Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). Yes
x
No
¨
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
If an emerging growth company, indicate by
check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
x
On May 1, 2019, approximately 148,382,299
shares of the Registrant’s common stock, $0.001 par value, were outstanding.
The statements set forth under the caption “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” and other statements included elsewhere in this
Quarterly Report on Form 10-Q, which are not historical, constitute “forward-looking statements” within the meanings
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or
the Exchange Act, including statements regarding expectations, beliefs, intentions or strategies for the future. When used in this
report, the terms “anticipate,” “believe,” “estimate,” “expect,” “can,”
“continue,” “could,” “intend,” “may,” “plan,” “potential,”
“predict,” “project,” “should,” “will,” “would” and words or phrases
of similar import, as they relate to the Company or our management, are intended to identify forward-looking statements. We intend
that all forward-looking statements be subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to
future events and financial performance, and we undertake no obligation to update or revise, nor do we have a policy of updating
or revising, any forward-looking statement to reflect events or circumstances after the date on which the statement is made or
to reflect the occurrence of unanticipated events, except as may be required under applicable law. Forward-looking statements are
subject to many risks and uncertainties that could cause our actual results to differ materially from any future results expressed
or implied by the forward-looking statements.
Examples of the risks and uncertainties include, but are not
limited to, the following:
Companies in the pharmaceutical and biotechnology industries
have suffered significant setbacks in advanced or late-stage clinical trials, even after obtaining promising earlier trial results
or preliminary findings for such clinical trials. Even if favorable testing data is generated from clinical trials of a drug product,
the FDA, the EMA or foreign regulatory authorities may not accept or approve a marketing application filed by a pharmaceutical
or biotechnology company for the drug product.
These forward-looking statements reflect our current views with
respect to future events and are based on assumptions and subject to numerous risks and uncertainties. Given these uncertainties,
you should not place undue reliance on these forward-looking statements. These and other risks and uncertainties are detailed under
the heading
“
Risk Factors
”
in our Annual Report on Form 10-K for the year ended December 31, 2018, and are described from time to time in the reports
we file with the U.S. Securities and Exchange Commission, or the Commission.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
PROTALIX BIOTHERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands)
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
30,363
|
|
|
$
|
37,808
|
|
|
Accounts receivable – Trade
|
|
|
8,565
|
|
|
|
4,729
|
|
|
Other assets
|
|
|
1,706
|
|
|
|
1,877
|
|
|
Inventories
|
|
|
6,707
|
|
|
|
8,569
|
|
|
Total current assets
|
|
$
|
47,341
|
|
|
$
|
52,983
|
|
|
|
|
|
|
|
|
|
|
|
|
FUNDS IN RESPECT OF EMPLOYEE RIGHTS UPON RETIREMENT
|
|
$
|
1,801
|
|
|
$
|
1,758
|
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
6,058
|
|
|
|
6,390
|
|
|
OPERATING LEASE RIGHT OF USE ASSETS
|
|
|
5,844
|
|
|
|
-
|
|
|
Total assets
|
|
$
|
61,044
|
|
|
$
|
61,131
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES NET OF CAPITAL DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accruals:
|
|
|
|
|
|
|
|
|
|
Trade
|
|
$
|
5,870
|
|
|
$
|
5,211
|
|
|
Other
|
|
|
10,480
|
|
|
|
10,274
|
|
|
Operating lease liabilities
|
|
|
1,257
|
|
|
|
|
|
|
Contracts liability
|
|
|
9,429
|
|
|
|
9,868
|
|
|
Total current liabilities
|
|
$
|
27,036
|
|
|
$
|
25,353
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
$
|
48,670
|
|
|
$
|
47,966
|
|
|
Contracts liability
|
|
|
32,979
|
|
|
|
33,027
|
|
|
Liability for employee rights upon retirement
|
|
|
2,426
|
|
|
|
2,374
|
|
|
Operating lease liabilities
|
|
|
4,498
|
|
|
|
|
|
|
Other long term liabilities
|
|
|
5,290
|
|
|
|
5,292
|
|
|
Total long term liabilities
|
|
$
|
93,863
|
|
|
$
|
88,659
|
|
|
Total liabilities
|
|
$
|
120,899
|
|
|
$
|
114,012
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL DEFICIENCY
|
|
|
(59,855
|
)
|
|
|
(52,881
|
)
|
|
Total liabilities net of capital deficiency
|
|
$
|
61,044
|
|
|
$
|
61,131
|
|
The accompanying notes are an integral
part of the condensed consolidated financial statements.
PROTALIX
BIOTHERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. dollars in thousands, except per share data)
(Unaudited)
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
REVENUES FROM SELLING GOODS
|
|
$
|
3,530
|
|
|
$
|
4,553
|
|
|
REVENUES FROM LICENSE AND R&D SERVICES
|
|
|
6,909
|
|
|
|
2,161
|
|
|
COST OF GOODS SOLD
|
|
|
(2,045
|
)
|
|
|
(2,924
|
)
|
|
RESEARCH AND DEVELOPMENT EXPENSES (1)
|
|
|
(11,701
|
)
|
|
|
(7,286
|
)
|
|
Less – grants
|
|
|
3
|
|
|
|
843
|
|
|
RESEARCH AND DEVELOPMENT EXPENSES, NET
|
|
|
(11,698
|
)
|
|
|
(6,443
|
)
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (2)
|
|
|
(2,230
|
)
|
|
|
(2,498
|
)
|
|
OPERATING LOSS
|
|
|
(5,534
|
)
|
|
|
(5,151
|
)
|
|
FINANCIAL EXPENSES
|
|
|
(1,920
|
)
|
|
|
(2,220
|
)
|
|
FINANCIAL INCOME
|
|
|
190
|
|
|
|
132
|
|
|
FINANCIAL EXPENSES, NET
|
|
|
(1,730
|
)
|
|
|
(2,088
|
)
|
|
LOSS FOR THE PERIOD
|
|
$
|
(7,264
|
)
|
|
$
|
(7,239
|
)
|
|
NET LOSS PER SHARE OF COMMON STOCK – BASIC AND DILUTED
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
|
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK USED IN COMPUTING LOSS PER SHARE-BASIC AND DILUTED
|
|
|
148,382,299
|
|
|
|
145,305,982
|
|
|
(1) Includes share-based compensation
|
|
$
|
178
|
|
|
$
|
42
|
|
|
(2) Includes share-based compensation
|
|
$
|
112
|
|
|
$
|
20
|
|
The accompanying
notes are an integral part of the condensed consolidated financial statements.
PROTALIX BIOTHERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN
CAPITAL DEFICIENCY
(U.S. dollars in thousands)
(Unaudited)
|
|
|
Common
|
|
|
Common
|
|
|
Additional
Paid–In
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Stock (1)
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
Number of
Shares
|
|
|
Amount
|
|
|
Balance at January 1, 2018
|
|
|
143,728,797
|
|
|
$
|
144
|
|
|
$
|
266,495
|
|
|
$
|
(296,096
|
)
|
|
$
|
(29,457
|
)
|
|
Changes during the three-month period ended March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation related to stock options
|
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
46
|
|
|
Share-based compensation related to restricted stock award
|
|
|
29,898
|
|
|
|
*
|
|
|
|
16
|
|
|
|
|
|
|
|
16
|
|
|
Convertible notes conversions
|
|
|
1,811,260
|
|
|
|
2
|
|
|
|
1,190
|
|
|
|
|
|
|
|
1,192
|
|
|
Net loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,239
|
)
|
|
|
(7,239
|
)
|
|
Balance at March 31, 2018
|
|
|
145,569,955
|
|
|
$
|
146
|
|
|
$
|
267,747
|
|
|
$
|
(303,335
|
)
|
|
$
|
(35,442
|
)
|
|
Balance at January 1, 2019
|
|
|
148,382,299
|
|
|
$
|
148
|
|
|
$
|
269,524
|
|
|
$
|
(322,553
|
)
|
|
$
|
(52,881
|
)
|
|
Changes during the three-month period ended March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation related to stock options
|
|
|
|
|
|
|
|
|
|
|
290
|
|
|
|
|
|
|
|
290
|
|
|
Net loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,264
|
)
|
|
|
(7,264
|
)
|
|
Balance at March 31, 2019
|
|
|
148,382,299
|
|
|
$
|
148
|
|
|
$
|
269,814
|
|
|
$
|
(329,817
|
)
|
|
$
|
(59,855
|
)
|
|
|
*
|
Represents an amount less than $1.
|
|
|
(1)
|
Common Stock, $0.001 par value; Authorized – as of March 31, 2019 and 2018 - 250,000,000.
|
The accompanying
notes are an integral part of the condensed consolidated financial statements.
PROTALIX BIOTHERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(U.S. dollars in thousands)
(Unaudited)
|
|
|
Three Months Ended
|
|
|
|
March 31,
2019
|
|
|
March 31,
2018
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,264
|
)
|
|
$
|
(7,239
|
)
|
|
Adjustments required to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Share based compensation
|
|
|
290
|
|
|
|
62
|
|
|
Depreciation
|
|
|
405
|
|
|
|
430
|
|
|
Financial expenses, net (mainly exchange differences)
|
|
|
20
|
|
|
|
28
|
|
|
Changes in accrued liability for employee rights upon retirement
|
|
|
(24
|
)
|
|
|
(124
|
)
|
|
Gain on amounts funded in respect of employee rights upon retirement
|
|
|
|
|
|
|
(44
|
)
|
|
Net loss in connection with conversions of convertible notes
|
|
|
|
|
|
|
218
|
|
|
Amortization of debt issuance costs and debt discount
|
|
|
704
|
|
|
|
619
|
|
|
Issuance of shares for interest payment in connection with conversions of convertible notes
|
|
|
|
|
|
|
205
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in contracts liability (including non-current portion)
|
|
|
(487
|
)
|
|
|
18
|
|
|
Increase in accounts receivable and other assets
|
|
|
(3,608
|
)
|
|
|
(3,512
|
)
|
|
Changes in right of use assets
|
|
|
(36
|
)
|
|
|
|
|
|
Decrease in inventories
|
|
|
1,862
|
|
|
|
814
|
|
|
Increase (decrease) in accounts
payable and accruals
|
|
|
864
|
|
|
|
(1,009
|
)
|
|
Increase
(decrease) in other long term liabilities
|
|
|
(2
|
)
|
|
|
121
|
|
|
Net cash used in operating activities
|
|
$
|
(7,276
|
)
|
|
$
|
(9,413
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
$
|
(170
|
)
|
|
$
|
(249
|
)
|
|
Increase in restricted deposit
|
|
|
(214
|
)
|
|
|
(188
|
)
|
|
Amounts funded in respect of employee rights upon retirement, net
|
|
|
13
|
|
|
|
109
|
|
|
Net cash used in investing activities
|
|
$
|
(371
|
)
|
|
$
|
(328
|
)
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
|
|
|
|
|
|
|
|
AND CASH EQUIVALENTS
|
|
$
|
202
|
|
|
$
|
(103
|
)
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(7,445
|
)
|
|
|
(9,844
|
)
|
|
BALANCE OF CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
AT BEGINNING OF PERIOD
|
|
|
37,808
|
|
|
|
51,163
|
|
|
BALANCE OF CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
30,363
|
|
|
$
|
41,319
|
|
The accompanying
notes are an integral part of the condensed consolidated financial statements.
PROTALIX BIOTHERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(U.S. dollars in thousands)
(Unaudited)
(Continued) - 2
|
|
|
Three Months Ended
|
|
|
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
|
SUPPLEMENTARY INFORMATION ON INVESTING AND FINANCING ACTIVITIES NOT INVOLVING CASH FLOWS:
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
$
|
128
|
|
|
$
|
342
|
|
|
Convertible notes conversions
|
|
|
|
|
|
$
|
987
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURE ON CASH FLOWS
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
|
|
|
$
|
145
|
|
The accompanying
notes are an integral part of the condensed consolidated financial statements.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Protalix BioTherapeutics, Inc. (collectively
with its subsidiaries, the “Company”) and its wholly-owned subsidiaries, Protalix Ltd. and Protalix B.V. (the “Subsidiaries”),
are biopharmaceutical companies focused on the development and commercialization of recombinant therapeutic proteins based on the
Company’s proprietary ProCellEx
®
protein expression system (“ProCellEx”). To date, the Company
has successfully developed taliglucerase alfa (marketed under the name alfataliglicerase in Brazil and certain other Latin American
countries and Elelyso
®
in the rest of the territories) for the treatment of Gaucher disease that has been approved
for marketing in the United States, Brazil, Israel and other markets. The Company has a number of product candidates in varying
stages of the clinical development process. The Company’s strategy is to develop proprietary recombinant proteins that are
therapeutically superior to existing recombinant proteins currently marketed for the same indications.
The Company’s product pipeline
currently includes, among other candidates:
(1) pegunigalsidase alfa, or PRX-102,
a therapeutic protein candidate for the treatment of Fabry disease, a rare, genetic lysosomal disorder;
(2) alidornase alfa, or PRX-110,
a proprietary plant cell recombinant human Deoxyribonuclease 1, or DNase, under development for the treatment of Cystic Fibrosis,
to be administered by inhalation; and
(3) OPRX-106, the Company’s
oral antiTNF product candidate which is being developed as an orally-delivered anti-inflammatory treatment using plant cells as
a natural capsule for the expressed protein.
Obtaining marketing approval with
respect to any product candidate in any country is dependent on the Company’s ability to implement the necessary regulatory
steps required to obtain such approvals. The Company cannot reasonably predict the outcome of these activities.
On October 19, 2017, Protalix
Ltd. and Chiesi Farmaceutici S.p.A. (“Chiesi”) entered into an Exclusive License and Supply Agreement (the “Chiesi
Ex-US Agreement”) pursuant to which Chiesi was granted an exclusive license for all markets outside of the United States
to commercialize pegunigalsidase alfa. On July 23, 2018, Protalix Ltd. entered into an Exclusive License and Supply Agreement
with Chiesi (the “Chiesi US Agreement”) with respect to the commercialization of pegunigalsidase alfa in the United
States.
Under each of the Chiesi Ex-US Agreement
and the Chiesi US Agreement (collectively, the “Chiesi Agreements”), Chiesi made an upfront payment to Protalix Ltd. of $25.0 million in
connection with the execution of the agreement. In addition, under the Chiesi Ex-US Agreement, Protalix Ltd. is entitled to additional
payments of up to $25.0 million in pegunigalsidase alfa development costs, capped at $10.0 million per year, and to receive
additional payments of up to $320.0 million, in the aggregate, in regulatory and commercial milestone payments. Under the
Chiesi US Agreement, Protalix Ltd. is entitled to payments of up to a maximum of $20.0 million to cover development costs
for pegunigalsidase alfa, subject to a maximum of $7.5 million per year, and to receive an additional up to a maximum of $760.0 million,
in the aggregate, in regulatory and commercial milestone payments.
Under the terms of both of the Chiesi
Agreements, Protalix Ltd. will manufacture all of the pegunigalsidase alfa needed under the agreements, subject to certain exceptions,
and Chiesi will purchase pegunigalsidase alfa from Protalix, subject to certain terms and conditions. Under the Chiesi Ex-US Agreement,
Chiesi is required to make tiered payments of 15% to 35% of its net sales, depending on the amount of annual sales outside of the
United States, as consideration for product supply. Under the Chiesi US Agreement, Chiesi is required to make tiered payments of
15% to 40% of its net sales, depending on the amount of annual sales in the United States, as consideration for product supply.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
(continued):
Since its approval by the FDA, taliglucerase
alfa has been marketed by Pfizer in accordance with the exclusive license and supply agreement entered into between Protalix Ltd. and Pfizer,
which is referred to herein as the Pfizer Agreement. In October 2015, the Company sold to Pfizer its share in the collaboration
created under the Pfizer Agreement for the commercialization of Elelyso. As part of the sale, the Company agreed to transfer its
rights to Elelyso in Israel to Pfizer while gaining full rights to it in Brazil. Under the Amended Pfizer Agreement, Pfizer is
entitled to all of the revenues, and is responsible for 100% of expenses globally for Elelyso, excluding Brazil where the Company
is responsible for all expenses and retains all revenues.
On June 18, 2013, the Company
entered into a Supply and Technology Transfer Agreement (the “Brazil Agreement”) with Fiocruz, an arm of the Brazilian
MoH, for taliglucerase alfa. Fiocruz’s purchases of alfataliglicerase to date have been significantly below certain agreed
upon purchase milestones and, accordingly, the Company has the right to terminate the Brazil Agreement. Notwithstanding the termination
right, the Company is, at this time, continuing to supply alfataliglicerase to Fiocruz under the Brazil Agreement, and patients
continue to be treated with alfataliglicerase in Brazil.
Based on its current cash resources
and commitments, the Company believes it will be able to maintain its current planned development activities and the corresponding
level of expenditures for at least 12 months from the date of approval of the financial statements as of March 31, 2019,
although no assurance can be given that it will not need additional funds prior to such time. If there are unexpected increases
in general and administrative expenses or research and development expenses, the Company may need to seek additional financing.
The accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United
States (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes
required by GAAP for annual financial statements. In the opinion of management, all adjustments (of a normal recurring nature)
considered necessary for a fair statement of the results for the interim periods presented have been included. Operating results
for the interim period are not necessarily indicative of the results that may be expected for the full year.
These unaudited condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements in the Annual Report on Form 10-K for the year
ended December 31, 2018, filed by the Company with the Commission. The comparative balance sheet at December 31, 2018
has been derived from the audited financial statements at that date.
Basic and diluted loss per share (“LPS”)
are computed by dividing net loss by the weighted average number of shares of the Company’s common stock, par value $0.001
per share (the “Common Stock”), outstanding for each period.
Diluted LPS is calculated in continuing operations.
The calculation of diluted LPS does not include 73,800,491 and 78,202,020 shares of Common Stock underlying outstanding options
and restricted shares of Common Stock and shares issuable upon conversion of outstanding convertible notes for the three months
ended March 31, 2018 and 2019, respectively, because the effect would be anti-dilutive.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
|
|
d.
|
Recently adopted standards
|
In February 2016, the Financial Accounting Standards
Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting,
Leases (Topic 840). The new standard requires a lessee to record assets and liabilities on its balance sheet for all leases with
terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern
of expense recognition in the lessee’s income statement. The Company adopted this standard as of January 1, 2019 on a modified
retrospective basis and will not restate comparative periods. The Company will elect the package of practical expedients permitted
under the transition guidance within the new standard which, among other things, allows the Company to carryforward the historical
lease classification. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off
of its balance sheet. The Company recognized those lease payments in its statements of operations on a straight-line basis over
the lease period.
As of the adoption date, the Company
recognized an operating lease asset and liability of $5.9 million and $5.7 million, respectively, as of January 1,
2019 on its balance sheet.
|
|
e.
|
Newly issued accounting pronouncements
|
In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718):
Improvements to Nonemployee Share-based Payment Accounting” that expands the scope of ASC Topic 718 to include share-based
payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of ASC Topic 718
to nonemployee awards except for certain exemptions specified in ASU 2018-07. The guidance is effective for fiscal years beginning
after December 15, 2018, including interim reporting periods within that fiscal year. Early adoption is permitted, but no earlier
than an entity’s adoption date of Topic 606. The Company does not expect the adoption of ASU 2018-07 to have a material impact
on its financial statements.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - INVENTORIES
|
|
a.
|
Inventories at March 31, 2019 and December 31, 2018 consisted of the following:
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
(
U.S. dollars in thousands)
|
|
2019
|
|
|
2018
|
|
|
Raw materials
|
|
$
|
3,047
|
|
|
$
|
3,792
|
|
|
Work in progress
|
|
|
45
|
|
|
|
|
|
|
Finished goods
|
|
|
3,615
|
|
|
|
4,777
|
|
|
Total inventory
|
|
$
|
6,707
|
|
|
$
|
8,569
|
|
|
|
b.
|
During the year ended December 31, 2018 and the three months ended March 31, 2019, the Company recorded approximately
$1.1 million and $65,000, respectively, for write-down of inventory under cost of goods sold.
|
NOTE 3 – FAIR VALUE MEASUREMENT
The Company measures fair value and discloses fair
value measurements for financial assets and liabilities. Fair value is based on the price that would be received from the sale
of an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.
The accounting standard establishes a fair value
hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described
below:
Level 1: Quoted prices (unadjusted) in active markets
that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level
1 inputs.
Level 2: Observable prices that are based on inputs
not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little
or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes
valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible
and considers counterparty credit risk in its assessment of fair value.
The fair value of the financial instruments included
in the working capital of the Company is usually identical or close to their carrying value. The fair value of the convertible
notes derivative is based on Level 3 measurement.
The fair value of the
$57.9 million principal amount of the Company’s outstanding 7.50% convertible promissory notes due 2021 (the
“2021 Notes”) as of March 31, 2019 is approximately $64.5 million based on a Level 3 measurement.
The
Company prepared a valuation of the fair value of the Company’s outstanding 2021 Notes (a Level 3 valuation) as of March
31, 2019.
The value of these notes was estimated by implementing the binomial model. The liability component was valued based on
the Income Approach. The following parameters were used:
|
|
|
|
2021 Notes
|
|
|
Stock price (USD)
|
|
|
0.44
|
|
|
Expected term
|
|
|
2.63
|
|
|
Risk free rate
|
|
|
2.21
%
|
|
|
Volatility
|
|
|
81.56%
|
|
|
Yield
|
|
|
12.6%
|
|
NOTE 4 – OPERATING LEASES
The Company is a party to a number of
lease agreements for its facilities, the latest of which has been extended until 2021. The Company has the option to extend
certain of such agreements on two additional occasions for additional five-year periods each, for a total of 10 additional
years. During the extended lease period, the aggregate monthly rental payments will increase by 7.5% - 10% for each option.
The Company expects to exercise these options in future periods. As of March 31, 2019, the Company provided bank
guarantees of approximately $412,000, in the aggregate, to secure the fulfillment of its obligations under the lease
agreements. As of December 31, 2018, the future minimum lease payments required under the operating leases for such premises
are approximately $758,000, $758,000 and $621,000, for fiscal years 2019 through 2021, respectively.
The Company entered into several
three-year leases for vehicles which are regularly amended as new vehicles are leased. As of December 31, 2018, the future
minimum lease payments for the years ending December 31, 2019, 2020 and 2021 are approximately $474,000, $333,000
and $82,000, respectively.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 – OPERATING LEASES (continued):
The following table sets forth data regarding the Company’s operating leases for the three months ended March 31, 2019:
|
(
U.S. dollars in thousands)
|
|
March 31, 2019
|
|
|
Operating lease costs
|
|
$
|
292
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
328
|
|
|
Right of use assets obtained in exchange for new operating lease liabilities
|
|
|
52
|
|
|
Weighted average remaining lease term (in years)
|
|
|
10.84
|
|
|
Weighted average discount rate
|
|
|
12.58
|
%
|
The following table sets forth a maturity analysis
of the Company’s operating lease liabilities as of March 31, 2019:
|
(
U.S. dollars in thousands)
|
|
March 31, 2019
|
|
|
2019 (excluding the three months ended March 31, 2019)
|
|
$
|
947
|
|
|
2020
|
|
$
|
1,135
|
|
|
2021
|
|
$
|
888
|
|
|
2022
|
|
$
|
774
|
|
|
2023
|
|
$
|
770
|
|
|
After 2024
|
|
$
|
6,380
|
|
|
Total undiscounted cash flows
|
|
$
|
10,894
|
|
|
Less: imputed interest
|
|
$
|
5,139
|
|
|
Present value of lease
liabilities
|
|
$
|
5,755
|
|
NOTE 5 – REVENUES
The following table summarizes the
Company’s disaggregation of revenues:
|
|
|
Three
months ended March 31,
|
|
|
(U.S. dollars in thousands)
|
|
2019
|
|
|
2018
|
|
|
Pfizer
|
|
$
|
1,356
|
|
|
$
|
1,980
|
|
|
Brazil
|
|
$
|
2,174
|
|
|
$
|
2,573
|
|
|
Total revenues from selling goods
|
|
$
|
3,530
|
|
|
$
|
4,553
|
|
|
Revenues from license and R&D services
|
|
$
|
6,909
|
|
|
$
|
2,161
|
|
The following table sets forth data regarding
the Company’s contract liability:
|
|
|
Three months ended March 31,
|
|
|
(U.S. dollars in thousands)
|
|
2019
|
|
|
2018
|
|
|
Contract liabilities at the beginning of the period
|
|
$
|
42,895
|
|
|
$
|
25,015
|
|
|
Additions during the period
|
|
|
6,422
|
|
|
|
2,179
|
|
|
Revenue recognized during the period
|
|
|
(6,909
|
)
|
|
|
(2,161
|
)
|
|
Contract liabilities at the end of the period
|
|
$
|
42,408
|
|
|
$
|
25,033
|
|
The following table represents the Company's
unsatisfied performance obligation:
|
|
|
March 31,
|
|
|
(U.S. dollars in thousands)
|
|
2019
|
|
|
2018
|
|
|
Unsatisfied performance obligation
|
|
$
|
64,581
|
|
|
$
|
91,033
|
|
NOTE 6 – SUBSEQUENT
EVENTS
The Company has evaluated subsequent events through the date
on which the consolidated financial statements were available to be issued and no subsequent events were identified.
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
You should read the following discussion
and analysis of our financial condition and results of operations together with our financial statements and the consolidated financial
statements and the related notes included elsewhere in this Form 10-Q and in our Annual Report on Form 10-K for the year ended
December
31, 2018. Some of the information contained in this discussion and analysis, particularly with respect to
our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties.
You should read “Risk Factors” in our Annual Report on Form 10-K for the year ended December
31, 2018 for
a discussion of important factors that could cause actual results to differ materially from the results described in or implied
by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a biopharmaceutical company focused on the development
and commercialization of recombinant therapeutic proteins based on our proprietary ProCellEx
®
protein expression
system. We developed our first commercial drug product, Elelyso
®
, using our ProCellEx system and we are now focused
on utilizing the system to develop a pipeline of proprietary, clinically superior versions of recombinant therapeutic proteins
that primarily target large, established pharmaceutical markets and that in most cases rely upon known biological mechanisms of
action. With our experience to date, we believe ProCellEx will enable us to develop additional proprietary recombinant proteins
that are therapeutically superior to existing recombinant proteins currently marketed for the same indications, including applying
the unique properties of our ProCellEx system for the oral delivery of therapeutic proteins.
On
October
19, 2017, Protalix Ltd., our
wholly-owned subsidiary, and Chiesi entered into the Chiesi Ex-US Agreement pursuant to which Chiesi was granted an exclusive
license for all markets outside of the United States to commercialize pegunigalsidase alfa.
Pegunigalsidase alfa is
our chemically modified version of the recombinant protein alpha-Galactosidase-A protein that is currently being evaluated in
phase III clinical trials for the treatment of Fabry disease
.
Under the terms and conditions of the Chiesi Ex-US Agreement, Protalix Ltd. retained the right to commercialize
pegunigalsidase alfa in the United States. Under the Chiesi Ex-US Agreement, Chiesi made an upfront payment to Protalix Ltd.
of $25.0
million in connection with the execution of the
agreement and Protalix Ltd. is entitled to additional payments of up to $25.0
million
in development costs in the aggregate, capped at $10.0
million
per year. Protalix Ltd. is also eligible to receive an additional up to a maximum of $320.0
million,
in the aggregate, in regulatory and commercial milestone payments. Protalix Ltd. agreed to manufacture all of the PRX-102
needed for all purposes under the agreement, subject to certain exceptions, and Chiesi will purchase pegunigalsidase alfa
from Protalix, subject to certain terms and conditions. Chiesi is required to make tiered payments of 15% to 35% of its net
sales, depending on the amount of annual sales, as consideration for the supply of pegunigalsidase alfa.
On
July
23, 2018, Protalix Ltd. entered into the Chiesi US Agreement
with respect to the development and commercialization of pegunigalsidase alfa in the United States. Under the terms of the Chiesi
US Agreement, Protalix Ltd. granted to Chiesi exclusive licensing rights for the commercialization of PRX-102 in the United States.
Protalix Ltd. is entitled to an upfront, non-refundable, non-creditable payment of $25.0
million
from Chiesi and additional payments of up to a maximum of $20.0
million, in the aggregate,
to cover development costs for PRX-102, subject to a maximum of $7.5
million
per year. Protalix Ltd. is also eligible to receive an additional up to a maximum of $760.0
million,
in the aggregate, in regulatory and commercial milestone payments. Chiesi will also make tiered payments of 15% to 40% of its net
sales under the Chiesi US Agreement to Protalix Ltd., depending on the amount of annual sales, subject to certain terms and conditions,
as consideration for product supply.
In December 2017, the European Commission granted Orphan Drug
Designation for pegunigalsidase alfa for the treatment of Fabry disease. The designation was granted after the European Medicine
Agency’s Committee for Orphan Medicinal Products, or the COMP, issued a positive opinion supporting the designation noting
that we had established that there was medically plausible evidence that pegunigalsidase alfa will provide a significant benefit
over existing approved therapies in the European Union for the treatment of Fabry disease. The COMP cited clinical and non-clinical
justifications we provided to establish the significant benefit of pegunigalsidase alfa, noting that the COMP considered the justifications
to constitute a clinically relevant advantage. Orphan Drug Designation for pegunigalsidase alfa qualifies Protalix Ltd. for access
to a centralized marketing authorization procedure, including applications for inspections and for protocol assistance. If the
orphan drug designation is maintained at the time pegunigalsidase alfa is approved for marketing in the European Union, if at all,
we expect that PRX-102 will benefit from 10 years of market exclusivity within the European Union. The market exclusivity will
not have any effect on Fabry disease treatments already approved at that time.
In January 2018, the FDA granted Fast Track designation to PRX-102.
Fast Track designation is a process designed to facilitate the development and expedite the review of drugs and vaccines for serious
conditions that fill an unmet medical need.
On
May
1, 2012, the FDA approved for sale our first commercial
product, taliglucerase alfa for injection, an ERT for the long-term treatment of adult patients with a confirmed diagnosis of type
1 Gaucher disease. Subsequently, taliglucerase alfa was approved for marketing by the regulatory authorities of other countries.
Taliglucerase alfa is marketed under the name alfataliglicerase in Brazil and certain other Latin American countries, and under
the name Elelyso in other territories.
Since
its approval by the FDA, taliglucerase alfa has been marketed by Pfizer, as provided in the Pfizer Agreement. In
October
2015, we entered into the Amended Pfizer Agreement which amends and restates the Pfizer Agreement in its entirety. Pursuant to
the Amended Pfizer Agreement, we sold to Pfizer our share in the collaboration created under the initial Pfizer Agreement for the
commercialization of Elelyso. As part of the sale, we agreed to transfer our rights to Elelyso in Israel to Pfizer, while gaining
full rights to Elelyso in Brazil. We will continue to manufacture drug substance for Pfizer, subject to certain terms and conditions.
Under the Amended Pfizer Agreement, Pfizer is responsible for 100% of expenses, and entitled to all revenues globally for Elelyso,
excluding Brazil, where we are responsible for all expenses and retain all revenues.
For the first 10-year period after the execution of the Amended
Pfizer Agreement, we have agreed to sell drug substance to Pfizer for the production of Elelyso, and Pfizer maintains the right
to extend the supply period for up to two additional 30-month periods subject to certain terms and conditions. Any failure to comply
with our supply commitments may subject us to substantial financial penalties, which will have a material adverse effect on our
business, results of operations and financial condition. The Amended Pfizer Agreement also includes customary provisions regarding
cooperation for regulatory matters, patent enforcement, termination, indemnification and insurance requirements.
On
June
18, 2013, we entered into the Brazil Agreement with
Fiocruz,
an arm of the Brazilian MoH,
for taliglucerase alfa.
Fiocruz’s
purchases of
alfataliglicerase
to date have been significantly
below certain agreed upon purchase milestones and, accordingly, we have the right to terminate the Brazil Agreement. Notwithstanding
our termination right, we are, at this time, continuing to supply
alfataliglicerase
to Fiocruz under the Brazil Agreement, and patients continue to be treated with
alfataliglicerase
in Brazil.
We are developing an innovative product pipeline using our ProCellEx
protein expression system. Our product pipeline currently includes, among other candidates:
(1) pegunigalsidase alfa, or PRX-102, a therapeutic protein
candidate for the treatment of Fabry disease, a rare, genetic lysosomal disorder in humans, currently in an ongoing phase III clinical
trial.
(2) alidornase alfa, or PRX-110, a proprietary plant cell recombinant
human Deoxyribonuclease 1 under development for the treatment of Cystic Fibrosis, or CF, to be administered by inhalation. We recently
completed a phase IIa efficacy and safety study of alidornase alfa for the treatment of CF.
(3)
OPRX-106,
our oral antiTNF product candidate
which is being developed
as
an orally-delivered anti-inflammatory treatment using plant cells as a natural capsule for the expressed protein. We
released final data generated in our phase II clinical trial of OPRX-106 for the treatment of ulcerative colitis in March 2018
.
Additional data was released in June 2018.
We have licensed the rights to commercialize taliglucerase alfa
worldwide (other than Brazil) to Pfizer, and the rights to commercialize pegunigalsidase alfa worldwide to Chiesi. Otherwise, we
hold the worldwide commercialization rights to our other proprietary development candidates. In addition, we continuously evaluate
potential strategic marketing partnerships as well as collaboration programs with biotechnology and pharmaceutical companies and
academic research institutes.
Critical Accounting Policies
Our significant accounting policies are more fully described
in Note 1 to our consolidated financial statements appearing in this Quarterly Report. There have been no material changes
to our critical accounting policies since we filed our Annual Report on Form 10-K for the year ended December 31, 2018.
The discussion and analysis of our financial condition and results
of operations is based on our financial statements, which we prepared in accordance with U.S. generally accepted accounting principles.
The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well
as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments,
including those described in greater detail below. We base our estimates on historical experience and on various other factors
that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
Results of Operations
Three months ended March 31, 2019 compared to the three
months ended March 31, 2018
Revenues from Selling Goods
We recorded revenues from selling goods of $3.5 million
during the three months ended March 31, 2019, a decrease of $1.0 million, or 22%, compared to revenues of $4.6 million
for the three months ended March 31, 2018. The decrease resulted primarily from a decrease of $0.6 million in sales of
drug substance to Pfizer.
Revenues from License and R&D Services
We recorded revenues from license and R&D services of $6.9 million
for the three months ended March 31, 2019, an increase of $4.7 million compared to revenues of $2.2 million for
the three months ended March 31, 2018. Revenues from the license agreements represent the revenues we recognized in connection
with the Chiesi Agreements.
Cost of Goods Sold
Cost of goods sold was $2.0 million for the three months
ended March 31, 2019, a decrease of $0.9 million, or 30%, from cost of goods sold of $2.9 million for the three
months ended March 31, 2018. The decrease is mainly due to a decrease in selling goods.
Research and Development Expenses, Net
Research and development expenses were $11.7 million for
the three months ended March 31, 2019, an increase of $5.3 million, or 82%, compared to $6.4 million of research
and development expenses for the three months ended March 31, 2018. The increase resulted primarily from an increase of $3.0 million
in clinical trial related costs.
We expect research and development expenses to continue to be
our primary expense as we enter into a more advanced stage of preclinical and clinical trials for certain of our product candidates,
primarily with respect to pegunigalsidase alfa
.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $2.2 million
for the three months ended March 31, 2019, a decrease of $0.3 million, or 11%, compared to $2.5 million for the
three months ended March 31, 2018.
Financial Expenses, net
Financial expenses net
were $1.7 million for the three months ended March 31, 2019, a decrease of $0.4 million, or 17%, compared
to financial expenses net of $2.1 million for the three months ended March 31, 2018. Financial expenses are
comprised primarily from interest expense on outstanding convertible notes of $1.1 million and $1.2 million for the
three months ended March 31, 2019 and 2018, respectively.
Liquidity and Capital Resources
Sources of Liquidity
As a result of our significant
research and development expenditures and the lack of significant revenue from sales of taliglucerase alfa, we have
generated operating losses from our continuing operations since our inception. To date, we have funded our operations
primarily with net proceeds equal to $31.3 million from the sale of shares of convertible preferred and ordinary shares
of Protalix Ltd., and an additional $14.1 million in connection with the exercise of warrants issued in connection with
the sale of such shares, through December 31, 2008. In addition, on October 25, 2007, we generated gross proceeds
of $50.0 million in connection with an underwritten public offering of our common stock and on each of March 23,
2011 and February 22, 2012, we generated gross proceeds of $22.0 million and $27.2 million, respectively,
in connection with underwritten public offerings of our common stock. We believe that the funds currently available to us
are sufficient to satisfy our capital needs for at least 12 months.
In addition to the foregoing, on September 18, 2013, we
completed a private placement of $69.0 million in aggregate principal amount of our 2018 Notes, including $9.0 million
aggregate principal amount of 2018 Notes related to the offering’s initial purchaser’s over-allotment option, which
was exercised in full. In December 2016, we completed a private placement of $22.5 million in aggregate principal amount of
2021 Notes. Finally, on July 25, 2017, we completed a private placement of an additional $10.0 million in aggregate principal
amount of 2021 Notes.
Pfizer
paid Protalix Ltd. $60.0
million as an upfront payment in
connection with the execution of the Pfizer Agreement and subsequently paid to Protalix Ltd. an additional $5.0
million
upon Protalix Ltd.’s meeting a certain milestone. Protalix Ltd. also received a milestone payment of $25.0
million
in connection with the FDA’s approval of taliglucerase alfa in May
2012.
Pfizer has also paid Protalix Ltd. $8.3 million in connection with the successful achievement of certain milestones
under a clinical development agreement between Pfizer and Protalix Ltd. In connection with the execution of the Amended Pfizer
Agreement, we received a $36.0 million payment from Pfizer, and Pfizer purchased 5,649,079 shares of our common stock for
$10.0 million.
In
the fourth quarter of 2017, Chiesi made a payment to Protalix Ltd. of $25.0
million
in connection with the execution of the Chiesi Ex-US Agreement and in the third quarter of 2018, Chiesi made a payment to
Protalix Ltd. of $25.0
million in connection with the
execution of the Chiesi US Agreement.
Cash Flows
Net cash used in operations was $7.3 million
for the three months ended March 31, 2019. The net loss for the three months ended March 31, 2019 of $7.3 million
was further increased by a $3.6 million increase in accounts receivable, but was partially offset by an increase of $0.9 million
in accounts payable and accruals and by a decrease in inventories of $1.9 million. Net cash used in investing activities for the
three months ended March 31, 2019 was $0.4 million and consisted primarily of purchases of property and equipment, and an
increase in restricted deposit.
Net cash used in operations was $9.4 million
for the three months ended March 31, 2018. The net loss for the three months ended March 31, 2018 of $7.2 million
was further increased by a $3.5 million increase in accounts receivable, and a decrease of $1.0 million in accounts payable
and accruals, but was partially offset by a decrease in inventories of $814,000. Net cash used in investing activities for the
three months ended March 31, 2018 was $328,000 and consisted primarily of purchases of property and equipment, and an increase
in restricted deposit.
Future Funding Requirements
We expect to continue to incur significant expenditures in the
near future, including significant research and development expenses related primarily to the clinical trials of PRX-102. We believe
that our existing cash and cash equivalents and commitments will be sufficient for at least 12 months. We have based this estimate
on assumptions that are subject to change and may prove to be wrong, and we may be required to use our available capital resources
sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization
of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated
with our current and anticipated clinical trials.
Our future capital requirements will depend
on many other factors, including our progress in commercializing
alfataliglicerase
in Brazil, the progress and results of our clinical trials, particularly our clinical trials of pegunigalsidase alfa, the duration
and cost of discovery and preclinical development and laboratory testing and clinical trials for our product candidates, conversions
of our 2021 Notes from time to time, the timing and outcome of regulatory review of our product candidates, the costs involved
in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims and other intellectual property rights, the
number and development requirements of other product candidates that we pursue and the costs of commercialization activities, including
product marketing, sales and distribution.
We may need to finance our future cash needs through corporate
collaboration, licensing or similar arrangements, public or private equity offerings and/or debt financings. We currently do not
have any commitments for future external funding, except with respect to the development-related payments and milestone payments
that may become payable under the Chiesi Agreements. We may need to raise additional funds more quickly if one or more of our assumptions
prove to be incorrect or if we choose to expand our product development efforts more rapidly than we presently anticipate. We may
also decide to raise additional funds even before we need them if the conditions for raising capital are favorable. Any sale of
additional equity or debt securities will likely result in dilution to our stockholders. The incurrence of indebtedness would result
in increased fixed obligations and could also result in covenants that would restrict our operations. Additional equity or debt
financing, grants or corporate collaboration and licensing arrangements may not be available on acceptable terms, if at all. If
adequate funds are not available, we may be required to delay, reduce the scope of or eliminate our research and development programs,
reduce our planned commercialization efforts or obtain funds through arrangements with collaborators or others that may require
us to relinquish rights to certain product candidates that we might otherwise seek to develop or commercialize independently.
Effects of Inflation and Currency Fluctuations
Inflation generally affects us by increasing
our cost of labor and clinical trial costs. We do not believe that inflation has had a material effect on our results of operations
during the three months ended March 31, 2019 and March 31, 2018.
Currency fluctuations could affect us through
increased or decreased acquisition costs for certain goods and services. We do not believe currency fluctuations have had a material
effect on our results of operations during the three months ended March 31, 2019 and March 31, 2018.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements
as of each of March 31, 2019 and March 31, 2018.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
Currency Exchange Risk
The currency of the primary economic environment
in which our operations are conducted is the U.S. dollar. We consider the currency of the primary economic environment to be the
currency in which we generate revenues and expend cash. Most of our revenues are denominated in U.S. dollars, approximately 50%
of our expenses and capital expenditures are incurred in U.S. dollars, and a significant source of our financing has been provided
in U.S. dollars. Since the dollar is the functional currency, monetary items maintained in currencies other than the dollar are
remeasured using the rate of exchange in effect at the balance sheet dates and non-monetary items are remeasured at historical
exchange rates. Revenue and expense items are remeasured at the average rate of exchange in effect during the period in which they
occur. Foreign currency translation gains or losses are recognized in the statement of operations.
A portion of our costs, including salaries, expenses and office
expenses, are incurred in NIS. Inflation in Israel may have the effect of increasing the U.S. dollar cost of our operations in
Israel. If the U.S. dollar declines in value in relation to the NIS, it will become more expensive for us to fund our operations
in Israel. A devaluation of 1% of the NIS will affect our income before tax by less than 1%. The exchange rate of the U.S. dollar
to the NIS, based on exchange rates published by the Bank of Israel, was as follows:
|
|
|
Three Months Ended
March 31,
|
|
Year Ended
December 31,
|
|
|
|
2019
|
|
2018
|
|
2018
|
|
Average rate for period
|
|
3.644
|
|
3.462
|
|
3.595
|
|
Rate at period end
|
|
3.632
|
|
3.514
|
|
3.748
|
To date, we have not engaged in hedging transactions. In the
future, we may enter into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange
rate of the U.S. dollar against the NIS. These measures, however, may not adequately protect us from material adverse effects due
to the impact of inflation in Israel.
Interest Rate Risk
Our exposure to market risk is confined to
our cash and cash equivalents. We consider all short term, highly liquid investments, which include short-term deposits with original
maturities of three months or less from the date of purchase, that are not restricted as to withdrawal or use and are readily convertible
to known amounts of cash, to be cash equivalents. The primary objective of our investment activities is to preserve principal while
maximizing the interest income we receive from our investments, without increasing risk. We invest any cash balances primarily
in bank deposits and investment grade interest-bearing instruments. We are exposed to market risks resulting from changes in interest
rates. We do not use derivative financial instruments to limit exposure to interest rate risk. Our interest gains may decline in
the future as a result of changes in the financial markets.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness
of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report
on Form 10-Q. The controls evaluation was conducted under the supervision and with the participation of management, including our
Chief Executive Officer and Chief Financial Officer. Disclosure controls and procedures are controls and procedures designed to
reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly
Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the Commission’s
rules and forms. Disclosure controls and procedures are also designed to reasonably assure that such information is accumulated
and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
The evaluation of our disclosure controls
and procedures included a review of the controls’ objectives and design, our implementation of the controls and their effect
on the information generated for use in this Quarterly Report on Form 10-Q. This type of evaluation will be performed on a quarterly
basis so that the conclusions of management, including the Chief Executive Officer and Chief Financial Officer, concerning the
effectiveness of the disclosure controls and procedures can be reported in our periodic reports on Forms 10-Q and Forms 10-K.
The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures, and to modify
them as necessary. Our intent is to maintain the disclosure controls and procedures as dynamic systems that change as conditions
warrant.
Based on the controls evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our
disclosure controls and procedures were not effective as of March 31, 2019 due to the material weakness in internal control
over financial reporting described below.
Our Chief Executive Officer and Chief Financial Officer have
concluded that notwithstanding the existence of the material weakness, the consolidated financial statements included in this Quarterly
Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for
the periods presented in conformity with U.S. generally accepted accounting principles. Additional corrective actions continue
to address the internal control material weakness as described below under the section “Remediation Plan.”
Material Weakness in Internal Control over Financial
Reporting
Management has concluded that
our internal control over financial reporting was not effective as of the end of our last fiscal quarter to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external reporting purposes in accordance with U.S. generally accepted accounting principles. We determined that a material
weakness in our internal control over financial reporting existed as of March 31, 2019 in that we did not maintain
effective internal controls related to accounting for complex revenue contracts. Specifically, we did not properly assess
the performance obligations we had with regard to certain out-licensing arrangements which became material to our company
during 2018. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.
Remediation Plan
In response to the identified material weakness, our management,
with the oversight of the Audit Committee of the Board of Directors, has updated our revenue recognition processes and controls
with respect to out-licensing arrangements, and retained a globally recognized business and accounting advisory firm to assist
us in improving our internal processes in connection with revenue recognition. While certain remedial actions have been completed
in the first quarter of 2019, we intend to continue to update our revenue recognition processes and controls and to implement additional
control procedures as the need to do so is identified by our management. The remediation efforts are intended both to address the
identified material weakness and to enhance our overall financial control environment.
The material weakness will not be considered remediated until
our management designs and implements effective controls that operate for a sufficient period of time and management has concluded,
through testing, that these controls are effective. We will monitor the effectiveness of our remediation plan and will refine its
remediation plan as appropriated.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief
Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control
over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control
system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their
costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within a company
have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns
can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion
of two or more people or by management override of the controls. The design of any system of controls is based in part on certain
assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are
subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of
compliance with policies or procedures.
Changes in Internal Control over Financial Reporting
Except with respect to the new lease accounting standard, there were no changes in our internal control over financial reporting (as defined in
Rules 13a-15f and 15d-15f under the Exchange Act) that occurred during the quarter ended March 31, 2019 that have
materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.