(U.S. dollars in thousands)
(U.S. dollars in thousands)
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 current 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 directly 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.
Since its approval by the FDA,
taliglucerase alfa has been marketed by Pfizer Inc. (“Pfizer”), as provided in the exclusive license and supply agreement
by and between Protalix Ltd. and Pfizer, which is referred to herein as the Pfizer Agreement. In October 2015, the Company entered
into an Amended and Restated Exclusive License and Supply Agreement (the “Amended Pfizer Agreement”) which amends and
restates the Pfizer Agreement in its entirety. Pursuant to the Amended Pfizer Agreement, the Company sold to Pfizer its share in
the collaboration created under the Pfizer Agreement for the commercialization of Elelyso in exchange for a cash payment equal
to $36.0 million. 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 Fundação Oswaldo
Cruz (“Fiocruz”), an arm of the Brazilian Ministry of Health (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 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. Approximately 10% of adult Gaucher patients in Brazil are currently treated with alfataliglicerase. The Company is discussing
with Fiocruz potential actions that Fiocruz may take to comply with its purchase obligations and, based on such discussions, the
Company will determine what it believes to be the course of action that is in the best interest of the Company.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
(continued)
:
In 2017, the Company received a
purchase order from the Brazilian MoH for the purchase of alfataliglicerase for the treatment of Gaucher patients in Brazil for
consideration of approximately $24.3 million. Shipments started in June 2017. The Company recorded revenues of $7.1 million
for sales of alfataliglicerase to Fiocruz in 2017, and $2.6 million during the three months ended March 31, 2018.
On October 19, 2017, Protalix
Ltd. and Chiesi Farmaceutici S.p.A. (“Chiesi”) entered into an Ex-US license (the “Chiesi Agreement”) pursuant
to which Chiesi was granted an exclusive license for all markets outside of the United States to commercialize pegunigalsidase
alfa. Under the terms and conditions of the Chiesi Agreement, Protalix Ltd. retained the right to commercialize pegunigalsidase
in the United States.
Under the Chiesi 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, capped at $10.0 million per year. Protalix
Ltd. is also eligible to receive additional payments of up to $320.0 million, in the aggregate, in regulatory and commercial
milestone payments.
Under the terms of the Chiesi Agreement,
Protalix Ltd. will 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 will 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.
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 March 31, 2018 financial statements, 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.
|
1.
|
Restatement of previously issued condensed consolidated
financial statements
|
The Company has restated
these financial statements to correct an error in the revenue recognition from the Chiesi Agreement. Previously, the Company
had identified a single performance obligation with regard to its promises under the agreement. The Company subsequently
concluded that there are two performance obligations under the agreement as follows: (i) the license together with research
and development services and (ii) a contingent performance obligation regarding future manufacturing. As such, the
Company has recognized revenue for the combined performance obligation (the license and the research and development
services) for the three months ended March 31, 2018 for the satisfaction of the performance obligation that occurred
during the three months ended March 31, 2018.
The Company’s decision to restate the financial
statements previously reported on its Quarterly Reports on Form 10-Q, was approved by, and with the continuing oversight of, the
Company’s Audit Committee.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONDE
NSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
(continued)
:
|
2.
|
Impacts of restatement
|
The effects of the restatement
on the line items within the Company’s condensed consolidated balance sheets as of March 31, 2018 are as follows:
|
|
March 31, 2018
|
|
(
U.S. dollars in thousands)
|
|
As
originally
reported
|
|
|
Adjustments
|
|
|
As restated
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts liability
|
|
$
|
-
|
|
|
$
|
2,651
|
|
|
$
|
2,651
|
|
Total current liabilities
|
|
|
21,499
|
|
|
|
2,651
|
|
|
|
24,150
|
|
LONG TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts liability
|
|
|
29,030
|
|
|
|
(6,648
|
)
|
|
|
22,382
|
|
Total long term liabilities
|
|
|
82,737
|
|
|
|
(6,648
|
)
|
|
|
76,089
|
|
Total liabilities
|
|
|
104,236
|
|
|
|
(3,997
|
)
|
|
|
100,239
|
|
CAPITAL DEFICIENCY
|
|
$
|
(39,439
|
)
|
|
$
|
3,997
|
|
|
$
|
(35,442
|
)
|
The effects of the restatement
on the line items within the Company’s condensed consolidated statements of operations for the three months ended March 31,
2018 are as follows:
|
|
Three Months Ended March 31, 2018
|
|
(
U.S. dollars in thousands, except per share data)
|
|
As
originally
reported
|
|
|
Adjustments
|
|
|
As restated
|
|
REVENUES FROM LICENSE AGREEMENTS
|
|
$
|
-
|
|
|
$
|
2,161
|
|
|
$
|
2,161
|
|
OPERATING LOSS
|
|
$
|
(7,312
|
)
|
|
$
|
2,161
|
|
|
$
|
(5,151
|
)
|
LOSS FOR THE PERIOD
|
|
$
|
(9,400
|
)
|
|
$
|
2,161
|
|
|
$
|
(7,239
|
)
|
Net loss per share of common stock-basic and diluted
|
|
$
|
(0.06
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.05
|
)
|
The effects of the restatement
on the line items within the Company’s condensed consolidated statements of changes in capital deficiency for the three months
ended March 31, 2018 are as follows:
|
|
Three Months Ended March 31, 2018
|
|
(
U.S. dollars in thousands)
|
|
As
originally
reported
|
|
|
Adjustments
|
|
|
As restated
|
|
Net loss
|
|
$
|
(9,400
|
)
|
|
$
|
2,161
|
|
|
$
|
(7,239
|
)
|
Balances as of March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(307,332
|
)
|
|
|
3,997
|
|
|
|
(303,335
|
)
|
Total capital deficiency
|
|
$
|
(39,439
|
)
|
|
$
|
3,997
|
|
|
$
|
(35,442
|
)
|
P
ROTALIX
BIOTHERAPEUTICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
(continued)
:
Although there was with no impact
to net cash provided by operating activities, net cash used in investing activities or net cash used in financing activities, the
effects of the restatement on the line items within the condensed consolidated statements of cash flows for the three months ended
March 31, 2018 are as follows:
|
|
Three Months Ended March 31, 2018
|
|
(
U.S. dollars in thousands)
|
|
As originally
reported
|
|
|
Adjustments
|
|
|
As restated
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,400
|
)
|
|
$
|
2,161
|
|
|
$
|
(7,239
|
)
|
Increase in contracts liability
|
|
|
2,179
|
|
|
|
(2,161
|
)
|
|
|
18
|
|
Net cash used in operating activities
|
|
$
|
(9,413
|
)
|
|
$
|
-
|
|
|
$
|
(9,413
|
)
|
The impacts of the restatement
have been reflected throughout the financial statements, including the applicable footnotes, as appropriate.
In addition, in connection with the agreement with Chiesi, the Company should have recognized $1.8 million
of revenue in the last quarter of 2017 and accordingly has revised certain items in its consolidated financial statements for December
31, 2017 presented herein.
The Company evaluated the
materiality of the error from quantitative and qualitative perspectives, and concluded that the error was immaterial to the Company’s
prior annual consolidated financial statements. Since the revision was not material to any prior interim period or annual consolidated
financial statements, no amendments to previously filed interim or annual periodic reports was required. Consequently, the Company
revised the historical consolidated financial information presented herein. Below are amounts as reported and as adjusted for December
31, 2017:
|
|
December 31, 2017
|
|
(
U.S. dollars in thousands)
|
|
As originally
reported
|
|
|
Adjustments
|
|
|
As revised
|
|
Contracts liability
|
|
$
|
26,851
|
|
|
$
|
(1,836
|
)
|
|
$
|
25,015
|
|
Accumulated deficit
|
|
|
(297,932
|
)
|
|
|
1,836
|
|
|
|
(296,096
|
)
|
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, 2017, filed by the Company with the Commission. The comparative balance sheet at December 31,
2017 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 78,142,133 and 73,800,491 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, 2017 and 2018, respectively, because the effect would be anti-dilutive.
|
d.
|
Revenue recognition (as restated)
|
|
1.
|
Revenues from supply agreements
|
The Company recognizes revenues from supply agreements
and from selling products when control is transferred to the customer and collectability is probable.
PROTALIX
BIOTHERAPEUTICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
(continued)
:
|
2.
|
Revenue from Chiesi Agreement
|
According to Accounting Standard Codification Topic
606, Revenue from contracts with customers (“ASC 606”), a
performance obligation
is a commitment to provide a distinct good or service or a series of distinct goods or services. Goods and services that are not
distinct are bundled with other goods or services in the contract until a bundle of goods or services that is distinct is created.
A good or service promised to a customer is distinct if the customer can benefit from the good or service either on its own or
together with other resources that are readily available to the customer and the entity’s promise to transfer the good or
service to the customer is separately identifiable from other promises in the contract.
The Company has identified two performance obligations
in the Chiesi Agreement as follows: (1) the license and research and development services and (2) a
contingent
performance obligation regarding future manufacturing
.
The Company determined that the license together with
the research and development services should be combined into single performance obligation since
Chiesi
cannot benefit from the license without the
research and development services.
The research
and development services are highly specialized and are dependent on the supply of the drug.
The future manufacturing
is
contingent on regulatory approvals of the drug and
the Company deems these services to be separately identifiable from other
performance obligations in the contract. Manufacturing services post-regulatory approval are not interdependent or interrelated
with the license and research and development services.
The transaction price was comprised of fixed consideration
and variable consideration (capped research and development reimbursements). Under ASC 606, the consideration to which the Company
would be entitled upon the achievement of contractual milestones, which are contingent upon the occurrence of future events, are
a form of variable consideration. The Company estimates variable consideration using the most likely method.
Amounts
included in the transaction price are recognized only when it is probable that a significant reversal of cumulative revenues will
not occur, usually upon achievement of a specific milestone.
The Company used significant judgment when it determined variable
consideration.
Since the customer benefits from the research and development
services as the entity performs, revenue from granting the license and the research and development services is recognized over
time using the cost-to-cost method. The Company used significant judgment when it determined the costs expected to be incurred
upon satisfying the identified performance obligation.
Revenue
from additional
research and development
services ordered by Chiesi,
is recognized over time using the cost-to-cost method.
The
Company's revenue recognition accounting policy prior to January 1, 2018, was materially the same.
|
e.
|
Recently adopted standards
|
In May 2014, the
Financial
Accounting Standards Board (“FASB”)
issued guidance on revenues from contracts with customers that will supersede
most current revenue recognition guidance, including industry-specific guidance. The underlying principle is to recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity
expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to
determine when and how revenue is recognized. Other major provisions require capitalization of certain contracts costs, consideration
of the time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies
are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount timing and
uncertainty of revenues and cash flows arising from an entity’s contracts with customers. The guidance is effective for the
interim and annual periods beginning on or after December 15, 2017. On January 1, 2018, the Company adopted the new accounting
standard, ASC 606, Revenue from Contracts with Customers, and all the related amendments, using the modified retrospective method.
The implementation of this Accounting Standards Update (ASU) did not have a material impact on the Company’s consolidated
financial statements.
In January 2016, the FASB issued ASU, No. 2016-01,
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance affects
the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements
of financial instruments. The guidance is effective for annual reporting periods beginning after December 15, 2017. The implementation
of this ASU did not have a material impact on the Company’s consolidated financial statements.
PROTALIX
BIOTHERAPEUTICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - INVENTORIES
Inventory at March 31, 2018 and December 31,
2017 consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
(
U.S. dollars in thousands)
|
|
2018
|
|
|
2017
|
|
Raw materials
|
|
$
|
3,529
|
|
|
$
|
3,838
|
|
Work in progress
|
|
|
317
|
|
|
|
485
|
|
Finished goods
|
|
|
3,173
|
|
|
|
3,510
|
|
Total inventory
|
|
$
|
7,019
|
|
|
$
|
7,833
|
|
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 remaining $5.9 million
in aggregate principal amount of the Company’s outstanding 4.50% convertible promissory notes due 2018 (the “2013 Notes”),
and of the remaining $58.1 million in aggregate principal amount of the Company’s outstanding 7.50% secured convertible
promissory notes due 2021 (the “2016 Notes”) is approximately $5.7 million and $69.3 million, respectively,
based on a Level 3 measurement.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – FAIR VALUE MEASUREMENT
(continued)
:
The
Company prepared a valuation of the fair value of the 2013 Notes and the 2016 Notes (a Level 3 valuation) as of March
31,
2018. The values of these notes were estimated by implementing the binomial model. The liability component was valued based on
the Income Approach. The following parameters were used:
|
|
2013 Notes
|
|
|
2016 Notes
|
|
Stock price (USD)
|
|
|
0.5399
|
|
|
|
0.5399
|
|
Expected term (years)
|
|
|
0.46
|
|
|
|
3.63
|
|
Risk free rate
|
|
|
1.88
|
%
|
|
|
2.45
|
%
|
Volatility
|
|
|
62.44
|
%
|
|
|
70.96
|
%
|
Yield
|
|
|
12.89
|
%
|
|
|
12.44
|
%
|
NOTE 4 – CONVERTIBLE NOTES
All of the Company’s outstanding convertible
notes are accounted for using the guidance set forth in the FASB Accounting Standards Codification (ASC) 815 which requires that
the Company determine whether the embedded conversion option must be separated and accounted for separately. ASC 470-20, regarding
debt with conversion and other options, requires the issuer of a convertible debt instrument that may be settled in cash upon conversion
to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects
the issuer’s nonconvertible debt borrowing rate.
The
Company accounts for the 2013 Notes as a liability, on an aggregated basis, in their entirety. The 2016 Notes were accounted for
partially as liability and equity components of the instrument and partially as a debt host contract with an embedded derivative
resulting from the conversion feature. During the year ended December
31,
2017, the embedded derivative was reclassified to additional paid in capital.
Issuance costs regarding the issuance of the 2016
Notes are amortized using the effective interest rate.
The debt discount and debt issuance costs regarding
the issuance of the 2013 Notes are deferred and amortized over the 2013 Notes period (5 years).
During
the three months ended March
31, 2018, note holders converted
$1.0 million
aggregate principal amount of the 2016 Notes
into a total of 1,338,707 shares of Common Stock,
and cash payments of approximately $11,668, in the aggregate.
As of March 31, 2018, a total
of $58.1 million aggregate principal amount of the
2016 Notes
and $5.9 million aggregate principal amount of the
2013 Notes
were outstanding.
NOTE 5 – REVENUES (AS RESTATED)
The following table summarizes the
Company’s disaggregation of revenues:
|
|
March 31,
|
|
(U.S. dollars in thousands)
|
|
2018
(as restated)
|
|
|
2017
|
|
Pfizer
|
|
$
|
1,980
|
|
|
$
|
1,646
|
|
Brazil
|
|
$
|
2,573
|
|
|
$
|
1,243
|
|
Total revenues from selling goods
|
|
$
|
4,553
|
|
|
$
|
2,889
|
|
Revenues from license and R&D services
|
|
$
|
2,161
|
|
|
|
|
|