Sol-Gel Technologies Ltd. — FY 2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; quarterly results are not provided. Financial statements are prepared under U.S. GAAP and audited by Kesselman & Kesselman, which issued an unqualified opinion.
Business context and operating progress
Sol-Gel is a clinical-stage dermatology company developing branded topical treatments using silica-based microencapsulation technology, alongside generic dermatology products. The lead branded candidates are TWIN for acne and Epsolay for subtype II rosacea. The company had not yet generated meaningful product revenue in FY 2018.
- TWIN: First subject dosed in its pivotal Phase III program in December 2018. The two trials were planned to enroll approximately 420 subjects each. Management expected top-line results by year-end 2019 and, if positive, planned an NDA submission in 2020.
- Epsolay: Pivotal Phase III trials began in June 2018; half of planned enrollment was complete by September, and a long-term safety study had commenced. Management expected top-line results in 2019.
- Generic acyclovir cream: Perrigo received final FDA approval in February 2019 and launched the product that month, after the reporting period. Sol-Gel is entitled to half of defined gross profits under its collaboration.
- Generic ivermectin cream: The ANDA received tentative FDA approval in January 2018, but patent litigation triggered a 30-month stay on final approval.
Financial results and liquidity
| Metric (US$ thousands, except per-share data) | FY 2017 | FY 2018 | Change |
|---|---|---|---|
| Revenue | 174 | 129 | Down 26% |
| Research and development expense | 25,805 | 28,146 | Up 9% |
| General and administrative expense | 6,002 | 5,504 | Down 8% |
| Operating loss | 31,633 | 33,521 | Up 6% |
| Net loss | 31,568 | 32,203 | Up 2% |
| Basic and diluted loss per share | $5.02 | $1.80 | Lower, principally reflecting higher weighted-average shares after the IPO and share split |
| Net cash used in operating activities | 24,089 | 23,467 | Use decreased 3% |
FY 2018 revenue consisted primarily of royalties from an earlier product-protection license and was not material. The company reported no gross profit or operating margin measure that meaningfully reflects a commercial business at this development stage.
- Cash and cash equivalents: $5.325 million at year-end, versus $5.024 million in 2017. The balance sheet also reported $1.0 million of bank deposits and $56.662 million of marketable securities; together these were approximately $62.987 million of cash, deposits and marketable securities.
- Liquidity: Current assets were $65.974 million and current liabilities $4.895 million, implying working capital of approximately $61.079 million. Marketable securities were primarily government and A-or-higher-rated corporate debt; $54.151 million was due within one year.
- Cash flow: Investing activities used $54.735 million, mainly reflecting purchases of marketable securities, partly offset by maturities and sales. Financing provided $78.819 million, primarily from the 2018 IPO. The cash-flow statement reports a $651,000 increase in cash and restricted cash; cash and cash equivalents alone increased $301,000.
- Debt and equity: The $65.338 million of non-interest-bearing controlling-shareholder loans was converted into 5,444,825 ordinary shares immediately before the IPO. No shareholder loan balance remained at year-end. Total liabilities were $5.773 million, while shareholders’ equity was $63.909 million.
- Loss history: Net losses were $20.771 million in 2016, $31.568 million in 2017 and $32.203 million in 2018. Accumulated deficit reached $127.464 million.
Material changes, outlook and risks
- The 2018 IPO generated approximately $78.8 million in net proceeds as reported in the financial statements. The shareholder loan conversion and IPO drove the change from a $52.699 million capital deficiency at year-end 2017 to positive equity of $63.909 million at year-end 2018.
- R&D spending rose as development advanced, including Phase III-related manufacturing, regulatory and clinical work. Management expects significant ongoing losses and increased development spending.
- Management stated that available resources were expected to fund operations for at least 12 months from the report date and complete the TWIN and Epsolay Phase III programs. This estimate depends on assumptions; the company expects to need additional funding to continue operations and pursue broader development and commercialization.
- Principal risks include clinical-trial failure or delay, regulatory approval uncertainty, need for additional capital and potential dilution, dependence on collaborators and contract manufacturers, intellectual-property disputes, competition, and the absence of an established sales organization. The company also disclosed Israeli operating and geopolitical risks and foreign-exchange exposure.
- Management concluded internal control over financial reporting was effective as of December 31, 2018; disclosure controls and procedures were also considered effective at a reasonable-assurance level. The auditor did not express an opinion on internal control effectiveness.
- No material legal proceedings or off-balance-sheet arrangements were reported. The company had no approved commercial product during FY 2018; the acyclovir approval and launch occurred in February 2019.
Key facts for investors to verify
- Progress, enrollment, safety and efficacy results for both TWIN and Epsolay Phase III programs, and whether the stated 2019 data and 2020 NDA timelines were achieved.
- Actual cash runway and subsequent financing needs, given continuing operating cash use and management’s funding caveat.
- Commercial launch performance and Sol-Gel’s realized share of acyclovir profits; confirm the timing and terms of any revenue recognition.
- Status and outcome of the ivermectin patent litigation and 30-month stay, along with development progress for the other generic candidates.
- Reconcile IPO net-proceeds figures: the filing gives approximately $78.8 million in several places, while the use-of-proceeds section reports approximately $78.3 million.
- Assess the controlling shareholder’s influence: Arkin Dermatology held approximately 72.3% of voting power as of January 2019, and the company intended to rely on Nasdaq controlled-company exemptions.