# NovoCure Ltd (NVCR) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from NovoCure Ltd's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1645113/000164511323000023/nvcr-20221231.htm
Accession: 0001645113-23-000023
Filing date: 2023-02-23
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/NVCR/
All MD&A years: /company/NVCR/mda/
Previous year: /company/NVCR/mda/fy2021/ (FY 2021)
Next year: /company/NVCR/mda/fy2023/ (FY 2023)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide information to assist you in better understanding and evaluating our financial condition and results of operations. We encourage you to read this MD&A in conjunction with our consolidated financial statements and the notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Please refer to the information under the heading "Cautionary Note Regarding Forward-Looking Statements" elsewhere in this report. References to the words "we," "our," "us," and the "Company" in this report refer to NovoCure Limited, including its consolidated subsidiaries.

Overview

We are a global oncology company with a proprietary platform technology called Tumor Treating Fields ("TTFields"), which are electric fields that exert physical forces to kill cancer cells via a variety of mechanisms. Our key priorities are to drive commercial adoption of Optune and Optune Lua, our commercial TTFields devices, and to advance clinical and product development programs intended to extend overall survival in some of the most aggressive forms of cancer.

Optune is approved by the U.S. Food and Drug Administration ("FDA") under the Premarket Approval ("PMA") pathway for the treatment of adult patients with newly diagnosed glioblastoma ("GBM") together with temozolomide, a chemotherapy drug, and for adult patients with GBM following confirmed recurrence after chemotherapy as monotherapy treatment. We also have a CE certificate to market Optune for the treatment of GBM in the European Union ("EU"), as well as approval or local registration in the United Kingdom ("UK"), Japan, Canada and certain other countries. Optune Lua is approved by the FDA under the Humanitarian Device Exemption ("HDE") pathway to treatment malignant pleural mesothelioma ("MPM") together with standard chemotherapies. We have also received CE certification in the EU and approval or local registration to market Optune Lua in certain other countries. We market Optune and Optune Lua in multiple countries around the globe with the majority of our revenues coming from the use of Optune in the U.S., Germany and Japan. We are actively evaluating opportunities to expand our international footprint.

We believe the physical mechanisms of action behind TTFields therapy may be broadly applicable to solid tumor cancers. We recently completed patient follow-up and announced top line results from our pivotal LUNAR study evaluating the use of TTFields in the treatment of non-small cell lung cancer ("NSCLC") together with standard therapies. Patients treated with TTFields and standard therapies demonstrated a statistically significant and clinically meaningful improvement in overall survival over standard therapies alone. The LUNAR study also showed a statistically significant and clinically meaningful improvement in overall survival when patients were treated with TTFields and immune checkpoint inhibitors, as compared to those treated with immune checkpoint inhibitors alone, and a positive trend in overall survival when patients were treated with TTFields and docetaxel versus docetaxel alone. We expect to present full results of the LUNAR study at a future medical conference.

In addition to the LUNAR study, we are conducting pivotal studies evaluating the use of TTFields in the treatment of ovarian cancer, brain metastases from NSCLC ("brain metastases") and pancreatic cancer. We are also conducting a pivotal study testing the potential survival benefit of initiating Optune concurrent with radiation therapy versus following radiation therapy in patients with newly diagnosed GBM.

We have one ongoing pilot study evaluating the use of TTFields in the treatment of stage 3 NSCLC and are designing several additional pilot and pivotal studies in partnership with oncology leaders to further explore the capabilities of TTFields. We anticipate expanding our clinical pipeline over time to study the safety and efficacy of TTFields for additional solid tumor indications and combinations with other cancer treatment modalities.

The table below presents the current status of the ongoing clinical studies in our pipeline and anticipated timing of data.

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Our therapy is delivered through a medical device and we continue to advance our Products with the intention to extend survival and maintain quality of life for patients. We have several product development programs underway that are designed to optimize TTFields delivery to the target tumor and enhance patient ease of use. Our intellectual property portfolio contains hundreds of issued patents and numerous patent applications pending worldwide. We believe we possess global commercialization rights to our Products in oncology and are well-positioned to extend those rights into the future as we continue to find innovative ways to improve our Products.

In 2018, we granted Zai Lab (Shanghai) Co., Ltd. ("Zai") a license to commercialize Optune in China, Hong Kong, Macau and Taiwan ("Greater China") under a License and Collaboration Agreement (the "Zai Agreement"). The Zai Agreement also establishes a development partnership intended to accelerate the development of TTFields in multiple solid tumor cancer indications. For additional information, see Note 12 to the Consolidated Financial Statements.

Impact of COVID-19

In March 2020, the World Health Organization (“WHO”) declared COVID-19 a global pandemic. Since the pandemic began, we have been following the guidance of the WHO, the U.S. Centers for Disease Control and Prevention, and local health authorities in all of our active markets and we have adjusted the way we conduct business to adapt to the evolving situation. The COVID-19 pandemic did not have a material impact on our financial results throughout 2022. The pandemic has had and is having an impact on our day-to-day operations, which varies by region based on factors such as geographical spread, stage of containment and recurrence of the pandemic in each region. We believe the prolonged disruption caused by COVID-19 is resulting in increased volatility across global health care systems, such as fluctuations in patient volumes and changes in patterns of care in certain regions, which is currently impacting and might continue to impact our business and clinical studies in the future. For example, outside the U.S., localized lockdowns are causing disruptions in the ability to monitor clinical studies. TTFields is an emerging modality in cancer care and requires significant educational effort to drive awareness and acceptance of our therapy. We have relied heavily on virtual engagement to manage these educational efforts since the onset of the pandemic, which poses challenges to our ability to effectively communicate and engage with our customers and partners around the world.

Given the aggressive nature of the cancers that we treat, we believe that the fundamental value proposition of the TTFields platform remains unchanged. We continue to evaluate and plan for the potential effects of COVID-19 on our business moving forward. The extent to which the COVID-19 pandemic may impact our business and clinical studies in the future will depend on further developments, which are highly uncertain and cannot be predicted with confidence. The COVID-19 pandemic may also heighten many of the other risks described in our risk factors disclosed in this Annual Report.

We view our operations and manage our business in one operating segment. Our net revenues were $537.8 million for the year ended December 31, 2022, $535.0 million for the year ended December 31, 2021 and $494.4 million for the year ended December 31, 2020. Our net loss was $92.5 million for the year ended December 31, 2022, net loss was $58.4 million for the year ended December 31, 2021 and net income was $19.8 million for the year ended December 31, 2020. As of December 31, 2022, we had an accumulated deficit of $778.5 million.

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Commentary on Results of Operations

Net revenues

Our revenues are primarily derived from patients using our Products in our active markets. We charge for treatment with our Products on a monthly basis. Our potential net revenues per patient are determined by our ability to secure payment, the monthly fee we collect and the number of months that the patient remains on therapy.

We also receive revenues pursuant to the Zai Agreement. For additional information regarding the Zai Agreement, see Note 12 to the Consolidated Financial Statements.

Cost of revenues

We contract with third parties to manufacture our Products. Our cost of revenues is primarily comprised of the following:

•disposable arrays;

•depreciation expense for the field equipment, including the electric field generator used by patients; and

•personnel and overhead costs such as facilities, freight and depreciation of property, plant and equipment associated with managing our inventory, warehousing and order fulfillment functions.

Operating expenses

Our operating expenses consist of research, development and clinical studies, sales and marketing and general and administrative expenses. Personnel costs are a significant component for each category of operating expenses and consist of wages, benefits and bonuses. Personnel costs also include share-based compensation.

Research, development and clinical studies

Our research, development and clinical studies activity is focused on advancing TTFields through clinical studies across multiple solid tumor types and improving the efficacy and usability of our devices. Research, development and clinical studies costs, including direct and allocated expenses, are expensed as incurred and consist primarily of the following:

•personnel costs for those employees involved in our preclinical and basic research, clinical development programs, clinical affairs, product development and regulatory activities;

•costs to conduct research, product development and clinical study activity through agreements with contract research organizations and other third parties;

•manufacturing expenses associated with our Products, including durable components and disposable arrays, utilized in clinical studies and other research;

•costs associated with medical grants, publications, presentations and investigator-sponsored trials;

•professional fees related to regulatory approvals and conformity assessment procedures; and

•facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment and laboratory and other supplies.

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The following table summarizes our research, development and clinical study expenses by program for the years ended December 31, 2022, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["U.S. dollars in thousands","","2022","","2021","","2020"],["Preclinical and basic research","","$","16,922","","","$","15,580","","","$","12,079"],["Clinical development programs:"],["LUNAR","","6,905","","","9,069","","","8,261"],["INNOVATE - 3","","9,494","","","17,708","","","14,190"],["METIS","","8,480","","","7,056","","","5,147"],["PANOVA - 3","","22,185","","","15,026","","","7,033"],["TRIDENT","","12,162","","","12,588","","","3,709"],["Other clinical studies","","5,524","","","4,634","","","2,764"],["Clinical administration","","22,690","","","19,764","","","13,158"],["Product development","","15,323","","","15,248","","","9,710"],["Clinical affairs","","19,891","","","24,486","","","21,058"],["Other research and development costs (1)","","35,719","","","32,547","","","16,776"],["Share based compensation","","30,790","","","27,597","","","18,125"],["Research, development and clinical studies","","$","206,085","","","$","201,303","","","$","132,010"]]
[[/GREPCENT_TABLE]]

(1)     Other research, development and clinical study costs include regulatory affairs, quality assurance, intellectual property, product safety, allocated facilities and other overhead costs.

We are committed to investing strategically to maximize the growth potential of the TTFields platform. We expect growth in our research and development investments to continue into 2023 as we work to advance our pipeline programs and increase acceptance of Tumor Treating Fields across the global oncology community.

Sales and marketing

Sales and marketing expenses consist primarily of personnel costs, travel, marketing and promotional activities, medical education, commercial shipping and facilities costs. Over the next few years, we expect to continue to make significant expenditures associated with selling and marketing our Products, primarily in connection with continued commercialization in North America, the EU and Japan for the treatment of our approved indications.

General and administrative

General and administrative expenses consist primarily of personnel, professional fees and facilities costs. General and administrative personnel costs include our executive, finance, human resources, information technology and legal functions. These costs also include our contributions to support industry and patient groups. Our professional fees consist primarily of accounting, information technology, legal and other consulting costs. We expect that general and administrative expenses will increase to support our growth. In addition, we incur significant legal and accounting costs related to compliance with SEC rules and regulations, including the costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and compliance with rules of the NASDAQ Stock Market, as well as insurance, investor relations and other costs associated with being a public company.

Financial expenses, net

Financial expenses, net primarily consists of credit facility interest expense and related debt issuance costs, interest income from cash balances and short-term investments and gains (losses) from foreign currency transactions. Our reporting currency is the U.S. dollar. We have historically held substantially all of our cash balances in U.S. dollar denominated accounts to minimize the risk of translational currency exposure.

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Critical accounting policies and estimates

In accordance with U.S. GAAP, in preparing our financial statements we must make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of net revenues and expenses during the reporting period. We develop and periodically change these estimates and assumptions based on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates.

The critical accounting policies requiring estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below.

Revenue recognition

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), an updated standard on revenue recognition and issued subsequent amendments to the initial guidance in March 2016, April 2016, May 2016 and December 2016 within ASU 2016-08, 2016-10, 2016-12 and 2016-20, respectively. The Company adopted the standard effective January 1, 2018 using the modified retrospective method for all contracts. The reported results for 2018 and thereafter reflect the application of Accounting Standards Codification ("ASC") 606 guidance. The amount of revenue recognized reflects the consideration to which we expect to be entitled to receive in exchange for our Products. For additional information, see Note 2(m) to the Consolidated Financial Statements.

We also receive revenues pursuant to the Zai Agreement. For additional information regarding the Zai Agreement, see Note 12 to the Consolidated Financial Statements.

Share-based compensation

Under the FASB's ASC 718, Compensation-Stock Compensation, we measure and recognize compensation expense for share options granted to our employees and directors and for our ESPP based on the fair value of the awards on the date of grant. The fair value of share options is estimated at the date of grant using the Black-Scholes option pricing model and for market condition awards we also use the Monte-Carlo simulation model. Both models requires management to apply judgment and make estimates, including:

•beginning with the first quarter of 2022, the computation of expected volatility is based on the historical volatility the Company's shares, beginning with the first quarter of 2021 and prior to the first quarter of 2022, the computation of expected volatility is based on a combination of actual historical share price volatility of comparable publicly-traded companies and the historical volatility the Company's shares. Prior to the first quarter of 2021, due to the lack of sufficient historical information for the Company, the computation was based on actual historical volatility of comparable publicly-traded companies;

•beginning with the first quarter of 2021, the expected term of options granted is calculated using the Company's historical and future exercise behavior. Prior to the first quarter of 2021, it was calculated using the average between the vesting period and the contractual term to the expected term of the options in effect at the time of grant;

•the risk-free interest rate, which we base on the yield curve of U.S. Treasury securities with periods commensurate with the expected term of the options being valued; and

•the expected dividend yield, which we estimate to be zero based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends.

For information about our ESPP, see Note 14 to the Consolidated Financial Statements.

We recognize share-based compensation costs only for those shares expected to vest over the requisite vesting period of the award, which is generally the option vesting term of four years, using the accelerated method.

We recognize compensation costs for the value of performance stock units ("PSU") over the performance period when the vesting conditions become probable in accordance with ASC 718.

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The table below summarizes the assumptions that were used to estimate the fair value of the options granted to employees during the periods presented:

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["","","2022","","2021","","2020"],["Expected term (years)","","5.33-5.83","","5.50-6.00","","5.50-6.00"],["Expected volatility","","60%-62%","","60%-63%","","54%-56%"],["Risk-free interest rate","","1.58%-4.23%","","0.78%-1.27%","","0.30%-0.86%"],["Dividend yield","","0.00%","","0.00%","","0.00%"]]
[[/GREPCENT_TABLE]]

If any of the assumptions used in the Black-Scholes option pricing model change significantly, share-based compensation for future awards may differ materially from the awards granted previously.

So long as our ordinary shares are publicly traded in a liquid market, we will rely on the daily trading price of our ordinary shares when we estimate the fair value of options granted.

We incurred share-based compensation expense of $107.0 million, $94.9 million and $75.7 million during the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, we have unrecognized compensation expense of $125.6 million, which is expected to be recognized over a weighted average period of approximately 2.38 years. We expect to continue to grant equity awards in the future, and to the extent that we do, our recognized share-based compensation expense will likely increase. For additional information, see Note 14 to the Consolidated Financial Statements.

Long-lived assets

Property and equipment and field equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful life of the relevant asset. We make estimates of the useful life of our property and equipment and field equipment, based on similar assets purchased in the past and our historical experience with such similar assets, in order to determine the depreciation expense to be recorded for each reporting period.

Our field equipment consists of equipment being utilized under rental agreements accounted for on a monthly basis as an operating lease, as well as service pool equipment. Service pool equipment is equipment owned and maintained by us that is swapped for equipment that needs repair or maintenance by us while being used by a patient. We record a provision for any excess, lost or damaged equipment when warranted based on an assessment of the equipment.

We assess impairment whenever events or changes in circumstances indicate that the carrying amount of the asset is impaired or the estimated useful life is no longer appropriate. Circumstances such as changes in technology or in the way an asset is being used may trigger an impairment review. For additional information, see Notes 2(i) and 2(j) to the Consolidated Financial Statements.

Inventories

Inventories are stated at the lower of cost or net realizable value. We regularly evaluate the ability to realize the value of inventory. If the inventories are deemed damaged, if actual demand for our devices declines, or if market conditions are less favorable than those projected, inventory write-offs may be required. For additional information, see Note 2(h) to the Consolidated Financial Statements.

Income taxes

As part of the process of preparing our consolidated financial statements, we are required to calculate our income taxes based on taxable income by jurisdiction. We make certain estimates and judgments in determining our income taxes, including assessment of our uncertain tax positions, for financial statement purposes. Significant changes to these estimates may result in an increase or decrease to our tax provision in the subsequent period when such a change in estimate occurs.

Uncertain tax positions are based on estimates and assumptions that have been deemed reasonable by management. Our estimates of unrecognized tax benefits and potential tax benefits may not be representative of actual outcomes.

For additional information, see Note 13 to the Consolidated Financial Statements.

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Results of operations

The following discussion provides an analysis of our results of operations and reasons for material changes therein for 2022 as compared to 2021. See "Results of Operations" in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 2021 Annual Report on Form 10-K, filed with the SEC on February 24, 2022, for an analysis of the 2021 results as compared to 2020.

The following table sets forth our consolidated statements of operations data:

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["U.S. dollars in thousands, except share and per share data","","2022","","2021","","2020"],["Net revenues","","$","537,840","","","$","535,031","","","$","494,366"],["Cost of revenues","","114,867","","","114,877","","","106,501"],["Gross profit","","422,973","","","420,154","","","387,865"],["Operating costs and expenses:"],["Research, development and clinical studies","","206,085","","","201,303","","","132,010"],["Sales and marketing","","173,658","","","137,057","","","118,017"],["General and administrative","","132,753","","","126,127","","","107,437"],["Total operating costs and expenses","","512,496","","","464,487","","","357,464"],["Operating income (loss)","","(89,523)","","","(44,333)","","","30,401"],["Financial (expenses) income, net","","7,677","","","(7,742)","","","(12,299)"],["Income (loss) before income tax","","(81,846)","","","(52,075)","","","18,102"],["Income tax","","10,688","","","6,276","","","(1,706)"],["Net income (loss)","","$","(92,534)","","","$","(58,351)","","","$","19,808"],["Basic net income (loss) per ordinary share","","$","(0.88)","","","$","(0.56)","","","$","0.20"],["Weighted average number of ordinary shares used in computing basic net income (loss) per share","","104,660,476","","","103,433,274","","","100,930,866"],["Diluted net income (loss) per ordinary share","","$","(0.88)","","","$","(0.56)","","","$","0.18"],["Weighted average number of ordinary shares used in computing diluted net income (loss) per share","","104,660,476","","","103,433,274","","","108,877,648"]]
[[/GREPCENT_TABLE]]

The following table details the share-based compensation expense included in costs and expenses:

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["U.S. dollars in thousands","","2022","","2021","","2020"],["Cost of revenues","","$","4,690","","","$","3,471","","","$","2,221"],["Research, development and clinical studies","","30,790","","","27,597","","","18,125"],["Sales and marketing","","28,826","","","22,673","","","17,672"],["General and administrative","","42,649","","","41,159","","","37,703"],["Total share-based compensation expense","","$","106,955","","","$","94,900","","","$","75,721"]]
[[/GREPCENT_TABLE]]

Key performance indicators

We believe certain commercial operating statistics are useful to investors in evaluating our commercial business as they help investors evaluate and compare the adoption of our Products from period to period. The number of active patients on therapy is our principal revenue driver. An "active patient" is a patient who is receiving treatment under a commercial prescription order as of the measurement date, including patients who may be on a temporary break from treatment and who plan to resume treatment in less than 60 days. Prescriptions are a leading indicator of

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demand. A "prescription received" is a commercial order for Optune or Optune Lua that is received from a physician certified to treat patients with our Products for a patient not previously on Optune or Optune Lua. Orders to renew or extend treatment are not included in this total.

The following table includes certain commercial operating statistics for and as of the end of the periods presented.

[[GREPCENT_TABLE]]
[["","December 31,"],["Operating statistics","2022","","2021","","2020"],["Active patients at period end"],["North America (1)","2,191","","","2,272","","","2,193"],["EMEA:"],["Germany","467","","","563","","","562"],["Other EMEA","403","","","445","","","391"],["Japan","369","","","307","","","265"],["Total","3,430","","","3,587","","","3,411"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["","2022","","2021","","2020"],["Prescriptions received in period"],["North America (1)","3,823","","","3,781","","","3,871"],["EMEA:"],["Germany","830","","","924","","","910"],["Other EMEA","495","","","521","","","467"],["Japan","381","","","436","","","365"],["Total","5,529","","","5,662","","","5,613"]]
[[/GREPCENT_TABLE]]

(1) North America includes data for the United States and Canada for the second half of 2021 and all of 2022, and the United States only for the first half of 2021 and 2020.

Worldwide, there were 7 active MPM patients on therapy as of December 31, 2022 and 33 MPM prescriptions were received in the year ended December 31, 2022.

Year ended December 31, 2022 compared to year ended December 31, 2021

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["","2022","","2021","","Change","","% Change"],["Net revenues","$","537,840","","","$","535,031","","","$","2,809","","","1","%"]]
[[/GREPCENT_TABLE]]

Net revenues. Net revenues increased by $2.8 million, or 1%, to $537.8 million for the year ended December 31, 2022 from $535.0 million for the year ended December 31, 2021. This was primarily due to an increase in collections from previously denied and appealed claims in the U.S. offset by a reduction in German approval rates as a result of updated coverage criteria, and the impact of foreign exchange rate fluctuations.

In 2022, we recorded $32 million in revenue from the successful appeal of previously denied claims for Medicare fee-for-service beneficiaries billed prior to established coverage. We continue to actively appeal and pursue previously denied claims for beneficiaries billed prior to established coverage, but the cadence and amount of these Medicare payments are impossible to predict. We believe collections from those claims which were most accessible were largely exhausted in 2022 and the remaining outstanding claims will take time to collect. As a result, we expect future net revenue to more closely reflect core drivers of net revenue: number of active patients on therapy, duration of therapy, and net realized price per month.

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["","2022","","2021","","Change","","% Change"],["Cost of revenues","$","114,867","","","$","114,877","","","$","(10)","","","\u2014","%"]]
[[/GREPCENT_TABLE]]

Cost of revenues. Our cost of revenues were $114.9 million for the year ended December 31, 2022, virtually unchanged from $114.9 million for the year ended December 31, 2021. Excluding sales to Zai, cost of revenues per

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active patient per month were $2,481 for the year ended December 31, 2022 compared to $2,474 for the year ended December 31, 2021.

Cost of revenues per active patient is calculated by dividing the cost of revenues for the year less product sales to Zai for the year by the average of the active patients at the end of the each quarter in the current year and the end of the year active patients from the prior year. This annual figure is then divided by twelve to estimate the monthly cost of revenues per active patient. Sales to Zai are deducted because they are made at burdened cost and in anticipation of future royalties from Zai, and Zai patient counts are not included in our active patient population. Product's cost sold to Zai totaled $11.1 million for the year ended December 31, 2022 compared to $11.3 million for the year ended December 31, 2021.

Gross margin was 79% for the year ended December 31, 2022 and 79% for the year ended December 31, 2021. Our gross margins are affected by our ability to achieve efficiencies of scale, the number of active patients and array usage within a given period, product mix, and product modifications. Increased product sales to Zai have the effect of tempering gross margin, as those products are sold at cost.

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["","2022","","2021","","Change","","% Change"],["Operating expenses:"],["Research, development and clinical studies","$","206,085","","","$","201,303","","","$","4,782","","","2","%"],["Sales and marketing","173,658","","","137,057","","","36,601","","","27","%"],["General and administrative","132,753","","","126,127","","","6,626","","","5","%"],["Total operating expenses","$","512,496","","","$","464,487","","","$","48,009","","","10","%"]]
[[/GREPCENT_TABLE]]

Research, development and clinical studies expenses. Research, development and clinical studies expenses increased by $4.8 million, or 2%, to $206.1 million for the year ended December 31, 2022 from $201.3 million for the year ended December 31, 2021. The change is driven by an increase of $4.8 million in product development and regulatory affairs expenses.

We expect growth in our research and development investments to continue into 2023 as we work to advance our pipeline programs and increase acceptance of TTFields across the global oncology community. We balance our investments in research and development with our organizational capacity to effectively execute our strategic initiatives.

Sales and marketing expenses. Sales and marketing expenses increased by $36.6 million, or 27%, to $173.7 million for the year ended December 31, 2022 from $137.1 million for the year ended December 31, 2021. The change primarily was due to increases of $22.7 million, $2.9 million and $2.9 million in marketing, health policy, and sales expenses, respectively, which are intended to increase awareness and acceptance of TTFields in our approved indications and enhance our commercial capabilities in anticipation of potential future approvals in new indications. Additionally, we are investing in market access capabilities in order to evaluate opportunities, identify optimal access pathways, and successfully gain reimbursement in new geographies.

General and administrative expenses. General and administrative expenses increased by $6.6 million, or 5%, to $132.8 million for the year ended December 31, 2022 from $126.1 million for the year ended December 31, 2021. The change primarily was due to increases of $5.0 million and $2.5 million in information technology infrastructure and supply chain optimization, respectively, and offset by a decrease in expenses associated with personnel costs and professional services.

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["","2022","","2021","","Change","","% Change"],["Financial (expenses) income, net","$","7,677","","","$","(7,742)","","","$","15,419","","","(199)","%"]]
[[/GREPCENT_TABLE]]

Financial (expenses) income, net. Financial expenses, net, decreased by $15.4 million, or 199%, to $7.7 million income for the year ended December 31, 2022 from $7.7 million expense for the year ended December 31, 2021. In 2022, financial income was primary driven by interest income and amortization of investment premiums on our cash, cash equivalents and short term investments. In 2021, financial expenses were primarily driven by foreign exchange expenses.

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[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["","2022","","2021","","Change","","% Change"],["Income tax","$","10,688","","","$","6,276","","","$","4,412","","","70","%"]]
[[/GREPCENT_TABLE]]

Income taxes. Income tax expenses increased by $4.4 million, or 70%, resulting in a tax expense of $10.7 million for the year ended December 31, 2022 compared to a tax expense of $6.3 million for the year ended December 31, 2021. The increase was primarily due to an increase in income before taxes in the U.S.

Non-GAAP financial measures

We also measure our performance based upon a non-U.S. GAAP measurement of earnings before interest, taxes, depreciation, amortization and shared-based compensation ("Adjusted EBITDA"). We believe Adjusted EBITDA is useful to investors in evaluating our operating performance because it helps investors evaluate and compare the results of our operations from period to period by removing the impact of earnings attributable to our capital structure, tax rate and material non-cash items, specifically share-based compensation.

We calculate Adjusted EBITDA as operating income before financial expenses and income taxes, net of depreciation, amortization and share-based compensation. The following table reconciles net loss (which is the most directly comparable U.S. GAAP operating performance measure) to Adjusted EBITDA.

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["","","2022","","2021","","2020"],["Net income (loss)","","$","(92,534)","","","$","(58,351)","","","$","19,808"],["Add: Income tax","","10,688","","","6,276","","","(1,706)"],["Add: Financial expenses (income), net","","(7,677)","","","7,742","","","12,299"],["Add: Depreciation and amortization","","10,624","","","10,251","","","9,150"],["EBITDA","","$","(78,899)","","","$","(34,082)","","","$","39,551"],["Add: Share-based compensation","","106,955","","","94,900","","","75,721"],["Adjusted EBITDA","","$","28,056","","","$","60,818","","","$","115,272"]]
[[/GREPCENT_TABLE]]

Adjusted EBITDA decreased by $32.8 million, or 54%, to $28.1 million for the year ended December 31, 2022 from $60.8 million for the year ended December 31, 2021. This decrease was primarily driven by an increase in sales and marketing expenses intended to increase awareness and acceptance of TTFields in our approved indications, enhance our commercial capabilities in anticipation of potential future approvals in new indications, and expand our international footprint.

Liquidity and capital resources

We have incurred significant losses and cumulative negative cash flows from operations with only limited and intermittent operating profits since our founding in 2000. As of December 31, 2022, we had an accumulated deficit of $778.5 million. To date, we primarily have financed our operations through the issuance and sale of equity and the proceeds from long-term loans.

At December 31, 2022, we had $115.3 million in cash and cash equivalents and $854.1 million in short-term investments. At December 31, 2022, our cash, cash equivalents and short-term investments totaled $969.4 million, an increase of $31.7 million compared to $937.7 million at December 31, 2021. The increase was primarily due to net cash generated by operating activities and the exercise of options.

We believe our cash, cash equivalents and short-term investments as of December 31, 2022 are sufficient for our operations for at least the next 12 months based on our existing business plan and our ability to control the timing of significant expense commitments. We expect that our research, development and clinical expenses, sales and marketing expenses and general and administrative expenses will continue to increase over the next several years and may outpace our gross profit. As a result, we may need to raise additional capital to fund our operations.

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The following summary of our cash flows for the periods indicated has been derived from our consolidated financial statements, which are included elsewhere in this Annual Report:

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["U.S. dollars in thousands","","2022","","2021","","2020"],["Net cash provided by (used in) operating activities","","$","30,788","","","$","82,756","","","$","99,148"],["Net cash provided by (used in) investing activities","","(139,957)","","","(144,834)","","","(472,847)"],["Net cash provided by (used in) financing activities","","15,491","","","25,702","","","440,209"],["Effect of exchange rate changes on cash and cash equivalents","","(97)","","","(188)","","","247"],["Net increase (decrease) in cash, cash equivalents and restricted cash","","$","(93,775)","","","$","(36,564)","","","$","66,757"]]
[[/GREPCENT_TABLE]]

Operating activities

Net cash provided by operating activities primarily represents our net income for the periods presented. Adjustments to net income for non-cash items include share-based compensation, depreciation, amortization and asset write-downs. Operating cash flows are also impacted by changes in operating assets and liabilities, principally trade payables, deferred revenues, other payables, prepaid expenses, inventory and trade receivables.

Net cash provided by operating activities was $30.8 million for the year ended December 31, 2022 compared to $82.8 million for the year ended December 31, 2021 a decrease of $ 52.0 million. The decrease in net cash provided by operating activities was primarily driven by a $43.2 million increase in sales, marketing, general and administrative expenses to enhance our capabilities in anticipation of potential future approvals of new indications and entry into potential new markets, and a $4.8 million increase in research and development expenses. In addition, finance income increased by $15.4 million and tax expenses increased by $ 4.4 million, offsetting a $2.8 million increase in gross profit and a $17.0 million change in working capital.

Upcoming use of cash in operations will include payments in the normal course of business of $42.1 million in purchase obligations with certain of our suppliers, primarily for the purchase of Product components along with other commitments to purchase goods or services. These amounts include approximately $30.6 million of commitments with three major suppliers. We make such commitments through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. We also have employment agreements with certain employees that require the funding of a specific level of payments if certain events, such as a change in control or termination without cause, occur. In the course of normal business operations, we also have agreements with contract service providers to assist in the performance of our research and development (including clinical studies) and manufacturing activities. We could also enter into additional collaborative research, contract research, manufacturing and supplier agreements in the future, which may require up-front payments and even long-term commitments of cash.

Investing activities

Our investing activities primarily consist of capital expenditures to purchase property and equipment and field equipment, as well as investments in and redemptions of our short-term investments.

Net cash used in investing activities was $140.0 million for the year ended December 31, 2022 compared to net cash used in investing activities of $144.8 million for the year ended December 31, 2021. The net cash used in investing activities for 2022 was primarily attributable to $21.4 million in property and equipment and the net purchase of $118.6 million in short-term investments. The net cash used in investing activities for 2021 was primary attributable to $24.2 million in property and equipment and the net purchase of $120.7 million in short-term investments.

Financing activities

To date, our primary financing activities have been the sale of equity and the proceeds from long-term loans.

Net cash provided by financing activities was $15.5 million for the year ended December 31, 2022 compared to $25.7 million for the year ended December 31, 2021. The net cash provided by financing activities for 2022 was primarily attributable to $10.3 million in proceeds from the exercise of options and $5.2 million in proceeds from the issuance of shares pursuant to the ESPP. The net cash provided by financing activities for 2021 was primarily attributable to $21.2 million in proceeds from the exercise of options and $4.5 million in proceeds from the issuance of shares pursuant to the ESPP.

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Convertible Notes

On November 5, 2020, we issued $575.0 million aggregate principal amount of 0% Convertible Senior Notes due 2025 (the “Notes”). The net proceeds from the offering were approximately $558.4 million. We intend to use the net proceeds to further advance our clinical and product development programs and to invest in associated pre-commercial and commercial activities, as well as for general corporate purposes.

The Notes are senior unsecured obligations. The Notes do not bear regular interest, and the principal amount of the Notes will not accrete. Special interest, if any, payable in accordance with the terms of the Notes will be payable in cash semi-annually in arrears on May 1 and November 1 of each year, beginning on May 1, 2021. The Notes mature on November 1, 2025, unless earlier repurchased, redeemed or converted.

The Notes are convertible at an initial conversion rate of 5.9439 ordinary shares per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $168.24 per ordinary share. In January 2021, we irrevocably elected to settle all conversions of Notes by a combination of cash and our ordinary shares and that the cash portion per $1,000 principal amount of Notes for all conversion settlements shall be $1,000, Accordingly, from and after the date of the election, upon conversion of any Notes, holders of Notes will receive, with respect to each $1,000 principal amount of Notes converted, cash in an amount up to $1,000 and the balance of the conversion value, if any, in our ordinary shares

The Notes are not redeemable prior to November 6, 2023, except in the event of certain tax law changes. We may redeem for cash all or any portion of the Notes, at our option, on or after November 6, 2023 if the last reported sale price of our ordinary shares has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid special interest, if any, to, but excluding, the redemption date. No sinking fund is provided for the Notes.

Prior to the close of business on the business day immediately preceding August 1, 2025, the Notes are convertible at the option of the holders only upon the satisfaction of certain conditions and during certain periods and if we exercise our right to redeem the Notes as permitted or required by the indenture. On or after August 1, 2025 until the close of the business on the business day immediately preceding the maturity date, holders may convert all or any portion of their Notes at the conversion rate at any time irrespective of the foregoing conditions.

Term loan credit facility

On November 6, 2020, we entered into a new three-year $150.0 million senior secured revolving credit facility with a syndicate of relationship banks (the "2020 Credit Facility"). We may, subject to certain conditions and limitations, increase the revolving credit commitments outstanding under the 2020 Credit Facility or incur new incremental term loans in an aggregate principal amount not to exceed $250.0 million in total.

The commitments under the 2020 Credit Facility are guaranteed by certain of our subsidiaries and secured by a first lien on our and certain of our subsidiaries’ assets. Outstanding loans will bear interest per annum at a sliding scale based on the our secured leverage ratio from 2.75% to 3.25% above the applicable interbank borrowing reference rate for the currency in which the loan is denominated. Additionally, the 2020 Credit Facility contains a fee for the unused revolving credit commitments at a sliding scale based on our secured leverage ratio from 0.35% to 0.45%. The 2020 Credit Facility contains financial covenants requiring maintenance of a minimum fixed charge coverage ratio and specifying a maximum senior secured net leverage ratio, as well as customary events of default which include a change of control.

As of December 31, 2022, we had no outstanding balance borrowed under the 2020 Credit Facility.

On February 17, 2023, we gave irrevocable notice to the administrative agent under the 2020 Credit Facility that we terminated all commitments, effective February 22, 2023. This effectively terminated the 2020 Credit Facility, as our ability to borrow and our obligations to comply with all covenants ended on such date. The liens and guaranties in favor of the lenders are released. There are no early termination fees payable and as of February 22, 2023 we had no outstanding balance borrowed under the 2020 Credit Facility.

2020 Prepayment of 2018 term loan

In 2018, we entered into a Loan and Security Agreement ("2018 Loan Agreement") pursuant to which we borrowed a term loan in the aggregate principal amount of $150 million (the "2018 Credit Facility"). The term loan, which was drawn in full upon execution of the 2018 Loan Agreement, bore interest at 9.0% per annum, payable quarterly in arrears. In 2020, we terminated the 2018 Credit Facility and prepaid the principal amount in full. The prepayment

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included $150 million in principal repayment and $3.0 million in prepayment premium, plus accrued and unpaid interest and expenses payable through the payoff date.