UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
☐
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the fiscal year ended December 31, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☐
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report ________________
Commission file number 001-38367
Sol-Gel Technologies Ltd.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Israel
(Jurisdiction of incorporation or organization)
7 Golda Meir St., Weizmann Science Park, Ness Ziona, 7403650, Israel
(Address of principal executive offices)
Gilad Mamlok, Chief Financial Officer
7 Golda Meir St., Weizmann Science Park, Ness Ziona, 7403650, Israel
Tel: 972-8-9313429; Fax: 972-153-523044444
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class
Ordinary Shares, par value NIS 0.1 per share
Trading Symbol(s)
SLGL
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the
period covered by the annual report: 20,402,800 Ordinary Shares, par value NIS 0.1 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act 1934.
Yes ☐ No ☒
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Emerging growth company ☒
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in
this filing:
U.S. GAAP ☒
International Financing Reporting Standards as issued by the International Accounting Standards Board ☐ Other ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item
the registrant has elected to follow.
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Item 17 ☐ Item 18 ☐
Yes ☐ No ☒
2
TABLE OF CONTENTS
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
OFFER STATISTICS AND EXPECTED TIMETABLE
KEY INFORMATION
INFORMATION ON THE COMPANY
ITEM 4A.
UNRESOLVED STAFF COMMENTS
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 8.
ITEM 9.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
ITEM 15.
ITEM 16.
ITEM 16A.
ITEM 16B.
ITEM 16C.
ITEM 16D.
ITEM 16E.
ITEM 16F.
ITEM 16G.
ITEM 16H.
ITEM 17.
ITEM 18.
ITEM 19.
EXHIBIT INDEX
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
FINANCIAL INFORMATION
THE OFFER AND LISTING
ADDITIONAL INFORMATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
CONTROLS AND PROCEDURES
[RESERVED]
AUDIT COMMITTEE FINANCIAL EXPERT
CODE OF ETHICS
PRINCIPAL ACCOUNTANT FEES AND SERVICES
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.
CORPORATE GOVERNANCE
MINE SAFETY DISCLOSURE
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
EXHIBITS
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6
6
6
50
83
83
94
116
119
119
120
138
139
140
140
140
141
141
141
142
142
142
142
142
143
143
143
143
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INTRODUCTION
All references to “Sol-Gel,” “Sol-Gel Technologies,” “we,” “us,” “our,” “the Company” and similar designations refer to
Sol-Gel Technologies Ltd. The terms “shekels,” “Israeli shekels” and “NIS” refer to New Israeli Shekels, the lawful currency of
the State of Israel, the terms “dollar,” “US$” or “$” refer to U.S. dollars, the lawful currency of the United States. Unless derived
from our financial statements or otherwise indicated, U.S. dollar translations of NIS amounts presented in this annual report are
translated using the rate of NIS 3.456, NIS 3.748 and NIS 3.467 to $1.00, based on the exchange rates reported by the Bank of
Israel on December 31, 2019, December 31, 2018 and December 31, 2017, respectively.
All references to the term “branded product candidates” refers to Twyneo®, a novel, once-daily, non-antibiotic topical
cream that we are developing for the treatment of acne vulgaris, or acne; Epsolay®, a once-daily topical cream containing 5%
encapsulated benzoyl peroxide that we are developing for the treatment for subtype II rosacea; SGT-210, a potential treatment of
palmoplantar keratoderma, or PPK, and non-melanoma skin cancer; tapinarof, an AhR agonist; and roflumilast, a PDE4 inhibitor.
Tapinarof, and roflumilast are each as a potential treatment of psoriasis and other dermatological indications., All references to
the term “product candidates” include both branded product candidate and generic product candidates.
Solely for convenience, the trademarks, service marks, and trade names referred to in this annual report are without the ®
and ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under
applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and trade names. This annual
report contains additional trademarks, service marks and trade names of others, which are the property of their respective owners.
All trademarks, service marks and trade names appearing in this annual report are, to our knowledge, the property of their
respective owners. We do not intend our use or display of other companies’ trademarks, service marks or trade names to imply a
relationship with, or endorsement or sponsorship of us by, any other companies.
This annual report includes statistics and other data relating to markets, market sizes and other industry data pertaining to
our business that we have obtained from industry publications and surveys and other information available to us. Industry
publications and surveys generally state that the information contained therein has been obtained from sources believed to be
reliable. Market data and statistics are inherently predictive and speculative and are not necessarily reflective of actual market
conditions. Such statistics are based on market research, which itself is based on sampling and subjective judgments by both the
researchers and the respondents, including judgments about what types of products and transactions should be included in the
relevant market. In addition, the value of comparisons of statistics for different markets is limited by many factors, including that
(i) the markets are defined differently, (ii) the underlying information was gathered by different methods, and (iii) different
assumptions were applied in compiling the data. Accordingly, the market statistics included in this annual report should be
viewed with caution. We believe that information from these industry publications included in this annual report is reliable.
4
We make forward-looking statements in this annual report that are subject to risks and uncertainties. These forward-
looking statements include information about possible or assumed future results of our business, financial condition, results of
operations, liquidity, plans and objectives. In some cases, you can identify forward-looking statements by terminology such as
“believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “potential,” or the
negative of these terms or other similar expressions. Forward-looking statements are based on information we have when those
statements are made or our management’s good faith belief as of that time with respect to future events, and are subject to risks
and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the
forward-looking statements. Important factors that could cause such differences include, but are not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the adequacy of our financial and other resources, particularly in light of our history of recurring losses and the uncertainty regarding the
adequacy of our liquidity to pursue our complete business objectives;
our ability to complete the development of, and obtain market approval for, our product candidates;
our ability to find suitable co-development, contract manufacturing and marketing partners;
our ability to obtain and maintain regulatory approvals for our product candidates in our target markets and the possibility of adverse regulatory
or legal actions relating to our product candidates even if regulatory approval is obtained;
our ability to commercialize and launch our pharmaceutical product candidates;
our ability to obtain and maintain adequate protection of our intellectual property;
our ability to manufacture our product candidates in commercial quantities, at an adequate quality or at an acceptable cost;
our ability to establish adequate sales, marketing and distribution channels;
acceptance of our product candidates by healthcare professionals and patients;
the possibility that we may face third-party claims of intellectual property infringement;
the timing and results of clinical trials that we may conduct or that our competitors and others may conduct relating to our or their products;
intense competition in our industry, with competitors having substantially greater financial, technological, research and development, regulatory
and clinical, manufacturing, marketing and sales, distribution and personnel resources than we do;
potential product liability claims;
potential adverse federal, state and local government regulation in the United States, Europe or Israel;
the impact of pandemics such as Novel Coronavirus Disease 2019, or COVID-19, on our business and financial condition; and
loss or retirement of key executives and research scientists.
You should review carefully the risks and uncertainties described under the heading “Risk Factors” in this annual report for a
discussion of these and other risks that relate to our business and investing in our ordinary shares. The forward-looking
statements contained in this annual report are expressly qualified in their entirety by this cautionary statement. Except as required
by law, we undertake no obligation to update publicly any forward-looking statements after the date of this annual report to
conform these statements to actual results or to changes in our expectations.
5
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
The following table sets forth our selected historical financial data, which is derived from our audited financial
statements, which have been prepared in accordance with U.S. GAAP. The selected consolidated balance sheet data as of
December 31, 2018 and 2019 and our selected statement of operations data for the years ended December 31, 2017, 2018 and
2019 is derived from our audited consolidated financial statements included elsewhere in this annual report. The selected
financial data as of December 31, 2015, December 31, 2016 and December 31, 2017 and our selected statement of operations
data for the years ended December 31, 2015 and December 31, 2016 have been derived from our audited financial statements not
included in this annual report. Our historical results are not necessarily indicative of the results that should be expected in the
future. You should read this selected financial data in conjunction with, and it is qualified in its entirety by, our historical financial
information and other information provided in this annual report including “Item 5. Operating and Financial Review and
Prospects” and our audited financial statements and related notes appearing elsewhere in this annual report.
Statement of Operations Data:
Collaboration Revenues
Research and development expenses
General and administrative expenses
Total operating loss
Financial expenses (income), net
Loss before income taxes
Income taxes
Loss for the year
Basic and diluted loss per ordinary share*
Weighted average number of ordinary shares outstanding –
basic and diluted*
$
$
$
2015
Year Ended December 31,
2017
(in thousands, except share and per share data)
2018
2016
$
-
7,184
2,463
9,647
13
9,660
$
-
17,023
3,733
20,756
15
20,771
9,660
2.76
$
$
20,771
3.30
$
$
$
174
25,805
6,002
31,633
(65)
31,568
31,568
5.02
$
$
$
129
28,146
5,504
33,521
(1,318)
32,203
32,203
1.80
$
$
2019
22,904
40,578
8,276
25,950
(1,374)
24,576
33
24,609
1.26
3,494,579
3,494,579
6,290,244
17,867,589
19,534,562
* On January 19, 2018, we effected a 1-for-1.8 share split of our ordinary shares by way of an issuance of bonus shares. Unless
otherwise indicated, except for our authorized capital, all information in this annual report relating to the number of our ordinary
shares and loss per ordinary share in this annual report have been adjusted, on a retroactive basis, to reflect this 1-for-1.8 share
split.
6
2015
2016
As of December 31,
2017
(in thousands)
5,024
$
15,315
68,014
(95,261)
(52,699)
$
7,001
10,985
42,322
(63,693)
(31,337)
2018
2019
$
5,325
69,682
5,773
(127,464)
63,909
9,412
61,301
8,836
(152,073)
52,465
Balance Sheet Data:
Cash and cash equivalents
Total Assets
Total liabilities
Accumulated deficit
Total shareholders’ equity (capital deficiency)
B. Capitalization and Indebtedness
Not applicable.
$
$
5,895
8,244
19,762
(42,922)
(11,518)
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
You should carefully consider the risks we describe below, in addition to the other information set forth elsewhere in this
annual report, including our financial statements and the related notes beginning on page F-1, before deciding to invest in our
ordinary shares (the “Ordinary Shares”). The risks and uncertainties described below in this annual report on Form/ 20-F for
the year ended December 31, 2019 are not the only risks facing us. We may face additional risks and uncertainties not currently
known to us or that we currently deem to be immaterial. Any of the risks described below or incorporated by reference in this
Form 20-F, and any such additional risks, could materially adversely affect our business, financial condition or results of
operations. In such case, you may lose all or part of your investment.
Risks Related to Our Business and Industry
We are a clinical stage company and have incurred significant losses since our inception. We expect to incur losses for the
foreseeable future and may never achieve or maintain profitability.
We are a clinical stage pharmaceutical company with a limited operating history. We have incurred net losses since our
formation in 1997. In particular, we incurred net losses of $31.6 million in 2017, $32.2 million in 2018, and $24.6 million in
2019. As of December 31, 2019, we had an accumulated deficit of $152.1 million. Our losses have resulted principally from
expenses incurred in research and development of our product candidates and from general and administrative expenses that we
have incurred while building our business infrastructure. We expect to continue to incur net losses for the foreseeable future as
we continue to invest in research and development and seek to obtain regulatory approval and commercialization of our product
candidates. The extent of our future operating losses and the timing of generating revenues and becoming profitable are highly
uncertain, and we may never achieve or sustain profitability. We anticipate that our expenses will increase substantially as we:
•
•
•
•
seek marketing approval and conduct pre-commercialization and launch activities for Twyneo® and Epsolay®;
conduct Phase I proof of concept clinical studies of SGT-210, and continue the research and development of future branded product candidates;
seek regulatory approvals for any product candidate that successfully completes clinical development;
potentially establish a sales, marketing and distribution infrastructure and commercial manufacturing capabilities to commercialize any product
candidates for which we may obtain regulatory approval;
7
•
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continue the development, bioequivalence and other studies required for abbreviated new drug application, or “ANDA", submissions for our
generic product candidates;
seek to enhance our technology platform;
maintain, expand and protect our intellectual property portfolio;
seek new drug candidates and expand our disease portfolio;
add clinical, scientific, operational, financial and management information systems and personnel, including personnel to support our product
development; and
experience any delays or encounter any issues with any of the above, including but not limited to failed studies, complex results, safety issues
or other regulatory challenges.
We have financed our operations primarily through public offerings in the U.S., private placements of equity securities
and loans from our controlling shareholder. To date, we have devoted a significant portion of our financial resources and efforts
to developing the first generic version of Zovirax® (acyclovir) cream, 5%, developing our product candidates and conducting
pre-clinical studies and our clinical trials for Twyneo®, Epsolay®, ivermectin cream, 1% and 5-fluorouracil cream, 5%. Other
than the first generic version of Zovirax® (acyclovir) cream, 5%, we have not completed development of any of our product
candidates. To become and remain profitable, we must succeed in developing and eventually commercializing product candidates
that generate significant revenue. This will require us to be successful in a range of challenging activities, including completing
pre-clinical studies and clinical trials for our product candidates, discovering and developing additional product candidates,
obtaining regulatory approval for any product candidates that successfully complete clinical trials, establishing manufacturing
and marketing capabilities and ultimately selling any product candidates for which we may obtain regulatory approval. We are
only in the preliminary stages of most of these activities. We may never succeed in these activities and, even if we do, may never
generate revenue that is significant enough to achieve profitability.
Because of the numerous risks and uncertainties associated with pharmaceutical products, we are unable to accurately
predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. If we are required by
the Food and Drug Administration ("FDA") or other regulatory authorities to perform studies in addition to those we currently
anticipate, or if there are any delays in completing our clinical trials, our expenses could increase and revenue could be further
delayed.
Even if we do generate revenue from product sales or product royalties, we may never achieve or sustain profitability on a
quarterly or annual basis. Our failure to sustain profitability would depress the market price of our ordinary shares and could
impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations. A decline in
the market price of our ordinary shares also could cause you to lose all or a part of your investment.
We will need substantial additional funding to meet our financial obligations and to pursue our business objectives. If we are
unable to raise capital when needed, we could be forced to curtail our planned operations and the pursuit of our growth
strategy.
Conducting pre-clinical studies and clinical trials is a time-consuming, expensive and uncertain process that takes years to
complete, and we may never generate the necessary data or results required to obtain regulatory approval and achieve product
sales. We expect to continue to incur significant expenses and operating losses over the next several years as we seek marketing
approval and conduct pre-commercialization and launch activities for Twyneo® and Epsolay®, conduct Phase I proof of concept
clinical studies of SGT-210 and advance our other product candidates. In addition, our product candidates, if approved, may not
achieve commercial success. Substantial revenue, if any, will be derived from sales of products that we do not expect to be
commercially available for a number of years, if at all. If we obtain marketing approval for Twyneo® or Epsolay® or any other
product candidates that we develop, we expect to incur significant commercialization expenses related to product sales,
marketing, distribution and manufacturing. We also expect an increase in our expenses associated with creating additional
infrastructure to support operations as a public company. . We have based this estimate on assumptions that may prove to be
wrong, and we could use our capital resources sooner than we currently expect. Our future capital requirements will depend on
many factors, including:
•
the timing and success for obtaining marketing approval for Twyneo® and Epsolay®;
8
•
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•
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•
the progress and results of our development activities for SGT-210, tapinarof, and roflumilast;
the scope, progress, results and costs of development, laboratory testing and clinical trials for our generic product candidates;
the cost of manufacturing clinical supplies and exhibition batches of our product candidates;
the costs, timing and outcome of regulatory reviews of any of our product candidates;
the costs and timing of future commercialization activities, including manufacturing, marketing, sales and distribution, for any of our product
candidates for which we receive marketing approval;
the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and
defending any intellectual property-related claims by third parties that we are infringing upon their intellectual property rights;
the amount of revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval; and
the extent to which we acquire or invest in businesses, product candidates and technologies, including entering into licensing or collaboration
arrangements for any of our product candidates.
In order to continue our future operations, we will need to raise additional capital until becoming profitable. If we are
unable to raise sufficient additional capital, we could be forced to curtail our planned operations and the pursuit of our growth
strategy.
We are largely dependent on the success of our branded product candidates for the treatment of topical dermatological
conditions.
We have invested a majority of our efforts and financial resources in the research and development of Twyneo® for the
treatment of acne and Epsolay® for the treatment of subtype II rosacea. We are currently investing a majority of our efforts and
resources in the conduct of pre-commercialization and launch activities for Twyneo® and Epsolay®. The success of our business
depends largely on our ability to fund, execute and complete the development of, obtain regulatory approval for and successfully
commercialize our branded product candidates in the United States in a timely manner.
We have not obtained regulatory approval for most of our product candidates in the United States or any other country.
Other than the first generic version of Zovirax® (acyclovir) cream, 5% for which Perrigo, our collaborator, received final
FDA approval in February 2019, we do not currently have any product candidates that have obtained regulatory approval for sale
in the United States or any other country, and we cannot guarantee that our other product candidates will ever obtain such
approvals. Our business is substantially dependent on our ability to complete the development of, obtain regulatory approval for
and successfully commercialize product candidates in a timely manner. We cannot commercialize our product candidates in the
United States without first obtaining regulatory approval to market each product candidate from the FDA. Similarly, we cannot
commercialize product candidates outside of the United States without obtaining regulatory approval from comparable foreign
regulatory authorities.
9
Before obtaining regulatory approvals for the commercial sale of any product candidate for a target indication, we must
demonstrate in pre-clinical studies and well-controlled clinical trials that the product candidate is safe and effective for use for its
target indication and that the related manufacturing facilities, processes and controls are adequate. In the United States, we are
required to submit and obtain the FDA’s approval of a new drug application, or NDA, before marketing our product candidates.
An NDA must include extensive preclinical and clinical data and supporting information to establish the product candidate's
safety and efficacy for each desired indication. We intend to submit NDAs that are subject to the requirements of section 505(b)
(2) of the Federal Food, Drug and Cosmetic Act, or FDCA, which will allow us to rely in part on published scientific literature
and/or the FDA's prior findings of safety and efficacy in its approvals of similar products. The NDA must also include significant
information regarding the chemistry, manufacturing and controls for the product candidate. The FDA will also inspect our
manufacturing facilities to ensure that the facilities can manufacture each product candidate that is the subject of an NDA, in
compliance with current good manufacturing practice, or “cGMP” requirements, and may inspect our clinical trial sites to ensure
that the clinical trials conducted at the inspected site were performed in accordance with good clinical practices, or "GCP", and
our clinical protocols.
Approval to market and distribute drugs that are shown to be equivalent to proprietary drugs previously approved by the
FDA through its NDA process is obtained by submitting an ANDA to the FDA. An ANDA is a comprehensive submission that
contains, among other things, data and information pertaining to the active pharmaceutical ingredient, drug product formulation,
specifications and stability of the generic drug, as well as analytical methods, manufacturing process validation data, and quality
control procedures. Premarket applications for generic drugs are termed abbreviated because they generally do not include pre-
clinical and clinical data to demonstrate safety and effectiveness. Instead, a generic applicant must demonstrate that its product is
bioequivalent to the innovator drug.
Obtaining approval of an NDA or an ANDA is a lengthy, expensive and uncertain process, and approval is never
guaranteed. Upon submission of an NDA or ANDA, the FDA must make an initial determination that the application is
sufficiently complete to accept the submission for filing. We cannot be certain that any submissions will be accepted for filing
and review by the FDA, or ultimately be approved. If the application is not accepted for review or approval, the FDA may require
that we conduct additional clinical trials or pre-clinical studies or take other actions before it will reconsider our application. If
the FDA requires additional studies or data, we would incur increased costs and delays in the marketing approval process, which
may require us to expend more resources than anticipated or that we have available. In addition, the FDA may not consider any
additional information to be complete or sufficient to support approval.
Regulatory authorities outside of the United States also have requirements for approval of drugs for commercial sale with
which we must comply prior to marketing in those countries. Regulatory requirements can vary widely from country to country
and could delay or prevent the introduction of our product candidates. Clinical trials conducted in one country may not be
accepted by regulatory authorities in other countries, and obtaining regulatory approval in one country does not mean that
regulatory approval will be obtained in any other country. However, the failure to obtain regulatory approval in one jurisdiction
could have a negative impact on our ability to obtain approval in a different jurisdiction. Approval processes vary among
countries and can involve additional product candidate testing, development, validation and additional administrative review
periods. Seeking regulatory approval outside of the United States could require additional chemical manufacturing control data,
pre-clinical studies or clinical trials, which could be costly and time consuming. Obtaining regulatory approval outside of the
United States may include all of the risks associated with obtaining FDA approval.
10
Our business will be highly dependent on market perception of us and the safety and quality of our product candidates. Our
business or products could be subject to negative publicity, which could have a material adverse effect on our business.
Market perception of our business is very important, especially market perception of the safety and quality of our product
candidates. If any of our product candidates, if approved, or similar products that other companies distribute, or third-party
products from which our product candidates are derived, are subject to market withdrawal or recall or are proven to be, or are
claimed to be, harmful to consumers, it could have a material adverse effect on our business. Negative publicity associated with
product quality, illness or other adverse effects resulting from, or perceived to result from, our product candidates could have a
material adverse impact on our business.
Additionally, continuing and increasingly sophisticated studies of the proper utilization, safety and efficacy of
pharmaceutical products are being conducted by the industry, government agencies and others which could call into question the
utilization, safety and efficacy of previously marketed products. In some cases, studies have resulted, and may in the future result,
in the discontinuance of product marketing or other costly risk management programs such as the need for a patient registry.
We have a limited operating history in the dermatological prescription drug space which may make it difficult to evaluate the
success of our business to date and to assess our future viability.
We have a limited operating history in the dermatological prescription drug space and have focused much of our efforts,
to date, on the research and development of our branded and generic product candidates, rather than commercialization. As such,
we cannot provide you with any assurances as to when, if ever, we will obtain approvals or generate sufficient revenues to
achieve sustained profitability. Our ability to successfully commercialize our product candidates and become profitable is subject
to a number of challenges, including, among others, that:
•
•
•
•
•
•
•
•
•
•
•
•
•
we may not have adequate financial or other resources;
we may not be able to manufacture our product candidates in commercial quantities, in an adequate quality or at an acceptable cost;
we may not be able to establish adequate sales, marketing and distribution channels;
we may not be able to find suitable co-development, contract manufacturing or marketing partners;
healthcare professionals and patients may not accept our product candidates;
we may not be aware of possible complications from the continued use of our product candidates since we have limited clinical experience with
respect to the actual use of our product candidates;
changes in the market, new alliances between existing market participants and the entrance of new market participants may interfere with our
market penetration efforts;
third-party payors may not agree to reimburse patients for any or all of the purchase price of our product candidates, which may adversely
affect patients’ willingness to purchase our product candidates;
uncertainty as to market demand may result in inefficient pricing of our product candidates;
we may face third-party claims of intellectual property infringement;
we may fail to obtain and maintain regulatory approvals for our product candidates in our target markets or may face adverse regulatory or legal
actions relating to our product candidates even if regulatory approval is obtained;
we are dependent upon the results of ongoing clinical trials relating to our product candidates and the products of our competitors; and
we may become involved in lawsuits pertaining to our clinical trials.
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The occurrence of any one or more of these events may limit our ability to successfully commercialize our product
candidates, which in turn could have a material adverse effect on our business, financial condition and results of operations.
Consequently, there can be no guaranty of the accuracy of any predictions about our future success or viability.
Raising additional capital may cause dilution to our shareholders, restrict our operations or require us to relinquish rights to
our technologies or product candidates.
Until such time, if ever, as we can generate substantial revenue, we may finance our cash needs through a combination of
equity offerings, debt financings and license and collaboration agreements. We do not currently have any committed external
source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your
ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely
affect your rights as an ordinary shareholder. Debt financing and preferred equity financing, if available, may involve agreements
that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital
expenditures or declaring dividends.
If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements
with third parties, we may be required to relinquish valuable rights to our technologies, future revenue streams or product
candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or
debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future
commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and
market ourselves.
Even if we are able to generate revenues from our operations in the future, our revenues and operating income could
fluctuate significantly.
Even if we are able to generate future revenues, our operating income, and results may vary significantly from year-to-
year and quarter-to-quarter. Variations may result from, among other factors:
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the timing of FDA or any other regulatory authority approvals;
the timing of process validation for particular product candidates;
the timing of product launches and market acceptance of such products launched;
changes in the amount we spend to research, develop, acquire, license or promote new product candidates;
the outcome of our research, development and clinical trial programs;
serious or unexpected health or safety concerns related to our product candidates or the branded product candidates we have genericized;
the introduction of new products by others that render our product candidates obsolete or noncompetitive;
the ability to maintain selling prices and gross margins on our product candidates;
the ability to comply with complex governmental regulations applicable to many aspects of our business;
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changes in coverage and reimbursement policies of health plans and other health insurers, including changes to Medicare, Medicaid and similar
government healthcare programs;
increases in the cost of raw materials used to manufacture our product candidates;
manufacturing and supply interruptions, including product rejections or recalls due to failure to comply with manufacturing specifications;
timing of revenue recognition related to our collaboration agreements;
the ability to protect our intellectual property and avoid infringing the intellectual property of others; and
the outcome and cost of possible litigation over patents with third parties.
Our business and operations would suffer in the event of computer system failures, cyber-attacks or deficiencies in our cyber-
security.
Despite the implementation of security measures, our internal computer systems, and those of third parties on which we
rely, are vulnerable to damage from computer viruses, malware, natural disasters, terrorism, war, telecommunication and
electrical failures, cyber-attacks or cyber-intrusions over the Internet, attachments to emails, persons inside our organization, or
persons with access to systems inside our organization. The risk of a security breach or disruption, particularly through cyber-
attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as
the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. If such an
event were to occur and cause interruptions in our operations, it could result in a material disruption of our product development
programs. For example, the loss of clinical trial data from completed or ongoing or planned clinical trials could result in delays in
our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any
disruption or security breach was to result in a loss of or damage to our data or applications, or inappropriate disclosure of
confidential or proprietary information, we could incur material legal claims and liability, and damage to our reputation, and the
further development of our product candidates could be delayed.
We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plan.
We have implemented a business continuity plan to prevent the collapse of critical business processes to a large extent or
to enable the resumption of critical business processes in case a natural disaster, public health emergency, such as the global
pandemic of Novel Coronavirus Disease 2019, or COVID-19, or other serious event occurs. However, depending on the severity
of the situation, it may be difficult or in certain cases impossible for us to continue our business for a significant period of time.
Our contingency plans for disaster recovery and business continuity may prove inadequate in the event of a serious disaster or
similar event and we may incur substantial costs that could have a material adverse effect on our business.
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Risks Related to Development and Clinical Testing of Our Product Candidates
Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies
and clinical trials may not be predictive of future trial results, which could result in development delays or a failure to obtain
marketing approval.
Clinical testing, of both innovative and generic products, and the submission of new drug applications under the Section
505(b)(2) regulatory pathway is expensive, time consuming and has an inherently uncertain outcome. Failure can occur at any
time during the clinical trial process, even with active ingredients that have been previously approved by the FDA as safe and
effective. Favorable results in pre-clinical studies and early clinical trials for one or more of our product candidates may not be
predictive of similar results in future clinical trials for such product candidate. Also, interim results during a clinical trial do not
necessarily predict final results. Product candidates in later stages of clinical trials may fail to show the desired safety and
efficacy traits despite having progressed through pre-clinical studies and initial clinical trials. A number of companies in the
pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving
promising results in early-stage development. Accordingly, the results from the completed pre-clinical studies and clinical trials
for our product candidates may not be predictive of the results we may obtain in later stage trials for such product candidates. Our
clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct
additional clinical trials. Clinical trial results may be inconclusive, or contradicted by other clinical trials, particularly larger
clinical trials. Moreover, clinical data are often susceptible to varying interpretations and analyses, and many companies that
believed their product candidates performed satisfactorily in pre-clinical studies and clinical trials have nonetheless failed to
obtain FDA, or other applicable regulatory agency, approval for their products. Additionally, if one or more of our product
candidates receives marketing approval, and we or others later identify undesirable side effects caused by such products, a
number of potentially significant negative consequences could result, including:
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regulatory authorities may withdraw approvals of such products;
regulatory authorities may require additional warnings on the label;
we may be required to create a medication guide outlining the risks of such side effects for distribution to patients;
we may be required to implement a risk evaluation and mitigation strategy, or “REMS,” which may include a medication guide or patient
package insert, a communication plan to educate healthcare providers of the drug’s risks, or other elements to assure safe use;
we could be sued and held liable for harm caused to patients; and
our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of the particular product
candidate, if approved, and could significantly harm our business, results of operations and prospects. Our future clinical trial
results may not be successful.
We may experience delays in our clinical trials, and we do not know whether planned clinical trials will begin on time,
need to be redesigned, enroll patients on time or be completed on schedule, if at all. Clinical trials can be delayed for a variety of
reasons, including delays related to:
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obtaining regulatory approval to commence a trial;
reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which
can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
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obtaining institutional review board, or IRB, approval at each site;
recruiting suitable patients to participate in a trial;
having patients complete a trial or return for post-treatment follow-up;
clinical sites deviating from FDA regulations, including GCPs, or the study protocol, or dropping out of a trial;
adding new clinical trial sites;
manufacturing sufficient quantities of a product candidate for use in clinical trials; and
damage to clinical supplies of a product candidate caused during storage and/or transportation.
Furthermore, we rely on CROs and clinical trial sites to ensure the proper and timely conduct of our clinical trials and
while we have agreements governing their committed activities, we have limited influence over their actual performance.
We may also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which
such trials are being conducted, by any Data Safety Monitoring Board for such trial, by the FDA or other regulatory authorities.
Such authorities may impose such a suspension or termination due to a number of factors, including failure to conduct the clinical
trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by
the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side
effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack
of adequate funding to continue the clinical trial. If we experience delays in the completion of any clinical trial for our product
candidates or if any clinical trials are terminated, the commercial prospects of our product candidates will be harmed, and our
ability to generate product revenues from any of these product candidates will be delayed.
Moreover, changes in regulatory requirements and guidance or unanticipated events during our clinical trials may occur,
as a result of which we may need to amend clinical trial protocols. Amendments may require us to resubmit our clinical trial
protocols for review and approval, which may adversely affect the cost, timing and successful completion of a clinical trial. If we
experience delays in the completion of, or if we terminate, any of our clinical trials, the commercial prospects for our affected
product candidates would be harmed and our ability to generate product revenue would be delayed, possibly materially.
Any delays in completing our clinical trials will increase our costs, slow down our product candidates’ development and
regulatory review and approval process and jeopardize our ability to commence product sales and generate revenues. Any of
these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that
cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory
approval of our product candidates.
The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming and
inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our product candidates, our
business will be substantially harmed.
The time required to obtain approval by the FDA and comparable foreign authorities is unpredictable but typically takes
many years following the commencement of clinical trials and depends upon numerous factors, including the substantial
discretion of the regulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data
necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among
jurisdictions. It is possible that none of our existing product candidates or any product candidates we may seek to develop in the
future will ever obtain regulatory approval.
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Our product candidates could fail to receive regulatory approval for many reasons, including the following:
the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;
we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a product candidate is safe
and effective for its proposed indication;
the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities
for approval;
we may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;
the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from pre-clinical studies or clinical trials;
the data collected from clinical trials of our product candidates may not be sufficient to support the submission of an NDA or other submission
or to obtain regulatory approval in the United States or elsewhere;
the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers
with which we contract for clinical and commercial supplies; or
the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering
our clinical data insufficient for approval.
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This lengthy approval process as well as the unpredictability of future clinical trial results may result in our failing to
obtain regulatory approval to market our product candidates, which would significantly harm our business, results of operations
and prospects.
In addition, even if we were to obtain approval, regulatory authorities may approve any of our product candidates for
fewer or more limited indications than we request, may not approve the price we intend to charge for our product candidates, may
grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a product candidate with a
label that does not include the labeling claims necessary or desirable for the successful commercialization of that product
candidate. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates.
We have limited experience using the 505(b)(2) regulatory pathway to submit an NDA or any similar drug approval filing
to the FDA, and we cannot be certain that any of our product candidates will receive regulatory approval. If we do not receive
regulatory approvals for our product candidates, we may not be able to continue our operations. Even if we successfully obtain
regulatory approvals to market one or more of our product candidates, our revenue will be dependent, to a significant extent,
upon the size of the markets in the territories for which we gain regulatory approval. If the markets for patients or indications that
we are targeting are not as significant as we estimate, we may not generate significant revenue from sales of such products, if
approved.
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Adverse side effects or other safety risks associated with our product candidates could delay or preclude approval, cause us to
suspend or discontinue clinical trials, abandon product candidates, limit the commercial profile of an approved label, or result
in significant negative consequences following marketing approval, if any.
Undesirable side effects caused by our product candidates could result in the delay, suspension or termination of clinical
trials by us, our collaborators, the FDA or other regulatory authorities for a number of reasons. For example, to date, patients
treated with Twyneo® and Epsolay® have experienced drug-related side effects including moderate local site irritation such as
dryness, erythema, scaling, pruritus, itching, stinging and burning. Results of our clinical trials could reveal a high and
unacceptable severity and prevalence of these or other side effects. In such an event, our clinical trials could be suspended or
terminated, and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny
approval of our product candidates for any or all targeted indications. The drug-related side effects could affect patient
recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. If we elect or are
required to delay, suspend or terminate any clinical trial for any product candidates that we develop, the commercial prospects of
such product candidates will be harmed and our ability to generate product revenues from any of these product candidates will be
delayed or eliminated. Any of these occurrences may harm our business, prospects, financial condition and results of operations
significantly.
We may find it difficult to enroll patients in our clinical trials, and patients could discontinue their participation in our clinical
trials, which could delay or prevent clinical trials for our product candidates.
Identifying and qualifying patients to participate in clinical trials for our product candidates is critical to our success. The
timing of our clinical trials depends on the speed at which we can recruit patients to participate in testing our product candidates.
If patients are unwilling to participate in our clinical trials because of negative publicity from adverse events in the biotechnology
or pharmaceutical industries or for other reasons, including competitive clinical trials for similar patient populations, the timeline
for recruiting patients, conducting clinical trials and obtaining regulatory approval of potential product candidates may be
delayed. These delays could result in increased costs, delays in advancing our product candidates development, delays in testing
the effectiveness of our technology or termination of the clinical trials altogether.
Patient enrollment is a significant factor in the timing of clinical trials. We may not be able to recruit and enroll a
sufficient number of patients, which would impact our ability to complete our clinical trials in a timely manner. Patient
enrollment may be affected by numerous factors, including:
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severity of the disease under investigation;
size and nature of the patient population;
eligibility criteria for the trial;
design of the trial protocol;
perceived risks and benefits of the product candidate under study;
physicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including
any drugs that may be approved for the same indications we are investigating;
proximity to and availability of clinical trial sites for prospective patients;
availability of competing therapies and clinical trials; and
ability to monitor patients adequately during and after treatment.
We face intense competition with regard to patient enrollment in clinical trials from other dermatological companies
which also seek to enroll subjects from the same patient populations. In addition, patients enrolled in our clinical trials may
discontinue their participation at any time during the trial as a result of a number of factors, including withdrawing their consent
or experiencing adverse clinical events, which may or may not be judged related to our product candidates under evaluation. For
example, 104 patients, or 12.12% of patients enrolled in our Twyneo® Phase III clinical trial, did not complete the study
protocol. The most common reasons for subjects not completing the study were the withdrawal of informed consent (41 subjects),
loss to follow-up (36 subjects) and adverse events (16 subjects). The discontinuation of patients in any one of our trials may
cause us to delay or abandon our clinical trial or cause the results from that trial not to be positive or sufficient to support a filing
for regulatory approval of the applicable product candidate.
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There is a substantial risk of product liability claims in our business. We currently do not maintain product liability insurance
and a product liability claim against us would adversely affect our business.
Our business exposes us to significant potential product liability risks that are inherent in the development, manufacturing
and marketing of our product candidates. Product liability claims could delay or prevent completion of our development
programs. If we succeed in commercializing our product candidates, such claims could result in a recall of our product candidates
or a change in the approved indications for which they may be used. While we intend to purchase and maintain product liability
insurance that we believe is adequate for our operations upon commercialization of our product candidates, such coverage may
not be adequate to cover any incident or all incidents. Furthermore, product liability insurance is becoming increasingly
expensive. As a result, we may be unable to maintain sufficient insurance at a reasonable cost to protect us against losses that
could have a material adverse effect on our business. These liabilities could prevent or interfere with our product development
and commercialization efforts.
If the FDA does not conclude that our product candidates for which we intend to seek approval under Section 505(b)(2) of the
Federal Food, Drug, and Cosmetic Act satisfy the requirements of the Section 505(b)(2) regulatory approval pathway, or if the
requirements for such product candidates under Section 505(b)(2) are not as we expect, the approval pathway for those
product candidates will likely take significantly longer, cost significantly more and entail significantly greater complications
and risks than anticipated, and in all cases may not be successful.
We are developing product candidates for which we intend to seek FDA approval through the Section 505(b)(2)
regulatory pathway. The Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman
Amendments, added Section 505(b)(2) to the FDCA. Section 505(b)(2) permits the filing of an NDA where at least some of the
information required for approval comes from studies that were not conducted by or for the applicant and for which the applicant
has not obtained a right of reference. Section 505(b)(2), if applicable to us under the FDCA, would allow an NDA we submit to
the FDA to rely in part on data in the public domain or the FDA’s prior conclusions regarding the safety and effectiveness of
approved drugs, which could expedite the development program for our product candidates by potentially decreasing the amount
of clinical data that we would need to generate in order to obtain FDA approval. If the FDA does not allow us to pursue the
Section 505(b)(2) regulatory pathway as anticipated, we may need to conduct additional clinical trials, provide additional data
and information, and meet additional standards for regulatory approval. If this were to occur, the time and financial resources
required to obtain FDA approval for these product candidates, and complications and risks associated with these product
candidates, would likely substantially increase. Moreover, any inability to pursue the Section 505(b)(2) regulatory pathway may
result in new competitive products reaching the market more quickly than our product candidates, which would likely materially
adversely impact our competitive position and prospects. Even if we are allowed to pursue the Section 505(b)(2) regulatory
pathway, our product candidates may not receive the requisite approvals for commercialization.
In addition, notwithstanding the approval of a number of products by the FDA under Section 505(b)(2) over the last few
years, certain brand-name pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If
the FDA’s interpretation of Section 505(b)(2) is successfully challenged, the FDA may change its 505(b)(2) policies and
practices, which could delay or even prevent the FDA from approving any NDA that we submit under Section 505(b)(2). In
addition, the pharmaceutical industry is highly competitive, and Section 505(b)(2) NDAs are subject to special requirements
designed to protect the patent rights of sponsors of previously approved drugs that are referenced in a Section 505(b)(2) NDA.
These requirements may give rise to patent litigation and mandatory delays in approval of our NDAs for up to 30 months or
longer depending on the outcome of any litigation. It is not uncommon for a manufacturer of an approved product to file a citizen
petition with the FDA seeking to delay approval of, or impose additional approval requirements for, pending competing products.
If successful, such petitions can significantly delay, or even prevent, the approval of the new product. However, even if the FDA
ultimately denies such a petition, the FDA may substantially delay approval while it considers and responds to the petition. In
addition, even if we are able to utilize the Section 505(b)(2) regulatory pathway, there is no guarantee this would ultimately lead
to accelerated product development or earlier approval.
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Even if our branded product candidates or our generic product candidates receive marketing approval, we may continue to
face future developmental and regulatory difficulties. In addition, we will be subject to ongoing obligations and continued
regulatory review.
Even if we complete clinical testing and receive approval of any of our branded or generic product candidates, the FDA
may grant approval contingent on the performance of additional post-approval clinical trials, risk mitigation requirements such as
the implementation of a or REMS, and/or surveillance requirements to monitor the safety or efficacy of the product, which could
negatively impact us by reducing revenues or increasing expenses, and cause the approved product candidate not to be
commercially viable. Absence of long-term safety data may further limit the approved uses of our product candidates, if any.
The FDA also may approve branded product candidates or any of our generic product candidates for a more limited
indication or a narrower patient population than we initially request, or may not approve the labeling that we believe is necessary
or desirable for the successful commercialization of our product candidates. Furthermore, any such approved product will remain
subject to extensive regulatory requirements, including requirements relating to manufacturing, labeling, packaging, adverse
event reporting, storage, advertising, promotion, distribution and recordkeeping. These requirements include registration with the
FDA, listing of our product candidates, payment of annual fees, as well as continued compliance with GCP requirements for any
clinical trials that we conduct post-approval. Application holders must notify the FDA, and depending on the nature of the
change, obtain FDA pre-approval for product manufacturing changes. In addition, manufacturers of drug products and their
facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance
with cGMP requirements.
If we fail to comply with the regulatory requirements of the FDA or previously unknown problems with any approved
commercial products, manufacturers or manufacturing processes are discovered, we could be subject to administrative or
judicially imposed sanctions or other setbacks, including the following:
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the FDA could suspend or impose restrictions on operations, including costly new manufacturing requirements;
the FDA could refuse to approve pending applications or supplements to applications;
the FDA could suspend any ongoing clinical trials;
the FDA could suspend or withdraw marketing approval;
the FDA could seek an injunction or impose civil or criminal penalties or monetary fines;
the FDA could ban or restrict imports and exports;
the FDA could issue warning letters or untitled letters or similar enforcement actions alleging noncompliance with regulatory requirements; or
the FDA or other governmental authorities could take other actions, such as imposition of product seizures or detentions, clinical holds or
terminations, refusals to allow the import or export of products, disgorgement, restitution, or exclusion from federal healthcare programs.
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In addition, if our branded product candidates or any of our other product candidates are approved, our product labeling,
advertising and promotional materials would be subject to regulatory requirements and continuing review by the FDA. The FDA
strictly regulates the promotional claims that may be made about prescription products. In particular, a product may not be
promoted for uses that are not approved by the FDA as reflected in the product’s approved labeling, a practice known as off-label
promotion. If we receive marketing approval for any of our branded product candidates or any of our generic product candidates,
physicians may nevertheless prescribe the products to their patients in a manner that is inconsistent with the approved label. If we
are found to have promoted such off-label uses, we may become subject to significant liability and government fines. The FDA
and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is
found to have improperly promoted off-label uses may be subject to significant sanctions. The federal government has levied
large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from
engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees of permanent injunctions
under which specified promotional conduct is changed or curtailed.
Moreover, the FDA’s policies may change and additional government regulations may be enacted that could prevent, limit
or delay marketing approval, and the sale and promotion of our branded product candidates or any of our other product
candidates, if approved. If we are slow or unable to adapt to changes in existing requirements or the adoption of new
requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we
may have obtained, which would adversely affect our business, prospects and ability to achieve or sustain profitability. In
addition, costs arising out of any regulatory developments could be time-consuming and expensive and could divert management
resources and attention and, consequently, could adversely affect our business operations and financial performance.
We also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or
administrative or executive action, either in the United States or abroad. For example, certain policies of the Trump
administration may impact our business and industry. The Trump administration has taken several executive actions, including
the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise materially delay, the FDA’s
ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of
guidance, and review and approval of marketing applications. If these executive actions impose constraints on the FDA’s ability
to engage in oversight and implementation activities in the normal course, our business may be negatively impacted.
Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could hinder
their ability to hire, retain or deploy key leadership and other personnel, or otherwise prevent new or modified products from
being developed, approved or commercialized in a timely manner or at all, which could negatively impact our business.
The ability of the FDA to review and approve new products can be affected by a variety of factors, including government
budget and funding levels, statutory, regulatory, and policy changes, the FDA’s ability to hire and retain key personnel and accept
the payment of user fees, and other events that may otherwise affect the FDA’s ability to perform routine functions. Average
review times at the agency have fluctuated in recent years as a result. In addition, government funding of other government
agencies that fund research and development activities is subject to the political process, which is inherently fluid and
unpredictable. Disruptions at the FDA and other agencies may also slow the time necessary for new biologics or modifications to
approved biologics to be reviewed and/or approved by necessary government agencies, which would adversely affect our
business. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government
has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and
stop critical activities.
Separately, in response to the global pandemic of COVID-19 on March 10, 2020 the FDA announced its intention to
postpone most foreign inspections of manufacturing facilities and products through April 2020, and regulatory authorities outside
the United States may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic. If a
prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities
from conducting their regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the
FDA or other regulatory authorities to timely review and process our regulatory submissions, which could have a material
adverse effect on our business.
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Even if our branded product candidates or our other product candidates receive regulatory approval, they may fail to achieve
the broad degree of physician adoption and market acceptance necessary for commercial success.
Even if we obtain FDA approvals for our branded product candidates or any of our generic product candidates, the
commercial success of such products will depend significantly on their broad adoption by dermatologists, pediatricians and other
physicians for approved indications and other therapeutic or aesthetic indications that we may seek to pursue if approved.
The degree and rate of physician and patient adoption of our branded product candidates and any of our generic product
candidates, if approved, will depend on a number of factors, including:
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the clinical indications for which the product is approved;
the safety and efficacy of our product as compared to existing therapies for those indications;
the prevalence and severity of adverse side effects;
patient satisfaction with the results and administration of our product and overall treatment experience, including relative convenience, ease of
use and avoidance of, or reduction in, adverse side effects;
patient demand for the treatment of acne and rosacea or other indications;
the cost of treatment in relation to alternative treatments, the extent to which these costs are reimbursed by third-party payors, and patients’
willingness to pay for our product candidates; and
the effectiveness of our sales and marketing efforts, including any head-to-head studies, if conducted, especially the success of any targeted
marketing efforts directed toward dermatologists, pediatricians, other physicians, clinics and any direct-to-consumer marketing efforts we may
initiate.
We expend a significant amount of resources on research and development efforts that may not lead to successful product
candidate introductions or the recovery of our research and development expenditures.
We conduct research and development primarily to enable us to manufacture and market topical dermatological creams
containing drugs in accordance with FDA regulations as well as other regulatory authorities. We spent approximately $25.8
million, $28.1 million and $40.6 million on research and development activities during the years ended December 31, 2017, 2018
and 2019, respectively. We are required to obtain FDA approval before marketing our product candidates in the United States.
The FDA approval process is costly, time consuming and inherently risky.
We cannot be certain that any investment made in developing product candidates will be recovered, even if we are
successful in commercialization. To the extent that we expend significant resources on research and development efforts and are
not able to introduce successful new product candidates as a result of those efforts, we will be unable to recover those
expenditures.
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Our clinical trials for our branded product candidates were not, and will not be, conducted head-to-head with the applicable
leading products of our competitors, and the comparison of our results to those of existing drugs, and the conclusions we have
drawn from such comparisons, may be inaccurate.
Our clinical trials for branded product candidates were not, and will not be, conducted head-to-head with the drugs
considered the applicable standard of care for the relevant indications. This means that none of the patient groups participating in
these trials were, and will not in the future be, treated with the applicable standard of care drugs alongside the groups treated with
our product candidates. Instead, we have compared and plan to continue comparing the results of our clinical trials with historical
data from prior clinical trials conducted by third parties for the applicable standard of care drugs, and which results are presented
in their respective product labels.
Direct comparison generally provides more reliable information about how two or more drugs compare, and reliance on
indirect comparison for evaluating their relative efficacy or other qualities is problematic due to lack of objective or validated
methods to assess trial similarity. For example, the various trials were likely conducted in different countries with different
demographic features and in patients with different baseline conditions and different hygiene standards, among other relevant
asymmetries. Therefore, the conclusions we have drawn from comparing the results of our clinical trials with those published in
the product labels for these current standard of care drugs, including conclusions regarding the relative efficacy and expediency
of our branded product candidates, may be distorted by the inaccurate methodology of the comparison. Moreover, the FDA
generally requires head-to-head studies to make labeling and advertising claims regarding superiority or comparability, and our
failure to collect head-to-head data may limit the types of claims we may make for our product candidates, if approved.
We may be subject to risk as a result of international manufacturing operations.
Certain of our product candidates may be manufactured, warehoused and/or tested at third-party facilities located in the
U.S., Canada, New Zealand, and India, in addition to our facility in Israel, and therefore our operations are subject to risks
inherent in doing business internationally. Such risks include the adverse effects on operations from corruption, war, public health
crises, such as pandemics and epidemics, international terrorism, civil disturbances, political instability, governmental activities,
deprivation of contract and property rights and currency valuation changes. Any of these changes could have a material adverse
effect on our reputation, business, financial condition or results of operations.
Pandemics such as the novel coronavirus (COVID-19) could have an adverse impact on our business and our financial
condition.
In December 2019, COVID-19 was identified in Wuhan, China. This virus continues to spread globally and, as of March
2020, has spread to over 50 countries, including the United States and Israel. Any outbreak of contagious diseases, or other
adverse public health developments, could have a material adverse effect on our business operations. These could include
disruptions or restrictions on our ability to travel, pursue collaborations and other business transactions, oversee the activities of
our third-party manufacturers and suppliers, conduct clinical trials, make shipments of materials, as well as be impacted by the
temporary closure of the facilities of suppliers and clinical trial sites. Any disruption of suppliers, clinical trial sites or access to
patients would likely impact our clinical trial enrollment progress and rates as well as our ability to access capital through the
financial markets. Moreover, the coronavirus outbreak has begun to have indeterminable adverse effects on general commercial
activity and the world economy, and our business and results of operations could be adversely affected to the extent that this
coronavirus or any other epidemic harms the global economy generally. The extent to which the coronavirus impacts our business
will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may
emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.
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If in the future we acquire or in-license technologies or additional product candidates, we may incur various costs, may have
integration difficulties and may experience other risks that could harm our business and results of operations.
In the future, we may acquire or in-license additional product candidates and technologies. Any product candidate or
technologies we in-license or acquire will likely require additional development efforts prior to commercial sale, including
extensive pre-clinical studies, clinical trials, or both, and approval by the FDA or other applicable foreign regulatory authorities,
if any. All product candidates are prone to risks of failure inherent in pharmaceutical product development, including the
possibility that the product candidate, or product developed based on in-licensed technology, will not be shown to be sufficiently
safe and effective for approval by regulatory authorities. If intellectual property related to product candidates or technologies we
in-license or our own know-how is not adequate, we may not be able to commercialize the affected product candidates even after
expending resources on their development. In addition, we may not be able to manufacture economically or successfully
commercialize any product candidate that we develop based on acquired or in-licensed technology that is granted regulatory
approval, and such product candidates may not gain wide acceptance or be competitive in the marketplace. Moreover, integrating
any newly acquired or in-licensed product candidates could be expensive and time-consuming. If we cannot effectively manage
these aspects of our business strategy, our business may not succeed.
The time necessary to develop generic API or drug products may adversely affect whether, and the extent to which, we receive
a return on our capital.
The development process, including drug formulation where applicable, testing, and FDA review and approval for generic
drug products often takes many years. This process requires that we expend considerable capital to pursue activities that do not
yield an immediate or near-term return. Also, because of the significant time necessary to develop a generic product, the actual
market for a generic product at the time it is available for sale may be significantly less than the originally projected market for
the generic product. If this were to occur, our potential return on our investment in developing the generic product, if approved
for marketing by the FDA, would be adversely affected and we may never receive a return on our investment in the generic
product. It is also possible for the manufacturer of the brand-name product for which we are developing a generic drug to obtain
approvals from the FDA to switch the brand-name drug from the prescription market to the over-the-counter, or OTC market. If
this were to occur, we would be prohibited from marketing our generic product other than as an OTC drug, in which case our
revenues could be significantly impacted.
Risks Related to Regulatory Matters
If we do not comply with laws regulating the protection of the environment and health and human safety, our business could
be adversely affected.
Our research and development and manufacturing involve the use of hazardous materials and chemicals and related
equipment. If an accident occurs, we could be held liable for resulting damages, which could be substantial. We are also subject
to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures
and the handling of biohazardous materials. We do not maintain insurance for environmental liability claims that may be asserted
against us. Moreover, additional foreign and local laws and regulations affecting our operations may be adopted in the future. We
may incur substantial costs to comply with such regulations and pay substantial fines or penalties if we violate any of these laws
or regulations.
With respect to environmental, safety and health laws and regulations, we cannot accurately predict the outcome or timing
of future expenditures that we may be required to make in order to comply with such laws as they apply to our operations and
facilities. We are also subject to potential liability for the remediation of contamination associated with both present and past
hazardous waste generation, handling, and disposal activities. We will be periodically subject to environmental compliance
reviews by environmental, safety, and health regulatory agencies. Environmental laws are subject to change and we may become
subject to stricter environmental standards in the future and face larger capital expenditures in order to comply with
environmental laws which could have a material adverse effect on our business.
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Healthcare reform in the United States may harm our future business.
Healthcare costs in the United States have risen significantly over the past decade. In March 2010, the “Patient Protection
and Affordable Care Act,” as amended by the “Health Care and Education Reconciliation Act,” collectively referred to as the
"Affordable Care Act", was signed into law, which, among other things, required most individuals to have health insurance,
established new regulations on health plans, created insurance exchanges and imposed new requirements and changes in
reimbursement or funding for healthcare providers, device manufacturers and pharmaceutical companies. The Affordable Care
Act also included a number of changes which may impact our product candidates, if approved:
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revisions to the Medicaid rebate program by: (a) increasing the rebate percentage for branded drugs to 23.1% of the average manufacturer price,
or AMP, with limited exceptions, (b) increasing the rebate for outpatient generic, multiple source drugs dispensed to 13% of AMP; (c) changing
the definition of AMP; and (d) extending the Medicaid rebate program to Medicaid managed care plans, with limited exceptions;
the imposition of annual fees upon manufacturers or importers of branded prescription drugs, which fees will be in amounts determined by the
Secretary of Treasury based upon market share and other data;
providing a discount on brand-name prescriptions filled in the Medicare Part D coverage gap as a condition for the manufacturers’ outpatient
drugs to be covered under Medicare Part D;
imposing increased penalties for the violation of fraud and abuse laws and funding for anti-fraud activities;
creating a new pathway for approval of biosimilar biological products and granting an exclusivity period of 12 years for branded drug
manufacturers of biological products before biosimilar products can be approved for marketing in the United States; and
expanding the definition of “covered entities” that purchase certain outpatient drugs in the 340B Drug Pricing Program of Section 340B of the
Public Health Service Act.
While the Affordable Care Act may have increased the number of patients who have insurance coverage for our product
candidates, if approved by the FDA, the Affordable Care Act also restructured payments to Medicare managed care plans and
reduced reimbursement to many institutional providers. Accordingly, the change in the Medicaid rebate levels, the additional fees
imposed upon us if we market branded drugs, other compliance obligations, and the reduced reimbursement levels to institutional
providers may result in a loss of revenue and could adversely affect our business. In addition, the Affordable Care Act
contemplates the promulgation of significant future regulatory action which may also further affect our business.
Since its enactment, there have been judicial and Congressional challenges to certain aspects of the Affordable Care Act.
By way of example, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted, which, among other things, removes penalties for
not complying with the Affordable Care Act’s individual mandate to carry health insurance. On December 14, 2018, a U.S.
District Court Judge in the Northern District of Texas, ruled that the individual mandate is a critical and inseverable feature of the
Affordable Care Act, and therefore, because it was repealed as part of the Tax Act, the remaining provisions of the Affordable
Care Act are invalid as well. On December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the District Court's
decision that the individual mandate was unconstitutional but remanded the case back to the District Court to determine whether
the remaining provisions of the Affordable Care Act are invalid as well. It is unclear how these decisions, subsequent appeals, or
other efforts to challenge, repeal or replace the Affordable Care Act will impact the law or and our business or financial
condition.
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Moreover, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. For
example, the Budget Control Act of 2011 resulted in aggregate reductions to Medicare payments to providers of 2% per fiscal
year, which went into effect on April 1, 2013, and will remain in effect through 2025 unless additional Congressional action is
taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further
reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers and increased
the statute of limitations period for the government to recover overpayments to providers from three to five years. Recently there
has also been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products,
which has resulted in several Congressional inquiries and proposed and enacted legislation designed to, among other things, bring
more transparency to product pricing, review the relationship between pricing and manufacturer patient programs and reform
government program reimbursement methodologies. Individual states in the United States have also become increasingly active
in passing legislation and implementing regulations designed to control pharmaceutical product pricing, including price or patient
reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency
measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. We expect that
additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that
federal and state governments will pay for healthcare products and services, which could result in reduced demand for our
product candidates, if approved, or additional pricing pressure.
Risks Related to Commercialization of Our Product Candidates
Our continued growth is dependent on our ability to successfully develop and commercialize new product candidates in a
timely manner.
Our financial results depend upon our ability to introduce and commercialize additional product candidates in a timely
manner. Generally, revenue from new products is highest immediately following launch and then declines over time, as new
competitors enter the market. Furthermore, the greatest revenue is generally experienced by the company that is able to bring its
product to the market first. Our growth is therefore dependent upon our ability to successfully introduce and commercialize new
product candidates.
The FDA and other regulatory authorities may not approve our product applications at all or in a timely fashion for our
product candidates under development. Additionally, we may not successfully complete our development efforts for other
reasons, such as poor results in clinical trials or a lack of funding to complete the required trials. Even if the FDA approves our
product candidates, we may not be able to market them successfully or profitably. Our future results of operations will depend
significantly upon our ability to timely develop, receive FDA approval for, and market new pharmaceutical product candidates or
otherwise develop new product candidates or acquire the rights to other products.
Our product candidates, if approved, will face significant competition and our failure to compete effectively may prevent us
from achieving significant market penetration and expansion.
The facial aesthetic market in general, and the market for acne and rosacea treatments in particular, are highly competitive
and dynamic, and characterized by rapid and substantial technological development and product innovations. These markets are
also characterized by competitors obtaining patents to protect what they consider to be their intellectual property. We anticipate
that Twyneo® and Epsolay®, if approved, will face significant competition from other approved products, including topical
drugs, topical anti-acne drugs such as Acanya, Ziana, Epiduo, Epiduo Forte, Benzaclin, Aczone, Onexton, Differin, Arazlo,
Aklief and Amzeeq, and topical drugs for the treatment of rosacea such as Metrogel, Finacea, Soolantra and Finacea, oral drugs
such as Solodyn, Doryx, Dynacin, Oracea and Minocin. If approved, Twyneo® and Epsolay® may also compete with non-
prescription anti-acne products, as well as unapproved and off-label treatments. In addition, if approved, Twyneo® may compete
with drug products utilizing other technologies that can separate two drug substances, such as dual chamber tubes, dual pouches
or dual sachets. To compete successfully in the facial aesthetic market, we will have to demonstrate that our product is safe and
effective for the respective treatment and has advantages over existing therapies. Competing in the facial aesthetic market could
result in price-cutting, reduced profit margins and loss of market share, any of which would harm our business, financial
condition and results of operations.
Due to less stringent regulatory requirements in certain jurisdictions outside the United States, there are many more acne
products and procedures available for use in those international markets than are approved for use in the United States. There are
also fewer limitations on the claims that our competitors in international markets can make about the effectiveness of their
products and the manner in which they can market them. As a result, we may face more competition in markets outside of the
United States.
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In addition, even if we are able to commercialize our product candidates, we may not be able to price them competitively
with the current standards of care or other competing products for their respective indications or their price may drop
considerably due to factors outside our control. If this happens or the price of materials and the cost to manufacture our product
candidates increases dramatically, our ability to continue to operate our business would be materially harmed and we may be
unable to commercialize our product candidates successfully.
We believe that our principal competitors are Bausch Health, Inc., Galderma S.A., Almirall, LLC, LEO Pharma A/S and
Mylan N.V. These competitors are large and experienced companies that enjoy significant competitive advantages over us, such
as greater financial, research and development, manufacturing, personnel and marketing resources, greater brand recognition, and
more experience and expertise in obtaining marketing approvals from the FDA and foreign regulatory authorities.
In addition to the above listed competitors, some of our product candidates might face internal competition with other
product candidates of ours, for the same markets and patient populations, due to overlap in the required treatment and/or
symptoms. For example, Epsolay® may compete with ivermectin cream, 1%, for treatment of rosacea.
With respect to generic pharmaceutical products, the FDA approval process often results in the FDA granting final
approval to a number of ANDAs for a given product at the time a relevant patent for a corresponding branded product or other
regulatory and/or market exclusivity expires. For example, on December 30, 2016, Actavis Ltd. submitted an ANDA for
ivermectin, 1%, cream, and, as a potential “first applicant,” may qualify for 180-day generic marketing exclusivity. Accordingly,
the FDA may be prohibited from approving any other generic ivermectin, 1%, cream product for 180 days from the date of the
Actavis Ltd. ANDA approval, such that we would not be able to commercialize this product until after Actavis Ltd.’s exclusivity
period expires. Thus, we expect, in accordance with the standard practices in the industry, to face immediate competition when
we introduce a generic product into the market. As competition from other manufacturers intensifies, selling prices and gross
profit margins often decline. Accordingly, the level of market share, revenue and gross profit attributable to a particular generic
product that we develop is generally related to the number of competitors in that product’s market and the timing of that product’s
regulatory approval and launch, in relation to competing approvals and launches. Additionally, ANDA approvals often continue
to be granted for a given product subsequent to the initial launch of the first generic product. These circumstances generally result
in significantly lower prices and reduced margins for generic products compared to brand products. New generic market entrants
generally cause continued price and margin erosion over the generic product life cycle.
In addition to the competition we face from other generic manufacturers, we face competition from brand-name
manufacturers related to our generic product candidates. Branded pharmaceutical companies may sell their branded products as
“authorized generics,” where an approved brand name drug is marketed, either by the brand name drug company or by another
company with the brand company’s permission, as a generic product without the brand name on its label, and potentially sold at a
lower price than the brand name drug. Further, branded pharmaceutical companies may seek to delay FDA approval of our
ANDAs or reduce generic competition by, for example, obtaining new patents on drugs whose original patent protection is about
to expire, filing patent infringement suits that could delay FDA approval of generics, developing new versions of their products
to obtain FDA market exclusivity, filing citizen petitions contesting FDA approvals of generics such as on alleged health and
safety grounds, developing “next generation” versions of products that reduce demand for the generic versions we are
developing, changing product claims and labeling, and seeking approval to market as OTC branded products.
Moreover, competitors may, upon the approval of an NDA, or an NDA supplement, obtain a three-year period of
exclusivity for a particular condition of approval, or change to a marketed product, such as a new formulation for a previously
approved product, if one or more new clinical trials (other than bioavailability or bioequivalence studies) was essential to the
approval of the application and was conducted/sponsored by the applicant. Such exclusivity may prevent the FDA from
approving one or more of our product candidates that are being developed, and for which we would seek the FDA’s approval
under the 505(b)(2) regulatory pathway, if we were to seek approval for the same conditions of approval as that protected by the
three-year period of exclusivity. Recent litigation against the FDA has affirmed the FDA’s interpretation of the scope of three-
year exclusivity as preventing the approval of a 505(b)(2) NDA for the same change to a previously approved drug, regardless of
whether or not the 505(b)(2) applicant relies on the competitor’s product as a listed drug in its 505(b)(2) application. Exclusivity
determinations are highly fact-dependent and are made by the FDA on a case-by-case basis at the end of the review period for a
505(b)(2) NDA. As such, we may not know until very late in the FDA’s review of our 505(b)(2) product candidates whether or
not approval may be delayed because of a competitor’s period of three-year exclusivity.
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Other pharmaceutical companies may develop competing products for acne, rosacea and other indications we are pursuing
and enter the market ahead of us.
Other pharmaceutical companies are engaged in developing, patenting, manufacturing and marketing healthcare products
that compete with those that we are developing. These potential competitors include large and experienced companies that enjoy
significant competitive advantages over us, such as greater financial, research and development, manufacturing, personnel and
marketing resources, greater brand recognition and more experience and expertise in obtaining marketing approvals from the
FDA and foreign regulatory authorities.
Several of these potential competitors are privately-owned companies that are not bound by public disclosure
requirements and closely guard their development plans, marketing strategies and other trade secrets. Publicly-traded
pharmaceutical companies are also able to maintain a certain degree of confidentiality over their pipeline developments and other
sensitive information. As a result, we do not know whether these potential competitors are already developing, or plan to develop
other topical treatments for acne, rosacea or other indications we are pursuing, and we will likely be unable to ascertain whether
such activities are underway in the future. These potential competitors may therefore introduce competing products without our
prior knowledge and without our ability to take preemptive measures in anticipation of their commercial launch.
Furthermore, such potential competitors may enter the market before us, and their products may be designed to
circumvent our granted patents and pending patent applications. They may also challenge, narrow or invalidate our granted
patents or our patent applications, and such patents and patent applications may fail to provide adequate protection for our
product candidates.
We currently have limited marketing capabilities and no sales organization. If we are unable to establish sales and marketing
capabilities on our own or through third parties, we will be unable to successfully commercialize Twyneo®, Epsolay® or any
other of our other product candidates, if approved, or generate product revenues.
We currently have limited marketing capabilities and no sales organization. To commercialize Twyneo®, Epsolay® or
any other of our other product candidates, if approved, in the United States and other jurisdictions we may seek to enter, we must
build our marketing, sales, distribution, managerial and other non-technical capabilities or make arrangements with third parties
to perform these services, and we may not be successful in doing so. For instance, if Twyneo® and Epsolay® receive regulatory
approval from the FDA, we intend to market them in the United States through a specialized internal sales force or a combination
of our internal sales force and distributors, which will be expensive and time-consuming. Alternatively, we may choose to
collaborate with third parties that have direct sales forces and established distribution systems, either to augment our own sales
force and distribution systems or in lieu of our own sales force and distribution systems. If we are unable to enter into such
arrangements on acceptable terms or at all, we may not be able to successfully commercialize Twyneo®, Epsolay® or any of our
other product candidates.
There are significant risks involved in building and managing a sales organization, including our ability to hire, retain and
incentivize qualified individuals, generate sufficient sales leads, provide adequate training to sales and marketing personnel and
effectively manage a geographically dispersed sales and marketing team. Any failure or delay in the development of our internal
sales, marketing and distribution capabilities would adversely impact the commercialization of our product candidates.
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If we are not successful in establishing sufficient sales and marketing capabilities to commercialize Twyneo®, Epsolay®
or any of our other product candidates, either on our own or through collaborations with one or more third parties, our revenues
will suffer and we will incur significant additional losses.
Third-party payor coverage and adequate reimbursement may not be available for our product candidates, if approved, which
could make it difficult for us to sell them profitably.
Sales of our product candidates, if approved, will depend, in part, on the extent to which the costs of our product
candidates will be covered by third-party payors, such as government health programs, private health insurers and managed care
organizations. Third-party payors generally decide which drugs they will cover and establish certain reimbursement levels for
such drugs. In particular, in the United States, private health insurers and other third-party payors often provide reimbursement
for products and services based on the level at which the government (through the Medicare or Medicaid programs) provides
reimbursement for such treatments. Patients who are prescribed treatments for their conditions and providers performing the
prescribed services generally rely on third-party payors to reimburse all or part of the associated healthcare costs. Patients are
unlikely to use our product candidates unless coverage is provided and reimbursement is adequate to cover a significant portion
of the cost of our product candidates. Sales of our product candidates, and any future product candidates, will therefore depend
substantially on the extent to which the costs of our product candidates, and any future product candidates, will be paid by third-
party payors. Additionally, the market for our product candidates, and any future product candidates, will depend significantly on
access to third-party payors’ formularies without prior authorization, step therapy, or other limitations such as approved lists of
treatments for which third-party payors provide coverage and reimbursement. Additionally, coverage and reimbursement for
therapeutic products can differ significantly from payor to payor. One third-party payor’s decision to cover a particular medical
product or service does not ensure that other payors will also provide coverage for the medical product or service, or will provide
coverage at an adequate reimbursement rate. As a result, the coverage determination process will require us to provide scientific
and clinical support for the use of our product candidates to each payor separately and will be a time-consuming process.
Third-party payors are developing increasingly sophisticated methods of controlling healthcare costs and increasingly
challenging the prices charged for medical products and services. Additionally, the containment of healthcare costs has become a
priority of federal and state governments and the prices of drugs have been a focus in this effort. The United States government,
state legislatures and foreign governments have shown significant interest in implementing cost-containment programs, including
price controls and transparency requirements, restrictions on reimbursement and requirements for substitution of generic
products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions
with existing controls and measures, could limit our revenue and operating results. If these third-party payors do not consider our
product candidates to be cost-effective compared to other therapies, they may not cover our product candidates once approved as
a benefit under their plans or, if they do, the level of reimbursement may not be sufficient to allow us to sell our product
candidates on a profitable basis. Decreases in third-party reimbursement for our product candidates once approved or a decision
by a third-party payor to not cover our product candidates could reduce or eliminate utilization of our product candidates and
have an adverse effect on our sales, results of operations and financial condition. In addition, state and federal healthcare reform
measures have been and may be adopted in the future, any of which could limit the amounts that federal and state governments
will pay for healthcare products and services, which could result in reduced demand for our product candidates once approved or
additional pricing pressures.
Outside the United States, sales of any approved products are generally subject to extensive governmental price controls
and other market regulations, and we believe the increasing emphasis on cost-containment initiatives in Europe and other
countries has and will continue to put pressure on the pricing and usage of our products, if any. In many countries, the prices of
medical products are subject to varying price control mechanisms as part of national health systems. Other countries allow
companies to fix their own prices for medical products but monitor and control company profits. Additional foreign price
controls or other changes in pricing regulation could restrict the amount that we are able to charge for our products. Accordingly,
in markets outside the United States, the reimbursement for our products may be reduced compared with the United States and
may be insufficient to generate commercially reasonable revenue and profits.
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Our current and future relationships with investigators, health care professionals, consultants, third-party payors, and
customers will be subject to applicable healthcare regulatory laws, which could expose us to penalties.
Our business operations and current and future arrangements with investigators, healthcare professionals, consultants,
third-party payors and customers, may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations.
These laws may constrain the business or financial arrangements and relationships through which we conduct our operations,
including how we research, market, sell and distribute our product candidates for which we obtain marketing approval. Such laws
include:
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the federal Anti-Kickback Statute prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering,
receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an
individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service, for which payment may be made, in
whole or in part, under a federal healthcare program such as Medicare and Medicaid. A person or entity does not need to have actual
knowledge of the federal Anti-Kickback Statute or specific intent to violate it in order to have committed a violation;
the federal false claims laws, including the civil False Claims Act, impose criminal and civil penalties, including through civil whistleblower or
qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for
payment that are false or fraudulent, knowingly making, using or causing to be made or used, a false record or statement material to a false or
fraudulent claim, or knowingly making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government; in
addition, the government may assert that a claim including items and services resulting from a violation of the federal Anti-Kickback Statute
constitutes a false or fraudulent claim for purposes of the civil False Claims Act;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for, among other things,
knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or making false or fraudulent
statements relating to healthcare matters; similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual
knowledge of the statute or specific intent to violate it in order to have committed a violation;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and its implementing
regulations, also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and
transmission of individually identifiable health information;
the federal Physician Payment Sunshine Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies for which
payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the
government information related to certain payments or other “transfers of value” made to physicians (defined to include doctors, dentists,
optometrists, podiatrists and chiropractors), certain other health care providers beginning in 2022, and teaching hospitals, and requires
applicable manufacturers and group purchasing organizations to report annually to the government ownership and investment interests held by
the physicians described above and their immediate family members and payments or other “transfers of value” to such physician owners.
Covered manufacturers are required to submit reports to the government by the 90th day of each calendar year;
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federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm
consumers;
analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to our business practices, including but not
limited to, research, distribution, sales and marketing arrangements and claims involving healthcare items or services reimbursed by non-
governmental third-party payors, including private insurers; state laws that require pharmaceutical companies to comply with the
pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, or
otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require drug
manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or that require
the reporting of pricing information and marketing expenditures; and state laws governing the privacy and security of health information in
some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating
compliance efforts. For example, the California Consumer Privacy Act, or the CCPA, which went into effect on January 1, 2020, gives
California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing, and receive
detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private
right of action for data breaches that is expected to increase data breach litigation; and
similar healthcare laws and regulations in the European Union and other non-U.S. jurisdictions, including reporting requirements detailing
interactions with and payments to healthcare providers and laws governing the privacy and security of certain protected information, such as the
General Data Protection Regulation, or GDPR, which imposes obligations and restrictions on the collection and use of personal data relating to
individuals located in the EU (including health data) and the United Kingdom until the end of the transition period on 31 December 2020
provided for in the Withdrawal Agreement between the EU and the U.K.
Efforts to ensure that our current and future business arrangements with third parties will comply with applicable
healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our
business practices do not comply with current or future statutes, regulations, agency guidance or case law involving applicable
healthcare laws. If our operations are found to be in violation of any of these or any other health regulatory laws that may apply
to us, we may be subject to significant penalties, including the imposition of significant civil, criminal and administrative
penalties, damages, monetary fines, disgorgement, individual imprisonment, possible exclusion from participation in Medicare,
Medicaid and other federal healthcare programs or similar programs in other countries or jurisdictions, integrity oversight and
reporting obligations to resolve allegations of non-compliance, contractual damages, reputational harm, diminished profits and
future earnings, and curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our
business and our results of operations. Defending against any such actions can be costly, time-consuming and may require
significant financial and personnel resources. Therefore, even if we are successful in defending against any such actions that may
be brought against us, our business may be impaired.
The illegal distribution and sale by third parties of counterfeit versions of our product candidates or of stolen products could
have a negative impact on our reputation and a material adverse effect on our business, results of operations and financial
condition.
Third parties could illegally distribute and sell counterfeit versions of our product candidates, which do not meet the
rigorous manufacturing and testing standards that our product candidates undergo. Counterfeit products are frequently unsafe or
ineffective and can be life-threatening. Counterfeit medicines may contain harmful substances, the wrong dose of the active
pharmaceutical ingredient or no active pharmaceutical ingredient at all. However, to distributors and users, counterfeit products
may be visually indistinguishable from the authentic version.
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Reports of adverse reactions to counterfeit drugs similar to our product candidates or increased levels of counterfeiting
such products could materially affect physician and patient confidence in our authentic product candidates. It is possible that
adverse events caused by unsafe counterfeit products will mistakenly be attributed to our authentic product candidates. In
addition, thefts of our inventory at warehouses, plant or while in-transit, which are not properly stored and which are sold through
unauthorized channels could adversely impact patient safety, our reputation and our business.
Public loss of confidence in the integrity of our pharmaceutical products as a result of counterfeiting or theft could have a
material adverse effect on our business, financial position and results of operations.
Risks Related to Dependence on Third Parties
Any collaborative arrangements that we have or may establish in the future may not be successful or we may otherwise not
realize the anticipated benefits from these collaborations. We do not control third parties with whom we have or may have
collaborative arrangements, and we will rely on them to achieve results which may be significant to us. In addition, any
current or future collaborative arrangements may place the development and commercialization of our product candidates
outside our control, may require us to relinquish important rights or may otherwise be on terms unfavorable to us.
We are currently party to collaborative arrangements with respect to the development, manufacture, study and
commercialization of certain of our product candidates including arrangements with Perrigo and Douglas Pharmaceuticals. Any
current or future potential collaborative arrangements may require us to rely on external consultants, advisors, and experts for
assistance in several key functions, including clinical development, manufacturing, regulatory and intellectual property. We
cannot and will not control these third parties, but we may rely on them to achieve results, which may be significant to us.
Relying upon collaborative arrangements to develop and commercialize our product candidates subjects us to a number of risks,
including:
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•
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•
•
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we may not be able to control the amount and timing of resources that our collaborators may devote to our product candidates;
should a collaborator fail to comply with applicable laws, rules, or regulations when performing services for us, we could be held liable for
such violations;
our current or future collaborators may fail to comply with local or any foreign health authorities’ laws and regulations, and as a result, the
receipt of a site manufacturing, export or import license may be delayed or withheld for an undefined period;
our current or future collaborators may experience financial difficulties or changes in business focus;
our current or future collaborators’ partners may fail to secure adequate commercial supplies of our product candidates upon marketing
approval, if at all;
our current or future collaborators’ partners may have a shortage of qualified personnel;
we may be required to relinquish important rights, such as marketing and distribution rights;
business combinations or significant changes in a collaborator’s business strategy may adversely affect a collaborator’s willingness or ability to
complete its obligations under any arrangement;
under certain circumstances, a collaborator could move forward with a competing product developed either independently or in collaboration
with others, including our competitors;
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our current or future collaborators may utilize our proprietary information in a way that could expose us to competitive harm; and
collaborative arrangements are often terminated or allowed to expire, which could delay the development and may increase the cost of
developing our product candidates.
In addition, if disputes arise between us and our collaborators, it could result in the delay or termination of the
development, manufacturing or commercialization of our product candidates, lead to protracted and costly legal proceedings, or
cause collaborators to act in their own interest, which may not be in our interest. As a result, there can be no assurance that the
collaborative arrangements that we have entered into, or may enter into in the future, will achieve their intended goals.
If any of these scenarios materialize, they could have an adverse effect on our business, financial condition or results of
operations.
We also may have other product candidates where it is desirable or essential to enter into agreements with a collaborator
who has greater financial resources or different expertise than us, but for which we are unable to find an appropriate collaborator
or are unable to do so on favorable terms. If we fail to enter into such collaborative agreements on favorable terms, it could
materially delay or impair our ability to develop and commercialize our product candidates and increase the costs of development
and commercialization of such product candidates.
We currently contract with third-party manufacturers and suppliers for certain compounds and components necessary to
produce our product candidates for clinical trials and expect to continue to do so to support commercial scale production if
any of our product candidates is approved. This increases the risk that if any of our product candidates is approved, we may
not have access to sufficient quantities or such quantities at an acceptable cost, which could delay, prevent or impair our
development or commercialization efforts.
We currently rely on third parties for the manufacture and supply of certain compounds and components necessary to
produce our product candidates for our clinical trials, including API’s such as benzoyl peroxide and tretinoin and other active
ingredients and excipients used in the formulation of our various product candidates, as well as primary and secondary packaging
and labeling materials. We lack the resources and the capability to manufacture any of our product candidates on a clinical or
commercial scale, and we expect to continue to rely on third parties to support our commercial requirements if any of our product
candidates is approved for marketing by the FDA or other foreign regulatory authorities.
The facilities used by our contract manufacturers to manufacture our product candidates must be approved by the FDA
pursuant to inspections that will be conducted after we submit our marketing applications to the FDA. We do not control the
manufacturing process of, and are completely dependent on, our contract manufacturing partners for compliance with the
regulatory requirements, known as current good manufacturing practices, or cGMPs, for manufacture of both active drug
substances and finished drug products. If our contract manufacturers cannot successfully manufacture material that conforms to
our specifications and the strict regulatory requirements of the FDA or others, they will not be able to secure and/or maintain
regulatory approval for their manufacturing facilities. In addition, we have no control over the ability of our contract
manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable
foreign regulatory authority does not approve these facilities for the manufacture of our product candidates or if it withdraws any
such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability
to develop, obtain regulatory approval for or market our product candidates, if approved.
Reliance on third-party manufacturers and suppliers entails a number of risks, including reliance on the third party for
regulatory compliance and quality assurance, the possible breach of the manufacturing or supply agreement by the third party, the
possibility that the supply is inadequate or delayed, the risk that the third party may enter the field and seek to compete and may
no longer be willing to continue supplying, and the possible termination or nonrenewal of the agreement by the third party at a
time that is costly or inconvenient for us. If any of these risks transpire, we may be unable to timely retain an alternate
manufacturer or suppliers on acceptable terms and with sufficient quality standards and production capacity, which may disrupt
and delay our clinical trials or the manufacture and commercial sale of our product candidates, if approved.
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Our failure or the failure of our third-party manufacturers and suppliers to comply with applicable regulations could result
in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals,
license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could
significantly and adversely affect supplies of our product candidates that we may develop. Any failure or refusal to supply or any
interruption in supply of the components for any of our product candidates could delay, prevent or impair our clinical
development or commercialization efforts.
We rely on third parties and consultants to assist us in conducting our clinical trials. If these third parties or consultants do
not successfully carry out their contractual duties or meet expected deadlines, we may be unable to obtain regulatory approval
for or commercialize our product candidates and our business could be substantially harmed.
We do not have the ability to independently perform all aspects of our anticipated pre-clinical studies and clinical trials.
We rely on medical institutions, clinical investigators, contract laboratories, collaborative partners and other third parties to assist
us in conducting our clinical trials and studies for our product candidates. The third parties with whom we contract for execution
of our clinical trials play a significant role in the conduct of these trials and the subsequent collection and analysis of data.
However, these third parties are not employees, and except for contractual duties and obligations, we have limited ability to
control the amount or timing of resources that they devote to our programs.
In addition, the execution of pre-clinical studies and clinical trials, and the subsequent compilation and analysis of the
data produced, require coordination among these various third parties. In order for these functions to be carried out effectively
and efficiently, it is imperative that these parties communicate and coordinate with one another, which may prove difficult to
achieve. Moreover, these third parties may also have relationships with other commercial entities, some of which may compete
with us. Our agreement with these third parties may inevitably enable them to terminate such agreements upon reasonable prior
written notice under certain circumstances.
Although we rely on these third parties to conduct certain aspects of our clinical trials and other studies and clinical trials,
we remain responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal,
regulatory and scientific standards, and our reliance on these third parties does not relieve us of our regulatory responsibilities.
Moreover, the FDA and foreign regulatory authorities require us to comply with GCPs, which are the regulations and standards
for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are
scientifically credible and accurate, and that the trial subjects are adequately informed of the potential risks of participating in
clinical trials. We also rely on our consultants to assist us in the execution, including data collection and analysis of our clinical
trials. If we or any of our third-party contractors fail to comply with applicable GCPs, the clinical data generated in our clinical
trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional
clinical trials before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory
authority, such regulatory authority will determine that any of our clinical trials complies with GCP regulations. In addition, our
clinical trials must be conducted with product produced under cGMP regulations. Our failure to comply with these regulations
may require us to repeat clinical trials, which would delay the regulatory approval process.
If the third parties or consultants that assist us in conducting our clinical trials do not perform their contractual duties or
obligations, experience work stoppages, do not meet expected deadlines, terminate their agreements with us or need to be
replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical
trial protocols, regulatory requirements or GCPs, or for any other reason, we may need to conduct additional clinical trials or
enter into new arrangements with alternative third parties, which could be difficult, costly or impossible, and our clinical trials
may be extended, delayed or terminated or may need to be repeated. If any of the foregoing were to occur, we may not be able to
obtain, or may be delayed in obtaining, regulatory approval for the product candidates being tested in such trials, and will not be
able to, or may be delayed in our efforts to, successfully commercialize these product candidates.
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The manufacture of pharmaceutical products is complex, and manufacturers often encounter difficulties in production. If we
or any of our third-party manufacturers encounter any difficulties, our ability to provide product candidates for clinical trials
or our product candidates to patients, once approved, and the development or commercialization of our product candidates
could be delayed or stopped.
The manufacture of pharmaceutical products is complex and requires significant expertise and capital investment,
including the development of advanced manufacturing techniques and process controls. We and our contract manufacturers must
comply with cGMP requirements. Manufacturers of pharmaceutical products often encounter difficulties in production,
particularly in scaling up and validating initial production and contamination controls. These problems include difficulties with
production costs and yields, quality control, including stability of the product, quality assurance testing, operator error, shortages
of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Furthermore, if
microbial, viral or other contaminations are discovered in our product candidates or in the manufacturing facilities in which our
product candidates are made, such manufacturing facilities may need to be closed for an extended period of time to investigate
and remedy the contamination.
We cannot assure you that any stability or other issues relating to the manufacture of any of our product candidates will
not occur in the future. Additionally, we and our third-party manufacturers may experience manufacturing difficulties due to
resource constraints or as a result of labor disputes or unstable political environments. If we or our third-party manufacturers
were to encounter any of these difficulties, our ability to provide any product candidates to patients in clinical trials and products
to patients, once approved, would be jeopardized. Any delay or interruption in the supply of clinical trial supplies could delay the
initiation or completion of clinical trials, increase the costs associated with maintaining clinical trial programs and, depending
upon the period of delay, require us to commence new clinical trials at additional expense or terminate clinical trials completely.
Any adverse developments affecting clinical or commercial manufacturing of our product candidates may result in shipment
delays, inventory shortages, lot failures, product withdrawals or recalls, or other interruptions in the supply of our product
candidates. We may also have to take inventory write-offs and incur other charges and expenses for products that fail to meet
specifications, undertake costly remediation efforts or seek more costly manufacturing alternatives. Accordingly, failures or
difficulties faced at any level of our supply chain could materially adversely affect our business and delay or impede the
development and commercialization of any of our product candidates and could have a material adverse effect on our business,
prospects, financial condition and results of operations.
Risks Related to Our Intellectual Property
We depend on our intellectual property, and our future success is dependent on our ability to protect our intellectual property
and not infringe on the rights of others.
Our success depends, in part, on our ability to obtain patent protection for our product candidates, maintain the
confidentiality of our trade secrets and know how, operate without infringing on the proprietary rights of others and prevent
others from infringing our proprietary rights. We try to protect our proprietary position by, among other things, filing U.S.,
European, and other patent applications related to our product candidates, inventions and improvements that may be important to
the continuing development of our product candidates. While we generally apply for patents in those countries where we intend
to make, have made, use, or sell patented products, we may not accurately predict all of the countries where patent protection will
ultimately be desirable. If we fail to timely file a patent application in any such country, we may be precluded from doing so at a
later date. In addition, we cannot assure you that:
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any of our future processes or product candidates will be patentable;
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our processes or product candidates will not infringe upon the patents of third parties; or
we will have the resources to defend against charges of patent infringement or other violation or misappropriation of intellectual property by
third parties or to protect our own intellectual property rights against infringement, misappropriation or violation by third parties.
Because the patent position of pharmaceutical companies involves complex legal and factual questions, we cannot predict
the validity and enforceability of patents with certainty. Changes in either the patent laws or in interpretations of patent laws may
diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowable or
enforceable in our patents (including patents owned by or licensed to us). Our issued patents may not provide us with any
competitive advantages, may be held invalid or unenforceable as a result of legal challenges by third parties or could be
circumvented. Our competitors may also independently develop formulations, processes and technologies or products similar to
ours or design around or otherwise circumvent patents issued to, or licensed by, us. Thus, any patents that we own or license from
others may not provide any protection against competitors. Our pending patent applications, those we may file in the future or
those we may license from third parties may not result in patents being issued. If these patents are issued, they may not be of
sufficient scope to provide us with meaningful protection. The degree of future protection to be afforded by our proprietary rights
is uncertain because legal means afford relatively limited protection and may not adequately protect our rights or permit us to
gain or keep our competitive advantage.
Patent rights are territorial; thus, the patent protection we do have will only extend to those countries in which we have
issued patents. Even so, the laws of certain countries do not protect our intellectual property rights to the same extent as do the
laws of the United States and the European Union. Therefore, we cannot assure you that the patents issued, if any, as a result of
our foreign patent applications will have the same scope of coverage as our U.S. patents. Competitors may successfully challenge
our patents, produce similar drugs or products that do not infringe our patents, or produce drugs in countries where we have not
applied for patent protection or that do not respect our patents. Furthermore, it is not possible to know the scope of claims that
will be allowed in published applications and it is also not possible to know which claims of granted patents, if any, will be
deemed enforceable in a court of law.
After the completion of development and registration of our patents, third parties may still act to manufacture and/or
market products in infringement of our patent protected rights, and we may not have adequate resources to enforce our patents.
Any such manufacture and/or market of products in infringement of our patent protected rights is likely to cause us damage and
lead to a reduction in the prices of our product candidates, thereby reducing our anticipated cash flows and profits, if any.
In addition, due to the extensive time needed to develop, test and obtain regulatory approval for our product candidates,
any patents that protect our product candidates may expire early during commercialization. This may reduce or eliminate any
market advantages that such patents may give us. Following patent expiration, we may face increased competition through the
entry of competing products into the market and a subsequent decline in market share and profits.
We have granted, and may in the future grant, to third parties licenses to use our intellectual property. Generally, these
licenses have granted rights to commercialize products outside the pharmaceutical field or to technology we no longer use or to
otherwise use our intellectual property for a limited purpose outside the scope of our business interests. For example, in August
2013 we entered into an assignment agreement with Medicis Pharmaceutical Corporation (“Medicis”), according to which
Medicis assigned to us its entire interest in one of the patents upon which we rely for our product candidate Twyneo® for the
treatment of acne . As part of this assignment agreement, we granted to Medicis a non-exclusive, transferable, sub-licensable,
royalty-free, perpetual, license to practice the inventions claimed under the patent.
However, our business interests may change or our licensees may disagree with the scope of our license grant. In such
cases, such licensing arrangements may result in the development, manufacturing, marketing and sale by our licensees of
products substantially similar to our products, causing us to face increased competition, which could reduce our market share and
significantly harm our business, results of operations and prospects.
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If we are unable to protect the confidentiality of our trade secrets or know-how, such proprietary information may be used by
others to compete against us.
In addition to filing patent applications, we generally try to protect our trade secrets, know-how, technology and other
proprietary information by entering into confidentiality or non-disclosure agreements with parties that have access to it, such as
our development and/or commercialization partners, employees, contractors and consultants. We also enter into agreements that
purport to require the disclosure and assignment to us of the rights to the ideas, developments, discoveries and inventions of our
employees, advisors, research collaborators, contractors and consultants while we employ or engage them. However, we cannot
assure you that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary
information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other
proprietary information because these agreements can be difficult and costly to enforce or may not provide adequate remedies.
Any of these parties may breach the confidentiality agreements and willfully or unintentionally disclose our confidential
information, or our competitors might learn of the information in some other way. The disclosure to, or independent development
by, a competitor of any trade secret, know-how or other technology not protected by a patent could materially adversely affect
any competitive advantage we may have over any such competitor.
To the extent that any of our employees, advisors, research collaborators, contractors or consultants independently
develop, or use independently developed, intellectual property in connection with any of our projects, disputes may arise as to the
proprietary rights to this type of information. If a dispute arises with respect to any proprietary right, enforcement of our rights
can be costly and unpredictable, and a court may determine that the right belongs to a third party.
Legal proceedings or third-party claims of intellectual property infringement and other challenges may require us to spend
substantial time and money and could prevent us from developing or commercializing our product candidates.
The development, manufacture, use, offer for sale, sale or importation of our product candidates may infringe on the
claims of third-party patents or other intellectual property rights. The nature of claims contained in unpublished patent filings
around the world is unknown to us and it is not possible to know which countries patent holders may choose for the extension of
their filings under the Patent Cooperation Treaty, or other mechanisms. Therefore, there is a risk that we could adopt a technology
without knowledge of a pending patent application, which technology would infringe a third-party patent once that patent is
issued. We may also be subject to claims based on the actions of employees and consultants with respect to the usage or
disclosure of intellectual property learned at other employers. The cost to us of any intellectual property litigation or other
infringement proceeding, even if resolved in our favor, could be substantial. Any claims of patent infringement, even those
without merit, could: be expensive and time consuming to defend; cause us to cease making, licensing or using products that
incorporate the challenged intellectual property; require us to redesign, reengineer or rebrand our product candidates, if feasible;
cause us to stop from engaging in normal operations and activities, including developing and marketing product candidates; and
divert management’s attention and resources. Some of our competitors may be able to sustain the costs of such litigation or
proceedings more effectively because of their substantially greater financial resources. Uncertainties resulting from the initiation
and continuation or defense of intellectual property litigation or other proceedings could have a material adverse effect on our
ability to compete in the marketplace. Intellectual property litigation and other proceedings may also absorb significant
management time. Consequently, we are unable to guarantee that we will be able to manufacture, use, offer for sale, sell or
import our product candidates in the event of an infringement action.
In the event of patent infringement claims, or to avoid potential claims, we may choose or be required to seek a license
from a third party and would most likely be required to pay license fees or royalties or both. These licenses may not be available
on acceptable terms, or at all. Even if we were able to obtain a license, the rights may be non-exclusive, which could potentially
limit our competitive advantage. Ultimately, we could be prevented from commercializing a product or be forced to cease some
aspect of our business operations if, as a result of actual or threatened patent infringement or other claims, we are unable to enter
into licenses on acceptable terms. This inability to enter into licenses could harm our business significantly.
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In addition, because of our developmental stage, claims that our product candidates infringe on the patent rights of others
are more likely to be asserted after commencement of commercial sales incorporating our technology.
We may be subject to claims that our employees, consultants, or independent contractors have wrongfully used or disclosed
confidential information of third parties or that our employees have wrongfully used or disclosed alleged trade secrets of their
former employers.
We employ individuals who were previously employed at universities or other biotechnology or pharmaceutical
companies, including our competitors or potential competitors. Although we try to ensure that our employees, consultants, and
independent contractors do not use the proprietary information or know-how of others in their work for us, we may be subject to
claims that we or our employees, consultants, or independent contractors have inadvertently or otherwise used or disclosed
intellectual property, including trade secrets or other proprietary information, of any of our employees’ former employers or other
third parties. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to
paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely impact our
business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a
distraction to management and other employees.
Although we believe that we take reasonable steps to protect our intellectual property, including the use of agreements
relating to the non-disclosure of confidential information to third parties, as well as agreements that purport to require the
disclosure and assignment to us of the rights to the ideas, developments, discoveries and inventions of our employees and
consultants while we employ them, the agreements can be difficult and costly to enforce. Although we seek to obtain these types
of agreements from our contractors, consultants, advisors and research collaborators, to the extent that employees and consultants
utilize or independently develop intellectual property in connection with any of our projects, disputes may arise as to the
intellectual property rights associated with our product candidates. If a dispute arises, a court may determine that the right
belongs to a third party. In addition, enforcement of our rights can be costly and unpredictable. We also rely on trade secrets and
proprietary know-how that we seek to protect in part by confidentiality agreements with our employees, contractors, consultants,
advisors or others. Despite the protective measures we employ, we still face the risk that:
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these agreements may be breached;
these agreements may not provide adequate remedies for the applicable type of breach;
our trade secrets or proprietary know-how will otherwise become known; or
our competitors will independently develop similar technology or proprietary information.
International patent protection is particularly uncertain, and if we are involved in opposition proceedings in foreign
countries, we may have to expend substantial sums and management resources.
Patent law outside the United States may be different than in the United States. Further, the laws of some foreign
countries may not protect our intellectual property rights to the same extent as the laws of the United States, if at all. A failure to
obtain sufficient intellectual property protection in any foreign country could materially and adversely affect our business, results
of operations and future prospects. Moreover, we may participate in opposition proceedings to determine the validity of our
foreign patents or our competitors’ foreign patents, which could result in substantial costs and divert management’s resources and
attention. Additionally, due to uncertainty in patent protection law, we have not filed applications in many countries where
significant markets exist.
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An NDA submitted under Section 505(b)(2) subjects us to the risk that we may be subject to a patent infringement lawsuit that
would delay or prevent the review or approval of our product candidates.
In the United States, we expect to file NDAs for our product candidates for approval under Section 505(b)(2) of the
FDCA. Section 505(b)(2) permits the submission of an NDA where at least some of the information required for approval comes
from studies that were not conducted by, or for, the applicant and on which the applicant has not obtained a right of reference.
The 505(b)(2) application would enable us to reference published literature and/or the FDA’s previous findings of safety and
effectiveness for the branded reference drug. For NDAs submitted under Section 505(b)(2) of the FDCA, the patent certification
and related provisions of the Hatch-Waxman Act apply. In accordance with the Hatch-Waxman Act, such NDAs may be required
to include certifications, known as paragraph IV certifications, that certify that any patents listed in the Patent and Exclusivity
Information Addendum of the FDA’s publication, Approved Drug Products with Therapeutic Equivalence Evaluations,
commonly known as the Orange Book, with respect to any product referenced in the 505(b)(2) application, are invalid,
unenforceable or will not be infringed by the manufacture, use or sale of the product that is the subject of the 505(b)(2) NDA.
Applicants must also notify the holder of the approved NDA for any product referenced in the 505(b)(2) application, along with
all patent owners, regarding submission of a paragraph IV certification with respect to applicable patents listed in the Orange
Book.
Under the Hatch-Waxman Act, the NDA holder and patent owner(s) may file a patent infringement lawsuit after receiving
notice of the paragraph IV certification. Filing of a patent infringement lawsuit against the filer of the 505(b)(2) application
within 45 days of the patent owner’s receipt of notice triggers a one-time, automatic, 30-month stay of the FDA’s ability to
approve the 505(b)(2) NDA, unless patent litigation is resolved in the favor of the paragraph IV filer or the patent expires before
that time. Accordingly, we may invest a significant amount of time and expense in the development of one or more product
candidates only to be subject to significant delay and patent litigation before such product candidates may be commercialized, if
at all. In addition, a 505(b)(2) application will not be approved until any non-patent exclusivity, such as exclusivity for obtaining
approval of a new chemical entity, or NCE, listed in the Orange Book for the referenced product has expired. The FDA may also
require us to perform one or more additional clinical trials or measurements to support the change from the branded reference
drug, which could be time consuming and could substantially delay our achievement of regulatory approvals for such product
candidates. The FDA may also reject our future 505(b)(2) submissions and require us to file such submissions under Section
505(b)(1) of the FDCA, which would require us to provide extensive data to establish safety and effectiveness of the drug for the
proposed use and could cause delay and be considerably more expensive and time consuming. These factors, among others, may
limit our ability to successfully commercialize our product candidates.
Companies that produce branded reference drugs routinely bring litigation against ANDA or 505(b)(2) applicants that
seek regulatory approval to manufacture and market generic and reformulated forms of their branded products. These companies
often allege patent infringement or other violations of intellectual property rights as the basis for filing suit against an ANDA or
505(b)(2) applicant. Likewise, patent holders may bring patent infringement suits against companies that are currently marketing
and selling their approved generic or reformulated products.
Litigation to enforce or defend intellectual property rights is often complex and often involves significant expense and can
delay or prevent introduction or sale of our product candidates. If patents are held to be valid and infringed by our product
candidates in a particular jurisdiction, we would, unless we could obtain a license from the patent holder, be required to cease
selling in that jurisdiction and may need to relinquish or destroy existing stock in that jurisdiction. There may also be situations
where we use our business judgment and decide to market and sell our approved product candidates, notwithstanding the fact that
allegations of patent infringement(s) have not been finally resolved by the courts, which is known as an “at-risk launch.” The risk
involved in doing so can be substantial because the remedies available to the owner of a patent for infringement may include,
among other things, damages measured by the profits lost by the patent owner and not necessarily by the profits earned by the
infringer. In the case of a willful infringement, the definition of which is subjective, such damages may be increased up to three
times. Moreover, because of the discount pricing typically involved with bioequivalent and, to a lesser extent, 505(b)(2),
products, patented branded products generally realize a substantially higher profit margin than bioequivalent and, to a lesser
extent, 505(b)(2), products, resulting in disproportionate damages compared to any profits earned by the infringer. An adverse
decision in patent litigation could have a material adverse effect on our business, financial position and results of operations and
could cause the market value of our ordinary shares to decline.
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Risks Related to Our Operations in Israel
Our headquarters, manufacturing and other significant operations are located in Israel and, therefore, our business and
operations may be adversely affected by political, economic and military conditions in Israel.
Our business and operations will be directly influenced by the political, economic and military conditions affecting Israel
at any given time. A change in the security and political situation in Israel and in the economy could impede the raising of the
funds required to finance our research and development plans and to create joint ventures with third parties and could otherwise
have a material adverse effect on our business, operating results and financial condition. Since the establishment of the State of
Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, including Hezbollah in
Lebanon (and Syria) and Hamas in the Gaza Strip, both of which involved missile strikes in various parts of Israel causing the
disruption of economic activities. Our principal offices are located within the range of rockets that could be fired from Lebanon,
Syria or the Gaza Strip into Israel. In addition, Israel faces many threats from more distant neighbors, in particular, Iran. Parties
with whom we do business have sometimes declined to travel to Israel during periods of heightened unrest or tension, forcing us
to make alternative arrangements when necessary. In addition, the political and security situation in Israel may result in parties
with whom we have agreements involving performance in Israel claiming that they are not obligated to perform their
commitments under those agreements pursuant to force majeure provisions in such agreements. Any hostilities involving Israel or
the interruption or curtailment of trade between Israel and its present trading partners could result in damage to our facilities and
likewise have a material adverse effect on our business, operating results and financial condition.
Several countries, principally in the Middle East, restrict doing business with Israel and Israeli companies, and additional
countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in the region continue or
intensify. Such restrictions may seriously limit our ability to sell our product candidates to customers in those countries. Any
hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or significant
downturns in the economic or financial condition of Israel, could adversely affect our operations and product development, cause
our revenues to decrease and adversely affect the share price of publicly traded companies having operations in Israel, such as us.
Similarly, Israeli corporations are limited in conducting business with entities from several countries.
Our commercial insurance does not cover losses that may occur as a result of an event associated with the security
situation in the Middle East. Although the Israeli government is currently committed to covering the reinstatement value of direct
damages that are caused by terrorist attacks or acts of war, there can be no assurance that this government coverage will be
maintained, or if maintained, will be sufficient to compensate us fully for damages incurred. Any losses or damages incurred by
us could have a material adverse effect on our business, financial condition and results of operations.
Exchange rate fluctuations between the U.S. dollar, the New Israeli Shekel and other foreign currencies, may negatively
affect our future revenues.
In the future, we expect that a substantial portion of our revenues will be generated in U.S. dollars, Euros and other
foreign currencies, although we currently incur a significant portion of our expenses in currencies other than U.S. dollars, and
mainly in NIS. Our financial records are maintained, and will be maintained, in U.S. dollars, which is our functional currency. As
a result, our financial results may be affected by fluctuations in the exchange rates of currencies in the countries in which our
prospective product candidates may be sold.
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Our operations may be affected by negative labor conditions in Israel.
Strikes and work-stoppages occur relatively frequently in Israel. If Israeli trade unions threaten additional strikes or work-
stoppages and such strikes or work-stoppages occur, those may, if prolonged, have a material adverse effect on the Israeli
economy and on our business, including our ability to deliver products to our customers and to receive raw materials from our
suppliers in a timely manner.
Our operations could be disrupted as a result of the obligation of our personnel to perform military service.
Substantially all of our executive officers and key employees reside in Israel and although most of them are no longer
required to perform reserve duty, some may be required to perform annual military reserve duty and may be called for active duty
under emergency circumstances at any time. Our operations could be disrupted by the absence for a significant period of time of
one or more of these officers or key employees due to military service. Any such disruption could adversely affect our business,
results of operations and financial condition.
The termination or reduction of tax and other incentives that the Israeli Government provides to domestic companies may
increase the costs involved in operating a company in Israel.
The Israeli government currently provides tax and capital investment incentives to domestic companies, as well as grant
and loan programs relating to research and development and marketing and export activities. In recent years, the Israeli
Government has reduced the benefits available under these programs and the Israeli Governmental authorities have indicated that
the government may in the future further reduce or eliminate the benefits of those programs. We may take advantage of these
benefits and programs in the future; however, there is no assurance that such benefits and programs would continue to be
available in the future to us. If such benefits and programs were terminated or further reduced, it could have an adverse effect on
our business, operating results and financial condition.
The Israeli government grants that we have received require us to meet several conditions and may restrict our ability to
manufacture some of our product candidates and transfer relevant know-how outside of Israel and require us to satisfy
specified conditions.
We have received royalty-bearing grants from the government of Israel through the National Authority for Technological
Innovation, or the Israel Innovation Authority, known as the “IIA” (formerly known as the Office of the Chief Scientist of the
Ministry of Economy and Industry, or the OCS), for the financing of a portion of our research and development expenditures in
Israel. These IIA grants relate to a peripheral line of product candidates which forms a negligible part of our activities. We are
required to pay the IIA royalties from the revenues generated from the sale of products (and related services) or services
developed (in all or in part) according to, or as a result of, a research and development program funded by the IIA (at rates which
are determined under the Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-
1984, or the Innovation Law, and related rules and regulations), up to the aggregate amount of the total grants received by the
IIA, plus annual interest at an annual rate based on LIBOR. When know-how is developed using IIA grants, the Innovation Law,
the IIA’s rules and guidelines as well as the terms of these grants, restrict our ability to manufacture product candidates and
transfer know-how developed as a result of the IIA’s funded R&D outside of Israel. Transfer of the IIA funded know-how outside
of Israel where the transferring company remains an operating Israeli entity or where the transferring company ceases to exist as
an Israeli entity, requires pre-approval by the IIA, which may, at its sole discretion, grant such approval and impose certain
conditions, including payment of a redemption fee calculated according to the formulas provided in the IIA’s rules and guidelines,
or Redemption Fee, which takes into account the consideration for such know-how paid to the transferring company in the
transaction in which the know-how is transferred. The IIA’s rules and guidelines establish a maximum payment of the
Redemption Fee under the formulas provided in the IIA’s rules and guidelines and differentiates between certain situations, as
further detailed in such rules and guidelines (while in any event the Redemption Fee will not exceed six times the grants
received). In addition, the product candidates may be manufactured outside of Israel by us or by another entity only if prior
approval is received from the IIA (such approval is not required for the transfer of less than 10% of the manufacturing capacity in
the aggregate). In addition to the obligation to receive prior approval to manufacture outside Israel, in general, a company that
transfers manufacturing rights abroad will be required to pay royalties at an accelerated rate and will be required to pay increased
royalties, as defined under the IIA’s rules and guidelines. The total amount of the increased royalties to be repaid to the IIA shall
not exceed, in the aggregate, 300% of the amount of the grant received (dollar linked), plus interest at annual rate based on
LIBOR, depending on the manufacturing volume that is performed outside Israel less royalties already paid to the IIA.
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A company also has the option of declaring in its IIA grant application its intention to exercise a portion of the
manufacturing capacity abroad, thus avoiding the need to obtain additional approval following the receipt of the grant and
avoiding the need to pay increased royalties to the IIA.
Recently, the IIA has published new rules and guidelines with respect to the grant to a foreign entity of the right to use
know-how that was developed using the IIA’s grants, or Funded Know-How. According to these rules, the grant to a foreign
entity of a right to use the Funded Know-How (which does not entirely prevent the IIA funded company from using the Funded
Know-How) is subject to receipt of the IIA’s prior approval. This approval is subject to payment to the IIA in accordance with the
formulas stipulated in these rules.
On August 2018, the IIA updated the abovementioned rules and established a new mechanism with respect to the grant of
a license by a company (which is part of a multinational corporation) that received grants from the IIA to its group entities to use
its funded Know-How. Such license is subject to the IIA's prior approval and to the payment of 5% royalties from the income
deriving from such license. Such mechanism includes certain restrictions which must be met in order to be able to enjoy such
lower royalty payment.
Subject to prior consent of the IIA, we may transfer Funded Know-How to another Israeli company, provided that the
acquiring company assumes all of our responsibilities toward the IIA. In addition, such transfer will not be subject to the payment
of the Redemption Fee, but there will be an obligation to pay royalties to the IIA from the income of such sale transaction as part
of the royalty payment obligation.
The restrictions under the IIA’s rules and guidelines continue to apply even after payment of the full amount of royalties
payable pursuant to the grants. In addition, the government of the State of Israel may from time to time audit sales of products
which it claims incorporate Funded Know-How and this may lead to additional royalties being payable on additional product
candidates. Following an audit conducted by the IIA, the IIA confirmed to us that products based on encapsulation technology of
solid material are exempt from royalty payment obligations to the IIA. Our product candidates Twyneo® and Epsolay® fall
within the category of products based on encapsulation technology of solid material. However, there can be no guarantee that the
IIA will not in the future attempt to claim royalties with respect to these products, or that future products will not be subject to
royalties.
These restrictions may impair our ability to enter into agreements for Funded Know-How product candidates or
technologies without the approval of the IIA. We cannot be certain that any approval of the IIA will be obtained on terms that are
acceptable to us, or at all. Furthermore, in the event that we undertake a transaction involving the transfer to a non-Israeli entity
of Funded Know-How pursuant to a merger or similar transaction, or in the event we undertake a transaction involving the
licensing of Funded Know-How, the consideration available to our shareholders may be reduced by the amounts we are required
to pay to the IIA. Any approval, if given, will generally be subject to additional financial obligations. Failure to comply with the
requirements under the IIA’s rules and guidelines and the Innovation Law may subject us to financial sanctions, to mandatory
repayment of grants received by us (together with interest and penalties), as well as expose us to criminal proceedings.
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In August 2015, an amendment to the Innovation Law was enacted, or Amendment No. 7, which came into effect on
January 1, 2016. Since Amendment No. 7 has entered into force, the IIA was appointed to act as the entity which is responsible
for the activity which was previously under the OCS’ responsibility. The IIA was granted wide freedom of action, and among
other things, the authority to amend the requirements and restrictions which were specified in the Innovation Law before
Amendment No. 7 became effective with respect to the ownership of Funded Know-How (including with respect to the
restrictions on transfer of the Funded Know-How and manufacturing activities outside of Israel) as well as with respect to royalty
payment obligations which apply to companies that received grants from the IIA. Although the IIA recently published rules,
which for the most part adopted the principal provisions and restrictions specified in the Innovation Law prior to the effectiveness
of Amendment No. 7, as of the date of this annual report, we are unable to assess the effect on our business of any future rules
which may be published by the IIA. See “Item 4. Information on the Company – B. Business Overview — Government
Regulation — IIA.”
Enforcing a U.S. judgment against us and our current executive officers and directors, or asserting U.S. securities law claims
in Israel, may be difficult.
We are incorporated in Israel. All of our current executive officers and directors reside in Israel (other than two of our
directors and one of our executive officers who reside in the United States) and most of our assets reside outside of the United
States. Therefore, a judgment obtained against us or any of these persons in the United States, including one based on the civil
liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by an
Israeli court. It may also be difficult to effect service of process on these persons in the United States or to assert U.S. securities
law claims in original actions instituted in Israel.
Even if an Israeli court agrees to hear such a claim, it may determine that Israeli, and not U.S., law is applicable to the
claim. Under Israeli law, if U.S. law is found to be applicable to such a claim, the content of applicable U.S. law must be proved
as a fact, which can be a time-consuming and costly process, and certain matters of procedure would be governed by Israeli law.
There is little binding case law in Israel addressing these matters.
Provisions of our amended and restated articles of association and Israeli law and tax considerations may delay, prevent or
make difficult an acquisition of us, which could prevent a change of control and negatively affect the price of our ordinary
shares.
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds,
requires special approvals for certain transactions involving directors, officers or significant shareholders and regulates other
matters that may be relevant to these types of transactions. These provisions of Israeli law may delay, prevent or make difficult an
acquisition of us, which could prevent a change of control and therefore depress the price of our ordinary shares.
Our amended and restated articles of association provide that our directors (other than external directors) are elected on a
staggered basis, such that a potential acquirer cannot readily replace our entire board of directors at a single annual general
shareholder meeting.
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders,
especially for those shareholders whose country of residence does not have a tax treaty with Israel which exempts such
shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S.
tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent
on the fulfillment of a number of conditions, including, in some cases, a holding period of two years from the date of the
transaction during which sales and dispositions of shares of the participating companies are subject to certain restrictions.
Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax
becomes payable even if no disposition of the shares has occurred.
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We may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which
could result in litigation and adversely affect our business.
We have entered into assignment of invention agreements with our employees pursuant to which such individuals agree to
assign to us all rights to any inventions created during and as a result of their employment or engagement with us. A significant
portion of our intellectual property has been developed by our employees in the course of their employment for us. Under the
Israeli Patents Law, 5727-1967, or the Patents Law, inventions conceived by an employee during the scope of his or her
employment with a company and as a result thereof are regarded as “service inventions,” which belong to the employer, absent a
specific agreement between the employee and employer giving the employee service invention rights. The Patents Law also
provides that if there is no agreement between an employer and an employee with respect to the employee’s right to receive
compensation for such “service inventions,” the Israeli Compensation and Royalties Committee, or the Committee, a body
constituted under the Patents Law, shall determine whether the employee is entitled to remuneration for service inventions
developed by such employee and the scope and conditions for such remuneration. Although our employees have agreed to assign
to us service invention rights and have waived their right to receive remuneration for their service inventions, as a result of
uncertainty under Israeli law with respect to the efficacy of waivers of service invention rights, we may face claims demanding
remuneration in consideration for assigned inventions. As a consequence of such claims, we could be required to pay additional
remuneration or royalties to our current and/or former employees, or be forced to litigate such claims, which could negatively
affect our business.
The government tax benefits that we currently are entitled to receive require us to meet several conditions and may be
terminated or reduced in the future.
Some of our operations in Israel may entitle us to certain tax benefits under the Law for the Encouragement of Capital
Investments, 5719-1959, or the Investment Law, once we begin to produce revenues. If we do not meet the requirements for
maintaining these benefits, they may be reduced or cancelled and the relevant operations would be subject to Israeli corporate tax
at the standard rate, which is set at 23% in 2018 and thereafter. In addition to being subject to the standard corporate tax rate, we
could be required to refund any tax benefits that we have already received, plus interest and penalties thereon. Even if we
continue to meet the relevant requirements, the tax benefits that our current “Benefited Enterprise” is entitled to may not be
continued in the future at their current levels or at all. If these tax benefits were reduced or eliminated, the amount of taxes that
we pay would likely increase, as all of our operations would consequently be subject to corporate tax at the standard rate, which
could adversely affect our results of operations. Additionally, if we increase our activities outside of Israel, for example, by way
of acquisitions, our increased activities may not be eligible for inclusion in Israeli tax benefits programs. See “Item 10.
Additional Information — Israeli Tax Considerations and Government Programs — Tax Benefits Under the 2011 Amendment”
for additional information concerning these tax benefits.
Your rights and responsibilities as a shareholder will be governed by Israeli law, which differs in some material respects from
the rights and responsibilities of shareholders of U.S. companies.
The rights and responsibilities of the holders of our ordinary shares are governed by our amended and restated articles of
association and by Israeli law. These rights and responsibilities differ in some material respects from the rights and
responsibilities of shareholders in U.S. corporations. For example, a shareholder of an Israeli company has a duty to act in good
faith and in a customary manner in exercising its rights and performing its obligations towards the company and other
shareholders, and to refrain from abusing its power in the company, including, among other things, voting at a general meeting of
shareholders on matters such as amendments to a company’s articles of association, increases in a company’s authorized share
capital, mergers and acquisitions and related party transactions requiring shareholder approval. In addition, a shareholder who is
aware that it possesses the power to determine the outcome of a shareholder vote or to appoint or prevent the appointment of a
director or executive officer in the company has a duty of fairness toward the company. There is limited case law available to
assist us in understanding the nature of these duties or the implications of these provisions. These provisions may be interpreted
to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of
U.S. corporations.
Risks Related to Employee Matters
If we are not able to retain our key management, or attract and retain qualified scientific, technical and business personnel,
our ability to implement our business plan may be adversely affected.
Our success largely depends on the skill, experience and effort of our senior management. The loss of the service of any
of these persons, including the chairman of our board of directors, Mr. Moshe Arkin, and our chief executive officer, Dr. Alon
Seri-Levy, would likely result in a significant loss in the knowledge and experience that we possess and could significantly delay
or prevent successful product development and other business objectives. There is intense competition from numerous
pharmaceutical and biotechnology companies, universities, governmental entities and other research institutions, seeking to
employ qualified individuals in the technical fields in which we operate, and we may not be able to attract and retain the qualified
personnel necessary for the successful development and commercialization of our product candidates.
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Under applicable employment laws, we may not be able to enforce covenants not to compete.
Our employment agreements generally include covenants not to compete. These agreements prohibit our employees, if
they cease working for us, from competing directly with us or working for our competitors for a limited period. We may be
unable to enforce these agreements under the laws of the jurisdictions in which our employees work. For example, Israeli courts
have required employers seeking to enforce covenants not to compete to demonstrate that the competitive activities of a former
employee will harm one of a limited number of material interests of the employer, such as the secrecy of a company’s
confidential commercial information or the protection of its intellectual property. If we cannot demonstrate that such an interest
will be harmed, we may be unable to prevent our competitors from benefiting from the expertise of our former employees and
our competitiveness may be diminished.
Risks Related to Our Ordinary Shares
The price of our ordinary shares may be volatile and may fluctuate due to factors beyond our control.
The share price of publicly traded emerging biopharmaceutical and drug discovery and development companies has been
highly volatile and is likely to remain highly volatile in the future. The market price of our ordinary shares may fluctuate
significantly due to a variety of factors, including:
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positive or negative results of testing and clinical trials by us, strategic partners and competitors;
delays in entering into strategic relationships with respect to development and/or commercialization of our product candidates or entry into
strategic relationships on terms that are not deemed to be favorable to us;
technological innovations or commercial product introductions by us or competitors;
changes in government regulations;
developments concerning proprietary rights, including patents and litigation matters;
public concern relating to the commercial value or safety of any of our product candidates;
financing or other corporate transactions;
publication of research reports or comments by securities or industry analysts;
general market conditions in the pharmaceutical industry or in the economy as a whole; or
other events and factors, many of which are beyond our control.
These and other market and industry factors may cause the market price and demand for our ordinary shares to fluctuate
substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their
ordinary shares and may otherwise negatively affect the liquidity of our ordinary shares. In addition, the stock market in general,
and biopharmaceutical companies in particular, have experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of these companies.
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The controlling share ownership position of Arkin Dermatology will limit your ability to elect the members of our board of
directors, may adversely affect our share price and will result in our non-affiliated investors having very limited, if any,
influence on corporate actions.
Arkin Dermatology is currently our controlling shareholder. As of March 18, 2020, Arkin Dermatology beneficially
owned approximately 60.51% of the voting power of our outstanding ordinary shares. Therefore, Arkin Dermatology has the
ability to substantially influence us and exert significant control through this ownership position. For example, Arkin
Dermatology is able to control elections of directors, amendments of our organizational documents, and approval of any merger,
amalgamation, sale of assets or other major corporate transaction. Arkin Dermatology’s interests may not always coincide with
our corporate interests or the interests of other shareholders, and it may exercise its voting and other rights in a manner with
which you may not agree or that may not be in the best interests of our other shareholders. So long as it continues to own a
significant amount of our equity, Arkin Dermatology will continue to be able to strongly influence and significantly control our
decisions.
We are a “controlled company” within the meaning of Nasdaq listing standards and, as a result, will qualify for, and intend to
rely on, exemptions from certain corporate governance requirements.
As a result of the number of shares owned by Arkin Dermatology, we are a “controlled company” under the Nasdaq
corporate governance rules. A “controlled company” is a company of which more than 50% of the voting power is held by an
individual, group or another company. Pursuant to the “controlled company” exemption, we are not required to, and intend to not
comply with the requirements that: (1) a majority of our board of directors consist of independent directors and (2) we have a
nominating committee composed entirely of independent directors with a written charter addressing such committee’s purpose
and responsibilities. See “Item 16G. Corporate Governance—Controlled Company.” Accordingly, you do not have the same
protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the Nasdaq
Global Market.
The market price of our ordinary shares could be negatively affected by future sales of our ordinary shares.
As of March 18, 2020, there are 22,499,155 ordinary shares outstanding. Future sales by us or our shareholders of a
substantial number of our ordinary shares in the public market, or the perception that these sales might occur, could cause the
market price of our ordinary shares to decline or could impair our ability to raise capital through a future sale of, or pay for
acquisitions using, our equity securities. Of our issued and outstanding shares, all of the ordinary shares listed for trading are
freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act of
1933, as amended, or the Securities Act.
In addition, we have filed a registration statement on Form S-8 with the Securities and Exchange Commission, or the
SEC, covering all of the ordinary shares issuable under our 2014 Share Incentive Plan, and we intend to filed one or more
registration statements on Form S-8 covering all of the ordinary shares issuable under any other equity incentive plans that we
may adopt, and such shares will be freely transferable, except for any shares held by “affiliates,” as such term is defined in Rule
144 under the Securities Act. The market price of our ordinary shares may drop significantly when the restrictions on resale by
our existing shareholders lapse and these shareholders are able to sell our ordinary shares into the market.
Upon the filing of the registration statements and following the expiration of the lock-up restrictions described above, the
number of ordinary shares that are potentially available for sale in the open market will increase materially, which could make it
harder for the value of our ordinary shares to appreciate unless there is a corresponding increase in demand for our ordinary
shares. This increase in available shares could result in the value of your investment in our ordinary shares decreasing.
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In addition, a sale by us of additional ordinary shares or similar securities in order to raise capital might have a similar
negative impact on the share price of our ordinary shares. A decline in the price of our ordinary shares might impede our ability
to raise capital through the issuance of additional ordinary shares or other equity securities and may cause you to lose part or all
of your investment in our ordinary shares.
Arkin Dermatology, our controlling shareholder, as holder of 13,613,936 of our ordinary shares as of March 18, 2020, is
entitled to require that we register under the Securities Act the resale of these shares into the public markets. All shares sold
pursuant to an offering covered by such registration statement will be freely transferable. See “Item 7.B — Related Party
Transactions — Registration Rights Agreement”.
We have broad discretion as to the use of the net proceeds from our public offerings and may not use them effectively.
We intend to use the remaining net proceeds from our initial public offering in February 2018 and our public offerings in
August 2019 and February 2020 to fund conduct pre-commercialization and launch activities for Epsolay and Twyneo and fund
development activities for our other branded product candidates. The remaining proceeds will be used for other research and
development activities, including the development of our generic product candidates, as well as for working capital and general
corporate purposes. However, our management has broad discretion in the application of the net proceeds. Our shareholders may
not agree with the manner in which our management chooses to allocate the net proceeds from our initial public offering. The
failure by our management to apply these funds effectively could have a material adverse effect on our business, financial
condition and results of operation. Pending their use, we may invest the net proceeds from our initial public offering in a manner
that does not produce income.
We do not intend to pay dividends on our ordinary shares for at least the next several years.
We do not anticipate paying any cash dividends on our ordinary shares for at least the next several years. We currently
intend to retain all available funds and any future earnings to fund the development and growth of our business. As a result,
capital appreciation, if any, of our ordinary shares will be the investors’ sole source of gain for at least the next several years. In
addition, Israeli law limits our ability to declare and pay dividends and may subject us to certain Israeli taxes. For more
information, see “Item 8. Financial Information – A. Financial Statements and Other Financial Information - Dividend Policy.”
If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or
downgrade our ordinary shares, the price of our ordinary shares could decline.
The trading market for our ordinary shares relies in part on the research and reports that equity research analysts publish
about us and our business. The price of our ordinary shares could decline if one or more securities analysts downgrade our
ordinary shares or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.
As a foreign private issuer whose shares are listed on The Nasdaq Global Market, we intend to follow certain home country
corporate governance practices instead of certain Nasdaq requirements.
As a foreign private issuer whose shares will be listed on The Nasdaq Global Market, we are permitted to follow certain
home country corporate governance practices instead of certain requirements of the rules of The Nasdaq Global Market. Pursuant
to the “foreign private issuer exemption”:
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we established a quorum requirement such that the quorum for any meeting of shareholders is two or more shareholders holding at least 331⁄3%
of our voting rights, which complies with Nasdaq requirements; however, if the meeting is adjourned for lack of quorum, the quorum for such
adjourned meeting will be any number of shareholders, instead of 331⁄3% of our voting rights;
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we also intend to adopt and approve material changes to equity incentive plans in accordance with Israeli Companies Law, 5759-1999, or with
the Companies Law, which does not impose a requirement of shareholder approval for such actions. In addition, we intend to follow Israeli
corporate governance practice in lieu of Nasdaq Marketplace Rule 5635(c), which requires shareholder approval prior to an issuance of
securities in connection with equity-based compensation of officers, directors, employees or consultants;
as opposed to making periodic reports to shareholders in the manner specified by the Nasdaq corporate governance rules, the Companies Law
does not require us to distribute periodic reports directly to shareholders, and the generally accepted business practice in Israel is not to
distribute such reports to shareholders but to make such reports available through a public website. We will only mail such reports to
shareholders upon request; and
we will follow Israeli corporate governance practice instead of Nasdaq requirements to obtain shareholder approval for certain dilutive events
(such as issuances that will result in a change of control, certain transactions other than a public offering involving issuances of a 20% or
greater interest in us and certain acquisitions of the stock or assets of another company). Accordingly, our shareholders may not be afforded the
same protection as provided under Nasdaq corporate governance rules.
Otherwise, we intend to comply with the rules generally applicable to U.S. domestic companies listed on the Nasdaq
Global Market. However, we may in the future decide to use the foreign private issuer exemption with respect to some or all of
the other Nasdaq corporate governance rules. Following our home country governance practices as opposed to the requirements
that would otherwise apply to a U.S. company listed on the Nasdaq Global Market may provide less protection than is accorded
to investors of domestic issuers. See “Item 16G. Corporate Governance – Controlled Company".
In addition, as a foreign private issuer, we are exempted from the rules and regulations under the United States Securities
Exchange Act of 1934, as amended, or the Exchange Act, related to the furnishing and content of proxy statements (including
disclosures with respect to executive compensation), and our officers, directors, and principal shareholders are exempted from the
reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not
required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently
or as promptly as domestic companies whose securities are registered under the Exchange Act.
We may lose our foreign private issuer status which would then require us to comply with the Exchange Act’s domestic
reporting regime and cause us to incur significant legal, accounting and other expenses.
We are a foreign private issuer and therefore we are not required to comply with all of the periodic disclosure and current
reporting requirements of the Exchange Act applicable to U.S. domestic issuers. In order to maintain our current status as a
foreign private issuer, either (a) a majority of our ordinary shares must be either directly or indirectly owned of record by non-
residents of the United States or (b)(i) a majority of our executive officers or directors may not be U.S. citizens or residents, (ii)
more than 50 percent of our assets cannot be located in the United States and (iii) our business must be administered principally
outside the United States. If we were to lose this status, we would be required to comply with the Exchange Act reporting and
other requirements applicable to U.S. domestic issuers, which are more detailed and extensive than the requirements for foreign
private issuers. We may also be required to make changes in our corporate governance practices in accordance with various SEC
and Nasdaq rules. The regulatory and compliance costs to us under U.S. securities laws if we are required to comply with the
reporting requirements applicable to a U.S. domestic issuer may be significantly higher than the cost we would incur as a foreign
private issuer. As a result, we expect that a loss of foreign private issuer status would increase our legal and financial compliance
costs and would make some activities highly time consuming and costly. We also expect that if we were required to comply with
the rules and regulations applicable to U.S. domestic issuers, it would make it more difficult and expensive for us to obtain
director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to
obtain coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified members of
our supervisory board.
47
We have been incurring and will continue to incur increased costs as a result of operating as a public company, and our
management will be required to devote substantial time to new compliance initiatives.
As a public company whose ordinary shares are listed in the United States, and particularly after we no longer qualify as
an emerging growth company, we have been incurring and will continue to incur accounting, legal and other expenses that we did
not incur as a private company, including costs associated with our reporting requirements under the Exchange Act. We also have
incurred and anticipate that we will continue to incur costs associated with corporate governance requirements, including
requirements under Section 404 and other provisions of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), as well as
rules implemented by the SEC and The Nasdaq Global Market, and provisions of Israeli corporate law applicable to public
companies. These rules and regulations increase our legal and financial compliance costs, introduce new costs such as investor
relations and stock exchange listing fees, and makes some activities more time-consuming and costly. Our board and other
personnel need to devote a substantial amount of time to these initiatives. We are currently evaluating and monitoring
developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the
timing of such costs. As an “emerging growth company,” as defined in the JOBS Act, we may take advantage of certain
temporary exemptions from various reporting requirements, including, but not limited to, not being required to comply with the
auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act (and the rules and regulations of the SEC thereunder).
When these exemptions cease to apply, we expect to incur additional expenses and devote increased management effort toward
ensuring compliance with them. We cannot predict or estimate the amount of additional costs we may incur as a result of
becoming a public company or the timing of such costs.
Pursuant to Section 404 of the Sarbanes-Oxley Act and the related rules adopted by the SEC and the Public Company
Accounting Oversight Board, starting with this Annual Report, our management is required to report on the effectiveness of our
internal control over financial reporting. In addition, once we no longer qualify as an “emerging growth company” under the
JOBS Act and lose the ability to rely on the exemptions related thereto discussed above and depending on our status as per Rule
12b-2 of the Exchange Act, our independent registered public accounting firm may also need to attest to the effectiveness of our
internal control over financial reporting under Section 404. The process of determining whether our existing internal controls
over financial reporting systems are compliant with Section 404 and whether there are any material weaknesses or significant
deficiencies in our existing internal controls requires the investment of substantial time and resources, including by our chief
financial officer and other members of our senior management. As a result, this process may divert internal resources and take a
significant amount of time and effort to complete. In addition, while our assessment of our internal control over financial
reporting resulted in our conclusion that as of December 31, 2019, our internal control over financial reporting was effective, we
cannot predict the outcome of this determination in future years and whether we will need to implement remedial actions in order
to implement effective controls over financial reporting. The determination and any remedial actions required could result in us
incurring additional costs that we did not anticipate, including the hiring of outside consultants. As a result, we may experience
higher than anticipated operating expenses, as well as higher independent auditor fees during and after the implementation of
these changes. If we are unable to implement any of the required changes to our internal control over financial reporting
effectively or efficiently or are required to do so earlier than anticipated, it could adversely affect our operations, financial
reporting and/or results of operations and could result in an adverse opinion on internal controls from our independent auditors.
Changes in the laws and regulations affecting public companies will result in increased costs to us as we respond to their
requirements. These laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance,
including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more
difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive
officers. We cannot predict or estimate the amount or timing of additional costs we may incur in order to comply with such
requirements.
48
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report
our financial results or prevent fraud. As a result, shareholders could lose confidence in our financial and other public
reporting, which would harm our business and the trading price of our ordinary shares.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together
with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or
improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations.
While our assessment of our internal control over financial reporting resulted in our conclusion that as of December 31, 2019, our
internal control over financial reporting was effective, we cannot predict the outcome of our testing or any subsequent testing by
our auditor in future periods. Any testing by us conducted in connection with Section 404, or any subsequent testing by our
independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are
deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify
other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our
reported financial information and affect our reputation, which could have a negative effect on the trading price of our ordinary
shares.
Our management will be required to assess the effectiveness of our internal controls and procedures and disclose changes
in these controls on an annual basis. However, for as long as we are an “emerging growth company” under the JOBS Act, our
independent registered public accounting firm will not be required to attest to the effectiveness of our internal controls over
financial reporting pursuant to Section 404. We could be an “emerging growth company” for up to five years. An independent
assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might not.
Undetected material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the
expense of remediation.
We are an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies
may make our ordinary shares less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions
from various requirements that are applicable to other public companies that are not “emerging growth companies.” Most of such
requirements relate to disclosures that we would only be required to make if we also ceased to be a foreign private issuer in the
future, for example, the requirement to hold stockholder advisory votes on executive and severance compensation and executive
compensation disclosure requirements for U.S. companies. However, as a foreign private issuer, we could still be required to
comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. We are exempt from such
requirement for as long as we remain an emerging growth company, which may be up to five fiscal years after the date of our
initial public offering. We will remain an emerging growth company until the earliest of: (a) the last day of our fiscal year during
which we have total annual gross revenues of at least $1.07 billion; (b) December 31, 2023, the last day of our fiscal year
following the fifth anniversary of the closing of our initial public offering; (c) the date on which we have, during the previous
three-year period, issued more than $1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large
accelerated filer” under the Exchange Act. We may choose to take advantage of some or all of the available exemptions. When
we are no longer deemed to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act
discussed above. We cannot predict if investors will find our ordinary shares less attractive as a result of our reliance on
exemptions under the JOBS Act. If some investors find our ordinary shares less attractive as a result, there may be a less active
trading market for our ordinary shares and our share price may be more volatile.
49
We may be considered to be a passive foreign investment company for U.S. federal income tax purposes for the current tax
year and possibly thereafter, which could result in materially adverse U.S. federal income tax consequences to U.S. Holders of
our ordinary shares or warrants.
A non-U.S. entity treated as a corporation for U.S. federal income tax purposes will be a passive foreign investment
company, or PFIC, for any taxable year if either (i) at least 75% of its gross income for such year is passive income or (ii) at least
50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets
that produce passive income or are held for the production of passive income. Starting in the first quarter of 2019, we began
generating revenue under our collaboration agreement with Perrigo for the development of the generic version of Zovirax®
(acyclovir) cream, 5%. We expect to generate substantial revenue under this agreement for our 2020 taxable year and foreseeable
future years. Though the application of the relevant rules governing the characterization of such revenue for purposes of the PFIC
income test is uncertain, we intend to take the position that, based on our involvement and management contributions throughout
the development process, such revenue is non-passive for PFIC purposes. As a result, assuming we continue to earn substantial
revenue from such agreement as anticipated and based on the current and anticipated value and composition of our income and
assets, we do not expect that we will be treated as a PFIC for U.S. federal income tax purposes for our current taxable year or for
foreseeable future years. However, there are substantial factual and legal ambiguities regarding the nature of the revenue and the
application of the relevant PFIC rules, and thus, the determination that such revenue is non-passive is not without doubt, and
alternative characterizations are possible.
A separate determination has to be made after the close of each taxable year as to whether we were a PFIC for that year.
Because the value of our assets for purposes of the PFIC test will generally be determined by reference to the market price of our
ordinary shares, our PFIC status may depend in part on the market price of our ordinary shares, which may fluctuate significantly.
In addition, there are certain other ambiguities in applying the PFIC test to us. If we are considered a PFIC, material adverse U.S.
federal income tax consequences could apply to U.S. Holders (as defined in “Item 10. Additional Information – E. Taxation –
U.S. Federal Income Tax Considerations with respect to the Company”) of our ordinary shares or warrants with respect to any
“excess distribution” received from us and any gain from a sale or other disposition of our ordinary shares or warrants. Please
see “Item 10. Additional Information – E. Taxation – U.S. Federal Income Tax Considerations with respect to the Company.”
If a United States person is treated as owning at least 10% of our ordinary shares, such holder may be subject to adverse U.S.
federal income tax consequences.
If a United States person is treated as owning (directly, indirectly or constructively) at least 10% of the value or voting
power of our ordinary shares, such person may be treated as a “United States shareholder” with respect to each “controlled
foreign corporation” in our group (if any). If our group includes one or more U.S. subsidiaries, under recently-enacted rules,
certain of our non-U.S. subsidiaries could be treated as controlled foreign corporations regardless of whether we are not treated as
a controlled foreign corporation (although there is currently a pending legislative proposal to significantly limit the application of
these rules). A United States shareholder of a controlled foreign corporation may be required to report annually and include in its
U.S. taxable income its pro rata share of “Subpart F income,” “global intangible low-taxed income” and investments in U.S.
property by controlled foreign corporations, regardless of whether we make any distributions. An individual that is a United
States shareholder with respect to a controlled foreign corporation generally would not be allowed certain tax deductions or
foreign tax credits that would be allowed to a United States shareholder that is a U.S. corporation. Failure to comply with these
reporting obligations may subject you to significant monetary penalties and may prevent the statute of limitations with respect to
your U.S. federal income tax return for the year for which reporting was due from starting. We cannot provide any assurances
that we will assist investors in determining whether any of our non-U.S. subsidiaries are treated as a controlled foreign
corporation or whether such investor is treated as a United States shareholder with respect to any of such controlled foreign
corporations or furnish to any United States shareholders information that may be necessary to comply with the aforementioned
reporting and tax paying obligations. A United States investor should consult its advisors regarding the potential application of
these rules to an investment in the ordinary shares.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
Our legal and commercial name is Sol-Gel Technologies Ltd. Our company was incorporated on October 28, 1997 and
was registered as a private company limited by shares under the laws of the State of Israel. Our principal executive offices are
located at 7 Golda Meir St., Weizmann Science Park, Ness Ziona, 7403650 Israel and our telephone number is 972-8-931 3433.
Our website address is http://www.sol-gel.com. The information contained therein, or that can be accessed therefrom, does not
constitute a part of this annual report and is not incorporated by reference herein. We have included our website address in this
annual report solely for informational purposes. Our agent for service of process in the United States is Cogency Global Inc.,
located at 10 E. 40th Street, 10th Floor, New York, NY 10016, and its telephone number is +1 (800) 221-0102.
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In February 2018 we completed our initial public offering on The Nasdaq Global Market, pursuant to which we issued
7,187,500 Ordinary Shares for aggregate gross proceeds of approximately $86.25 million before deducting underwriting
discounts and commissions and offering expenses payable by us, including the full exercise by the underwriters of their option to
purchase additional shares. Our Ordinary Shares are traded on The Nasdaq Global Market under the symbol "SLGL".
Our capital expenditures for the years ended December 31, 2017, 2018 and 2019 were approximately $1,925, $1,052 and
$597, respectively. Our current capital expenditures involve equipment and leasehold improvements.
B. Business Overview
We are a clinical-stage dermatology company focused on identifying, developing and commercializing branded and
generic topical drug products for the treatment of skin diseases. Our current product candidate pipeline consists of late-stage and
early-stage branded product candidates that leverage our proprietary, silica-based microencapsulation technology platform, other
early-stage branded product candidates and several generic product candidates across multiple indications. Our lead product
candidate, Twyneo®, is a novel, once-daily, non-antibiotic topical cream containing a fixed-dose combination of encapsulated
benzoyl peroxide and encapsulated tretinoin, that we are developing for the treatment of acne vulgaris, or acne.
On December 30, 2019, we announced top-line results from two pivotal Phase 3 clinical trials evaluating Twyneo for the
treatment of acne. Twyneo met all co-primary endpoints in both Phase 3 trials. The Phase 3 program enrolled an aggregate of 858
patients aged nine and older in two multicenter, randomized, double-blind, parallel group, vehicle-controlled trials at 63 sites
across the United States. Twyneo demonstrated statistically significant improvement in each of the co-primary endpoints of (1)
the proportion of patients who succeeded in achieving at least a two grade reduction from baseline and Clear (grade 0) or Almost
Clear (grade 1) at Week 12 on a 5-point Investigator Global Assessment (IGA) scale, (2) an absolute change from baseline in
inflammatory lesion count at Week 12, and (3) and an absolute change from baseline in non-inflammatory lesion count at Week
12. In addition, Twyneo was found to be well-tolerated. We intend to submit an NDA for marketing approval for Twyneo in the
second half of 2020.
Our second branded product candidate is Epsolay®, a potential treatment for subtype II rosacea. On July 8, 2019, we
announced positive top-line results from our Phase 3 program evaluating Epsolay. The program enrolled 733 patients aged 18
and older in two identical, double-blind, vehicle-controlled Phase 3 clinical trials at 54 sites across the United States. Epsolay
demonstrated statistically significant improvement in both co-primary endpoints of (1) the number of patients achieving “clear”
or “almost clear” in the Investigator Global Assessment (IGA) relative to baseline at week 12 and (2) absolute mean reduction
from baseline in inflammatory lesion count at week 12. In an additional analysis, Epsolay demonstrated rapid efficacy, achieving
statistically significant improvements on both co-primary endpoints compared with vehicle as early as Week 2. In addition,
Epsolay® was found to be well- tolerated. We intend to submit an NDA to the FDA for marketing approval of Epsolay in the
second quarter of 2020.
Our other branded product candidates are SGT-210, a potential treatment of palmoplantar keratoderma (PPK) and non-
melanoma skin cancer, and tapinarof and roflumilast, each a potential treatment of psoriasis and other dermatological
indications.
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We designed our proprietary, silica-based microencapsulation technology platform to enhance the tolerability and stability
of topical drugs while maintaining their efficacy. Topical drugs often struggle to balance achieving both high efficacy and high
tolerability. Our technology platform entraps active ingredients in an inert, inorganic silica shell, which creates an unnoticeable
barrier between the active ingredient and the skin. The resulting microcapsules are designed to allow the entrapped active
ingredients to gradually migrate through the pores of the shell and deliver active ingredient doses onto the skin in a controlled
manner, resulting in improved tolerability and stability without sacrificing efficacy. By separately encapsulating active
ingredients within protective silica shells, our technology platform also enables the production of novel fixed-dose active
ingredient combinations that otherwise would not be stable. We believe that our microencapsulation technology has the potential
to be used for topical drug products to treat a variety of skin diseases. As a result of the FDA having already approved silica as a
safe excipient for topical drug products, we expect the review process for Twyneo® and Epsolay® to be conducted according to
the FDA’s 505(b)(2) regulatory pathway, which may provide for a more efficient regulatory process by permitting us to rely, in
part, upon the FDA’s previous findings of safety and efficacy of an approved product.
We maintain exclusive, worldwide commercial rights for our branded product candidates, which consist of:
•
Twyneo®, a novel, once-daily, non-antibiotic topical cream, which we are developing for the treatment of acne, containing a fixed-dose
combination of encapsulated benzoyl peroxide, or E-BPO, and encapsulated tretinoin. Acne is one of the three most prevalent skin diseases in
the world and is the most commonly treated skin disease in the United States. According to the American Academy of Dermatology, acne
affects approximately 40 to 50 million people in the United States, of which approximately 10% are treated with prescription medications. In
July 2017, we reported positive top-line results from a double-blind, dose-ranging active- and placebo-controlled, six-arm, multi-center Phase II
clinical trial of Twyneo® in the United States in 726 subjects, 128 of which subjects across six treatment groups did not complete the study. The
clinical trial evaluated the efficacy, tolerability and safety of two Twyneo® concentrations, Twyneo® Low and Twyneo® High, each containing
a lower or higher concentration, respectively, of encapsulated tretinoin and an identical concentration of encapsulated benzoyl peroxide.
Tretinoin and benzoyl peroxide, the two active components in Twyneo®, are both widely-used therapies for the treatment of acne that
historically have not been conveniently co-administered due to stability concerns. The trial also evaluated the contribution of encapsulated
tretinoin and encapsulated benzoyl peroxide, in the same concentrations as those in the respective Twyneo® treatment groups, to the efficacy of
Twyneo® High and Twyneo® Low. In this trial, Twyneo® showed statistically significant improvements in all pre-defined co-primary and
secondary efficacy endpoints, as compared to vehicle. In addition, Twyneo® was well tolerated with no treatment-related serious adverse
events. Based on the efficacy data we observed in the Phase II trial, we believe Twyneo®, if approved, has the potential to become a preferred
treatment for acne. On December 30, 2019, we announced top-line results from two pivotal Phase 3 clinical trials evaluating Twyneo for the
treatment of acne. Twyneo met all co-primary endpoints in both Phase 3 trials. The Phase 3 program enrolled an aggregate of 858 patients aged
nine and older in two multicenter, randomized, double-blind, parallel group, vehicle-controlled trials at 63 sites across the United States.
Twyneo demonstrated statistically significant improvement in each of the co-primary endpoints of (1) the proportion of patients who succeeded
in achieving at least a two grade reduction from baseline and Clear (grade 0) or Almost Clear (grade 1) at Week 12 on a 5-point Investigator
Global Assessment (IGA) scale, (2) an absolute change from baseline in inflammatory lesion count at Week 12, and (3) and an absolute change
from baseline in non-inflammatory lesion count at Week 12. In addition, Twyneo was found to be well-tolerated. We intend to submit a new
drug application, or NDA, to the FDA for marketing approval of Twyneo in the second half of 2020.
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•
•
•
Epsolay®, a topical cream containing 5% encapsulated benzoyl peroxide, which we are developing for the treatment of subtype II
(papulopustular) rosacea. Rosacea is a chronic skin disease characterized by facial redness, inflammatory lesions, burning and stinging.
According to the U.S. National Rosacea Society, approximately 16 million people in the United States are affected by rosacea. According to a
study we commissioned, approximately 4.8 million people in the United States experience subtype II symptoms. Subtype II rosacea is
characterized by small, dome-shaped erythematous papules, tiny surmounting pustules on the central aspects of the face, solid facial erythema
and edema, and thickening/overgrowth of skin. Subtype II rosacea resembles acne, except that comedowns are absent, and patients may report
associated burning and stinging sensations. We evaluated Epsolay® in a double blind, randomized, dose-ranging Phase II clinical trial involving
92 adult subjects at ten centers in the United States. In this trial, Epsolay® showed statistically significant improvements in the Investigator
Global Assessment, or IGA, pre-defined co-primary efficacy endpoint and in the percent change in inflammatory lesion count at week 12, as
compared to vehicle. Epsolay® was also well tolerated in this trial. Current topical therapies for subtype II rosacea are limited due to
tolerability concerns. For example, BPO, a common therapy for acne, is not used for the treatment of subtype II rosacea due to side effects. As
encapsulated BPO, Epsolay® is designed to redefine the standard of care for the treatment of subtype II rosacea. If approved, we expect
Epsolay® to be the first product containing BPO that is marketed for the treatment of subtype II rosacea. On July 8, 2019, we
announced positive top-line results from our Phase 3 program evaluating Epsolay. The program enrolled 733 patients aged 18 and older in two
identical, double-blind, vehicle-controlled Phase 3 clinical trials at 54 sites across the United States. Epsolay demonstrated statistically
significant improvement in both co-primary endpoints of (1) the number of patients achieving “clear” or “almost clear” in the Investigator
Global Assessment (IGA) relative to baseline at week 12 and (2) absolute mean reduction from baseline in inflammatory lesion count at week
12. In an additional analysis, Epsolay demonstrated rapid efficacy, achieving statistically significant improvements on both co-primary
endpoints compared with vehicle as early as Week 2. In addition, Epsolay® was found to be well-tolerated. On February 12, 2020, we
announced positive topline results from our open-label, long-term safety study, evaluating Epsolay® for a treatment duration up to 52 weeks.
We intend to submit an NDA to the FDA for marketing approval of Epsolay in the second quarter of 2020.
SGT-210, a novel, topical epidermal growth factor receptor inhibitor which is in development for the treatment of palmoplantar keratoderma, or
PPK, a group of skin conditions characterized by thickening of the skin on the hands and soles of the feet, and basal cell carcinoma and
squamous cell carcinoma, collectively referred to as non-melanoma skin cancer. SGT-210 is designed to be used alone or in combination for
the treatment of hyperproliferation and hyperkeratinization disorders, including PPK. On January 2, 2020, we announced the initiation of
a Phase 1 proof of concept clinical study of SGT-210 with punctate palmoplantar keratoderma type -1 (PPPK type 1), a genetic form of PPK.
The Phase 1 proof of concept study SGT-84-01 is a single-center, single-blinded, vehicle-controlled study designed to evaluate the
bioavailability, safety and tolerability of SGT-210 as well as inform on potential efficacy. The study is targeting enrollment of approximately 15
patients to undergo a three-month treatment period, followed by a three-month follow-up period. We expect to report top-line data in the first
half of 2021. We are also planning to initiate pre-clinical studies to evaluate SGT-210 in plaque psoriasis, superficial squamous cell carcinoma
and in combination with roflumilast, a PDE4 inhibitor, to address various inflammatory conditions, such as hidradenitis suppurativa and prurigo
nodularis.
We also intend to develop tapinarof, an AhRagonist, and roflumilast, a PDE4 inhibitor, each as a potential treatment of psoriasis and other
dermatological indications.
In addition to our branded product candidates, we have one FDA approved generic topical dermatological product, which
is a generic version of Zovirax® (acyclovir) cream, 5%. In February 2019, we announced that Perrigo received final approval
from the FDA for this product. The product was developed in a collaboration between us and Perrigo in which we shared
development costs with Perrigo and will equally share the gross profits generated from sales of the product. Following receipt by
Perrigo of final approval from the FDA, we launched the product in February 2019.
We are also currently developing a portfolio of seven generic topical dermatological products. Six of our generic product
candidates are being developed in collaboration with Perrigo UK Finco Limited Partnership, or Perrigo. A seventh generic
product candidate is being developed in collaboration with Douglas Pharmaceuticals (New Zealand), or Douglas
Pharmaceuticals. Both Perrigo and Douglas Pharmaceuticals have significant experience in the development of generic drugs.
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Our most advanced generic product candidate is ivermectin cream, 1%, for the treatment of inflammatory lesions
associated with rosacea, which is being developed in collaboration with Perrigo. In March 2017, Perrigo submitted an ANDA
with a Paragraph IV certification for ivermectin cream, 1% to the FDA. In January 2018, this ANDA was tentatively approved by
the FDA. Final approval from the FDA is subject to a 30-month stay under the Hatch-Waxman Amendments. . In addition,
because Actavis Ltd. filed an ANDA for ivermectin cream, 1%, before us or any other generic applicants, we may be unable to
obtain final approval for our ANDA until the expiration of Actavis Ltd.’s 180-day generic exclusivity. Ivermectin cream, 1% is
the active molecule in Soolantra, which is currently marketed in the United States by Galderma Laboratories LP.
Our leadership team has considerable expertise in the identification and development of generic dermatological drug
products and our intellectual property and formulation teams continue to seek to identify new opportunities to expand our
pipeline of generic product candidates.
The following chart represents our current branded and generic product candidate pipeline:
Our Branded Product Candidates
Twyneo® for Acne
Using our proprietary, silica-based microencapsulation technology platform, we are developing Twyneo® to become a
preferred treatment for acne by dermatologists and their patients.
Twyneo® is a novel, once-daily, non-antibiotic topical cream containing a fixed-dose combination of encapsulated
benzoyl peroxide and encapsulated tretinoin that we are developing for the treatment of acne. Studies have shown that benzoyl
peroxide and tretinoin are effective in treating acne as monotherapies; moreover, according to an article in the American
Academy of Dermatology (2009), dermatologists recommend combining the two monotherapies as a first-line approach for acne,
but a drug-drug interaction that causes the degradation of tretinoin has previously prohibited the development of a combination
therapy. By encapsulating the two agents separately through the use of our technology platform, Twyneo® is designed to be a
fixed-dose combination that otherwise would not be stable. Similar to other combination drug products, such as clindamycin and
benzoyl peroxide, we expect Twyneo® to be kept refrigerated throughout the supply chain and then stored in ambient conditions
upon its distribution to patients. Pre-clinical data suggests that Twyneo® may be more tolerable than generic tretinoin gel 0.1%
and Epiduo, a branded fixed-dose combination of benzoyl peroxide and adapalene, without a corresponding loss in efficacy. In
addition, Epiduo and its successor Epiduo Forte contain adapalene as opposed to tretinoin, which is widely considered to be more
effective than adapalene, but generally causes greater irritation. We expect that Twyneo®, if approved, will compete directly with
Epiduo and Epiduo Forte. We expect to utilize the FDA’s 505(b)(2) regulatory pathway in seeking approval of Twyneo® in the
United States.
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In July 2017, we reported the completion of a 726 subject, randomized, multi-center, double-blind, placebo-controlled
Phase II clinical trial of Twyneo® in the United States that demonstrated statistically significant improvements compared to
vehicle in the co-primary efficacy endpoints of “clear” or “almost clear” with a two-grade reduction in IGA and in reducing
absolute inflammatory and non-inflammatory lesion counts at week 12. Of the 726 subjects enrolled in the trial, 128 subjects
across six treatment groups did not complete the study. The most common reasons for subjects not completing the study were the
withdrawal of informed consent (42 subjects), loss to follow-up (56 subjects) and adverse events (18 subjects).
On December 30, 2019, we announced top-line results from two pivotal Phase 3 clinical trials evaluating Twyneo for the
treatment of acne. Twyneo met all co-primary endpoints in both Phase 3 trials. The Phase 3 program enrolled an aggregate of 858
patients aged nine and older in two multicenter, randomized, double-blind, parallel group, vehicle-controlled trials at 63 sites
across the United States. Twyneo demonstrated statistically significant improvement in each of the co-primary endpoints of (1)
the proportion of patients who succeeded in achieving at least a two grade reduction from baseline and Clear (grade 0) or Almost
Clear (grade 1) at Week 12 on a 5-point Investigator Global Assessment (IGA) scale, (2) an absolute change from baseline in
inflammatory lesion count at Week 12, and (3) and an absolute change from baseline in non-inflammatory lesion count at Week
12. In addition, Twyneo was found to be well-tolerated. We intend to submit an NDA to the FDA for marketing approval of
Twyneo in the second half of 2020.
Acne Market Opportunity
Acne is a disease characterized by areas of scaly red skin, non-inflammatory blackheads and whiteheads, inflammatory
lesions, papules and pustules and occasionally boils and scarring that occur on the face, neck, chest, back, shoulders and upper
arms. The development of acne lesions is caused by genetic and environmental factors that arise from the interplay of the
following pathogenic factors:
•
•
•
•
blockage of hair follicles through abnormal keratinization in the follicle, which narrows pores;
increase in oils, or sebum production, secreted by the sebaceous gland;
overgrowth of naturally occurring bacteria caused by the colonization by the anaerobic lipohilic bacterium Propionibacterium acnes, or P.
acnes;
inflammatory response due to relapse of pro-inflammatory mediators into the skin.
Due to the frequency of recurrence and relapse, acne is characterized as a chronic inflammatory disease, which may
require treatment over a prolonged period of time. Acne is one of the three most prevalent skin diseases in the world and is the
most commonly treated skin disease in the United States. According to the American Academy of Dermatology, acne affects
approximately 40 to 50 million people in the United States and approximately 85% of people between the ages of 12 and 24
experience some form of acne. Acne patients suffer from the appearance of lesions on areas of the body with a large
concentration of oil glands, such as the face, chest, neck and back. These lesions can be inflamed (papules, pustules, nodules) or
non-inflamed (comedones). Early effective treatment is recommended to lessen the overall long-term impact. For most people,
acne diminishes over time and tends to disappear, or at least to decrease, by the age of 25. There is, however, no way to predict
how long it will take for symptoms to disappear entirely, and some individuals continue to suffer from acne well into adulthood.
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Current Treatment Landscape for Acne
The treatment options for acne depend on the severity of the disease and consist of topical and oral drugs:
•
•
•
Mild acne: characterized by few papules or pustules (both comedonal and inflammatory); treated with an over-the-counter product or topical
prescription therapies.
Moderate acne: characterized by multiple papules and pustules with moderate inflammation and seborrhea (scaly red skin); treated with a
combination of oral antibiotics and topical therapies.
Severe acne: characterized by substantial papulopustular disease, many nodules and/or cysts and significant inflammation and seborrhea;
treated with oral and topical combination therapies and photodynamic therapy as a third-line treatment.
Topical therapies dominate the acne market as physicians and patients often prefer therapies that act locally on the skin, while
minimizing side effects. For more pronounced symptoms, patients are typically treated with a combination of topical and oral
therapies.
The acne prescription treatment landscape is comprised of four classes of topical products and two classes of oral
products:
•
•
•
•
•
•
Topical over-the-counter monotherapies such as adapalene 0.1%, benzoyl peroxide and salicylic acid, in different concentrations, are the
most commonly used therapies. These are generally tolerable first-line treatments for mild acne, but less efficacious than prescription therapies.
Topical prescription antibiotic monotherapies such as clindamycin and erythromycin that are most commonly used as topical therapies in
cases of mild-to-moderate acne.
Topical prescription retinoid monotherapies such as tretinoin, adapalene 0.3% and tazarotene. Physicians view retinoids as moderately
efficacious, but they have high rates of skin irritation.
Topical prescription combination products such as combinations of BPO/adapalene, BPO/clindamycin, BPO/erythromycin and
clindamycin/tretinoin. These target multiple components that contribute to the development of acne, though topical side effects are common.
Oral prescription antibiotics such as doxycycline and minocycline. These are typically used as step-up treatments for more severe cases of
acne, with risk of systemic side effects.
Oral prescription isotretinoin, which is primarily used for severe cystic acne and acne that has not responded to other treatments. The use of
oral prescription isotretinoin is tightly controlled due to tolerability issues.
Twyneo® for Acne
Using our proprietary, silica-based microencapsulation technology platform, we are developing Twyneo® to become a
preferred treatment for acne by dermatologists and their patients. Our silica-based proprietary delivery system is designed to
enhance the tolerability and stability of topical drugs while maintaining their efficacy. Topical drugs often struggle to balance
achieving both high efficacy and high tolerability. Our technology platform entraps active ingredients in an inert silica shell,
which creates an unnoticeable barrier between the active ingredient and the skin. The resulting microcapsules are designed to
allow the entrapped active ingredients to gradually migrate through the pores of the shell and deliver active ingredient doses into
the skin in a controlled manner, resulting in improved tolerability and stability without sacrificing efficacy.
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We believe that Twyneo®, a fixed-dose combination of a cream containing encapsulated benzoyl peroxide and
encapsulated tretinoin, has the potential to solve the industry-wide challenge of stabilizing tretinoin in the presence of benzoyl
peroxide, a combination known to be effective in acne therapy, but not previously conveniently co-administered. While benzoyl
peroxide slows the proliferation of P. acnes, tretinoin regulates hyperkeratinization and abnormal desquamation of follicular
epithelium. This creates a synergistic combination which has the potential to overcome the challenges faced by currently
approved products.
•
•
We designed Twyneo® to protect tretinoin from oxidative decomposition, which occurs when it is combined with benzoyl peroxide, with the
goal of enhancing stability without reducing efficacy. We believe this could allow for a suitable clinical and commercial shelf life.
The silica shell creates a barrier between the two drug substances and the skin. As a result, we believe Twyneo® can reduce irritation typically
associated with topical application of benzoyl peroxide and tretinoin, leading to greater tolerability to acne-affected skin.
Twyneo® Phase III Trial Design
The pivotal Phase III clinical program evaluating the safety and efficacy of Twyneo® in subjects with acne vulgaris
enrolled an aggregate of 858 patients aged nine and older, with moderate-to-severe acne in two multicenter, randomized, double-
blind, parallel group, vehicle-controlled trials at 63 sites across the United States. Patients were randomized at a 2:1 ratio to be
treated once-daily with either Twyneo (n=571) or vehicle cream (n=287) for 12 weeks.
The primary and secondary efficacy endpoints were assessed at the end of the 12-week treatment period. Three primary
efficacy endpoints were defined for this trial:
•
•
•
the proportion of subjects who achieve at least a two-grade reduction in the IGA score and either “clear” or “almost clear” at week 12;
the mean absolute change from baseline in the number of inflammatory acne lesions at week 12; and
the mean absolute change from baseline in the number of non-inflammatory acne lesions at week 12.
Twyneo® Phase III Trial Results
As outlined below Twyneo met all co-primary endpoints in both Phase 3 trials. Twyneo demonstrated statistically
significant improvement in each of the co-primary endpoints described above.
In trial SGT-65-04, 38.5% of patients treated with Twyneo achieved success in IGA versus 11.5% in the vehicle treated
group (P<0.001) at week 12. In trial SGT-65-05, 25.4% of patients treated with Twyneo achieved success in IGA versus 14.7% in
the vehicle group (P=0.017) at week 12. In trial SGT-65-04, the absolute mean change from baseline of inflammatory lesion
count for Twyneo was -21.6 versus -14.8 for the vehicle group (P<0.001) at week 12. In trial SGT-65-05, the absolute change
from baseline of inflammatory lesion count for Twyneo was -16.2 versus -14.1 for the vehicle group (P=0.021) at week 12. In
trial SGT-65-04, the absolute mean change from baseline of non-inflammatory lesion count for Twyneo was -29.7 versus -19.8
for the vehicle group (P<0.001). In trial SGT-65-05, the absolute mean change from baseline of non-inflammatory lesion count
for Twyneo was -24.2 versus -17.4 for the vehicle group (P<0.001) at week 12.
In both trials, Twyneo appeared to be generally safe and well-tolerated and the majority of local skin reactions, when
reported, were mild or moderate and improved over time. A total of 18 subjects discontinued treatment in both trials due to
treatment emergent adverse events. There were no treatment-related serious adverse events and four unrelated serious adverse
events (one Twyneo (depression), three vehicle) were reported across both trials.
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The following chart presents the proportion of subjects in the ITT population in studies SGT 65-04 and SGT 65-05 who
achieved a successful improvement in the severity of their disease at week 12, as assessed using the IGA:
The following chart presents the absolute mean change from baseline in the number of inflammatory acne lesions at week
12:
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The following chart presents the absolute mean change from baseline in the number of non-inflammatory acne lesions at
week 12:
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We also assessed cutaneous tolerability by recording the erythema (redness), scaling, pigmentation, dryness, itching,
burning and stinging on a four-point scale from 0 to 3 at baseline and at each visit. These measurements are either measured by
the physician or reported by the subject. Overall, Twyneo® was generally well tolerated. The majority of cutaneous adverse
events were mild.
Out of the 858 subjects who enrolled in both studies, 754 subjects were included in the safety population, and a combined
total of 16 subjects discontinued treatment due to an adverse event across both trials. The most common reasons for subjects not
completing the study in both groups (active and vehicle) were the withdrawal of informed consent (41 subjects, 4.8%), and loss
to follow-up (39 subjects, 4.5%).
Epsolay® for Subtype II Rosacea
Epsolay® Overview
Epsolay® is a once-daily topical cream containing 5% encapsulated benzoyl peroxide that we are developing for the
treatment of subtype II rosacea. We believe Epsolay® has the potential to become the first product to contain encapsulated
benzoyl peroxide for the treatment of subtype II rosacea and, if approved, has the potential to redefine the standard of care for the
treatment of inflammatory lesions associated with subtype II rosacea. Subtype II rosacea is characterized by small, dome-shaped
erythematous papules, tiny surmounting pustules on the central aspects of the face, solid facial erythema and edema, and
thickening/overgrowth of skin. Subtype II rosacea resembles acne, except that comedones are absent, and patients may report
associated burning and stinging sensations. In 2012, we completed a 92 subject, randomized, multi-center, double-blind, vehicle-
controlled Phase II trial for Epsolay® in the United States that demonstrated statistically significant improvements compared to
vehicle in achieving the IGA success co-primary efficacy endpoint and in reducing papulopustular-lesions based on the
percentage change in the inflammatory lesion count from baseline at week 12. In addition, the tolerability profile of Epsolay®
was similar to that of vehicle. We expect that Epsolay®, if approved, will compete directly with Soolantra. We expect to utilize
the FDA’s 505(b)(2) regulatory pathway in seeking approval of Epsolay® in the United States. On July 8, 2019, we
announced positive top-line results from our Phase 3 program evaluating Epsolay. The program enrolled 733 patients aged 18
and older in two identical, double-blind, vehicle-controlled Phase 3 clinical trials at 54 sites across the United States. Epsolay
demonstrated statistically significant improvement in both co-primary endpoints of (1) the number of patients achieving “clear”
or “almost clear” in the Investigator Global Assessment (IGA) relative to baseline at week 12 and (2) absolute mean reduction
from baseline in inflammatory lesion count at week 12. In an additional analysis, Epsolay demonstrated rapid efficacy, achieving
statistically significant improvements on both co-primary endpoints compared with vehicle as early as Week 2. In addition,
Epsolay® was found to be well- tolerated. On February 12, 2020, we announced positive topline results from our open-label,
long-term safety study, evaluating Epsolay® for a treatment duration up to 52 weeks. We intend to submit an NDA to the FDA
for marketing approval of Epsolay in the first half 2020.
Rosacea is a chronic skin disease characterized by persistent facial erythema (redness) and temporary inflammatory
lesions (papules, pustules or both). Often misdiagnosed as acne vulgaris due to similarities between inflammatory acne lesions
and rosacea lesions and the potential for disfigurement, rosacea is gradually increasing in visibility as a disease. The most
prominent age group affected includes adults age 30 and above, with stronger prevalence across women and adults with fair skin.
Current Treatment Landscape for Subtype II Rosacea
As there is no cure for rosacea, treatment is largely focused on managing the disease. We believe that a significant market
opportunity exists for a subtype II rosacea treatment option that can provide both efficacy and higher tolerability than existing
treatments. There are currently four approved drugs for the treatment of subtype II rosacea: Soolantra, Metrogel, Oracea and
generic metronidazole. In certain cases, dermatologists often prescribe oral antibiotics either as monotherapies or in conjunction
with approved medications.
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Our Solution for Subtype II Rosacea — Epsolay®
Benzoyl peroxide is approved by the FDA for the treatment of acne and is widely considered to be safe and effective.
Currently, there is no approved benzoyl peroxide product in the rosacea treatment landscape as a result of potential tolerability
issues, despite clinical studies showing that treatment with benzoyl peroxide could be efficacious. According to a published
study, benzoyl peroxide was found to be an effective treatment for rosacea but caused irritation. Using our proprietary, silica-
based microencapsulation technology platform, we believe our Epsolay® candidate for the treatment of subtype II rosacea can
improve on current subtype II rosacea treatments in the following ways:
•
•
Epsolay® creates a silica-based barrier between benzoyl peroxide crystals and the skin and, as a result, can reduce irritation typically associated
with topical application of benzoyl peroxide, increasing the potential for more tolerable application to rosacea-affected skin.
Epsolay®'s release of the drug can reduce irritation while maintaining efficacy.
Epsolay® is an innovative topical cream, and if approved, would be the first product containing benzoyl peroxide for the
treatment of subtype II rosacea.
Epsolay® Phase III Trial Design
In June 2018, we announced dosing of the first subject in our pivotal Phase III clinical program of Epsolay® in subjects
with papulopustular rosacea. The program enrolled 733 patients aged 18 and older in two identical, double-blind, vehicle-
controlled Phase 3 clinical trials at 54 sites across the United States. Patients were randomized at a 2:1 ratio to be treated once-
daily with either Epsolay (n=493) or vehicle cream (n=240) for 12 weeks. After the initiation of treatment, clinical and safety
evaluations were performed at Weeks 2, 4, 6, 8 and 12.
The primary efficacy endpoints for both trials were success in the IGA defined as two-grade reduction in IGA on a stage
of 0 to 4 with a “clear” (0) or “almost clear” (1) at week 12, and a reduction in mean inflammatory lesion count at week 12.
Epsolay® Phase III Trial Results
As outlined below, Epsolay demonstrated statistically significant improvement in both co-primary endpoints of (1) the
number of patients achieving “clear” or “almost clear” in the IGA relative to baseline at week 12 and (2) absolute mean reduction
from baseline in inflammatory lesion count at week 12. In an additional analysis, Epsolay demonstrated rapid efficacy, achieving
statistically significant improvements on both co-primary endpoints compared with vehicle as early as Week 2. Epsolay
demonstrated a favorable safety and tolerability profile similar to vehicle.
In study SGT 54-01, patients in the Epsolay and vehicle treatment groups had a baseline mean inflammatory lesion count
of 25.7 and 26.3, respectively. The proportion of patients with “moderate” (3) or “severe” (4) IGA in the Epsolay treatment group
was 86.4% and 13.6%, respectively, and 88.1% and 11.9%, respectively, in the vehicle treatment group. In study SGT 54-02,
patients in Epsolay and vehicle treatment groups had a baseline mean inflammatory lesion count of 29.8 and 27.5, respectively.
The proportion of patients with “moderate” (3) or “severe” (4) IGA in the Epsolay treatment group was 90.8% and 9.2%,
respectively, and 91.8% and 8.2%, respectively, in the vehicle treatment group.
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As outlined below, Epsolay met all co-primary endpoints in both Phase 3 trials. Epsolay demonstrated statistically
significant improvement in each of the co-primary endpoints described above.
In study SGT 54-01, 43.5% of patients treated with Epsolay achieved success in IGA versus 16.1% in the vehicle treated
group (P<0.001) at week 12. In Study 54-02, 50.1% of patients treated with Epsolay achieved success in IGA versus 25.9% in
the vehicle group (P<0.001) at week 12. In study SGT 54-01, the absolute change from baseline of inflammatory lesion count
for Epsolay was -17.4 versus -9.5 for the vehicle group (P<0.001) at week 12. In study SGT 54-02, the absolute change from
baseline of inflammatory lesion count for Epsolay was -20.3 versus -13.3 for the vehicle group (P<0.001) at week 12.
The following chart presents the proportion of subjects in the ITT population in studies SGT 54-01 and SGT 54-02 who
achieved a successful improvement in the severity of their disease at week 12, as assessed using the IGA:
The following chart presents the absolute change from baseline in the number of inflammatory acne lesions at week 12:
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The following chart presents the percent change from baseline in the number of inflammatory acne lesions at week 12:
In both studies, Epsolay demonstrated a favorable safety and tolerability profile similar to vehicle, with a low rate of
cutaneous side effects (e.g., dryness, scaling, itching and burning/stinging) comparable to vehicle. Adverse events were primarily
mild to moderate in severity with the most frequently reported adverse events across both studies being application site erythema
and application site pain reported by less than 3.4% of subjects. There were no treatment-related serious adverse events, with a
combined total of two unrelated serious adverse events (1 Epsolay, 1 vehicle) reported across both trials.
Out of the 733 subjects who enrolled in both studies, 721 subjects were included in the safety population, and a combined
total of 10 subjects (9 Epsolay, 1 vehicle) discontinued treatment due to an adverse event across both trials. The most common
reasons for subjects not completing the study in both groups (active and vehicle) were the withdrawal of informed consent (25
subjects, 3.4%), and loss to follow-up (17 subjects, 2.3%).
Topline Results of Long-Term Safety Study for Epsolay
On February 12, 2020, we announced positive topline results from our open-label, long-term safety study, evaluating
Epsolay for a treatment duration up to 52 weeks. The study enrolled 547 subjects, all of whom had completed 12 weeks of
treatment with Epsolay or vehicle in the preceding double-blind Phase 3 studies. Patients continued onto open-label treatment
with Epsolay once-daily for up to an additional 40 weeks. The safety population of 535 subjects received Epsolay therapy for an
overall period of at least 28 weeks. Of these 535 subjects, 209 subjects completed 52 weeks of treatment with Epsolay, exceeding
the sample size requirements previously defined by the FDA for the Epsolay one-year safety evaluation.
Non-cutaneous adverse events were similar in frequency and type to those observed in the preceding Phase 3 trials. The
most common adverse event reported was nasopharyngitis (5.4%). Less than 3% of patients experienced application site adverse
events that were considered to be drug-related, and no serious drug-related adverse events were reported.
At every study visit, the investigator conducted Local Tolerability and Cutaneous Safety Assessments. At the end of 52
weeks more than 90% of subjects had “none” or “mild” signs or symptoms (burning or stinging, itching, dryness and scaling) and
no “severe” tolerability scores were recorded.
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Although the study was designed to evaluate long-term safety, subjects also continued to undergo evaluation according to
the Investigator Global Assessment (IGA) 5-point scale. Of the 209 patients treated with Epsolay for 52 weeks, 73.2% reported
an IGA score of 0 ("clear") or 1 ("almost clear") at 52 weeks.
We intend to submit an NDA to the FDA for marketing approval of Epsolay in the second quarter of 2020.
SGT-201 for Palmoplantar Keratoderma
SGT-210 is a novel, topical epidermal growth factor receptor inhibitor which is in development for the treatment of
palmoplantar keratoderma, or PPK, a group of skin conditions characterized by thickening of the skin on the hands and soles of
the feet, and basal cell carcinoma and squamous cell carcinoma, collectively referred to as non-melanoma skin cancer. SGT-210
is designed to be used alone or in combination for the treatment of hyperproliferation and hyperkeratinization disorders, including
PPK. On January 2, 2020, we announced the initiation of a Phase 1 proof of concept clinical study of SGT-210 with punctate
palmoplantar keratoderma type -1 (PPPK type 1), a genetic form of PPK. The Phase 1 proof of concept study SGT-84-01 is a
single-center, single-blinded, vehicle-controlled study designed to evaluate the bioavailability, safety and tolerability of SGT-210
as well as inform on potential efficacy. The study is targeting enrollment of approximately 15 patients to undergo a three-month
treatment period, followed by a three-month follow-up period. We expect to report top-line data in the first half of 2021. We are
also planning to initiate pre-clinical studies to evaluate SGT-210 in plaque psoriasis, superficial squamous cell carcinoma and in
combination with roflumilast, a PDE4 inhibitor, to address various inflammatory conditions, such as hidradenitis suppurativa and
prurigo nodularis.
Tapinarof and roflumilast potentially for psoriasis and other dermatological indications
We also intend to develop tapinarof, an AhRagonist, and roflumilast, a PDE4 inhibitor, each as a potential treatment of
psoriasis and other dermatological indications.
Generic Drug Product Candidates
In addition to our branded product candidates, we have one FDA approved generic topical dermatological product, which
is a generic version of Zovirax® (acyclovir) cream, 5%. In February 2019, we announced that Perrigo received final approval
from the FDA for this product. The product was developed in a collaboration between us and Perrigo in which we shared
development costs with Perrigo and will equally share the gross profits generated from sales of the product. Following receipt by
Perrigo of final approval from the FDA, we launched the product in February 2019.
We are also currently developing a portfolio of eight generic topical dermatological products, with seven of our generic
product candidates, including ivermectin cream, 1%, being developed in collaboration with Perrigo and another being developed
in collaboration with Douglas Pharmaceuticals. Both Perrigo and Douglas Pharmaceuticals have significant experience in the
development of generic drugs.
Our most advanced generic product candidate is ivermectin cream, 1%, for the treatment of inflammatory lesions
associated with rosacea, which we are developing in collaboration with Perrigo. In March 2017, Perrigo submitted an ANDA for
ivermectin cream, 1% to the FDA and received acceptance for filing. Following notification from Perrigo, Galderma
Laboratories, L.P., Galderma S.A., and Nestle Skin Health S.A., filed a patent litigation suit triggering the application of a 30-
month stay on approval of the ANDA, under the Hatch-Waxman Amendments. In January 2018, this ANDA was tentatively
approved by the FDA. Approval from the FDA is subject to the 30-month stay under the Hatch-Waxman Amendments. In
addition, because Actavis Ltd. filed an ANDA for ivermectin cream, 1%, before us or any other generic applicants, we may be
unable to obtain final approval for our ANDA until the expiration of Actavis Ltd.’s 180-day generic exclusivity. Ivermectin
cream, 1% is the active molecule in Soolantra which is currently marketed in the United States by Galderma Laboratories LP.
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Our Proprietary Silica-Based Microencapsulation Technology Platform
Encapsulation of a drug substance can be made using a variety of techniques, such as solvent evaporation, coacervation,
and interfacial polymerization. Most encapsulations involve organic polymers, such as poly-methyl methacrylate, chitosan and
cellulose. The resultant encapsulated drug substance can be an aqueous dispersion of varying payload and volume fraction or a
dried powder. Control over the encapsulation process when organic polymers are used is challenging and is mainly limited to
shell thickness. Other properties of the organic polymer encapsulating material are hard to control.
In contrast, we use proprietary ‘sol-gel’ processes to shape silica on site to form microcapsule shells of almost any size
and release profile. Sol-gel is a chemical process whereby amorphous silica, or other metal oxides, are made by forming
interconnections among colloidal particles (the “sol”) under increasing viscosity until a rigid silica shell (the “gel”) is formed.
The drug substance that is added during the sol-gel reaction is encapsulated, using a patented technique, by which a core-shell
structure is formed. The drug substance is in the core and the silica is the capsule shell. At the end of the process, the
microcapsules are in the shape of small beads ranging from 1 – 50 micron in size. This process results in an aqueous suspension
in which the drug substances are entrapped in silica particles.
Collaboration Agreements
Perrigo
On April 27, 2015, we entered into a development, manufacturing and commercialization agreement with Perrigo, as
amended on October 26, 2015, to work toward the objective of obtaining all FDA approvals necessary for the commercialization
of ivermectin cream, 1%, in the United States. Perrigo will conduct all regulatory, scientific, clinical and technical activities
necessary to develop ivermectin cream, 1%, prepare and file an ANDA with the FDA, and gain regulatory approval to market
ivermectin cream, 1%, in the United States. We granted Perrigo the right, title and interest in and to ivermectin cream, 1%, and
agreed on each party’s portion of the costs associated with performance under the agreement. Perrigo also owns intellectual
property created in connection with the development of ivermectin cream, 1%. If approval by the FDA of the ANDA, Perrigo is
required to use diligent efforts to commercialize ivermectin cream, 1%, in the United States. Perrigo has the sole and exclusive
right to establish and control the prices and all other terms and conditions for the sales of ivermectin cream, 1%, in the United
States and is required to do so in good faith. We will be entitled to 50% of Perrigo’s gross profits related to the sale of ivermectin
cream, 1%, on a quarterly basis, for a period of 20 years following the first commercial sale of the ivermectin cream, 1%, in the
United States. The agreement may be terminated if the gross profits relating to the sale of the product do not exceed a certain
threshold or if the potential market for the product has been significantly reduced due to regulatory changes.
Each party is responsible for its own costs in relation to performance under the agreement.
We are obligated to finance all out-of-pocket trial expenses (including materials), and Perrigo UK is required to reimburse
us for 40% of the out-of-pocket clinical trial expenses as follows (a) if we obtain FDA approval, by financing our share of the
out-of-pocket litigation expenses, or (b) if FDA approval is not obtained, by reimbursing us an amount equal to 40% of our out-
of-pocket expenses.
In connection with the transfer of the first generic version of Zovirax® (acyclovir) cream, to us by Arkin Dermatology on
August 22, 2017, we assumed an agreement with Perrigo UK for the development, manufacturing and commercialization of the
generic version of Zovirax® (acyclovir) cream. Under the terms of the agreement, Perrigo UK was required to conduct all
regulatory, scientific, clinical and technical activities necessary to develop the generic version of Zovirax® (acyclovir) cream,
prepare and file an ANDA with the FDA, and gain regulatory approval to market the generic version of Zovirax® (acyclovir)
cream. The agreement provides that as soon as reasonably practical after final approval by the FDA of the ANDA, Perrigo UK is
required to use diligent efforts to commercialize the product in the United States. Perrigo UK has the sole and exclusive right to
establish and control the prices and all other terms and conditions for the sales of the product in the United States and is required
to do so in good faith . We are responsible for 80% of all out-of-pocket clinical study costs related to the generic version of
Zovirax® (acyclovir) cream. We will be entitled to 50% of Perrigo UK’s gross profits related to the sale of the generic version of
Zovirax® (acyclovir) cream, on a quarterly basis, for a period of 20 years following the first commercial sale of the generic
product. The agreement may be terminated if the gross profits relating to the sale of the generic version of Zovirax® (acyclovir)
cream do not exceed a certain threshold or if the potential market for the product has been significantly reduced to regulatory
changes.
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In February 2019, we announced that Perrigo received final approval from the FDA for the first generic version of
Zovirax® (acyclovir) cream, 5%. We launched the product in February 2019.
In addition, we have entered into collaboration agreements with Perrigo Israel, an affiliate of Perrigo Company plc, for the
development, manufacturing and commercialization of five other generic product candidates. Under such agreements Perrigo
will conduct the regulatory (if relevant), scientific, clinical and technical activities necessary to develop the generic product
candidates and seek regulatory approval with the FDA for the generic product candidates. If approved by the FDA, Perrigo has
agreed to commercialize the generic product candidates in the United States. We and Perrigo will share the development costs
and the gross profits generated from the sales of the generic product candidates, if approved.
Douglas Pharmaceuticals
On June 7, 2017, we entered into a Development, License, Supply and Marketing Agreement, with Douglas with respect
to the development and commercialization of a generic product candidate for a drug that already has generic substitutions.
Douglas will manufacture the product for non-clinical and clinical trial uses, and once approved for marketing, for
commercialization by us in the countries we elect to commercialize the product. Douglas will also be responsible for completing
the formulation of the product and providing chemistry, manufacturing and control support, conducting all steps for production
and quality controls of the product, formulation development of the product in final finished form and supporting the ANDA or
any other applicable registration application. We will be responsible for conducting the legal and regulatory review process,
performing bioequivalence and clinical studies to obtain marketing approval for the product in the United States and preparing
and filing the regulatory filings to obtain marketing approval in the United States. We have the right to commercialize the product
in all countries in North America and any other country agreed to with Douglas, and Douglas has the right to commercialize the
product in Australia, New Zealand, the Southeast, East and North Asia region and the Middle East and North Africa region and
any other country agreed to by us and Douglas.
Each party granted the other an exclusive royalty free license under its related intellectual property with the right to grant
sublicenses, to use and commercialize the product in the countries in which the other party has the right to commercialize the
product. Any new intellectual property generated in the development plan will be jointly owned. We are responsible for patent
prosecution and Douglas is required to reimburse us for 50% of our patent expenses.
Each party is required to pay the other party 50% of its net profits from the sale of the products during the term of the
agreement. In addition, we or the third party commercializing the product on our behalf will pay Douglas a transfer price based
on the cost of goods for the manufacture of the products. The term of the agreement is ten years, and either party may terminate
the agreement (i) for breach, (ii) if the joint steering committee established by the parties determines that it is unlikely that
marketing approval will be achieved or determines that the commercialization of the product becomes unfeasible or uneconomic,
(iii) a patent injunction permanently prohibits the future commercialization of the product or (iv) in the case of force majeure.
Intellectual Property
Our intellectual property and proprietary technology are directed to the development, manufacture and sale of our branded
product candidates, including Twyneo®, Epsolay® and SGT-210. We seek to protect our intellectual property, core technologies
and other know-how, through a combination of patents, trademarks, trade secrets, non-disclosure and confidentiality agreements,
assignments of invention and other contractual arrangements with our employees, consultants, partners, suppliers, customers and
others.
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We will be able to protect our technology from unauthorized use by third parties only to the extent it is covered by valid
and enforceable patents or is effectively maintained as trade secrets. Patents and other proprietary rights are an essential element
of our business. If any of the below described applications are not approved, or any of the below described patents are
invalidated, deemed unenforceable or otherwise successfully challenged, such loss would have a material effect on the
commercialization of our product candidates and our future prospects.
Our patent portfolio that is directed to our branded product candidates includes 83 patents and patent applications and
claims processes for manufacture (including silica microencapsulation platform and other technologies), formulations,
composition of matter, and methods of use. Of these 83 patents and patent applications, 47 are granted patents (5 in the United
States and 42 in other countries) and 36 are pending applications (22 in the United States and 14 in other countries).
For our Twyneo® product candidate, we have obtained patent protection for the composition of matter in the United
States, Canada, Japan, Mexico (with a term until 2028) and we have a pending application claiming composition of matter in the
European Patent Office. There are four patent families protecting the process for the encapsulation of the active agents of our
Twyneo® product candidate (one patent family has patents granted in Canada, India, Mexico, Europe and Japan (with a term until
2028) and an application pending in the United States; the second patent family has patents granted in Mexico and Canada (with
a term until 2029) and applications pending in the United States and Canada; and the third patent family has patents granted in
Europe (validated in France, Germany, Ireland, Italy, Spain, Switzerland, United Kingdom), China, India, Japan, Canada and
Mexico (with a term until 2030) and an application pending in the United States); and the fourth patent family has patents granted
in Canada, China, Israel, India and Mexico and an application pending in the United States. We own pending patents for the
formulation of our Twyneo® product candidate in the United States (with a term until 2038), Canada, Europe, China, India and
Mexico and patents granted in Japan, Canada and Mexico (with a term until 2032). We have pending patent applications in the
United States for the composition of our Twyneo® product candidate and one patent granted in the United States for the method
of treatment of Twyneo® (with a term until 2038).We have five registered trademarks in Israel, Europe, the United States and
Canada.
For our Epsolay® product candidate, we have obtained patents in China, Japan and the United States (with a term until
2032) covering the composition for topical treatment of rosacea. We have further pending applications for this composition in the
United States, Canada, Europe, Japan, China and Mexico. There are two patent families directed to the process for encapsulation
of the active agents of our Epsolay® product candidate (one patent family has granted patents in Canada, India, Mexico, Europe
and Japan (with a term until 2028) and a pending application in the United States; and the second patent family has patents
granted in Canada, China, Israel, India and Mexico and an application pending in the United States. We also have three
unpublished patent applications covering the methods of use of Epsolay® for the treatment of rosacea.
We have four registered trademarks in Israel, Europe, Canada and the United States. These registrations cover potential
brand names for our Epsolay® product candidate in Israel, Europe, Canada and the United States.
Competition
The pharmaceutical industry is subject to intense competition as well as rapid technological changes. Our ability to
compete is based on a variety of factors, including product efficacy, safety, cost-effectiveness, patient compliance, patent position
and effective product promotion. Competition is also based upon the ability of a company to offer a broad range of other product
offerings, large direct sales forces and long-term customer relationships with target physicians.
There are numerous companies that have branded or generic products or product candidates in the dermatology market.
Among them are Aclaris Therapeutics, Inc., Akorn, Inc., Almirall S.A., Aqua Pharmaceuticals LLC, Bayer HealthCare AG,
Cassiopea SpA, Dermira, Inc., Foamix Pharmaceuticals Ltd., Galderma Pharma S.A., Glenmark Pharmaceuticals Ltd., G&W
Laboratories, Inc., LEO Pharma A/S, Mylan N.V., Novan, Inc., Novartis AG, Novum Pharma, LLC, Perrigo Company plc, Pfizer,
Inc., Spear Therapeutics, Ltd., Sun Pharmaceutical Industries Ltd., Teligent, Inc., Teva Pharmaceutical Industries Ltd. and
Bausch Health Companies Inc.
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In order for our approved product candidates, if any, to compete successfully in the dermatology market, we will have to
demonstrate that their efficacy, safety and cost-effectiveness provide an attractive alternative to existing therapies, some of which
are widely known and accepted by physicians and patients, as well as to future new therapies. Such competition could lead to
reduced market share for our product candidates and contribute to downward pressure on the pricing of our product candidates,
which could harm our business, financial condition, operating results and prospects.
Many of the companies, academic research institutions, governmental agencies and other organizations involved in the
field of dermatology have substantially greater financial, technical and human resources than we do, and may be better equipped
to discover, develop, test and obtain regulatory approvals for products that compete with ours. They may also be better equipped
to manufacture, market and sell products. These companies, institutions, agencies and organizations may develop and introduce
products and drug delivery technologies competitive with or superior to ours which could inhibit our market penetration efforts.
Twyneo® and Epsolay® target the well-established acne and rosacea markets. If approved, we expect them to compete
with current standard-of-care treatments, whether branded, generic or over-the-counter, as well as with new treatments to be
approved in the future. The current standard-of-care for acne includes topical anti-bacterial drugs such as benzoyl peroxide that
are broadly available over-the-counter, prescription drug products that are based on single retinoid drug products such as Differin,
Atralin, Retin-A, Retin-A Micro, Tazorac, and Altreno, fixed-dose combinations of benzoyl peroxide and adapalene such as
Epiduo and Epiduo Forte, fixed-dose combinations of benzoyl peroxide and clindamycin such as Duac, Benzaclin, Onexton and
Acanya, fixed-dose combinations of tretinoin and clindamycin such as Ziana and Veltin, and topical antibiotics such as Aczone.
The current standard of care for rosacea includes Metrogel, Finacea and the recently launched Soolantra, as well as oral Oracea
(doxycycline embedded in a technology platform). As a fixed-dose combination product candidate, Twyneo® may also compete
with drug products utilizing other technologies that can separate two drug substances, such as dual chamber tubes, dual pouches
or dual sachets. In addition to these products, our FDA approved generic version of Zovirax® (acyclovir) cream, 5% and our
generic drug product candidates, including ivermectin cream, 1%, are expected to face direct competition from branded drugs and
authorized generics which are prescription drugs produced by the branded pharmaceutical companies and marketed under a
private label, at generic prices. On December 30, 2016, Actavis Ltd. submitted an ANDA for ivermectin, 1%, cream, and
therefore we will only be able to commercialize this product after Actavis Ltd.'s six-month exclusivity period expires.
Marketing, Sales and Distribution
We do not currently have any sales, marketing or distribution capabilities. In order to commercialize our product
candidates, if approved for commercial sale, we must either develop a sales and marketing infrastructure or collaborate with third
parties that have sales and marketing experience. We intend to commercialize our late-stage branded product candidates in the
United States, if approved, by building a specialized sales and marketing organization focused solely on dermatologists and their
patients. Because the U.S. market is served by a relatively small number of practicing dermatologists, we believe a small and
dedicated sales force can efficiently cover a significant portion of that targeted patient population. In other markets, we may
selectively pursue strategic collaborations with third parties in order to maximize the commercial potential of our product
candidates.
Manufacturing
We rely on and expect to continue to rely on third-party contract manufacturing organizations, or CMOs, for the supply of
current good manufacturing practice-grade, or cGMP-grade, clinical trial materials and commercial quantities of our product
candidates and products, if approved. For some materials, we rely on a single source supplier of raw material while for the
majority of raw materials used for the production of clinical and commercial supplies of our product candidates, alternative
suppliers are available
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Government Regulation
Regulation by governmental authorities in Israel, the United States and other countries is a significant factor in the
development, manufacture and commercialization of our product candidates and in our ongoing research and development
activities. Our business is subject to extensive government regulation in Israel for its manufacturing activities involving drug
products, drug product intermediates, and drug product active substances to be used in Phase III clinical trials and commercial
manufacturing. Prior to 2019, we voluntarily complied with and were certified by the Israeli Standards Institution for ISO
9001:2015 (quality standard), ISO 14001:2015 (environmental standard), and OHSAS 18001:2007 (safety standard). As of
August 2018, we complied with current good manufacturing, or cGMP, requirements, were audited and were granted a cGMP
certification by the Israel Ministry of Health. This certification confirms our cGMP compliance and allows us to manufacture
Twyneo® and its intermediates to support phase 3 clinical trials. The Company intends that the cGMP certification will be
extended to other products as they reach relevant stages of development, and that ISO 14001:2015 and OHSAS 18001:2007
certifications will continue to be maintained in the future. However, ISO 9001:2015 is made redundant by the cGMP
certification, and the Company does not intend to maintain it in 2020.
Product Approval Process in the United States
Review and approval of drugs
In the United States, pharmaceutical products are subject to extensive regulation by the FDA. The FDCA and other
federal and state statutes and implementing regulations govern, among other things, the research, development, testing,
manufacture, storage, recordkeeping, approval, labeling, promotion and marketing, distribution, post-approval monitoring and
reporting, sampling, and import and export of pharmaceutical products. Failure to comply with the applicable U.S. requirements
at any time during the product development process, approval process or after approval may subject an applicant to a variety of
administrative or judicial sanctions and enforcement actions brought by the FDA, the Department of Justice or other
governmental entities. Possible sanctions may include the FDA’s refusal to approve pending applications, withdrawal of an
approval, imposition of a clinical hold, issuance of warning letters or untitled letters, product recalls, product seizures, total or
partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement and
civil or criminal penalties.
FDA approval of a new drug application is required before any new unapproved drug or dosage form, can be marketed in
the United States. Section 505 of the FDCA describes three types of new drug applications: (1) an application that contains full
reports of investigations of safety and effectiveness (section 505(b)(1)); (2) an application that contains full reports of
investigations of safety and effectiveness but where at least some of the information required for approval comes from studies not
conducted by or for the applicant and for which the applicant has not obtained a right of reference (section 505(b)(2)); and (3) an
application that contains information to show that the proposed product is identical in active ingredient, dosage form, strength,
route of administration, labeling, quality, performance characteristics, and intended use, among other things, to a previously
approved product (section 505(j)). Section 505(b)(1) and 505(b)(2) new drug applications are referred to as NDAs, and section
505(j) applications are referred to as ANDAs. We believe that the applications for our late-stage branded product candidates will
be section 505(b)(2) NDAs and that those for our generic product candidates will be section 505(j) ANDAs.
In general, the process required by the FDA prior to marketing and distributing a new drug, as opposed to a generic drug
subject to section 505(j), in the United States usually involves the following:
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completion of pre-clinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s good laboratory practices, or
GLP, requirements or other applicable regulations;
submission to the FDA of an investigational new drug application, or IND, which must become effective before human clinical trials in the
United States may begin;
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approval by an independent institutional review board, or IRB, at each clinical site before each trial may be initiated;
performance of adequate and well-controlled human clinical trials in accordance with good clinical practice, or GCP, requirements to establish
the safety and efficacy of the proposed drug for its intended use;
preparation and submission to the FDA of an NDA;
satisfactory completion of an FDA advisory committee review, if applicable;
satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities at which the product or components thereof
are produced, to assess compliance with current good manufacturing practices, or cGMPs, and to assure that the facilities, methods and controls
are adequate to preserve the drug’s identity, strength, quality and purity;
satisfactory completion of FDA audits of clinical trial sites to assure compliance with GCPs and the integrity of the clinical data;
payment of user fees and FDA review and approval of the NDA; and
compliance with any post-approval requirements, including the potential requirement to implement a Risk Evaluation and Mitigation Strategy,
or REMS, and the potential requirement to conduct post-approval studies.
Pre-clinical studies
Pre-clinical studies include laboratory evaluation or product chemistry, formulation and toxicity, as well as animal studies
to assess the potential safety and efficacy of the product candidate. Pre-clinical safety tests must be conducted in compliance with
the FDA regulations. The results of the pre-clinical studies, together with manufacturing information and analytical data, are
submitted to the FDA as part of an IND which must become effective before clinical trials may commence. Long-term pre-
clinical studies, such as animal tests of reproductive toxicity and carcinogenicity, may continue after the IND application is
submitted.
Clinical trials
Clinical trials involve the administration of an investigational product to human subjects under the supervision of
qualified investigators in accordance with GCP requirements, which include, among other things, the requirement that all
research subjects provide their informed consent in writing before their participation in any clinical trial. Clinical trials are
conducted under written trial protocols detailing, among other things, the objectives of the trial, the parameters to be used in
monitoring safety, and the effectiveness criteria to be evaluated. A protocol for each clinical trial and any subsequent protocol
amendments must be submitted to the FDA as part of the IND.
An IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises
concerns or questions related to a proposed clinical trial and places the trial on clinical hold. In such a case, the IND sponsor and
the FDA must resolve any outstanding concerns before the clinical trial can begin. In addition, information about certain clinical
trials must be submitted within specific timeframes to the National Institutes of Health, or NIH, for public dissemination on the
NIH-maintained website, www.clinicaltrials.gov.
An IRB representing each institution participating in the clinical trial must review and approve the plan for any clinical
trial before it commences at that institution, and the IRB must conduct continuing review at least annually. The IRB must review
and approve, among other things, the trial protocol information to be provided to trial subjects. An IRB must operate in
compliance with FDA regulations.
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Clinical trials are typically conducted in three sequential phases, which may overlap or be combined:
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Phase I: The drug is initially introduced into healthy human subjects or patients with the target disease or condition and tested for safety, dosage
tolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an early indication of its effectiveness and to determine
optimal dosage.
Phase II: The drug is administered to a limited patient population to identify possible short-term adverse effects and safety risks, to
preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.
Phase III: The drug is administered to an expanded patient population, generally at geographically dispersed clinical trial sites, in well-
controlled clinical trials to generate enough data to statistically evaluate the efficacy and safety of the product for approval, to establish the
overall risk-benefit profile of the product, and to provide adequate information for the labeling of the product.
Unlike NDA products which must be shown to be safe and effective for their intended use, ANDA products must be
shown to be the same as, and bioequivalent to, a reference listed drug, or RLD. A product is considered bioequivalent if there is
no significant difference in the rate and extent to which the active ingredient in the generic product and in the RLD becomes
available at the site of drug action when administered at the same molar dose under similar conditions in an appropriately
designed study. Accordingly, an applicant typically compares the systemic exposure profile of the generic test drug product to
that of the RLD at the same regimen and exposure period as the RLD to demonstrate bioequivalence. For most ANDAs,
bioequivalence must be shown in human clinical trials, but in some cases, FDA will accept in vitro data. Specific requirements
are typically outlined by FDA in product-specific bioequivalence guidance.
Submission of an NDA to the FDA
The results of the pre-clinical studies and clinical trials, together with other detailed information, including information on
the manufacture, control and composition of the product, are submitted to the FDA as part of an NDA requesting approval to
market the product candidate for a proposed indication. Under the Prescription Drug User Fee Act, as amended, applicants are
required to pay fees to the FDA for reviewing an NDA. These application user fees, as well as the annual program fees required
for approved products, can be substantial. The NDA application review fee alone can exceed $2.5 million, subject to certain
limited deferrals, waivers and reductions that may be available.
The FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing based
on the agency’s threshold determination that it is sufficiently complete to permit substantive review. The FDA may request
additional information rather than accept an NDA for filing. In this event, the NDA must be resubmitted with the additional
information and is subject to payment of additional user fees. The resubmitted application is also subject to review before the
FDA accepts it for filing. If found complete, the FDA will accept the NDA for filing. Once the submission is accepted for filing,
the FDA begins an in-depth substantive review.
Under the Prescription Drug User Fee Act, the FDA has agreed to certain performance goals in the review of NDAs
through a two-tiered classification system, Standard Review and Priority Review. An NDA for a product is eligible for Priority
Review if it has the potential to provide a significant improvement in the treatment, diagnosis or prevention of a serious disease
or condition compared to marketed products. For non-new molecular entities, such as those typically submitted in 505(b)(2)
applications, the FDA endeavors to review applications subject to Standard Review within approximately 10 months of receipt,
whereas the FDA’s goal is to review Priority Review applications within approximately six months of receipt. The FDA,
however, may not approve a drug within these established goals, as the review process is often significantly extended by FDA
requests for additional information or clarification, and its review goals are subject to change from time to time.
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Before approving an NDA, the FDA inspects the facilities at which the product is manufactured or facilities that are
significantly involved in the product development and distribution process and will not approve the product unless cGMP
compliance is satisfactory. Additionally, the FDA will typically inspect one or more clinical sites to assure compliance with GCP
requirements. The FDA may also refer applications for novel drug products or drug products which present difficult questions of
safety or efficacy to an advisory committee for review, evaluation and recommendation as to whether the application should be
approved and under what conditions.
After the FDA evaluates the NDA and the manufacturing facilities, it issues either an approval letter or a complete
response letter to indicate that the review cycle for an application is complete and that the application is not ready for approval. A
complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing, or
information, in order for the FDA to reconsider the application. Even with submission of this additional information, the FDA
may ultimately decide that an application does not satisfy the regulatory criteria for approval. If, or when, the deficiencies have
been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. An approval letter
authorizes commercial marketing of the drug with specific prescribing information for specific indications.
If a product is approved, the approval will impose limitations on the indicated uses for which the product may be
marketed, may require that warning statements be included in the product labeling, may require that additional studies or trials be
conducted following approval as a condition of the approval, may impose restrictions and conditions on product distribution,
prescribing or dispensing in the form of a risk management plan, or impose other limitations. For example, as a condition of
NDA approval, the FDA may require a risk evaluation and mitigation strategy, or REMS, to ensure that the benefits of the drug
outweigh the potential risks. If the FDA determines a REMS is necessary during review of the application, the drug sponsor must
agree to the REMS plan at the time of approval. A REMS may be required to include various elements, such as a medication
guide or patient package insert, a communication plan to educate healthcare providers of the drug’s risks, limitations on who may
prescribe or dispense the drug, or other elements to assure safe use, such as special training or certification for prescribing or
dispensing, dispensing only under certain circumstances, special monitoring and the use of patient registries. In addition, the
REMS must include a timetable to periodically assess the strategy. The requirement for a REMS can materially affect the
potential market and profitability of a drug.
Further changes to some of the conditions established in an approved application, including changes in indications,
labeling, or manufacturing processes or facilities, require submission and FDA approval of a new NDA or NDA supplement
before the change can be implemented, which may require us to develop additional data or conduct additional pre-clinical studies
and clinical trials. An NDA supplement for a new indication typically requires clinical data similar to that in the original
application, and the FDA uses the similar procedures in reviewing NDA supplements as it does in reviewing NDAs.
Post-Approval Requirements
Any drug products for which we receive FDA approval will be subject to continuing regulation by the FDA. Certain
requirements include, among other things, record-keeping requirements, reporting of adverse experiences with the product,
providing the FDA with updated safety and efficacy information on an annual basis or more frequently for specific events,
product sampling and distribution requirements, complying with certain electronic records and signature requirements and
complying with FDA promotion and advertising requirements. These promotion and advertising requirements include standards
for direct-to-consumer advertising, prohibitions against promoting drugs for uses or patient populations that are not described in
the drug’s approved labeling, known as “off-label use,” and other promotional activities, such as those considered to be false or
misleading. Failure to comply with FDA requirements can have negative consequences, including the immediate discontinuation
of noncomplying materials, adverse publicity, enforcement letters from the FDA, mandated corrective advertising or
communications with doctors, and civil or criminal penalties. Such enforcement may also lead to scrutiny and enforcement by
other government and regulatory bodies.
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Although physicians may prescribe legally available drugs for off-label uses, manufacturers may not encourage, market or
promote such off-label uses. As a result, “off-label promotion” has formed the basis for litigation under the Federal False Claims
Act, violations of which are subject to significant civil fines and penalties. In addition, manufacturers of prescription products are
required to disclose annually to the Center for Medicaid and Medicare any payments made to physicians in the United States
under the Sunshine Act of 2012. These payments could be in cash or kind, could be for any reason, and are required to be
disclosed even if the payments are not related to the approved product. A failure to fully disclose or not report in time could lead
to penalties of up to $1 million per year.
The manufacturing of any of our product candidates will be required to comply with applicable FDA manufacturing
requirements contained in the FDA’s cGMP regulations. The FDA’s cGMP regulations require, among other things, quality
control and quality assurance, as well as the corresponding maintenance of comprehensive records and documentation. Drug
manufacturers and other entities involved in the manufacture and distribution of approved drugs are also required to register their
establishments and list any products they make with the FDA and to comply with related requirements in certain states. Changes
to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDA
regulations also require investigation and correction of any deviations from cGMP requirements and impose reporting and
documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use. These
entities are further subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP
and other laws. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality
control to maintain cGMP compliance.
Discovery of problems with a product after approval may result in serious and extensive restrictions on a product,
manufacturer or holder of an approved NDA, as well as lead to potential market disruptions. These restrictions may include
recalls, suspension of a product until the FDA is assured that quality standards can be met, and continuing oversight of
manufacturing by the FDA under a “consent decree,” which frequently includes the imposition of costs and continuing
inspections over a period of many years, as well as possible withdrawal of the product from the market. In addition, changes to
the manufacturing process generally require prior FDA approval before being implemented. Other types of changes to the
approved product, such as adding new indications and additional labeling claims, are also subject to further FDA review and
approval. There also are continuing, annual program user fee requirements for any approved products, as well as new application
fees for supplemental applications with clinical data.
The FDA also may require post-marketing testing, or Phase IV testing, as well as risk minimization action plans and
surveillance to monitor the effects of an approved product or place conditions on an approval that could otherwise restrict the
distribution or use of our product candidates.
Once approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards
is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems
with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to
comply with regulatory requirements, may result in mandatory revisions to the approved labeling to add new safety information;
imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions
under a REMS program. Other potential consequences include, among other things:
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restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;
fines, warning letters or holds on post-approval clinical trials;
refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product approvals;
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product seizure or detention, or refusal to permit the import or export of products; or
injunctions or the imposition of civil or criminal penalties.
Pediatric trials and exclusivity
Even when not pursuing a pediatric indication, under the Pediatric Research Equity Act of 2003, an NDA or supplement
thereto must contain data that is adequate to assess the safety and effectiveness of the drug product for the claimed indications in
all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the
product is safe and effective. Sponsors must also submit pediatric study plans prior to the assessment data. Those plans must
contain an outline of the proposed pediatric trials the applicant plans to conduct, including trial objectives and design, any
deferral or waiver requests, and other information required by the statute. The applicant, the FDA, and the FDA’s internal review
committee must then review the information submitted, consult with each other, and agree upon a final plan. The FDA or the
applicant may request an amendment to the plan at any time.
The FDA may also, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all
pediatric data until after approval of the product for use in adults, or full or partial waivers from the pediatric data requirements.
Separately, in the event the FDA makes a written request for pediatric data relating to a drug product, an NDA sponsor
who submits such data may be entitled to pediatric exclusivity. Pediatric exclusivity is another type of non-patent marketing
exclusivity in the United States and, if granted, provides for the attachment of an additional six months of marketing protection to
the term of any existing exclusivity.
The Hatch-Waxman Amendments
ANDA Approval Process
The Hatch-Waxman Amendments established abbreviated FDA approval procedures for drugs that are shown to be
equivalent to proprietary drugs previously approved by the FDA through the NDA process. Approval to market and distribute
these drugs is obtained by submitting an ANDA to the FDA. An ANDA is a comprehensive submission that contains, among
other things, data and information pertaining to the active pharmaceutical ingredient, drug product formulation, specifications and
stability of the generic drug, as well as analytical methods, manufacturing process validation data, and quality control procedures.
Premarket applications for generic drugs are termed abbreviated because they generally do not include pre-clinical and clinical
data to demonstrate safety and effectiveness. Instead, a generic applicant must demonstrate that its product is bioequivalent to the
innovator drug. In certain situations, an applicant may obtain ANDA approval of a generic product with a strength or dosage
form that differs from a referenced innovator drug pursuant to the filing and approval of an ANDA Suitability Petition. The FDA
will approve the generic product as suitable for an ANDA application if it finds that the generic product does not raise new
questions of safety and effectiveness as compared to the innovator product. A product is not eligible for ANDA approval if the
FDA determines that it is not bioequivalent to the referenced innovator drug, if it is intended for a different use, or if it is not
subject to an approved Suitability Petition. However, such a product might be approved under an NDA, with supportive data
from clinical trials. We are developing certain of our product candidates as generic drugs, for which we intend to submit ANDAs
to the FDA.
505(b)(2) NDAs
Section 505(b)(2) was enacted as part of the Hatch-Waxman Amendment, and permits the filing of an NDA where at least
some of the information required for approval comes from studies or trials not conducted by or for the applicant and for which
the applicant has not obtained a right of reference. Section 505(b)(2) typically serves as an alternative path to FDA approval for
modifications to formulations or uses of products previously approved by the FDA. If the 505(b)(2) applicant can establish that
reliance on the FDA’s previous findings of safety and effectiveness is scientifically appropriate, it may eliminate the need to
conduct certain pre-clinical studies or clinical trials for the new product. The FDA may also require companies to perform
additional studies or measurements, including clinical trials, to support the change from the approved branded reference drug.
The FDA may then approve the new product candidate for all, or some, of the labeled indications for which the branded reference
drug has been approved, as well as for any new indication sought by the 505(b)(2) applicant. We are developing our branded
product candidates with the expectation that we will submit 505(b)(2) NDAs to FDA for these products.
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Orange Book Listing
In seeking approval for a drug through an NDA, including a 505(b)(2) NDA, applicants are required to list with the FDA
certain patents whose claims cover the applicant’s product or method of using the product. Upon approval of an NDA, each of the
patents listed in the application for the drug is then published in the FDA’s Publication of Approved Drug Products with
Therapeutic Equivalence Evaluations, commonly known as the “Orange Book.” Any applicant who submits an ANDA seeking
approval of a generic equivalent of a drug listed in the Orange Book or a Section 505(b)(2) NDA referencing a drug listed in the
Orange Book must certify to the FDA (1) that no patent information on the drug product that is the subject of the application has
been submitted to the FDA; (2) that such patent has expired; (3) the date on which such patent expires; or (4) that such patent is
invalid or will not be infringed upon by the manufacture, use, or sale of the drug product for which the application is submitted.
This last certification is known as a Paragraph IV certification. The applicant may also elect to submit a “section viii” statement
certifying that its proposed label does not contain (or carves out) any language regarding a patented method-of-use rather than
certify to a listed method-of-use patent.
If the applicant does not challenge one or more listed patents through a Paragraph IV certification, the FDA will not
approve the ANDA or Section 505(b)(2) NDA until all the listed patents claiming the referenced product have expired. Further,
the FDA will also not approve, as applicable, an ANDA or Section 505(b)(2) NDA until any non-patent exclusivity, as described
in greater detail below, has expired.
If the ANDA or Section 505(b)(2) NDA applicant has provided a Paragraph IV certification to the FDA, the applicant
must also send notice of the Paragraph IV certification to the owner of the referenced NDA for the previously approved product
and relevant patent holders within 20 days after the ANDA or Section 505(b)(2) NDA has been accepted for filing by the FDA.
The NDA and patent holders may then initiate a patent infringement suit against the ANDA or Section 505(b)(2) applicant.
Under the FDCA, the filing of a patent infringement lawsuit within 45 days of receipt of the notification regarding a Paragraph
IV certification automatically prevents the FDA from approving the ANDA or Section 505(b)(2) NDA until the earliest to occur
of 30 months beginning on the date the patent holder receives notice, expiration of the patent, settlement of the lawsuit, or until a
court deems the patent unenforceable, invalid or not infringed. Even if a patent infringement claim is not brought within the 45-
day period, a patent infringement claim may be brought under traditional patent law, but it does not invoke the 30-month stay.
Moreover, in cases where an ANDA or Section 505(b)(2) application containing a Paragraph IV certification is submitted
after the fourth year of a previously approved drug’s five-year NCE exclusivity period, as described more fully below, and the
patent holder brings suit within 45 days of notice of the Paragraph IV certification, the 30-month period is automatically extended
to prevent approval of the Section 505(b)(2) application until the date that is seven and one-half years after approval of the
previously approved reference product that has the five-year NCE exclusivity. The court also has the ability to shorten or
lengthen either the 30-month or the seven and one-half year period if either party is found not to be reasonably cooperating in
expediting the litigation.
Notwithstanding the approval of many products by the FDA pursuant to Section 505(b)(2), over the last few years, some
pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA changes its
interpretation of Section 505(b)(2), or if the FDA’s interpretation is successfully challenged in court, this could delay or even
prevent the FDA from approving any Section 505(b)(2) NDA that we submit.
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Non-Patent Exclusivity
In addition to patent exclusivity, NDA holders may be entitled to a period of non-patent exclusivity, during which the
FDA cannot approve an ANDA or 505(b)(2) application that relies on the listed drug. For example, a pharmaceutical
manufacturer may obtain five years of non-patent exclusivity upon NDA approval of a new chemical entity, or NCE, which is a
drug that contains an active moiety that has not been approved by FDA in any other NDA. An “active moiety” is defined as the
molecule or ion responsible for the drug substance’s physiological or pharmacologic action. During the five year exclusivity
period, the FDA cannot accept for filing any ANDA seeking approval of a generic version of that drug or any 505(b)(2) NDA for
the same active moiety and that relies on the FDA’s findings regarding that drug, except that FDA may accept an application for
filing after four years if the follow-on applicant makes a Paragraph IV certification.
Another form of non-patent exclusivity is clinical investigation exclusivity. A drug, including one approved under Section
505(b)(2), may obtain a three-year period of exclusivity for a particular condition of approval, or change to a marketed product,
such as a new formulation for a previously approved product, if one or more new clinical trials (other than bioavailability or
bioequivalence studies) was essential to the approval of the application and was conducted or sponsored by the applicant. Should
this occur, the FDA would be precluded from approving any ANDA or 505(b)(2) application for the protected modification until
after that three-year exclusivity period has run. However, unlike NCE exclusivity, the FDA can accept an application and begin
the review process during the exclusivity period.
Patent Term Restoration and Extension
A patent claiming a new drug product may be eligible for a limited patent term extension, or PTE, under the Hatch-
Waxman Amendments, which permits an extended patent term of up to five years for the developed pharmaceutical to
compensate for patent term lost during product development and the FDA regulatory review. The PTE period granted is typically
one-half the time between the effective date of an IND and the submission date of an NDA, plus the time between the submission
date of an NDA and the ultimate approval date. However, the PTE cannot be used to extend the remaining term of a patent past a
total of 14 years from the product’s approval date. Only one patent applicable to an approved drug product is eligible for the
extension, and the application for the extension must be submitted prior to the expiration of the patent in question. A patent that
covers multiple drugs for which approval is sought can only be extended in connection with one of the approvals. The U.S. Patent
and Trademark Office reviews and approves the PTE application in consultation with the FDA.
Review and Approval of Drug Products Outside the United States
In addition to regulations in the United States, if we target non-U.S. markets, we will be subject to a variety of foreign
regulations governing manufacturing, clinical trials, commercial sales and distribution of our future product candidates. Whether
or not we obtain FDA approval for a product candidate, we must obtain approval of the product by the comparable regulatory
authorities of foreign countries before commencing clinical trials or marketing in those countries. The approval process varies
from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing
the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.
Under European Union regulatory systems, marketing authorizations may be submitted either under a centralized,
decentralized or mutual recognition procedure. The centralized procedure provides for the grant of a single marketing
authorization that is valid for all European Union member states. The decentralized procedure includes selecting one “reference
member state,” or RMS, and submitting to more than one-member state at the same time. The RMS National Competent
Authority conducts a detailed review and prepares an assessment report, to which concerned member states provide comment.
The mutual recognition procedure provides for mutual recognition of national approval decisions. Under this procedure, the
holder of a national marketing authorization may submit an application to the remaining member states post-initial approval.
Within 90 days of receiving the applications and assessment report, each member state must decide whether to recognize the
approval.
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Pharmaceutical Coverage, Pricing and Reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we obtain
regulatory approval. In the United States and other markets, sales of any product candidates for which we receive regulatory
approval for commercial sale will depend in part on the availability of coverage and reimbursement from third-party payors.
Third-party payors include government health administrative authorities, managed care providers, private health insurers and
other organizations. The process for determining whether a payor will provide coverage for a drug product may be separate from
the process for setting the price or reimbursement rate that the payor will pay for the drug product. Third-party payors may limit
coverage to specific drug products on an approved list, or formulary, which might not include all of the FDA-approved drug
products for a particular indication.
Third-party payors are increasingly challenging the price and examining the medical necessity and cost-effectiveness of
medical products and services, in addition to their safety and efficacy. We may need to conduct expensive pharmacoeconomic
studies in order to demonstrate the medical necessity and cost-effectiveness of Epsolay® and Twyneo®, in addition to the costs
required to obtain the FDA approvals. For example, Epsolay® and Twyneo® may not be considered medically necessary or cost-
effective. A payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be
approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an
appropriate return on our investment in product development.
In March 2010, the President of the United States signed the Affordable Care Act, one of the most significant healthcare
reform measures in decades. The Affordable Care Act substantially changed the way healthcare is financed by both governmental
and private insurers, and significantly impacted the pharmaceutical industry. The Affordable Care Act contained a number of
provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse,
which impacted existing government healthcare programs and will result in the development of new programs, including
Medicare payment for performance initiatives and improvements to the physician quality reporting system and feedback
program.
Additionally, the Affordable Care Act:
•
•
increased the minimum level of rebates payable by manufacturers of brand-name drugs from 15.1% to 23.1%; and
imposed a non-deductible annual fee on pharmaceutical manufacturers or importers who sell “branded prescription drugs” to specified federal
government programs.
Since its enactment, there have been judicial and Congressional challenges to certain aspects of the Affordable Care Act.
By way of example, the Tax Act was enacted, which, among other things, removes penalties for not complying with the
Affordable Care Act’s individual mandate to carry health insurance. On December 14, 2018, a U.S. District Court Judge in the
Northern District of Texas, ruled that the individual mandate is a critical and inseverable feature of the Affordable Care Act, and
therefore, because it was repealed as part of the Tax Act, the remaining provisions of the Affordable Care Act are invalid as well.
On December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the District Court's decision that the individual
mandate was unconstitutional but remanded the case back to the District Court to determine whether the remaining provisions of
the Affordable Care Act are invalid as well. It is unclear how these decisions, subsequent appeals, or other efforts to challenge,
repeal or replace the Affordable Care Act will impact the law or our business.
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In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. For
example, the Budget Control Act of 2011 resulted in aggregate reductions to Medicare payments to providers of 2% per fiscal
year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will stay in effect
through 2029 unless additional Congressional action is taken. Additionally, in January 2013, the American Taxpayer Relief Act
of 2012 was signed into law, which, among other things, further reduced Medicare payments to several providers and increased
the statute of limitations period for the government to recover overpayments to providers from three to five years. Recently there
has also been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products,
which has resulted in several Congressional inquiries and proposed and enacted legislation designed to, among other things, bring
more transparency to product pricing, review the relationship between pricing and manufacturer patient programs and reform
government program reimbursement methodologies. Individual states in the United States have also become increasingly active
in passing legislation and implementing regulations designed to control pharmaceutical product pricing, including price or patient
reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency
measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. We expect that
additional state and federal healthcare initiatives will be adopted in the future, any of which could impact the coverage and
reimbursement for drugs, including our product candidates, if approved.
In the European Union, pricing and reimbursement schemes vary widely from country to country. Some countries provide
that drug products may be marketed only after a reimbursement price has been agreed. Some countries may require the
completion of additional studies or trials that compare the cost-effectiveness of a particular product candidate to currently
available therapies. For example, the European Union provides options for its member states to restrict the range of drug products
for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for
human use. European Union member states may approve a specific price for a drug product, or it may instead adopt a system of
direct or indirect controls on the profitability of the company placing the drug product on the market. Other member states allow
companies to fix their own prices for drug products but monitor and control company profits. The downward pressure on health
care costs in general, particularly prescription drugs, has become intense. As a result, there are increasingly high barriers to entry
for new products. In addition, in some countries, cross-border imports from low-priced markets exert competitive pressure that
may reduce pricing within a country. Any country that has price controls or reimbursement limitations for drug products may not
allow favorable reimbursement and pricing arrangements.
Healthcare Laws and Regulations
Although currently have any product candidates on
the first generic version of
Zovirax® (acyclovir) cream, 5% for which Perrigo, our collaborator, received final FDA approval in February 2019, our current
and future business operations may be subject to additional healthcare regulation and enforcement by the federal government and
by authorities in the states and foreign jurisdictions in which we conduct our business. Such laws include, without limitation,
state and federal anti-kickback, fraud and abuse, false claims, privacy and security, price reporting and physician sunshine laws.
Some of our pre-commercial activities are subject to some of these laws.
the market, other
than
The federal Anti-Kickback Statute makes it illegal for any person or entity, including a prescription drug manufacturer or
a party acting on its behalf to knowingly and willfully, directly or indirectly solicit, receive, offer, or pay any remuneration that is
intended to induce the referral of business, including the purchase, order, lease of any good, facility, item or service for which
payment may be made under a federal healthcare program, such as Medicare or Medicaid. The term “remuneration” has been
broadly interpreted to include anything of value. The Anti-Kickback Statute has been interpreted to apply to arrangements
between pharmaceutical manufacturers on one hand and prescribers, purchasers, formulary managers, and beneficiaries on the
other. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from
prosecution, the exceptions and safe harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be
intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception
or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does
not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on
a case-by-case basis based on a cumulative review of all its facts and circumstances. Several courts have interpreted the statute’s
intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal
healthcare covered business, the Anti-Kickback Statute has been violated. In addition, a person or entity does not need to have
actual knowledge of the statute or specific intent to violate it in order to have committed a violation. Violations of this law are
punishable by up to ten years in prison, and can also result in criminal fines, civil money penalties and exclusion from
participation in federal healthcare programs. Moreover, a claim including items or services resulting from a violation of the
federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act.
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The federal civil False Claims Act prohibits, among other things, any person or entity from knowingly presenting, or
causing to be presented, for payment to, or approval by, federal programs, including Medicare and Medicaid, claims for items or
services, including drugs, that are false or fraudulent or not provided as claimed, knowingly making, using or causing to be made
or used, a false record or statement material to a false or fraudulent claim, or from knowingly making a false statement to avoid,
decrease or conceal an obligation to pay money to a federal program. Persons and entities can be held liable under these laws if
they are deemed to “cause” the submission of false or fraudulent claims by, for example, providing inaccurate billing or coding
information to customers or promoting a product off-label. In addition, our future activities relating to the reporting of wholesaler
or estimated retail prices for our product candidates, the reporting of prices used to calculate Medicaid rebate information and
other information affecting federal, state and third-party reimbursement for our product candidates, and the sale and marketing of
our product candidates, are subject to scrutiny under this law. Penalties for federal civil False Claims Act violations may include
up to three times the actual damages sustained by the government, plus mandatory civil penalties for each separate false claim,
the potential for exclusion from participation in federal healthcare programs, and, although the federal False Claims Act is a civil
statute, False Claims Act violations may also implicate various federal criminal statutes.
HIPAA created new federal criminal statutes that prohibit among other actions, knowingly and willfully executing, or
attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors, knowingly and
willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare
offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false,
fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Like the
federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to
violate it in order to have committed a violation.
The civil monetary penalties statute imposes penalties against any person or entity that, among other things, is determined
to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an
item or service that was not provided as claimed or is false or fraudulent.
Also, many states have similar fraud and abuse statutes or regulations that may be broader in scope and may apply
regardless of payor, in addition to items and services reimbursed under Medicaid and other state programs. Additionally, to the
extent that any of our product candidates are sold in a foreign country, we may be subject to similar foreign laws. For example,
the collection and use of personal health data in the European Union, previously governed by the provisions of the Data
Protection Directive, is now governed by the GDPR, which became effective on May 25, 2018. While the Data Protection
Directive did not apply to organizations based outside the EU, the GDPR has expanded its reach to include any business,
regardless of its location, that provides goods or services to residents in the EU. This expansion would incorporate any clinical
trial activities in EU members states. The GDPR imposes strict requirements on controllers and processors of personal data,
including special protections for “sensitive information” which includes health and genetic information of data subjects residing
in the EU. GDPR grants individuals the opportunity to object to the processing of their personal information, allows them to
request deletion of personal information in certain circumstances, and provides the individual with an express right to seek legal
remedies in the event the individual believes his or her rights have been violated. Further, the GDPR imposes strict rules on the
transfer of personal data out of the European Union to the United States or other regions that have not been deemed to offer
“adequate” privacy protections. Failure to comply with the requirements of the GDPR and the related national data protection
laws of the European Union Member States, which may deviate slightly from the GDPR, may result in fines of up to 4% of
global revenues, or € 20,000,000, whichever is greater. Additionally, following the United Kingdom’s withdrawal from the
European Union, we will have to comply with the GDPR and the United Kingdom GDPR, each regime having the ability to fine
up to the greater of €20 million/ £17.5 million or 4% of global turnover. The relationship between the United Kingdom and the
European Union in relation to certain aspects of data protection law remains unclear, for example around how data can lawfully
be transferred between each jurisdiction, which exposes us to further compliance risk.
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HIPAA, as amended by HITECH, and their implementing regulations, including the final omnibus rule published on
January 25, 2013, mandates, among other things, the adoption of uniform standards for the electronic exchange of information in
common healthcare transactions, as well as standards relating to the privacy and security of individually identifiable health
information, which require the adoption of administrative, physical and technical safeguards to protect such information. Among
other things, HITECH makes HIPAA’s security standards directly applicable to business associates, defined as independent
contractors or agents of covered entities that create, receive or obtain protected health information in connection with providing a
service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against
covered entities and business associates, and gave state attorneys general new authority to file civil actions for damages or
injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing
federal civil actions. In addition, certain state laws govern the privacy and security of health information in certain circumstances,
some of which are more stringent than HIPAA and many of which differ from each other in significant ways and may not have
the same effect, thus complicating compliance efforts. Failure to comply with these laws, where applicable, can result in the
imposition of significant civil and/or criminal penalties. By way of example, California enacted the California Consumer Privacy
Act, or CCPA, on June 28, 2018, which went into effect on January 1, 2020. The CCPA gives California residents expanded
rights to access and delete their personal information, opt out of certain personal information sharing, and receive detailed
information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a
private right of action for data breaches that is expected to increase data breach litigation. The CCPA may increase our
compliance costs and potential liability.
The Affordable Care Act imposed, among other things, new annual reporting requirements for covered manufacturers for
certain payments and other transfers of value provided to physicians (defined to include doctors, dentists, optometrists, podiatrists
and chiropractors), certain other health care providers beginning in 2022, and teaching hospitals, as well as certain ownership and
investment interests held by physicians as defined by statute and their immediate family members. Failure to submit timely,
accurately and completely the required information for all payments, transfers of value and ownership or investment interests
may result in civil monetary penalties. Certain states also mandate implementation of compliance programs, impose restrictions
on drug manufacturer marketing practices, require reporting of marketing expenditures and pricing information and/or require the
tracking and reporting of gifts, compensation and other remuneration to physicians.
Because we intend to commercialize products that could be covered by a federal healthcare program and other
governmental healthcare programs, we intend to develop a comprehensive compliance program that establishes internal controls
to facilitate adherence to the rules and program requirements to which we will or may become subject. Although the development
and implementation of compliance programs designed to establish internal controls and facilitate compliance can mitigate the risk
of investigation, prosecution, and penalties assessed for violations of these laws, the risks cannot be entirely eliminated.
If our operations are found to be in violation of any of such laws or any other governmental regulations that apply to us,
we may be subject to penalties, including, without limitation, administrative, civil and criminal penalties, damages, fines,
disgorgement, contractual damages, reputational harm, diminished profits and future earnings, the curtailment or restructuring of
our operations, exclusion from participation in federal and state healthcare programs or similar programs in other countries or
jurisdictions, integrity oversight and reporting obligations, and individual imprisonment, any of which could adversely affect our
ability to operate our business and our financial results.
Innovation Authority
We have received royalty-bearing grants from the government of Israel through the IIA, for the financing of a portion of
our research and development expenditures in Israel.
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Under the Innovation Law and the IIA’s rules and guidelines, recipients of grants, or Recipient Company(ies), are subject
to certain obligations including, the following:
•
•
•
In general, the Recipient Company is obligated to pay the IIA royalties from the revenues generated from the sale of products (and related
services) developed (in all or in part) as a result of, a research and development program funded by the IIA at rates which are determined under
the IIA’s rules and guidelines (currently a yearly rate of 1.3% to 5% on sales of products or services developed under the approved programs,
depending on the type of the Recipient Company — i.e., whether it is a “Small Company,” a “Large Company” or a “Traditional Industrial
Company” as such terms are defined in the IIA’s rules and guidelines), up to the aggregate amount of the total grants received by the IIA, plus
annual interest (as determined in the IIA’s rules and guidelines);
Products developed as a result of the IIA funded R&D must, as a general matter, be manufactured in Israel. The Recipient Company is
prohibited from manufacturing products developed using these IIA grants outside of the State of Israel without receiving prior approval from
the IIA (except for the transfer of less than 10% of the manufacturing capacity in the aggregate which requires only a notice). If the Recipient
Company receives approval to manufacture products developed with government grants outside of Israel, it will be required to pay increased
royalties to the IIA, up to 300% of the grant amount plus interest, depending on the manufacturing volume that is performed outside of Israel.
The Recipient Company may also be subject to an accelerated royalty repayment rate. A Recipient Company also has the option of declaring in
its IIA grant application its intention to exercise a portion of the manufacturing capacity abroad, thus avoiding the need to obtain additional
approval following the receipt of the grant; and
Under the IIA’s rules and guidelines, a Recipient Company is prohibited from transferring the IIA-financed know-how and related intellectual
property rights outside of Israel except under limited circumstances, and only with the approval of the Research Committee and subject to
certain payments to the IIA calculated according to formulas provided under the IIA’s rules and guidelines (which are capped to amounts
specified under such rules and guidelines).
We have received grants from the IIA in connection with our research and development of a peripheral line of product
candidates, which forms a negligible part of our activities, and therefore, we are subject to the aforementioned restrictions with
respect to such product candidates. Such restrictions continue to apply even after payment of the full amount of royalties payable
pursuant to the grants.
Even if our IIA funded know-how is transferred to another Israeli entity, the transfer would require the IIA’s approval but
will not be subject to the payment of a redemption fee (we note that there will be an obligation to pay royalties to the IIA from
the income of such sale transaction as part of the royalty payment obligation). In such case, the acquiring company would have to
assume all of our responsibilities towards the IIA as a condition to the IIA’s approval.
The government of Israel does not own intellectual property rights in technology developed with IIA funding and there is
no restriction on the export of products manufactured using technology developed with IIA funding. However, the know-how is
subject to transfer of know-how and manufacturing rights restrictions as described above. The IIA’s approval is not required for
the export of any products resulting from the IIA research or development grants. In addition, the IIA has recently published new
rules and guidelines for the granting of licenses to use know-how developed as a result of research financed by the IIA to foreign
entities. According to such rules, we will be required to receive the IIA’s prior approval for the grant of such use rights, and we
will be subject to the IIA in accordance with the formula stipulated under these rules and guidelines.
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Pursuant to Amendment No. 7 of the Innovation Law, the IIA is authorized to change the restrictions imposed on the
recipients of grants that were stipulated under the Innovation Law prior to the effectiveness of Amendment No. 7 with a new set
of arrangements in connection with ownership obligations of know-how (including with respect to restrictions on transfer of
know-how and manufacturing activities outside of Israel), as well as royalties obligations associated with approved programs.
Amendment No. 7 also includes provisions with respect to sanctions imposed for violations of the Innovation Law. Although the
IIA published rules which for the most part adopted the principal provisions and restrictions specified in the Innovation Law prior
to the effectiveness of Amendment No. 7, as of the date of this annual report, we are unable to assess the effect on our business of
any future rules which may be published by the IIA.
We may not receive the required approvals for any actual proposed transfer and, if received, we may be required to pay
the IIA a portion of the consideration that we receive upon any sale of the IIA funded know-how to a non-Israeli entity. The
scope of the support received, the royalties that we have already paid to the IIA, the amount of time that has elapsed between the
date on which the know-how was transferred and the date on which the IIA grants were received and the sale price and the form
of transaction will be taken into account in calculating the amount of the payment to the IIA.
Environmental, Health and Safety Matters
We are subject to extensive environmental, health and safety laws and regulations in a number of jurisdictions including
Israel. These laws and regulations govern, among other things, (i) the use, storage, registration, handling, emission and disposal
of chemicals, waste materials and sewage and (ii) chemical, air, water and ground contamination, air emissions and the cleanup
of contaminated sites, including any contamination that results from spills due to our failure to properly dispose of chemicals,
waste materials and sewage. Our operations at our Ness Ziona facility use chemicals and produce waste materials and sewage.
Our activities require permits from various governmental authorities, including local municipal authorities, the Ministry of
Environmental Protection and the Ministry of Health. The Ministry of Environmental Protection and the Ministry of Health, local
authorities and the municipal water and sewage company conduct periodic inspections in order to review and ensure our
compliance with the various regulations. As of the date of this annual report, we are in the process of updating our business
permit which was originally in effect until December 31, 2019.
These laws, regulations and permits could potentially require the expenditure by us of significant amounts for compliance
or remediation. If we fail to comply with such laws, regulations or permits, we may be subject to fines and other civil,
administrative or criminal sanctions, including the revocation of permits and licenses necessary to continue our business
activities. In addition, we may be required to pay damages or civil judgments in respect of third-party claims, including those
relating to personal injury (including exposure to hazardous substances we use, store, handle, transport, manufacture or dispose
of), property damage or contribution claims. Some environmental, health and safety laws allow for strict, joint and several
liability for remediation costs, regardless of comparative fault. We may be identified as a responsible party under such laws. Such
developments could have a material adverse effect on our business, financial condition and results of operations.
In addition, laws and regulations relating to environmental, health and safety matters are often subject to change. In the
event of any changes or new laws or regulations, we could be subject to new compliance measures or to penalties for activities
which were previously permitted.
The operations of our subcontractors and suppliers are also subject to various Israeli and foreign laws and regulations
relating to environmental, health and safety matters, and their failure to comply with such laws and regulations could have a
material adverse effect on our business and reputation, result in an interruption or delay in the development or manufacture of our
product candidates, or increase the costs for the development or manufacture of our product candidates.
Properties
Our principal executive offices are located in a leased facility in Weizmann Science Park, Ness Ziona 7403650, Israel.
The facility is 2,040 square meters, and houses our offices, warehouse, laboratories and production area. Our lease will expire on
December 31, 2023.
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Legal Proceedings
We are not subject to any material legal proceedings.
C. Organizational Structure
Not applicable.
D. Property, Plant and Equipment
See “Item 4. Information on the Company—B. Business Overview—Properties”.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion of our financial condition and results of operations in conjunction with the financial
statements and the notes thereto included elsewhere in this annual report. The following discussion contains forward-looking
statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and
elsewhere in this annual report, particularly those in “Item 3. Key Information – D. Risk Factors.”
Overview
We are a clinical-stage dermatology company focused on identifying, developing and commercializing branded and
generic topical drug products for the treatment of skin diseases. Our current product candidate pipeline consists of late-stage and
early-stage branded product candidates that leverage our proprietary, silica-based microencapsulation technology platform, other
early-stage branded product candidates and several generic product candidates across multiple indications. Our lead product
candidate, Twyneo®, is a novel, once-daily, non-antibiotic topical cream that we are developing for the treatment of acne
vulgaris, or acne. We completed a 726 subject, double-blind, placebo-controlled, six-arm, multi-center Phase II clinical trial
designed to assess the safety and efficacy of Twyneo® in subjects with facial acne. In this trial, Twyneo® demonstrated
statistically significant improvements in all pre-defined co-primary and secondary efficacy endpoints, as compared to vehicle.
On December 30, 2019, we announced top-line results from two pivotal Phase 3 clinical trials evaluating Twyneo for the
treatment of acne. Twyneo met all co-primary endpoints in both Phase 3 trials. The Phase 3 program enrolled an aggregate of 858
patients aged nine and older in two multicenter, randomized, double-blind, parallel group, vehicle-controlled trials at 63 sites
across the United States. Twyneo demonstrated statistically significant improvement in each of the co-primary endpoints of (1)
the proportion of patients who succeeded in achieving at least a two grade reduction from baseline and Clear (grade 0) or Almost
Clear (grade 1) at Week 12 on a 5-point Investigator Global Assessment (IGA) scale, (2) an absolute change from baseline in
inflammatory lesion count at Week 12, and (3) and an absolute change from baseline in non-inflammatory lesion count at Week
12. In addition, Twyneo was found to be well-tolerated. We intend to submit an NDA to the FDA for marketing approval of
Twyneo in the second half of 2020.
Our second branded product candidate is Epsolay®, a potential treatment for subtype II rosacea. On July 8, 2019, we
announced positive top-line results from our Phase 3 program evaluating Epsolay. The program enrolled 733 patients aged 18
and older in two identical, double-blind, vehicle-controlled Phase 3 clinical trials at 54 sites across the United States. Epsolay
demonstrated statistically significant improvement in both co-primary endpoints of (1) the number of patients achieving “clear”
or “almost clear” in the Investigator Global Assessment (IGA) relative to baseline at week 12 and (2) absolute mean reduction
from baseline in inflammatory lesion count at week 12. In an additional analysis, Epsolay demonstrated rapid efficacy, achieving
statistically significant improvements on both co-primary endpoints compared with vehicle as early as Week 2. In addition,
Epsolay® was found to be well-tolerated.
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On February 12, 2020, we announced positive topline results from our open-label, long-term safety study, evaluating
Epsolay® for a treatment duration up to 52 weeks. The study enrolled 547 subjects, all of whom had completed 12 weeks of
treatment with Epsolay or vehicle in the preceding double-blind Phase 3 studies. Patients continued onto open-label treatment
with Epsolay once-daily for up to an additional 40 weeks. The safety population of 535 subjects received Epsolay therapy for an
overall period of at least 28 weeks. Of these 535 subjects, 209 subjects completed 52 weeks of treatment with Epsolay, exceeding
the sample size requirements previously defined by the FDA for the Epsolay one-year safety evaluation. We intend to submit an
NDA to the FDA for marketing approval of Epsolay in the second quarter of 2020.
Our other branded product candidates are SGT-210, a potential treatment of palmoplantar keratoderma (PPK) and non-
melanoma skin cancer, and tapinarof and roflumilast, each a potential treatment of psoriasis and other dermatological
indications.
We designed our proprietary, silica-based microencapsulation technology platform to enhance the tolerability and stability
of topical drugs while maintaining their efficacy. Topical drugs often struggle to balance achieving both high efficacy and high
tolerability. Our technology platform entraps active ingredients in an inert, inorganic silica shell, which creates an unnoticeable
barrier between the active ingredient and the skin. The resulting microcapsules are designed to allow the entrapped active
ingredients to gradually migrate through the pores of the shell and deliver active ingredient doses onto the skin in a controlled
manner, resulting in improved tolerability and stability without sacrificing efficacy. By separately encapsulating active
ingredients within protective silica shells, our technology platform also enables the production of novel fixed-dose active
ingredient combinations that otherwise would not be stable. We believe that our microencapsulation technology has the potential
to be used for topical drug products to treat a variety of skin diseases. As a result of the FDA having already approved silica as a
safe excipient for topical drug products, we expect the review process for Twyneo and Epsolay to be conducted according to the
FDA’s 505(b)(2) regulatory pathway, which may provide for a more efficient regulatory process by permitting us to rely, in part,
upon the FDA’s previous findings of safety and efficacy of an approved product.
Since our inception, we have incurred significant operating losses. We incurred net losses of $31.6 million, $32.2 million
$24.6 million for the years ended December 31, 2017, 2018 and 2019, respectively. As of December 31, 2019, we had an
accumulated deficit of $152.1 million. We expect to incur significant expenses and operating losses for the foreseeable future as
we advance our product candidates from formulation development through pre-clinical development and clinical trials, seek
regulatory approval and pursue commercialization of any approved product candidate. In addition, if we obtain marketing
approval for any of our product candidates, we expect to incur significant expenses related to product manufacturing, marketing,
sales and distribution. In addition, we may incur expenses in connection with the in-license or acquisition of additional product
candidates.
In February 2018 we closed our initial public offering, at which time we sold a total of 7,187,500 ordinary shares in the
offering and received net proceeds of approximately $78.8 million, after deducting underwriting discounts and commissions and
without deducting other offering expenses.
On August 12, 2019, the Company completed an underwritten public offering, in which it issued 1,437,500 ordinary
shares, including the full exercise by the underwriters of their option to purchase 187,500 additional ordinary shares, at a public
offering price of $8.00 per ordinary share. The total proceeds received from the offering were approximately $10.8 million net of
underwriting discounts and commissions and without deducting other offering expenses.
On February 19, 2020 the Company completed an underwritten public offering in which it issued 2,091,907 ordinary
shares together with ordinary share warrants to purchase 1,673,525 ordinary shares. The ordinary shares and warrants were sold
together at a combined public offering price of $11.00 per ordinary share and accompanying warrant. The total proceeds
received from the offering were approximately $21.6 million net of underwriting discounts and commissions and without
deducting other offering expenses.
84
In addition M. Arkin Dermatology Ltd., the controlling shareholder of the Company, has agreed to purchase 454,628
ordinary shares and warrants to purchase up to 363,702 ordinary shares in a concurrent private placement, exempt from the
registration of the Securities Act of 1933, as amended, at a price equal to the public offering price of the ordinary shares and
accompanying warrants in the underwritten public offering. The private placement would generate proceeds of approximately $5
million and is contingent on disinterested shareholder approval. A shareholder meeting to approve the private placement is
scheduled for April 8, 2020.
Collaboration Agreements
For a description of our collaboration agreements, please see “Item 4. Information on the Company—B. Business
Overview—Collaboration Agreements.”
A. Operating Results
Collaboration Revenues
From 2013 until December 31, 2018, other than revenues of approximately $0.2 million and $0.1 million on royalties
generated in 2017 and 2018, respectively, pursuant to sales of products overseas under past collaboration agreements with Merck,
we did not recognize any revenue. In 2019, we generated approximately $0.1 million in revenues under such past collaboration
agreements with Merck. In addition, in February 2019 we announced that Perrigo had received final approval from the FDA for
the first generic version of Zovirax® (acyclovir) cream, 5%. The product was developed in a collaboration between us and
Perrigo in which we shared development costs with Perrigo and are sharing equally the gross profits generated from sales of the
product. During the year ended December 31, 2019, the Company recognized revenues from royalties related to sales of this
product in the amount of $22.8 million.
Operating expenses
Our current operating expenses consist primarily of research and development as well as general and administrative
expenses.
Research and development expenses
Research and development expenses consist principally of:
•
•
•
•
•
salaries for research and development staff and related expenses, including employee benefits and share-based compensation expenses;
expenses paid to suppliers of disposables and raw materials, including drug substances, and related expenses, such as, external laboratory
testing and development of analytical methods;
expenses for production of our product candidates both in-house and by contract manufacturers;
expenses paid to contract research organizations and other third parties in connection with the performance of pre-clinical studies, clinical trials
and related expenses;
expenses incurred under agreements with other third parties, including subcontractors, suppliers and consultants that conduct formulation
development, regulatory activities and pre-clinical studies;
85
•
•
•
expenses incurred to acquire, develop and manufacture materials for use in pre-clinical and other studies;
expenses incurred from the purchase and transfer of product candidates; and
facilities, depreciation of fixed assets used to develop our product candidates, maintenance of equipment used to develop our product
candidates and other expenses, including direct and allocated expenses for rent, maintenance of facilities, insurance and other operating
expenses.
Research and development activities are central to our business model. Product candidates in later stages of clinical
development generally have higher development expenses than those in earlier stages of clinical development, primarily due to
the increased size and duration of later-stage clinical trials. We expect our research and development expenses to increase
significantly over the next several years as we increase personnel expenses, including share-based compensation and conduct pre-
clinical studies and clinical trials and prepare regulatory filings for our product candidates.
Due to the inherently unpredictable and highly uncertain nature of clinical development processes, we cannot reasonably
estimate the nature, timing and expenses of the efforts that will be necessary to complete the remainder of the development of our
product candidates, or when, if ever, material net cash inflows may commence from any of our product candidates. Clinical
development timelines, the probability of success and development expenses can differ materially from expectations. This is due
to numerous risks and uncertainties associated with developing drugs, including the uncertainty of:
•
•
•
•
•
the scope, rate of progress and expense of our research and development activities;
clinical trials and early-stage results;
the terms and timing of regulatory requirements and approvals;
the expense of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; and
the ability to market, commercialize and achieve market acceptance of any product candidate that we are developing or may develop in the
future.
While we are currently focused on advancing our product development, our future research and development expenses
will depend on the clinical success of our product candidates, as well as ongoing assessments of the candidates’ commercial
potential. As we obtain results from clinical trials, we may elect to discontinue or delay clinical trials for one or more of our
product candidates in certain indications in order to focus our resources on more promising product candidates. Completion of
clinical trials may take several years or more, but the length of time generally varies according to the type, complexity, novelty
and intended use of a product candidate.
The lengthy process of completing clinical trials and seeking regulatory approval for our product candidates requires the
expenditure of substantial resources. Any failure or delay in completing clinical trials, or in obtaining regulatory approvals, could
cause a delay in generating product revenue and cause our research and development expenses to increase and, in turn, have a
material adverse effect on our operations.
General and administrative expenses
Our general and administrative expenses consist primarily of salaries and related expenses, including employee benefits
and share-based compensation expenses, legal expenses and professional fees for auditors and other expenses not related to
research and development activities.
If and when we believe a regulatory approval of our branded product candidates appears likely, we anticipate an increase
in payroll and expense as a result of our preparation for commercial operations, especially as it relates to the sales and marketing
of our product candidates.
86
Financial income, net
Our financial income, net consists primarily of income generated on our marketable securities net of expenses related to
bank charges and foreign currency exchange transactions.
Results of operations
The following table summarizes our results of operations for the indicated periods:
Collaboration Revenues
Research and development
General and administrative
Total operating loss
Financial income, net
Loss before income taxes
Income taxes
Loss for the year
Year ended December 31,
2018
2017
2019
$
174 $
25,805
6,002
31,633
(65)
31,568
129 $
28,146
5,504
33,521
(1,318)
32,203
$
31,568 $
32,203 $
22,904
40,578
8,276
25,950
(1,374)
24,576
33
24,609
Year ended December 31, 2018 compared to year ended December 31, 2019
Collaboration Revenues
Revenues are comprised of royalties earned under a collaboration agreement with Perrigo related to the first generic
version of Zovirax® (acyclovir) cream, 5%, and under an agreement entered into by the Company in 2007 that granted rights to a
third party for use and commercialization of a product for skin protection. Revenues under both agreements amounted to $22.9
million in 2019, $22.8 million of which was generated from the collaboration agreement with Perrigo, compared with $0.1
million in 2018.
Research and development expenses
The following table describes the breakdown of our research and development expenses for the indicated periods:
Payroll and related expenses
Clinical trial expenses
Professional consulting and subcontracted work
Other
Total research and development expenses
Year Ended December 31,
2018
2019
(in thousands)
7,118 $
10,569
6,907
3,552
28,146 $
6,001
23,037
7,425
4,115
40,578
$
$
Our research and development expenses were $28.1 million for the year ended December 31, 2018, compared to $40.6
million for the year ended December 31, 2019. The increase of $12.5 million was mainly attributed to an increase of $12.5
million in clinical trial expenses, mainly related to clinical trials of Epsolay and Twyneo, an increase of $0.5 million in
manufacturing expenses and an increase of $0.5 million in other expenses, mainly purchase of raw material for manufacturing,
partially offset by a decrease of $1.1 million in payroll and related expenses, mainly related to stock based compensation
expenses.
87
General and administrative expenses
Our general and administrative expenses were $5.5 million for the year ended December 31, 2018, compared to $8.3
million for the year ended December 31, 2019. The increase of $2.8 million was mainly attributed to an increase of $0.9 million
in legal fees, an increase of $1.5 million in commercialization expenses and an increase of $0.3 million in professional service
expenses.
Financial income, net
Our financial income, net, was $1.3 million for the year ended December 31, 2018 compared to $1.4 million for the year
ended December 31, 2019.
Year ended December 31, 2017 compared to year ended December 31, 2018
This analysis can be found in Item 5 of the Company’s Annual Report on Form 20‑F for the year ended December 31,
2018.
Significant Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with U.S. GAAP. We describe our significant accounting
policies and estimates more fully in Note 2 to our consolidated financial statements as of and for the year ended December 31,
2019, included elsewhere in this annual report. We believe that the accounting policies and estimates below are critical in order to
fully understand and evaluate our financial condition and results of operations. In preparing these consolidated financial
statements, our management has made estimates and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during
the reporting periods recognized in our financial statements. Actual results may differ from these estimates. As applicable to the
financial statements included in this annual report, the most significant estimates and assumptions relate to the fair value of share-
based compensation.
Share-based Compensation
Share-based compensation reflects the compensation expense of our share option programs granted to employees which
compensation expense is measured at the grant date fair value of the options. The grant date fair value of share-based
compensation is recognized as an expense over the requisite service period, net of estimated forfeitures. We recognize
compensation expense for awards conditioned only on continued service that have a graded vesting schedule using the
accelerated method based on the multiple-option award approach, and classify these amounts in our statement of operations based
on the department to which the related employee reports.
Options Valuation
We selected the Black-Scholes option pricing model as the most appropriate method for determining the estimated fair
value of the shared based compensation.
For the purpose of the evaluation of the fair value and the manner of the recognition of share-based compensation, our
management is required to estimate, among others, various subjective and complex parameters that are included in the calculation
of the fair value of the option as well as our results and the number of options that will vest. These parameters include the
expected volatility of our share price over the expected term of the options, the risk-free interest rate assumption, the share option
exercise and forfeitures behaviors and expected dividends.
Prior to the initial public offering of our ordinary shares, the fair value of our ordinary shares was determined in good
faith by our management and approved by our board of directors. Our management considered the fair value of our ordinary
shares based on a number of objective and subjective variables, consistent with the methodologies outlined in the American
Institute of Certified Public Accountants Practice Aid, Valuation of Private-Held-Company Equity Securities issued as
Compensation, referred to as the AICPA Practice Aid.
88
Upon the commencement of public trading of our ordinary shares in February 2018 in connection with our initial public
offering, estimates by our board of directors are no longer necessary to determine the fair value of ordinary shares.
Recently Adopted Accounting Pronouncements
In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to
Nonemployee Share-based Payment Accounting”, which expands the scope of ASC Topic 718 to include share-based payment
transactions for acquiring goods and services from non-employees. An entity is required to apply the requirements of ASC Topic
718 to non-employee awards except for certain exemptions specified in the amendment. The guidance is effective for fiscal years
beginning after December 15, 2018, including interim reporting periods within such fiscal years. Early adoption is permitted, but
no earlier than an entity’s adoption date of Topic 606. This standard had no material impact on the Company’s financial
statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842),
which supersedes the existing guidance for lease accounting, Leases (Topic 840). The new standard requires lessees to record
assets and liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either
finance or operating, with classification affecting the pattern of expense recognition in the income statement. The Company
adopted the standard as of January 1, 2019 on a modified retrospective basis and will not restate comparative periods. The
Company will elect the package of practical expedients permitted under the transition guidance within the new standard, which
among other things, allows the Company to carry forward the historical lease classification. The Company will make an
accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. The Company
recognizes those lease payments in the Statements of Operations on a straight-line basis over the lease period.
JOBS Act
On April 5, 2012, the JOBS Act was signed into law. Subject to certain conditions set forth in the JOBS Act, as an
“emerging growth company,” we elected or may elect to rely on certain exemptions, including without limitation, not
(i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 and
(ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding
mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the
financial statements (auditor discussion and analysis). These exemptions will apply until the earliest of (a) the last day of our
fiscal year during which we have total annual gross revenues of at least $1.07 billion; (b) December 31, 2023, the last day of our
fiscal year following the fifth anniversary of the closing of our initial public offering; (c) the date on which we have, during the
previous three-year period, issued more than $1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a
“large accelerated filer” under the Exchange Act.
B. Liquidity and Capital Resources
Overview
Since our inception, we have devoted substantially all of our resources to developing our product candidates, building our
intellectual property portfolio, developing our supply chain, business planning, raising capital and providing for general and
administrative support for these operations. We do not currently have any approved products other than the first generic version
of Zovirax® (acyclovir) cream, 5% for which Perrigo, our collaborator, received final FDA approval in February 2019.
From inception through December 31, 2019, we have funded our operations primarily through proceeds from our public
offerings, the issuance of equity securities to and loans from our controlling shareholder, funding received from the IIA and from
amounts received pursuant to past and current collaboration agreements. We automatically converted our outstanding promissory
note between us and our controlling shareholder into an aggregate of 5,444,825 ordinary shares immediately prior to the closing
of our initial public offering. For a description of the conversion of our shareholder loan agreement, see “Item 7. Major
Shareholders and Related Party Transactions – B. Related Party Transactions — Loan Agreements with Our Controlling
Shareholder.” As of December 31, 2019, our cash and cash equivalents was $50.4 million.
89
On February 5, 2018, we announced the closing of our initial public offering of 7,187,500 ordinary shares at a public
offering price of $12.00 per ordinary share, which included the exercise in full by the underwriters of their option to purchase up
to 937,500 additional shares. The aggregate net proceeds to us from the offering were approximately $78.8 million, after
deducting underwriting discounts and commissions and before deducting other offering expenses.
On August 12, 2019, the Company completed an underwritten public offering in which it issued 1,437,500 ordinary
shares, including the full exercise by the underwriters of their option to purchase 187,500 additional ordinary shares, at a public
offering price of $8.00 per ordinary share. The total proceeds received from the offering were approximately $10.8 million net of
underwriting discounts and commissions and without deducting other offering expenses.
On February 19, 2020 the Company completed an underwritten public offering in which it issued 2,091,907 ordinary
shares together with ordinary share warrants to purchase 1,673,525 ordinary shares. The ordinary shares and accompanying
warrants were sold together at a combined public offering price of $11.00 per ordinary share and accompanying warrant. Each
warrant sold in the underwritten public offering is exercisable for 0.80 of an ordinary share and has an initial exercise price of
$14.00 per share, subject to certain adjustments. The warrants are immediately exercisable and will expire on February 19, 2023.
The total proceeds received from the offering were approximately $21.6 million net of underwriting discounts and commissions
and without deducting other offering expenses.
In addition M. Arkin Dermatology Ltd., the controlling shareholder of the Company, has agreed to purchase 454,628
ordinary shares and warrants to purchase up to 363,702 ordinary shares in a concurrent private placement, exempt from the
registration of the Securities Act of 1933, as amended, at a price equal to the public offering price of the ordinary shares and
accompanying warrants in the underwritten public offering. The private placement would generate proceeds of approximately $5
million and is contingent on disinterested shareholder approval. A shareholder meeting to approve the private placement is
scheduled for April 8, 2020.
The table below summarizes our cash flow activities for the indicated periods:
Net cash used in operating activities
Net cash provided by (used in) investing activities
Net cash from financing activities
Increase (decrease) in cash and cash equivalents
Operating Activities
2017
Year Ended
December 31,
2018
(in thousands)
2019
$
$
(24,089) $
(5,938)
28,000
(1,977) $
(23,467) $
(54,735)
78,819
617 $
(22,500)
16,024
10,613
4,037
Net cash used in operating activities was $23.5 million during the year ended December 31, 2018, compared to $22.5
million during the year ended December 31, 2019.
Net cash used in operating activities in the year ended December 31, 2019 primarily resulted from our loss of $24.6
million during the period, a net increase of $1.5 million in working capital, $2.6 million due to share-based compensation
expenses and $0.9 million of depreciation of property and equipment.
90
Net cash used in operating activities in the year ended December 31, 2018 primarily resulted from our loss of $32.2
million during the period, a net increase of $3.2 million in working capital, $4.7 million due to share-based compensation
expenses and $0.8 million of depreciation of property and equipment.
Net cash used in operating activities was $24.1 million during the year ended December 31, 2017, compared to $23.5
million during the year ended December 31, 2018.
Net cash used in operating activities in the year ended December 31, 2017 primarily resulted from our loss of $31.6
million during the period, a net increase of $2.9 million in working capital and $0.3 million used as advance payments for long
term receivables in connection with the Phase II clinical trial for TWIN and the collaboration agreement with Perrigo UK for
Ivermectin cream, 1%. This amount was partially offset by $6.2 million due to acquiring an in-process research and development
product candidate, $0.5 million of depreciation of property and equipment and $4 million of share-based compensation expenses.
Investing Activities
Net cash used in investing activities was $54.7 million during the year ended December 31, 2018, compared to net cash
provided by investing activities of $16.0 million during the year ended December 31, 2019. The change was due to a decrease of
$72.3 million in investment in marketable securities, net and a decrease of $0.5 million in property and equipment, offset by an
increase of $2.0 million in bank deposits.
Net cash used in investing activities was $5.9 million during the year ended December 31, 2017, compared to net cash
used in investing activities of $54.7 million during the year ended December 31, 2018. The increase was due to an increase of
$56.7 million in investment in marketable securities, net, offset by a decrease of $7.0 million in bank deposits and a decrease of
$0.9 million in property and equipment.
Financing Activities
Net cash from financing activities was $78.8 million during the year ended December 31, 2018, compared to $10.6
million during the year ended December 31, 2019. The decrease was due to our initial public offering in 2018, net of issuance
cost, of $78.9 million, compared to our underwritten public offering in 2019, net of issuance cost, of $10.6 million. Net cash
from financing activities was $28.0 million during the year ended December 31, 2017, compared to $78.8 million during the year
ended December 31, 2018. The increase was due to the Company’s initial public offering in 2018, net of issuance cost, of $78.8
million.
Funding Requirements
Our primary uses of cash have been to fund working capital requirements and research and development. We expect to
continue to incur net losses for the foreseeable future as we continue to invest in research and development and seek to obtain
regulatory approval for and commercialize our product candidates. We believe that the our existing cash resources together with
the net proceeds of the follow on offering in February 2020, without giving effect to anticipated net proceeds from our private
placement agreement with our controlling shareholder, if approved, will be sufficient to enable us to fund our operating expenses
and capital expenditure requirements into the second quarter of 2021. We have based this estimate on assumptions that may prove
to be wrong, and we could use our capital resources sooner than we currently expect. Our ability to continue as a going concern
will depend on our ability to generate positive cash flow from operations and obtain additional financing, both of which are
uncertain.
91
Developing drugs, conducting clinical trials, obtaining commercial manufacturing capabilities and commercializing
products is expensive and we will need to raise substantial additional funds to achieve our strategic objectives. We will require
significant additional financing in the future to fund our operations, including if and when we progress into additional clinical
trials for our product candidates, obtain regulatory approval for one or more of our product candidates, obtain commercial
manufacturing capabilities and commercialize one or more of our product candidates. Our future funding requirements will
depend on many factors, including, but not limited to:
•
•
•
•
•
•
the progress and expenses of our pre-clinical studies, clinical trials and other research and development activities;
the scope, prioritization and number of our clinical trials and other research and development programs;
the expenses and timing of obtaining regulatory approval, if any, for our product candidates;
the expenses of filing, prosecuting, enforcing and defending patent claims and other intellectual property rights;
the expenses of, and timing for, expanding our manufacturing agreements for production of sufficient clinical and commercial quantities of our
product candidates; and
the potential expenses of contracting with third parties to provide marketing and distribution services for us or for building such capacities
internally.
Other than revenue that we expect to generate from a collaboration between us and Perrigo with respect to the first
generic version of Zovirax® (acyclovir) cream, 5%, until we can generate recurring revenues, we expect to satisfy our future cash
needs through existing cash resources as well as the net proceeds from our public offering in February 2020, additional debt or
equity financings or by entering into collaborations with third parties in connection with one or more of our product candidates.
We cannot be certain that additional funding will be available to us on acceptable terms, if at all. In addition, the terms of any
securities we issue in future financings may be more favorable to new investors and may include preferences, superior voting
rights and the issuance of warrants or other derivative securities, which may have a further dilutive effect on the holders of any of
our securities then outstanding. If we raise additional funds through collaborations with third parties, we may be required to
relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant
licenses on terms that may not be favorable to us. If we are unable to obtain adequate funds on reasonable terms, we will need to
curtail operations significantly, including possibly postponing anticipated clinical trials or entering into financing agreements
with unattractive terms.
C. Research and Development, Patents and Licenses
For a description of our research and development programs and the amounts that we have incurred over the last two
years pursuant to those programs, please see “Item 5. Operating and Financial Review and Prospects — A. Operating Results —
Research and Development Expenses”; and “Item 5. Operating and Financial Review and Prospects — A. Operating Results —
Year Ended December 31, 2018 compared to Year ended December 31, 2019 - Research and Development Expenses.”; and “Item
5. Operating and Financial Review and Prospects — A. Operating Results — Year Ended December 31, 2017 compared to Year
ended December 31, 2018 - Research and Development Expenses.”
D. Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands,
commitments or events for the period from January 1, 2019 to December 31, 2019 that are reasonably likely to have a material
adverse effect on our revenue, income, profitability, liquidity or capital resources, or that caused that disclosed financial
information to be not necessarily indicative of future operating results or financial condition.
E. Off-Balance Sheet Arrangements
We do not have any, and during the periods presented we did not have any, off-balance sheet arrangements as defined in
the rules and regulations of the SEC.
92
F. Tabular Disclosure of Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2019:
Operating lease obligations (1)
Total
$
$
2,273 $
2,273 $
672 $
672 $
1,083
1,083
518
518
-
-
Total
Less than
1 year
1 – 3 years
(in thousands)
3 – 5 years
More than
5 years
(1)
Operating lease obligations consist of payments pursuant to several lease agreements that are scheduled to expire on December 31, 2023.
93
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following table sets forth information concerning our directors and senior management, which includes members of
our administrative, supervisory and management bodies, including their ages, as of the date of this annual report:
Name
Moshe Arkin
Alon Seri-Levy
Gilad Mamlok
Ofer Toledano
Ofra Levy-Hacham
Karine Neimann
Itzik Yosef
Dubi Zamir
Nissim Bilman
John Vieira
Itai Arkin
Shmuel Ben Zvi
Hani Lerman
Yaffa Krindel-Sieradzki
Jonathan B. Siegel
Ran Gottfried
Jerrold S. Gattegno
Age Position
67
58
51
55
54
48
43
66
58
50
31
59
47
65
46
75
67
Chairman of the Board of Directors
Chief Executive Officer and Director
Chief Financial Officer
Vice President Research and Development
Vice President Clinical and Regulatory Affairs
Vice President Projects and Planning, Chief Chemist
Vice President Operations
Vice President Special Projects
Vice President Quality
U.S. Head of Commercialization
Director
Director
Director
Director
Director
External Director
External Director
Mr. Moshe Arkin has served as chairman of our board of directors since 2014. Mr. Moshe Arkin currently sits on the
board of directors of several private pharmaceutical and medical device companies including Exalenz Bioscience Ltd., a
developer of advanced systems for gastrointestinal and liver disorders since 2006, SoniVie Ltd., a company developing systems
for the treatment of pulmonary arterial hypertension, Digma Medical, a company developing systems to treat insulin resistance
present in type 2 diabetes and other metabolic syndrome diseases, and Valcare Medical, a company developing heart valve
devices. From 2005 to 2008, Mr. Moshe Arkin served as the head of generics at Perrigo Company and from 2005 until 2011 as
the vice chairman of its board of directors. Prior to joining us, Mr. Moshe Arkin served as a director of cCAM Biotherapeutics
Ltd., a company focused on the discovery and development of novel immunotherapies to treat cancer from 2012 until its
acquisition in 2015 by Merck & Co., Inc. Mr. Moshe Arkin served as chairman of Agis Industries Ltd. from its inception in 1972
until its acquisition by Perrigo Company in 2005. Mr. Moshe Arkin holds a B.A. in psychology from the Tel Aviv University,
Israel.
Dr. Alon Seri-Levy co-founded Sol-Gel and has served as our chief executive officer since our inception in 1997 and as a
member of our board of directors until 2014. Prior to founding Sol-Gel, Dr. Seri-Levy established the computer-aided drug design
department at Peptor Ltd., an Israeli research and development company that specialized in the development of peptide-based
drug products. Dr. Seri-Levy holds a Ph.D. in Chemistry (summa cum laude) from The Hebrew University of Jerusalem, Israel,
and conducted his post-doctoral studies at Oxford University, United Kingdom. Dr. Seri-Levy was appointed to our board of
directors immediately following the pricing of our initial public offering.
94
Mr. Gilad Mamlok has served as our chief financial officer since February 2017. From August 2015 to January 2017,
Mr. Mamlok served as the chief financial officer for Medigus Ltd., a medical device company dual listed on Nasdaq and the Tel
Aviv Stock Exchange, or the TASE. From September 2005 to March 2015, Mr. Mamlok served as senior vice president, global
finance and accounting of Given Imaging Ltd., a medical device company dual listed on Nasdaq and TASE, acquired by
Covidien plc in February 2014. From January 2002 to September 2005, Mr. Mamlok served as chief financial officer of two other
medical device companies. Mr. Mamlok holds a Master’s degree in business economics from Tel-Aviv University and a B.A. in
economics (magna cum laude) from Tel-Aviv University, Israel.
Dr. Ofer Toledano has served as our vice president of research and development since 2004. Prior to joining Sol-Gel, Dr.
Toledano served as manager of the formulation department at ADAMA Agricultural Solutions Ltd. (formerly known as
Makhteshim Agan Industries Ltd.), an Israeli manufacturer and distributor of crop protection products from 1998 until 2004. Dr.
Toledano holds a Ph.D. in chemistry from The Hebrew University of Jerusalem, Israel.
Dr. Ofra Levy-Hacham has served as our vice president of clinical assurance and regulatory affairs since 2018, and as our
vice president of quality and regulatory affairs from 2011 to 2018. Prior to joining Sol-Gel, Dr. Levy-Hacham served as a
scientific specialist and project manager at Biotechnology General Ltd., a wholly owned subsidiary of Ferring Pharmaceuticals
Ltd., and a fully integrated biopharmaceutical services private company from 2010 until 2011. From 2005 until 2010, Dr. Levy-
Hacham served as vice president chemistry, manufacturing and controls at HealOr Ltd., a private company engaging in the
development of therapeutics for the treatment of various skin disorders. Dr. Levy-Hacham holds a Ph.D. in chemistry from The
Technion – Israel Institute of Technology, Israel.
Dr. Karine Neimann has served as our vice president of projects and planning and chief chemist since September 2016.
Since joining us in 2008, Dr. Neimann held various positions, including as chief chemist and laboratory manager. Dr. Neimann
holds a Ph.D. in chemistry from The Hebrew University of Jerusalem, Israel.
Dr. Itzik Yosef has served as our vice president of operations since August 2016. Since joining us in 2010, Dr. Yosef held
various positions including as head of operations. Dr. Yosef holds a Ph.D. in chemistry from The Hebrew University of
Jerusalem, Israel.
Dr. Dubi Zamir has served as our vice president special projects since August 2016. Prior to joining us, Dr. Zamir lead
the R&D group in Cima NanoTech Ltd., a private company developing sophisticated nanotechnology-based coating formulations
from 2007 until 2016. From 2004 to 2007, Dr. Zamir was VP of Pharma and Analytical R&D at Taro Pharmaceutical Industries
in Haifa, and for three years prior to that he managed its Analytical R&D lab. Dr. Zamir holds a Ph.D. in organic chemistry from
Tel-Aviv University, Israel.
Mr. Nissim Bilman became Vice President Quality of Sol-Gel on the August 15, 2018. From 2004 until 2018, Mr. Bilman
served as CEO of QPRO Pharma, a project management and consulting company offering services related to the pharmaceutical
industry. From 2011 until 2018, he served as the Vice President Drug Development of Exalenz Bioscience. From 2007 until
2010, Mr. Bilman served as VP R&D and Manufacturing and Site Manager for Gelesis Inc./Gelesis R&D Ltd. Mr. Bilman holds
a Bachelor Degree in Chemistry and Meteorology, as well as a Master of Science in Applied Chemistry, both from the Hebrew
University in Israel.
Mr. John Vieira has served as our U.S. head of commercialization since January 2019. Prior to joining Sol-Gel, Mr.
Vieira served in U.S. and Global Marketing roles at Leo Pharmaceuticals. Prior to Leo Pharmaceuticals, Mr. Vieira was
Executive Director, Thrombosis, at Daiichi Sankyo, where he led the global launch of a major anti-coagulant, following various
senior leadership roles in the U.S. commercial operations. Prior to Daiichi Sankyo, Mr. Vieira held leadership positions at several
healthcare companies, including Organon Biopharmaceuticals and GlaxoSmithKline, successfully launching over six new global
and U.S. products in diverse therapeutic areas. Mr. Vieira holds an M.B.A. degree from Rutgers University and a B.A. degree
from York University in Toronto, Canada.
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Mr. Itai Arkin became a member of our board of directors immediately following the pricing of our initial public offering.
Mr. Itai Arkin currently serves as Investment Manager at Arkin Holdings Ltd. and on the boards of directors of Exalenz
Bioscience Ltd. Mr. Itai Arkin is an investment committee member of both Accelmed, a leading Israeli MedTech investment firm
since March 2014, and of Sphera Global Healthcare, a leading healthcare hedge fund. Mr. Itai Arkin holds a B.A. in business
administration (cum laude) from Interdisciplinary Center, Herzliya, Israel, and an MBA (cum laude) from Tel Aviv University.
Mr. Itai Arkin is the son of Mr. Moshe Arkin, the chairman of our board of directors and sole beneficial owner of Arkin
Dermatology, our controlling shareholder.
Dr. Shmuel (Muli) Ben Zvi became a member of our board of directors immediately following pricing of our initial
public offering. Dr. Ben Zvi is currently a board member and member of the audit, risk management, technology and strategy
committees at Bank Leumi, and a board member and member of the audit committee of VBL Therapeutics. From 2004 to 2014,
Dr. Ben Zvi held various managerial positions at Teva Pharmaceuticals Industries Ltd., including Vice President of Finance and
Vice President of Strategy. From 2000 to 2004, Dr. Ben Zvi was the financial advisor to the Chief of General Staff of the Israel
Defense Forces and head of the Defense Ministry budget department. Dr. Ben Zvi holds a Ph.D. in economics from Tel-Aviv
University, Israel and participated in the Harvard Business School Advanced Management Program (AMP).
Ms. Hani Lerman became a member of our board of directors immediately following pricing of our initial public
offering. Ms. Lerman has served as chief financial officer at Arkin Holdings since 2015. From 2010 until 2014, Ms. Lerman
served as chief financial officer of Sansa Security (f/k/a Discretix Technologies), and from 2006 until 2010, she served as chief
financial officer of Storwize, which was acquired by IBM in 2010. She serves as a board member of Exalenz Bioscience and of
Sphera Global Healthcare. She holds a Master's degree in business administration with a major in finance from Tel-Aviv
University, Israel, and a B.A. in economics and accounting from Tel-Aviv University, Israel.
Ms. Yaffa Krindel-Sieradzki became a member of our board of directors on February 23, 2018. Ms. Krindel-Sieradzki
currently serves on the board of Itamar Medical Ltd., a medical device company publicly traded on the Tel Aviv Stock Exchange
("TASE"), BGN Technologies Ltd., the technology transfer company of Ben Gurion University, and three private medical device
companies, as follows: EZbra Advanced Wound Care Ltd., Theranica Bio Electronics Ltd. and Trisol Medical Ltd. Ms. Krindel-
Sieradzki has served on the board of directors of numerous companies publicly traded on Nasdaq. From 1997 until 2007, Ms.
Krindel-Sieradzki served as Partner and Managing Partner of Star Ventures, a private venture capital fund headquartered in
Munich, Germany. Before joining Star Ventures, Ms. Krindel served from 1992 to 1996 as CFO and VP Finance of Lannet Data
Communications Ltd., an Israeli telecommunications company publicly traded on Nasdaq which is now part of Avaya Inc. From
1993 to 1997, she served as CFO and later as director of BreezeCOM Ltd., an Israeli telecommunications company which traded
on Nasdaq and TASE. Ms. Krindel-Sieradzki has earned an M.B.A. from Tel Aviv University and a B.A. in Economics and
Japanese Studies from the Hebrew University in Jerusalem.
Jonathan B. Siegel became a member of our board of directors on September 13, 2018. Mr. Siegel is the founder and
CEO of JBS Healthcare Ventures since formation in 2017. Previously, he was a partner and healthcare sector head at Kingdon
Capital Management from 2011 until 2017. Prior to joining Kingdon, Mr. Siegel was a healthcare portfolio manager at SAC
Capital Advisors from 2005 until 2011; an associate director of pharmaceutical and specialty pharmaceutical research at Bear,
Stearns & Co.; a pharmaceuticals research associate at Dresdner Kleinwort Wasserstein; and a consultant to the Life Sciences
Division of Computer Sciences Corporation. Mr. Siegel has worked as a research associate at the Novartis Center for
Immunobiology at Harvard Medical School and as a research assistant at Tufts University School of Medicine. He is also a
director at Jaguar Health, Inc., a Nasdaq listed company, and has served on the board of advisors of Vitalis LLC, a private
pharmaceutical company, since March 2019. Mr. Siegel received a BS in Psychology from Tufts University in 1995 and an MBA
from Columbia Business School on 1999.
Mr. Ran Gottfried became a member of our board of directors immediately following the pricing of our initial public
offering and serves as an external director under the Companies Law. Since 1975, Mr. Gottfried has served as a chief executive
officer, consultant and director of private companies in Israel and Europe in the areas of retail and distribution of
pharmaceuticals, consumer and household products. Mr. Gottfried served as a director of Perrigo Company from 2006 until 2015.
From 2006 until 2008, Mr. Gottfried served as chairman and chief executive officer of Powerpaper Ltd., a leading developer and
manufacturer of micro electrical cosmetic and pharmaceutical patches. From 2005 until 2010, Mr. Gottfried served as a director
of Bezeq, Israel’s leading telecommunications provider and from 2003 until its acquisition by Perrigo Company in 2005, Mr.
Gottfried served as a director of Agis Industries Ltd. He is currently a board member and member of the audit and investment
committee at Shufersal Ltd.
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Mr. Jerrold S. Gattegno became a member of our board of directors immediately following the pricing of our initial
public offering and serves as an external director under the Companies Law. Mr. Gattegno worked in the New York, Washington
D.C. and London offices of Deloitte Touche Tohmatsu Limited, a public accounting firm, from 1973 until 2015, where he served
in various senior positions, including as the partner-in-charge and founding partner of Deloitte’s multistate tax practice and as a
managing partner in Deloitte’s Washington National Tax Office, and as managing director and principal of Deloitte Tax Overseas
Services LLC. Mr. Gattegno served as a governing board member of the Hispanic Association of Colleges and Universities and a
member of its finance and audit committee, from 2012 until 2015. Mr. Gattegno is a certified public accountant and holds a B.S.
in accounting (cum laude) from the City University of New York and an M.B.A. in taxation (with honors) from Pace University,
New York.
B. Compensation
The aggregate compensation paid by us to our executive officers and directors for the year ended December 31, 2019 was
approximately $5.0 million. This amount includes approximately $0.2 million set aside or accrued to provide pension, severance,
retirement or similar benefits or expenses, but does not include business travel, relocation, professional and business association
dues and expenses reimbursed to officers, and other benefits commonly reimbursed or paid by companies in Israel.
The table and summary below outline the compensation granted to our five highest compensated directors and officers
during the year ended December 31, 2019. The compensation detailed in the table below refers to actual compensation granted or
paid to the director or officer during the year 2019.
Name and Position of director or officer
Base Salary or
Other
Payment
(1)
Value of
Social
Benefits
(2)
Value of
Equity Based
Compensation All Other
Granted
(3)
Compensation
(4)
Total
(Amounts in U.S. dollars are based on 2019 monthly average representative U.S. dollar – NIS rate of exchange)
Alon Seri-Levy / CEO
Gilad Mamlok / CFO
Ofer Toledano / VP R&D
John Vieira / U.S. Head of Commercialization
Ofra Levy-Hacham / VP Clinical & RA
303
222
192
227
141
59
48
53
47
42
539
334
178
210
142
384
231
157
68
91
1,285
835
580
551
417
(1)
(2)
(3)
“Base Salary or Other Payment” means the aggregate yearly gross monthly salaries or other payments with respect to the Company's Executive
Officers and members of the board of directors for the year 2019.
“Social Benefits” include payments to the National Insurance Institute, advanced education funds, managers’ insurance and pension funds; vacation
pay; and recuperation pay as mandated by Israeli law.
Consists of the fair value of the equity-based compensation granted during 2019 in exchange for the directors and officers services recognized as an
expense in profit or loss and is carried to the accumulated deficit under equity. The total amount recognized as an expense over the vesting period of
the options.
(4)
“All Other Compensation” includes, among other things, car-related expenses, communication expenses, basic health insurance, holiday presents,
and 2018 and 2019 special bonuses that officers received, both of which were paid in 2019.
In addition, all of our directors and executive officers are covered under our directors’ and executive officers’ liability insurance
policies and were granted letters of indemnification by us.
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Employment Agreements
We have entered into written employment agreements with each of our executive officers. These agreements provide for
notice periods of varying duration for termination of the agreement by us or by the relevant executive officer, during which time
the executive officer will continue to receive base salary and benefits. These agreements also contain customary provisions
regarding noncompetition, confidentiality of information and assignment of inventions. However, the enforceability of the
noncompetition provisions may be limited under applicable law. See “Item 3. Key Information – D. Risk Factors — Risks
Related to Employee Matters — Under applicable employment laws, we may not be able to enforce covenants not to compete”
for a further description of the enforceability of non-competition clauses.
For information on exemption and indemnification letters granted to our directors and officers, please see “ – C. Board
Practices – Exculpation, Insurance and Indemnification of Directors and Officers”.
Director Compensation
We currently pay our external directors and our other independent directors: (i) $35,000 annually in cash; (ii) $5,000
annually in cash for service on each of the Audit Committee and/or Compensation Committee (as the case may be) and (iii)
$10,000 annually in cash for service as chairman of the Audit Committee and/or Compensation Committee (as the case may be),
which includes amounts payable under clause (ii) (all cash amounts to be paid quarterly).
There shall be no limit regarding the number and/or hours of meetings, and it includes all meetings of the Board and any
Board’s committees.
In addition, each of our external directors and our other independent directors has received 11,500 Restricted Share Units
("RSU's") for the first three years of their service as a director, with a three-year vesting, one-third of the RSU's to vest after each
year (if they continue to serve as directors), and otherwise in accordance with the Company's 2014 Share Incentive Plan.
We do not pay compensation to the other directors of the Company in their capacity as directors.
Compensation Policy
Our compensation policy, which became effective immediately after the pricing of our initial public offering, is designed
to promote retention and motivation of directors and executive officers, incentivize superior individual excellence, align the
interests of our directors and executive officers with our long-term performance and provide a risk management tool. To that end,
a portion of an executive officer compensation package is targeted to reflect our short and long-term goals, as well as the
executive officer’s individual performance. On the other hand, our compensation policy includes measures designed to reduce the
executive officer’s incentives to take excessive risks that may harm us in the long-term, such as limits on the value of cash
bonuses and equity-based compensation, limitations on the ratio between the variable and the total compensation of an executive
officer and minimum vesting periods for equity-based compensation.
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Our compensation policy also addresses our executive officer’s individual characteristics (such as his or her respective
position, education, scope of responsibilities and contribution to the attainment of our goals) as the basis for compensation
variation among our executive officers, and considers the internal ratios between compensation of our executive officers and
directors and other employees. Pursuant to our compensation policy, the compensation that may be granted to an executive
officer may include: base salary, annual bonuses and other cash bonuses (such as a signing bonus and special bonuses with
respect to any special achievements, such as outstanding personal achievement, outstanding personal effort or outstanding
company performance), equity-based compensation, benefits and retirement and termination of service arrangements. All cash
bonuses are limited to a maximum amount linked to the executive officer’s base salary. In addition, the total variable
compensation components (cash bonuses and equity-based compensation) may not exceed 85% of each executive officer’s total
compensation package with respect to any given calendar year.
An annual cash bonus may be awarded to executive officers upon the attainment of pre-set periodic objectives and
individual targets. The annual cash bonus that may be granted to our executive officers other than our chief executive officer will
be based on performance objectives and a discretionary evaluation of the executive officer’s overall performance by our chief
executive officer and subject to minimum thresholds. The annual cash bonus that may be granted to executive officers other than
our chief executive officer may be based entirely on a discretionary evaluation. Furthermore, our chief executive officer will be
entitled to recommend performance objectives, and such performance objectives will be approved by our compensation
committee (and, if required by law, by our board of directors).
The performance measurable objectives of our chief executive officer will be determined annually by our compensation
committee and board of directors, will include the weight to be assigned to each achievement in the overall evaluation. A less
significant portion of the chief executive officer’s annual cash bonus may be based on a discretionary evaluation of the chief
executive officer’s overall performance by the compensation committee and the board of directors based on quantitative and
qualitative criteria.
The equity-based compensation under our compensation policy for our executive officers (including members of our
board of directors) is designed in a manner consistent with the underlying objectives in determining the base salary and the
annual cash bonus, with its main objectives being to enhance the alignment between the executive officers’ interests with our
long-term interests and those of our shareholders and to strengthen the retention and the motivation of executive officers in the
long term. Our compensation policy provides for executive officer compensation in the form of share options or other equity-
based awards, such as restricted shares and restricted share units, in accordance with our share incentive plan then in place. All
equity-based incentives granted to executive officers shall be subject to vesting periods in order to promote long-term retention of
the awarded executive officers. The equity-based compensation shall be granted from time to time and be individually
determined and awarded according to the performance, educational background, prior business experience, qualifications, role
and the personal responsibilities of the executive officer.
In addition, our compensation policy contains compensation recovery provisions which allows us under certain conditions
to recover bonuses paid in excess, enables our chief executive officer to approve an immaterial change in the terms of
employment of an executive officer (provided that the changes of the terms of employment are in accordance our compensation
policy) and allows us to exculpate, indemnify and insure our executive officers and directors subject to certain limitations set
forth thereto.
Our compensation policy also provides for compensation to the members of our board of directors either (i) in accordance
with the amounts provided in the Companies Regulations (Rules Regarding the Compensation and Expenses of an External
Director) of 2000, as amended by the Companies Regulations (Relief for Public Companies Traded in Stock Exchange Outside of
Israel) of 2000, as such regulations may be amended from time to time, or (ii) in accordance with the amounts determined in our
compensation policy.
Our compensation policy, which was approved by our board of directors and our controlling shareholder on October 2,
2017, became effective upon the pricing of our initial public offering.
C. Board Practices
Appointment of Directors and Terms of Officers
Our board of directors consists of eight directors, including two external directors, and appointment fulfills the
requirements of the Companies Law for the company to have two external directors (see “ – External Directors”). These two
directors, as well as one additional director, qualify as independent directors under the corporate governance standards of the
Nasdaq corporate governance rules and the independence requirements of Rule 10A-3 of the Exchange Act.
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Under our amended and restated articles of association, the number of directors on our board of directors will be no less
than five (5) and no more than nine (9), including any external directors required to be appointed under the Companies Law. The
minimum and maximum number of directors may be changed, at any time and from time to time, by a special 662⁄3% majority
shareholder vote.
Other than external directors, for whom special election requirements apply under the Companies Law, as detailed below,
our directors are divided into three classes with staggered three-year terms. Each class of directors consists, as nearly as possible,
of one-third of the total number of directors constituting the entire board of directors (other than the external directors). At each
annual general meeting of our shareholders, the election or re-election of directors following the expiration of the term of office
of the directors of that class of directors will be for a term of office that expires on the third annual general meeting following
such election or re-election, such that from 2019 and after, at each annual general meeting the term of office of only one class of
directors will expire. Each director holds office until the third annual general meeting of our shareholders and until his or her
successor is duly appointed, unless the tenure of such director expires earlier pursuant to the Companies Law or unless removed
from office as described below, except that our external directors have a term of office of three years under Israeli law. See
“— External directors — Election and Dismissal of External Directors”.
Our directors who are not external directors are divided among the three classes as follows:
•
•
•
Class I directors consist of Ms. Yaffa Krindel-Sieradzki, Dr. Ben Zvi and Mr. Jonathan Siegel, who are all independent directors, and their term
will expire at our annual general meeting of our shareholders to be held in 2022;
Class II directors consist of Ms. Lerman and Dr. Seri-Levy, and their term will expire at our annual general meeting of our shareholders to be
held in 2020; and
Class III directors consist of Mr. Itai Arkin and Mr. Moshe Arkin, and their term will expire at our annual general meeting of our shareholders
to be held in 2021.
Mr. Gattegno and Mr. Gottfried serve as our external directors and will each have a term of three years.
Under our amended and restated articles of association, our board of directors may elect new directors if the number of
directors is below the maximum provided therein. External directors are elected for an initial term of three years and may be
elected for up to two additional three-year terms (or more) under the circumstances described below. External directors may be
removed from office only under the limited circumstances set forth in the Companies Law. See “— External Directors— Election
and Dismissal of External Directors” for a description of the procedure for the election of external directors.
Under Israeli law, the chief executive officer of a public company may not serve as the chairman of the board of directors
of the company unless approved by a special majority of our shareholders as required under the Companies Law.
In addition, under the Companies Law, our board of directors must determine the minimum number of directors who are
required to have financial and accounting expertise. Under applicable regulations, a director with financial and accounting
expertise is a director who, by reason of his or her education, professional experience and skill, has a high level of proficiency in
and understanding of business accounting matters and financial statements. See “— External Directors — Qualifications of
External Directors.” He or she must be able to thoroughly comprehend the financial statements of the company and initiate
debate regarding the manner in which financial information is presented. In determining the number of directors required to have
such expertise, the board of directors must consider, among other things, the type and size of the company and the scope and
complexity of its operations. Our board of directors has determined that we require at least one director with the requisite
financial and accounting expertise and that has such expertise.
There are no family relationships among any of our office holders (including directors), other than Mr. Itai Arkin who is
the son of Mr. Moshe Arkin.
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Alternate Directors
Our amended and restated articles of association provide, as allowed by the Companies Law, that any director may, by
written notice to us, appoint another person who is qualified to serve as a director to serve as an alternate director. The alternate
director will be regarded as a director. Under the Companies Law, a person who is not qualified to be appointed as a director, a
person who is already serving as a director or a person who is already serving as an alternate director for another director, may
not be appointed as an alternate director. Nevertheless, a director who is already serving as a director may be appointed as an
alternate director for a member of a committee of the board of directors as long as he or she is not already serving as a member of
such committee, and if the alternate director is to replace an external director, he or she is required to be an external director and
to have either “financial and accounting expertise” or “professional expertise,” depending on the qualifications of the external
director he or she is replacing. The term of appointment of an alternate director may be for one meeting of the board of directors
or until notice is given of the cancellation of the appointment. A person who does not have the requisite “financial and accounting
experience” or the “professional expertise,” depending on the qualifications of the external director he or she is replacing, may
not be appointed as an alternate director for an external director.
External Directors
Qualifications of External Directors
Under the Companies Law, companies incorporated under the laws of the State of Israel that are “public companies,”
including companies with shares listed on The Nasdaq Global Market, are generally required to appoint at least two external
directors who meet the qualification requirements set forth in the Companies Law.
A person may not be appointed as an external director if the person is a relative of a controlling shareholder or if on the
date of the person’s appointment or within the preceding two years the person or his or her relatives, partners, employers or
anyone to whom that person is subordinate, whether directly or indirectly, or entities under the person’s control have or had any
affiliation with any of (each an “Affiliated Party”): (1) us; (2) any person or entity controlling us on the date of such
appointment; (3) any relative of a controlling shareholder; or (4) any entity controlled, on the date of such appointment or within
the preceding two years, by us or by a controlling shareholder. If there is no controlling shareholder or any shareholder holding
25% or more of voting rights in the company, a person may not be appointed as an external director if the person has any
affiliation to the chairman of the board of directors, the general manager (chief executive officer), any shareholder holding 5% or
more of the company’s shares or voting rights or the senior financial officer as of the date of the person’s appointment.
The term “controlling shareholder” means a shareholder with the ability to direct the activities of the company, other than
by virtue of being an office holder. A shareholder is presumed to have “control” of the company and thus to be a controlling
shareholder of the company if the shareholder holds 50% or more of the “means of control” of the company. “Means of control”
is defined as (1) the right to vote at a general meeting of a company or a corresponding body of another corporation; or (2) the
right to appoint directors of the corporation or its general manager. For the purpose of approving related-party transactions, the
term also includes any shareholder that holds 25% or more of the voting rights of the company if the company has no shareholder
that owns more than 50% of its voting rights. For the purpose of determining the holding percentage stated above, two or more
shareholders who have a personal interest in a transaction that is brought for the company’s approval are deemed as joint holders.
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The term affiliation includes:
•
•
•
•
an employment relationship;
a business or professional relationship maintained on a regular basis;
control; and
service as an office holder, excluding service as a director in a private company prior to the first offering of its shares to the public if such
director was appointed as a director of the private company in order to serve as an external director following the initial public offering.
The term “relative” is defined as a spouse, sibling, parent, grandparent, descendant, spouse’s descendant, sibling and
parent and the spouse of each of the foregoing.
The term “office holder” is defined as a general manager, chief business manager, deputy general manager, vice general
manager, director or manager directly subordinate to the general manager or any other person assuming the responsibilities of any
of the foregoing positions, without regard to such person’s title.
A person may not serve as an external director if that person or that person’s relative, partner, employer, a person to whom
such person is subordinate (directly or indirectly) or any entity under the person’s control has a business or professional
relationship with any entity that has an affiliation with any Affiliated Party, even if such relationship is intermittent (excluding
insignificant relationships). Additionally, any person who has received compensation intermittently (excluding insignificant
relationships) other than compensation permitted under the Companies Law may not continue to serve as an external director.
No person can serve as an external director if the person’s position or other affairs create, or may create, a conflict of
interest with the person’s responsibilities as a director or may otherwise interfere with the person’s ability to serve as a director or
if such a person is an employee of the Israeli Securities Authority or of an Israeli stock exchange. If at the time an external
director is appointed all current members of the board of directors, who are not controlling shareholders or relatives of controlling
shareholders, are of the same gender, then the external director to be appointed must be of the other gender. In addition, a person
who is a director of a company may not be elected as an external director of another company if, at that time, a director of the
other company is acting as an external director of the first company.
The Companies Law provides that an external director must meet certain professional qualifications or have financial and
accounting expertise and that at least one external director must have financial and accounting expertise. However, if at least one
of our other directors (1) meets the independence requirements of the Exchange Act, (2) meets the standards of the Nasdaq
corporate governance rules for membership on the audit committee and (3) has financial and accounting expertise as defined in
the Companies Law and applicable regulations, then neither of our external directors is required to possess financial and
accounting expertise as long as both possess other requisite professional qualifications. The determination of whether a director
possesses financial and accounting expertise is made by the board of directors. A director with financial and accounting expertise
is a director who by virtue of his or her education, professional experience and skill, has a high level of proficiency in and
understanding of business accounting matters and financial statements so that he or she is able to fully understand our financial
statements and initiate debate regarding the manner in which the financial information is presented.
The regulations promulgated under the Companies Law define an external director with requisite professional
qualifications as a director who satisfies one of the following requirements: (1) the director holds an academic degree in either
economics, business administration, accounting, law or public administration, (2) the director either holds an academic degree in
any other field or has completed another form of higher education in the company’s primary field of business or in an area which
is relevant to his or her office as an external director in the company, or (3) the director has at least five years of experience
serving in any one of the following, or at least five years of cumulative experience serving in two or more of the following
capacities: (a) a senior business management position in a company with a substantial scope of business, (b) a senior position in
the company’s primary field of business or (c) a senior position in public administration.
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Until the lapse of a two-year period from the date that an external director of a company ceases to act in such capacity, the
company in which such external director served, and its controlling shareholder or any entity under control of such controlling
shareholder may not, directly or indirectly, grant such former external director, or his or her spouse or child, any benefit,
including via (i) the appointment of such former director or his or her spouse or his child as an officer in the company or in an
entity controlled by the company’s controlling shareholder, (ii) the employment of such former director, and (iii) the engagement,
directly or indirectly, of such former director as a provider of professional services for compensation, directly or indirectly,
including via an entity under his or her control. With respect to a relative who is not a spouse or a child, such limitations shall
only apply for one year from the date such external director ceased to be engaged in such capacity.
Election and Dismissal of External Directors
Under Israeli law, external directors are elected by a majority vote at a shareholders’ meeting, provided that either:
•
•
the majority of the shares that are voted at the meeting in favor of the election of the external director, excluding abstentions, include at least a
majority of the votes of shareholders who are not controlling shareholders and do not have a personal interest in the appointment (excluding a
personal interest that did not result from the shareholder’s relationship with the controlling shareholder); or
the total number of shares held by non-controlling shareholders or any one on their behalf that are voted against the election of the external
director does not exceed two percent of the aggregate voting rights in the company.
Under Israeli law, the initial term of an external director of an Israeli public company is three years. The external director
may be re-elected, subject to certain circumstances and conditions, for up to two additional terms of three years each, and
thereafter, subject to conditions set out in the regulations promulgated under the Companies Law, to further three year terms, each
re-election subject to one of the following:
•
•
•
his or her service for each such additional term is recommended by one or more shareholders holding at least 1% of the company’s voting rights
and is approved at a shareholders meeting by a disinterested majority, where the total number of shares held by non-controlling, disinterested
shareholders voting for such reelection exceeds 2% of the aggregate voting rights in the company and subject to additional restrictions set forth
in the Companies Law with respect to the affiliation of the external director nominee;
the external director proposed his or her own nomination, and such nomination was approved in accordance with the requirements described in
the paragraph above; or
his or her service for each such additional term is recommended by the board of directors and is approved at a meeting of shareholders by the
same majority required for the initial election of an external director (as described above).
An external director may be removed by the same special majority of the shareholders required for his or her election, if
he or she ceases to meet the statutory qualifications for appointment or if he or she violates his or her fiduciary duty to the
company. An external director may also be removed by order of an Israeli court if the court finds that the external director is
permanently unable to exercise his or her office, has ceased to meet the statutory qualifications for his or her appointment, has
violated his or her fiduciary duty to the company, or has been convicted by a court outside Israel of certain offenses detailed in
the Companies Law.
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If the vacancy of an external directorship causes a company to have fewer than two external directors, the company’s
board of directors is required under the Companies Law to call a special general meeting of the company’s shareholders as soon
as possible to appoint such number of new external directors so that the company thereafter has two external directors.
Additional Provisions
Under the Companies Law, each committee authorized to exercise any of the powers of the board of directors is required
to include at least one external director and its audit and compensation committees are required to include all of the external
directors.
An external director is entitled to compensation and reimbursement of expenses in accordance with regulations
promulgated under the Companies Law and is prohibited from receiving any other compensation, directly or indirectly, in
connection with serving as a director except for certain exculpation, indemnification and insurance provided by the company, as
specifically allowed by the Companies Law.
Audit Committee
Companies Law Requirements
Under the Companies Law, the board of directors of any public company must also appoint an audit committee comprised
of at least three directors, including all of the external directors. The audit committee may not include:
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the chairman of the board of directors;
a controlling shareholder or a relative of a controlling shareholder;
any director employed by us or by one of our controlling shareholders or by an entity controlled by our controlling shareholders (other than as a
member of the board of directors); or
any director who regularly provides services to us, to one of our controlling shareholders or to an entity controlled by our controlling
shareholders.
According to the Companies Law, the majority of the members of the audit committee, as well as the majority of
members present at audit committee meetings, will be required to be “independent” (as defined below) and the chairman of the
audit committee will be required to be an external director. Any persons disqualified from serving as a member of the audit
committee may not be present at the audit committee meetings, unless the chairman of the audit committee has determined that
such person is required to be present at the meeting or if such person qualifies under one of the exemptions of the Companies
Law.
The term “independent director” is defined under the Companies Law as an external director or a director who meets the
following conditions and who is appointed or classified as such according to the Companies Law: (1) the conditions for his or her
appointment as an external director (as described above) are satisfied and the audit committee approves the director having met
such conditions and (2) he or she has not served as a director of the company for over nine consecutive years with any
interruption of up to two years of his or her service not being deemed a disruption to the continuity of his or her service.
Nasdaq Listing Requirements
Under the Nasdaq corporate governance rules, we are required to maintain an audit committee consisting of at least three
independent directors, all of whom are financially literate and one of whom has accounting or related financial management
expertise.
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Our audit committee consists of Ran Gottfried, Jerrold S. Gattegno, Shmuel Ben Zvi and Yaffa Krindel-Sieradzki. Jerrold
S. Gattegno serves as Chairman of the committee. All members of our audit committee meet the requirements for financial
literacy under the applicable rules and regulations of the SEC and the Nasdaq corporate governance rules. Our board of directors
has determined that Jerrold S. Gattegno is an audit committee financial expert as defined by SEC rules and has the requisite
financial experience as defined by the Nasdaq corporate governance rules.
Each of the members of the audit committee is “independent” as such term is defined in Rule 10A-3(b)(1) under the
Exchange Act.
Approval of Transactions with Related Parties
The approval of the audit committee is required to effect specified actions and transactions with office holders and
controlling shareholders and their relatives, or in which they have a personal interest. See “— Duties of Directors and Officers
and Approval of Specified Related Party Transactions under the Israeli Companies Law – Fiduciary Duties of Office Holders.”
The audit committee may not approve an action or a transaction with a controlling shareholder or with an office holder unless at
the time of approval the audit committee meets the composition requirements under the Companies Law.
Audit Committee Role
Our board of directors has adopted an audit committee charter effective immediately after the pricing of our initial public
offering setting forth the responsibilities of the audit committee consistent with the rules of the SEC and the Nasdaq corporate
governance rules, which include:
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•
•
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retaining and terminating our independent auditors, subject to board of directors and shareholder ratification;
overseeing the independence, compensation and performance of the Company’s independent auditors;
the appointment, compensation, retention and oversight of any accounting firm engaged for the purpose of preparing or issuing an audit report
or performing other audit services;
pre-approval of audit and non-audit services to be provided by the independent auditors;
reviewing with management and our independent directors our financial statements prior to their submission to the SEC; and
approval of certain transactions with office holders and controlling shareholders, as described below, and other related party transactions.
Additionally, under the Companies Law, the role of the audit committee includes the identification of irregularities in our
business management, among other things, by consulting with the internal auditor or our independent auditors and suggesting an
appropriate course of action to the board of directors. In addition, the audit committee or the board of directors, as set forth in the
articles of association of the company, is required to approve the yearly or periodic work plan proposed by the internal auditor.
The audit committee is required to assess the company’s internal audit system and the performance of its internal auditor. The
Companies Law also requires that the audit committee assess the scope of the work and compensation of the company’s external
auditor. In addition, the audit committee is required to determine whether certain related party actions and transactions are
“material” or “extraordinary” for the purpose of the requisite approval procedures under the Companies Law and whether certain
transactions with a controlling shareholder will be subject to a competitive procedure. The audit committee charter states that in
fulfilling its role the committee is empowered to conduct or authorize investigations into any matters within its scope of
responsibilities. A company whose audit committee’s composition also meets the requirements set for the composition of a
compensation committee (as further detailed below) may have one committee acting as both audit and compensation committees.
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Compensation Committee
Under the Companies Law, public companies are required to appoint a compensation committee in accordance with the
guidelines set forth thereunder.
The compensation committee must consist of at least three members. All of the external directors must serve on the
committee and constitute a majority of its members. The chairman of the compensation committee must be an external director.
The remaining members are not required to be external directors, but must be directors who qualify to serve as members of the
audit committee (as described above).
The compensation committee, which consists of Ran Gottfried, Jerrold S. Gattegno and Shmuel Ben Zvi, assists the board
of directors in determining compensation for our directors and officers. Ran Gottfried serves as Chairman of the committee.
Under SEC and Nasdaq rules, there are heightened independence standards for members of the compensation committee,
including a prohibition against the receipt of any compensation from us other than standard supervisory board member fees.
Although foreign private issuers are not required to meet this heightened standard, our board of directors has determined that all
of our expected compensation committee members meet this heightened standard.
In accordance with the Companies Law, the roles of the compensation committee are, among others, as follows:
(1)
to recommend to the board of directors the compensation policy for directors and officers, and to recommend to the board of directors once
every three years whether the compensation policy that had been approved should be extended for a period of more than three years;
(2)
to recommend to the board of directors updates to the compensation policy, from time to time, and examine its implementation;
(3)
(4)
to decide whether to approve the terms of office and employment of directors and officers that require approval of the compensation committee;
and
to decide whether the compensation terms of the chief executive officer, which were determined pursuant to the compensation policy, will be
exempted from approval by the shareholders because such approval would harm the ability to engage the chief executive officer.
In addition to the roles mentioned above our compensation committee also makes recommendations to our board of
directors regarding the awarding of employee equity grants.
In general, under the Companies Law, a public company must have a compensation policy approved by the board of
directors after receiving and considering the recommendations of the compensation committee. In addition, the compensation
policy requires the approval of the general meeting of the shareholders. In public companies such as our company, shareholder
approval requires one of the following: (i) the majority of shareholder votes counted at a general meeting including the majority
of all of the votes of those shareholders who are non-controlling shareholders and do not have a personal interest in the approval
of the compensation policy, who vote at the meeting (excluding abstentions) or (ii) the total number of votes against the proposal
among the shareholders mentioned in paragraph (i) does exceed two percent (2%) of the voting rights in the company. Under
special circumstances, the board of directors may approve the compensation policy despite the objection of the shareholders on
the condition that the compensation committee and then the board of directors decide, on the basis of detailed arguments and after
discussing again the compensation policy, that approval of the compensation policy, despite the objection of the meeting of
shareholders, is for the benefit of the company.
If a company initially offer its securities to the public, like we recently did, adopts a compensation policy in advance of its
initial public offering, and describes it in its prospectus, then such compensation policy shall be deemed a validly adopted policy
in accordance with the Companies Law requirements described above. Furthermore, if the compensation policy is set in
accordance with the aforementioned relief, then it will remain in effect for term of five years from the date such company has
become a public company.
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The compensation policy must be based on certain considerations, include certain provisions and needs to reference
certain matters as set forth in the Companies Law.
The compensation policy must serve as the basis for decisions concerning the financial terms of employment or
engagement of office holders, including exculpation, insurance, indemnification or any monetary payment or obligation of
payment in respect of employment or engagement. The compensation policy must relate to certain factors, including
advancement of the company’s objectives, business plan and long-term strategy, and creation of appropriate incentives for office
holders. It must also consider, among other things, the company’s risk management, size and the nature of its operations. The
compensation policy must furthermore consider the following additional factors:
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the education, skills, experience, expertise and accomplishments of the relevant office holder;
the office holder’s position, responsibilities and prior compensation agreements with him or her;
the ratio between the cost of the terms of employment of an office holder and the cost of the employment of other employees of the company,
including employees employed through contractors who provide services to the company, in particular the ratio between such cost, the average
and median salary of the employees of the company, as well as the impact of such disparities on the work relationships in the company;
if the terms of employment include variable components — the possibility of reducing variable components at the discretion of the board of
directors and the possibility of setting a limit on the value of non-cash variable equity-based components; and
if the terms of employment include severance compensation — the term of employment or office of the office holder, the terms of his or her
compensation during such period, the company’s performance during the such period, his or her individual contribution to the achievement of
the company goals and the maximization of its profits and the circumstances under which he or she is leaving the company.
The compensation policy must also include, among others:
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with regards to variable components:
with the exception of office holders who report directly to the chief executive officer, determining the variable components on long-term
performance basis and on measurable criteria; however, the company may determine that an immaterial part of the variable components of the
compensation package of an office holder’s shall be awarded based on non-measurable criteria, if such amount is not higher than three monthly
salaries per annum, while taking into account such office holder contribution to the company;
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the ratio between variable and fixed components, as well as the limit of the values of variable components at the time of their grant.
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a condition under which the office holder will return to the company, according to conditions to be set forth in the compensation policy, any
amounts paid as part of his or her terms of employment, if such amounts were paid based on information later to be discovered to be wrong,
and such information was restated in the company’s financial statements;
the minimum holding or vesting period of variable equity-based components to be set in the terms of office or employment, as applicable, while
taking into consideration long-term incentives; and
a limit to retirement grants.
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Corporate Governance Practices
Internal Auditor
Under the Companies Law, the board of directors of a public company must appoint an internal auditor based on the
recommendation of the audit committee. The role of the internal auditor is, among other things, to examine whether a company’s
actions comply with applicable law and orderly business procedure. Under the Companies Law, the internal auditor may not be
an interested party or an office holder or a relative of an interested party or of an office holder, nor may the internal auditor be the
company’s independent auditor or the representative of the same.
An “interested party” is defined in the Companies Law as (i) a holder of 5% or more of the issued share capital or voting
power in a company, (ii) any person or entity who has the right to designate one or more directors or to designate the chief
executive officer of the company, or (iii) any person who serves as a director or as a chief executive officer of the company. As of
the date of this annual report, we have not yet appointed our internal auditor.
Duties of Directors and Officers and Approval of Specified Related Party Transactions under the Israeli Companies Law
Fiduciary Duties of Office Holders
The Companies Law imposes a duty of care and a fiduciary duty on all office holders of a company. The duty of care of
an office holder is based on the duty of care set forth in connection with the tort of negligence under the Israeli Torts Ordinance
(New Version) 5728-1968. This duty of care requires an office holder to act with the degree of proficiency with which a
reasonable office holder in the same position would have acted under the same circumstances. The duty of care includes, among
other things, a duty to use reasonable means, in light of the circumstances, to obtain:
•
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information on the business advisability of a given action brought for his or her approval or performed by virtue of his or her position; and
all other important information pertaining to such action.
The fiduciary duty incumbent on an office holder requires him or her to act in good faith and for the benefit of the
company, and includes, among other things, the duty to:
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refrain from any act involving a conflict of interest between the performance of his or her duties in the company and his or her other duties or
personal affairs;
refrain from any activity that is competitive with the business of the company;
refrain from exploiting any business opportunity of the company for the purpose of gaining a personal advantage for himself or herself or
others; and
disclose to the company any information or documents relating to the company’s affairs which the office holder received as a result of his or her
position as an office holder.
We may approve an act specified above which would otherwise constitute a breach of the office holder’s fiduciary duty,
provided that the office holder acted in good faith, the act or its approval does not harm the company, and the office holder
discloses his or her personal interest a sufficient time before the approval of such act. Any such approval is subject to the terms of
the Companies Law, setting forth, among other things, the appropriate bodies of the company entitled to provide such approval,
and the methods of obtaining such approval.
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Disclosure of Personal Interests of an Office Holder and Approval of Transactions
The Companies Law requires that an office holder promptly disclose to the company any personal interest that he or she
may have and all related material information or documents relating to any existing or proposed transaction by the company. An
interested office holder’s disclosure must be made promptly and in any event no later than the first meeting of the board of
directors at which the transaction is considered. An office holder is not obliged to disclose such information if the personal
interest of the office holder derives solely from the personal interest of his or her relative in a transaction that is not considered an
extraordinary transaction.
Under the Companies Law, once an office holder has complied with the above disclosure requirement, a company may
approve a transaction between the company and the office holder or a third party in which the office holder has a personal
interest. However, a company may not approve a transaction or action that is not to the company’s benefit.
Under the Companies Law, unless the articles of association of a company provide otherwise, a transaction with an office
holder or with a third party in which the office holder has a personal interest, which is not an extraordinary transaction, requires
approval by the board of directors. Our amended and restated articles of association provide that such a transaction, which is not
an extraordinary transaction, shall be approved by the board of directors or a committee of the board of directors or any other
body or person (which has no personal interest in the transaction) authorized by the board of directors. If the transaction
considered is an extraordinary transaction with an office holder or third party in which the office holder has a personal interest,
then audit committee approval is required prior to approval by the board of directors. For the approval of compensation
arrangements with directors and executive officers, see “ – Duties of Directors and Officers and Approval of Specified Related
Party Transactions under the Israeli Companies Law – Fiduciary Duties of Office Holders.”
Any persons who have a personal interest in the approval of a transaction that is brought before a meeting of the board of
directors or the audit committee may not be present at the meeting or vote on the matter. However, if the chairman of the board of
directors or the chairman of the audit committee has determined that the presence of an office holder with a personal interest is
required, such office holder may be present at the meeting for the purpose of presenting the matter. Notwithstanding the
foregoing, a director who has a personal interest may be present at the meeting and vote on the matter if a majority of the
directors or members of the audit committee have a personal interest in the approval of such transaction. If a majority of the
directors at a board of directors meeting have a personal interest in the transaction, such transaction also requires approval of the
shareholders of the company.
A “personal interest” is defined under the Companies Law as the personal interest of a person in an action or in a
transaction of the company, including the personal interest of such person’s relative or the interest of any other corporate body in
which the person and/or such person’s relative is a director or general manager, a 5% shareholder or holds 5% or more of the
voting rights, or has the right to appoint at least one director or the general manager, but excluding a personal interest stemming
solely from the fact of holding shares in the company. A personal interest also includes (1) a personal interest of a person who
votes according to a proxy of another person, including in the event that the other person has no personal interest, and (2) a
personal interest of a person who gave a proxy to another person to vote on his or her behalf regardless of whether or not the
discretion of how to vote lies with the person voting.
An “extraordinary transaction” is defined under the Companies Law as any of the following:
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a transaction other than in the ordinary course of business;
a transaction that is not on market terms; or
a transaction that may have a material impact on the company’s profitability, assets or liabilities.
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Disclosure of Personal Interests of a Controlling Shareholder and Approval of Transactions
The Companies Law also requires that a controlling shareholder promptly disclose to the company any personal interest
that he or she may have and all related material information or documents relating to any existing or proposed transaction by the
company. A controlling shareholder’s disclosure must be made promptly and, in any event, no later than the first meeting of the
board of directors at which the transaction is considered. Extraordinary transactions with a controlling shareholder or in which a
controlling shareholder has a personal interest, including a private placement in which a controlling shareholder has a personal
interest, and the terms of engagement of the company, directly or indirectly, with a controlling shareholder or a controlling
shareholder’s relative (including through a corporation controlled by a controlling shareholder), regarding the company’s receipt
of services from the controlling shareholder, and if such controlling shareholder is also an office holder or employee of the
company, regarding his or her terms of employment, require the approval of each of (i) the audit committee or the compensation
committee with respect to the terms of the engagement of the company, (ii) the board of directors and (iii) the shareholders, in
that order. In addition, the shareholder approval must fulfill one of the following requirements:
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a majority of the shares held by shareholders who have no personal interest in the transaction and are voting at the meeting must be voted in
favor of approving the transaction, excluding abstentions; or
the shares voted by shareholders who have no personal interest in the transaction who vote against the transaction represent no more than two
percent (2%) of the voting rights in the company.
In addition, an extraordinary transaction with a controlling shareholder or in which a controlling shareholder has a
personal interest, and an engagement of the company, directly or indirectly, with a controlling shareholder or a controlling
shareholder’s relative (including through a corporation controlled by a controlling shareholder), regarding the company’s receipt
of services from the controlling shareholder, and if such controlling shareholder is also an office holder or employee of the
company, regarding his or her terms of employment, in each case with a term of more than three years requires the
abovementioned approval every three years, however, transactions not involving the receipt of services or compensation can be
approved for a longer term, provided that the audit committee determines that such longer term is reasonable under the
circumstances. In addition, transactions with a controlling shareholder or a controlling shareholder’s relative who serves as an
officer in a company, directly or indirectly (including through a corporation under his control), involving the receipt of services
by a company or their compensation can have a term of five years from the company's initial public offering under certain
circumstances.
The Companies Law requires that every shareholder that participates, in person, by proxy or by voting instrument, in a
vote regarding a transaction with a controlling shareholder, must indicate in advance or in the ballot whether or not that
shareholder has a personal interest in the vote in question. Failure to so indicate will result in the invalidation of that
shareholder’s vote.
Disclosure of Compensation of Executive Officers
For so long as we qualify as a foreign private issuer, we are not required to comply with the proxy rules applicable to U.S.
domestic companies, including the requirement applicable to emerging growth companies to disclose the compensation of our
chief executive officer and other two most highly compensated executive officers on an individual, rather than an aggregate,
basis. Nevertheless, regulations promulgated under the Companies Law will require us, after we became a public company, to
disclose the annual compensation of our five most highly compensated office holders on an individual basis, rather than on an
aggregate basis. This disclosure will not be as extensive as that required of a U.S. domestic issuer.
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Compensation of Directors and Executive Officers
Directors. Under the Companies Law, the compensation of our directors requires the approval of our compensation
committee, the subsequent approval of the board of directors and, unless exempted under regulations promulgated under the
Companies Law, the approval of the shareholders at a general meeting. If the compensation of our directors is inconsistent with
our stated compensation policy, then, those provisions that must be included in the compensation policy according to the
Companies Law must have been considered by the compensation committee and board of directors, and shareholder approval
will also be required, provided that:
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at least a majority of the shares held by all shareholders who are not controlling shareholders and do not have a personal interest in such matter,
present and voting at such meeting, are voted in favor of the compensation package, excluding abstentions; or
the total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in such matter voting against
the compensation package does not exceed two percent (2%) of the aggregate voting rights in the company.
Executive officers other than the chief executive officer. The Companies Law requires the approval of the compensation of
a public company’s executive officers (other than the chief executive officer) in the following order: (i) the compensation
committee, (ii) the company’s board of directors, and (iii) if such compensation arrangement is inconsistent with the company’s
stated compensation policy, the company’s shareholders (by a special majority vote as discussed above with respect to the
approval of director compensation). However, if the shareholders of the company do not approve a compensation arrangement
with an executive officer that is inconsistent with the company’s stated compensation policy, the compensation committee and
board of directors may override the shareholders’ decision if each of the compensation committee and the board of directors
provide detailed reasons for their decision.
Chief executive officer. Under the Companies Law, the compensation of a public company’s chief executive officer is
required to be approved by: (i) the company’s compensation committee; (ii) the company’s board of directors, and (iii) the
company’s shareholders (by a special majority vote as discussed above with respect to the approval of director compensation).
However, if the shareholders of the company do not approve the compensation arrangement with the chief executive officer, the
compensation committee and board of directors may override the shareholders’ decision if each of the compensation committee
and the board of directors provide a detailed report for their decision. The approval of each of the compensation committee and
the board of directors should be in accordance with the company’s stated compensation policy; however, in special
circumstances, they may approve compensation terms of a chief executive officer that are inconsistent with such policy provided
that they have considered those provisions that must be included in the compensation policy according to the Companies Law
and that shareholder approval was obtained (by a special majority vote as discussed above with respect to the approval of director
compensation). In addition, the compensation committee may waive the shareholder approval requirement with regards to the
approval of the engagement terms of a candidate for the chief executive officer position, if they determine that the compensation
arrangement is consistent with the company’s stated compensation policy, and that the chief executive officer did not have a prior
business relationship with the company or a controlling shareholder of the company and that subjecting the approval of the
engagement to a shareholder vote would impede the company’s ability to employ the chief executive officer candidate.
Duties of Shareholders
Under the Companies Law, a shareholder has a duty to refrain from abusing its power in the company and to act in good
faith and in an acceptable manner in exercising its rights and performing its obligations to the company and other shareholders,
including, among other things, when voting at meetings of shareholders on the following matters:
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an amendment to the articles of association;
an increase in the company’s authorized share capital;
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•
a merger; and
the approval of related party transactions and acts of office holders that require shareholder approval.
A shareholder also has a general duty to refrain from discriminating against other shareholders.
The remedies generally available upon a breach of contract will also apply to a breach of the shareholder duties
mentioned above, and in the event of discrimination against other shareholders, additional remedies may be available to the
injured shareholder.
In addition, any controlling shareholder, any shareholder that knows that its vote can determine the outcome of a
shareholder vote and any shareholder that, under a company’s articles of association, has the power to appoint or prevent the
appointment of an office holder, or any other power with respect to a company, is under a duty to act with fairness towards the
company. The Companies Law does not describe the substance of this duty except to state that the remedies generally available
upon a breach of contract will also apply in the event of a breach of the duty to act with fairness, taking the shareholder’s position
in the company into account.
Approval of Private Placements
Under the Companies Law and the regulations promulgated thereunder, a private placement of securities does not require
approval at a general meeting of the shareholders of a company; provided however, that in special circumstances, such as a
private placement which is intended to obviate the need to conduct a special tender offer (see “Item 10. Additional Information—
Memorandum of Association – Acquisitions under Israeli Law”) or a private placement which qualifies as a related party
transaction (see “— Duties of Directors and Officers and Approval of Specified Related Party Transactions under the Israeli
Companies Law – Fiduciary Duties of Office Holders”), approval at a general meeting of the shareholders of a company is
required.
Exculpation, Insurance and Indemnification of Directors and Officers
Under the Companies Law, a company may not exculpate an office holder from liability for a breach of the fiduciary duty.
An Israeli company may exculpate an office holder in advance from liability to the company, in whole or in part, for damages
caused to the company as a result of a breach of duty of care but only if a provision authorizing such exculpation is included in its
articles of association. Our amended and restated articles of association include such a provision. The company may not
exculpate in advance a director from liability arising due to the breach of his or her duty of care in the event of a prohibited
dividend or distribution to shareholders.
Under the Companies Law and the Israeli Securities Law, 5728-1968 (the “Securities Law”) a company may indemnify
an office holder in respect of the following liabilities, payments and expenses incurred for acts performed by him or her as an
office holder, either in advance of an event or following an event, provided its articles of association include a provision
authorizing such indemnification:
•
a monetary liability incurred by or imposed on the office holder in favor of another person pursuant to a court judgment, including pursuant to a
settlement confirmed as judgment or arbitrator’s decision approved by a competent court. However, if an undertaking to indemnify an office
holder with respect to such liability is provided in advance, then such an undertaking must be limited to events which, in the opinion of the
board of directors, can be foreseen based on the company’s activities when the undertaking to indemnify is given, and to an amount or
according to criteria determined by the board of directors as reasonable under the circumstances, and such undertaking shall detail the
abovementioned foreseen events and amount or criteria;
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reasonable litigation expenses, including reasonable attorneys’ fees, which were incurred by the office holder as a result of an investigation or
proceeding filed against the office holder by an authority authorized to conduct such investigation or proceeding, provided that such
investigation or proceeding was either (i) concluded without the filing of an indictment against such office holder and without the imposition on
him of any monetary obligation in lieu of a criminal proceeding; (ii) concluded without the filing of an indictment against the office holder but
with the imposition of a monetary obligation on the office holder in lieu of criminal proceedings for an offense that does not require proof of
criminal intent; or (iii) in connection with a monetary sanction;
a monetary liability imposed on the office holder in favor of a payment for a breach offended at an Administrative Procedure (as defined below)
as set forth in Section 52(54)(a)(1)(a) to the Securities Law;
expenses expended by the office holder with respect to an Administrative Procedure under the Securities Law, including reasonable litigation
expenses and reasonable attorneys’ fees;
reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or which were imposed on the office holder by a court (i)
in a proceeding instituted against him or her by the company, on its behalf, or by a third party, (ii) in connection with criminal indictment of
which the office holder was acquitted, or (iii) in a criminal indictment which the office holder was convicted of an offense that does not require
proof of criminal intent; and
any other obligation or expense in respect of which it is permitted or will be permitted under applicable law to indemnify an office holder,
including, without limitation, matters referenced in Section 56H(b)(1) of the Securities Law.
An “Administrative Procedure” is defined as a procedure pursuant to chapters H3 (Monetary Sanction by the Israeli
Securities Authority), H4 (Administrative Enforcement Procedures of the Administrative Enforcement Committee) or I1
(Arrangement to prevent Procedures or Interruption of procedures subject to conditions) to the Securities Law.
Under the Companies Law and the Securities Law, a company may insure an office holder against the following liabilities
incurred for acts performed by him or her as an office holder if and to the extent provided in the company’s articles of
association:
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a breach of the fiduciary duty to the company, provided that the office holder acted in good faith and had a reasonable basis to believe that the
act would not harm the company;
a breach of duty of care to the company or to a third party, to the extent such a breach arises out of the negligent conduct of the office holder;
a monetary liability imposed on the office holder in favor of a third party;
a monetary liability imposed on the office holder in favor of an injured party at an Administrative Procedure pursuant to Section 52(54)(a)(1)(a)
of the Securities Law; and
expenses incurred by an office holder in connection with an Administrative Procedure, including reasonable litigation expenses and reasonable
attorneys’ fees.
Under the Companies Law, a company may not indemnify, exculpate or insure an office holder against any of the
following:
•
•
a breach of the fiduciary duty, except for indemnification and insurance for a breach of the fiduciary duty to the company to the extent that the
office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
a breach of duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder;
113
•
•
an act or omission committed with intent to derive illegal personal benefit; or
a fine or forfeit levied against the office holder.
Under the Companies Law, exculpation, indemnification and insurance of office holders must be approved by the
compensation committee and the board of directors and, with respect to directors or controlling shareholders, their relatives and
third parties in which controlling shareholders have a personal interest, also by the shareholders.
Our amended and restated articles of association permit us to exculpate, indemnify and insure our office holders to the
fullest extent permitted or to be permitted by law. Our office holders are currently covered by a directors’ and officers’ liability
insurance policy. As of the date of this annual report, no claims for directors’ and officers’ liability insurance have been filed
under this policy and we are not aware of any pending or threatened litigation or proceeding involving any of our office holders,
including our directors, in which indemnification is sought.
See "Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions - Directors and Officers
Insurance Policy and Indemnification Agreements" for information regarding letters of indemnification to directors and officers
of the Company.
D. Employees
As of December 31, 2019, we had 61 employees, all of whom except one are located in Israel.
Management
Research and development and other
2017
As of December 31,
2018
Company
Employees
Company
Consultants Employees
6
43
Consultants Employees Consultants
8
48
9
52
2019
Company
While none of our employees are party to a collective bargaining agreement, certain provisions of the collective
bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic
Organizations (including the Industrialists’ Associations) are applicable to our employees by order of the Israel Ministry of
Labor. These provisions primarily concern the length of the workday, minimum daily wages for professional workers, pension
fund benefits for all employees, insurance for work-related accidents, procedures for dismissing employees, determination of
severance pay and other conditions of employment. We generally provide our employees with benefits and working conditions
beyond the required minimums.
We have never experienced any employment-related work stoppages and believe our relationship with our employees is
good.
E. Share Ownership
For information regarding the share ownership of our directors and executive officers, please see “Item 7.A. Major
Shareholders.”
Award Plans
2014 Share Incentive Plan
On December 2, 2014, we adopted the 2014 Share Incentive Plan, or the Plan, and, in connection with our initial public
offering, we amended and restated the Plan which became effective immediately after the pricing of our initial public offering.
The Plan is intended to afford an incentive to our and any of our affiliate’s employees, directors, officers, consultants, advisors
and any other person or entity who provides services to the Company, to continue as service providers, to increase their efforts on
our and our affiliates behalf and to promote our success, by providing such persons with opportunities to acquire a proprietary
interest in us.
114
Our board of directors has approved an increase in the maximum aggregate number of ordinary shares that may be issued
under the Plan, as amended and restated, to 2,262,230 of our ordinary shares. A shareholder meeting to approve this increase is
scheduled for April 8, 2020 in connection with grants under the Plan of incentive stock options under the U.S. Internal Revenue
Code. The number of shares that may be issued under the Plan is subject to adjustment if particular capital changes affect our
share capital or such other number as our board of directors may determine from time to time. Ordinary shares subject to
outstanding awards under the Plan that subsequently expire, are cancelled, forfeited or terminated for any reason before being
exercised will be automatically, and without any further action, returned to the “pool” of reserved shares and will again be
available for grant under the Plan. As of February 28, 2020, we had an aggregate of 2,215,051 ordinary shares available for
issuance under the Plan (including ordinary shares underlying outstanding options and restricted share units).
A share option is the right to purchase a specified number of ordinary shares in the future at a specified exercise price and
subject to the other terms and conditions specified in the option agreement and the Plan. The exercise price of each share option
granted under the Plan will be determined in accordance with the limitations set forth under the Plan. The exercise price of any
share options granted under the Plan may be paid in cash, through the surrender of ordinary shares by the option holder or any
other method that may be approved by our compensation committee, which may include procedures for cashless exercise.
Our compensation committee may also grant, or recommend that our board of directors grant, other forms of equity
incentive awards under the Plan, such as restricted shares, restricted share units, and other forms of share-based compensation.
Israeli participants in the Plan may be granted options subject to Section 102 of the Israeli Income Tax Ordinance (New
Version), 1961, or the Israeli Tax Ordinance. Section 102 of the Israeli Tax Ordinance allows employees, directors and officers
who are not controlling shareholders (as defined for those purposes under the Israeli Tax Ordinance) and are considered Israeli
residents to receive favorable tax treatment for compensation in the form of shares or options. Our non-employee service
providers and controlling shareholders may only be granted options under another section of the Israeli Tax Ordinance, which
does not provide for similar tax benefits. Section 102 includes two alternatives for tax treatment involving the issuance of options
or shares to a trustee for the benefit of the grantees and also includes an additional alternative for the issuance of options or shares
directly to the grantee. The most favorable tax treatment for the grantees is under Section 102(b)(2) of the Israeli Tax Ordinance,
the issuance to a trustee under the “capital gain track.” However, under this track we are not allowed to deduct an expense with
respect to the issuance of the options or shares. Any options granted under the Plan to participants in the United States will be
either “incentive stock options,” which may be eligible for special tax treatment under the Internal Revenue Code of 1986, or
options other than incentive stock options (referred to as “nonqualified stock options”), as determined by our compensation
committee or our board of directors and stated in the option agreement.
Our compensation committee will administer the Plan, or if determined otherwise by our board of directors, the Plan will
be administered by our board of directors or other designated committee on its behalf. Even if the compensation committee or
any other committee was appointed by our board of directors in order to administrate the Plan, our board of directors may, subject
to any legal limitations, exercise any powers or duties of the compensation committee or any other committee concerning the
Plan. The compensation committee will, among others, select which eligible persons will receive options or other awards under
the Plan and will determine, or recommend to our board of directors, the number of ordinary shares covered by those options or
other awards, the terms under which such options or other awards may be exercised (however, options generally may not be
exercised later than ten years from the grant date of an option) or may be settled or paid, and the other terms and conditions of
such options and other awards under the Plan. All awards granted under the Plan shall not be transferable other than by will or by
the laws of descent and distribution, unless otherwise determined by our compensation committee.
115
To the extent permitted under applicable law, our compensation committee will have the authority to accelerate the
vesting of any outstanding awards at such time and under such circumstances as it, in its sole discretion, deems appropriate. In
the event of a change of control, as defined in the Plan, any award then outstanding shall be assumed or an equivalent award shall
be substituted by the successor corporation of the merger or sale or any parent or affiliate thereof as determined by our board of
directors. In the event that the awards are not assumed or substituted, our compensation committee may, in its discretion,
accelerate the vesting, exercisability of the outstanding award, or provide for the cancellation of such award and payment of cash,
as determined to be fair in the circumstances.
Subject to particular limitations specified in the Plan and under applicable law, our board of directors may amend or
terminate the Plan, and the compensation committee may amend awards outstanding under the Plan. In addition, an amendment
to the Plan that requires shareholder approval under applicable law will not be effective unless approved by the requisite vote of
shareholders. In addition, in general, no suspension, termination, modification or amendment of the Plan may adversely affect
any award previously granted without the written consent of grantees holding a majority in interest of the awards so affected. The
Plan will continue in effect until all ordinary shares available under the Plan are delivered and all restrictions on those shares have
lapsed, unless the Plan is terminated earlier by our board of directors. No awards may be granted under the Plan on or after the
tenth anniversary of the date of adoption of the plan unless our board of directors chooses to extend the term.
Any equity award to an office holder, director or controlling shareholder, whether under the Plan or otherwise, may be
subject to further approvals in addition to the approval of the compensation committee as described above. As of December 31,
2019, options to purchase 971,460 ordinary shares, at a weighted average exercise price of $3.66 per share, were outstanding
under our Plan.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of
December 31, 2019 by:
•
•
•
each person or entity known by us to own beneficially 5% or more of our outstanding ordinary shares;
each of our directors, executive officers and director nominees; and
all of our executive officers, directors and director nominees as a group.
The beneficial ownership of our ordinary shares is determined in accordance with the rules of the SEC. Under these rules,
a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to
vote or to direct the voting of the security, or investment power, which includes the power to dispose of or to direct the
disposition of the security. For purposes of the table below, we deem ordinary shares issuable pursuant to options that are
currently exercisable or exercisable within 60 days as of March 18, 2020, if any, to be outstanding and to be beneficially owned
by the person holding the options or warrants for the purposes of computing the percentage ownership of that person, but we do
not treat them as outstanding for the purpose of computing the percentage ownership of any other person. The percentage of
ordinary shares beneficially owned is based on 22,499,155ordinary shares outstanding as of March 18, 2020.
Except where otherwise indicated, we believe, based on information furnished to us by such owners, that the beneficial
owners of the ordinary shares listed below have sole investment and voting power with respect to such shares.
116
None of our shareholders has different voting rights from other shareholders. We are not aware of any arrangement that
may, at a subsequent date, result in a change of control of our company.
Unless otherwise noted below, the address for each beneficial owner is c/o Sol-Gel Technologies Ltd., 7 Golda Meir St.,
Weizmann Science Park, Ness Ziona, 7403650 Israel.
Name of Beneficial Owner
5% or greater shareholders
M. Arkin Dermatology Ltd. (1)
The Phoenix Holding Ltd. (2)
Directors, director nominees and executive officers
Moshe Arkin (1)
Alon Seri-Levy (3)
Gilad Mamlok
Ofer Toledano
Ofra Levy-Hacham
Karine Neimann
Itzik Yosef
Dubi Zamir
John Vieira
Itai Arkin
Ran Gottfried
Jerrold S. Gattegno
Shmuel Ben Zvi
Hani Lerman
Yaffa Krindel Sieradzki
Jonathan Siegel
All directors, director nominees and executive officers as a group (16 persons) (1)
*
Less than 1%.
Shares Beneficially
Owned
Number Percentage
13,613,936
60.51%
2,109,779
9.38%
13,699,936
242,603
*
*
*
*
*
*
*
*
*
*
*
*
*
*
14,328,053
60.89%
1.07%
*
*
*
*
*
*
*
*
*
*
*
*
*
*
62.05%
(1)
(2)
Based on the Schedule 13D/A filed with the SEC on August 21, 2019, Arkin Dermatology directly owns 13,613,936 ordinary shares. Mr.
Moshe Arkin, the chairman of our board of directors, is the sole shareholder and sole director of Arkin Dermatology and may therefore be
deemed to be the indirect beneficial owner of the ordinary shares owned directly by Arkin Dermatology. In addition, Mr. Moshe Arkin directly
owns 86,000 ordinary shares.
Based on the Schedule 13G/A filed with the SEC on February 18, 2020, the ordinary shares are beneficially owned by various direct or indirect,
majority or wholly-owned subsidiaries of the Phoenix Holding Ltd. (the "Subsidiaries"). The Subsidiaries manage their own funds and/or the
funds of others, including for holders of exchange-traded notes or various insurance policies, members of pension or provident funds, unit
holders of mutual funds, and portfolio management clients. Each of the Subsidiaries operates under independent management and makes its
own independent voting and investment decisions.
(3)
Consists of options to purchase 242,603 ordinary shares exercisable within 60 days of March 18, 2020. The exercise price of these options
ranges between $1.59 and $11.21 per share and the options expire between March 2025 and May 2028.
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Record Holders
As of March 18, 2020, we had one holder of record of our ordinary shares in the United States, consisting of Cede & Co.,
the nominee of The Depository Trust Company. That shareholder held, in the aggregate, 10,764,086 ordinary shares, representing
47.84% of the outstanding ordinary shares as of March 18, 2020. The number of record holders in the United States is not
representative of the number of beneficial holders nor is it representative of where such beneficial holders are resident since
many of these ordinary shares were held by brokers or other nominees.
B. Related Party Transactions
Project Transfer from Our Controlling Shareholder
On August 22, 2017, our controlling shareholder, Arkin Dermatology, transferred an in-process research and development
generic product candidate to us, in consideration of one ordinary share (two ordinary shares after giving effect to the stock split).
Loan Agreements with Our Controlling Shareholder
From January 1, 2014 until June 28, 2017, we received several loans in an aggregate principal amount of approximately
$65.34 million from Mr. Moshe Arkin, our controlling shareholder. These loans were denominated in U.S. dollars, bore no
interest and were backed by a promissory note, or the Promissory Note. The Promissory Note was an unsecured note, had no
repayment date and was subject to acceleration in certain events of default.
The Promissory Note was automatically converted into an aggregate of 5,444,825 ordinary shares immediately prior to
the closing of our initial public offering. The number of shares issued upon conversion of the promissory note was determined by
dividing the principal amount of the promissory note at the time of conversion by the initial public offering price per ordinary
share in our initial public offering. The Promissory Note was assigned to Arkin Dermatology immediately prior to the automatic
conversion thereof, and the ordinary shares issued pursuant to the automatic conversion of the Promissory Note are held by Arkin
Dermatology. Mr. Moshe Arkin, the chairman of our board of directors, owns 100% of the share capital of Arkin Dermatology.
Participation in Our Initial Public Offering
According to Form 13D filed by it on February 12, 2018, our controlling shareholder, Arkin Dermatology, which is
wholly-owned by the chairman of our board of directors, purchased 1,833,333 of our ordinary shares in our initial public offering
in consideration for $22.0 million, on the same terms as the other purchasers in the offering.
Directors and Officers Insurance Policy and Indemnification Agreements
Our amended and restated articles of association permit us to exculpate, indemnify and insure each of our directors and
officers to the fullest extent permitted by the Companies Law. We have obtained Directors and Officers insurance for each of our
executive officers and directors. For further information, see “Item 6 C. – Board Practices – Exculpation, Insurance and
Indemnification of Directors and Officers”.
We entered into agreements with each of our current directors and officers exculpating them from a breach of their duty of
care to us to the fullest extent permitted by law, subject to limited exceptions, and undertaking to indemnify them to the fullest
extent permitted by law, subject to limited exceptions, including, with respect to liabilities resulting from our initial public
offering, to the extent that these liabilities are not covered by insurance. This indemnification is limited, with respect to any
monetary liability imposed in favor of a third party, to events determined as foreseeable by the board of directors based on our
activities. The maximum aggregate amount of indemnification that we may pay to our directors and officers based on such
indemnification agreement is the greater of (1) 25% of our shareholders’ equity pursuant to our audited financial statements for
the year preceding the year in which the event in connection of which indemnification is sought occurred, and (2) $40 million (as
may be increased from time to time by shareholders’ approval). Such indemnification amounts are in addition to any insurance
amounts. Each director or officer who agrees to receive this letter of indemnification also gives his approval to the termination of
all previous letters of indemnification that we have provided to him or her in the past, if any.
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Registration Rights Agreement
We entered into a registration rights agreement, pursuant to which we granted demand registration rights, short-form
registration rights and piggyback registration rights to Arkin Dermatology, our controlling shareholder. All fees, costs and
expenses of underwritten registrations are expected to be borne by us. No registration rights to be granted pursuant to this
registration rights agreement shall be exercisable until expiration of the 180-day lock-up agreement entered into by Arkin
Dermatology with the underwriters in connection with our initial public offering.
C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Financial Statements and Other Financial Information
The financial statements required by this item are found at the end of this annual report, beginning on page F-2.
Legal Proceedings
We are not currently a party to any material legal proceedings.
Dividend Policy
We have never declared or paid any cash dividends on our ordinary shares and we anticipate that, for the foreseeable
future, we will retain any future earnings to support operations and to finance the growth and development of our business.
Therefore, we do not expect to pay cash dividends for at least the next several years.
The distribution of dividends may also be limited by the Companies Law, which permits the distribution of dividends only
out of retained earnings or earnings derived over the two most recent fiscal years, whichever is higher, provided that there is no
reasonable concern that payment of a dividend will prevent a company from satisfying its existing and foreseeable obligations as
they become due. Our amended and restated articles of association provide that dividends will be paid at the discretion of, and
upon resolution by, our board of directors, subject to the provisions of the Companies Law.
B. Significant Changes
Except as otherwise disclosed in this annual report, no significant change has occurred since December 31, 2019.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
Our Ordinary Shares have been trading on The Nasdaq Global Market under the symbol “SLGL” since February 1, 2018.
Prior to that date, there was no public trading market for our Ordinary Shares. Our initial public offering was priced at $12.00 per
share on January 31, 2018.
119
On March 18, 2020, the last reported closing price of our Ordinary Shares on The Nasdaq Global Market was $5.88 per
share.
B. Plan of Distribution
Not applicable.
C. Markets
Our Ordinary Shares are listed and traded on The Nasdaq Global Market under the symbol “SLGL”.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Registration Number and Purposes of the Company
Our registration number with the Israeli Registrar of Companies is 51-254469-3. Our purpose as set forth in our amended
and restated articles of association is to engage in any lawful activity.
Voting Rights and Conversion
All ordinary shares will have identical voting and other rights in all respects.
Transfer of Shares
Our fully paid ordinary shares are issued in registered form and may be freely transferred under our amended and restated
articles of association, unless the transfer is restricted or prohibited by another instrument, applicable law or the rules of a stock
exchange on which the shares are listed for trade. The ownership or voting of our ordinary shares by non-residents of Israel is not
restricted in any way by our amended and restated articles of association or the laws of the State of Israel, except for ownership
by nationals of some countries that are, or have been, in a state of war with Israel.
Liability to Further Capital Calls
Our board of directors may make, from time to time, such calls as it may deem fit upon shareholders with respect to any
sum unpaid with respect to shares held by such shareholders which is not payable at a fixed time. Such shareholder shall pay the
amount of every call so made upon him. Unless otherwise stipulated by the board of directors, each payment in response to a call
shall be deemed to constitute a pro rata payment on account of all shares with respect to which such call was made. A shareholder
shall not be entitled to his rights as shareholder, including the right to dividends, unless such shareholder has fully paid all the
notices of call delivered to him, or which according to our amended and restated articles of association are deemed to have been
delivered to him, together with interest, linkage and expenses, if any, unless otherwise determined by the board of directors.
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Election of Directors
Our ordinary shares do not have cumulative voting rights for the election of directors. As a result, the holders of a
majority of the voting power represented at a shareholders meeting have the power to elect all of our directors, subject to the
special approval requirements for external directors under the Companies Law described under “Management — External
Directors.”
Under our amended and restated articles of association, our board of directors must consist of not less than five (5) but no
more than nine (9) directors, including any external directors required to be appointed by the Companies Law. Pursuant to our
amended and restated articles of association, other than the external directors, for whom special election requirements apply
under the Companies Law, the vote required to appoint a director is a simple majority vote of holders of our voting shares
participating and voting at the relevant meeting. In addition, our amended and restated articles of association allow our board of
directors to appoint new directors to fill vacancies on the board of directors if the number of directors is below the maximum
number provided in our amended and restated articles. Furthermore, under our amended and restated articles of association our
directors other than external directors are divided into three classes with staggered three-year terms. For a more detailed
description on the composition of our board of election procedures of our directors, other than our external directors, see “Item 6.
Directors, Senior Management and Employees — C. Board Practices — Appointment of Directors and Terms of Officers.”
External directors are elected for an initial term of three years, may be elected for additional terms of three years each under
certain circumstances, and may be removed from office pursuant to the terms of the Companies Law. For further information on
the election and removal of external directors, see “Item 6. Directors, Senior Management and Employees — C. Board Practices
— External Directors — Election and Dismissal of External Directors.”
Dividend and Liquidation Rights
We may declare a dividend to be paid to the holders of our ordinary shares in proportion to their respective shareholdings.
Under the Companies Law, dividend distributions are determined by the board of directors and do not require the approval of the
shareholders of a company unless the company’s articles of association provide otherwise. Our amended and restated articles of
association do not require shareholder approval of a dividend distribution and provide that dividend distributions may be
determined by our board of directors.
Pursuant to the Companies Law, the distribution amount is limited to the greater of retained earnings or earnings
generated over the previous two years, according to our then last reviewed or audited financial statements, provided that the date
of the financial statements is not more than six months prior to the date of the distribution, or we may distribute dividends that do
not meet such criteria only with court approval. In each case, we are only permitted to distribute a dividend if our board of
directors and the court, if applicable, determines that there is no reasonable concern that payment of the dividend will prevent us
from satisfying our existing and foreseeable obligations as they become due.
In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of
our ordinary shares in proportion to their shareholdings. This right, as well as the right to receive dividends, may be affected by
the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential rights that may be
authorized in the future.
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Shareholder Meetings
Under Israeli law, we are required to hold an annual general meeting of our shareholders once every calendar year that
must be held no later than 15 months after the date of the previous annual general meeting. All general meetings other than the
annual meeting of shareholders are referred to in our amended and restated articles of association as special meetings. Our board
of directors may call special meetings whenever it sees fit, at such time and place, within or outside of Israel, as it may determine.
In addition, the Companies Law provides that our board of directors is required to convene a special meeting upon the written
request of (i) any two of our directors or one-quarter of the members of our board of directors or (ii) one or more shareholders
holding, in the aggregate, either (a) 5% or more of our outstanding issued shares and 1% or more of our outstanding voting power
or (b) 5% or more of our outstanding voting power. This is different from the Delaware General Corporation Law, or the DGCL,
which allows such right of shareholders to be denied by a provision in a company’s certificate of incorporation.
Under Israeli law, one or more shareholders holding at least 1% of the voting rights at the general meeting may request
that the board of directors include a matter in the agenda of a general meeting to be convened in the future, provided that it is
appropriate to discuss such a matter at the general meeting.
Subject to the provisions of the Companies Law and the regulations promulgated thereunder, shareholders entitled to
participate and vote at general meetings are the shareholders of record on a date to be decided by the board of directors, which
may be between four and 40 days prior to the date of the meeting. Furthermore, the Companies Law requires that resolutions
regarding the following matters must be passed at a general meeting of our shareholders:
•
•
•
•
•
•
•
amendments to our amended and restated articles of association;
appointment or termination of our auditors;
appointment of external directors;
approval of certain related party transactions;
increases or reductions of our authorized share capital;
mergers; and
the exercise of our board of director’s powers by a general meeting, if our board of directors is unable to exercise its powers and the exercise of
any of its powers is required for our proper management.
Under our amended and restated articles of association, we are not required to give notice to our registered shareholders
pursuant to the Companies Law, unless otherwise required by law. The Companies Law requires that a notice of any annual
general meeting or special general meeting be provided to shareholders at least 21 days prior to the meeting and if the agenda of
the meeting includes the appointment or removal of directors, the approval of transactions with office holders or interested or
related parties, or an approval of a merger, or as otherwise required under applicable law, notice must be provided at least 35 days
prior to the meeting. Under the Companies Law, shareholders are not permitted to take action by written consent in lieu of a
meeting. Our amended and restated articles of association provide that a notice of general meeting shall be published by us on
Form 6-K at a date prior to the meeting as required by law.
Voting Rights
Quorum Requirements
Pursuant to our amended and restated articles of association, holders of our ordinary shares have one vote for each
ordinary share held on all matters submitted to a vote before the shareholders at a general meeting. Under our amended and
restated articles of association, the quorum required for general meetings of shareholders must consist of at least two shareholders
present in person or by proxy (including by voting deed) holding 331⁄3% or more of the voting rights in the Company, which
complies with the quorum requirements for general meetings under the Nasdaq Marketplace Rules. A meeting adjourned for lack
of a quorum will generally be adjourned to the same day of the following week at the same time and place, or to such other day,
time or place as indicated by our board of directors if so specified in the notice of the meeting. At the reconvened meeting, any
number of shareholders present in person or by proxy shall constitute a lawful quorum, instead of 331⁄3% of the issued share
capital as required under the Nasdaq Marketplace Rules.
122
Vote Requirements
Our amended and restated articles of association provide that all resolutions of our shareholders require a simple majority
vote, unless otherwise required by the Companies Law or by our amended and restated articles of association. Pursuant to our
amended and restated articles of association, an amendment to our amended and restated articles of association regarding any
change of the composition or election procedures of our directors will require a special majority vote (662⁄3%). Under the
Companies Law, each of (i) the approval of an extraordinary transaction with a controlling shareholder and (ii) the terms of
employment or other engagement of the controlling shareholder of the company or such controlling shareholder’s relative (even
if not extraordinary) requires the approval described above under “Management — Fiduciary Duties and Approval of Specified
Related Party Transactions and Compensation under Israeli Law — Disclosure of Personal Interests of a Controlling Shareholder
and Approval of Transactions.” Certain transactions with respect to remuneration of our office holders and directors require
further approvals described above under “Management — Fiduciary Duties and Approval of Specified Related Party
Transactions and Compensation under Israeli Law — Compensation of Directors and Executive Officers.” Under our amended
and restated articles of association, any change to the rights and privileges of the holders of any class of our shares requires a
simple majority of the class so affected (or such other percentage of the relevant class that may be set forth in the governing
documents relevant to such class), in addition to the ordinary majority vote of all classes of shares voting together as a single
class at a shareholder meeting. Another exception to the simple majority vote requirement is a resolution for the voluntary
winding up, or an approval of a scheme of arrangement or reorganization, of the company pursuant to Section 350 of the
Companies Law, which requires the approval of holders of 75% of the voting rights represented at the meeting, in person, by
proxy or by voting deed and voting on the resolution.
Access to Corporate Records
Under the Companies Law, shareholders are provided access to minutes of our general meetings, our shareholders register
and principal shareholders register, our amended and restated articles of association, our financial statements and any document
that we are required by law to file publicly with the Israeli Companies Registrar or the Israel Securities Authority. In addition,
shareholders may request to be provided with any document related to an action or transaction requiring shareholder approval
under the related party transaction provisions of the Companies Law. We may deny this request if we believe it has not been
made in good faith or if such denial is necessary to protect our interest or protect a trade secret or patent.
Modification of Class Rights
Under the Companies Law and our amended and restated articles of association, the rights attached to any class of share,
such as voting, liquidation and dividend rights, may be amended by adoption of a resolution by the holders of a majority of the
shares of that class present at a separate class meeting, or otherwise in accordance with the rights attached to such class of shares,
in addition to the ordinary majority vote of all classes of shares voting together as a single class at a shareholder meeting, as set
forth in our amended and restated articles of association.
Registration Rights
For a discussion of registration rights we granted to our controlling shareholder in connection with the closing of our
initial public offering, please see “Item 7. Major Shareholders and Related Party Transactions – Related Party Transactions —
Registration Rights Agreement.”
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Acquisitions under Israeli Law
Full Tender Offer
A person wishing to acquire shares of an Israeli public company and who would as a result hold over 90% of the target
company’s issued and outstanding share capital is required by the Companies Law to make a tender offer to all of the company’s
shareholders for the purchase of all of the issued and outstanding shares of the company. A person wishing to acquire shares of a
public Israeli company and who would as a result hold over 90% of the issued and outstanding share capital of a certain class of
shares is required to make a tender offer to all of the shareholders who hold shares of the relevant class for the purchase of all of
the issued and outstanding shares of that class. If the shareholders who do not accept the offer hold less than 5% of the issued and
outstanding share capital of the company or of the applicable class, and more than half of the shareholders who do not have a
personal interest in the offer accept the offer, all of the shares that the acquirer offered to purchase will be transferred to the
acquirer by operation of law. However, a tender offer will also be accepted if the shareholders who do not accept the offer hold
less than 2% of the issued and outstanding share capital of the company or of the applicable class of shares.
Upon a successful completion of such a full tender offer, any shareholder that was an offeree in such tender offer, whether
such shareholder accepted the tender offer or not, may, within six months from the date of acceptance of the tender offer, petition
an Israeli court to determine whether the tender offer was for less than fair value and that the fair value should be paid as
determined by the court. However, under certain conditions, the offeror may include in the terms of the tender offer that an
offeree who accepted the offer will not be entitled to petition the Israeli court as described above.
If (a) the shareholders who did not respond or accept the tender offer hold at least 5% of the issued and outstanding share
capital of the company or of the applicable class or the shareholders who accept the offer constitute less than a majority of the
offerees that do not have a personal interest in the acceptance of the tender offer, or (b) the shareholders who did not accept the
tender offer hold 2% or more of the issued and outstanding share capital of the company (or of the applicable class), the acquirer
may not acquire shares of the company that will increase its holdings to more than 90% of the company’s issued and outstanding
share capital or of the applicable class from shareholders who accepted the tender offer.
Special Tender Offer
The Companies Law provides that an acquisition of shares of an Israeli public company must be made by means of a
special tender offer if as a result of the acquisition the purchaser would become a holder of 25% or more of the voting rights in
the company. This requirement does not apply if there is already another holder of at least 25% of the voting rights in the
company. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a
special tender offer if as a result of the acquisition the purchaser would become a holder of more than 45% of the voting rights in
the company, if there is no other shareholder of the company who holds more than 45% of the voting rights in the company,
subject to certain exceptions.
A special tender offer must be extended to all shareholders of a company but the offeror is not required to purchase shares
representing more than 5% of the voting power attached to the company’s outstanding shares, regardless of how many shares are
tendered by shareholders. A special tender offer may be consummated only if (i) at least 5% of the voting power attached to the
company’s outstanding shares will be acquired by the offeror and (ii) the number of shares tendered in the offer exceeds the
number of shares whose holders objected to the offer (excluding the purchaser and its controlling shareholder, holders of 25% or
more of the voting rights in the company or any person having a personal interest in the acceptance of the tender offer or any
other person acting on their behalf, including relatives and entities under such person’s control). If a special tender offer is
accepted, then the purchaser or any person or entity controlling it or under common control with the purchaser or such controlling
person or entity may not make a subsequent tender offer for the purchase of shares of the target company and may not enter into a
merger with the target company for a period of one year from the date of the offer, unless the purchaser or such person or entity
undertook to effect such an offer or merger in the initial special tender offer.
Under the DGCL there are no provisions relating to mandatory tender offers.
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Merger
The Companies Law permits merger transactions if approved by each party’s board of directors and, unless certain
requirements described under the Companies Law are met, by a majority vote of each party’s shares, and, in the case of the target
company, a majority vote of each class of its shares voted on the proposed merger at a shareholders meeting.
For purposes of the shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if a majority
of the votes of the shares represented at the shareholders meeting that are held by parties other than the other party to the merger,
or by any person (or group of persons acting in concert) who holds (or hold, as the case may be) 25% or more of the voting rights
or the right to appoint 25% or more of the directors of the other party, vote against the merger. If, however, the merger involves a
merger with a company’s own controlling shareholder or if the controlling shareholder has a personal interest in the merger, then
the merger is instead subject to the same special majority approval that governs all extraordinary transactions with controlling
shareholders (as described under “Management — Fiduciary Duties and Approval of Specified Related Party Transactions and
Compensation under Israeli Law — Disclosure of Personal Interests of a Controlling Shareholder and Approval of
Transactions”).
If the transaction would have been approved by the shareholders of a merging company but for the separate approval of
each class or the exclusion of the votes of certain shareholders as provided above, a court may still approve the merger upon the
request of holders of at least 25% of the voting rights of a company, if the court holds that the merger is fair and reasonable,
taking into account the value to the parties to the merger and the consideration offered to the shareholders of the company.
Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it
concludes that there exists a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the
obligations of the merging entities, and may further give instructions to secure the rights of creditors.
In addition, a merger may not be consummated unless at least 50 days have passed from the date on which a proposal for
approval of the merger was filed by each party with the Israeli Registrar of Companies and at least 30 days have passed from the
date on which the merger was approved by the shareholders of each party.
Anti-Takeover Measures under Israeli Law
The Companies Law allows us to create and issue shares having rights different from those attached to our ordinary
shares, including shares providing certain preferred rights with respect to voting, distributions or other matters and shares having
preemptive rights. As of the date of this annual report, no preferred shares are authorized under our amended and restated articles
of association. In the future, if we do authorize, create and issue a specific class of preferred shares, such class of shares,
depending on the specific rights that may be attached to it, may have the ability to frustrate or prevent a takeover or otherwise
prevent our shareholders from realizing a potential premium over the market value of their ordinary shares. The authorization and
designation of a class of preferred shares will require an amendment to our amended and restated articles of association, which
requires the prior approval of the holders of a majority of the voting power attaching to our issued and outstanding shares at a
general meeting. The convening of the meeting, the shareholders entitled to participate and the majority vote required to be
obtained at such a meeting will be subject to the requirements set forth in the Companies Law as described above in “— Voting
Rights.”
As an Israeli company we are not subject to the provisions of Section 203 of the DGCL, which in general prohibits a
publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of
three years after the date of the transaction in which the person became an interested stockholder, unless the business combination
is approved in a prescribed manner. For purposes of Section 203, a “business combination” includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder, and an “interested stockholder” is a person who, together
with affiliates and associates, owns, or within three years prior did own, 15% or more of the voting stock of a corporation.
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Borrowing Powers
Pursuant to the Companies Law and our amended and restated articles of association, our board of directors may exercise
all powers and take all actions that are not required under law or under our amended and restated articles of association to be
exercised or taken by our shareholders, including the power to borrow money for company purposes.
Changes in Capital
Our amended and restated articles of association enable us to increase or reduce our share capital. Any such changes are
subject to the provisions of the Companies Law and must be approved by a resolution duly adopted by our shareholders at a
general meeting. In addition, transactions that have the effect of reducing capital, such as the declaration and payment of
dividends in the absence of sufficient retained earnings or profits, require the approval of both our board of directors and an
Israeli court.
Transfer Agent and Registrar
The transfer agent and registrar for our ordinary shares is American Stock Transfer & Trust Company, LLC.
C. Material Contracts
For a description of other material agreements, please see "Item 4. Information on the Company – B. Business Overview."
D. Exchange Controls
There are currently no Israeli currency control restrictions on remittances of dividends on our ordinary shares, proceeds
from the sale of the shares or interest or other payments to non-residents of Israel, except for shareholders who are subjects of
certain countries that are considered to be in a state of war with Israel at such time.
E. Taxation
Israeli Tax Considerations and Government Programs
General
The following is a summary of the material Israeli tax laws applicable to us, and some Israeli Government programs
benefiting us. This section also contains a discussion of some Israeli tax consequences to persons owning our ordinary shares.
This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her
personal investment circumstances or to some types of investors subject to special treatment under Israeli law. Examples of this
kind of investor include traders in securities or persons that own, directly or indirectly, 10% or more of our outstanding voting
capital, all of whom are subject to special tax regimes not covered in this discussion. Some parts of this discussion are based on
new tax legislation which has not been subject to judicial or administrative interpretation. The discussion should not be construed
as legal or professional tax advice and does not cover all possible tax considerations.
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SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE ISRAELI OR OTHER
TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES,
INCLUDING, IN PARTICULAR, THE EFFECT OF ANY FOREIGN, STATE OR LOCAL TAXES.
General Corporate Tax Structure in Israel
Israeli resident companies are generally subject to corporate tax at the rate of 23% in 2018 and thereafter. However, the
effective tax rate payable by a company that derives income from a Benefited Enterprise or a Preferred Enterprise (as discussed
below) may be considerably less. Capital gains derived by an Israeli resident company are subject to tax at the prevailing
corporate tax rate.
Under Israeli tax legislation, a corporation will be considered as an “Israeli resident company” if it meets one of the
following: (i) it was incorporated in Israel; or (ii) the control and management of its business are exercised in Israel.
Law for the Encouragement of Industry (Taxes), 5729-1969
The Law for the Encouragement of Industry (Taxes), 5729-1969, generally referred to as the Industry Encouragement
Law, provides several tax benefits for “Industrial Companies.”
The Industry Encouragement Law defines an “Industrial Company” as a company resident in Israel and which was
incorporated in Israel of which 90% or more of its income in any tax year, other than income from defense loans, is derived from
an “Industrial Enterprise” owned by it and which is located in Israel. An “Industrial Enterprise” is defined as an enterprise whose
principal activity in a given tax year is industrial production.
The following corporate tax benefits, among others, are available to Industrial Companies:
amortization over an eight-year period of the cost of purchased know-how and patents and rights to use a patent and know-how which are used
for the development or advancement of the Industrial Enterprise;
under limited conditions, an election to file consolidated tax returns with related Israeli Industrial Companies; and
expenses related to a public offering are deductible in equal amounts over three years.
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Although as of the date of this annual report, we do not have industrial production activities, we may qualify as an
Industrial Company in the future and may be eligible for the benefits described above.
Tax Benefits and Grants for Research and Development
Israeli tax law allows, under certain conditions, a tax deduction for expenditures, including capital expenditures, for the
year in which they are incurred. Expenditures are deemed related to scientific research and development projects, if:
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The expenditures are approved by the relevant Israeli government ministry, determined by the field of research;
The research and development must be for the promotion of the company; and
The research and development are carried out by or on behalf of the company seeking such tax deduction.
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The amount of such deductible expenses is reduced by the sum of any funds received through government grants for the
financing of such scientific research and development projects. No deduction under these research and development deduction
rules is allowed if such deduction is related to an expense invested in an asset depreciable under the general depreciation rules of
the Israeli Tax Ordinance, 1961. Expenditures not so approved are deductible in equal amounts over three years.
From time to time we may apply to the IIA for approval to allow a tax deduction for all research and development
expenses during the year incurred. There can be no assurance that such application will be accepted.
Law for the Encouragement of Capital Investments, 5719-1959
The Law for the Encouragement of Capital Investments, 5719-1959, generally referred to as the Investment Law, provides
certain incentives for capital investments in production facilities (or other eligible assets) by “Industrial Enterprises” (as defined
under the Investment Law).
Tax Benefits Prior to the 2005 Amendment
An investment program that is implemented in accordance with the provisions of the Investment Law prior to an
amendment that became effective in April 2005, or the 2005 Amendment, referred to as an “Approved Enterprise,” is entitled to
certain benefits. A company that wished to receive benefits as an Approved Enterprise must have received approval from the
Investment Center of the Israeli Ministry of Economy and Industry, or the Investment Center. Each certificate of approval for an
Approved Enterprise relates to a specific investment program in the Approved Enterprise, delineated both by the financial scope
of the investment and by the physical characteristics of the facility or the asset.
In general, an Approved Enterprise is entitled to receive a grant from the Government of Israel or an alternative package
of tax benefits, known as the alternative benefits track. The tax benefits from any certificate of approval relate only to taxable
profits attributable to the specific Approved Enterprise. Income derived from activity that is not integral to the activity of the
Approved Enterprise does not enjoy tax benefits.
In addition, a company that has an Approved Enterprise program is eligible for further tax benefits if it qualifies as a
Foreign Investors’ Company, or FIC, which is a company with a level of foreign investment, as defined in the Investment Law, of
more than 25%. The level of foreign investment is measured as the percentage of rights in the company (in terms of shares, rights
to profits, voting and appointment of directors), and of combined share and loan capital, that are owned, directly or indirectly, by
persons who are not residents of Israel. The determination as to whether a company qualifies as an FIC is made on an annual
basis. We are currently not entitled to tax benefits for Approved Enterprise.
Tax Benefits Subsequent to the 2005 Amendment
The 2005 Amendment applies to new investment programs and investment programs commencing after 2004, but does
not apply to investment programs approved prior to April 1, 2005. The 2005 Amendment provides that terms and benefits
included in any certificate of approval that was granted before the 2005 Amendment became effective (April 1, 2005) will remain
subject to the provisions of the Investment Law as in effect on the date of such approval. Pursuant to the 2005 Amendment, the
Investment Center will continue to grant Approved Enterprise status to qualifying investments. The 2005 Amendment, however,
limits the scope of enterprises that may be approved by the Investment Center by setting criteria for the approval of a facility as
an Approved Enterprise, such as provisions generally requiring that at least 25% of the Approved Enterprise’s income be derived
from exports.
The 2005 Amendment provides that Approved Enterprise status will only be necessary for receiving cash grants. As a
result, it was no longer necessary for a company to obtain Approved Enterprise status in order to receive the tax benefits
previously available under the alternative benefits track. Rather, a company may claim the tax benefits offered by the Investment
Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set forth in the amendment. Companies
are entitled to approach the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the Investment Law,
as amended.
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In order to receive the tax benefits, the 2005 Amendment states that a company must make an investment which meets all
of the conditions, including exceeding a minimum investment amount specified in the Investment Law. Such investment allows a
company to receive “Benefited Enterprise” status, and may be made over a period of no more than three years from the end of the
year in which the company requested to have the tax benefits apply to its Benefited Enterprise. Where the company requests to
apply the tax benefits to an expansion of existing facilities, only the expansion will be considered to be a Benefited Enterprise
and the company’s effective tax rate will be the weighted average of the applicable rates. In this case, the minimum investment
required in order to qualify as a Benefited Enterprise is required to exceed a certain percentage of the value of the company’s
production assets before the expansion.
The extent of the tax benefits available under the 2005 Amendment to qualifying income of a Benefited Enterprise depend
on, among other things, the geographic location in Israel of the Benefited Enterprise. The location will also determine the period
for which tax benefits are available. Such tax benefits include an exemption from corporate tax on undistributed income for a
period of between two to 10 years, depending on the geographic location of the Benefited Enterprise in Israel, and a reduced
corporate tax rate of between 10% and the applicable corporate tax for the remainder of the benefits period, depending on the
level of foreign investment in the company in each year. A company qualifying for tax benefits under the 2005 Amendment
which pays a dividend out of income derived by its Benefited Enterprise during the tax exemption period will be subject to
corporate tax in respect of the gross amount of the dividend at the otherwise applicable corporate tax rate or a lower rate in the
case of a qualified FIC which is at least 49% owned by non-Israeli residents. Dividends paid out of income attributed to a
Benefited Enterprise are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided
in an applicable tax treaty.
The benefits available to a Benefited Enterprise are subject to the fulfillment of conditions stipulated in the Investment
Law and its regulations. If a company does not meet these conditions, it may be required to refund the amount of tax benefits, as
adjusted by the Israeli consumer price index, and interest, or other monetary penalties.
We applied for tax benefits as a “Benefited Enterprise” with 2012 as a “Year of Election.” We may be entitled to tax
benefits under this regime once we are profitable for tax purposes and subject to the fulfillment of all the relevant conditions. If
we do not meet these conditions, the tax benefits may not be applicable which would result in adverse tax consequences to us.
Alternatively, and subject to the fulfillment of all the relevant conditions, we may elect in the future to irrevocably waive the tax
benefits available for Benefited Enterprise and claim the tax benefits available to Preferred Enterprise under the 2011
Amendment (as detailed below).
Tax Benefits Under the 2011 Amendment
The Investment Law was significantly amended as of January 1, 2011, or the 2011 Amendment. The 2011 Amendment
introduced new benefits to replace those granted in accordance with the provisions of the Investment Law in effect prior to the
2011 Amendment.
The 2011 Amendment introduced new tax benefits for income generated by a “Preferred Company” through its “Preferred
Enterprise,” in accordance with the definition of such term in the Investment Law, which generally means that a “Preferred
Company” is an industrial company meeting certain conditions (including a minimum threshold of 25% export).
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A Preferred Company is entitled to a reduced flat tax rate with respect to the income attributed to the Preferred Enterprise,
at the following rates:
Tax Year
2011 – 2012
2013
2014 – 2016
2017 and thereafter
Development
Region “A”
Other Areas
within Israel
10%
7%
9%
7.5%
15%
12.5%
16%
16%
Dividends distributed from income which is attributed to a “Preferred Enterprise” will be subject to withholding tax at
source at the following rates: (i) Israeli resident corporations — 0%, (ii) Israeli resident individuals — 20% in 2020 (iii) non-
Israeli residents — may be reduced down to 4% in 2020, subject to certain conditions under the Investment Law and to a reduced
tax rate under the provisions of an applicable double tax treaty.
Under the 2011 Amendment, a company located in Development Region “A” may be entitled to cash grants and the
provision of loans under certain conditions, if approved. The rates for grants and loans shall not be fixed, but up to 20% of the
amount of the approved investment (may be increased by an additional 4%). In addition, a company owning a Preferred
Enterprise under the Grant Track may be entitled also to the tax benefits which are prescribed for a Preferred Company.
The termination or substantial reduction of any of the benefits available under the Investment Law could materially
increase our tax liabilities.
We are currently not entitled to tax benefits for a Preferred Enterprise.
Taxation of Our Shareholders
Capital Gains
Capital gain tax is imposed on the disposition of capital assets by an Israeli resident, and on the disposition of such assets
by a non-Israeli resident if those assets are either (i) located in Israel; (ii) are shares or a right to a share in an Israeli resident
corporation, or (iii) represent, directly or indirectly, rights to assets located in Israel. The Israeli Tax Ordinance distinguishes
between “Real Gain” and the “Inflationary Surplus.” Real Gain is the excess of the total capital gain over Inflationary Surplus
computed generally on the basis of the increase in the Israeli consumer price index between the date of purchase and the date of
disposition. Inflationary Surplus is not currently subject to tax in Israel.
Real Gain accrued by individuals on the sale of our ordinary shares will be taxed at the rate of 25%. However, if the
individual shareholder is a “Controlling Shareholder” (i.e., a person who holds, directly or indirectly, alone or together with
another, 10% or more of one of the Israeli resident company’s means of control) at the time of sale or at any time during the
preceding 12-month period, such gain will be taxed at the rate of 30%.
Real Gain derived by corporations will be generally subject to the corporate tax rate of 23% in 2018 and thereafter.
Individual and corporate shareholder dealing in securities in Israel are taxed at the tax rates applicable to business income
—23% for corporations in 2018 and thereafter, and a marginal tax rate of up to 50% for individuals, including an excess tax.
Notwithstanding the foregoing, capital gain derived from the sale of our ordinary shares by a non-Israeli shareholder may
be exempt under the Israeli Tax Ordinance from Israeli capital gain tax provided that the seller does not have a permanent
establishment in Israel to which the derived capital gain is attributed. However, non-Israeli corporations will not be entitled to the
foregoing exemption if more than 25% of its means of control are held, directly and indirectly, by Israeli residents, and Israeli
residents are entitled to 25% or more of the revenues or profits of the corporation, directly or indirectly. In addition, such
exemption would not be available to a person whose gains from selling or otherwise disposing of the securities are deemed to be
business income.
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In addition, the sale of shares may be exempt from Israeli capital gain tax under the provisions of an applicable tax treaty.
For example, the U.S.-Israel Double Tax Treaty exempts U.S. residents from Israeli capital gain tax in connection with such sale,
provided (i) the U.S. resident owned, directly or indirectly, less than 10% of an Israeli resident company’s voting power at any
time within the 12-month period preceding such sale; (ii) the seller, being an individual, is present in Israel for a period or periods
of less than 183 days during the taxable year; and (iii) the capital gain from the sale was not derived through a permanent
establishment of the U.S. resident in Israel.
In some instances where our shareholders may be liable for Israeli tax on the sale of their ordinary shares, the payment of
the consideration may be subject to the withholding of Israeli tax at source at a rate of 25% if the seller is an individual and at the
corporate tax rate (23% in 2018 and thereafter) if the seller is a corporation. Shareholders may be required to demonstrate that
they are exempt from tax on their capital gains in order to avoid withholding at source at the time of sale.
At the sale of securities traded on a stock exchange a detailed return, including a computation of the tax due, must be filed
and an advanced payment must be paid on January 31 and July 31 of every tax year in respect of sales of securities made within
the previous six months. However, if all tax due was withheld at source according to applicable provisions of the Israeli Tax
Ordinance and regulations promulgated thereunder, the aforementioned return need not be filed and no advance payment must be
paid. Capital gain is also reportable on the annual income tax return.
Dividends
We have never paid cash dividends. A distribution of a dividend by our company from income attributed to a Benefited
Enterprise will generally be subject to withholding tax in Israel at a rate of 20% unless a reduced tax rate is provided under an
applicable tax treaty. A distribution of a dividend by our company from income attributed to a Preferred Enterprise will generally
be subject to withholding tax in Israel at the following tax rates: Israeli resident individuals — 20%; Israeli resident companies —
0% for a Preferred Enterprise; Non-Israeli residents — 20%, subject to a reduced rate under the provisions of any applicable
double tax treaty. A distribution of dividends from income, which is not attributed to a Preferred Enterprise to an Israeli resident
individual, will generally be subject to withholding tax at a rate of 25%, or 30% if the dividend recipient is a “Controlling
Shareholder” (as defined above) at the time of distribution or at any time during the preceding 12-month period. If the recipient
of the dividend is an Israeli resident corporation, such dividend will not be subject to Israeli tax provided the income from which
such dividend is distributed was derived or accrued within Israel.
The Israeli Tax Ordinance provides that a non-Israeli resident (either individual or corporation) is generally subject to
Israeli withholding tax on the receipt of dividends at the rate of 25% (30% if the dividends recipient is a “Controlling
Shareholder” (as defined above), at the time of distribution or at any time during the preceding 12-month period); those rates may
be subject to a reduced rate under the provisions of an applicable double tax treaty. Under the U.S.-Israel Double Tax Treaty, the
following withholding rates will apply in respect of dividends distributed by an Israeli resident company to a U.S. resident: (i) if
the U.S. resident is a corporation which holds during that portion of the taxable year which precedes the date of payment of the
dividend and during the whole of its prior taxable year (if any), at least 10% of the outstanding shares of the voting share capital
of the Israeli resident paying corporation and not more than 25% of the gross income of the Israeli resident paying corporation for
such prior taxable year (if any) consists of certain type of interest or dividends — the rate is 12.5%, (ii) if both the conditions
mentioned in clause (i) above are met and the dividend is paid from an Israeli resident company’s income which was entitled to a
reduced tax rate applicable to an Approved Enterprise — the rate is 15% and (iii) in all other cases, the rate is 25%. The
aforementioned rates under the Israel U.S. Double Tax Treaty will not apply if the dividend income was derived through a
permanent establishment of the U.S. resident in Israel.
A non-Israeli resident who receives dividends from which tax was withheld is generally exempt from the obligation to file
tax returns in Israel with respect to such income, provided that (i) such income was not generated from a business conducted in
Israel by the taxpayer, and (ii) the taxpayer has no other taxable sources of income in Israel with respect to which a tax return is
required to be filed.
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Dividends are generally subject to Israeli withholding tax at a rate of 25% so long as the shares are registered with a
nominee company (whether or not the recipient is a “Controlling Shareholder,” as defined above), unless relief is provided in a
treaty between Israel and the shareholder’s country of residence and provided that a certificate from the Israel Tax Authority
allowing for a reduced withholding tax rate is obtained in advance.
Excess Tax
Individuals who are subject to tax in Israel are also subject to an additional tax at a rate of 3% on annual income
exceeding NIS 640,000 for 2017 and thereafter, linked to the annual change in the Israeli consumer price index (NIS 641,880 for
2018 and NIS 649,560 for 2019), including, but not limited to income derived from, dividends, interest and capital gains.
Foreign Exchange Regulations
Non-residents of Israel who hold our ordinary shares are able to receive any dividends, and any amounts payable upon the
dissolution, liquidation and winding up of our affairs, repayable in non-Israeli currency at the rate of exchange prevailing at the
time of conversion. However, Israeli income tax is generally required to have been paid or withheld on these amounts. In
addition, the statutory framework for the potential imposition of currency exchange control has not been eliminated and may be
restored at any time by administrative action.
Estate and Gift Tax
Israeli law presently does not impose estate or gift taxes.
U.S. Federal Income Tax Considerations with respect to the Company
The following discussion describes certain material U.S. federal income tax consequences to U.S. Holders (as defined
below) under present law of an investment in our ordinary shares or warrants. This discussion applies only to U.S. Holders
that hold our ordinary shares or warrants as capital assets within the meaning of Section 1221 of the Internal Revenue Code of
1986, as amended (the “Code”) and that have the U.S. dollar as their functional currency.
This discussion is based on the tax laws of the United States, including the Code, as in effect on the date hereof and on
U.S. Treasury regulations as in effect or, in some cases, as proposed, on the date hereof, as well as judicial and administrative
interpretations thereof available on or before such date. All of the foregoing authorities are subject to change, which change
could apply retroactively and could affect the tax consequences described below. This summary does not address any estate or
gift tax consequences, the alternative minimum tax, the Medicare tax on net investment income or any state, local, or non-U.S.
tax consequences. The following discussion neither deals with the tax consequences to any particular investor nor describes all
of the tax consequences applicable to persons in special tax situations such as:
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banks;
certain financial institutions;
insurance companies;
regulated investment companies;
real estate investment trusts;
broker-dealers;
traders that elect to mark to market;
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• U.S. expatriates;
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tax-exempt entities;
persons holding our ordinary shares or warrants as part of a straddle, hedging, constructive sale, conversion or integrated transaction;
persons that actually or constructively (including through the ownership of our warrants) own 10% or more of our share capital (by vote or
value);
persons that are resident or ordinarily resident in or have a permanent establishment in a jurisdiction outside the United States;
persons who acquired our ordinary shares or warrants pursuant to the exercise of any employee share option or otherwise as compensation;
persons subject to special tax accounting rules as a result of any item of gross income with respect to our ordinary shares or warrants being taken
into account in an applicable financial statement; or
pass-through entities, or persons holding our ordinary shares or warrants through pass-through entities.
INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S.
FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL, NON-U.S.
AND OTHER TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN OUR ORDINARY SHARES OR WARRANTS.
The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are the
beneficial owner of our ordinary shares or warrants and you are, for U.S. federal income tax purposes,
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an individual who is a citizen or resident of the United States;
a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the
laws of the United States, any state thereof or the District of Columbia;
an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
a trust that (i) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all
substantial decisions or (ii) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
If an entity or other arrangement treated as a partnership for U.S. federal income tax purposes holds our ordinary shares
or warrants, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the
partnership. A person that would be a U.S. Holder if it held our ordinary shares or warrants directly and that is a partner of a
partnership holding our ordinary shares or warrants is urged to consult its own tax advisor.
Passive Foreign Investment Company
A non-U.S. entity treated as a corporation for U.S. federal income tax purposes will generally be a passive foreign
investment company (“PFIC”) for U.S. federal income tax purposes for any taxable year if either:
•
•
at least 75% of its gross income for such year is passive income (such as interest income); or
at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that
produce passive income or are held for the production of passive income.
For this purpose, we will be treated as owning our proportionate share of the assets and earning our proportionate
share of the income of any other entity treated as a corporation for U.S. federal income tax purposes in which we own,
directly or indirectly, 25% or more (by value) of the stock.
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Starting in the first quarter of 2019, we began generating revenue under a collaboration agreement with Perrigo for the
development of the generic version of Zovirax® (acyclovir) cream, 5%. We expect to generate substantial revenue under such
agreement for our 2020 taxable year and foreseeable future years. Though the application of the relevant rules governing the
characterization of such revenue for purposes of the PFIC income test is uncertain, we intend to take the position that, based on
our involvement and management contributions throughout the development process, such revenue is non-passive for PFIC
purposes. As a result, assuming we continue to earn substantial revenue from such agreement as anticipated and based on the
current and anticipated value and composition of our income and assets, we do not expect that we will be treated as a PFIC for
U.S. federal income tax purposes for our current taxable year or for foreseeable future years. However, there are substantial
factual and legal ambiguities regarding the nature of the revenue and the application of the relevant PFIC rules, and thus, the
determination that such revenue is non-passive is not without doubt, and alternative characterizations are possible.
A separate determination must be made after the close of each taxable year as to whether we were a PFIC for that year.
Because the value of our assets for purposes of the PFIC test will generally be determined by reference to the market price of
our ordinary shares, our PFIC status may depend in part on the market price of our ordinary shares, which may fluctuate
significantly. In addition, there may be certain other ambiguities in applying the PFIC test to us. No rulings from the U.S.
Internal Revenue Service (the “IRS”), however, have been or will be sought with respect to our status as a PFIC. If the IRS
were to assert that, contrary to our expectation, we are a PFIC in the current taxable year or a future year, there would be
adverse tax consequences to investors, including those described below. Potential investors are strongly advised to consult
their own advisors regarding the consequences to them if we were to be considered a PFIC.
If we are a PFIC for any taxable year during your holding period for our ordinary shares (or under proposed
Regulations, our warrants), we generally will continue to be treated as a PFIC with respect to your investment in our
ordinary shares or warrants for all succeeding years during which you hold our ordinary shares or warrants, and, although
subject to uncertainty, potentially our ordinary shares received upon exercise of such warrants. Certain elections (such as a
deemed sale election) may be available under certain circumstances.
For each taxable year that we are treated as a PFIC with respect to you, you will be subject to special tax rules with
respect to any “excess distribution” (as defined below) you receive and any gain you realize from a sale or other disposition
(including a pledge) of our ordinary shares or warrants, unless you make a valid “mark-to-market” election as discussed
below, which may not be available for the warrants. Distributions you receive in a taxable year that are greater than 125% of
the average annual distributions you received during the shorter of the three preceding taxable years or your holding period
will be treated as an excess distribution. Under these special tax rules:
•
•
•
the excess distribution or gain will be allocated ratably over your holding period;
the amount allocated to the current taxable year, and any taxable years in your holding period prior to the first taxable year in which we were a
PFIC, will be treated as ordinary income; and
the amount allocated to each other taxable year will be subject to the highest tax rate in effect for individuals or corporations, as applicable, for
each such year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such
year.
The tax liability for amounts allocated to taxable years prior to the year of disposition or excess distribution cannot be
offset by any net operating losses, and gains (but not losses) realized on the sale of our ordinary shares or warrants cannot be
treated as capital gains, even if you hold our ordinary shares or warrants as capital assets.
134
If we are treated as a PFIC with respect to you for any taxable year, to the extent any of our subsidiaries are also PFICs,
you may be deemed to own a proportionate interest in such lower-tier PFICs that are directly or indirectly owned by us, and
you may be subject to the adverse tax consequences described above with respect to the shares of such lower-tier PFICs you
would be deemed to own. As a result, you may incur liability for any excess distribution described above if we receive a
distribution from our lower-tier PFICs or if any shares in such lower-tier PFICs are disposed of (or deemed disposed of). You
should consult your tax advisor regarding the application of the PFIC rules to any of our subsidiaries.
A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock
to elect out of the tax treatment discussed above. If you make a valid mark-to-market election for our ordinary shares, you will
include in income for each year that we are treated as a PFIC with respect to you an amount equal to the excess, if any, of the
fair market value of our ordinary shares as of the close of your taxable year over your adjusted basis in such ordinary shares.
You will be allowed a deduction for the excess, if any, of the adjusted basis of our ordinary shares over their fair market value
as of the close of the taxable year. However, deductions will be allowable only to the extent of any net mark-to-market gains
on our ordinary shares included in your income for prior taxable years. Amounts included in your income under a mark-to-
market election, as well as gain on the actual sale or other disposition of our ordinary shares, will be treated as ordinary
income. Ordinary loss treatment will also apply to the deductible portion of any mark-to-market loss on our ordinary shares, as
well as to any loss realized on the actual sale or disposition of our ordinary shares, to the extent the amount of such loss does
not exceed the net mark-to-market gains for such ordinary shares previously included in income. Your basis in our ordinary
shares will be adjusted to reflect any such income or loss amounts. If you make a mark-to-market election, any distributions
we make would generally be subject to the rules discussed below under “— Taxation of Dividends and Other Distributions on
our Ordinary Shares,” except the lower rates applicable to qualified dividend income would not apply.
The mark-to-market election is available only for “marketable stock,” which is stock that is regularly traded on a
qualified exchange or other market, as defined in applicable U.S. Treasury regulations, and may not include our warrants. Our
ordinary shares are listed on the Nasdaq Global Market. Because a mark-to-market election cannot be made for equity interests
in any lower-tier PFICs we own, you generally will continue to be subject to the PFIC rules with respect to your indirect
interest in any investments held by us that are treated as an equity interest in a PFIC for
U.S. federal income tax purposes. The Nasdaq Global Market is a qualified exchange, but there can be no assurance that
the trading in our ordinary shares will be sufficiently regular to qualify our ordinary shares as marketable stock. You should
consult your tax advisor as to the availability and desirability of a mark-to-market election, as well as the impact of such
election on interests in any lower-tier PFICs.
Alternatively, if a non-U.S. entity treated as a corporation is a PFIC, a holder of shares in that entity may avoid taxation
under the PFIC rules described above regarding excess distributions and recognized gains by making a “qualified electing
fund” election to include in income its share of the entity’s income on a current basis. However, you may make a qualified
electing fund election with respect to your ordinary shares only if we furnish you annually with certain tax information, and we
currently do not intend to prepare or provide such information. A qualified electing fund election may not be available for our
warrants regardless of whether we provide such information.
A U.S. Holder of a PFIC may be required to file an IRS Form 8621. If we are a PFIC, you should consult your tax
advisor regarding any reporting requirements that may apply to you. You are urged to consult your tax advisor regarding the
application of the PFIC rules to an investment in ordinary shares or warrants.
YOU ARE STRONGLY URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE IMPACT ON YOUR
INVESTMENT IN OUR ORDINARY SHARES OR WARRANTS IF WE WERE TO BE CONSIDERED A PFIC AS WELL
AS THE APPLICATION OF THE PFIC RULES AND THE POSSIBILITY OF MAKING A MARK-TO-MARKET
ELECTION.
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Taxation of Dividends and Other Distributions on our Ordinary Shares
Subject to the PFIC rules discussed above, the gross amount of any distributions we make to you (including the amount
of any tax withheld) with respect to our ordinary shares generally will be includible in your gross income as dividend income
on the date of receipt by the holder, but only to the extent the distribution is paid out of our current or accumulated earnings
and profits (as determined under U.S. federal income tax principles). The dividends will not be eligible for the dividends-
received deduction allowed to corporations in respect of dividends received from other U.S. corporations. To the extent the
amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income
tax principles), such excess amount will be treated first as a tax-free return of your tax basis in your ordinary shares, and then,
to the extent such excess amount exceeds your tax basis in your ordinary shares, as capital gain. We currently do not, and we
do not intend to, calculate our earnings and profits under
U.S. federal income tax principles. Therefore, you should expect that a distribution will generally be reported as a dividend
even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules
described above.
With respect to certain non-corporate U.S. Holders, including individual U.S. Holders, dividends may be taxed at the
lower capital gain rates applicable to “qualified dividend income,” provided (i) our ordinary shares are readily tradable on an
established securities market in the United States (such as the Nasdaq Global Market), (ii) we are neither a PFIC nor treated as
such with respect to you (as discussed above) for either the taxable year in which the dividend was paid or the preceding
taxable year, (iii) certain holding period requirements are met and (iv) you are not under an obligation to make related
payments with respect to positions in substantially similar or related property.
The amount of any distribution paid in a currency other than U.S. dollars will be equal to the U.S. dollar value of such
currency on the date such distribution is includible in your income, regardless of whether the payment is in fact converted into
U.S. dollars at that time. The amount of any distribution of property other than cash will be the fair market value of such
property on the date of distribution.
Any dividends will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed
as qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating
the foreign tax credit limitation will in general be limited to the gross amount of the dividend, multiplied by the reduced tax rate
applicable to qualified dividend income and divided by the highest tax rate normally applicable to dividends. The limitation on
foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends
distributed by us with respect to our ordinary shares will generally constitute “passive category income.”
If Israeli withholding taxes apply to any dividends paid to you with respect to our ordinary shares, subject to certain
conditions and limitations, such withholding taxes may be treated as foreign taxes eligible for credit against your U.S. federal
income tax liability. Instead of claiming a credit, you may elect to deduct such taxes in computing taxable income, subject to
applicable limitations. If a refund of the tax withheld is available under the applicable laws of Israel or under the Israel-U.S.
income tax treaty (the “Treaty”), the amount of tax withheld that is refundable will not be eligible for such credit against your
U.S. federal income tax liability (and will not be eligible for the deduction against your U.S. federal taxable income). The rules
relating to the determination of the foreign tax credit are complex, and you should consult your tax advisor regarding the
availability of a foreign tax credit in your particular circumstances, including the effects of the Treaty.
Constructive Dividends on our Ordinary Shares or Warrants
If the exercise price of our warrants is adjusted in certain circumstances (or in certain circumstances, there is a failure to
make adjustments or a failure to make adequate adjustments), that adjustment (or failure to adjust) may result in the deemed
payment of a taxable dividend to a U.S. Holder of the warrants or our ordinary shares. Any such constructive dividend will be
taxable generally as described above under “Taxation of Dividends and Other Distributions on our Ordinary Shares.”
Generally, a U.S. Holder’s tax basis in our ordinary shares or the warrants will be increased to the extent of any such
constructive dividend. It is not entirely clear whether a constructive dividend deemed paid to a non-corporate U.S. Holder
could be “qualified dividend income” as discussed above under “Taxation of Dividends and Other Distributions on our
Ordinary Shares.” U.S. Holders should consult their tax advisers regarding the proper U.S. federal income tax treatment of any
adjustments to (or failure to adjust or adjust adequately) the exercise price of the warrants.
136
We are currently required to report the amount of any constructive dividends on our website or to the IRS and to holders
not exempt from reporting. The IRS has proposed regulations addressing the amount and timing of constructive dividends, as
well as, obligations of withholding agents and filing and notice obligations of issuers in respect of such constructive dividends.
If adopted as proposed, the regulations would generally provide that (i) the amount of a constructive dividend is the excess of
the fair market value of the right to acquire stock immediately after the exercise price adjustment over the fair market value of
the right to acquire stock (after the exercise price adjustment) without the adjustment, (ii) the constructive dividend occurs at
the earlier of the date the adjustment occurs under the terms of the instrument and the date of the actual distribution of cash or
property that results in the constructive dividend and (iii) we are required to report the amount of any constructive dividends on
our website or to the IRS and to all holders (including holders that would otherwise be exempt from reporting). The final
regulations will be effective for constructive dividends occurring on or after the date of adoption, but holders and withholding
agents may rely on them prior to that date under certain circumstances.
Taxation of Disposition of our Ordinary Shares or Warrants
Subject to the PFIC rules discussed above, upon a sale or other disposition of our ordinary shares or warrants, you will
generally recognize capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the
amount realized (including the amount of any tax withheld) and your tax basis in such ordinary shares or warrants. If the
consideration you receive for our ordinary shares or warrants is not paid in U.S. dollars, the amount realized will be the U.S.
dollar value of the payment received determined by reference to the spot rate of exchange on the date of the sale or other
disposition. However, if our ordinary shares or warrants are treated as traded on an “established securities market” and you are
either a cash basis taxpayer or an accrual basis taxpayer that has made a special election (which must be applied consistently
from year to year and cannot be changed without the consent of the IRS), you will determine the U.S. dollar value of the
amount realized in a non-U.S. dollar currency by translating the amount received at the spot rate of exchange on the settlement
date of the sale. If you are an accrual basis taxpayer that is not eligible to or does not elect to determine the amount realized
using the spot rate on the settlement date, you will recognize foreign currency gain or loss to the extent of any difference
between the U.S. dollar amount realized on the date of sale or disposition and the U.S. dollar value of the currency received at
the spot rate on the settlement date.
Any gain or loss on the sale or other disposition of our ordinary shares or warrants will generally be treated as U.S.
source income or loss and treated as long-term capital gain or loss if your holding period in our ordinary shares or warrants at
the time of the disposition exceeds one year. Accordingly, in the event any Israeli tax (including withholding tax) is imposed
upon the sale or other disposition, you may not be able to utilize foreign tax credit unless you have foreign source income or
gain in the same category from other sources. Long-term capital gain of non-corporate U.S. Holders generally will be subject
to U.S. federal income tax at reduced tax rates. The deductibility of capital losses is subject to significant limitations.
Taxation of Exercise or Expiration of our Warrants
In general, you will not be required to recognize income, gain or loss upon exercise of our warrants by payment of the
exercise price. Your tax basis in our ordinary shares received upon exercise of our warrants will be equal to the sum of (1) your
tax basis in the warrants exchanged therefor and (2) the exercise price of the warrants. Your holding period in our ordinary
shares received upon exercise will commence on the day after you exercise the warrants.
If the warrants expire without being exercised, you will recognize a capital loss in an amount equal to your tax basis in
the warrants. Such loss will be long-term capital loss if, at the time of the expiration, your holding period in the warrants is
more than one year. The deductibility of capital losses is subject to limitations.
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Information Reporting and Backup Withholding
Dividend payments (including constructive dividends) with respect to our ordinary shares or warrants and proceeds from
the sale, exchange or redemption of our ordinary shares or warrants may be subject to information reporting to the IRS and
possible U.S. backup withholding. Backup withholding will not apply, however, to a U.S. Holder that furnishes a correct
taxpayer identification number and makes any other required certification or that is otherwise exempt from backup
withholding. U.S. Holders that are required to establish their exempt status generally must provide such certification on IRS
Form W-9. You should consult your tax advisor regarding the application of the U.S. information reporting and backup
withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your
U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding
rules by filing the appropriate claim for refund with the IRS and furnishing any required information in a timely manner.
Information with respect to Foreign Financial Assets
Certain U.S. Holders may be required to report information relating to an interest in our ordinary shares or warrants,
subject to certain exceptions (including an exception for ordinary shares held in accounts maintained by certain financial
institutions). Penalties can apply if U.S. Holders fail to satisfy such reporting requirements. You should consult your tax advisor
regarding the effect, if any, of this requirement on your ownership and disposition of our ordinary shares.
THE SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES SET OUT ABOVE IS FOR GENERAL
INFORMATIONAL PURPOSES ONLY. INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT
THE APPLICATION OF THE U.S. FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL
AS THE STATE, LOCAL, NON-U.S. AND OTHER TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN OUR
ORDINARY SHARES OR WARRANTS.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are subject to the information reporting requirements of the Exchange Act, applicable to foreign private issuers, and
under those requirements, we file reports with the SEC. Our filings with the SEC are available to the public through the SEC’s
website at http://www.sec.gov.
As a foreign private issuer, we are exempt from the rules under the Exchange Act, related to the furnishing and content of
proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit
recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act, to file
annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as U.S. companies
whose securities are registered under the Exchange Act. However, we are required to comply with the informational requirements
of the Exchange Act, and, accordingly, file current reports on Form 6-K, annual reports on Form 20-F and other information with
the SEC.
I. Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may
impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a
result of foreign currency exchange rates, which is discussed in detail below.
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Interest Rate Risk
We do not anticipate undertaking any significant long-term borrowings.
At present, our investments consist primarily of marketable securities. We may be exposed to market price risk because of
investments in tradable securities, mainly corporate bonds, held by us and classified in our financial statements as financial assets
at fair value through profit or loss. To manage the price risk arising from investments in tradable securities, we invest in
marketable securities with high ratings and diversify our investment portfolio. Our investments may also be exposed to market
risk due to fluctuation in interest rates, which may affect our interest income and the fair market value of our investments, if any.
Foreign Currency Exchange Risk
The U.S. dollar is our functional and reporting currency. Although a substantial portion of our expenses (mainly salaries
and related costs) are denominated in NIS, accounting for almost half of our expenses in the year ended December 31, 2019, all
of our financing has been in U.S. dollars and the vast majority of our liquid assets are held in U.S. dollars. Furthermore, while we
anticipate that a portion of our expenses, principally salaries and related personnel expenses in Israel, will continue to be
denominated in NIS, we expect to incur an increasing amount of expenses in U.S. dollars as we progress in the development and
the regulatory processes of our product candidates. Changes of 5% in the U.S. dollar/NIS exchange rate would have
increased/decreased operating expenses by approximately 1.3% during the fiscal year ended on December 31, 2019. We also
have expenses, although to a much lesser extent, in other non-U.S. dollar currencies, in particular the Euro.
Moreover, for the next few years we expect that the substantial majority of our revenues from the sale of our products in
the United States, if any, will be denominated in U.S. dollars. Since a portion of our expenses is denominated in NIS and other
non-U.S. currencies, we are exposed to risk associated with exchange rate fluctuations vis-à-vis the non-U.S. currencies. See
“Item 3 – D. Risk Factors — Exchange rate fluctuations between the U.S. dollar, the New Israeli Shekel and other foreign
currencies, may negatively affect our future revenues.” If the NIS fluctuates significantly against the U.S. dollar it may have a
negative impact on our results of operations. As of the date of this annual report and for the periods under review, fluctuations in
the currencies exchange rates have not materially affected our results of operations or financial condition.
The Company carries out transactions involving foreign currency exchange derivative financial instruments. The
transactions are designed to hedge the Company’s exposure in currencies other than the U.S. dollar. The derivative does not meet
the definition of a cash flow accounting hedge, and therefore the changes in the fair value are included in financial expense
(income), net.
Inflation-related risks
We do not believe that the rate of inflation in Israel has had a material impact on our business to date, however, our costs
in Israel will increase if the inflation rate in Israel exceeds the devaluation of the NIS against the U.S. dollar or if the timing of
such devaluation lags behind inflation in Israel.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
139
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Not applicable.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Initial Public Offering
On February 5, 2018, we completed an initial public offering in the United States on Nasdaq of our ordinary shares, par
value NIS 0.1 per share, pursuant to a Registration Statement on Form F-1, as amended (File No. 333-220234), which became
effective on January 31, 2018. Jefferies LLC and BMO Capital Markets Corp. acted as joint book-running managers for the
offering. JMP Securities LLC and Raymond James & Associates, Inc. acted as co-managers, with Jefferies LLC and BMO
Capital Markets acting as representatives of the underwriters. We issued and sold 7,187,500 ordinary shares in the offering at a
price of $12.00 per ordinary share, including 937,500 ordinary shares purchased by the underwriters pursuant to their over-
allotment option. The option to purchase additional ordinary shares was exercised in full on February 2, 2018. Following the sale
of our ordinary shares in connection with the initial public offering, the offering terminated.
The gross proceeds of the shares sold (including the over-allotment option) was approximately $86.2 million. The total
expenses of the offering, including underwriting discounts and commissions, were approximately $7.9 million. The net proceeds
we received from the offering (including the over-allotment option) were approximately $78.3 million. No payments for such
expenses were made directly or indirectly to (i) any of our directors, officers or their associates, (ii) any persons owning 10% or
more of any class of our equity securities or (iii) any of our affiliates.
We intend to use the net proceeds from the offering to fund pre-commercialization and launch activities for Epsolay and
Twyneo, research and development activities and the remainder for working capital and other general corporate purposes.
ITEM 15. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
We performed an evaluation of the effectiveness of our disclosure controls and procedures that are designed to ensure that
information required to be disclosed and filed with the SEC is recorded, processed, summarized and reported timely within the
time period specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the
Exchange Act, is accumulated and communicated to our management, including our principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There
can be no assurance that our disclosure controls and procedures will detect or uncover all failures of persons within the company
to disclose information otherwise required to be set forth in our reports. Nevertheless, our disclosure controls and procedures are
designed to provide reasonable assurance of achieving the desired control objectives. Based on our evaluation, our management,
including our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report are effective
at such reasonable assurance level.
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(b) - (c) Management’s Annual Report on Internal Control over Financial Reporting and Attestation Report of
Registered Public Accounting Firm
Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for
establishing and maintaining adequate internal control over our financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of
the Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies
and procedures that:
•
•
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and asset dispositions;
provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our financial statements in accordance
with generally accepted accounting principles;
provide reasonable assurance that receipts and expenditures are made only in accordance with authorizations of our management and board of
directors (as appropriate); and
provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of assets that could
have a material effect on our financial statements.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In
addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we assessed the effectiveness of our internal control over financial reporting as of December 31, 2019 based on
the framework for Internal Control-Integrated Framework set forth by The Committee of Sponsoring Organizations of the
Treadway Commission (COSO) (2013).
Based on our assessment and this framework, our management concluded that the Company’s internal control over
financial reporting was effective as of December 31, 2019.
(d) Changes in Internal Controls Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the year ended December 31,
2019 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
ITEM16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Mr. Jerrold S. Gattegno is an audit committee financial expert. Mr. Gattegno is
an independent director for the purposes of the Nasdaq Listing Rules.
ITEM 16B. CODE OF ETHICS
We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions. This code of ethics is posted on our website,
http://ir.sol-gel.com/corporate-governance/governance-overview.
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ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees Paid to Independent Registered Public Accounting Firm
The following table sets forth, for each of the years indicated, the aggregate fees billed by our independent registered
public accounting firm for professional services.
Services Rendered
Audit Fees (1)
Tax (2)
Total
Year Ended December 31,
2019
2018
(U.S. dollars in thousands)
164
37
201
120
35
155
(1)
(2)
Audit Fees consist of professional services rendered in connection with the audit of our consolidated financial statements, review of our consolidated
quarterly financial statements, issuance of comfort letters, consents and assistance with review of documents filed with the SEC.
Tax fees relate to tax compliance, planning and advice.
Audit Committee Pre-Approval Policies and Procedures
Our audit committee’s specific responsibilities in carrying out its oversight of the quality and integrity of the accounting,
auditing and reporting practices of the Company include the approval of audit and non-audit services to be provided by the
external auditor. The audit committee approves in advance the particular services or categories of services to be provided to the
Company during the following yearly period and also sets forth a specific budget for such audit and non-audit services.
Additional non-audit services may be pre-approved by the audit committee.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not applicable.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE
Nasdaq Stock Listing Rules and Home Country Practices
As a foreign private issuer, we will be exempt from the rules under the Exchange Act related to the furnishing and content
of proxy statements, and our officers, directors and principal shareholders will be exempt from the reporting and short-swing
profit recovery provisions contained in Section 16 of the Exchange Act. Also, we are not required to comply with Regulation FD,
which restricts the selective disclosure of material information. However, we intend to file with the SEC, within 120 days after
the end of each fiscal year, or such applicable time as required by the SEC, an annual report on Form 20-F containing financial
statements audited by an independent registered public accounting firm, and we intend to submit to the SEC from time to time,
on Form 6-K, reports of information that would likely be material to an investment decision in our securities.
142
As a foreign private issuer, we are permitted to follow certain Israeli corporate governance practices instead of the Nasdaq
corporate governance rules, provided that we disclose which requirements we are not following and the equivalent Israeli
requirement. Pursuant to the “foreign private issuer exemption”:
•
•
•
•
we intend to establish a quorum requirement such that the quorum for any meeting of shareholders is two or more shareholders holding at least
331⁄3% of our voting rights, which complies with Nasdaq requirements, however, if the meeting is adjourned for lack of quorum, the quorum
for such adjourned meeting will be any number of shareholders, instead of 331⁄3% of our voting rights;
we intend to adopt and approve material changes to equity incentive plans in accordance with the Companies Law, which does not impose a
requirement of shareholder approval for such actions. In addition, we intend to follow Israeli corporate governance practice in lieu of Nasdaq
Marketplace Rule 5635(c), which requires shareholder approval prior to an issuance of securities in connection with equity based compensation
of officers, directors, employees or consultants;
as opposed to making periodic reports to shareholders and proxy solicitation materials available to shareholders in the manner specified by the
Nasdaq corporate governance rules, the Companies Law does not require us to distribute periodic reports directly to shareholders, and the
generally accepted business practice in Israel is not to distribute such reports to shareholders but to make such reports available through a
public website. We will only mail such reports to shareholders upon request; and
we will follow Israeli corporate governance practice instead of Nasdaq requirements to obtain shareholder approval for certain dilutive events
(such as issuances that will result in a change of control, certain transactions other than a public offering involving issuances of a 20% or
greater interest in us and certain acquisitions of the stock or assets of another company).
Otherwise, we intend to comply with the rules generally applicable to U.S. domestic companies listed on the Nasdaq
Global Market. We may in the future decide to use the foreign private issuer exemption with respect to some or all of the other
Nasdaq corporate governance rules. We also intend to comply with Israeli corporate governance requirements under the
Companies Law applicable to public companies.
Controlled Company
As a result of the number of shares owned by Arkin Dermatology, as of the date of this annual report, we are a “controlled
company” under the Nasdaq corporate governance rules. A “controlled company” is a company of which more than 50% of the
voting power is held by an individual, group or another company. Pursuant to the “controlled company” exemption, we are not
required to, and will not, comply with the requirements that: (1) a majority of our board of directors consist of independent
directors; and (2) we have a nominating committee composed entirely of independent directors with a written charter addressing
such committee’s purpose and responsibilities. See “Item 6. Directors, Senior Management and Employees — C. Board
Practices."
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
The financial statements required by this item are found at the end of this annual report, beginning on page F-1.
ITEM 19. EXHIBITS
See Exhibit Index on page 144.
143
The exhibits filed with or incorporated into this Registration Statement are listed in the index of exhibits below.
EXHIBIT INDEX
Exhibit
Number
Exhibit Description
1.1
1.2
2.1
2.2
4.1†
4.2†
4.3
4.4
4.5
4.6
4.7∞
4.8∞
4.9∞
Amended and Restated Memorandum of Association (incorporated by reference to Exhibit 3.1 of the Registration Statement on Form F-1/A
filed with the Securities and Exchange Commission on January 23, 2018).
Amended and Restated Articles of Association (incorporated by reference to Exhibit 99.1 of Form 6-K/A filed with the Securities and
Exchange Commission on August 20, 2018).
Form of Specimen Share Certificate (incorporated by reference to Exhibit 4.1 of the Registration Statement on Form F-1/A filed with the
Securities and Exchange Commission on September 20, 2017).
Description of Share Capital.
Development, Manufacturing and Commercialization Agreement between Perrigo UK Finco Limited Partnership and Sol-Gel Technologies
Ltd., dated as of April 27, 2015 (incorporated by reference to Exhibit 10.3 of the Registration Statement on Form F-1/A filed with the
Securities and Exchange Commission on September 20, 2017).
Amendment to the Development, Manufacturing and Commercialization Agreement between the Registrant and Perrigo UK Finco Limited
Partnership, dated as of October 26, 2015 (incorporated by reference to Exhibit 10.4 of the Registration Statement on Form F-1/A filed with
the Securities and Exchange Commission on September 6, 2017).
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.5 of the Registration Statement on Form F-1/A filed with the
Securities and Exchange Commission on September 20, 2017).
2014 Share Incentive Plan.
Compensation Policy (incorporated by reference to Exhibit 10.6 of the Registration Statement on Form F-1/A filed with the Securities and
Exchange Commission on January 23, 2018).
Registration Rights Agreement (incorporated by reference to Exhibit 99.2 of Form 6-K filed with the Securities and Exchange Commission
on February 6, 2018).
Lease Agreement by and between the Registrant and Rachel Zacks, dated as of October 10, 2007 (incorporated by reference to Exhibit 10.7
of the Registration Statement on Form F-1/A filed with the Securities and Exchange Commission on August 29, 2017).
Lease Agreement by and between the Registrant and Rachel Zacks, dated as of September 29, 2014 (incorporated by reference to Exhibit
10.8 of the Registration Statement on Form F-1/A filed with the Securities and Exchange Commission on August 29, 2017).
Lease Agreement by and between the Registrant and Rachel Zacks, dated as of March 30, 2016 (incorporated by reference to Exhibit 10.9
of the Registration Statement on Form F-1/A filed with the Securities and Exchange Commission on August 29, 2017).
144
4.10∞
4.11∞
4.12∞
4.13∞
4.14∞
Lease Agreement by and between the Registrant and Rachel Zacks, dated as of September 20, 2016 (incorporated by reference to Exhibit
10.10 of the Registration Statement on Form F-1/A filed with the Securities and Exchange Commission on August 29, 2017).
Lease Agreement by and between the Registrant and Rachel Zacks, dated as of January 30, 2017 (incorporated by reference to Exhibit
10.11 of the Registration Statement on Form F-1/A filed with the Securities and Exchange Commission on August 29, 2017).
Lease Agreement by and between the Registrant and Rachel Zacks, dated as of September 25, 2017 (incorporated by reference to Exhibit
4.12 of the Annual on Form 20-F filed with the Securities and Exchange Commission on March 21, 2019).
Lease Agreement by and between the Registrant and Rachel Zacks, dated as of July 3, 2018 (incorporated by reference to Exhibit 4.13 of
the Annual on Form 20-F filed with the Securities and Exchange Commission on March 21, 2019).
Lease Agreement by and between the Registrant and Rachel Zacks, dated as of August 14, 2018 (incorporated by reference to Exhibit 4.14
of the Annual on Form 20-F filed with the Securities and Exchange Commission on March 21, 2019).
4.15∞
Lease Agreement by and between the Registrant and Rachel Zacks, dated as of November 12, 2019.
4.16
4.17
4.18
4.19
4.20∞
12.1
12.2
13
15.1
101
†
∞
Promissory Note by and between the Registrant and Moshe Arkin, dated as of August 2, 2016 (incorporated by reference to Exhibit 10.12
of the Registration Statement on Form F-1/A filed with the Securities and Exchange Commission on August 29, 2017).
Schedule A, as amended, of Promissory Note by and between the Registrant and Moshe Arkin, dated as of June 28, 2017 (incorporated by
reference to Exhibit 10.13 of the Registration Statement on Form F-1/A filed with the Securities and Exchange Commission on August 29,
2017).
Instrument of Conversion of Promissory Note by and between the Registrant and Moshe Arkin, dated as of August 22, 2017 (incorporated
by reference to Exhibit 10.14 of the Registration Statement on Form F-1/A filed with the Securities and Exchange Commission on August
29, 2017).
Assignment Agreement between the Registrant and Medicis Pharmaceutical Corporation, dated August 16, 2013 (incorporated by
reference to Exhibit 10.15 of the Registration Statement on Form F-1/A filed with the Securities and Exchange Commission on August 29,
2017).
Asset Transfer Agreement and Assignment Deed between Sol-Gel Technologies Ltd. and M. Arkin Dermatology Ltd., dated August 22,
2017 (incorporated by reference to Exhibit 10.16 of the Registration Statement on Form F-1/A filed with the Securities and Exchange
Commission on January 30, 2017).
Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification by Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Consent of Independent Registered Public Accounting Firm
The following financial statements from the Company’s 20-F for the fiscal year ended December 31, 2019 formatted in XBRL:
(i) Consolidated Statements of Comprehensive Loss, (ii) Consolidated Statements of Financial Position, (iii) Consolidated Statements of
Changes in Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to the Consolidated Financial Statements.
Confidential treatment granted with respect to certain portions of this Exhibit.
Informal translation of the original Hebrew document.
145
The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this annual report on its behalf.
SIGNATURE
Date: March 24, 2020
SOL-GEL TECHNOLOGIES LTD.
By: /s/ Alon Seri-Levy
Name:Alon Seri-Levy
Title: Chief Executive Officer
and
Director
By: /s/ Gilad Mamlok
Name:Gilad Mamlok
Title: Chief Financial Officer
146
SOL-GEL TECHNOLOGIES LTD.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
SOL-GEL TECHNOLOGIES LTD.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
TABLE OF CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets
Statements of Operations
Statements of Changes in Shareholders' Equity
Statements of Cash Flows
Notes to the Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-7
Report of Independent Registered Public Accounting Firm
To the board of directors and shareholders of Sol-Gel Technologies Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Sol-Gel Technologies Ltd. and its subsidiary (the “Company”)
as of December 31, 2019 and 2018, and the related consolidated statements of operations, of changes in shareholders' equity and
of cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred
to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally
accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 2(n) to the consolidated financial statements, the Company changed the manner in which it accounts for
leases in 2019.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of
the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Tel-Aviv, Israel
March 24, 2020
/s/ Kesselman & Kesselman
Certified Public Accountants (Isr.)
A member firm of PricewaterhouseCoopers International Limited
We have served as the Company's auditor since 2000.
Kesselman & Kesselman, Trade Tower, 25 Hamered Street, Tel-Aviv 6812508, Israel,
P.O Box 50005 Tel-Aviv 6150001 Telephone: +972 -3- 7954555, Fax:+972 -3- 7954556, www.pwc.com/il
F - 2
SOL-GEL TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share and per share data)
Assets
CURRENT ASSETS:
Cash and cash equivalents
Bank deposits
Marketable securities
Receivables from collaborative arrangements
Prepaid expenses and other current assets
TOTAL CURRENT ASSETS
NON-CURRENT ASSETS:
Restricted long-term deposits
Property and equipment, net
Operating lease right-of-use assets
Funds in respect of employee rights upon retirement
TOTAL NON-CURRENT ASSETS
TOTAL ASSETS
Liabilities and shareholders' equity
CURRENT LIABILITIES:
Accounts payable
Other accounts payable
Current maturities of operating leases
TOTAL CURRENT LIABILITIES
LONG-TERM LIABILITIES:
Operating leases liabilities
Liability for employee rights upon retirement
TOTAL LONG-TERM LIABILITIES
COMMITMENTS
TOTAL LIABILITIES
SHAREHOLDERS' EQUITY:
$
$
$
Ordinary shares, NIS 0.1 par value – authorized: 50,000,000 as of December 31, 2018 and 2019, respectively;
issued and outstanding: 18,949,968 and 20,402,800 as of December 31, 2018 and December 31, 2019, respectively
Additional paid-in capital
Accumulated deficit
TOTAL SHAREHOLDERS' EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
The accompanying notes are an integral part of these consolidated financial statements.
F - 3
December 31
2018
2019
5,325 $
1,000
56,662
-
2,987
65,974
462
2,604
-
642
3,708
69,682 $
2,924 $
1,971
-
4,895
-
878
878
9,412
-
40,966
4,120
1,293
55,791
472
2,314
2,040
684
5,510
61,301
1,710
4,123
672
6,505
1,373
958
2,331
5,773
8,836
520
190,853
(127,464)
63,909
69,682 $
561
203,977
(152,073)
52,465
61,301
SOL-GEL TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. dollars in thousands, except share and per share data)
COLLABORATION REVENUES
OPERATING EXPENSES
Research and Development
General and Administrative
TOTAL OPERATING LOSS
FINANCIAL INCOME, net
LOSS BEFORE INCOME TAXES
INCOME TAXES
LOSS FOR THE YEAR
BASIC AND DILUTED LOSS PER ORDINARY SHARE
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING USED IN
COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE
Year ended December 31,
2018
2017
2019
$
174 $
129 $
22,904
25,805
6,002
31,633
(65)
31,568
-
31,568 $
5.02 $
28,146
5,504
33,521
(1,318)
33,203
-
32,203 $
1.80 $
40,578
8,276
25,950
(1,374)
24,576
33
24,609
1.26
$
$
6,290,244
17,867,589
19,534,562
The accompanying notes are an integral part of these consolidated financial statement.
F - 4
SOL-GEL TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. dollars in thousands, except share data)
Ordinary shares
Additional
paid-in
capital
Accumulated
deficit
Total
Number
of shares
Amounts
Amounts
6,290,242
82
32,274
(63,693)
(31,337)
BALANCE AS OF JANUARY 1, 2017
CHANGES DURING 2017:
Loss for the year
Issuance of shares due to in- process research and
development acquired
Share-based compensation
BALANCE AS OF DECEMBER 31, 2017
CHANGES DURING 2018:
Loss for the year
Stock split
Conversion of loans from the Controlling shareholder
Issuance of shares through an initial public offering, net of
issuance costs
Exercise of options granted to employee
Share-based compensation
2
6,290,244
*
5,444,825
7,187,500
27,399
*
82
66
160
211
1
BALANCE AS OF DECEMBER 31, 2018
18,949,968
520
CHANGES DURING 2019:
Loss for the year
Vesting of restricted shares
Issuance of shares through public offering, net of issuance
costs
Share-based compensation
15,332
1,437,500
*
41
BALANCE AS OF DECEMBER 31, 2019
20,402,800
561
* Less than 1,000.
The accompanying notes are an integral part of these consolidated financial statements.
F - 5
(31,568)
(31,568)
6,232
3,974
42,480
(66)
65,178
78,564
43
4,654
190,853
*
10,572
2,552
203,977
(95,261)
(32,203)
(127,464)
(24,609)
(152,073)
6,232
3,974
(52,699)
(32,203)
-
65,338
78,775
44
4,654
63,909
(24,609)
-
10,613
2,552
52,465
SOL-GEL TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss
Adjustments required to reconcile loss to net cash used in operating activities:
Depreciation
Changes in accrued liability for employee rights upon retirement
Share-based compensation
Net changes in operating leases
Changes in fair value of marketable securities
In-process research and development acquired
Finance expenses, net
Changes in operating asset and liabilities:
Accounts receivable
Prepaid expenses and other current assets
Accounts payable, accrued expenses and other
Long term receivables
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment
Bank deposits
Restricted long-term deposits
Investments in marketable securities
Proceeds from sales and maturity of marketable securities
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options granted to an employee
Proceeds from issuance of shares through public offering, net of issuance costs
Loans received from the controlling shareholder
Net cash provided by financing activities
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AND RESRICTED CASH AT BEGINNING OF THE
YEAR
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF THE YEAR $
Cash and Cash equivalents
Restricted cash
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH SHOWN IN STATEMENT
Year ended December 31,
2018
2017
2019
$
(31,568) $
(32,203) $
(24,609)
471
30
3,974
-
-
6,232
(50)
-
(229)
(2,486)
(463)
(24,089)
(1,925)
(4,000)
(13)
-
-
(5,938)
-
-
28,000
28,000
50
(1,977)
762
106
4,654
-
29
-
(34)
-
(1,463)
3,029
1,653
(23,467)
(1,052)
3,000
8
(71,783)
15,092
(54,735)
44
78,775
-
78,819
34
651
7,001
5,024 $
5,024
-
5,024
5,675 $
5,325
350
887
38
2,552
5
65
-
50
(4,120)
1,694
938
-
(22,500)
(597)
1,000
(10)
(38,702)
54,333
16,024
-
10,613
-
10,613
(50)
4,087
5,675
9,762
9,412
350
OF CASH FLOWS
$
5,024 $
5,675 $
9,762
SUPPLEMENTARY INFORMATION ON INVESTING AND FINANCING ACTIVITIES
NOT INVOLVING CASH FLOWS:
Purchase of property and equipment
Obtaining a right-of-use asset in exchange for a lease liability
Conversion of loans from the controlling shareholder
Acquisition of in-process research and development product candidate
SUPPLEMENTARY INFORMATION:
Interest received
$
$
$
$
$
62 $
- $
- $
6,232 $
- $
$
65,338 $
- $
-
1,329
-
-
- $
1,477 $
1,600
The accompanying notes are an integral part of these consolidated financial statements.
F - 6
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share amounts)
NOTE 1 — NATURE OF OPERATIONS
Sol-Gel Technologies Ltd. (collectively with its subsidiary, the Company) is an Israeli Company incorporated in 1997.
The Company is a clinical stage specialty pharmaceutical company focused on developing and commercializing topical
dermatological drug products. The Company’s lead product candidates are based upon its proprietary microencapsulation
delivery system, consisting of microcapsules made of precipitated silica. In addition to these novel product candidates, the
Company’s product pipeline includes generic product candidates.
On August 4, 2014, 100% of the Company’s shares were acquired by its current controlling shareholder (the “Controlling
Shareholder”).
In January 2018, the Company completed an Initial Public Offering ("IPO") on the NASDAQ Stock Market, in which it
issued 6,250,000 Ordinary shares at a price per share of $12. During February 2018 the underwriters exercised their green
shoe option and purchased additional 937,500 ordinary shares at the same price per share. The total proceeds received from
the IPO, net of issuance costs, were approximately $78.8 million.
Immediately prior to the closing of the IPO, the outstanding promissory note received from the Controlling Shareholder were
automatically converted into 5,444,825 Ordinary shares of the Company based on the IPO price of $12 per ordinary share.
In August 2019, the Company completed an underwritten follow-on public offering, in which it issued 1,437,500 ordinary
shares at a price per share of $8 for a total net proceeds of approximately $10.6 million.
In 2018, the Company incorporated a wholly owned U.S. subsidiary - Sol-Gel Technologies Inc. (the "Subsidiary"). The
Subsidiary commenced operations in 2019 and will support the Company with regard to marketing, regulatory affairs and
business development relating to its products and technology in the U.S. The Subsidiary is consolidated as part of the
Company’s financial statements commencing January 1, 2019.
Since incorporation through December 31, 2019, the Company has an accumulated deficit of approximately $152,073
thousand and its activities have been funded mainly by its shareholders and collaboration revenues. The Company expects to
continue to incur significant research and development and other costs related to its ongoing operations and in order to
continue its future operations, the Company will need to obtain additional funding until becoming profitable. Subsequent to
December 31, 2019, the Company issued additional ordinary shares and warrants for a net consideration of approximately
$21.5 million. In addition, the Company signed a private placement agreement with its Controlling Shareholder for issuance
of additional ordinary shares and warrants for a net consideration of approximately $5 million, see also note 12. The
Company's cash and cash equivalents and marketable securities as of December 31, 2019, together with the additional
proceeds from the follow-on public offering will allow the Company to fund its operating plan through at least the next 12
months from the financial statements issuance date.
F - 7
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
a. Basis of presentation
The Company’s financial statements have been prepared in accordance with generally accepted accounting principles in
the United States of America (“U.S. GAAP”).
b. Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Actual results may differ from those estimates.
As applicable to these financial statements, the most significant estimates and assumptions relate to the fair value of
share-based compensation and the incremental borrowing rate for leases.
c. Functional and presentation currency
The U.S. dollar (“dollar”) is the currency of the primary economic environment in which the operations of the Company
and its subsidiary are conducted. The Company’s financing has been provided in dollars, revenues are primarily in dollars
and a significant part of expenses are incurred in dollars. The financial statements are presented in dollars, which is the
Company’s functional and presentation currency.
Transactions and balances originally denominated in dollars are presented at their original amounts. Balances in non-
dollar currencies are translated into dollars using historical and current exchange rates for non-monetary and monetary
balances, respectively. For non-dollar transactions and other items in the statements of operations (indicated below), the
following exchange rates are used: (I) for transactions — exchange rates at transaction dates or average rates; and (ii) for
other items (derived from non-monetary balance sheet items such as depreciation) — historical exchange rates. Currency
transaction gains and losses are presented in financial income or expenses, as appropriate.
d. Cash and cash equivalents
The Company considers as cash equivalents all short-term, highly liquid investments, which include short-term bank
deposits with original maturities of three months or less from the date of purchase that are not restricted as to withdrawal
or use and are readily convertible to known amounts of cash.
e. Bank deposits
Bank deposits with original maturity dates of more than three months but less than one year are included in short-term deposits. . Bank deposits
with maturity of more than one year are considered long-term.
f. Marketable securities
Marketable securities consist of debt securities. The Company elected the fair value option to measure and recognize its
investments in debt securities in accordance with ASC 825, Financial Instruments as the Company manages its portfolio
and evaluates the performance on a fair value basis. Changes in fair value, realized gains and losses on sales of
marketable securities, are reflected in the statements of operation as finance expense (income), net.
F - 8
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
g. Derivatives and hedging
The Company carries out transactions involving foreign currency exchange derivative financial instruments. The transactions are designed to
hedge the Company’s exposure in currencies other than the U.S. dollar. The derivative does not meet the definition of a cash flow accounting
hedge, therefore the changes in the fair value are included in financial expense (income), net.
The currency hedged items are denominated in New Israeli Shekel (NIS). The counterparties to the derivatives are major banks in Israel.
As of December 31, 2019, the Company has $350 on the Company’s bank account that is restricted in order to secure the
hedging transactions. This amount is presented among Restricted long-term deposits.
h. Property and equipment:
1) Property and equipment are stated at cost, net of accumulated depreciation and amortization.
2) The Company’s property and equipment are depreciated utilizing the straight-line method on the basis of their estimated useful life.
Annual rates of depreciation are as follows:
Laboratory equipment
Office equipment and furniture
Computers and related equipment
%
10 – 33 (mainly 15 – 25)
7 – 15
33
Leasehold improvements are amortized utilizing the straight-line method over the shorter of the expected lease term or
the estimated useful life of the improvements.
i.
Impairment of long-lived assets
The Company tests long-lived assets for impairment whenever events or circumstances present an indication of
impairment. If the sum of expected future cash flows (undiscounted and without interest charges) of the assets is less than
the carrying amount of such assets, an impairment loss would be recognized. The assets would then be written down to
their estimated fair values.
For the three years ended December 31, 2019, the Company did not recognize an impairment loss for its long-lived
assets.
F - 9
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
j.
Share-based compensation
The Company accounts for employees’ share-based payment awards classified as equity awards using the grant-date fair
value method. The fair value of share-based payment transactions is recognized as an expense over the requisite service
period.
The Company elected to recognize compensation costs for awards conditioned only on continued service that have a
graded vesting schedule using the accelerated method based on the multiple-option award approach.
The Company applies ASU 2018-07 (Topic 718) that expands the scope of Topic 718 to include share-based payment
transactions for acquiring goods and services from nonemployees. Under the provision of the amendment, the Company
measures share-based compensation to non-employees in the same manner (except for certain exceptions) as share-based
compensation to employees.
Prior to January 1, 2019, when options were granted as consideration for services provided by consultants and other non-
employees, the grant was accounted for based on the fair value of the consideration received or the fair value of the
options issued, whichever is more reliably measurable. The fair value of the options granted was measured on a final
basis at the end of the related service period and recognized over the related service period using the graded vesting
schedule method.
The Company has elected to recognize forfeitures as they occur.
k. Research and development expenses
Research and development expenses include costs directly attributable to the conduct of research and development
programs, including the cost of salaries, share-based compensation expenses, payroll taxes and other employee benefits,
lab expenses, consumable equipment and consulting fees. All costs associated with research and developments are
expensed as incurred.
Acquisitions of in-process research and development product candidate, which are not part of business combination, are
recognized as an expense as research and development expenses as incurred.
Grants received from Israel Innovation Authority (hereafter — “IIA”), formerly known as the Office of the Chief
Scientist of the Ministry of Economy and Industry, or the OCS are recognized when the grant becomes receivable,
provided there is reasonable assurance that the Company will comply with the conditions attached to the grant and there
is reasonable assurance the grant will be received. The grant is deducted from the research and development expenses as
the applicable costs are incurred. See note 6a(1).
Clinical trial costs are a significant component of research and development expenses and include costs associated with
third-party contractors. The Company out sources its clinical trial activities utilizing external entities such as clinical
research organizations, independent clinical investigators, and other third-party service providers to assist the Company
with the execution of its clinical trials. Clinical trial costs are expensed as incurred.
F - 10
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
l. Revenue recognition
On January 1, 2018 the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).
According to the standard, an entity recognizes revenue when its customer obtains control of promised goods or services,
in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To
determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity
performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in
the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the
contract; and (v) recognize revenue when (or as) the performance obligation is satisfied.
An entity only applies the five-step model to contracts when it is probable that the entity will collect the consideration it
is entitled to in exchange for the goods or services it transfers to the customer, after considering any price concession
expected to be provided to the customer, when applicable. At contract inception, the entity assesses the goods or services
promised within each contract and determines those that are performance obligations, and assesses whether each
promised good or service is distinct. The entity then recognizes as revenue the amount of the transaction price that is
allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Collaborative Arrangements
The Company entered into collaborative arrangements with partners that fall under the scope of Topic 808, Collaborative
Arrangements (“ASC 808”). While these arrangements are in the scope of ASC 808, the Company may analogize to ASC
606 for some aspects of the arrangements. The Company analogizes to ASC 606 for certain activities within the
collaborative arrangement for the delivery of a good or service (i.e., a unit of account) that is part of its ongoing major or
central operations. Revenue recognized by analogizing to ASC 606 is recorded as “collaboration revenues”.
The terms of the Company’s collaborative arrangements typically include one or more of the following: (i) royalties on
net sales of licensed products; (ii) reimbursements or cost-sharing of R&D expenses. Each of these payments results in
collaboration revenues or an offset against R&D expense.
Royalties: For arrangements that include sales-based royalties and the license is deemed to be the predominant item to
which the royalties relate, the Company recognizes collaboration revenue at the later of (i) when the related sales occur,
or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or
partially satisfied).
Under certain collaborative arrangements, the Company has been reimbursed for a portion of its R&D expenses or
participates in the cost-sharing of such R&D expenses. Such reimbursements and cost-sharing arrangements have been
reflected as a reduction of R&D expense in the Company’s consolidated statements of operations, as the Company does
not consider performing research and development services for reimbursement to be a part of its ongoing major or central
operations.
F - 11
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
m. Income taxes:
1) Deferred taxes
The Company accounts for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). ASC 740
prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined
based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a
valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value if it is more likely
than not that a portion or all of the deferred tax assets will not be realized, based on the weight of available positive
and negative evidence. Deferred tax liabilities and assets are classified as non-current in accordance with
ASU 2015‑17.
Uncertainty in income taxes
The Company follows a two-step approach in recognizing and measuring uncertain tax positions. The first step is to
evaluate the tax position for recognition by determining if the available evidence indicates that it is more likely than
not that the position will be sustained based on technical merits. If this threshold is met, the second step is to measure
the tax position as the largest amount that has more than a 50% likelihood of being realized upon ultimate settlement.
n. Leases
As of January 1, 2019, the Company adopted ASU No. 2016-02, “Leases (Topic 842)" while prior period amounts have
not been adjusted and continue to be reported in accordance with its historical accounting under Topic 840. The Company
adopted the standard using the modified retrospective approach with an effective date as of the beginning of the
Company's fiscal year, January 1, 2019. The Company elected the package of transition provisions available for expired
or existing contracts, which allowed it to carryforward its historical assessments of (1) whether contracts are or contain
leases, (2) lease classification and (3) initial direct costs.
Right of Use ("ROU") assets represent the Company’s right to use an underlying asset for the lease term and lease
liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets
and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.
The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the
Company will exercise that option. The Company uses the implicit rate when readily determinable. As the Company’s
leases do not provide an implicit rate, the Company uses its estimated incremental borrowing rate based on the
information available at commencement date in determining the present value of lease payments. Lease expense for lease
payments is recognized on a straight-line basis over the lease term. The Company elected to not separate lease and non-
lease components for the leases. The Company elected the practical expedient of the short-term lease recognition
exemption for all leases with a term shorter than 12 months.
Additionally, the company applies the portfolio approach to account for operating lease ROU asset and liabilities for
certain car leases and incremental borrowing rates.
The Consolidated Financial Statements for the year ended December 31, 2019 are presented under the new standard,
while comparative period presented is not adjusted and continue to be reported in accordance with the historical
accounting policy.
Upon adoption, the new standard resulted in an increase of $1,200 in operating lease ROU assets and corresponding
liabilities on the Company’s consolidated balance sheet and did not have a material impact on the Company’s
consolidated statements of operations or consolidated statements of cash flows. See also note 6b.
F - 12
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
o. Loss per share
Basic loss per share is computed on the basis of the net loss for the period divided by the weighted average number of
ordinary shares outstanding during the period. Diluted loss per share is based upon the weighted average number of
ordinary shares and of ordinary shares equivalents outstanding when dilutive. Ordinary share equivalents include
outstanding stock options and restricted shares, which are included under the treasury stock method when dilutive. The
calculation of diluted loss per share does not include 673,892,1,119,310 and 1,260,984 options and restricted shares for
the years ended December 31, 2017, 2018 and 2019, respectively, because their effect would be anti-dilutive.
p. Fair value measurement
Fair value is based on the price that would be received from the sale of an asset or that would be paid to transfer a
liability in an orderly transaction between market participants at the measurement date. In order to increase consistency
and comparability in fair value measurements, the guidance establishes a fair value hierarchy that prioritizes observable
and unobservable inputs used to measure fair value into three broad levels, which are described as follows:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.
The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest
priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and
minimize the use of unobservable inputs to the extent possible and considers counterparty credit risk in its assessment of
fair value.
The carrying amount of the cash and cash equivalents, bank deposits, restricted cash, receivables from collaborative
arrangements, restricted long-term deposits, accrued expenses (under other account payable) and other liabilities
approximates their fair value.
q. Concentration of credit risks
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and
cash equivalents, bank deposits and marketable securities and certain receivables. The Company deposits cash and cash
equivalents with highly rated financial institutions (Israeli banks). In addition, all marketable securities carry a high rating
or are government insured. The Company has not experienced any material credit losses in these accounts and does not
believe it is exposed to significant credit risk on these instruments.
F - 13
SOL-GEL TECHOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
r. Newly issued and recently adopted accounting pronouncements:
1) Recently adopted accounting pronouncements:
a.
In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee
Share-based Payment Accounting” that expands the scope of ASC Topic 718 to include share-based payment transactions for acquiring
goods and services from nonemployees. An entity should apply the requirements of ASC Topic 718 to nonemployee awards except for
certain exemptions specified in the amendment. The guidance is effective for fiscal years beginning after December 15, 2018, including
interim reporting periods within that fiscal year. Under the provisions of the amendment, the Company measures share-based
compensation to non-employees in the same manner (except for certain exceptions) as share-based compensation to employees.
2) Newly issued accounting pronouncements but not yet adopted:
a.
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments Credit Losses Measurement of Credit Losses on Financial
Instruments”. This guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit
losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The
guidance will be effective for the fiscal year beginning on January 1, 2020, including interim periods within that year. The adoption of
this guidance will not have a significant impact on the Company's consolidated financial statements.
F - 14
SOL-GEL TECHOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 3 — MARKETABLE SECURITIES
The following table sets forth the Company’s marketable securities for the indicated period:
Level 2 securities:
U.S government and agency bonds
Canada government bonds
Other foreign government bonds
Corporate bonds*
Total
* Investments in Corporate bonds rated A or higher.
December 31,
2018
2019
$
$
7,933 $
1,009
5,259
42,461
56,662 $
2,499
999
3,521
33,947
40,966
The Company’s debt securities are classified within Level 2 because it uses quoted market prices or alternative pricing
sources and models utilizing market observable inputs to determine their fair value.
The table below sets forth a summary of the changes in the fair value of the Company’s marketable securities for the years
ended December 31, 2018 and 2019:
Balance at beginning of the year
Additions
Sale or maturity
Changes in fair value during the year
Balance at end of the year
As of December 31, 2019, the Company’s debt securities had the following maturity dates:
Due within one year
1 to 2 years
Total
F - 15
December 31,
2018
2019
$
$
- $
71,783
(15,092)
(29)
56,662 $
56,662
38,702
(54,333)
(65)
40,966
Market
value
December
31,
2019
$
$
37,698
3,268
40,966
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 4 — PROPERTY AND EQUIPMENT
Cost:
Laboratory equipment
Office equipment and furniture
Computers and software
Leasehold improvements
Less:
Accumulated depreciation and amortization
Property and equipment, net
December 31
2018
2019
$
2,829 $
258
410
1,849
5,346
3,242
265
490
1,946
5,943
(2,742)
2,604 $
(3,629)
2,314
$
Depreciation and amortization expense totaled $471, $762 and $887 for the years ended December 31, 2017, 2018 and 2019,
respectively.
NOTE 5 — EMPLOYEE SEVERANCE BENEFITS
The Company is required to make severance payments upon dismissal of an employee or upon termination of employment in
certain circumstances. The severance payment liability to the employees (based upon length of service and the latest monthly
salary — one month’s salary for each year employed) is recorded on the Company’s balance sheet under “Liability for
employee rights upon retirement.” The liability is recorded as if it was payable at each balance sheet date on an undiscounted
basis.
In accordance with the current employment terms starting in August 2014 with all of its employees (Section 14 of the Israeli
Severance Pay Law, 1963), the Company makes regular deposits with certain insurance companies for accounts controlled by
each applicable employee in order to secure the employee’s retirement benefit obligation. The Company is fully relieved
from any severance pay liability with respect to each such employee after it makes the payments on behalf of the employee.
The liability accrued in respect of these employees and the amounts funded, as of the respective agreement dates, are not
reflected in the Company balance sheet, as the amounts funded are not under the control and management of the Company
and the pension or severance pay risks have been irrevocably transferred to the applicable insurance companies (the
“Contribution Plan”).
With regard to the period before August 2014, the liability is funded in part from the purchase of insurance policies or by the
establishment of pension funds with dedicated deposits in the funds. The amounts used to fund these liabilities are included
in the balance sheets under “Funds in respect of employee rights upon retirement.” These policies are the Company’s assets.
The amounts of severance payment expenses were $275, $431 and $402 for the years ended December 31, 2017, 2018 and
2019, respectively, of which $257, $292 and $363 in the years ended December, 2017, 2018 and 2019, respectively, were in
respect of the Contribution Plan.
The Company expects to contribute approximately $374 in the year ending December 31, 2020 to insurance companies in
connection with its expected severance liabilities for that year.
F - 16
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 6 — COMMITMENTS:
a. Royalty Commitments:
1) The Company is obligated to pay royalties to the IIA on proceeds from the sale of products developed from research and development
activities that were funded, partially, by grants from the IIA.
Under the specific terms of the funding arrangements with the IIA, royalties of 3.5% to 25% are payable on the sale
of products developed with funding received from the IIA, which payments shall not exceed, in the aggregate, 300%
of the amount of the grant received (dollar linked), plus interest at annual rate based on LIBOR.
Up to December 31, 2019, the Company had recognized and received grants from the IIA in the aggregate amount of
$1,431 (no grants were received in the last three years.). Through December 31, 2019, the Company recorded an
accumulated royalty expense of $2,061 as royalties to the IIA with respect to revenue recognized through December
31, 2019 ($44, $32 and $32 were recorded in 2017, 2018 and 2019 accordingly, as an expense in the consolidated
statements of operations).
The Company did not receive any grants from the IIA for the years ended December 31, 2017, 2018 and 2019.
2) The Company has an agreement, that was amended several times (hereafter — the agreements) with Yissum Research Development
Company (hereafter — “Yissum”), the technology-licensing arm of the Hebrew University of Jerusalem.
According to the agreements, the Company received from Yissum an exclusive and a non-exclusive license for the
commercialization of certain Yissum patents. According to the agreements the Company shall pay Yissum:
i. Royalties of 1.5% of net sales related to certain patents.
ii. 1.5% – 8% of proceeds received by the Company for the sub-license or license of certain patents.
According to the agreements, the Company may continue commercial use of certain Yissum’s patents in connection
with the products and subject to the obligation to pay Yissum the royalties and the sub-license fees.
The Company granted rights to a third party for use and commercialization of certain Yissum patents.
F - 17
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 6 — COMMITMENTS (continued):
b. Lease Agreements
The Company leases offices and vehicles under operating leases. For leases with terms greater than 12 months, the
Company record the related asset and obligation at the present value of lease payments over the term.
Offices
The Company leases office spaces and research and development facilities under several agreements. These agreements
are linked to the change in the Israeli consumer price index and expire in December 2020. In November 2019, the
Company signed on additional amendment to the agreements to extend the lease period through December 2023. These
agreements are considered as operating leases and presented under operating lease right-of-use assets.
Vehicles
The Company has entered into operating lease agreements for vehicles used by its employees for a period of 3 years.
These contracts are considered as operating leases and presented under operating lease right-of-use assets.
Lease Position
The table below presents the lease-related assets and liabilities recorded on the consolidated balance sheet:
Assets
Operating Leases
Operating lease right-of-use assets
Liabilities
Current liabilities
Current maturities of operating leases
Long-term liabilities
Non-current operating leases
Weighted Average Remaining Lease Term
Operating leases
Weighted Average Discount Rate
Operating leases
F - 18
As of
December
31, 2019
$
2,040
$
$
672
1,373
1.66
7.44%
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 6 — COMMITMENTS (continued):
Lease Costs
The table below present certain information related to lease costs of operating leases the year ended December 31, 2019:
Operating lease cost:
Year
Ended
December
31, 2019
$
643
The table below presents supplemental cash flow information related to leases for the year ended December 31, 2019:
Cash paid for amounts included in the measurement of leases liabilities:
Operating cash flows from operating leases
Undiscounted Cash Flows
Year
Ended
December
31, 2019
$
807
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to
the operating lease liabilities recorded on the consolidated balance sheet:
For the year ended December 31, 2019
2020
2021
2022
2023
Total minimum lease payments
Less: amount of lease payments representing interest
Present value of future minimum lease payments
Less: Current maturities of operating leases
Long-term operating leases liabilities
F - 19
Operating
Leases
$
$
672
564
519
518
2,273
(228)
2,045
672
1,373
2,045
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 6 — COMMITMENTS (continued):
Future minimum lease commitments under non-cancelable operating lease agreements as of December 31, 2018
according to ASC 840, are as follows:
2019
2020
2021
Total
$
$
662
613
28
1,303
c.
d.
e.
f.
In June 2008, the Company entered into a Master Clinical Trial Services Agreement with a third party, which was later amended in April 2017, to
retain its services as a clinical research organization for certain product candidate subject to task work orders to be issued by the Company. During
2018, the Company entered into six additional task orders. As consideration for its services the Company will pay a total amount of approximately
$14,360 during the term of the engagement and based on achievement of certain milestones, out of which $9,561 were recognized as an expense
until December 31, 2019.
In 2016 through 2019, the Company entered into eight collaboration agreements with two third parties for the development, manufacturing and
commercialization of six product candidates (including an agreement assumed by the Company in August 2018, following the transfer of an in-
process research and development product candidate from a related party). See detailed information in note 7b.
In October 2017, the Company entered into a Clinical Development Master Services Agreement with a third party, to retain it as clinical research
organization for certain product candidate, subject to task work orders to be issued by the Company. As consideration for its services the
Company will pay a total amount of approximately $13,779 during the term of the engagement and based on achievement of certain milestones,
out of which $7,825 were recognized as an expense until December 31, 2019.
In July 2018, the Company signed on a Master Services Agreement to receive certain clinical research services for certain product candidate
subject to task work orders to be issued by the Company. As consideration for the services in the first work order the Company will pay a total
amount of approximately $2,234 during the term of the engagement and based on achievement of certain milestones, $957 of which were
recognized as an expense until December 31, 2019.
F - 20
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 7 — COLLABORATION AGREEMENTS
a.
b.
In 2007, the Company granted rights to a third party for use and commercialization of a product for skin protection. Under this agreement, the
Company is entitled to royalties during the years 2016 to 2024. Based on current sales, royalties are not material.
In 2016 through 2019, the Company entered into several collaboration agreements with two third parties for the development, manufacturing and
commercialization of several product candidates. Under the agreements, the third parties are obligated to conduct regulatory, scientific, clinical
and technical activities necessary to develop the product and prepare and file ANDA, with the FDA and gain regulatory approval. The Company
participates in the development of the product candidates, including participation in joint steering committees and is obligated for sourcing the
active pharmaceutical ingredient (API) during the development phase.
Upon FDA approval, the third parties have exclusive rights and are required to use diligent efforts to commercialize these products in territories
defined under the agreements, including all required sales, marketing and distributing activities associated with the agreements. The Company is
entitled to 50% of the third parties’ gross profits related to the sale of these products, as such term is defined in the agreements.
In February 2019, the Company announced that a third party has received final approval from the FDA for the first generic version of a drug
product. During the year ended December 31, 2019 the Company recognized collaboration revenue related to sales of products in the U.S. under
this agreement in the amount of $22.8 million.
This Agreement is considered to be within the scope of ASC 808, as the parties are active participants and exposed to the risks and rewards of the
collaborative activity.
The Company recognizes collaboration revenue when the related sales occur.
NOTE 8— SHARE CAPITAL
a. Ordinary shares
1) Rights of the Company’s ordinary shares
Each ordinary share is entitled to one vote. The holder of the ordinary shares is also entitled to receive dividends whenever funds are legally
available, when and if declared by the Board of Directors. Since its inception, the Company has not declared any dividends.
2) On October 2, 2017, the Company increased its authorized share capital to 50,000,000 shares, NIS 0.1 par value.
3) On January 19, 2018, the Company executed a 1-for-1.8 share split of the Company’s shares by way of an issuance of bonus shares for each
share. Upon the effectiveness of the share split, (i) 0.8 bonus shares were issued for each outstanding share, (ii) the number of ordinary shares
into which each outstanding option to purchase ordinary shares is exercisable was proportionally increased, and (iii) the exercise price of each
outstanding option to purchase ordinary shares was proportionately decreased. Unless otherwise indicated, and except for authorized capital,
all of the share numbers, loss per share amounts, share prices and option exercise prices in these financial statements have been adjusted, on a
retroactive basis, to reflect this 1-for-1.8 share split.
F - 21
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 8 — SHARE CAPITAL (continued)
4)
In January 2018, the Company completed an IPO on the NASDAQ Stock Market, in which it issued 6,250,000 Ordinary shares at a price per
share of $12. During February 2018 the underwriters exercised their green shoe option and purchased additional 937,500 ordinary shares at
the same price per share. The net proceeds received from the IPO were approximately $78,800, after deducting underwriting discounts,
commissions and other offering expenses in a total amount of approximately $7,450.
Immediately prior to the closing of the IPO, the outstanding promissory notes received from the Controlling shareholder were automatically
converted into Company's shares.
5) On August 12, 2019, the Company completed an underwritten follow-on public offering, in which it issued 1,437,500 ordinary
shares, including the full exercise by the underwriters of their option to purchase 187,500 additional ordinary shares, at a public offering price
of $8.00 per ordinary share.
The total proceeds received from the offering, net of issuance costs, were approximately $10.6 million.
6) See note 12, as to issuance of ordinary shares and warrants, subsequent to December 31, 2019, for a net consideration of approximately $21.5
million.
7) See note 12 as to private placement agreement signed with the Controlling Shareholder, subsequent to December 31, 2019, for a net
consideration of approximately $5 million.
b. Share-based compensation:
1) Option plan
In December, 2014, the Company’s Board of Directors approved a Share Incentive Plan (hereafter — the Plan) and
reserved a pool of 629,025 ordinary shares, par value NIS 0.1 each, or such other number as the Board may
determine, subject to certain terms and conditions as defined in the Plan. According to the Plan, the Company may
issue shares or restricted shares, may grant options or restricted share units and other share-based awards (hereafter —
the awards) to the Company employees, consultants, directors and other service providers.
The Plan is designed to enable the Company to grant awards to purchase Ordinary Shares under various and different
tax regimes including, without limitation: pursuant and subject to Section 102 of the Israeli Tax Ordinance and
pursuant and subject to Section 3(i) of the Israeli Tax Ordinance and under Internal revenue Code Section 422.
The awards may be exercised after vesting and in accordance with vesting schedules which will be determined by the
Board of Directors for each grant. The maximum term of the awards is 10 years. The fair value of each option granted
under this Plan is estimated using the Black-Scholes option pricing method. Expected volatility is based on the
historical volatility of comparable peer companies.
The risk-free interest rate assumption is based on observed interest rates appropriate for the expected term of the
options granted in dollar terms. The expected term of the options is estimated based on the simplified method, as its
historical experience for options grants as a public company is insufficient.
In July 2017 and December 2019, the Company’s Board of Directors approved an increase of the ordinary shares that
may be issued under the Company’s Plan by reserving an additional amount of 720,975 and 912,230 ordinary shares,
respectively
As of December 31, 2019, 958,102 ordinary shares remain available for future grants under the Plan.
F - 22
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 8 — SHARE CAPITAL (continued)
2) Options grants
a. Option granted to employees and directors
i.
ii.
iii.
iv.
v.
vi.
In March 2018, the board of directors approved and recommended the Company shareholders to approve a grant of 105,471
options to the Company CEO to purchase ordinary shares at an exercise price of $11.21 per share. The Company's shareholders
approved the grant in May 2018.
In March 2018, the Company granted a total of 20,138 options to two employees to purchase ordinary shares at an exercise price of
$11.21 per share.
In August 2018, the Company granted a total of 10,069 options to an Executive Officer to purchase ordinary shares at an exercise
price of $6.78 per share.
In January 2019, the Company granted a total of 80,000 options to an executive officer to purchase ordinary shares at an exercise
price of $5.95 per share.
In May 2019, the Company granted a total of 9,000 options to several employees to purchase ordinary shares at an exercise price of
$7.32 per share.
In December 2019, the Company granted a total of 6,300 options to several employees to purchase ordinary shares at an exercise
price of $8.32 per share.
The options vest over a period of 4 years; 25% of the options vest on the first anniversary of the vesting
commencement date (as described in each agreement) and the rest vest quarterly over the following three years.
The options expire on the tenth anniversary of their grant date.
The fair value of options granted to employees and directors in 2017, 2018 and 2019 were $9,841, $878 and
$485, respectively. The underlying data used for computing the fair value of the options are as follows:
Value of one ordinary share
Dividend yield
Expected volatility
Risk-free interest rate
Expected term
2017
$20.47-$24.37
0%
72.91%-78.71%
1.57%-2.23%
5-7 years
2018
$6.24-$10.40
0%
2019
$6.08-$8.59
0%
70.43 %-73.35%
74.87%-77.83 %
2.67%-2.83%
5.50-7 years
1.82%-2.75%
6.11 years
The total unrecognized compensation cost of employee options at December 31, 2019 is $1,260, which is
expected to be recognized over a period of 3.96 years.
F - 23
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 8 — SHARE CAPITAL (continued)
The following table summarizes the number of options granted to employees under the Plan for the years ended
December 31, 2017, 2018 and 2019, and related information:
2017
Weighted
average
exercise
price
Weighted
average
remaining
contractual
life
Year ended December 31
2018
Weighted
average
exercise
price
Weighted
average
remaining
contractual
life
Number of
options
Number of
options
2019
Weighted
average
exercise
price
Weighted
average
remaining
contractual
life
Number of
options
Options
outstanding
at the
beginning of
the year
Granted
Exercised
Expired
Forfeited
Options
outstanding
at the end of
the year
Options
exercisable
at the end of
the year
402,955 $
468,572 $
-
-
(21,747) $
1.59
4.99
-
-
2.25
8.55
9.52
-
-
7.87
849,780 $
135,678 $
(27,399) $
(1,350) $
(18,619) $
3.45
10.88
1.59
5.57
8.62
8.63
9.41
-
-
-
938,090 $
95,300 $
-
(563) $
(1,238) $
4.47
6.24
-
5.57
5.57
7.89
9.17
-
-
-
849,780 $
3.45
8.63
938,090 $
4.47
7.89 1,031,591 $
4.74
7.25
297,420 $
1.59
7.49
519,084 $
2.53
6.74
683,979 $
3.60
6.56
b. Option granted to non-employees
In March 2018, the Company granted a total of 76,895 options to several consultants to purchase ordinary shares
at an exercise price of $11.21 per share.
The options vest over a period of 4 years; 25% of the options vest on the first anniversary of the vesting
commencement date (as described in each agreement) and the rest vest quarterly over the following three years.
The options expire on the tenth anniversary of their grant date.
The fair value of options granted to non-employees in 2018 was $648. The underlying data used for computing
the fair value of the options are as follows:
Value of one ordinary share
Dividend yield
Expected volatility
Risk-free interest rate
Expected term
2018
$
10.40
0%
79.07%
2.86%
10
years
The total unrecognized compensation cost of non-employees options at December 31, 2019 is $105, which is
expected to be recognized over a period of 2.23 years.
F - 24
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 8 — SHARE CAPITAL (continued)
The following table summarizes the number of options granted to non-employees under the Plan for the year
ended December 31, 2017, 2018 and 2019, and related information:
2017
Weighted
average
exercise
price
Weighted
average
remaining
contractual
life
Year ended December 31
2018
Weighted
average
exercise
price
Weighted
average
remaining
contractual
life
Number of
options
Number of
options
2019
Weighted
average
exercise
price
Weighted
average
remaining
contractual
life
Number of
options
Options
outstanding
at the
beginning of
the year
Granted
Options
outstanding
at the end of
the year
Options
exercisable
at the end of
the year
-
121,680 $
-
5.12
-
9.54
121,680 $
76,895 $
5.12
11.21
9.54
9.24
198,575 $
-
7.48
-
8.81
-
121,680 $
5.12
9.54
198,575 $
7.48
8.81
198,575 $
7.48
7.84
7,614 $
1.59
9.54
44,793 $
4.59
8.54
96,588 $
6.97
7.78
c. The aggregate intrinsic value of the total outstanding and of total exercisable options as of December 31, 2019 is approximately $14,832
and $10,250, respectively.
d. Restricted Shares granted to Directors
In February 2018 and September 2018, the board of directors approved and recommended the Company shareholders to approve a total
grant of 46,000 and 11,500 restricted share units (RSUs), respectively, to its independent and external directors that vest annually in
equal portions over a three-year period. The fair value of shares as of the date of grant was $495 and $105 respectively. As of December
31, 2019, 15,332 RSUs were vested.
e. The following table illustrates the effect of share-based compensation on the statements of operations:
Research and development expenses
General and administrative expenses
F - 25
Year ended
December 31
2018
2017
$
$
1,932 $
2,042 $
3,974 $
2,708 $
1,946 $
4,654 $
2019
1,028
1,524
2,552
SOL-GEL TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 9 — TAXES ON INCOME
a. Tax rates in Israel
In December 2016, a tax legislation was enacted in Israel, reducing the corporate tax rate to 24% for 2017 and to 23% for
2018 and thereafter. There is no impact on the financial statements of the Company as a result of the changes in the
Israeli corporate tax rate.
Capital gain is subject to capital gain tax according to the corporate tax rate in the year the assets are sold.
b. Tax rates for the U.S Subsidiary
The subsidiary is taxed according to U.S. tax laws. The Company’s income is taxed in the United States at the rate of
21%.
c. Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (the “Investment Law”)
Under the Investment Law, including Amendment No. 60 to the Investment Law that was published in April 2005, by
virtue of the Benefited Enterprise program for certain of its facilities; the Company may be entitled to various tax
benefits.
The main benefit arising from such status is the reduction in tax rates on income derived from a Benefited Enterprise. The
extent of such benefits depends on the location of the enterprise. Since the Company’s facilities are not located in
“national development zone A,” income derived from Benefited Enterprises will be tax exempt for a period of two years
and then have a reduced tax rate for a period of up to an additional eight years.
The period of tax benefits, as described above, is limited to 12 years from the beginning of the Benefited Enterprise
election year (2012). As of December 31, 2019, the period of benefits has not yet commenced.
In the event of distribution of cash dividends from income which was tax exempt as above, the amount distributed will be
subject to the tax rate it was exempted from. The Company is entitled to claim accelerated depreciation in respect of
equipment used by the approved enterprises during five tax years.
Entitlement to the above benefits is conditioned upon the Company fulfilling the conditions stipulated by the Investment
Law and regulations published thereunder.
In the event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to
refund the amount of the benefits, in whole or in part, with the addition of linkage differences to the Israeli consumer
price index and interest.
The Investment Law was amended as part of the Economic Policy Law for the years 2011 – 2012 (the “Amendment”),
which became effective on January 1, 2011 and was further amended in August 2013 and January 2017.
Under the 2017 Amendment, and provided the conditions stipulated therein are met, income derived by Preferred
Companies from ‘Preferred Technological Enterprises’ (“PTE”) (as defined in the 2017 Amendment), would be subject to
reduced corporate tax rates of 7.5% in Development Zone “A” and 12% elsewhere, or 6% in case of a ‘Special Preferred
Technological Enterprise’ (“SPTE”) as defined in the 2017 Amendment) regardless of the company’s geographical
location within Israel. A Preferred Company distributing dividends from income derived from its PTE or SPTE, would
subject the recipient to a 20% tax (or lower, if so provided under an applicable tax treaty). The 2017 Amendment further
provides that, in certain circumstances, a dividend distributed to a corporate shareholder who is not an Israeli resident for
tax purposes would be subject to a 4% tax (inter alia, if the amount of foreign investors in the distributing company
exceeds 90%). Such taxes would generally be withheld at source by the distributing company.
F - 26
SOL-GEL TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 9 — TAXES ON INCOME (continued)
On June 14, 2017, the Encouragement of Capital Investments Regulations (Preferred Technology Income and Capital
Profits for a Technological Enterprise), 2017 (the “Regulations”) were published, which adopted Action 5 under the base
erosion and profit shifting (“BEPS”) regulations. The Regulations describe, inter alia, the mechanism used to determine
the calculation of the benefits under the PTE and under the SPTE Regime and determine certain requirements relating to
documentation of intellectual property for the purpose of the PTE. According to these provisions, a company that
complies with the terms under the PTE regime may be entitled to certain tax benefits with respect to income generated
during the company’s regular course of business and derived from the preferred intangible asset (as determined in the
Investments Law), excluding income derived from intangible assets used for marketing and income attributed to
production activity. In the event that intangible assets used for marketing purposes generate over 10% of the PTE’s
income, the relevant portion, calculated using a transfer pricing study, would be subject to regular corporate income tax.
If such income does not exceed 10%, the PTE will not be required to exclude the marketing income from the PTE’s total
income. The Regulations set a presumption of direct production expenses plus 10% with respect to income related to
production, which can be countered by the results of a supporting transfer pricing study. Tax rates applicable to such
production income expenses will be similar to the tax rates under the Preferred Enterprise regime, to the extent such
income would be considered as eligible. In order to calculate the preferred income, the PTE is required to take into
account the income and the research and development expenses that are attributed to each single preferred intangible
asset. Nevertheless, it should be noted that the transitional provisions allow companies to take into account the income
and research and development expenses attributed to all of the preferred intangible assets they have.
Under the transitional provisions of the law, a company is allowed to continue to enjoy the tax benefits available under
the law prior to its amendment until the end of the period of benefits, as defined in the law. In each year during the period
of benefits as a Benefited Enterprise, the Company will be able to opt for application of the amendment, thereby making
available the tax rates discussed above. The Company’s election to apply the amendment is irrecoverable.
As of December 31, 2019, the Company’s management decided not to adopt the application of the Amendment.
There is no assurance that future taxable income of the Company will qualify as Benefited or Preferred income or that the
benefits described above will be available to the Company in the future.
d. Tax assessments
Tax assessments filed by the Company through the year 2014 are considered to be final.
F - 27
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 9 — TAXES ON INCOME (continued)
e. Losses for tax purposes carried forward to future years
As of December 31, 2019, the Company had approximately $112.5 million of net carry forward tax losses which are
available to reduce future taxable income with no limited period of use.
f. Deferred income taxes:
In respect of:
Net operating loss carry forward
Research and development expenses
Other
Less – valuation allowance
Net deferred tax assets
December, 31
2018
2019
$
$
$
19,670
5,094
1,402
(26,166)
$
—
25,879
7,842
1,226
(34,947)
—
g. Reconciliation of theoretical tax expenses to actual expenses
Actual tax expenses are in respect of the U.S. subsidiary. The primary reconciling items between the statutory tax rate of
the Company and the effective rate are the full valuation allowance of deferred tax assets and nondeductible expenses in
relation to the operations in Israel.
h. Roll forward of valuation allowance
Balance at January 1, 2017
Additions
Balance at December 31, 2017
Additions
Balance at December 31, 2018
Additions
Balance at December 31, 2019
i.
Provision for uncertain tax positions
$
$
$
$
13,999
7,983
21,982
4,184
26,166
8,781
34,947
As of December 31, 2018, and 2019, the Company does not have a provision for uncertain tax positions.
F - 28
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 10 — SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
Other accounts payables and accruals
Accrued expenses
Employees payables
Other
NOTE 11 — RELATED PARTIES
December, 31
2018
2019
$
$
1,031 $
897
43
1,971 $
3,249
841
33
4,123
a. Related parties include the Controlling Shareholder and companies under his control, the Board of Directors and the Executive Officers of the
Company.
b. As to options and restricted shares granted to directors and executive officers, see note 8.
c. On August 22, 2017, a related company (wholly owned by the Company’s controlling shareholder) transferred an in-process research and
development product candidate (hereafter - the Product) to the Company, together with a collaboration agreement with third party to research,
develop and manufacture the Product, in consideration of 2 shares. This was considered a transaction between entities under common control and
thus it was recorded on historical cost basis and therefore the Company recognized an amount of $6,232 as a research and development expense in
2017.
d.
In January 2018, immediately prior to the closing of the IPO, the outstanding promissory notes from the Controlling Shareholder were
automatically converted into 5,444,825 Ordinary shares.
NOTE 12 — SUBSEQUENT EVENTS
a. On February 19, 2020, the Company completed an underwritten public offering, in which it issued 2,091,908 ordinary shares and warrants to
purchase up to 1,673,525 ordinary shares, at a public offering price of $11.00 per ordinary shares. The warrants are exercisable over a three-years
period from the date of issuance at a per share exercise price of $14, subject to certain adjustments as defined in the agreement. The total proceeds
received from the offering, net of issuance costs, were approximately $21.5 million.
b.
In addition and in parallel to the public offering, the Company signed an agreement for a private placement with its Controlling Shareholder for an
additional investment of approximately $5 million dollar in consideration of 454,628 ordinary shares and warrants to purchase up to 363,702
ordinary shares, at the same terms of the underwritten public offering mentioned above. The private placement agreement is contingent on certain
conditions including disinterested shareholders' approval.
F - 29
Exhibit 2.2
DESCRIPTION OF SECURITIES REGISTERED PURSUANT TO SECTION 12 OF
THE SECURITIES EXCHANGE ACT OF 1934
This section summarizes certain information regarding the ordinary shares, par value NIS 0.1 per share (the “Ordinary Shares”)
of Sol-Gel Technologies Ltd. (the “Company”). The Ordinary Shares constitute the only class of the Company’s securities that is
registered under Section 12 of the Securities Exchange Act of 1934, as amended. The following descriptions of our Ordinary
Shares and provisions of our amended and restated articles of association (the “Articles”) is a summary and does not purport to
be complete and is qualified by refence to the Articles, which are filed with the Securities and Exchange Commission as an
exhibit to our annual report on Form 20-F.
Registration Number and Purposes of the Company
Our registration number with the Israeli Registrar of Companies is 51-254469-3. Our purpose as set forth in our amended
and restated articles of association is to engage in any lawful activity.
Voting Rights and Conversion
All ordinary shares will have identical voting and other rights in all respects.
Transfer of Shares
Our fully paid ordinary shares are issued in registered form and may be freely transferred under our amended and restated
articles of association, unless the transfer is restricted or prohibited by another instrument, applicable law or the rules of a stock
exchange on which the shares are listed for trade. The ownership or voting of our ordinary shares by non-residents of Israel is not
restricted in any way by our amended and restated articles of association or the laws of the State of Israel, except for ownership
by nationals of some countries that are, or have been, in a state of war with Israel.
Liability to Further Capital Calls
Our board of directors may make, from time to time, such calls as it may deem fit upon shareholders with respect to any
sum unpaid with respect to shares held by such shareholders which is not payable at a fixed time. Such shareholder shall pay the
amount of every call so made upon him. Unless otherwise stipulated by the board of directors, each payment in response to a call
shall be deemed to constitute a pro rata payment on account of all shares with respect to which such call was made. A shareholder
shall not be entitled to his rights as shareholder, including the right to dividends, unless such shareholder has fully paid all the
notices of call delivered to him, or which according to our amended and restated articles of association are deemed to have been
delivered to him, together with interest, linkage and expenses, if any, unless otherwise determined by the board of directors.
Election of Directors
Our ordinary shares do not have cumulative voting rights for the election of directors. As a result, the holders of a
majority of the voting power represented at a shareholders meeting have the power to elect all of our directors, subject to the
special approval requirements for external directors under the Israeli Companies Law.
Under our amended and restated articles of association, our board of directors must consist of not less than five (5) but no
more than nine (9) directors, including any external directors required to be appointed by the Companies Law. Pursuant to our
amended and restated articles of association, other than the external directors, for whom special election requirements apply
under the Companies Law, the vote required to appoint a director is a simple majority vote of holders of our voting shares
participating and voting at the relevant meeting. In addition, our amended and restated articles of association allow our board of
directors to appoint new directors to fill vacancies on the board of directors if the number of directors is below the maximum
number provided in our amended and restated articles. Furthermore, under our amended and restated articles of association our
directors other than external directors are divided into three classes with staggered three-year terms.
Dividend and Liquidation Rights
We may declare a dividend to be paid to the holders of our ordinary shares in proportion to their respective shareholdings.
Under the Companies Law, dividend distributions are determined by the board of directors and do not require the approval of the
shareholders of a company unless the company’s articles of association provide otherwise. Our amended and restated articles of
association do not require shareholder approval of a dividend distribution and provide that dividend distributions may be
determined by our board of directors.
Pursuant to the Companies Law, the distribution amount is limited to the greater of retained earnings or earnings
generated over the previous two years, according to our then last reviewed or audited financial statements, provided that the date
of the financial statements is not more than six months prior to the date of the distribution, or we may distribute dividends that do
not meet such criteria only with court approval. In each case, we are only permitted to distribute a dividend if our board of
directors and the court, if applicable, determines that there is no reasonable concern that payment of the dividend will prevent us
from satisfying our existing and foreseeable obligations as they become due.
In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of
our ordinary shares in proportion to their shareholdings. This right, as well as the right to receive dividends, may be affected by
the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential rights that may be
authorized in the future.
Shareholder Meetings
Under Israeli law, we are required to hold an annual general meeting of our shareholders once every calendar year that
must be held no later than 15 months after the date of the previous annual general meeting. All general meetings other than the
annual meeting of shareholders are referred to in our amended and restated articles of association as special meetings. Our board
of directors may call special meetings whenever it sees fit, at such time and place, within or outside of Israel, as it may determine.
In addition, the Companies Law provides that our board of directors is required to convene a special meeting upon the written
request of (i) any two of our directors or one-quarter of the members of our board of directors or (ii) one or more shareholders
holding, in the aggregate, either (a) 5% or more of our outstanding issued shares and 1% or more of our outstanding voting power
or (b) 5% or more of our outstanding voting power. This is different from the Delaware General Corporation Law, or the DGCL,
which allows such right of shareholders to be denied by a provision in a company’s certificate of incorporation.
Under Israeli law, one or more shareholders holding at least 1% of the voting rights at the general meeting may request
that the board of directors include a matter in the agenda of a general meeting to be convened in the future, provided that it is
appropriate to discuss such a matter at the general meeting.
Subject to the provisions of the Companies Law and the regulations promulgated thereunder, shareholders entitled to
participate and vote at general meetings are the shareholders of record on a date to be decided by the board of directors, which
may be between four and 40 days prior to the date of the meeting. Furthermore, the Companies Law requires that resolutions
regarding the following matters must be passed at a general meeting of our shareholders:
•
•
•
•
•
•
•
amendments to our amended and restated articles of association;
appointment or termination of our auditors;
appointment of external directors;
approval of certain related party transactions;
increases or reductions of our authorized share capital;
mergers; and
the exercise of our board of director’s powers by a general meeting, if our board of directors is unable to exercise its powers and the exercise of
any of its powers is required for our proper management.
Under our amended and restated articles of association, we are not required to give notice to our registered shareholders
pursuant to the Companies Law, unless otherwise required by law. The Companies Law requires that a notice of any annual
general meeting or special general meeting be provided to shareholders at least 21 days prior to the meeting and if the agenda of
the meeting includes the appointment or removal of directors, the approval of transactions with office holders or interested or
related parties, or an approval of a merger, or as otherwise required under applicable law, notice must be provided at least 35 days
prior to the meeting. Under the Companies Law, shareholders are not permitted to take action by written consent in lieu of a
meeting. Our amended and restated articles of association provide that a notice of general meeting shall be published by us on
Form 6-K at a date prior to the meeting as required by law.
Voting Rights
Quorum Requirements
Pursuant to our amended and restated articles of association, holders of our ordinary shares have one vote for each
ordinary share held on all matters submitted to a vote before the shareholders at a general meeting. Under our amended and
restated articles of association, the quorum required for general meetings of shareholders must consist of at least two shareholders
present in person or by proxy (including by voting deed) holding 331⁄3% or more of the voting rights in the Company, which
complies with the quorum requirements for general meetings under the Nasdaq Marketplace Rules. A meeting adjourned for lack
of a quorum will generally be adjourned to the same day of the following week at the same time and place, or to such other day,
time or place as indicated by our board of directors if so specified in the notice of the meeting. At the reconvened meeting, any
number of shareholders present in person or by proxy shall constitute a lawful quorum, instead of 331⁄3% of the issued share
capital as required under the Nasdaq Marketplace Rules.
Vote Requirements
Our amended and restated articles of association provide that all resolutions of our shareholders require a simple majority
vote, unless otherwise required by the Companies Law or by our amended and restated articles of association. Pursuant to our
amended and restated articles of association, an amendment to our amended and restated articles of association regarding any
change of the composition or election procedures of our directors will require a special majority vote (662⁄3%). Under the
Companies Law, each of (i) the approval of an extraordinary transaction with a controlling shareholder and (ii) the terms of
employment or other engagement of the controlling shareholder of the company or such controlling shareholder’s relative (even
if not extraordinary) requires the approval of each of (i) the audit committee or the compensation committee with respect to the
terms of the engagement of the Company, (ii) the board of directors and (iii) the shareholders, in that order. In addition, the
shareholder approval must fulfill one of the following requirements:
•
•
a majority of the shares held by shareholders who have no personal interest in the transaction and are voting at the meeting must be voted in
favor of approving the transaction, excluding abstentions; or
the shares voted by shareholders who have no personal interest in the transaction who vote against the transaction represent no more than two
percent (2%) of the voting rights in the company.
Certain transactions with respect to remuneration of our office holders and directors require further approvals. Under our
amended and restated articles of association, any change to the rights and privileges of the holders of any class of our shares
requires a simple majority of the class so affected (or such other percentage of the relevant class that may be set forth in the
governing documents relevant to such class), in addition to the ordinary majority vote of all classes of shares voting together as a
single class at a shareholder meeting. Another exception to the simple majority vote requirement is a resolution for the voluntary
winding up, or an approval of a scheme of arrangement or reorganization, of the company pursuant to Section 350 of the
Companies Law, which requires the approval of holders of 75% of the voting rights represented at the meeting, in person, by
proxy or by voting deed and voting on the resolution.
Access to Corporate Records
Under the Companies Law, shareholders are provided access to minutes of our general meetings, our shareholders register
and principal shareholders register, our amended and restated articles of association, our financial statements and any document
that we are required by law to file publicly with the Israeli Companies Registrar or the Israel Securities Authority. In addition,
shareholders may request to be provided with any document related to an action or transaction requiring shareholder approval
under the related party transaction provisions of the Companies Law. We may deny this request if we believe it has not been
made in good faith or if such denial is necessary to protect our interest or protect a trade secret or patent.
Modification of Class Rights
Under the Companies Law and our amended and restated articles of association, the rights attached to any class of share,
such as voting, liquidation and dividend rights, may be amended by adoption of a resolution by the holders of a majority of the
shares of that class present at a separate class meeting, or otherwise in accordance with the rights attached to such class of shares,
in addition to the ordinary majority vote of all classes of shares voting together as a single class at a shareholder meeting, as set
forth in our amended and restated articles of association.
Registration Rights
In connection with the closing of our initial public offering, we entered into a registration rights agreement, pursuant to
which we granted demand registration rights, short-form registration rights and piggyback registration rights to M. Arkin
Dermatology Ltd., our controlling shareholder. All fees, costs and expenses of underwritten registrations are expected to be borne
by us..”
Acquisitions under Israeli Law
Full Tender Offer
A person wishing to acquire shares of an Israeli public company and who would as a result hold over 90% of the target
company’s issued and outstanding share capital is required by the Companies Law to make a tender offer to all of the company’s
shareholders for the purchase of all of the issued and outstanding shares of the company. A person wishing to acquire shares of a
public Israeli company and who would as a result hold over 90% of the issued and outstanding share capital of a certain class of
shares is required to make a tender offer to all of the shareholders who hold shares of the relevant class for the purchase of all of
the issued and outstanding shares of that class. If the shareholders who do not accept the offer hold less than 5% of the issued and
outstanding share capital of the company or of the applicable class, and more than half of the shareholders who do not have a
personal interest in the offer accept the offer, all of the shares that the acquirer offered to purchase will be transferred to the
acquirer by operation of law. However, a tender offer will also be accepted if the shareholders who do not accept the offer hold
less than 2% of the issued and outstanding share capital of the company or of the applicable class of shares.
Upon a successful completion of such a full tender offer, any shareholder that was an offeree in such tender offer, whether
such shareholder accepted the tender offer or not, may, within six months from the date of acceptance of the tender offer, petition
an Israeli court to determine whether the tender offer was for less than fair value and that the fair value should be paid as
determined by the court. However, under certain conditions, the offeror may include in the terms of the tender offer that an
offeree who accepted the offer will not be entitled to petition the Israeli court as described above.
If (a) the shareholders who did not respond or accept the tender offer hold at least 5% of the issued and outstanding share
capital of the company or of the applicable class or the shareholders who accept the offer constitute less than a majority of the
offerees that do not have a personal interest in the acceptance of the tender offer, or (b) the shareholders who did not accept the
tender offer hold 2% or more of the issued and outstanding share capital of the company (or of the applicable class), the acquirer
may not acquire shares of the company that will increase its holdings to more than 90% of the company’s issued and outstanding
share capital or of the applicable class from shareholders who accepted the tender offer.
Special Tender Offer
The Companies Law provides that an acquisition of shares of an Israeli public company must be made by means of a
special tender offer if as a result of the acquisition the purchaser would become a holder of 25% or more of the voting rights in
the company. This requirement does not apply if there is already another holder of at least 25% of the voting rights in the
company. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a
special tender offer if as a result of the acquisition the purchaser would become a holder of more than 45% of the voting rights in
the company, if there is no other shareholder of the company who holds more than 45% of the voting rights in the company,
subject to certain exceptions.
A special tender offer must be extended to all shareholders of a company but the offeror is not required to purchase shares
representing more than 5% of the voting power attached to the company’s outstanding shares, regardless of how many shares are
tendered by shareholders. A special tender offer may be consummated only if (i) at least 5% of the voting power attached to the
company’s outstanding shares will be acquired by the offeror and (ii) the number of shares tendered in the offer exceeds the
number of shares whose holders objected to the offer (excluding the purchaser and its controlling shareholder, holders of 25% or
more of the voting rights in the company or any person having a personal interest in the acceptance of the tender offer or any
other person acting on their behalf, including relatives and entities under such person’s control). If a special tender offer is
accepted, then the purchaser or any person or entity controlling it or under common control with the purchaser or such controlling
person or entity may not make a subsequent tender offer for the purchase of shares of the target company and may not enter into a
merger with the target company for a period of one year from the date of the offer, unless the purchaser or such person or entity
undertook to effect such an offer or merger in the initial special tender offer.
Under the DGCL there are no provisions relating to mandatory tender offers.
Merger
The Companies Law permits merger transactions if approved by each party’s board of directors and, unless certain
requirements of the Companies Law are met, by a majority vote of each party’s shares, and, in the case of the target company, a
majority vote of each class of its shares voted on the proposed merger at a shareholders meeting.
For purposes of the shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if a majority
of the votes of the shares represented at the shareholders meeting that are held by parties other than the other party to the merger,
or by any person (or group of persons acting in concert) who holds (or hold, as the case may be) 25% or more of the voting rights
or the right to appoint 25% or more of the directors of the other party, vote against the merger. If, however, the merger involves a
merger with a company’s own controlling shareholder or if the controlling shareholder has a personal interest in the merger, then
the merger is instead subject to the same special majority approval that governs all extraordinary transactions with controlling
shareholders.
If the transaction would have been approved by the shareholders of a merging company but for the separate approval of
each class or the exclusion of the votes of certain shareholders as provided above, a court may still approve the merger upon the
request of holders of at least 25% of the voting rights of a company, if the court holds that the merger is fair and reasonable,
taking into account the value to the parties to the merger and the consideration offered to the shareholders of the company.
Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it
concludes that there exists a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the
obligations of the merging entities, and may further give instructions to secure the rights of creditors.
In addition, a merger may not be consummated unless at least 50 days have passed from the date on which a proposal for
approval of the merger was filed by each party with the Israeli Registrar of Companies and at least 30 days have passed from the
date on which the merger was approved by the shareholders of each party.
Anti-Takeover Measures under Israeli Law
The Companies Law allows us to create and issue shares having rights different from those attached to our ordinary
shares, including shares providing certain preferred rights with respect to voting, distributions or other matters and shares having
preemptive rights. As of the date of this annual report, no preferred shares are authorized under our amended and restated articles
of association. In the future, if we do authorize, create and issue a specific class of preferred shares, such class of shares,
depending on the specific rights that may be attached to it, may have the ability to frustrate or prevent a takeover or otherwise
prevent our shareholders from realizing a potential premium over the market value of their ordinary shares. The authorization and
designation of a class of preferred shares will require an amendment to our amended and restated articles of association, which
requires the prior approval of the holders of a majority of the voting power attaching to our issued and outstanding shares at a
general meeting. The convening of the meeting, the shareholders entitled to participate and the majority vote required to be
obtained at such a meeting will be subject to the requirements set forth in the Companies Law.
As an Israeli company we are not subject to the provisions of Section 203 of the DGCL, which in general prohibits a
publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of
three years after the date of the transaction in which the person became an interested stockholder, unless the business combination
is approved in a prescribed manner. For purposes of Section 203, a “business combination” includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder, and an “interested stockholder” is a person who, together
with affiliates and associates, owns, or within three years prior did own, 15% or more of the voting stock of a corporation.
Borrowing Powers
Pursuant to the Companies Law and our amended and restated articles of association, our board of directors may exercise
all powers and take all actions that are not required under law or under our amended and restated articles of association to be
exercised or taken by our shareholders, including the power to borrow money for company purposes.
Changes in Capital
Our amended and restated articles of association enable us to increase or reduce our share capital. Any such changes are
subject to the provisions of the Companies Law and must be approved by a resolution duly adopted by our shareholders at a
general meeting. In addition, transactions that have the effect of reducing capital, such as the declaration and payment of
dividends in the absence of sufficient retained earnings or profits, require the approval of both our board of directors and an
Israeli court.
Trading of Ordinary Shares
Our Ordinary Shares are listed and traded on The Nasdaq Global Market under the symbol “SLGL”.
Transfer Agent and Registrar
The transfer agent and registrar for our ordinary shares is American Stock Transfer & Trust Company, LLC.
SOL-GEL TECHNOLOGIES LTD.
2014 SHARE INCENTIVE PLAN
Exhibit 4.4
Unless otherwise defined, terms used herein shall have the meaning ascribed to them in Section 2 hereof.
1.
PURPOSE; TYPES OF AWARDS; CONSTRUCTION.
1.1. Purpose. The purpose of this 2014 Share Incentive Plan (as amended, this “Plan”) is to afford an
incentive to Service Providers of Sol-Gel Technologies Ltd., an Israeli company (together with any successor corporation
thereto, the “Company”), or any Affiliate of the Company, which now exists or hereafter is organized or acquired by the
Company or its Affiliates, to continue as Service Providers, to increase their efforts on behalf of the Company or its
Affiliates and to promote the success of the Company's business, by providing such Service Providers with opportunities to
acquire a proprietary interest in the Company by the issuance of Shares or restricted Shares (“Restricted Shares”) of the
Company, and by the grant of options to purchase Shares (“Options”), Restricted Share Units (“RSUs”) and other Share-
based Awards pursuant to Sections 11 through 13 of this Plan.
1.2. Types of Awards. This Plan is intended to enable the Company to issue Awards under various tax
regimes, including:
(i) pursuant and subject to the provisions of Section 102 of the Ordinance (or the
corresponding provision of any subsequently enacted statute, as amended from time to time), and all
regulations and interpretations adopted by any competent authority, including the Israeli Income Tax
Authority (the “ITA”), including the Income Tax Rules (Tax Benefits in Stock Issuance to Employees)
5763-2003 or such other rules so adopted from time to time (the “Rules”) (such Awards that are intended
to be (as set forth in the Award Agreement) and which qualify as such under Section 102 of the Ordinance
and the Rules, “102 Awards”);
(ii) pursuant to Section 3(9) of the Ordinance or the corresponding provision of any
subsequently enacted statute, as amended from time to time (such Awards, “3(9) Awards”);
(iii) Incentive Stock Options within the meaning of Section 422 of the Code, or the
corresponding provision of any subsequently enacted United States federal tax statute, as amended from
time to time, to be granted to Employees who are deemed to be residents of the United States, for purposes
of taxation, or are otherwise subject to U.S. Federal income tax (such Awards that are intended to be (as set
forth in the Award Agreement) and which qualify as an incentive stock option within the meaning of
Section 422(b) of the Code, “Incentive Stock Options”); and
(iv) Awards not intended to be (as set forth in the Award Agreement) or which do not qualify
as an Incentive Stock Option to be granted to Service Providers who are deemed to be residents of the
United States for purposes of taxation, or are otherwise subject to U.S. Federal income tax (“Nonqualified
Stock Options”).
In addition to the issuance of Awards under the relevant tax regimes in the United States of America and the State of
Israel, and without derogating from the generality of Section 25, this Plan contemplates issuances to Grantees in
other jurisdictions or under other tax regimes with respect to which the Committee is empowered, but is not required,
to make the requisite adjustments in this Plan and set forth the relevant conditions in an appendix to this Plan or in
the Company’s agreement with the Grantee in order to comply with the requirements of such other tax regimes.
1.3. Company Status. This Plan contemplates the issuance of Awards by the Company, both as a private and
public company.
1.4. Construction. To the extent any provision herein conflicts with the conditions of any relevant tax law, rule
or regulation which are relied upon for tax relief in respect of a particular Award to a Grantee, the Committee is
empowered, but is not required, hereunder to determine that the provisions of such law, rule or regulation shall prevail over
those of this Plan and to interpret and enforce such prevailing provisions.
2.
DEFINITIONS.
2.1. Terms Generally. Except when otherwise indicated by the context, (i) the singular shall include the plural
and the plural shall include the singular; (ii) any pronoun shall include the corresponding masculine, feminine and neuter
forms; (iii) any definition of or reference to any agreement, instrument or other document herein shall be construed as
referring to such agreement, instrument or other document as from time to time amended, restated, supplemented or
otherwise modified (subject to any restrictions on such amendments, restatements, supplements or modifications set forth
therein or herein), (iv) references to any law, constitution, statute, treaty, regulation, rule or ordinance, including any section
or other part thereof shall refer to it as amended from time to time and shall include any successor thereof, (v) reference to a
“company” or “entity” shall include a, partnership, corporation, limited liability company, association, trust, unincorporated
organization, or a government or agency or political subdivision thereof, and reference to a “person” shall mean any of the
foregoing or an individual, (vi) the words “herein”, “hereof” and “hereunder”, and words of similar import, shall be
construed to refer to this Plan in its entirety, and not to any particular provision hereof, (vii) all references herein to Sections
shall be construed to refer to Sections to this Plan; (viii) the words “include”, “includes” and “including” shall be deemed to
be followed by the phrase “without limitation”; and (ix) use of the term “or” is not intended to be exclusive.
2.2. Defined Terms. The following terms shall have the meanings ascribed to them in this Section 2:
2.3. “Affiliate” shall mean, (i) with respect to any person, any other person that, directly or indirectly through
one or more intermediaries, controls, is controlled by, or is under common control with, such person (with the term
“control” or “controlled by” within the meaning of Rule 405 of Regulation C under the Securities Act), including,
without limitation, any Parent or Subsidiary, or (ii) for the purpose of 102 Awards, “Affiliate” shall only mean an
“employing company” within the meaning and subject to the conditions of Section 102(a) of the Ordinance.
2.4. “Applicable Law” shall mean any applicable law, rule, regulation, statute, pronouncement, policy,
interpretation, judgment, order or decree of any federal, provincial, state or local governmental, regulatory or
adjudicative authority or agency, of any jurisdiction, and the rules and regulations of any stock exchange, over-the-
counter market or trading system on which the Company's shares are then traded or listed.
2.5. “Award” shall mean any Option, Restricted Share, RSUs or any other Share-based award granted under
this Plan.
2.6. “Board” shall mean the Board of Directors of the Company.
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2.7. “Change of Control” shall mean for purposes of this Plan, an event described in paragraphs (i), (ii), (iii)
or (iv) below:
(i) A transaction or series of transactions (other than an offering of Shares to the general public through
a registration statement filed with the Securities and Exchange Commission) resulting in the acquisition by
any Person of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of more than 30% of the total combined voting power of the then outstanding Shares; provided, however, that
for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control:
(1) Any acquisition directly from the Company;
(2) Any acquisition by the Company or by any affiliate (as defined in Rule 405 under the
Securities Act) of the Company;
(3) Any acquisition by any employee benefit plan (or related trust) sponsored or maintained by
the Company or any corporation controlled by the Company; or
(4) Any acquisition by any corporation pursuant to a transaction which complies with clauses (1)
and (2) of subsection (ii) below.
(ii) The consummation of a reorganization, merger or consolidation involving the Company or its
Subsidiaries, or a sale or other disposition of all or substantially all of the assets of the Company and its
Subsidiaries on a consolidated basis (a “Business Combination”), in each case, unless, following such
Business Combination:
(1) All or substantially all of the individuals and entities who were the beneficial owners,
respectively, of the outstanding Shares immediately prior to such Business Combination beneficially
own, directly or indirectly, more than 50% of the then outstanding voting securities entitled to vote
generally in the election of directors of the Company or its successor (including, without limitation, an
entity which as a result of such transaction owns the Company or all or substantially all of the assets
of the Company either directly or through one or more Subsidiaries); and
(2) No Person (excluding any corporation resulting from such Business Combination or any
employee benefit plan (or related trust) of the Company or its successor resulting from such Business
Combination) beneficially owns, directly or indirectly, more than 30% of the then outstanding voting
securities of the Company or its successor (including, without limitation, an entity which as a result of
such transaction owns the Company or all or substantially all of the assets of the Company either
directly or through one or more Subsidiaries) except to the extent that such ownership existed prior to
the Business Combination.
(iii) The Incumbent Directors cease for any reason to constitute a majority of the Board.
(iv) The date which is 10 business days prior to the completion of a liquidation or dissolution of the
Company.
(v) For purposes of this definition of Change in Control only:
(1) “Exchange Act” means the Securities Exchange Act of 1934, as amended.
(2) “Incumbent Directors” means, for any period of 12 consecutive months, individuals who,
at the beginning of such period, constitute the Board together with any new director(s) (other than a
director designated by a Person who shall have entered into an agreement with the Company to effect
a transaction described in paragraphs (i) or (ii) above) whose election or nomination for election to the
Board was approved by a vote of at least a majority (either by a specific vote or by approval of the
proxy statement of the Company in which such Person is named as a nominee for director without
objection to such nomination) of the directors then still in office who either were directors at the
beginning of the 12-month period or whose election or nomination for election was previously so
approved. No individual initially elected or nominated as a director of the Company as a result of an
actual or threatened election contest with respect to directors or as a result of any other actual or
threatened solicitation of proxies by or on behalf of any Person other than the Board shall be an
Incumbent Director.
3
“Person” means an individual, entity or group (within the meaning of Section I3(d)(3) or
(3)
14(d)(2) of the Exchange Act).
(4) “Shares” means the Company's Ordinary Shares, or any shares substituted for such
Ordinary Shares, which the Company is currently authorized to issue or may in the future be
authorized to issue.
(5) “Subsidiary” means (i) any corporation in an unbroken chain of corporations beginning with
the Company, if each of the corporations other than the last corporation in the unbroken chain owns
stock possessing a majority of the total combined voting power of all classes of stock in one of the
other corporations in the chain, (ii) any limited partnership, if the Company or any corporation
described in item (i)(4) above owns a majority of the general partnership interest and a majority of the
limited partnership interests entitled to vote on the removal and replacement of the general partner,
and (iii) any partnership or limited liability company, if the partners or members thereof are composed
only of the Company, any corporation listed in item (i) above or any limited partnership listed in item
(ii) above. “Subsidiaries” means more than one of any such corporations, limited partnerships,
partnerships or limited liability companies.
2.8. “Code” shall mean the United States Internal Revenue Code of 1986, and any applicable regulations
promulgated thereunder, all as amended.
2.9. “Committee” shall mean a committee established or appointed by the Board to administer this Plan,
subject to Section 3.1.
2.10. “Companies Law” shall mean the Israel Companies Law, 5759-1999, and the regulations promulgated
thereunder, all as amended from time to time.
2.11. “Controlling Shareholder” shall have the meaning set forth in Section 32(9) of the Ordinance.
2.12. “Disability” shall mean (i) the inability of a Grantee to engage in any substantial gainful activity or to
perform the major duties of the Grantee’s position with the Company or its Affiliates by reason of any medically
determinable physical or mental impairment which has lasted or can be expected to last for a continuous period of
not less than 12 months (or such other period as determined by the Committee), as determined by a qualified doctor
acceptable to the Company, (ii) if applicable, a “permanent and total disability” as defined in Section 22(e)(3) of the
Code or Section 409A(a)(2)(c)(i) of the Code, as amended from time to time, or (iii) as defined in a policy of the
Company that the Committee deems applicable to this Plan, or that makes reference to this Plan, for purposes of this
definition.
2.13. “Employee” shall mean any person treated as an employee (including an officer or a director who is also
treated as an employee) in the records of the Company or any of its Affiliates (and in the case of 102 Awards,
subject to Section 9.3 or in the case of Incentive Stock Options, who is an employee for purposes of Section 422 of
the Code); provided, however, that neither service as a director nor payment of a director’s fee shall be sufficient to
constitute employment for purposes of this Plan. The Company shall determine in good faith and in the exercise of
its discretion whether an individual has become or has ceased to be an Employee and the effective date of such
individual’s employment or termination of employment, as the case may be. For purposes of a person’s rights, if
any, under this Plan as of the time of the Company’s determination, all such determinations by the Company shall
be final, binding and conclusive, notwithstanding that the Company or any court of law or governmental agency
subsequently makes a contrary determination.
4
2.14. “employment”, “employed” and words of similar import shall be deemed to refer to the employment of
Employees or to the services of any other Service Provider, as the case may be.
2.15. “exercise” “exercised” and words of similar import, when referring to an Award that does not require
exercise or that is settled upon vesting (such as may be the case with RSUs or Restricted Shares, if so determined in
their terms), shall be deemed to refer to the vesting of such an Award (regardless of whether or not the wording
included reference to vesting of such an Awards explicitly).
2.16. “Exercise Period” shall mean the period, commencing on the date of grant of an Award, during which
an Award shall be exercisable, subject to any vesting provisions thereof (including any acceleration thereof, if any)
and subject to the termination provisions hereof.
2.17. “Exercise Price” shall mean the exercise price for each Share covered by an Option or the purchase
price for each Share covered by any other Award.
2.18. “Fair Market Value” shall mean, as of any date, the value of a Share or other property as determined
by the Board, in its discretion, subject to the following: (i) if, on such date, the Shares are listed on any securities
exchange, the average closing sales price per Share on which the Shares are principally traded over the thirty (30)
day calendar period preceding the subject date (utilizing all trading days during such 30 calendar day period), as
reported in The Wall Street Journal or such other source as the Company deems reliable; (ii) if, on such date, the
Shares are then quoted in an over-the-counter market, the average of the closing bid and asked prices for the Shares
in that market during the thirty (30) day calendar period preceding the subject date (utilizing all trading days during
such 30 calendar day period), as reported in The Wall Street Journal or such other source as the Company deems
reliable; (iii) if, on such date, the Shares are not then listed on a securities exchange or quoted in an over-the-counter
market, or in case of any other property, such value as the Committee, in its sole discretion, shall determine, with
full authority to determine the method for making such determination and which determination shall be conclusive
and binding on all parties, and shall be made after such consultations with outside legal, accounting and other
experts as the Committee may deem advisable; provided, however, that, if applicable, the Fair Market Value of the
Shares shall be determined in a manner that satisfies the applicable requirements of and subject to Section 409A of
the Code, and with respect to Incentive Stock Options, in a manner that satisfies the applicable requirements of and
subject to Section 422 of the Code, subject to Section 422(c)(7) of the Code. The Committee shall maintain a
written record of its method of determining such value. If the Shares are listed or quoted on more than one
established stock exchange or over-the-counter market, the Committee shall determine the principal such exchange
or market and utilize the price of the Shares on that exchange or market (determined as per the method described in
clauses (i) or (ii) above, as applicable) for the purpose of determining Fair Market Value.
2.19. “Grantee” shall mean a person who has been granted an Award(s) under this Plan.
2.20. “Ordinance” shall mean the Israeli Income Tax Ordinance (New Version) 1961, and the regulations and
rules (including the Rules) promulgated thereunder, all as amended from time to time.
2.21. “Parent” shall mean any company (other than the Company), which now exists or is hereafter
organized, (i) in an unbroken chain of companies ending with the Company if, at the time of granting an Award,
each of the companies (other than the Company) owns stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other companies in such chain, or (ii) if applicable and
for purposes of Incentive Stock Options, that is a “parent corporation” of the Company, as defined in Section 424(e)
of the Code.
5
2.22. “Retirement” shall mean a Grantee's retirement pursuant to Applicable Law or in accordance with the
terms of any tax-qualified retirement plan maintained by the Company or any of its Affiliates in which the Grantee
participates or is subject to.
2.23. “Securities Act” shall mean the U.S. Securities Act of 1933, and the rules and regulations promulgated
thereunder, all as amended from time to time.
2.24. “Service Provider” shall mean an Employee, director, officer, consultant, advisor and any other person
or entity who provides services to the Company or any Parent, Subsidiary or Affiliate thereof. Service Providers
shall include prospective Service Providers to whom Awards are granted in connection with written offers of an
employment or other service relationship with the Company or any Parent, Subsidiary or any Affiliates thereof,
provided however that such employment or service shall have actually commenced.
2.25. “Shares” shall mean Ordinary Shares, par value NIS 0.10 of the Company (as adjusted for stock split,
reverse stock split, bonus shares, combination or other recapitalization events), or shares of such other class of
shares of the Company as shall be designated by the Board in respect of the relevant Award(s). “Shares” include
any securities or property issued or distributed with respect thereto.
2.26. “Subsidiary” shall mean any corporation (other than the Company), which now exists or is hereafter
organized or acquired by the Company, (i) in an unbroken chain of corporations beginning with the Company if, at
the time of granting an Award, each of the corporations other than the last corporations in the unbroken chain owns
stock possessing more than fifty percent (50%) of the total combined voting power of all classes of stock in one of
the other companies in such chain, or (ii) if applicable and for purposes of Incentive Stock Options, that is a
“subsidiary corporation” of the Company, as defined in Section 424(f) of the Code.
2.27. “Ten Percent Shareholder” shall mean a Grantee who, at the time an Award is granted to the Grantee,
owns shares possessing more than ten percent (10%) of the total combined voting power of all classes of shares of
the Company or any Parent or Subsidiary, within the meaning of Section 422(b)(6) of the Code.
2.28. “Trustee” shall mean the trustee appointed by the Committee to hold the Awards (and, in relation with
102 Awards, approved by the ITA), if so appointed.
6
2.29. Other Defined Terms. The following terms shall have the meanings ascribed to them in the Sections set
forth below:
Term
102 Awards
102 Capital Gains Track Awards
102 Non-Trustee Awards
102 Ordinary Income Track Awards
102 Trustee Awards
3(9) Awards
Award Agreements
Cause
Company
Effective Date
Election
Eligible 102 Grantees
Incentive Stock Options
ITA
Market Stand-Off
Market Stand-Off Period
Nonqualified Stock Options
Plan
Recapitalization
Required Holding Period
Restricted Period
Restricted Share Agreement
Restricted Share Unit Agreement
Restricted Shares
RSUs
Rules
Securities
Successor Corporation
Withholding Obligations
Section
1.2(i)
9.1
9.2
9.1
9.1
1.2(ii)
6
6.6.4.4
1.1
27.1
9.2
9.3.1
1.2(iii)
1.1(i)
17.1
17.1
1.2(iv)
1.1
14.1
9.5
11.2
11
12
1.1
1.1
1.1(i)
17.1
14.2.1
18.5
7
3.
ADMINISTRATION.
3.1. To the extent permitted under Applicable Law, the Articles of Association and any other governing
document of the Company, this Plan shall be administered by the Committee. In the event that the Board does not appoint
or establish a committee to administer this Plan, this Plan shall be administered by the Board. In the event that an action
necessary for the administration of this Plan is required under Applicable Law to be taken by the Board without the right of
delegation, or if such action or power was explicitly reserved by the Board in appointing, establishing and empowering the
Committee, then such action shall be so taken by the Board. In any such event, all references herein to the Committee shall
be construed as references to the Board. Even if such a Committee was appointed or established, the Board may take any
actions that are stated to be vested in the Committee, and shall not be restricted or limited from exercising all rights, powers
and authorities under this Plan or Applicable Law.
3.2. The Board shall appoint the members of the Committee, may from time to time remove members from, or
add members to, the Committee, and shall fill vacancies in the Committee, however caused, provided that the composition
of the Committee shall at all times be in compliance with any mandatory requirements of Applicable Law, the Articles of
Association and any other governing document of the Company. The Committee may select one of its members as its
Chairman and shall hold its meetings at such times and places as it shall determine. The Committee may appoint a
Secretary, who shall keep records of its meetings, and shall make such rules and regulations for the conduct of its business
as it shall deem advisable and subject to mandatory requirements of Applicable Law.
3.3. Subject to the terms and conditions of this Plan, any mandatory provisions of Applicable Law and any
provisions of any Company policy required under mandatory provisions of Applicable Law, and in addition to the
Committee's powers contained elsewhere in this Plan, the Committee shall have full authority, in its discretion, from time to
time and at any time, to determine any of the following, or to recommend to the Board any of the following if it is not
authorized to take such action according to Applicable Law:
(i) eligible Grantees,
(ii) grants of Awards and setting the terms and provisions of Award Agreements (which need
not be identical) and any other agreements or instruments under which Awards are made, including, but not
limited to, the number of Shares underlying each Award and the class of Shares underlying each Award (if
more than one class was designated by the Board),
(iii) the time or times at which Awards shall be granted,
(iv) the terms, conditions and restrictions applicable to each Award (which need not be
identical) and any Shares acquired upon the exercise or (if applicable) vesting thereof, including, without
limitation, (1) designating Awards under Section 1.2; (2) the vesting schedule, the acceleration thereof and
terms and conditions upon which Awards may be exercised or become vested, (3) the Exercise Price, (4)
the method of payment for Shares purchased upon the exercise or (if applicable) vesting of the Awards, (5)
the method for satisfaction of any tax withholding obligation arising in connection with the Awards or such
Shares, including by the withholding or delivery of Shares, (6) the time of the expiration of the Awards, (7)
the effect of the Grantee’s termination of employment with the Company or any of its Affiliates, and (8) all
other terms, conditions and restrictions applicable to the Award or the Shares not inconsistent with the
terms of this Plan,
(v) to accelerate, continue, extend or defer the exercisability of any Award or the vesting
thereof, including with respect to the period following a Grantee’s termination of employment or other
service,
(vi) the interpretation of this Plan and any Award Agreement and the meaning, interpretation
and applicability of terms referred to in Applicable Laws,
(vii) policies, guidelines, rules and regulations relating to and for carrying out this Plan, and
any amendment, supplement or rescission thereof, as it may deem appropriate,
8
(viii) to adopt supplements to, or alternative versions of, this Plan, including, without
limitation, as it deems necessary or desirable to comply with the laws of, or to accommodate the tax regime
or custom of, foreign jurisdictions whose citizens or residents may be granted Awards,
(ix) the Fair Market Value of the Shares or other property,
(x) the tax track (capital gains, ordinary income track or any other track available under the
Section 102 of the Ordinance) for the purpose of 102 Awards,
(xi) the authorization and approval of conversion, substitution, cancellation or suspension
under and in accordance with this Plan of any or all Awards or Shares,
(xii) the amendment, modification, waiver or supplement of the terms of each outstanding
Award (with the consent of the applicable Grantee, if such amendments refers to the increase of the
Exercise Price of Awards or reduction of the number of Shared underlying an Award (but, in each case,
other than as a result of an adjustment or exercise of rights in accordance with Section 14)) unless
otherwise provided under the terms of this Plan,
(xiii) without limiting the generality of the foregoing, and subject to the provisions of
Applicable Law, to grant to a Grantee, who is the holder of an outstanding Award, in exchange for the
cancellation of such Award, a new Award having an Exercise Price lower than that provided in the Award
so canceled and containing such other terms and conditions as the Committee may prescribe in accordance
with the provisions of this Plan or to set a new Exercise Price for the same Award lower than that
previously provided in the Award,
(xiv) to correct any defect, supply any omission or reconcile any inconsistency in this Plan or
any Award Agreement and all other determinations and take such other actions with respect to this Plan or
any Award as it may deem advisable to the extent not inconsistent with the provisions of this Plan or
Applicable Law, and
(xv) any other matter which is necessary or desirable for, or incidental to, the administration
of this Plan and any Award thereunder.
3.4. The authority granted hereunder includes the authority to modify Awards to eligible individuals who are
foreign nationals or are individuals who are employed outside Israel to recognize differences in local law, tax policy or
custom, in order to effectuate the purposes of this Plan but without amending this Plan.
3.5. The Board and the Committee shall be free at all times to make such determinations and take such actions
as they deem fit. The Board and the Committee need not take the same action or determination with respect to all Awards,
with respect to certain types of Awards, with respect to all Service Providers or any certain type of Service Providers and
actions and determinations may differ as among the Grantees, and as between the Grantees and any other holders of
securities of the Company.
3.6. All decisions, determinations, and interpretations of the Committee, the Board and the Company under this
Plan shall be final and binding on all Grantees (whether before or after the issuance of Shares pursuant to Awards), unless
otherwise determined by the Committee, the Board or the Company, respectively. The Committee shall have the authority
(but not the obligation) to determine the interpretation and applicability of Applicable Laws to any Grantee or any Awards.
No member of the Committee or the Board shall be liable to any Grantee for any action taken or determination made in
good faith with respect to this Plan or any Award granted hereunder.
3.7. Any officer or authorized signatory of the Company shall have the authority to act on behalf of the
Company with respect to any matter, right, obligation, determination or election which is the responsibility of or which is
allocated to the Company herein, provided such person has apparent authority with respect to such matter, right, obligation,
determination or election. Such person or authorized signatory shall not be liable to any Grantee for any action taken or
determination made in good faith with respect to this Plan or any Award granted hereunder.
9
4.
ELIGIBILITY.
4.1. Awards may be granted to Service Providers of the Company or any Affiliate thereof, taking into account,
at the Committee’s discretion and without an obligation to do so, the qualification under each tax regime pursuant to which
such Awards are granted, subject to the limitation on the granting of Incentive Stock Options set forth in Section 8.1. A
person who has been granted an Award hereunder may be granted additional Awards, if the Committee shall so determine,
subject to the limitations herein. However, eligibility in accordance with this Section 4 shall not entitle any person to be
granted an Award, or, having been granted an Award, to be granted an additional Award.
4.2. Awards may differ in number of Shares covered thereby, the terms and conditions applying to them or on
the Grantees or in any other respect (including, that there should not be any expectation (and it is hereby disclaimed) that a
certain treatment, interpretation or position granted to one shall be applied to the other, regardless of whether or not the
facts or circumstances are the same or similar).
5.
SHARES.
5.1. The maximum aggregate number of Shares that may be issued pursuant to Awards under this Plan (the
“Pool”) shall be 2,262,230 authorized but unissued Shares (except and as adjusted pursuant to Section 14.1 of this Plan).
However, except as adjusted pursuant to Section 14.1, in no event shall more than such number of Shares included in the
Pool, as adjusted in accordance with Section 5.2, be available for issuance pursuant to the exercise of Incentive Stock
Options.
5.2. Any Shares (a) underlying an Award granted hereunder that has expired, or was cancelled, terminated,
forfeited or, repurchased or settled in cash in lieu of issuance of Shares, for any reason, without having been exercised; (b)
if permitted by the Company, tendered to pay the Exercise Price of an Award, or withholding tax obligations with respect to
an Award; or (c) if permitted by the Company, subject to an Award that are not delivered to a Grantee because such Shares
are withheld to pay the Exercise Price of such Award, or withholding tax obligations with respect to such Award; shall
automatically, and without any further action on the part of the Company or any Grantee, again be available for grant of
Awards and Shares issued upon exercise of (if applicable) vesting thereof for the purposes of this Plan (unless this Plan
shall have been terminated) or unless the Board determines otherwise. Such Shares may, in whole or in part, be authorized
but unissued Shares, treasury shares (dormant shares) or Shares otherwise that shall have been or may be repurchased by
the Company (to the extent permitted pursuant to the Companies Law).
5.3. Any Shares under the Pool that are not subject to outstanding or exercised Awards at the termination of this
Plan shall cease to be reserved for the purpose of this Plan.
6.
TERMS AND CONDITIONS OF AWARDS.
Each Award granted pursuant to this Plan shall be evidenced by a written or electronic agreement between the
Company and the Grantee or a written or electronic notice delivered by the Company (the “Award Agreement”), in
substantially such form or forms and containing such terms and conditions, as the Committee shall from time to time
approve. The Award Agreement shall comply with and be subject to the following general terms and conditions and
the provisions of this Plan (except for any provisions applying to Awards under different tax regimes), unless
otherwise specifically provided in such Award Agreement, or the terms referred to in other Sections of this Plan
applying to Awards under such applicable tax regimes, or terms prescribed by Applicable Law. Award Agreements
need not be in the same form and may differ in the terms and conditions included therein.
6.1. Number of Shares. Each Award Agreement shall state the number of Shares covered by the Award.
6.2. Type of Award. Each Award Agreement may state the type of Award granted thereunder, provided that the
tax treatment of any Award, whether or not stated in the Award Agreement, shall be as determined in accordance with
Applicable Laws.
6.3. Exercise Price. Each Award Agreement shall state the Exercise Price, if applicable. Unless otherwise set
forth in this Plan, an Exercise Price of an Award of less than the par value of the Shares shall comply with Section 304 of
the Companies Law, 1999, as amended. Subject to Sections 3 7.2 and 8.2 and to the foregoing, the Committee may reduce
the Exercise Price of any outstanding Award, on terms and subject to such conditions as it deems advisable. The Exercise
Price shall also be subject to adjustment as provided in Section 14 hereof.
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6.4. Manner of Exercise. An Award may be exercised, as to any or all Shares as to which the Award has
become exercisable, by written notice delivered in person or by mail (or such other methods of delivery prescribed by the
Company) to the Chief Financial Officer of the Company or to such other person as determined by the Committee, or in
any other manner as the Committee shall prescribe from time to time, specifying the number of Shares with respect to
which the Award is being exercised (which may be equal to or lower than the aggregate number of Shares that have become
exercisable at such time, subject to the last sentence of this Section), accompanied by payment of the aggregate Exercise
Price for such Shares in the manner specified in the following sentence. The Exercise Price shall be paid in full with
respect to each Share, at the time of exercise, either in (i) cash, (ii) if the Company’s shares are listed for trading on any
securities exchange or over-the-counter market, and if the Committee so determines, all or part of the Exercise Price and
any withholding taxes may be paid by the delivery (on a form prescribed by the Company) of an irrevocable direction to a
securities broker approved by the Company to sell Shares and to deliver all or part of the sales proceeds to the Company or
the Trustee, (iii) if the Company’s shares are listed for trading on any securities exchange or over-the-counter market, and if
the Committee so determines, all or part of the Exercise Price and any withholding taxes may be paid by the delivery (on a
form prescribed by the Company) of an irrevocable direction to pledge Shares to a securities broker or lender approved by
the Company, as security for a loan, and to deliver all or part of the loan proceeds to the Company or the Trustee, or (iv) in
such other manner as the Committee shall determine, which may include procedures for cashless exercise. For as long as
the Company’s shares are not listed for trading on any securities exchange or over-the-counter market and unless the
Committee determines otherwise, a Grantee may not exercise Awards unless the aggregate Exercise Price thereof is equal
to or in excess of the lower of: (a) the aggregate Exercise Price for all Shares as to which the Award has become exercisable
at such time; or (b) US$2,000.
6.5. Term and Vesting of Awards.
6.5.1. Each Award Agreement shall provide the vesting schedule for the Award as determined by the
Committee. The Committee shall have the authority to determine the vesting schedule and accelerate the vesting of
any outstanding Award at such time and under such circumstances as it, in its sole discretion, deems appropriate.
Unless otherwise resolved by the Committee and stated in the Award Agreement, and subject to Sections 6.6 and 6.7
hereof, Awards shall vest and become exercisable under the following schedule: twenty-five percent (25%) of the
Shares covered by the Award, on the first anniversary of the vesting commencement date determine by the Committee
(and in the absence of such determination, of date on which such Award was granted), and six and one-quarter percent
(6.25%) of the Shares covered by the Award at the end of each subsequent three-month period thereafter over the
course of the following three (3) years; provided that the Grantee remains continuously as a Service Provider of the
Company or its Affiliates throughout such vesting dates.
6.5.2. The Award Agreement may contain performance goals and measurements (which, in case of 102
Awards, shall, if then required, be subject to obtaining a specific tax ruling or determination from the ITA), and the
provisions with respect to any Award need not be the same as the provisions with respect to any other Award. Such
performance goals may include, but are not limited to, sales, earnings before interest and taxes, return on investment,
earnings per share, any combination of the foregoing or rate of growth of any of the foregoing, as determined by the
Committee. The Committee may adjust performance goals pursuant to Awards previously granted to take into
account changes in law and accounting and tax rules and to make such adjustments as the Committee deems
necessary or appropriate to reflect the inclusion or the exclusion of the impact of extraordinary or unusual items,
events or circumstances.
6.5.3. The Exercise Period of an Award will be ten (10) years from the date of grant of the Award,
unless otherwise determined by the Committee and stated in the Award Agreement, but subject to the vesting
provisions described above and the early termination provisions set forth in Sections 6.6 and 6.7 hereof. At the
expiration of the Exercise Period, any Award, or any part thereof, that has not been exercised within the term of the
Award and the Shares covered thereby not paid for in accordance with this Plan and the Award Agreement shall
terminate and become null and void, and all interests and rights of the Grantee in and to the same shall expire.
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6.6. Termination.
6.6.1. Unless otherwise determined by the Committee, and subject to Section 6.7 hereof, an Award
may not be exercised unless the Grantee is then a Service Provider of the Company or an Affiliate thereof or, in the
case of an Incentive Stock Option, a company or a parent or subsidiary company of such company issuing or
assuming the Option in a transaction to which Section 424(a) of the Code applies, and unless the Grantee has
remained continuously so employed since the date of grant of the Award and throughout the vesting dates.
6.6.2. In the event that the employment or service of a Grantee shall terminate (other than by reason of
death, Disability or Retirement), all Awards of such Grantee that are unvested at the time of such termination shall
terminate on the date of such termination, and all Awards of such Grantee that are vested and exercisable at the time
of such termination may be exercised within up to three (3) months after the date of such termination (or such
different period as the Committee shall prescribe), but in any event no later than the date of expiration of the Award’s
term as set forth in the Award Agreement or pursuant to this Plan; provided, however, that if the Company (or the
Subsidiary or Affiliate, when applicable) shall terminate the Grantee’s employment or service for Cause (as defined
below) or if at any time during the Exercise Period (whether prior to and after termination of employment or service,
and whether or not the Grantee’s employment or service is terminated by either party as a result thereof), facts or
circumstances arise or are discovered with respect to the Grantee that would have constituted Cause, all Awards
theretofore granted to such Grantee (whether vested or not) shall, to the extent not theretofore exercised, terminate on
the date of such termination (or on such subsequent date on which such facts or circumstances arise or are discovered,
as the case may be) unless otherwise determined by the Committee; and any Shares issued upon exercise or (if
applicable) vesting of Awards (including other Shares or securities issued or distributed with respect thereto), whether
held by the Grantee or by the Trustee for the Grantee’s benefit, shall be deemed to be irrevocably offered for sale to
the Company, any of its Affiliates or any person designated by the Company to purchase, at the Company’s election
and subject to Applicable Law, either for no consideration, for the par value of such Shares or against payment of the
Exercise Price previously received by the Company for such Shares upon their issuance, as the Committee deems fit,
upon written notice to the Grantee at any time after the Grantee’s termination of employment or service. Such Shares
or other securities shall be sold and transferred within 30 days from the date of the Company’s notice of its election to
exercise its right. If the Grantee fails to transfer such Shares or other securities to the Company, the Company, at the
decision of the Committee, shall be entitled to forfeit or repurchase such Shares and to authorize any person to
execute on behalf of the Grantee any document necessary to effect such transfer, whether or not the share certificates
are surrendered. The Company shall have the right and authority to affect the above either by: (i) repurchasing all of
such Shares or other securities held by the Grantee or by the Trustee for the benefit of the Grantee, or designate any
other person who shall have the right and authority to purchase all of Such Shares or other securities, for the Exercise
Price paid for such Shares, the par value of such Shares or for no payment or consideration whatsoever, as the
Committee deems fit; (ii) forfeiting all such Shares or other securities; (iii) redeeming all such Shares or other
securities, for the Exercise Price paid for such Shares, the par value of such Shares or for no payment or consideration
whatsoever, as the Committee deems fit; (iv) taking action in order to have such Shares or other securities converted
into deferred shares entitling their holder only to their par value upon liquidation of the Company; or (v) taking any
other action which may be required in order to achieve similar results; all as shall be determined by the Committee, at
its sole and absolute discretion, and the Grantee is deemed to irrevocably empower the Company or any person which
may be designated by it to take any action by, in the name of or on behalf of the Grantee to comply with and give
effect to such actions (including, voting such shares, filling in, signing and delivering share transfer deeds, etc.).
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6.6.3. Without derogating from the above, the Committee may determine, in its discretion, that any
Grantee whose employment with or service to the Company or an Affiliate thereof (or, in the case of an Incentive
Stock Option, a company or a parent or subsidiary company of such company issuing or assuming the Awards in a
transaction to which Section 424(a) of the Code), has or shall terminate for any reason, shall be deemed to have
irrevocably offered to the Company and any of its Affiliates (or any other person designated by the Company) to
purchase all or part of the Shares issued pursuant to the exercise or (if applicable) the vesting of an Award (including
other Shares or securities issued or distributed with respect thereto), whether held by the Grantee or by the Trustee for
the Grantee’s benefit, in consideration for the Fair Market Value of such Shares or other consideration as shall be
determined by the Committee, and subject to Applicable Law. In the event that such Shares are not purchased as set
forth above, any subsequent sale or disposition thereof shall be subject to provisions of this Plan and the Company’s
Article of Association.
6.6.4. Notwithstanding anything to the contrary, the Committee, in its absolute discretion, may, on such
terms and conditions as it may determine appropriate, extend the periods for which Awards held by any Grantee may
continue to vest and be exercisable; it being clarified that such Awards may lose their entitlement to certain tax
benefits under Applicable Law as a result of the modification of such Awards and/or in the event that the Award is
exercised beyond the later of: (i) three (3) months after the date of termination of the employment or service
relationship; or (ii) the applicable period under Section 6.7 below with respect to a termination of the employment or
service relationship because of the death, Disability or Retirement of Grantee.
6.6.5. For purposes of this Plan:
6.6.5.1. a termination of employment or service of a Grantee shall not be deemed to occur (except
to the extent required by the Code with respect to the Incentive Stock Option status of an Option) in case of (i) a
transition or transfer of a Grantee among the Company and its Affiliates, (ii) a change in the capacity in which the
Grantee is employed or renders service to the Company or any of its Affiliates or a change in the identity of the
employing or engagement entity among the Company and its Affiliates, provided, in case of (i) and (ii) above, that the
Grantee has remained continuously employed by and/or in the service of the Company and its Affiliates since the date
of grant of the Award and throughout the vesting period; or (iii) if the Grantee takes any unpaid leave as set forth in
Section 6.8(i) below.
6.6.5.2. An entity or an Affiliate thereof assuming an Award or issuing in substitution thereof in a
transaction to which Section 424(a) of the Code applies or in the event of a Change of Control in accordance with
Section 14 shall be deemed as an Affiliate of the Company for purposes of this Section 6.6, unless the Committee
determines otherwise.
6.6.5.3. In the case of a Grantee whose principal employer or service recipient is a Subsidiary or
Affiliate, the Grantee’s employment shall also be deemed terminated for purposes of this Section 6.6 as of the date on
which such principal employer or service recipient ceases to be a Subsidiary or Affiliate.
13
6.6.5.4. The term “Cause” shall mean (irrespective of, and in addition to, any definition included
in any other agreement or instrument applicable to the Grantee, and unless otherwise determined by the Committee)
any of the following: (i) any theft, fraud, embezzlement, dishonesty, willful misconduct, breach of fiduciary duty for
personal profit, falsification of any documents or records of the Company or any of its Affiliates, felony or similar act
by the Grantee (whether or not related to the Grantee’s relationship with the Company); (ii) an act of moral turpitude
by the Grantee, or any act that causes significant injury to, or is otherwise adversely affecting, the reputation,
business, assets, operations or business relationship of the Company (or a Subsidiary or Affiliate, when applicable);
(iii) any breach by the Grantee of any material agreement with or of any material duty of the Grantee to the Company
or any Subsidiary or Affiliate thereof (including breach of confidentiality, non-disclosure, non-use non-competition or
non-solicitation covenants towards the Company or any of its Affiliates) or failure to abide by code of conduct or
other policies (including, without limitation, policies relating to confidentiality and reasonable workplace conduct); or
(iv) any act which constitutes a breach of a Grantee’s fiduciary duty towards the Company or an Affiliate or
Subsidiary, including disclosure of confidential or proprietary information thereof or acceptance or solicitation to
receive unauthorized or undisclosed benefits, irrespective of their nature, or funds, or promises to receive either, from
individuals, consultants or corporate entities that the Company or a Subsidiary does business with; (v) the Grantee’s
unauthorized use, misappropriation, destruction, or diversion of any tangible or intangible asset or corporate
opportunity of the Company or any of its Affiliates (including, without limitation, the improper use or disclosure of
confidential or proprietary information); or (vi) any circumstances that constitute grounds for termination for cause
under the Grantee’s employment or service agreement with the Company or Affiliate, to the extent applicable. For
the avoidance of doubt, the determination as to whether a termination is for Cause for purposes of this Plan, shall be
made in good faith by the Committee and shall be final and binding on the Grantee.
6.7. Death, Disability or Retirement of Grantee.
6.7.1. If a Grantee shall die while employed by, or performing service for, the Company or its
Affiliates, or within the three (3) month period (or such longer period of time as determined by the Board, in its
discretion) after the date of termination of such Grantee's employment or service (or within such different period as
the Committee may have provided pursuant to Section 6.6 hereof), or if the Grantee's employment or service shall
terminate by reason of Disability, all Awards theretofore granted to such Grantee may (to the extent otherwise vested
and exercisable and unless earlier terminated in accordance with their terms) be exercised by the Grantee or by the
Grantee's estate or by a person who acquired the legal right to exercise such Awards by bequest or inheritance, or by a
person who acquired the legal right to exercise such Awards in accordance with applicable law in the case of
Disability of the Grantee, as the case may be, at any time within one (1) year (or such longer period of time as
determined by the Committee, in its discretion) after the death or Disability of the Grantee (or such different period as
the Committee shall prescribe), but in any event no later than the date of expiration of the Award’s term as set forth in
the Award Agreement or pursuant to this Plan. In the event that an Award granted hereunder shall be exercised as set
forth above by any person other than the Grantee, written notice of such exercise shall be accompanied by a certified
copy of letters testamentary or proof satisfactory to the Committee of the right of such person to exercise such Award.
6.7.2. In the event that the employment or service of a Grantee shall terminate on account of such
Grantee's Retirement, all Awards of such Grantee that are exercisable at the time of such Retirement may, unless
earlier terminated in accordance with their terms, be exercised at any time within the three (3) month period after the
date of such Retirement (or such different period as the Committee shall prescribe).
14
6.8. Suspension of Vesting. Unless the Committee provides otherwise, vesting of Awards granted hereunder
shall be suspended during any unpaid leave of absence, other than in the case of any (i) leave of absence which was pre-
approved by the Company explicitly for purposes of continuing the vesting of Awards, or (ii) transfers between locations of
the Company or any of its Affiliates, or between the Company and any of its Affiliates, or any respective successor thereof.
For clarity, for purposes of this Plan, military leave, statutory maternity or paternity leave or sick leave are not deemed
unpaid leave of absence.
6.9. Securities Law Restrictions. Except as otherwise provided in the applicable Award Agreement or other
agreement between the Service Provider and the Company, if the exercise of an Award following the termination of the
Service Provider’s employment or service (other than for Cause) would be prohibited at any time solely because the
issuance of Shares would violate the registration requirements under the Securities Act or equivalent requirements under
equivalent laws of other applicable jurisdictions, then the Award shall remain exercisable and terminate on the earlier of
(i) the expiration of a period of three (3) months (or such longer period of time as determined by the Board, in its
discretion) after the termination of the Service Provider’s employment or service during which the exercise of the Award
would not be in such violation, or (ii) the expiration of the term of the Award as set forth in the Award Agreement or
pursuant to this Plan. In addition, unless otherwise provided in a Grantee’s Award Agreement, if the sale of any Shares
received upon exercise or (if applicable) vesting of an Award following the termination of the Grantee's employment or
service (other than for Cause) would violate the Company’s insider trading policy, then the Award shall terminate on the
earlier of (i) the expiration of a period equal to the applicable post-termination exercise period after the termination of the
Grantee's employment or service during which the exercise of the Award would not be in violation of the Company’s
insider trading policy, or (ii) the expiration of the term of the Award as set forth in the applicable Award Agreement or
pursuant to this Plan.
6.10. Voting Proxy. Until immediately after the listing for trading on a stock exchange or market or trading
system of the Company’s (or the Successor Corporation’s) shares, the Shares subject to an Award or to be issued pursuant
to an Award or any other Securities, shall, unless otherwise determined by the Committee, be subject to an irrevocable
proxy and power of attorney by the Grantee or the Trustee (if so requested from the Trustee), as the case may be, to the
Company, which shall designate such person or persons (with a right of substitution) from time to time as determined by
the Committee (and in the absence of such determination, the CEO or Chairman of the Board, ex officio). The Trustee is
deemed to be instructed by the Grantee to sign such proxy, as requested by the Company. The proxy shall entitle the holder
thereof to receive notices, vote and take such other actions in respect of the Shares or other Securities. Any person holding
or exercising such voting proxies shall do so solely in his capacity as the proxy holder and not individually. All Awards
granted hereunder shall be conditioned upon the execution of such irrevocable proxy in substantially the form prescribed by
the Committee from time to time. So long as any such Shares are subject to such irrevocable proxy and power of attorney
or held by a Trustee (and unless a proxy was given by the Trustee as aforesaid), (i) in any shareholders meeting or written
consent in lieu thereof, such Shares shall be voted by the proxy holder (or the Trustee, as applicable), unless directed
otherwise by the Board, in the same proportion as the result of the vote at the shareholders’ meeting (or written consent in
lieu thereof) in respect of which the Shares are being voted (whether an extraordinary or annual meeting, and whether of
the share capital as one class or of any class thereof), and (ii) or in any act or consent of shareholders under the Company’s
Articles of Association or otherwise, such Shares shall be cast by the proxy holder (or the Trustee, as applicable), unless
directed otherwise by the Board, in the same proportion as the result of the shareholders’ act or consent. The provisions of
this Section shall apply to the Grantee and to any purchaser, assignee or transferee of any Shares.
15
6.11. Other Provisions. The Award Agreement evidencing Awards under this Plan shall contain such other
terms and conditions not inconsistent with this Plan as the Committee may determine, at or after the date of grant, including
provisions in connection with the restrictions on transferring the Awards or Shares covered by such Awards, which shall be
binding upon the Grantees and any purchaser, assignee or transferee of any Awards, and other terms and conditions as the
Committee shall deem appropriate.
7.
NONQUALIFIED STOCK OPTIONS.
7.1. Awards granted pursuant to this Section 7 are intended to constitute Nonqualified Stock Options and shall
be subject to the general terms and conditions specified in Section 6 hereof and other provisions of this Plan, except for any
provisions of this Plan applying to Awards under different tax laws or regulations. In the event of any inconsistency or
contradictions between the provisions of this Section 7 and the other terms of this Plan, this Section 7 shall prevail.
7.2. Certain Limitations on Eligibility for Nonqualified Stock Options. Nonqualified Stock Options may not be
granted to a Service Provider who is deemed to be a resident of the United States for purposes of taxation or who is
otherwise subject to United States federal income tax unless the Shares underlying such Options constitute “service
recipient stock” under Section 409A of the Code or unless such Options comply with the payment requirements of Section
409A of the Code.
7.3. Exercise Price. The Exercise Price of a Nonqualified Stock Option shall not be less than 100% of the Fair
Market Value of a Share on the date of grant of such Option unless the Committee specifically indicates that the Awards
will have a lower Exercise Price and the Award complies with Section 409A of the Code. Notwithstanding the foregoing, a
Nonqualified Stock Option may be granted with an exercise price lower than the minimum exercise price set forth above if
such Award is granted pursuant to an assumption or substitution for another option in a manner qualifying under the
provisions of that complies with Section 424(a) of the Code1.409A-1(b)(5)(v)(D) of the U.S. Treasury Regulations or any
successor guidance.
8.
INCENTIVE STOCK OPTIONS.
Awards granted pursuant to this Section 8 are intended to constitute Incentive Stock Options and shall be granted
subject to the following special terms and conditions, the general terms and conditions specified in Section 6 hereof
and other provisions of this Plan, except for any provisions of this Plan applying to Awards under different tax laws
or regulations. In the event of any inconsistency or contradictions between the provisions of this Section 8 and the
other terms of this Plan, this Section 8 shall prevail.
8.1. Eligibility for Incentive Stock Options. Incentive Stock Options may be granted only to Employees of the
Company, or to Employees of a Parent or Subsidiary, determined as of the date of grant of such Options. An Incentive
Stock Option granted to a prospective Employee upon the condition that such person become an Employee shall be deemed
granted effective on the date such person commences employment, with an exercise price determined as of such date in
accordance with Section 8.2.
8.2. Exercise Price. The Exercise Price of an Incentive Stock Option shall not be less than one hundred percent
(100%) of the Fair Market Value of the Shares covered by the Awards on the date of grant of such Option or such other
price as may be determined pursuant to the Code. Notwithstanding the foregoing, an Incentive Stock Option may be
granted with an exercise price lower than the minimum exercise price set forth above if such Award is granted pursuant to
an assumption or substitution for another option in a manner that complies with the provisions of Section 424(a) of the
Code.
8.3. Date of Grant. Notwithstanding any other provision of this Plan to the contrary, no Incentive Stock Option
may be granted under this Plan after 10 years from the date this Plan is adopted, or the date this Plan is approved by the
shareholders, whichever is earlier.
8.4. Exercise Period. No Incentive Stock Option shall be exercisable after the expiration of ten (10) years after
the effective date of grant of such Award, subject to Section 8.6. No Incentive Stock Option granted to a prospective
Employee may become exercisable prior to the date on which such person commences employment.
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8.5. $100,000 Per Year Limitation. The aggregate Fair Market Value (determined as of the date the Incentive
Stock Option is granted) of the Shares with respect to which all Incentive Stock Options granted under this Plan and all
other “incentive stock option” plans of the Company, or of any Parent or Subsidiary or Affiliate, become exercisable for the
first time by each Grantee during any calendar year shall not exceed one hundred thousand United States dollars ($100,000)
with respect to such Grantee. To the extent that the aggregate Fair Market Value of Shares with respect to which such
Incentive Stock Options and any other such incentive stock options are exercisable for the first time by any Grantee during
any calendar year exceeds one hundred thousand United States dollars ($100,000), such options shall be treated as
Nonqualified Stock Options. The foregoing shall be applied by taking options into account in the order in which they were
granted. If the Code is amended to provide for a different limitation from that set forth in this Section 8.5, such different
limitation shall be deemed incorporated herein effective as of the date and with respect to such Awards as required or
permitted by such amendment to the Code. If an Option is treated as an Incentive Stock Option in part and as a
Nonqualifed Stock Option in part by reason of the limitation set forth in this Section 8.5, the Grantee may designate which
portion of such Option the Grantee is exercising. In the absence of such designation, the Grantee shall be deemed to have
exercised the Incentive Stock Option portion of the Option first. Separate certificates representing each such portion may
be issued upon the exercise of the Option.
8.6. Ten Percent Shareholder. In the case of an Incentive Stock Option granted to a Ten Percent Shareholder, (i)
the Exercise Price shall not be less than one hundred and ten percent (110%) of the Fair Market Value of a Share on the date
of grant of such Incentive Stock Option, and (ii) the Exercise Period shall not exceed five (5) years from the effective date
of grant of such Incentive Stock Option.
8.7. Payment of Exercise Price. Each Award Agreement evidencing an Incentive Stock Option shall state each
alternative method by which the Exercise Price thereof may be paid.
8.8. Leave of Absence. Notwithstanding Section 6.8, a Grantee’s employment shall not be deemed to have
terminated if the Grantee takes any leave as set forth in Section 6.8(i); provided, however, that if any such leave exceeds
three (3) months, on the day that is six (6) months following the commencement of such leave any Incentive Stock Option
held by the Grantee shall cease to be treated as an Incentive Stock Option and instead shall be treated thereafter as a
Nonqualified Stock Option, unless the Grantee’s right to return to employment is guaranteed by statute or contract.
8.9. Exercise Following Termination for Disability. Notwithstanding anything else in this Plan to the contrary,
Incentive Stock Options that are not exercised within three (3) months following termination of the Grantee’s employment
with the Company or its Parent or Subsidiary or a corporation or a Parent or Subsidiary of such corporation issuing or
assuming an Option in a transaction to which Section 424(a) of the Code applies, or within one year in case of termination
of the Grantee’s employment with the Company or its Parent or Subsidiary due to a Disability (within the meaning of
Section 22(e)(3) of the Code), shall be deemed to be Nonqualified Stock Options.
8.10. Adjustments to Incentive Stock Options. Any Awards Agreement providing for the grant of Incentive
Stock Options shall indicate that adjustments made pursuant to this Plan with respect to Incentive Stock Options could
constitute a “modification” of such Incentive Stock Options (as that term is defined in Section 424(h) of the Code) or could
cause adverse tax consequences for the holder of such Incentive Stock Options and that the holder should consult with his
or her tax advisor regarding the consequences of such “modification” on his or her income tax treatment with respect to the
Incentive Stock Option.
8.11. Notice to Company of Disqualifying Disposition. Each Grantee who receives an Incentive Stock Option
must agree to notify the Company in writing immediately after the Grantee makes a Disqualifying Disposition of any
Shares received pursuant to the exercise of Incentive Stock Options. A “Disqualifying Disposition” is any disposition
(including any sale) of such Shares before the later of (i) two years after the date the Grantee was granted the Incentive
Stock Option, or (ii) one year after the date the Grantee acquired Shares by exercising the Incentive Stock Option. If the
Grantee dies before such Shares are sold, these holding period requirements do not apply and no disposition of the Shares
will be deemed a Disqualifying Disposition.
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9.
102 AWARDS.
Awards granted pursuant to this Section 9 are intended to constitute 102 Awards and shall be granted subject to the
following special terms and conditions, the general terms and conditions specified in Section 6 hereof and other
provisions of this Plan, except for any provisions of this Plan applying to Awards under different tax laws or
regulations. In the event of any inconsistency or contradictions between the provisions of this Section 9 and the
other terms of this Plan, this Section 9 shall prevail.
9.1. Tracks. Awards granted pursuant to this Section 9 are intended to be granted pursuant to Section 102 of the
Ordinance pursuant to either (i) Section 102(b)(2) thereof, under the capital gain track (“102 Capital Gain Track
Awards”), or (ii) Section 102(b)(1) thereof under the ordinary income track (“102 Ordinary Income Track Awards”, and
together with 102 Capital Gain Track Awards, “102 Trustee Awards”). 102 Trustee Awards shall be granted subject to the
special terms and conditions contained in this Section 9, the general terms and conditions specified in Section 6 hereof and
other provisions of this Plan, except for any provisions of this Plan applying to Options under different tax laws or
regulations.
9.2. Election of Track. Subject to Applicable Law, the Company may grant only one type of 102 Trustee
Awards at any given time to all Grantees who are to be granted 102 Trustee Awards pursuant to this Plan, and shall file an
election with the ITA regarding the type of 102 Trustee Awards it elects to grant before the date of grant of any 102 Trustee
Awards (the “Election”). Such Election shall also apply to any other securities, including bonus shares, received by any
Grantee as a result of holding the 102 Trustee Awards. The Company may change the type of 102 Trustee Awards that it
elects to grant only after the expiration of at least 12 months from the end of the year in which the first grant was made in
accordance with the previous Election, or as otherwise provided by Applicable Law. Any Election shall not prevent the
Company from granting Awards, pursuant to Section 102(c) of the Ordinance without a Trustee (“102 Non-Trustee
Awards”).
9.3. Eligibility for Awards.
9.3.1. Subject to Applicable Law, 102 Awards may only be granted to an "employee" within the
meaning of Section 102(a) of the Ordinance (which as of the date of the adoption of this Plan means (i) individuals
employed by an Israeli company being the Company or any of its Affiliates, and (ii) individuals who are serving and
are engaged personally (and not through an entity) as “office holders” by such an Israeli company), but may not be
granted to a Controlling Shareholder (“Eligible 102 Grantees”). Eligible 102 Grantees may receive only 102
Awards, which may either be granted to a Trustee or granted under Section 102 of the Ordinance without a Trustee.
9.4. 102 Award Grant Date.
9.4.1. Each 102 Award will be deemed granted on the date determined by the Committee, subject to
Section 9.4.2, provided that (i) the Grantee has signed all documents required by the Company or pursuant to
Applicable Law, and (ii) with respect to 102 Trustee Award, the Company has provided all applicable documents to
the Trustee in accordance with the guidelines published by the ITA, and if an agreement is not signed and delivered
by the Grantee within 90 days from the date determined by the Committee (subject to Section 9.4.2), then such 102
Trustee Award shall be deemed granted on such later date as such agreement is signed and delivered and on which the
Company has provided all applicable documents to the Trustee in accordance with the guidelines published by the
ITA. In the case of any contradiction, this provision and the date of grant determined pursuant hereto shall supersede
and be deemed to amend any date of grant indicated in any corporate resolution or Award Agreement.
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9.4.2. Unless otherwise permitted by the Ordinance, any grants of 102 Trustee Awards that are made
on or after the date of the adoption of this Plan or an amendment to this Plan, as the case may be, that may become
effective only at the expiration of thirty (30) days after the filing of this Plan or any amendment thereof (as the case
may be) with the ITA in accordance with the Ordinance shall be conditional upon the expiration of such 30-day
period, such condition shall be read and is incorporated by reference into any corporate resolutions approving such
grants and into any Award Agreement evidencing such grants (whether or not explicitly referring to such condition),
and the date of grant shall be at the expiration of such 30-day period, whether or not the date of grant indicated therein
corresponds with this Section. In the case of any contradiction, this provision and the date of grant determined
pursuant hereto shall supersede and be deemed to amend any date of grant indicated in any corporate resolution or
Award Agreement.
9.5. 102 Trustee Awards.
9.5.1. Each 102 Trustee Award, each Share issued pursuant to the exercise of any 102 Trustee Award,
and any rights granted thereunder, including bonus shares, shall be issued to and registered in the name of the Trustee
and shall be held in trust for the benefit of the Grantee for the requisite period prescribed by the Ordinance or such
longer period as set by the Committee (the “Required Holding Period”). In the event that the requirements under
Section 102 of the Ordinance to qualify an Award as a 102 Trustee Award are not met, then the Award may be treated
as a 102 Non-Trustee Award or 3(9) Award, all in accordance with the provisions of the Ordinance. After expiration
of the Required Holding Period, the Trustee may release such 102 Trustee Awards and any such Shares, provided that
(i) the Trustee has received an acknowledgment from the ITA that the Grantee has paid any applicable taxes due
pursuant to the Ordinance, or (ii) the Trustee and/or the Company and/or its Affiliate withholds all applicable taxes
and compulsory payments due pursuant to the Ordinance arising from the 102 Trustee Awards and/or any Shares
issued upon exercise or (if applicable) vesting of such 102 Trustee Awards. The Trustee shall not release any 102
Trustee Awards or Shares issued upon exercise or (if applicable) vesting thereof prior to the payment in full of the
Grantee’s tax and compulsory payments arising from such 102 Trustee Awards and/or Shares or the withholding
referred to in (ii) above.
9.5.2. Each 102 Trustee Award shall be subject to the relevant terms of the Ordinance, the Rules and
any determinations, rulings or approvals issued by the ITA, which shall be deemed an integral part of the 102 Trustee
Awards and shall prevail over any term contained in this Plan or Award Agreement that is not consistent therewith.
Any provision of the Ordinance, the Rules and any determinations, rulings or approvals by the ITA not expressly
specified in this Plan or Award Agreement that are necessary to receive or maintain any tax benefit pursuant to
Section 102 of the Ordinance shall be binding on the Grantee. The Grantee granted a 102 Trustee Awards shall
comply with the Ordinance and the terms and conditions of the trust agreement entered into between the Company
and the Trustee. The Grantee shall execute any and all documents that the Company and/or its Affiliates and/or the
Trustee determine from time to time to be necessary in order to comply with the Ordinance and the Rules.
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9.5.3. During the Required Holding Period, the Grantee shall not release from trust or sell, assign,
transfer or give as collateral, the Shares issuable upon the exercise or (if applicable) vesting of a 102 Trustee Awards
and/or any securities issued or distributed with respect thereto, until the expiration of the Required Holding Period.
Notwithstanding the above, if any such sale, release or other action occurs during the Required Holding Period it may
result in adverse tax consequences to the Grantee under Section 102 of the Ordinance and the Rules, which shall
apply to and shall be borne solely by such Grantee. Subject to the foregoing, the Trustee may, pursuant to a written
request from the Grantee, but subject to the terms of this Plan, release and transfer such Shares to a designated third
party, provided that both of the following conditions have been fulfilled prior to such release or transfer: (i) payment
has been made to the ITA of all taxes and compulsory payments required to be paid upon the release and transfer of
the Shares, and confirmation of such payment has been received by the Trustee and the Company, and (ii) the Trustee
has received written confirmation from the Company that all requirements for such release and transfer have been
fulfilled according to the terms of the Company’s corporate documents, any agreement governing the Shares, this
Plan, the Award Agreement and any Applicable Law.
9.5.4. If a 102 Trustee Award is exercised or (if applicable) vested, the Shares issued upon such
exercise or (if applicable) vesting shall be issued in the name of the Trustee for the benefit of the Grantee.
9.5.5. Upon or after receipt of a 102 Trustee Award, if required, the Grantee may be required to sign an
undertaking to release the Trustee from any liability with respect to any action or decision duly taken and executed in
good faith by the Trustee in relation to this Plan, or any 102 Trustee Awards or Share granted to such Grantee
thereunder.
9.6. 102 Non-Trustee Awards. The foregoing provisions of this Section 9 relating to 102 Trustee Awards shall
not apply with respect to 102 Non-Trustee Awards, which shall, however, be subject to the relevant provisions of Section
102 of the Ordinance and the applicable Rules. The Committee may determine that 102 Non-Trustee Awards, the Shares
issuable upon the exercise or (if applicable) vesting of a 102 Non-Trustee Awards and/or any securities issued or distributed
with respect thereto, shall be allocated or issued to the Trustee, who shall hold such 102 Non-Trustee Awards and all
accrued rights thereon (if any), in trust for the benefit of the Grantee and/or the Company, as the case may be, until the full
payment of tax arising from the 102 Non-Trustee Awards, the Shares issuable upon the exercise or (if applicable) vesting of
a 102 Non-Trustee Awards and/or any securities issued or distributed with respect thereto. The Company may choose,
alternatively, to force the Grantee to provide it with a guarantee or other security, to the satisfaction of each of the Trustee
and the Company, until the full payment of the applicable taxes.
9.7. Israeli Index Base for 102 Awards. Each 102 Award will be subject to the Israeli index base of the Value of
Benefit, as defined in Section 102(a) of the Ordinance, as determined by the Committee in its discretion, pursuant to the
Rules, from time to time. The Committee may amend (which may have a retroactive effect) the Israeli index base, pursuant
to the Ordinance, without the Grantee’s consent.
9.8. Written Grantee Undertaking. To the extent and with respect to any 102 Trustee Award, and as required by
Section 102 of the Ordinance and the Rules, by virtue of the receipt of such Award, the Grantee is deemed to have
undertaken and confirm in writing the following (and such undertaking is deemed incorporated into any documents signed
by the Grantee in connection with the employment or service of the Grantee and/or the grant of such Award). The
following written undertaking shall be deemed to apply and relate to all 102 Trustee Awards granted to the Grantee,
whether under this Plan or other plans maintained by the Company, and whether prior to or after the date hereof.
9.8.1. The Grantee shall comply with all terms and conditions set forth in Section 102 of the Ordinance
with regard to the “Capital Gain Track” or the “Ordinary Income Track”, as applicable, and the applicable rules and
regulations promulgated thereunder, as amended from time to time;
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9.8.2. The Grantee is familiar with, and understands the provisions of, Section 102 of the Ordinance in
general, and the tax arrangement under the “Capital Gain Track” or the “Ordinary Income Track” in particular, and its
tax consequences; the Grantee agrees that the 102 Trustee Awards and Shares that may be issued upon exercise or (if
applicable) vesting of the 102 Trustee Awards (or otherwise in relation to the 102 Trustee Awards), will be held by a
trustee appointed pursuant to Section 102 of the Ordinance for at least the duration of the "Holding Period" (as such
term is defined in Section 102) under the "Capital Gain Track" or the “Ordinary Income Track”, as applicable. The
Grantee understands that any release of such 102 Trustee Awards or Shares from trust, or any sale of the Share prior
to the termination of the Holding Period, as defined above, will result in taxation at marginal tax rate, in addition to
deductions of appropriate social security, health tax contributions or other compulsory payments; and
9.8.3. The Grantee agrees to the trust deed signed between the Company, his employing company and
the trustee appointed pursuant to Section 102 of the Ordinance.
10.
3(9) AWARDS.
10.1. Awards granted pursuant to this Section 10 are intended to constitute 3(9) Awards and shall be granted
subject to the general terms and conditions specified in Section 6 hereof and other provisions of this Plan, except for any
provisions of this Plan applying to Awards under different tax laws or regulations. In the event of any inconsistency or
contradictions between the provisions of this Section 10 and the other terms of this Plan, this Section 10 shall prevail.
10.2. To the extent required by the Ordinance or the ITA or otherwise deemed by the Committee to be
advisable, the 3(9) Awards and/or any shares or other securities issued or distributed with respect thereto granted pursuant
to this Plan shall be issued to a Trustee nominated by the Committee in accordance with the provisions of the Ordinance.
In such event, the Trustee shall hold such Awards and/or any shares or other securities issued or distributed with respect
thereto in trust, until exercised or (if applicable) vested by the Grantee and the full payment of tax arising therefrom,
pursuant to the Company's instructions from time to time as set forth in a trust agreement, which will have been entered
into between the Company and the Trustee. If determined by the Board or the Committee, and subject to such trust
agreement, the Trustee shall be responsible for withholding any taxes to which a Grantee may become liable upon issuance
of Shares, whether due to the exercise or (if applicable) vesting of Awards.
10.3. Shares pursuant to a 3(9) Award shall not be issued, unless the Grantee delivers to the Company payment
in cash or by bank check or such other form acceptable to the Committee of all withholding taxes due, if any, on account of
the Grantee acquired Shares under the Award or gives other assurance satisfactory to the Committee of the payment of
those withholding taxes.
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11.
RESTRICTED SHARES.
The Committee may award Restricted Shares to any eligible Grantee, including under Section 102 of the Ordinance.
Each Award of Restricted Shares under this Plan shall be evidenced by a written agreement between the Company
and the Grantee (the “Restricted Share Agreement”), in such form as the Committee shall from time to time
approve. The Restricted Shares shall be subject to all applicable terms of this Plan, which in the case of Restricted
Shares granted under Section 102 of the Ordinance shall include Section 9 hereof, and may be subject to any other
terms that are not inconsistent with this Plan. The provisions of the various Restricted Shares Agreements entered
into under this Plan need not be identical. The Restricted Share Agreement shall comply with and be subject to
Section 6 and the following terms and conditions, unless otherwise specifically provided in such Agreement and not
inconsistent with this Plan, or Applicable Law:
11.1. Purchase Price. Section 6.4 shall not apply. Each Restricted Share Agreement shall state an amount of
Exercise Price to be paid by the Grantee, if any, in consideration for the issuance of the Restricted Shares and the terms of
payment thereof, which may include, payment in cash or, subject to the Committee’s approval, by issuance of promissory
notes or other evidence of indebtedness on such terms and conditions as determined by the Committee.
11.2. Restrictions. Restricted Shares may not be sold, assigned, transferred, pledged, hypothecated or otherwise
disposed of, except by will or the laws of descent and distribution (in which case they shall be transferred subject to all
restrictions then or thereafter applicable thereto), until such Restricted Shares shall have vested (the period from the date on
which the Award is granted until the date of vesting of the Restricted Share thereunder being referred to herein as the
“Restricted Period”). The Committee may also impose such additional or alternative restrictions and conditions on the
Restricted Shares, as it deems appropriate, including the satisfaction of performance criteria. Such performance criteria
may include, but are not limited to, sales, earnings before interest and taxes, return on investment, earnings per share, any
combination of the foregoing or rate of growth of any of the foregoing, as determined by the Committee or pursuant to the
provisions of any Company policy required under mandatory provisions of Applicable Law. Certificates for shares issued
pursuant to Restricted Share Awards, if issued, shall bear an appropriate legend referring to such restrictions, and any
attempt to dispose of any such shares in contravention of such restrictions shall be null and void and without effect. Such
certificates may, if so determined by the Committee, be held in escrow by an escrow agent appointed by the Committee, or,
if a Restricted Share Award is made pursuant to Section 102 of the Ordinance, by the Trustee. In determining the
Restricted Period of an Award the Committee may provide that the foregoing restrictions shall lapse with respect to
specified percentages of the awarded Restricted Shares on successive anniversaries of the date of such Award. To the
extent required by the Ordinance or the ITA, the Restricted Shares issued pursuant to Section 102 of the Ordinance shall be
issued to the Trustee in accordance with the provisions of the Ordinance and the Restricted Shares shall be held for the
benefit of the Grantee for at least the Required Holding Period.
11.3. Forfeiture; Repurchase. Subject to such exceptions as may be determined by the Committee, if the
Grantee's continuous employment with or service to the Company or any Affiliate thereof shall terminate for any reason
prior to the expiration of the Restricted Period of an Award or prior to the timely payment in full of the Exercise Price of
any Restricted Shares, any Shares remaining subject to vesting or with respect to which the purchase price has not been
paid in full, shall thereupon be forfeited, transferred to, and redeemed, repurchased or cancelled by, as the case may be, in
any manner as set forth in Section 6.6.2(i) through (v), subject to Applicable Laws and the Grantee shall have no further
rights with respect to such Restricted Shares.
11.4. Ownership. During the Restricted Period the Grantee shall possess all incidents of ownership of such
Restricted Shares, subject to Section 6.10 and Section 11.2, including the right to vote and receive dividends with respect to
such Shares. All securities, if any, received by a Grantee with respect to Restricted Shares as a result of any stock split,
stock dividend, combination of shares, or other similar transaction shall be subject to the restrictions applicable to the
original Award.
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12.
RESTRICTED SHARE UNITS.
12.1. An RSU is an Award covering a number of Shares that is settled, if vested and (if applicable) exercised, by
issuance of those Shares. An RSU may be awarded to any eligible Grantee, including under Section 102 of the Ordinance,
provided that, to the extent required by Applicable Laws, a specific ruling is obtained from the ITA to grant RSUs as 102
Trustee Awards. The Award Agreement relating to the grant of RSUs under this Plan (the “Restricted Share Unit
Agreement”), shall be in such form as the Committee shall from time to time approve. The RSUs shall be subject to all
applicable terms of this Plan, which in the case of RSUs granted under Section 102 of the Ordinance shall include Section 9
hereof, and may be subject to any other terms that are not inconsistent with this Plan. The provisions of the various
Restricted Share Unit Agreements entered into under this Plan need not be identical. RSUs may be granted in
consideration of a reduction in the recipient’s other compensation.
12.2. Exercise Price. No payment of Exercise Price shall be required as consideration for RSUs, unless
included in the Award Agreement or as required by Applicable Law (including, Section 304 of the Companies Law, 1999,
as amended), and Section 6.4 shall apply, if applicable.
12.3. Shareholders’ Rights. The Grantee shall not possess or own any ownership rights in the Shares underlying
the RSUs and no rights as a shareholder shall exist prior to the actual issuance of Shares in the name of the Grantee.
12.4. Settlements of Awards. Settlement of vested RSUs shall be made in the form of Shares. Distribution to a
Grantee of an amount (or amounts) from settlement of vested RSUs can be deferred to a date after settlement as determined
by the Committee. The amount of a deferred distribution may be increased by an interest factor or by dividend
equivalents. Until the grant of RSUs is settled, the number of Shares underlying such RSUs shall be subject to adjustment
pursuant hereto.
12.5. Section 409A Restrictions. Notwithstanding anything to the contrary set forth herein, any RSUs granted
under this Plan that are not exempt from the requirements of Section 409A of the Code shall contain such restrictions or
other provisions so that such RSUs will comply with the requirements of Section 409A of the Code, if applicable to the
Company. Such restrictions, if any, shall be determined by the Committee and contained in the Restricted Share Unit
Agreement evidencing such RSU. For example, such restrictions may include a requirement that any Shares that are to be
issued in a year following the year in which the RSU vests must be issued in accordance with a fixed, pre-determined
schedule.
13.
OTHER SHARE OR SHARE-BASED AWARDS.
13.1. The Committee may grant other Awards under this Plan pursuant to which Shares (which may, but need
not, be Restricted Shares pursuant to Section 11 hereof), cash (in settlement of Share-based Awards) or a combination
thereof, are or may in the future be acquired or received, or Awards denominated in stock units, including units valued on
the basis of measures other than market value.
13.2. The Committee may also grant stock appreciation rights without the grant of an accompanying option,
which rights shall permit the Grantees to receive, at the time of any exercise of such rights, cash equal to the amount by
which the Fair Market Value of the Shares in respect to which the right was granted is so exercised exceed the exercise
price thereof. The exercise price of any such stock appreciation right granted to a Grantee who is subject to U.S. federal
income tax shall be determined in compliance with Section 7.2.
13.3. Such other Share-based Awards as set forth above may be granted alone, in addition to, or in tandem with
any Award of any type granted under this Plan.
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14.
EFFECT OF CERTAIN CHANGES.
14.1. General. In the event of a division or subdivision of the outstanding share capital of the Company, any
distribution of bonus shares (stock split), consolidation or combination of share capital of the Company (reverse stock
split), reclassification with respect to the Shares or any similar recapitalization events (each, a "Recapitalization"), a
merger (including, a reverse merger and a reverse triangular merger), consolidation, amalgamation or like transaction of the
Company with or into another corporation, a reorganization (which may include a combination or exchange of shares, spin-
off or other corporate divestiture or division, or other similar occurrences, the Committee shall have the authority to make,
without the need for a consent of any holder of an Award, such adjustments as determined by the Committee to be
appropriate, in its discretion, in order to adjust (i) the number and class of shares reserved and available for grants of
Awards, (ii) the number and class of shares covered by outstanding Awards, (iii) the Exercise Price per share covered by
any Award, (iv) the terms and conditions concerning vesting and exercisability and the term and duration of the outstanding
Awards, and (v) any other terms of the Award that in the opinion of the Committee should be adjusted. Any fractional
shares resulting from such adjustment shall be treated as determined by the Committee, and in the absence of such
determination shall be rounded to the nearest whole share, and the Company shall have no obligation to make any cash or
other payment with respect to such fractional shares. No adjustment shall be made by reason of the distribution of
subscription rights or rights offering to outstanding shares or other issuance of shares by the Company, unless the
Committee determines otherwise. The adjustments determined pursuant to this Section 14.1 (including a determination that
no adjustment is to be made) shall be final, binding and conclusive.
14.2. Change of Control. In the event of a Change of Control, then, without derogating from the general
authority and power of the Board or the Committee under this Plan, without the Grantee’s consent and action and without
any prior notice requirement:
14.2.1. Unless otherwise determined by the Committee in its sole and absolute discretion, any Award
then outstanding shall be assumed or be substituted by the Company, or by the successor corporation in an event
described in paragraph (i) or (ii) of the definition of Change of Control, or by any parent or Affiliate thereof, as
determined by the Committee in its discretion (the “Successor Corporation”), under terms as determined by the
Committee or the terms of this Plan applied by the Successor Corporation to such assumed or substituted Awards.
For the purposes of this Section 14.2.1, the Award shall be considered assumed or substituted if,
following such a Change of Control, the Award confers on the holder thereof the right to purchase or receive,
for each Share underlying an Award immediately prior to the Change of Control, either (i) the consideration
(whether stock, cash, or other securities or property, or any combination thereof) distributed to or received by
holders of Shares in the Change of Control for each Share held on the effective date of the Change of Control
(and if holders were offered a choice or several types of consideration, the type of consideration as determined
by the Committee), or (ii) regardless of the consideration received by the holders of Shares in the Change of
Control, solely shares or any type of Awards (or their equivalent) of the Successor Corporation at a value to be
determined by the Committee in its discretion, or a certain type of consideration (whether stock, cash, or other
securities or property, or any combination thereof) as determined by the Committee. Any of the above
consideration referred to in clauses (i) and (ii) shall be subject to the same vesting and expiration terms of the
Awards applying immediately prior to the Change of Control, unless determined by the Committee in its
discretion that the consideration shall be subject to different vesting and expiration terms, or other terms, and
the Committee may determine that it be subject to other or additional terms. The foregoing shall not limit the
Committee's authority to determine, in its sole discretion, that in lieu of such assumption or substitution of
Awards for Awards of the Successor Corporation, such Award will be substituted for any other type of asset or
property, including as set forth in Section 14.2.2 hereunder.
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14.2.2. Regardless of whether or not Awards are assumed or substituted, the Committee may (but shall
not be obligated to), in its sole discretion:
14.2.2.1.
14.2.2.2.
provide for the Grantee to have the right to exercise the Award in respect of Shares covered by the Award
which would otherwise be exercisable or vested, under such terms and conditions as the Committee shall
determine, and the cancellation of all unexercised Awards (whether vested or unvested) upon or immediately
prior to the closing of the Change of Control, unless the Committee provides for the Grantee to have the right
to exercise the Award, or otherwise for the acceleration of vesting of such Award, as to all or part of the Shares
covered by the Award which would not otherwise be exercisable or vested, under such terms and conditions as
the Committee shall determine; and/or
provide for the cancellation of each outstanding Award at or immediately prior to the closing of such Change
of Control, and payment to the Grantee of an amount in cash, shares of the Company, the acquiror or of a
corporation or other business entity which is a party to the Change of Control or other property, as determined
by the Committee to be fair in the circumstances, and subject to such terms and conditions as determined by
the Committee. The Committee shall have full authority to select the method for determining the payment
(being the Black-Scholes model or any other method). The Committee’s determination may further provide
that payment shall be set to zero if the value of the Shares is determined to be less than the Exercise Price or in
respect of Shares covered by the Award which would not otherwise be exercisable or vested, or that payment
may be made only in excess of the Exercise Price.
14.2.3. The Committee may determine that any payments made in respect of Awards shall be made or
delayed to the same extent that payment of consideration to the holders of the Shares in connection with the Change
of Control is made or delayed as a result of escrows, indemnification, earn outs, holdbacks or any other contingencies;
and the terms and conditions applying to the payment made to the Grantees, including participation in escrow,
indemnification, releases, earn-outs, holdbacks or any other contingencies.
14.2.4. Notwithstanding the foregoing, in the event of a Change of Control, the Committee may
determine, in its sole discretion, that upon completion of such Change of Control the terms of any Award shall be
otherwise amended, modified or terminated, as the Committee shall deem in good faith to be appropriate and without
any liability to the Company or its Affiliates and to their respective officers, directors, employees and representatives
and the respective successors and assigns of any of the foregoing in connection with the method of treatment or
chosen course of action permitted hereunder.
14.2.5. Neither the authorities and powers of the Committee under this Section 14.2, nor the exercise
or implementation thereof, shall (i) be restricted or limited in any way by any adverse consequences (tax or otherwise)
that may result to any holder of an Award, and (ii) as, inter alia, being a feature of the Award upon its grant, be
deemed to constitute a change or an amendment of the rights of such holder under this Plan, nor shall any such
adverse consequences (as well as any adverse tax consequences that may result from any tax ruling or other approval
or determination of any relevant tax authority) be deemed to constitute a change or an amendment of the rights of
such holder under this Plan, and may be effected without consent of any Grantee and without any liability to the
Company or its Affiliates and to their respective its officers, directors, employees and representatives and the
respective successors and assigns of any of the foregoing. The Committee need not take the same action with respect
to all Awards or with respect to all Service Providers. The Committee may take different actions with respect to the
vested and unvested portions of an Award. The Committee may determine an amount or type of consideration to be
received or distributed in a Change of Control which may differ as among the Grantees, and as between the Grantees
and any other holders of shares of the Company.
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14.2.6. The Committee’s determinations pursuant to this Section 14 shall be conclusive and binding on
all Grantees.
14.2.7. If determined by the Committee, the Grantees shall be subject to the definitive agreement(s) in
connection with the Change of Control as applying to holders of Shares including, such terms, conditions,
representations, undertakings, liabilities, limitations, releases, indemnities, participating in transaction expenses and
escrow arrangement, in each case as determined by the Committee. Each Grantee shall execute such separate
agreement(s) or instruments as may be requested by the Company, the Successor Corporation or the acquiror in
connection with such in such Change of Control and in the form required by them. The execution of such separate
agreement(s) may be a condition to the receipt of assumed or substituted Awards, payment in lieu of the Award or the
exercise of any Award.
14.3. Reservation of Rights. Except as expressly provided in this Section 14 (if any), the Grantee of an Award
hereunder shall have no rights by reason of any Recapitalization of shares of any class, any increase or decrease in the
number of shares of any class, or any dissolution, liquidation, reorganization (which may include a combination or
exchange of shares, spin-off or other corporate divestiture or division, or other similar occurrences), or Change of Control.
Any issue by the Company of shares of any class, or securities convertible into shares of stock of any class, shall not affect,
and no adjustment by reason thereof shall be made with respect to, the number, type or price of shares subject to an Award.
The grant of an Award pursuant to this Plan shall not affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its capital or business structures or to merge or to consolidate
or to dissolve, liquidate or sell, or transfer all or part of its business or assets or engage in any similar transactions.
15.
NON-TRANSFERABILITY OF AWARDS; SURVIVING BENEFICIARY.
15.1. All Awards granted under this Plan by their terms shall not be transferable other than by will or by the
laws of descent and distribution, unless otherwise determined by the Committee or under this Plan, provided that with
respect to Shares issued upon exercise or (if applicable) the vesting of Awards the restrictions on transfer shall be the
restrictions referred to in Section 16 (Conditions upon Issuance of Shares) hereof. Subject to the above provisions, the
terms of such Award, this Plan and any applicable Award Agreement shall be binding upon the beneficiaries, executors,
administrators, heirs and successors of such Grantee. Awards may be exercised or otherwise realized, during the lifetime of
the Grantee, only by the Grantee or by his guardian or legal representative, to the extent provided for herein. Any transfer
of an Award not permitted hereunder (including transfers pursuant to any decree of divorce, dissolution or separate
maintenance, any property settlement, any separation agreement or any other agreement with a spouse) and any grant of
any interest in any Award to, or creation in any way of any direct or indirect interest in any Award by, any party other than
the Grantee shall be null and void and shall not confer upon any party or person, other than the Grantee, any rights. A
Grantee may file with the Committee a written designation of a beneficiary, who shall be permitted to exercise such
Grantee’s Award or to whom any benefit under this Plan is to be paid, in each case, in the event of the Grantee’s death
before he or she fully exercises his or her Award or receives any or all of such benefit, on such form as may be prescribed
by the Committee and may, from time to time, amend or revoke such designation. If no designated beneficiary survives the
Grantee, the executor or administrator of the Grantee's estate shall be deemed to be the Grantee's beneficiary.
Notwithstanding the foregoing, upon the request of the Grantee and subject to Applicable Law the Committee, at its sole
discretion, may permit the Grantee to transfer the Award to a trust whose beneficiaries are the Grantee and/or the Grantee’s
immediate family members (all or several of them).
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15.2. Notwithstanding any other provisions of the Plan to the contrary, no Incentive Stock Option may be sold,
transferred, pledged, assigned or otherwise alienated or hypothecated, other than by will or by the laws of descent and
distribution or in accordance with a beneficiary designation pursuant to Section 15.1. Further, all Incentive Stock Options
granted to a Grantee shall be exercisable during his or her lifetime only by such Grantee.
15.3. As long as the Shares are held by the Trustee in favor of the Grantee, all rights possessed by the Grantee
over the Shares are personal, and may not be transferred, assigned, pledged or mortgaged, other than by will or laws of
descent and distribution.
15.4. The provisions of this Section 15 shall apply to the Grantee and to any purchaser, assignee or transferee of
any Shares.
16.
CONDITIONS UPON ISSUANCE OF SHARES; GOVERNING PROVISIONS.
16.1. Legal Compliance. The grant of Awards and the issuance of Shares upon exercise or settlement of Awards
shall be subject to compliance with all Applicable Laws as determined by the Company, including, applicable requirements
of federal, state and foreign law with respect to such securities. The Company shall have no obligations to issue Shares
pursuant to the exercise or settlement of an Award and Awards may not be exercised or settled, if the issuance of Shares
upon exercise or settlement would constitute a violation of any Applicable Laws as determined by the Company, including,
applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or
market system upon which the Shares may then be listed. In addition, no Award may be exercised unless (i) a registration
statement under the Securities Act shall at the time of exercise or settlement of the Award be in effect with respect to the
shares issuable upon exercise of the Award, or (ii) in the opinion of legal counsel to the Company, the shares issuable upon
exercise of the Award may be issued in accordance with the terms of an applicable exemption from the registration
requirements of the Securities Act. The inability of the Company to obtain authority from any regulatory body having
jurisdiction, if any, deemed by the Company to be necessary to the lawful issuance and sale of any Shares hereunder, and
the inability to issue Shares hereunder due to non-compliance with any Company policies with respect to the sale of Shares,
shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite
authority or compliance shall not have been obtained or achieved. As a condition to the exercise of an Award, the
Company may require the person exercising such Award to satisfy any qualifications that may be necessary or appropriate,
to evidence compliance with any Applicable Law or regulation and to make any representation or warranty with respect
thereto as may be requested by the Company, including to represent and warrant at the time of any such exercise that the
Shares are being purchased only for investment and without any present intention to sell or distribute such Shares, all in
form and content specified by the Company.
16.2. Provisions Governing Shares. Shares issued pursuant to an Award shall be subject to the Articles of
Association of the Company, any limitation, restriction or obligation included in any shareholders agreement applicable to
all or substantially all of the holders of shares (regardless of whether or not the Grantee is a formal party to such
shareholders agreement), any other governing documents of the Company, all policies, manuals and internal regulations
adopted by the Company from time to time, in each case, as may be amended from time to time, including any provisions
included therein concerning restrictions or limitations on disposition of Shares (such as, but not limited to, right of first
refusal and lock up/market stand-off) or grant of any rights with respect thereto, forced sale and bring along provisions, any
provisions concerning restrictions on the use of inside information and other provisions deemed by the Company to be
appropriate in order to ensure compliance with Applicable Laws. Each Grantee shall execute such separate agreement(s) as
may be requested by the Company relating to matters set forth in this Section 16.2. The execution of such separate
agreement(s) may be a condition by the Company to the exercise of any Award.
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16.3. Forced Sale. In the event the that Board approves a Change of Control effected by way of a forced or
compulsory sale (whether pursuant to the Company’s Articles of Association or pursuant to Section 341 of the Companies
Law), then, without derogating from such provisions and in addition thereto, the Grantee shall be obligated, and shall be
deemed to have agreed to the offer to effect the Change of Control on the terms approved by the Board (and the Shares held
by or for the benefit of the Grantee shall be included in the shares of the Company approving the terms of such Change of
Control for the purpose of satisfying the required majority), and shall sell all of the Shares held by or for the benefit of the
Grantee on the terms and conditions applying to the holders of Shares, in accordance with the instructions then issued by
the Board, whose determination shall be final. No Grantee shall contest, bring any claims or demands, or exercise any
appraisal rights related to any of the foregoing. The proxy pursuant to Section 6.10 includes an authorization of the holder
of such proxy to sign, by and on behalf of any Grantee, such documents and agreements as are required to affect the sale of
Shares in connection with such Change of Control.
16.4. Share Transfer Restrictions. Any transfer or other disposition of Shares or any interest therein is subject to
the prior approval of the Board, which, if granted (without any obligation to do so), may be subject to such terms,
conditions and restrictions, as it deems appropriate. The terms, conditions and restrictions of any approval may differ from
one Grantee to another, and need not be the same. Any transfer or otherwise grant of any interest in any Shares to any third
party that does not comply with this Section shall be null and void and shall not confer upon any person, other than the
Grantee, any rights. This Section shall terminate immediately after the public offering of securities of the Company
pursuant to an effective registration statement filed under the Securities Act or equivalent law in another jurisdiction and
the listing for trading on a stock exchange or market or trading system. This Section shall apply in addition to any other
limitation, restriction and/or condition in this Plan (including, without limitation, after the application of Section 16), any
Award Agreement, shareholders agreement, Company’s Articles of Association or other instrument between the Grantee
and the Company or by which the Grantee is bound. This Section shall not apply to a transfer of Shares in a sale of all or
substantially all of the shares of the Company which was approved by the Board or pursuant to the Company’s Articles of
Association or upon a Change of Control.
17. MARKET STAND-OFF
17.1. In connection with any underwritten public offering of equity securities of the Company pursuant to an
effective registration statement filed under the Securities Act or equivalent law in another jurisdiction, the Grantee shall not
directly or indirectly, without the prior written consent of the Company or its underwriters, (i) lend, offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any Shares or other Awards, any securities of
the Company (whether or not such Shares were acquired under this Plan), or any securities convertible into or exercisable
or exchangeable (directly or indirectly) for Shares or securities of the Company and any other shares or securities issued or
distributed in respect thereto or in substitution thereof (collectively, “Securities”), or (ii) enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Securities,
whether any such transaction described in clauses (i) or (ii) is to be settled by delivery of Securities, in cash or otherwise.
The foregoing provisions of this Section 17.1 shall not apply to the sale of any shares to an underwriter pursuant to an
underwriting agreement. Such restrictions (the “Market Stand-Off”) shall be in effect for such period of time (the
“Market Stand-Off Period”): (A) following the first public filing of the registration statement relating to the underwritten
public offering until the extirpation of 180 days following the effective date of such registration statement relating to the
Company’s initial public offering or 90 days following the effective date of such registration statement relating to any other
public offering, in each case, provided, however, that if (1) during the last 17 days of the initial Market Stand-Off Period,
the Company releases earnings results or announces material news or a material event or (2) prior to the expiration of the
initial Market Stand-Off Period, the Company announces that it will release earnings results during the 15-day period
following the last day of the initial Market Stand-Off Period, then in each case the Market Stand-Off Period will be
automatically extended until the expiration of the 18-day period beginning on the date of release of the earnings results or
the announcement of the material news or material event; or (B) such other period as shall be requested by the Company or
the underwriters. Notwithstanding anything herein to the contrary, if the underwriter(s) and the Company agree on a
termination date of the Market Stand-Off Period in the event of failure to consummate a certain public offering, then such
termination shall apply also to the Market Stand-Off Period hereunder with respect to that particular public offering.
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17.2. In the event of a subdivision of the outstanding share capital of the Company, the distribution of any
securities (whether or not of the Company), whether as bonus shares or otherwise, and whether as dividend or otherwise, a
recapitalization, a reorganization (which may include a combination or exchange of shares or a similar transaction affecting
the Company’s outstanding securities without receipt of consideration), a consolidation, a spin-off or other corporate
divestiture or division, a reclassification or other similar occurrence, any new, substituted or additional securities which are
by reason of such transaction distributed with respect to any Shares subject to the Market Stand-Off, or into which such
Shares thereby become convertible, shall immediately be subject to the Market Stand-Off.
17.3. In order to enforce the Market Stand-Off, the Company may impose stop-transfer instructions with respect
to the Shares acquired under this Plan until the end of the applicable Market Stand-Off period.
17.4. The underwriters in connection with a registration statement so filed are intended third party beneficiaries
of this Section 17 and shall have the right, power and authority to enforce the provisions hereof as though they were a party
hereto. Each Grantee shall execute such separate agreement(s) as may be requested by the Company or the underwriters in
connection with such registration statement and in the form required by them, relating to Market Stand-Off (which need not
be identical to the provisions of this Section 17, and may include such additional provisions and restrictions as the
underwriters deem advisable) or that are necessary to give further effect thereto. The execution of such separate
agreement(s) may be a condition by the Company to the exercise of any Award.
17.5. Without derogating from the above provisions of this Section 17 or elsewhere in this Plan, the provisions
of this Section 17 shall apply to the Grantee and the Grantee’s heirs, legal representatives, successors, assigns, and to any
purchaser, assignee or transferee of any Awards or Shares.
18.
AGREEMENT REGARDING TAXES; DISCLAIMER.
18.1. If the Committee shall so require, as a condition of exercise of an Award, the release of Shares by the
Trustee or the expiration of the Restricted Period, a Grantee shall agree that, no later than the date of such occurrence, the
Grantee will pay to the Company (or the Trustee, as applicable) or make arrangements satisfactory to the Committee and
the Trustee (if applicable) regarding payment of any applicable taxes and compulsory payments of any kind required by
Applicable Law to be withheld or paid.
18.2. TAX LIABILITY. ALL TAX CONSEQUENCES UNDER ANY APPLICABLE LAW WHICH MAY
ARISE FROM THE GRANT OF ANY AWARDS OR THE EXERCISE THEREOF, THE SALE OR DISPOSITION OF
ANY SHARES GRANTED HEREUNDER OR ISSUED UPON EXERCISE OR (IF APPLICABLE) THE VESTING OF
ANY AWARD, THE ASSUMPTION, SUBSTITUTION, CANCELLATION OR PAYMENT IN LIEU OF AWARDS OR
FROM ANY OTHER ACTION IN CONNECTION WITH THE FOREGOING (INCLUDING WITHOUT LIMITATION
ANY TAXES AND COMPULSORY PAYMENTS, SUCH AS SOCIAL SECURITY OR HEALTH TAX PAYABLE BY
THE GRANTEE OR THE COMPANY IN CONNECTION THEREWITH) SHALL BE BORNE AND PAID SOLELY BY
THE GRANTEE, AND THE GRANTEE SHALL INDEMNIFY THE COMPANY, ITS SUBSIDIARIES AND
AFFILIATES AND THE TRUSTEE, AND SHALL HOLD THEM HARMLESS AGAINST AND FROM ANY
LIABILITY FOR ANY SUCH TAX OR PAYMENT OR ANY PENALTY, INTEREST OR INDEXATION THEREON.
EACH GRANTEE AGREES TO, AND UNDERTAKES TO COMPLY WITH, ANY RULING, SETTLEMENT,
CLOSING AGREEMENT OR OTHER SIMILAR AGREEMENT OR ARRANGEMENT WITH ANY TAX
AUTHORITY IN CONNECTION WITH THE FOREGOING WHICH IS APPROVED BY THE COMPANY.
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18.3. NO TAX ADVICE. THE GRANTEE IS ADVISED TO CONSULT WITH A TAX ADVISOR WITH
RESPECT TO THE TAX CONSEQUENCES OF RECEIVING, EXERCISING OR DISPOSING OF AWARDS
HEREUNDER. THE COMPANY DOES NOT ASSUME ANY RESPONSIBILITY TO ADVISE THE GRANTEE ON
SUCH MATTERS, WHICH SHALL REMAIN SOLELY THE RESPONSIBILITY OF THE GRANTEE.
18.4. TAX TREATMENT. THE COMPANY DOES NOT UNDERTAKE OR ASSUME ANY LIABILITY OR
RESPONSIBILITY TO THE EFFECT THAT ANY AWARD SHALL QUALIFY WITH ANY PARTICULAR TAX
REGIME OR RULES APPLYING TO PARTICULAR TAX TREATMENT, OR BENEFIT FROM ANY PARTICULAR
TAX TREATMENT OR TAX ADVANTAGE OF ANY TYPE AND THE COMPANY SHALL BEAR NO LIABILITY IN
CONNECTION WITH THE MANNER IN WHICH ANY AWARD IS EVENTUALLY TREATED FOR TAX
PURPOSES, REGARDLESS OF WHETHER THE AWARD WAS GRANTED OR WAS INTENDED TO QUALIFY
UNDER ANY PARTICULAR TAX REGIME OR TREATMENT. THIS PROVISION SHALL SUPERSEDE ANY TYPE
OF AWARDS OR TAX QUALIFICATION INDICATED IN ANY CORPORATE RESOLUTION OR AWARD
AGREEMENT, WHICH SHALL AT ALL TIMES BE SUBJECT TO THE REQUIREMENTS OF APPLICABLE LAW.
THE COMPANY DOES NOT UNDERTAKE AND SHALL NOT BE REQUIRED TO TAKE ANY ACTION IN ORDER
TO QUALIFY THE AWARD WITH THE REQUIREMENT OF ANY PARTICULAR TAX TREATMENT AND NO
INDICATION IN ANY DOCUMENT TO THE EFFECT THAT ANY AWARD IS INTENDED TO QUALIFY FOR ANY
TAX TREATMENT SHALL IMPLY SUCH AN UNDERTAKING. NO ASSURANCE IS MADE BY THE COMPANY
OR ANY OF ITS AFFILIATES THAT ANY PARTICULAR TAX TREATMENT ON THE DATE OF GRANT WILL
CONTINUE TO EXIST OR THAT THE AWARD WOULD QUALIFY AT THE TIME OF EXERCISE OR
DISPOSITION THEREOF WITH ANY PARTICULAR TAX TREATMENT. THE COMPANY AND ITS AFFILIATES
SHALL NOT HAVE ANY LIABILITY OR OBLIGATION OF ANY NATURE IN THE EVENT THAT AN AWARD
DOES NOT QUALIFY FOR ANY PARTICULAR TAX TREATMENT, REGARDLESS WHETHER THE COMPANY
COULD HAVE OR SHOULD HAVE TAKEN ANY ACTION TO CAUSE SUCH QUALIFICATION TO BE MET AND
SUCH QUALIFICATION REMAINS AT ALL TIMES AND UNDER ALL CIRCUMSTANCES AT THE RISK OF THE
GRANTEE. THE COMPANY DOES NOT UNDERTAKE OR ASSUME ANY LIABILITY TO CONTEST A
DETERMINATION OR INTERPRETATION (WHETHER WRITTEN OR UNWRITTEN) OF ANY TAX
AUTHORITIES, INCLUDING IN RESPECT OF THE QUALIFICATION UNDER ANY PARTICULAR TAX REGIME
OR RULES APPLYING TO PARTICULAR TAX TREATMENT. IF THE AWARDS DO NOT QUALIFY UNDER ANY
PARTICULAR TAX TREATMENT IT COULD RESULT IN ADVERSE TAX CONSEQUENCES TO THE GRANTEE.
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18.5. The Company or any Subsidiary or Affiliate may take such action as it may deem necessary or
appropriate, in its discretion, for the purpose of or in connection with withholding of any taxes and compulsory payments
which the Trustee, the Company or any Subsidiary or Affiliate is required by any Applicable Law to withhold in connection
with any Awards (collectively, “Withholding Obligations”). Such actions may include (i) requiring a Grantees to remit to
the Company in cash an amount sufficient to satisfy such Withholding Obligations and any other taxes and compulsory
payments, payable by the Company in connection with the Award or the exercise or (if applicable) the vesting thereof; (ii)
subject to Applicable Law, allowing the Grantees to provide Shares to the Company, in an amount that at such time, reflects
a value that the Committee determines to be sufficient to satisfy such Withholding Obligations; (iii) withholding Shares
otherwise issuable upon the exercise of an Award at a value which is determined by the Committee to be sufficient to
satisfy such Withholding Obligations; or (iv) any combination of the foregoing. The Company shall not be obligated to
allow the exercise of any Award by or on behalf of a Grantee until all tax consequences arising from the exercise of such
Award are resolved in a manner acceptable to the Company.
18.6. Each Grantee shall notify the Company in writing promptly and in any event within ten (10) days after the
date on which such Grantee first obtains knowledge of any tax bureau inquiry, audit, assertion, determination, investigation,
or question relating in any manner to the Awards granted or received hereunder or Shares issued thereunder and shall
continuously inform the Company of any developments, proceedings, discussions and negotiations relating to such matter,
and shall allow the Company and its representatives to participate in any proceedings and discussions concerning such
matters. Upon request, a Grantee shall provide to the Company any information or document relating to any matter
described in the preceding sentence, which the Company, in its discretion, requires.
18.7. With respect to 102 Non-Trustee Options, if the Grantee ceases to be employed by the Company or any
Affiliate, the Grantee shall extend to the Company and/or its Affiliate with whom the Grantee is employed a security or
guarantee for the payment of taxes due at the time of sale of Shares, all in accordance with the provisions of Section 102 of
the Ordinance and the Rules.
18.8. For the purpose hereof “tax(es)” means (a) all federal, state, local or foreign taxes, charges, fees, imposts,
levies or other assessments, including all income, capital gains, transfer, withholding, payroll, employment, social security,
national security, health tax, wealth surtax, stamp, registration and estimated taxes, customs duties, fees, assessments and
charges of any similar kind whatsoever (including under Section 280G of the Code), (b) all interest, indexation
differentials, penalties, fines, additions to tax or additional amounts imposed by any taxing authority in connection with any
item described in clause (a), (c) any transferee or successor liability in respect of any items described in clauses (a) or (b)
payable by reason of contract, assumption, transferee liability, successor liability, operation of Applicable Law, or as a
result of any express or implied obligation to assume Taxes or to indemnify any other person, and (d) any liability for the
payment of any amounts of the type described in clause (a) or (b) payable as a result of being a member of an affiliated,
consolidated, combined, unitary or aggregate group for any taxable period, including under U.S. Treasury Regulations
Section 1.1502-6(a) (or any predecessor or successor thereof of any analogous or similar provision under Law) or
otherwise.
18.9. If a Grantee makes an election under Section 83(b) of the Code to be taxed with respect to an Award as of
the date of transfer of Shares rather than as of the date or dates upon which the Grantee would otherwise be taxable under
Section 83(a) of the Code, such Grantee shall deliver a copy of such election to the Company upon or prior to the filing
such election with the U.S. Internal Revenue Service. Neither the Company nor any Affiliate shall have any liability or
responsibility relating to or arising out of the filing or not filing of any such election or any defects in its construction.
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19.
RIGHTS AS A SHAREHOLDER; VOTING AND DIVIDENDS.
19.1. Subject to Section 11.4, a Grantee shall have no rights as a shareholder of the Company with respect to
any Shares covered by an Award until the Grantee shall have exercised the Award, paid the Exercise Price therefor and
becomes the record holder of the subject Shares. In the case of 102 Awards or 3(9) Awards (if such Awards are being held
by a Trustee), the Trustee shall have no rights as a shareholder of the Company with respect to the Shares covered by such
Award until the Trustee becomes the record holder for such Shares for the Grantee’s benefit, and the Grantee shall not be
deemed to be a shareholder and shall have no rights as a shareholder of the Company with respect to the Shares covered by
the Award until the date of the release of such Shares from the Trustee to the Grantee and the transfer of record ownership
of such Shares to the Grantee (provided however that the Grantee shall be entitled to receive from the Trustee any cash
dividend or distribution made on account of the Shares held by the Trustee for such Grantee’s benefit, subject to any tax
withholding and compulsory payment). No adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distribution of other rights for which the record date is prior to the date on which the
Grantee or Trustee (as applicable) becomes the record holder of the Shares covered by an Award, except as provided in
Section 14 hereof.
19.2. With respect to all Awards issued in the form of Shares hereunder or upon the exercise or (if applicable)
the vesting of Awards hereunder, any and all voting rights attached to such Shares shall be subject to Section 6.9, and the
Grantee shall be entitled to receive dividends distributed with respect to such Shares, subject to the provisions of the
Company’s Articles of Association, as amended from time to time, and subject to any Applicable Law.
19.3. The Company may, but shall not be obligated to, register or qualify the sale of Shares under any applicable
securities law or any other Applicable Law.
20.
NO REPRESENTATION BY COMPANY.
21. By granting the Awards, the Company is not, and shall not be deemed as, making any representation or
warranties to the Grantee regarding the Company, its business affairs, its prospects or the future value of its Shares. The
Company shall not be required to provide to any Grantee any information, documents or material in connection with the
Grantee’s considering an exercise of an Award. To the extent that any information, documents or materials are provided,
the Company shall have no liability with respect thereto. Any decision by a Grantee to exercise an Award shall solely be at
the risk of the Grantee.
22.
NO RETENTION RIGHTS.
23. Nothing in this Plan, any Award Agreement or in any Award granted or agreement entered into pursuant hereto shall
confer upon any Grantee the right to continue in the employ of, or be in the service of the Company or any Subsidiary or
Affiliate thereof as a Service Provider or to be entitled to any remuneration or benefits not set forth in this Plan or such
agreement, or to interfere with or limit in any way the right of the Company or any such Subsidiary or Affiliate to terminate
such Grantee's employment or service (including, any right of the Company or any of its Affiliates to immediately cease the
Grantee’s employment or service or to shorten all or part of the notice period, regardless of whether notice of termination
was given by the Company or its Affiliates or by the Grantee). Awards granted under this Plan shall not be affected by any
change in duties or position of a Grantee, subject to Sections 6.6 through 6.8. No Grantee shall be entitled to claim and the
Grantee hereby waives any claim against the Company or any Subsidiary or Affiliate that he or she was prevented from
continuing to vest Awards as of the date of termination of his or her employment with, or services to, the Company or any
Subsidiary or Affiliate. No Grantee shall be entitled to any compensation in respect of the Awards which would have
vested had such Grantee’s employment or engagement with the Company (or any Subsidiary or Affiliate) not been
terminated.
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24.
PERIOD DURING WHICH AWARDS MAY BE GRANTED.
25. Awards may be granted pursuant to this Plan from time to time within a period of ten (10) years from the
Effective Date, which period may be extended from time to time by the Board. From and after such date (as extended) no
grants of Awards may be made and this Plan shall continue to be in full force and effect with respect to Awards or Shares
issued thereunder that remain outstanding.
26.
AMENDMENT OF THIS PLAN AND AWARDS.
26.1. The Board at any time and from time to time may suspend, terminate, modify or amend this Plan, whether
retroactively or prospectively. Any amendment effected in accordance with this Section shall be binding upon all Grantees
and all Awards, whether granted prior to or after the date of such amendment, and without the need to obtain the consent of
any Grantee. No termination or amendment of this Plan shall affect any then outstanding Award unless expressly provided
by the Board.
26.2. Subject to changes in Applicable Law that would permit otherwise, without the approval of the
Company’s shareholders, there shall be (i) no increase in the maximum aggregate number of Shares that may be issued
under this Plan as Incentive Stock Options (except by operation of the provisions of Section 14.1), (ii) no change in the
class of persons eligible to receive Incentive Stock Options, and (iii) no other amendment of this Plan that would require
approval of the Company’s shareholders under any Applicable Law. Unless not permitted by Applicable Law, if the grant
of an Award is subject to approval by shareholders, the date of grant of the Award shall be determined as if the Award had
not been subject to such approval. Failure to obtain approval by the shareholders shall not in any way derogate from the
valid and binding effect of any grant of an Award, which is not an Incentive Stock Option. Upon approval of an
amendment to this Plan by the shareholders of the Company as set forth above, all Incentive Stock Options granted under
this Plan on or after such amendment shall be fully effective as if the shareholders of the Company had approved the
amendment on the same date.
26.3. The Board or the Committee at any time and from time to time may modify or amend any Award
theretofore granted, including any Award Agreement, whether retroactively or prospectively.
27.
APPROVAL.
27.1. This Plan shall take effect upon its adoption by the Board (the “Effective Date”).
27.2. Solely with respect to grants of Incentive Stock Options, this Plan shall also be subject to shareholders’
approval, within one year of the Effective Date, by a majority of the votes cast on the proposal at a meeting or a written
consent of shareholders (however, if the grant of an Award is subject to approval by shareholders, the date of grant of the
Award shall be determined as if the Award had not been subject to such approval). Failure to obtain such approval by the
shareholders within such period shall not in any way derogate from the valid and binding effect of any grant of an Award,
except that any Options previously granted under this Plan may not qualify as Incentive Stock Options but, rather, shall
constitute Nonqualified Stock Options. Upon approval of this Plan by the shareholders of the Company as set forth above,
all Incentive Stock Options granted under this Plan on or after the Effective Date shall be fully effective as if the
shareholders of the Company had approved this Plan on the Effective Date.
27.3. 102 Awards are conditional upon the filing with or approval by the ITA, if required, as set forth in Section
9.49. Failure to so file or obtain such approval shall not in any way derogate from the valid and binding effect of any grant
of an Award, which is not an 102 Award.
28.
RULES PARTICULAR TO SPECIFIC COUNTRIES; SECTION 409A.
28.1. Notwithstanding anything herein to the contrary, the terms and conditions of this Plan may be
supplemented or amended with respect to a particular country or tax regime by means of an appendix to this Plan, and to
the extent that the terms and conditions set forth in any appendix conflict with any provisions of this Plan, the provisions of
such appendix shall govern. Terms and conditions set forth in such appendix shall apply only to Awards granted to
Grantees under the jurisdiction of the specific country or such other tax regime that is the subject of such appendix and
shall not apply to Awards issued to a Grantee not under the jurisdiction of such country or such other tax regime. The
adoption of any such appendix shall be subject to the approval of the Board or the Committee, and if determined by the
Committee to be required in connection with the application of certain tax treatment, pursuant to applicable stock exchange
rules or regulations or otherwise, then also the approval of the shareholders of the Company at the required majority.
33
28.2. This Section 25.2 shall only apply to Awards granted to Grantees who are subject to United States Federal
income tax.
25.2.1 It is the intention of the Company that no Award shall be deferred compensation subject
to Code Section 409A unless and to the extent that the Committee specifically determines otherwise as
provided in Section 25.2.2, and the Plan and the terms and conditions of all Awards shall be interpreted and
administered accordingly.
25.2.2 The terms and conditions governing any Awards that the Committee determines will be
subject to Section 409A of the Code, including any rules for payment or elective or mandatory deferral of the
payment or delivery of Shares or cash pursuant thereto, and any rules regarding treatment of such Awards in the
event of a Change in Control, shall be set forth in the applicable Award Agreement and shall be intended to
comply in all respects with Section 409A of the Code, and the Plan and the terms and conditions of such
Awards shall be interpreted and administered accordingly.
25.2.3 The Company shall have complete discretion to interpret and construe the Plan and any
Award Agreement in any manner that establishes an exemption from (or compliance with) the requirements of
Code Section 409A. If for any reason, such as imprecision in drafting, any provision of the Plan and/or any
Award Agreement does not accurately reflect its intended establishment of an exemption from (or compliance
with) Code Section 409A, as demonstrated by consistent interpretations or other evidence of intent, such
provision shall be considered ambiguous as to its exemption from (or compliance with) Code Section 409A and
shall be interpreted by the Company in a manner consistent with such intent, as determined in the discretion of
the Company. If, notwithstanding the foregoing provisions of this Section 25.2.3, any provision of the Plan or
any such agreement would cause a Grantee to incur any additional tax or interest under Code Section 409A, the
Company shall reform such provision in a manner intended to avoid the incurrence by such Grantee of any
such additional tax or interest; provided that the Company shall maintain, to the extent reasonably practicable,
the original intent and economic benefit to the Grantee of the applicable provision without violating the
provisions of Code Section 409A.
25.2.4 Notwithstanding any other provision in the Plan, any Award Agreement, or any other
written document establishing the terms and conditions of an Award, if any Grantee is a “specified employee,”
within the meaning of Section 409A of the Code, as of the date of his or her “separation from service” (as
defined under Section 409A of the Code), then, to the extent required by Treasury Regulation Section 1.409A-
3(i)(2) (or any successor provision), any payment made to such Grantee on account of his or her separation
from service shall not be made before a date that is six months after the date of his or her separation from
service. The Committee may elect any of the methods of applying this rule that are permitted under Treasury
Regulation Section 1.409A-3(i)(2)(ii) (or any successor provision).
25.2.5 Notwithstanding any other provision of this Section 25.2 to the contrary, although the
Company intends to administer the Plan so that Awards will be exempt from, or will comply with, the
requirements of Code Section 409A, the Company does not warrant that any Award under the Plan will qualify
for favorable tax treatment under Code Section 409A or any other provision of federal, state, local, or non-
United States law. The Company shall not be liable to any Grantee for any tax, interest, or penalties the
Grantee might owe as a result of the grant, holding, vesting, exercise, or payment of any Award under the Plan.
34
29.
GOVERNING LAW; JURISDICTION.
30. This Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State
of Israel, except with respect to matters that are subject to tax laws, regulations and rules of any specific jurisdiction, which
shall be governed by the respective laws, regulations and rules of such jurisdiction. Certain definitions, which refer to laws
other than the laws of such jurisdiction, shall be construed in accordance with such other laws. The competent courts
located in Tel-Aviv-Jaffa, Israel shall have exclusive jurisdiction over any dispute arising out of or in connection with this
Plan and any Award granted hereunder. By signing any Award Agreement or any other agreement relating to an Award,
each Grantee irrevocably submits to such exclusive jurisdiction.
31.
NON-EXCLUSIVITY OF THIS PLAN.
32. The adoption of this Plan shall not be construed as creating any limitations on the power or authority of the
Company to adopt such other or additional incentive or other compensation arrangements of whatever nature as the
Company may deem necessary or desirable or preclude or limit the continuation of any other plan, practice or arrangement
for the payment of compensation or fringe benefits to employees generally, or to any class or group of employees, which
the Company or any Affiliate now has lawfully put into effect, including any retirement, pension, savings and stock
purchase plan, insurance, death and disability benefits and executive short-term or long-term incentive plans.
33. MISCELLANEOUS.
33.1. Survival. The Grantee shall be bound by and the Shares issued upon exercise or (if applicable) the vesting
of any Awards granted hereunder shall remain subject to this Plan after the exercise or (if applicable) the vesting of Awards,
in accordance with the terms of this Plan, whether or not the Grantee is then or at any time thereafter employed or engaged
by the Company or any of its Affiliates.
33.2. Additional Terms. Each Award awarded under this Plan may contain such other terms and conditions not
inconsistent with this Plan as may be determined by the Committee, in its sole discretion.
33.3. Fractional Shares. No fractional Share shall be issuable upon exercise or vesting of any Award and the
number of Shares to be issued shall be rounded down to the nearest whole Share, with in any Share remaining at the last
vesting date due to such rounding to be issued upon exercise at such last vesting date.
33.4. Severability. If any provision of this Plan, any Award Agreement or any other agreement entered into in
connection with an Award shall be determined to be illegal or unenforceable by any court of law in any jurisdiction, the
remaining provisions hereof and thereof shall be severable and enforceable in accordance with their terms, and all
provisions shall remain enforceable in any other jurisdiction. In addition, if any particular provision contained in this Plan,
any Award Agreement or any other agreement entered into in connection with an Award shall for any reason be held to be
excessively broad as to duration, geographic scope, activity or subject, it shall be construed by limiting and reducing such
provision as to such characteristic so that the provision is enforceable to fullest extent compatible with Applicable Law as it
shall then appear.
33.5. Captions and Titles. The use of captions and titles in this Plan or any Award Agreement or any other
agreement entered into in connection with an Award is for the convenience of reference only and shall not affect the
meaning or interpretation of any provision of this Plan or such agreement.
35
Dr. Moshe Eliash
Barrister-at-law, Advocate and Notary
2 Hasoreg St., POB 433
Telephone 651681, 6054281
Faximilia 6254282
Jerusalem 91003
Eliash7@bezeqint.net
To: Sol-Gel
Golda Meir 7
Ness Ziona
Exhibit 4.15
Tuesday, 12 November 2019
Re: Extension of the lease periods
The owners of the property agree to extend the lease period in accordance with the lease agreement of 10/10/2007, as last
amended in documents dated 30/3/16 and 22/09/16, and also the lease period in accordance with the lease agreement dated
30/01/17, as was last amended in documents dated 03/07/2018, so that the aforementioned lease periods end on December 31,
2023.
The extended lease periods are subject to all provisions of the aforementioned agreements, mutatis mutandis including
provisions regarding the lease fee and management fee.
The owners guarantee that if any lessee evacuates parking spaces, the owners will inform you of such and you will be entitled to
lease all or some of those parking space, upon a 14 day notice period, on the same terms as are customary at that time.
If you agree to extend the lease periods as stated above, please confirm your approval on a copy of this letter and return to me.
Respectfully,
/s/ Moshe Eliash
Dr. Moshe Eliash, Adv.
We agree and confirm
/s/ Gilad Mamlok
Gilad Mamlok, CFO
Sol-Gel Technologies Ltd.
CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 12.1
I, Alon Seri-Levy, certify that:
1.
I have reviewed this annual report on Form 20-F of Sol-Gel Technologies Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the company and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial
reporting;
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s
internal control over financial reporting.
Date: March 24, 2020
/s/ Alon Seri-Levy
Alon Seri-Levy
Chief Executive Officer
CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302
OF THE SARBANES‑OXLEY ACT OF 2002
Exhibit 12.1
I, Gilad Mamlok, certify that:
1.
I have reviewed this annual report on Form 20-F of Sol-Gel Technologies Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the company and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial
reporting;
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s
internal control over financial reporting.
Date: March 24, 2020
/s/ Gilad Mamlok
Gilad Mamlok
Chief Financial Officer
Exhibit 13
CERTIFICATION BY CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL
OFFICER PURSUAN TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Sol-Gel Technologies Ltd. (the “Company”) on Form 20-F for the period ended
December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the
undersigned officers of the Company certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley
Act of 2002, that to such officer's knowledge:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: March 24, 2020
/s/ Alon Seri-Levy
Alon Seri-Levy
Chief Executive Officer
/s/ Gilad Mamlok
Gilad Mamlok
Chief Financial Officer
Exhibit 15.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-223915) and Form F-3
(No. 333-230564) of Sol-Gel Technologies Ltd. of our report dated March 24, 2020 relating to the financial statements, which
appears in this Form 20-F.
Tel-Aviv, Israel
March 24, 2020
/s/Kesselman & Kesselman
Certified Public Accountants (Isr.)
A member firm of PricewaterhouseCoopers International Limited
Kesselman & Kesselman, Trade Tower, 25 Hamered Street, Tel-Aviv 6812508, Israel,
P.O Box 50005 Tel-Aviv 6150001 Telephone: +972 -3- 7954555, Fax:+972 -3- 7954556, www.pwc.com/il