ORGENESIS INC. The following Management's Discussion and Analysis of Financial Condition and
Results of Operations is intended to provide information necessary to understand
our audited consolidated financial statements for the years ended
This discussion should be read in conjunction with our consolidated financial
statements for the years ended
Corporate Overview
We are a global biotech company working to unlock the potential of CGTs in an affordable and accessible format. CGTs can be centered on autologous (using the patient's own cells) or allogenic (using master banked donor cells) and are part of a class of medicines referred to as advanced therapy medicinal products, or ATMPs. We are mostly focused on autologous therapies that can be manufactured under processes and systems that are developed for each therapy using a closed and automated approach that is validated for compliant production near the patient for treatment of the patient at the point of care, or POCare. This approach has the potential to overcome the limitations of traditional commercial manufacturing methods that do not translate well to commercial production of advanced therapies due to their cost prohibitive nature and complex logistics to deliver such treatments to patients (ultimately limiting the number of patients that can have access to, or can afford, these therapies).
To achieve these goals, we have developed a collaborative worldwide network of research institutes and hospitals who are engaged in the POCare model, or our POCare Network, and a pipeline of licensed POCare advanced therapies that can be processed and produced under such closed and automated processes and systems, or POCare Therapies. We are developing our pipeline of advanced therapies and with the goal of entering into out-licensing agreements for these therapies.
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Following the
Morgenesis segment (mainly POCare Services)
The POCare Services that we and our affiliated entities perform include:
? Process development of therapies, process adaptation, and optimization inside
the OMPULs, or "OMPULization"; ? Adaptation of automation and closed systems to serviced therapies; ? Incorporation of the serviced therapies compliant with GMP in the OMPULs that
we designed and built; ? Tech transfers and training of local teams for the serviced therapies at the POCare Centers; ? Processing and supply of the therapies and required supplies under GMP
conditions within our POCare Network, including required quality control
testing; and ? Contract Research Organization services for clinical trials.
The POCare Services are performed in decentralized hubs that provide harmonized and standardized services to customers, or POCare Centers. We are working to expand the number and scope of our POCare Centers. We believe that this provides an efficient and scalable pathway for CGT therapies to reach patients rapidly at lowered costs. Our POCare Services are designed to allow rapid capacity expansion while integrating new technologies to bring together patients, doctors and industry partners with a goal of achieving standardized, regulated clinical development and production of therapies.
Therapies segment (POCare Therapies)
While the biotech industry struggles to determine the best way to lower cost of goods and enable CGTs to scale, the scientific community continues to advance and push the development of such therapies to new heights. Clinicians and researchers are excited by all the new tools (new generations of industrial viruses, big data analysis for genetic and molecular data) and technologies (CRISPR, mRNA, etc.) available (often at a low cost) to perform advanced research in small labs. Most new therapies arise from academic institutes or small spinouts from such institutes. Though such research efforts may manage to progress into a clinical stage, utilizing lab based or hospital-based production solutions they lack the resources to continue the development of such drugs to market approval.
Historically, drug/therapeutic development has required investments of hundreds of millions of dollars to be successful. One significant cause for the high cost is that each therapy often requires unique production facilities and technologies that must be subcontracted or built. Further the cost of production during the clinical stage is extremely expensive, and the cost of the clinical trial itself is very high. Given these financial restraints, researchers and institutes hope to out- license their therapeutic products to large biotech companies or spin-out new companies and raise large fundraising rounds. However, in many cases they lack the resources and the capability to de-risk their therapeutic candidates enough to be attractive for such fundings or partnership.
Our POCare Network is an alternative to the traditional pathway of drug
development.
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The ability to produce these products at low cost, allows for an expedited development process and the partnership with hospitals around the globe enables joint grants and lower cost of clinical development. The POCare Therapies division reviews many therapies available for out licensing and select the ones which they believe have the highest market potential, can benefit the most from a point of care approach and have the highest chance of clinical success. It assesses such issues by utilizing its global POCare Network and its internal knowhow accumulated over a decade of involvement in the field.
The goal of this in-licensing is to quickly adapt such therapies to a point-of- care approach through regional partnerships, and to out-license the products for market approval in preferred geographical regions. This approach lowers overall development cost, through minimizing pre-clinical development costs incurred by us, and through receiving of the additional funding from grants and/or payments by regional partners.
Significant Developments During Fiscal 2022
Financing Activities Equity
From March to
Convertible Loan Agreements
During April and
During
In addition, we repaid four loans in the principal amount of
In
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Pursuant to a unit purchase agreement (the "UPA"), MM purchased 3,019,651 Class
A Preferred Units of Morgenesis (the "Class A Units"), which represented 22.31%
of the outstanding equity interests of Morgenesis following the initial closing,
for a purchase price of
Until the consummation of a Company IPO or Change of Control of Morgenesis (in
each case, as defined in the LLC Agreement), MM may, in its sole discretion,
elect to invest up to an additional
The proceeds of the investment will generally be used to fund the activities of Morgenesis and its consolidated subsidiaries.
In connection with the entry into of the UPA, we, Morgenesis and MM entered into
the Second Amended and Restated Limited Liability Company Agreement (the "LLC
Agreement") providing for certain restrictions on the disposition of Morgenesis
securities, the provisions of certain options and rights with respect to the
management and operations of Morgenesis, a right for MM to exchange any units of
Morgenesis for shares of
Purchase of
During
License, Collaboration and Joint Venture Agreements
License and Research Agreement with
During
In addition, during 2022, we continued the development of license agreements previously entered into, as described more fully in notes 11 and 12 to our consolidated financial statements included in Item 8 of this annual report on Form 10-K.
56 Results of Operations
Comparison of the Year Ended
Our financial results for the year ended
Years Ended December 31,
2022 2021
(in thousands)
Revenues $ 34,741 $ 31,646
Revenues from related party 1,284 3,856
Total revenues 36,025 35,502
Cost of revenues, development services and
research and development expenses 27,066 36,644
Amortization of intangible assets 911 948
Selling, general and administrative expenses 15,589 14,710
Impairment expenses 1,061 -
Operating loss 8,602 16,800
Other income (173 ) (2,278 )
Loss from extinguishment in connection with
convertible loan (see note 7 a of Item 8) 52 1,865
Financial expense, net 1,971 1,292
Share in income of associated company 1,508 272
Loss before income taxes 11,960 17,951
Tax expense 209 108
Net loss $ 12,169 $ 18,059
Revenues
The following table shows our revenues by major revenue streams:
Years Ended December 31,
2022 2021
(in thousands)
Revenue stream:
POCare development services $ 14,894 $ 32,192
Cell process development services and hospital
services 11,212 3,310
POCare cell processing 9,919 -
Total $ 36,025 $ 35,502 Our revenues for the year ended
? A decline in POCare development services as a result of our having completed
the majority of performance obligations under the POCare development services
contracts in 2021. The next stage in our revenue model, following the
completion of POCare development services is to enter into cell processing
agreements with the relevant customers. ? An increase in cell process development services and hospital services as a
result of our having signed new process development services agreements with
third party customers who retain the ownership of the intellectual property
created through the process. ? During the year endedDecember 31, 2022 we signed cell processing agreements
with customers. In most cases, the cell processing agreements represent a new
stage in our revenue model, following the completion of POCare development
services contracts.
A breakdown of the revenues per customer that constituted at least 10% of
revenues is as follows:
Years Ended December 31,
2022 2021
(in thousands)
Revenue earned:
Customer A (Greece) $ 8,936 $ 4,693
Customer B (United States) 8,316 6,491
Customer C (United Arab Emirates) 5,271 6,969
Customer D (Korea) 3,873 7,703
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Cost of revenues, development services and research and development expenses
Years Ended December 31,
2022 2021
(in thousands)
Salaries and related expenses $ 11,206 $ 10,977
Stock-based compensation 616 729
Subcontracting, professional and consulting services 5,655 12,796
Lab expenses 2,685 3,513
Depreciation expenses, net 1,017 874
Other research and development expenses 6,010 7,755
Less - grant (123 ) -
Total $ 27,066 $ 36,644 Cost of revenues, development services and research and development for the year
ended
Selling, General and Administrative Expenses
Years Ended December 31,
2022 2021
(in thousands)
Salaries and related expenses $ 4,008 $ 6,277
Stock-based compensation 362 945
Accounting and legal fees 5,527 3,293
Professional fees 3,080 1,107
Rent and related expenses 199 249
Business development 474 577
Depreciation expenses, net 50 42
Other general and administrative expenses 1,889 2,220
Total $ 15,589 $ 14,710 Selling, general and administrative expenses for the year ended
Impairment Expenses
Years Ended December 31,
2022 2021
(in thousands)
Impairment expenses $ 1,061 $ -
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Impairment expenses for the year ended December 31, 2022 were $1,061 thousand ,
as compared to $0 for the year ended December 31, 2021 . These were attributable
to the write-off of customer relationships and IPR&D intangible assets purchased
in previous years.
Financial Expenses, net
Years Ended December 31,
2022 2021
(in thousands)
Interest expense on convertible loans and loans 1,824 943
Foreign exchange loss, net 145 574
Other income 2 (225 )
Total $ 1,971 $ 1,292 Financial expenses, net for the year ended
Tax expense
Years Ended December 31,
2022 2021
(in thousands)
Tax expense $ 209 $ 108
Total $ 209 $ 108 Tax expense, net for the year ended
Working Capital
December 31,
2022 2021
(in thousands)
Current assets $ 46,318 $ 25,758
Current liabilities $ 15,910 $ 15,365
Working capital $ 30,408 $ 10,393 Current assets increased by
Current liabilities increased by
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Liquidity and Capital Resources
Years Ended December 31,
2022 2021
(in thousands)
Net loss $ (12,169 ) $ (18,059 )
Net cash used in operating activities (24,924 ) (26,866 )
Net cash used in investing activities (14,133 ) (12,384 )
Net cash provided by (used in) financing
activities 39,578 (106 )
Net change in cash and cash equivalents and
restricted cash $ 521 $ (39,356 ) During year ended
Net cash used in operating activities for the year ended
? a loss of
loss of
reduced share price; ? an increase of$1,236 thousand in our share of losses in our associated companies (see note 13); ? impairment expenses of$1,061 thousand as a result of the write off of certain intangible assets; ? an increase of$881 thousand in interest expenses accrued on convertible loans
as a result of increased interest rates and new loan agreements entered into;
? an increase in accounts receivable of
increase in POCare revenue; ? a decline of$1,284 thousand in accounts payable and accrued expenses a result of reduced expenditures.
Net cash used in investing activities for the year ended
Net cash provided by financing activities for the year ended
? proceeds raised from equity investments in the amount of
? proceeds raised from loans in the amount of
repayments in the amount of
? proceeds in the amount of
Liquidity and Capital Resources Outlook
Through
If there are further increases in operating costs for facilities expansion,
research and development, commercial and clinical activity or decreases in
revenues from customers, we will need to use mitigating actions such as to seek
additional financing, refinance or amend the terms of existing convertible loans
or postpone expenses that are not based on firm commitments. In addition, in
order to fund our operations until such time that we can generate sustainable
positive cash flows, we will need to raise additional funds. For the year ended
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Subsequent to the year end, we and investors representing
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
Critical Accounting Policies and Estimates
Our significant accounting policies are more fully described in the notes to our
financial statements included in this Annual Report on Form 10-K for the year
ended
Income Taxes
Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
In addition, our management performs an evaluation of all uncertain income tax positions taken or expected to be taken in the course of preparing our income tax returns to determine whether the income tax positions meet a "more likely than not" standard of being sustained under examination by the applicable taxing authorities. This evaluation is required to be performed for all open tax years, as defined by the various statutes of limitations, for federal and state purposes.
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Revenue from Contracts with Customers
Our agreements are primarily service contracts that range in duration. We recognize revenue when control of these services is transferred to the customer for an amount, referred to as the transaction price, which reflects the consideration to which we are expected to be entitled in exchange for those goods or services.
A contract with a customer exists only when:
? the parties to the contract have approved it and are committed to perform their
respective obligations;
? we can identify each party's rights regarding the distinct goods or services to
be transferred ("performance obligations");
? we can determine the transaction price for the goods or services to be
transferred; and
? the contract has commercial substance, and it is probable that we will collect
the consideration to which it will be entitled in exchange for the goods or
services that will be transferred to the customer.
Nature of Revenue Streams
We have three main revenue streams, which are POCare development services, cell process development services, including hospital supplies, and POCare cell processing.
POCare Development Services
Revenue recognized under contracts for POCare development services may, in some contracts, represent multiple performance obligations (where promises to the customers are distinct) in circumstances in which the work packages are not interrelated or the customer is able to complete the services performed.
For arrangements that include multiple performance obligations, the transaction price is allocated to the identified performance obligations based on their relative standalone selling prices.
We recognize revenue when, or as, it satisfies a performance obligation. At contract inception, we determine whether the services are transferred over time or at a point in time. Performance obligations that have no alternative use and that we have the right to payment for performance completed to date, at all times during the contract term, are recognized over time. All other Performance obligations are recognized as revenues by us at point of time (upon completion).
Significant Judgement and Estimates
Significant judgment is required to identifying the distinct performance obligations and estimating the standalone selling price of each distinct performance obligation and identifying which performance obligations create assets with alternative use to us, which results in revenue recognized upon completion, and which performance obligations are transferred to the customer over time.
Cell Process Development Services
Revenue recognized under contracts for cell process development services may, in some contracts, represent multiple performance obligations (where promises to the customers are distinct) in circumstances in which the work packages and milestones are not interrelated or the customer is able to complete the services performed independently or by using our competitors. In other contracts when the above circumstances are not met, the promises are not considered distinct, and the contract represents one performance obligation. All performance obligations are satisfied over time, as there is no alternative use to the services it performs, since, in nature, those services are unique to the customer, which retain the ownership of the intellectual property created through the process.
For arrangements that include multiple performance obligations, the transaction price is allocated to the identified performance obligations based on their relative standalone selling prices. For these contracts, the standalone selling prices are based on our normal pricing practices when sold separately with consideration of market conditions and other factors, including customer demographics and geographic location.
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We measure the revenue to be recognized over time on a contract-by-contract basis, determining the use of either a cost-based input method or output method, depending on whichever best depicts the transfer of control over the life of the performance obligation.
Included in Cell Process Development Services is hospital supplies revenue which is derived principally from the sale or lease of products and the performance of services to hospitals or other medical providers. Revenue is earned and recognized when product and services are received by the customer.
Revenue from POCare Cell processing
Revenues from POCare Cell processing represent performance obligations which are recognized either over, or at a point of time. The progress towards completion will continue to be measured on an output measure based on direct measurement of the value transferred to the customer (units produced).
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