and result in financial and reputational harm to MaSTherCell.
We face competition from other third party contact manufacturers, as well as more general competition from companies
and academic and research institutions that may choose to self-manufacture rather than utilize a contract manufacturer.
We face competition from companies that are large, well-established manufacturers with financial, technical, research and
development and sales and marketing resources that are significantly greater than those that we currently possess. In addition, certain of our
leading competitors, such as Lonza Group, WuXi AppTec and PCT have international capabilities that we do not currently possess though
we are pursuing.
More generally, we face competition inherent in any third-party manufacturer’s business - namely, that potential customers may
instead elect to invest in their own facilities and infrastructure, affording them greater control over their products and the hope of long-term
cost savings compared to a third party contract manufacturer. To be successful, we will need to convince potential customers that our
current and expanding capabilities are more innovative, of higher-quality and more cost-effective than could be achieved through internal
manufacturing and that our experience and quality manufacturing and process development expertise are unique in the industry. Our ability
to achieve this and to successfully compete against other manufacturers will depend, in large part, on our success in developing
technologies that improve both the quality and profitability associated with cell therapy manufacturing. If we are unable to successfully
compete against other manufacturers, we may not be able to develop our CDMO business plans which may harm our business, financial
condition and results of operations.
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Extensive industry regulation has had, and will continue to have, a significant impact on our CDMO business, and it may
require us to substantially invest in our development, manufacturing and distribution capabilities and may negatively impact our
ability to generate and meet future demand for our products and improve profitability.
Although we seek to conduct our business in compliance with applicable governmental healthcare laws and regulations, these laws
and regulations are exceedingly complex and often subject to varying interpretations. The cell therapy industry is the topic of significant
government interest, and thus the laws and regulations applicable to our business are subject to frequent change and/or reinterpretation. As
such, there can be no assurance that we will be able, or will have the resources, to maintain compliance with all such healthcare laws and
regulations. Failure to comply with such healthcare laws and regulations could result in significant enforcement actions, civil or criminal
penalties, which along with the costs associated with such compliance or with enforcement of such healthcare laws and regulations, may
have a material adverse effect on our operations or may require restructuring of our operations or impair our ability to operate profitably.
Joint-venture partnerships integration into our global CDMO network would be subject to various risks and uncertainties
and may involve significant time and attention, all of which could disrupt or adversely affect our business and harm our reputation
We need our cell therapy facilities to be located in major population centers in which patients are likely to be located and within
close proximity of major airports. To do so, we intend to build up a global CDMO network partnership offering alternative manufacturing
sites for our third-party clients currently operating out of Belgium, Korea and Israel. The failure to provide harmonized manufacturing
quality standards between the current and any future sites to our clients and compliance with local regulatory agencies requirements could
have a material adverse effect on our reputation, business, operating results and financial condition.
We are highly dependent on our key personnel, and if we are not successful in attracting, motivating and retaining highly
qualified personnel, we may not be able to successfully implement our business strategy
Our ability to compete in the highly competitive biotechnology and pharmaceutical industries depends upon our ability to attract,
motivate and retain highly qualified managerial, scientific and medical personnel. We are highly dependent on our management and on our
trained staff turnover. If the staff turnover increases, it could result in additional hiring and training expenses, potentially delays in product
development and manufacturing and harm our business and our growth. Competition for skilled personnel is intense and the turnover rate
can be high, which may limit our ability to hire and retain highly qualified personnel on acceptable terms or at all.
To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have provided stock option
grants that vest over time. The value to employees of these equity grants that vest over time may be significantly affected by movements in
our stock price that are beyond our control, and may at any time be insufficient to counteract more lucrative offers from other companies.
Although we have employment agreements with our key employees, some of these employment agreements provide for at-will
employment, which means that any of our employees could leave our employment at any time, with or without notice. We do not maintain
“key man” insurance policies on the lives of all of these individuals or the lives of any of our other employees.
Risks Related to Our Trans-Differentiation Technologies for Diabetes
THM is entitled to cancel the License Agreement.
Pursuant to the terms of the License Agreement with THM, the Israeli Subsidiary must develop, manufacture, sell and market the
products pursuant to the milestones and time schedule specified in the development plan. In the event the Israeli Subsidiary fails to fulfill
the terms of the development plan under the License Agreement, THM shall be entitled to terminate the License Agreement by providing
the Israeli Subsidiary with written notice of such a breach and if the Israeli Subsidiary does not cure such breach within one year of
receiving the notice. If THM cancels the License Agreement, our CT business may be materially adversely affected. THM may also
terminate the License Agreement if the Israeli Subsidiary breaches an obligation contained in the License Agreement and does not cure it
within 180 days of receiving notice of the breach. Any termination or cancellation of the License Agreement is likely to materially
adversely affect our business and prospects.
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Our success will depend on strategic collaborations with third parties to develop and commercialize therapeutic product
candidates, and we may not have control over a number of key elements relating to the development and commercialization of any
such product candidate.
A key aspect of our strategy is to seek collaboration with a partner, such as a large pharmaceutical organization, that is willing to
further develop and commercialize a selected product candidate. To date, we have not entered into any such collaborative arrangement. By
entering into any such strategic collaboration, we may rely on our partner for financial resources and for development, regulatory and
commercialization expertise. Our partner may fail to develop or effectively commercialize our product candidate because they:
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do not have sufficient resources or decide not to devote the necessary resources due to internal constraints such as limited cash or
human resources;
decide to pursue a competitive potential product developed outside of the collaboration;
cannot obtain the necessary regulatory approvals;
determine that the market opportunity is not attractive; or
cannot manufacture or obtain the necessary materials in sufficient quantities from multiple sources or at a reasonable cost.
We may not be able to enter into a collaboration on acceptable terms, if at all. We face competition in our search for partners from
other organizations worldwide, many of whom are larger and are able to offer more attractive deals in terms of financial commitments,
contribution of human resources, or development, manufacturing, regulatory or commercial expertise and support. If we are not successful
in attracting a partner and entering into a collaboration on acceptable terms, we may not be able to complete development of or
commercialize any product candidate. In such event, our ability to generate revenues and achieve or sustain profitability would be
significantly hindered and we may not be able to continue operations as proposed, requiring us to modify our business plan, curtail various
aspects of our operations or cease operations.
Third parties to whom we may license or transfer development and commercialization rights for products covered by
intellectual property rights may not be successful in their efforts, and as a result, we may not receive future royalty or other
milestone payments relating to those products or rights.
If we are unable to successfully acquire, develop or commercialize new products, our operating results will suffer. Our future results
of operations will depend to a significant extent upon our ability to successfully develop and commercialize our technology and businesses
in a timely manner. There are numerous difficulties in developing and commercializing new technologies and products, including:
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successfully achieving major developmental steps required to bring the product to a clinical testing stage and clinical testing may not
be positive;
developing, testing and manufacturing products in compliance with regulatory standards in a timely manner;
the failure to receive requisite regulatory approvals for such products in a timely manner or at all;
developing and commercializing a new product is time consuming, costly and subject to numerous factors, including legal actions
brought by our competitors, that may delay or prevent the development and commercialization of our product;
incomplete, unconvincing or equivocal clinical trials data;
experiencing delays or unanticipated costs;
significant and unpredictable changes in the payer landscape, coverage and reimbursement for our future product;
experiencing delays as a result of limited resources at the U.S. Food and Drug Administration (“FDA”) or other regulatory agencies;
and
changing review and approval policies and standards at the FDA and other regulatory agencies.
As a result of these and other difficulties, products in development by us may or may not receive timely regulatory approvals, or
approvals at all, necessary for marketing by us or other third-party partners. If any of our future products are not approved in a timely
fashion or, when acquired or developed and approved, cannot be successfully manufactured, commercialized or reimbursed, our operating
results could be adversely affected. We cannot guarantee that any investment we make in developing product will be recouped, even if we
are successful in commercializing these products.
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Our research and development programs are based on novel technologies and are inherently risky.
We are subject to the risks of failure inherent in the development of products based on new technologies. The novel nature of our
cell therapy technology creates significant challenges with respect to product development and optimization, manufacturing, government
regulation and approval, third-party reimbursement and market acceptance. For example, the FDA and EMA have relatively limited
experience with the development and regulation of cell therapy products and, therefore, the pathway to marketing approval for our cell
therapy product candidates may accordingly be more complex, lengthy and uncertain than for a more conventional product candidate. The
indications of use for which we choose to pursue development may have clinical effectiveness endpoints that have not previously been
reviewed or validated by the FDA or EMA, which may complicate or delay our effort to ultimately obtain FDA or EMA approval. Our
efforts to overcome these challenges may not prove successful, and any product candidate we seek to develop may not be successfully
developed or commercialized.
Extensive industry regulation has had, and will continue to have, a significant impact on our business, especially our product
development, manufacturing and distribution capabilities.
All pharmaceutical companies are subject to extensive, complex, costly and evolving government regulation. For the U.S., this is
principally administered by the FDA and to a lesser extent by the Drug Enforcement Administration (“DEA”) and state government
agencies, as well as by varying regulatory agencies in foreign countries where products or product candidates are being manufactured
and/or marketed. The Federal Food, Drug and Cosmetic Act, the Controlled Substances Act and other federal statutes and regulations, and
similar foreign statutes and regulations, govern or influence the testing, manufacturing, packing, labeling, storing, record keeping, safety,
approval, advertising, promotion, sale and distribution of our future products. Under these regulations, we may become subject to periodic
inspection of our facilities, procedures and operations and/or the testing of our future products by the FDA, the DEA and other authorities,
which conduct periodic inspections to confirm that we are in compliance with all applicable regulations. In addition, the FDA and foreign
regulatory agencies conduct pre-approval and post-approval reviews and plant inspections to determine whether our systems and processes
are in compliance with current good manufacturing practice (“cGMP”) and other regulations. Following such inspections, the FDA or other
agency may issue observations, notices, citations and/or warning letters that could cause us to modify certain activities identified during the
inspection. FDA guidelines specify that a warning letter is issued only for violations of “regulatory significance” for which the failure to
adequately and promptly achieve correction may be expected to result in an enforcement action. We may also be required to report adverse
events associated with our future products to FDA and other regulatory authorities. Unexpected or serious health or safety concerns would
result in labeling changes, recalls, market withdrawals or other regulatory actions.
The range of possible sanctions includes, among others, FDA issuance of adverse publicity, product recalls or seizures, fines, total
or partial suspension of production and/or distribution, suspension of the FDA’s review of product applications, enforcement actions,
injunctions, and civil or criminal prosecution. Any such sanctions, if imposed, could have a material adverse effect on our business,
operating results, financial condition and cash flows. Under certain circumstances, the FDA also has the authority to revoke previously
granted drug approvals. Similar sanctions as detailed above may be available to the FDA under a consent decree, depending upon the actual
terms of such decree. If internal compliance programs do not meet regulatory agency standards or if compliance is deemed deficient in any
significant way, it could materially harm our business.
For Europe, the European Medicines Agency (“EMA”) will regulate our future products. Regulatory approval by the EMA will be
subject to the evaluation of data relating to the quality, efficacy and safety of our future products for its proposed use. The time taken to
obtain regulatory approval varies between countries. Different regulators may impose their own requirements and may refuse to grant, or
may require additional data before granting, an approval, notwithstanding that regulatory approval may have been granted by other
regulators.
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Regulatory approval may be delayed, limited or denied for a number of reasons, including insufficient clinical data, the
product not meeting safety or efficacy requirements or any relevant manufacturing processes or facilities not meeting applicable
requirements.
Further trials and other costly and time-consuming assessments of the product may be required to obtain or maintain regulatory
approval. Medicinal products are generally subject to lengthy and rigorous pre-clinical and clinical trials and other extensive, costly and
time-consuming procedures mandated by regulatory authorities. We may be required to conduct additional trials beyond those currently
planned, which could require significant time and expense. In addition, even after the technology approval, both in the U.S. and Europe, we
will be required to maintain post marketing surveillance of potential adverse and risk assessment programs to identify adverse events that
did not appear during the clinical studies and drug approval process. All of the foregoing could require an investment of significant time
and expense.
We have never generated any revenue from therapeutic product sales and our ability to generate revenue from product
sales and become profitable depends significantly on our success in a number of factors.
We have no therapeutic products approved for commercial sale, have not generated any revenue from product sales, and do not
anticipate generating any revenue from product sales until sometime after we have received regulatory approval for the commercial sale of
a product candidate. Our ability to generate revenue and achieve profitability depends significantly on our success in many factors,
including:
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completing research regarding, and nonclinical and clinical development of, our product candidates;
obtaining regulatory approvals and marketing authorizations for product candidates for which we complete clinical studies;
developing a sustainable and scalable manufacturing process for our product candidates, including establishing and maintaining
commercially viable supply relationships with third parties and establishing our own manufacturing capabilities and infrastructure;
launching and commercializing product candidates for which we obtain regulatory approvals and marketing authorizations, either
directly or with a collaborator or distributor;
obtaining market acceptance of our product candidates as viable treatment options;
addressing any competing technological and market developments;
identifying, assessing, acquiring and/or developing new product candidates;
negotiating favorable terms in any collaboration, licensing, or other arrangements into which we may enter;
maintaining, protecting, and expanding our portfolio of intellectual property rights, including patents, trade secrets, and know-how;
and
attracting, hiring, and retaining qualified personnel.
Even if one or more of the product candidates that we develop is approved for commercial sale, we anticipate incurring significant
costs associated with commercializing any approved product candidate. Our expenses could increase beyond expectations if we are
required by the U.S. Food and Drug Administration, or the FDA, or other regulatory agencies, domestic or foreign, to change our
manufacturing processes or assays, or to perform clinical, nonclinical, or other types of studies in addition to those that we currently
anticipate. If we are successful in obtaining regulatory approvals to market one or more of our product candidates, our revenue will be
dependent, in part, upon the size of the markets in the territories for which we gain regulatory approval, the accepted price for the product,
the ability to get reimbursement at any price, and whether we own the commercial rights for that territory. If the number of our addressable
disease patients is not as significant as we estimate, the indication approved by regulatory authorities is narrower than we expect, or the
reasonably accepted population for treatment is narrowed by competition, physician choice or treatment guidelines, we may not generate
significant revenue from sales of such products, even if approved. If we are not able to generate revenue from the sale of any approved
products, we may never become profitable.
We have concentrated our research and development efforts on technology using cell-based therapy, and our future success
is highly dependent on the successful development of that technology for diabetes.
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We have developed a technology that demonstrates the capacity to induce a shift in the developmental fate of cells from the liver
and differentiating (converting) them into “pancreatic beta cell-like” insulin-producing cells for patients with diabetes. Based on licensed
know-how and patents, our intention is to develop our technology to the clinical stage for regeneration of functional insulin-producing
cells, thus enabling normal glucose regulated insulin secretion, via cell therapy. By using therapeutic agents (i.e., PDX-1, and additional
pancreatic transcription factors in an adenovirus-vector) that efficiently convert a sub-population of liver cells into pancreatic islets
phenotype and function, this approach allows the diabetic patient to be the donor of his own therapeutic tissue and to start producing his/her
own insulin in a glucose-responsive manner, thereby eliminating the need for insulin injections. Because this is a new approach to treating
diabetes, developing and commercializing our product candidates subjects us to a number of challenges, including:
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obtaining regulatory approval from the FDA, EMA and other regulatory authorities that have very limited experience with the
commercial development of our technology for diabetes;
developing and deploying consistent and reliable processes for engineering a patient’s liver cells ex vivo and infusing the engineered
cells back into the patient;
developing processes for the safe administration of these products, including long-term follow-up for all patients who receive our
products;
sourcing clinical and, if approved, commercial supplies for the materials used to manufacture and process our products;
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
maintaining a system of post marketing surveillance and risk assessment programs to identify adverse events that did not appear
during the drug approval process
When we commence our clinical trials, we may not be able to conduct our trials on the timelines we expect.
Clinical testing is expensive, time consuming, and subject to uncertainty. We cannot guarantee that any clinical studies will be
conducted as planned or completed on schedule, if at all. We expect that our early clinical work will help support the filing with the FDA
of an IND for our product in 2018. However, we cannot be sure that we will be able to submit an IND in this time-frame, and we cannot be
sure that submission of an IND will result in the FDA allowing clinical trials to begin. Moreover, even if these trials begin, issues may arise
that could suspend or terminate such clinical trials. A failure of one or more clinical studies can occur at any stage of testing, and our future
clinical studies may not be successful. Events that may prevent successful or timely completion of clinical development include:
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the inability to generate sufficient preclinical or other in vivo or in vitro data to support the initiation of clinical studies;
delays in reaching a consensus with regulatory agencies on study design;
delays in establishing CMC (Chemistry, Manufacturing, and Controls) which is a cornerstone in clinical study submission and later
on, the regulatory approval;
the FDA not allowing us to use the clinical trial data from a research institution to support an IND if we cannot demonstrate the
comparability of our product candidates with the product candidate used by the relevant research institution in its clinical studies;
delays in obtaining required Institutional Review Board, or IRB, approval at each clinical study site;
imposition of a temporary or permanent clinical hold by regulatory agencies for a number of reasons, including after review of an
IND application or amendment, or equivalent application or amendment;
a result of a new safety finding that presents unreasonable risk to clinical trial participants;
a negative finding from an inspection of our clinical study operations or study sites;
developments on trials conducted by competitors for related technology that raises FDA concerns about risk to patients of the
technology broadly;
if FDA finds that the investigational protocol or plan is clearly deficient to meet its stated objectives;
delays in recruiting suitable patients to participate in our clinical studies;
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difficulty collaborating with patient groups and investigators;
failure to perform in accordance with the FDA’s current good clinical practices, or cGCPs, requirements, or applicable regulatory
guidelines in other countries;
delays in having patients complete participation in a study or return for post-treatment follow-up;
patients dropping out of a study;
occurrence of adverse events associated with the product candidate that are viewed to outweigh its potential benefits;
changes in regulatory requirements and guidance that require amending or submitting new clinical protocols;
changes in the standard of care on which a clinical development plan was based, which may require new or additional trials;
the cost of clinical studies of our product candidates being greater than we anticipate;
clinical studies of our product candidates producing negative or inconclusive results, which may result in our deciding, or regulators
requiring us, to conduct additional clinical studies or abandon product development programs; and
delays in manufacturing, testing, releasing, validating, or importing/exporting sufficient stable quantities of our product candidates
for use in clinical studies or the inability to do any of the foregoing.
Any inability to successfully complete preclinical and clinical development could result in additional costs to us or impair our
ability to generate revenue. In addition, if we make manufacturing or formulation changes to our product candidates, we may be required
to, or we may elect to conduct additional studies to bridge our modified product candidates to earlier versions. Clinical study delays could
also shorten any periods during which our products have patent protection and may allow our competitors to bring products to market
before we do, which could impair our ability to successfully commercialize our product candidates and may harm our business and results
of operations.
Our clinical trial results may also not support approval, whether accelerated approval, conditional marketing authorizations, or
regular approval. The results of preclinical and clinical studies may not be predictive of the results of later-stage clinical trials, and product
candidates in later stages of clinical trials may fail to show the desired safety and efficacy despite having progressed through preclinical
studies and initial clinical trials. In addition, our product candidates could fail to receive regulatory approval for many reasons, including
the following:
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the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;
the population studied in the clinical program may not be sufficiently broad or representative to assure safety in the full population
for which we seek approval;
we may be unable to demonstrate that our product candidates’ risk-benefit ratios for their proposed indications are acceptable;
the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory
authorities for approval;
we may be unable to demonstrate that the clinical and other benefits of our product candidates outweigh their safety risks;
the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical studies or
clinical trials;
the data collected from clinical trials of our product candidates may not be sufficient to the satisfaction of the FDA or comparable
foreign regulatory authorities to obtain regulatory approval in the United States or elsewhere;
the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes, our own manufacturing
facilities, or our third-party manufacturers’ facilities with which we contract for clinical and commercial supplies; and
the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner
rendering our clinical data insufficient for approval.
Further, failure to obtain approval for any of the above reasons may be made more likely by the fact that the FDA and other
regulatory authorities have very limited experience with commercial development of our cell therapy for the treatment of Type 1 Diabetes.
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Our 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 our 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. Any of these occurrences may materially
and adversely harm our business, financial condition and prospects.
Research and development of biopharmaceutical products is inherently risky.
We may not be successful in our efforts to use and enhance our technology platform to create a pipeline of product candidates and
develop commercially successful products, or we may expend our limited resources on programs that do not yield a successful product
candidate and fail to capitalize on product candidates or diseases that may be more profitable or for which there is a greater likelihood of
success. If we fail to develop additional product candidates, our commercial opportunity will be limited. Even if we are successful in
continuing to build our pipeline, obtaining regulatory approvals and commercializing additional product candidates will require substantial
additional funding and are prone to the risks of failure inherent in medical product development. Investment in biopharmaceutical product
development involves significant risk that any potential product candidate will fail to demonstrate adequate efficacy or an acceptable safety
profile, gain regulatory approval, and become commercially viable. We cannot provide you any assurance that we will be able to
successfully advance any of these additional product candidates through the development process. Our research programs may initially
show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development or commercialization
for many reasons, including the following:
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our platform may not be successful in identifying additional product candidates;
we may not be able or willing to assemble sufficient resources to acquire or discover additional product candidates;
our product candidates may not succeed in preclinical or clinical testing;
a product candidate may on further study be shown to have harmful side effects or other characteristics that indicate it is unlikely to
be effective or otherwise does not meet applicable regulatory criteria;
competitors may develop alternatives that render our product candidates obsolete or less attractive;
product candidates we develop may nevertheless be covered by third parties’ patents or other exclusive rights;
the market for a product candidate may change during our program so that the continued development of that product candidate is
no longer reasonable;
a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all; and
a product candidate may not be accepted as safe and effective by patients, the medical community or third- party payers, if
applicable.
If any of these events occur, we may be forced to abandon our development efforts for a program or programs, or we may not be
able to identify, discover, develop, or commercialize additional product candidates, which would have a material adverse effect on our
business and could potentially cause us to cease operations.
Our product candidates are biologics and the manufacture of our product candidates is complex and we may encounter
difficulties in production, particularly with respect to process development or scaling-out of our manufacturing capabilities.
If we encounter such difficulties, our ability to provide supply of our product candidates for clinical trials or our products for
patients, if approved, could be delayed or stopped, or we may be unable to maintain a commercially viable cost structure. Our product
candidates are biologics and the process of manufacturing our products is complex, highly regulated and subject to multiple risks. The
manufacture of our product candidates involves complex processes, including the biopsy of tissue from a patient’s liver, propagation of the
patient’s liver cells from that liver tissue to obtain the desired dose, trans-differentiating those cells into insulin-producing cells ex vivo and
ultimately infusing the cells back into a patient’s body. As a result of the complexities, the cost to manufacture biologics is generally higher
than traditional small molecule chemical compounds, and the manufacturing process is less reliable and is more difficult to reproduce. Our
manufacturing process will be susceptible to product loss or failure due to logistical issues associated with the collection of liver 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 patient starting materials, interruptions in the
manufacturing process, contamination, equipment or reagent failure, improper installation or operation of equipment, vendor or operator
error, inconsistency in cell growth, failures in process testing and variability in product characteristics. Even minor deviations from normal
manufacturing processes could result in reduced production yields, product defects, and other supply disruptions. If for any reason we lose
a patient’s starting material or later-developed product at any point in the process, the manufacturing process for that patient will need to be
restarted and the resulting delay may adversely affect that patient’s outcome. If microbial, viral, or other contaminations are discovered in
our product candidates or in the manufacturing facilities in which our product candidates are made, such manufacturing facilities may need
to be closed for an extended period of time to investigate and remedy the contamination. Because our product candidates are manufactured
for each particular patient, we will be required to maintain a chain of identity and tractability of all reagents and viruses involved in the
process 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 our products from the market. Further, as product candidates are developed
through preclinical 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 our product candidates to
perform differently and affect the results of planned clinical trials or other future clinical trials.
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Although we are working to develop commercially viable processes, doing so is a difficult and uncertain task, and there are risks
associated with scaling to the level required for advanced clinical trials or 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 our product candidates to levels that will allow for an attractive
return on investment if and when those product candidates are commercialized.
We expect that continued development of our manufacturing facility via MaSTherCell and our global CDMO network will provide
us with enhanced control of material supply for both clinical trials and the commercial market, enable the more rapid implementation of
process changes, and allow for better long-term margins. We may establish multiple manufacturing facilities as we expand our commercial
footprint to multiple geographies, which may lead to regulatory delays or prove costly. Even if we are successful, our manufacturing
capabilities could be affected by cost-overruns, unexpected delays, equipment failures, labor shortages, natural disasters, power failures and
numerous other factors that could prevent us from realizing the intended benefits of our manufacturing strategy and have a material adverse
effect on our business.
In addition, the manufacturing process for any products that we may develop is subject to FDA and foreign regulatory authority
approval process, and we will need to contract with manufacturers who can meet all applicable FDA and foreign regulatory authority
requirements on an ongoing basis. If we are unable to reliably produce products to specifications acceptable to the FDA or other regulatory
authorities, we may not obtain or maintain the approvals we need to commercialize such products. Even if we obtain regulatory approval
for any of our product candidates, there is no assurance that either we or our CDMO subsidiaries and joint ventures will be able to
manufacture the approved product to specifications acceptable to the FDA or other 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 delay completion of clinical trials, require bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial
costs, delay approval of our product candidate, impair commercialization efforts, increase our cost of goods, and have an adverse effect on
our business, financial condition, results of operations and growth prospects.
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The manufacture of biological drug products is complex and requires significant expertise and capital investment, including the
development of advanced manufacturing techniques and process controls. Manufacturers of biologic products often encounter difficulties in
production, particularly in scaling up or out, validating the production process, and assuring high reliability of the manufacturing process
(including the absence of contamination). These problems include logistics and shipping, difficulties with production costs and yields,
quality control, including stability of the product, product testing, operator error, availability of qualified personnel, as well as compliance
with strictly enforced federal, state and foreign regulations. Furthermore, if contaminants are discovered in our supply of our product
candidates or in the manufacturing facilities, such manufacturing facilities may need to be closed for an extended period of time to
investigate and remedy the contamination. We cannot assure you that any stability failures or other issues relating to the manufacture of
our product candidates will not occur in the future. Additionally, our manufacturers may experience manufacturing difficulties due to
resource constraints or as a result of labor disputes or unstable political environments. If our manufacturers were to encounter any of these
difficulties, or otherwise fail to comply with their contractual obligations, our ability to provide our product candidate to patients in clinical
trials would be jeopardized. Any delay or interruption in the supply of clinical trial supplies could delay the completion of clinical trials,
increase the costs associated with maintaining clinical trial programs and, depending upon the period of delay, require us to begin new
clinical trials at additional expense or terminate clinical trials completely.
Cell-based therapies rely on the availability of reagents, specialized equipment, and other specialty materials, which may not
be available to us on acceptable terms or at all. For some of these reagents, equipment, and materials, we rely or may rely on sole
source vendors or a limited number of vendors, which could impair our ability to manufacture and supply our products.
Manufacturing our product candidates will require many reagents and viruses, which are substances used in our manufacturing
processes to bring about chemical or biological reactions, and other specialty materials and equipment, some of which are manufactured or
supplied by small companies with limited resources and experience to support commercial biologics production. We currently depend on a
limited number of vendors for certain materials and equipment used in the manufacture of our product candidates. Some of these suppliers
may not have the capacity to support commercial products manufactured under GMP by biopharmaceutical firms or may otherwise be ill-
equipped to support our needs. We also do not have supply contracts with many of these suppliers and may not be able to obtain supply
contracts with them on acceptable terms or at all. Accordingly, we may experience delays in receiving key materials and equipment to
support clinical or commercial manufacturing.
For some of these reagents, viruses, equipment, and materials, we rely and may in the future rely on sole source vendors or a limited
number of vendors. An inability to continue to source product from any of these suppliers, which could be due to regulatory actions or
requirements affecting the supplier, adverse financial or other strategic developments experienced by a supplier, labor disputes or
shortages, unexpected demands, or quality issues, could adversely affect our ability to satisfy demand for our product candidates, which
could adversely and materially affect our product sales and operating results or our ability to conduct clinical trials, either of which could
significantly harm our business.
As we continue to develop and scale our manufacturing process, we expect that we will need to obtain rights to and supplies of
certain materials and equipment to be used as part of that process. We may not be able to obtain rights to such materials on commercially
reasonable terms, or at all, and if we are unable to alter our process in a commercially viable manner to avoid the use of such materials or
find a suitable substitute, it would have a material adverse effect on our business.
We currently have no marketing and sales organization and have no experience in marketing therapeutic products. If we
are unable to establish marketing and sales capabilities or enter into agreements with third parties to market and sell our product
candidates, we may not be able to generate product revenue.
We currently have no sales, marketing, or commercial therapeutic product distribution capabilities and have no experience in
marketing products. We intend to develop an in-house marketing organization and sales force, which will require significant capital
expenditures, management resources, and time. We will have to compete with other pharmaceutical and biotechnology companies to
recruit, hire, train, and retain marketing and sales personnel. If we are unable or decide not to establish internal sales, marketing and
commercial distribution capabilities for any or all products we develop, we will likely pursue collaborative arrangements regarding the
sales and marketing of our products. However, there can be no assurance that we will be able to establish or maintain such collaborative
arrangements, or if we are able to do so, that they will have effective sales forces. Any revenue we receive will depend upon the efforts of
such third parties, which may not be successful. We may have little or no control over the marketing and sales efforts of such third parties,
and our revenue from product sales may be lower than if we had commercialized our product candidates ourselves. We also face
competition in our search for third parties to assist us with the sales and marketing efforts of our product candidates.
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There can be no assurance that we will be able to develop in-house sales and commercial distribution capabilities or
establish or maintain relationships with third-party collaborators to successfully commercialize any product in the United States or
overseas, and as a result, we may not be able to generate product revenue.
A variety of risks associated with operating our business internationally could materially adversely affect our business. We plan to
seek regulatory approval of our product candidates outside of the United States and, accordingly, we expect that we, and any potential
collaborators in those jurisdictions, will be subject to additional risks related to operating in foreign countries, including:
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differing regulatory requirements in foreign countries, unexpected changes in tariffs, trade barriers, price and exchange controls, and
other regulatory requirements;
economic weakness, including inflation, or political instability in particular foreign economies and markets;
compliance with tax, employment, immigration, and labor laws for employees living or traveling abroad;
foreign taxes, including withholding of payroll taxes;
foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations
incident to doing business in another country;
difficulties staffing and managing foreign operations;
workforce uncertainty in countries where labor unrest is more common than in the United States;
potential liability under the Foreign Corrupt Practices Act of 1977 or comparable foreign laws;
challenges enforcing our contractual and intellectual property rights, especially in those foreign countries that do not respect and
protect intellectual property rights to the same extent as the United States;
production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
business interruptions resulting from geo-political actions, including war and terrorism.
These and other risks associated with our planned international operations may materially adversely affect our ability to attain or
maintain profitable operations.
We face significant competition from other biotechnology and pharmaceutical companies, and our operating results will
suffer if we fail to compete effectively.
The biopharmaceutical industry, and the rapidly evolving market for developing cell-based therapies is characterized by intense
competition and rapid innovation. Our competitors may be able to develop other compounds or drugs that are able to achieve similar or
better results. Our potential competitors include major multinational pharmaceutical companies, established biotechnology companies,
specialty pharmaceutical companies, universities, and other research institutions. Many of our competitors have substantially greater
financial, technical and other resources, such as larger research and development staff and experienced marketing and manufacturing
organizations as well as established sales forces. Smaller or early-stage companies may also prove to be significant competitors, particularly
through collaborative arrangements with large, established companies. Mergers and acquisitions in the biotechnology and pharmaceutical
industries may result in even more resources being concentrated in our competitors. Competition may increase further as a result of
advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our
competitors, either alone or with collaborative partners, may succeed in developing, acquiring or licensing on an exclusive basis drug or
biologic products that are more effective, safer, more easily commercialized, or less costly than our product candidates or may develop
proprietary technologies or secure patent protection that we may need for the development of our technologies and products.
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Specifically, we face significant competition from companies in the insulin therapy market. Insulin therapy is widely used for
Insulin-Dependent Diabetes Mellitus (IDDM) patients who are not controlled with oral medications. The global diabetes market comprising
the insulin, insulin analogues and other anti-diabetic drugs has been evolving rapidly. A look at the diabetes market reveals that it is
dominated by a handful of participants such as Novo Nordisk A/S, Eli Lilly and Company, Sanofi-Aventis, Takeda Pharmaceutical
Company Limited, Pfizer Inc., Merck KgaA, and Bayer AG. Even if we obtain regulatory approval of our product candidates, we may not
be the first to market and that may affect the price or demand for our product candidates. Additionally, the availability and price of our
competitors’ products could limit the demand and the price we are able to charge for our product candidates. We may not be able to
implement our business plan if the acceptance of our product candidates is inhibited by price competition or the reluctance of physicians to
switch from existing methods of treatment to our product candidates, or if physicians switch to other new drug or biologic products or
choose to reserve our product candidates for use in limited circumstances. Additionally, a competitor could obtain orphan product
exclusivity from the FDA with respect to such competitor’s product. If such competitor product is determined to be the same product as
one of our product candidates, that may prevent us from obtaining approval from the FDA for such product candidate for the same
indication for seven years, except in limited circumstances.
We are highly dependent on our key personnel, and if we are not successful in attracting, motivating and retaining highly
qualified personnel, we may not be able to successfully implement our business strategy.
Our ability to compete in the highly competitive biotechnology and pharmaceutical industries depends upon our ability to attract,
motivate and retain highly qualified managerial, scientific and medical personnel. We are highly dependent on our senior management,
particularly our chief science officer, Prof. Sarah Ferber and our chief executive officer, Vered Caplan. The loss of the services of any of
our executive officers, other key employees, and other scientific and medical advisors, and our inability to find suitable replacements, could
result in delays in product development and harm our business. Competition for skilled personnel is intense and the turnover rate can be
high, which may limit our ability to hire and retain highly qualified personnel on acceptable terms or at all.
To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have provided stock option
grants that vest over time. The value to employees of these equity grants that vest over time may be significantly affected by movements in
our stock price that are beyond our control, and may at any time be insufficient to counteract more lucrative offers from other companies.
Although we have employment agreements with our key employees, most these employment agreements provide for at-will employment,
which means that any of our employees could leave our employment at any time, with or without notice. We do not maintain “key man”
insurance policies on the lives of all of these individuals or the lives of any of our other employees.
Risks Related to our Common Stock
If we issue additional shares in the future, it will result in the dilution of our existing stockholders.
Our articles of incorporation authorizes the issuance of up to 145,833,334 shares of our common stock with a par value of $0.0001
per share. Our Board of Directors may choose to issue some or all of such shares to acquire one or more companies or products and to fund
our overhead and general operating requirements. The issuance of any such shares will reduce the book value per share and may contribute
to a reduction in the market price of the outstanding shares of our common stock. If we issue any such additional shares, such issuance will
reduce the proportionate ownership and voting power of all current stockholders. Further, such issuance may result in a change of control
of our company.
Our stock price and trading volume may be volatile, which could result in losses for our stockholders.
The equity trading markets have recently experienced high volatility resulting in highly variable and unpredictable pricing of equity
securities. If the turmoil in the equity trading markets continues, the market for our common stock could change in ways that may or may
not be related to our business, our industry or our operating performance and financial condition. In addition, the trading volume in our
common stock may fluctuate and cause significant price variations to occur. Some of the factors that could negatively affect our share price
or result in fluctuations in the price or trading volume of our common stock include:
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actual or anticipated quarterly variations in our operating results, including further impairment to unproved oil and gas properties;
changes in expectations as to our future financial performance or changes in financial estimates, if any;
announcements relating to our business;
conditions generally affecting the oil and natural gas industry;
the success of our operating strategy; and
the operating and stock performance of other comparable companies.
Many of these factors are beyond our control, and we cannot predict their potential effects on the price of our common stock. In
addition, the stock market is subject to extreme price and volume fluctuations. During the past 52 weeks ended November 30, 2017, our
stock price has fluctuated from a low of $2.76 to a high of $11.76 (adjusted to account for the 1:12 reverse split implemented in November
2017). This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their
operating performance and could have the same effect on our common stock.
No assurance can be provided that a purchaser of our common stock will be able to resell their shares of common stock at or above
the price that they acquired those shares. We can provide no assurances that the market price of common stock will increase or that the
market price of common stock will not fluctuate or decline significantly.
We do not intend to pay dividends on any investment in the shares of stock of our company.
We have never paid any cash dividends, and currently do not intend to pay any dividends for the foreseeable future. The Board of
Directors has not directed the payment of any dividends and does not anticipate paying dividends on the shares for the foreseeable future
and intends to retain any future earnings to the extent necessary to develop and expand our business. Payment of cash dividends, if any, will
depend, among other factors, on our earnings, capital requirements, and the general operating and financial condition, and will be subject to
legal limitations on the payment of dividends out of paid-in capital. Because we do not intend to declare dividends, any gain on an
investment in our company will need to come through an increase in the stock’s price. This may never happen, and investors may lose all of
their investment in our company.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2. PROPERTIES
We do not own any real property. A description of the leased premises we utilize in several of our facilities is as follows:
Entity
Property Description
Orgenesis Inc./Orgenesis Maryland Inc.
These are the principal offices:
• Located at 20271 Goldenrod Lane, Germantown, MD
20876.
• Occupy office space at the Germantown Innovation
Center.
• Cost is $200 per month on a month-to-month contract.
MaSTherCell SA, Cell Therapy Holding SA and Orgenesis SPRL
All activities located in Gosselies, Belgium, in the I-Tech Incubator 2.
Property consists of:
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Orgenesis Ltd.
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Operational production and Office area represent +/- 1,911 m²
Monthly costs are approximately €20 thousand
Lease agreement for the office and operational production
area expires on March 31, 2030.
Additional offices are leased in a separate building to
temporarily
it
locate MaSTherCell corporate
represents 180m² for a monthly cost of €2 thousand and
termination lease agreement on January 31, 2019
The new production area designed during 2016 is to be built in
2017-2018 and operational end of 2018.
service;
The development lab is located in Nasher, Israel. Monthly
costs are NIS 10 thousand.
The offices are located in the Science Park of Nes Tziona.
Annual costs are approximately €20 thousand
We believe that our facilities are generally in good condition and suitable to carry on our business. We also believe that, if required,
suitable alternative or additional space will be available to us on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any pending legal proceedings that we anticipate would result in a material adverse effect on our business or
operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
PART II
Market information
Our common stock has been listed on the OTCQB under the trading symbol “ORGS.”
The following table shows the quarterly high and low bid prices or sales prices for our common stock over the last two completed
fiscal years and subsequent interim periods, as quoted on the OTCQB Platform. The prices represent quotations by dealers without
adjustments for retail mark-ups, mark-downs or commissions and may not represent actual transactions.
The prices have been adjusted to reflect the 1 for 12 reverse stock split of our common stock that became effective on November
16, 2017.
Year Ended November 30, 2018
First Quarter (1)
$ 10.75
$ 4.00
High
Low
Year Ended November 30, 2017
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Year Ended November 30, 2016
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
$ 7.80
$ 7.56
$ 11.76
$ 10.68
$ 5.16
$ 6.18
$ 4.80
$ 4.92
$ 2.76
$ 3.84
$ 6.60
$ 3.39
$ 3.41
$ 3.40
$ 2.82
$ 3.13
(1) December 1, 2017 – February 27, 2018
As of February 28, 2018, there were 76 holders of record of our common stock, and the last reported sale price of our common stock
on the OTCQB on February 27, 2018 was $8.09. A significant number of shares of our common stock are held in either nominee name or
street name brokerage accounts, and consequently, we are unable to determine the number of beneficial owners of our stock.
Dividend Policy
To date, we have paid no dividends on our common stock and do not expect to pay cash dividends in the foreseeable future. We
plan to retain all earnings to provide funds for the operations of our company. In the future, our Board of Directors will decide whether to
declare and pay dividends based upon our earnings, financial condition, capital requirements, and other factors that our Board of Directors
may consider relevant. We are not under any contractual restriction as to present or future ability to pay dividends.
Unregistered Sales of Equity Securities
During the three months ended November 30, 2017, our financing activities consisted of the following:
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Between September and November 2017, we issued in private placement to accredited or offshore investors 160,265 shares of
common stock and three-year common stock purchase warrants for an additional 160,265 shares of our common stock, exercisable at a per
share exercise price of $6.24 for aggregate gross proceeds of $1,000,053.
Between September and November 2017, we issued in private placement to accredited or offshore investors our convertible
promissory notes in the aggregate principal amount of $1.1 million which are convertible into closing on $1.1 million, in private placement
debt offerings through the issuance our convertible promissory notes with maturity dates of twenty-four months, convertible as of
November 30, 2017 into 176,282 shares of our common stock and 176,282 three-year warrants to purchase up to an additional 176,282
shares of our common stock at a per share exercise price of $6.24.
All of the securities issued in the transactions described above were issued without registration under the Securities Act in reliance
upon the exemptions provided in Section 4(2) of the Securities Act or Regulation S under such Securities Act. Except with respect to
securities sold under Regulation S, the recipients of securities in each such transaction acquired the securities for investment only and not
with a view to or for sale in connection with any distribution thereof. Appropriate legends were affixed to the share certificates issued in all
of the above transactions. Each of the recipients represented that they were “accredited investors” within the meaning of Rule 501(a) of
Regulation D under the Securities Act, or had such knowledge and experience in financial and business matters as to be able to evaluate the
merits and risks of an investment in its common stock. All recipients had adequate access, through their relationships with the Company
and its officers and directors, to information about the Company. None of the transactions described above involved general solicitation or
advertising.
Issuer Purchases of Equity Securities
We do not have a stock repurchase program for our common stock and have not otherwise purchased any shares of our common
stock.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial statements and the notes related to those statements.
Some of our discussion is forward-looking and involves risks and uncertainties. For information regarding risk factors that could have a
material adverse effect on our business, refer to the “risk factors” section of this annual report.
Corporate History
We were incorporated in the state of Nevada on June 5, 2008 under the name Business Outsourcing Services, Inc. Effective August
31, 2011, we completed a merger with our subsidiary, Orgenesis Inc., a Nevada corporation, which was incorporated solely to effect a
change in its name. As a result, the Company changed its name from “Business Outsourcing Services, Inc.” to “Orgenesis Inc.”
Our strategy is to accelerate the development of breakthrough life-improving medical treatments through a hybrid business model
combining proprietary technologies in our CT and CDMO businesses.
On October 11, 2011, we incorporated Orgenesis Ltd. as our wholly-owned subsidiary under the laws of Israel. On February 2,
2012, Orgenesis Ltd. signed and closed a definitive agreement to license from Tel Hashomer - Medical Research, Infrastructure and
Services Ltd. (“THM”), a private company duly incorporated under the laws of Israel, patents and know-how related to the development of
AIP (Autologous Insulin Producing) cells. Through Orgenesis Ltd., we became engaged in our CT business.
-46-
On November 6, 2014 we entered into an agreement with the shareholders of MaSTherCell S.A. to acquire MaSTherCell S.A. On
March 2, 2015, we closed on the acquisition of MaSTherCell whereby it became a wholly-owned subsidiary of Orgenesis. Through
MaSTherCell, we became engaged in the CDMO business. Currently, the Company’s revenues are generated through MaSTherCell.
Corporate Overview
We are a service and research company in the field of the regenerative medicine industry with a focus on cell therapy development
and manufacturing for advanced medicinal products serving the regenerative medicine industry. In addition, we are focused on developing
novel and proprietary cell therapy trans-differentiation technologies for the treatment of diabetes, with a revenue generating contract
development and manufacturing service business to serve the regenerative medicine industry.
Our vertically integrated manufacturing capabilities are being used to serve to emerging technologies of other cell therapy markets
in such areas as cell-based cancer immunotherapies and neurodegenerative diseases and also to optimize our abilities to scale-up our
technologies for clinical trials and eventual commercialization of our proposed diabetes treatment. Our hybrid business model of combining
our own proprietary cell therapy trans-differentiation technologies for the treatment of diabetes and a revenue-generating contract
development and manufacturing service business provides us with unique capabilities and supports our mission of accelerating the
development and ultimate marketing of breakthrough life-improving medical treatments.
We seek to differentiate our company from other cell therapy companies through MaSTherCell and a world-wide network of CDMO
joint venture partners who have built a unique and fundamental base platform of know-how and expertise for manufacturing in a multitude
of cell types. The goal is to industrialize cell therapy for fast, safe and cost-effective production in order to provide rapid therapies for any
market around the world. All these services are already compliant with GMP requirements, ensuring identity, purity, stability, potency and
robustness of cell therapy products for clinical phase I, II, III through commercialization.
We have leveraged the recognized expertise and experience in cell process development and manufacturing of MaSTherCell, and
our international joint ventures, in Israel and Korea, to build a global and fully integrated bio-pharmaceutical company in the cell therapy
development and manufacturing area. We believe that cell therapy companies need to be global in order to truly succeed. In furtherance of
that belief, we intend to expand our establishment of CDMO facilities to the United States and other international markets. We target the
international manufacturing market as a key priority through joint-venture agreements that provide development capabilities, along with
manufacturing facilities and experienced staff. All of these capabilities offered to third-parties will be mobilized for our internal
development projects, allowing us to be in a position to bring new products to the patients faster and in a cost-effective way.
Our trans-differentiation technologies for treating diabetes, which we refer to as our cellular therapy (“CT”) business, is based on a
technology licensed by our Israeli Subsidiary, that demonstrates the capacity to induce a shift in the developmental fate of cells from the
liver and transdifferentiating them into “pancreatic beta cell-like” Autologous Insulin Producing (“AIP”) cells for patients with Type 1
Diabetes. Moreover, those cells were found to be resistant to autoimmune attack and to produce insulin in a glucose-sensitive manner in
relevant animal models which significantly broadens the potential of the technology for other therapeutics areas. Our trans-differentiation
technology for diabetes is from the work of Prof. Sarah Ferber, our Chief Science Officer and a researcher at Tel Hashomer Medical
Research Infrastructure and Services Ltd. (“THM”) in Israel. Our development plan calls for conducting additional preclinical safety and
efficacy studies with respect to diabetes and other potential indications prior to initiating clinical trials. In parallel, we work on establishing
the GMP manufacturing process which development is already accomplished.
We operate our CDMO and the CT business as two separate business segments.
Revenue History
Companies developing cell therapies need to make a decision early on in their approach to the transition from the lab to the clinic
regarding the manufacturing and production of the cells necessary for their respective treatments. Of the companies active in this market,
only a small number have established their own GMP manufacturing facilities due to the high costs and expertise required to develop and
maintain such production centers. In addition to the limitations imposed by a limited number of trained personnel and high
infrastructure/operational costs, we believe that the industry faces a need for custom innovative process development and manufacturing
solutions. In this context, we have grown total revenue from $6.4 million in our fiscal year 2016 to $10.1 million for fiscal year 2017. The
increased revenues derive from an increase in the volume of the services provided by our CDMO segment, namely our Belgian-based
subsidiary, MaSTherCell, through its customer service contracts with existing customers and the entry into new customer service contracts
with leading biotech companies, as well as from revenues generated from existing manufacturing agreements.
-47-
Backlog
We define our backlog as products that we are obligated to deliver or services to be rendered based on firm commitments relating to
purchase orders received from customers. As of November 30, 2017, MaSTherCell had backlog of approximately $9.5 million, consisting
of services that we expect to deliver into fiscal year 2018. However, no assurance can be provided that such contracts will not be cancelled,
in which case we will not be authorized to deliver and record the anticipated revenues.
Recent Developments
Following the SFPI investment in MaSTherCell in November 2017, MaSTherCell decided to expand its facilities with a dedicated,
late-stage clinical and commercial unit, anticipated to be operational by the end of 2018. This new asset will provide the most up-to-date
commercial capabilities in Europe with five state-of-the-art advanced therapy manufacturing units and extended Good Manufacturing
Practice (GMP)-accredited quality control (QC) laboratories.
Additionally, we announced a strategic organizational regrouping of our CDMO global manufacturing services offerings. The
planned CDMO regrouping will utilize the global MaSTherCell brand, except for At-Vio Biotech Ltd. (“At-Vio”), for its unique technology
and innovation activity located in Israel and serving the global cell and gene therapy markets. The primary purpose of the strategic
regrouping is to create a more efficient CDMO corporate organization that can optimally utilize resources from the parent, Orgenesis Inc.,
and more efficiently broaden, streamline and harmonize the CDMO service offerings on a global basis utilizing the quality and standards of
our flagship Belgian-based subsidiary, MaSTherCell S.A.
Critical Accounting Policies and Use of Estimates
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have
been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, bad debts, investments,
intangible assets and income taxes. Our estimates are based on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances. Actual results may differ from these estimates.
We have identified the accounting policies below as critical to our business operations and the understanding of our results of
operations.
Business Combination
We allocated the purchase price of the business we acquired to the tangible and intangible assets acquired and liabilities assumed
based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets
acquired is recorded as goodwill. Acquired in-process backlog, customer relations, brand name and know how are recognized at fair value.
The purchase price allocation process requires from us to make significant estimates and assumptions, especially at the acquisition date
with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred. The allocation
of the consideration transferred in certain cases may be subject to revision based on the final determination of fair values during the
measurement period, which may be up to one year from the acquisition date. We included the results of operations of the business that we
acquired in the consolidated results prospectively from the date of acquisition when control was obtained.
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Intangible Assets
Intangible assets are recorded at acquisition cost less accumulated amortization and impairment. Definite lived intangible assets are
amortized over their estimated useful life using the straight-line method over their estimated period of useful life, which is determined by
identifying the period over which the cash flows are expected to be generated.
Goodwill
Goodwill represents the excess of the purchase price of an acquired business over the estimated fair value of the identifiable net
assets acquired. Goodwill is not amortized but is tested for impairment at least annually (at November 30), at the reporting unit level or
more frequently if events or changes in circumstances indicate that the goodwill might be impaired. The goodwill impairment test is
applied by performing a qualitative assessment before calculating the fair value of the reporting unit. If, on the basis of qualitative factors,
it is considered not more likely than not that the fair value of the reporting unit is less than the carrying amount, further testing of goodwill
for impairment would not be required. Otherwise, goodwill impairment is tested using a two-step approach.
The first step involves comparing the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit is
determined to be greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is determined to be greater
than the fair value, the second step must be completed to measure the amount of impairment, if any. The second step involves calculating
the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit
from the fair value of the reporting unit as determined in step one. The implied fair value of the goodwill in this step is compared to the
carrying value of goodwill. If the implied fair value of the goodwill is less than the carrying value of the goodwill, an impairment loss
equivalent to the difference is recorded.
As of November 30, 2017, the fair value of the reporting unit, our CDMO, exceeded the carrying value by approximately $10.4
million. A decrease in the terminal year growth rate of 1% and an increase in the discount rate of 1% would reduce the fair value of the
reporting unit by approximately $1.1 million and $2.3 million, respectively. These changes would not result in an impairment. Given the
small amount that the fair value exceeded the carrying value of the reporting unit, a negative change in the future to the income approach
based on discounted cash flows of a number of assumptions (including the expected cash flows, discount rate, growth rate and terminal
rate) will result in an impairment. Given that the reporting unit is still in its growth stage, there can be no assurance that an impairment may
not occur in the near future.
Impairment of Long-lived Assets
We are reviewing the property and equipment, intangible assets subject to amortization and other long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset class may not be recoverable. Indicators of
potential impairment include an adverse change in legal factors or in the business climate that could affect the value of the asset; an adverse
change in the extent or manner in which the asset is used or is expected to be used, or in its physical condition; and current or forecasted
operating or cash flow losses that demonstrate continuing losses associated with the use of the asset. If indicators of impairment are present,
the asset is tested for recoverability by comparing the carrying value of the asset to the related estimated undiscounted future cash flows
expected to be derived from the asset. If the expected cash flows are less than the carrying value of the asset, then the asset is considered to
be impaired and its carrying value is written down to fair value, based on the related estimated discounted cash flows. There were no
indicators for impairment charges in 2017 and 2016 and, therefore, no fair value assessment was performed.
Revenue Recognition
We recognize the revenue for services linked to cell process development and cell manufacturing services based on individual
contracts in accordance with Accounting Standards Codification (“ASC”) 605, Revenue Recognition, when the following criteria have been
met: persuasive evidence of an arrangement exists; delivery of the processed cells has occurred or the services that are milestones based
have been provided; the price is fixed or determinable and collectability is reasonably assured. We determine that persuasive evidence of
an arrangement exists based on written contracts that define the terms of the arrangements. In addition, we determine that services have
been delivered in accordance with the arrangement. We assess whether the fee is fixed or determinable based on the payment terms
associated with the transaction and whether the sales price is subject to refund or adjustment. Service revenues are recognized as the
services are provided.
-49-
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09
(“ASU 2014-09”) "Revenue from Contracts with Customers." ASU 2014-09 will supersede most current revenue recognition guidance,
including industry-specific guidance. The underlying principle is that an entity will recognize revenue upon the transfer of goods or
services to customers in an amount that the entity expects to be entitled to in exchange for those goods or services. On July 9, 2015, the
FASB deferred the effective date of the standard by one year, which results in the new standard being effective for the Company at the
beginning of its first quarter of fiscal year 2018. In addition, during March, April and May 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing and ASU 2016-12, Revenue from Contracts
with Customers: Narrow-Scope Improvements and Practical Expedients, respectively, which clarified the guidance on certain items such as
reporting revenue as a principal versus agent, identifying performance obligations, accounting for intellectual property licenses, assessing
collectability and presentation of sales taxes. The FASB also agreed to allow entities to choose to adopt the standard as of the original
effective date. As applicable for the Company, the effective date for adopting the ASU is for the year ending November 30, 2019. The
Company is currently evaluating the impact of adopting ASU 2014-09 on its financial position, results of operations and related disclosures
and has not yet determined whether the effect of the revenue portion will be material.
We also incur revenue from selling of some consumables which are incidental to the services provided as foreseen in the clinical
services contracts. Such revenue is recognized upon delivery of the processed cells in which they were consumed.
Results of Operations
Comparison of the Year Ended November 30, 2017 to the Year Ended November 30, 2016
Our loss before income tax for the year ended November 30, 2017 are summarized as follows in comparison to our expenses for the
year ended November 30, 2016:
Year ended November 30,
2017
2016
(in thousands)
Revenues
Cost of revenues
Research and development expenses, net
Amortization of intangible assets
General and administration expenses
Share in losses of associated company
Financial expenses , net
Loss before income taxes
$
$
10,089 $
6,807
2,478
1,631
9,189
1,214
2,447
13,677 $
6,397
7,657
2,157
1,620
6,240
123
1,260
12,660
Revenues
Our revenues for the year ended November 30, 2017 are summarized as follows in comparison to its revenues for the year ended
November 30, 2016:
-50-
Services
Goods
Total
Year ended November 30,
2016
2017
(in thousands)
8,024 $
2,065
10,089 $
4,683
1,714
6,397
$
$
All revenues were derived from our subsidiary, MaSTherCell. Manufacturing activities increased by $3,692 thousand, or 58%,
reflecting our revenue diversification by source in the CDMO segment. We believe this reflects the market recognition of our CDMO
business and our expertise and responsiveness to industry needs. Considering the vertical integration of research and manufacturing
segments, the revenues from other group companies related to manufacturing activities for its CT business were $1,395 thousand.
In 2017, MaSTherCell benefited from the extension of manufacturing activities with its existing clients, together with agreements
with leading pharmaceutical companies like Servier and CRISPR. In January 2017, MaSTherCell signed a master service agreement with
Servier for the development of a manufacturing platform for allogeneic cell therapies. Under the master service agreement, MaSTherCell is
developing a CAR-T cell therapy manufacturing platform, which will enable industrial and commercial manufacturing of Servier's cell
therapy products. This is a critical step in the development of these products for later stage clinical trials.
In June 2017, MaSTherCell signed an agreement with CRISPR to develop and manufacture allogeneic CAR-T therapies.
MaSTherCell will be responsible for the development and cGMP manufacturing of CTX101 for use in clinical studies. CTX101 is an
allogeneic CAR T-cell therapy currently in development by CRISPR Therapeutics for the treatment of CD19 positive malignancies.
Expenses
Cost of Revenues
Salaries and related expenses
Professional fees and consulting services
Raw Material
Depreciation and amortization expenses
Other expenses
Total
Year Ended November 30,
(in thousands)
2017
2016
$
$
2,642 $
-
2,692
986
487
6,807 $
3,356
967
1,769
1,299
266
7,657
As with our revenues, all costs of revenues are derived from our Belgian Subsidiary, MaSTherCell. Cost of revenues for the year
ended November 30, 2017 decreased by 11%, or $850 thousand, compared to 2016. This decrease is driven by the salaries and related
expenses for the year ended November 30, 2017 in an amount of $2,624 thousand, as compared to $3,356 thousand during the same periods
in 2016. It is primarily attributable to a decrease in salaries and related expenses associated with an internal transformation program
implemented in MaSTherCell in the second quarter of 2017 to evolve from an organization based on project to a matrix organization
supported by transversal departments focusing on value creation. As part of the program, we changed the business positions of certain
employees from laboratory managers to general manager positions in order to reflect the current period’s business activity. Subsequently,
these changes in business positions resulted in a shift of costs into general and administration expenses.
Raw materials for the year ended November 30, 2017 increased by 52%, or $923 thousand, compared to the year ended November
30, 2016. This was due to the increase in the volume of our manufacturing and process development services.
-51-
Amortization and depreciation expenses for the year ended November 30, 2017 decreased by 24%, or $313 thousand, as compared
to the year ended November 2016. This was primarily attributable to the increase in the production facility useful life from 10 to 20 years
and due to an increase in the classification of depreciation expenses to research and development expenses related to assets used in our CT
business. We increased the level of investment in tangible assets of MaSTherCell in 2017 by $1,038 thousand, including $326 thousand in
assets related to the expansion plan of its facilities.
Research and Development Expenses
We are a vertically integrated biopharmaceutical company combining proprietary technologies and manufacturing services. If
process development and manufacturing activities are primarily reflected in revenues and costs of revenues, the research and development
of our proprietary technologies are accounted as specific expenses. Our research and development expenses for the year ended November
30, 2017 are summarized as follows in comparison to our research and development expenses for the year ended November 30, 2016:
Salaries and related expenses
Stock-based compensation
Professional fees and consulting services
Depreciation expenses, net
Lab expenses
Other research and development expenses
Less – grants
Total
Year Ended November 30,
(in thousands)
2017
2016
1,181 $
711
854
110
287
183
(848)
2,478 $
1,040
327
400
691
179
(480)
2,157
$
$
The increase in research and development expenses reflects management’s determination to move transdifferentiating technology to
the next the stage towards clinical studies. In the year ended 2017, we focused our CT business on two major developments of our
proprietary technology platform: (i) three-dimensional (3D) cell culture systems and (ii) process development of our technology for the
sourcing of the starting material (liver sampling and cell collection) for the development of the autologous insulin producing (AIP) cells. In
furtherance of these two developments, salaries and related expenses increased for the year ended November 30, 2017 compared to 2016,
primarily due to the expansion of our development team in Israel and Belgium.
Our success depends substantially on the efforts and abilities of our senior management and certain key personnel. The competition
for qualified management and key personnel, especially engineers, is intense. We believe that we will be able to retain qualified personnel
through, among other things, the issuance of stock-based compensation. Stock-based compensation for the year ended November 30, 2017
increased by $384 thousand compared to the same period in 2016, due to new grants of stock options to employees during fiscal year 2017.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses for the year ended November 30, 2017 are summarized as follows in comparison
to our selling, general and administrative expenses for the year ended November 30, 2016:
Salaries and related expenses
Stock-based compensation
Accounting and legal fees
Professional fees
Rent and related expenses
Business development
Expenses related to a JV
Other general and administrative expenses
Total
Year Ended November 30,
(in thousands)
2017
2016
2,862 $
1,155
1,773
2,017
859
599
-
(76)
9,189 $
241
2,334
786
845
798
397
497
342
6,240
$
$
Selling, general and administrative expenses increased by $2,949, or 47%, in year ended November 30, 2017, primarily attributable
to (i) a decrease in stock based compensation in the 2017 periods attributable to the termination of the vesting period of options and shares
awarded to executive officers and consultants in 2016; (ii) an increase in corporate governance costs in order to remediate specific material
weaknesses; (iii) an increase in salaries and related expenses resulting from the retention of new senior management at our Belgian
Subsidiary and new accounting staff in our financial department in our Israeli Subsidiary; (iv) an increase in professional fees resulting from
the appointment of an independent third party to assess our risk management framework to manage enterprise risk and work on corporate
governance; (v) and increase in accounting and legal expenses associated with exploring new strategic collaboration arrangements, new
capital raising initiatives, repayment of bonds issued by MaSTherCell; (vi) an increase in legal expenses associated with the preparation of
applications for new patents under our CT business; (vii) an increase in expenses related to expanding our CDMO network, namely
expenses related to a joint venture which primarily consisted of salary expenses and set up related cost of the new production facility in
Korea under our joint venture with CureCell Co. Ltd.
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Financial Expenses, net
(Decrease) in fair value of financial liabilities measured at fair value
Warrants granted to bondholder and shares and units granted to creditor
Interest expense on loans and convertible loans
Foreign exchange loss, net
Other expenses (income)
Total
Year Ended November 30,
(in thousands)
2017
2016
(902) $
1,497
1,233
562
57
2,447 $
332
208
694
31
(5)
1,260
$
$
Financial income for the year ended November 30, 2017 increased by $1,188 thousand or 94%, compared to the same period in
2016. The increase in financial expenses is mainly attributable to an increase (i) of $1.3 million in the Stock-based compensation related to
restricted shares and warrants issued in accordance with the terms of the convertible loan agreements (ii) of 0.5 million in interest expense
on loans and convertible loans due to $6.2 million new convertible loans invested in our company during the year ended 2017. In addition,
the increase was partly offset due to a decrease in fair value of embedded derivative following total repayments of $1.8 million principal
amount and accrued interest of convertible loan during the year ended 2017.
Working Capital Deficiency
Current assets
Current liabilities
Working capital deficiency
November 30,
2017
2016
(in thousands)
7,295 $
16,914
(9,619) $
4,205
14,500
(10,295)
$
$
Current assets increased by $3 million, which was primarily attributable to an increase of $2.3 million in cash mainly derived from
SFPI investment and $0.7 million in receivables from a related party due to advance payments under services agreements for virus
production by Atvio.
Current liabilities increased by $2.4 million, which was primarily attributable to an increase (i) of $1.5 million in advanced
payments on account of grant in connection with the new grant approved by the DGO6 to support a clinical study in Germany and Belgium
(ii) of $2.3 million in deferred income paid upfront by our customers under new agreements signed in the CDMO segment. The increase in
deferred income is a result of a greater number of customer contracts during the fiscal year and, as a result, a greater number of required
upfront payments from customers. The increase was partly offset by (i) a net decrease of $2.5 million due to repayments of loans and
convertible bonds and loans received (ii) a decrease of $0.5 million in accounts payable due to repayments to old debtors and (iii) $1.3
million in employees and related payables.
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Liquidity and Financial Condition
Net loss
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Decrease in cash and cash equivalents
Year Ended November 30,
2017
2016
(in thousands)
(12,367) $
(11,113)
(3,833)
(3,404)
8,365
1,128 $
(3,783)
(1,536)
2,123
(3,196)
$
$
Since inception, we have funded our operations primarily through the sale of our securities and, more recently, through revenue
generated from the activities of MaSTherCell, our Belgian Subsidiary. As of November 30, 2017, we had negative working capital of $9.6
million, including cash and cash equivalents of $3.5 million.
Net cash used in operating activities was approximately $3.8 million for the year ended November 30, 2017, we successfully
expanded our global activity of the CDMO division while maintaining the same level of cash used in operating activities as a result of the
increased revenues at our subsidiary, MaSTherCell, thereby significantly increasing gross profit and generating cash to pay our ongoing
operating expenses.
Net cash used in investing activities for the year ended November 30, 2017 increased by $1.9 million, or 122%, compared to the
same period in 2016, mainly due to completion of our obligation under the JV’s agreements with Atvio and CureCell in total amount of
$2.4 million.
During the fiscal year ended November 30, 2017, our financing activities consisted of (i) closing on $5.3 million net of transaction
costs in private placement equity offerings through the issuance of 828,409 units. Each unit is comprised of (i) one share of the Company’s
common stock and (ii) three-year warrant to purchase up to an additional one share of the Company’s Common Stock at a per share
exercise price of $6.24 or $7.68 and (ii) closing on $5.9 million in private placement debt offerings consisting of convertible promissory
notes with maturity dates of between six and twenty-four months.
Liquidity & Capital Resources Outlook
We believe that our business plan will provide sufficient liquidity to fund our operating needs for the next 12 months. However,
there are factors that can impact our ability continue to fund our operating needs, including:
•
•
•
•
Our ability to expand sales volume, which is highly dependent on implementing our growth strategy in MaSTherCell;
Restrictions on our ability to continue receiving government funding for our CT business;
Additional CDMO expansion into other regions that we may decide to undertake; and
The need for us to continue to invest in operating activities in order to remain competitive or acquire other businesses and
technologies and in order to complement our products, expand the breadth of our business, enhance our technical capabilities or
otherwise offer growth opportunities.
If we cannot effectively manage these factors, we may need to raise additional capital in order to fund our operating needs.
From December 1, 2017 to the date of this report on Form 10-K, we raised an aggregate of $3 million in private placements of our
securities with accredited investors. In addition, $720,000 was raised through convertible loans which are convertible at any time by the
holders into units of our securities at a conversion price per unit of $6.24, with each unit comprised of one share of common stock and a
warrant for an additional share of common stock exercisable for three years from the date of issuance at a per share exercise price of $6.24.
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For the fiscal year ended November 30, 2017, we had been funding operations primarily from the proceeds from private placements
of our convertible debt and equity securities and from revenues generated by MaSTherCell. From December 2016 through November 2017,
we received, through MaSTherCell, proceeds of approximately $8.9 million in revenues and accounts receivable from customers and $11.4
million from the private placement to accredited investors of our equity and equity linked securities and convertible loans, out of which $4.5
million is from the institutional investor with whom we entered into definitive agreements in January 2017 for the private placement of
units of our securities for aggregate subscription proceeds to us of $16 million. The subscription proceeds are payable on a periodic basis
through August 2018.
The equity investment in November 2017 by SFPI in MaSTherCell of €5.9 million (approximately $6 million), which includes the
conversion of €1 million in an outstanding loan by SFPI to MaSTherCell, will cover costs associated with an expansion of MaSTherCell’s
manufacturing and production capabilities.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the
Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by Item 8 is included following the “Index to Financial Statements” on page F-1 contained in this annual
report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to management, including our chief executive and financial officers (our principal
executive officer and principal financial and accounting officer, respectively) to allow timely decisions regarding required disclosure based
on the definition of "disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of
November 30, 2017. In designing and evaluating the Company’s disclosure controls and procedures, the Company’s management
recognizes that controls and procedures are designed on a risk-based approach and, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives. The Company’s management is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures. The continuous improvement of the Company’s disclosure
controls and procedures is based on material weaknesses identification in the Company’s internal control over financial reporting.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of November 30, 2017, our
principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were not
effective at reasonable assurance level due to a material weakness in internal control over financial reporting, as further described below.
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Management’s Annual Report on Internal Controls Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with
generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. This
assessment included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating
effectiveness of controls and a conclusion on this evaluation.
We conducted risk assessment on five corporate criteria – Strategic, management, regulatory, IT, operational and financial –
resulting in a risk-based management of the company and establishment of a remediation plan based on company risk aversion. This plan is
designed to strengthen the effectiveness of our internal controls over financial reporting as of November 30, 2017. Based on this
evaluation, which is based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control Integrated Framework (2013), management concluded that the material weakness in internal control over financial
reporting described below existed as of November 30, 2017.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or
detected on a timely basis.
The limitation of the Company’s internal control over financial reporting was due to the applied risk-based approach which is
indicative of many small companies with limited number of staff in corporate functions implying:
(i)
(ii)
Improved but insufficient segregation of duties with control objectives; and
Insufficient controls over period end financial disclosure and reporting processes.
Our management believes the weaknesses identified above have not had any material effect on our financial results.
Remediation Plan
During the fiscal year ended November 30, 2017, we continued to expand upon our implementation of a risk management, resource
planning and internal control system, which are all intended to strengthen our overall control environment. Management has taken
additional steps to address the causes of the above weaknesses and to improve our internal control over financial reporting, including the re-
design of our accounting processes and control procedures and the identification of gaps in our skills base and the expertise of our staff as
required to meet the financial reporting requirements of a public company. In particular, during the first quarter of fiscal year 2017, we
retained qualified independent third-party personnel, to conduct a comprehensive review of our internal controls and formalization of our
review and approval processes in order. The appointed qualified independent third party assessed the Company’s risk management
framework to manage enterprise risk. During the third quarter, the appointed qualified independent third party designed a remediation plan
which, among other things, is designed to prevents fraudulent transaction. The risk based approach identified by the Company reflects the
awareness of an acceptable level of risk to manage the Company, considering the strategy, resources and regulatory environment.
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This measure led to an overarching remediation plan and program brief to be followed by a detailed action plan for each major risk
selected. Subsequently, it is expected to lead to an improvement in our internal controls which will enable us to expedite our month-end
close process, thereby facilitating the timely preparation of financial reports and to strengthen our segregation of duties at the Company.
We are also hired a full time Chief Financial Officer at MaSTherCell in September 2017 and a full-time controller in our Israeli subsidiary.
Finally, we are exploring implementing a new initiative to ease and automate data gathering from all affiliated companies (data
warehousing) and implement quantitative and qualitative controls.
We are committed to maintaining a strong internal control environment, and believe that these remediation efforts will represent
significant improvements in our control environment. Our management will continue to monitor and evaluate the relevance of our risk-
based approach and the effectiveness of our internal controls and procedures over financial reporting on an ongoing basis and is committed
to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
Changes in Internal Control Over Financial Reporting
We regularly review our system of internal control over financial reporting and make changes to our processes and systems to
improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include
such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.
Other than these changes mentioned, during the quarter ended November 30, 2017, there were no changes in our internal control
over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The following table sets forth certain information regarding our Directors and Executive Officers. The age of each Director and
Executive Officer listed below is given as of February 28, 2018.
Name
Vered Caplan
Neil Reithinger
Prof. Sarah Ferber
Denis Bedoret
David Sidransky (1)
Guy Yachin (1)
Yaron Adler (1)
Hugues Bultot
Ashish Nanda
Age
49
48
63
37
56
50
46
52
53
Position
Chief Executive Officer, President and Director
Chief Financial Officer, Secretary and Treasurer
Chief Scientific Officer
General Manager of MaSTherCell
Director
Director
Director
Director
Director
(1)
A member on each of the audit, compensation and the nominating and corporate governance committees.
Set forth below are brief accounts of the business experience during the past five years of each of our directors and executive
officers of the Company.
Vered Caplan - Chairman of the Board of Directors, Chief Executive Officer and President
Ms. Caplan has been the Chairman of the Board of Directors and Chief Executive Officer since August 14, 2014, prior to which she
was Interim President and CEO since December 23, 2013. Since 2008, Ms. Caplan has been Chief Executive Officer of Kamedis Ltd., a
company focused on utilizing plant extracts for dermatology purposes. From 2004 to 2007, Ms. Caplan was Chief Executive Officer of
GammaCan International Inc., a company focused on the use of immunoglobulins for treatment of cancer. During the previous five years,
Ms. Caplan has been a director of the following companies: Opticul Ltd., a company involved with optic based bacteria classification;
Inmotion Ltd., a company involved with self-propelled disposable colonoscopies; Nehora Photonics Ltd., a company involved with
noninvasive blood monitoring; Ocure Ltd., a company involved with wound management; Eve Medical Ltd., a company involved with
hormone therapy for Menopause and PMS; and Biotech Investment Corp., a company involved with prostate cancer diagnostics. Ms.
Caplan has a M.Sc. in biomedical engineering from Tel Aviv University specializing in signal processing; management for engineers from
Tel Aviv University specializing in business development; and a B.Sc. in mechanical engineering from the Technion– Israel Institute of
Technology specialized in software and cad systems.
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We believe that Ms. Caplan’s significant experience relating to our industry and a deep knowledge of our business, based on her
many years of involvement with our company, makes her suitable to serve as a director of our company.
Neil Reithinger - Chief Financial Officer, Secretary and Treasurer
Mr. Reithinger was appointed Chief Financial Officer, Secretary and Treasurer on August 1, 2014. Mr. Reithinger is the Founder
and President of Eventus Advisory Group, LLC, a private, CFO-services firm incorporated in Arizona, which specializes in capital
advisory and SEC compliance for publicly-traded and emerging growth companies. He is also the President of Eventus Consulting, P.C., a
registered CPA firm in Arizona. Prior to forming Eventus, Mr. Reithinger was COO & CFO from March 2009 to December 2009 of New
Leaf Brands, Inc., a branded beverage company, CEO of Nutritional Specialties, Inc. from April 2007 to October 2009, a nationally
distributed nutritional supplement company that was acquired by Nutraceutical International, Inc., Chairman, CEO, President and director
of Baywood International, Inc. from January 1998 to March 2009, a publicly-traded nutraceutical company and Controller of Baywood
International, Inc. from December 1994 to January 1998. Mr. Reithinger earned a B.S. in Accounting from the University of Arizona and is
a Certified Public Accountant. He is a Member of the American Institute of Certified Public Accountants and the Arizona Society of
Certified Public Accountants.
Prof. Sarah Ferber – Chief Scientific Officer
Prof. Ferber was appointed Chief Scientific Officer on February 2, 2012. Since 2017, Prof. Ferber has been the Principal
Investigator of cell therapy for TMU DiaCure. From 2012 to present, she has been the Chief Scientific Offer of the Company. Prof. Ferber
studied biochemistry at the Technion under the supervision of Professor Avram Hershko and Professor Aharon Ciechanover, winners of the
Nobel Prize in Chemistry in 2004. Most of the research was conducted in Prof. Ferber’s Endocrine Research Lab. Prof. Ferber received
Teva, Lindner, Rubin and Wolfson awards for this research. Prof. Ferber’s research work has been funded over the past 15 years by the
JDRF, the Israel Academy of Science foundation (ISF), BIODISC and DCure. Prof. Ferber earned her B.Sc. from Technion-Haifa, a M.Sc.
in Biochemistry from Technion-Haifa and a Ph.D. in Medical Sciences from Technion-Haifa. She also holds a Post Doctorate degree in
Molecular Biology from Harvard and a degree in Cell Therapy Sciences from UTSW, Dallas,
Dr. Denis Bedoret – General Manager of MaSTherCell S.A.
Dr. Bedoret was appointed General Manager of MaSTherCell on July 6, 2017. Dr. Bedoret joined MaSTherCell in October 2016 as
Chief Business and Administration Officer. Prior to joining MaSTherCell, from January 2014 to September 2016, he held the position of
Chief Operations Officer at Quality Assistance, a leading European analytical CRO where he was also member of the board of directors.
Between September 2011 and January 2014, Dr. Bedoret served as Engagement Manager at McKinsey & Company, focusing on bio-
pharmaceutical projects. Through those experiences, he gained a strong expertise in biologicals, FDA and EMA regulations, as well as team
management. He holds a degree in Veterinary Medicine, a Ph.D. in Life Sciences from ULg and a post-doctorate degree in Immunology
from Harvard Medical School.
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Dr. David Sidransky – Director
Dr. Sidransky was appointed as a director on July 18, 2013. Dr. Sidransky is a renowned oncologist and research scientist named
and profiled by TIME magazine in 2001 as one of the top physicians and scientists in America, recognized for his work with early detection
of cancer. Since 1994, Dr. Sidransky has been the Director of the Head and Neck Cancer Research Division at Johns Hopkins University
School of Medicine’s Department of Otolaryngology and Professor of Oncology, Cellular & Molecular Medicine, Urology, Genetics, and
Pathology at the John Hopkins University School of Medicine. Dr. Sidransky is one of the most highly cited researchers in clinical and
medical journals in the world in the field of oncology during the past decade, with over 460 peer reviewed publications. Dr. Sidransky is a
founder of a number of biotechnology companies and holds numerous biotechnology patents. Dr. Sidransky has served as Vice Chairman
of the board of directors, and was, until the merger with Eli Lilly, a director of ImClone Systems, Inc., a global biopharmaceutical company
committed to advancing oncology care. He is serving, or has served on, the scientific advisory boards of MedImmune, LLC, Roche, Amgen
Inc. and Veridex, LLC (a Johnson & Johnson diagnostic company), among others and is currently on the board of Directors of Galmed and
Rosetta Genomics Ltd. and chairs the board of directors of Advaxis and Champions Oncology, Inc. Dr. Sidransky served as Director from
2005 until 2008 of the American Association for Cancer Research (AACR). He was the chairperson of AACR International Conferences
during the years 2006 and 2007 on Molecular Diagnostics in Cancer Therapeutic Development: Maximizing Opportunities for Personalized
Treatment. Dr. Sidransky is the recipient of a number of awards and honors, including the 1997 Sarstedt International Prize from the
German Society of Clinical Chemistry, the 1998 Alton Ochsner Award Relating Smoking and Health by the American College of Chest
Physicians, and the 2004 Richard and Hinda Rosenthal Award from the American Association of Cancer Research. Dr. Sidransky received
his BS in Chemistry from Brandies University and his medical degree from Baylor College of medicine where he also completed his
residency in internal medicine. His specialty in Medical Oncology was completed at Johns Hopkins University and Hospital.
We believe Dr. Sidransky is qualified to serve on our Board of Directors because of his education, medical background, experience
within the life science industry and his business acumen in the public markets.
Guy Yachin – Director
Mr. Yachin has served as a director since April 2, 2012. Mr. Yachin is the CEO of NasVax Ltd., a company focused on the
development of improved immunotherapeutics and vaccines. Prior to joining NasVax, Mr. Yachin served as CEO of MultiGene Vascular
Systems Ltd., a cell therapy company focused on blood vessels disorders, leading the company through clinical studies in the U.S. and
Israel, financial rounds, and a keystone strategic agreement with Teva Pharmaceuticals Industries Ltd. He was CEO and founder of
Chiasma Inc., a biotechnology company focused on the oral delivery of macromolecule drugs, where he built the company’s presence in
Israel and the U.S., concluded numerous financial rounds, and guided the company’s strategy and operation for over six years. Earlier he
was CEO of Naiot Technological Center Ltd., and provided seed funding and guidance to more than a dozen biomedical startups such as
Remon Medical Technologies Ltd., Enzymotec Ltd. and NanoPass Technologies Ltd. He holds a BSc. in Industrial Engineering and
Management and an MBA from the Technion – Israel Institute of Technology.
We believe Mr. Yachin is qualified to serve on our Board of Directors because of his education, experience within the life science
industry and his business acumen in the public markets.
Yaron Adler – Director
Mr. Adler was appointed as a director on April 17, 2012. In 1999 Mr. Adler co-founded IncrediMail Ltd. and served as its Chief
Executive Officer until 2008 and President until 2009. In 1999, prior to founding IncrediMail, Mr. Adler consulted Israeli startup
companies regarding Internet products, services and technologies. Mr. Adler served as a product manager from 1997 to 1999, and as a
software engineer from 1994 to 1997, at Tecnomatix Technologies Ltd., a software company that develops and markets production
engineering solutions to complex automated manufacturing lines that fill the gap between product design and production, and which was
acquired by UGS Corp. in April 2005. In 1993, Mr. Adler held a software engineer position at Intel Israel Ltd. He has a B.A. in computer
sciences and economics from Tel Aviv University.
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We believe Mr. Adler is qualified to serve on our Board of Directors because of his education, success with early-stage enterprises
and his business acumen in the public markets.
Hugues Bultot – Director
Mr. Bultot was appointed as a director on March 2, 2015. Mr. Bultot is a technology entrepreneur with a 10-year track record in
bioprocessing. From April 2014 to July 2017, Mr. Bultot was the Chief Executive Officer of MaSTherCell, a company he co-founded in
2011. Since January 2013, Mr. Bultot is the Founder and CEO of Univercells SA, a Belgian-based company focused on the development of
the implementation of disruptive manufacturing science in order to make biologics accessible and affordable. Prior to founding
MaSTherCell and Univercells, Mr. Bultot founded Artelis in 2005 with his partner, José Castillo, a Belgian biotech company that
specialized in the development of disposable bioreactors for the vaccine and monoclonal antibodies industry and for cell therapy
applications. Artelis was sold to ATMI in November 2010, which was subsequently acquired by Pall Corporation (NYSE: PLL) in
February 2014. From 2006 until 2009, Mr. Bultot was a director with Ascencio, a Euronext-quoted real estate company where he was the
head of the Audit Committee. Mr. Bultot founded Kitozyme in 2000, a company developing vegetal chitosan-based applications for the
nutrition, wine-making, cosmetics and medical device industry where he developed the entire manufacturing chain, led the strategy and the
operations and concluded numerous co-development agreements and financial rounds. Between 1994 and 1999, Mr. Bultot served as
investment manager and COO of Synerfi, a private equity firm affiliated with Generale de Banque, a major Belgian banking institution. In
these positions, he concluded several funding rounds and exited deals for start-ups and mature companies. Mr. Bultot holds a master’s
degree in law from UCL, Belgium and an executive master’s degree in business administration from Solvay Business School, Belgium and
in tax management from ICHEC in Belgium. Mr. Bultot followed the advanced management program at INSEAD in 1997 and several
courses in tech entrepreneurship at MIT from 2009 to 2011. Mr. Bultot is also serving on the Board of Directors of Ovizio, a company
specialized in holographic microscopy and of Vivaldi Biosciences, a company developing live-attenuated influenza vaccines for pediatric
and elderly segments.
We believe Mr. Bultot is qualified to serve on our Board of Directors because of his success with early-stage enterprises, and
knowledge and leadership skills for his role as a former Chief Executive Officer of MaSTherCell, our subsidiary.
Ashish Nanda – Director
Mr. Nanda was appointed a director on February 22, 2017. Since 1990, Mr. Nanda has been the Managing Director of Innovations
Group, one of the largest outsourcing companies in the financial sector that employs close to 14,000 people working across various
financial sectors. Prior to that, from 1991 to 1994, Mr. Nanda held the position of Asst. Manager Corporate Banking at Emirates Banking
Group where he was involved in establishing relationship with business houses owned by UAE nationals and expatriates in order to set up
banking limits and also where he managed portfolios of USD $26 billion. Mr. Nanda holds a Chartered Accountancy from the Institute of
Chartered Accountants from India.
We believe that Mr. Nanda is qualified to serve on our Board of Directors because of his business experience and strategic
understanding of advancing the valuation of companies in emerging industries.
There are no family relationships between any of the above executive officers or directors or any other person nominated or chosen
to become an executive officer or a director. Pursuant to an agreement entered into between the Company and Image Securities fzc.
(“Image”), so long as Image’s ownership of the company is 10% or greater, it was granted the right to nominate a director to the
Company’s Board of Directors. Mr. Nanda was nominated for a directorship at the 2017 annual meeting in compliance with our contractual
undertakings.
Board of Directors
Our Board of Directors currently consists of six directors. All directors hold office until the next annual meeting of stockholders. At
each annual meeting of stockholders, the successors to directors whose terms then expire are elected to serve from the time of election and
qualification until the next annual meeting following election.
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Board Committees
Our Board of Directors has established an Audit Committee, a Compensation Committee and a Nominating and Corporate
Governance Committee, with each comprised of independent directors. Our Board of Directors has also established a Finance Committee.
Each committee operates under a charter that has been approved by our Board of Directors. Copies of our committee charters are available
on the investor relations section of our website, which is located at www.orgenesis.com.
Audit Committee
The members of our Audit Committee are Messrs. Sidransky, Adler and Yachin. Mr. Yachin is also an “Audit Committee financial
expert,” as defined in applicable SEC rules.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires officers and directors of the
Company and persons who beneficially own more than ten percent (10%) of the Common Stock outstanding to file initial statements of
beneficial ownership of Common Stock (Form 3) and statements of changes in beneficial ownership of Common Stock (Forms 4 or 5) with
the SEC. Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish the Company with copies of all
such forms they file.
Based solely on review of the copies of such forms received by the Company with respect to 2017, or written representations from
certain reporting persons, each of Ashish Nanda and Denis Bedoret did not timely file a Form 3.
Code of Business Conduct and Ethics
Our Board of Directors has adopted a written code of business conduct and ethics that applies to our directors, officers and
employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons
performing similar functions. Copies of our code of business conduct and ethics are available, without charge, upon request in writing to
Orgenesis Inc., 20271 Goldenrod Lane, Germantown, MD, 20876, Attn: Secretary and are posted on the investor relations section of our
website, which is located at www.orgenesis.com. The inclusion of our website address in this prospectus does not include or incorporate by
reference the information on our website into this prospectus. We also intend to disclose any amendments to the Code of Business Conduct
and Ethics, or any waivers of its requirements, on our website.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information for the last two completed fiscal years concerning compensation of the officers identified
below (the “Named Executive Officers”):
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Summary Compensation Table
Name and
Principal
Position
Vered Caplan
CEO &
President
Neil Reithinger
CFO, Treasurer
& Secretary
Sarah Ferber
Chief Scientific
Officer
Hugues Bultot
Former
General
Manager of
MaSTherCell
Denis Bedoret,
General
Manager of
MaSTherCell
Year
Salary
($)
Bonus
($)
2017
156,232(3)
150,000
2016
150,077 (3)
2017
112,652 (4)
2016
108,596 (4)
2017
128,907 (5)
2016
112,353 (5)
2017
22,513 (6)
2016
168,029 (6)
-
-
-
-
-
-
-
2017
208,542 (7)
31,281
2016
-
Stock
Awards
($)
-
-
-
-
-
-
-
-
-
-
Option
Awards
($) (1)
685,318
500,649
136,148
-
-
-
-
-
-
-
Change in
Pension Value
and Non-
qualified
Deferred
Compensation
Earnings
($)
Non-equity
Incentive
Plan
Compensa-
tion
($)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
All Other
Compensa-
Tion
($) (2)
63,262
Total ($)
1,054,842
50,304
701,030
-
-
248,799
108,596
43,328 (5)
172,235
39,808 (5)
-
-
-
-
152,161
22,513
168,029
239,824
-
(1)
(2)
(3)
(4)
(5)
In accordance with SEC rules, the amounts in this column reflect the fair value on the grant date of the option awards granted to the
named executive, calculated in accordance with ASC Topic 718. Stock options were valued using the Black-Scholes model. The
grant-date fair value does not necessarily reflect the value of shares which may be received in the future with respect to these
awards. The grant-date fair value of the stock options in this column is a non-cash expense for the Company that reflects the fair
value of the stock options on the grant date and therefore does not affect our cash balance. The fair value of the stock options will
likely vary from the actual value the holder receives because the actual value depends on the number of options exercised and the
market price of our Common Stock on the date of exercise. For a discussion of the assumptions made in the valuation of the stock
options, see Note 13 to this Annual Report on form 10-K for the year ended November 30, 2017.
For 2017 and 2016, represents the compensation as described under the caption “All Other Compensation” below.
Due to cash flow considerations, part of the amounts earned have been deferred periodically and, as of November 30, 2017, an
aggregate of $246,461 has been deferred by agreement and accrued by the Company. See below under “Employment/Consulting
Agreements – Vered Caplan.”
Due to cash flow considerations, part of the amounts earned have been deferred periodically and, as of November 30, 2017, an
aggregate of $111,813 has been deferred and accrued by agreement and accrued the Company. See below under
“Employment/Consulting Agreements – Neil Reithinger.”
Under her employment agreement with the Company, Prof. Ferber was entitled to additional salary and social benefits of $82,012
and $152,161 for the years ended November 30, 2017 and 2016, respectively. Due to cash flow considerations, Prof. Ferber has been
deferring part of her salary and social benefits due thereon until such time as our cash position permits payment of salary and
benefits in full without interfering with our ability to pursue our plan. As of November 30, 2017, such deferred amount totaled an
aggregate of $582,371 for the years 2013 to 2017. Any increase in Prof. Ferber’s compensation amounts was due to currency
fluctuations during the fiscal year ended November 30, 2017.
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(6) We acquired MaSTherCell on March 3, 2015. Of the 2017 and 2016 amounts earned, $22,513 and $149,317 was paid, respectively,
and $1,480 and $41,685 was deferred, respectively, by agreement and accrued by the Company. On July 6, 2017, Mr. Bultot
resigned as General Manager of MaSTherCell. See below under “Employment/Consulting Agreements – Hugues Bultot.”
(7)
On July 6, 2017, the Board of directors of MaSTherCell appointed Denis Bedoret, Ph.D. as General Manager and day-to-day
Manager of MaSTherCell, effective as of July 11, 2017. Of the 2017 amounts earned, $208,542 was paid and $31,281was deferred
by agreement by the Company.
All Other Compensation
The following table provides information regarding each component of compensation for 2017 and 2016 included in the All Other
Compensation column in the Summary Compensation Table above. Represents amounts paid in New Israeli Shekels (NIS) and converted at
average exchange rates for the year.
Name
Vered Caplan
Prof. Sarah Ferber
Automobile and
Communication
Related
Expenses
$ (1)
21,921
13,231
5,144
5,019
Israel-
related
Social
Benefits
$ (2)
41,371
37,073
38,183
34,789
Year
2017
2016
2017
2016
Total
$ (3)
63,262
50,304
43,328
39,808
(1)
(2)
Represents for Ms. Caplan, a leased automobile and communication expenses.
These are comprised of contribution by the Company to savings, severance, pension, disability and insurance plans generally
provided in Israel, including education funds and managerial insurance funds. For Ms. Caplan, this amount represents Israeli
severance fund payments, managerial insurance funds, disability insurance, supplemental education fund contribution, and social
securities. For Prof Ferber, this amount represents Israeli severance fund payments, managerial insurance funds, disability insurance,
supplemental education fund contribution, and social securities. See discussion below under “Employment/Consulting Agreements –
Vered Caplan and Sarah Ferber.”
Outstanding Equity Awards at November 30, 2017
The following table summarizes the outstanding equity awards held by each named executive officer of our company as of
November 30, 2017.
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Equity Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(#)
206,923
278,191
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
551,458
Vered Caplan (1)
Neil Reithinger (2)
47,917
52,084
Prof. Sarah Ferber
231,826
-
-
-
Option
Exercise
Price
($)
$0.0012,
$4.80 &
$7.20
$6.00 &
$4.80
$0.0012
Option
Expiration
Date
02/02/2022 to
01/06/27
08/01/2024 &
12/09/26
02/02/2022
(1)
(2)
On December 9, 2016, the Board of Directors granted Ms. Caplan 166,667 options for shares of common stock with an exercise
price of $4.80 that are exercisable quarterly over two years from date of grant. On June 6, 2017, the Compensation Committee
granted Ms. Caplan options for 83,334 shares of common stock at an exercise price of $7.20 that vest in two equal installments of
41,667 options, each on December 6, 2017 and June 6, 2018.
On December 9, 2016 the Board of Directors granted Mr. Reithinger 83,334 options for Common Shares that vest on a quarterly
basis over two years at an exercise price of $4.80 per share.
Option Exercises and Stock Vested in 2017
There were no option exercises by our named executive officers during our fiscal year ended November 30, 2017.
Employment/Consulting Agreements
Vered Caplan
On August 14, 2014, our Board of Directors confirmed that Ms. Vered Caplan, who has served as our President and Chief
Executive Officer on an interim basis since December 23, 2013, was appointed as our President and Chief Executive Officer. In connection
with her appointment as our President and Chief Executive Officer, on August 22, 2014, our wholly-owned Israeli Subsidiary, Orgenesis
Ltd., entered into a Personal Employment Agreement with Ms. Caplan (the “Caplan Employment Agreement”). The Caplan Employment
Agreement replaces a previous employment agreement with Ms. Caplan dated April 1, 2012 pursuant to which she had served as Vice
President.
On March 30, 2017, we and Ms. Caplan entered into an employment agreement replacing the Caplan Employment Agreement (the
“Amended Caplan Employment Agreement”). Under the Amended Caplan Employment Agreement, which took effect April 1, 2017, Ms.
Caplan's annual salary continues at $160,000 per annum, subject to adjustment to $250,000 per annum upon the listing of the Company’s
securities on an Exchange. Ms. Caplan is also entitled to an annual cash bonus with a target of 25% of base salary, provided that the actual
amount of such bonus may be greater or less than the target amount. Ms. Caplan is entitled to a signing bonus of $150,000 upon execution
of the Amended Caplan Employment Agreement. Ms. Caplan continues to have the social benefits described above. Under the Amended
Caplan Employment Agreement, Ms. Caplan is entitled to the following social benefits typically provided to Israeli employees, computed
on the basis of her base salary (i) Manager's Insurance under Israeli law pursuant to which the Company contributes between 6.5% and
7.5% (and Ms. Caplan contributes an additional 6%) (ii) severance pay under Israeli law pursuant to which the Company contributes 8 1/3%
(iii) Education fund pursuant to which the Company continues to contribute $3,677 a year. In addition, Ms. Caplan is also entitled to paid
annual vacation days, annual recreation allowance, sick leave and expenses reimbursement. In addition, we provide Ms. Caplan with a
leased company car and a mobile phone.
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Either we or Ms. Caplan may terminate the employment under the Amended Caplan Employment Agreement upon six months prior
written notice. Upon termination by us of Ms. Caplan’s employment without cause (as defined therein) or by Ms. Caplan for any reason
whatsoever, in addition to any accrued but unpaid base salary and expense reimbursement, she shall be entitled to receive an amount equal
to 12 months of base salary at the highest annualized rate in effect at any time before the employment terminates payable in substantially
equal installments. Upon termination of by us Ms. Caplan’s employment without cause (as defined therein) or by Ms. Caplan for any
reason following a Change of Control (as defined therein), in addition to any accrued but unpaid base salary and expense reimbursement,
she shall be entitled to receive an amount equal to 18 months of one and a half times annual base salary at the highest annualized rate in
effect at any time before the employment terminates payable in substantially equal installments.
On May 10, 2017, we and Ms. Caplan further amended the Amended Caplan Employment Agreement pursuant to which Ms.
Caplan is entitled to a grant under the 2017 of options (the “Initial Option”) to purchase 1,000,000 shares of the Company’s common stock
at a per share exercise price equal to the Fair Market Value (as defined in the 2017 Plan) of the Company’s common stock on the date of
grant. The amendment further provides that beginning in fiscal 2018, subject to approval by the compensation committee, Ms. Caplan is
entitled to an additional option (the “Additional Option”; together with the Initial Option, the “Options”) under the 2017 Plan for up to
3,000,000 shares of common stock (on a pre-split basis) of the Company to be awarded in such amounts per fiscal year as shall be
consistent with the Plan, in each case at a per share exercise price equal to the Fair Market Value (as defined in the Plan) of the Company’s
common stock on the date of grant.
The Initial Option shall vest in two equal tranches upon the six and twelve month anniversary of the grant date. The Additional
Option shall vest in tranches of 500,000 shares of common stock (on a pre-split basis) every six months from the date of grant, provided
that Ms. Caplan remains employed by Company on the vesting date; provided, further, however, that the Options shall vest fully
immediately prior to a Change of Control (as defined in the 2017 Plan), or as otherwise provided for in the 2017 Plan.
The employment agreement also contains restrictive covenants for customary protections of the Company's confidential information
and intellectual property.
Neil Reithinger
Mr. Reithinger was appointed Chief Financial Officer, Treasurer and Secretary on August 1, 2014. Mr. Reithinger’s employment
agreement stipulates a monthly salary of salary of $1,500; payment of an annual bonus as determined by the Company in its sole discretion,
participation in the Company’s pension plan; grant of stock options as determined by the Company; and reimbursement of expenses. As of
November 30, 2017, Mr. Reithinger is owed $22,610 in accrued salary. In addition, on August 1, 2014, the Company entered into a
financial consulting agreement with Eventus Consulting, P.C., an Arizona professional corporation, of which Mr. Reithinger is the sole
shareholder, (“Eventus”) pursuant to which Eventus has agreed to provide financial consulting services to the Company. In consideration
for Eventus’s services, the Company agreed to pay Eventus according to its standard hourly rate structure. The term of the consulting
agreement was for a period of one year from August 1, 2014 and automatically renews for additional one-year periods upon the expiration
of the term unless otherwise terminated. Eventus is owned and controlled by Neil Reithinger. As of November 30, 2017, Eventus was
owed $89,203 for accrued and unpaid services under the financial consulting agreement.
Prof. Sarah Ferber.
Our wholly-owned Israeli Subsidiary, Orgenesis Ltd., entered into a Personal Employment Agreement with Prof. Ferber February 2,
2012 to serve as Chief Scientific Officer (the “Ferber Employment Agreement”) on a part time basis. Under the Ferber Employment
Agreement, Prof. Ferber earned an annual salary of the current New Israeli Shekel equivalent of $232,000 since September, 2013.
However, in order to reduce operating expenses and conserve cash, Prof. Ferber has been deferring a part of her salary and social benefits
due thereon until such time as our cash position permits payment of salary in full without interfering with our ability to pursue our plan of
operations, and, as of November 30, 2017, such deferred amount totaled an aggregate of $582,371. Under the Ferber Employment
Agreement, Prof. Ferber is entitled to the following social benefits out of her base salary typically provided to Israeli employees, (i)
Manager’s Insurance under Israeli law pursuant to which the Company contributes 2.5% (and Prof. Ferber contributes an additional 3.5% )
and in addition, the Company contributes 1.25 % towards loss of working capacity disability insurance (ii) pension plan to which the
Company contributes 3.75% (and Prof. Ferber contributes an additional 3.5% ) or (ii) Severance pay under Israeli law pursuant to which the
Company contributes 8 1/3% (iii) Education fund pursuant to which the Company contributes 7.5 % (with Prof. Farber contributing an
additional 2.5%) . In addition, Prof. Ferber is also entitled to paid annual vacation days, annual recreation allowance, sick leave and
expenses reimbursement. In addition, we provide Prof. Ferber with a mobile phone.
-65-
The Ferber Employment Agreement does not specify a stated term and either we or Ms. Ferber are entitled to terminate Prof.
Ferber’s employment upon four months’ notice other than in the case of a termination for cause. The Ferber Employment contains
customary provisions regarding confidentiality of information, non-competition and assignment of inventions.
Denis Bedoret
Effective October 24, 2017, our subsidiary, MaSTherCell, entered into a management agreement with BM&C SPRL/BVBA, a
Belgian company owned by Denis Bedoret, for certain services to be performed by Dr. Bedoret on an exclusive and full-time basis (the
“Bedoret Agreement”). The agreement appoints Dr. Bedoret as General Manager of MaSTherCell, requires him to work 220 days annually
and stipulates compensation based on revenue with (i) a daily rate of Euro 800 until such time that MaSTherCell’s annual revenue reaches
Euro 10 million, (ii) a daily rate of Euro 850 until such time that MaSTherCell’s annual revenue reaches Euro 15 million and (iii) a daily
rate of Euro 900 until such time that MaSTherCell’s annual revenue exceeds Euro 15 million. Dr. Bedoret is also entitled to expense
reimbursement and a bonus equivalent to up 15% of the annual fees approved by MaSTherCell’s Board of Directors subject to goals and
achievements to be agreed by the parties. Dr. Bedoret is also entitled to participation in Orgenesis’s equity incentive plan after six months
after the effective date. The Bedoret Agreement also contains customary termination clauses.
Potential Payments upon Change of Control or Termination following a Change of Control
Our employment agreements with our named executive officers provide incremental compensation in the event of termination, as
described herein. Generally, we currently do not provide any severance specifically upon a change in control nor do we provide for
accelerated vesting upon change in control. Termination of employment also impacts outstanding stock options.
Due to the factors that may affect the amount of any benefits provided upon the events described below, any actual amounts paid or
payable may be different than those shown in this table. Factors that could affect these amounts include the basis for the termination, the
date the termination event occurs, the base salary of an executive on the date of termination of employment and the price of our common
stock when the termination event occurs.
The following table sets forth the compensation that would have been received by each of the Company’s executive officers had
they been terminated as of November 30, 2017.
Name
Vered Caplan
Prof. Sarah Ferber
Salary
Continuation
Bonus
Accrued
Vacation
Pay
Total
Value
$
$
- $
- $
- $
- $
22,383 $
191,722 $
22,383
191,722
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Director Compensation
The following table sets forth for each director certain information concerning his compensation for the year ended November 30,
2017:
Fees
Earned
or
Paid in
Cash
($)(1)
38,130
31,130
905
1,055
680
-
Stock
Awards
($)
Option
Awards
($) (2)
-
-
-
-
-
-
-
139,590
139,590
139,590
139,590
-
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
Non-equity
Incentive
Plan
Compensation
($)
All other
Compensation
($)
Total
($)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
38,130
170,720
140,495
140,645
140,270
-
Vered Caplan
Guy Yachin
Yaron Adler
Dr. David Sidransky
Hugues Bultot
Ashish Nanda
(1)
(2)
None of these amounts were paid to the directors.
In accordance with SEC rules, the amounts in this column reflect the fair value on the grant date of the option awards granted to the
named executive, calculated in accordance with ASC Topic 718. Stock options were valued using the Black-Scholes model. The
grant-date fair value does not necessarily reflect the value of shares which may be received in the future with respect to these
awards. The grant-date fair value of the stock options in this column is a non-cash expense for the Company that reflects the fair
value of the stock options on the grant date and therefore does not affect our cash balance. The fair value of the stock options will
likely vary from the actual value the holder receives because the actual value depends on the number of options exercised and the
market price of our common stock on the date of exercise. For a discussion of the assumptions made in the valuation of the stock
options, see Note 13 (Stock Based Compensation) to our financial statements, which are included in the Annual Report on Form 10-
K.
All directors receive reimbursement for reasonable out of pocket expenses in attending Board of Directors meetings and for
participating in our business.
On February 2, 2012, we entered into a compensation agreement with Ms. Vered Caplan (the “Caplan Compensation Agreement”).
Pursuant to the Caplan Compensation Agreement, Ms. Caplan will serve as a director of our company for a gross salary of NIS (Israeli
Shekel) 10,000 per month, which is approximately $2,689.
On April 2, 2012, we entered into an agreement with Guy Yachin to serve as a member of our Board of Directors for a consideration
of $2,500 per month and an additional payment for every Board of Directors’ meeting at the rate of $300 for the first hour of attendance
and $200 for each additional hour or portion of an hour.
On April 17, 2012, we entered into an agreement with Yaron Adler to serve as a member of our Board of Directors. In consideration
for Dr. Sidransky’s services, we pay for his attendance at Board of Directors’ meetings at the rate of $300 for the first hour of attendance
and $200 for each additional hour or portion of an hour.
On July 17, 2013 we entered into an agreement with Dr. David Sidransky to serve as a member of our Board of Directors. In
consideration for Dr. Sidransky’s services, we pay for his attendance at Board of Directors’ meetings at the rate of $300 for the first hour of
attendance and $200 for each additional hour or portion of an hour.
-67-
On June 18, 2015, we entered into an agreement with Hugues Bultot to serve as a member of our Board of Directors. In
consideration for Mr. Bultot’s services, we will pay for his attendance at Board of Directors’ meetings at the rate of $300 for the first hour
of attendance and $200 for each additional hour or portion of an hour.
Newly Adopted Compensation Policy for Non-Employee Directors.
On March 5, 2017, the Board of Directors adopted a compensation policy for non-employee directors which is intended to replace
the non-employee director compensation terms discussed above. By its terms, the policy becomes effective when (and if) the Company
uplists its securities to a National Exchange in the United States. Under the newly adopted policy, each director is to receive an annual cash
compensation of $30,000 and the Chairman and Vice Chairman is paid an additional $15,000 per annum. Each committee member will be
paid an additional $7,500 per annum and each committee chairman is to receive $15,000 per annum. Cash compensation will be made on a
quarterly basis.
All newly appointed directors also receive options to purchase up to 6,250 shares of the Company’s common stock. All directors are
entitled on an annual bonus of options for 12,500 shares and each committee member is an entitled to a further option to purchase up to
1,250 shares of common stock and each committee chairperson to options for an additional 2,083 shares of common stock. In all cases, the
options are granted at a per share exercise price equal to the closing price of the Company’s publicly traded stock on the date of grant and
the vesting schedule is determined by the compensation committee at the time of grant. All of the foregoing share amounts have been
adjusted to post-split amounts. Once the new policy becomes effective, such policy will replace the compensation currently paid to the
directors and non –employee directors will no longer receive any payment on respect of service on the Board of Directors.
Compensation Committee Interlocks and Insider Participation
None of our executive officers has served as a member of the Board of Directors, or as a member of the compensation or similar
committee, of any entity that has one or more executive officers who served on our Board of Directors or Compensation Committee during
the fiscal year ended November 30, 2017.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table sets forth, as of February 27, 2018, the number of shares of our common stock owned by (i) each person who is
known by us to own of record or beneficially five percent (5%) or more of our outstanding shares, (ii) all five percent (5%) or greater
shareholders as a group, (iii) each of our directors, (iv) each of our executive officers and (v) all of our directors and executive officers as a
group. Unless otherwise indicated, each of the persons listed below has sole voting and investment power with respect to the shares of our
common stock beneficially owned. The address of our directors and officers is c/o Orgenesis Inc., at 20271 Goldenrod Lane, Germantown,
MD 20876.
Security Ownership of Certain Beneficial Holders
Name and Address of
Beneficial Owner
Oded Shvartz
130 Biruintei Blvd.
Pantelmon
Ilfov, Romania
Universite Libre De Bruxelles
Avenue Franklin D. Roosevelt 50
1050 Brussels, Belgium
Image Securities fzc.
2310, 23rd floor, Tiffany
Towers, JLT
Dubai, UAE
Amount and Nature of
Beneficial Ownership (1)
1,830,658 Direct
1,021,980 Direct (2)
721,160 Direct (3)
-68-
Percent(1)
17.82%
9.95%
7.02%
Security Ownership of Management
Name and Address of
Beneficial Owner
Vered Caplan
c/o Orgenesis Inc.
20271 Goldenrod Lane
Germantown, MD 20876
Neil Reithinger
14201 N. Hayden Road, Suite A-1
Scottsdale, AZ 85260
Prof. Sarah Ferber
c/o Orgenesis Inc.
20271 Goldenrod Lane
Germantown, MD 20876
Dr. Denis Bedoret
c/o Orgenesis Inc.
20271 Goldenrod Lane
Germantown, MD 20876
Guy Yachin
c/o Orgenesis Inc.
20271 Goldenrod Lane
Germantown, MD 20876
Dr. David Sidransky
c/o Orgenesis Inc.
20271 Goldenrod Lane
Germantown, MD 20876
Yaron Adler
c/o Orgenesis Inc.
20271 Goldenrod Lane
Germantown, MD 20876
Hugues Bultot
Avenue Victor Jacobs 78
1040 Brussels, Belgium
Ashish Nanda
c/o Orgenesis Inc.
20271 Goldenrod Lane
Germantown, MD 20876
Amount and Nature of
Beneficial Ownership (1)
633,380 Direct (4)
Percent(1)
5.81%
58,334 Direct (5)
231,826 Direct (6)
-
60,101 Direct (7)
41,668 Direct (8)
<1%
2.21%
<1%
<1%
<1%
114,999 Direct (9)
1.11%
635,593 (10)
- (3)
6.04%
-
Directors & Executive Officers as a
Group (9 persons)
1,775,901 Direct
15.26%
Notes:
(1)
Percentage of ownership is based on 10,273,644 shares of our common stock outstanding as of February 27, 2018, after giving effect
to a 12 for 1 reverse stock split effective November 16, 2017. Except as otherwise indicated, we believe that the beneficial owners of
the common stock listed above, based on information furnished by such owners, have sole investment and voting power with respect
to such shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.
Shares of common stock subject to options or warrants currently exercisable or exercisable within 60 days, are deemed outstanding
for purposes of computing the percentage ownership of the person holding such option or warrants, but are not deemed outstanding
for purposes of computing the percentage ownership of any other person.
-69-
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
To the Company’s knowledge, Messrs. Pierre Gurdjian and Yves Englert have voting and dispositive power over these securities.
The foregoing disclosure is based on a report on Schedule 13D filed on December 13, 2017.
Does not include options to purchase an additional 1,842,943 shares of common stock to which the shareholder committed to
purchase from the Company periodically over through August 2018, at the per unit purchase price of $6.24. The warrants are
exercisable over a three year period from the date of issuance at a per share exercise price of $6.24. Mr. Ashish Nanda has voting
and dispositive power over these securities.
Consists of options for 508,380 shares of common stock with an exercise price of $0.0012 that are fully vested, options for 83,334
shares of common stock with an exercise price of $4.80 and options for 41,667 shares of common stock at an exercise price of $7.20.
Does not include options for 83,334 shares of common stock with an exercise price of $4.80 that are exercisable quarterly after
December 9, 2017 and 41,667 shares of common stock with an exercise price of $7.20 are exercisable on June 6, 2018.
Consists of options for 16,667 shares of common stock with an exercise price of $6.00 that are fully vested and options for 41,667
shares of common stock with an exercise price of $4.80. Does not include options for 41,667 shares of common stock with an
exercise price of $4.80 that are exercisable quarterly after December 9, 2017.
Consists of options for 231,826 shares of common stock with an exercise price of $0.0012 that are fully vested.
Consists of options for 39,267 shares of common stock with an exercise price of $10.20 that are fully vested and options for 20,834
shares of common stock with an exercise price of $4.80. Does not include options for 20,834 shares of common stock with an
exercise price of $4.80 that are exercisable quarterly after December 9, 2017.
Consists of options for 20,834 shares of common stock with an exercise price of $9.00 that are fully vested and options for for
20,834 shares of common stock with an exercise price of $4.80. Does not include options for 20,834 shares of common stock with an
exercise price of $4.80 that are exercisable quarterly after December 9, 2017.
Consists of options for 58,908 shares of common stock with an exercise price of $9.48 that are fully vested, options for 20,834
shares of common stock with an exercise price of $4.80 and 9,616 warrants for shares of common stock with an exercise price of
$6.24. Does not include options for 20,834 shares of common stock with an exercise price of $4.80 that are exercisable quarterly
after December 9, 2017.
(10)
Consists of options for 20,834 shares of common stock with an exercise price of $6.36 that are fully vested, options for 20,834
shares of common stock with an exercise price of $4.80 and an option, under a private agreement with Universite Libre de Bruxelles
(ULB), to purchase 204,396 common shares at an exercise price of $0.1454 per share from ULB, under which Mr. Bultot has not yet
received such shares from ULB. Does not include options for 20,834 shares of common stock with an exercise price of $4.80 that are
exercisable quarterly after December 9, 2017.
-70-
Securities Authorized for Issuance Under Existing Equity Compensation Plans
The following table summarizes certain information regarding our equity compensation plans as of November 30, 2017:
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(a)
83,334
1,921,101
2,004,435
(b)
$7.20
$5.29
$5.34
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a))
(c)
1,666,666
494,880
2,161,546
Plan Category
Equity compensation plans
approved by security holders (1)
Equity compensation plans not
approved by security holders (2)
Total
(1)
(2)
Consists of the 2017 Equity Incentive Plan. For a short description of this plan see Note 13 to our 2017 Consolidated Financial
Statements included in this Annual Report on Form 10-K for the year ended November 30, 2017.
Consists of the Global Share Incentive Plan (2012). For a short description of this see Note 13 to our 2017 Consolidated Financial
Statements included in this Annual Report on Form 10-K for the year ended November 30, 2017.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORS INDEPENDENCE
Transactions with Related Persons
Except as set out below, as of November 30, 2017, there have been no transactions, or currently proposed transactions, in which we
were or are to be a participant and the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at
year-end for the last two completed fiscal years, and in which any of the following persons had or will have a direct or indirect material
interest:
•
•
•
•
any director or executive officer of our company;
any person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights attached to our
outstanding shares of common stock;
any promoters and control persons; and
any member of the immediate family (including spouse, parents, children, siblings and in laws) of any of the foregoing persons.
On September 15, 2014, the Company received a loan in the principal amount of $100,000 from Yaron Adler Investments (1999)
Ltd., an entity of which Mr. Yaron Adler, one of the Company’s non-employee director, is the sole shareholder. The loan, with an original
interest rate of 6% per annum, was repayable on or before March 15, 2015. The Loan currently bears a default interest rate of 24% per
annum and, as of November 30, 2017, the outstanding balance on the note was $166,581.
In January 2017, the Company entered into definitive agreements with Image Securities fzc. (“Image”) for the private placement of
2,564,115 units of the Company’s securities for aggregate subscription proceeds to the Company of $16 million at $6.24 price per unit.
Each unit is comprised of one share of the Company’s Common Stock and a warrant, exercisable over a three-years period from the date of
issuance, to purchase one additional share of Common Stock at a per share exercise price of $6.24. The subscription proceeds are payable
on a periodic basis through August 2018. Each periodic payment of subscription proceeds will be evidenced by the Company’s standard
securities subscription agreement. During the year ended November 30, 2017, Image remitted to the Company $4.5 million, in
consideration of which, the investor received 721,160 shares of the Company’s Common Stock and three-year warrants to purchase up to
an additional 721,160 shares of the Company’s Common Stock at a per share exercise price of $6.24. Pursuant to an agreement entered into
between the Company and Image, so long as Image’s ownership of the company is 10% or greater, it is entitled to nominate a director to
the Company’s Board of Directors. Mr. Nanda was nominated for a directorship at the 2017 annual meeting in compliance with our
contractual undertakings.
-71-
Pursuant to our Audit Committee charter adopted in March 2017, the Audit Committee is responsible for reviewing and approving,
prior to our entry into any such transaction, all transactions in which we are a participant and in which any parties related to us have or will
have a direct or indirect material interest.
Named Executive Officers and Current Directors
For information regarding compensation for our named executive officers and current directors, see “Executive Compensation.”
Director Independence
Our Board of Directors has determined that four of our six directors are independent directors within the meaning of the
independence requirements of the NASDAQ Listing Rules. The independent directors are Messrs. Adler, Sidransky, Yachin and Nanda
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Board of Directors of the Company has appointed Kesselman & Kesselman, a member firm of PricewaterhouseCoopers
International Limited (“PwC”) as our independent registered public accounting firm (the “Independent Auditor”) for the fiscal year ending
November 30, 2017. The following table sets forth the fees billed to the Company for professional services rendered by PwC for the years
ended November 30, 2017 and 2016:
Services
Audit fees
Audit related fees
Tax fees
Total fees
$
$
2017
2016
211,000 $
22,000
-
233,000 $
160,964
31,193
9,250
201,407
Audit Fees
The audit fees were paid for the audit services of our annual and quarterly reports.
Tax Fees
The tax fees were paid for reviewing various tax related matters.
Pre-Approval Policies and Procedures
Our Audit Committee preapproves all services provided by our independent registered public accounting firm. All of the above
services and fees were reviewed and approved by the Board of Directors before the respective services were rendered. Our Board of
Directors has considered the nature and amount of fees billed by PwC and believes that the provision of services for activities unrelated to
the audit is compatible with maintaining their respective independence.
-72-
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Exhibits required by Regulation S-K
PART IV
No.
3.1
3.2
3.3
3.4
3.5
3.6
3.7
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
Description
Articles of Incorporation (incorporated by reference to an exhibit to a registration statement on Form S-1 filed on April 2,
2009)
Certificate of Change (incorporated by reference to an exhibit to a current report on Form 8-K filed on September 2, 2011)
Articles of Merger (incorporated by reference to an exhibit to a current report on Form 8-K filed on September 2, 2011)
Certificate of Amendment to Articles of Incorporation (incorporated by reference to an exhibit to a current report on Form
8-K filed on September 21, 2011)
Amended and Restated Bylaws (incorporated by reference to an exhibit to a current report on Form 8-K filed on September
21, 2011)
Certificate of Correction dated February 27, 2012 (incorporated by reference to an exhibit to a current report on Form 8-
K/A filed on March 16, 2012)
Certificate of Change Pursuant to Nevada Revised Statutes Section 78.209, as filed by Orgenesis Inc. on November 13,
2017 (incorporated by reference to an exhibit to a current report on Form 8- K filed on November 16, 2017)
Convertible Loan Agreement dated December 6, 2013 with Mediapark Investments Limited (incorporated by reference to
our current report on Form 8-K filed on December 16, 2013)
Investment Agreement dated December 13, 2013 with Kodiak Capital Group, LLC (incorporated by reference to our
current report on Form 8-K filed on December 16, 2013)
Registration Rights Agreement dated December 13, 2013 with Kodiak Capital Group, LLC (incorporated by reference to
our current report on Form 8-K filed on December 16, 2013)
Form of subscription agreement (incorporated by reference to our current report on Form 8-K filed on March 4, 2014)
Form of warrant (incorporated by reference to our current report on Form 8-K filed on March 4, 2014)
Consulting Agreement dated April 3, 2014 with Aspen Agency Limited (incorporated by reference to our current report on
Form 8-K filed on April 7,2014)
Stock Option Agreement dated April 3, 2014 with Aspen Agency Limited (incorporated by reference to our current report
on Form 8-K filed on April 7,2014)
Form of subscription agreement with form of warrant (incorporated by reference to our current report on Form 8-K filed
on April 28, 2014)
Convertible Loan Agreement dated May 29, 2014 with Nine Investments Limited (incorporated by reference to our current
report on Form 8-K filed on May 30, 2014)
Services Agreement between Orgenesis SPRL and MaSTherCell SA dated July 3, 2014 (incorporated by reference to our
current report on Form 8-K filed on July 7, 2014)
Financial Consulting Agreement dated August 1, 2014 with Eventus Consulting, P.C. (incorporated by reference to our
current report on Form 8-K filed on August 5, 2014)
Personal Employment Agreement dated August 1, 2014 by and between Orgenesis, Inc. and Neil Reithinger (incorporated
by reference to our current report on Form 8-K filed on August 5, 2014)
Personal Employment Agreement dated as of July 23, 2014 by and between Orgenesis Maryland Inc. and Scott Carmer
(incorporated by reference to our current report on Form 8-K filed on August 6, 2014)
Release Agreement dated November 26, 2016 by and between Orgenesis Maryland Inc., Orgenesis Inc. and Scott Carmer
(incorporated by reference to our current report on Form 8-K filed on November 23, 2016)
Executive Employment Agreement dated March 30, 2017 between Orgenesis Inc. and Vered Caplan (incorporated by
reference to our quarterly report on From 10-Q filed on July 24, 2017)
-73-
No.
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
21.1*
31.1*
31.2*
32.1*
32.2*
99.1
99.2
99.3*
99.4*
Description
Amendment No. 1 dated May 10, 2017 to Executive Employment Agreement dated as of March 30, 2017 between
Orgenesis Inc. and Vered Caplan (incorporated by reference to our quarterly report on Form 10-Q filed on July 24, 2017)
Share Exchange Agreement dated November 6, 2014 with MaSTherCell SA and Cell Therapy Holding SA (collectively
“MaSTherCell”) and each of the shareholders of MaSTherCell (incorporated by reference to our current report on Form 8-
K filed on November 10, 2014)
Addendum No. 1 to Share Exchange Agreement dated March 2, 2015 with MaSTherCell SA, Cell Therapy Holding SA and
their shareholders (incorporated by reference to the Company’s current report on Form 8-K filed on March 5, 2015)
Escrow Agreement dated February 27, 2015 with the shareholders of MaSTherCell SA and Cell Therapy Holding SA and
bondholders of MaSTherCell SA and Securities Transfer Corporation (incorporated by reference to the Company’s current
report on Form 8-K filed on March 5, 2015)
Orgenesis Inc. Board of Advisors Consulting Agreement dated March 16, 2015 (incorporated by reference to the
Company’s current report on Form 8-K filed on March 17, 2015)
Addendum No. 2 to Share Exchange Agreement dated March 2, 2015 with MaSTherCell SA, Cell Therapy Holding SA and
their shareholders (incorporated by reference to the Company’s current report on Form 8-K filed on November 13, 2015)
Joint Venture Agreement dated March 14, 2016 with CureCell Co., Ltd. (incorporated by reference to our annual report on
From 10-K for the year ended November 30, 2016, as filed on February 28, 2017)
Joint Venture Agreement dated as of May 10, 2016 between Orgenesis Inc. and Atvio Biotech Ltd. (incorporated by
reference to our quarterly report on From 10-Q filed on April 19, 2017)
Private Placement Subscription Agreement dated January 26, 2017 between Orgenesis Inc. and Image Securities FZC
(incorporated by reference to our quarterly report on From 10-Q filed on April 19, 2017)
Amendment No. 1 dated February 9, 2017 to the Private Placement Subscription Agreement between Orgenesis Inc. and
Image Securities fzc. (incorporated by reference to our quarterly report on From 10-Q filed on April 19, 2017)
2017 Equity Incentive Plan (incorporated by reference from the Proxy Statement on Schedule 14A filed on March 30,
2017)
List of Subsidiaries of Orgenesis Inc.
Certification Statement of the Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
Certification Statement of the Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
Certification Statement of the Chief Executive Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002
Certification Statement of the Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002
Global Share Incentive Plan (2012) (incorporated by reference to our current report on Form 8K filed on May 31, 2012)
Appendix – Israeli Taxpayers Global Share Incentive Plan (incorporated by reference to our current report on Form 8K
filed on May 31, 2012)
Audit Committee Charter
Compensation Committee Charter
101.INS
101.SCH
101 CAL
101 DEF
101 LAB
101.PRE
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Definition Linkbase
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Presentation Linkbase
*Filed herewith
-74-
ITEM 16. SUMMARY
Registrants may voluntarily include a summary of information required by Form 10-K under this Item 16. We have elected not to include
such summary.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
ORGENESIS INC.
By: /s/ Vered Caplan
Vered Caplan
President, Chief Executive Officer and Chairperson
of the Board of Directors (Principal Executive
Officer)
Date: February 28, 2018
By: /s/ Neil Reithinger
Neil Reithinger
Chief Financial Officer, Treasurer and Secretary
(Principal Accounting Officer)
Date: February 28, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Guy Yachin
Guy Yachin
Director
Date: February 28, 2018
By: /s/ David Sidransky
David Sidransky
Director
Date: February 28, 2018
By: /s/ Yaron Adler
Yaron Adler
Director
Date: February 28, 2018
By: /s/ Ashish Nanda
Ashish Nanda
Director
Date: February 28, 2018
By: /s/ Hugues Bultot
Hugues Bultot
Director
Date: February 28, 2018
-76-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ORGENESIS INC.
CONSOLIDATED FINANCIAL STATEMENTS AS OF NOVEMBER 30, 2017
TABLE OF CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-1
Page
F-2
F-3
F-5
F-6
F-7
F-7 to
F-42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
ORGENESIS INC.
We have audited the accompanying consolidated balance sheets of Orgenesis Inc. and its subsidiaries as of November 30, 2017 and
2016, and the related consolidated statements of comprehensive loss, changes in equity (capital deficiency) and cash flows for each of the
two years in the period ended November 30, 2017. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of the Company and its subsidiaries as of November 30, 2017 and 2016, and the results of their operations and cash flows for each of the
two years in the period ended November 30, 2017, in conformity with accounting principles generally accepted in the United States of
America.
Tel-Aviv, Israel
February 28, 2018
/s/ Kesselman & Kesselman
Certified Public Accountants (Isr.)
A member firm of PricewaterhouseCoopers International Limited
F-2
ORGENESIS INC.
CONSOLIDATED BALANCE SHEETS
(U.S. Dollars, in thousands)
Assets
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable, net
Prepaid expenses and other receivables
Receivables from related party
Grants receivable
Inventory
Total current assets
NON CURRENT ASSETS:
Call option derivative
Investments in associates, net
Property and equipment, net
Intangible assets, net
Other assets
Goodwill
Total non current assets
TOTAL ASSETS
F-2
November 30,
2017
2016
3,519 $
1,336
841
691
183
725
7,295
339
1,321
5,104
15,051
78
10,684
32,577
39,872 $
891
1,229
779
-
906
400
4,205
-
-
4,573
15,050
75
9,584
29,282
33,487
$
$
ORGENESIS INC.
CONSOLIDATED BALANCE SHEETS
(U.S. Dollars, in thousands)
November 30,
2017
2016
Liabilities and equity
CURRENT LIABILITIES:
Short term bank credit
Accounts payable
Accrued expenses and other payables
Employees and related payables
Related parties
Advance payments on account of grant
Short-term loans and current maturities of long term loans
Deferred income
Current maturities of convertible loans
Convertible bonds
Investments in associate, net
TOTAL CURRENT LIABILITIES
LONG-TERM LIABILITIES:
Loans payable
Convertible loans
Retirement benefits obligation
Put option derivative
Deferred taxes
TOTAL LONG-TERM LIABILITIES
TOTAL LIABILITIES
COMMITMENTS
REDEEMABLE NON CONTROLLING INTEREST
EQUITY:
Common stock of $0.0001 par value, 145,833,334 shares authorized, 9,872,659 and 9,508,068
shares issued and outstanding as of November 30, 2017 and November 30, 2016, respectively
Additional paid-in capital
Receipts on account of shares to be allotted
Accumulated other comprehensive income (loss)
Accumulated deficit
TOTAL EQUITY
-
3,914
1,435
2,961
116
1,719
378
3,611
2,780
-
-
16,914
2,118
2,415
6
-
690
5,229
22,143
3,606
1
55,334
1,483
1,425
(44,120)
14,123
21
4,554
1,205
1,680
42
243
11, 11
1,273
2,541
1,818
12
14,500
3,291
1,059
5
273
1,862
6,490
20,990
-
1
45,454
-
(1,205)
(31,753)
12,497
TOTAL LIABILITIES AND EQUITY
$
39,872 $
33,487
The accompanying notes are an integral part of these consolidated financial statements.
F-3
ORGENESIS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(U.S. Dollars, in thousands, except share and per share amounts)
REVENUES
COST OF REVENUES
GROSS PROFIT (LOSS)
RESEARCH AND DEVELOPMENT EXPENSES, net
AMORTIZATION OF INTANGIBLE ASSETS
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SHARE IN LOSSES OF ASSOCIATED COMPANY
OPERATING LOSS
FINANCIAL EXPENSES, net
LOSS BEFORE INCOME TAXES
INCOME TAX BENEFIT
NET LOSS
LOSS PER SHARE:
Basic
Diluted
WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTATION OF BASIC
AND DILUTED LOSS PER SHARE:
Basic
Diluted
COMPREHENSIVE LOSS -
Net loss
Translation adjustments
TOTAL COMPREHENSIVE LOSS
Year ended
November 30,
2017
2016
10,089 $
6,807
3,282
2,478
1,631
9,189
1,214
11,230
2,447
13,677
(1,310)
12,367 $
1.28 $
1.31 $
6,397
7,657
1,260( )
2,157
1,620
6,240
123
11,400
1,260
12,660
(1,547)
11,113
1.30
1.30
9,679,964
9,714,252
8,521,583
8,521,583
12,367 $
(2,630)
9,737 $
11,113
(81)
11,032
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-4
ORGENESIS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(U.S. Dollars, in thousands, except share amounts)
Common Stock
Par
Additional
Paid-in
Number
Value
Capital
Receipts
on
Account
of
Share to
be
Allotted
Accumulated
Other
Comprehensive
Accumulated
Income (loss)
Deficit
Total
4,653,009 $
1 $
14,234 $
1,251 $
(1,286) $
(20,640) $
(6,440)
BALANCE AT DECEMBER 1,
2016
Changes during the Year ended
November 30, 2016:
Stock-based compensation to
employees and directors
Stock-based compensation to service
providers
Warrants and shares issued due to
extinguishment of a convertible loan
Beneficial conversion feature of
convertible loans
Issuances of shares and warrants from
investments and conversion of
convertible loans
Reclassification of redeemable non-
controlling interest **
Comprehensive loss for the year
BALANCE AT NOVEMBER 30,
2016
Changes during the Year ended
November 30, 2017:
Stock-based compensation to
employees and directors
Stock-based compensation to service
providers
Beneficial conversion feature of
convertible loans and warrants issued
Issuance of shares, cancellation of
contingent shares, and receipts on
account of shares and warrants to be
allotted and
220,836
24,039
1,076,707
3,533,477
9,508,068
79,167
1,103
1,613
114
257
6,675
(1,251)
21,458
81
(11,113)
1,103
1,613
114
257
5,424
21,458
(11,032)
45,454
-
(1,205)
(31,753)
12,497
*
*
*
*
1
*
1,536
1,828
2,814
1,536
1,828
2,814
5,185
285,424
*
3,702
1,483
Comprehensive income (loss) for the
year
BALANCE AT NOVEMBER 30,
2017
9,872,659 $
1 $
55,334 $
1,483 $
1,425 $
(44,120) $
14,123
2,630
(12,367)
(9,737)
*Represents an amount lower than $ 1 thousand
**Including outstanding contingent share, see Note 11(d)
The accompanying notes are an integral part of these consolidated financial statements.
F-5
ORGENESIS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. Dollars, in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments required to reconcile net loss to net cash used in operating activities:
Stock-based compensation
Share in losses of associated company
Loss from extinguishment of a convertible loan
Depreciation and amortization expenses
Change in fair value of warrants and embedded derivatives
Change in fair value of convertible bonds
Interest expense accrued on loans and convertible loans (including amortization
of beneficial conversion feature)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable, net
Increase in inventory
Increase in other assets
Decrease (increase) in prepaid expenses and other accounts receivable
Increase in related parties, net
Increase (decrease) in accounts payable
Increase in accrued expenses
Increase in employee and related payables
Increase in deferred income
Increase in advance payments and receivables on account of grant
Decrease in deferred taxes
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment
Investments in associates
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term line of credit
Proceeds from issuance of shares and warrants
Loans received
Redeemable non-controlling interest
Repayment of short and long-term debt
Repayment of convertible loans
Proceeds from issuance of convertible loans (net of transaction costs)
Net cash provided by financing activities
NET CHANGE IN CASH AND CASH EQUIVALENTS
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR
SUPPLEMENTAL NON-CASH FINANCING ACTIVITY
Conversion of loans (including accrued interest) to common stock and warrants of MaSTherCell
Reclassification of redeemable non-controlling interest to equity
SUPPLEMENTAL INFORMATION ON INTEREST PAID IN CASH
Year ended November 30,
2016
2017
$
(12,367) $
(11,113)
3,364
1,214
-
2,598
(826)
(192)
1,110
33
(265)
(3)
(107)
(583)
(933)
92
1,142
1,044
2,156
(1,310)
(3,833)
(975)
(2,429)
(3,404)
(21)
5,297
-
2,349
(1,108)
(4,051)
5,899
8,365
1,128
1,497
891
3,519 $
2,869
123
229
2,923
187
(84)
283
(54)
(101)
(17)
136
1,079
399
352
53
499
(1,546)
(3,783)
(1,425)
(111)
(1,536)
21
1,488
1,121
-
(2,106)
1,599
2,123
(3,196)
(81)
4,168
891
1,277
$
- $
1,028
21,458
903 $
106
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-7
ORGENESIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED NOVEMBER 30, 2017 AND 2016
NOTE 1 – DESCRIPTION OF BUSINESS
a. General
Orgenesis Inc., a Nevada corporation, is a service and research company in the field of regenerative medicine industry with a focus
on cell therapy development and manufacturing for advanced medicinal products. In addition, the Company is focused on developing novel
and proprietary cell therapy trans-differentiation technologies for the treatment of diabetes. The consolidated financial statements include
the accounts of Orgenesis Inc., its subsidiaries MaSTherCell S.A (“MaSTherCell”), its Belgian-based subsidiary and a contract
development and manufacturing organization, or CDMO, specialized in cell therapy development and manufacturing for advanced
medicinal products; Orgenesis SPRL (the “Belgian Subsidiary”), a Belgian-based subsidiary which is engaged in development and
manufacturing activities, together with clinical development studies in Europe, Orgenesis Maryland Inc. (the “U.S. Subsidiary”), a
Maryland corporation, and Orgenesis Ltd., an Israeli corporation, (the “Israeli Subsidiary”).
The Company’s goal is to industrialize cell therapy for fast, safe and cost-effective production in order to provide rapid therapies for
any market around the world through a world-wide network of CDMOs joint venture partners. The Company’s trans-differentiation
technologies for treating diabetes, which will be referred to as the cellular therapy (“CT”) business, is based on a technology licensed by
Tel Hashomer Medical Research (“THM”) to the Israeli Subsidiary that demonstrates the capacity to induce a shift in the developmental
fate of cells from the liver and trans-differentiating (converting) them into “pancreatic beta cell-like” insulin-producing cells.
On March 14, 2016, the Company and CureCell Co., Ltd. (“CureCell”) entered into a Joint Venture Agreement (the “CureCell
JVA”) pursuant to which the parties are collaborating in the contract development and manufacturing of cell therapy products in Korea. See
also Note 5.
On May 10, 2016, the Company and Atvio Biotech Ltd., (“Atvio”) entered into a Joint Venture Agreement (the “Atvio JVA”)
pursuant to which the parties agreed to collaborate in the contract development and manufacturing of cell and virus therapy products in the
field of regenerative medicine in Israel. See also Note 5.
As used in this report and unless otherwise indicated, the term “Company” refers to Orgenesis Inc. and its subsidiaries
(“Subsidiaries”). Unless otherwise specified, all amounts are expressed in United States Dollars.
On November 16, 2017, the Company implemented a reverse stock split of its outstanding shares of common stock at a ratio of 1-
for-12 shares. The reverse stock split has been reflected in this Annual Report on Form 10-K. See Note 11(a).
b. Liquidity
As of November 30, 2017, we have accumulated losses of approximately $44.1 million. Although we are now showing positive
revenue and gross profit trends in our CDMO division, we expect to incur further losses in the CT division.
The Company has been funding operations primarily from the proceeds from private placements of the Company’s convertible debt
and equity securities and from revenues generated by MaSTherCell. From December 1, 2016 through November 30, 2017, the Company
received, through MaSTherCell, proceeds of approximately $8.9 million in revenues and accounts receivable from customers and $11.4
million from the private placement to accredited investors of the Company's equity and equity linked securities and convertible loans, out of
which $4.5 million are from the institutional investor with whom the Company entered into definitive agreements in January 2017 for the
private placement of units of the Company's securities for aggregate subscription proceeds of $16 million. The subscription proceeds are
payable on a periodic basis through August 2018. In addition, from December 1, 2017 through February 28, 2018, the Company raised $3.8
million from the proceeds of a private placement to certain accredited investors of equity and equity-linked securities and received, through
MaSTherCell, proceeds of approximately $2.6 million in accounts receivable from its customers.
F-9
Based on its current cash resources and commitments, the Company believes it will be able to maintain its current planned
development activity and corresponding level of expenditures for at least 12 months from the date of the issuance of the financial
statements, although no assurance can be given that it will not need additional funds prior to such time. If there are unexpected increases in
general and administrative expenses or research and development expenses, or decreases in MaSTherCell's income, the Company will need
to seek additional financing.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies adopted are generally consistent with those of the previous financial year.
a. Use of Estimates in the Preparation of Financial Statements
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the financial
statement date and the reported expenses during the reporting periods. Actual results could differ from those estimates. As applicable to
these consolidated financial statements, the most significant estimates and assumptions relate to the valuation of stock-based compensation,
valuation of financial instruments measured at fair value and valuation of impairment of goodwill and intangible assets.
b. Business Combination
The Company allocates the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities
assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net
assets acquired is recorded as goodwill. Acquired in-process backlog, customer relations, brand name and know how are recognized at fair
value. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the
acquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as
incurred. The allocation of the consideration transferred in certain cases may be subject to revision based on the final determination of fair
values during the measurement period, which may be up to one year from the acquisition date. The Company includes the results of
operations of the business that it has acquired in its consolidated results prospectively from the date of acquisition.
c. Cash Equivalents
The Company considers all short term, highly liquid investments, which include short term bank deposits with original maturities of
three months or less from the date of purchase, that are not restricted as to withdrawal or use and are readily convertible to known amounts
of cash, to be cash equivalents.
d. Research and Development, net
Research and development expenses include costs directly attributable to the conduct of research and development programs,
including the cost of salaries, stock-based compensation expenses, payroll taxes and other employees' benefits, lab expenses, consumable
equipment and consulting fees. All costs associated with research and developments are expensed as incurred. Participation from
government departments and from research foundations for development of approved projects is recognized as a reduction of expense as
the related costs are incurred.
e. Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its Subsidiaries. All intercompany transactions and
balances have been eliminated in consolidation.
F-10
f. Non Marketable Equity Investments
The Company’s investments in certain non-marketable equity securities in which it has the ability to exercise significant influence,
but does not control through variable interests or voting interests, are accounted for under the equity method of accounting and presented as
Investment in associates, net, in the Company’s consolidated balance sheets. Under the equity method, the Company recognizes its
proportionate share of the comprehensive income or loss of the investee. The Company’s share of income and losses from equity method
investments is included in share in losses of associated company.
The Company reviews its investments accounted for under the equity method for possible impairment, which generally involves an
analysis of the facts and changes in circumstances influencing the investments.
g. Functional Currency
The currency of the primary economic environment in which the operations of the Company and part of its Subsidiaries are
conducted is the U.S. dollar (“$” or “dollar”). The functional currency of the Belgian Subsidiaries is the Euro (“€” or “Euro”). The
functional currency of CureCell is the Won (“KRW”). Most of the Company’s expenses are incurred in dollars, and the source of the
Company’s financing has been provided in dollars. Thus, the functional currency of the Company and its other subsidiaries is the dollar.
Transactions and balances originally denominated in dollars are presented at their original amounts. Balances in foreign currencies are
translated into dollars using historical and current exchange rates for nonmonetary and monetary balances, respectively. For foreign
transactions and other items reflected in the statements of operations, the following exchange rates are used: (1) for transactions – exchange
rates at transaction dates or average rates and (2) for other items (derived from nonmonetary balance sheet items such as depreciation) –
historical exchange rates. The resulting transaction gains or losses are recorded as financial income or expenses. The financial statements
of the Belgian Subsidiaries and the investment in CureCell are included in the consolidated financial statements, translated into U.S.
dollars. Assets and liabilities are translated at year-end exchange rates, while revenues and expenses are translated at yearly average
exchange rates during the year. Differences resulting from translation of assets and liabilities are presented as other comprehensive income.
h. Inventory
Inventory is stated at the lower of cost or net realizable value with cost determined under the first-in-first-out (FIFO) cost method.
The entire balance of inventory at November 30, 2017 and 2016, consists of raw material.
i. Property and Equipment
Property and equipment are recorded at cost and depreciated by the straight-line method over the estimated useful lives of the
related assets.
Annual rates of depreciation are presented in the table below:
Production facility
Laboratory equipment
Office equipment and computers
Intangible assets and their useful lives are as follows:
Customer Relationships
Brand
Know-How
Weighted Average
Useful Life (Years)
20
5
3-5
Weighted Average
Useful Life (Years)
7.75
9.75
11.75
F-11
Amortization Recorded at
Comprehensive Loss Line Item
Amortization of intangible assets
Amortization of intangible assets
Amortization of intangible assets
Intangible assets are recorded at acquisition cost less accumulated amortization and impairment. Definite lived intangible assets are
amortized over their estimated useful life using the straight-line method, which is determined by identifying the period over which the cash
flows from the asset are expected to be generated.
j. Goodwill
Goodwill represents the excess of the purchase price of acquired business over the estimated fair value of the identifiable net assets
acquired. Goodwill is not amortized but is tested for impairment at least annually (at November 30), at the reporting unit level or more
frequently if events or changes in circumstances indicate that the asset might be impaired. The goodwill impairment test is applied by
performing a qualitative assessment before calculating the fair value of the reporting unit. If, on the basis of qualitative factors, it is
considered not more likely than not that the fair value of the reporting unit is less than the carrying amount, further testing of goodwill for
impairment would not be required. Otherwise, goodwill impairment is tested using a two-step approach.
The first step involves comparing the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit is
determined to be greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is determined to be greater
than the fair value, the second step must be completed to measure the amount of impairment, if any. The second step involves calculating
the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit
from the fair value of the reporting unit as determined in step one. The implied fair value of the goodwill in this step is compared to the
carrying value of goodwill. If the implied fair value of the goodwill is less than the carrying value of the goodwill, an impairment loss
equivalent to the difference is recorded. There were no impairment charges in 2017 and 2016.
k. Impairment of Long-lived Assets
The Company reviews its property and equipment, intangible assets subject to amortization and other long-lived assets for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset class may not be recoverable.
Indicators of potential impairment include: an adverse change in legal factors or in the business climate that could affect the value of the
asset; an adverse change in the extent or manner in which the asset is used or is expected to be used, or in its physical condition; and current
or forecasted operating or cash flow losses that demonstrate continuing losses associated with the use of the asset. If indicators of
impairment are present, the asset is tested for recoverability by comparing the carrying value of the asset to the related estimated
undiscounted future cash flows expected to be derived from the asset. If the expected cash flows are less than the carrying value of the
asset, then the asset is considered to be impaired and its carrying value is written down to fair value, based on the related estimated
discounted cash flows. There were no impairment charges in 2017 and 2016.
l. Revenue Recognition
The Company recognizes revenue for services linked to cell process development and cell manufacturing services based on
individual contracts in accordance with Accounting Standards Codification (“ASC”) 605, Revenue Recognition, when the following criteria
have been met: persuasive evidence of an arrangement exists; delivery of the processed cells has occurred or the services that are
milestones based have been provided; the price is fixed or determinable and collectability is reasonably assured. The Company determines
that persuasive evidence of an arrangement exists based on written contracts that define the terms of the arrangements. In addition, the
Company determines that services have been delivered in accordance with the arrangement. The Company assesses whether the fee is
fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or
adjustment. Service revenues are recognized as the services are provided.
The Company also incurs revenue from selling of some consumables which are incidental to the services provided as foreseen in the
clinical services contracts. Such revenue is recognized upon delivery of the processed cells in which they were consumed.
m. Financial Liabilities Measured at Fair Value
1) Fair Value Option
F-12
Topic 815 provides entities with an option to report certain financial assets and liabilities at fair value with subsequent changes
in fair value reported in earnings. The election can be applied on an instrument by instrument basis. The Company elected the fair
value option to its convertible bonds. The liability is measured both initially and in subsequent periods at fair value, with changes in
fair value charged to finance expenses, net (See also Note 15).
2) Derivatives
Embedded derivatives are separated from the host contract and carried at fair value when (1) the embedded derivative
possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a
separate, standalone instrument with the same terms would qualify as a derivative instrument. The derivative is measured both initially
and in subsequent periods at fair value, with changes in fair value charged to finance expenses, net. As to embedded derivatives
arising from the issuance of convertible debentures (See Note 15).
n. Income Taxes
1) With respect to deferred taxes, income taxes are computed using the asset and liability method. Under the asset and liability
method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax
bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is recognized to
the extent that it is more likely than not that the deferred taxes will not be realized in the foreseeable future.
2) The Company follows a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate
the tax position for recognition by determining if the available evidence indicates that it is more likely than not that the position will
be sustained on examination. If this threshold is met, the second step is to measure the tax position as the largest amount that is greater
than 50% likely of being realized upon ultimate settlement.
3) Taxes that would apply in the event of disposal of investment in Subsidiaries have not been taken into account in computing
the deferred income taxes, as it is the Company’s intention to hold these investments and not realize them.
o. Stock-based Compensation
The Company accounts for employee stock-based compensation in accordance with the guidance of ASC Topic 718, Compensation
- Stock Compensation, which requires all share based payments to employees, including grants of employee stock options, to be recognized
in the financial statements based on their grant date fair values. The fair value of the equity instrument is charged to compensation expense
and credited to additional paid in capital over the period during which services are rendered. The Company recorded stock based
compensation expenses using the straight line method.
The Company follows ASC Topic 505-50, Equity-Based Payments to Non-Employees, for stock options issued to consultants and
other non-employees. In accordance with ASC Topic 505-50, these stock options issued as compensation for services provided to the
Company are accounted for based upon the fair value of the options. The fair value of the options granted is measured on a final basis at
the end of the related service period and is recognized over the related service period using the straight line method.
p. Redeemable Non-controlling Interest
Non-controlling interests with embedded redemption features, such as an unwind option, whose settlement is not at the Company's
discretion, are considered redeemable non-controlling interest. Redeemable non-controlling interests are considered to be temporary equity
and are therefore presented as a mezzanine section between liabilities and equity on the Company's consolidated balance sheets. Subsequent
adjustment of the amount presented in temporary equity is required only if the Company's management estimates that it is probable that the
instrument will become redeemable. Adjustments of redeemable non-controlling interest to its redemption value are recorded through
additional paid-in capital.
F-13
q. Loss per Share of Common Stock
Net loss per share, basic and diluted, is computed on the basis of the net loss for the period divided by the weighted average number
of common shares outstanding during the period. Diluted net loss per share is based upon the weighted average number of common shares
and of common shares equivalents outstanding when dilutive. Common share equivalents include: (i) outstanding stock options under the
Company’s Global Share Incentive Plan (2012) and warrants which are included under the treasury share method when dilutive, and (ii)
common shares to be issued under the assumed conversion of the Company’s outstanding convertible loans, which are included under the
if-converted method when dilutive (See Note 12).
r. Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist of principally cash and cash
equivalents and certain receivables. The Company held these instruments with highly rated financial institutions and the Company has not
experienced any significant credit losses in these accounts and does not believe the Company is exposed to any significant credit risk on
these instruments apart of accounts receivable. The Company performs ongoing credit evaluations of its customers for the purpose of
determining the appropriate allowance for doubtful accounts. An appropriate allowance for doubtful accounts is included in the accounts
and netted against accounts receivable. In the year ended November 30, 2017, the Company has recorded an allowance of $897 thousand
($336 in the year ended November 30, 2016).
Bad debt allowance is created when objective evidence exists of inability to collect all sums owed it under the original terms of the
debit balances. Material customer difficulties, the probability of their going bankrupt or undergoing economic reorganization and
insolvency or material delays in payments are all considered indicative of reduced debtor balance value.
s. Beneficial Conversion Feature (“BCF”)
When the Company issues convertible debt, if the stock price is greater than the effective conversion price (after allocation of the
total proceeds) on the measurement date, the conversion feature is considered "beneficial" to the holder. If there is no contingency, this
difference is treated as issued equity and reduces the carrying value of the host debt; the discount is accreted as deemed interest on the debt
(See Note 7).
t. Other Comprehensive Loss
Other comprehensive loss represents adjustments of foreign currency translation. u. Recently Issued Accounting Pronouncements
a. Recently Issued Accounting Pronouncements- adopted by the Company
In July 2017, the FASB issued ASU 2017-11, "Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic
480; Derivatives and Hedging (Topic 815)", ("ASU 2017-11"). This update was issued to address complexities in accounting for
certain equity-linked financial instruments containing down round features. The amendment changes the classification analysis of
these financial instruments (or embedded features) so that equity classification is no longer precluded. The amendments in ASU 2017-
11 are effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those
annual reporting periods. Early adoption is permitted. The Company elected to early adopt the standard effective September 1, 2017,
retrospectively. Following is the results of the adoption on the Company’s consolidated financial statements previously reported:
F-14
Balance sheet and Shareholders’ equity
Price protection derivative
Total current liabilities
Warrants
Total long-term liabilities
Total liabilities
Additional paid-in capital
Accumulated deficit
Total equity
Statement of Comprehensive loss
Financial expenses, net
Loss before income taxes
Net loss
As reported
Previously
November 30, 2016
Impact
of
adoption
In thousands
As revised
76 $
14,576
1,843
8,333
22,909
41,605
(29,834)
10,578 $
(76) $
(76)
(1,843)
(1,843)
(1,919)
3,838
(1,919)
1,919 $
-
14,500
-
6,490
20,990
45,443
(31,753)
12,497
As reported
Previously
Year ended November 30, 2016
Impact
of
adoption
In thousands
As revised
(659) $
10,741 $
9,194 $
1,919 $
1,919 $
1,919 $
1,260
12,660
11,113
$
$
$
$
$
b. Recently Issued Accounting Pronouncements- not yet adopted by the Company
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-
09 (“ASU 2014-09”) "Revenue from Contracts with Customers." ASU 2014-09 will supersede most current revenue recognition
guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue upon the transfer of
goods or services to customers in an amount that the entity expects to be entitled to in exchange for those goods or services. On July 9,
2015, the FASB deferred the effective date of the standard by one year, which results in the new standard being effective for the
Company at the beginning of its first quarter of fiscal year 2018. In addition, during March, April and May 2016, the FASB issued
ASU No. 2016-08, Revenue from Contracts with Customers : Principal versus Agent Considerations (Reporting Revenue Gross
versus Net), ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing and ASU
2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, respectively, which
clarified the guidance on certain items such as reporting revenue as a principal versus agent, identifying performance obligations,
accounting for intellectual property licenses, assessing collectability and presentation of sales taxes. The FASB also agreed to allow
entities to choose to adopt the standard as of the original effective date. As applicable for the Company, the effective date for adopting
the ASU is for the year ending November 30, 2019. The Company is currently evaluating the impact of adopting ASU 2014-09 on its
financial position, results of operations and related disclosures and has not yet determined whether the effect of the revenue portion
will be material.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall: Recognition and Measurement of
Financial Assets and Financial Liabilities. The pronouncement requires equity investments (except those accounted for under the
equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair
value recognized in net income. ASU 2016-01 requires public business entities to use the exit price notion when measuring the fair
value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by
measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the
method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments
measured at amortized cost. These changes become effective for the Company's fiscal year beginning November 30, 2019. The
Company is currently evaluating the impact of this new standard on its consolidated financial statements.
F-15
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease
accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor
accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and
interim periods within those fiscal years. Early application is permitted for all entities. As applicable for the Company, the effective
date for adopting the ASU is for the year ending November 30, 2019. ASU 2016-02 requires a modified retrospective approach for all
leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. The
Company is currently evaluating the impact of this new standard on its consolidated financial statements.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13) "Financial Instruments- Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which requires the measurement and recognition of
expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model
with an expected loss methodology, which will result in more timely recognition of credit losses. As applicable for the Company, the
effective date for adopting the ASU is for the year ending November 30, 2020. The Company is currently in the process of evaluating
the impact of the adoption of ASU 2016-13 on its consolidated financial statements.
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2017-01,
"Business Combinations (Topic 805) Clarifying the Definition of a Business" ("ASU 2017-01") which amended the existing FASB
Accounting Standards Codification. The standard provides additional guidance to assist entities with evaluating whether transactions
should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of
accounting, including acquisitions, disposals, goodwill, and consolidation. As applicable for the Company, the effective date for
adopting the ASU is for the year ending November 30, 2019. The Company is currently assessing the impact that this updated
standard will have on the consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment, which simplifies the goodwill impairment test by eliminating the need to determine the fair value of individual
assets and liabilities of a reporting unit to measure goodwill impairment. The same impairment assessment applies to all reporting
units including those with zero or negative carrying amounts. A goodwill impairment will represent the excess of a reporting unit's
carrying amount over its fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to
determine if the quantitative impairment test is necessary. The amendments in ASU No. 2017-04 should be applied on a prospective
basis. Disclosure of the nature and reason for the change in accounting principle upon transition is required. For public business
entities, the amendments in this ASU are effective for annual or interim goodwill impairments tests in fiscal years beginning after
December 15, 2019. As applicable for the Company, the effective date for adopting the ASU is for the year ending November 30,
2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
F-16
NOTE 3 - SEGMENT INFORMATION
The Chief Executive Officer ("CEO") is the Company’s chief operating decision-maker ("CODM"). Following the acquisition of
MaSTherCell, management has determined that there are two operating segments, based on the Company's organizational structure, its
business activities and information reviewed by the CODM for the purposes of allocating resources and assessing performance.
CDMO
The CDMO activity is operated by MaSTherCell, which specializes in cell therapy development for advanced medicinal products.
MaSTherCell is providing two types of services to its customers: (i) process and assay development services and (ii) GMP contract
manufacturing services. The CDMO segment includes only the results of MaSTherCell.
CT Business
The CT Business activity is based on our technology that demonstrates the capacity to induce a shift in the developmental fate of
cells from the liver and differentiating (converting) them into “pancreatic beta cell-like” insulin producing cells for patients with Type 1
Diabetes. This segment is comprised of all entities aside from MaSTherCell.
The CODM does not reviews assets by segment, therefore the measure of assets has not been disclosed for each segment.
Segment data for the year ended November 30, 2017 is as follows:
Revenues from external customers
Cost of revenues
Gross profit
Research and development expenses, net
Operating expenses
Operating profit
Adjustments to presentation of segment
Adjusted EBIT
Depreciation and amortization
Segment performance
CDMO
CT
Business
Corporate
and
Eliminations
Consolidated
$
11,484 $
(6,356)
5,128
(4,699)
429
(2,720)
(2,291)
F-17
(in thousands)
- $
-
(2,517)
(3,335)
(5,852)
(6)
(5,858)
(1,395) $
638
(757)
757
-
10,089
(5,718)
4,371
(1,760)
(8,034)
(5,423)
Reconciliation of segment performance to loss for the year:
Segment subtotal performance
Stock-based compensation
Financial income (expenses), net
Share in losses of associated companies
Loss before income tax
Segment data for the year ended November 30, 2016 is as follows:
Year ended
November 30,
2017
in thousands
(8,149)
(3,364)
(950)
(1,214)
(13,677)
$
Revenues from external customers
Cost of revenues
Gross profit
Research and development expenses, net
Operating expenses
Operating profit
Adjustments to presentation of segment
Adjusted EBIT
Depreciation and amortization
Segment performance
CDMO
CTB
Eliminations
Consolidated
Corporate
and
$
6,853 $
(6,915)
(62)
(2,239)
(2,301)
(2,918)
(5,219)
(in thousands)
- $
-
(1,725)
(1,667)
(3,392)
(5)
(3,397)
(456) $
557
101
(101)
-
-
6,397
(6,358)
39
(1,826)
(3,906)
(5,693)
Reconciliation of segment performance to loss for the year:
Segment performance
Stock-based compensation
Financial income (expenses), net
Share in losses of associated company
Loss before income tax
Geographic, Product and Customer Information
Year ended
November 30,
2016
in thousands
(8,616)
(2,661)
(1,260)
(123)
(12,660)
$
Substantially all the Company's revenues and long-lived assets are located in Belgium through its subsidiary, MaSTherCell. Net
revenues from single customers from the CDMO segment that exceed 10% of total net revenues are:
F-18
Customer A
Customer B
Customer C
Customer D
Year Ended
November 30,
Year Ended
November 30,
2017
2016
$
$
$
$
(in thousands)
4,115 $
47 $
2,837
2,055
3,754
1,742
The CDMO business has substantially diversified revenues by source signing contracts with biotech companies in their respective
cell-based therapy field. In January 2017, MaSTherCell entered into a service agreement with Les Laboratoires Servier (“Servier”) for the
development of its CAR T-cell therapy manufacturing platform and in June 2017, MaSTherCell entered into a service agreement with
CRISPR Therapeutics AG (“CRISPR”) for the development and manufacturing of allogeneic cell therapies.
NOTE 4 – PROPERTY AND EQUIPMENT
The following table represents the components of property and equipment:
Cost:
Production facility
Office furniture and computers
Lab equipment
Less – accumulated depreciation
Total
November 30,
2017
2016
(in thousands)
$
$
6,246 $
353
2,039
8,638
(3,534)
5,104 $
4,403
211
1,491
6,105
(1,532)
4,573
Depreciation expense for the years ended November 30, 2017 and 2016 was $1,096 thousand and $1,160 thousand, respectively.
NOTE 5 – INVESTMENTS IN ASSOCIATES, NET
(a) On May 10, 2016, the Company and Atvio entered into the Atvio JVA pursuant to which the parties agreed to collaborate in the
contract development and manufacturing of cell and virus therapy products in the field of regenerative medicine in Israel. The parties
pursue the joint venture through Atvio, in which the Company has a 50% participating interest therein in any and all rights and obligations
and in any and all profits and losses.
Under the Atvio JVA, Atvio has procured, at its sole expense, a GMP facility and appropriate staff in Israel. The Company shares
with Atvio the Company’s know-how in the field of cell therapy manufacturing, which know-how will not include the intellectual property
included in the license from the Tel Hashomer Hospital in Israel to the Israeli Subsidiary. Atvio's operations commenced in September
2016.
Through November 30, 2017, the Company remitted to Atvio $1 million under the terms of the Atvio JVA to defray the costs
associated with the setting up and the maintenance of the GMP facility. The Company’s funding was made by way of a convertible loan to
Atvio, which shall be convertible at the Company’s option at any time into 50% of the then outstanding equity immediately following such
conversion. The Company concluded that, based on the terms of the agreement, it has the ability to exercise significant influence in Atvio,
but does not have control. Therefore, the investment is accounted for under the equity method.
In addition, at any time following the first anniversary year of the Effective Date the Company has the option to require the Atvio
shareholders to transfer to the Company the entirety of their interest in Atvio for the consideration specified in the agreement. Within three
years from the Effective Date, the Atvio shareholders have the option to require the Company to purchase from Atvio’s shareholders their
entire interest in Atvio for the consideration based on Atvio's valuation mechanism as specified in the agreement. The above-mentioned
options are accounted as derivatives and measured at fair value and presented in the balance sheet in "put/call option derivative" line item
(See Note 15).
F-19
(b) On March 14, 2016, Orgenesis Inc. and CureCell entered into the CureCell JVA, pursuant to which the parties are collaborating in
the contract development and manufacturing of cell therapy products in Korea.
Under the CureCell JVA, CureCell has procured, at its sole expense, a GMP facility and appropriate staff in Korea for the
manufacture of the cell therapy products. The Company will share with CureCell the Company’s know-how in the field of cell therapy
manufacturing, which know-how does not include the intellectual property included in the license from the THM to the Israeli subsidiary.
As of November 30, 2017, all obligations were fulfilled by the parties and the JV Company was established under the CureCell JVA
agreement and each party has 50% from the participating interest and in any and all profits and losses of the JV Company subject to the
fulfillment by each Party of his obligations under the CureCell JVA.
Under the CureCell JVA, the Company and CureCell each undertook to remit, within two years of the execution of the CureCell
JVA, minimum amount of $2 million to the JV Company, of which $1 million is to be in cash and the balance may be in an in-kind
investment, the scope and valuation of which shall be preapproved in writing by CureCell and the Company. The Company’s funding was
made by way of a convertible loan. The CureCell JVA provides that, under certain specified conditions, the Company can require CureCell
to sell to the Company its participating (including equity) interest in the JV Company in consideration for the issuance of the Company’s
common stock based on the then valuation of the JV Company. Through November 30, 2017, the Company remitted to CureCell $2.1
million.
(c) The table below sets forth a summary of the changes in the investments for the years ended November 30, 2017 and 2016:
Opening balance
Reclass from short-term receivables *
Investments during the period
Share in losses
November 30,
2017
(In thousands)
November 30,
2016
(In thousands)
$
$
(12) $
118
2,429
(1,214)
1,321 $
-
111
(123)
(12)
*As of November 30, 2016, prior to the formal incorporation of the CureCell JV company, the actual joint operations already
began. The amounts transferred to CureCell by the Company on account of the investment and the share in loss were recorded as short-
term receivables, and Company's share in the expenses incurred through balance sheet date was recorded by the Company as part of its
selling, general and administrative expenses.
NOTE 6 – INTANGIBLE ASSETS AND GOODWILL
Changes in the carrying amount of the Company’s goodwill for the years ended November 30, 2017 and 2016 are as follows:
Goodwill as of November 30, 2015
Translation differences
Goodwill as of November 30, 2016
Translation differences
Goodwill as of November 30, 2017
F-20
(in thousands)
9,535
$
49
9,584
1,100
10,684
$
Goodwill Impairment
The Company reviews goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying
amount of goodwill may not be recoverable. The Company performed a quantitative two-step assessment for goodwill impairment for the
CDMO unit.
As part of the first step of the two-step impairment test, the Company compared the fair value of the reporting units to their carrying
values and determined that the carrying amount of the units do not exceed their fair values. The Company estimated the fair value of the
unit by using an income approach based on discounted cash flows. The assumptions used to estimate the fair value of the Company’s
reporting units were based on expected future cash flows and an estimated terminal value using a terminal year growth rate based on the
growth prospects for each reporting unit. The Company used an applicable discount rate which reflected the associated specific risks for the
CDMO unit future cash flows.
Key assumptions used to determine the estimated fair value include: (a) expected cash flow for the five-year period following the
testing date (including market share, sales volumes and prices, costs to produce and estimated capital needs); (b) an estimated terminal
value using a terminal year growth rate of 2% determined based on the growth prospects; and (c) a discount rate of 16.6% and 15.3% .
Based on the Company’s assessment as of November 30, 2017 and 2016, respectively, the carrying amount of its reporting unit does not
exceeds its fair value.
A decrease in the terminal year growth rate of 1% or an increase of 1% to the discount rate would reduce the fair value of the
reporting unit by approximately $1.1 million and $2.3 million, respectively. These changes would not result in an impairment. A decrease
in the terminal year growth rate and an increase in the discount rate of 1% would reduce the fair value of the reporting unit by
approximately $3.3 million. These changes would not result in an impairment.
Other Intangible Assets
Other intangible assets consisted of the following:
Gross Carrying Amount:
Know How
Customer relationships
Brand name
Accumulated amortization
Net carrying amount of other intangible assets
November 30,
November 30,
2017
2016
(In thousands)
$
$
17,998
369
1,418
19,785
4,734
15,051
16,158
331
1,272
17,998
2,948
15,050
Intangible asset amortization expenses were approximately $1.8 million for each of the years ended November 30, 2017 and 2016.
Estimated aggregate amortization expenses for the five succeeding years ending November 30 th are as follows:
Amortization expenses
F-21
2018
2019 to 2022
(in thousands)
1,947 $
7,790
$
NOTE 7– CONVERTIBLE LOAN AGREEMENTS
(a) During the year ended November 30, 2015 and 2014, the Company entered into six convertible loan agreements with new investors
for a total amount of $1 million (the “Convertible Loans”). The loans bear an annual interest rate of 6%.
On April 27, 2016 and December 23, 2015, the holders of all the Convertible Loans converted the principal amount and the accrued
interest in amount of $1,018 thousand into units, with each unit comprising one share of the Company’s common stock and one three-year
warrant to purchase an additional share of the Company’s common stock at an exercise price of $6.24. Upon conversion of the Convertible
Loans, the Company issued an aggregate of 163,904 shares of Common stock and three year warrants to purchase up to an additional
163,904 shares. Furthermore, in the event that the Company will issue any common shares or securities convertible into common shares in
a private placement for cash at a price less than $6.24 on or before December 23, 2016, the Company will issue to the subscribers, for no
additional consideration, additional common stock. As of the date of the approval of these financial statements, the shares anti-dilution
protection mechanism described above, has expired and no shares were issued under this provision.
(b) On April 27, 2016, the Company entered into an assignment and assumption of debt agreement with Nine Investments Ltd. (“Nine
Investments”) and Admiral Ventures Inc. (“Admiral”). Pursuant to the terms of a Convertible Loan Agreement dated May 29, 2014, as
amended on December 2014 (collectively, the "Loan Agreement"), Nine Investments assigned and transferred to Admiral all of the
Company’s obligations for the outstanding amount of the Loan Agreement. Additional amendments to the provisions of the Loan
Agreement were included the following:
(1) Extending the due date of the loan of $1.5 million through September 30, 2016;
(2) The Company paid to Admiral an extension fee in the form of 288,461 units, each unit was comprised of one common share
and one, three-year warrant converted into one common share at an exercise price of $6.24 per common share. The fair value of the
warrants as of the grant date was $34 thousand. Using the Black-Scholes model, the shares were valued at the fair value of the
Company’s common stock as of April 27, 2016, or $3.36; and
(3) The Company shall accrue additional interest totalling $55 thousand for the period from January 31, 2015 to December 31,
2015. In addition, the interest rate shall be 12% per annum commencing from January 1, 2016.
The Company accounted for the above changes as an extinguishment of the old debt and issuance of a new debt. As a result, a loss
of $229 thousand was recorded within financial expenses.
On February 27, 2017, the Company and Admiral entered into an agreement resolving the payment of amounts owed to Admiral.
Under the terms of the agreement, Admiral extended the maturity date to June 30, 2018. The Company agreed to pay to Admiral, on or
before March 1, 2017, between $0.3 million and $1.5 million. Further, beginning April 2017, the Company will make a monthly payment
of $125 thousand on account of the remaining unpaid balance, and also remit 25% of all amounts received from equity financing raised
above $1 million and 20% of such amounts above $500 thousand on account of amounts owed. The Company accounted for the above
changes as a modification of the old debt. Upon an occurrence of a default, the loan bears interest at an annual rate of 15%.
During the year ended November 30, 2017, the Company repaid $1,875 thousand on account of the principal amount and accrued
interest. In January 2018, the Company repaid the remaining of accrued interest in total amount of $177 thousand.
(c) On November 2, 2016 the Company entered into unsecured convertible note agreements with accredited or offshore investors for
an aggregate amount of NIS 1 million ($262 thousand). The loan bears a monthly interest rate of 2% and mature on May 1, 2017, unless
converted earlier. The holder, at its option, may convert the outstanding principal amount and accrued interest under this note into shares of
the Company’s common stock at a per share conversion price of $6.24.
F-22
The Company allocated the principal amount of the convertible loan and the accrued interest thereon based on their fair value. The
table below presents the fair value of the instrument issued as of November 2, 2016 and the allocation of the proceed (for the fair value as
of November 30, 2017 and 2016, see Note 15):
Embedded derivative component
Loan component
Total
Total Fair
Value
(in thousands)
November 2,
2016
$
$
40
222
262
The transaction costs were approximately $29 thousand, out of which $8 thousand as stock based compensation due to issuance of
warrants (See also Note 13(d)).
On April 27, 2017 and November 2, 2017, the Company entered into extension agreements through November 2, 2017 and May 2,
2018, respectively.
(d) During the years ended November 30, 2017 and 2016 the Company entered into several unsecured convertible note agreements
with accredited or offshore investors for an aggregate amount of $5 and $1.4 million, respectively. The loans bear an annual interest rate of
6% and mature in two years, unless converted earlier. Under certain conditions as defined in the agreements, the entire principal amount
and accrued interest automatically convert into Units (as defined below).
Each $6.24 of principal amount and accrued interest due shall convert into a Unit, consisting of one share of Common Stock and one
three-year warrant exercisable into an additional share of common stock at a per share exercise price of $6.24. In addition, in certain loans
within 12 months of the issuance date hereof, the holder, at its option, may convert the outstanding principal amount and accrued interest
either (i) Units as provided above, or (ii) shares of the Company’s common stock at a per share conversion price of $6.
Since the closing price of the Company's publicly traded stock is greater than the effective conversion price on the closing date, the
conversion feature is considered "beneficial" to the holders and equal to $2.3 million and $257 thousand for the convertible notes received
during the years ended November 30, 2017 and 2016, respectively. The difference is treated as issued equity and reduces the carrying value
of the host debt; the discount is accreted as deemed interest on the debt.
The transaction costs for the convertible notes received during the year ended November 30, 2017 and 2016 were approximately
$527 and $126 thousand, respectively, out of which $163 and $55 thousand are stock-based compensation due to issuance of warrants (See
also Note 13(d)).
(e) During the year ended November 30, 2017, the Company entered into several unsecured convertible note agreements with
accredited or offshore investors for an aggregate amount of $0.8 million. The notes have mainly 6% interest rate and are scheduled to
mature between six to nine months and one year unless converted earlier. At any time, all or a portion of the outstanding principal amount
and accrued but unpaid interest thereon may be converted at the Holder’s option into shares of the Company common stock at a price of
$6.24 per share. The Company also issued to the investors three-year warrants to purchase up to 145,509 shares of the Company’s Common
Stock at a per share exercise price of $6.24.
Since the closing price of the Company’s publicly traded stock is greater than the effective conversion price on the measurement
date, the conversion feature is considered "beneficial" to the holders and equal to $81 thousand. The difference is treated as issued equity
and reduces the carrying value of the host debt; the discount is accreted as deemed interest on the debt.
(f) On January 23, 2017, the Company entered into unsecured convertible note agreement with a Non-U.S. institutional investor, on
amount of $400,000 at per annum rate of 6% and with a maturity date of April 23, 2017.
F-23
The transaction costs were approximately $71 thousand, out of which $35 thousand as stock based compensation due to issuance of
6,410 warrants and 2,671 shares. The fair value of those warrants as of the date of grant was evaluated by using the Black-Scholes
valuation model.
The principal amount and accrued interest were repaid by the Company on March 7, 2017 and, in accordance with the terms of the
agreement, the Company issued to the investor 54,167 restricted shares of the Company’s Common Stock. The fair value of the shares as
of March 7, 2017, was $494 thousand and was recorded as financial expenses.
(g) In January 2017, MaSTherCell repaid all but one of its bondholders (originally issued on September 14, 2014), and the aggregate
payment amounted to $1.7 million (€1.5 million). On January 17, 2017, the remaining bondholder agreed to extend the duration of his
Convertible bond until March 21, 2017. In consideration for the extension, the Company issued to the bondholder warrants to purchase
8,569 shares of the Company’s Common Stock, exercisable over a three-year period at a per share exercise price of $6.24. The fair value of
those warrants as of the date of grant was $20 thousand using the Black-Scholes valuation model.
On March 20, 2017, the remaining bondholder converted his convertible bonds into 40,682 shares of the Company’s Common
Stock (See also note 11(c)).
NOTE 8 – LOANS
a. Terms of Long-term Loans
Long-term loan (*)
Long-term loan
Long-term loan
Long-term loan (**)
Current portion of loans
payable
Principal
Amount
(in thousands)
€ 1,400
€ 1,000
€ 790
€ 1,000
Grant Year
Interest Rate
Year of
Maturity
November 30,
2017
2016
2012
2013
2012-2016
2016
4.05%
6%-7.5%
5.5%-6%
7%
$
2022
2023
2020-2024
2019
$
(in thousands)
899 $
977
620
-
2,496 $
(378)
952
1,000
739
1,063
3,754
(463)
$
2,118 $
3,291
(*) The loan has a business pledge on the Company’s assets at the same value.
(**) On November 15, 2017 the outstanding loan and the accrued interest in a total amount of $1.1 million were converted into
MaSTherCell common shares. See also Note 10.
b. Terms of Short-term Loans and Current Portion of Long Term Loans
Current portion of loans payable
Current portion of loans payable
Current portion of loans payable
Short term-loans*
Currency
Interest Rate
2017
2016
November 30,
Euro
Euro
Euro
Euro
4.05%
6%-7.5%
5.5%-6%
7%
$
$
$
(in thousands)
169 $
70
139
378 $
-
378
145
135
183
463
648
1,111
(*) On various dates from September 14, 2015 through the year 2015, MaSTherCell received short term loans from management and
shareholders for a total amount of €1,247 thousand, which bear an annual interest rate of 7%. No maturity dates were defined. As of
November 30, 2017, MaSTherCell repaid the remaining amount of these loans.
F-24
NOTE 9 - COMMITMENTS
a. Tel Hashomer Medical Research, Infrastructure and Services Ltd (“THM”).
On February 2, 2012, the Company’s Israeli Subsidiary entered into a licensing agreement with THM. According to the agreement,
the Israeli Subsidiary was granted a worldwide, royalty bearing, exclusive license to trans-differentiation of cells to insulin producing cells,
including the population of insulin producing cells, methods of making this population, and methods of using this population of cells for
cell therapy or diabetes treatment developed by Dr. Sarah Ferber of THM.
As consideration for the license, the Israeli Subsidiary will pay the following to THM:
1)
2)
3)
4)
A royalty of 3.5% of net sales;
16% of all sublicensing fees received;
An annual license fee of $15 thousand, which commenced on January 1, 2012 and shall be paid once every year thereafter. The
annual fee is non-refundable, but it shall be paid each year against the royalty noted above, to the extent that such are payable,
during that year; and
Milestone payments as follows:
a)
b)
c)
d)
e)
$50 thousand on the date of initiation of phase I clinical trials in human subjects;
$50 thousand on the date of initiation of phase II clinical trials in human subjects;
$150 thousand on the date of initiation of phase III clinical trials in human subjects;
$750 thousand on the date of initiation of issuance of an approval for marketing of the first product by the FDA; and
$2 million when worldwide net sales of Products (as defined in the agreement) have reached the amount of $150 million for
the first time, (the “Sales Milestone”).
As of November 30, 2017, the Israeli Subsidiary has not reached any of these milestones.
In the event of closing of an acquisition of all of the issued and outstanding share capital of the Israeli Subsidiary and/or
consolidation of the Israeli Subsidiary or the Company into or with another corporation (“Exit”), the THM shall be entitled to choose
whether to receive from the Israeli Subsidiary a one-time payment based, as applicable, on the value of either 463,651 shares of common
stock of the Company at the time of the Exit or the value of 1,000 shares of common stock of the Israeli Subsidiary at the time of the Exit.
In 2016 and 2017, the Israeli Subsidiary entered into a research service agreement with the THM. According to the agreements, the
Israeli Subsidiary will perform a study at the facilities and use the equipment and personnel of the Sheba Medical Center, with annual
consideration of approximately $88 and $131 thousand, respectively.
b. Maryland Technology Development Corporation
On June 30, 2014, the Company’s U.S. Subsidiary entered into a grant agreement with Maryland Technology Development
Corporation (“TEDCO”). TEDCO was created by the Maryland State Legislature in 1998 to facilitate the transfer and commercialization of
technology from Maryland’s research universities and federal labs into the marketplace and to assist in the creation and growth of
technology based businesses in all regions of the State. TEDCO is an independent organization that strives to be Maryland’s lead source for
entrepreneurial business assistance and seed funding for the development of startup companies in Maryland’s innovation economy. TEDCO
administers the Maryland Stem Cell Research Fund to promote State funded stem cell research and cures through financial assistance to
public and private entities within the State. Under the agreement, TEDCO has agreed to give the U.S Subsidiary an amount not to exceed
approximately $406 thousand (the “Grant”). The Grant will be used solely to finance the costs to conduct the research project entitled
“Autologous Insulin Producing (AIP) Cells for Diabetes” during a period of two years. On June 21, 2016 TEDCO has approved an
extension until June 30, 2017.
F-25
On July 22, 2014 and September 21, 2015, the U.S Subsidiary received an advance payment of $406 thousand on account of the
Grant. Through November 30, 2017, the Company utilized $356 thousand. The amount of Grant that was utilized through November 30,
2017, was recorded as a deduction of research and development expenses in the statement of comprehensive loss.
c. Department De La Gestion Financiere Direction De L’analyse Financiere (“DGO6”)
i. On March 20, 2012, MaSTherCell was awarded an investment grant from the DGO6 of Euro1,421 thousand. This grant is
related to the investment in the production facility with a coverage of 32% of the investment planned. A first payment of Euro 568 thousand
has been received in August 2013. In December 2016, the DGO6 paid to MaSTherCell Euro 669 thousand on account of the grant and the
remaining grant amount has been declined.
ii. On November 17, 2014, the Belgian Subsidiary, received the formal approval from the DGO6 for a Euro 2.015 thousand
($2.4 million) support program for the research and development of a potential cure for Type 1 Diabetes. The financial support was
composed of Euro 1,085 thousand (70% of budgeted costs) grant for the industrial research part of the research program and a further
recoverable advance of Euro 930 thousand (60% of budgeted costs) of the experimental development part of the research program. In
December 2014, the Belgian Subsidiary received advance payment of Euro 1,209 thousand under the grant. The grants are subject to certain
conditions with respect to the Belgian Subsidiary’s work in the Walloon Region. In addition, the DGO6 is also entitled to a royalty upon
revenue being generated from any commercial application of the technology. In 2017 the Company received by the DGO6 approval for
Euro 1.8 million costs invested in the project out of which Euro 1.192 founded by the DGO6. During 2017 the Company repaid to the
DGO6 the down payments of Euro 17 thousand. As of November 30, 2017, an amount of $160 thousand was recorded as advance
payments on account of grant.
iii. In April 2016, the Belgian Subsidiary received the formal approval from DGO6 for a budgeted Euro 1,304 thousand ($1,455
thousand) support program for the development of a potential cure for Type 1 Diabetes. The financial support is awarded to the Belgium
Subsidiary as a recoverable advance payment at 55% of budgeted costs, or for a total of Euro 717 thousand ($800 thousand). The grant will
be paid over the project period. On December 19, 2016, the Belgian Subsidiary received a first payment of Euro 359 thousand ($374
thousand). Up through November 30, 2017, an amount of Euro 303 thousand was recorded as deduction of research and development
expenses and an amount of $66 thousand was recorded as advance payments on account of grant.
iv. On October 8, 2016, the Belgian Subsidiary received the formal approval from the DGO6 for a budgeted Euro 12.3 million
($12.8 million) support program for the GMP production of AIP cells for two clinical trials that will be performed in Germany and
Belgium. The project will be held during a period of three years commencing January 1, 2017. The financial support is awarded to the
Belgium subsidiary at 55% of budgeted costs, a total of Euro 6.8 million ($7 million). The grant will be paid over the project period. On
December 19, 2016, the Belgian Subsidiary received a first payment of Euro 1.7 million ($1.8 million). Up through November 30, 2017, an
amount of $558 was recorded as deduction of research and development expenses and an amount of $1,442 thousand was recorded as
advance payments on account of grant.
d. Israel-U.S Binational Industrial Research and Development Foundation (“BIRD”)
On September 9, 2015, the Israeli Subsidiary entered into a pharma Cooperation and Project Funding Agreement (CPFA) with
BIRD and Pall Corporation, a U.S. company. BIRD will give a conditional grant of $400 thousand each (according to terms defined in the
agreement), for a joint research and development project for the use Autologous Insulin Producing (AIP) Cells for the Treatment of
Diabetes (the “Project”). The Project started on March 1, 2015. Upon the conclusion of product development, the grant shall be repaid at
the rate of 5% of gross sales. The grant will be used solely to finance the costs to conduct the research of the project during a period of 18
months starting on March 1, 2015. Up to date the Israeli Subsidiary received $200 thousand under the grant. On July 28, 2016 BIRD
approved an extension till May 31, 2017 and final report was submitted to BIRD.
Up through November 30, 2017, an amount of $359 thousand was recorded as deduction of research and development expenses and
$159 thousand as a receivable on account of grant.
F-26
e. Korea-Israel Industrial Research and Development Foundation (“KORIL”)
On May 26, 2016, the Israeli Subsidiary entered into a pharma Cooperation and Project Funding Agreement (CPFA) with KORIL
and CureCell. KORIL will give a conditional grant of up to $400 thousand each (according to terms defined in the agreement), for a joint
research and development project for the use of Autologous Insulin Producing (AIP) Cells for the Treatment of Diabetes (the “Project”).
The Project started on June 1, 2016. Upon the conclusion of product development, the grant shall be repaid at the yearly rate of 2.5% of
gross sales. The grant will be used solely to finance the costs to conduct the research of the project during a period of 18 months starting on
June 1, 2016. On June 2016, the Israeli Subsidiary received $160 thousand under the grant.
Up through November 30, 2017, an amount of $184 thousand was recorded as deduction of research and development expenses and
$24 thousand as a receivable on account of grant.
f. Lease Agreement
MaSTherCell has an operational lease agreement for the rent of offices for a period of 12 years expiring on November 30, 2027.
The costs per year are €329 thousand (approximately $390 thousand).
The Israeli subsidiary has an operational lease agreement for the rent of development lab. The costs per year are NIS 120 thousand
(approximately $35 thousand).
g. Quality Manufacturing System (“QMS”) License Agreement
In December 2016, MaSTherCell and the Company entered into a license agreement pursuant to which MaSTherCell granted to the
Company a worldwide (excluding Europe), perpetual, exclusive, royalty-free and sub-licensable right to MaSTherCell’s quality
manufacturing system for the Company and its affiliates’ own internal quality assurance program and for the Company’s CDMO activity.
In consideration of the license, the Company has a financial obligation to pay to MaSTherCell Euro 2.5 million, payable by an initial and
second payment of Euro 250,000, with the balance to be made by an in-kind contribution by the Company by no later than December 2018.
h. Collaboration Agreement
On March 14, 2016, the Israel subsidiary, entered into a collaboration agreement with CureCell Co., Ltd. (“CureCell”), initially for
the purpose of applying for a grant from KORIL for pre-clinical and clinical activities related to the commercialization of Orgenesis Ltd.’s
AIP cell therapy product in Korea ("KORIL Grant"). Subject to receiving the Koril Grant, the Parties agreed to carry out at their own
expense their respective commitments under the work plan approved by KORIL and any additional work plan to be agreed between the
Israeli Subsidiary and CureCell. The Israeli Subsidiary will own sole rights to any intellectual property developed from the collaboration
which is derived under the Israeli Subsidiary’s AIP cell therapy product, information licensed from THM. Subject to obtaining the requisite
approval needed to commence commercialization in Korea, the Israel subsidiary has agreed to grant to CureCell, or a fully owned
subsidiary thereof, under a separate sub-license agreement an exclusive sub-license to the intellectual property underlying the Company’s
API product solely for commercialization of the Israel subsidiary products in Korea. As part of any such license, CureCell has agreed to pay
annual license fees, ongoing royalties based on net sales generated by CureCell and its sublicensees, milestone payments and sublicense
fees. Under the agreement, CureCell is entitled to share in the net profits derived by the Israeli Subsidiary from world-wide sales (except for
sales in Korea) of any product developed as a result of the collaboration with CureCell. Additionally, CureCell was given the first right to
obtain exclusive commercialization rights in Japan of the AIP product, subject to CureCell procuring all of the regulatory approvals
required for commercialization in Japan. As of November 30, 2017, none of the requisite regulatory approvals for conducting clinical trials
had been obtained (See also Note 5(b)).
i. On November 18, 2016, Mr. Scott Carmer, the Chief Executive Officer of the U.S Subsidiary, resigned from his position in order to
pursue other interests. The Company’s Chief Executive Officer assumed his position. In connection with his resignation the Company
entered into a Release Agreement pursuant to which the Company agreed that Mr. Carmer will be able to exercise options to purchase up to
136,775 shares of the Company’s common stock previously issued to him through their original exercise period and Mr. Carmer waived,
released and forever discharge Company from any claims, demands, obligations, liabilities, rights, causes of action and damages. In
furtherance thereof, on November 18, 2016, Mr. Carmer and the Company entered into a Strategic Advisory Agreement whereas he will
continue to serve the Company as a non-employee advisor on its activities in the U.S. and internationally. The Company accounted for the
above changes as a waiver of Mr. Carmer’s accrued salary and modification of his options. As a result, a non-cash net income of $458
thousand was recorded within financial expenses in the year ended November 30, 2016.
F-27
NOTE 10 – REDEEMABLE NON CONTROLING INTEREST
On November 15, 2017 the Company, MaSTherCell and the Belgian Sovereign Funds Société Fédérale de Participations et
d'Investissement (“SFPI”) entered into a Subscription and Shareholders Agreement (“SFPI Agreement” ) pursuant to which SFPI is making
an equity investment in MaSTherCell in the aggregate amount of Euro 5 million (approximately $5.9 million), for approximately 16.7% of
MaSTherCell. The equity investment commitment included the conversion of the outstanding loan of Euro 1 million (approximately $1.1
million) plus accrued interest in the approximate amount of Euro 70 thousand (approximately $77 thousand), previously made by SFPI to
MaSTherCell (the “Loan Amount”).
Under the Agreement, an initial subscription amount of Euro 2 million ($2.3 million) has been paid and the outstanding Loan
Amount been converted. The balance of approximately Euro 1.9 million ($2.2 million) is payable as needed by MaSTherCell and called in
by the board of directors of MaSTherCell. The proceeds of the investment will be used to expand MaSTherCell’s facilities in Belgium by
the addition of five new cGMP manufacturing cleanrooms. This expansion will position MaSTherCell as the European hub for the
Company’s continental activities and strengthen its position in cell and gene manufacturing. The design enables MaSTherCell to offer full
flexibility for production and process development. Under the Agreement, SFPI will be represented by one board member of the five board
members of MaSTherCell. In addition, SFPI is entitled to designate one independent board member to the MaSTherCell board who is
acceptable to the Company. The Agreement provides that, under certain specified circumstances where MaSTherCell breaches the terms of
the Agreement, SFPI is entitled to put its equity interest in MaSTherCell to the Company at a price equal to the subscription price paid by
SFPI, plus a specified annual premium ranging from 10% to 25%, depending on the year following the subscription in which the put is
exercised. However, the agreement specifies that SFPI has a right to such put provision if the Company is not listed on NASDAQ within
six months from the date the SFPI Agreement. If the Company elects to terminate SFPI Agreement before its scheduled term of seven years
(or to not renew the agreement upon its scheduled termination), SFPI is entitled to put its MaSTherCell equity interest to the Company at
fair market value (as determined by SFPI and the Company). Additionally, at any time during the first three years following the investment,
SFPI is entitled to exchange its equity interest in MaSTherCell into shares of the Company’s Common Stock, at a rate equal to the
subscription price paid by SFPI divided by $6.24 (subject to adjustment for certain capital events, such as stock splits).
The Agreement contains customary representations, warranties and covenants by MaSTherCell, in respect of which the Company
has undertaken to indemnify SFPI for the consequences of any breach thereof by MaSTherCell.
The SFPI investment was presented as redeemable non-controlling interest in the balance sheet in the amount of $3,606 thousand.
NOTE 11 – EQUITY
a. Share Capital
The Company’s common shares are traded on the OTCQB Venture Market under OTC Market Group’s OTCQB tier under
the symbol “ORGS”.
On November 16, 2017, the Company implemented a 1:12 reverse stock split (the “Reverse Split”) of its authorized and
outstanding shares of Common Stock. All share and per share amounts in these financial statements have been retroactively adjusted
to reflect the reverse split as if it had been effected prior to the earliest financial statement period included herein. Following the
Reverse Split, the number of authorized shares of common stock that the Company is authorized to issue from time to time is
145,833,334 shares.
F-28
b. Financings
1) During the year ended November 30, 2017 and 2016, the Company entered into definitive agreements with accredited and
other qualified investors relating to a private placement (the “Private Placement”) of (i) 107,249 and 2,860,578 units, respectively.
Each unit is comprised of (i) one share of the Company’s common stock and (ii) three-year warrant to purchase up to an additional
one share of the Company’s Common Stock at a per share exercise price of $6.24 or $7.68. The purchased securities were issued
pursuant to subscription agreements between the Company and the purchasers for aggregate proceeds to the Company of $699
thousand and $1,488 thousand, respectively. Furthermore, in certain events the subscribers received anti-dilution protection for
issuance at less than their purchase price.
2) In January 2017, the Company entered into definitive agreements with an institutional investor for the private placement of
2,564,115 units of the Company’s securities for aggregate subscription proceeds to the Company of $16 million at $6.24 price per
unit. Each unit is comprised of one share of the Company’s Common Stock and a warrant, exercisable over a three-years period from
the date of issuance, to purchase one additional share of Common Stock at a per share exercise price of $6.24. The subscription
proceeds are payable on a periodic basis through August 2018. Each periodic payment of subscription proceeds will be evidenced by
the Company’s standard securities subscription agreement.
During the year ended November 30, 2017 the investor remitted to the Company $4.5 million, in consideration of which, the
investor is entitled to 721,160 shares of the Company’s Common Stock and three-year warrants to purchase up to an additional
721,160 shares of the Company’s Common Stock at a per share exercise price of $6.24. The Company allocated the proceeds based
on the fair value of the warrants and the shares. The table below presents the allocation of the proceeds as of the closing date:
Warrants component
Shares component
Total
Total Fair
Value
(in thousands)
$
$
1,516
2,984
4,500
As of November 30, 2017, 320,516 shares have not been issued and therefore the Company has recorded $1,483 thousand in
receipts on account of shares to be allotted in the statement of equity. In connection therewith, the Company undertook to pay a fee of
5% resulting in the payment of $225 thousand (classified as Additional Paid-in Capital in the statement of equity) and the issuance of
36,063 restricted shares of Common Stock. The fair value of the shares as of the date of grant was $253 thousand using the share
price on the date of grant. See also note 20(b).
c. Contingent Shares
According to the share exchange agreement signed during 2015, the former shareholders of MaSTherCell received a “consideration
of shares” of Orgenesis in exchange of their shares in MaSTherCell. At the time of MaSTherCell acquisition by Orgenesis, there was
outstanding convertible bonds issued by MaSTherCell in an amount of $1.8 million (Euro 1.6 million).
In case MaSTherCell is repaying the principal amount and the accrued interest of the convertible bonds, the “consideration shares”
received by the former shareholders will be reduced by the amount that was due to those bondholders who did not exchange their
convertible bond. The consideration of shares will be released back to the Company proportionally to the holding of former shareholders.
To that effect, the number of consideration shares to be released back to the Company, shall be determined by dividing the subscription
amount of the outstanding convertible bonds plus interest owed thereunder (converted into USD according to the currency exchange rate
applicable on the day of conversion) by the consideration and by applying the resulting quotient to actual total number of consideration
shares received by former shareholder of MaSTherCell. In case of such release for cancellation of consideration shares, each former
shareholder of MaSTherCell will give up for cancellation a part of its consideration shares that will be proportionate to such former
shareholder’s share in the total number of consideration share issued at acquisition closing.
F-29
During January 2017 MaSTherCell repaid all but one of its bondholders and the aggregate payment amounted to $1.7 million
(Euro1.5 million). According to the terms of the release back pursuant the share exchange agreement, the Company returned to treasury a
total of 263,148 shares. These shares have been retired and cancelled. (See also Note 7(g)).
d. Warrants
(1) Warrants which are subject to exercise price adjustments
Issuance
Date
October 2015
November 2015
December 2015
February 2016
March 2016
April 2016
May 2016
June 2016
Number of
Warrants Issued
and Outstanding
16,026
657,597
175,924
16,026
64,103
40,859
24,039
72,117
1,066,691
Exercise Price /
Adjusted
Exercise
Price
$6.24
$6.24
$6.24
$6.24
$6.24
$6.24
$6.24
$6.24
Expiration
Date
March 2018
November 2018
December 2018
February 2019
March 2019
April 2019
May 2019
June 2019
(2) Warrants which are not subject to exercise price adjustments
Grant
Month
November 2013
October 2015
December 2015
April 2016
July 2016
August 2016
September 2016
October 2016
November 2016
December 2016
January 2017
February 2017
March 2017
April 2017
May 2017
June 2017
July 2017
August 2017
September 2017
October 2017
November 2017
Exercise Price /
Adjusted
Exercise
Price
$6
$6.24
$6.24
$6.24
$6.24
$6.24
$6.24
$6.24
$6.24
$6.24
$6.24
$6.24,$10.2
$6.24
$6.24,$7.8
$6.24
$6.24
$6.24
$6.24
$6.24
$6.24
$6.24
Number of
Warrants Issued
and Outstanding
16,668
196,543
2,552
24,039
10,016
17,973
641
642
70,033
95,887
76,655
220,863
37,003
123,896
100,162
100,162
80,129
115,492
7,697
100,162
86,539
1,483,754
F-30
Expiration
Month
November 2018
October 2018
December 2018
April 2019
July 2019
August 2019
September 2019
October 2019
November 2019
December 2019
January 2020
February 2020
March 2020
April 2020
May 2020
June 2020
July 2020
August 2020
September 2020
October 2020
November 2020
NOTE 12 – LOSS PER SHARE
The following table sets forth the calculation of basic and diluted loss per share for the periods indicated:
Basic:
Loss for the year
Weighted average number of common shares outstanding
Basic loss per common share
Diluted:
Loss for the year
Changes in fair value of embedded derivative and interest expenses on convertible bonds
Loss for the year
Weighted average number of shares used in the computation of basic loss per share
Number of dilutive shares related to convertible bonds
Number of dilutive shares related to warrants
Weighted average number of common shares outstanding
Diluted loss per common share
Year Ended
November 30,
2017
2016
(in thousands,
except per share data)
12,367 $
9,679,964
1.28 $
12,367
392
12,759 $
11,113
8,521,583
1.30
11,113
11,113
9,679,964
8,521,583
34,289
9,714,252
8,521,583
1.31 $
1.30
$
$
$
$
$
Diluted loss per share does not include 2,004,435 shares underlying outstanding options, 2,088,239 shares issuable upon exercise of
warrants and 1,057,785 shares upon conversion of convertible notes for the year ended November 30, 2017, because the effect of their
inclusion in the computation would be anti-dilutive.
Basic loss per share for the year ended November 30, 2016, does not include 681,124 contingent shares.
Diluted loss per share does not include 1,420,446 shares underlying outstanding options, 1,620,965 shares issuable upon exercise of
warrants, 32,212 shares due to stock-based compensation to service providers and 655,269 shares upon conversion of convertible notes for
the year ended November 30, 2016, because the effect of their inclusion in the computation would be anti-dilutive.
NOTE 13 – STOCK-BASED COMPENSATION
a. Global Share Incentive Plan
On May 11, 2017, the annual meeting of the Company’s stockholders approved the 2017 Equity Incentive Plan (the “2017 Plan”)
under which, the Company had reserved a pool of 1,750,000 shares of the Company’s common stock, which may be issued at the discretion
of the Company's board of directors from time to time. Under this Plan, each option is exercisable into one share of common stock of the
Company. The options may be exercised after vesting and in accordance with the vesting schedule that will be determined by the
Company's board of directors for each grant. The maximum contractual life term of the options is 10 years.
In addition, the Company has one stock option plan, the Global share incentive plan (2012) (the “Plan”), under which, the Company
had reserved a pool of 12,000,000 shares of the Company’s common stock, which may be issued at the discretion of the Company's board
of directors from time to time. Under this Plan, each option is exercisable into one share of common stock of the Company. The options
may be exercised after vesting and in accordance with the vesting schedule that will be determined by the Company's board of directors for
each grant. The maximum contractual life term of the options is 10 years.
F-31
b. Options Granted to Employees and Directors
Below is a table summarizing all of the options grants to employees and made during the years ended November 30, 2017, and
2016:
Year of
No. of options Exercise price
Vesting period
Employees
Directors
Employees
grant
2016
2017
2017
granted
255,855
166,668
525,005
$0.0012-$4.32
$4.80
$4.8,$7.2
vest immediately-2 years
2 years
vest immediately-4 years
Fair value at
grant
(in thousands)
$697
$ 558
$1,915
Expiration
period
10 years
10 years
10 years
The fair value of each stock option grant is estimated at the date of grant using a Black Scholes option pricing model. The volatility
is based on historical volatility of the Company, by statistical analysis of the weekly share price for past periods based on expected term.
The expected option term is calculated using the simplified method ,as the Company concludes that its historical share option exercise
experience does not provide a reasonable basis to estimate its expected option term. The fair value of each option grant is based on the
following assumptions:
Value of one common share
Dividend yield
Expected stock price volatility
Risk free interest rate
Expected term (years)
Year Ended November 30,
2017
$4.68,$7.2
0%
93.8%-95.4%
1.89%-1.76%
5
2016
$0.28-$0.36
0%
87.4%-89%
1.32%-1.33%
5
A summary of the Company's stock options granted to employees and directors as of November 30, 2017 and 2016 and changes for
the years then ended is presented below:
2017
2016
Weighted
Average
Exercise
Price
$
Weighted
Average
Exercise
Price
$
Number of
Options
Number of
Options
Options outstanding at the beginning of the year
Changes during the year:
Granted
Expired
Forfeited
Re-designation to non- employee (see Note 9i)
Options outstanding at end of the year
Options exercisable at end of the year
978,853
691,673
(38,106)
(27,365)
1,605,055
1,135,107
F-32
1.92
5.28
7.58
4.8
3.11
2.57
861,773
253,855
(136,775)
978,853
879,759
1.92
2.24
3.36
1.92
1.71
The following table presents summary information concerning the options granted and exercisable to employees and directors
outstanding as of November 30, 2017:
Exercise
Price
$
Number of
Outstanding
Options
Weighted
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
$
(in thousands)
Number of
Exercisable
Options
Aggregate
Exercisable
Options
Value $
(in thousands)
0.0012
0.012
4.32
4.8
6
6.36
7.2
9
9.48
10.2
462,015
278,191
25,000
583,338
33,334
20,834
83,334
20,834
58,908
39,267
1,605,055
5.78
4.18
8.43
9.03
6.67
2.55
9.51
5.63
4.61
4.51
6.82
2,079
1,249
113
3,444
442,593
278,191
9,375
235,938
33,334
20,834
-
16,667
58,908
39,267
1,135,107
1
3
41
1,133
200
133
-
150
558
401
2,620
Costs incurred with respect to stock-based compensation for employees and directors for the years ended November 30, 2017 and
2016 were $1,536 thousand and $1,103 thousand, respectively. As of November 30, 2017, there was $1,273 thousand of unrecognized
compensation costs related to non-vested employees and directors stock options, to be recorded over the next 1.1 years.
c. Options Granted to Non- Employees
Below is a table summarizing all the compensation granted to consultants and service providers during the years ended November
30, 2017 and 2016:
Non-employees
Year of
grant
2016
No. of options
granted
83,333*
Exercise
price
$3.6
Non-employees
2017
16,668
$4.8
Vesting period
Quarterly over a period of
one year
Quarterly over a period of
one year
Fair value at
grant
(in thousands)
$187
Expiration
period
4 years
$68
10 years
* The options had been immediately vested prior to such one-year period if there was an acquisition of 40% or more of the
Company or upon funding of $5 million, the criteria have not been completed in the first year.
F-33
The fair value of each stock option grant is estimated at the date of grant using a Black Scholes option pricing model. The volatility
is based on historical volatility of the Company, by statistical analysis of the weekly share price for past periods based on expected term.
The expected term is the mid-point between the vesting date and the maximum contractual term for each grant equal to the contractual life.
The fair value of each option grant is based on the following assumptions:
Value of one common share
Dividend yield
Expected stock price volatility
Risk free interest rate
Expected term (years)
June 1,
2017
$7.44
0%
95%
1.76%
5
December 9,
2016
$4.8
0%
94%
1.89%
5
March 1,
2016
$3.6
0%
87%
1.19%
4
A summary of the status of the stock options granted to consultants and service providers as of November 30, 2017, and 2016 and
changes for the years then ended is presented below:
Options outstanding at the beginning of the year
Changes during the year:
Granted
Expired
Re-designation to non-employee (see Note 9i)
Options outstanding at end of the year
Options exercisable at end of the year
2017
2016
Weighted
Average
Exercise
Price
$
Weighted
Average
Exercise
Price
$
Number of
Options
Number of
Options
441,621
16,668
58,909
399,380
379,712
6.24
4.80
8.28
7.47
5.76
221,512
83,334
136,775
441,621
387,284
9.00
3.60
3.36
6.24
5.70
The following table presents summary information concerning the options granted and exercisable to consultants and service
providers outstanding as of November 30, 2017 (in thousands, except per share data):
Exercise
Price
$
Number of
Outstanding
Options
Weighted
Average
Remaining
Contractual
Life
4.8
3.36
3.60
6.00
6.24
7.32
11.52
16.80
16,668
136,775
83,334
90,000
8,334
16,668
8,334
39,267
399,380
9.1
8.4
8.3
6.7
7.5
7.3
5.4
4.4
7.47 $
F-34
Aggregate
Intrinsic
Value*
$
(in thousands)
Number of
Exercisable
Options
Aggregate
Exercisable
Options
Value $
(in thousands)
156
75
231
16,667
136,775
83,334
72,000
8,334
16,668
6,667
39,267
379,712 $
151
1,153
689
481
25
85
36
172
2,792
Costs incurred with respect to options granted to consultants and service providers for the year ended November 30, 2017 and 2016
was $322 thousand and $2,543 thousand, respectively. As of November 30, 2017, there was $22 thousand of unrecognized compensation
costs related to non-vested consultants and service providers, to be recorded over the next 2.55 years.
d. Warrants Issued to Non-Employees
1) During the year ended November 30, 2016, the Company granted to several consultants 89,288 warrants each
exercisable at $6.24 per share for three years. The fair value of those options as of the date of grant using the Black-Scholes valuation
model was $219 thousand, out of which $64 thousand is related to 22,621 warrants granted as a success fee with respect to the
issuance of the convertible notes.
2) During the year ended November 30, 2017, the Company granted to several consultants 53,148 warrants each
exercisable at $6.24 or $10.2 per share for three years. The fair value of those options as of the date of grant using the Black-Scholes
valuation model was $211 thousand, out of which $169 thousand is related to 38,001 warrants granted as a success fee with respect to
the issuance of the convertible notes.
e. Shares Issued to Non-Employees
1) On March 1, 2016, the Company entered into a consulting agreement for a period of one year. Under the terms of the
agreement, the Company granted the consultant 20,834 shares of restricted common stock. The fair value of the shares as of the date
of grant was $75 thousand. In addition, the Company had to pay a retainer fee of $10,000 per month, consisting of $5,000 cash per
month and $5,000 shall be payable in shares of the Company’s common stock at a value equal to the price paid for an equity capital
raise of at least $3 million (the “financing”). The cash fee per month and shares shall be issued upon completion of the financing. The
fair value of the shares as of November 30, 2016, was $34 thousand. The consultant has not met the financing criteria therefore the
Company has not issued additional shares under this agreement.
2) On April 27, 2016, the Company entered into consulting agreements for a period of one year with two consultants.
Under the terms of the agreements, the Company agreed to grant the consultants an aggregate of 100,001 shares of restricted common
stock that vested on the grant date. The fair value of the shares as of the date of grant was $336 thousand.
3) On May 1, 2016, the Company entered into a consulting agreement for a period of one year. Under the terms of the
agreement, the Company agreed to grant a consultant 83,334 shares of restricted common stock, of which the first 29,167 shares
vested immediately, 29,167 shares are to vest 90 days following the agreement date and 25,000 shares are schedule to vested 180 days
following the agreement date. The fair value of the shares as of the date of grants of these three tranches was $383 thousand.
NOTE 14 – TAXES
a. The Company and the US Subsidiary
The Company and the US Subsidiary are taxed according to tax laws of the United States. The income of the Company is taxed in
the United States at a federal tax rate of up to 35% and state tax rate of 8.25% .
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “TCJA”), which among other changes
reduces the federal corporate tax rate to 21%. The Company is currently evaluating the impact of the TCJA on its consolidated financial
statements and does not expect any material impact.
F-35
b. The Israeli Subsidiary
The Israeli Subsidiary is taxed according to Israeli tax laws.
In January 2016, the Law for the Amendment of the Income Tax Ordinance (No. 216) was published, enacting a reduction of
corporate tax rate in 2016 and thereafter, from 26.5% to 25%.
In December 2016, the Economic Efficiency Law (Legislative Amendments for Implementing the Economic Policy for the 2017
and 2018 Budget Year), 2016 was published, introducing a gradual reduction in corporate tax rate from 25% to 23%. However, the law also
included a temporary provision setting the corporate tax rate in 2017 at 24%. As a result, the corporate tax rate in 2017 was 24% and in
2018 and thereafter reduced to 23%.
c . The Belgian Subsidiaries
The Belgian Subsidiaries are taxed according to Belgian tax laws. The regular corporate tax rate in Belgium for 2016 and 2017 is
34%.
On 22 December 2017, the Belgian Parliament has approved the Belgian reform bill. The main impacts of this tax reform are:
A decrease of the nominal tax rate from 34% to 30% in 2018 and 25% in 2020
Limitation of deductions on the taxable basis (i.e. carried forward losses, notional interests…) meaning that there will be a
minimum taxable basis (if profit above Euro 1 million)
Tax supplements resulting from a tax audit will constitute a minimum tax base
d. Tax Loss Carryforwards
1) As of November 30, 2017, the Company had net operating loss (NOL) carry forwards equal to $12.8 million that is available to
reduce future taxable income. Out of the Company’s NOL carry forward, an amount of $138 thousand may be restricted under
Section 382 of the Internal Revenue Code (“IRC”). IRC Section 382 applies whenever a corporation with an NOL experiences an
ownership change. As a result of Section 382, the taxable income for any post change year that may be offset by a pre-change NOL
may not exceed the general Section 382 limitation, which is the fair market value of the pre-change entity multiplied by the long-term
tax exempt rate.
2) U.S. Subsidiary - As of November 30, 2017, the U.S. Subsidiary had approximately $276 thousand of NOL carry forwards that
are available to reduce future taxable income with no limited period of use.
3) Israeli Subsidiary - As of November 30, 2017, the Israeli Subsidiary had approximately $5.8 million of NOL carry forwards
that are available to reduce future taxable income with no limited period of use.
4) Belgian Subsidiaries - As of November 30, 2017, the Belgian Subsidiaries had approximately $15.8 million (€13.3 million) of
NOL carry forwards that are available to reduce future taxable income, with no limited period of use.
F-36
e. Deferred Taxes
The following table presents summary of information concerning the Company’s deferred taxes as of the periods ending November
30, 2017 and 2016 (in thousands):
Net operating loss carry forwards
Research and development expenses
Employee benefits
Property and equipment
Convertible bonds
Deferred income
Intangible assets
Less: Valuation allowance
Net deferred tax liabilities
November 30,
2017
2016
(U.S dollars in thousands)
$
$
11,819 $
1,065
180
(61)
(292)
(5,117)
(8,284)
(690) $
8,278
655
152
(355)
1
(325)
(5,117)
(5,151)
(1,862)
Realization of deferred tax assets is contingent upon sufficient future taxable income during the period that deductible temporary
differences and carry forwards losses are expected to be available to reduce taxable income. As the achievement of required future taxable
income is not considered more likely than not achievable, the Company and all of its subsidiaries except MaSTherCell have recorded full
valuation allowance.
The changes in valuation allowance are comprised as follows:
Balance at the beginning of year .
Additions during the year
Balance at end of year
$
$
(5,151) $
(3,207)
(8,358) $
(2,982)
(2,169)
(5,151)
Year Ended November 30,
2017
2016
(U.S dollars in thousands)
f. Reconciliation of the Theoretical Tax Expense to Actual Tax Expense
The main reconciling item between the statutory tax rate of the Company and the effective rate is the provision for full valuation
allowance with respect to tax benefits from carry forward tax losses.
g. Tax Assessments
1) The Company - As of November 30, 2017, the Company has received a final tax assessment up to the year 2010.
2) U.S. Subsidiary and the Israeli Subsidiary - As of November 30, 2017, the U.S. Subsidiary and the Israeli Subsidiary have not
received any final tax assessment.
3) Belgian Subsidiary - As of November 30, 2017, the Belgian Subsidiary has received a final tax assessment for the year 2014.
4) MaSTherCell - As of November 30, 2017, MaSTherCell has received a final tax assessment for the year 2013.
h. Uncertain Tax Provisions
As of November 30, 2017, the Company has not accrued a provision for uncertain tax positions.
F-37
NOTE 15 - FAIR VALUE PRESENTATION
The Company measures fair value and discloses fair value measurements for financial assets and liabilities. Fair value is based on
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. The accounting standard establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to
measure fair value into three broad levels, which are described below:
•
•
•
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair
value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable inputs that are based on inputs not quoted on active markets but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to
Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the
use of unobservable inputs, to the extent possible, and considers credit risk in its assessment of fair value.
As of November 30, 2017, and 2016, the Company’s liabilities that are measured at fair value and classified as level 3 fair value are
as follows (in thousands):
Embedded derivatives convertible loans *(1)
CALL/PUT option derivative(1)
Convertible bonds(2)
November 30,
2017
Level 3
November 30,
2016
Level 3
(37)
(339)
- $
240
273
1,818
$
* The embedded derivative is presented in the Company's balance sheets on a combined basis with the related host contract (the
convertible loans).
(1) The fair value is determined by using a Black-Scholes Model.
(2) The fair value of the convertible bonds described in Note 3 is determined by using a binomial model for the valuation of the
embedded derivative and the fair value of the bond was calculated based on the effective rate on the valuation date (6%). The
binomial model used the forecast of the Company share price during the convertible bond's contractual term. Since the convertible
bond is in Euro and the model is in USD, the Company has used the Euro/USD forward rates for each period. In order to solve for the
embedded derivative fair value, the calculation was performed as follows:
Stage A - The model calculates a number of potential future share prices of the Company based on the volatility and risk-free
interest rate assumptions.
Stage B - the embedded derivative value is calculated "backwards" in a way that takes into account the maximum value between
holding the bonds until maturity or converting the bonds.
F-38
The following table presents the assumptions that were used for the models as of November 30, 2017:
Fair value of shares of common stock
Expected volatility
Discount on lack of marketability
Risk free interest rate
Expected term (years)
Expected dividend yield
Embedded
Derivative
$ 4.38
77%
-
1.21%-1.39%
0.17-0.42
0%
Put Option
Derivative
54%
12%
1.44%
0.5
The following table presents the assumptions that were used for the models as of November 30, 2016:
Fair value of shares of common stock
Expected volatility
Discount on lack of marketability
Risk free interest rate
Expected term (years)
Expected dividend yield
Probability of external Investment in Atvio
Orgenesis cost of debt
Revenues Multiplier distribution
Embedded
Derivative
$ 4.68
103%
-
0.38%-0.62%
0.08-0.42
0%
Put Option
Derivative
63%
-
0.9%
20%
26%
3.34
The table below sets forth a summary of the changes in the fair value of the Company’s financial liabilities classified as Level 3 for
the year ended November 30, 2017:
Balance at beginning of the year
Repayment
Changes in fair value during the period
Translation adjustments
Balance at end of the year
Embedded
Derivatives
Convertible
Bonds
Put Option
Derivative
$
$
240 $
(876)
662
11
37 $
1,818 $
(1,827)
22
(13)
- $
273
(612)
(339)
(*) There were no transfers to Level 3 during the twelve months ended November 30, 2017.
The table below sets forth a summary of the changes in the fair value of the Company’s financial liabilities classified as Level 3 for the
year ended November 30, 2016:
Embedded
Derivatives
Convertible
Bonds
Put Option
Derivative
Balance at beginning of the year
Additions
Conversion
Changes in fair value during the period
Changes in fair value due to extinguishment of convertible loan
Translation adjustments
Balance at end of the year
$
$
289 $
40
(10)
(87)
8
11
240 $
1,888 $
(84)
14
1,818 $
-
273
273
(*) There were no transfers to Level 3 during the twelve months ended November 30, 2016.
F-39
The Company has performed a sensitivity analysis of the results for the Put Option Derivative fair value as of November 30, 2017
with the following parameters:
Base -50%
Base
Base+50%
(in thousands)
$
335 $
252
339 $
339
379
440
Sensitivity analysis due to changes in the assumptions expected
volatility
Sensitivity analysis due to changes in Atvio's FV
NOTE 16 – REVENUES
Services
Goods
Total
NOTE 17 – RESEARCH AND DEVELOPMENT EXPENSES, NET
Total expenses
Less grants
Total
NOTE 18 – FINANCIAL EXPENSES (INCOME), NET
Decrease in fair value of warrants and financial liabilities measured at fair value
Stock-based compensation related to warrants granted due to issuance of credit facility
Interest expense on convertible loans
Foreign exchange loss, net
Other income
Total
F-40
Year Ended November 30,
2017
2016
(in thousands)
8,024 $
2,065
10,089 $
4,683
1,714
6,397
Year Ended November 30,
2017
2016
(in thousands)
3,326 $
(848)
2, 478 $
2,637
(480)
2,157
Year ended November 30,
2016
2017
(in thousands)
(902) $
1,497
1,233
562
57
2,447 $
(1,587)
208
694
31
(5)
(659)
$
$
$
$
$
$
NOTE 19- RELATED PARTIES TRANSACTIONS
1) Related Parties presented in the consolidated statements of comprehensive loss
Management and consulting fees to Board Members
Stock Based Compensation expenses to Board Members
Compensation of executive officers
Stock Based Compensation expenses to executive officers
Interest Expenses on convertible loan from director
2) Related Parties presented in the consolidated balance sheets
Convertible Loan from director
Executive officers payables
Non-executive directors payable
For the year ended November 30,
2017
2016
(in thousands)
$
$
$
$
25 $
393
419
821
55 $
Year ended November 30,
2016
2017
(in thousands)
167 $
358
316 $
85
242
318
501
2
112
308
280
3) The balances with Related Parties in the balance sheet are mainly related to on-going transactions between the
Company and the associates companies. See also Note 5.
NOTE 20- SUBSEQUENT EVENTS
a. On December 6, 2017 the Board of Directors approved grant of 70,700 shares to several consultants and service providers.
b. On December 18, 2017, MaSTherCell received the approval of a new grant from Intitule ICONE with a financial support of Euro 1
million ($1.2 million) in program for development of iPS-derived Cortical Neurons. In December 2017, MaSTherCell received an advance
payment of Euro 0.6 million ($0.7 million).
c. In December 2017 and February 2018, the institutional investor referred to in Note 11b(2), remitted to the Company $500 thousand
in subscription proceeds entitling such investor to 80,128 shares of Common Stock and three-year warrants for an additional 80,128 shares.
The Company has received as of February 28, 2018 a total of $5,000thousand out of the committed $16 million subscription proceeds.
d. In January 2018, the Company entered into investors relation services, marketing and related services agreement. Under the terms of
the agreement, the Company agreed to grant the consultants 100,000 shares of restricted common stock, of which the first 25,000 shares
will vest immediately, and 75,000 shares are to vest monthly over 15 months commencing February 2018.
e. On January 28, 2018 the Company and Adva Biotechnology Ltd. ("Adva"), entered into a Master Services Agreement ("MSA"),
under which the Company and/or its affiliates are to provide certain services relating to development of products to Adva, as may be agreed
between the parties from time to time. Under the MSA, the Company undertook to provide Adva with in kind funding in the form of
materials and services having an aggregate value of $749,900 at the Company's own cost in accordance with a project schedule and related
mutually acceptable project budget. In consideration for and subject to the fulfilment by the Company of such in-kind funding
commitment, Adva agreed that upon completion of the development of the products, the Company and/or its affiliates and Adva shall enter
into a supply agreement pursuant to which for a period of eight (8) years following execution of such supply agreement, the Company
and/or its affiliates (as applicable) is entitled (on a non-exclusive basis) to purchase the products from Adva at a specified discount pricing
from their then standard pricing . The Company and/or its affiliates were also granted a non-exclusive worldwide right to distribute such
products, directly or through any of their respective contract development and manufacturing organization (CDMO) service centers during
such term. The MSA shall remain in effect for 10 years unless earlier terminated in accordance with its terms.
F-41
f. During December 2017 thorough February 2018, the Company entered into definitive agreements with accredited and other qualified
investors relating to a private placement of (i) 408,454 units, Each unit is comprised of (i) one share of the Company’s common stock and
(ii) three-year warrant to purchase up to an additional one share of the Company’s Common Stock at a per share exercise price of $6.24, for
aggregate proceeds to the Company of $2.5 million
g. During December 2017 and January 2018, the Company entered into unsecured convertible note agreements with accredited or
offshore investors for an aggregate amount of $720 thousand. The notes bear an annual interest rate of 6% and mature in six months or two
years from the closing date, unless earlier converted subject to the terms defined in the agreements. The notes provide that the entire
principal amount and accrued interest automatically convert into units as in the agreement under certain condition described in the
agreement. In addition, the Company issued to certain investors 40,064 three-year warrant to purchase up to an additional one share of the
Company’s Common Stock at a per share exercise price of $6.24.
Through February 27, 2018, $650 thousand in principal amount out of these convertible notes were converted into units of the Company's
securities. See additional information in Note 20h.
h. During January and February 2018, holders of $6.8 million in principal and accrued interest of convertible notes with maturity dates
between June 2018 and January 2020 converted these outstanding amounts, in accordance with the terms specified in such notes, into units
of the Company’s securities at a deemed per unit conversion rate of $6.24, with each unit comprised of: (i) one (1) share of the Company’s
Common Stock and (ii) one warrant, exercisable for a period of three years from the date of issuance, for an additional share of Common
Stock, at a per share exercise price of $6.24. As a result of these conversions, the Company will issue 1,087,960 shares of Common Stock
and three-year warrants for an additional 1,087,960 shares of common stock at a per share exercise price of $6.24.
F-42
ORGENESIS, INC.
List of Subsidiaries
Exhibit 21.1
MaSTherCell, S.A.
Orgenesis SPRL
Orgenesis Ltd.
Orgenesis Maryland Inc.
Cell Therapy Holdings S.A.
ORGENESIS INC.
CEO CERTIFICATE
PURSUANT TO SECTION 302
Exhibit 31.1
I, Vered Caplan, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Orgenesis Inc. for the year ended November 30, 2017;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in
this report;
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on
such evaluation; and
Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the
Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the
equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
Registrant’s internal control over financial reporting.
Date:
February 28, 2018
By:
/s/ Vered Caplan
Name: Vered Caplan
Title:
Chief Executive Officer (Principal Executive Officer)
ORGENESIS INC.
CFO CERTIFICATE
PURSUANT TO SECTION 302
Exhibit 31.2
I, Neil Reithinger, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Orgenesis Inc. for the year ended November 30, 2017;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in
this report;
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on
such evaluation; and
Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the
Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the
equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
Registrant’s internal control over financial reporting.
Date:
February 28, 2018
By:
/s/ Neil Reithinger
Name: Neil Reithinger
Title:
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and Principal
Accounting
Officer)
ORGENESIS INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with this Annual Report on Form 10-K of Orgenesis Inc. (the “Company”) for the year ended November 30, 2017 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacity and on the date indicated
below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to
his knowledge:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of
the Company.
Date:
February 28, 2018
By:
/s/ Vered Caplan
Name: Vered Caplan
Title:
Chief Executive Officer (Principal Executive
Officer)
ORGENESIS INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with this Annual Report on Form 10-K of Orgenesis Inc. (the “Company”) for the year ended November 30, 2017 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacity and on the date indicated
below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to
his knowledge:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of
the Company.
Date:
February 28, 2018
By:
/s/ Neil Reithinger
Name: Neil Reithinger
Title:
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and Principal
Accounting
Officer)
ORGENESIS, INC.
AUDIT COMMITTEE CHARTER
I. PURPOSE
The Audit Committee shall provide assistance to the Board of Directors (the "Board") of Orgenesis, Inc. (the "Corporation") in fulfilling
the Board's responsibility to the Corporation's shareholders relating to the Corporation's accounting, financial reporting practices, the
system of internal control, the audit process, the quality and integrity of its financial reports, and the Corporation's process for monitoring
compliance with laws and regulations and the Corporation's code of conduct.
The Audit Committee's responsibility is oversight. Management of the Corporation has the responsibility for the Corporation's financial
statements as well as the Corporation's financial reporting process, principles, and internal controls. The independent auditor is responsible
for performing an audit of the Corporation's annual financial statements, expressing an opinion as to the conformity of such annual
financial statements with generally accepted accounting principles, reviewing the Corporation's quarterly financial statements and other
procedures. Each member of the Audit Committee shall be entitled to rely on (i) the integrity of those persons within the Corporation and
of the professionals and experts (such as the independent auditor) from which it receives information, (ii) the accuracy of the financial and
other information provided to the Audit Committee by such persons, professionals or experts absent actual knowledge to the contrary and
(iii) representations made by management of the independent auditor as to any non-audit services provided by the independent auditor to
the Corporation.
II. AUTHORITY
The Audit Committee has the authority to conduct or authorize investigations into any matters within its scope of responsibility. Its
primary duties and responsibilities are to:
Appoint, compensate, and oversee the work of any registered public accounting firm (referred to herein as the "independent
auditor") employed by the Corporation and, if necessary, replace such independent auditor;
Resolve any disagreements between management and the auditor regarding financial reporting;
Pre-approve all auditing and non-audit services;
Retain independent counsel, accountants, or others to advise the Audit Committee or assist in the conduct of an investigation;
Seek any information it requires from employees—all of whom are directed to cooperate with the Audit Committee's requests—or
external parties;
Meet with the Corporation's officers, the independent auditor, or outside counsel, as necessary; and
Oversee that management has established and maintained processes to assure compliance by the Corporation with all applicable
laws, regulations and corporate policy.
The Audit Committee intends to fulfill these responsibilities primarily by carrying out the activities enumerated in Section IV of this
Charter.
III. MEMBERSHIP AND PROCEDURES
A. Membership and Appointment
The Audit Committee shall be comprised of not fewer than three members of the Board, as shall be determined from time to time by the
Board. The members of the Audit Committee shall hold office until their resignations or until their successors shall be duly elected and
qualified.
All members of the Audit Committee shall be "independent," as such term is defined in Rule 10A-3(b)(1) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), in that each Audit Committee member may not, other than in his or her capacity as a director or
member of any committee of the Board, (i) accept any consulting, advisory, or other compensatory fee from the Corporation or any
subsidiary thereof; or (ii) be an affiliated person of the Corporation or any subsidiary thereof. In addition, all members of the Audit
Committee shall qualify as "independent directors" for purposes of the listing standards of The NASDAQ Stock Market, as such standards
may be changed from time to time; provided, that any non-independent director serving on the Audit Committee pursuant to the
"exceptional and limited circumstances" exception available under NASDAQ rules may not serve on the Audit Committee for more than
two (2) years; and provided, further, that such non-independent director may not be permitted to serve as Chairperson of the Audit
Committee.
All members of the Audit Committee shall be financially literate by being familiar with basic finance and accounting practices and able
to read and understand fundamental financial statements at the time of their appointment to the Audit Committee. Furthermore, at least one
member of the Audit Committee shall be designated as the "financial expert" with financial sophistication as defined by having experience
in finance or accounting, professional certification in accounting, or any other comparable experience or background, such as being or
having been a CEO or CFO or other senior officer with financial oversight responsibilities. The Corporation shall disclose, in its annual
report, whether or not, and if not, the reasons therefor, the Audit Committee includes at least one "audit committee financial expert," as
defined by Item 407(d)(5)(ii) of Regulation S-K under the Securities Act of 1933, as amended (the "Securities Act").
B. Removal
The entire Audit Committee or any individual Audit Committee member may be removed without cause by the affirmative vote of a
majority of the Board. Any Audit Committee member may resign effective upon giving oral or written notice to the Chairman of the Board,
the Secretary of the Corporation, or the Board (unless the notice specifies a later time for the effectiveness of such resignation). The Board
may elect a successor to assume the available position on the Audit Committee when the resignation becomes effective.
C. Chairperson
A chairperson of the Audit Committee (the "Chairperson") may be designated by the Board. In the absence of such designation, the
members of the Audit Committee may designate the Chairperson by majority vote of the full Audit Committee membership. The
Chairperson shall determine the agenda for and the length of meetings and shall have unlimited access to management and to information
relating to the Audit Committee's purposes. The Chairperson shall establish such other rules as may from time to time be necessary and
proper for the conduct of the business of the Audit Committee.
D. Meetings, Minutes and Reporting
The Audit Committee shall meet as required but not less than once per quarter. All Audit Committee members are expected to attend
each meeting, in person or via tele- or video-conference. Meeting agendas will be prepared and provided in advance to members, along
with appropriate briefing materials.
- 2 -
The Audit Committee shall keep minutes of the proceedings of the Audit Committee. In addition to the specific matters set forth herein
requiring reports by the Audit Committee to the full Board, the Audit Committee shall report such other significant matters as it deems
necessary concerning its activities to the full Board. The Audit Committee may appoint a Secretary whose duties and responsibilities shall
be to keep records of the proceedings of the Audit Committee for the purposes of reporting Audit Committee activities to the Board and to
perform all other duties as may from time to time be assigned to him or her by the Audit Committee, or otherwise at the direction of an
Audit Committee member. The Secretary need not be a member of the Audit Committee or a director and shall have no membership or
voting rights by virtue of the position.
As part of its job to foster open communication, the Audit Committee should meet separately, at least annually, with management, the
director of the internal auditing department and the independent auditor to discuss any matters that the Audit Committee or each of these
groups believe should be discussed privately. In addition, the Audit Committee or at least its Chairperson should meet separately with the
independent auditor, and management quarterly to review the Corporation's financial statements in accordance with Section IV below.
A majority of Committee members shall constitute a quorum for the transaction of business. The action of a majority of those present at
a meeting at which a quorum is attained, shall be the act of the Committee. The Committee may delegate matters within its responsibility to
subcommittees composed of certain of its members.
E. Delegation
The Audit Committee may, by resolution passed by a majority of the Audit Committee members, designate one or more subcommittees,
each subcommittee to consist of one or more members of the Audit Committee. Any such subcommittee, to the extent provided in the
resolutions of the Audit Committee and to the extent not limited by applicable law, shall have and may exercise all the powers and authority
of the Audit Committee. Each subcommittee shall have such name as may be determined from time to time by resolution adopted by the
Audit Committee. Each subcommittee shall keep regular minutes of its meetings and report the same to the Audit Committee or the Board
when required.
F. Authority to Retain Advisors
In the course of its duties, the Audit Committee shall have the authority, at the Corporation's expense and without needing to seek
approval for the retention of such advisors or consultants from the Board, to retain and terminate consultants, legal counsel, or other
advisors, as the Audit Committee deems advisable, including the sole authority to approve any such advisors' fees and other retention terms.
IV. DUTIES AND RESPONSIBILITIES
The Audit Committee, in its capacity as a committee of the Board, shall be directly responsible for the appointment, retention,
compensation, evaluation, oversight and, if necessary, termination of the independent auditor(s) employed by the Corporation (including
resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an
audit report or related work, and each independent auditor shall report directly to the Audit Committee.
- 3 -
The following shall be recurring duties and responsibilities of the Audit Committee in carrying out its purposes. These duties and
responsibilities are set forth below as a guide to the Audit Committee, with the understanding that the Audit Committee may alter or
supplement them as appropriate under the circumstances, to the extent permitted by applicable law.
A. Document Review & Reporting Process
1.
2.
3.
4.
5.
6.
7.
8.
9.
Review and reassess, at least annually, the adequacy of this Charter, make recommendations to the Board and request
approval for proposed changes, as conditions dictate, to update this Charter, and ensure appropriate disclosure as may be
required by law or regulation.
Review with management and the independent auditor the Corporation's annual financial statements and Form 10-K prior to
the filing of the Form 10-K or prior to the release of earnings, including a discussion with the independent auditor of the
matters required to be discussed under the applicable Statements of Auditing Standards ("SAS").
Review with management and the independent auditor each Form 10-Q prior to its filing or prior to the release of earnings,
including a discussion with the independent auditor of the matters required to be discussed under SAS. The Chairperson of
the Audit Committee may represent the entire Audit Committee for purposes of this review.
Review with management and the independent auditor the effect of regulatory and accounting initiatives that may affect the
Corporation, as well as the effect of any off- balance sheet structures and transactions on the Corporation's financial
statements.
Regularly report to the Board about Audit Committee activities, issues, and related recommendations.
Provide an open avenue of communication between the internal auditing department, the independent auditor, and the Board.
Report annually to the shareholders, describing the Audit Committee's composition, responsibilities and how they were
discharged, and any other information required by applicable rules and regulations, including approval of non-audit services.
Review any other reports the Corporation issues that relate to Audit Committee responsibilities.
Perform other activities related to this Charter as requested by the Board.
10.
Institute and oversee special investigations as needed.
11.
Confirm annually that all responsibilities outlined in this Charter have been carried out.
12.
Evaluate the Audit Committee's and each member's performance and qualifications under applicable rules and regulations on a
regular basis.
B. Financial Reporting Process
1.
In consultation with the independent auditor and the chief audit executive, review the integrity of the Corporation's financial
reporting processes and the coordination of the internal audit function with the independent auditor. The Audit Committee shall
report regularly to and review with the full Board any issues that arise with respect to the quality or integrity of the Corporation's
financial statements, compliance with legal or regulatory requirements, the performance and independence of the independent
auditor, or the performance of the internal audit function.
- 4 -
2.
3.
4.
5.
Consider and approve, if appropriate, changes to the Corporation's auditing and accounting principles and practices as suggested by
the independent auditor, management, or the internal auditing department.
Ensure that there exist regular systems of reporting to the Audit Committee by each of management, the independent auditor and the
chief audit executive regarding any significant judgments made in management's preparation of the financial statements and any
significant difficulties encountered during the course of the review or audit, including any restrictions on the scope of work or access
to required information.
Regularly review any significant disagreements among management and the independent auditor or the internal auditing department
in connection with the preparation of the financial statements.
Ensure and oversee timely reports from the independent auditor to the Audit Committee of (i) all critical accounting policies and
practices; (ii) all alternative treatments of financial information within generally accepted accounting principles that have been
discussed with management officials of the Corporation, ramifications of the use of such alternative disclosures and treatments, and
the treatment preferred by the independent auditor; and (iii) other material written communications between the independent auditor
and the management of the Corporation, such as any management letter or schedule of unadjusted differences.
C. Financial Statements
1.
2.
3.
4.
5.
6.
7.
Review significant accounting and reporting issues, including complex or unusual transactions (such as off-balance sheet structures,
if any) and highly judgmental areas, and recent professional and regulatory pronouncements, and understand their impact on the
financial statements.
Review with management and the independent auditor the results of the audit, including any difficulties encountered and any
significant changes in the audit plan.
Review the annual financial statements, and consider whether they are complete, consistent with information known to the Audit
Committee members, and reflect appropriate accounting principles.
Review other sections of the annual report and related regulatory filings before release and consider the accuracy and completeness
of the information.
Review with management and the independent auditor all matters required to be communicated to the Audit Committee under
generally accepted auditing standards.
Understand how management and the internal auditing department prepare interim financial statements, and the degree of
involvement of the independent auditor in the review process.
Review interim financial statements with management and the independent auditor before filing with regulators, and consider
whether financial statements are complete and consistent with the information known to the Audit Committee members.
- 5 -
D. Internal Controls
1.
2.
3.
4.
Discuss with management and the independent auditor policies and programs with respect to risk management and risk assessment
and inquire about risks or exposures facing the Corporation.
Understand how the internal auditing department has implemented and maintains the Corporation's internal controls and understand
the process for the independent auditor's review of the internal controls, and obtain reports on significant findings and
recommendations regarding effectiveness of the controls, together with management's responses.
Consider and review with the independent auditor the effectiveness of the Corporation's internal control system, including
information technology security and control.
Review management's annual internal control report which acknowledges management's responsibility for establishing and
maintaining an adequate internal control structure and procedures for financial reporting; and contains an assessment of the
effectiveness of the internal control structure.
E. Internal Audit
1.
2.
3.
4.
Review with management and the chief audit executive the charter, plans, activities, staffing, and organizational structure of the
internal audit function.
Ensure there are no unjustified restrictions or limitations, and review and concur in the appointment, replacement, or dismissal of the
chief audit executive.
Review the effectiveness of the internal audit function, including compliance with The Institute of Internal Auditors' Standards for
the Professional Practice of Internal Auditing.
On a regular basis, meet separately with the chief audit executive to discuss any matters that the Audit Committee or the chief audit
executive believes should be discussed privately.
F. Independent Auditor
1.
2.
3.
Review the independent auditor's proposed scope and approach for the audit, including coordination with internal audit function.
Review the performance of the independent auditor, and exercise final approval on the appointment or discharge of the independent
auditor. The Audit Committee has the sole authority and responsibility to select, evaluate, and where appropriate, replace the
independent auditor. The independent auditor is ultimately accountable to the Audit Committee for such auditor's review of the
financial statements and internal controls of the Corporation. The Audit Committee shall also exercise final approval on the
compensation of the independent auditor.
Approve in advance all audit services and all permitted non-audit services, except where such services are determined to be de
minimis under the Exchange Act. The Audit Committee may delegate, to one or more designated members of the Audit Committee,
the authority to grant such pre-approvals. The decisions of any member to whom such authority is delegated shall be presented to the
full Audit Committee at each of its scheduled meetings.
- 6 -
4.
Review and ensure the independence of the auditor by:
receiving from, and reviewing and discussing with, the auditor, on a periodic basis, a formal written statement delineating all
relationships between the auditor and the Corporation consistent with the applicable requirements of the Public Company
Accounting Oversight Board;
reviewing, and actively discussing with the Board, if necessary, and the auditor, on a periodic basis, any disclosed
relationships or services, including non-audit services, between the auditor and the Corporation or any other disclosed
relationships or services that may impact the objectivity and independence of the auditor;
recommending, if necessary, that the Board take appropriate action to satisfy itself of the auditor's independence; and
ensuring that the lead or coordinating audit partner having primary responsibility for the audit, or the audit partner
responsible for reviewing the audit does not perform audit services for the Corporation for more than five consecutive fiscal
years.
5.
6.
Set clear policies for the hiring by the Corporation of employees or former employees of the Corporation's independent auditor.
On a regular basis, meet separately with the independent auditor to discuss any matters that the Audit Committee or independent
auditor believes should be discussed privately.
G. Approval of Related Person Transactions
1.
Review and approve, prior to the Corporation's entry into any such transactions, all transactions in which the Corporation is or will
be a participant, which would be reportable by the Corporation under Item 404 of Regulation S-K promulgated under the Securities
Act as a result of any of the following persons having or expected to have a direct or indirect material interest (a "Related Person
Transaction"):
executive officers of the Corporation;
members of the Board;
beneficial holders of more than 5% of the Corporation's securities;
immediate family members1 of any of the foregoing persons; and
any other persons whom the Board determines may be considered to be related persons as defined by Item 404 of Regulation
S-K promulgated under the Securities Act.
2.
In reviewing and approving such transactions, the Audit Committee shall obtain, or shall direct management to obtain on its behalf,
all information that the Audit Committee believes to be relevant and important to a review of the transaction prior to its approval.
Following receipt of the necessary information, a discussion shall be held of the relevant factors if deemed to be necessary by the
Audit Committee prior to approval. If a discussion is not deemed to be necessary, approval may be given by written consent of the
Audit Committee. This approval authority may also be delegated to the Chairperson of the Audit Committee in some circumstances.
No Related Person Transaction shall be entered into prior to the completion of these procedures.
________________________
1 "Immediate family member" means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law, or sister-in-law, and any person (other than a tenant or employee) sharing the household with the executive
officer, director or 5% beneficial owner.
- 7 -
3.
The Audit Committee or the Chairperson, as the case may be, shall approve only those Related Person Transactions that are
determined to be in, or not inconsistent with, the best interests of the Corporation and its stockholders, taking into account all
available facts and circumstances as the Audit Committee or the Chairperson determines in good faith to be necessary in accordance
with principles of Delaware law generally applicable to directors of a Delaware corporation. No member of the Audit Committee
shall participate in any review, consideration or approval of any Related Person Transaction with respect to which the member or
any of his or her immediate family members has an interest.
4.
The Audit Committee shall adopt any further policies and procedures relating to the approval of Related Person Transactions that it
deems necessary or advisable from time to time.
H. Legal Compliance/General
I.
2.
3.
4.
Review, with the Corporation's counsel, any legal or regulatory matter that could have a significant impact on the Corporation's
financial statements.
Review and approve the Corporation's investment policies.
Review the adequacy of the Corporation's insurance coverage.
Review the status of any material tax audits and proceedings, the Corporation's tax strategy and other material tax matters.
5. Maintain minutes or other records of meetings and activities of the Audit Committee.
6. When deemed necessary by the members of the Audit Committee, retain independent legal, accounting or other advisors or
consultants to advise and assist the Audit Committee in carrying out its duties, without needing to seek approval for the retention of
such advisors or consultants from the Board. The Audit Committee shall determine the appropriate compensation for any advisors
retained by the Audit Committee. The Audit Committee may request any officer or employee of the Corporation or the Corporation's
outside counsel or independent auditor to attend a meeting of the Audit Committee or to meet with any members of, or consultants to,
the Audit Committee.
7.
8.
Establish procedures for (i) the receipt, retention, and treatment of complaints received by the Corporation from external parties
regarding accounting, internal accounting controls, or auditing matters; and (ii) the confidential, anonymous submission by
employees of the Corporation of concerns regarding questionable accounting or auditing matters, whether through the whistleblower
hotline or other reporting channels. Ensure such procedures maintain the confidentiality and anonymity of persons reporting
violations or suspected violations and ensure that the Corporation does not take retaliatory actions against those reporting.
Review the effectiveness of the system for monitoring compliance with laws and regulations and the results of management's
investigation and follow-up (including disciplinary action) of any instances of noncompliance.
6.
7.
8.
9.
Review the findings of any examinations by regulatory agencies, and any auditor observations.
Review the process for communicating the code of conduct to the Corporation's personnel, and for monitoring compliance
therewith.
Obtain regular updates from management and the Corporation's legal counsel regarding compliance matters.
Review with management the policies and procedures with respect to officers' expense accounts and perquisites.
10.
Perform any other activities consistent with this Charter, the Corporation's by-laws, and governing law, as the Audit
Committee or the Board deems necessary or appropriate.
- 8 -
V. COMPENSATION
Audit Committee members shall be compensated by the Corporation solely in the form of directors' fees. Audit Committee members
may, however, receive greater fees than those received for Board service by other Board members, in light of their heightened
responsibilities to the Corporation.
ORGENESIS, INC.
COMPENSATION COMMITTEE CHARTER
I. PURPOSE
The purpose of the Compensation Committee (the "Committee") of the Board of Directors (the "Board") of Orgenesis, Inc. (the
"Corporation") is:
1.
2.
3.
4.
To discharge the responsibilities of the Board relating to compensation of the Corporation's directors, executive officers and
key employees;
To assist the Board in establishing appropriate incentive compensation and equity-based plans and to administer such plans;
and
To oversee the annual process of evaluation of the performance of the Corporation's management; and
To perform such other duties and responsibilities as enumerated in and consistent with this Charter.
II. MEMBERSHIP AND PROCEDURES
A. Membership and Appointment
The Committee shall be comprised of not fewer than two members of the Board, as shall be determined from time to time by the Board.
The members of the Committee shall be elected by the Board, or the committee thereof responsible for nominations of directors, at the
annual organizational meeting of the Board or such committee, as applicable, and shall hold office until their resignation or removal or until
their successors shall be duly elected and qualified.
All members of the Committee shall qualify as "independent directors" for purposes of the listing standards of The NASDAQ Stock
Market, as such standards may be changed from time to time. To the extent that the Board deems practicable and advisable, all members of
the Committee shall also qualify as "non-employee directors" for purposes of Rule 16b-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and as "outside directors" for purposes of Section 162(m) of the Internal Revenue Code of 1986, as
amended, as such standards and definitions may be revised or amended from time to time; provided, however, that notwithstanding
anything contained herein to the contrary, if not all members of the Committee qualify as non- employee directors, any grant of equity
compensation to directors and officers (as defined by Rule 16a-1(f) of the Exchange Act) shall be made by the full Board or a
subcommittee of the Committee comprised of at least two members who qualify as non-employee directors.
B. Removal
The entire Committee or any individual Committee member may be removed without cause by the affirmative vote of a majority of the
Board. Any Committee member may resign effective upon giving oral or written notice to the Chairman of the Board, the Secretary of the
Corporation, or the Board (unless the notice specifies a later time for the effectiveness of such resignation). The Board may elect a
successor to assume the available position on the Committee when the resignation becomes effective.
C. Chairperson
A chairperson of the Committee (the "Chairperson") may be designated by the Board. In the absence of such designation, the members
of the Committee may designate the Chairperson by majority vote of the full Committee membership. The Chairperson shall determine the
agenda for and the length of meetings and shall have unlimited access to management and to information relating to the Committee's
purposes. The Chairperson shall establish such other rules as may from time to time be necessary and proper for the conduct of the business
of the Committee.
D. Meetings, Minutes and Reporting
The Committee shall meet at least two times per year and at such other times as it deems necessary to carry out its responsibilities. All
Committee members are expected to attend each meeting, in person or via tele- or video-conference.
The Committee shall keep full and complete minutes of the proceedings of the Committee. In addition to the specific matters set forth
herein requiring reports by the Committee to the full Board, the Committee shall report such other significant matters as it deems necessary
concerning its activities to the full Board. The Committee may appoint a Secretary whose duties and responsibilities shall be to keep
records of the proceedings of the Committee for the purposes of reporting Committee activities to the Board and to perform all other duties
as may from time to time be assigned to him or her by the Committee, or otherwise at the direction of a Committee member. The Secretary
need not be a member of the Committee or a director and shall have no membership or voting rights by virtue of the position.
E. Delegation & Meetings
The Committee may, by resolution passed by a majority of the Committee members, designate one or more subcommittees, each
subcommittee to consist of one or more members of the Committee. Any such subcommittee, to the extent provided in the resolutions of
the Committee and to the extent not limited by applicable law, shall have and may exercise all the powers and authority of the Committee.
Each subcommittee shall have such name as may be determined from time to time by resolution adopted by the Committee. Each
subcommittee shall keep regular minutes of its meetings and report the same to the Committee or the Board when required.
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A majority of Committee members shall constitute a quorum for the transaction of business. The action of a majority of those present at
a meeting at which a quorum is attained, shall be the act of the Committee.
F. Authority to Retain Advisors
In the course of its duties, the Committee shall have the sole authority, at the Corporation's expense, to retain and terminate
compensation consultants, legal counsel, or other advisors, as the Committee deems advisable, including the sole authority to approve any
such advisors' fees and other retention terms.
III. DUTIES AND RESPONSIBILITIES
The following shall be recurring duties and responsibilities of the Committee in carrying out its purposes. These duties and
responsibilities are set forth below as a guide to the Committee, with the understanding that the Committee may alter or supplement them as
appropriate under the circumstances, to the extent permitted by applicable law.
1.
2.
3.
4.
5.
Establish a compensation policy for executives designed to (i) enhance the profitability of the Corporation and increase
stockholder value, (ii) reward executive officers for their contribution to the Corporation's growth and profitability, (iii)
recognize individual initiative, leadership, achievement, and other contributions and (iv) provide competitive compensation
that will attract and retain qualified executives.
Subject to variation where appropriate, the compensation policy for executive officers and other key employees shall include
(i) base salary, which shall be set on an annual or other periodic basis, (ii) annual or other time or project based incentive
compensation, which shall be awarded for the achievement of predetermined financial, project, research or other designated
objectives of the Corporation as a whole and of the executive officers and key employees individually and (iii) long-term
incentive compensation in the forms of equity participation and other awards with the goal of aligning, where appropriate, the
long-term interests of executive officers and other key employees with those of the Corporation's stockholders and otherwise
encouraging the achievement of superior results over an extended time period.
Review competitive practices and trends to determine the adequacy of the executive compensation program.
Review and consider participation and eligibility in the various components of the total executive compensation package.
Annually review and approve corporate goals and objectives relevant to CEO compensation, evaluate the CEO's performance
in light of those goals and objectives, and recommend to the Board the CEO's compensation levels based on this evaluation.
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6.
7.
8.
9.
Annually review and make recommendations to the Board with respect to compensation of directors, executive officers of the
Corporation other than the CEO and key employees.
Approve employment contracts, severance arrangements, change in control provisions and other agreements.
Approve and administer cash incentives and deferred compensation plans for executives (including any modification to such
plans) and oversight of performance objectives and funding for executive incentive plans.
Approve and oversee reimbursement policies for directors, executive officers and key employees.
10.
Review matters relating to management succession, including, but not limited to, compensation.
11.
Approve and oversee compensation programs involving the use of the Corporation's stock.
12.
13.
14.
If the Corporation is required by applicable Securities and Exchange Commission ("SEC") rules to include a Compensation
Discussion and Analysis ("CD&A") in its SEC filings, review the CD&A prepared by management, discuss the CD&A with
management and, based on such review and discussions, recommend to the Board that the CD&A be included in the
Corporation's Annual Report on Form 10-K, proxy statement, or any other applicable filing as required by the SEC.
Review all compensation policies and practices for all employees to determine whether such policies and practices create
risks that are reasonably likely to have a material adverse effect on the Corporation.
Periodically review executive supplementary benefits and, as appropriate, the organization's retirement, benefit, and special
compensation programs involving significant cost.
15.
Form and delegate authority to subcommittees when appropriate.
16. Make regular reports to the Board.
17.
Annually review and reassess the adequacy of this Charter and recommend any proposed changes to the Board for approval.
18.
Annually evaluate its own performance.
19.
Oversee the annual process of performance evaluations of the Corporation's management.
20.
Fulfill such other duties and responsibilities as may be assigned to the Committee, from time to time, by the Board and/or the
Chairman of the Board.
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