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, 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 November 1, 2018, approximately 148,374,921
shares of the Registrant’s common stock, $0.001 par value, were outstanding.
This Amendment No. 1 to Form 10-Q, or this Amendment, amends
the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018 we originally filed with the Securities
and Exchange Commission, or the Commission, on November 7, 2018, or the Original Filing, in connection with the recognition in this Amendment of revenues from license agreements that were not
recognized previously.
All amendments and restatements to the financial statements
are non-cash in nature.
As further discussed in Note 1 to our unaudited condensed consolidated
financial statements in Part I, Item 1, “Financial Statements” of this Amendment, on March 14, 2019, we concluded that
we would restate our previously issued consolidated financial statements as of and for the three and nine months ended September 30,
2018, as set forth in the Original Filing in connection with the recognition in this Amendment of revenues from license agreements
that were not recognized previously.
Management has reassessed its evaluation of the effectiveness
of the design and operation of its disclosure controls and procedures as of September 30, 2018. As a result of that reassessment,
management has concluded that we did not maintain effective disclosure controls and procedures due to the material weakness in
internal control over financial reporting which existed at that date. For a description of the material weakness in internal control
over financial reporting and actions taken, and to be taken, to address the material weakness, see Part 1, Item 4 “Controls
and Procedures” of this Amendment.
The purpose of this Amendment is to restate our previously issued
unaudited condensed consolidated financial statements and related disclosures as of and for the three and nine months ended September 30,
2018 in connection with the recognition in this Amendment of revenues from license agreements that were not
recognized previously. This Amendment also includes (a) an amended Part I, Item 2 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” to reflect the correction of the errors described above, and (b) an amended Part I,
Item 4 “Controls and Procedures” to restate the conclusion on the effectiveness of disclosure controls and procedures.
Disclosure controls and procedures were deemed effective in the Original Filing on November 7, 2018 and are deemed ineffective
as a result of the material weakness described in Part I, Item 4 “Controls and Procedures” of this Amendment.
Except as expressly set forth herein, including in
the notes to the consolidated financial statements, this Amendment does not reflect events occurring after the date of
the Original Filing or modify or update any of the other disclosures contained therein in any way other than as required
to reflect the amendment discussed above. Accordingly, this Amendment should be read in conjunction with the Original Filing
and our other filings with the Commission. Information not affected by the restatement is unchanged and reflects disclosures
made at the time of the filling of the Original Filing.
For reasons discussed above, we are filing this Amendment in
order to amend the following items in our Original Filing to the extent necessary to reflect the adjustments discussed above and
make corresponding revisions to our financial data cited elsewhere in this Amendment in connection with the recognition in this Amendment of revenues from license agreements that were not
recognized previously:
In accordance with applicable Commission rules, this Amendment
includes new certifications required by Rule 13a-14 under the Securities Exchange Act of 1934, as amended, or the Exchange Act,
from our Chief Executive Officer and Chief Financial Officer dated as of the date of filing of this Amendment.
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 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 U.S. Food and Drug Administration, or the FDA, 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, 2017, and are described from time to time in the reports
we file with the Commission.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
PROTALIX BIOTHERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands)
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
(Unaudited)
(as restated)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
41,868
|
|
|
$
|
51,163
|
|
Accounts receivable – Trade
|
|
|
4,894
|
|
|
|
1,721
|
|
Other assets
|
|
|
2,619
|
|
|
|
1,934
|
|
Inventories
|
|
|
7,959
|
|
|
|
7,833
|
|
Total current assets
|
|
$
|
57,340
|
|
|
$
|
62,651
|
|
|
|
|
|
|
|
|
|
|
FUNDS IN RESPECT OF EMPLOYEE RIGHTS UPON RETIREMENT
|
|
$
|
1,779
|
|
|
$
|
1,887
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
6,628
|
|
|
|
7,676
|
|
Total assets
|
|
$
|
65,747
|
|
|
$
|
72,214
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES NET OF CAPITAL DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accruals:
|
|
|
|
|
|
|
|
|
Trade
|
|
$
|
4,388
|
|
|
$
|
7,521
|
|
Other
|
|
|
10,163
|
|
|
|
9,310
|
|
Contracts liability
|
|
|
9,786
|
|
|
|
|
|
Convertible notes
|
|
|
|
|
|
|
5,921
|
|
Total current liabilities
|
|
$
|
24,337
|
|
|
$
|
22,752
|
|
|
|
|
|
|
|
|
|
|
LONG TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
$
|
47,320
|
|
|
$
|
46,267
|
|
Contracts liability
|
|
|
33,493
|
|
|
|
25,015
|
|
Liability for employee rights upon retirement
|
|
|
2,386
|
|
|
|
2,586
|
|
Other long term liabilities
|
|
|
6,154
|
|
|
|
5,051
|
|
Total long term liabilities
|
|
$
|
89,353
|
|
|
$
|
78,919
|
|
Total liabilities
|
|
$
|
113,690
|
|
|
$
|
101,671
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL DEFICIENCY
|
|
|
(47,943
|
)
|
|
|
(29,457
|
)
|
Total liabilities net of capital deficiency
|
|
$
|
65,747
|
|
|
$
|
72,214
|
|
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)
|
|
Nine Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30, 2018
(as restated)
|
|
|
September 30, 2017
|
|
|
September 30, 2018
(as restated)
|
|
|
September 30, 2017
|
|
REVENUES FROM SELLING GOODS
|
|
$
|
7,222
|
|
|
$
|
16,773
|
|
|
$
|
663
|
|
|
$
|
7,526
|
|
REVENUES FROM LICENSE AND R&D SERVICES
|
|
|
16,665
|
|
|
|
|
|
|
|
11,672
|
|
|
|
|
|
COST OF GOODS SOLD
|
|
|
(7,024
|
)
|
|
|
(13,677
|
)
|
|
|
(1,917
|
)
|
|
|
(6,066
|
)
|
RESEARCH AND DEVELOPMENT EXPENSES (1)
|
|
|
(25,565
|
)
|
|
|
(22,389
|
)
|
|
|
(10,803
|
)
|
|
|
(7,118
|
)
|
Less – grants
|
|
|
1,810
|
|
|
|
2,545
|
|
|
|
732
|
|
|
|
729
|
|
RESEARCH AND DEVELOPMENT EXPENSES, NET
|
|
|
(23,755
|
)
|
|
|
(19,844
|
)
|
|
|
(10,071
|
)
|
|
|
(6,389
|
)
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (2)
|
|
|
(8,744
|
)
|
|
|
(8,187
|
)
|
|
|
(4,088
|
)
|
|
|
(2,836
|
)
|
OPERATING LOSS
|
|
|
(15,636
|
)
|
|
|
(24,935
|
)
|
|
|
(3,741
|
)
|
|
|
(7,765
|
)
|
FINANCIAL EXPENSES
|
|
|
(5,824
|
)
|
|
|
(8,809
|
)
|
|
|
(1,811
|
)
|
|
|
(3,680
|
)
|
FINANCIAL INCOME
|
|
|
437
|
|
|
|
1,670
|
|
|
|
230
|
|
|
|
8
|
|
LOSS FROM CHANGE IN FAIR VALUE OF CONVERTIBLE NOTES EMBEDDED DERIVATIVE
|
|
|
|
|
|
|
(38,061
|
)
|
|
|
|
|
|
|
|
|
FINANCIAL EXPENSES, NET
|
|
|
(5,387
|
)
|
|
|
(45,200
|
)
|
|
|
(1,581
|
)
|
|
|
(3,672
|
)
|
NET LOSS FOR THE PERIOD
|
|
|
(21,023
|
)
|
|
|
(70,135
|
)
|
|
|
(5,322
|
)
|
|
|
(11,437
|
)
|
NET LOSS PER SHARE OF COMMON STOCK BASIC AND DILUTED
|
|
$
|
(0.14
|
)
|
|
$
|
(0.55
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.09
|
)
|
WEIGHTED
AVERAGE NUMBER OF SHARES OF COMMON STOCK USED IN COMPUTING LOSS PER SHARE – BASIC AND DILUTED
|
|
|
146,752,355
|
|
|
|
128,223,722
|
|
|
|
148,187,513
|
|
|
|
132,549,001
|
|
(1) Includes share-based compensation
|
|
$
|
54
|
|
|
$
|
163
|
|
|
$
|
14
|
|
|
$
|
43
|
|
(2) Includes share-based compensation
|
|
$
|
42
|
|
|
$
|
128
|
|
|
$
|
8
|
|
|
$
|
32
|
|
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)
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Paid–In
|
|
|
Accumulated
|
|
|
|
|
|
|
Stock (1)
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
Number of
shares
|
|
|
Amount
|
|
Balance at December 31, 2016
|
|
|
124,134,085
|
|
|
$
|
124
|
|
|
$
|
202,575
|
|
|
$
|
(212,656
|
)
|
|
$
|
(9,957
|
)
|
Changes during the nine-month period ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation related to stock options
|
|
|
|
|
|
|
|
|
|
|
291
|
|
|
|
|
|
|
|
291
|
|
Reclassification of embedded derivative
|
|
|
|
|
|
|
|
|
|
|
43,634
|
|
|
|
|
|
|
|
43,634
|
|
Convertible notes conversions
|
|
|
9,711,235
|
|
|
|
10
|
|
|
|
8,771
|
|
|
|
|
|
|
|
8,781
|
|
Conversion component related to convertible notes issuance
|
|
|
|
|
|
|
|
|
|
|
1,315
|
|
|
|
|
|
|
|
1,315
|
|
Net loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(70,135
|
)
|
|
|
(70,135
|
)
|
Balance at September 30, 2017
|
|
|
133,845,320
|
|
|
$
|
134
|
|
|
$
|
256,586
|
|
|
$
|
(282,791
|
)
|
|
$
|
(26,071
|
)
|
Balance at December 31, 2017
|
|
|
143,728,797
|
|
|
$
|
144
|
|
|
$
|
266,495
|
|
|
$
|
(296,096
|
)
|
|
$
|
(29,457
|
)
|
Changes during the nine-month period ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation related to stock options
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
80
|
|
Share-based compensation related to restricted stock award
|
|
|
29,898
|
|
|
|
*
|
|
|
|
16
|
|
|
|
|
|
|
|
16
|
|
Convertible notes conversions
|
|
|
1,928,907
|
|
|
|
2
|
|
|
|
1,289
|
|
|
|
|
|
|
|
1,291
|
|
Convertible notes exchange
|
|
|
2,613,636
|
|
|
|
2
|
|
|
|
1,148
|
|
|
|
|
|
|
|
1,150
|
|
Net loss for the period (as restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,023
|
)
|
|
|
(21,023
|
)
|
Balance at September 30, 2018 (as restated)
|
|
|
148,301,238
|
|
|
$
|
148
|
|
|
$
|
269,028
|
|
|
$
|
(317,119
|
)
|
|
$
|
(47,943
|
)
|
|
*
|
Represents an amount less than $1.
|
|
(1)
|
Common Stock, $0.001 par value; Authorized – as
of September 30, 2018 and 2017 - 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)
|
|
Nine Months Ended
|
|
|
|
September 30,
2018
(as restated)
|
|
|
September 30,
2017
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(21,023
|
)
|
|
$
|
(70,135
|
)
|
Adjustments required to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Share based compensation
|
|
|
96
|
|
|
|
291
|
|
Depreciation
|
|
|
1,257
|
|
|
|
1,469
|
|
Financial (income) expenses, net (mainly exchange differences)
|
|
|
(37
|
)
|
|
|
13
|
|
Changes in accrued liability for employee rights upon retirement
|
|
|
(86
|
)
|
|
|
54
|
|
Gain on amounts funded in respect of employee rights upon retirement
|
|
|
(45
|
)
|
|
|
(21
|
)
|
Net loss in connection with conversions of convertible notes
|
|
|
204
|
|
|
|
587
|
|
Change in fair value of convertible notes embedded derivative
|
|
|
|
|
|
|
38,061
|
|
Amortization of debt issuance costs and debt discount
|
|
|
1,916
|
|
|
|
1,710
|
|
Issuance of shares for interest payment in connection with conversions of convertible notes
|
|
|
205
|
|
|
|
1,111
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase (decrease) in contracts liability (including non-current
portion)
|
|
|
18,264
|
|
|
|
(837
|
)
|
Increase in accounts receivable and other assets
|
|
|
(3,661
|
)
|
|
|
(6,467
|
)
|
Increase in inventories
|
|
|
(126
|
)
|
|
|
(2,234
|
)
|
Increase (decrease) in accounts payable and accruals
|
|
|
(1,805
|
)
|
|
|
8,698
|
|
Increase in other long term liabilities
|
|
|
1,103
|
|
|
|
|
|
Net cash used in continuing operations
|
|
|
(3,738
|
)
|
|
|
(27,700
|
)
|
Net cash provided by discontinued operations
|
|
|
|
|
|
|
116
|
|
Net cash used in operating activities
|
|
$
|
(3,738
|
)
|
|
$
|
(27,584
|
)
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
$
|
(498
|
)
|
|
$
|
(681
|
)
|
Increase in restricted deposit
|
|
|
(247
|
)
|
|
|
(336
|
)
|
Amounts funded in respect of employee rights upon retirement, net
|
|
|
70
|
|
|
|
(68
|
)
|
Net cash used in investing activities
|
|
$
|
(675
|
)
|
|
$
|
(1,085
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net payment for convertible notes
|
|
|
(4,752
|
)
|
|
|
(10,961
|
)
|
Net proceeds from issuance of convertible notes
|
|
|
|
|
|
|
9,542
|
|
Net cash used in financing activities
|
|
|
(4,752
|
)
|
|
|
(1,419
|
)
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
|
|
$
|
(130
|
)
|
|
$
|
289
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(9,295
|
)
|
|
|
(29,799
|
)
|
BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
|
|
|
51,163
|
|
|
|
63,281
|
|
BALANCE OF CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
41,868
|
|
|
$
|
33,482
|
|
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
|
|
Nine Months Ended
|
|
|
|
September 30, 2018
(as restated)
|
|
|
September 30, 2017
|
|
SUPPLEMENTARY INFORMATION ON INVESTING AND FINANCING ACTIVITIES NOT INVOLVING CASH FLOWS:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
$
|
237
|
|
|
$
|
666
|
|
Convertible notes conversions
|
|
$
|
2,236
|
|
|
$
|
7,668
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURE ON CASH FLOWS
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
2,411
|
|
|
$
|
2,613
|
|
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 Ex-US license agreement (the “Chiesi Ex-U.S. 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
U.S. Agreement”), with respect to the development and commercialization of pegunigalsidase alfa in the United States.
Under each of the Chiesi Ex-U.S.
Agreement and the Chiesi U.S. Agreement, 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-U.S. 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 U.S.
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.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
(continued)
:
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-U.S. 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 U.S. Agreement, Chiesi is required to
make tiered payments of 15% to 40% of its net sales, depending on the amount of annual sales outside of the United States, as consideration
for product supply.
Since its approval by the FDA,
taliglucerase alfa has been marketed by Pfizer Inc. (“Pfizer”), in accordance with the exclusive license and supply
agreement 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 with Pfizer (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 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. 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.
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 nine months ended September 30, 2018.
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 September 30, 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.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
(continued)
:
|
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 agreements with Chiesi. Previously, the Company had
identified a single performance obligation with regard to its promises under each of the agreements. The Company subsequently
concluded that there are two performance obligations under each of the agreements 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 obligations (the license and the research and development
services) for the three and nine months ended September 30, 2018 for the satisfaction of the performance obligation that
occurred during the three and nine months ended September 30, 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.
|
2.
|
Impacts of restatement
|
The effects of the restatement
on the line items within the Company’s condensed consolidated balance sheets as of September 30, 2018 are as follows:
|
|
September 30, 2018
|
|
(
U.S. dollars in thousands)
|
|
As
originally
reported
|
|
|
Adjustments
|
|
|
As restated
|
|
CONTRACTS ASSET
|
|
$
|
1,450
|
|
|
$
|
(1,450
|
)
|
|
$
|
-
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts liability
|
|
|
-
|
|
|
|
9,786
|
|
|
|
9,786
|
|
Total current liabilities
|
|
$
|
14,551
|
|
|
$
|
9,786
|
|
|
$
|
24,337
|
|
LONG TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts liability
|
|
|
61,780
|
|
|
|
(28,287
|
)
|
|
|
33,493
|
|
Total long term liabilities
|
|
|
117,640
|
|
|
|
(28,287
|
)
|
|
|
89,353
|
|
Total liabilities
|
|
|
132,191
|
|
|
|
(18,501
|
)
|
|
|
113,690
|
|
CAPITAL DEFICIENCY
|
|
$
|
(64,994
|
)
|
|
$
|
17,051
|
|
|
$
|
(47,943
|
)
|
The effects of the restatement
on the line items within the Company’s condensed consolidated statements of operations for the three and nine months ended
September 30, 2018 are as follows:
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
(continued)
:
|
|
Three Months Ended September 30, 2018
|
|
|
Nine Months Ended September 30, 2018
|
|
(
U.S. dollars in thousands,
except per share data)
|
|
As
originally
reported
|
|
|
Adjustments
|
|
|
As
restated
|
|
|
As
originally
reported
|
|
|
Adjustments
|
|
|
As
restated
|
|
REVENUES FROM LICENSE AGREEMENTS
|
|
$
|
-
|
|
|
$
|
11,672
|
|
|
$
|
11,672
|
|
|
$
|
-
|
|
|
$
|
16,665
|
|
|
$
|
16,665
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
|
$
|
(2,638
|
)
|
|
$
|
(1,450
|
)
|
|
$
|
(4,088
|
)
|
|
$
|
(7,294
|
)
|
|
$
|
(1,450
|
)
|
|
$
|
(8,744
|
)
|
OPERATING LOSS
|
|
$
|
(13,963
|
)
|
|
$
|
10,222
|
|
|
$
|
(3,741
|
)
|
|
$
|
(30,851
|
)
|
|
$
|
15,215
|
|
|
$
|
(15,636
|
)
|
LOSS FOR THE PERIOD
|
|
$
|
(15,544
|
)
|
|
$
|
10,222
|
|
|
$
|
(5,322
|
)
|
|
$
|
(36,238
|
)
|
|
$
|
15,215
|
|
|
$
|
(21,023
|
)
|
Net loss per share of common stock-basic and diluted
|
|
$
|
(0.10
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
0.11
|
|
|
$
|
(0.14
|
)
|
The effects of the restatement
on the line items within the Company’s condensed consolidated statements of changes in capital deficiency for the nine months
ended September
30, 2018 are as follows:
|
|
Nine Months Ended September 30, 2018
|
|
(
U.S. dollars in thousands, except per share data)
|
|
As
originally
reported
|
|
|
Adjustments
|
|
|
As restated
|
|
Net loss for the nine months ended September 30, 2018
|
|
$
|
(36,238
|
)
|
|
$
|
15,215
|
|
|
$
|
(21,023
|
)
|
Balances as of September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(334,170
|
)
|
|
|
17,051
|
|
|
|
(317,119
|
)
|
Total capital deficiency
|
|
$
|
(64,994
|
)
|
|
$
|
17,051
|
|
|
$
|
(47,943
|
)
|
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 nine months ended
September 30, 2018 are as follows:
|
|
Nine Months Ended September 30, 2018
|
|
(
U.S.
dollars in thousands)
|
|
|
|
|
Adjustments
|
|
|
As restated
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(36,238
|
)
|
|
$
|
15,215
|
|
|
$
|
(21,023
|
)
|
Increase in contracts liability
|
|
|
34,929
|
|
|
|
(16,665
|
)
|
|
|
18,264
|
|
Increase in contract asset
|
|
|
(1,450
|
)
|
|
|
1,450
|
|
|
|
-
|
|
Net cash used in operating activities
|
|
$
|
(3,738
|
)
|
|
$
|
-
|
|
|
$
|
(3,738
|
)
|
The impacts of the restatement have been reflected
throughout the financial statements, including the applicable footnotes, as appropriate.
In addition, in connection with the Chiesi Ex-U.S.
Agreement, 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)
|
|
|
|
|
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.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
(continued)
:
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 76,195,921 and 73,310,911 shares of Common Stock underlying outstanding options
and restricted shares of Common Stock and shares of Common Stock issuable upon conversion of the convertible notes for the nine
months ended September 30, 2017 and 2018, respectively, and 80,696,070 and 73,280,977 shares of Common Stock for the three
months ended September 30, 2017 and 2018, respectively, because the effect would be anti-dilutive.
|
d.
|
Revenue recognition (as restated)
|
|
1.
|
Revenue 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.
|
2.
|
Revenue from Chiesi Agreements
|
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 each of the Chiesi agreements as follows: (1) the license and research and development services and (2)
a
contingent performance obligation regarding future
manufacturing.
The Company determined that the licenses granted to
Chiesi together with the research and development services should be combined into a single performance obligation under each agreement
since
Chiesi cannot benefit from a 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 accounted for the Chiesi U.S.
agreement as a modification of the Chiesi Ex-U.S. Agreement. As such, the Company recorded revenue through a cumulative
catch-up adjustment in the amount of $6.2 million.
The
Company’s revenue recognition accounting policy prior to January 1, 2018, was materially the same.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
(continued)
:
|
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.
NOTE 2 - INVENTORIES
The Company’s inventory at September 30,
2018 and December 31, 2017 consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
(U.S. dollars in thousands)
|
|
2018
|
|
|
2017
|
|
Raw materials
|
|
$
|
3,201
|
|
|
$
|
3,838
|
|
Work in progress
|
|
|
276
|
|
|
|
485
|
|
Finished goods
|
|
|
4,482
|
|
|
|
3,510
|
|
Total inventory
|
|
$
|
7,959
|
|
|
$
|
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.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 - FAIR VALUE MEASUREMENT
(continued)
:
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 $58.0 million
in aggregate principal amount of the Company’s outstanding 7.50% secured convertible promissory notes due 2021 (the “2021
Notes”) is approximately $78.0 million, based on a Level 3 measurement.
The
Company prepared a valuation of the fair value of the
Company’s
2021
Notes (a Level 3 valuation) as of September
30, 2018. 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)
|
|
|
0.73
|
|
Expected term (years)
|
|
|
3.13
|
|
Risk free rate
|
|
|
2.87
|
%
|
Volatility
|
|
|
75.56
|
%
|
Yield
|
|
|
13.50
|
%
|
NOTE 4 – CONVERTIBLE NOTES
All of our 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
2021 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 2021
Notes are amortized using the effective interest rate.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 – CONVERTIBLE NOTES
(continued)
:
During the nine months ended
September 30, 2018, note holders converted $1.1 million aggregate principal amount of the 2021 Notes into a total
of 1,456,354 shares of Common Stock, and cash payments of approximately $14,439, in the aggregate. An additional 14,860
shares of Common Stock were issued after September 30, 2018 in connection with the make-whole premium associated with
certain of the converted notes that were converted during the third quarter of 2018. In addition, in June 2018, the Company
exchanged $3.42 million aggregate principal amount of the Company’s outstanding 4.50% convertible promissory notes
due 2018 (the “2018 Notes”) for 2,613,636 shares of Common Stock and approximately $2.2 million in cash and
delivered the necessary funds under the indenture governing the 2018 Notes, which was $2.5 million. On
September 15, 2018, the 2018 Notes matured and have been paid in full.
As of September 30, 2018, a
total of $58.0 million aggregate principal amount of the 2021 Notes were outstanding. In addition, as of September 30,
2018, none of the 2018 Notes were outstanding.
NOTE 5 – REVENUES (AS RESTATED)
The following table summarizes the
Company’s disaggregation of revenues:
|
|
Nine Months Ended September 30,
|
|
(U.S. dollars in thousands)
|
|
2018
|
|
|
2017
|
|
Pfizer
|
|
$
|
4,649
|
|
|
$
|
10,198
|
|
Brazil
|
|
$
|
2,573
|
|
|
$
|
6,575
|
|
Total revenues from selling goods
|
|
$
|
7,222
|
|
|
$
|
16,773
|
|
Revenues from license and R&D services
|
|
$
|
16,665
|
|
|
|
|
|
NOTE 6 – STOCK TRANSACTIONS
On September 13, 2018, the
Company’s compensation committee approved the grant of 10-year options to purchase, in the aggregate, 6,360,000 shares of
Common Stock, of which options to purchase 4,000,000 shares of Common Stock were granted to the Company’s executive officers
and options to purchase 2,360,000 shares of Common Stock were granted to other employees with an exercise price equal to $0.56
per share and $0.51 per share, respectively, under the Company’s 2006 Employee Stock Incentive Plan, as amended (the “Plan”).
The options vest over a four-year period in 16 equal quarterly increments. Vesting of the options granted to the executive officers
is subject to acceleration in full upon a Corporate Transaction or a Change in Control, as those terms are defined in the Plan,
and are subject to certain other terms and conditions. The Company estimated the fair value of the options on the date of grant
using the Black-Scholes option-pricing model to be approximately $1.9 million based on the following weighted average assumptions:
share price equal to $0.51; dividend yield of 0% for all years; expected volatility of 64.3%; risk-free interest rates of 2.9%;
and expected life of six years.
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
RESTATEMENT OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Explanatory Note
This Amendment amends and restates our unaudited condensed
consolidated financial statements and related disclosures in Part I, Item 1. “Financial Statements” for the three
and nine months ended and as of September 30, 2018 to recognize certain revenue from a license agreement that was not
recognized previously. Accordingly, the Management’s Discussion and Analysis of Financial Condition and Results of
Operations set forth below reflects the effects of this restatement.
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, 2017. 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, 2017 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 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 Agreement,
Protalix Ltd. retained the right to commercialize pegunigalsidase alfa 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 an additional up to $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 an Exclusive License
and Supply Agreement with Chiesi, or the Chiesi U.S. Agreement, with respect to the development and commercialization of pegunigalsidase
alfa in the United States. Under the terms of the Chiesi U.S. 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 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 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 enzyme replacement therapy (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 in exchange for a cash payment equal to $36.0 million. 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 discussing with Fiocruz potential actions that Fiocruz may take to comply with its purchase obligations and,
based on such discussions, we will determine what we believe to be the course of action that is in our best interest.
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 not been any changes to
our significant accounting policies since we filed our Annual Report on Form 10-K for the year ended December 31, 2017, except
for recognition of revenue from license agreements that was not recognized previously. We used a significant estimate
in order to determine the cost expected to be incurred upon satisfying the identified performance obligation.
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.
Convertible Notes
Our 2021 Notes are accounted for using the guidance set forth
in FASB ASC 815 which requires that we 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.
Our
2021 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 2021 Notes are
amortized using the effective interest rate.
During the nine months ended September 30, 2018, note holders
converted $1.1 million aggregate principal amount of the 2021 Notes into a total of 1,456,354 shares of our common stock,
and cash payments of approximately $14,439, in the aggregate. An additional 14,860 shares of common stock were issued after September
30, 2018 in connection with the make-whole premium associated with certain of the converted notes that were converted during the
third quarter of 2018. On September 15, 2018, our 2018 Notes matured and the outstanding principal amount for such notes was paid
in full.
As of September 30, 2018, a total of
$58.0 million aggregate principal amount of the
2021 Notes
were outstanding, and no 2018 Notes were outstanding.
Results of Operations
Three months ended September 30, 2018 compared to the
three months ended September 30, 2017
Revenues from Selling Goods
We recorded revenues of $663,000 during the three months ended
September 30, 2018, a decrease of $6.9 million from revenues of $7.5 million for the three months ended September 30,
2017. The decrease resulted from decreased sales of drug substance to Pfizer and drug product to Brazil.
Revenues from License and R&D Services
We recorded revenues of $11.7 million for the three months
ended September 30, 2018. Revenues from the license agreements represent the revenues we recognized in connection with the
Chiesi agreements including a cumulative catch-up adjustment in the amount of $6.2 million.
Cost of Goods Sold
Cost of goods sold was $1.9 million for the three
months ended September 30, 2018, a decrease of $4.2 million, from cost of revenues of $6.1 million for the
three months ended September 30, 2017. The decrease resulted primarily from decreased sales of drug substance to Pfizer
and drug product to Brazil.
Research and Development Expenses, Net
Research and development expenses were $10.1 million for
the three months ended September 30, 2018, an increase of $3.6 million from $6.4 million for the three months ended
September 30, 2017. The increase resulted primarily from an increase in clinical trial activity during 2018.
We expect research and development expenses
for our various development programs to continue to be our primary expense for the foreseeable future.
Selling, General and Administrative Expenses
Selling, general and
administrative expenses were $4.1 million for the three months ended September 30, 2018, an increase of $1.3
million, or 46%, from $2.8 million for the three months ended September 30, 2017. The increase resulted primarily
from costs incurred in connection with the Chiesi U.S. Agreement.
Financial Expenses, net
Financial expenses, net were $1.6 million for the three
months ended September 30, 2018, a decrease of $2.1 million compared to financial expenses, net of $3.7 million
for the three months ended September 30, 2017. Financial expenses are comprised primarily from interest expense on our outstanding
convertible notes of $1.2 million for the period ended September 30, 2018.
Nine months ended September 30, 2018 compared to the nine
months ended September 30, 2017
Revenues from Selling Goods
We recorded revenues of $7.2 million during the nine months
ended September 30, 2018, a decrease of $9.6 million, or 57%, from revenues of $16.8 million for the nine months
ended September 30 2017. The decrease resulted from a decrease of $5.6 million in sales of drug substance to Pfizer and
$4.0 million in sales of drug product to Brazil.
Revenues from License and R&D Services
We recorded revenues of $16.7 million for the nine months
ended September 30, 2018. Revenues from the license agreements represent the revenues we recognized in connection with the
Chiesi agreements including a cumulative catch-up adjustment in the amount of $6.2 million.
Cost of Goods Sold
Cost of goods sold was $7.0 million for the nine
months ended September 30, 2018, a decrease of $6.7 million, or 49%, from cost of revenues of $13.7 million
for the nine months ended September 30, 2017. The decrease resulted primarily from costs related to the production of drug
substance sold to Pfizer and drug product sold to Brazil.
Research and Development Expenses, Net
Research and development expenses was $23.8 million for
the nine months ended September 30, 2018, an increase of $4.0 million, or 20%, from $19.8 million for the nine months
ended September 30, 2017. The increase resulted primarily from an increase in clinical trial activity during 2018.
We expect research and development expenses for our various
development programs to continue to be our primary expense for the foreseeable future.
Selling, General and Administrative Expenses
Selling, general and
administrative expenses were $8.7 million for the nine months ended September 30, 2018, an increase of $557,000, or
6%, from $8.2 million for the nine months ended September 30, 2017. The increase resulted primarily from costs
incurred in connection with the Chiesi U.S. Agreement.
Financial Expenses, net
Financial expenses, net were $5.4 million
for the nine months ended September 30, 2018, compared to financial expenses net of $45.2 million for the nine months
ended September 30, 2017. During the nine months ended September 30, 2017, financial expenses included a charge of $38.1 million
as a result of the re-measurement of the fair value of the 7.5% convertible notes embedded derivative. In addition, financial expenses
are comprised primarily from interest expense on our outstanding convertible notes.
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 incurred operating losses
from our continuing operations since our inception. To date, we have funded our operations primarily with 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.
In addition to the foregoing, on September 18, 2013, we
completed a private placement of $69.0 million in aggregate principal amount of 4.50% convertible notes due 2018, including
$9.0 million aggregate principal amount of the of 4.50% convertible 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 7.50% convertible notes due 2021. Finally, on July 25, 2017, we completed a private placement
of an additional $10.0 million in aggregate principal amount of 7.50% convertible notes due 2021.
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 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 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 an upfront payment to Protalix Ltd. of $25.0
million
in connection with the execution of the Chiesi Ex-U.S. Agreement and in the third quarter of 2018, Chiesi made an upfront payment
to Protalix Ltd. of $25.0
million in connection with the execution
of the Chiesi U.S. Agreement.
Cash Flows
Net cash used in operations
was $3.7 million for the nine months ended September 30, 2018. The net loss for the nine months ended
September 30, 2018 of $21.0 million was partially offset by an increase of $18.3 million in contracts
liabilities representing an upfront payment and certain expense reimbursements actually received from Chiesi in connection
with our license agreements with Chiesi which we have not yet recognized as revenues. Net cash used in investing activities
for the nine months ended September 30, 2018 was $675,000 and consisted primarily of purchases of property and equipment, and
an increase in restricted deposit. Net cash used in financing activities was $4.8 million for the repayment of
convertible notes.
Net cash used in operations was $27.6 million
for the nine months ended September 30, 2017. The net loss for the nine months ended September 30, 2017 of $70.1 million
was partially offset by a change of $38.1 million in the fair value of convertible notes embedded derivative and increase
of $8.7 million in accounts payable. Net cash used in investing activities for the nine months ended September 30, 2017
was $1.1 million and consisted primarily of purchases of property and equipment and an increase in restricted deposit. Net
cash used in financing activities for the nine months ended September 30, 2017 was $1.4 million and consisted primarily
of cash settlement of $11.0 million for certain conversions of our convertible notes which was partially offset by $9.5 million
of net proceeds from the issuance of our 2021 Notes.
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 pegunigalsidase
alfa. 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 outstanding 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 our agreements with Chiesi. 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 nine months ended September 30, 2018 and September 30, 2017.
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 nine months ended September 30, 2018 and September 30, 2017.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements
as of each of September 30, 2018 and September 30, 2017.
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:
|
|
Nine Months Ended
September 30,
|
|
|
Year Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
Average rate for period
|
|
|
3.558
|
|
|
|
3.629
|
|
|
|
3.600
|
|
Rate at period end
|
|
|
3.627
|
|
|
|
3.529
|
|
|
|
3.467
|
|
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
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures to ensure that the information
required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Commission’s rules and forms, and to ensure that such information is
accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosure. Based on that evaluation, in the Original Filing, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) were effective.
Subsequent to the evaluation made in connection with the
Original Filing, our Chief Executive Officer and Chief Financial Officer re-evaluated the effectiveness of the design and
operation of our disclosure controls and procedures concluding that our disclosure controls and procedures were not effective as of September 30, 2018
because of the material weakness in our internal control over financial reporting which existed at that date and is discussed
below.
Material Weakness in Internal Control over Financial Reporting
A material weakness is defined as a deficiency, or combination
of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement
of annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
In our Original Filing, we did not disclose the existence of
any material weaknesses in internal control over financial reporting. Subsequent to that evaluation, the Company determined the
following material weakness existed as of September 30, 2018:
In our Original Filing, we did not disclose the existence
of any material weaknesses in internal control over financial reporting. Subsequent to that evaluation, we determined that a
material weakness in our internal control over financial reporting existed as of March 31, 2018 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 of our out-licensing arrangements which became material to
our company in 2018. The foregoing resulted in the restatement of our unaudited condensed consolidated financial statements
for each of the fiscal quarters of 2018 and in a revision to 2017 figures.
The foregoing restatements were effected through our
filing of this Amendment and the filing of an amended Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2018
and an amended Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2018. Our management has concluded that this
deficiency constitutes a material weakness in our internal control over financial reporting as of September 30, 2018.
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 intends to continue to update our revenue recognition processes and controls and
to implement additional control procedures including retaining 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 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.
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 material weakness described
herein, there were no changes to 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 September 30, 2018 that have materially affected, or that are
reasonably likely to materially affect, our internal control over financial reporting.