Orgenesis(ORGS) - 2023 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION This section covers the unaudited condensed consolidated financial statements and management's analysis ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements for Orgenesis Inc., including the balance sheets, statements of loss and comprehensive loss, statements of changes in equity, and statements of cash flows for the three months ended March 31, 2023 and 2022, along with accompanying notes Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position at March 31, 2023, and December 31, 2022 Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2023 | December 31, 2022 | | :---------------- | :------------- | :---------------- | | Total Assets | $93,267 | $90,928 | | Total Liabilities | $33,959 | $31,654 | | Total Equity | $29,003 | $29,071 | Current Assets and Liabilities (in thousands) | Metric | March 31, 2023 | December 31, 2022 | Change | | :---------------------- | :------------- | :---------------- | :----- | | Total Current Assets | $49,450 | $46,318 | +$3,132 | | Total Current Liabilities | $13,938 | $15,910 | -$1,972 | Condensed Consolidated Statements of Loss and Comprehensive Loss This section details the company's financial performance, including revenues, costs, and net loss for the three months ended March 31, 2023 and 2022 Financial Performance (Three Months Ended March 31, in thousands, except per share) | Metric | 2023 | 2022 | Change (%) | | :-------------------------------------------------- | :--- | :--- | :--------- | | Total revenues | $7,044 | $7,212 | -2.3% | | Cost of revenues | $2,722 | $714 | +281.2% | | Gross profit | $4,322 | $6,498 | -33.5% | | Operating loss | $3,205 | $3,236 | -1.0% | | Net loss | $4,261 | $3,997 | +6.6% | | Net loss attributable to Orgenesis Inc. | $4,189 | $4,009 | +4.5% | | Basic and diluted loss per share | $0.16 | $0.16 | 0.0% | Condensed Consolidated Statements of Changes in Equity This section outlines changes in the company's equity for the three months ended March 31, 2023 and 2022 Equity Changes (Three Months Ended March 31, in thousands) | Metric | January 1, 2023 | March 31, 2023 | | :-------------------------------- | :-------------- | :------------- | | Additional Paid-in Capital | $150,355 | $154,691 | | Accumulated Deficit | $(121,261) | $(125,450) | | Equity attributable to Orgenesis Inc. | $27,561 | $27,667 | | Total Equity | $29,071 | $29,003 | - Key activities contributing to changes in equity include stock-based compensation to employees and service providers, issuance of shares and warrants, and comprehensive loss for the period[16] Condensed Consolidated Statements of Cash Flows This section summarizes cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2023 and 2022 Cash Flow Summary (Three Months Ended March 31, in thousands) | Cash Flow Activity | 2023 | 2022 | | :----------------------------------- | :--- | :--- | | Net cash used in operating activities | $(7,240) | $(2,792) | | Net cash used in investing activities | $(1,307) | $(1,613) | | Net cash provided by financing activities | $5,910 | $1 | | Net change in cash, cash equivalents and restricted cash | $(2,637) | $(4,404) | | Cash, cash equivalents and restricted cash at end of period | $3,731 | $1,613 | - Financing activities in Q1 2023 included $3,441 thousand from equity investments and $5,485 thousand from convertible loan issuances, partially offset by $3,000 thousand in convertible loan repayments[21][111] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements NOTE 1 – DESCRIPTION OF BUSINESS This note describes Orgenesis Inc.'s business, focus on Cell and Gene Therapies, and going concern considerations - Orgenesis Inc. is a global biotech company focused on Cell and Gene Therapies (CGTs), primarily autologous therapies, manufactured using closed and automated systems at the point of care (POCare)[24][81] - The company utilizes a collaborative worldwide POCare Network and a scalable POCare Platform to develop and out-license POCare Therapies and provide POCare Services, aiming to overcome cost and logistical limitations of traditional manufacturing[25][26][82] - As of March 31, 2023, the company had an accumulated deficit of $125 million and negative operating cash flows of $7.2 million, raising substantial doubt about its ability to continue as a going concern for the next 12 months without additional capital[34][36][113] NOTE 2 – BASIS OF PRESENTATION This note explains the accounting principles and basis used for preparing the financial statements - The unaudited condensed consolidated financial statements are prepared in conformity with U.S. GAAP, consistent with annual statements, and reflect management's estimates and judgments[38][39] - The adoption of ASU 2016-13 (Credit Losses) and ASU 2021-08 (Business Combinations) did not materially impact the consolidated financial statements[40][41] NOTE 3 – SEGMENT INFORMATION This note provides financial information disaggregated by the company's operating segments: Morgenesis and Therapies - Operations were separated into two segments: Morgenesis (POCare Services) and Therapies (therapeutic development), following the Metalmark Investment in November 2022[43][83] - The CEO, as chief operating decision maker (CODM), reviews consolidated financial information along with disaggregated revenue and contributed profit data for these two segments[46] Segment Performance (Three Months Ended March 31, 2023, in thousands) | Metric | Morgenesis | Therapies | Eliminations | Consolidated | | :-------------------------------------------------- | :--------- | :-------- | :----------- | :----------- | | Revenues | $6,914 | $130 | $- | $7,044 | | Gross profit | $4,606 | $(48) | $- | $4,558 | | Income (loss) before income taxes | $162 | $(4,294) | $- | $(4,132) | NOTE 4 – EQUITY This note details significant equity transactions, including stock and warrant issuances, during the period - On February 23, 2023, the company issued 1,947,368 shares of common stock and warrants for 973,684 shares at $1.90 per share, generating $3.7 million in gross proceeds[49][50][93] - The warrants are exercisable immediately at $1.90 per share and expire in five years, with an alternate cashless exercise option[50] - Net proceeds from the offering are designated for working capital and general corporate purposes, including therapy-related activities[50][93] NOTE 5 – CONVERTIBLE LOANS This note outlines new and extended convertible loan agreements and their key terms - On January 10, 2023, the company secured $5 million in new convertible loans from NewTech Investment Holdings and Ariel Malik, with an 8% annual interest rate and a conversion price of $2.464 per share[52][53][54][91] - On March 27, 2023, subsidiary Koligo Therapeutics Inc. entered into a convertible loan agreement for up to $5 million with Yehuda Nir, at 8% interest, with a maturity date of January 1, 2024, and a mandatory conversion clause under certain equity financing conditions[59][60][94][95] - On January 12, 2023, the company extended $12 million in existing convertible loans with Yosef Dotan, Aharon Lukach, and Yehuda Nir to January 31, 2026, increasing interest rates to 10% (for most) and reducing conversion prices to $2.50 per share[63] NOTE 6 – LOSS PER SHARE This note presents the calculation of basic and diluted loss per share for the reporting periods Loss Per Share (Three Months Ended March 31) | Metric | 2023 | 2022 | | :----------------------------------- | :--- | :--- | | Net loss attributable to Orgenesis Inc. | $4,189 thousand | $4,009 thousand | | Weighted average common shares outstanding | 26,246,924 | 24,600,954 | | Basic and diluted loss per share | $0.16 | $0.16 | - Diluted loss per share excludes 8,390,035 shares underlying options/warrants and 6,987,879 shares from convertible loans for Q1 2023 due to their anti-dilutive effect[67] NOTE 7 – REVENUES This note disaggregates revenue by stream and identifies major customers for the reporting periods Revenue Disaggregation (Three Months Ended March 31, in thousands) | Revenue Stream | 2023 | 2022 | Change | | :------------------------------------------ | :--- | :--- | :----- | | POCare development services | $- | $6,324 | $(6,324) | | Cell process development services and hospital services | $2,308 | $888 | $1,420 | | POCare cell processing | $4,736 | $- | $4,736 | | Total | $7,044 | $7,212 | $(168) | - The decline in POCare development services is a result of the company's revenue model progression, where completed development services lead to new cell processing agreements with customers[101] - Major customers in Q1 2023 included Customer A (US) contributing $3,605 thousand, Customer B (Greece) $2,022 thousand, and Customer C (US) $750 thousand[70] NOTE 8 – OTHER SIGNIFICANT TRANSACTIONS DURING THE PERIOD This note describes other material transactions, including updates to joint venture agreements - Orgenesis updated joint venture agreements (JVAs) and assigned certain rights and obligations to Texas Advanced Therapies LLC, transferring its option to require JV entity incorporation and its share in the JV entity[72][97] - The company retained call options to acquire JV partner shares, royalty rights, and the right to conclude manufacturing/service agreements, while eliminating its obligation for additional funding and the right to an additional 15% of JVE's GAAP profit[72][97] NOTE 9 – LEGAL PROCEEDINGS This note details ongoing legal proceedings and the company's assessment of their potential impact - A complaint was filed in January 2022 by the State of Israel and Sheba Medical Center seeking 7% royalties on sales and 24% on sublicense revenues related to specific know-how and technology, plus NIS 10 million[73][121] - Orgenesis believes the allegations are without merit and is vigorously defending against the claims, with no provision made in financial statements as a material loss is not considered probable[73] NOTE 10 – SUBSEQUENT EVENTS This note discloses significant events that occurred after the balance sheet date but before financial statement issuance - On May 5, 2023, MM OS Holdings, L.P. (an affiliate of Metalmark) agreed to invest an additional $5 million in Morgenesis for 500,000 Class A Preferred Units[74] - This investment aims to support the continued expansion of Orgenesis' POCare Services business[74] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial condition and results of operations for the three months ended March 31, 2023, compared to the prior year. It covers business overview, significant developments, detailed analysis of revenues and expenses, working capital, liquidity, and capital resources outlook, highlighting the company's focus on Cell and Gene Therapies (CGTs) and the challenges related to its going concern status Forward-Looking Statements This section cautions readers about forward-looking statements and inherent risks and uncertainties - The report contains forward-looking statements based on management's beliefs, estimates, and assumptions, identified by words like "anticipate," "believe," "expect," etc[76] - These statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from current expectations[76] - The company does not intend to update forward-looking statements to conform to actual results, except as required by applicable law[77] Business Overview This section describes Orgenesis's business model, focus on CGTs, and segment structure - Orgenesis is a global biotech company focused on Cell and Gene Therapies (CGTs), particularly autologous therapies, manufactured at the point of care (POCare) to improve affordability and accessibility[81] - The company's operations are divided into two segments: Morgenesis (POCare Services) and Therapies (therapeutic development), established after a November 2022 investment[83] - The company aims to expand its decentralized POCare Centers for efficient and scalable CGT delivery and to develop and out-license POCare advanced therapies by collaborating with academic institutions and hospitals[84][88][90] Significant developments during the quarter ended March 31, 2023 This section highlights key financial and operational events that occurred during the first quarter of 2023 - The company entered into convertible loan agreements totaling $5 million with NewTech Investment Holdings and Ariel Malik, with an 8% interest rate and a $2.464 conversion price, used for debt redemption and general corporate purposes[91][92] - A registered direct offering closed on February 27, 2023, raising approximately $3.7 million (gross) through the issuance of 1,947,368 common shares and warrants, with proceeds allocated to working capital and therapy-related activities[93] - Subsidiary Koligo Therapeutics Inc. secured a convertible loan of up to $5 million from Yehuda Nir, bearing 8% interest, with $485 thousand drawn as of March 31, 2023[94][96] - Updated Joint Venture (JV) agreements assigned certain rights to Texas Advanced Therapies LLC, reducing Orgenesis's funding obligations while retaining call options, royalty rights, and manufacturing/service agreement rights[97] Results of Operations This section provides a detailed analysis of the company's revenues and expenses for the reporting periods Financial Performance Summary (Three Months Ended March 31, in thousands) | Metric | 2023 | 2022 | Change (%) | | :-------------------------------------------------- | :--- | :--- | :--------- | | Total revenues | $7,044 | $7,212 | -2.3% | | Cost of revenues | $2,722 | $714 | +281.2% | | Gross profit | $4,322 | $6,498 | -33.5% | | Cost of development services and R&D expenses | $3,281 | $6,651 | -50.7% | | Selling, general and administrative expenses | $4,039 | $2,851 | +41.7% | | Financial expenses, net | $644 | $213 | +202.3% | | Net loss | $4,261 | $3,997 | +6.6% | Revenues This section analyzes the company's revenue streams and their changes between periods Revenue Breakdown (Three Months Ended March 31, in thousands) | Revenue Stream | 2023 | 2022 | Change | | :------------------------------------------ | :--- | :--- | :----- | | POCare development services | $- | $6,324 | $(6,324) | | Cell process development services and hospital services | $2,308 | $888 | $1,420 | | POCare cell processing | $4,736 | $- | $4,736 | | Total | $7,044 | $7,212 | $(168) | - The decrease in total revenue reflects a shift from POCare development services to cell processing agreements as performance obligations for prior development contracts were completed[101] Cost of revenues This section details the costs directly associated with generating the company's revenues Cost of Revenues (Three Months Ended March 31, in thousands) | Expense Category | 2023 | 2022 | Change (%) | | :-------------------------------- | :--- | :--- | :--------- | | Total Cost of revenues | $2,722 | $714 | +281.2% | | Salaries and related expenses | $1,113 | $329 | +238.3% | | Professional fees and consulting services | $807 | $22 | +3568.2% | | Raw materials | $228 | $30 | +660.0% | - The substantial increase was due to higher costs associated with increased process development and cell processing revenues[100] Cost of development services and research and development expenses This section analyzes expenses related to development services and research and development activities R&D Expenses (Three Months Ended March 31, in thousands) | Expense Category | 2023 | 2022 | Change (%) | | :------------------------------------------ | :--- | :--- | :--------- | | Total Cost of development services and R&D | $3,281 | $6,651 | -50.7% | | Salaries and related expenses | $1,628 | $2,849 | -42.8% | | Professional fees and consulting services | $796 | $1,726 | -53.9% | | Lab expenses | $176 | $582 | -69.8% | - The decrease was primarily attributed to reduced R&D spending in the Morgenesis segment and lower professional fees and other R&D expenses in the Therapies segment[102] Selling, General and Administrative Expenses This section details the company's selling, general, and administrative expenses and their drivers SG&A Expenses (Three Months Ended March 31, in thousands) | Expense Category | 2023 | 2022 | Change (%) | | :-------------------------------- | :--- | :--- | :--------- | | Total SG&A expenses | $4,039 | $2,851 | +41.7% | | Salaries and related expenses | $1,173 | $900 | +30.3% | | Accounting and legal fees | $1,550 | $910 | +70.3% | | Professional fees | $361 | $260 | +38.8% | - The increase was driven by expansion in the Morgenesis segment and higher accounting and legal fees related to fundraising activities in Q1 2023[103] Financial Expenses, net This section outlines the company's net financial expenses, including interest and foreign exchange impacts Financial Expenses (Three Months Ended March 31, in thousands) | Expense Category | 2023 | 2022 | Change (%) | | :------------------------------------------ | :--- | :--- | :--------- | | Total Financial expenses, net | $644 | $213 | +202.3% | | Interest expense on convertible loans and loans | $495 | $125 | +296.0% | | Foreign exchange loss, net | $148 | $82 | +80.5% | - The increase was mainly due to higher interest rates on convertible loans and increased convertible loan financing[104] Working Capital This section analyzes the company's current assets and liabilities, and overall working capital position Working Capital Position (in thousands) | Metric | March 31, 2023 | December 31, 2022 | Change | | :---------------- | :------------- | :---------------- | :----- | | Current assets | $49,450 | $46,318 | +$3,132 | | Current liabilities | $13,938 | $15,910 | -$1,972 | | Working capital | $35,512 | $30,408 | +$5,104 | - Current assets increased due to higher accounts receivable and prepaid expenses, while current liabilities decreased primarily from the repayment and extension of short-term convertible loans[106][107] Liquidity and Financial Condition This section assesses the company's cash flows, liquidity, and overall financial health Cash Flow Summary (Three Months Ended March 31, in thousands) | Cash Flow Activity | 2023 | 2022 | | :----------------------------------- | :--- | :--- | | Net loss | $(4,261) | $(3,997) | | Net cash used in operating activities | $(7,240) | $(2,792) | | Net cash used in investing activities | $(1,307) | $(1,613) | | Net cash provided by financing activities | $5,910 | $1 | | Decrease in cash and cash equivalents | $(2,637) | $(4,404) | - The increased cash used in operating activities was mainly due to a higher net loss, increased interest expenses on convertible loans, and a rise in prepaid expenses[109][110] - Financing activities provided significant cash, driven by $3,441 thousand from equity investments and $5,485 thousand from convertible loan issuances, partially offset by $3,000 thousand in loan repayments[111] Liquidity & Capital Resources Outlook This section discusses the company's future funding needs, going concern status, and capital raising plans - Operations are funded by revenue, convertible loans, and securities offerings, but sustainable positive cash flows are not assured[112] - Management has identified substantial doubt about the company's ability to continue as a going concern for the next 12 months, based on current and projected cash resources and commitments[113] - Plans include raising additional capital, refinancing or amending existing convertible loans, and exploring ways to increase revenues and reduce expenditures[113] Off-Balance Sheet Arrangements This section confirms the absence of material off-balance sheet arrangements - The company reports no off-balance sheet arrangements that are material to stockholders or likely to affect financial condition, results, or liquidity[114] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section states that there are no applicable quantitative and qualitative disclosures about market risk for the company - The company has no disclosures regarding quantitative and qualitative market risk[115] ITEM 4. CONTROLS AND PROCEDURES Management, including the CEO and CFO, evaluated the effectiveness of the company's disclosure controls and procedures as of March 31, 2023, and concluded they were effective at a reasonable assurance level. There have been no material changes in internal control over financial reporting during the quarter - Management concluded that disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2023[117] - There were no material changes in internal control over financial reporting during the quarter ended March 31, 2023[118] PART II - OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings and risk factors ITEM 1. LEGAL PROCEEDINGS Information regarding legal proceedings is available in Note 9 to the condensed consolidated financial statements. The company is not involved in any other pending material legal proceedings - Details on legal proceedings are provided in Note 9 of the financial statements[121] - The company is not involved in any other pending material legal proceedings beyond those described[122] ITEM 1A. RISK FACTORS This section refers readers to the "Risk Factors" section of the company's Annual Report on Form 10-K for the year ended December 31, 2022, for a comprehensive understanding of significant risks. No material changes to these risk factors have occurred since the annual report - Investors should consider risk factors from the Annual Report on Form 10-K for December 31, 2022[123] - There have been no material changes to the previously disclosed risk factors[123] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section states that there were no unregistered sales of equity securities or use of proceeds to report - There were no unregistered sales of equity securities or use of proceeds during the period[124] ITEM 3. DEFAULTS UPON SENIOR SECURITIES This section states that there were no defaults upon senior securities to report - There were no defaults upon senior securities during the period[125] ITEM 4. MINE SAFETY DISCLOSURES This section states that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable to the company[126] ITEM 5. OTHER INFORMATION This section states that there is no other information to report - There is no other information to report[127] ITEM 6. EXHIBITS This section lists the exhibits filed as part of the Form 10-Q, including various warrant forms, convertible loan agreements, extension agreements, a securities purchase agreement, a placement agency agreement, and certifications - The report includes exhibits such as warrant forms, convertible loan agreements, extension agreements, a securities purchase agreement, a placement agency agreement, and certifications (302 and 906)[129] SIGNATURES This section contains the official signatures of the company's executive officers, certifying the report SIGNATURES The report is duly signed on behalf of Orgenesis Inc. by Vered Caplan, President & Chief Executive Officer, and Neil Reithinger, Chief Financial Officer, Treasurer and Secretary, on May 10, 2023 - The report was signed by Vered Caplan (President & CEO) and Neil Reithinger (CFO, Treasurer, and Secretary) on May 10, 2023[132]