10-Q/A: Orgenesis Inc. Restates Q2 2023 Financials Due to Accounting Errors

Orgenesis Inc. has amended its Q2 2023 quarterly report to restate financials due to errors in revenue recognition and credit loss accounting.

Summary

• Orgenesis Inc. has filed an amended quarterly report for the period ended June 30, 2023, to correct previously reported financial statements.
• The restatement was necessary due to errors in accounting for revenues, equity investees, goodwill, share on loss of associated companies, selling, general and administration expenses, convertible loan receivable and credit losses related to such convertible loan.
• The company's management reassessed the effectiveness of its disclosure controls and procedures and internal control over financial reporting as of June 30, 2023, and determined they were not effective due to the inappropriate measurement of expected credit losses and revenues.
• The company reported a net loss of $54.57 million for the six months ended June 30, 2023, compared to a net loss of $9.49 million for the same period in 2022.
• Revenues for the six months ended June 30, 2023, were $255 thousand, a significant decrease from $14.41 million in the same period of 2022.
• The company's cash and cash equivalents decreased from $5.31 million at the end of 2022 to $180 thousand as of June 30, 2023.
• The company deconsolidated Octomera LLC from its financial statements as of June 30, 2023, due to changes in the board composition, resulting in a loss of $5.34 million.

Sentiment

Score: 2

Explanation: The document reveals significant financial and operational issues, including a substantial loss, a major revenue decline, ineffective internal controls, and a going concern warning. The restatement of financials and the deconsolidation of a subsidiary further contribute to a negative outlook.

Positives

• The company has taken steps to correct the accounting errors by restating its financial statements.
• The company is exploring additional avenues to increase revenue and reduce capital expenditures.
• The company is planning to raise additional capital to fund its operations and repay outstanding loans.

Negatives

• The company experienced a significant decrease in revenue and a substantial increase in net loss.
• The company's internal controls were deemed ineffective, indicating a material weakness in financial reporting.
• The company's cash position has significantly deteriorated.
• The deconsolidation of Octomera resulted in a significant loss.
• There is substantial doubt about the company's ability to continue as a going concern.

Risks

• The company's ability to generate sustainable positive cash flows is uncertain.
• The company may need to seek additional financing or postpone expenses if operating costs increase or revenues decrease.
• The company's current and projected cash resources raise substantial doubt about its ability to continue as a going concern.
• The company's internal controls over financial reporting were deemed ineffective.
• The company is subject to legal proceedings that could have a material impact on its financial condition.

Future Outlook

The company plans to raise additional capital to fund operations and repay outstanding loans, as well as explore additional avenues to increase revenue and reduce expenditures. However, there is no assurance that the company will be able to raise additional capital on acceptable terms, or at all.

Management Comments

• Management determined that its disclosure controls and procedures and internal control over financial reporting as of June 30, 2023 were not effective as a result of the inappropriate measurement of expected credit losses and revenues.
• Management plans include raising additional capital to fund the Company's operations and to repay the Company's outstanding loans when they become due, as well as exploring additional avenues to increase revenue and reduce capital expenditures.

Industry Context

The document highlights the challenges faced by biotech companies in scaling cell and gene therapies, particularly in reducing costs and ensuring accessibility. Orgenesis's POCare model is presented as an alternative to traditional drug development, aiming to address these challenges. The company's focus on autologous therapies and decentralized production aligns with industry trends towards personalized medicine and point-of-care solutions.

Comparison to Industry Standards

• The significant decrease in revenue and increase in net loss are concerning when compared to industry benchmarks for biotech companies in the development stage.
• The restatement of financials and identification of material weaknesses in internal controls are not typical for companies of this size and stage, indicating potential issues with financial management and governance.
• The company's cash burn rate and liquidity position are significantly worse than many comparable companies, raising concerns about its ability to continue operations without additional funding.
• While the POCare model is innovative, its financial performance is not yet demonstrating the potential for scalability and profitability seen in other successful biotech companies.
• The deconsolidation of Octomera and the resulting loss are unusual and suggest a significant shift in the company's strategy and structure, which may not be viewed positively by investors.

Management Changes

Corporate Governance

Legal Proceedings

• The company is involved in a legal proceeding in the Tel Aviv District Court, where the plaintiffs are seeking royalties and financial statements related to a license agreement.

Related Party Transactions

• The company has related party transactions with Octomera LLC, including investments and loans.
• The company has related party transactions with certain customers.

Stakeholder Impact

• Shareholders will be negatively impacted by the restatement of financials, the significant increase in net loss, and the decrease in cash position.
• Employees may be affected by potential cost-cutting measures or restructuring due to the company's financial difficulties.
• Customers may be concerned about the company's ability to continue operations and fulfill its obligations.
• Creditors may be concerned about the company's ability to repay its debts.
• Suppliers may be concerned about the company's ability to pay for goods and services.

Next Steps

• The company plans to raise additional capital to fund its operations.
• The company will explore additional avenues to increase revenue and reduce capital expenditures.
• The company will continue to address the material weakness in its internal control over financial reporting.

Key Dates

Keywords

restatement, financial statements, accounting errors, revenue recognition, credit losses, internal controls, net loss, deconsolidation, convertible loans, going concern, POCare, cell therapy