NovoCure Ltd 10-Q

Item 1. Financial Statements NOVOCURE LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS U.S. dollars in thousands (except share data) March 31, 2022 December 31, 2021 Unaudited Audited ASSETS CURRENT ASSETS: Cash and cash equivalents $ 190,739 $ 208,802 Short-term investments 741,562 728,898 Restricted cash 889 807 Trade receivables, net 100,965 93,567 Receivables and prepaid expenses 17,343 17,025 Inventories 29,084 24,427 Total current assets 1,080,582 1,073,526 LONG-TERM ASSETS: Property and equipment, net 25,072 22,693 Field equipment, net 12,792 12,923 Right-of-use assets 19,937 18,267 Other long-term assets 11,827 12,086 Total long-term assets 69,628 65,969 TOTAL ASSETS $ 1,150,210 $ 1,139,495 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, 2022 December 31, 2021 Unaudited Audited LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Trade payables $ 69,186 $ 72,600 Other payables, lease liabilities and accrued expenses 58,613 70,002 Total current liabilities 127,799 142,602 LONG-TERM LIABILITIES: Long-term debt, net 563,026 562,216 Deferred revenue 5,511 6,477 Long-term leases 14,813 12,997 Employee benefit liabilities 3,024 4,543 Other long-term liabilities 156 166 Total long-term liabilities 586,530 586,399 TOTAL LIABILITIES 714,329 729,001 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Share capital - Ordinary shares no par value, unlimited shares authorized; issued and outstanding: 104,559,088 shares and 103,971,263 shares at March 31, 2022 (unaudited) and December 31, 2021, respectively — — Additional paid-in capital 1,127,782 1,099,589 Accumulated other comprehensive income (loss) ( 1,328 ) ( 3,169 ) Retained earnings (accumulated deficit) ( 690,573 ) ( 685,926 ) TOTAL SHAREHOLDERS' EQUITY 435,881 410,494 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,150,210 $ 1,139,495 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, 2022 2021 2021 Unaudited Audited Net revenues $ 137,547 $ 134,695 $ 535,031 Cost of revenues 27,727 26,385 114,877 Gross profit 109,820 108,310 420,154 Operating costs and expenses: Research, development and clinical studies 42,234 45,916 201,303 Sales and marketing 37,884 31,357 137,057 General and administrative 30,508 31,125 126,127 Total operating costs and expenses 110,626 108,398 464,487 Operating income (loss) ( 806 ) ( 88 ) ( 44,333 ) Financial expenses (income), net 1,709 2,646 7,742 Income (loss) before income tax ( 2,515 ) ( 2,734 ) ( 52,075 ) Income tax 2,132 1,394 6,276 Net income (loss) $ ( 4,647 ) $ ( 4,128 ) $ ( 58,351 ) Basic net income (loss) per ordinary share $ ( 0.04 ) $ ( 0.04 ) $ ( 0.56 ) Weighted average number of ordinary shares used in computing basic net income (loss) per share 104,186,120 102,633,545 103,433,274 Diluted net income (loss) per ordinary share $ ( 0.04 ) $ ( 0.04 ) $ ( 0.56 ) Weighted average number of ordinary shares used in computing diluted net income (loss) per share 104,186,120 102,633,545 103,433,274 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, 2022 2021 2021 Unaudited Audited Net income (loss) $ ( 4,647 ) $ ( 4,128 ) $ ( 58,351 ) Other comprehensive income (loss), net of tax: Change in foreign currency translation adjustments 330 ( 268 ) 302 Pension benefit plan 1,511 2,152 361 Total comprehensive income (loss) $ ( 2,806 ) $ ( 2,244 ) $ ( 57,688 ) 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, 2021 (audited) 103,971,263 $ 1,099,589 $ ( 3,169 ) $ ( 685,926 ) $ 410,494 Share-based compensation to employees — 25,045 — — 25,045 Exercise of options and vested RSUs 587,825 3,148 — — 3,148 Other comprehensive income (loss), net of tax benefit of $ 0 — — 1,841 — 1,841 Net income (loss) — — — ( 4,647 ) ( 4,647 ) Balance as of March 31, 2022 (Unaudited) 104,559,088 $ 1,127,782 $ ( 1,328 ) $ ( 690,573 ) $ 435,881 Ordinary shares Additional paid-in capital Accumulated other comprehensive loss Retained earnings (accumulated deficit) Total shareholders' equity Balance as of December 31, 2020 (audited) 102,334,276 $ 1,111,435 $ ( 3,832 ) $ ( 631,077 ) $ 476,526 Share-based compensation to employees — 18,863 — — 18,863 Exercise of options and vested RSUs 853,184 7,961 — — 7,961 Cumulative effect adjustment resulting from ASU 2020-06 early adoption — ( 132,474 ) — 3,502 ( 128,972 ) Other comprehensive income (loss), net of tax benefit of $ 0 — — 1,884 — 1,884 Net income (loss) — — — ( 4,128 ) ( 4,128 ) Balance as of March 31, 2021 (Unaudited) 103,187,460 $ 1,005,785 $ ( 1,948 ) $ ( 631,703 ) $ 372,134 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, 2022 2021 2021 Unaudited Audited Cash flows from operating activities: Net income (loss) $ ( 4,647 ) $ ( 4,128 ) $ ( 58,351 ) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 2,610 2,370 10,251 Accrued Interest ( 221 ) — ( 94 ) Asset write-downs and impairment of field equipment 135 176 649 Share-based compensation 25,045 18,863 94,900 Foreign currency remeasurement loss (gain) 249 2,157 3,231 Decrease (increase) in accounts receivables ( 7,461 ) 4,624 5,270 Amortization of discount (premium) 684 603 3,101 Decrease (increase) in inventories ( 4,804 ) ( 1,296 ) 2,483 Decrease (increase) in other long-term assets 1,863 1,432 4,519 Increase (decrease) in accounts payables and accrued expenses ( 14,809 ) ( 2,626 ) 27,777 Increase (decrease) in other long-term liabilities ( 2,331 ) ( 4,394 ) ( 10,980 ) Net cash provided by (used in) operating activities $ ( 3,687 ) $ 17,780 $ 82,756 Cash flows from investing activities: Purchase of property, equipment and field equipment $ ( 5,093 ) $ ( 3,981 ) $ ( 24,170 ) Proceeds from maturity of short-term investments 279,000 608,000 958,000 Purchase of short-term investments ( 291,317 ) ( 549,848 ) ( 1,078,664 ) Net cash provided by (used in) investing activities $ ( 17,410 ) $ 54,171 $ ( 144,834 ) Cash flows from financing activities: Proceeds from issuance of shares, net $ — $ — $ 4,546 Repayment of long-term debt ( 7 ) ( 6 ) ( 26 ) Exercise of options 3,148 7,961 21,182 Net cash provided by (used in) financing activities $ 3,141 $ 7,955 $ 25,702 Effect of exchange rate changes on cash, cash equivalents and restricted cash $ ( 25 ) $ ( 102 ) $ ( 188 ) Increase (decrease) in cash, cash equivalents and restricted cash ( 17,981 ) 79,804 ( 36,564 ) Cash, cash equivalents and restricted cash at the beginning of the period 209,609 246,173 246,173 Cash, cash equivalents and restricted cash at the end of the period $ 191,628 $ 325,977 $ 209,609 Supplemental cash flow activities: Cash paid during the period for: Income taxes paid (refunded), net $ 1,173 $ ( 2,405 ) $ 3,110 Interest paid $ 1 $ 1 $ 101 Non-cash activities: Right-of-use assets obtained in exchange for lease liabilities $ 3,580 $ 284 $ 5,387 The accompanying notes are an integral part of these unaudited consolidated financial statements. 6 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 ("TTFields") devices, including Optune and Optune Lua (collectively, our "Products"), for the treatment of solid tumor cancers. The Company currently markets Optune in the United States ("U.S."), Germany, Japan and certain other countries. The Company currently markets Optune Lua in the U.S. and European Union. The Company also has a License and Collaboration Agreement (the "Zai Agreement") with Zai Lab (Shanghai) Co., Ltd. ("Zai") to market Optune in China, Hong Kong, Macau and Taiwan ("Greater China"). See Note 12 to the Consolidated Financial Statements in the 2021 10-K. During the year ended December 31, 2019, the Company implemented changes to its corporate entity operating structure, including transferring certain intellectual property to its Swiss subsidiary, primarily to align corporate entities with the Company’s evolving operations and business model. As of January 1, 2022, the effective place of daily management and control of the Company moved to Switzerland and the Company has become a Swiss tax resident. 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 ("GAAP") 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, 2021 (the "2021 10-K") filed with the Securities and Exchange Commission on February 24, 2022. The significant accounting policies applied in the audited annual consolidated financial statements of the Company as disclosed in the 2021 10-K are applied consistently in these unaudited interim consolidated financial statements, except as noted below: Short-term investments The Company accounts for investments in debt securities in accordance with ASC 320, "Investments—Debt and Equity Securities." Management determines the appropriate classification of its investments at the time of purchase and reevaluates such determinations at each balance sheet date. The Company classifies part of its debt securities as available-for-sale and the rest of the balance as held-to-maturity since the Company has the intent and ability to hold the securities to maturity. Available-for-sale debt securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income (loss) in shareholders’ equity. Realized gains and losses on sale of investments are included in financial income, net and are derived using the specific identification method for determining the cost of securities sold. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization together with interest on securities is included in financial income, net. Each reporting period, the Company evaluates whether declines in fair value below amortized cost are due to expected credit losses, as well as the Company’s ability and intent to hold the investment until a forecasted recovery occurs. Allowance for credit losses on available-for-sale debt securities are recognized in the Company’s consolidated statements of income, and any remaining unrealized losses, net of taxes, are included in accumulated other comprehensive income (loss) in stockholders’ equity. 7 Table of Contents Held-to-maturity debt securities are stated at amortized cost of which is adjusted for amortization of premiums and accretion of discounts to maturity and any credit losses. Such amortization and interest are included in the consolidated statement of operations as financial income or expenses, as appropriate. NOTE 2: CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents include items almost as liquid as cash, with maturity periods of three months or less when purchased. As of March 31, 2022 and December 31, 2021, the Company’s cash and cash equivalents were composed of: March 31, 2022 December 31, 2021 Unaudited Audited Cash $ 8,376 $ 3,139 Money market funds 92,071 64,668 Corporate debt securities 2,580 — Certificate of deposits, notes and term deposits 87,712 140,995 Total cash and cash equivalents $ 190,739 $ 208,802 Short-term investments include items with maturity dates between three months and one year when purchased. As of March 31, 2022 and December 31, 2021, the Company’s short-term investments were: March 31, 2022 December 31, 2021 Unaudited Audited U.S. Treasury bills $ 24,857 $ 199,981 Other government and governmental agency notes 34,786 — Corporate debt securities 196,274 104,823 Certificate of deposits, notes and term deposits 485,645 424,094 Total short-term investments $ 741,562 $ 728,898 The Company invests in marketable U.S. Treasury Bills (“T-bills”), other government and governmental agency notes, term deposits, notes, certificate of deposits, money market funds and corporate debt securities that are classified as "held-to-maturity" or "available for sale" securities. These investments are presented as cash and cash equivalents or short-term investments, according their maturity periods. The estimated fair value of the Company’s short-term investments as of March 31, 2022 and December 31, 2021 was $ 741,562 and $ 728,906 , respectively. As of March 31, 2022 and December 31, 2021, amounts of $ 24,857 and $ 199,988 , respectively were categorized as Level 1 and the remaining balance as level 2 in accordance with ASC 820, “Fair Value Measurements and Disclosures”. 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, 2022 and December 31, 2021, the Company’s inventories were composed of: March 31, 2022 December 31, 2021 Unaudited Audited Raw materials $ 1,831 $ 1,485 Work in progress 14,010 8,274 Finished products 13,243 14,668 Total $ 29,084 $ 24,427 NOTE 4: COMMITMENTS AND CONTINGENT LIABILITIES 8 Table of Contents Operating Leases. The facilities of the Company are leased under various operating lease agreements for periods, including options for extensions, ending no later than 2044. The Company also leases motor vehicles under various operating leases, which expire on various dates, the latest of which is in 2025. Pledged deposits and bank guarantees. As of March 31, 2022 and December 31, 2021, the Company pledged bank deposits of $ 2,344 and $ 2,350 , 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 $ 2,692 and $ 2,698 , respectively . Senior secured revolving credit facility. On November 6, 2020, the Company entered into a three-year $ 150,000 senior secured revolving credit facility with a syndicate of relationship banks. For additional information, see Note 12(c) to the Consolidated Financial Statements in the 2021 10-K. As of March 31, 2022, the Company had no outstanding balance borrowed under the facility. NOTE 5: CONVERTIBLE NOTE On November 5, 2020, the Company issued $ 575,000 aggregate principal amount of 0 % Convertible Senior Notes due 2025 (the “Notes”). The Notes mature on November 1, 2025, unless earlier repurchased, redeemed or converted as set forth in the Notes. As of March 31, 2022, the conditions allowing holders of the Notes to convert were not met. The Notes are therefore not convertible as of March 31, 2022 and are classified as long-term liability. For additional information, see Note 10(a) to the Consolidated Financial Statements in the 2021 10-K. The net carrying amount of the liability of the Notes as of March 31, 2022 and December 31, 2021 are as follows: March 31, 2022 December 31, 2021 Unaudited Audited Liability component, net: Principal amount $ 575,000 $ 575,000 Unamortized issuance costs ( 11,974 ) ( 12,784 ) Net carrying amount of liability component (1) $ 563,026 $ 562,216 (1) An effective interest rate determines the fair value of the Notes, therefore they are categorized as Level 3 in accordance with ASC 820, "Fair Value Measurements and Disclosures." The estimated fair value of the net carrying amount of liability component of the Notes as of March 31, 2022 and December 31, 2021 were $ 454,285 and $ 467,469 , respectively. Finance expense related to the Notes was as follows: Three months ended March 31, Year ended December 31, 2021 2022 2021 Unaudited Audited Amortization of debt issuance costs 810 709 3,339 Total finance expense recognized $ 810 $ 709 $ 3,339 NOTE 6: SHARE OPTION PLANS 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. Options granted under the 2015 Plan generally have a two-year or 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 9 Table of Contents 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, 2022, 17,070,368 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, 2022 and changes during the period then ended is presented below: Three months ended March 31, 2022 Unaudited Number of options Weighted average exercise price Outstanding at beginning of year 8,549,322 $ 33.09 Granted 575,246 80.59 Exercised ( 175,650 ) 18.14 Forfeited and canceled ( 13,467 ) 77.31 Outstanding as of March 31, 2022 8,935,451 $ 36.38 Exercisable options 5,787,733 $ 24.15 For the three months ended March 31, 2022, options to purchase 175,650 ordinary shares were exercised, resulting in the issuance of 175,650 ordinary shares. A summary of the status of the Company’s RSUs and PSUs as of March 31, 2022 and changes during the period then ended is presented below. Three months ended March 31, 2022 Unaudited Number of RSU/PSUs Weighted average grant date fair value Unvested at beginning of year 4,459,107 $ 65.56 Granted 964,555 80.59 Vested ( 412,175 ) 84.05 Forfeited and cancelled ( 15,928 ) 99.97 Unvested as of March 31, 2022 (1) 4,995,559 66.83 (1) Includes PSUs that have a mix of service, market and other milestone performance vesting conditions which are vested upon achievements of performance milestones which are not probable, as of March 31, 2022, in accordance with ASC 718 as follows: 10 Table of Contents March 31, 2022 Number of PSUs Fair value at grant date per PSU Total fair value at grant date 2,703,852 $ 48.16 $ 130,218 108,113 69.37 7,500 124,701 80.59 10,050 17,712 84.68 1,500 10,532 94.94 1,000 189,626 $ 114.26 21,667 3,154,536 $ 171,935 These PSUs will be expensed over the performance period when the vesting conditions become probable 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 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, 2022, 4,954,997 ordinary shares were available to be purchased by eligible employees 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, 2021 2022 2021 Unaudited Audited Stock Option Plans Expected term (years) 5.33 - 5.83 5.86 - 6.00 5.50 - 6 Expected volatility 60 %- 62 % 60 %- 60 % 60 %- 63 % Risk-free interest rate 1.58 %- 1.61 % 0.85 %- 0.88 % 0.78 %- 1.27 % Dividend yield 0.00 % 0.00 % 0.00 % ESPP Expected term (years) 0.50 0.50 0.50 Expected volatility 51 % 54 % 54 %- 81 % Risk-free interest rate 0.19 % 0.09 % 0.05 %- 0.09 % 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, 2022 and 2021 and the year ended December 31, 2021 was: Three months ended March 31, Year ended December 31, 2021 2022 2021 Unaudited Audited Cost of revenues $ 952 $ 733 $ 3,471 Research, development and clinical studies 6,801 5,124 27,597 Sales and marketing 6,655 4,471 22,673 General and administrative 10,637 8,535 41,159 Total share-based compensation expense $ 25,045 $ 18,863 $ 94,900 11 Table of Contents NOTE 7: Basic and diluted net income (loss) per ordinary 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 (deriving from options, RSUs, PSUs, convertible notes and the ESPP) considered outstanding during the period, in accordance with ASC 260-10, as determined under the if-converted method. The following table sets forth the computation of the Company’s basic and diluted net income (loss) per ordinary share: Three months ended March 31, Year ended December 31, 2021 2022 2021 Unaudited Audited Net income (loss) attributable to ordinary shares as reported used in computing basic and diluted net income (loss) per share $ ( 4,647 ) $ ( 4,128 ) $ ( 58,351 ) Weighted average number of ordinary shares used in computing basic net income (loss) per share 104,186,120 102,633,545 103,433,274 Potentially dilutive shares that were excluded from the computation of basic net income (loss) per share: Options — — — Restricted share units — — — ESPP — — — Weighted average number of ordinary shares used in computing diluted net income (loss) per share 104,186,120 102,633,545 103,433,274 Weighted anti-dilutive shares outstanding which were not included in the diluted calculation 7,874,118 9,734,269 8,524,922 Basic net income (loss) per ordinary share $ ( 0.04 ) $ ( 0.04 ) $ ( 0.56 ) Diluted net income (loss) per ordinary share $ ( 0.04 ) $ ( 0.04 ) $ ( 0.56 ) 12 Table of Contents NOTE 8: SUPPLEMENTAL INFORMATION The Company operates in a single reportable segment. The following table presents long-lived assets by location: March 31, 2022 December 31, 2021 Unaudited Audited United States $ 24,336 $ 23,263 Israel 5,933 5,297 Switzerland 4,625 4,085 Japan 955 799 Germany 812 1,020 Others 1,203 1,152 Total $ 37,864 $ 35,616 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, 2021 2022 2021 Unaudited Audited United States $ 97,416 $ 85,908 $ 353,110 EMEA: Germany 19,238 26,364 93,939 Other EMEA 7,775 8,619 30,577 Japan 8,750 8,278 34,640 Greater China (1) 4,368 5,526 22,765 Total net revenues $ 137,547 $ 134,695 $ 535,031 (1) For additional information, see Note 12 to the Consolidated Financial Statements in the 2021 10-K. 13 Table of Contents