| SIGNIFICANT ACCOUNTING POLICIES | NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES a. General 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 ® ® 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. 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. b. Basis of presentation 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 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: Three Months Ended September 30, 2018 Nine Months Ended September 30, 2018 ( U.S. dollars in thousands, except per share data) As Adjustments As As Adjustments As 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 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) As 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) As originally 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. c. Net loss per share 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. e. Recently adopted standards In May 2014, the Financial Accounting Standards Board (“FASB”) 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. |
