NovoCure Ltd 10-Q/A

Item 1. Financial Statements NOVOCURE LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS U.S. dollars in thousands (except share data) March 31, 2020 December 31, 2019 Unaudited Audited ASSETS CURRENT ASSETS: Cash and cash equivalents $ 181,919 $ 177,321 Short-term investments 149,349 148,769 Restricted cash 786 2,095 Trade receivables 65,139 58,859 Receivables and prepaid expenses 42,483 29,202 Inventories 22,502 23,701 Total current assets 462,178 439,947 LONG-TERM ASSETS: Property and equipment, net 9,778 9,342 Field equipment, net 8,467 7,684 Right-of-use assets, net 17,201 17,571 Other long-term assets 4,824 4,904 Total long-term assets 40,270 39,501 TOTAL ASSETS $ 502,448 $ 479,448 The accompanying notes are an integral part of these unaudited consolidated financial statements. 2 Table of Contents NOVOCURE LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS U.S. dollars in thousands (except share data) March 31, 2020 December 31, 2019 Unaudited Audited LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Trade payables $ 40,408 $ 36,925 Other payables, lease liabilities and accrued expenses 43,795 49,386 Total current liabilities 84,203 86,311 LONG-TERM LIABILITIES: Long-term loan, net of discount and issuance costs 149,465 149,424 Deferred revenue 8,772 7,807 Long-term leases 13,274 14,140 Employee benefits 4,519 3,754 Other long-term liabilities 267 222 Total long-term liabilities 176,297 175,347 TOTAL LIABILITIES 260,500 261,658 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Share capital - Ordinary shares no par value, unlimited shares authorized; issued and outstanding: 100,362,973 shares and 99,528,435 shares at March 31, 2020 (unaudited) and December 31, 2019, respectively — — Additional paid-in capital 892,510 871,442 Accumulated other comprehensive income (loss) ( 3,629 ) ( 2,767 ) Retained earnings (accumulated deficit) ( 646,933 ) ( 650,885 ) TOTAL SHAREHOLDERS' EQUITY 241,948 217,790 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 502,448 $ 479,448 The accompanying notes are an integral part of these unaudited consolidated financial statements. 3 Table of Contents NOVOCURE LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS U.S. dollars in thousands (except share and per share data) Three months ended March 31, Year ended December 31, 2020 2019 2019 Unaudited Audited Net revenues $ 101,828 $ 73,309 $ 351,318 Cost of revenues 24,496 19,814 88,606 Gross profit 77,332 53,495 262,712 Operating costs and expenses: Research, development and clinical trials 25,271 17,042 79,003 Sales and marketing 28,834 22,333 96,675 General and administrative 26,608 20,238 87,948 Total operating costs and expenses 80,713 59,613 263,626 Operating income (loss) ( 3,381 ) ( 6,118 ) ( 914 ) Financial expenses (income), net 2,432 2,371 7,910 Income (loss) before income tax ( 5,813 ) ( 8,489 ) ( 8,824 ) Income tax ( 9,765 ) 3,661 ( 1,594 ) Net income (loss) $ 3,952 $ ( 12,150 ) $ ( 7,230 ) Basic net income (loss) per ordinary share $ 0.04 $ ( 0.13 ) $ ( 0.07 ) Weighted average number of ordinary shares used in computing basic net income (loss) per share 99,877,567 94,811,282 97,237,549 Diluted net income (loss) per ordinary share $ 0.04 $ ( 0.13 ) $ ( 0.07 ) Weighted average number of ordinary shares used in computing diluted net income (loss) per share 108,100,623 94,811,282 97,237,549 The accompanying notes are an integral part of these unaudited consolidated financial statements. 4 Table of Contents CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) U.S. dollars in thousands Three months ended March 31, Year ended December 31, 2020 2019 2019 Unaudited Audited Net income (loss) $ 3,952 $ ( 12,150 ) $ ( 7,230 ) Other comprehensive income (loss), net of tax: Change in foreign currency translation adjustments ( 200 ) ( 261 ) ( 304 ) Pension benefit plan ( 662 ) ( 81 ) ( 1,063 ) Total comprehensive income (loss) $ 3,090 $ ( 12,492 ) $ ( 8,597 ) NOVOCURE LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY U.S. dollars in thousands (except share data) Ordinary shares Additional paid-in capital Accumulated other comprehensive loss Retained earnings (accumulated deficit) Total shareholders' equity Balance as of December 31, 2019 (audited) 99,528,435 $ 871,442 $ ( 2,767 ) $ ( 650,885 ) $ 217,790 Share-based compensation to employees — 16,557 — — 16,557 Exercise of options and vested RSUs 834,538 4,511 — — 4,511 Other comprehensive income (loss), net of tax benefit of $ 0 — — ( 862 ) — ( 862 ) Net income (loss) — — 3,952 3,952 Balance as of March 31, 2020 (unaudited) 100,362,973 $ 892,510 $ ( 3,629 ) $ ( 646,933 ) $ 241,948 Ordinary shares Additional paid-in capital Accumulated other comprehensive loss Retained earnings (accumulated deficit) Total shareholders' equity Balance as of December 31, 2018 (audited) 93,254,185 $ 757,314 $ ( 1,400 ) $ ( 643,655 ) $ 112,259 Share-based compensation to employees — 9,649 — — 9,649 Exercise of options and warrants and vested RSUs 2,438,612 16,978 — — 16,978 Other comprehensive income (loss), net of tax benefit of $ 11 — — ( 342 ) — ( 342 ) Net income (loss) — — — ( 12,150 ) ( 12,150 ) Balance as of March 31, 2019 (unaudited) 95,692,797 $ 783,941 $ ( 1,742 ) $ ( 655,805 ) $ 126,394 The accompanying notes are an integral part of these unaudited consolidated financial statements. 5 Table of Contents NOVOCURE LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS U.S. dollars in thousands Three months ended March 31, Year ended December 31, 2020 2019 2019 Unaudited Audited Cash flows from operating activities: Net income (loss) $ 3,952 $ ( 12,150 ) $ ( 7,230 ) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 1,888 1,929 8,460 Asset write-downs and impairment of field equipment 6 75 398 Share-based compensation 16,557 9,649 52,416 Foreign currency remeasurement loss (gain) ( 7 ) — ( 917 ) Decrease (increase) in accounts receivables ( 19,718 ) ( 2,036 ) ( 36,496 ) Amortization of discount (premium) ( 539 ) ( 578 ) ( 2,176 ) Decrease (increase) in inventories 1,147 ( 1,583 ) ( 1,159 ) Decrease (increase) in other long-term assets 1,235 ( 86 ) 3,446 Increase (decrease) in accounts payables and accrued expenses ( 2,339 ) 2,246 16,883 Increase (decrease) in other long-term liabilities ( 225 ) ( 1,781 ) ( 7,006 ) Net cash provided by (used in) operating activities $ 1,957 $ ( 4,315 ) $ 26,620 Cash flows from investing activities: Purchase of property, equipment and field equipment $ ( 3,112 ) $ ( 2,325 ) $ ( 10,485 ) Proceeds from maturity of short-term investments — 105,661 420,661 Purchase of short-term investments — ( 104,325 ) ( 461,843 ) Net cash provided by (used in) investing activities $ ( 3,112 ) $ ( 989 ) $ ( 51,667 ) Cash flows from financing activities: Proceeds from issuance of shares, net $ — $ — $ 2,467 Repayment of long-term loan ( 8 ) ( 8 ) ( 31 ) Exercise of options and warrants 4,511 16,978 59,245 Net cash provided by (used in) financing activities $ 4,503 $ 16,970 $ 61,681 Effect of exchange rate changes on cash, cash equivalents and restricted cash $ ( 59 ) $ ( 261 ) $ 26 Increase (decrease) in cash, cash equivalents and restricted cash 3,289 11,405 36,660 Cash, cash equivalents and restricted cash at the beginning of the period 179,416 142,756 142,756 Cash, cash equivalents and restricted cash at the end of the period $ 182,705 $ 154,161 $ 179,416 6 Table of Contents Three months ended March 31, Year ended December 31, 2020 2019 2019 Unaudited Audited Supplemental cash flow activities: Cash paid during the period for: Income taxes $ 2,209 $ 3,033 $ 11,241 Interest $ 3,415 $ 3,379 $ 13,699 Non-cash activities in accordance with of ASC-842: Right-of-use assets obtained in exchange for lease obligations $ 783 $ 15,733 $ 22,943 The accompanying notes are an integral part of these unaudited consolidated financial statements. 7 Table of Contents NOVOCURE LIMITED AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share data) NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION Organization . NovoCure Limited (including its consolidated subsidiaries, the “Company”) was incorporated in the Bailiwick of Jersey and is principally engaged in the development, manufacture and commercialization of Tumor Treating Fields delivery systems, including Optune and Optune Lua, for the treatment of solid tumors. The Company has received regulatory approval from the U.S. Food and Drug Administration (“FDA”) under the Premarket Approval (“PMA") pathway and regulatory approvals and clearances in certain other countries for Optune to treat adult patients with glioblastoma multiforme (“GBM”). The Company also has received FDA approval under the Humanitarian Device Exemption pathway to market Optune Lua for unresectable, locally advanced or metastatic malignant pleural mesothelioma (“MPM”) in combination with standard chemotherapies. Financial statement preparation . The accompanying unaudited consolidated financial statements include the accounts of the Company and intercompany accounts and transactions have been eliminated. In the opinion of the Company’s management, the consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation for the periods presented. The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. These consolidated financial statements and accompanying notes should be read in conjunction with the Company’s annual consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “2019 10-K”) filed with the Securities and Exchange Commission on February 27, 2020. The significant accounting policies applied in the audited annual consolidated financial statements of the Company as disclosed in the 2019 10-K are applied consistently in these unaudited interim consolidated financial statements, except as noted below: Recently Adopted Accounting Pronouncements. In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. ASU 2016-13 also applies to employee benefit plan accounting, with an effective date of the first quarter of fiscal 2020. The Company adopted the standard effective as of January 1, 2020, and the adoption of this standard did not have an impact on the Company's consolidated financial statements. In August 2018, FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The implementation costs incurred in a hosting arrangement that is a service contract should be presented as a prepaid asset in the balance sheet and expensed over the term of the hosting arrangement to the same line item in the statement of income as the costs related to the hosting fees. The Company adopted the standard effective as of January 1, 2020, and the adoption of this standard did not have an impact on the Company's consolidated financial statements. 8 Table of Contents NOTE 2: CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents include items almost as liquid as cash, such as certificates of deposit and time deposits with maturity periods of three months or less when purchased. March 31, 2020 December 31, 2019 Unaudited Audited Cash $ 8,192 $ 18,377 Money market funds 173,727 158,944 Total cash and cash equivalents $ 181,919 $ 177,321 The Company invests in marketable U.S. Treasury Bills (“T-bills”) that are classified as held-to-maturity securities. The amortized cost and recorded basis of the T-bills are presented as short-term investments. March 31, 2020 December 31, 2019 Unaudited Audited Short-term investments $ 149,349 $ 148,769 Quoted market prices were applied to determine the fair value of cash equivalents and short-term investments, therefore they are categorized as Level 1 in accordance with Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures.” The estimated fair value of the Company’s short-term investments as of March 31, 2020 and December 31, 2019 was $ 149,951 and $ 148,738 , respectively. NOTE 3: INVENTORIES Inventories are stated at the lower of cost or net realizable value. The weighted average methodology is applied to determine cost. As of March 31, 2020 and December 31, 2019, the Company’s inventories were composed of: March 31, 2020 December 31, 2019 Unaudited Audited Raw materials $ 3,889 $ 3,912 Work in progress 7,498 6,482 Finished products 11,115 13,308 Total $ 22,502 $ 23,701 NOTE 4: COMMITMENTS AND CONTINGENT LIABILITIES Operating Leases. The facilities of the Company are leased under various operating lease agreements for periods, including options for extensions, ending no later than 2030. The Company also leases motor vehicles under various operating leases, which expire on various dates, the latest of which is in 2023. Pledged deposits and bank guarantees. As of March 31, 2020 and December 31, 2019, the Company pledged bank deposits of $ 1,612 and $ 1,557 , respectively, to cover bank guarantees in respect of its leases of operating facilities and obtained bank guarantees for the fulfillment of the Company’s lease and other contractual commitments of $ 1,387 and $ 1,390 , respectively . NOTE 5: SHARE OPTION PLAN AND ESPP In September 2015, the Company adopted the 2015 Omnibus Incentive Plan (the “2015 Plan”). Under the 2015 Plan, the Company can issue various types of equity compensation awards such as share options, restricted shares, performance shares, restricted share units (“RSUs”), performance-based share units (“PSUs”), long-term cash awards and other share-based awards. 9 Table of Contents Options granted under the 2015 Plan generally have a four -year vesting period and expire ten years after the date of grant. Options granted under the 2015 Plan that are canceled or forfeited before expiration become available for future grants. RSUs granted under the 2015 Plan generally vest over a three year period. PSUs granted under the 2015 Plan generally vest between a three and six year period as performance targets are attained. RSUs and PSUs granted under the 2015 Plan that are canceled before expiration become available for future grants. As of March 31, 2020, 11,430,386 ordinary shares were available for grant under the 2015 Plan. A summary of the status of the Company’s option plans as of March 31, 2020 and changes during the period then ended is presented below: Three months ended March 31, 2020 Unaudited Number of options Weighted average exercise price Outstanding at beginning of year 10,350,810 $ 20.40 Granted 671,530 69.37 Exercised ( 291,088 ) 15.52 Forfeited and canceled ( 6,025 ) 41.39 Outstanding as of March 31, 2020 10,725,227 $ 23.58 Exercisable options 4,572,967 $ 16.17 For the three months, ended March 31, 2020, options to purchase 291,088 ordinary shares were exercised, resulting in the issuance of 291,088 ordinary shares. A summary of the status of the Company’s RSUs and PSUs as of March 31, 2020 and changes during the period then ended is presented below. Three months ended March 31, 2020 Unaudited Number of RSU/PSUs Weighted average grant date fair value Unvested at beginning of year 1,474,395 $ 30.26 Granted (1) 3,747,545 54.07 Vested ( 543,450 ) 22.10 Forfeited and cancelled ( 3,194 ) 52.84 Unvested as of March 31, 2020 4,675,296 50.28 (1) Represents RSUs and PSUs granted on March 3, 2020 as follows: (a) 527,041 RSUs that are expensed based on their grant date fair value of $ 69.37 per RSU over the service period of three years ; (b) 408,539 PSUs that have a mix of service and clinical milestone vesting conditions, cliff-vest in pre-determined increments, and that have been deemed probable to vest and are therefore expensed beginning in the first quarter of 2020 based on their grant date fair value of $ 69.37 per PSU; (c) 108,113 PSUs that have a mix of service and clinical milestone vesting conditions, cliff-vest in pre-determined increments, and that will begin to be expensed at $ 69.37 per PSU when it becomes probable that the milestones will be achieved, and (d) 2,703,852 PSUs that have a mix of service, market and other milestone performance vesting conditions (including but not limited to new FDA approved indications), cliff-vest in pre-determined increments, and that will begin to be expensed at $ 48.16 per PSU when it becomes probable that the milestones will be achieved. The PSUs vest no earlier than three years from the date of grant and no later than six years from the date of grant. The grant date fair value of PSUs with market vesting conditions were obtained by using Monte Carlo simulations. All RSUs and PSUs are expensed in accordance with ASC 718. In September 2015, the Company adopted an employee share purchase plan (“ESPP”) to encourage and enable eligible employees to acquire ownership of the Company’s ordinary shares purchased through accumulated payroll 10 Table of Contents deductions on an after-tax basis. In the United States, the ESPP is intended to be an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code and the provisions of the ESPP are construed in a manner consistent with the requirements of such section. As of March 31, 2020, 4,050,089 ordinary shares were available to be purchased by eligible employees under the ESPP and 414,559 shares had been issued under the ESPP. The fair value of share-based awards was estimated using the Black-Scholes model for all equity grants. For market condition awards, the Company also applied the Monte-Carlo simulation model. We assessed fair value using the following underlying assumptions: Three months ended March 31, Year ended December 31, 2019 2020 2019 Unaudited Audited Stock Option Plans Expected term (years) 6.25 6.23 5.50 - 6.5 Expected volatility 54 % 55 % 55 %- 61 % Risk-free interest rate 0.86 % 2.40 % 1.73 %- 2.40 % Dividend yield 0.00 % 0.00 % 0.00 % ESPP Expected term (years) 0.50 0.50 0.50 Expected volatility 47 % 62 % 44 %- 62 % Risk-free interest rate 1.57 % 2.51 % 2.10 %- 2.51 % Dividend yield 0.00 % 0.00 % 0.00 % The total non-cash share-based compensation expense related to all of the Company’s equity-based awards recognized for the three months ended March 31, 2020 and 2019 and the year ended December 31, 2019 was: Three months ended March 31, Year ended December 31, 2019 2020 2019 Unaudited Audited Cost of revenues $ 590 $ 426 $ 2,231 Research, development and clinical trials 3,394 1,188 7,570 Sales and marketing 3,616 1,962 11,897 General and administrative 8,957 6,073 30,718 Total share-based compensation expense $ 16,557 $ 9,649 $ 52,416 NOTE 6: EARNINGS PER SHARE Basic net income (loss) per share is computed based on the weighted average number of ordinary shares outstanding during each period. Diluted net income per share is computed based on the weighted average number of ordinary shares outstanding during the period, plus potential dilutive shares considered outstanding during the period, in accordance with ASC 260-10, as determined under the treasury stock method. Basic and diluted net loss per ordinary share was the same for each period presented, except for the three months ended March 31, 2020, as the inclusion of all potential dilutive shares (deriving from options, RSUs and the ESPP) outstanding would be anti-dilutive. The calculation of diluted earnings per share includes the weighted average of potentially dilutive securities, which consists of ordinary shares underlying outstanding share options, RSUs, performance share units and the ESPP. The effect of these dilutive securities under the treasury stock method was approximately 8,223,056 shares for the three months ended March 31, 2020. The Company excluded 352,291 share options under the treasury stock method from the computation of dilutive net income per share for the three months ended March 31, 2020 because including them would had have an anti-dilutive effect. 11 Table of Contents NOTE 7: SUPPLEMENTAL INFORMATION The Company operates in a single reportable segment. The following table presents long-lived assets by location: March 31, 2020 December 31, 2019 Unaudited Audited United States $ 9,562 $ 8,896 Switzerland 2,472 3,067 Israel 3,366 2,753 Germany 711 729 Others 2,134 1,581 Total long-term assets $ 18,245 $ 17,026 The Company’s revenues by geographic region, based on the customer’s location, are summarized as follows: Three months ended March 31, Year ended December 31, 2019 2020 2019 Unaudited Audited United States $ 69,259 $ 46,604 $ 232,805 EMEA: Germany 21,802 20,238 86,564 Other EMEA 2,674 2,282 8,782 Japan 6,451 3,370 17,912 Greater China (1) 1,642 815 5,255 Total net revenues $ 101,828 $ 73,309 $ 351,318 (1) Reflects revenue recognized in accordance with a License and Collaboration Agreement (the "Zai Agreement") between us and Zai Lab (Shanghai) Co., Ltd. (“Zai”), dated September 10, 2018, pursuant to which Zai is commercializing Optune in China, Hong Kong, Macau and Taiwan (referred to in this table as “Greater China”) and also includes $ 90 recognized during the three months ended March 31, 2020 from reaching a clinical trial milestone during the period. The full amount of the milestone payable is $ 2,000 that will be recognized over the remainder of the Zai performance period ending in September 2024. For additional information, see Note 12 to the Consolidated Financial Statements in our 2019 10-K. NOTE 8: INCOME TAX In accordance with the changes to the U.S. tax code enacted in response to the economic impacts of COVID-19 signed into legislation on March 27, 2020 the Company recorded a net tax benefit of $ 11,269 in the first quarter of 2020. The benefit results from net operating loss carry-backs in the U.S. 12 Table of Contents