RECONSOLIDATION OF OCTOMERA LLC

6 Months Ended

Jun. 30, 2024

Reconsolidation Of Octomera Llc

RECONSOLIDATION OF OCTOMERA LLC

NOTE 4 – RECONSOLIDATION OF OCTOMERA LLC

Pursuant to the MM UPA signed on January 29, 2024, the Company and MM agreed to the following:

1. Consideration:

● Royalty Payments: If Octomera and its subsidiaries generate Net Revenue during the three-year period 2025-2027, then the Company will pay 5% of Net Revenues to MM pursuant to the MM UPA.

● Milestone Payments: If the Company sells Octomera within ten years from the date of the Closing at a price that is more than $40 million excluding consideration for certain Excluded Assets as per the UPA, the Company shall pay MM 5% of the net proceeds.

2. MM’s designated members of the Board of Managers of Octomera resigned and the Company amended the Second Amended and Restated Limited Liability Company Agreement of Octomera (the “Octomera LLC Agreement”) to be a single member agreement reflecting the transactions consummated under the UPA, such that MM no longer (i) is a member of Octomera or a party to the Octomera LLC Agreement, or (ii) has a right to appoint members of the board of managers of Octomera.

3. 10 secured promissory notes between Orgenesis Maryland LLC and MM, reflecting an aggregate outstanding principal amount of $2,600 (the “Notes”), were amended to, among other things, extend the maturity thereof to January 29, 2034 and to terminate the security interest granted by Orgenesis Maryland LLC in favor of MM that secured the obligations under the Notes.

Fair Value of Consideration Transferred

Accounting guidance provides that the allocation of the purchase price may be adjusted for up to one year from the date of the acquisition to the extent that additional information is obtained about the facts and circumstances that existed as of the acquisition date. The primary area of the purchase price allocation that is not yet finalized is related to intangible assets, property, plant and equipment, and certain other assets and tax matters and the related impact on goodwill.

In evaluating the fair value of the Octomera Equity Investment under the income approach, the Company used a discounted cash flow model of the business, adjusted to the Company’s share in the investment. Key assumptions used to determine the estimated fair value included: (a) internal cash flows forecasts for 5 years following the assessment date, including expected revenue growth, costs to produce, operating profit margins and estimated capital needs; (b) an estimated terminal value using a terminal year long-term future growth determined based on the growth prospects of the reporting units; and (c) a discount rate which reflects the weighted average cost of capital adjusted for the relevant risk associated with the Company’s reporting unit operations and the uncertainty inherent in the Company’s internally developed forecasts. The allocation of the purchase price to the net assets acquired and liabilities assumed resulted in the recognition of other intangible assets, net, which comprised of technology. The useful life of the technology for amortization purposes was determined by considering the period of expected cash flows generated by the assets used to measure the fair value of the intangible assets, adjusted as appropriate for the entity-specific factors including legal, regulatory, contractual, competitive, economic, or other factors that may limit the useful life of intangible assets.

The following table summarizes the allocation of purchase price to the fair values of the assets acquired and liabilities assumed as of the Transaction date:

	(in thousands)
Total Contingent consideration to MM for royalty and milestone payments	$	4,643
Total assets acquired:
Cash and cash equivalents	$	139
Property, plants and equipment, net		17,852
Other Assets		3,478
Total assets	$	21,469
Total liabilities assumed:
Total current liabilities	$	(12,518	)
Total long-term liabilities		(5,628	)
Total liabilities	$	(18,146	)
Know how Technology		1,728
Total Net Assets	$	5,051
Fair-Value of Non-controlling interests		(408	)
Total liability to MM	$	4,643

The allocation of the purchase price to the net assets acquired and liabilities assumed resulted in the recognition of an intangible asset know-how of $1,728 and a liability to MM in the amount of $4,643. The know-how has a useful life of 10 years. The useful life of the intangible asset for amortization purposes was determined considering the period of expected cash flows generated by the assets used to measure the fair value of the intangible asset adjusted as appropriate for the entity-specific factors, including legal, regulatory, contractual, competitive, economic or other factors that may limit the useful life of intangible assets.

Key inputs for the fair values valuation are summarized below. 

Key Valuation Inputs	Jan 29, 2024
Discount rate		40	%
Risk-free interest rate		4.4	%
Average 5 years revenue growth		50	%

The Company incurred transaction costs of approximately $50 and $0 during the six and three months ended June 30, 2024 respectively, which were included in general and administrative expenses in the condensed consolidated statements of operations.

The revenues and net loss of Octomera from January 1, 2024 until the reconsolidation date were $23 and $1,244 respectively.

Fair value assumptions used in accounting for contingent consideration

On January 29, 2024, in connection with the PPA study of Octomera LLC, the Company recognized a contingent consideration to pay MM based on two components:

1. Royalties based on revenues in 2025, 2026 and 2027, and;

2. An earnout amount, which is dependent on a future triggering event being either an IPO or exit.

The estimated fair value of the contingent consideration is based on management’s assessment of whether, and at what level, the financial metrics will be achieved, and the present value factors associated with the timing of the payments. This fair value measurement is based on significant unobservable inputs in the market and thus represents a Level 3 fair value measurement and used the Monte Carlo pricing model to calculate the fair value, which was $4,643 as of January 29, 2024. As of June 30, 2024, the fair value was $4,825. Changes in the fair value of contingent consideration are recorded in operating expenses. The total revaluation expense for the period ended June 30, 2024 was $182.

Key inputs for the simulation are summarized below.

Key Valuation Inputs	Jan 29, 2024			June 30, 2024
Standard Deviation		13.5	%		13.5	%
Risk-free interest rate		4.4	%		4.6	%
Possible trigger event examination		Year 10			Year 10
Average 5 years revenue growth		50	%		50	%
Trigger events		30	%		30	%
Revenues multiple		10			9.75

* Based on a Monte Carlo simulation analysis of 30,000 iterations

Deconsolidation of Orgenesis Biotech Israel Limited (“OBI”)

On February 14, 2024, following a claim for payment by employees of OBI, a fully owned subsidiary of Octomera of past salaries due, the district court in Haifa, Israel appointed a trustee to run the affairs of OBI. As a result of this appointment, effective February 14, 2024, the Company no longer controls OBI and has ceased to consolidate the results of OBI into its consolidated results. The Company recognized a loss as a result of the deconsolidation of $66. The Company does not currently believe that rehabilitation is possible and purchased certain OBI equipment.

The Company recorded $2,696 being what it owes to OBI under Accounts payable related Parties on the balance sheet of June 30, 2024.

The following table summarizes the deconsolidated assets and liabilities as of February 14, 2024:

Total assets acquired:
Cash and cash equivalents	$	4
Property, plants and equipment, net		2,884
Other Assets		1,422
Total assets	$	4,310
Total liabilities assumed:	$	4,244
Total Net Assets deconsolidated	$	66
Loss from deconsolidation of OBI	$	66