Evogene(US:EVGN)2020-04-27 15:01PART I This section provides comprehensive details on the company's financial performance, operational structure, governance, and key risks, including selected financial data, business overview, and market risk exposures Key Information This section presents selected consolidated financial data for the five years ended December 31, 2019, showing a history of operating losses and negative cash flow, alongside significant risks related to the company's business, industry, intellectual property, Israeli location, and share ownership Selected Financial Data The company has a history of operating losses, with a net loss of $19.1 million in 2019, and declining revenues from $3.4 million in 2017 to $0.8 million in 2019, while total assets increased to $71.4 million Selected Consolidated Financial Data (U.S. dollars in thousands) | Indicator | 2019 (in thousands) | 2018 (in thousands) | 2017 (in thousands) | | :--- | :--- | :--- | :--- | | Total Revenues | $753 | $1,747 | $3,381 | | Operating Loss | $(21,166) | $(19,989) | $(21,947) | | Loss | $(19,115) | $(20,812) | $(20,838) | | Basic and Diluted Loss Per Share | $(0.70) | $(0.81) | $(0.81) | | Total Assets (End of Period) | $71,364 | $58,694 | $77,602 | | Shareholders' Equity (End of Period) | $60,217 | $50,306 | $69,378 | Risk Factors The company faces significant risks including potential equity dilution in subsidiaries, product commercialization failures, lengthy development cycles, reliance on collaborators, intense competition, regulatory hurdles, operational disruptions from COVID-19, intellectual property protection issues, Israeli political conditions, and share price volatility - The company's new corporate strategy involves subsidiaries that may seek external financing, which could dilute Evogene's ownership and reduce the benefit recognized by its shareholders from any value created in these subsidiaries44 - There is a significant risk that the company's discoveries and product candidates may not achieve the desired effects to become commercially viable products, as none, except for castor varieties, have completed the development process454647 - The COVID-19 pandemic poses a risk of disrupting operations for the company, its collaborators, and contractors, potentially causing operational delays, labor shortages, and travel disruptions that could adversely affect development programs100101103 - The company has a history of operating losses, incurring $21.1 million, $20.0 million, and $21.9 million in losses for the years ended December 31, 2019, 2018, and 2017, respectively, and may never achieve profitability109 - The company believes it was classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes in 2019 and faces a significant risk of being a PFIC in 2020, which could lead to adverse tax consequences for U.S. shareholders189190 Information on the Company Evogene is a biotechnology company using its Computational Predictive Biology (CPB) platform to develop products for agriculture, human health, and industrial applications, operating through market-focused subsidiaries and strategic partnerships History and Development of the Company Evogene Ltd., founded in 1999 and spun off in 2002, has been listed on TASE since 2007 and Nasdaq since 2016, reorganizing divisions into subsidiaries in 2018-2019 with $0.9 million in 2019 capital expenditures - The company was founded in 1999, spun-off as an independent corporation in 2002, and has been listed on the TASE since 2007 and on Nasdaq since 2016193194 Capital Expenditures (USD) | Year | Amount (in millions USD) | | :--- | :--- | | 2019 | $0.9 | | 2018 | $0.4 | | 2017 | $0.6 | Business Overview Evogene leverages its Computational Predictive Biology (CPB) platform to develop products in agriculture, human health, and industrial applications through market-focused subsidiaries and strategic partnerships, notably Corteva's $10 million investment in Lavie Bio and the establishment of Canonic in 2019 - Evogene's business model focuses on two pathways: establishing market-focused subsidiaries and engaging in direct strategic partnerships, both leveraging its CPB platform201 - The company operates through subsidiaries and divisions in three main areas: Agriculture (ag-biologicals, ag-chemicals, seed traits), Human Health (microbiome therapeutics, medical cannabis), and Industrial Applications (castor seeds)205 - In August 2019, Corteva AgriScience invested in Lavie Bio, providing $10 million in equity and contributing its shares in Taxon Biosciences in exchange for approximately 28% of Lavie Bio's equity212257 - In April 2019, the company established a new subsidiary, Canonic Ltd., to develop next-generation medical cannabis products211393 Organizational Structure Evogene Ltd. operates through several significant subsidiaries, including 100% ownership in AgPlenus, Canonic, and Casterra Ag, 90.9% in Biomica, and 72.2% in Lavie Bio Ownership of Significant Subsidiaries | Subsidiary | Jurisdiction | Ownership Interest | | :--- | :--- | :--- | | AgPlenus Ltd. | Israel | 100% | | Biomica Ltd. | Israel | 90.9% | | Canonic Ltd. | Israel | 100% | | Casterra Ag Ltd. | Israel | 100% | | Lavie Bio Ltd. | Israel | 72.2% | Property, Plants and Equipment The company's principal facilities include leased offices and labs in Rehovot, Israel, and a research and development facility in St. Louis, Missouri, housing Lavie Bio Inc. activities - The main corporate offices and labs are located in 3,209 square meters of leased space in Rehovot, Israel, with the lease expiring on December 31, 2021430 - A research and development facility is leased in St. Louis, Missouri, expiring November 1, 2021, which houses the activities of subsidiary Lavie Bio Inc433 Operating and Financial Review and Prospects This section details the company's financial performance, liquidity, and capital resources, showing a significant revenue decrease to $0.8 million in 2019, an operating loss widening to $21.2 million, and a strong cash position of $46.9 million bolstered by a $10 million Corteva investment Operating Results For 2019, total revenues decreased by 56.9% to $0.8 million due to the completion of Monsanto collaboration activities, leading to an increased operating loss of $21.2 million despite a 77.0% decrease in cost of revenues, while net loss narrowed to $19.1 million Comparison of Operating Results (U.S. dollars in thousands) | Item | 2019 (in thousands) | 2018 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $753 | $1,747 | (56.9)% | | Cost of Revenues | $334 | $1,452 | (77.0)% | | Gross Profit | $419 | $295 | 42.0% | | Operating Loss | $(21,166) | $(19,989) | 5.9% | | Loss | $(19,115) | $(20,812) | (8.2)% | - The decline in 2019 revenues was mainly due to the completion of gene discovery and optimization activities under the collaboration agreement with Monsanto463 - Research and development expenses increased by 7.5% to $15.8 million in 2019, driven by payments for pre-clinical studies at Biomica, field trials at Lavie Bio, and seed collection acquisition for Canonic467 Liquidity and Capital Resources As of December 31, 2019, the company had $46.9 million in cash and equivalents and $43.3 million in working capital, with net cash used in operating activities at $17.7 million, bolstered by a $10 million Corteva investment and ongoing government grants - As of December 31, 2019, the company held $46.9 million in cash, marketable securities, and short-term bank deposits, and had working capital of $43.3 million503 Cash Flow Summary (U.S. dollars in thousands) | Cash Flow Activity | 2019 (in thousands) | 2018 (in thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | $(17,666) | $(15,161) | | Net cash provided by investing activities | $37,139 | $17,353 | | Net cash provided by financing activities | $9,306 | $297 | - Cash from financing activities in 2019 included $10 million from the issuance of subsidiary shares to third parties, primarily the Corteva investment514 - The company has received government grants from entities like the IIA and BIRD, with total grants received from the IIA amounting to $7.4 million (including interest) through 2019516517 Directors, Senior Management and Employees This section details the company's leadership, compensation policies, and board practices, with aggregate compensation for directors and executive officers at approximately $3.2 million in 2019, and a total of 143 employees as of year-end 2019 Directors and Senior Management The company is led by President and CEO Ofer Haviv and a team of executive officers, with a six-member Board of Directors chaired by Martin S. Gerstel, a majority of whom are independent - The executive team includes Ofer Haviv as President and CEO of Evogene Ltd., with separate CEOs leading the subsidiaries Lavie Bio, Biomica, Canonic, and AgPlenus542543 Compensation In 2019, aggregate compensation for all directors and executive officers was approximately $3.2 million, governed by a formal compensation policy, with various share option plans for parent and subsidiary levels - Aggregate compensation for all directors and executive officers for the year ended December 31, 2019, was approximately $3.2 million561 2019 Compensation for Top 5 Executive Officers (in thousands, US$) | Name and Position | Salary and benefits (in thousands US$) | Bonus (in thousands US$) | Value of Options Granted (in thousands US$) | Total (in thousands US$) | | :--- | :--- | :--- | :--- | :--- | | Ofer Haviv, President and CEO | 366 | 76 | 96 | 538 | | Eran Kosover, CEO AgPlenus | 208 | - | 370 | 578 | | Ido Dor, CEO Lavie Bio | 209 | 48 | 404 | 661 | | Mark Kapel, EVP Technology | 199 | 35 | 51 | 285 | | Dorit Kreiner, CFO | 201 | 31 | 45 | 277 | - As of April 20, 2020, there were options to purchase 4,124,899 ordinary shares outstanding under the company's incentive plans, with an additional 1,653,827 shares available for future grants583 Board Practices The Board of Directors consists of six annually elected members, adhering to Nasdaq independence and committee composition rules while leveraging exemptions from Israeli external director requirements, with established Audit, Compensation and Nominating, and Corporate Development Committees - The Board of Directors currently consists of six directors, elected annually for a one-year term592593 - The company has opted out of the Israeli Companies Law requirement to appoint external directors, leveraging an exemption for foreign-listed companies without a controlling shareholder, and instead adheres to Nasdaq independence rules599601 - The board has established an Audit Committee, a Compensation and Nominating Committee, and a Corporate Development Committee to oversee various aspects of governance and strategy604612618 Employees As of December 31, 2019, Evogene and its subsidiaries had 143 employees, a decrease from 150 in 2018 and 165 in 2017, with 139 based in Israel and approximately 67% engaged in research and development Total Employees (Year-End) | Year | Number of Employees | | :--- | :--- | | 2019 | 143 | | 2018 | 150 | | 2017 | 165 | - As of December 31, 2019, approximately 67% of the company's workforce was engaged in research and development534 Major Shareholders and Related Party Transactions This section identifies major shareholders with holdings greater than 5%, including Waddell & Reed (10.7%), Senvest Management (8.5%), The Phoenix Holdings (7.6%), Monsanto Company (6.4%), and UBS Group (5.3%), and confirms related party transactions Major Shareholders (as of April 20, 2020) | Shareholder | Ownership Percentage | | :--- | :--- | | Entities affiliated with Waddell & Reed Financial, Inc. | 10.7% | | Entities affiliated with Senvest Management, LLC | 8.5% | | Entities affiliated with The Phoenix Holdings Ltd. | 7.6% | | Monsanto Company | 6.4% | | Entities affiliated with UBS Group AG | 5.3% | - All directors and executive officers as a group beneficially own 11.6% of the company's shares655 Financial Information This section contains the company's consolidated financial statements and notes that the company is not currently involved in any significant legal proceedings, and has not paid dividends since its inception, planning to retain earnings for business use - The company is not currently involved in any legal proceedings that could be reasonably expected to have a significant effect on its financial position687 - The company has never declared or paid dividends and intends to retain any future earnings to fund its business operations688 Additional Information This section provides details on material contracts, exchange controls, and taxation, including collaboration agreements with Bayer and Corteva, and the company's classification as a Passive Foreign Investment Company (PFIC) in 2019 for U.S. federal income tax purposes Material Contracts The company's material contracts include collaboration and license agreements with Bayer (formerly Monsanto) and a share purchase agreement with Corteva related to its investment in the Lavie Bio subsidiary, alongside indemnification agreements with office holders - Key material contracts include collaboration agreements with Bayer and a share purchase agreement with Corteva for its investment in Lavie Bio700701 Taxation This subsection outlines material Israeli and U.S. federal income tax consequences for shareholders, noting general exemption from Israeli capital gains tax for non-residents but a 25% dividend withholding tax, and the company's belief it was a Passive Foreign Investment Company (PFIC) in 2019 - Non-Israeli resident shareholders are generally exempt from Israeli capital gains tax on the sale of shares but are subject to a 25% withholding tax on dividends (30% for a "substantial shareholder"), potentially reducible by tax treaties707711 - The company believes it was classified as a PFIC for U.S. federal income tax purposes for the 2019 taxable year, which may subject U.S. Holders to adverse tax rules on excess distributions and gains728732 Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks, primarily foreign currency risk from USD revenues and NIS expenses, where a 10% decrease in USD relative to NIS would have increased 2019 financing expenses by $0.8 million, and interest rate risk on its $2.1 million marketable securities - The company's primary market risk is foreign currency exposure, as most revenues are in USD while significant expenses are in NIS. A 10% decrease in the USD relative to the NIS would have increased 2019 financing expenses by $0.8 million758759 - The company is exposed to interest rate risk through its $2.1 million investment in marketable securities as of December 31, 2019. A hypothetical 0.5% increase in interest rates would result in a potential fair value loss of approximately $0.03 million762 PART II This section details the company's internal controls, disclosure procedures, and corporate governance practices, including audit committee composition and ethical guidelines Controls and Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2019, with no material changes reported during the period - Management concluded that as of December 31, 2019, the company's disclosure controls and procedures were effective768 - Based on an assessment using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2019771 Corporate Governance This section covers various corporate governance topics, including the audit committee's financial experts, the company's Code of Ethics, and its adherence to Israeli law for certain governance matters as a foreign private issuer - The company has adopted a Code of Ethics and Proper Business Conduct applicable to all executive officers, directors, and employees775 - As a foreign private issuer, the company follows Israeli corporate law instead of Nasdaq rules regarding quorum for shareholder meetings, which is set at 25% of voting power784 Principal Accountant Fees (2018-2019) | Fee Type | 2019 (USD) | 2018 (USD) | | :--- | :--- | :--- | | Audit Fees | $130,000 | $155,000 | | Audit-Related Fees | $5,000 | - | | Tax Fees | $14,000 | $23,000 | | Total | $149,000 | $178,000 | PART III This section presents the company's audited consolidated financial statements for the three years ended December 31, 2019, prepared in accordance with IFRS Financial Statements This section includes the audited consolidated financial statements for Evogene Ltd. and its subsidiaries for the three years ended December 31, 2019, prepared in accordance with IFRS, showing total assets of $71.4 million and a net loss of $19.1 million for 2019 Consolidated Statement of Financial Position (U.S. dollars in thousands) | Account | Dec 31, 2019 (in thousands) | Dec 31, 2018 (in thousands) | | :--- | :--- | :--- | | Total Current Assets | $49,027 | $55,488 | | Total Assets | $71,364 | $58,694 | | Total Current Liabilities | $5,729 | $5,431 | | Total Liabilities | $11,147 | $8,388 | | Total Equity | $60,217 | $50,306 | Consolidated Statement of Profit or Loss (U.S. dollars in thousands) | Account | 2019 (in thousands) | 2018 (in thousands) | 2017 (in thousands) | | :--- | :--- | :--- | :--- | | Revenues | $753 | $1,747 | $3,381 | | Operating Loss | $(21,166) | $(19,989) | $(21,947) | | Loss | $(19,115) | $(20,812) | $(20,838) |