As filed with the Securities and Exchange Commission on May
15, 2017
Registration No. 333-217765
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Amendment No. 1 to
FORM F-1
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
ROSETTA GENOMICS LTD.
(Exact name of Registrant as specified in
its charter)
Not Applicable
(Translation of Registrant’s Name into
English)
Israel
|
|
2834
|
|
Not Applicable
|
(State or other jurisdiction of
|
|
(Primary Standard Industrial
|
|
(IRS Employer
|
incorporation or organization)
|
|
Classification Code Number)
|
|
Identification No.)
|
Rosetta Genomics Ltd.
10 Plaut Street, Science Park
Rehovot 76706 POB 4059
Israel
+972-73-222-0700
(Address, including zip code, and telephone
number, including area code, of registrant’s principal executive offices)
Rosetta Genomics Inc.
3711 Market Street, Suite 740
Philadelphia, Pennsylvania 19104
Attn: President
(215) 382-9000
(Name, address , including zip code, and
telephone number,
including area code, of agent for service)
With copies to:
|
Robert E. Burwell, Esq.
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C.
44 Montgomery Street, 36th Floor
San Francisco, CA 94104
(415) 432-6000
|
Oded Har-Even, Esq.
Robert V. Condon III, Esq.
Zysman, Aharoni, Gayer and
Sullivan & Worcester LLP
1633 Broadway
New York, New York 10019
(212) 660-5000
|
Approximate date of commencement of proposed
sale to the public:
From time to time after this registration statement becomes effective.
If any of the securities being registered on
this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following
box.
x
If this Form is filed to register additional
securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration statement for the same offering.
¨
____________
If this Form is a post-effective amendment
filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering.
¨
____________
If this Form is a post-effective amendment
filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering.
¨
____________
Indicate by check mark whether the registrant
is an emerging growth company as defined in Rule 405 of the Securities Act of 1933. 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
7(a)(2)(B)
of the Securities Act .
¨
CALCULATION OF REGISTRATION FEE
Title of each Class of Securities to be Registered
|
|
Proposed
Maximum
Aggregate
Offering
Price(1)(2)
|
|
|
Amount of
Registration
Fee(1)
|
|
Class A Unit consisting of:
|
|
$
|
|
|
|
$
|
|
|
(i) Ordinary Shares, par value
NIS 7.2 per share
|
|
|
—
|
|
|
|
—
|
|
(ii) Series A Warrants
to purchase Ordinary Shares (3)
|
|
|
—
|
|
|
|
—
|
|
Class B Unit consisting of:
|
|
|
|
|
|
|
|
|
(i) Pre-funded
Series B Warrants to purchase Ordinary Shares
|
|
|
|
|
|
|
|
|
(ii) Series A Warrants
to purchase Ordinary Shares (3)
|
|
|
|
|
|
|
|
|
Ordinary Shares issuable upon exercise of Series A Warrants
|
|
|
|
|
|
|
|
|
Ordinary Shares issuable upon exercise of Series B Warrants
|
|
|
|
|
|
|
|
|
Placement Agent’s warrants to purchase Ordinary Shares (3)
|
|
|
|
|
|
|
|
|
Ordinary shares underlying the Placement Agent’s warrants (4)
|
|
|
|
|
|
|
|
|
Total
|
|
|
15,609,375
|
|
|
|
1,810.00
|
(5)
|
|
(1)
|
Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act
of 1933, as amended.
|
|
(2)
|
Pursuant to Rule 416(a) under the Securities Act of 1933, as amended, the registrant is also registering hereunder an indeterminate
number of shares that may be issued and resold resulting from stock splits, stock dividends or similar transactions.
|
|
(3)
|
No registration fee required pursuant to Rule 457(g) under the Securities Act of 1933, as amended.
|
|
(4)
|
Represents warrants to purchase
a number of Ordinary Shares equal to 6.5% of the Ordinary Shares sold in this offering
(excluding any Ordinary Shares underlying the Series A Warrants issued in this offering)
at an exercise price equal to 125% of the offering price of Ordinary Shares sold pursuant
to this offering.
|
|
(5)
|
$870.00 previously
paid.
|
The
Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until
the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter
become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary
prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are
not soliciting offers to buy these securities in any state or jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED
MAY 15, 2017
Preliminary Prospectus
Up to 1,500,000
Class
A Units consisting of
Ordinary Shares
and Series A
Warrants
and
1,500,000 Class B Units consisting of Pre-Funded Series B Warrants and Series A Warrants
(3,000,000
Ordinary Shares underlying the Series A and Pre-Funded Series B Warrants)
ROSETTA GENOMICS LTD.
We are
offering, on a best efforts basis, up to 1,500,000 Class A Units, with each Class A Unit consisting of (i) one ordinary
share, par value NIS 7.2, or Ordinary Shares, and (ii) a warrant to purchase 0.50 Ordinary Share, or a Series A Warrant.
We
do not currently have a sufficient number of authorized Ordinary Shares to cover the shares issuable upon exercise of
the Series A Warrants being offered by this prospectus. As a result, before any Series A Warrants can become
exercisable, we will seek shareholder approval of an amendment to our amended and restated articles of association to
increase the number of authorized Ordinary Shares to [ ] Ordinary Shares
(the “Charter Amendment”) at a special meeting of shareholders. While all current directors and executive
officers are supportive of the Charter Amendment, we cannot assure you that we will be able to obtain requisite shareholder
approval of the Charter Amendment. In the event our shareholders do not approve the Charter Amendment, the Series A Warrants
will not be exercisable and may not have any value.
The exercise price per full Ordinary Share purchasable upon
exercise of the Series A Warrants is $ . The Series A Warrants
will be exercisable on any day on or after the date that we publicly announce through the filing of a Current Report on Form
6-K that the Charter Amendment has been approved by our shareholders and has become effective. The Series A Warrants will
expire years from the date the Series A Warrants are first exercisable. Each Class A Unit will be sold at an assumed
public offering price of $2.22 per unit, the closing price of our Ordinary Shares on the NASDAQ Capital Market on May 12,
2017. The actual offering price per Class A Unit will be determined between us and the placement agent at the time of pricing
and may be at a discount to the current market price. The Class A Units will not be issued or certificated. The Ordinary
Shares and Series A Warrants part of a Class A Unit are immediately separable and will be issued separately, but will be
purchased together in this offering.
We are also
offering to those purchasers, if any, whose purchase of Class A Units in this offering would result in the purchaser,
together with its affiliates and certain related parties, beneficially owning more than 4.99% of our outstanding Ordinary
Shares immediately following the consummation of this offering, the opportunity to purchase, if they so choose, up to
1,500,000 Class B Units, in lieu of Class A Units that would otherwise result in beneficial ownership in excess of 4.99% (or
at the election of the purchaser, 9.99%) of our outstanding Ordinary Shares, with each Class B Unit consisting of (i) a
pre-funded warrant to purchase one Ordinary Share, or a Series B Warrant, and (ii) a Series A Warrant to
purchase 0.50 Ordinary Share. The Series B Warrants will have an exercise price of $0.01 per Ordinary Share and will be
exercisable immediately until exercised in full. Each Class B Unit will be sold at an assumed public offering price of $2.21.
The actual offering price per Class B Unit will be determined between us and the placement agent at the time of pricing and
may be at a discount to the current market price, but will be identical to the offering price of Class A Unit minus $0.01.
The Class B Units will not be issued or certificated. The pre-funded Series B Warrants and the Series A Warrants part of a
Class B Unit are immediately separable and will be issued separately, but will be purchased together in this offering. There
can be no assurance that we will sell any of the Series B Warrants being offered.
The
Ordinary Shares issuable from time to time upon exercise of the Series A Warrants and the pre-funded Series B Warrants are also
being offered by this prospectus.
Our Ordinary Shares
are currently listed on the NASDAQ Capital Market under the symbol “ROSG.” On May 12, 2017, the last reported sale
price of our Ordinary Shares was $2.22 per share. There is currently no established public trading market for the Series A Warrants
and the pre-funded Series B Warrants offered in this offering. The Series A Warrants and pre-funded Series B Warrants are not
and will not be listed for trading on any national securities exchange.
For a more detailed description
of the Class A Units and Class B Units, see the section entitled “Description of Securities We Are Offering” beginning
on page 73 of this prospectus. For a more detailed description of our Ordinary Shares, see the section
entitled “Description of Share Capital” beginning on page 70 of this prospectus. We refer to
the Class A Units, Class B Units and the Ordinary Shares issued hereunder and issuable upon the exercise of the Series A Warrants
and Series B Warrants collectively, as the “securities.”
AN INVESTMENT IN OUR ORDINARY SHARES INVOLVES
RISKS. SEE THE
SECTION ENTITLED “RISK FACTORS”
BEGINNING ON PAGE 10.
Neither the Securities and Exchange Commission
nor any state securities commission has
approved or disapproved of these securities
or determined if this prospectus is truthful
or complete. Any representation to the contrary
is a criminal offense.
|
|
Per Class A Unit
(Ordinary Shares
and Series A
Warrants)
|
|
|
Per Unit Class B
Unit (Series B
Warrants and
Series A
Warrants)
|
|
|
Total
|
|
Public offering price
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Placement Agent fee (1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Proceeds to us (before expenses)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
(1)
|
We have also agreed to issue to H.C. Wainwright & Co., LLC, our placement agent in this offering, warrants to purchase
up to of our Ordinary Shares, which equates to 6.5% of the number of Ordinary Shares to be issued and sold in this offering.
In addition, we have agreed to reimburse the placement agent for certain expenses related to this offering. See “Plan of
Distribution” beginning on page 85 of this prospectus for additional information regarding compensation
payable to the placement agent.
|
We have
retained Rodman & Renshaw, a unit of H.C. Wainwright & Co., LLC as our exclusive placement agent to use its reasonable
best efforts to solicit offers to purchase the securities in this offering. The placement agent has no obligation to buy any of
the securities from us or to arrange for the purchase or sale of any specific number or dollar amount of the securities. Because
there is no minimum offering amount required as a condition to closing in this offering, the actual public offering amount, placement
agent’s fees, and proceeds to us, if any, are not presently determinable and may be substantially less than the total maximum
offering amounts set forth above.
We
expect to deliver the securities purchased in the offering on or about
,
2017.
Rodman
& Renshaw
a unit
of H.C. Wainwright & Co.
The date of this prospectus is , 2017
TABLE OF CONTENTS
Neither we nor the placement
agent has authorized anyone to provide information different from that contained in this prospectus, any amendment or supplement
to this prospectus or in any free writing prospectus, if any, prepared by us or on our behalf. When you make a decision about whether
to invest in our securities, you should not rely upon any information other than the information in this prospectus and any free
writing prospectus, if any, prepared by us or on our behalf. Neither the delivery of this prospectus nor the sale of our securities
means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer
to sell or solicitation of an offer to buy these securities in any circumstances under which the offer or solicitation is unlawful.
Market data and certain
industry data and forecasts used throughout this prospectus were obtained from sources we believe to be reliable, including market
research databases, publicly available information, reports of governmental agencies, and industry publications and surveys. We
have relied on certain data from third-party sources, including internal surveys, industry forecasts, and market research, which
we believe to be reliable based on our management's knowledge of the industry. While we are not aware of any misstatements regarding
the industry data presented in this prospectus, our estimates involve risks and uncertainties and are subject to change based on
various factors, including those discussed under the heading “Risk Factors” and elsewhere in this prospectus.
For investors outside of
the United States: Neither we nor the placement agent has done anything that would permit this offering or possession or distribution
of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required
to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.
ABOUT THIS PROSPECTUS
You should rely only on
information contained in this prospectus and the documents we incorporate by reference in this prospectus. We have not authorized
anyone to provide you with information that is different. You should not assume that the information in this prospectus is accurate
as of any date other than the date on the front of this prospectus or that any document that we incorporated by reference in this
prospectus is accurate as of any date other than its filing date. You should not consider this prospectus to be an offer or solicitation
relating to the securities in any jurisdiction in which such an offer or solicitation relating to the securities is not authorized.
Furthermore, you should not consider this prospectus to be an offer or solicitation relating to the securities if the person making
the offer or solicitation is not qualified to do so, or if it is unlawful for you to receive such an offer or solicitation.
Unless the context otherwise
requires, references to “we,” “our,” “us,” the “Company” or “Rosetta”
in this prospectus mean Rosetta Genomics Ltd. and its subsidiaries.
“RosettaGX Cancer
Origin™”, “RosettaGX Next-Gen”, “mi-KIDNEY™” and “RosettaGx Reveal™”
are the subject of either a trademark registration or application for registration in the United States. Other brands, names and
trademarks contained in this prospectus are the property of their respective owners. Solely for convenience, the trademarks, service
marks and trade names referred to in this prospectus may appear without the ® and ™ symbols, but such references are
not intended to indicate, in any way, that the owner thereof will not assert, to the fullest extent under applicable law, such
owner’s rights to these trademarks, service marks and trade names. This prospectus contains additional trade names, trademarks
and service marks of other companies, which, to our knowledge, are the property of their respective owners.
We obtained industry and
market data used throughout and incorporated by reference into this prospectus through our research, surveys and studies conducted
by third parties and industry and general publications. We have not independently verified market and industry data from third-party
sources.
PROSPECTUS SUMMARY
This summary highlights
only some of the information included or incorporated by reference in this prospectus. You should carefully read this prospectus
together with the additional information about us described in the sections entitled “Where You Can Find Additional Information”
and “Incorporation of Certain Information by Reference” before purchasing our Units in this offering.
Overview
We are seeking to develop
and commercialize new diagnostic tests based on various genomics markers, including microRNA, DNA, and protein biomarkers and using
various technologies, including qPCR, microarrays, Next Generation Sequencing (NGS) and Fluorescence In Situ Hybridization (FISH).
We have two CLIA-certified, CAP-accredited, laboratories in Philadelphia, PA, and Lake Forest, CA which enable us to commercialize
our own diagnostic tests applying our microRNA technology.
We believe that we were
the first commercial enterprise to focus on the emerging microRNA field, and that as a result, we have developed an early and strong
intellectual property position related to the development and commercialization of microRNA-based diagnostics. Using our intellectual
property, collaborative relationships with leading commercial enterprises and academic and medical institutions, and expertise
in the field of microRNAs, we have initiated microRNA-based diagnostic programs for various cancers and other diseases. We are
currently marketing and selling the following three diagnostic tests based on our proprietary microRNA technologies:
|
·
|
RosettaGX Reveal
– This is a microRNA-based assay for the classification of indeterminate
thyroid fine-needle aspirate, or FNA, samples. The test utilizes routinely prepared FNA smears as well as liquid-based cytology
samples (prepared using the ThinPrep® system) to classify a cytologically indeterminate thyroid nodule as “benign”
or “suspicious for malignancy by microRNA”. The test also measures a microRNA biomarker for medullary carcinoma.
|
|
·
|
RosettaGX Cancer Origin™ (formerly “miRview® mets2”)
– This
test is our second-generation microRNA-based diagnostic for the identification of the primary site of metastatic cancer, specifically
metastatic cancer of unknown primary (CUP).
|
|
·
|
mi-KIDNEY™ (formerly “Rosetta Kidney Cancer Test”)
– This test is
a microRNA-based kidney tumor classification test for pathology samples. This test was designed to classify primary kidney tumors
into one of the four most common types: the malignant renal cell carcinomas clear cell (conventional), papillary and chromophobe
as well as the benign oncocytoma.
|
We recently announced our
plans to increase investments in commercial, promotional and reimbursement efforts for RosettaGX Reveal.
We currently have distribution
agreements with respect to some of these tests covering Australia, Greece, India, Israel, New Zealand and Turkey. All of these
distribution agreements call for samples to be sent to our CLIA-certified laboratory in Philadelphia for analysis.
In general, we are generating
demand for our testing services through our direct selling effort in the United States and are successfully fulfilling that demand
in either of our labs. We are working to gain more consistent payment from commercial payors, as well as to secure reimbursement
coverage from Medicare. We are increasing our activity to establish policy-level reimbursement, which could improve our ability
to receive prompt payment from commercial payors. We announced in May 2012 that the designated Medicare Administrative Contractor,
or MAC, for RosettaGX Cancer Origin is covering this test for all Medicare beneficiaries, and we are receiving approved payments
for claims submitted.
On April 13, 2015, we acquired
CynoGen, Inc., which does business as PersonalizeDx (“CynoGen” or “PersonalizeDx”). PersonalizeDx is a
molecular diagnostics and services company serving community-based pathologists, urologists, oncologists and other reference laboratories
across the United States. PersonalizeDx is focused on the detection of genomic changes through FISH technology, which helps to
detect cancer, measure the potential aggressiveness of the disease and identify patients most likely to respond to targeted therapies.
PersonalizeDx offers its
clients a virtual “tech only” platform in which such clients can collaborate with the company to perform and bill for
the “professional component” of FISH molecular testing services for lung, breast, bladder, prostate and hematologic
cancers. PersonalizeDx also performs IHC and histology testing services for its clients in its 30,000 square foot laboratory facility
located in Lake Forest, CA. PersonalizeDx was initially founded by Abbott Laboratories and PersonalizeDx performed several clinical
trial studies for Abbott and Abbott’s research partners. PersonalizeDx is currently performing testing for one clinical trial
for Abbott in bladder cancer. There is no guarantee that PersonalizeDx will be granted additional clinical trial business from
Abbott going forward. We recently announced our plans to explore strategic alternatives for PersonalizeDx.
We have entered into an
agreement to sell and market products for Admera Health, offering products to oncology physicians that are key call points for
our sales force. By entering into this agreement, we believe we could gain additional opportunities to meet with oncologists and
discuss new products that may improve the patients’ diagnostic experience.
In addition, we have a
number of projects in our diagnostics pipelines including the research and development of product line extensions to, and next
generation versions of, our thyroid assay.
We are seeking to develop
a second version of RosettaGX Reveal, a microRNA-based assay for the differential diagnosis of indeterminate thyroid FNAs that
utilizes routinely prepared FNA smears. This second version will combine RosettaGX Reveal’s current microRNA biomarkers with
other genetic biomarkers (e.g. mRNA, other small RNAs) to optimize test performance. We anticipate that we will launch this assay
by 2018.
MicroRNAs also represent
potential targets for the development of novel drugs. Until December 2016 we participated in the Rimonim Consortium, which was
supported by the Israel Innovation Authority (the “IIA”) (formerly known as the Office of the Chief of Scientist, or
“OCS”) of the Ministry of Economy. The aim of this consortium was to develop novel technologies for the use of short
interfering RNA, or siRNA, and microRNA mimetics or anti-microRNAs for therapeutics. In this consortium we attempted to: (1) develop
novel RNA molecules that contain chemical modifications or conjugations for therapeutic purposes; and (2) develop novel delivery
systems for microRNAs that will enable targeted delivery to desired cells. The transfer of know-how developed in the framework
of the consortium or rights to manufacture based on and/or incorporating such know-how to third parties which are not members of
the consortium requires the consent of the IIA.
In addition, in the past
we participated in a two-year Magneton Project. This two-year project was also supported by the IIA and was conducted in collaboration
with Prof. Ronit Satchi-Fainaro (Department of Physiology and Pharmacology, Sackler School of Medicine, Tel Aviv University). It
was aimed at developing a nano-carrier delivery system for microRNA mimetics for the treatment of cancer. In December 2015, we
completed this project. Project activity included in vivo studies, pre-clinical toxicity studies and in vivo efficacy studies in
an animal model of glioblastoma. The results have shown limited efficacy. The transfer of knowledge discovered in this project
is subject to limitations specified in the Israeli Encouragement of Industrial Research and Development Law, 5744-1984 (R&D
Law).
The IIA, under special
circumstances, may approve the transfer of the know-how developed in these supported projects outside of Israel, provided that
the grant recipient pays to the IIA a portion of the sale price paid in consideration for such know-how, which portion will not
exceed six times the amount of the grants received plus interest (or three times the amount of the grant received plus interest,
in the event that the recipient of the know-how has committed to retain the research and development activities of the grant recipient
in Israel after the transfer).
As of December 31, 2016,
we had received from the IIA total grants of $932,299 for our development under the Rimonim Consortium and $282,141 for our development
under the Magneton project.
The R&D Law was amended
effective as of January 1, 2016. Pursuant to the amendment, the IIA was established and will replace the OCS in the implementation
of the governmental policy in connection with the R&D Law (and has been given discretion in the implementation of the R&D
Law for such purpose). Pursuant to the amendment, the current restrictions under the R&D Law will be replaced by new arrangements
to be determined by the IIA; however, until the IIA determines otherwise, the provisions of the R&D Law and regulations that
applied to existing OCS programs (including those provisions described above) will continue to apply.
Background
Rosetta Genomics was founded
in 2000 with the belief that what was known as “junk DNA” actually contains hundreds, possibly thousands, of tiny RNA
genes that encode small RNA molecules, later termed microRNAs, which play an important role in the regulation of protein production,
and hence the onset and progression of disease. In the cell, genes are expressed through information carried from our DNA by messenger
RNAs, or mRNAs, which is in turn translated into proteins. Proteins are the building blocks of all living cells. The type of cell,
its function, and the timing of its death are determined by which proteins are produced in the cell, and at what quantities and
time they are produced. However, the proteins are the end product of a complex process, which begins with the genetic code present
in DNA. Before a protein is expressed, or produced, relevant parts of the DNA are copied into an mRNA. Each mRNA holds a code with
instructions on how to build a specific protein using a process called translation. Although one messenger RNA molecule is capable
of translating hundreds of thousands of protein molecules, the number it actually produces is regulated by microRNAs. MicroRNAs
have been found to regulate the expression of other genes by binding to the mRNA.
MicroRNAs have been shown
to have varying expression levels across various pathological conditions, and thus have significant potential as a class of highly
sensitive and tissue specific biomarkers. We have developed a microRNA discovery process and have demonstrated, in a work published
by us in Nature Genetics, that the number of human microRNAs is significantly higher than what was previously believed. We have
discovered hundreds of biologically validated human microRNAs and dozens of validated viral microRNAs and filed extensive patent
applications with claims potentially covering these microRNAs, some of which have been issued.
To leverage the potential
of microRNAs as a novel diagnostic platform, we have developed proprietary methods to extract microRNAs from a wide range of tissue
and body fluid samples and to quantify specific microRNA expression signatures, which may be used as diagnostic panels to potentially
diagnose cancers, their subtypes, as well as the origin of metastases. We have already developed and launched a number of diagnostic
tests based on our platforms and have published several papers demonstrating how our methods can be used to develop such diagnostics
(e.g. Rosenwald et al., Modern Pathology, 2010; Benjamin et al., Journal of Molecular Diagnostics, 2010). Moreover, we were able
to demonstrate the utility of our developed tests in post-market studies with collaborators from leading medical centers in the
United States and Europe (Bishop et al. Clinical Cancer Research, 2010; Muller et al., The Oncologist, 2010).
We believe that microRNAs
are stable, sensitive and specific markers, and we are advancing diagnostic development programs in cancer and other areas, to
potentially enable accurate diagnosis and improve patient care management worldwide.
Our Strategy
Our goal is to become a
leader in the development and commercialization of microRNA-based and other diagnostic tests. Our key business strategies to achieve
this goal are as follows:
|
·
|
Leverage our knowledge and experience
. We plan to leverage our extensive microRNA and Fluorescence
in situ Hybridization, or FISH, knowhow and experience to potentially develop additional tissue-based as well as body fluid-based
diagnostic tests.
|
|
·
|
Maximize sales of our current commercial tests through geographic partners and our own commercial
efforts
. We plan to maximize revenues from our current commercial tests via corporate relationships and through our own targeted
commercial efforts. To date we have entered into distribution agreements with three distributors, pursuant to which these distributors
have the right to commercialize these tests in their territories.
|
|
·
|
Build and maintain a strong intellectual property position
. We believe that we were the
first commercial enterprise to focus on the emerging field of microRNAs. We also believe we have an early and strong intellectual
property position (both patents we own and those we have exclusively, co-exclusively, or non-exclusively licensed) in the area
of developing and commercializing microRNA-based diagnostic tests. Our patent strategy is to seek broad coverage on all of our
identified microRNA sequences. We have also filed, and intend to continue to file, patent applications that claim our technical
platforms and method-of-use for specific diagnostic and therapeutic applications.
|
|
·
|
Leverage our intellectual property position and microRNA expertise to continue to establish
strategic collaborations
. We intend to continue to establish strategic collaborations with leading clinical diagnostic and
pharmaceutical companies to further develop and commercialize microRNA-based diagnostics. We believe that our strong intellectual
property position and expertise in the field of microRNAs will be very attractive to additional collaboration partners.
|
|
·
|
Selectively pursue opportunities to expand our business and enhance our product offerings
.
We plan to selectively pursue opportunities to acquire, license, or invest in complementary businesses, products, technologies
and assets teams that will allow us to expand our portfolio of diagnostic tests and therapeutics, accelerate the pace of our innovation,
and expand into additional markets beyond what we can achieve organically.
|
Risks associated with our business
Investing in our securities
involves risks. You should carefully consider the risks described in “Risk Factors” beginning on page 10 before
making a decision to invest in our securities. The following is a summary of some of the principal risks we face:
|
·
|
we will require substantial additional funds to continue our operations and, if additional funds
are not available, we may need to significantly scale back or cease our operations
|
|
·
|
we have a history of operating losses and we expect to incur additional losses in the future and
may never be profitable;
|
|
·
|
our limited operating history as a pharmaceutical research and development company makes it difficult
to evaluate our business and prospects;
|
|
·
|
our current working capital is not sufficient to complete our research and development with respect
to each of our therapeutic candidates and our failure to raise sufficient capital would significantly impair our ability to fund
our operations, develop our therapeutic candidates, attract development or commercial partners and retain key personnel;
|
|
·
|
if we and/or our potential commercialization partners are unable to obtain U.S. Food and Drug Administration
or other foreign regulatory authority approval for our candidates, we and/or our potential commercialization partners will be unable
to commercialize our therapeutic candidates;
|
|
·
|
clinical trials may involve a lengthy and expensive process with an uncertain outcome, and results
of earlier studies and trials may not be predictive of future trial results; we and/or our potential commercialization partners
will not be able to commercialize our therapeutic candidates without completing such trials;
|
|
·
|
we rely on third parties to conduct our clinical trials, and those third parties may not perform
satisfactorily, including, but not limited to, failing to meet established deadlines for the completion of such clinical trials;
|
|
·
|
even if our candidates receive regulatory approval or do not require regulatory approval, they
may not become commercially viable products; and
|
|
·
|
the market for our candidates is rapidly changing and competitive, and new drug delivery mechanisms,
drug delivery technologies, new drugs and new treatments which may be developed by others could impair our ability to maintain
and grow our business and remain competitive.
|
Corporate Information
We were incorporated under
the laws of the State of Israel on March 9, 2000, as Rosetta Genomics Ltd., an Israeli company. The principal legislation under
which we operate is the Israeli Companies Law, 5759-1999, as amended, or the Companies Law. Our principal executive office is located
at 10 Plaut Street, Science Park, Rehovot 76706 Israel, and our telephone number is + 972-73-222-0700. Our wholly owned subsidiary,
Rosetta Genomics Inc., which was incorporated in Delaware on April 21, 2005, is located at 3711 Market Street, Suite 740, Philadelphia,
Pennsylvania 19104, and its telephone number is (215) 382-9000. Rosetta Genomics Inc. serves as our agent for service of process
in the United States. In April 2015, we acquired CynoGen Inc. (d/b/a PersonalizeDx), a Delaware corporation with principal offices
located at 25901 Commercentre Drive, Lake Forest, CA 92630. Our web site address is www.rosettagx.com. The information on our web
site is not incorporated by reference into this prospectus and should not be considered to be a part of this prospectus.
Dividend Policy
To date, we have not declared
or paid cash dividends on any of our shares, and we have no current intention of paying any cash dividends in the near future.
The Companies Law also
restricts our ability to declare and pay dividends. We can only distribute dividends from profits (as defined in the Companies
Law), if, in the discretion of our board of directors, there is no reasonable concern that the dividend distribution will prevent
us from meeting our existing and anticipated obligations as they come due. The payment of dividends may be subject to Israeli withholding
taxes.
THE OFFERING
Class A Units offered by us
|
We are offering up to 1,500,000
Class A Units. Each Class A Unit will consist of (i) one Ordinary Share and (ii) a warrant to purchase 0.50 Ordinary
Share, or a Series A Warrant. The Class A Units will not be certificated, and the Ordinary Shares and Series A Warrants
part of such unit are immediately separable and will be issued separately in this offering.
This prospectus also relates to
the offering of Ordinary Shares issuable upon exercise of the Series A Warrants part of the Class A Units.
|
|
|
Class B Units offered by us
|
We are also offering to those purchasers, if any, whose purchase of
Class A Units in this offering would result in the purchaser, together with its affiliates and certain related parties, beneficially
owning more than 4.99%
(or at the election of the purchaser, 9.99%)
of
our outstanding Ordinary Shares immediately following the consummation of this offering, the opportunity to purchase, if they
so choose, up to 1,500,000 Class B Units, in lieu of Class A Units that would otherwise result in beneficial ownership in
excess of 4.99%
(or 9.99%, as applicable)
of our outstanding Ordinary
Shares.
|
|
|
|
Each Class B unit will consist of (i) a pre-funded warrant to purchase
one Ordinary Share, or a Series B Warrant, and (ii) a Series A Warrant to purchase 0.50 Ordinary Share. The Class B Units
will not be certificated, and the pre-funded Series B Warrants and the Series A Warrants part of such unit are immediately
separable and will be issued separately in this offering.
|
|
|
|
This prospectus also relates to the offering of Ordinary Shares issuable upon exercise of the pre-funded Series B Warrants and the Series A Warrants part of the Class B Units.
|
|
|
Series A Warrants
|
The
exercise price per full Ordinary Share purchasable upon exercise of the Series A Warrants is equal to % of the
per Class A Unit public offering price, and the Series A Warrants will expire __ years from the date of issuance.
We
do not currently have a sufficient number of authorized Ordinary Shares to cover the shares issuable upon exercise of
the Series A Warrants being offered by this prospectus. As a result, before any Series A Warrants can become
exercisable, we will need to seek shareholder approval of an amendment to our amended and restated articles of
association to increase the number of authorized Ordinary Shares to [ ] Ordinary Shares
(the “Charter Amendment”) at a special meeting of shareholders. While all current directors and executive
officers are supportive of the Charter Amendment, we cannot assure you that we will be able to obtain
requisite shareholder approval of the Charter Amendment. In the event our shareholders do not approve the Charter
Amendment, the Series A Warrants will not be exercisable and may not have any value. The Series A Warrants will
be exercisable on any day on or after the date that we publicly announce through the filing of a Current
Report on Form 6-K that the Charter Amendment has been approved by our shareholders and has become effective.
The Series A Warrants will expire years from the date the Series A Warrants are first exercisable. To better
understand the terms of the Series A Warrants, you should carefully read the
“Description of Securities We Are Offering” section of this
prospectus. You should also read the form of Series A Warrant, which is
filed as an exhibit to the registration statement that is included in this
prospectus.
|
|
|
Pre-Funded Series B Warrants
|
Each pre-funded Series B Warrant will have an exercise price of $0.01 per full Ordinary Share and will be immediately exercisable until it is exercised in full. To better understand the terms of the pre-funded Series B Warrants, you should carefully read the “Description of Securities We Are Offering” section of this prospectus. You should also read the form of pre-funded Series B Warrant, which is filed as an exhibit to the registration statement that is included in this prospectus.
|
|
|
Ordinary Shares outstanding immediately before this offering
|
2,588,086
|
|
|
Ordinary Shares outstanding after this offering
|
5,588,086 (or 7,088,086 Ordinary Shares if the warrants offered in this offering are
exercised in full).
|
|
|
Use of proceeds
|
We intend to use the net proceeds from the sale of securities under this prospectus for our operations and for other general corporate purposes, including, but not limited to, repayment or refinancing of indebtedness or other corporate borrowings, working capital, intellectual property protection and enforcement, capital expenditures, investments, acquisitions or collaborations, research and development and product development. We have not determined the amount of net proceeds to be used specifically for the foregoing purposes. As a result, our management will have broad discretion in the allocation of the net proceeds. Pending use of the net proceeds, we intend to invest any proceeds in a variety of capital preservation instruments, including short-term, investment-grade, interest-bearing instruments.
|
|
|
Risk factors
|
Before deciding to invest in our securities, you should
carefully consider the risks related to our business, the offering and our securities. See section entitled “Risk
Factors” beginning on page 10.
|
|
|
The NASDAQ Capital Market symbol
|
“ROSG.” The Series A Warrants and Series B Warrants are not and will not be listed for trading on any national securities exchange.
|
The number of Ordinary Shares to be outstanding
immediately after this offering as shown above assumes that all of the securities offered hereby are sold and is based on 2,588,086
Ordinary Shares outstanding as of May 5, 2017, but does not include the following:
|
·
|
157,673 Ordinary Shares issuable upon exercise of stock options outstanding under our stock
plans, at a weighted average exercise price of $38.08 per share;
|
|
·
|
2,243 Ordinary Shares issuable upon vesting of outstanding restricted
stock units under our stock plans;
|
|
·
|
34,305 Ordinary Shares available for future grant or issuance pursuant
to our stock plans;
|
|
·
|
1,020,652 Ordinary Shares issuable upon exercise of outstanding warrants,
at a weighted average exercise price of $6.70 per share;
|
|
·
|
646,754 Ordinary Shares issuable upon the conversion of the remaining $1,975,443 principal
amount (as was outstanding at December 31, 2016) of the convertible debentures, at a conversion price of $3.0544 per
share;
|
|
·
|
3,000,000
Ordinary Shares issuable upon exercise of the Series A Warrants and Series B Warrants
to be issued in this offering; and
|
|
·
|
Ordinary Shares issuable upon exercise of the warrants to be issued
to the placement agent in connection with this offering, at an exercise price of $ per share.
|
Unless otherwise stated, all information in this prospectus assumes
no exercise of the outstanding options and warrants and offered warrants for Ordinary Shares as described above.
SUMMARY FINANCIAL DATA
The following summary financial
data for the years ended December 31, 2016, 2015 and 2014 and as of December 31, 2016 and 2015 are derived from, and should be
read in conjunction with, the audited consolidated financial statements, and notes thereto, included elsewhere in this prospectus.
The summary consolidated financial data for the years ended December 31, 2013 and 2012 and as of December 31, 2014, 2013 and 2012
have been derived from audited financial statements not included in this prospectus.
Our historical results
are not necessarily indicative of the results that may be expected in the future. The following summary financial data should
be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
our financial statements and related notes included elsewhere in this prospectus.
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
(In thousands, except share and per share data)
|
|
Consolidated Statement of Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical testing revenues
|
|
$
|
9,234
|
|
|
$
|
6,668
|
|
|
$
|
1,099
|
|
|
$
|
405
|
|
|
$
|
201
|
|
Licensing revenues
|
|
|
-
|
|
|
|
1,600
|
|
|
|
228
|
|
|
|
-
|
|
|
|
-
|
|
Total revenues
|
|
|
9,234
|
|
|
$
|
8,268
|
|
|
$
|
1,327
|
|
|
$
|
405
|
|
|
$
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of clinical testing revenues
|
|
|
7,439
|
|
|
|
6,192
|
|
|
|
1,310
|
|
|
|
709
|
|
|
|
258
|
|
Cost of licensing revenues
|
|
|
-
|
|
|
|
80
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total cost of revenues
|
|
|
7,439
|
|
|
|
6,272
|
|
|
|
1,310
|
|
|
|
709
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
1,795
|
|
|
|
1,996
|
|
|
|
(17
|
)
|
|
|
304
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
|
3,156
|
|
|
|
2,956
|
|
|
|
1,927
|
|
|
|
1,744
|
|
|
|
1,247
|
|
Marketing and business development
|
|
|
6,806
|
|
|
|
7,350
|
|
|
|
6,848
|
|
|
|
7,002
|
|
|
|
3,938
|
|
General and administrative
|
|
|
7,497
|
|
|
|
7,566
|
|
|
|
5,494
|
|
|
|
4,297
|
|
|
|
3,025
|
|
Gain from bargain purchase related to acquisition of CynoGen, Inc.
|
|
|
-
|
|
|
|
(155
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total operating expenses
|
|
|
17,459
|
|
|
|
17,717
|
|
|
|
14,269
|
|
|
|
13,043
|
|
|
|
8,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
15,664
|
|
|
|
15,721
|
|
|
|
14,252
|
|
|
|
13,347
|
|
|
|
8,267
|
|
Financial expenses (income), net
|
|
|
603
|
|
|
|
1,605
|
|
|
|
259
|
|
|
|
(177
|
)
|
|
|
2,429
|
|
Loss before taxes
|
|
|
16,267
|
|
|
|
17,326
|
|
|
|
14,511
|
|
|
|
13,170
|
|
|
|
10,696
|
|
Tax expense
|
|
|
(34
|
)
|
|
|
19
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
16,233
|
|
|
|
17,345
|
|
|
|
14,526
|
|
|
|
13,170
|
|
|
|
10,696
|
|
Net loss (income) from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(273
|
)
|
|
|
(239
|
)
|
Net loss after discontinued operations
|
|
|
16,233
|
|
|
|
17,345
|
|
|
|
14,526
|
|
|
|
12,897
|
|
|
|
10,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Rosetta
|
|
$
|
16,233
|
|
|
$
|
17,345
|
|
|
$
|
14,526
|
|
|
$
|
12,897
|
|
|
$
|
10,457
|
|
Basic and diluted net loss per Ordinary Share from continuing operations
|
|
$
|
9.31
|
|
|
$
|
13.80
|
|
|
$
|
15.51
|
|
|
$
|
16.47
|
|
|
$
|
28.85
|
|
Basic and diluted net loss (income) per Ordinary Share from discontinued operations attributable to Rosetta
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(0.336
|
)
|
|
$
|
(0.648
|
)
|
Basic and diluted net loss per Ordinary Share attributable to Rosetta
|
|
$
|
9.31
|
|
|
$
|
13.79
|
|
|
$
|
15.51
|
|
|
$
|
16.13
|
|
|
$
|
28.21
|
|
Weighted average number of Ordinary Shares used to compute basic and diluted net loss per Ordinary Share attributable to Rosetta
|
|
|
1,743,067
|
|
|
|
1,257,724
|
|
|
|
936,658
|
|
|
|
799,496
|
|
|
|
370,705
|
|
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,163
|
|
|
$
|
12,447
|
|
|
$
|
7,929
|
|
|
$
|
16,744
|
|
|
$
|
30,978
|
|
Short-term bank deposits and restricted cash
|
|
|
130
|
|
|
|
1,098
|
|
|
|
7,702
|
|
|
|
7,702
|
|
|
|
164
|
|
Trade receivable
|
|
|
2,851
|
|
|
|
3,633
|
|
|
|
338
|
|
|
|
224
|
|
|
|
88
|
|
Working capital
|
|
|
5,709
|
|
|
|
16,567
|
|
|
|
14,241
|
|
|
|
23,060
|
|
|
|
30,487
|
|
Total assets
|
|
|
11,961
|
|
|
|
22,423
|
|
|
|
17,278
|
|
|
|
25,880
|
|
|
|
32,530
|
|
Long-term liabilities
|
|
|
3,740
|
|
|
|
-
|
|
|
|
2
|
|
|
|
309
|
|
|
|
364
|
|
Total shareholders’ equity
|
|
|
4,417
|
|
|
|
19,620
|
|
|
|
15,065
|
|
|
|
23,633
|
|
|
|
30,900
|
|
Capital stock
|
|
|
160,920
|
|
|
|
159,890
|
|
|
|
137,990
|
|
|
|
132,032
|
|
|
|
126,402
|
|
RISK FACTORS
Investing in our securities
involves risks. Please carefully consider the risk factors described below and in our periodic reports filed with the Securities
and Exchange Commission (the “SEC”), including those set forth under the caption “Item 3. Key Information - D.
Risk Factors” in our annual report on Form 20-F for the year ended December 31, 2016 (File No. 001-33042), filed with the
SEC on March 30, 2017. Before making an investment decision, you should carefully consider these risks as well as other information
we include or incorporate by reference in this prospectus. You should be able to bear a complete loss of your investment.
Risks Related to Our Business, Our Financial
Results and Need for Financing
We will require substantial additional
funds to continue our operations and, if additional funds are not available, we may need to significantly scale back or cease our
operations.
We anticipate that our
principal sources of liquidity will only be sufficient to fund our activities into the third quarter of 2017. As of December 31,
2016, we had cash, cash equivalents, short-term bank deposits and restricted cash of $6.3 million, compared to $13.5 million as
of December 31, 2015. We need to raise additional capital (by issuing equity or long-term debt) by the third quarter of 2017 in
order to continue to fund our operations, and we cannot provide any assurance that we will be successful in doing so.
We may seek additional
funding through collaborative arrangements and public or private equity offerings and debt financings. Additional funds may not
be available to us when needed on acceptable terms, or at all. In addition, the terms of any financing may adversely affect the
holdings or the rights of our existing shareholders. For example, if we raise additional funds by issuing equity securities, further
dilution to our then-existing shareholders may result. Debt financing, if available, may involve restrictive covenants that could
limit our flexibility in conducting future business activities. We also could be required to seek funds through arrangements with
collaborators or others.
If adequate funds are needed
and not available, we may be required to:
|
·
|
delay, reduce the scope of or eliminate certain research and development programs;
|
|
·
|
obtain funds through arrangements with collaborators or others on terms unfavorable to us or that
may require us to relinquish rights to certain technologies or products that we might otherwise seek to develop or commercialize
independently;
|
|
·
|
monetize certain of our assets;
|
|
·
|
pursue merger or acquisition strategies; or
|
|
·
|
seek protection under the bankruptcy laws of Israel and the United States.
|
Although our financial
statements have been prepared on a going concern basis, we must raise additional capital before the third quarter of 2017 to fund
our operations in order to continue as a going concern.
Kost Forer Gabbay
& Kasierer, a member of Ernst & Young Global, our independent registered public accounting firm for the fiscal year
ended December 31, 2016, has included an explanatory paragraph in their auditor’s report that accompanies our audited
consolidated financial statements as of and for the year ended December 31, 2016, indicating that our current liquidity
position raises substantial doubt about our ability to continue as a going concern. If we are unable to improve our liquidity
position we may not be able to continue as a going concern. The accompanying consolidated financial statements do not include
any adjustments that might result if we are unable to continue as a going concern and, therefore, be required to realize our
assets and discharge our liabilities other than in the normal course of business which could cause investors to suffer the
loss of all or a substantial portion of their investment.
We anticipate that our
principal sources of liquidity will only be sufficient to fund our activities into the third quarter of 2017. In order to have
sufficient cash to fund our operations through the end of the third quarter and beyond, we will need to raise additional equity
or debt capital, and we cannot provide any assurance that we will be successful in doing so.
Even
if this offering is successful, we will need additional funding. If we are unable to raise capital, we will be forced to reduce
or eliminate our operations.
As
of May 3, 2017, we had a total cash balance of approximately $3 million. Based on our projected cash flows and our cash balances
as of the date of this prospectus, our management is of the opinion that without further fund raising we may not have sufficient
resources to enable us to continue advancing our activities, and as a result, there is substantial doubt about our ability to
continue as a going concern. At our current burn rate and without taking into account the proceeds from this offering, our current
cash balance will be sufficient to fund our activities into the third quarter of 2017, taking into account shut down costs. Assuming
the proceeds from this offering will be approximately $6.0 million, based upon an assumed public offering price of $2.22 per Class
A Unit, the last reported sales price of our Ordinary Shares on the NASDAQ Capital Market on May 12, 2017, and of $2.21 per Class
B Unit, after deducting the estimated placement agent fee and estimated offering expenses payable by us, at our expected burn
rate following this offering, the proceeds from this offering will be sufficient until approximately the first quarter of 2018.
Even
if this offering is successful, if we are unable to obtain additional financing, we will be forced to reduce the scope of, or eliminate
our operations. We will also have to reduce marketing, customer service or other resources devoted to our products. Any of these
factors will materially harm our business and results of operations.
Our
management’s plans include the continued commercialization of our products, taking cost reduction steps and securing
sufficient financing through the sale of additional equity securities, debt or capital inflows from strategic partnerships.
There are no assurances however, that we will be successful in obtaining the level of financing needed for our operations.
Even
if we are able to continue to finance our business, the sale of additional equity or debt securities could result in dilution to
our current shareholders and could require us to grant a security interest in our assets. If we raise additional funds through
the issuance of debt securities, these securities may have rights senior to those of our Ordinary Shares and could contain covenants
that could restrict our operations. In addition, we may require additional capital beyond our currently forecasted amounts to achieve
profitability. Any such required additional capital may not be available on reasonable terms, or at all.
The approach we are taking to discover
and develop novel microRNA-based diagnostics and therapeutics is new and may never lead to commercially accepted products.
We
have concentrated our research and development efforts on diagnostics and therapeutics in the relatively new field of microRNAs.
We are currently marketing and selling the following four diagnostic tests based on our proprietary
microRNA technologies: RosettaGX Cancer Origin
™
,
mi-KIDNEY
™
and
RosettaGX Reveal
™
.
To date, these tests have achieved
very limited commercial success. The scientific discoveries that form the basis for our efforts to develop diagnostics and therapeutics
are relatively new, and the scientific evidence to support the feasibility of developing products based on these discoveries is
limited. Further, our focus on developing microRNA-based diagnostics and therapeutics as opposed to multiple or more proven technologies
for the development of diagnostics and therapeutics increases the risks associated with the ownership of our Ordinary Shares. If
we or a collaborative partner are not successful in commercializing our existing diagnostic tests or developing and commercializing
additional microRNA-based tests or products, our business may fail.
Successful integration of PersonalizeDx
with us and successful operation of the combined company are not assured. Also, integrating our business with that of PersonalizeDx
may divert the attention of management away from operations.
In April 2015, we acquired
CynoGen, Inc., which does business as PersonalizeDx (“CynoGen” or “PersonalizeDx”). There can be no assurance
that we will be able to maintain and grow the acquired business and operations of PersonalizeDx. In addition, the market segments
in which PersonalizeDx operates may experience declines in demand and/or new competitors. Integrating and coordinating certain
aspects of the operations, portfolio of products and personnel of PersonalizeDx with ours have involved and will continue to involve
complex operational, technological and personnel-related challenges. This process will be time-consuming and expensive, may disrupt
the businesses of either or both of the companies and may not result in the full benefits expected by us and PersonalizeDx, including
cost synergies expected to arise from supply chain efficiencies and overlapping general and administrative functions. The potential
difficulties, and resulting costs and delays, include:
|
·
|
managing a larger combined company;
|
|
·
|
consolidating corporate and administrative infrastructures;
|
|
·
|
issues in integrating research and development, commercial and sales forces;
|
|
·
|
difficulties attracting and retaining key personnel;
|
|
·
|
loss of customers and suppliers and inability to attract new customers and suppliers;
|
|
·
|
unanticipated issues in integrating information technology, communications and other systems;
|
|
·
|
incompatibility of purchasing, logistics, marketing, administration and other systems and processes;
|
|
·
|
unforeseen and unexpected liabilities related to the acquisition or PersonalizeDx’s business;
and
|
|
·
|
potential costs of relocating employees to PersonalizeDx’s facilities or our other facilities.
|
Additionally, the integration
of our and PersonalizeDx’s operations, products and personnel may place a significant burden on management and other internal
resources. The diversion of management’s attention, and any difficulties encountered in the transition and integration process,
could harm the combined company’s business, financial condition and operating results.
Because we have a short operating history,
there is a limited amount of information about us upon which our business and prospects can be evaluated.
Our operations began in
2000, and we have only a limited operating history upon which our business and prospects can be evaluated. In addition, as a company
providing relatively new diagnostic services, we have limited experience and have not yet demonstrated an ability to successfully
overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly
in the biotechnology area. For example, to execute our business plan, we will need to successfully:
|
·
|
maintain and further build our intellectual property portfolio;
|
|
·
|
execute development activities using an unproven technology;
|
|
·
|
execute sales, marketing and distribution activities;
|
|
·
|
continue to develop and maintain successful strategic relationships;
|
|
·
|
manage our spending while costs and expenses increase as we expand our efforts to discover, develop
and commercialize diagnostics and therapeutics based on microRNAs; and
|
|
·
|
gain commercial and, if applicable, regulatory acceptance of our tests and products.
|
If we are unsuccessful
in accomplishing these objectives, we may not be able to raise capital, develop additional tests or products, successfully commercialize
our existing tests, expand our business or continue our operations.
We have a history of losses and may never
be profitable.
We have experienced significant
operating losses since our inception in 2000, and as of December 31, 2016, we had an accumulated deficit of approximately $157
million. We had net loss of $16.2 million for the year ended December 31, 2016. We anticipate that the majority of any revenues
we generate over the next several years will be from sales of our currently marketed products in the United States and from existing
and future collaborations and licensing arrangements and the sale of future products we develop or acquire. We cannot be certain,
however, that our sales efforts will be successful or that we will be able to secure any collaborations or achieve any milestones
that may be required to receive payments or that diagnostic tests based on our technologies, including our currently marketed tests,
will be successfully commercialized. If we are unable to secure significant revenues from our current selling efforts or through
collaborations and the sale of tests or products, we may be unable to continue our efforts to discover, develop and commercialize
microRNA-based diagnostics and therapeutics without raising additional funds from other sources.
Fluctuations in currency exchange rates
of the New Israeli Shekel vs. the U.S. dollar may have a significant impact on our reported results of operations.
Fluctuations in currency
exchange rates may have a significant impact on our reported results of operations. Although our reporting currency is the U.S.
dollar, significant portions of our expenses are denominated in New Israeli Shekels, or NIS. In periods when the U.S. dollar is
devalued against the NIS, our reported results of operations may be adversely affected. In addition, fluctuations in currencies
may result in valuation adjustments in our assets and liabilities which could affect our reported results of operations. We enter
from time to time into foreign currency hedge transactions in order to mitigate some of this risk; however, we are unlikely to
offset the entire currency exchange risk.
Fluctuations in our share price may have
a significant impact on our reported liabilities and reported results of financial income or expenses.
Fluctuations in our share
price may have a significant impact on our reported liabilities because certain outstanding warrants and debentures are classified
as liabilities measured at fair value each reporting period until they are exercised or expire, with changes in the fair values
being recognized in our statement of operations as financial income or expense. In periods when share price is ascending, the reported
liability and the reported results of financial expense are adversely affected.
Risks Related to Our Intellectual Property
If we are not able to obtain and enforce
patent protection for our discoveries, our ability to develop and commercialize microRNA-based diagnostics and therapeutics could
be harmed.
Our success depends, in
large part, on our ability to protect proprietary methods and technologies that we develop under the patent and other intellectual
property laws of the United States, Israel and other countries, so that we can prevent others from unlawfully using our inventions
and proprietary information. As of March 1, 2017, our patent portfolio included a total of 49 issued U.S. patents, two issued Australian
patents, three issued European Union patents, all validated in UK, Germany and France, and one validated also in Denmark, four
issued Israeli patents, one issued Japanese patent, one issued Korean patent, 41 pending patent applications worldwide, consisting
of 20 U.S. patent applications, four of which received notice of allowance, six applications that are pending in Europe, two of
which received a notice of allowance, two applications pending in Israel, one application pending in Japan, two applications pending
in Canada, three applications pending in China, three applications pending in Brazil, and two PCT applications. There can be no
assurance, however, that any of these pending patent applications will result in issued patents. The patent position of pharmaceutical
or biotechnology companies, including ours, is generally uncertain and involves complex legal and factual considerations, and,
therefore, validity and enforceability cannot be predicted with certainty. Patents may be challenged, deemed unenforceable, invalidated,
or circumvented.
Furthermore, the standards
that the U.S. Patent and Trademark Office, or USPTO, and its foreign counterparts use to grant patents are not always applied predictably
or uniformly and may change. There is also no uniform, worldwide policy regarding the subject matter and scope of claims granted
or allowable in pharmaceutical or biotechnology patents. Furthermore, the field of microRNAs is new and developing. Accordingly,
there is significant uncertainty about what patents will be issued, and what their claims may cover. It is likely that there will
be significant litigation and other proceedings, such as interference proceedings and opposition proceedings, in certain patent
offices, relating to patent rights in the microRNA field. Others may attempt to invalidate our intellectual property rights. Currently,
there is an opposition proceeding pending against one of our patents in Europe. This opposition relates to a patent granted by
the European Patent Office that claims the use of miR-34a for the preparation of a pharmaceutical composition for treating cancer
where the cancer is p53 negative. Even if this opposition is successful, we do not anticipate that the result will have a materially
adverse effect on our business.
Even if our other rights
are not directly challenged, disputes among third parties could lead to the weakening or invalidation of our intellectual property
rights. Accordingly, we do not know the degree of future protection for our proprietary rights or the breadth of claims that will
be allowed in any patents issued to us or to others. Additionally, the mere issuance of a patent does not guarantee that it is
valid or enforceable, so even issued patents may not be valid or enforceable against third parties.
In addition, we cannot
be certain that we hold the rights to the technology covered by our pending patent applications or to other proprietary technology
required for us to commercialize our proposed tests and products. Because certain U.S. patent applications are confidential until
patents issue, and because certain applications will not be filed in foreign countries, third parties may have filed patent applications
for technology covered by our pending patent applications without our being aware of those applications, and our patent applications
may not have priority over those applications. For this and other reasons, we may be unable to secure desired patent rights, thereby
losing desired exclusivity. Thus, it is possible that one or more organizations will hold patent rights to which we will need a
license. If those organizations refuse to grant us a license to such patent rights on reasonable terms, we will not be able to
market our tests and products.
From time to time, the
U.S. Supreme Court, other federal courts, the U.S. Congress or the USPTO may change the standards of patentability and any such
changes could have a negative impact on our business. There have been several cases involving “gene patents” and diagnostic
claims that have been considered by the U.S. Supreme Court. On June 13, 2013, in Association for Molecular Pathology v. Myriad
Genetics, Inc., the Court held that claims to isolated genomic DNA were not patentable subject matter, but claims to complementary
DNA (cDNA) molecules were patentable subject matter. The effect of the decision on patents for other isolated natural products
is uncertain, and this uncertainty includes microRNAs, which have a different chemical composition, differ in size, and have a
more complicated discovery process than DNA. On March 20, 2012, in Mayo Collaborative Services, DBA Mayo Medical Laboratories,
et al. v. Prometheus Laboratories, Inc., the Court held that several claims drawn to measuring drug metabolite levels from patient
samples and correlating them to drug doses were not patentable subject matter. Although the decision relates to biomarker method
patents, relating to simple methods, for affecting treatment decisions, the decision has created uncertainty around the ability
to patent certain biomarker-related method patents. On June 12, 2015, the United States Court of Appeals for the Federal Circuit
(CAFC) issued a decision in Ariosa Diagnostics, Inc. v. Sequenom, Inc. The decision dealt with the subject matter eligibility of
a non-invasive method for detecting paternally inherited cell-free fetal DNA from a blood sample of the pregnant woman carrying
a fetus. The district court ruled that the method claims were patent ineligible and the Federal Circuit agreed. In December 2015,
the CAFC denied an
en banc
hearing of this case. These decisions have increased the uncertainty with regard to our ability
to obtain patents in the future as well as the value of current and future patents, once obtained. Depending on decisions by the
U.S. federal courts and the Patent Office, the interpretation of laws and regulations governing patents could change in unpredictable
ways that would weaken our ability to obtain new patents or to enforce our existing patents, all of which could have a material
adverse effect on our business
On March 4, 2014, the USPTO
issued a memorandum to patent examiners titled 2014 Procedure For Subject Matter Eligibility Of Claims Reciting Or Involving Laws
Of Nature/Natural Principles, Natural Phenomena, And/Or Natural Products. These guidelines instruct USPTO examiners on the ramifications
of the Prometheus and Myriad rulings. In addition, these guidelines reflect the USPTO’s interpretation of Supreme Court case
law addressing patent subject matter eligibility. As such, the guidelines are subject to challenge in a court proceeding and are
subject to modification by future court or USPTO decisions.
On December 15, 2014, the
USPTO released the revised subject matter eligibility examination guidance to patent examiners entitled “2014 Interim Guidance
on Patent Subject Matter Eligibility” (the “Interim Guidance”). The Interim Guidance intends to assist USPTO
patent examiners to evaluate inventions that may be related to law of nature, natural phenomena, and/or an abstract idea. The Interim
Guidance addresses the concerns raised by the public against the guidance issued in March of 2014 – namely that the USPTO
applied with too broad a brush the recent Supreme Court decisions regarding the judicial exceptions (law of nature, natural phenomena,
and/or an abstract idea). The USPTO’s new analysis, focusing on the claims as a whole and an analysis of the “markedly
different” properties of the claimed subject matter (as compared to the natural counterpart product) is a balanced approach.
The Interim Guidance also appears to indicate that a claim that recites a natural phenomenon, such as a diagnostic process or method,
will satisfy Section 101 if the claim sufficiently limits the practical application of the natural phenomenon. The USPTO issued
another update in July 2015 to provide additional information for subject matter eligibility. While we believe our patents and
pending patent applications include claims that are patentable under current US law, as well as in foreign jurisdictions, no assurances
can be given that a federal district court of the USPTO would agree.
In addition, Congress has
directed the USPTO to study effective ways to provide independent, confirming genetic diagnostic test activity where gene patents
and exclusive licensing for primary genetic diagnostic tests exist. This study will examine the impact that independent second
opinion testing has on providing medical care to patients; the effect that providing independent second opinion genetic diagnostic
testing would have on the existing patent and license holders of an exclusive genetic test; the impact of current practices on
testing results and performance; and the role of insurance coverage on the provision of genetic diagnostic tests. The USPTO was
directed to report the findings of the study to Congress and provide recommendations for establishing the availability of independent
confirming genetic diagnostic test activity by June 16, 2012. On August 28, 2012, the Department of Commerce sent a letter to the
House and Senate Judiciary Committee leadership updating them on the status of the genetic testing report. The letter stated in
part: “Given the complexity and diversity of the opinions, comments, and suggestions provided by interested parties, and
the important policy considerations involved, we believe that further review, discussion, and analysis are required before a final
report can be submitted to Congress.” The USPTO issued a Request for Comments and Notice of Public Hearing on Genetic Diagnostic
Testing on January 25, 2012, and held additional public hearings in February and March 2013. In September 2015, the USPTO submitted
a report to Congress pursuant to Section 27 of the Leahy Smith America Invents Act. The report stated that in view of the altered
legal landscape, the USPTO’s recommendations to Congress are limited in scope. The report provided three recommendations.
The first recommendation was to proceed cautiously, monitoring changes in the actual availability of gene-based diagnostic tests
from multiple providers. The second recommendation was to consider creating mechanisms to facilitate sharing data on diagnostic
correlations in order to build robust databases of the relationships between genetic mutations and the presence, absence, or likelihood
of acquiring the relevant medical condition. The third recommendation was to consider the role of cost and insurance. It is unclear
whether the recommendations of this study will be acted upon by Congress to change the law or process in a manner that could negatively
impact our patent portfolio or our future research and development efforts.
It may be more difficult to adequately
protect or enforce the intellectual property rights of our company as a result of the acquisition of PersonalizeDx, which could
harm our competitive position.
Our success and future
revenue growth depends in part, on our ability to protect our intellectual property. We primarily rely on patent, copyright, trademark
and trade secret laws, as well as nondisclosure agreements and other methods, to protect our proprietary technologies and processes.
It is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose proprietary technologies
and processes, despite efforts by us to protect our proprietary technologies and processes. While we hold and have access to a
significant number of patents, there can be no assurances that any additional patents will be issued. Even if new patents are issued,
the claims allowed may not be sufficiently broad to protect our technology. In addition, any of our existing patents, and any future
patents issued to us, may be challenged, invalidated or circumvented. As such, any rights granted under these patents may not provide
us with meaningful protection. We may not have foreign patents or pending applications corresponding to its U.S. patents and applications.
Even if foreign patents are granted, effective enforcement in foreign countries may not be available. If our patents do not adequately
protect our technology, competitors may be able to offer products similar to our products. Our competitors may also be able to
develop similar technology independently or design around our patents.
If we become involved in patent litigation
or other proceedings related to a determination of rights, we could incur substantial costs and expenses, substantial liability
for damages or be required to stop our development and commercialization efforts.
A third party may sue us
for infringing its patent rights. Likewise, we may need to resort to litigation to enforce a patent issued or licensed to us or
to determine the scope and validity of third-party proprietary rights. In addition, a third party may claim that we have improperly
obtained or used its confidential or proprietary information. The cost to us of any litigation or other proceeding relating to
intellectual property rights, even if resolved in our favor, could be substantial, and the litigation would divert our management’s
efforts. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because
they have substantially greater resources, and we may not have sufficient resources to adequately enforce our intellectual property
rights. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue our
operations.
If we are found to infringe
upon intellectual property rights of third parties, we could be forced to pay damages, potentially including treble damages, if
we are found to have willfully infringed on such parties’ patent rights. In addition to any damages we might have to pay,
a court could require us to stop the infringing activity or obtain a license. If we fail to obtain a required license and are unable
to design around a patent, we may be unable to effectively market some of our technology, tests and products, which could limit
our ability to generate revenues or achieve profitability and possibly prevent us from generating revenues sufficient to sustain
our operations. Moreover, we expect that a number of our collaborations will provide that royalties payable to us for licenses
to our intellectual property may be offset by amounts paid by our collaborators to third parties who have competing or superior
intellectual property positions in the relevant fields, which could result in significant reductions in our revenues from tests
or products developed through collaborations.
We license patent rights from third-party
owners. If such owners do not properly maintain or enforce the patents underlying such licenses, our competitive position and business
prospects will be harmed.
We are a party to license
agreements that give us rights to third-party intellectual property that we believe may be necessary or useful for our business,
such as our agreements with The Rockefeller University, Max Planck Innovation GmbH, or Max Planck, and Johns Hopkins University.
We expect to enter into additional licenses of intellectual property with third parties in the future. Our success will depend
in part on the ability of our licensors to obtain, maintain and enforce patent protection for our licensed intellectual property,
in particular, those patents to which we have secured exclusive or co-exclusive rights. Our licensors may not successfully prosecute
the patent applications which we have licensed. Even if patents are issued in respect of these patent applications, our licensors
may fail to maintain these patents, may determine not to pursue litigation against other companies that are infringing these patents,
or may pursue such litigation less aggressively than we would. Without protection for the intellectual property we license, other
companies might be able to offer substantially identical tests or products for sale, which could adversely affect our competitive
business position and harm our business prospects.
In addition, as a result
of the acquisition of PersonalizeDx, after twelve months from the date of the acquisition, we will be required to renegotiate the
terms of certain agreements under which PersonalizeDx had in-licensed proprietary markers from Abbott Molecular, Inc. We cannot
be sure that we will be able to renegotiate these license agreements on acceptable terms or at all. If we are unable to do so,
we may lose the ability to commercialize the products that rely on these licenses.
If we fail to comply with our obligations
under any licenses or related agreements, we could lose license rights that may be necessary for developing microRNA-based diagnostics
and therapeutics.
Our current licenses impose,
and any future licenses we enter into are likely to impose, various obligations on us. Such obligations may include:
|
·
|
annual maintenance fees;
|
|
·
|
payment of fees relating to patent prosecution, maintenance and enforcement;
|
|
·
|
maintaining insurance coverage; and
|
|
·
|
using commercially reasonable efforts to develop and commercialize tests and products using the
licensed technology.
|
If we breach any of our
obligations under our licenses, the licensor may have the right to terminate the license, which could result in our being unable
to develop, manufacture and sell tests or products that are covered by the licensed technology or a competitor gaining access to
the licensed technology.
Confidentiality agreements with employees
and others may not adequately prevent disclosure of trade secrets and other proprietary information.
We rely on trade secrets,
know-how and technology, which are not protected by patents, to maintain our competitive position. In order to protect our proprietary
technology and processes, we rely in part on confidentiality agreements with our collaborators, employees, consultants, outside
scientific collaborators and sponsored researchers and other advisors. These agreements may not effectively prevent disclosure
of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information.
In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert
any trade secret rights against such party. Costly and time-consuming litigation could be necessary to enforce and determine the
scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive
business position.
Risks Related to Development, Clinical
Testing and Regulatory Approval of Diagnostics
If we fail to comply with the complex
federal, state, local and foreign laws and regulations that apply to our business, we could suffer severe consequences that could
materially and adversely affect our operating results and financial condition.
Our operations are subject
to extensive federal, state, local and foreign laws and regulations, all of which are subject to change. These laws and regulations
currently include, among other things:
|
·
|
CLIA, which requires that laboratories obtain certification from the federal government;
|
|
·
|
Some state laws that require laboratories that test specimens from residents of the state to obtain
licenses;
|
|
·
|
Food Drug and Cosmetics Act and Food and Drug Administration (FDA) regulations;
|
|
·
|
Health Insurance Portability and Accountability Act of 1996 (HIPAA), which established comprehensive
federal standards with respect to the privacy and security of protected health information and requirements for the use of certain
standardized electronic transactions; amendments to HIPAA under the Health Information Technology for Economic and Clinical Health
Act, or HITECH, which strengthen and expand HIPAA privacy and security compliance requirements, increase penalties for violators,
extend enforcement authority to state attorneys general and impose requirements for breach notification;
|
|
·
|
state laws regulating genetic testing and protecting the privacy of genetic test results, as well
as state laws protecting the privacy and security of health information and personal data and mandating reporting of breaches to
affected individuals and state regulators;
|
|
·
|
the federal anti-kickback law, or the Anti-Kickback Statute, which prohibits knowingly and willfully
offering, paying, soliciting, receiving, or providing remuneration, directly or indirectly, in exchange for or to induce either
the referral of an individual, or the furnishing, arranging for, or recommending of an item or service that is reimbursable, in
whole or in part, by a federal health care program;
|
|
·
|
the federal False Claims Act, which imposes liability on any person or entity that, among other
things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment to the federal government;
|
|
·
|
the federal Civil Monetary Penalties Law, which prohibits, among other things, the offering or
transfer of remuneration to a Medicare or state health care program beneficiary if the person knows or should know it is likely
to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by
Medicare or a state health care program, unless an exception applies;
|
|
·
|
other federal and state fraud and abuse laws, such as anti-kickback laws, prohibitions on self-referral,
and false claims acts, which may extend to services reimbursable by any third-party payor, including private insurers; and
|
|
·
|
similar foreign laws and regulations that apply to us in the countries in which we operate.
|
These laws and regulations
are complex and are subject to interpretation by the courts and by government agencies. Our failure to comply could lead to civil
or criminal penalties, exclusion from participation in government health care programs, or prohibitions or restrictions on our
laboratories’ ability to provide services. We believe that we are in material compliance with all statutory and regulatory
requirements, but there is a risk that one or more government agencies could take a contrary position, or that a private party
could file suit under the qui tam provisions of the federal False Claims Act or a similar state law. Such occurrences, regardless
of their outcome, could damage our reputation and adversely affect important business relationships with third parties, including
managed care organizations, and other private third-party payors.
If we do not comply with governmental
regulations applicable to our CLIA-certified laboratories, we may not be able to continue our operations.
The operations of our laboratories
in Philadelphia, Pennsylvania and Lake Forest, California are subject to regulation by numerous federal, state and local governmental
authorities in the United States. Both laboratories are CLIA-certified and are accredited by the College of American Pathologists,
or CAP. The CAP Laboratory Accreditation Program is an internationally recognized program that utilizes teams of practicing laboratory
professionals as inspectors, and accreditation by CAP can also be used to meet CLIA and state certification requirements. In addition,
our laboratories have obtained certain state licenses as required, including from California, Florida, Maryland, New York, Pennsylvania,
and Rhode Island, and we plan to obtain licenses from other states if and as required.
CLIA is a federal law that
regulates clinical laboratories that perform testing on human specimens for the purpose of providing information for the diagnosis,
prevention or treatment of disease. CLIA imposes quality standards for laboratory testing to ensure the accuracy, reliability and
timeliness of reporting patient test results. CLIA-certified laboratories are subject to survey and inspection every two years.
Moreover, CLIA inspectors may make random inspections of these laboratories. If we were to lose our CLIA certification or our state
licenses, or if they were limited in scope, we would no longer be able to continue our testing operations, which would have a material
adverse effect on our business.
From time to time, we may
become aware of states other than California, Florida, Maryland, New York, Pennsylvania, and Rhode Island that require out-of-state
laboratories to obtain a license in order to accept specimens from the state, and it is possible that other states already have
such requirements or will have such requirements in the future. If we identify any other state with such requirements or if we
are contacted by any other state advising us of such requirements, we intend to follow instructions from the state regulators as
to how we should comply with such requirements. If we learn that we were accepting specimens from a state that requires licensure,
we may be required to cease accepting specimens from that state while obtaining licensure, and we may be subject to monetary and
other penalties for accepting specimens without a license.
Any diagnostic tests that may be developed
by us or others using our microRNA technology may be subject to regulatory approval, which can be lengthy, costly and burdensome.
Although the FDA has consistently
stated that it has the authority to regulate clinical laboratory tests as medical devices, it generally exercised enforcement discretion
in not otherwise regulating most tests such as ours that are designed, manufactured and used within the same high complexity CLIA-certified
laboratory at which the test was performed. These tests are known as laboratory developed tests, or LDTs. In 2014, the FDA issued
a draft guidance on the regulation of LDTs entitled, “Framework for Regulatory Oversight of Laboratory Developed Tests (LDTs)”
and an accompanying draft guidance document, or Draft Guidance, entitled, “FDA Notification and Medical Device Reporting
for Laboratory Developed Tests (LDTs)”. However, in November 2016, the FDA announced that it would not release a final version
of the Draft Guidance, and in January 2017, it published a discussion paper with its thoughts about elements of a possible future
LDT regulatory framework. We cannot predict when or whether the FDA will issue a final guidance, but FDA could still try to regulate
LDTs in the absence of additional guidance. Although we intend to continue to launch new clinical tests as LDTs in our CLIA-certified
laboratory, we cannot provide any assurance that FDA regulations, including pre-market clearance or approval, will not be required
in the future for LDTs applying our microRNA technology. If pre-market clearance or approval, or additional legal requirements
such as implementing additional quality controls, are required, our business could be negatively impacted because we would have
to obtain the data required to support the requirements of new FDA regulations and because our CLIA-certified laboratory may be
required to stop offering our tests until they are cleared or approved by the FDA.
Diagnostic tests based on our microRNA
technology may require the performance of clinical trials, which can be lengthy, costly and burdensome.
If the FDA decides to require
pre-market clearance or approval of our current tests or the tests that we are developing, it may require us to perform clinical
trials prior to submitting a marketing application. If we are required to conduct clinical trials, whether using prospectively
acquired samples or archival samples, delays in the commencement or completion of clinical testing could significantly increase
development costs and delay commercialization. The commencement of clinical trials also may be delayed if we are unable to obtain
a sufficient number of patient samples, which is a function of many factors, including the size of the relevant patient population
and the nature of the disease or condition being studied. We also might need to engage contract research organizations, or CROs,
to perform data collection and analysis and other aspects of these clinical trials, which might increase the cost and increase
the time to completion.
Failure to comply with government laws
and regulations related to submission of claims for our services could result in significant monetary damages and penalties and
exclusion from the Medicare and Medicaid programs and corresponding foreign reimbursement programs.
We are subject to laws
and regulations governing the submission of claims for payment for our services, such as those relating to: coverage of our services
under Medicare, Medicaid and other state, federal and foreign health care programs; the amounts that we may bill for our services;
and the party to which we must submit claims. Our failure to comply with applicable laws and regulations could result in our inability
to receive payment for our services or in attempts by government healthcare programs, such as Medicare and Medicaid, to recover
payments already made. Submission of claims in violation of these laws and regulations can result in recoupment of payments already
received, substantial civil monetary penalties, and exclusion from government health care programs, and can subject us to liability
under the federal False Claims Act and similar laws. The failure to report and return an overpayment to the Medicare or Medicaid
program within 60 days of identifying its existence can give rise to liability under the False Claims Act. Further, a government
agency could attempt to hold us liable for causing the improper submission of claims by another entity for services that we performed
if we were found to have knowingly participated in the arrangement at issue.
If we are found to have violated laws
protecting the privacy or security of patient health information, we could be subject to civil or criminal penalties, which could
increase our liabilities and harm our reputation or our business.
We are subject to a number
of U.S. federal and state laws and foreign laws protecting the privacy and security of identifiable health information, or “protected
health information” as defined under HIPAA, and restricting the use and disclosure of that protected health information.
In the United States, the U.S. Department of Health and Human Services promulgated health information privacy and security rules
under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and then significantly strengthened and broadened
the applicability of HIPAA under the Health Information Technology for Economic and Clinical Health Act (HITECH). HIPAA and HITECH
and their implementing regulations and guidance will be collectively referred to herein as “HIPAA”. HIPAA applies to
health care providers engaging in certain standard transactions electronically; health plans and health care clearing houses. These
entities are referred to as “covered entities.” Certain HIPAA provisions also apply to “business associates”
of covered entities, or third party providers of services to covered entities that involve the use or disclosure of protected health
information. HIPAA’s privacy rules protect medical records and protected health information in all forms by limiting its
use and disclosure, giving individuals the right to access, amend and seek accounting of their own health information and limiting,
in some circumstances, the use and disclosure of protected health information to the minimum amount reasonably necessary to accomplish
the intended purpose of the use or disclosure. HIPAA’s security standards require both covered entities and business associates
to implement administrative, physical and technical security measures to maintain the security of protected health information
in electronic form. Covered entities and business associates must conduct initial and ongoing risk assessments to ensure the ongoing
effectiveness of security measures and maintain a written information security plan. HITECH amended HIPAA to require the reporting
of breaches of protected health information to affected individuals, the federal government and in some cases, to the media. We
are a covered entity, and as such, we must comply with HIPAA and ensure that all aspects of our operations comply with relevant
HIPAA standards. For example, we must take steps to ensure that our sales team does not inappropriately access or use protected
health information in providing services and support to customers. We are subject to random audit by federal authorities, and enforcement
by both state and federal regulators. We are also subject to investigation in response to complaints. If we are found to be in
violation of the privacy rules security standards, breach notification rules or other HIPAA requirements, we could be subject to
civil or criminal penalties as well as fines, which could increase our liabilities and harm our reputation or our business. Large
breaches of protected health information could lead to class action lawsuits and other litigation. Any publicly reported breach
could cause significant reputational harm to our business and significant expense for reporting, mitigation of harm and implementation
of corrective actions mandated by regulators. HITECH expanded HIPAA enforcement authority to state attorneys general, so we are
subject to additional enforcement and penalties from each state where individuals affected by a HIPAA violation may reside. Allegations
that we have violated individuals’ privacy or security rights, even if we are not found liable, could be expensive and time-consuming
to defend and could result in adverse publicity that could harm our business.
Beyond HIPAA, most states
have adopted data security laws protecting the personal data of state residents. Personal data subject to protection typically
includes name coupled with social security number, state-issued identification number, or financial account number. Most states
require specific, technical security measures for the protection of all personal data, including employee data, and impose their
own breach notification requirements in the event of a loss of personal data. Many states also have adopted genetic testing and
privacy laws. These laws typically require a specific, written consent for genetic testing, as well as consent for the disclosure
of genetic test results, and otherwise limit uses and disclosures of genetic testing results. A few states have adopted laws that
give their residents property rights in their genetic information. State privacy and data security laws generally overlap and apply
simultaneously with HIPAA. In the event of a data breach affecting individuals from more than one state, we must comply with all
relevant state notification requirements as well as HIPAA and are subject to enforcement by all relevant state and federal authorities
as well as fines and penalties imposed by each state.
Non-U.S. privacy protection
requirements such as the European Union’s Data Protection Directive governing the processing of personal data, may be stricter
than U.S. law, and violations could result in claims for damages, fines or orders to stop or change the processing of the personal
data. The European Union’s final draft General Data Protection Regulation, which is likely to be formally adopted, imposes
extensive new legal obligations and substantially increases the risk of fines, with upper limits based on a corporate group’s
global turnover. Privacy and data security laws, including those relating to health information, are complex, overlapping and rapidly
evolving. All of these laws impact our business either directly or indirectly. Our failure to comply with applicable privacy or
security laws, or significant changes in these laws, could significantly impact our business and future business plans.
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
activities involve the use of hazardous and chemical materials, and we maintain quantities of various flammable and toxic chemicals
in our facilities in Israel and the United States. We believe our procedures for storing, handling and disposing these materials
in our Israel and U.S. facilities comply with the relevant guidelines of the State of Israel and the United States. Although we
believe that our safety procedures for handling and disposing of these materials comply with the standards mandated by applicable
regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. 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, exposure to blood-borne pathogens and the
handling of biohazardous materials. We may incur substantial costs to comply with, and substantial fines or penalties if we violate,
any of these laws or regulations.
If we do not comply with laws regulating
the use of human tissues, our business could be adversely affected.
We use human tissue samples
for the purpose of development and validation of our tests. Our access and use of these samples is subjected to government regulation
in the United States, Israel and elsewhere and may become subject to further regulation. For example, the Israeli Ministry of Health
requires compliance with the principles of the Helsinki Declaration, the Public Health Regulations (Clinical Trials in Human Subjects)
1980, the provisions of the Guidelines for Clinical Trials in Human Subjects and the provisions of the current Harmonized Tripartite
Guideline for Good Clinical Practice. Our failure to comply with these or similar regulations could impact our business and results
of operations. In the United States, we must comply with 45 C.F.R. 46, Federal Policy for the Protected of Human Subjects, or the
Common Rule, as well as HIPAA with respect to the use of clinical data associated with tissue samples. Failure to comply with these
laws may result in federal or state enforcement, fines and/or civil penalties, reputational harm and inability to use data for
test validation, research or other purposes.
Risks Related to Competition and Commercialization
If we are unable to expand sales of our
diagnostic tests in the United States, it would have a material adverse effect on our business and financial condition.
In November 2010, we reacquired
the U.S. commercial rights to our microRNA-based diagnostic tests, and in May 2011, we established our own internal sales team
consisting of four sales specialists, which has since been increased and as of the date of this report stands at 10 sales specialists,
two Regional Managers and an Executive Vice President. To date, this team has had moderate success in commercializing our diagnostic
tests. In addition, in July 2012 (as amended in October 2012), we entered into a co-marketing agreement with Precision Therapeutics,
pursuant to which we granted Precision Therapeutics the co-exclusive right, along with us, to market the
RosettaGX
Cancer Origin Test
TM
in the United States. Precision Therapeutics launched its marketing effort in October 2012,
but had limited success and this agreement terminated on February 28, 2014. If we are unable to establish adequate sales, marketing
and distribution capabilities to successfully commercialize our tests in the United States, whether independently or with third
parties, it will have a material adverse effect on our business and financial condition.
The intensely competitive biotechnology
market could diminish demand for our tests and products.
The biopharmaceutical market
is intensely competitive and rapidly changing. Many diagnostic, pharmaceutical and biotechnology companies, academic institutions,
governmental agencies and other public and private research organizations are pursuing the research of technologies and development
of novel diagnostic tests and therapeutic products for the same diseases that we and others who may develop products based on our
technologies are targeting or may target. We and they will face intense competition from tests and products that have already been
approved and accepted by the medical community for the diseases for which we or they may develop tests or products. We and others
who may develop products based on our technologies may also face competition from new tests or products that enter the market.
We believe a significant number of tests and products are currently under development, and may become commercially available in
the future, for the diseases for which we, our collaborators, or third-party licensees may try to develop tests and products. In
addition to the competition we face from existing tests and products in development, we will also face competition from other companies
working to develop novel tests and products using technology that competes more directly with our technologies. We are aware of
several other companies that are working to develop microRNA diagnostics and therapeutics, including Alnylam Pharmaceuticals, Inc.,
Asuragen Inc., HTG Molecular Diagnostics Inc., Interpace Diagnostics, Inc., QIAGEN N.V., Life Technologies Corporation, Ionis Pharmaceuticals,
Inc. (formerly Isis Pharmaceuticals), Miragen Therapeutics, Inc., Mirna Therapeutics Group, Inc. Merck & Co., Inc., Santaris
Pharma A/S, Regulus Therapeutics Inc. and others. In addition, we face competition from companies that have developed or are developing
diagnostic tests based on other non-microRNA technologies such as Cancer Genetics, Inc., NeoGenomics Inc., Biotheranostics, Inc.,
Foundation Medicine, and Veracyte Inc. We are also aware of several other companies that provide tests and services that are competitive
with those provided by our recently acquired PersonalizeDx business, including Cancer Genetics, Inc., NeoGenomics, Inc., Miraca
Life Sciences, Inc., Bostwick Laboratories, Inc. and Healthtronics Inc. If we are unable to compete effectively with existing tests
and products, new treatment methods and new technologies, we and others who may develop products based on our technologies may
be unable to commercialize any diagnostic tests or therapeutic products that we or they develop.
Many of our competitors
have:
|
·
|
much greater financial, technical and human resources than we have at every stage of the discovery,
development, manufacture and commercialization process;
|
|
·
|
more extensive experience in preclinical testing, conducting clinical trials, obtaining regulatory
approvals, and in manufacturing and marketing diagnostics and therapeutics;
|
|
·
|
tests or products that have been approved or are in late stages of development; and
|
|
·
|
collaborative arrangements in our target markets with leading companies and research institutions.
|
Our competitors may develop
or commercialize tests or products with significant advantages over any diagnostic tests or therapeutic products we, our collaborators
or third-party licensees may develop. Our competitors may therefore be more successful in commercializing their tests and products
than we, our collaborators, or third party licensees are, which could adversely affect our competitive position and business.
Health insurers and other third-party
payors may decide not to cover our diagnostic products or may provide inadequate reimbursement, which could jeopardize our commercial
prospects.
In the United States, private
and government payors decide whether to cover a new diagnostic test, the amount that they will pay for a covered test and the specific
conditions for reimbursement. In May 2012, we announced that the designated Medicare Administrative Contractor, or MAC, with jurisdiction
for the
RosettaGX Cancer Origin Test
TM
had informed us that it plans to
cover this test for Medicare beneficiaries, and in June 2012, we announced that the MAC had established a reimbursement rate for
the test. We then announced that this MAC had formalized its coverage decision in a Local Coverage Determination (LCD) effective
August 1, 2013. Each third-party payor, however, makes its own decision about which tests it will cover and how much it will pay.
While many third-party payors will follow the lead of Medicare, we cannot provide any assurance that other payors will cover this
test or any of our other tests. The coverage determination process is often a time-consuming and costly process that will require
us to provide scientific and clinical support for the use of each of our tests to each payor separately, with no assurance that
approval will be obtained. Furthermore, reimbursement from third-party payors depends upon whether a service is covered under the
patient’s policy and if payment practices for the service have been established. If third-party payors decide not to cover
our diagnostic tests or if Medicare or other payors offer inadequate payment amounts, our ability to generate revenue from our
diagnostic tests could be limited. Third-party payors that decide to reimburse for our tests may stop or lower payment at any time,
which would reduce revenue. We cannot predict whether third-party payors will cover our tests or offer adequate payments. We also
cannot predict the timing of such decisions. In addition, physicians or patients may decide not to order our tests if third-party
payments are inadequate, especially if ordering the test could result in financial liability for the patient.
In the United States, the
American Medical Association, or AMA, assigns specific Current Procedural Terminology, or CPT, codes, which are a medical nomenclature
used to report medical procedures and services under public and private health insurance plans. Once the CPT code is established,
the Centers for Medicare and Medicaid Services, or CMS, establishes reimbursement payment levels and coverage rules for Medicare,
and private payors establish rates and coverage rules independently. While we have been assigned a CPT code for the
Rosetta
Cancer Origin Test
TM
, we cannot guarantee that any of our other tests will be assigned a CPT code and will be
approved for reimbursement by Medicare or other third-party payors. Additionally, any or all of our diagnostic tests developed
in the future may not be approved for reimbursement or may be approved at a level that limits our commercial success.
In addition, payment for
diagnostic tests furnished to Medicare beneficiaries in most instances is made based on a fee schedule set by CMS. In recent years,
payments under these fee schedules have decreased and may decrease more, which could jeopardize our commercial prospects. Reimbursement
decisions in the European Union and in other jurisdictions outside of the United States vary by country and regions and there can
be no assurance that we will be successful obtaining adequate reimbursement.
Recent and future changes
to policies and pricing from the MolDx molecular diagnostics program utilized by Noridian Healthcare Solutions, our Medicare Administrative
Carrier, could have positive or negative effects on our Medicare billing. This relates primarily to our high complexity laboratory
in Lake Forest, California which is under Noridian and MolDx jurisdiction. MolDx changes to coding and reimbursement over the past
three years for Fluorescence In Situ Hybridization, or FISH, is indicative of the MolDx impact. In 2013, MolDx reduced FISH reimbursement
in an attempt to reduce overutilization causing substantive losses for many laboratories. In 2016, MolDx revised pricing for FISH
upward after implementing better utilization controls in the form of revised code and billing guidance.
Because of Medicare billing rules, we
may not receive reimbursement for all tests provided to Medicare patients.
Under current Medicare
billing rules, the bundled payment for inpatient services includes clinical laboratory testing performed for a Medicare beneficiary
who was a hospital inpatient at the time the tumor tissue sample was obtained and whose testing was ordered less than 14 days after
discharge. Medicare billing rules also require hospitals to bill for our testing if it is ordered for a hospital outpatient under
the same circumstances. Accordingly, we must bill hospitals for such testing. Because we generally do not have written agreements
in place obligating these hospitals to pay for our testing, we may not be paid or may have to pursue payment from the hospital
on a case-by-case basis. We cannot ensure that hospitals will pay us for tests performed on patients falling under these rules.
Failure to comply with federal and state
anti-kickback and fraud and abuse laws could result in severe penalties.
Healthcare providers, physicians
and third-party payors play a primary role in the recommendation and prescription of drug products that are granted marketing approval.
Arrangements with third-party payors and customers are subject to broadly applicable fraud and abuse and other healthcare laws
and regulations. Such restrictions under applicable federal and state healthcare laws and regulations, include the following:
|
·
|
the federal Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully
soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either
the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made,
in whole or in part, under a federal healthcare program such as Medicare and Medicaid;
|
|
·
|
the federal False Claims Act imposes civil penalties, and provides for 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 or making a false statement to avoid, decrease or conceal an obligation to pay money to
the federal government;
|
|
·
|
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal
and civil liability for executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare
matters;
|
|
·
|
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act 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 false statements statute prohibits knowingly and willfully falsifying, concealing or
covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare
benefits, items or services;
|
|
·
|
the federal transparency requirements under the Patient Protection and Affordable Care Act, as
amended by the Health Care and Education Reconciliation Act of 2010, or collectively the ACA will require applicable manufacturers
of covered drugs, devices, drugs and medical supplies to report to the Department of Health and Human Services information related
to payments and other transfers of value to physicians and teaching hospitals and physician ownership and investment interests;
and
|
|
·
|
analogous state and foreign laws and regulations, such as state anti-kickback and false claims
laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental
third-party payors, including private insurers.
|
Changes in healthcare policy, including
legislation reforming the U.S. healthcare system, may have a material adverse effect on our financial condition and operations.
The Patient Protection
and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively the ACA, enacted
in March 2010, makes changes that are expected to significantly affect the pharmaceutical and medical device industries and clinical
laboratories. Effective January 1, 2013, the ACA includes a 2.3% excise tax on the sale of certain medical devices sold outside
of the retail setting. Although a moratorium has been imposed on this excise tax for 2016 and 2017, the excise tax is scheduled
to be restored in 2018.
Other significant measures
contained in the ACA include, for example, coordination and promotion of research on comparative clinical effectiveness of different
technologies and procedures, initiatives to revise Medicare payment methodologies, such as bundling of payments across the continuum
of care by providers and physicians, and initiatives to promote quality indicators in payment methodologies. The ACA also includes
significant new fraud and abuse measures, including required disclosures of financial arrangements with physician customers, lower
thresholds for violations and increasing potential penalties for such violations. In addition, the ACA establishes an Independent
Payment Advisory Board, or IPAB, to reduce the per capita rate of growth in Medicare spending. The IPAB has broad discretion to
propose policies to reduce expenditures, which may have a negative effect on payment rates for services. The IPAB proposals may
affect payments for clinical laboratory services beginning in 2016 and for hospital services beginning in 2020. We are monitoring
the effect of the ACA to determine the trends and changes that may be necessitated by the legislation, any of which may potentially
affect our business.
President Trump and some
members of the U.S. Congress have repeatedly expressed their intentions to repeal or repeal and replace the ACA. We cannot predict
whether they will be successful in repealing the ACA in its entirety or in part or whether they will be successful in replacing
it with a new law, nor can we predict what the effect of either of these actions would have on our business.
In addition to the ACA,
various healthcare reform proposals have also emerged from federal and state governments. For example, in February 2012, Congress
passed the Middle Class Tax Relief and Job Creation Act of 2012, which in part reset the clinical laboratory payment rates on the
Medicare Clinical Laboratory Fee Schedule, or CLFS, by 2% in 2013. In addition, under the Budget Control Act of 2011, which is
effective for dates of service on or after April 1, 2013, Medicare payments, including payments to clinical laboratories, are subject
to a reduction of 2% due to the automatic expense reductions (sequester) until fiscal year 2024. Reductions resulting from the
Congressional sequester are applied to total claims payment made; however, they do not currently result in a rebasing of the negotiated
or established Medicare reimbursement rates.
State legislation on reimbursement
applies to Medicaid reimbursement and managed Medicaid reimbursement rates within that state. Some states have passed or proposed
legislation that would revise reimbursement methodology for clinical laboratory payment rates under those Medicaid programs. We
cannot predict whether future healthcare initiatives will be implemented at the federal or state level or in countries outside
of the United States in which we may do business, or the effect any future legislation or regulation will have on us. The taxes
imposed by the new federal legislation, cost reduction measures and the expansion in the role of the U.S. government in the healthcare
industry may result in decreased revenue, lower reimbursement by payers for our tests or reduced medical procedure volumes, all
of which may adversely affect our business, financial condition and results of operations. In addition, sales of our tests outside
the United States subject our business to foreign regulatory requirements and cost-reduction measures, which may also change over
time.
Ongoing calls for deficit
reduction at the federal government level and reforms to programs such as the Medicare program to pay for such reductions may affect
the pharmaceutical, medical device and clinical laboratory industries. Currently, clinical laboratory services are excluded from
the Medicare Part B co-insurance and co-payment as preventative services. Any requirement for clinical laboratories to collect
co-payments from patients may increase our costs and reduce the amount ultimately collected.
The Protecting Access to
Medicare Act of 2014, or PAMA, includes a substantial new payment system for clinical laboratory tests under the CLFS. Under PAMA,
laboratories that receive the majority of their Medicare revenues from payments made under the CLFS would report initially and
then on a subsequent three-year basis thereafter (or annually for advanced diagnostic laboratory tests, or ADLTs), private payer
payment rates and volumes for their tests. The final PAMA ruling was issued June 17, 2016, indicating that data for reporting for
the new PAMA process will begin in 2017 and the new market based rates will take effect January 1, 2018. The private payer rate
will be calculated based on claims whose adjudication is final and will include patient deductible and co-insurance amounts. Additionally,
we believe our Reveal test, once covered, would be considered ADLTs and that we can determine when to seek ADLT status. We cannot
assure you that reimbursement rates under the final regulations for tests like ours will not be adversely affected.
The market may not be receptive to any
diagnostic tests or therapeutic products using our microRNA technology upon their commercial introduction.
Any diagnostic tests or
therapeutic products using our microRNA technology that we, our collaborators or third-party licensees have developed or are developing
are based upon new technologies or diagnostic or therapeutic approaches. Key participants in pharmaceutical marketplaces, such
as physicians, third-party payors and consumers, may not accept a microRNA-based approach. As a result, it may be more difficult
for us, our collaborators or third-party licensees to convince the medical community and third-party payors to accept and use such
tests and products. Other factors that we believe will materially affect market acceptance of diagnostic tests or therapeutic products
using our microRNA technology include:
|
·
|
the timing of any marketing approvals, the terms of any approvals and the countries in which approvals
are obtained;
|
|
·
|
the success of physician education programs;
|
|
·
|
the availability of alternative diagnostics and therapeutics; and
|
|
·
|
the pricing of such tests or products, particularly as compared to alternatives.
|
Risks Related to Our Dependence on Third
Parties
We are largely dependent upon our distributors
for the success of commercialization of our current diagnostic tests.
We currently have distribution
agreements with respect to some of our tests covering Australia, Greece, India, Israel, New Zealand, and Turkey. All of these distribution
agreements call for samples to be sent to our CLIA-certified laboratory in Philadelphia for analysis, but we are largely dependent
upon these distributors for the commercial success of our tests outside of the United States. The potential revenues from these
agreements are based on the sale of our products by these distributors and will depend upon our distributors’ ability to
devote the necessary resources to successfully commercialize these tests. In addition, if any of our current or potential future
distributors were to breach or terminate its agreement with us, the commercialization of these tests could be adversely affected
because we may not have sufficient financial resources or capabilities to successfully commercialize these tests on our own or
find other partners. If any of our distributors or co-marketers does not devote sufficient time and resources to the collaboration
or if a collaboration is breached or terminated, we may not realize the potential commercial benefits of the arrangement, and our
results of operations may be adversely affected.
We contract with a single manufacturer
for the purchase of microarray chips for certain tests, including the
RosettaGX Cancer Origin
Test
™
and miKIDNEY
™
. The failure of this
manufacturer to supply sufficient quantities on a timely basis could have a material adverse effect on our business.
We use a single manufacturer
for the supply of microarray chips for certain tests, including the
RosettaGX Cancer Origin
Test
™
and miKIDNEY
™
. While we believe that
there are a number of manufacturers from whom we could obtain such chips, we have not screened or approved any such manufacturers
as potential back-up manufacturers for these chips, and it could take a significant amount of time and would be costly to do so.
Accordingly, if this manufacturer is unable or unwilling to supply sufficient quantities of chips on a timely basis, it could have
a material adverse effect on our business.
We may not be able to execute our business
strategy if we are unable to enter into additional collaborations with other companies that can provide capabilities and funds
for the development and commercialization of our microRNA-based diagnostics and therapeutics.
We have limited capabilities
for sales, marketing, distribution and product development, including obtaining regulatory approval of therapeutic products. Accordingly,
we may enter into additional collaborations with pharmaceutical, biotechnology or diagnostic companies to jointly develop specific
tests or products and to jointly commercialize them. In such collaborations, we would expect our collaborators to provide substantial
capabilities in clinical development, regulatory affairs, marketing and sales. While such agreements could provide us with an opportunity
to develop and commercialize tests and products, they may necessitate a reliance on our collaboration partner in numerous aspects
of the research and development, regulation, manufacturing, marketing and sales of these tests and products. We may not be successful
in entering into any additional collaborations on favorable terms or maintaining any such collaborations into which we enter. In
addition, while such agreements would provide us with opportunities, they would also require us to share the down-stream profits
with our collaborators, thereby reducing our ability to fully capitalize on sales.
If any collaborator terminates or
fails to perform its obligations under agreements with us, the development and commercialization of our tests and products could
be delayed or terminated.
Our expected dependence
on collaborators for certain capabilities and funding means that our business would be adversely affected if any collaborator terminates
its collaboration agreement with us or fails to perform its obligations under that agreement. Our current or future collaborations,
if any, may not be scientifically or commercially successful. Disputes may arise in the future with respect to the ownership of
rights to tests or products developed with collaborators, which could have an adverse effect on our ability to develop and commercialize
any affected test or product. If a collaborator terminates its collaboration with us, for breach or otherwise, it could be difficult
for us to attract new collaborators and it could adversely affect how we are perceived in the business and financial communities.
In addition, a collaborator could determine that it is in its financial interest to:
|
·
|
pursue alternative technologies or develop alternative tests or products, either on its own or
jointly with others, that may be competitive with the tests or products on which it is collaborating with us or which could affect
its commitment to the collaboration with us;
|
|
·
|
pursue higher priority programs or change the focus of their development programs, which could
affect the collaborator’s commitment to us; or
|
|
·
|
if it has marketing rights and obligations, choose to devote fewer resources to the marketing of
our tests or products, than they do for tests or products of their own development, or of their co-development with third parties.
|
If any of these occur,
we may not have sufficient financial resources or capabilities to continue the development and commercialization of such test or
product on our own.
We rely on third parties for tissue
samples and other materials required for our research and development activities, and if we are unable to reach agreements with
these third parties our research and development activities would be delayed.
We rely on third parties,
primarily hospitals, health clinics and academic institutions, for the provision of tissue samples and other materials required
in our research and development activities. Obtaining these materials requires various approvals as well as reaching a commercial
agreement on acceptable terms with the hospital or other provider of the materials. We may not be able to reach agreements with
a sufficient number of suppliers or do so on terms acceptable to us. If we are unable to reach acceptable agreements with a sufficient
number of suppliers of research materials, our research and development activities will be delayed and our ability to implement
our business plan will be compromised.
We currently have limited sales,
marketing or distribution experience and may in the future depend significantly on third parties to commercialize microRNA-based
diagnostic tests or therapeutic products we may develop.
We currently have a
U.S. sales and marketing team that covers the markets for our current product offerings; however, we may need to expand our sales
team as we introduce diagnostic tests to new markets. In the future, we may rely on collaborators or other third parties to commercialize
certain future tests we may develop in the United States in the event such tests don’t align with current call points. We
have limited control over the sales, marketing and distribution activities of our collaborators, and our future revenues will depend
on the success of the efforts of our collaborators. To expand our internal sales, distribution and marketing capabilities, we will
have to invest financial and management resources, and we will face a number of additional risks, including:
|
·
|
our inability to develop and launch new tests that focus on larger potential markets;
|
|
·
|
we may not be able to attract and grow a marketing or sales force;
|
|
·
|
the cost of establishing a marketing or sales force may not be justifiable in light of the revenues
generated by any particular test or product; and
|
|
·
|
our direct sales and marketing efforts may not be successful.
|
Risks Related to Our Operations
If we are unable to attract and retain
qualified key management and scientists, staff consultants and advisors, our ability to implement our business plan may be adversely
affected.
We are highly dependent
upon certain of our senior management and scientific staff. The loss of the service of these persons may significantly delay or
prevent our achievement of product development and other business objectives. Our employment agreements with our key personnel
are terminable by the employee at any time with notice. Additionally, we face intense competition for qualified individuals from
numerous pharmaceutical and biotechnology companies, universities, governmental entities and other research institutions. We may
be unable to attract and retain suitably qualified individuals, and our failure to do so could have an adverse effect on our ability
to implement our business plan.
There is a substantial risk of product
liability claims in our business. If we are unable to obtain sufficient insurance, a product liability claim against us could adversely
affect our business.
Our business exposes
us to significant potential product liability risks that are inherent in the development, manufacturing and marketing of diagnostics
and therapeutics. Product liability claims could delay or prevent completion of our clinical development programs. We currently
have product liability insurance covering our current commercial tests, and clinical trial insurance for certain trials and cancer
programs requiring insurance in an amount up to $5 million in the aggregate. We plan to obtain insurance for all research programs
at appropriate levels prior to initiating any required clinical trials and at higher levels prior to marketing approved therapeutic
products. Any insurance we obtain may not provide sufficient coverage against potential liabilities. Furthermore, clinical trial
and product liability insurance is becoming increasingly expensive. As a result, we may be unable to obtain sufficient insurance
at a reasonable cost to protect us against losses caused by product liability claims that could have a material adverse effect
on our business.
If we are unable to manage the challenges
associated with our international operations, the growth of our business could be limited.
We are subject to a
number of risks and challenges that specifically relate to international operations. Our international operations may not be successful
if we are unable to meet and overcome these challenges, which could limit the growth of our business and may have an adverse effect
on our business and operating results. These risks include:
|
·
|
fluctuations in foreign currency exchange rates that may increase the U.S. dollar cost of our international
operations;
|
|
·
|
difficulty managing operations in multiple locations, which could adversely affect the progress
of our development programs and business prospects;
|
|
·
|
local regulations that may restrict or impair our ability to conduct pharmaceutical and biotechnology-based
research and development;
|
|
·
|
foreign protectionist laws and business practices that favor local competition;
|
|
·
|
failure of local laws to provide the same degree of protection against infringement of our intellectual
property, which could adversely affect our ability to develop tests or products or reduce future product or royalty revenues, if
any, from tests or products we may develop;
|
|
·
|
laws and regulations governing U.S. immigration and entry into the United States that may restrict
free movement of our employees between Israel and the United States; and
|
|
·
|
laws and regulations governing U.S. immigration and entry into the United States that could limit
the number of foreign employees in our U.S. facilities.
|
We are exposed to risks relating
to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act of 2002.
Our management is
responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f)
of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). We cannot guarantee that we will not identify
material weaknesses or significant control deficiencies in the future. Any failure to maintain or implement required new or
improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or
material weaknesses and cause us to fail to meet our periodic reporting obligations or result in material misstatements in
our financial statements, which in turn could lead to a decline in our stock price. Any such failure could also adversely
affect the results of periodic management evaluations regarding the effectiveness of our internal control over financial
reporting.
Risks Related to Israeli Law and Our
Operations in Israel
For certain calendar years, we were
a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. There may be negative tax consequences for
holders of our Ordinary Shares who are U.S. residents and do not make certain timely tax elections.
We believe we may be
a PFIC for the year ended December 31, 2016. The determination of whether or not we are a PFIC is made on an annual basis and will
depend on the composition of our income and assets from time to time. Specifically, for U.S. federal income tax purposes, we will
generally be classified as a PFIC for any taxable year in which either: (i) 75% or more of our gross income is passive income or
(ii) at least 50% of the average value (determined on a quarterly basis) of our total assets for the taxable year (including cash)
produce or are held for the production of passive income. The calculation of the value of our assets will be based, in part, on
the quarterly market value of our Ordinary Shares. It is difficult to make accurate predictions of our future income, assets, activities
and market capitalization, all of which are relevant to the PFIC determination. For years in which we are determined to be a PFIC
for U.S. federal income tax purposes, U.S. holders of our Ordinary Shares may become subject to increased tax liabilities under
U.S. tax laws and regulations and will become subject to burdensome reporting requirements. Accordingly, our treatment as a PFIC
could therefore result in a reduction in the after-tax return of U.S. holders of our Ordinary Shares and may cause a reduction
in the value of our shares. For more information please see “Certain Material U.S. Federal Income Tax Considerations –
Passive Foreign Investment Company” herein.
We are headquartered in Israel and
therefore our results may be adversely affected by political, economic and military instability in Israel.
Our principal executive
offices and research and development facilities are located in Israel. Accordingly, political, economic and military conditions
in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts
have taken place between Israel and its Arab neighbors, as well as incidents of civil unrest. Although Israel has entered in the
past into various agreements with the Palestinian Authority, Israel has been and is subject to related civil unrest and Palestinian
terrorist activity, with varying levels of severity. In addition, tension among the different Palestinian factions may create additional
unrest and uncertainty. In recent years, Israel was engaged in several rounds of armed conflicts with Hamas in the Gaza Strip.
These conflicts involved missile strikes against civilian targets in parts of Israel that resulted in economic losses.
We can give no assurance
that security and political conditions will have no impact on our business in the future. Hostilities involving Israel or the interruption
or curtailment of trade between Israel and its present trading partners could adversely affect our operations and could make it
more difficult for us to raise capital. Ongoing and revived hostilities or other adverse political or economic developments in
Israel or the region could harm our operations and product development and cause sales of any approved products to decrease. In
addition, Israel and companies doing business with Israel have, in the past, been subject to economic boycotts. Several countries,
principally those in the Middle East, still restrict business with Israel and Israeli companies. These restrictions may seriously
limit our ability to sell any approved products in these countries.
Our business insurance
does not cover losses that may occur as a result of events associated with the security situation in the Middle East. Although
the Israeli government commonly covers 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. Any losses or damages incurred by us could have
a material adverse effect on our business. Any armed conflicts or political instability in the region would likely negatively affect
business conditions and could harm our results of operations.
Our operations could be disrupted
as a result of the obligation of management or key personnel to perform military service in Israel.
Many of our male employees
in Israel are obligated to perform military reserve duty annually for extended periods of time through the age of 40 (or older
for citizens with certain occupations) and, in the event of a military conflict, could be called to active duty. In response to
increases in terrorist activity, there have been periods of significant call-ups of military reservists. It is possible that there
will be additional call-ups in the future. Our operations could be disrupted by the absence of a significant number of our employees
related to military service or the absence for extended periods of military service of one or more of our key employees.
The government tax benefits that
we are currently eligible to receive require us to meet several conditions and may be terminated or reduced in the future, which
would increase our costs.
Some of our operations
in Israel have been granted “approved enterprise” status by the Investment Center in the Israeli Ministry of Economy,
which resulted in our being eligible for tax benefits under the Israeli Law for Encouragement of Capital Investments, 1959, as
amended. These benefits will commence in the first year in which we produce taxable income. Pursuant to these benefits, undistributed
income that we generate from our “approved enterprise” will be tax exempt for two years and, thereafter, will be subject
to a corporate tax at a rate of 10%-25% for an additional five to eight years, depending on the extent of foreign investment in us.
The availability of these tax benefits, however, is subject to certain requirements, including, among other things, making specified
investments in fixed assets and equipment, financing a percentage of those investments with our capital contributions, compliance
with our marketing program which was submitted to the Investment Center, filing of certain reports with the Investment Center and
compliance with Israeli intellectual property laws. If we do not meet these requirements in the future, these tax benefits may
be cancelled and we may be required to refund the amount of the benefits already received, in whole or in part, with the addition
of linkage differentials to the Israeli consumer price index and interest, or other monetary penalty. The tax benefits that we
anticipate receiving under our current “approved enterprise” program may not be continued in the future at their current
levels or at all.
We participated in programs supported
by the Israeli Chief Scientist, which may restrict the transfer of know-how that we develop.
Until December 2016
we participated in the consortium “Rimonim,” which was supported by the Israel Innovation Authority (“IIA”) of the Ministry of Economy and Industry of the State
of Israel. The aim of this consortium was to develop novel technologies for the use of short interfering RNA, or siRNA, and microRNA
mimetics or anti-microRNAs for therapeutics. In addition, in the past we participated in a two year Magneton project with Tel Aviv
University that was jointly funded by the IIA, the aim of which was to develop a delivery system for microRNA mimetics for the
treatment of cancer. The transfer of know-how developed in the framework of these programs or rights to manufacture based on and/or
incorporating such know-how to third parties which are not members of the programs requires the consent of the IIA.
The IIA, under special
circumstances, may approve the transfer of the know-how developed in these supported projects outside of Israel, provided that
the grant recipient pays to the IIA a portion of the sale price paid in consideration for such know-how, which portion will not
exceed six times the amount of the grants received plus interest (or three times the amount of the grant received plus interest,
in the event that the recipient of the know-how has committed to retain the R&D activities of the grant recipient in Israel
after the transfer). As of December 31, 2016, we had received from the IIA total grants of $932,299 for our development under the
Rimonim Consortium and $282,141 for our development under the Magneton project.
According to an amendment to the Israeli
Encouragement of Industrial Research and Development Law, 5744-1984 (R&D Law), the IIA was established and will replace the
OCS in the implementation of the governmental policy in connection with the R&D Law (and has been given discretion in the implementation
of the R&D Law for such purpose). Pursuant to the amendment, the current restrictions under the R&D Law will be replaced
by new arrangements to be determined by the IIA; however, until the IIA determines otherwise, the provisions of the R&D Law
and regulations that applied to existing OCS programs (including those provisions described above) will continue to apply.
Provisions of Israeli law may delay,
prevent or impede an acquisition of us, which could prevent a change of control.
Israeli corporate law
regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for
transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these
types of transactions. For example, a merger may not be completed unless at least 50 days have passed from the date that a merger
proposal was filed by each merging company with the Israel Registrar of Companies and at least 30 days from the date that the shareholders
of both merging companies approved the merger. In addition, if the target company’s shares are divided into classes, the
approval of a majority of each class of shares of the target company is required to approve a merger.
Furthermore, Israeli
tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence does not
have a tax treaty with Israel exempting 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 numerous conditions, including a holding period of two years
from the date of the transaction during which sales and dispositions of shares of the participating companies are restricted. Moreover,
with respect to certain share swap transactions, the tax deferral is limited in time, and when the time expires, tax then becomes
payable even if no actual disposition of the shares has occurred.
These provisions could
delay, prevent or impede an acquisition of us, even if such an acquisition would be considered beneficial by some of our shareholders.
It may be difficult to enforce a
U.S. judgment against us, our officers and directors or to assert U.S. securities law claims in Israel.
We are incorporated
in Israel. Most of our executive officers and directors are not residents of the United States, and a majority of our assets and
the assets of these persons are located outside of the United States. Therefore, it may be difficult to enforce a judgment obtained
in the United States against us or any of these persons in U.S. or Israeli courts based on the civil liability provisions of the
U.S. federal securities laws. Additionally, it may be difficult to enforce civil liabilities under U.S. federal securities laws
in original actions instituted in Israel.
Being a foreign private issuer exempts
us from certain SEC and NASDAQ requirements
We are a “foreign
private issuer” within the meaning of rules promulgated by the SEC. As such, we are exempt from certain provisions applicable
to U.S. public companies including:
|
·
|
the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form
10-Q and current reports on Form 8-K;
|
|
·
|
the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations
in respect of a security registered under the Exchange Act;
|
|
·
|
the provisions of Regulation FD aimed at preventing issuers from making selective disclosures of
material information; and
|
|
·
|
the sections of the Exchange Act requiring insiders to file public reports of their stock ownership
and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction
(a purchase and sale, or sale and purchase, of the issuer’s equity securities within less than six months).
|
In addition, under
the rules and regulations of The NASDAQ Stock Market, a foreign private issuer may follow its home country practice in lieu of
certain NASDAQ listing requirements. For example, under NASDAQ’s rules, each of (1) the private placement completed in December
2010, (2) the concurrent private placement and registered direct offering completed in February 2011, (3) the private placement
completed in October 2011, (4) the Debenture transaction completed in January 2012, (5) the registered direct offering completed
in April 2012, (6) the registered direct offerings completed in May 2012, (7) the private placement completed in October 2015 and
(8) the concurrent private placement and registered direct offering completed in November 2016, would have required shareholder
approval because these offerings represented the issuance (or potential issuance) of more than 20% of our outstanding Ordinary
Shares at a price per share below the greater of book value per share or market value per share. However, we chose to follow our
home country practice, which did not require shareholder approval of these offerings. Because of these SEC and NASDAQ exemptions,
investors are not afforded the same protections or information generally available to investors holding shares in public companies
organized in the United States.
Risks Related to our Ordinary Shares
Our stock price has been and is likely
to continue to be volatile and the market price of our Ordinary Shares may drop.
Prior to our February
2007 initial public offering, there was not a public market for our Ordinary Shares. Since our Ordinary Shares began trading on
NASDAQ on February 27, 2007, through March 24, 2017, our stock price has fluctuated from a low of $3.22 to a high of $7,086.22
(after giving effect to the reverse stock splits effected in July 2011, May 2012, and March 2017). Furthermore, the stock market
has recently experienced significant volatility, particularly with respect to pharmaceutical, biotechnology, and other life sciences
company stocks. The volatility of pharmaceutical, biotechnology, and other life sciences company stocks often does not relate to
the operating performance of the companies represented by the stock. Some of the factors that may cause the market price of our
Ordinary Shares to fluctuate include:
|
·
|
failure of any of our diagnostic tests to achieve commercial success;
|
|
·
|
failure to successfully maintain and grow the acquired business and operations of PersonalizeDx;
|
|
·
|
introduction of technological innovations or new commercial products by us or our competitors;
|
|
·
|
our entry into new, or termination or other developments relating to our existing, collaboration,
distribution and licensing agreements;
|
|
·
|
developments relating to our efforts to commercialize our tests in the United States;
|
|
·
|
regulatory developments in the United States and foreign countries;
|
|
·
|
developments or disputes concerning patents or other proprietary rights;
|
|
·
|
failure to secure adequate capital to fund our operations, or the issuance of equity securities
at prices below fair market volume;
|
|
·
|
changes in estimates or recommendations by securities analysts, if any cover our securities;
|
|
·
|
future sales of our Ordinary Shares;
|
|
·
|
general market conditions;
|
|
·
|
changes in the structure of healthcare payment systems;
|
|
·
|
economic and other external factors or other disasters or crises;
|
|
·
|
period-to-period fluctuations in our financial results; and
|
|
·
|
overall fluctuations in U.S. equity markets.
|
These and other external
factors may cause the market price and demand for our Ordinary Shares to fluctuate substantially, which may limit or prevent investors
from readily selling their shares and may otherwise negatively affect the liquidity of our Ordinary Shares. In addition, in the
past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation
against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial
costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management.
We do not intend to pay any cash
dividends in the foreseeable future and, therefore, any return on an investment in our Ordinary Shares must come from increases
in the fair market value and trading price of our Ordinary Shares.
We do not intend to
pay any cash dividends in the foreseeable future and, therefore, any return on an investment in our Ordinary Shares must come from
increases in the fair market value and trading price of our Ordinary Shares.
Risks Related to an Investment in
the Securities and this Offering
Our management team will have immediate
and broad discretion over the use of the net proceeds from this offering and may not use them effectively.
We currently intend
to use the net proceeds of this offering for general corporate purposes, including marketing, production, and research and development
related purposes. See “Use of Proceeds.” However, our management will have 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
this 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 this offering in a manner
that does not produce income. The decisions made by our management may not result in positive returns on your investment and you
will not have an opportunity to evaluate the economic, financial or other information upon which our management bases its decisions.
The offering may not be fully subscribed,
and, even if the offering is fully subscribed, we will need additional capital in the future. If additional capital is not available,
we may not be able to continue to operate our business pursuant to our business plan or we may have to discontinue our operations
entirely.
The placement agent
in this offering will offer the securities on a “best-efforts” basis, meaning that we may raise substantially less
than the total maximum offering amount. We will not provide any refund to investors if less than all of the securities are sold.
We have incurred losses in each year since our inception. If we continue to use cash at our historical rates of use we will need
significant additional financing, which we may seek through a combination of private and public equity offerings, debt financings
and collaborations and strategic and licensing arrangements. 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 any such offerings may include
liquidation or other preferences that may adversely affect the then-existing shareholders’ rights. Debt financing, if available,
would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our
ability to take specific actions such as incurring debt or making capital expenditures. If we raise additional funds through collaboration,
strategic alliance or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies,
future revenue streams or product candidates, or grant licenses on terms that are not favorable to us.
The Series A Warrants included
in this offering may not have any value.
We do not
currently have a sufficient number of authorized Ordinary Shares to cover the shares issuable upon exercise of the Series A
Warrants being offered by this prospectus. As a result, before any Series A Warrants can become exercisable, we need to
receive shareholder approval of the Charter Amendment. While our board of directors has unanimously recommended that
shareholders approve the Charter Amendment and all current directors and executive officers are supportive of the Charter
Amendment, we cannot assure you that we will be able to obtain requisite shareholder approval of the Charter Amendment. The
Series A Warrants will be exercisable on any day on or after the date that we publicly announce through the filing of a
Current Report on Form 6-K that the Charter Amendment has been approved by our stockholders and has become effective. The
Series A Warrants will expire years from the date the Series A Warrants are first
exercisable.
In the event our
shareholders do not approve the Charter Amendment, the Series A Warrants will not be exercisable and may not have any value. Further,
if our Ordinary Share price does not exceed the exercise price of the Series A Warrants during the period when the Series A Warrants
are exercisable, the Series A Warrants may not have any value.
You will experience immediate dilution
in the net tangible book value of any securities you purchase.
Because the
effective price per Ordinary Share being offered is substantially higher than our net tangible book value per Ordinary Share,
you will suffer substantial dilution in the net tangible book value of any Ordinary Shares you purchase in this offering.
Therefore, if you purchase Ordinary Shares in this offering, you will suffer immediate and substantial dilution of our pro
forma as adjusted net tangible book value. To the extent outstanding options, warrants or offered warrants are exercised, you
will incur further dilution. See “Dilution” on page 34 for a more detailed discussion of the dilution you will
incur in connection with this offering.
We do not know whether a market for
the Ordinary Shares will be sustained or what the trading price of the Ordinary Shares will be, and as a result, it may be difficult
for you to sell your Ordinary Shares.
Although the Ordinary
Shares now trade on the NASDAQ Capital Market, an active trading market for the Ordinary Shares may not be sustained. It may be
difficult for you to sell your Ordinary Shares without depressing the market price for the Ordinary Shares or at all. As a result
of these and other factors, you may not be able to sell your Ordinary Shares. Further, an inactive market may also impair our ability
to raise capital by selling Ordinary Shares and may impair our ability to enter into strategic partnerships or acquire companies
or products by using our Ordinary Shares as consideration.
There is no public market for the
Series A Warrants and Series B Warrants being offered by us in this offering.
There is no established
public trading market for the Series A Warrants and Series B Warrants being offered in this offering, and we do not expect a market
to develop. In addition, we do not intend to apply to list the Series A Warrants and Series B Warrants on any national securities
exchange or other nationally recognized trading system, including the NASDAQ Capital Market. Without an active market, the liquidity
of the Series A Warrants and Series B Warrants will be limited.
Substantial future sales of our Ordinary Shares could cause the market price of our Ordinary Shares to decline.
Sales of a substantial
number of our Ordinary Shares into the public market, including sales by members of our management or board of directors or entities
affiliated with such members, could occur at any time. These sales, or the perception in the market that the holders of a large
number of Ordinary Shares intend to sell those Ordinary Shares, could reduce the market price of our Ordinary Shares and could
impair our ability to raise capital through the sale of additional equity or equity-related securities. We are unable to predict
the effect that such sales may have on the prevailing market price of our Ordinary Shares. As of May 5, 2017, we had 2,588,086
Ordinary Shares outstanding, all of which shares are eligible for sale in the public market, subject in some cases to the volume
limitations and manner of sale and other requirements under Rule 144. In addition, future issuances by us of our Ordinary Shares
upon the exercise or settlement of equity-based awards would dilute existing stockholders’ ownership interest in our company
and any sales in the public market of these shares, or the perception that these sales might occur, could also adversely affect
the market price of our ordinary shares. For example, approval of the Charter Amendment will increase our authorized share capital
to [ ] Ordinary Shares, which will provide additional shares for potential future
issuance.
Moreover, we have
in the past and may in the future grant rights to some of our stockholders that require us to register the resale of our Ordinary
Shares or other securities on behalf of these stockholders and/or facilitate public offerings of our securities held by these
stockholders, including in connection with potential future acquisition or capital-raising transactions. For example, in connection
with a private placement transaction that took place on November 23, 2016, we also entered into a registration rights agreement
with a certain institutional investor. Under the registration rights agreement, pursuant to which we filed a resale registration
statement on Form F-1 which became effective on February 16, 2017. If the investor decides to sell a large number of our Ordinary
Shares, or the market perceives that the investor intends to sell a large number of our Ordinary Shares, this could adversely
affect the market price of our Ordinary Shares. We have also filed registration statements to register the sale of our Ordinary
Shares reserved for issuance under our incentive and employee incentive plans. Accordingly, these shares will be able to be freely
sold in the public market upon issuance as permitted by any applicable vesting requirements.
If securities or industry analysts
do not publish research or publish inaccurate or unfavorable research about our business, our share price and trading volume could
decline.
The trading market
for our securities will depend on the research and reports that securities or industry analysts publish about us or our business.
We do not have any control over these analysts. There can be no assurance that analysts will cover us, or provide favorable coverage.
If one or more analysts downgrade our share or change their opinion of our securities, the price of our securities would likely
decline. In addition, if one or more analysts cease coverage of our company or fail to regularly publish reports on us, we could
lose visibility in the financial markets, which could cause our share price or trading volume to decline
.
If we fail to maintain the listing of our Ordinary Shares
with a U.S. national securities exchange, the liquidity of our Ordinary Shares could be adversely affected.
Our Ordinary
Shares are listed for trading on the NASDAQ Capital Market. NASDAQ has adopted a number of continued listing standards that
are applicable to our Ordinary Shares, including a requirement that the bid price of our Ordinary Share to be at least $1.00
per share. Failure to maintain the minimum bid price can result in the delisting of our Ordinary Shares from the NASDAQ
Capital Market. We have previously fallen out of compliance with the minimum bid price requirement. On March 16, 2017 we
effected a one-for-twelve reverse stock split in connection with regaining compliance with the minimum bid requirement
following a notice from the Listing Qualifications Department of the Nasdaq Stock Market on October 13, 2016. We received a
notice of re-compliance from the Listing Qualifications Department of the Nasdaq Stock Market on March 27, 2017. We currently
have approximately 2,588,086 million publicly held shares as of May 5, 2017. Because of NASDAQ’s continued listing
standard which requires that we maintain at least 500,000 publicly held shares, our ability to effectuate a reverse split in
the future is limited to a reverse split ratio that would maintain compliance with such publicly held share requirement. This
effective limit to a reverse split ratio could prevent us from remediating a minimum bid price violation under circumstances
where our stock price was substantially below $1.00 and a higher ratio was needed to remediate the noncompliance.
FORWARD-LOOKING STATEMENTS
This prospectus contains
forward-looking statements. These forward-looking statements may be included herein or incorporated by reference in this prospectus
and include, in particular, statements about our plans, strategies and prospects and may be identified by terminology such as “may,”
“will,” “should,” “expect,” “scheduled,” “plan,” “intend,”
“anticipate,” “believe,” “estimate,” “aim,” “potential,” “seek,”
“could,” “likely,” “strategy,” “goal” or “continue” or the negative
of those terms or other comparable terminology. These forward-looking statements are subject to risks, uncertainties and assumptions
about us. Although we believe that our plans, intentions and expectations are reasonable, we may not achieve our plans, intentions
or expectations.
Important factors that
could cause actual results to differ materially from the forward-looking statements we make in this prospectus are set forth in
“Risk Factors.” All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified
in their entirety by the cautionary statements in “Risk Factors,” in which we have disclosed the material risks related
to our business. These forward-looking statements involve risks and uncertainties, and the cautionary statements identify important
factors that could cause actual results to differ materially from those predicted in any forward-looking statements. We undertake
no obligation to update any of the forward-looking statements after the date of this prospectus to conform those statements to
reflect the occurrence of unanticipated events, except as required by applicable law. You should read this prospectus, the documents
incorporated by reference in this prospectus and any supplements to this prospectus, completely and with the understanding that
our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We
qualify all of our forward-looking statements by these cautionary statements. Actual results and performance could differ materially
from those projected in the forward-looking statements as a result of many factors, including, without limitation:
|
•
|
Our ability to continue as a growing concern.
|
|
•
|
We have incurred losses since our inception, have a limited
operating history on which to assess our business, and anticipate that we will continue to incur significant losses for the foreseeable
future.
|
|
•
|
We have generated revenue from product sales, however,
we may never be profitable.
|
|
•
|
Raising additional capital may cause dilution to our stockholders,
restrict our operations or require us to relinquish rights.
|
|
•
|
Clinical trials are costly, time consuming and inherently
risky, and we may fail to demonstrate safety and efficacy to the satisfaction of applicable regulatory authorities.
|
|
•
|
Our product candidates may properties that could delay
or prevent the regulatory approval, limit the commercial viability of an approved label, or result in significant negative consequences
following marketing approval, if any.
|
|
•
|
We may use our financial and human resources to pursue
a particular research program or product candidate and fail to capitalize on programs or product candidates that may be more profitable
or for which there is a greater likelihood of success.
|
USE OF PROCEEDS
We expect to
receive approximately $6.0 million in net proceeds from the sale of 3,000,000
Class A Units or Class B Units offered by us in this offering, based on an assumed public offering price of $2.22 per Class
A Unit, the closing price of our Ordinary Shares on May 12, 2017, and after deducting estimated placement agent’s fees
and estimated offering expenses payable by us. The actual offering price per unit will be as determined between us and the
placement agent at the time of pricing, and may be at a discount to the current market price. A $0.10 increase (decrease) in
the assumed public offering price of $2.22 per Class A Unit would increase (decrease) our net proceeds from this offering by
approximately $300,000, assuming that the number of units offered by us, as set forth on the cover page of
this prospectus, remains the same and after deducting the placement agent’s fees and estimated offering expenses. We
may also increase or decrease the number of units we are offering. An increase (decrease) of 1,000,000 in the number of units
offered by us would increase (decrease) the net proceeds to us from this offering by approximately
$2.0 million after deducting placement agent’s fees and estimated offering expenses payable by us.
We intend to use the net proceeds from
the sale of securities under this prospectus for our operations and for other general corporate purposes, including, but not limited
to, repayment or refinancing of indebtedness or other corporate borrowings, working capital, intellectual property protection and
enforcement, capital expenditures, investments, acquisitions or collaborations, research and development and product development.
We have not determined the amount of net proceeds to be used specifically for the foregoing purposes. As a result, our management
will have broad discretion in the allocation of the net proceeds. Pending use of the net proceeds, we intend to invest any proceeds
in a variety of capital preservation instruments, including short-term, investment-grade, interest-bearing instruments.
CAPITALIZATION AND INDEBTEDNESS
The table below sets
forth our capitalization and indebtedness as of December 31, 2016:
|
·
|
on an actual basis (as derived from the audited consolidated financial statements as of December
31, 2016);
|
|
·
|
on a pro forma basis to reflect the sale of an aggregate of $1.3 million in PIPE Debentures
in the 2016 Private Placement, for aggregate gross proceeds of $1.3 million, less fees and aggregate offering expenses paid
by us in the amount of approximately $90,000 recorded as an increase to accumulated deficit; and
|
|
·
|
on
a pro forma as adjusted basis to give effect to the sale of 3,000,000 units in this offering
at an assumed public offering price of $2.22 per Class A Unit, the last reported sale
price of the Ordinary Shares on the NASDAQ Capital Market on May 12, 2017, and $2.21
per Class B Unit, as well as $0.01 per each Class B Unit after giving effect to the exercise
of each Class B Unit in full, and after deducting the placement agent’s fees and
estimated offering expenses payable by us.
|
|
|
As of December 31, 2016
|
|
|
|
Actual
|
|
|
Pro forma
(Unaudited)
|
|
|
Pro forma
As Adjusted
(Unaudited)
|
|
|
|
(in thousands, except share and
per share data)
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures and embedded conversion option
|
|
$
|
755
|
|
|
$
|
2,047
|
|
|
$
|
2,047
|
|
Warrants
|
|
|
2,920
|
|
|
|
2,920
|
|
|
|
2,920
|
|
Total Debt
|
|
$
|
3,675
|
|
|
$
|
4,967
|
|
|
$
|
4,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares of NIS 7.2 par value: 5,000,000 shares authorized; 1,842,704 shares issued and outstanding, actual; and 1,842,704 shares issued and outstanding, pro forma (unaudited); and shares issued and outstanding, pro forma as adjusted (unaudited)
|
|
$
|
3,442
|
|
|
$
|
3,442
|
|
|
$
|
9,442
|
|
Additional paid-in capital
|
|
|
157,478
|
|
|
|
157,478
|
|
|
|
157,458
|
|
Accumulated deficit
|
|
|
(156,503
|
)
|
|
|
(156,593
|
)
|
|
|
(156,593
|
)
|
Total shareholders’ equity
|
|
$
|
4,417
|
|
|
$
|
4,327
|
|
|
$
|
10,307
|
|
DILUTION
Our net tangible
book value (deficit) as of December 31, 2016 was approximately $4.4 million, or $2.40 per Ordinary Share, based on 1,842,704 of
our Ordinary Shares outstanding on that date. Net tangible book value (deficit) per share is determined by dividing our total tangible
assets (total assets less intangible assets), less total liabilities, by the number of shares of our Ordinary Shares outstanding.
The pro forma net tangible
book value (deficit) as of December 31, 2016 was approximately $4.3 million, or $2.35 per Ordinary Share, based on 1,842,704 of
our Ordinary Shares outstanding on that date.
The pro
forma as adjusted net tangible book value of our Ordinary Shares as of December 31, 2016 was $10.3 million, or $2.13 per
share. The pro forma as adjusted net tangible book value gives effect to the sale of 3,000,000 units in this offering at the
public offering price of $2.22 per Class A Unit (based on the last reported sale price of the Ordinary Shares on the NASDAQ
Capital Market on May 12, 2017), or $2.21 per Class B Unit, as well as $0.01 per each Class B Unit after giving effect to the
exercise of each Class B Unit in full, and after deducting the placement agent’s fees and estimated offering
expenses payable by us. The difference between the public offering price and the as adjusted net tangible book value per
share represents an immediate dilution of $0.09 per share to new investors purchasing units in this offering.
The following table
illustrates this dilution on a per share basis:
Assumed public offering price
|
|
$
|
2.22
|
|
Pro forma as adjusted net tangible book value (deficit)
per Ordinary Share as of December 31, 2016, before this offering
|
|
|
2.35
|
|
Decrease in pro forma as adjusted
net tangible book value per Ordinary Share attributable to new investors
|
|
|
(0.22
|
)
|
Pro forma as adjusted net tangible book value per Ordinary
Share as of December 31, 2016, after giving effect to this offering
|
|
|
2.13
|
|
Dilution per share to new investors
|
|
$
|
0.09
|
|
A $0.10 increase
in the assumed public offering price of $2.22 per Class A Unit and $2.21 per Class B Unit, would result in the pro forma as adjusted
net tangible book value per share after this offering to increase by $0.06 and be approximately $2.19 per share, the pro forma
as adjusted net tangible book value per share attributable to new investors would decrease by $0.16 and would be approximately
$2.19 per share and the dilution to new investors purchasing shares in this offering would be approximately $0.13 per share. Conversely,
a $0.10 decrease in the assumed public offering price of $2.22 per Class A Unit and $2.21 per Class B Unit would result in the
pro forma as adjusted net tangible book value per share after this offering to decrease by $0.28 and be approximately $2.07 per
share, the pro forma as adjusted net tangible book value per share attributable to new investors would decrease by $0.06 and would
be approximately $2.07 per share and the dilution to new investors purchasing shares in this offering would be approximately $0.05
per share.
An increase of 1,000,000 units
in the number of units offered by us, would increase our pro forma as adjusted net tangible book value after this offering
by approximately $2.0 million and would result in the pro forma as adjusted net tangible book value per share after this
offering to decrease by $0.02 and be approximately $2.11 and the dilution per Ordinary Share to new investors to increase by $0.02
and would be approximately $0.11, assuming no changes in the assumed public offering price of $2.22 per Class A Unit and $2.21
per Class B Unit and after deducting estimated placement agent’s fees and estimated offering expenses payable by us. Conversely,
a decrease of 1,000,000 units in the number of units offered by us would decrease our pro forma as adjusted net tangible book
value after this offering by approximately $2.0 million and would result in the pro forma as adjusted net tangible book value
per share after this offering to increase by $0.02 and be approximately $2.15, and the dilution per Ordinary Share to new investors
decrease by $0.02 and would be approximately $0.07, assuming no changes in the assumed public offering price of $2.22 per Class
A Unit and $2.21 per Class B Unit and after deducting estimated placement agent’s fees and estimated offering expenses payable
by us. The information discussed above is illustrative only and will adjust based on the actual public offering price
and other terms of the offering determined at pricing.
The
foregoing discussion and table does not take into account further dilution to investors in this offering that could occur upon
the exercise of outstanding options and warrants. To the extent that options or warrants outstanding as of December 31, 2016 have
been or may be exercised or other shares issued, investors purchasing securities in this offering may experience further dilution.
In addition, we may seek to raise additional capital in the future through the sale of equity or convertible debt securities.
To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these
securities could result in further dilution to our shareholders.
The information above is based on 1,842,704
Ordinary Shares outstanding as of December 31, 2016, and excludes:
|
·
|
178,833 Ordinary Shares issuable upon exercise of stock options outstanding
under our stock plans, at a weighted average exercise price of $36.18 per share;
|
|
·
|
2,740 Ordinary Shares issuable upon vesting of outstanding restricted
stock units under our stock plans;
|
|
·
|
13,207 Ordinary Shares available for future grant or issuance pursuant
to our stock plans;
|
|
·
|
1,020,926 Ordinary Shares issuable upon exercise of outstanding warrants,
at a weighted average exercise price of $6.70 per share;
|
|
·
|
1,441,364 Ordinary Shares issuable upon the conversion of the remaining
$4,402,500 principal amount (as was outstanding at December 31, 2016) of the convertible debentures, at a conversion price of $3.0544
per share;
|
|
·
|
Ordinary Shares issuable upon exercise of the Series A Warrants
and Series B Warrants to be issued in this offering; and
|
|
·
|
Ordinary Shares issuable upon exercise of the warrants to be issued
to the placement agent in connection with this offering, at an exercise price of $ per share.
|
SELECTED FINANCIAL DATA
We derived the selected
financial statement data as set forth below from our audited consolidated financial statements and related notes included elsewhere
in this prospectus. You should read the information presented below together with our financial statements, the notes to those
statements and the other financial information included elsewhere in this prospectus.
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
(In thousands, except share and per share data)
|
|
Consolidated Statement of Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical testing revenues
|
|
$
|
9,234
|
|
|
$
|
6,668
|
|
|
$
|
1,099
|
|
|
$
|
405
|
|
|
$
|
201
|
|
Licensing revenues
|
|
|
-
|
|
|
|
1,600
|
|
|
|
228
|
|
|
|
-
|
|
|
|
-
|
|
Total revenues
|
|
|
9,234
|
|
|
$
|
8,268
|
|
|
$
|
1,327
|
|
|
$
|
405
|
|
|
$
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of clinical testing revenues
|
|
|
7,439
|
|
|
|
6,192
|
|
|
|
1,310
|
|
|
|
709
|
|
|
|
258
|
|
Cost of licensing revenues
|
|
|
-
|
|
|
|
80
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total cost of revenues
|
|
|
7,439
|
|
|
|
6,272
|
|
|
|
1,310
|
|
|
|
709
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
1,795
|
|
|
|
1,996
|
|
|
|
(17
|
)
|
|
|
304
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
|
3,156
|
|
|
|
2,956
|
|
|
|
1,927
|
|
|
|
1,744
|
|
|
|
1,247
|
|
Marketing and business development
|
|
|
6,806
|
|
|
|
7,350
|
|
|
|
6,848
|
|
|
|
7,002
|
|
|
|
3,938
|
|
General and administrative
|
|
|
7,497
|
|
|
|
7,566
|
|
|
|
5,494
|
|
|
|
4,297
|
|
|
|
3,025
|
|
Gain from bargain purchase related to acquisition of CynoGen, Inc.
|
|
|
-
|
|
|
|
(155
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total operating expenses
|
|
|
17,459
|
|
|
|
17,717
|
|
|
|
14,269
|
|
|
|
13,043
|
|
|
|
8,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
15,664
|
|
|
|
15,721
|
|
|
|
14,252
|
|
|
|
13,347
|
|
|
|
8,267
|
|
Financial expenses (income), net
|
|
|
603
|
|
|
|
1,605
|
|
|
|
259
|
|
|
|
(177
|
)
|
|
|
2,429
|
|
Loss before taxes
|
|
|
16,267
|
|
|
|
17,326
|
|
|
|
14,511
|
|
|
|
13,170
|
|
|
|
10,696
|
|
Tax expense
|
|
|
(34
|
)
|
|
|
19
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
16,233
|
|
|
|
17,345
|
|
|
|
14,526
|
|
|
|
13,170
|
|
|
|
10,696
|
|
Net loss (income) from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(273
|
)
|
|
|
(239
|
)
|
Net loss after discontinued operations
|
|
|
16,233
|
|
|
|
17,345
|
|
|
|
14,526
|
|
|
|
12,897
|
|
|
|
10,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Rosetta
|
|
$
|
16,233
|
|
|
$
|
17,345
|
|
|
$
|
14,526
|
|
|
$
|
12,897
|
|
|
$
|
10,457
|
|
Basic and diluted net loss per ordinary share from continuing operations
|
|
$
|
9.31
|
|
|
$
|
13.80
|
|
|
$
|
15.51
|
|
|
$
|
16.47
|
|
|
$
|
28.85
|
|
Basic and diluted net loss (income) per ordinary share from discontinued operations attributable to Rosetta
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(0.336
|
)
|
|
$
|
(0.648
|
)
|
Basic and diluted net loss per ordinary share attributable to Rosetta
|
|
$
|
9.31
|
|
|
$
|
13.79
|
|
|
$
|
15.51
|
|
|
$
|
16.13
|
|
|
$
|
28.21
|
|
Weighted average number of ordinary shares used to compute basic and diluted net loss per ordinary share attributable to Rosetta
|
|
|
1,743,067
|
|
|
|
1,257,724
|
|
|
|
936,658
|
|
|
|
799,496
|
|
|
|
370,705
|
|
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,163
|
|
|
$
|
12,447
|
|
|
$
|
7,929
|
|
|
$
|
16,744
|
|
|
$
|
30,978
|
|
Short-term bank deposits and restricted cash
|
|
|
130
|
|
|
|
1,098
|
|
|
|
7,702
|
|
|
|
7,702
|
|
|
|
164
|
|
Trade receivable
|
|
|
2,851
|
|
|
|
3,633
|
|
|
|
338
|
|
|
|
224
|
|
|
|
88
|
|
Working capital
|
|
|
5,709
|
|
|
|
16,567
|
|
|
|
14,241
|
|
|
|
23,060
|
|
|
|
30,487
|
|
Total assets
|
|
|
11,961
|
|
|
|
22,423
|
|
|
|
17,278
|
|
|
|
25,880
|
|
|
|
32,530
|
|
Long-term liabilities
|
|
|
3,740
|
|
|
|
-
|
|
|
|
2
|
|
|
|
309
|
|
|
|
364
|
|
Total shareholders’ equity
|
|
|
4,417
|
|
|
|
19,620
|
|
|
|
15,065
|
|
|
|
23,633
|
|
|
|
30,900
|
|
Capital stock
|
|
|
160,920
|
|
|
|
159,890
|
|
|
|
137,990
|
|
|
|
132,032
|
|
|
|
126,402
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion
and analysis of our financial condition and results of operations should be read in conjunction with the section entitled “Selected
Financial Data” and our consolidated financial statements and the related notes to those statements included elsewhere in
this prospectus. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially
from those anticipated in these forward-looking statements as a result of many factors, including those discussed under the sections
entitled “Forward-Looking Statements,” “Risk Factors” and elsewhere in this prospectus.
Overview
We are seeking to develop
and commercialize new diagnostic products based on a recently discovered group of genes known as microRNAs. MicroRNAs are naturally
expressed, or produced, using instructions encoded in DNA and are believed to play an important role in regulating protein production.
Proteins control most biological processes and thus we believe that microRNAs as their regulators have the potential to form the
basis of a novel class of diagnostic tests and therapies for many serious illnesses.
We anticipate that
our principal sources of liquidity will only be sufficient to fund our activities into the third quarter of 2017. As of December
31, 2016, we had cash, cash equivalents, short-term bank deposits and restricted cash of $6.3 million, compared to $13.5 million
as of December 31, 2015. As of May 3, 2017, we had a total cash balance of approximately $3 million. We need to raise additional
equity or debt capital by the third quarter of 2017 in order to continue to fund our operations, and we cannot provide any assurance
that we will be successful in doing so. Our independent registered public accounting firm, Kost Forer Gabbay & Kasierer, a
member of Ernst & Young Global, has included an explanatory paragraph in their auditors' report that accompanies our audited
consolidated financial statements as of and for the year ended December 31, 2016, indicating that our current liquidity position
raises substantial doubt about our ability to continue as a going concern.
We have used substantial
funds to discover, develop, commercialize and protect our microRNA tests and technologies and will require substantial additional
funds to continue our operations. Following our acquisition of PersonalizeDx in 2015, we have incurred and, assuming the availability
of sufficient cash resources, expect to continue to incur increased costs that may adversely affect our operations and liquidity
in 2017 and beyond. Our current operating plan includes various assumptions concerning the level and timing of cash receipts from
sales and cash outlays for operating expenses and capital expenditures. Our ability to successfully carry out our business plan
is primarily dependent upon our ability to: (1) obtain sufficient additional capital, (2) attract and retain knowledgeable employees,
(3) increase our cash collections and (4) generate significant additional revenues.
We may seek additional
funding through collaborative arrangements and public or private equity offerings and debt financings. Additional funds may not
be available to us when needed on acceptable terms, or at all. In addition, the terms of any financing may adversely affect the
holdings or the rights of our existing shareholders. For example, if we raise additional funds by issuing equity securities, further
dilution to our then-existing shareholders may result. Debt financing, if available, may involve restrictive covenants that could
limit our flexibility in conducting future business activities. We also could be required to seek funds through arrangements with
collaborators or others.
If adequate funds are
needed and not available, we may be required to:
|
·
|
delay, reduce the scope of or eliminate certain research and development programs;
|
|
·
|
obtain funds through arrangements with collaborators or others on terms unfavorable to us or that
may require us to relinquish rights to certain technologies or products that we might otherwise seek to develop or commercialize
independently;
|
|
·
|
monetize certain of our assets;
|
|
·
|
pursue merger or acquisition strategies; or
|
|
·
|
seek protection under the bankruptcy laws of Israel and the United States.
|
Since our inception
in March 2000, we have generated significant losses. As of December 31, 2016, we had an accumulated deficit of approximately $157
million. We funded our operations through December 31, 2016 primarily through proceeds received from the sale of equity securities
to investors:
We have focused our
efforts since inception primarily on research and development, building and maintaining our intellectual property, business planning
and commercializing our products. We have not achieved profitability and, assuming the availability of sufficient cash resources,
we expect to incur significant additional losses over the next several years. We expect our net losses to continue primarily due
to research and development activities relating to our internal product development, collaborations, business development, commercialization,
and other general corporate activities. We anticipate that our operating results will fluctuate for the foreseeable future. Therefore,
period-to-period comparisons should not be relied upon as predictive of the results in future periods. Potential source of funding
include our existing cash and cash equivalents, as well as product revenues, additional equity and/or debt financings, funded research
and development payments, and license fees and/or milestone payments under potential future collaborative arrangements.
Research and development
expenses represented 18%, 17%, and 14% of our total operating expenses for the years ended December 31, 2016, 2015, and 2014, respectively.
We have not tracked our historical research and development costs on a project-by-project basis because the majority of our efforts
have been focused on the development of capabilities associated with our microRNA discovery process rather than on specific projects.
Major components of the $3.2 million in research and development expenses for the year ended December 31, 2016 included payroll
and related expenses, research materials and related expenses, and sample acquisition costs.
On April 13, 2015,
we acquired CynoGen, Inc. (“CynoGen” or “PersonalizeDx”) from Prelude Corporation, a Fjord Ventures portfolio
company. The purchase price included $2.1 million in cash, 41,667 of our Ordinary Shares and the provision of certain assets and
services to Prelude Corporation. On July 22, 2015, we issued an additional 10,000 of our Ordinary Shares in lieu of services that
were to be provided to an affiliate of PersonalizeDx. PersonalizeDx is a molecular diagnostics and services company serving community-based
pathologists, urologists, oncologists and other reference laboratories across the United States. PersonalizeDx is focused on the
detection of genomic changes through Fluorescence In Situ Hybridization, or FISH, technology, which helps to detect cancer, measure
the potential aggressiveness of the disease and identify patients most likely to respond to targeted therapies. We recently announced
our plans to explore strategic alternatives for PersonalizeDx.
Financial Operations Overview
Revenues
Revenues from continuing
operations consist of revenues from sales of our diagnostic tests processed in either our laboratory in Philadelphia, Pennsylvania
or in our laboratory in Lake Forest, California. Our first diagnostic products applying our microRNA technology that were launched
in late 2008 began generating revenues in 2009. We have generated revenues from continuing operations for the years ended December
31, 2016, 2015, and 2014, in the amounts of $9.2 million, $8.3 million, and $1.3 million, respectively.
Cost of Revenues
Cost of revenues related
to our products consist primarily of salaries and employee benefits of our lab personnel as well as material costs and costs related
to rent and maintenance of our labs in Philadelphia and Lake Forest.
Research and Development Expenses,
net
We expense research
and development costs as incurred. Our research and development expenses currently include costs of salaries and related expenses,
activities related to intellectual property and licensing, tissue samples and other research materials, supplies, equipment depreciation,
outsourced clinical and other research activities, consultants, utilities expenses and an allocation of corporate administrative
costs.
We are currently conducting
a number of studies analyzing microRNA expression profiles in healthy and diseased samples. As a result, assuming the availability
of sufficient cash resources, we expect that our expenses related to the purchase of tissue and body fluid samples, as well as
other research consumables, will increase in the future. We have entered into several license agreements for rights to utilize
certain technologies. The terms of the licenses provide for up-front payments, annual maintenance payments and royalties on product
sales. Costs to acquire and maintain licensed technology are expensed as incurred.
Marketing and Business Development
Expenses
Marketing and business
development expenses consist primarily of salaries and related expenses as well as expenses related to advertising, marketing campaigns,
and our commercialization. As we continue to market our own products as well as explore new collaborations to develop and commercialize
diagnostic and therapeutic products, we anticipate that these expenses will increase, assuming the availability of sufficient cash
resources.
General and Administrative Expenses
General and administrative
expenses consist primarily of salaries and related expenses, patent expenses, professional fees and expenses related to general
corporate activities. Assuming the availability of sufficient cash resources, we anticipate that general and administrative expenses
will continue to grow in 2017 due to the continued growth and activities of our business.
Financial Expenses (Income)
Financial expenses
for the year ended December 31, 2016, consisted primarily of expenses associated with issuance of warrants and debentures pursuant
to share purchase agreements, partially offset by interest from bank deposits and foreign currency adjustment gains.
Critical Accounting
Estimates
Our discussion and
analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been
prepared in conformity with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of our consolidated financial
statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.
On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions and could have a material impact on our reported results.
While our significant
accounting policies are more fully described in the notes to our consolidated financial statements included in this prospectus,
we believe the following accounting estimates to be the most critical in understanding our consolidated financial statements and
the assumptions management used.
Accounting for Stock-Based Compensation
We account for stock-based
compensation in accordance with ASC 718 “Compensation- Stock Compensation”. ASC 718 requires companies to estimate
the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the
award that is ultimately expected to vest is recognized as an expense over the requisite service periods in our consolidated income
statements.
We recognize compensation
expenses for the value of awards granted based on the straight line method over the requisite service period of each of the awards,
net of estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on actual historical pre-vesting forfeitures.
The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only
the unvested portion of the surrendered option. We currently expect, based on future expected forfeitures, that approximately 90%
of our options will actually vest, and therefore have applied an annual forfeiture rate of 10% to all options that are not vested
as of December 31, 2016. Ultimately, the actual expenses recognized over the vesting period will only be for those shares that
vest.
We selected the Black-Scholes
option pricing model as the most appropriate fair value method for stock-option awards and value restricted stock based on the
market value of the underlying shares at the date of grant. The option-pricing model requires a number of assumptions, of which
the most significant are the expected stock price volatility and the expected option term. The computation of expected volatility
is based on realized historical stock price of our stock starting from the IPO date. As a result of the above-mentioned calculations,
the volatility used for the twelve months ended December 31, 2016 and 2015 was 115% and 123%, respectively. The risk-free interest
rate assumption is the implied yield currently available on United States treasury zero-coupon issues with a remaining term equal
to the expected life term of our options. We determined the expected life of the options based on realized historical share price
volatility of our share, average of vesting, and the contractual term of the options.
We apply ASC 718 and
ASC 505-50 “Equity-Based Payments to Non-Employees”, with respect to options and warrants issued to non-employees.
ASC 718 requires the use of option valuation models to measure the fair value of the options and warrants at the measurement date.
At the end of each
financial reporting period prior to vesting, the value of these options, as calculated using the Black-Scholes option pricing model,
was re-measured using the then current fair value of our Ordinary Shares. Since the fair market value of the Ordinary Shares to
non-employees is subject to change in the future, the compensation expense recognized during the years ended December 31, 2016,
2015, and 2014 may not be indicative of future compensation charges.
Operating Results
Years Ended December 31, 2016 and
2015
Revenues.
In
the years ended December 31, 2016 and December 31, 2015, we recognized $9.2 million and $8.3 million, respectively, as revenues.
This increase resulted primarily from our acquisition of PersonalizeDx in April 2015.
Cost of revenues.
Cost of revenues were $7.4 million for the year ended December 31, 2016, including $47,000 of non-cash stock-based compensation,
compared to $6.3 million for the year ended December 31, 2015, which included $37,000 of non-cash stock-based compensation. This
increase resulted primarily from the additional volume generated by the acquired PersonalizeDx business.
Research and development
expense, net.
Research and development expenses were $3.1 million for the year ended December 31, 2016, including $116,000
of non-cash stock-based compensation, compared to $2.9 million for the year ended December 31, 2015, including $100,000 of non-cash
stock-based compensation, the increase is primarily related to post-market studies.
Royalty bearing grants
from the
IIA
for funding approved research and development projects are presented
as a reduction from the research and development expenses. We recognized grants in an amount of $197,000 and $292,000, for the
years ended December 31, 2015 and 2014, respectively.
Sales, marketing
and business development.
Marketing and business development expenses were $6.8 million for the year ended December 31, 2016,
including $293,000 of non-cash stock-based compensation, as compared to $7.3 million for the year ended December 31, 2015, including
$281,000 of non-cash stock-based compensation. The decrease is primarily attributable to lower marketing, travel and business development
expenses.
General and administrative
expenses.
General and administrative expenses were $7.5 million for the year ended December 31, 2016, including $403,000 of
non-cash stock-based compensation, as compared to $7.6 million for the year ended December 31, 2015, including $598,000 of non-cash
stock-based compensation.
Financial expenses,
net
. Net financial expense was $603,000 for the year ended December 31, 2016, as compared to a net financial expense of $1.6
million for the year ended December 31, 2015. Financial expenses for 2016 consisted primarily of issuance expenses associated
with warrants and debentures classified as liabilities, partially offset by interest from bank deposits and foreign currency adjustment
gains. Financial expenses for 2015 consisted primarily of revaluation of warrants, issuance expenses of warrants classified as
liabilities, interest from bank deposits and foreign currency adjustment losses.
Years Ended December 31, 2015 and
2014
Revenues.
In
the years ended December 31, 2015 and December 31, 2014, we recognized $8.3 million and $1.3 million, respectively. This increase
resulted primarily from our acquisition of PersonalizeDx in April 2015.
Cost of revenues.
Cost of revenues were $6.3 million for the year ended December 31, 2015, including $37,000 of non-cash stock-based compensation,
compared to $1.3 million for the year ended December 31, 2014, which included $34,000 of non-cash stock-based compensation. This
increase resulted primarily from the additional volume generated by the acquired PersonalizeDx business.
Research and development
expense, net.
Research and development expenses were $3 million for the year ended December 31, 2015, including $100,000 of
non-cash stock-based compensation, compared to $1.9 million for the year ended December 31, 2014, including $73,000 of non-cash
stock-based compensation. Research and development expenses for the year ended December 31, 2015, increased as we invested in launching
our new thyroid assay, RosettaGX Reveal
TM
, in late 2015.
Royalty
bearing grants from the
Office of the Chief Scientist at the Ministry of Economy and
Industry of the State of Israel, or the IIA,
for funding approved research and development projects are presented as
a reduction from the research and development expenses. We recognized grants in an amount of $197,000 and $292,000, for the
years ended December 31, 2015 and 2014, respectively.
Sales, marketing
and business development.
Marketing and business development expenses were $7.3 million for the year ended December 31, 2015,
including $281,000 of non-cash stock-based compensation, as compared to $6.8 million for the year ended December 31, 2014, including
$226,000 of non-cash stock-based compensation. This increase resulted primarily from increased commercial activities, as a result
of the acquisition of the PersonalizeDx business.
General and administrative
expenses.
General and administrative expenses were $7.6 million for the year ended December 31, 2015, including $598,000 of
non-cash stock-based compensation, as compared to $5.5 million for the year ended December 31, 2014, including $590,000 of non-cash
stock-based compensation. This increase is a result of increased corporate activities due to the acquisition of the PersonalizeDx
business.
Financial expenses,
net
. Net financial expense was $1.6 million for the year ended December 31, 2015, as compared to a net financial expense of
$259,000 for the year ended December 31, 2014. Financial expenses for 2015 consisted primarily of revaluation of warrants,
interest from bank deposits and foreign currency adjustment losses. Financial expenses for 2014 primarily consisted primarily of
interest from bank deposits and foreign currency adjustment losses.
Liquidity and Capital Resources
Since our inception,
we have generated significant losses and expect to continue to generate losses for the foreseeable future. As of December 31, 2016,
we had an accumulated deficit of approximately $157 million. We have funded our operations primarily through the proceeds from
the sales of Ordinary Shares, convertible debentures and warrants.
We anticipate that
our principal sources of liquidity will only be sufficient to fund our activities into the third quarter of 2017. As of December
31, 2016, we had cash, cash equivalents, short-term bank deposits and restricted cash of $6.3 million, compared to $13.5 million
as of December 31, 2015. As of May 3, 2017, we had a total cash balance of approximately $3 million. We need to raise additional
equity or debt capital by the third quarter of 2017 in order to continue to fund our operations, and we cannot provide any assurance
that we will be successful in doing so.
We have completed the
following financing transactions since January 1, 2013:
|
·
|
On March 22, 2013, we entered into a Controlled Equity OfferingSM Sales Agreement (the “2013
Cantor Sales Agreement”) with Cantor Fitzgerald & Co., as sales agent (“Cantor”), pursuant to which we could
offer and sell, from time to time through Cantor, our Ordinary Shares. We terminated the 2013 Cantor Sales Agreement on October
13, 2014. Between March 22, 2013 and October 13, 2014, we sold through the 2013 Cantor Sales Agreement an aggregate of 211,008
of our Ordinary Shares and received gross proceeds of $10.1 million, including 102,851 Ordinary Shares sold in 2014 for gross proceeds
of $5.1 million.
|
|
·
|
On February 18, 2015, we entered into a Controlled Equity OfferingSM Sales Agreement (the “2015
Cantor Sales Agreement” and, collectively with the 2013 Cantor Sales Agreement, the “Cantor Sales Agreements”)
with Cantor and filed a prospectus supplement with the SEC relating to the sale, from time to time through Cantor, of up to $14.4
million of our Ordinary Shares. Between February 18, 2015, and the time of the filing of this prospectus, we sold through the 2015
Cantor Sales Agreement an aggregate of 202,030 of our Ordinary Shares, and received gross proceeds of $10.5 million.
|
Sales
of our Ordinary Shares under the Cantor Sales Agreements are made in sales deemed to be “at-the-market” equity offerings
as defined in Rule 415 promulgated under the Securities Act of 1933, as amended.
|
·
|
On October 13, 2015, we entered into a Securities Purchase Agreement (the “Securities Purchase
Agreement”), pursuant to which we agreed to sell securities to various accredited investors (the “Purchasers”)
in a private placement transaction (the “2015 Private Placement”). The 2015 Private Placement closed on October 16,
2015 (the “Closing Date”).
|
|
·
|
Under the terms of the 2015 Private Placement, we issued an aggregate of 277,778 units and at a
purchase price of $28.80 per unit for gross proceeds of approximately $8 million, Each unit consisted of (i) one Ordinary Share,
(ii) a Series A Warrant to purchase one-half of an Ordinary Share at an exercise price of $33 per Ordinary Share (subject to adjustment),
exercisable for a period of five years from the Closing Date, and (iii) a partially pre-funded Series B Warrant. The Series B Warrants
had an exercise price of NIS 7.2 (which has been prepaid) plus $0.0012 per share. The Series B Warrants were intended to reset
the price of the units, and became exercisable for an aggregate of 222,223 shares based on 85% of the arithmetic average of the
five lowest weighted average prices calculated during the ten trading days following the effective date of the resale registration
statement registering the shares sold in the 2015 Private Placement. The Series A Warrant exercise price has been adjusted to $19.752
per share, and all of the Series B Warrants have been exercised on a cashless basis, resulting in the issuance of 222,208 of our
Ordinary Shares.
|
|
·
|
On November 23, 2016, we entered into a securities purchase agreement (the “Purchase
Agreement”) with a prominent institutional healthcare investor to purchase (i) an aggregate of 91,250 of our Ordinary
Shares (the “Shares”) at a purchase price of $6 per share and an aggregate principal amount of $3.2 million of
unsecured convertible debentures (the “Registered Debentures”) in a registered direct offering (the
“Registered Direct Offering”) and (ii) warrants to purchase up to 833,334 Ordinary Shares with an initial
exercise price of $10.20 per share (the “2016 Warrants”) and an aggregate principal amount of $1.3 million
unsecured convertible debentures (the “PIPE Debentures” and together with the Registered Debentures, the
“Debentures”) in a concurrent private placement (the “2016 Private Placement” and, together with
the Registered Direct Offering, the “2016 Offerings”). The initial closing of the 2016 Offerings occurred on
November 29,
2016, at which time we received gross proceeds of $3.7 million for the Ordinary Shares, the Registered Debentures and
2016 Warrants. The closing of the second tranche of the private placement of convertible debentures occurred on February 23,
2017. The closing of this second tranche involved the sale of newly registered convertible debentures (convertible into
215,417 Ordinary Shares) for gross proceeds of $1.3 million. The aggregate net proceeds to the Company from the 2016
Offerings, after
deducting the placement agents’ fees and expenses and our estimated offering expenses, were approximately $4.6
million. Under the terms of the Purchase Agreement, we are prohibited from issuing Ordinary Shares or warrants, debt,
preferred stock, rights, options or any other instrument that is convertible into or exercisable for our Ordinary Shares
until May 24, 2017. On May 8, 2017, we obtained a waiver from the counterparty to the Purchase Agreement allowing us to
issue
securities
contemplated by this offering. Under the terms of the waiver, in the event we effect a Subsequent Financing (as
defined in the Purchase Agreement), the counterparty would have the right to exchange some or all of its Debentures then
held for any
securities or units issued by us in the Subsequent Financing, provided that this right will not apply to any Exempt
Issuances (as defined in the Purchase Agreement).
|
The
Debentures are non-interest bearing, have a term of 30 years and were convertible into Ordinary Shares at an initial
conversion price of $6 per share. However, upon completion of the 10 trading days following the 1-for-12 reverse split of our
Ordinary Shares on March 16, 2017, the conversion price of the Debentures was reduced to $3.0544, representing
the
lesser of (x) the then-applicable conversion price, as adjusted, and (y) the average of the two lowest volume
weighted average prices of our Ordinary Shares during the 10 trading days immediately following the reverse stock split.
Additionally, subject to limited exceptions, for a period of 18 months following the effective date of a resale registration
statement on Form F-1 covering the resale of the Ordinary Shares issuable upon exercise of the 2016 Warrants and conversion
of the PIPE Debentures (the “Resale Registration Statement”), if we issue Ordinary Shares or securities that are
convertible or exercisable into Ordinary Shares at a price that is less than the effective conversion price, then the
conversion price shall be automatically reduced to the price at which the Company issued the Ordinary Shares or the
underlying exercise price or conversion price of the securities. However, under no circumstances will the adjusted conversion
price of the Debentures be lower than $3. Our payment obligations under the Debentures are guaranteed by our subsidiaries
pursuant to a subsidiary guarantee. The Debentures are not subject to voluntary prepayment prior to maturity.
The 2016
Warrants were immediately exercisable upon issuance and have a term of five years. The exercise price of the 2016 Warrants is subject
to adjustment upon the occurrence of specific events, including stock dividends, stock splits, combinations and reclassifications
of the Company’s Ordinary Shares and rights offerings and pro rata distributions with respect to all holders of the Company’s
Ordinary Shares. Additionally, upon completion of the 10 trading days following the 1-for-12 reverse split of our Ordinary Shares
on March 16, 2017, the exercise price was reduced to $3.0544, representing the lesser of (x) the then-applicable exercise price,
as adjusted, and (y) the average of the two lowest volume weighted average prices of the Company’s Ordinary Shares during
the 10 trading days immediately following the reverse stock split. Additionally, subject to limited exceptions, for a period of
12 months following the effective date of the Resale Registration Statement, if we issue Ordinary Shares or securities that are
convertible or exercisable into Ordinary Shares at a price that is less than the effective exercise price, then the exercise price
will be automatically reduced to the price at which the Company issued the Ordinary Shares or the underlying exercise price or
conversion price of the securities.
Cash Flows
Net cash used in
operating activities.
Net cash used in operating activities was $10.4 million in 2016, compared to $16.9 million in 2015 and
$13.6 million in 2014. These amounts were used to fund our commercial, corporate, and R&D activities for these periods, adjusted
for non-cash expenses and changes in operating assets and liabilities.
Net cash provided
by (used in) investing activities.
Net cash provided by investing activities was $823,000 in 2016, compared to $4.1 million
in 2015 and $258,000 net cash used in investing activities in 2014. Net cash provided by investing activities during 2016 primarily
relates to bank deposits and restricted cash. Net cash provided by investing activities during 2015 primarily relates to bank deposits
and restricted cash. Net cash used in investing activities during 2014 primarily relates to the purchase of property and equipment.
Net cash provided
by financing activities.
Net cash provided by financing activities from continuing operations was $3.2 million in 2016, compared
to $17.3 million in 2015 and $5.0 million in 2014. In 2016, 2015, and 2014, net cash provided by financing activities consisted
primarily of proceeds from the issuance of shares, warrants and debentures.
Funding Requirements
We expect to incur
continuing and increasing losses from operations for at least the next several years. In particular, we expect to incur significant
marketing and business development expenses, research and development expenses, and general and administrative expenses in the
future as we expand our operations and product development efforts and continue operating as a public company.
We anticipate
that our principal sources of liquidity will only be sufficient to fund our activities into the third quarter of 2017. As of
December 31, 2016, we had cash, cash equivalents, short-term bank deposits and restricted cash of $6.3 million, compared to
$13.5 million as of December 31, 2015. As of May 3, 2017, we had a total cash balance of approximately $3 million. We need to
raise additional equity or debt capital by the third quarter of 2017 in order to continue to fund our operations, and we
cannot provide any assurance that we will be successful in doing so. Our independent registered public accounting firm, Kost
Forer Gabbay & Kasierer, a member of Ernst & Young Global, independent registered public accountants, has included an
explanatory paragraph in their auditor’s report that accompanies our audited consolidated financial statements as of
and for the year ended December 31, 2016, indicating that our current liquidity position raises substantial doubt about our
ability to continue as a going concern.
Our funding requirements
may change and will depend upon numerous factors, including but not limited to:
|
·
|
the timing, receipt and amount of sales of our products;
|
|
·
|
progress in our research and development programs;
|
|
·
|
the resources, time and costs required to initiate and complete development and any required preclinical
studies and clinical trials, and obtain regulatory approvals for our products;
|
|
·
|
the timing, receipt, and amount of milestone, royalty and other payments from present and future
collaborators, if any; and
|
|
·
|
costs necessary to protect our intellectual property.
|
If we need additional
funding, there can be no assurance that we will be able to obtain adequate levels of additional funding on favorable terms, if
at all. If adequate funds are needed and not available, we may be required to:
|
·
|
delay, reduce the scope of or eliminate certain research and development programs;
|
|
·
|
obtain funds through arrangements with collaborators or others on terms unfavorable to us or that
may require us to relinquish rights to certain technologies or products that we might otherwise seek to develop or commercialize
independently;
|
|
·
|
monetize certain of our assets;
|
|
·
|
pursue merger or acquisition strategies; or
|
|
·
|
seek protection under the bankruptcy laws of Israel and the United States.
|
Research and Development, Patents
and Licenses
Our research and development
expenditures were $3.1 million, $2.9 million, and $1.9 million in the years ended December 31, 2016, 2015, and 2014, respectively.
See also section entitled “Management’s Discussion and Analysis of our Financial Position—Financial Operations
Overview—Research and Development Expenses.”
Off-Balance Sheet Arrangements
We are not party to
any material off-balance-sheet arrangements.
Tabular Disclosure of Contractual
Obligations
Set forth below is
a description of our contractual cash obligations as of December 31, 2016. Operating and capital lease obligations consist of rent
payable under our existing facility leases and lease payments for company automobiles and equipment. Other long-term obligations
consist of cash obligations under various license agreements.
(In thousands)
|
|
Total
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
Operating and capital lease obligations
|
|
$
|
1,377
|
|
|
$
|
750
|
|
|
$
|
611
|
|
|
$
|
16
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Other long-term liabilities
|
|
$
|
1,612
|
|
|
$
|
147
|
|
|
$
|
147
|
|
|
$
|
147
|
|
|
$
|
147
|
|
|
$
|
147
|
|
|
$
|
877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,989
|
|
|
$
|
897
|
|
|
$
|
758
|
|
|
$
|
163
|
|
|
$
|
147
|
|
|
$
|
147
|
|
|
$
|
877
|
|
Under our license agreements
as of December 31, 2016, we are obligated to pay an aggregate amount of approximately $147,000 annually after 2021 and until 2022,
$100,000 annually after 2022 and until 2029 and $10,000 annually after 2029 and until 2032. Each of these agreements terminates
upon the expiration of all patents relating to such agreement, including patents to be filed and potentially issued at an indeterminable
date in the future, and, thus, such termination dates cannot be determined at this time. Accordingly, we are also unable to determine
the aggregate amount of such payments due after 2020 at this time. However, based on current facts and circumstances, we estimate
that our obligations under these agreements will be through at least 2032. See the section entitled “Business” for
more information on our contractual obligations.
BUSINESS
Overview
We are seeking to develop
and commercialize new diagnostic tests based on various genomics markers, including microRNA, DNA, and protein biomarkers and using
various technologies, including, qPCR, microarrays, Next Generation Sequencing (NGS) and Fluorescence In Situ Hybridization (FISH).
We have two CLIA-certified, CAP-accredited, laboratories in Philadelphia, PA and Lake Forest, CA which enable us to commercialize
our own diagnostic tests applying our microRNA technology.
We
believe that we were the first commercial enterprise to focus on the emerging microRNA field, and that as a result, we have developed
an early and strong intellectual property position related to the development and commercialization of microRNA-based diagnostics.
Using our intellectual property, collaborative relationships with leading commercial enterprises and academic and medical institutions,
and expertise in the field of microRNAs, we have initiated microRNA-based diagnostic programs for various cancers and other diseases.
We are currently marketing and selling the following three diagnostic tests based on our
proprietary microRNA technologies:
|
·
|
RosettaGX Cancer Origin
™
(formerly “miRview
®
mets
2
”) – This test is our second-generation microRNA-based diagnostic for the identification of the
primary site of metastatic cancer, specifically metastatic cancer of unknown or uncertain primary (CUP). RosettaGX Cancer Origin
™
has replaced miRview
®
mets
as our primary
CUP assay.
|
|
·
|
mi-KIDNEY
™
(formerly “Rosetta Kidney
Cancer Test”)
– This test is a microRNA-based kidney tumor classification test for pathology samples. This
test was designed to classify primary kidney tumors into one of the four most common types: the malignant renal cell carcinomas
clear cell (conventional), papillary and chromophobe as well as the benign oncocytoma.
|
|
·
|
RosettaGX Reveal
–
This is a microRNA-based
assay for the diagnosis of indeterminate thyroid
fine-needle aspirate, or FNA, samples. The
test utilizes routinely prepared FNA smears to diagnose a cytologically indeterminate thyroid nodule as “benign” or
“suspicious for malignancy by microRNA”. The test also measures a microRNA biomarker for medullary carcinoma.
|
We
recently announced our plans to increase investments in commercial, promotional and reimbursement efforts for RosettaGX Reveal.
We
currently have distribution agreements with respect to some of our tests covering Australia, Brazil, Greece, India, Israel, New
Zealand, and Turkey. All of these distribution agreements call for samples to be sent to our CLIA-certified laboratory in Philadelphia
for analysis.
In general, we are
generating demand for our testing services, primarily
RosettaGX Cancer Origin and RosettaGX
Reveal
through our direct selling effort in the United States and are successfully fulfilling that demand in our lab in
Philadelphia, Pennsylvania. We are working with our Director of Reimbursement and Managed Care to gain more consistent payment
from commercial payors, as well as to secure reimbursement coverage from Medicare. We are increasing our activity to establish
policy-level reimbursement, which could improve our ability to receive prompt payment from commercial payors. We announced in May
2012 that the designated Medicare Administrative Contractor, or MAC, for
RosettaGX Cancer
Origin
is covering this test for all Medicare beneficiaries, and we are receiving approved payments for claims submitted.
On April 13, 2015,
we acquired CynoGen, Inc., which does business as PersonalizeDx (“CynoGen” or “PersonalizeDx”). PersonalizeDx
is a molecular diagnostics and services company serving community-based pathologists, urologists, oncologists and other reference
laboratories across the United States. PersonalizeDx is focused on the detection of genomic changes through Fluorescence In Situ
Hybridization, or FISH, technology, which helps to detect cancer, measure the potential aggressiveness of the disease and identify
patients most likely to respond to targeted therapies.
PersonalizeDx offers its clients a virtual “tech only”
platform in which such clients can collaborate with the company to perform and bill for the “professional component”
of FISH molecular testing services for lung, breast, bladder, prostate and hematologic cancers. PersonalizeDx also performs IHC
and histology testing services for its clients in its 30,000 square foot laboratory facility located in Lake Forest, CA. PersonalizeDx
was initially founded by Abbott Laboratories, and PersonalizeDx performed several clinical trial studies for Abbott and Abbott’s
research partners. PersonalizeDx is currently performing testing for one clinical trial for Abbott in bladder cancer. There is
no guarantee that PersonalizeDx will be granted additional clinical trial business from Abbott moving forward. We recently announced
our plans to explore strategic alternatives for PersonalizeDx.
Rosetta has entered
into an agreement to sell and market products for Admera Health, offering products to oncology physicians that are key call points
for the Rosetta sales force. By entering into this agreement, Rosetta believes it could gain additional opportunities to meet with
oncologists and discuss new products that may improve the patients’ diagnostic experience.
In addition, we have
a number of projects in our diagnostics pipelines including the research and development of product line extensions to, and next
generation versions of, our thyroid assay.
We are seeking to develop
a second version of RosettaGX Reveal, a microRNA-based assay for the differential diagnosis of indeterminate thyroid FNAs that
utilizes routinely prepared FNA smears. This second version will combine RosettaGX Reveal’s current microRNA biomarkers with
a panel of additional biomarkers. We anticipate that we will launch this assay by the end of 2018.
MicroRNAs also represent
potential targets for the development of novel drugs. Until December 2016 we participated in the Rimonim Consortium, which was
supported by the IIA. The aim of this consortium was to develop novel technologies for the use of short interfering RNA, or siRNA,
and microRNA mimetics or anti-microRNAs for therapeutics. In this consortium we attempted to: (1) develop novel RNA molecules that
contain chemical modifications or conjugations for therapeutic purposes; and (2) develop novel delivery systems for microRNAs that
will enable targeted delivery to desired cells. The transfer of know-how developed in the framework of the consortium or rights
to manufacture based on and/or incorporating such know-how to third parties which are not members of the consortium requires the
consent of the IIA.
In addition, in the
past we participated in a two-year Magneton Project. This two-year project was also supported by the IIA and was conducted in collaboration
with Prof. Ronit Satchi-Fainaro (Department of Physiology and Pharmacology, Sackler School of Medicine, Tel Aviv University). It
was aimed at developing a nano-carrier delivery system for microRNA mimetics for the treatment of cancer. In December 2015, we
completed this project. Project activity included in vivo studies, pre-clinical toxicity studies and in vivo efficacy studies in
an animal model of glioblastoma. The results have shown limited efficacy. The transfer of knowledge discovered in this project
is subject to limitations specified in the Israeli R&D Law.
The IIA, under special
circumstances, may approve the transfer of the know-how developed in these supported projects outside of Israel, provided that
the grant recipient pays to the IIA a portion of the sale price paid in consideration for such know-how, which portion will not
exceed six times the amount of the grants received plus interest (or three times the amount of the grant received plus interest,
in the event that the recipient of the know-how has committed to retain the R&D activities of the grant recipient in Israel
after the transfer).
As of December 31,
2016, we had received from the IIA total grants of $932,299 for our development under the Rimonim Consortium and $282,141 for our
development under the Magneton project.
The R&D Law was
amended effective as of January 1, 2016. Pursuant to the amendment, a new IIA was established and will replace the OCS in the implementation
of the governmental policy in connection with the R&D Law (and has been given discretion in the implementation of the R&D
Law for such purpose). Pursuant to the amendment, the current restrictions under the R&D Law will be replaced by new arrangements
to be determined by the IIA; however, until the IIA determines otherwise, the provisions of the R&D Law and regulations that
applied to existing IIA programs (including those provisions described above) will continue to apply.
Background
Rosetta Genomics was
founded in 2000 with the belief that what was known as “junk DNA” actually contains hundreds, possibly thousands, of
tiny RNA genes that encode small RNA molecules, later termed microRNAs, which play an important role in the regulation of protein
production, and hence the onset and progression of disease. In the cell, genes are expressed through information carried from our
DNA by messenger RNAs, or mRNAs, which is in turn translated into proteins. Proteins are the building blocks of all living cells.
The type of cell, its function, and the timing of its death are determined by which proteins are produced in the cell, and at what
quantities and time they are produced. However, the proteins are the end product of a complex process, which begins with the genetic
code present in DNA. Before a protein is expressed, or produced, relevant parts of the DNA are copied into a mRNA. Each mRNA holds
a code with instructions on how to build a specific protein using a process called translation. Although one messenger RNA molecule
is capable of translating hundreds of thousands of protein molecules, the number it actually produces is regulated by microRNAs.
MicroRNAs have been found to regulate the expression of other genes by binding to the mRNA.
MicroRNAs have been
shown to have varying expression levels across various pathological conditions, and thus have significant potential as a class
of highly sensitive and tissue specific biomarkers. We have developed a microRNA discovery process and have demonstrated, in a
work published by us in
Nature Genetic
, that the number of human microRNAs is significantly higher than what was previously
believed. We have discovered hundreds of biologically validated human microRNAs and dozens of validated viral microRNAs and filed
extensive patent applications with claims potentially covering these microRNAs, some of which have been issued.
To leverage the potential
of microRNAs as a novel diagnostic platform, we have developed proprietary methods to extract microRNAs from a wide range of tissue
and body fluid samples and to quantify specific microRNA expression signatures, which may be used as diagnostic panels to potentially
diagnose cancers, their subtypes, as well as the origin of metastases. We have already developed and launched a number of diagnostic
tests based on our platforms and have published several papers demonstrating how our methods can be used to develop such diagnostics
(e.g., Rosenwald et al.,
Modern Pathology
, 2010; Benjamin et al.,
Journal of Molecular Diagnostics
, 2010). Moreover,
we were able to demonstrate the utility of our developed tests in post-market studies with collaborators from leading medical centers
in the United States and Europe (Bishop et al.
Clinical Cancer Research
, 2010; Muller et al.,
The Oncologist
, 2010).
We believe that microRNAs
are stable, sensitive and specific markers, and we are advancing diagnostic development programs in cancer and other areas, to
potentially enable accurate diagnosis and improve patient care management worldwide.
Our Strategy
Rosetta’s goal
is to become a leader in the development and commercialization of microRNA-based and other genomics-based, diagnostic tests. Our
key business strategies to achieve this goal are as follows:
|
·
|
Leverage our knowledge and experience
. We plan to leverage our extensive microRNA and Fluorescence
in situ Hybridization, or FISH, knowhow and experience to potentially develop additional tissue-based as well as body fluid-based
diagnostic tests.
|
|
·
|
Maximize sales of our current commercial tests through
geographic partners and our own commercial efforts
. We plan to maximize revenues from our current commercial tests via corporate
relationships and through our own targeted commercial efforts. We have distribution agreements with several distributors, pursuant
to which these distributors have the right to commercialize these tests in their territories.
|
|
·
|
Build and maintain a strong intellectual property position
. We believe that we were the
first commercial enterprise to focus on the emerging field of microRNAs. We also believe we have an early and strong intellectual
property position (both patents we own and those we have exclusively, co-exclusively, or non-exclusively licensed) in the area
of developing and commercializing microRNA-based diagnostic tests. Our patent strategy is to seek broad coverage on all of our
identified microRNA sequences. We have also filed, and intend to continue to file, patent applications that claim our technical
platforms and method-of-use for specific diagnostic and therapeutic applications.
|
|
·
|
Leverage our intellectual property position and microRNA expertise to continue to establish
strategic collaborations
. We intend to continue to establish strategic collaborations with leading clinical diagnostic and
pharmaceutical companies to further develop and commercialize microRNA-based diagnostics. We believe that our strong intellectual
property position and expertise in the field of microRNAs will be very attractive to additional collaboration partners.
|
Our MicroRNA-Based Diagnostic Tests
The Role of MicroRNAs in Diagnostic
Products
Diagnostic tests are
designed to provide physicians and their patients with information relating to one or more of the following:
|
·
|
the existence or the probability of developing disease;
|
|
·
|
the exact type of the disease;
|
|
·
|
the severity of the disease;
|
|
·
|
the potential efficacy of specific therapies, such as different drugs or therapeutic procedures;
|
|
·
|
the monitoring of success of a chosen therapy; or
|
|
·
|
the likelihood of disease recurrence.
|
We believe that using
microRNAs as diagnostic biomarkers enables the development of diagnostic products that can provide more accurate and comprehensive
information to doctors and patients. Currently, many diagnostic tests are designed to detect abnormal levels of messenger RNAs
or proteins. We believe microRNA-based tests have the potential to be superior to these tests because it is believed that microRNAs
are closer to the biological origin of disease, and many studies have shown their involvement in disease processes, including the
demonstration that microRNAs are both diagnostic and prognostic markers. A change in the expression level of a single microRNA
may affect the activity of dozens of messenger RNA genes, which in turn may affect the level of hundreds of proteins. In addition,
microRNAs are very tissue specific and very stable in body fluids and tissue samples. Thus, we expect that by focusing our efforts
on microRNAs, we can develop a less complex biomarker panel. Furthermore, extracting microRNAs from tissue and body fluid samples
is more reliable than extracting messenger RNAs because of the greater stability of microRNAs. In addition, amplification technologies,
such as PCR, can potentially increase the sensitivity of a microRNA-based diagnostic test by generating millions of copies of a
particular microRNA and thereby making it easier for the test to detect the presence of the microRNA. Since amplification technologies
cannot be used with proteins, we believe microRNA-based diagnostic tests have the potential to be more sensitive than protein-based
diagnostic tests.
Our Diagnostic Product Development
Process
Our development process
for diagnostic products consists of the following important steps:
|
·
|
Access to samples
. As a prerequisite for the development and clinical validation of diagnostic
products, evaluation of clinical samples is critical. Accordingly, we have entered into collaborations with several institutions
in Israel, Europe and the United States that provide us high quality clinical samples. These relationships provide us the opportunity
to study thousands of well-characterized samples relevant to different disease areas such as cancer, cardiovascular indications,
women’s health, and neurodegenerative diseases. The sample collections include solid tumor samples and various body fluids,
as well as high quality tissue samples from archival pathology banks. Where relevant, samples are accompanied by a database of
medical history and clinical information, such as diagnosis, treatment and response to treatment, recurrence and survival, which
for the samples from the archival pathology banks can be as long as 20 years.
|
|
·
|
RNA extraction
. We utilize both commercial and our proprietary technologies to extract microRNAs
from both tissue and body fluid samples.
|
|
·
|
Expression profiling
. The identification of microRNA biomarkers requires sensitive and specific
measurements of the levels of the microRNAs extracted from the tissue or body fluid samples. We have developed proprietary methods
to rapidly, robustly and accurately perform these measurements. Our methods allow us to perform simultaneous profiling of multiple
samples, and we believe result in more accurate measurements of expression levels for each of the analyzed samples.
|
|
·
|
Analysis
. We analyze expression profiles to identify microRNA signatures, which detect the
existence of disease and provide information on certain disease parameters, such as tumor subtype, tumor origin, tumor aggressiveness,
response to treatment, and risk of recurrence. Identifying microRNA signatures is a complex task, and we believe our analytical
expertise is one of our key advantages.
|
Current MicroRNA-Based Commercial
Tests
We are currently marketing
and selling the following diagnostic tests based on our proprietary microRNA technologies:
|
·
|
RosettaGX Reveal
– This is a microRNA-based assay for the diagnosis of indeterminate
thyroid
fine-needle aspirate, or FNA, samples. The test utilizes routinely prepared FNA smears
to diagnose a cytologically indeterminate thyroid nodule as “benign” or “suspicious for malignancy by microRNA”.
The test also measures a microRNA biomarker for medullary carcinoma. The test targets patients with a cytologically indeterminate
FNA biopsy result, estimated to be up to 150,000 people annually in the United States alone. FNA biopsy is the most widely used
method for diagnosis of thyroid nodules. FNA biopsy allows a definitive benign or malignant diagnosis of the majority of tumors;
however, 10-30% of FNAs are classified as cytologically indeterminate. Most patients with cytologically indeterminate nodules are
referred for partial or complete thyroidectomy, though up to 70% of these nodules prove to be benign on final surgical pathology.
|
|
·
|
RosettaGX Cancer Origin
™
(formerly “miRview
®
mets
2
”)
–
This test is our second-generation microRNA-based diagnostic for the identification of the primary site of metastatic cancer, specifically
metastatic cancer of unknown primary (CUP). CUP is a heterogeneous group of cancers that constitutes approximately 3-5% of all
cancers with a poor median survival of six to ten months. It is estimated that over 50,000 patients in the United States are diagnosed
with CUP each year. A patient is typically diagnosed with CUP only after undergoing a wide range of tests, including various imaging
tests such as x-ray, CT, MRI, and PET, which have failed to identify the origin of the cancer. Presently, the choice of treatment
for metastatic cancer is largely dependent on the nature of the primary tumor. Patients with CUP pose a therapeutic dilemma and
treatment is often empiric with a “one treatment fits all” approach. In the era of rapidly growing effective cytotoxic
and targeted therapies for known cancers, quicker and more accurate methods to identify the tissue of origin of CUP cancers would
permit the use of these therapies, thereby improving the chances of achieving a response and possibly extending the patient’s
survival. RosettaGX Cancer Origin
tm
is able to identify 49 tumor types
that include carcinomas, soft tissue tumors, lymphoma and other malignancies with very high accuracy.
|
|
·
|
mi-KIDNEY
(formerly “Rosetta Kidney Cancer Test”)
-
In May 2012 we launched this microRNA-based kidney tumor classification test for pathology samples. This test targets newly
diagnosed kidney tumor patients, estimated to be 61,560 people in the United States in 2015. Renal cancers account for more than
3% of adult malignancies and cause more than 14,000 deaths per year in the United States. The test was designed to classify primary
kidney tumors into one of the four most common types: the malignant renal cell carcinomas clear cell (conventional), papillary
and chromophobe as well as the benign oncocytoma. These histological subtypes vary in their clinical course and their prognosis,
and different clinical strategies have been developed for their management. In some of the kidney tumor cases it is difficult for
the pathologist to distinguish between tumor types on the basis of morphology. The microRNA-based assay that we have developed
is performed by measuring microRNA biomarkers in a sample from the tumor. The assay uses the expression of 24 microRNAs to accurately
identify the kidney tumor subtype.
|
We currently have distribution
agreements with respect to some of our tests covering Australia, Greece, India, Israel, New Zealand, and Turkey. All of these distribution
agreements call for samples to be sent to our CLIA-certified, CAP-accredited laboratory in Philadelphia, Pennsylvania for analysis.
Our Long-Term MicroRNA-Based Diagnostic
Test Pipeline
We are seeking to develop
a second version of RosettaGX Reveal, a microRNA-based assay for the differential diagnosis of indeterminate thyroid FNAs that
utilizes routinely prepared FNA smears. This second version will combine RosettaGx Reveal’s current microRNA biomarkers with
a panel of DNA-based biomarkers providing prognostic information (e.g. BRAF and TERT mutations). Four to seven percent of the general
population develops nodules in the thyroid that can be felt on examination but fewer than 10% are malignant. An FNA to obtain tissue
for analysis is the standard technique for detecting cancer. Interpretation of FNA samples is not always straightforward, leading
to an indeterminate result in up to 30% of the samples. Currently, many patients with indeterminate results are sent to surgery
as a precaution, even though the majority are benign, exposing patients to unnecessary surgical risk and costing hundreds of millions
of dollars.
Our PersonalizeDx Business
PersonalizeDx is a
CAP-accredited, CLIA-certified commercial laboratory that performs testing services on two primary platforms: FISH and IHC. FISH
molecular tests query specific chromosome regions and genes in order to provide diagnostic, prognostic and predictive information
to clients in order to assist with patient treatment decisions. The majority of the company’s test volume and revenues are
derived from the following tests in bladder, prostate and lung cancers:
|
·
|
UroVysion
®
- UroVysion is a urine-based FISH assay intended for use in conjunction
with and not in lieu of current standard diagnostic procedures, as an aid for initial diagnosis of bladder carcinoma in patients
with hematuria and subsequent monitoring for tumor recurrence in patients previously diagnosed with bladder cancer. UroVysion was
the first test launched by CynoGen/PersonalizeDx in 2009 and remains a top volume and revenue producer for the company. UroVysion
is currently a covered service by Medicare and the majority of private third party payers for the FDA approved clinical indications.
PersonalizeDx provides a ‘tech only’ service option for UroVysion that allows Pathologists throughout the United States
to partner with the lab through its ‘virtual’ portal.
|
|
·
|
ERG/PTEN
- ERG and PTEN are FISH-based prognostic tests in prostate cancer that help urologists
with the important decision point of whether or not to initiate surgery with their lower risk prostate cancer patients. ERG and
PTEN have both been proven to be key biomarkers in the progression of prostate cancer, and abnormal results specific to these genes
may indicate the need for more aggressive treatment. ERG and PTEN testing is performed on the same tumor tissue that is taken from
the patient’s initial core needle biopsy procedure. PersonalizeDx also offers a ‘tech only, virtual’ service
for ERG and PTEN testing.
|
|
·
|
ALK/ROS1
- ALK and ROS1 are FISH-based predictive tests indicated for patients that are
diagnosed with late stage lung cancer. Patients that test positive for either ALK or ROS1 rearrangements are considered candidates
for ALK-inhibitor therapy such as XALKORI® (crizotinib). Both ALK and ROS1 are listed in the FDA label for such therapy, and
these tests have been recommended for routine testing by the National Comprehensive Cancer Institute’s (NCCN) guidelines.
Again, PersonalizeDx offers its ‘tech only’ platform for ALK/ROS1 testing to its clients.
|
Our Intellectual Property Strategy
and Position
Our success will depend
significantly on our ability to:
|
·
|
obtain and maintain patent and other proprietary protection for the technology, inventions and
improvements we consider important to our business;
|
|
·
|
navigate the changing legal patent landscape;
|
|
·
|
preserve the confidentiality of our trade secrets; and
|
|
·
|
operate without infringing the patents and proprietary rights of third parties.
|
We believe that we
were the first commercial enterprise to focus on the emerging microRNA field, and as a result, we have developed an early and strong
intellectual property position related to the development and commercialization of research, diagnostic and therapeutic products
and other applications based on microRNAs. Our patent strategy is to seek broad coverage on all of our identified microRNA sequences.
We have filed, and will continue to file, patent applications that claim method-of-use for specific diagnostic and therapeutic
applications as we or our collaborators develop them. We believe this approach will provide strong and broad patent protection
for a large number of microRNAs that we have discovered and may provide us with a competitive advantage over new entrants to the
field.
As of March 1, 2017,
our patent portfolio included a total of 49 issued U.S. patents, two issued Australian patents, three issued European patents,
all validated in UK, Germany and France, and one validated also in Denmark, four issued Israeli patents, one issued Japanese patent,
one issued Korean patent, 41 pending patent applications worldwide, consisting of 20 U.S. patent applications, four of which received
notice of allowance, six applications that are pending in Europe, two of which received a notice of allowance, two applications
pending in Israel, one of which received a notice of allowance, three applications pending in Japan, three applications pending
in Canada, three applications pending in China, three applications pending in Brazil, and one PCT application. All 41 pending patent
applications relate to human microRNAs and their uses. Thirty applications contain claims directed to microRNA-based diagnostics
in Heart Failure, Alzheimer’s disease, Cancer of Unknown Origin (CUP), thyroid, lung, gastric and other cancers; and six
contain claims directed to microRNA-based therapeutics. The issued patents expire between 2022 and 2031.
To date, patent protection
related to numerous human genes has been obtained in the United States and elsewhere. Although recent rulings from the U.S. Supreme
Court, as well as guidelines recently issued by the USPTO expanding these, have caused uncertainty relating to the patentability
of naturally occurring nucleic acid sequences, our patents and pending applications include claims to non-naturally occurring derivatives
of microRNAs, which we believe are patentable under U.S. and foreign patent laws.
In order to obtain
maximum patent protection for composition of matter of microRNAs in the U.S. and foreign jurisdictions, our patent applications:
|
·
|
provide for utility, function and disease targets for each microRNA sequence; and
|
|
·
|
claim specific microRNA sequences, having modified nucleotides.
|
|
·
|
We believe this approach avoids common mistakes made by others in the past with respect to attempts
to patent genes and, if patents are issued, will make it more difficult for competitors to design around our patents.
|
Our intellectual property
strategy is closely coordinated with our research and development plan and we have an ongoing three-tier approach to obtaining
patent protection, which is illustrated and described below:
First Tier: Composition-of-Matter
Patent applications on Biologically Validated MicroRNAs
We have filed a first
tier of patent applications claiming patent coverage for the composition-of-matter of microRNAs that we have either detected by
microarray or biologically validated by sequencing or qRT-PCR. In addition to the function and utility based on informatically
calculated targets, the microRNAs claimed in these patent applications are further described as potential markers of a disease,
as supported by differential expression of these microRNAs in healthy versus diseased tissue. Our patent portfolio includes 34
issued patents and five patent applications with composition-of-matter claims.
Second Tier: Technologies to detect
MicroRNAs
We have filed a second
tier of patent applications claiming patent coverage for our proprietary discovery process technologies for microRNA detection,
including qRT-PCR methods, microarray, in-situ hybridization and extraction methods from all body fluids. Our patent portfolio
includes two issued patents, one in the U.S. and one in Europe which has been validated in the UK, Germany, France and Denmark
related to discovery process technologies.
Third Tier: Method-of-Use Patents
We have filed a third
tier of patent applications claiming patent coverage for the method-of-use of microRNAs, including diagnostic and therapeutic uses
for specific diseases. This tier of patent applications includes applications which we have filed ourselves and those that we have
filed jointly with academic, medical and commercial partners with whom we collaborate. Our patent portfolio includes 36 (22 of
which are solely owned by Rosetta and 14 that are co-owned) patent applications with method of use claims related to diagnostic
and therapeutic uses of microRNAs and we expect to file additional third tier applications in the future.
Individual patents
extend for varying periods depending on the effective date of filing of the patent application or the date of patent issuance,
and the legal term of the patents in the countries in which they are obtained. Generally, patents issued in the United States are
effective for:
|
·
|
the longer of 17 years from the issue date or 20 years from the earliest effective filing date,
if the patent application was filed prior to June 8, 1995; and
|
|
·
|
20 years from the earliest effective filing date, if the patent application was filed on or after
June 8, 1995.
|
All of our current
patent applications were filed after June 8, 1995.
The term of foreign
patents varies in accordance with provisions of applicable local law, but typically is 20 years from the earliest effective filing
date.
In some instances,
a patent term in the United States and outside of the United States can be extended to recapture a portion of the term effectively
lost as a result of the health authority regulatory review period. These extensions, which may be as long as five years, are directed
to the approved product and its approved indications. We intend to seek such extensions as appropriate. Because of the extensive
time required for development, testing and regulatory review of a potential product, it is possible that a patent may remain in
force for a short period following commercialization, thereby reducing the advantage of the patent to our business and products.
The patent positions
of companies like ours are generally uncertain and involve complex legal and factual questions. Our ability to maintain and solidify
our proprietary position for our technology will depend on our success in obtaining effective claims and enforcing those claims
once granted. We do not know whether any of our patent applications will result in the issuance of any patents or if issued will
assist our business. Any patents that may issue in the future may be challenged, invalidated or circumvented. This could limit
our ability to stop competitors from marketing related products and reduce the length of term of patent protection that we may
have for any products. In addition, the rights granted under any patents which may issue may not provide us with proprietary protection
or competitive advantages against competitors with similar technology. Our competitors may develop similar technologies, duplicate
any technology developed by us, or use their patent rights to block us from taking full advantage of the market.
In addition to patents,
we may rely, in some circumstances, on trade secrets to protect our technology. However, trade secrets are difficult to protect.
We seek to protect the trade secrets in our proprietary technology and processes, in part, by entering into confidentiality agreements
with commercial partners, collaborators, employees, consultants, scientific advisors and other contractors and into invention assignment
agreements with our employees and some of our commercial partners and consultants. These agreements are designed to protect our
proprietary information and, in the case of the invention assignment agreements, to grant us ownership of the technologies that
are developed. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets
may otherwise become known or be independently discovered by competitors.
In-Licensed Intellectual Property
License Agreement with The Rockefeller
University (Diagnostics)
In May 2006, we signed
a royalty-bearing, co-exclusive, worldwide license agreement with The Rockefeller University, or Rockefeller. Under this agreement,
we were granted the right to make, use and sell Rockefeller’s proprietary microRNAs for diagnostic purposes including a limited
right to sublicense. Our right to sublicense is limited to sublicenses we grant as part of a license that includes other technology
or patent rights of ours. The agreement covers microRNAs and microRNA candidates, including approximately 80 biologically validated
human microRNAs and approximately 30 biologically validated viral microRNAs discovered by researchers at The Rockefeller University
and for which it has filed patent applications. These microRNAs can be licensed by Rockefeller in the diagnostics field to three
additional parties. In consideration for this license, we paid an initiation fee and will pay a fixed annual license maintenance
fee, royalties based on net sales and a percentage of our revenues from any sublicenses. Rockefeller is obligated to notify us
of any license it grants to a third party at a lower royalty rate and we will have the right to modify the terms of our license
to adopt all of the material terms and conditions of that license.
Rockefeller controls
prosecution, maintenance and enforcement of all the licensed patent rights; however, we are responsible for a pro rata share of
associated costs. Also, if Rockefeller elects not to take action against a claim of infringement of the licensed patent rights,
we may undertake such action at our own expense. We are obligated to indemnify Rockefeller against any liabilities arising from
our development and use of the licensed microRNAs and any actions brought by third parties or related to clinical trials or studies.
We are also required to maintain comprehensive insurance coverage.
The agreement will
terminate upon the later of the expiration or abandonment of the last patent to expire or become abandoned. If no patent ever issues,
the agreement will terminate ten years after the first commercial sale of the first licensed product. Based on an estimate of the
date of expiration of the last patent to expire, we estimate that we will pay a minimum of approximately $960,000 in aggregate
annual license maintenance fees over the term of this agreement. Rockefeller has the right to terminate the agreement if we are
more than 30 days late in meeting our payment obligations and do not pay in full within ten days of Rockefeller’s written
demand; or upon our uncured material breach. We can terminate the agreement by providing sixty days written notice to Rockefeller,
ceasing all use of the licensed products, terminating any sublicenses granted under the agreement and paying all amounts owed to
Rockefeller through the date of termination.
License Agreement with The Rockefeller
University (Therapeutics)
In May 2007, we signed
a royalty-bearing, co-exclusive, worldwide license agreement with The Rockefeller University. Under this agreement, we were granted
the right to make, use and sell Rockefeller’s proprietary microRNAs for therapeutic purposes, including a limited right to
sublicense. Our right to sublicense is limited to sublicenses that are for research and development of products and that are granted
as part of a license that includes other technology or patent rights of ours. The agreement covers microRNAs and microRNA candidates,
including approximately 80 biologically validated human microRNAs and approximately 30 biologically validated viral microRNAs discovered
by researchers at The Rockefeller University for which it has filed patent applications. These microRNAs can be licensed by Rockefeller
in the therapeutics field to three additional parties. In consideration for this license, we paid an initiation fee and are required
to pay a fixed annual license maintenance fee, milestone payments and royalties based on net sales and a percentage of our revenues
from any sublicenses. Rockefeller is obligated to notify us of any license it grants to a third party at a lower royalty rate,
and we will have the right to modify the terms of our license to adopt all of the material terms and conditions of that license.
Rockefeller controls
prosecution, maintenance and enforcement of all the licensed patent rights; however, we are responsible for a pro rata share of
associated costs. Also, if Rockefeller elects not to take action against a claim of infringement of the licensed patent rights,
we may undertake such action at our own expense. We are obligated to indemnify Rockefeller against any liabilities arising from
our development and use of the licensed microRNAs and any actions brought by third parties or related to clinical trials or studies.
We are also required to maintain comprehensive insurance coverage.
The agreement will
terminate upon the later of the expiration or abandonment of the last patent to expire or become abandoned. If no patent ever issues,
the agreement will terminate ten years after the first commercial sale of the first licensed product. Based on an estimate of the
date of expiration of the last patent to expire, we estimate that we will pay a minimum of approximately $690,000 in aggregate
annual license maintenance fees over the term of this agreement. Rockefeller has the right to terminate the agreement if we are
more than 30 days late in meeting our payment obligations and do not pay in full within ten days of Rockefeller’s written
demand; or upon our uncured material breach. We can terminate the agreement by providing 60 days written notice to Rockefeller,
ceasing all use of the licensed products, terminating any sublicenses granted under the agreement and paying all amounts owed to
Rockefeller through the date of termination.
License Agreement with The Rockefeller
University (Research)
In January 2008, we
signed a royalty-bearing, nonexclusive, worldwide license agreement with The Rockefeller University. Under this agreement, we were
granted the right to make, use, import, sell and offer for sale Rockefeller’s proprietary microRNAs for research purposes
including a limited right to sublicense. Our right to sublicense is limited to sublicenses we grant as part of a license that includes
other technology or patent rights of ours. The agreement covers microRNAs and microRNA candidates, including approximately 80 biologically
validated human microRNAs and approximately 30 biologically validated viral microRNAs discovered by researchers at The Rockefeller
University and for which it has filed patent applications. In consideration for this license, we paid an initiation fee and will
pay a minimum annual royalty, based on net sales and a percentage of our revenues from any sublicenses. Rockefeller is obligated
to notify us of any license it grants to a third party at a lower royalty rate and we will have the right to modify the terms of
our license to adopt all of the material terms and conditions of that license.
Rockefeller controls
preparation, prosecution and maintenance of the licensed patent rights and the selection of patent council with our input; however,
we are responsible for a pro rata share of associated costs. Also, if Rockefeller elects not to take action against a claim of
infringement of the licensed patent rights, we may undertake such action at our own expense. We are obligated to indemnify Rockefeller
against any liabilities arising from our development, testing, use, manufacture, promotion, sale of other disposition of the licensed
microRNAs and any actions brought by third parties. We are also required to maintain comprehensive insurance coverage.
The agreement will
terminate upon the later of the expiration or abandonment of the last patent to expire or become abandoned. If no patent ever issues,
the agreement will terminate ten years after the first commercial sale of the first licensed product. Based on an estimate of the
date of expiration of the last patent to expire, we estimate that we will pay a minimum of approximately $440,000 in aggregate
minimum annual royalty over the term of this agreement. Rockefeller has the right to terminate the agreement if we are more than
30 days late in meeting our payment obligations and do not pay in full within ten days of Rockefeller’s written demand; or
upon our uncured material breach. We can terminate the agreement by providing 60 days written notice to Rockefeller, ceasing all
use of the licensed products, terminating any sublicenses granted under the agreement and paying all amounts owed to Rockefeller
through the date of termination.
License Agreement with Max Planck Innovation
GmbH (Diagnostics)
In June 2006, we entered
into a royalty-bearing, co-exclusive, worldwide license agreement with Max Planck Innovation GmbH, the technology transfer agency
of the Max Planck Society. This agreement was amended and restated in March 2009. Under this agreement, we licensed from Max Planck
the rights to its proprietary microRNAs for diagnostics purposes. The agreement covers microRNAs and microRNA candidates, including
approximately 110 biologically validated human microRNAs, discovered by the researchers of the Max-Planck-Institute for Biophysical
Chemistry in Goettingen. In consideration for this license, we paid an initiation fee, and are required to pay a fixed annual license
maintenance fee, royalties based on net sales and a percentage of our revenues from any sublicenses.
These microRNAs can
be licensed by Max Planck for diagnostics purposes to three other parties. Max Planck is obligated to notify us of any more favorable
license in the diagnostics field it grants for these microRNAs, in which event we shall have the right to adopt all material terms
of such license. We have the right to enter into sublicense agreements, provided that the granted sublicense includes a license
to intellectual property rights owned or co-owned by us as well, is reasonably necessary for sublicensee in order to further develop
and/or commercialize or manufacture products and permits no more than one tier of sublicensing.
Max Planck is responsible,
in its sole discretion, to apply for, seek issuance of, maintain and prosecute the licensed patent rights, and we have the right
to comment on the documents to be filed by the patent office. We are required, however, to pay a pro rata share of associated costs.
We are obligated to indemnify Max Planck against any liabilities arising from any use by us, our affiliates, sublicensees and sales
partners of the patent rights, the development and use of any product, process or service under the agreement, and the use by third
parties of any products, processes or services sold by us. We are also required to maintain comprehensive insurance coverage.
The agreement terminates
upon the expiration or abandonment of all issued and filed licensed patents. Based on an estimate of the date of expiration of
the last patent to expire, we estimate that we will pay a minimum of approximately $410,164 in aggregate annual license maintenance
fees over the term of this agreement. We have the right to terminate the agreement with three months’ prior written notice.
We have the obligation to use commercially reasonable efforts to develop and commercialize the products and services based on the
licensed patents in the field of diagnostics. In the event we cease carrying out our business related to the agreement we must
notify Max Planck and then both parties have the right to terminate the agreement with three months’ prior notice. Max Planck
also has the right to terminate the agreement if we challenge one of the licensed patents; if we fail to cure a breach within 60
days of receiving notice of such breach; or if we fail to pay within 30 days of a notice requiring a payment. The agreement will
terminate automatically upon filing of bankruptcy or insolvency proceedings by or against us, or upon the assignment of all or
a substantial portion of our assets for the benefit of creditors.
License Agreement with Max Planck Innovation
GmbH (Research)
In December 2006, we
entered into a royalty-bearing, non-exclusive, worldwide license agreement with Max Planck. Under this agreement, we licensed from
Max Planck the rights to its proprietary microRNAs for research purposes. The agreement covers microRNAs and microRNA candidates,
including approximately 110 biologically validated human microRNAs, discovered by the researchers of the Max-Planck-Institute for
Biophysical Chemistry in Goettingen. In consideration for this license, we have paid an initiation fee, and are required to pay
a fixed annual license maintenance fee, royalties based on net sales and a percentage of our revenues from any sublicenses.
Max Planck is obligated
to notify us of any more favorable license in the research field it grants for these microRNAs, in which event we shall have the
right to adopt all material terms of such license. We have the right to enter into sublicense agreement, but only if the granted
sublicense includes a license to microRNAs owned by us as well.
Max Planck is responsible,
in its sole discretion, to apply for, seek issuance of, maintain and prosecute the licensed patent rights, and we have the right
to comment on the documents to be filed with the patent office. We are obligated to indemnify Max Planck against any liabilities
arising from any use by us, our affiliates, sublicensees and sales partners of the patent rights, the development and use of any
product, process or service under the agreement, and the use by third parties of any products, processes or services sold by us.
We are also required to maintain comprehensive insurance coverage.
The agreement terminates
upon the later of the expiration or abandonment of the last patent to expire or become abandoned of the patent rights contemplated
under the agreement, or, if no patent ever issues from the patent rights, ten years after the first commercial sale of the first
licensed product, as contemplated under the agreement. Based on an estimate of the date of expiration of the last patent to expire,
we estimate that we will pay a minimum of approximately $252,409 in aggregate annual license maintenance fees over the term of
this agreement. We have the right to terminate the agreement with 60 days prior written notice. Max Planck also has the right to
terminate the agreement if we fail to cure a breach within 60 days of receiving notice of such breach; or if we fail to pay within
30 days of a notice requiring a payment.
License Agreement with Johns Hopkins
University
In August 2006, we
signed a royalty-bearing, exclusive, worldwide license agreement with Johns Hopkins University. This agreement was amended and
restated in August 2011. Under the restated agreement, we have licensed from Johns Hopkins the rights to its proprietary microRNAs
for all fields and applications on a non-exclusive basis. The agreement covers approximately 130 biologically validated microRNAs.
We also have the right to further sublicense these rights, provided that such sublicense includes a license to substantial intellectual
property rights owned or co-owned by us and is consistent with the terms of our license agreement. In consideration for the restated
license we paid an amendment fee, and are required to pay minimum annual royalties, royalties based on net sales and a percentage
of our revenues from any sublicense. We are obligated to perform commercially reasonable diligent efforts in the development of
products, including or using the licensed microRNAs.
Johns Hopkins is responsible
for filing, prosecuting and maintaining the licensed patent rights, and we have the right to comment on and advise Johns Hopkins
with respect to such matters. We are required to pay all expenses related to filing, prosecution and maintenance of the licensed
patent rights; unless we provide Johns Hopkins notice that we elect not to do so. If we so elect, Johns Hopkins may file, prosecute
or maintain such patent rights at its own expense and any license we have with respect to such patent rights shall terminate. We
have the right but not the obligation to enforce the patent rights against infringement.
We are obligated to
indemnify Johns Hopkins against any liabilities arising out of use by us, our affiliates or sublicensees of the licensed microRNAs.
We are also obligated to establish and maintain product liability or other appropriate insurance prior to initial human testing
or first commercial sale of any product incorporating the licensed microRNAs.
The agreement terminates
with respect to each country in which a patent has issued upon the expiration of the last to expire patent covered by the terms
of the agreement in such country. If no patents ever issue in a country but patent applications are filed in such country, the
agreement will expire with respect to such country upon the cancellation, abandonment, withdrawal or disallowance of all claims
under all patent applications in that country or at such time as there is no claim that has been pending in such country for less
than six years from the date such claim was filed in a non-provisional patent application in that country. Based on an estimate
of the date of expiration of the last patent to expire, we estimate that we will pay a minimum of approximately $320,000 in aggregate
annual royalties over the term of the agreement. In addition, either party may terminate the agreement (1) upon the filing of bankruptcy
or insolvency proceedings with respect to the other party or (2) if the other party is in material breach of the agreement and
such breach is not cured within 30 days of notice. We also have the right to terminate the agreement for any reason upon 90-day
notice.
Competition
Our industry is highly
competitive and subject to rapid and significant technological change. All of the tests and products we are developing or may develop
in the future, if approved, will compete against existing non-microRNA-based diagnostic tests and therapies. In addition, we believe
a significant number of non-microRNA-based diagnostic tests and drug candidates are currently under development and may become
available for the diseases we are targeting or may target. We face competition for our micro-RNA-based test and products from non-microRNA-based
competing tests and products from companies such as Cancer Genetics, Inc., Biotheranostics, Inc., Foundation Medicine and Veracyte,
Inc. that have developed or are developing diagnostic tests based on other non-microRNA technologies. We also face competition
from other companies working to develop novel tests and products using technology that competes more directly with our microRNAs.
We are aware of several other companies that are working to develop microRNA diagnostics and therapeutics, including Alnylam Pharmaceuticals,
Inc., Asuragen Inc., HTG Molecular Diagnostics Inc., Interpace Diagnostics, Inc., QIAGEN N.V., Life Technologies Corporation, Ionis
Pharmaceuticals, Inc. (formerly Isis Pharmaceuticals), Miragen Therapeutics, Inc., Merck & Co., Inc., Santaris Pharma A/S,
Regulus Therapeutics Inc. and others. We are also aware of several other companies that provide tests and services that are competitive
with those provided by our recently acquired PersonalizeDx business, including Cancer Genetics, Inc., NeoGenomics, Inc., Miraca
Life Sciences, Inc., Bostwick Laboratories, Inc. and Healthtronics Inc.
We believe the key
competitive factors affecting the commercial success of our potential tests and products will be:
|
·
|
the safety and effectiveness of our products;
|
|
·
|
the timing and scope of regulatory approvals, if required, for these tests and products;
|
|
·
|
the availability and cost of manufacturing, marketing and sales capabilities;
|
|
·
|
providing economic healthcare benefits, by either possibly directing better clinical treatment,
or potentially reducing unnecessary surgical procedures;
|
|
·
|
reimbursement coverage; and
|
Many of our potential
competitors, either alone or with their collaborative partners, have substantially greater financial, technical and human resources
than we do and significantly greater experience in the discovery and development of diagnostics and therapeutics, obtaining FDA
and other regulatory approvals of tests and products and the commercialization of those tests and products. Accordingly, our competitors
may be more successful than we may be in obtaining FDA approval and achieving widespread market acceptance. Our competitors’
tests or products may be more effective, or more effectively marketed and sold, than any test or product we may commercialize and
may render our tests and products obsolete or non-competitive before we can recover the expenses of developing and commercializing
them. We anticipate that we will face intense and increasing competition as advanced technologies become available.
Manufacturing
We currently intend
to rely on contract manufacturers or our collaborative partners to produce materials for diagnostic tests and drug substances and
drug products required for preclinical studies and clinical trials. We plan to continue to rely upon contract manufacturers and
collaboration partners to manufacture commercial quantities of these materials for any marketed diagnostic or therapeutic.
Regulatory
Diagnostics
CLIA and Other Laboratory Licensure
Laboratories that perform
testing on human specimens for the purpose of providing information for diagnosis, prevention or treatment of disease or assessment
of health are subject to the Clinical Laboratory Improvement Amendments of 1988, or CLIA. This law imposes quality standards for
laboratory testing to ensure the accuracy, reliability and timeliness of patient test results. The FDA is responsible for the categorization
of commercially marketed IVD tests under CLIA into one of three categories based upon the potential risk to public health in reporting
erroneous results. The categories were devised on the basis of the complexity of the test and include waived tests, tests of moderate
complexity, and tests of high complexity. Laboratories performing moderate or high-complexity testing must meet the CLIA requirements
for proficiency testing, patient test management, quality control, quality assurance and personnel.
Under CLIA, certified
laboratories are required to hold a certificate applicable to the categories of testing they perform and to comply with standards
covering, among other things, personnel, facilities administration, quality systems and proficiency testing. CLIA-certified laboratories
are typically subject to survey and inspection every two years to assess compliance with program standards.
In addition to CLIA
certification, laboratories offering clinical testing services are required to hold certain other federal, state and local licenses,
certifications and permits. A clinical laboratory may be licensed by the state in which it is located, but not all states require
licensure. California and Pennsylvania require state licensure, and our laboratories located in those states each hold the appropriate
state license. In addition, some states (California, Florida, Maryland, New York, Pennsylvania, and Rhode Island) require any clinical
laboratory that analyzes samples taken from residents of or physicians located in that state to also be licensed by it. Many CLIA-certified
laboratories also seek accreditation by the College of American Pathologists, or CAP, and licensure by states that require that
state specific licensure for a laboratory that intends to test clinical samples from residents of that state. The CAP Laboratory
Accreditation Program is an internationally recognized program that utilizes teams of practicing laboratory professionals as inspectors,
and accreditation by CAP can be used to meet the CLIA requirements.
Food and Drug Administration
Laboratory Developed Tests
Although the FDA has
consistently stated that it has the authority to regulate clinical laboratory tests as medical devices, it generally exercised
enforcement discretion in not otherwise regulating most tests such as ours that are designed, manufactured and used within the
same high complexity CLIA-certified laboratory at which the test was performed. These tests are known as laboratory developed tests,
or LDTs. In 2014, the FDA issued a draft guidance on the regulation of LDTs entitled, “Framework for Regulatory Oversight
of Laboratory Developed Tests (LDTs)” and an accompanying draft guidance document, or Draft Guidance, entitled, “FDA
Notification and Medical Device Reporting for Laboratory Developed Tests (LDTs).” However, in November 2016, the FDA announced
that it would not release a final version of the Draft Guidance, and in January 2017, it published a discussion paper with its
thoughts about elements of a possible future LDT regulatory framework. We cannot predict when or whether the FDA will issue a final
guidance, but the FDA could still try to regulate LDTs in the absence of additional guidance.
If the FDA were to
regulate LDTs as it does other types of in vitro diagnostic tests, the LDTs could be subject to premarket review which could necessitate
obtaining (i) clearance of a 510(k); or (ii) approval a premarket approval application, or PMA.
Non-U.S. Regulations
In addition to regulations
in the United States, we are subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution
of our tests and products outside the United States. Whether or not we obtain FDA approval for a product, we must obtain the necessary
approvals by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of
the product 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, the approval process, product licensing,
pricing and reimbursement vary greatly from country to country.
HIPAA and Other Privacy and Security
Laws
The Health Insurance
Portability and Accountability Act of 1996, or HIPAA, established for the first time comprehensive United States protection for
the privacy and security of health information. The HIPAA standards apply to three types of organizations, or “Covered Entities”:
health plans, healthcare clearing houses, and healthcare providers which conduct certain healthcare transactions electronically.
Covered Entities must have in place administrative, physical, and technical safeguards to guard against the misuse of protected
health information. Specifically, Title II of HIPAA, the administrative Simplification Act, contains four provisions that address
the privacy of health data, the security of health data, the standardization of identifying numbers used in the healthcare system
and the standardization of data content, codes and formats used in healthcare transactions. The privacy regulations protect identifiable
health information or “protected health information” by limiting its use and release and giving patients the right
to access and amend their protected health information. The HIPAA security standards require the adoption of administrative, physical
and technical safeguards and the adoption of written security policies and procedures. Additionally, some state laws impose privacy
protections more stringent than HIPAA and many impose security standards and breach notification requirements that apply in addition
to HIPAA. Most of the institutions and physicians from which we obtain biological specimens that we use in our research and validation
work are Covered Entities that must comply with HIPAA standards, such as obtaining proper authorization and consent from their
patients for the subsequent use of those samples and associated clinical information. We are a Covered Entity to the extent that
our U.S. operations involve standard transactions conducted electronically (such as billing) in connection with clinical testing.
Accordingly, we have implemented privacy and security policies and procedures consistent with HIPAA standards and taken other steps
to comply.
In 2009, Congress enacted
Subtitle D of the Health Information Technology for Economic and Clinical Health Act, or HITECH, provisions of the American Recovery
and Reinvestment Act of 2009. Final HITECH regulations were published in January, 2013. HITECH amends HIPAA and, among other things,
creates significant new regulatory compliance obligations for “business associates” or organizations that provide services
to Covered Entities involving the use or disclosure of protected health information and downstream entities providing services
to business associates. Additionally, HITECH expands and strengthens HIPAA enforcement, imposes new penalties for noncompliance
and establishes new breach notification requirements for Covered Entities and business associates. Under HITECH’s new breach
notification requirements, Covered Entities must, as soon as possible but not later than 60 days following discovery, notify each
individual whose information has been or is reasonably believed to have been, accessed, acquired or disclosed as a result of a
breach. Covered Entities must also report breaches to the U.S. Department of Health and Human Services, or HHS, and in some cases,
publish information about the breach in local or prominent media outlets. Consequently, it is important that breaches of PHI are
promptly detected and reported within the company, so that we can make all required notifications. Most states have adopted data
security laws protecting the personal data of state residents. Personal data subject to protection typically includes an individual’s
name coupled with social security number, state-issued identification number, or financial account number. Most states require
specific, technical security measures for the protection of all personal data, including employee data, and impose their own breach
notification requirements in the event of a loss of personal data. Many states have also adopted genetic testing and privacy laws.
These laws typically require a specific, written consent for genetic testing as well as consent for the disclosure of genetic test
results, and otherwise limit uses and disclosures of genetic testing results. A few states have adopted laws that give their residents
property rights in their genetic information. State privacy and data security laws generally overlap and apply simultaneously with
HIPAA. In the event of a data breach affecting individuals from more than one state, we must comply with all relevant state notification
requirements as well as HIPAA and are subject to enforcement by all relevant state and federal authorities as well as fines and
penalties imposed by each state.
We are currently subject
to the HIPAA regulations and maintain an active program designed to address regulatory compliance issues. Regulations and guidance
in this area are evolving so we must regularly evaluate and update our regulatory compliance measures to remain in compliance with
the law. We are subject to audit by federal authorities and subject to prosecution or administrative enforcement and increased
civil and criminal penalties for non-compliance, including monetary penalties. We are also subject to enforcement by state attorneys
general who were given authority to enforce HIPAA under HITECH and who also enforce state data security laws.
Our activities must
also comply with other applicable privacy laws. For example, there are international privacy laws that impose restrictions on the
access, use, and disclosure of health and other personal information. Non-U.S. privacy protection requirements, such as the European
Union’s Data Protection Directive governing the processing of personal data, may be stricter than U.S. law and violations
could result in claims for damages, fines, or orders to stop or change the processing of the personal data. The European Union’s
final draft General Data Protection Regulation, which is likely to be formally adopted, imposes extensive new legal obligations
and substantially increases the risk of fines, with upper limits based on a corporate group’s global turnover. Privacy and
data security laws, including those relating to health information, are complex, overlapping and rapidly evolving. All of these
laws may impact our business. Our failure to comply with these privacy laws or significant changes in the laws restricting our
ability to obtain tissue samples and associated patient information or to conduct clinical testing could significantly impact our
business and our future business plans.
Compliance with Fraud and Abuse Laws
We have to comply
with various U.S. federal and state laws, rules and regulations pertaining to healthcare fraud and abuse, including anti-kickback
and physician self-referral laws, rules and regulations. Violations of the fraud and abuse laws are punishable by criminal and
civil sanctions, including, in some instances, exclusion from participation in federal and state healthcare programs, including
Medicare and Medicaid.
Anti-Kickback Statute
The federal Anti-Kickback
Statute prohibits persons from knowingly or willfully soliciting, receiving, offering or paying remuneration, directly or indirectly,
in exchange for or to induce:
|
·
|
the referral of an individual for a service or product for which payment may be made by Medicare,
Medicaid or other federal healthcare program; or
|
|
·
|
purchasing, ordering, arranging for, or recommending the ordering of, any service or product for
which payment may be made by a federal healthcare program.
|
The definition of “remuneration”
has been broadly interpreted to include anything of value, including such items as gifts, certain discounts, waiver of payments,
and providing anything at less than its fair market value. In addition, several courts have interpreted the law to mean that if
“one purpose” of an arrangement is intended to induce referrals, the statute is violated.
The Anti-Kickback Statute
is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Recognizing
that the Anti-Kickback Statute is broad and may technically prohibit many innocuous or beneficial arrangements, the Office of Inspector
General for the Department of Health and Human Services, or OIG, has issued regulations, commonly known as “safe harbors.”
These safe harbors set forth certain requirements that, if fully met, will assure healthcare providers, including clinical laboratories,
that they will not be prosecuted under the Anti-Kickback Statute. Although full compliance with these safe harbor provisions ensures
against prosecution under the Anti-Kickback Statute, full compliance is often difficult and the failure of a transaction or arrangement
to fit within a specific safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution
under the Anti-Kickback Statute will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable
safe harbor may result in increased scrutiny by government enforcement authorities such as the OIG.
The statutory penalties
for violating the Anti-Kickback Statute include imprisonment for up to five years and criminal fines of up to $25,000 per violation.
In addition, through application of other laws, conduct that violates the Anti-Kickback Statute can also give rise to False Claims
Act lawsuits, civil monetary penalties and possible exclusion from Medicare and Medicaid and other federal healthcare programs.
Although the federal
Anti-Kickback Statute applies only to federal health care programs, a number of states in which we operate have their own kickback
laws. Often, these laws closely follow the language of the federal law, although they do not always have the same scope, exceptions,
safe harbors or sanctions. In some states, these anti-kickback laws apply not only to payment made by a state or federal health
care program but also by other payors, including commercial insurance companies.
Physician Self-Referral Laws
The federal ban on
physician self-referrals, commonly known as the “Stark Law,” prohibits, subject to certain exceptions, a physician
from referring Medicare and Medicaid patients to an entity providing certain “designated health services” for which
payment would otherwise be made by Medicare if the physician or an immediate family member of the physician has any financial relationship
with the entity. The Stark Law also prohibits the entity receiving the referral from billing Medicare for any good or service furnished
pursuant to an unlawful referral, and any person collecting any amounts in connection with an unlawful referral is obligated to
refund such amounts. A person who engages in a scheme to circumvent the Stark Law’s referral prohibition may be fined up
to $100,000 for each such arrangement or scheme. The penalties for violating the Stark Law also include civil monetary penalties
of up to $15,000 per service and possible exclusion from federal healthcare programs. In addition, through application of other
laws, conduct that violates the Stark Law can also give rise to False Claims Act lawsuits.
Many states have their
own self-referral laws. Often, these laws closely follow the language of the federal law, although they do not always have the
same scope, exceptions, safe harbors or sanctions. In some states these anti-referral laws apply not only to payment made by a
federal health care program but also with respect to other payors, including commercial insurance companies. In addition, some
state laws require physicians to disclose any financial interest they may have with a healthcare provider to their patients when
referring patients to that provider even if the referral itself is not prohibited.
The False Claims Act and Other Fraud
and Abuse Laws
The federal False Claims
Act, or FCA, prohibits any person from knowingly presenting, or causing to be presented, a false claim or knowingly making, or
causing to be made, a false statement to obtain payment from the federal government. Those found in violation of the FCA can be
subject to fines and penalties of three times the damages sustained by the government, plus mandatory civil penalties of between
$5,500 and $11,000 for each separate false claim. Actions filed under the FCA can be brought by any individual with the requisite
level of knowledge on behalf of the government, a “qui tam” action, and such individual, known as a “relator”
or, more commonly, as a “whistleblower,” may share in any amounts paid by the entity to the government in damages and
penalties or by way of settlement. In addition, certain states have enacted laws modeled after the FCA, and this legislative activity
is expected to increase. Qui tam actions have increased significantly in recent years, causing greater numbers of healthcare companies,
including clinical laboratories, to defend false claim actions, pay damages and penalties or be excluded from Medicare, Medicaid
or other federal or state healthcare programs as a result of investigations arising out of such actions.
The OIG also has authority
to bring administrative actions to impose civil monetary penalties or exclusion from the Medicare, Medicaid and other federal health
care programs. The federal Civil Monetary Penalties Law, or the CMP Law, prohibits, among other things (1) the offering or transfer
of remuneration to a Medicare or state health care program beneficiary if the person knows or should know it is likely to influence
the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a
state health care program, unless an exception applies; (2) employing or contracting with an individual or entity that the provider
knows or should know is excluded from participation in a federal health care program; (3) billing for services requested by an
unlicensed physician or an excluded provider; and (4) billing for medically unnecessary services. The penalties for violating the
CMP Law include exclusion, substantial fines, and payment of up to three times the amount billed, depending on the nature of the
offense.
Federal Prohibitions on Health Care
Fraud and False Statements Related to Health Care Matters
The administrative
simplification provisions of the Health Insurance Portability and Accountability Act, or HIPAA, created new federal crimes: health
care fraud, false statements relating to health care matters, theft or embezzlement in connection with a health benefit program
and obstruction of criminal investigation of health care offenses. The health care fraud statute prohibits knowingly and willfully
executing a scheme to defraud any health care benefit program, including a private insurer. The false statements statute prohibits
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 health care benefits, items, or services. The theft or embezzlement
statute prohibits knowingly and willfully embezzling, stealing or otherwise converting or misapplying the money or property of
a health care benefit program. The obstruction of criminal investigations of health care offenses statute prohibits willfully preventing,
obstructing, misleading or delaying the communication of information and records relating to a violation of a federal health care
offense to a criminal investigator. A violation of any of these laws is a felony and may result in fines, imprisonment, or exclusion
from the federal health care programs.
Reimbursement
United States
Recent and future changes
to policies and pricing from the MolDx molecular diagnostics program utilized by Noridian Healthcare Solutions, our Medicare Administrative
Carrier, could have positive or negative effects on our Medicare billing. This relates primarily to our high complexity laboratory
in Lake Forest, California which is under Noridian and MolDx jurisdiction. MolDx changes to FISH coding and reimbursement over
the past three years is indicative of the MolDx impact. In 2013, MolDx reduced FISH reimbursement in an attempt to reduce overutilization
causing substantial losses for many laboratories. In 2016, MolDx revised pricing for FISH upward after implementing better utilization
controls in the form of revised code and billing guidance.
In the United States,
payments for diagnostic tests come from several sources, including third-party payors such as insurance companies and health maintenance
organizations; government health programs such as Medicare and Medicaid; patients; and, in certain circumstances, hospitals or
referring laboratories (who then bill health third-party payors for testing).
Reimbursement of our
tests by third-party payors is essential to our commercial success. Where there is a payor coverage policy, contract, or agreement
in place, we bill the third party payor, the hospital, or referring laboratory as well as the patient (for deductibles and coinsurance
or copayments, where applicable) in accordance with established policy, contract, or agreement terms. Where there is no payor policy
in place, we pursue third party reimbursement on behalf of each patient on a case-by-case basis. Our efforts on behalf of these
patients take a substantial amount of time and expense, and bills may not be paid for many months, if at all. Furthermore, if a
third-party payor denies coverage after final appeal, it may take a substantial amount of time to collect from the patient, if
we are able to collect at all.
Code Assignment
.
In the United States, a third-party payor’s decisions regarding coverage and payment are driven, in large part, by the specific
Current Procedural Terminology, or CPT, code used to identify a test. The American Medical Association, or AMA, publishes the CPT,
which is a listing of descriptive terms and identifying codes for reporting medical services and procedures. The purpose of the
CPT is to provide a uniform language that accurately describes medical, surgical, and diagnostic services and therefore to ensure
reliable nationwide communication among healthcare providers, patients, and third-party payors.
A manufacturer of in
vitro diagnostic kits or a provider of laboratory services may request establishment of a Category I CPT code for a new product.
Assignment of a specific CPT code ensures routine processing and payment for a diagnostic test by both private and government third-party
payors.
The AMA has specific
procedures for establishing a new CPT code and, if appropriate, for modifying existing nomenclature to incorporate a new test into
an existing code. If the AMA concludes that a new code or modification of nomenclature is unnecessary, the AMA will inform the
requestor how to use one or more existing codes to report the test.
While the AMA’s
decision is pending, billing and collection may be sought under one or more existing, non-specific CPT codes. A clinical laboratory
may decide not to request assignment of a CPT code and instead use an existing, non-specific code for reimbursement purposes. However,
use of such codes may result in more frequent denials and/or requests for supporting clinical documentation from the third-party
payor and in lower reimbursement rates, which may vary based on geographical location.
Coverage Decisions
.
When deciding whether to cover a particular diagnostic test, private and government third-party payors generally consider whether
the test is a covered benefit and, if so, whether it is reasonable and necessary for the diagnosis or treatment of illness and
injury. Most third-party payors do not cover experimental services. Coverage determinations often are influenced by current standards
of practice and clinical data, particularly at the local level. The Centers for Medicare & Medicaid Services, or CMS, which
is the government agency responsible for overseeing the Medicare program, has the authority to make coverage determinations on
a national basis, but most Medicare coverage decisions are made at the local level by contractors that administer the Medicare
program in specified geographic areas. Private and government third-party payors have separate processes for making coverage determinations,
and private third-party payors may or may not follow Medicare’s coverage decisions. If a third-party payor has a coverage
determination in place for a particular diagnostic test, billing for that test must comply with the established policy. Otherwise,
the third-party payor makes reimbursement decisions on a case-by-case basis.
Payment.
Payment
for covered diagnostic tests is determined based on various methodologies, including prospective payment systems and fee schedules.
In addition, private third-party payors may negotiate contractual rates with participating providers or set rates as a percentage
of the billed charge. Payment for diagnostic tests furnished to Medicare Part B beneficiaries is made based on the Clinical Laboratory
Fee Schedule (“CLFS”), under which a payment amount is assigned to each covered CPT code. The law technically requires
fee schedule amounts to be adjusted annually by the percentage increase in the consumer price index, or CPI, for the prior year,
but Congress has frozen payment rates in certain years. For clinical laboratory services furnished through December 31, 2017, the
ceiling for established tests is set at 74% of the median of all contractor fee schedule amounts for a particular test for which
the national limitation amount (“NLA”) was established before January 1, 2001. The NLA is 100% of the median for diagnostic
tests for which no limitation amount was established prior to 2001. Medicaid programs generally pay for diagnostic tests based
on a fee schedule, but reimbursement varies by state.
On April 1, 2014, President
Obama signed into law the Protecting Access to Medicare Act (“PAMA”), which established a new method for setting rates
paid pursuant to the CLFS. PAMA requires laboratories that receive the majority of their Medicare revenues from payments made under
the CLFS or Medicare’s Physician Fee Schedule to report, beginning January 1, 2016, private payer payment rates and volumes
for their tests. Under a proposed rule ruled published by CMS on September 25, 2015, CMS proposed to limit reporting to laboratories
that receive at least $50,000 in Medicare revenues from laboratory services. CMS has yet to finalize the proposed rule. CMS will
use the rates and volumes reported by laboratories to develop Medicare payment rates for the tests equal to the volume-weighted
median of the private payer payment rates for the tests. Rates for “advanced diagnostic laboratory tests” will be reported
annually; rates for other diagnostic tests will be reported every three years. Laboratories that fail to report the required payment
information may be subject to substantial civil money penalties.
The final PAMA ruling
was issued June 17, 2016, indicating that data for reporting for the new PAMA process will begin in 2017 and the new market based
rates will take effect January 1, 2018. We believe that the final PAMA regulations are generally favorable for us. The private
payer rate will be calculated based on claims whose adjudication is final and will include patient deductible and co-insurance
amounts. Additionally, we believe our tests, once covered, would be considered ADLTs and that we can determine when to seek ADLT
status. We cannot assure you that reimbursement rates under the final regulations for tests like ours will not be adversely affected.
For the first three
years, payment rate reductions are limited to ten (10) percent per year, and to fifteen (15) percent the following three years.
The phased-in payment amount limit per year for existing tests paid under the CLFS prior to January 1, 2018 will be applied using
the 2017 NLA for the existing test as the baseline payment amount. To determine the application of the phased-in payment reduction
limit for a test, the weighted median private payor rate calculated for calendar year 2018 will be compared to the calendar year
2017 NLA.
Diagnostic tests furnished
to Medicare inpatients generally are included in the bundled payment made to the hospital under Medicare Part A’s Inpatient
Prospective Payment System. Further, in 2014, CMS began to bundle payment for clinical laboratory tests together with other services
performed during hospital outpatient visits under the Hospital Outpatient Prospective Payment System. While CMS exempted molecular
diagnostic tests from this packaging provision, it is possible that CMS could propose to bundle payment for such tests in the future.
Our tests are generally not paid in the hospital outpatient setting, and insofar as they are paid in that setting they likely would
be considered molecular tests if billed under specific procedure codes, but it is possible that payment for our tests could be
bundled if furnished in a hospital outpatient setting in the future.
Under current Medicare
billing rules, the bundled payment for inpatient services includes clinical laboratory testing performed for a Medicare beneficiary
who was a hospital inpatient at the time the tumor tissue sample was obtained and whose testing was ordered less than 14 days after
discharge. Medicare billing rules also require hospitals to bill for our testing if it is ordered for a hospital outpatient under
the same circumstances. Accordingly, we must bill hospitals for such testing.
On several occasions
Congress has considered various cost reduction alternatives, including imposing a 20% co-insurance amount on clinical laboratory
services (which would require beneficiaries to pay a portion of the cost of their clinical laboratory testing). Although these
changes have not been enacted at this time, Congress could decide to impose these or other fee reductions or taxes at some point
in the future. If so, these additional coinsurance payments for our tests could be difficult to collect and any new fee reductions
or taxes would impact our revenues.
Finally, state Medicaid
agencies may assign a reimbursement rate equal to or less than the prevailing Medicare rate, often times determined by state law
(e.g., a percentage of the Medicare reimbursement rate).
European Union
In the European Union
the reimbursement mechanisms used by third party payors vary by country. For the public systems reimbursement is determined by
guidelines established by the legislator or responsible national authority. As elsewhere, inclusion in reimbursement catalogues
focuses on the medical usefulness, need, quality and economic benefits to patients and the healthcare system. Acceptance for reimbursement
comes with cost, use and often volume restrictions, which again can vary by country.
Organizational Structure
Rosetta Genomics Ltd.
is organized under the laws of the State of Israel and has a direct wholly owned subsidiary, Rosetta Genomics Inc., which is a
Delaware corporation. Rosetta Genomics Ltd. also has two indirect wholly owned subsidiaries, Minuet Diagnostics, Inc., a Delaware
corporation (which is wholly owned by Rosetta Genomics Inc.), and CynoGen, Inc., a Delaware corporation (which is wholly owned
by Minuet Diagnostics, Inc.).
Property, Plants and Equipment
We currently rent approximately
6,437 square feet of office and laboratory space in Rehovot, Israel, under a lease that expires in October 2017. Our wholly-owned
subsidiary, Rosetta Genomics Inc., rents approximately 3,651 square feet of office space in Princeton, New Jersey under a lease
that expires in September 30, 2018. The Princeton, New Jersey premises have been sub-leased under an agreement that expires on
September 29, 2018. In addition, Rosetta Genomics, Inc., rents approximately 7,349 square feet of laboratory space in Philadelphia,
Pennsylvania under a lease that expires in December 2018. Rosetta Genomics, Inc.’s wholly-owned subsidiary, Cynogen, Inc.,
rents approximately 28,700 square feet of laboratory and office space in Lake Forest, California under a lease that expires in
November 2018. If our business grows we may need additional space, but expect that alternate facilities will be available on reasonable
terms as and when needed.
DIRECTORS AND SENIOR MANAGEMENT
The following table
sets forth information regarding our corporate and executive officers and directors as of May 8, 2017:
Name
|
|
Age
|
|
Position
|
Kenneth A. Berlin
|
|
52
|
|
Chief Executive Officer and President
|
Ron Kalfus
|
|
42
|
|
Chief Financial Officer
|
Eti Meiri, Ph.D.
|
|
48
|
|
Vice President, Research
|
Sigal Russo-Gueta
|
|
39
|
|
Senior Director Of Finance
|
Brian Markison(3)
|
|
57
|
|
Chairman of the Board of Directors
|
Roy N. Davis(4)
|
|
70
|
|
Director
|
Joshua Rosensweig, Ph.D.(2,3)
|
|
64
|
|
Director
|
Dr. David Sidransky, M.D.(1,4)
|
|
56
|
|
Director
|
Gerald Dogon (1,2)
|
|
77
|
|
Director
|
Tali Yaron-Eldar (1,2)
|
|
53
|
|
Director
|
|
(1)
|
Member of our Audit Committee
|
|
(2)
|
Member of our Compensation Committee
|
|
(3)
|
Member of our Nominating and Corporate Governance Committee
|
|
(4)
|
Member of our research and development Committee
|
Kenneth A. Berlin
joined us in November 2009 as our President and Chief Executive Officer. He was later appointed by our shareholders in December
2009 as a member of our board of directors, and resigned as a director in March 2011. Prior to joining us, Mr. Berlin, served as
Worldwide General Manager at cellular and molecular cancer diagnostics developer Veridex, LLC, a Johnson & Johnson company.
Under his leadership the organization grew to over 100 employees, and he spearheaded the launch of three cancer diagnostic products,
the acquisition of its cellular diagnostics partner, and delivered significant growth in sales as Veridex transitioned from a research
and development entity to a commercial provider of oncology diagnostic products and services. During Mr. Berlin’s tenure,
Veridex received numerous awards including recognition from the Cleveland Clinic and Prix Galien for the use of its innovative
CellSearch® technology in the fight against cancer. Mr. Berlin joined Johnson & Johnson in 1994 and served as corporate
counsel for six years. He then held positions of increasing responsibility within Johnson & Johnson and a number of its subsidiary
companies. From 2001 until 2004, he served as Vice President, licensing and new business development in the pharmaceuticals group,
and from 2004 until 2007 was Worldwide Vice President, franchise development, Ortho-Clinical Diagnostics. Mr. Berlin holds an A.B.
degree from Princeton University and a J.D. from the University of California, Los Angeles School of Law.
Ron Kalfus
joined
us in May 2012 as our Chief Financial Officer. Prior to joining Rosetta, Mr. Kalfus served as the Chief Financial Officer and Treasurer
of MabCure Inc., a publicly-traded biotechnology startup company in the field of early cancer detection using antibodies, from
2008 to 2012. From 2003 to 2007, Mr. Kalfus held various positions with Toys “R” Us, Inc., being responsible for the
company’s financial reporting to the Securities and Exchange Commission and being responsible for the Toys “R”
Us division’s annual budget. Prior to joining Toys “R” Us, Inc., Mr. Kalfus worked as an auditor for two large
public accounting firms, specializing in audits of medium-sized enterprises as well as public companies. Mr. Kalfus holds an M.Sc.
in Accounting from Fairleigh Dickinson University and a B.B.A. in Finance from the University of Georgia, and is a Certified Public
Accountant licensed in New Jersey.
Eti Meiri, Ph.D.
has served as our Vice President, Research since May 2012. She previously served as our Senior Scientist, Molecular Biology
since 2003. Her contributions included the development of our microRNA array platform as well as the development of RNA extraction
protocols suitable for microRNA extraction from clinical samples. Prior to joining us, from 2001 to 2002, Dr. Meiri served as Senior
Scientist in ViroGene Ltd. She is the author of 20 papers published in peer reviewed journals. Dr. Meiri earned her Ph.D. from
the Department of Plant Sciences in the Weizmann Institute of Science in Rehovot, her M.Sc. from The Hebrew University of Jerusalem,
and her B.Sc. from the faculty of life sciences, in Tel Aviv University.
Sigal Russo-Gueta
joined us in September 2008 as our controller. Prior to joining Rosetta, Ms. Russo worked as an audit manager at Ernst &
Young in Israel, specializing in audits of companies from various fields, both publicly traded and privately owned American and
Israeli entities, from 2004 to 2008. Ms. Russo holds a B.A. in economics and accounting, from the Ruppin Academic College, and is
a Certified Public Accountant licensed in Israel.
Brian Markison
has served as a member of our board of directors since March 2011. Mr. Markison was appointed by our board of directors to fill
the vacancy created by the resignation of Mr. Berlin. Mr. Markison’s appointment was approved by the general meeting dated
July 6, 2011. Mr. Markison was appointed as chairman of the board on April 12, 2011. Mr. Markison has been a healthcare industry
executive at Avista Capital Partners since September 2012, prior to which he served as President, Chief Executive Officer and a
member of the Board of Directors of Fougera Pharmaceuticals Inc., from July 2011, until it was sold to the generics division of
Novartis in July 2012. Previously, he had been with King Pharmaceuticals since 2004 and led the company through its acquisition
by Pfizer for $3.6 billion in 2010. Previously Mr. Markison was with Bristol-Myers Squibb from 1982 to 2004, where he served in
various commercial and executive positions rising from an oncology sales representative to become President, BMS Oncology/Virology
and Oncology Therapeutics Network. Mr. Markison serves on the board of directors of Immunomedics, Inc., Lantheus Medical Imaging
and Alere Inc, and is the Chairman and Chief Executive Officer of Osmotica Pharmaceuticals, Mr. Markison received a B.S. from Iona
College in New Rochelle, New York and serves as a Trustee for The College of New Jersey.
Roy N. Davis
has served as a member of our board of directors since June 2012. Mr. Davis joined Johnson & Johnson (J&J) in 1984, where
he moved through leadership positions of increasing responsibility in the organization in the U.S., Europe and Asia for 27 years
prior to his retirement in January 2012. Most recently, from January 2008 through January 2012 Mr. Davis was President, J&J
Development Corporation, J&J’s wholly owned venture group, and Vice President of Corporate Development for all of J&J.
In these roles Mr. Davis was responsible for acquisition and licensing in areas outside of current J&J business sectors, venture
capital investing on behalf of J&J and management of J&J’s wholly owned ventures. These efforts focused on developing
new companies for J&J that offer transformational health care solutions. From 2003 to 2007, Mr. Davis held the positions of
Company Group Chairman, J&J and Worldwide Franchise Chairman, Ortho Clinical Diagnostics with responsibilities for Ortho Clinical
Diagnostics, Inc., Veridex LLC and Therakos, Inc. Mr. Davis received a Bachelor of Science from the State University of New York
and a Master of Science from Rensselaer Polytechnic Institute. He served as a member of the Innovations Advisory Board for the
Cleveland Clinic during 2008-2014 and is currently a member of the Advisory Board for the Wake Forest Institute for Regenerative
Medicine and in March 2012 was named to the Board of Directors of Innosight, an innovation consulting firm.
Joshua Rosensweig
has served as a member of our board of directors since May 2004. Since November 2010, he has served as a member of the board of
directors of
Bezeq Israel Telecommunication Corp. Ltd.
(Israel’s leading communications group) and of Alrov Real Estate
and Hotels Ltd., a publicly-traded property development company. From September 2003 to September 2006, Dr. Rosensweig served as
the Chairman of the Board of Directors of the First International Bank of Israel. From 1998 to July 2005, Dr. Rosensweig was a
senior partner at Gornitzky and Co., a law firm where he specialized in international transactions and taxation. Dr. Rosensweig
lectured at Bar-Ilan University, Law School from 1980 to 1995 and at Tel Aviv University, School of Business from 1983 to 1995.
Dr. Rosensweig received his J.S.D. (International Taxation), and LL.M. (Taxation) from New York University Law School. Dr. Rosensweig
is currently a partner at the law firm of Rosensweig & Aviram, Attorneys.
David Sidransky,
M.D.
, has served as a member of our board of directors since December 22, 2009. Dr. Sidransky is a renowned oncologist and
research scientist named and profiled by TIME magazine in 2001 as one of the top physicians and scientists in America, recognized
for his work with early detection of cancer. He serves as the Director of the Head and Neck Cancer Research Program at the Sidney
Kimmel Comprehensive Cancer Center at Johns Hopkins University. He is a Professor of Oncology, Otolaryngology, Cellular & Molecular
Medicine, Urology, Genetics, and Pathology at John Hopkins University and Hospital. Dr. Sidransky has written over
500
peer-reviewed publications, and has contributed to more than 6
5
cancer reviews and chapters.
Dr. Sidransky is a founder of a number of biotechnology companies and holds numerous biotechnology patents. He has been the recipient
of many awards and honors, including the 1997 Sarstedt International prize from the German Society of Clinical Chemistry, 1998
Alton Ochsner Award Relating Smoking and Health by the American College of Chest Physicians and the 2004 Hinda Rosenthal Award
presented by the American Association of Cancer Research. Dr. Sidransky has served as Vice Chairman of the Board of Directors of
ImClone. He is Chairman of the Board of Champions Oncology, Advaxis, and Tamir Biotechnology and is on the Board of Directors of
Galmed, Celsus, and Orgenesis. He is serving and has served on scientific advisory boards of corporations and institutions, including
Amgen, MedImmune, Roche and Veridex, LLC (a Johnson & Johnson diagnostic company), among others. In Addition, Dr. Sidransky
served as Director of American Association for Cancer Research from 2005 to 2008. Dr. Sidransky received his B.A. from Brandeis
University and his M.D. from the Baylor College of Medicine.
Gerald Dogon
has served as a member of our board of directors since February 2007. From December 2004 to December 2006, Mr. Dogon served as
a director and a member of the audit, investment and nomination committees of Scailex Corporation (previously Scitex Corporation).
From October 2005 until it was acquired by PMC-Sierra, Inc. in May 2006, he served as a member of the board of directors of Passave,
Inc., a semiconductor company. From 1999 to 2000, he served as a director and as chairman of the audit committee of Nogatech, Inc.
Mr. Dogon has also served as a member of the board of directors of Fundtech Ltd. and was a member of its audit and nominating committees.
From 1994 to 1998, Mr. Dogon served as Executive Vice President and Chief Financial Officer of DSPC Inc., and in addition, from
November 1997 until December 1999, as a member of its board of directors. Mr. Dogon holds a B.Comm. in Economics from the University
of Cape Town.
Tali Yaron-Eldar
has served as a member of our board of directors since February 2007. From January 2013, Ms. Yaron-Eldar has served as a partner
and founder of Yetax law offices. Between March 2007 and December 2012, Ms. Yaron-Eldar had been a partner with the law firm of
Tadmor & Co. From January 2004 to March 2007, she was a partner at the law firm of Cohen, Yaron-Eldar & Co. From January
2004 to January 2008, Ms. Yaron-Eldar served as the Chief Executive Officer of Arazim Investment Company. She has also served in
a variety of public positions, including as the Chief Legal Advisor of the Customs and V.A.T department of the Finance Ministry
of the State of Israel from 1998 to 2001 and as the Commissioner of Income Tax and Real Property Tax Authority of the State of
Israel from 2002 to 2004. Ms. Yaron-Eldar holds an M.B.A. specializing in finance and an LL.M. from Tel Aviv University and is
a member of the Israeli Bar Association.
CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS
Major Shareholders
Based on
a review of required SEC filings, we are not aware of any person or entity that is the beneficial owner of more than 5% of
our outstanding Ordinary Shares.
Our Ordinary Shares
are traded on the NASDAQ Capital Market in the United States. A significant portion of our shares are held in street name, therefore
we generally have no way of determining who our shareholders are, their geographical location or how many shares a particular shareholder
owns.
Control of Registrant
To our knowledge, we
are not directly or indirectly owned or controlled by another corporation, by any foreign government, or by any other natural or
legal person. As of March 1, 2017, our officers and directors as a group beneficially owned 3.50% of our outstanding Ordinary Shares.
Related Party Transactions
Other than as disclosed
in this prospectus, since January 1, 2014, we have not entered into any related party transactions.
Exemption, Indemnification and Insurance
Our Articles permit
us to exempt from liability, indemnify and insure our directors and officers to the fullest extent permitted by the Companies Law.
An undertaking provided in advance by an Israeli company to indemnify an office holder with respect to a financial liability imposed
on or incurred by him or her in favor of another person pursuant to a judgment, settlement or arbitrator’s award approved
by a court 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 criteria determined by the board of directors as reasonable
under the circumstances, and such undertaking shall detail the abovementioned events and amount or criteria. In addition, a company
may indemnify an office holder against the following liabilities incurred for acts performed as an office holder:
|
·
|
reasonable litigation expenses, including attorneys’ fees, incurred by the office holder
as a result of an investigation or proceeding instituted against him or her by an authority authorized to conduct such investigation
or proceeding, provided that (i) no indictment was filed against such office holder as a result of such investigation or proceeding;
and (ii) either (A) no financial liability was imposed upon him or her as a substitute for the criminal proceeding as a result
of such investigation or proceeding or, (B) if such financial liability was imposed, it was imposed with respect to an offense
that does not require proof of criminal intent or with respect to monetary sanction; and
|
|
·
|
reasonable litigation expenses, including attorneys’ fees, incurred by the office holder
or imposed by a court in proceedings instituted against him or her by the company, on its behalf or by a third party or in connection
with criminal proceedings in which the office holder was acquitted or criminal proceedings in which the office holder was convicted
in an offense that does not require proof of criminal intent.
|
An Israeli company
may insure an office holder against the following liabilities incurred for acts performed as an office holder:
|
·
|
a breach of duty of loyalty 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 to the company or to a third party; and
|
|
·
|
a financial liability imposed on the office holder in favor of a third party.
|
An Israeli company
may not indemnify or insure an office holder against any of the following:
|
·
|
a breach of duty of loyalty, except 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;
|
|
·
|
an act or omission committed with intent to derive illegal personal benefit; or
|
|
·
|
a fine, monetary sanction, forfeit or penalty levied against the office holder.
|
As of the effective
date of Amendment no. 20 to the Companies Law, exemption of liability, indemnification and insurance of office holders are included
in the definition of “terms of office and of employment” and as such they should be in accordance with the compensation
policy and approved (subject to certain exceptions) by the compensation committee and the board of directors, and with respect
to the CEO, directors and controlling shareholders and their relatives, also by the general meeting of shareholders, with a special
majority in case of the CEO or controlling shareholders and their relatives.
Our directors and officers
are currently covered by a directors’ and officers’ liability policy and our legal department is currently covered
by a legal professional liability policy as well. We have also resolved to provide directors and certain other office holders with
indemnification from any liability for damages caused as a result of a breach of duty of care and to provide such directors and
other office holders with an exemption, to the fullest extent permitted by law, all in accordance with and pursuant to the terms
set forth in our standard indemnification undertaking.
PRINCIPAL SHAREHOLDERS
The following table
sets forth, as of May 5, 2017, the number of our Ordinary Shares beneficially owned by (i) each of our directors and corporate
and executive officers and (ii) our current directors and corporate and executive officers as a group. The information in this
table is based on 2,588,086 Ordinary Shares outstanding as of May 5, 2017. We do not believe there is any person or group of affiliated
persons that beneficially own more than 5% of our outstanding Ordinary Shares. Beneficial ownership of shares is determined in
accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or
investment power. Ordinary shares that are subject to convertible securities, warrants or options that are currently convertible
or exercisable or convertible or exercisable within 60 days of May 5, 2017 are deemed to be outstanding and beneficially owned
by the person holding the convertible securities, warrants or options for the purpose of computing the percentage ownership of
that person, but are not treated as outstanding for the purpose of computing the percentage of any other person. The percentage
of shares beneficially owned after the offering is based on the number of shares outstanding prior to the offering plus the Ordinary
Shares we are selling in this offering.
Name of Beneficial Owner
|
|
Number
of
Shares
Beneficially
Owned
|
|
|
Percentage
of
Shares
Beneficially
Owned Before
Offering
|
|
|
Percentage
of
Shares
Beneficially
Owned After
Offering
|
|
Kenneth A. Berlin(1)
|
|
|
37,315
|
|
|
|
1.44
|
%
|
|
|
*
|
|
Ron Kalfus(2)
|
|
|
2,207
|
|
|
|
*
|
|
|
|
*
|
|
Eti Meiri(3)
|
|
|
2,001
|
|
|
|
*
|
|
|
|
*
|
|
Sigal Russo-Gueta(4)
|
|
|
961
|
|
|
|
*
|
|
|
|
*
|
|
Brian Markison(5)
|
|
|
8,752
|
|
|
|
*
|
|
|
|
*
|
|
Roy N. Davis(6)
|
|
|
2,834
|
|
|
|
*
|
|
|
|
*
|
|
Joshua Rosensweig(7)
|
|
|
3,028
|
|
|
|
*
|
|
|
|
*
|
|
Dr. David Sidransky(8)
|
|
|
3,540
|
|
|
|
*
|
|
|
|
*
|
|
Gerald Dogon(9)
|
|
|
2,417
|
|
|
|
*
|
|
|
|
*
|
|
Tali Yaron-Eldar(10)
|
|
|
2,417
|
|
|
|
*
|
|
|
|
*
|
|
Total directors and
executive officers as a group (10 persons)
|
|
|
65,472
|
|
|
|
2.53
|
%
|
|
|
1.17
|
%
|
* Less
than 1%
|
(1)
|
Consists of (i) 91 Ordinary Shares, which were granted to Mr. Berlin upon the start of his employment
with us, 824 shares, which were granted as RSUs and converted to shares in 2013, and 506 shares which were granted as RSUs in 2014
and converted to shares in 2015 and 2016(ii) options currently exercisable or exercisable within 60 days of March 1, 2017 to purchase
695 Ordinary Shares (which have an exercise price of $1,476 per share and expire in November 2019), 696 Ordinary Shares (which
have an exercise price of $352.8 per share and expire in November 2019), 556 Ordinary Shares (which have an exercise price of $81
per share and expire in November 2021), 8,000 Ordinary Shares (which have an exercise price of $64.44 per share and expire in October
2022), 13,003 Ordinary Shares (which have an exercise price of $40.92 per share and expire in August 2023) , 4,688 Ordinary Shares
(which have an exercise price of $33.48 per share and expire in November 2024) and 6,303 Ordinary Shares (which have an exercise
price of $13.92 per share and expire in December 2022). Does not include the following options that become exercisable after April
30, 2017: (i) 1,858 Ordinary Shares (which have an exercise price of $40.92 per share and expire in August 2023) (ii) 3,646 Ordinary
Shares (which have an exercise price of $33.48 per share and expire in November 2024) (iii) 12,032 Ordinary Shares (which have
an exercise price of $13.92 per share and expire in December 2022), (iv) 834 RSUs (which will vest in equal instalments annually
over a period of four years and complete convert to shares in November 2018).
|
|
(2)
|
Consists of (i) 250 shares, which were granted as RSUs and converted to shares in 2013, and 250
shares, which were granted as RSUs and converted to shares in 2015 and (ii) options currently exercisable or exercisable within
60 days of March 1, 2017 to purchase 834 Ordinary Shares (which have an exercise price of $64.44 per share and expire in October
2022), and 352 Ordinary Shares (which have an exercise price of $30.84 per share and expire in December 2024), and 521 Ordinary
Shares (which have an exercise price of $10.08 and expire on February 2026). Does not include the following options that become
exercisable after April 30, 2017: (i) options to purchase 274 shares (which have an exercise price of $30.84 per share and expire
in December 2024), and options to purchase 1,563 shares (which have an exercise price of $10.08 per share and expire in February
2026), and options to purchase 13,125 shares (which have an exercise price of $6.72 per share and expire in December 2027).
|
|
(3)
|
Consists of (i) 282 shares which were granted as RSUs and converted to shares in the years 2014
and 2015 (ii) 2 shares, which were granted as options and converted to shares in 2014 and (iii) options currently exercisable or
exercisable within 60 days of March 1, 2017 to purchase 3 Ordinary Shares (which have an exercise price of $2,995.20 per share
and expire in June 2018), 7 Ordinary Shares (which have an exercise price of $1,008 per share and expire in October 2020), 834
shares (which have an exercise price of $64.44 per share and expire in October 2022), 352 Ordinary Shares (which have an exercise
price of $30.84 per share and expire in December 2024), and 521 Ordinary Shares (which have an exercise price of $10.08 per share
and expire in February 2026). Does not include the following options that become exercisable after April 30, 2017: (i) options
to purchase 274 shares (which have an exercise price of $30.84 per share and expire in December 2024) and (ii) 1,563 shares (which
have an exercise price of $10.08 per share and expire in October 2026), and (iii) 219 RSUs (which will vest in equal installment
quarterly over a period of 4 years and complete convert to shares in October 2018).
|
|
(4)
|
Consists of (i) 250 shares, which were granted as RSUs and converted to shares in 2015 and (ii)
options currently exercisable or exercisable within 60 days of March 1, 2017 to purchase 9 Ordinary Shares (which have an exercise
price of $1,605.60 per share and expire in March 2019), 417 Ordinary Shares (which have an exercise price of $51.24 per share and
expire in December 2022), and 118 Ordinary Shares (which have an exercise price of $30.84 per share and expire in December 2024),
and 167 Ordinary Shares (which have an exercise price of $10.08 per share and expire in February 2026). Does not include the following
options that become exercisable after April 30, 2017: (i) options to purchase 92 shares (which have an exercise price of $30.84
per share and expire in December 2024), and (ii) options to purchase 500 shares (which have an exercise price of $10.08 per share
and expire in February 2026).
|
|
(5)
|
Consists of (i) 1,668 shares, which were granted as RSUs and converted to shares in the years 2013
and 2014 and (ii) options currently exercisable or exercisable within 60 days of March 1, 2017 to purchase 417 Ordinary Shares
(which have an exercise price of $194.4 per share and expire in July 2021), 4,000 Ordinary Shares (which have an exercise price
of $64.44 per share and expire in October 2019), and 2,667 Ordinary Shares (which have an exercise price of $33.24 per share and
expire in November 2021). Does not include the following options that become exercisable after April 30, 2017: 1,334 Ordinary Shares
(which have an exercise price of $33.24 per share and expire in November 2021).
|
|
(6)
|
Consists of (i) 834 shares, which were granted as RSUs and converted to shares in the years 2013
and 2014 and (ii) options currently exercisable or exercisable within 60 days of March 1, 2017 to purchase 2,000 Ordinary Shares
(which have an exercise price of $64.44 per share and expire in October 2019). Does not include the following options that become
exercisable after April 30, 2017: 2,000 Ordinary Shares (which have an exercise price of $13.08 per share and expire in August
2023).
|
|
(7)
|
Consists of (i) 194 Ordinary Shares held by Dr. Rosensweig, (ii) 834 shares, which were granted
as RSUs and converted to shares in the years 2013 and 2015 and (iii) options currently exercisable or exercisable within 60 days
of March 1, 2017 to purchase 2,000 Ordinary Shares (which have an exercise price of $64.44 per share and expire in October 2019).
Does not include the following options that become exercisable after April 30, 2017: 2,000 Ordinary Shares (which have an exercise
price of $13.08 per share and expire in August 2023).
|
|
(8)
|
Consists of (i) 834 shares, which were granted as RSUs and converted to shares in the years 2013
and 2014 and (ii) options currently exercisable or exercisable within 60 days of March 1, 2017 to purchase 21 Ordinary Shares (which
have an exercise price of $4,104 per share and expire in January 2018), 18 Ordinary Shares (which have an exercise price of $1,188
per share and expire in December 2019), 2,000 shares (which have an exercise price of $64.44 per share and expire in October 2019),
and 667 shares (which have an exercise price of $13.92 per share and expire in December 2022). Does not include the following options
that become exercisable after April 30, 2017: 1,334 Ordinary Shares (which have an exercise price of $13.92 per share and expire
in December 2022).
|
|
(9)
|
Consists of (i) 417 shares, which were granted as RSUs and converted to shares in 2014 (ii) options
currently exercisable or exercisable within 60 days of March 1, 2017 to purchase 2,000 Ordinary Shares (which have an exercise
price of $40.92 per share and expire in August 2020). Does not include the following (i) options that become exercisable after
April 30, 2017: options to purchase 2,000 Ordinary Shares (which have an exercise price of $13.08 per share and expire in August
2023).
|
|
(10)
|
Consists of (i) 417 shares, which were granted as RSUs and converted to shares in 2014 (ii) options
currently exercisable or exercisable within 60 days of March 1, 2017 to purchase 2,000 Ordinary Shares (which have an exercise
price of $40.92 per share and expire in August 2020). Does not include the following (i) options that become exercisable after
April 30, 2017: options to purchase 2,000 Ordinary Shares (which have an exercise price of $13.08 per share and expire in August
2023).
|
PRICE RANGE OF OUR ORDINARY SHARES
Our Ordinary Shares
began trading on The NASDAQ Global Market on February 27, 2007 under the symbol “ROSG.” On June 30, 2010, we transferred
the listing of our Ordinary Shares from The NASDAQ Global Market to The NASDAQ Capital Market. Prior to February 27, 2007, there
was no established public trading market for our Ordinary Shares. The high and low sales prices per share of our Ordinary Shares
for the periods indicated are set forth below. This information reflects the 1-for-4 reverse stock split effected on July 6, 2011,
the 1-for 15 reverse stock split effected on May 14, 2012 and the 1-for-12 reverse stock split effected on March 16, 2017.
Year Ended
|
|
High
|
|
|
Low
|
|
December 31, 2012
|
|
$
|
281.16
|
|
|
$
|
16.80
|
|
December 31, 2013
|
|
$
|
71.76
|
|
|
$
|
28.20
|
|
December 31, 2014
|
|
$
|
80.28
|
|
|
$
|
24.84
|
|
December 31, 2015
|
|
$
|
53.76
|
|
|
$
|
12.60
|
|
December 31, 2016
|
|
$
|
18.00
|
|
|
$
|
5.04
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
|
|
|
March 31, 2015
|
|
$
|
66.60
|
|
|
$
|
27.48
|
|
June 30, 2015
|
|
$
|
53.76
|
|
|
$
|
34.80
|
|
September 30, 2015
|
|
$
|
41.28
|
|
|
$
|
26.40
|
|
December 31, 2015
|
|
$
|
32.16
|
|
|
$
|
12.60
|
|
March 31, 2016
|
|
$
|
18.00
|
|
|
$
|
9.24
|
|
June 30, 2016
|
|
$
|
16.20
|
|
|
$
|
12.60
|
|
September 30, 2016
|
|
$
|
13.68
|
|
|
$
|
9.84
|
|
December 31, 2016
|
|
$
|
9.84
|
|
|
$
|
5.04
|
|
March 31, 2017
|
|
$
|
6.84
|
|
|
$
|
2.79
|
|
|
|
|
|
|
|
|
|
|
Month Ended
|
|
|
|
|
|
|
|
|
November, 2016
|
|
$
|
9.36
|
|
|
$
|
7.20
|
|
December, 2016
|
|
$
|
7.44
|
|
|
$
|
5.04
|
|
January, 2017
|
|
$
|
6.84
|
|
|
$
|
5.40
|
|
February, 2017
|
|
$
|
6.00
|
|
|
$
|
5.40
|
|
March, 2017
|
|
$
|
5.52
|
|
|
$
|
2.79
|
|
April, 2017
|
|
$
|
3.29
|
|
|
$
|
2.27
|
|
May, 2017 (until May 12, 2017)
|
|
$
|
2.82
|
|
|
$
|
2.01
|
|
On May 12, 2017,
the closing price of our Ordinary Shares on The NASDAQ Capital Market was $2.22.
DESCRIPTION OF SHARE CAPITAL
Authorized Share Capital
As of the date of this
prospectus, our authorized share capital was NIS 54,000,000 divided into 7,500,000 Ordinary Shares, nominal (par) value NIS 7.2
per share.
Ordinary Shares
As of March 31, 2017,
2,377,722 Ordinary Shares were issued and outstanding. As of February 1, 2017, there were approximately 118 stockholders of record
of our Ordinary Shares. All our Ordinary Shares rank
pari passu
in all respects, and all our issued and outstanding Ordinary
Shares are fully paid and non-assessable.
Transfer Agent and Registrar
The transfer agent
and registrar for our Ordinary Shares is American Stock Transfer & Trust Company.
The NASDAQ Capital Market
Our Ordinary Shares
are listed on The NASDAQ Capital Market under the symbol “ROSG.”
On April 3, 2017, we
received confirmation from NASDAQ that we had regained compliance with the $1.00 minimum bid price requirement for continued listing
on The Nasdaq Capital Market, as required by Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). As previously announced,
on October 13, 2016, we received a staff deficiency letter from The Nasdaq Stock Market (“Nasdaq”) notifying us that
for the previous 30 consecutive business days, the closing bid price per share of our Ordinary Shares was below the $1.00 minimum
bid price requirement. Nasdaq provided us with 180 calendar days, or until April 11, 2017, to regain compliance with the Bid Price
Rule by demonstrating at least ten consecutive days of a closing bid price of at least $1.00 per share prior to the end of the
180-day period. On March 27, 2017, we achieved our tenth consecutive day with a closing bid price in excess of $1.00 per share.
Warrants
As of March 31, 2017,
we had the following warrants outstanding:
|
·
|
Warrants issued in the April 2012 Registered Offering.
In connection with a registered direct
offering in April 2012, we issued warrants to purchase up to 1,125 Ordinary Shares at an exercise price of $38.25 per share to
the placement agent and its affiliates for services as placement agent. These placement agent warrants expire on April 12, 2017.
As of the date of this prospectus, warrants have been exercised for 898 shares and warrants to purchase up to 228 Ordinary Shares
remain outstanding.
|
|
·
|
Warrants issued in the First May 2012 Registered Offering.
In connection with a registered
direct offering in May 2012, we issued warrants to purchase up to 1,316 Ordinary Shares at an exercise price of $52.50 per share
to the placement agent and its affiliates for services as placement agent. These placement agent warrants expire on May 16, 2017.
As of the date of this prospectus, warrants have been exercised for 1,083 shares and warrants to purchase up to 234 Ordinary Shares
remain outstanding.
|
|
·
|
Warrants issued in the Second May 2012 Registered Offering.
In connection with a registered
direct offering in May 2012, we issued warrants to purchase up to 1,190 Ordinary Shares at an exercise price of $172.50 per share
to the placement agent and its affiliates for services as placement agent. These placement agent warrants expire on May 24, 2017.
|
|
·
|
Warrants issued in the August 2012 Registered Offering.
In connection with an underwritten
offering in August 2012, we issued warrants to purchase up to 12,414 Ordinary Shares at an exercise price of $75 per share to the
underwriter and its affiliates for services as underwriter. These placement agent warrants expire on August 2, 2017.
|
|
·
|
Warrants issued to Consultants.
In October 2013, we issued warrants to purchase up to 1,250
Ordinary Shares at an exercise price of $38.16 per share a consultant for services. These warrants expire on October 16, 2023.
|
|
·
|
Warrants issued in the 2015 Private Placement.
In connection with the 2015 Private Placement
in October 2015, we issued the purchasers (i) Series A warrants to purchase up to an aggregate of 138,893 Ordinary Shares at an
exercise price of $33.00 per share (subject to adjustment as set forth below) and (ii) partially pre-funded Series B warrants to
purchase a maximum of up to an aggregate of 222,222 Ordinary Shares. The Series B warrants had an exercise price of NIS 7.2 (which
had been prepaid) plus $0.0012 per share. The Series B warrants were intended to reset the price of the units sold in the 2015
Private Placement, and were exercisable for an aggregate number of Ordinary Shares based on a reset price per unit equal to 85%
of the arithmetic average of the five lowest weighted average prices calculated during the ten trading days following the effective
date of a resale registration statement; provided that such average was less than $28.80 and; provided, further, however, that
the maximum aggregate number of Ordinary Shares issuable upon exercise of the Series B warrants would not exceed 222,222 shares.
All Series B warrants were exercised on a cashless basis for an aggregate of 222,207 shares. The Series A warrants expire on October
15, 2020, and the exercise price of the Series A warrants was adjusted downward upon the eleventh trading day after the effective
date of the resale registration statement to $19.76 per share. In addition, we issued warrants to purchase up to 8,334 Ordinary
Shares on the same terms as the Series A warrants, to the placement agent and its affiliates for services as placement agent. These
placement agent warrants expire on October 15, 2020.
|
|
·
|
Warrants issued in the 2016 Offerings.
In connection with the 2016 Offerings, we issued
the investors 2016 Warrants to purchase up to 833,334 Ordinary Shares with an initial exercise price of $10.20 per share. The 2016
Warrants were immediately exercisable upon issuance and have a term of five years. The exercise price of the 2016 Warrants is subject
to adjustment upon the occurrence of specific events, including stock dividends, stock splits, combinations and reclassifications
of the Company’s Ordinary Shares and rights offerings and pro rata distributions with respect to all holders of the Company’s
Ordinary Shares. Additionally, following completion of 10 trading days following the 1-for-12 reverse split of our Ordinary Shares
on March 16, 2017, the exercise price was reduced to $3.0544, representing the lesser of (x) the then-applicable exercise price,
as adjusted, and (y) the average of the two lowest volume weighted average prices of our Ordinary Shares during the 10 trading
days immediately following the reverse stock split. Additionally, subject to limited exceptions, for a period of 12 months following
the effective date of the Resale Registration Statement, if we issue Ordinary Shares or securities that are convertible or exercisable
into Ordinary Shares at a price that is less than the effective exercise price, the exercise price will be automatically reduced
to the price at which we issued the Ordinary Shares or the underlying exercise price or conversion price of the securities. Furthermore,
in the event we enter into a Fundamental Transaction (as defined in the 2016 Warrants) while any portions 2016 Warrants remain
unexercised, the investors shall have the right to receive an equivalent number of shares of the successor or acquiring corporation
or the Company, if it is the surviving corporation, and such additional consideration receivable as a result of the Fundamental
Transaction by a holder of our Ordinary Shares for which the 2016 Warrants are exercisable immediately prior to the Fundamental
Transaction. We may at any time concurrently with or within 30 days after the consummation of a Fundamental Transaction, at the
option of the investors holding any unexercised portions of the 2016 Warrants and subject to any applicable law, including the
limitations under the Israeli Companies Law, 1999, purchase the unexercised portion of the 2016 Warrants for an amount of cash
equal to the Black Scholes Value (as defined in the 2016 Warrants) of the unexercised portion of the 2016 Warrants. We undertook
not to cause or suffer to be completed any Fundamental Transaction if the Company or its successor entity cannot pay the Black
Scholes Value as a result of any restriction on such payment pursuant to the Israeli Companies Law, 1999 or otherwise, and there
is no other party under the terms of the Fundamental Transaction that is obligated to pay the Black Scholes Value. In addition,
we issued the to the placement agents in that transaction warrants to purchase up to 25,000 Ordinary Shares to the placement agents
and their affiliates for services as placement agents. The placement agent warrants will become exercisable on November 29, 2017
and will expire on November 29, 2021 and have an exercise price equal to $7.50.
|
Share History
The following is a
summary of the history of our share capital since February 1, 2014.
Ordinary Share Issuances
Stock Options/RSUs.
Since February
1, 2014, we have issued 3 Ordinary Shares upon the exercise of stock options and 13,237 shares pursuant to restricted stock units
(RSUs).
Exercise of Warrants.
Since February
1, 2014, we have issued 745 Ordinary Shares upon the exercise of warrants (not including the 222,207 Ordinary Shares issued upon
exercise of the Series B warrants as discussed under “- 2015 Private Placement” below).
CynoGen, Inc. Acquisition.
On April
14, 2015, we issued 41,666 Ordinary Shares in connection with our acquisition of CynoGen, Inc. (d/b/a PersonalizeDx). In addition,
on July 22, 2015, we issued an addition 10,000 Ordinary Shares in lieu of services that were to be provided to an affiliate of
CynoGen.
Sales under at-the-market issuance Sales
Agreements.
Since February 1, 2014, we have sold an aggregate of 283,080 Ordinary Shares under at-the market sales agreements
for aggregate gross proceeds of $14,736,842.
2015 Private
Placement
. On October 15, 2015, we closed the 2015 Private Placement, pursuant to which we sold an aggregate 27,777 units
at $28.80 per unit, with each unit consisting of (i) one Ordinary Share, (ii) a Series A warrant to purchase one-half of an
Ordinary Share at an exercise price of $33.00 per Ordinary Share (subject to adjustment), and (iii) a partially pre-funded
Series B warrant. In connection with the 2015 Private Placement, we also issued to the placement agent and its affiliates
warrants to purchase a total of 8,333 Ordinary Shares on the same terms as the Series A warrants. All of the Series B
warrants were exercised on a cashless basis for an aggregate of 222,207 shares.
2016 Offerings
.
On November 23, 2016, we entered into the Purchase Agreement with a prominent institutional healthcare investor to purchase (i)
an aggregate of 91,250 Shares at a purchase price of $6 per share and an aggregate principal amount of $3.2 million of Registered
Debentures in the Registered Direct Offering and (ii) warrants to purchase up to 833,334 Ordinary Shares with an initial exercise
price of $10.20 per share (and an aggregate principal amount of $1.3 million unsecured convertible debentures. At this initial
closing, we received gross proceeds of $3,707,500 for the Ordinary Shares, the Registered Debentures and 2016 Warrants. The closing
of the second tranche of the private placement of convertible debentures occurred on February 23, 2017. The closing of this second
tranche involved the sale of additional PIPE Debentures (convertible into a maximum of 430,834 Ordinary Shares) for gross proceeds
of $1.3 million. The placement agents also received warrants to purchase up to 25,000 Ordinary Shares at an exercise price equal
to $7.50. Under the terms of the Purchase Agreement, we are prohibited from issuing Ordinary Shares or warrants, debt, preferred
stock, rights, options or any other instrument that is convertible into or exercisable for our Ordinary Shares until May 24, 2017.
On May 8, 2017, we obtained a waiver from the counterparty to the Purchase Agreement allowing us to issue securities contemplated
by this offering. Under the terms of the waiver, in the event we effect a Subsequent Financing (as defined in the Purchase Agreement),
the counterparty would have the right to exchange some or all of its Debentures then held for any securities or units issued by
us in the Subsequent Financing, provided that this right will not apply to any Exempt Issuances (as defined in the Purchase Agreement).
Other Issuances
.
In September 2014, we issued 500 Ordinary Shares to a former employee in consideration for settlement of a dispute.
Authorized Share Capital
On March 16, 2017,
our stockholders approved the consolidation and the increase of our registered (authorized) share capital, such that following
such consolidation and increase, the registered (authorized) share capital was NIS 54,000,000 divided into 7,500,000, Ordinary
Shares nominal (par) value NIS 7.2 each.
DESCRIPTION OF SECURITIES WE ARE OFFERING
Units in this Offering
We are offering
up to 1,500,000 Class A Units. Each Class A Unit will consist of (i) one Ordinary Share and (ii) a Series A Warrant. We are
also offering to those purchasers, if any, whose purchase of Class A Units in this offering would result in the purchaser, together
with its affiliates and certain related parties, beneficially owning more than 4.99% (or at the election of the purchaser, 9.99%)
of our outstanding Ordinary Shares immediately following the consummation of this offering, the opportunity to purchase, if they
so choose, up to 1,500,000 Class B Units, in lieu of Class A Units that would otherwise result in beneficial ownership in excess
of 4.99% (or 9.99%, as applicable) of our outstanding Ordinary Shares.
Each Class B unit will
consist of (i) a pre-funded Series B Warrant and (ii) and a Series A Warrant to purchase 0.50 Ordinary Share.
Series A Warrants
The
following summary of certain terms and provisions of the Series A Warrants offered hereby is not complete and is subject to,
and qualified in its entirety by the provisions of the Series A Warrant which is filed as an exhibit to the
registration statement of which this prospectus is a part. Prospective investors should carefully review the terms and
provisions set forth in the form of Series A Warrant agreement.
We do not currently
have a sufficient number of authorized Ordinary Shares to cover the shares issuable upon exercise of the Series A
Warrants being offered by this prospectus. As a result, before any Series A Warrants can become exercisable, we will seek
shareholder approval of an amendment to our amended and restated articles of association to increase the number of authorized
Ordinary Shares to [ ] Ordinary Shares (the “Charter Amendment”) at a special meeting
of shareholders. While our board of directors will unanimously recommend that shareholders approve the Charter Amendment and
all current directors and executive officers are supportive of the Charter Amendment, we cannot assure you that we will be
able to obtain requisite shareholder approval of the Charter Amendment. In the event our shareholders do not approve the
Charter Amendment, the Series A Warrants will not be exercisable and may not have any value.
Exercisability
The Series A
Warrants will be exercisable on any day on or after the date that we publicly announce through the filing of a Current Report
on Form 6-K that the Charter Amendment has been approved by our shareholders and has become effective. The Series Warrants
will expire years from the date the Series A Warrants are first exercisable. The Series A Warrants will be exercisable,
at the option of each holder, in whole or in part by delivering to us a duly executed exercise notice accompanied by payment
in full for the number of Ordinary Shares purchased upon such exercise (except in the case of a cashless exercise as
discussed below), and other applicable charges and taxes. Unless otherwise specified in the Series A Warrant, the holder will
not have the right to exercise the Series A Warrants, in whole or in part, if the holder (together with its affiliates) would
beneficially own in excess of 4.99% of the number of our Ordinary Shares outstanding immediately after giving effect to the
exercise, as such percentage is determined in accordance with the terms of the Series A Warrants. However, any holder
may decrease or increase such percentage to any other percentage, not in excess of 9.99%, upon at least 61 days’ prior
notice from the holder to us.
Cashless Exercise
If the Charter
Amendment is approved, and in the event that no current prospectus is available for the issuance of the Ordinary Shares underlying
the Series A Warrants, the holder may, in its sole discretion, exercise the Series A Warrants and, in lieu of making the cash
payment otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price, elect instead to
receive upon such exercise the net number of Ordinary Shares determined according to the formula set forth in the Series A Warrant
agreement.
Exercise Price
The initial exercise
price per full Ordinary Share purchasable upon exercise of the Series A Warrants is equal to $ , and is subject to adjustments
for stock splits, reclassifications, subdivisions, and other similar transactions.
Fundamental Transaction
If, at any time while
a Series A Warrant is outstanding, we consummate any fundamental transaction, as described in the form of warrant and generally
including any consolidation or merger with or into another corporation, the consummation of a transaction whereby another entity
acquires more than 50% of our outstanding Ordinary Shares, or the sale or other disposition of all or substantially all of our
assets, or other transaction in which our Ordinary Shares are converted into or exchanged for other securities or other consideration,
the holder of any Series A Warrants will thereafter receive upon exercise of the Series A Warrants, the securities or other consideration
to which a holder of the number of Ordinary Shares then deliverable upon the exercise or conversion of such warrants would have
been entitled upon such consolidation or merger or other transaction.
Transferability
Subject to applicable
laws, the Series A Warrants may be transferred at the option of the holders upon surrender of the Series A Warrants to us, together
with the appropriate instruments of transfer.
Listing
The Series A Warrants
will be issued in physical form. We do not plan on applying to list the Series A Warrants on the NASDAQ Capital Market, any other
national securities exchange or any other nationally recognized trading system.
Rights as a Shareholder
Except as otherwise
provided in the Series A Warrant or by virtue of such holder’s ownership of Ordinary Shares, the holder of Series A Warrants
does not have rights or privileges of a holder of Ordinary Shares, including any voting rights, until the holder exercises the
warrants.
Pre-Funded Series B Warrants
The following summary
of certain terms and provisions of the Series B Warrants offered hereby is not complete and is subject to, and qualified in its
entirety by the provisions of the form of pre-funded Series B Warrant, which is filed as an exhibit to the registration statement
of which this prospectus is a part. Prospective investors should carefully review the terms and provisions set forth in the Series
B Warrant agreement.
The purpose of the
pre-funded Series B Warrants is to enable investors that may have restrictions on their ability to beneficially own more than 4.99%
(or at the election of the investor, 9.99%) of our outstanding Ordinary Shares following the consummation of this offering the
opportunity to invest capital into the Company without triggering such ownership restrictions. By receiving pre-funded Series B
Warrants in lieu of the Ordinary Shares contained in the Class A Units which would result in such holders’ ownership exceeding
4.99% (or at the election of the investor, 9.99%), such holders will have the ability to exercise their options to purchase the
Ordinary Shares underlying the pre-funded Series B warrants for additional nominal consideration of $0.01 per Ordinary Share at
a later date.
Exercisability
The Series B Warrants
are exercisable until fully exercised. The Series B Warrants will be exercisable, at the option of each holder, in whole or in
part by delivering to us a duly executed exercise notice accompanied by payment in full for the number of Ordinary Shares purchased
upon such exercise (except in the case of a cashless exercise as discussed below). Unless otherwise specified in the Series B Warrant,
a holder will not have the right to exercise the Series B Warrants, in whole or in part, if the holder (together with its affiliates)
would beneficially own in excess of 4.99% of the number of our Ordinary Shares outstanding immediately after giving effect to the
exercise, as such percentage is determined in accordance with the terms of the Series B Warrants. However, any holder may
decrease or increase such percentage to any other percentage, not in excess of 9.99%, upon at least 61 days’ prior notice
from the holder to us.
Cashless Exercise
In the event that a
registration statement covering the Ordinary Shares underlying the Series B Warrants is not effective, or no current prospectus
is available for the issuance of the Ordinary Shares underlying the Series B Warrants, the holder may, in its sole discretion,
exercise Series B Warrants and, in lieu of making the cash payment otherwise contemplated to be made to us upon such exercise in
payment of the aggregate exercise price, elect instead to receive upon such exercise the net number of Ordinary Shares determined
according to the formula set forth in the Series B Warrant.
Exercise Price
The initial exercise price per Ordinary
Share purchasable upon exercise of the Series B Warrants is equal to $0.01 (in addition to the pre-funded consideration).
Listing
The Series B Warrants
will be issued in physical form. We do not plan on applying to list the pre-funded Series B Warrants on The NASDAQ Capital Market,
any other national securities exchange or any other nationally recognized trading system.
TAXATION
CERTAIN MATERIAL ISRAELI TAX CONSIDERATIONS
The following contains
a description of material relevant provisions of the current Israeli income tax regime applicable to companies in Israel, with
special reference to its effect on us. To the extent that the discussion is based on new tax legislation which has not been subject
to judicial or administrative interpretation, we cannot assure you that the views expressed in the discussion will be accepted
by the appropriate tax authorities or the courts.
This discussion does
not address all of the tax consequences that may be relevant to purchasers of our Ordinary Shares in light of their particular
circumstances or certain types of purchasers of our Ordinary Shares subject to special tax treatment. Examples of this kind of
investor include residents of Israel and traders in securities who are subject to special tax regimes not covered in this discussion.
Because individual circumstances may differ, you should consult your tax advisor to determine the applicability of the rules discussed
below to you and the particular tax effects of the offer, including the application of Israeli or other tax laws. The discussion
below is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax
considerations.
Taxation of Companies
General Corporate Tax Structure
Israeli companies are
generally subject to corporate tax. In 2016 and 2015, the corporate tax rate was 25.0% and 26.5%, respectively. The corporate tax
rate for 2017 is scheduled to be 24% and the corporate tax rate for 2018 and thereafter is scheduled to be 23%. However, the effective
tax rate payable by a company that derives income from an Approved Enterprise, a Benefited Enterprise or a Preferred Enterprise
(as discussed below) may be considerably less. Capital gains derived by an Israeli company are generally subject to the prevailing
corporate tax rate.
In December 2010, the
“Knesset” (Israeli Parliament) passed the Law for Economic Policy for 2011 and 2012 (Amended Legislation), 2011, which
prescribes, among others, amendments to the Law. The amendment became effective as of January 6, 2011. According to the amendment,
the benefit tracks in the Law were modified and a flat tax rate applies to the Company’s entire preferred income. The Company
will be able to opt to apply (the waiver is non-recourse) the amendment and from then on it will be subject to the amended tax
rates that are: 2011, 2012, and 2013 - 15% (in development area A - 10%), 2014 and 2015 - 16% (in development area A - 9%).
In December 2016, the
Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which
includes Amendment 73 to the Law for the Encouragement of Capital Investments (“the Amendment”) was published. According
to the Amendment, a preferred enterprise located in Development Zone A will be subject to a tax rate of 7.5% instead of 9% effective
from January 1, 2017 and thereafter (the tax rate applicable to preferred enterprises located in other areas remains at 16%).
The new tax tracks
under the Amendment are as follows:
Technological preferred
enterprise - an enterprise for which total consolidated revenues of its parent company and all subsidiaries are less than NIS 10
billion. A technological preferred enterprise, as defined in the Law, which is located in the center of Israel will be subject
to tax at a rate of 12% on profits deriving from intellectual property (in development area A - a tax rate of 7.5%).
Any dividends distributed
to “foreign companies,” as defined in the Law, deriving from income from the technological enterprises will be subject
to tax at a rate of 4%.
We examined the possible
effect of the amendment on the financial statements, if at all, and at this time do not believe it will opt to apply the amendment.
Tax Benefits for Research and Development
Israeli tax law allows,
under specified conditions, a tax deduction for R&D expenditures, including capital expenditures, for the year in which they
are incurred. These expenses must relate to scientific research and development projects and must be approved by the relevant Israeli
government ministry, determined by the field of research. Furthermore, the research and development must be for the promotion of
the company and carried out by or on behalf of the company seeking such tax deduction. However, the amount of such deductible expenses
is reduced by the sum of any funds received through government grants for the finance of such scientific research and development
projects. Expenditures not so approved are deductible over a three-year period.
Tax Benefits Under the Law for the
Encouragement of Industry (Taxes), 1969
The Law for the Encouragement
of Industry (Taxes), 1969, industrial companies, as defined under the law, are entitled to the following tax benefits, among others:
|
1.
|
Deduction of purchases of know-how and patents over an eight-year period for tax purposes;
|
|
2.
|
Right to elect, under specified conditions, to file a consolidated tax return with additional related
Israeli Industrial Companies;
|
|
3.
|
Deductions over a three-year period of expenses involved with the issuance and listing of shares
on a stock market.
|
Under certain tax laws
and regulations, an “Industrial Enterprise” may be eligible for special depreciation rates for machinery, equipment
and buildings. These rates differ based on various factors, including the date the operations begin and the number of work shifts.
An “Industrial Company” owning an approved enterprise may choose between these special depreciation rates and the depreciation
rates available to the approved enterprise.
Eligibility for benefits
under the Law for the Encouragement of Industry is not subject to receipt of prior approval from any governmental authority. Under
the law, an “industrial company” is defined as a company resident in Israel, at least 90.0% of the income of which,
in any tax year, determined in Israeli currency, exclusive of income from government loans, capital gains, interest and dividends,
is derived from an “industrial enterprise” owned by it and located in Israel. An “industrial enterprise”
is defined as an enterprise whose major activity in a given tax year is industrial production activity.
We believe that we
currently qualify as an industrial company within the definition under the Law for the Encouragement of Industry. No assurance
can be given that we will continue to qualify as an industrial company or that the benefits described above will be available in
the future.
Special Provisions Relating to Taxation
under Inflationary Conditions
According to the Income
Tax law (Inflationary Adjustments), 1985, until 2007 (inclusive), the results for tax purposes were measured based on the changes
in the Israeli CPI.
Starting 2008, the
results for tax purposes are measured in nominal values, excluding certain adjustments for changes in the Israeli CPI carried out
in the period up to December 31, 2007. The amendment to the law includes, inter alia, the elimination of the inflationary additions
and deductions and the additional deduction for depreciation starting 2008.
Tax Benefits for Income from Approved
Enterprises Approved Before April 1, 2005
Before April 1, 2005
an Approved Enterprise was entitled to either receive investment grants and certain tax benefits from the Government of Israel
or an alternative package of tax benefits (“Alternative Benefits”). We have elected to forego the entitlement to grants
and have applied for the Alternative Benefits, under which undistributed income that we generate from our Approved Enterprises
will be completely tax exempt (a “tax exemption”) for two years commencing from the year that we first produce taxable
income and will be subject to a reduced tax rate of 10%-25% for an additional five to eight years, depending on the extent of foreign
investment in the company.
Alternative Benefits
are available until the earlier of (i) seven consecutive years, commencing in the year in which the specific Approved Enterprise
first generates taxable income, (ii) 12 years from commencement of production and (iii) 14 years from the date of approval of the
Approved Enterprise status.
Dividends paid out
of income generated by an Approved Enterprise (or out of dividends received from a company whose income is generated by an Approved
Enterprise) are generally subject to withholding tax at the rate of 15%. This tax is withheld at source by the Approved Enterprise.
The 15% tax rate is limited to dividends and distributions out of income derived during the benefits period and actually paid at
any time up to 12 years thereafter. Since we elected the Alternative Benefits track, we will be subject to pay corporate tax at
the rate of 10% - 25% (as mentioned below) in respect of the gross amount of the dividend that we may distribute out of profits
which were exempt from corporate tax in accordance with the provisions of the Alternative Benefits track. However, we are not obliged
to attribute any part of dividends that we may distribute to exempt profits, and we may decide from which year’s profits
to declare dividends. We currently intend to reinvest any income that we may in the future derive from our Approved Enterprise
programs and not to distribute the income as a dividend.
If we qualify as a
“Foreign Investors’ Company” or “FIC”, our Approved Enterprises will be entitled to additional tax
benefits. Subject to certain conditions, a FIC is a company with a level of foreign investment 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. Such a company will be eligible for an extension of the period during which it is entitled to tax benefits under its
Approved Enterprise status (so that the benefit periods may be up to ten years) and for further tax benefits if the level of foreign
investment exceeds 49%. The tax rate for the remainder of the benefits period will be 25%, unless the level of foreign investment
exceeds 49%, in which case the tax rate will be 20% if the foreign investment is more than 49% and less than 74%; 15% if more than
74% and less than 90%; and 10% if 90% or more. The benefits available to an Approved Enterprise are subject to the fulfillment
of conditions stipulated in the Investment Law and its regulations and the criteria in the specific certificate of approval, as
described above. If a company does not meet these conditions, it would be required to refund the amount of tax benefits, together
with consumer price index linkage adjustment and interest.
Tax Benefits under an Amendment that
became effective on April 1, 2005
On April 1, 2005, a
significant amendment to the Investment Law became effective (the “2005 Amendment”). The Investment Law provides that
terms and benefits included in any certificate of approval that was granted before the 2005 Amendment came into effect will remain
subject to the provisions of the Investment Law as they were on the date of such approval.
The 2005 Amendment
changed certain provisions of the Law. As a result of the 2005 Amendment, a company is no longer obliged to acquire Approved Enterprise
status in order to receive the tax benefits previously available under the Alternative Benefits provisions, and therefore generally
there is no need to apply to the Investment Center for this purpose (Approved Enterprise status remained mandatory for companies
seeking grants). Rather, the company may claim the tax benefits offered by the Investments Law directly in its tax returns, provided
that its facilities meet the criteria for tax benefits set out by the 2005 Amendment. A company is also granted a right to approach
the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the 2005 Amendment.
Tax benefits are available
under the Amendment to production facilities (or other eligible facilities), which are generally required to derive more than 25%
of their business income from export (referred to as a “Benefited Enterprise”). In order to receive the tax benefits,
the 2005 Amendment states that the company must make an investment which meets all the conditions set out in the 2005 Amendment
for tax benefits and exceeds a minimum amount specified in the Investment Law. Such investment allows the company to receive a
“Benefiting Enterprise” status, and may be made over a period of no more than three years ending at the end of the
year in which the company requested to have the tax benefits apply to the Benefiting Enterprise (the “Year of Election”).
Where the company requests to have the tax benefits apply to an expansion of existing facilities, only the expansion will be considered
to be a Benefiting 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 Benefiting Enterprise is required to exceed a certain amount
or certain percentage of the value of the company’s production assets before the expansion.
The duration of tax
benefits is subject to a limitation of the earliest of 7 (or 10 years) from the commencement year, or 12 years from the first day
of the Year of Election. The tax benefits granted to a Benefiting Enterprise are determined, as applicable to its geographic location
within Israel, according to one of the following new tax routes, which may be applicable to us:
|
·
|
Similar to the previous Alternative Benefits package, exemption from corporate tax on undistributed
income for a period of two to ten years, depending on the geographic location of the Benefiting Enterprise within Israel, and a
reduced corporate tax rate of 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment
in each year. Benefits may be granted for a term of seven or ten years, depending on the level of foreign investment in the company.
If the company pays a dividend out of income derived from the Benefiting Enterprise during the tax exemption period, such income
will be subject to corporate tax at the applicable rate (10%-25%). The company is required to withhold tax at the source at a rate
of 15% from any dividends distributed from income derived from the Benefiting Enterprise; and
|
|
·
|
A special tax route, which enables companies owning facilities in certain geographical locations
in Israel to pay corporate tax at the rate of 11.5% on income of the Benefiting Enterprise. The benefits period is ten years. Upon
payment of dividends, the company is required to withhold tax at source at a rate of 15% for Israeli residents and at a rate of
4% for foreign residents.
|
Generally, a company
which has a sufficiently high level of foreign investment (as defined in the Investments Law) is entitled to an extension of the
benefits period by an additional five years, depending on the extent of its income that is derived from exports.
Dividends paid out
of income derived by a Benefiting Enterprise will be treated similarly to payment of dividends by an Approved Enterprise under
the Alternative Benefits track. Therefore, dividends paid out of income derived by a Benefiting Enterprise (or out of dividends
received from a company whose income is derived from a Benefiting Enterprise) are generally subject to withholding tax at the reduced
rate of 15% (deductible at source). The reduced rate of 15% is limited to dividends and distributions out of income derived from
a Benefiting Enterprise during the benefits period. A company qualifying for tax benefits under the 2005 Amendment which pays a
dividend out of income derived by its Benefiting Enterprise during the tax exemption period will be subject to tax in respect of
the gross amount of the dividend at the otherwise applicable rate of 10%-25%.
The 2005 Amendment
changed the definition of “foreign investment” in the Investment Law so that the definition now requires a minimal
investment of NIS 5 million by foreign investors. Furthermore, such definition now also includes the purchase of shares of a company
from another shareholder, provided that the company’s outstanding and paid-up share capital exceeds NIS 5 million. Such changes
to the aforementioned definition are retroactive from 2003.
As a result of the
2005 Amendment, tax-exempt income generated under the new provisions will subject us to taxes upon distribution of the tax-exempt
income to shareholders or upon liquidation of the company, and we may be required to record a deferred tax liability with respect
to such tax-exempt income.
Under the transitional
provisions of the 2011 Tax Amendment, the Company may elect whether to irrevocably implement the 2011 Tax Amendment with respect
to its existing Approved and Benefiting Enterprises while waiving benefits provided under the legislation prior to the 2011 Tax
Amendment or keep implementing the legislation prior to the 2011 Tax Amendment during the next years.
We do not expect the
2011 Tax Amendment to have a material effect on the tax payable in respect of our Israeli operations.
As of December 31,
2016, we did not generate income under any of the above mentioned laws.
Israeli Transfer Pricing Regulations
On November 29, 2006,
Income Tax Regulations (Determination of Market Terms), 2006, promulgated under Section 85A of the Tax Ordinance, came into effect
(the “TP Regs”). Section 85A of the Tax Ordinance and the TP Regs generally require that all cross-border transactions
carried out between related parties be conducted on an arm’s length basis and be taxed accordingly. The TP Regs are not expected
to have a material effect on us.
Taxation of our Shareholders
To the extent that
the following discussion is based on new or existing tax or other legislation that has not been subject to judicial or administrative
interpretation, there can be no assurance that the views expressed herein will be accepted by the tax or other authorities in question.
The summary below does not address all of the tax consequences that may be relevant to all purchasers of Ordinary Shares in light
of each purchaser’s particular circumstances and specific tax treatment. For example, the summary below does not address
the tax treatment of residents of Israel and traders in securities who are subject to specific tax regimes. As individual circumstances
may differ, holders of Ordinary Shares should consult their own tax advisors as to United States, Israeli or other tax consequences
of the purchase, ownership and disposition of Ordinary Shares. This discussion is not intended, nor should it be construed, as
legal or professional tax advice and it is not exhaustive of all possible tax considerations. Each individual should consult his
or her own tax or legal advisor.
|
(i)
|
Taxation of Capital Gains Applicable to Non-Israeli Shareholders
|
Israeli law generally
imposes a capital gains tax on the sale of securities and any other capital assets located in Israel. Pursuant to an amendment
of the Tax Ordinance in 2005, effective as of January 1, 2006, the capital gains tax rate applicable to individuals upon the sale
of securities acquired after that date is 20%. A 25% tax rate will apply to an individual who meets the definition of a ‘Substantial
Shareholder’ on the date of the sale of the securities or at any time during the 12 months preceding such date. A ‘Substantial
Shareholder’ is defined as a person who, either alone or together with any other person, holds, directly or indirectly, at
least 10% of any of the means of control of a company (including, among other things, the right to receive profits of the company,
voting rights, the right to receive the company’s liquidation proceeds and the right to appoint a director). Pursuant to
an amendment of the Tax Ordinance in 2011, effective as of January 1, 2012, the capital gains tax rate applicable to individuals
upon the sale of securities acquired after that date is 25% (instead of 20%), and a 30% tax rate will apply to an individual who
meets the definition of a ‘Substantial Shareholder’ on the date of the sale of the securities or at any time during
the 12 months preceding such date (instead of 25%). For sake of good order, securities acquired before January 1, 2012 and sold
after that date, the profit received from such sale will be taxed as follows: from the purchase date until January 1, 2012 –
20% (or 25% - for Substantial Shareholder), and from January 1, 2012 until sales date – 25% (or 30% for Substantial Shareholder).
In addition, shareholders
who bought their securities before January 1, 2003, will be taxed for the profit made from the purchase date until January 1, 2003
in accordance with their marginal rate of income.
In addition, as of
January 1, 2013, shareholders that are individuals who have taxable income that exceeds ILS 800,000 in a tax year (linked to the
CPI each year - ILS 803,520 in 2016), will be subject to an additional tax, referred to as High Income Tax, at the rate of 2% on
their taxable income for such tax year which is in excess of such amount. Starting from January 1, 2017, the High Income tax rate
has increased to 3% and its threshold has been lowered to 640,000 ILS. For this purpose taxable income will include taxable capital
gains from the sale of our shares and taxable income from dividend distributions.
With respect to corporate
investors capital gain tax of 25% will be imposed on the sale of traded shares. This rate is subject to the provisions of any applicable
bilateral double taxation treaty. The treaty concerning double taxation between the United States and Israel (the Convention between
the Government of the State of Israel and the Government of the United States of America With Respect to Taxes on Income (the “Treaty”)
is discussed below.
In addition, if the
shares are traded on the Tel Aviv Stock Exchange, on an authorized stock exchange outside Israel or on a regulated market (which
includes a system through which securities are traded pursuant to rules prescribed by the competent authority in the relevant jurisdiction)
in or outside Israel, gains on the sale of shares held by non-Israeli tax resident investors will generally be exempt from Israeli
capital gains tax. However, non-Israeli corporations will not be entitled to such exemption if Israeli residents (i) have controlling
interest of 25% or more in such non-Israeli corporation, or (ii) are the beneficiaries of or are entitled to 25% or more of the
revenues or profits of such non-Israeli corporation, whether directly or indirectly. Notwithstanding the foregoing, dealers in
securities in Israel are taxed at regular tax rates applicable to business income. In addition, persons paying consideration for
shares, including purchasers of shares, Israeli securities dealers effecting a transaction, or a financial institution through
which securities being sold are held, are required, subject to any applicable exemptions and the demonstration of the selling shareholder
of its non-Israeli residency, to withhold tax upon the sale of publicly traded securities at the applicable corporate tax rate
(25% in 2013) for a corporation and 25% for an individual, subject to further conditions under the Israeli law.
Israeli law generally
exempts non-resident individuals and entities from capital gains tax on the sale of securities of Israeli companies, provided that
the securities were acquired on or after January 1, 2009.
|
(ii)
|
Income Taxes on Dividend Distribution to Non-Israeli Shareholders
|
Non-Israeli residents
(whether individuals or corporations) are generally subject to Israeli income tax on the receipt of dividends paid on the shares
of companies that are not publicly traded at the rate of 25% (30% if the dividend recipient is a Substantial Shareholder, at the
time of distribution or at any time during the preceding 12-month period), which tax is to be withheld at source, unless a different
rate is provided under an applicable tax treaty. Dividends paid on the shares of companies that are publicly traded, like our Ordinary
Shares, to non-Israeli residents, although generally subject to the same tax rates applicable to dividends paid on the shares of
companies that are not publicly traded, are generally subject to Israeli withholding tax at a rate of 25% (whether or not the recipient
is a Substantial Shareholder), unless a different rate is provided under an applicable tax treaty. The distribution of dividends
to non-Israeli residents (either individuals or corporations) from income derived from an Approved Enterprise or a Benefiting Enterprise
during the applicable benefits period or from Preferred Income is subject to withholding tax at a rate of 20% (as of January 1,
2014), unless a different tax rate is provided under an applicable tax treaty. In addition, non-Israeli residents who receive dividends
may be entitled to tax refund from the Israeli Tax Authority, under certain conditions.
A non-resident of Israel
who has dividend income derived from or accrued in Israel, from which the full amount of tax was withheld at source, is generally
exempt from the duty to file tax returns in Israel in respect of such income, provided that: (i) such income was not derived 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.
Residents of the United
States generally will have withholding tax in Israel deducted at source. Such residents may be entitled to a credit or deduction
for U.S. federal income tax purposes in the amount of the taxes withheld, subject to detailed rules contained in U.S. tax legislation.
|
(iii)
|
U.S. - Israel Tax Treaty
|
The Treaty is generally
effective as of January 1, 1995. Under the Treaty, the maximum Israeli withholding tax on dividends paid to a holder of shares
who is a Treaty U.S. Resident (as defined below) is generally 25%. However, pursuant to the Investment Law, dividends distributed
by an Israeli company and derived from income eligible for benefits under the Investment Law will generally be subject to a reduced
15% dividend withholding tax rate, subject to the conditions specified in the Treaty. The Treaty further provides that a 12.5%
Israeli dividend withholding tax will apply to dividends paid to a U.S. corporation owning 10% or more of an Israeli company’s
voting shares during, in general, the current and preceding tax year of the Israeli company. The lower 12.5% rate applies only
on dividends distributed from income not derived from an Approved Enterprise or a Benefiting Enterprise in the applicable period
or, presumably, from a Preferred Enterprise, and does not apply if the company has certain amounts of passive income.
Pursuant to the Treaty,
the sale, exchange or disposition of shares in an Israeli company by a person who qualifies as a resident of the United States
within the meaning of the Treaty and who is entitled to claim the benefits afforded to such residents under the Treaty (a “Treaty
U.S. Resident”) generally will not be subject to the Israeli capital gains tax unless such Treaty U.S. Resident holds, directly
or indirectly, shares representing 10% or more of the voting power of the company during any part of the 12-month period preceding
such sale, exchange or disposition subject to certain conditions. A sale, exchange or disposition of shares in an Israeli Company
by a Treaty U.S. Resident who holds, directly or indirectly, shares representing 10% or more of the voting power of the company
at any time during such preceding 12-month period would not be exempt under the Treaty from such Israeli tax; however, under the
Treaty, such Treaty U.S. Resident would be permitted to claim a credit for such taxes against U.S. federal income tax imposed on
any gain from such sale, exchange or disposition, under the circumstances and subject to the limitations specified in the Treaty.
In addition, in the event that (1) the capital gains arising from the sale of shares of an Israeli company will be attributable
to a permanent establishment of the shareholder located in Israel, or (2) the shareholder, being an individual, is present in Israel
for a period or periods aggregating 183 days or more during a taxable year, the aforesaid exemption shall not apply.
CERTAIN MATERIAL U.S. FEDERAL INCOME
TAX CONSIDERATIONS
General
The following is a
summary of certain material U.S. federal income tax consequences to U.S. holders (as defined below) of purchasing, owning, and
disposing of our Ordinary Shares. For this purpose, a U.S. holder is, in each case as defined for U.S. federal income tax purposes:
(a) an individual who is a citizen or resident of the United States; (b) a corporation (or other entity taxable as a corporation
for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the
District of Columbia; (c) an estate the income of which is subject to U.S. federal income tax regardless of its source; or (d)
a trust that is subject to the primary supervision of a court over its administration and one or more U.S. persons control all
substantial decisions, or a trust that has validly elected to be treated as a domestic trust under applicable Treasury Regulations.
This summary does not address any tax consequences to persons other than U.S. holders.
This discussion is
a general summary and does not address all aspects of U.S. federal income taxation that may be relevant to particular U.S. holders
based on their particular investment or tax circumstances. Except where noted, this summary deals only with Ordinary Shares held
as capital assets (generally, property held for investment). It does not address any tax consequences to certain types of U.S.
holders that are subject to special treatment under the U.S. federal income tax laws, such as insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, dealers in securities or currencies, traders in securities that elect to use the mark-to-market
method of accounting for their securities, partnerships or other pass-through entities for U.S. federal tax purposes, regulated
investment companies, real estate investment trusts, expatriates, persons liable for alternative minimum tax, persons owning, directly
or by attribution, 10% or more, by voting power or value, of our Ordinary Shares, persons whose “functional currency”
is not the U.S. dollar, persons holding Ordinary Shares as part of a hedging, constructive sale or conversion, straddle, or other
risk-reducing transaction, or persons acquiring an interest in our Ordinary Shares in exchange for services.
This summary relates
only to U.S. federal income taxes. It does not address any other tax, including but not limited to, state, local, or foreign taxes,
or any other U.S. federal taxes other than income taxes.
If a partnership holds
our Ordinary Shares, the tax treatment of a partner will generally depend upon the status of the partner and the activities of
the partnership. A partner of a partnership holding our Ordinary Shares should consult its tax advisors.
The statements in this
summary are based on the current U.S. federal income tax laws as contained in the Internal Revenue Code, Treasury Regulations,
and relevant judicial decisions and administrative guidance, all as of the date hereof, and such authorities may be replaced, revoked
or modified so as to result in U.S. federal income tax consequences different from those discussed below. The U.S. federal tax
laws are subject to change, and any such change may materially affect the U.S. federal income tax consequences of purchasing, owning,
or disposing of our Ordinary Shares. We cannot assure you that new laws, interpretations of law or court decisions, any of which
may take effect retroactively, will not cause any statement in this summary to be inaccurate. No ruling or opinions of counsel
will be sought in connection with the matters discussed herein. There can be no assurance that the positions we take on our tax
returns will be accepted by the Internal Revenue Service.
This summary is not a substitute for
careful tax planning. Prospective investors are urged to consult their own tax advisors regarding the specific U.S. federal, state,
foreign and other tax consequences to them, in light of their own particular circumstances, of the purchase, ownership and disposition
of our Ordinary Shares and the effect of potential changes in applicable tax laws.
Dividends
Subject to the discussion
under “—Passive Foreign Investment Company” below, the gross amount of any distributions with respect to our
Ordinary Shares (including any amounts withheld to reflect Israeli withholding taxes) will be taxable as dividends, to the extent
paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Such income
(including any withheld taxes) will be includable in a U.S. holder’s gross income as ordinary income on the day actually
or constructively received. The dividends received deduction will not be available to a U.S. holder that is taxed as a corporation.
With respect to non-corporate
U.S. holders, certain dividends received from a qualified foreign corporation may be subject to reduced rates of taxation. A qualified
foreign corporation includes a foreign corporation that is eligible for the benefits of a comprehensive income tax treaty with
the United States which the United States Treasury Department determines to be satisfactory for these purposes and which includes
an exchange of information provision. The United States Treasury Department has determined that the Treaty meets these requirements.
A foreign corporation is also treated as a qualified foreign corporation with respect to dividends paid by that corporation on
shares that are readily tradable on an established securities market in the United States. Our Ordinary Shares are listed and readily
tradeable on NASDAQ, which United States Treasury Department guidance treats as an established securities market in the United
States. There can be no assurance that our Ordinary Shares will be considered readily tradable on an established securities market
in later years. Non-corporate holders that do not meet a minimum holding period requirement during which they are not protected
from the risk of loss or that elect to treat the dividend income as “investment income’’ pursuant to Section
163(d)(4) of the Code will not be eligible for the reduced rates of taxation regardless of our status as a qualified foreign corporation.
In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments
with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period
has been met.
Notwithstanding the
above, dividends received by a non-corporate U.S. holder during a year in which the Company is a Passive Foreign Investment Company
(a “PFIC Year”) or in a year following a PFIC Year generally will not be eligible for the reduced rates of taxation.
Dividends will generally be from a non-U.S. source and treated as “passive income” for U.S. foreign tax credit purposes.
U.S. holders should consult their own tax advisors regarding the application of these rules given their particular circumstances.
Although, to the extent
we pay dividends in the future, we intend to pay dividends to U.S. holders in U.S. dollars, the amount of any dividend paid in
Israeli currency will equal its U.S. dollar value for U.S. federal income tax purposes, calculated by reference to the exchange
rate in effect on the date the dividend is received by the U.S. holder, regardless of whether the Israeli currency is converted
into U.S. dollars. If the Israeli currency received as a dividend is converted into United States dollars on the date they are
received, the U.S. holder generally will not be required to recognize foreign currency gain or loss in respect of the dividend
income. If the Israeli currency is not converted into U.S. dollars on the date of receipt, the U.S. holder will have a basis in
the Israeli currency equal to its U.S. dollar value on the date of receipt. Any subsequent gain or loss upon the conversion or
other disposition of the Israeli currency will be treated as ordinary income or loss, and generally will be income or loss from
U.S. sources
Subject to certain conditions
and limitations, Israeli withholding taxes on dividends may be treated as foreign taxes eligible for credit against a U.S. holder’s
U.S. federal income tax liability. For purposes of calculating the foreign tax credit, dividends paid on our Ordinary Shares will
be treated as income from sources outside the United States and will generally constitute passive category income. Further, in
certain circumstances, if a U.S. holder has held Ordinary Shares for less than a specified minimum period during which the U.S.
holder is not protected from risk of loss, or is obligated to make payments related to the dividends, such U.S. holder will not
be allowed a foreign tax credit for foreign taxes imposed on dividends paid on our Ordinary Shares. The rules governing the foreign
tax credit are complex. U.S. holders are urged to consult their tax advisors regarding the availability of the foreign tax credit
under their particular circumstances. Instead of claiming a credit, a U.S. holder may, at its election, deduct such otherwise creditable
Israeli withholding taxes in computing its taxable income, but only for a taxable year in which such holder elects to do so with
respect to all foreign income taxes paid or accrued in such taxable year and subject to generally applicable limitations under
U.S. law.
To the extent that the
amount of any distribution (including amounts withheld to reflect Israeli withholding taxes) exceeds our current and accumulated
earnings and profits for a taxable year, as determined under U.S. federal income tax principles, the distribution will first be
treated as a tax-free return of capital, causing a reduction in the adjusted basis of the shares, and the balance in excess of
adjusted basis will be treated as capital gain, long-term if the U.S. holder has held the shares for more than one year, and generally
will be gain or loss from U.S. sources. See “Disposition of Ordinary Shares” below for a discussion of capital gains
tax rates and limitations on deductions for losses. We do not expect to determine earnings and profits in accordance with U.S.
federal income tax principles. Therefore, U.S. holders should expect that a distribution will generally be treated as a dividend
(as discussed above).
Disposition of Ordinary Shares
In general, subject to
the discussion under “—Passive Foreign Investment Company,”, a U.S. holder must treat any gain or loss recognized
upon a taxable disposition of an Ordinary Share as capital gain or loss, long-term if the U.S. holder has held the share for more
than one year. In general, a U.S. holder will recognize gain or loss in an amount equal to the difference between the sum of the
fair market value of any property and the amount of cash received in such disposition and the U.S. holder’s adjusted tax
basis in such share. A U.S. holder’s adjusted tax basis generally will equal the U.S. holder’s acquisition cost less
any return of capital. Subject to certain exceptions (including but not limited to those described under “Passive Foreign
Investment Company” below), long-term capital gain realized by a non-corporate U.S. holder generally will be eligible for
reduced rates of tax. The deduction of capital losses is subject to limitations, as are losses upon a taxable disposition of our
Ordinary Shares if the U.S. holder purchases, or enters into a contract or option to purchase, substantially identical stock or
securities within 30 days before or after any disposition. Gain or loss from the disposition of our Ordinary Shares will generally
be from U.S. sources, but such gain or loss may be from a non-U.S. source under some circumstances under the Treaty. If such gain
or loss is treated as U.S. source gain or loss, a U.S. holder may not be able to use the foreign tax credit arising from any Israeli
tax imposed on the disposition of an Ordinary Share unless such credit can be applied (subject to applicable limitations) against
tax due on other income treated as derived from foreign sources. U.S. holders should consult their own independent tax advisors
regarding the sourcing of any gain or loss on the disposition of our Ordinary Shares, as well as regarding any foreign currency
gain or loss in connection with such a disposition.
Credit for Foreign Taxes Paid or Withheld
Payments to U.S. holders
as dividends or consideration for Ordinary Shares may in some circumstances be subject to Israeli withholding taxes. See “Israeli
Taxation, U.S. – Israel tax Treaty” above. Generally, such withholding taxes in lieu of Israeli income taxes imposed
on such transactions are creditable against the U.S. holder’s U.S. tax liability, subject to numerous U.S. foreign tax credit
limitations, including additional limitations in the case of qualified dividends eligible for the maximum rate accorded to capital
gains. A corporate U.S. holder may also be eligible for an “indirect” foreign tax credit on dividends to take account
of certain Israeli taxes we previously paid to Israel. A U.S. holder should consult its own independent tax advisor regarding use
of the U.S. foreign tax credit and its limitations. A U.S. holder (except an individual who does not itemize deductions) may elect
to take a deduction rather than a credit for foreign taxes paid.
Passive Foreign Investment Company
We believe we may be a
PFIC for the year ended December 31, 2016. In general, we will be a PFIC for any taxable year in which:
|
·
|
at least 75% of our gross income is passive income, or
|
|
·
|
at least 50% of the value (determined on a quarterly basis) of our assets is attributable to assets,
that produce or are held for the production of passive income.
|
For this purpose, cash
is a passive asset and passive income generally includes dividends, interest, royalties and rents (other than royalties and rents
derived in the active conduct of a trade or business and not derived from a related person). If we own at least 25% (by value)
of the stock of another corporation, we will be treated, for purposes of the PFIC tests, as owning our proportionate share of the
other corporation’s assets and receiving our proportionate share of the other corporation’s income.
PFIC status is determined
annually and cannot be definitively determined until the close of the year in question. Accordingly, it is possible that we may
become a PFIC in the current or any future taxable year due to changes in our asset or income composition. Because we have valued
our goodwill based on the market value of our equity, a decrease in the price of our Ordinary Shares may also result in our becoming
a PFIC to the extent we are not already a PFIC. If we are a PFIC for any taxable year during which a U.S. holder holds our Ordinary
Shares, such U.S. holder will be subject to special tax rules discussed below.
If we qualify as a PFIC
at any time during a U.S. holder’s holding period of our Ordinary Shares, any subsequent distributions to, or disposition
of the shares by, the U.S. holder will be subject to the excess distribution rules (described below), regardless of whether we
are a PFIC in the year of distribution or disposition, unless the U.S. holder: (1) made the qualified electing fund (“QEF”)
election (described below); (2) made the mark-to-market election (described below); or (3) during a year in which the corporation
is no longer a PFIC, elected to recognize all gain inherent in the shares on the last day of the last taxable year in which the
corporation was a PFIC. If a U.S. holder holds our Ordinary Shares in a PFIC Year, such Ordinary Shares will henceforth be considered
shares in a PFIC, regardless of whether we meet the PFIC tests in future years, unless the U.S. holder makes a timely QEF or mark-to-market
election, or makes the deemed-gain election in a year in which the corporation is no longer a PFIC.
If we are a PFIC, each
U.S. holder, upon certain “excess distributions” by us and upon disposition of our Ordinary Shares at a gain, would
be liable to pay tax at the highest then-prevailing income tax rate on ordinary income plus interest on the tax, as if the distribution
or gain had been recognized ratably over the holder’s holding period for the Ordinary Shares. Distributions received in a
taxable year that are greater than 125.0% of the average annual distributions received during the shorter of the three preceding
taxable years or the U.S. holder’s holding period for the shares will be treated as excess distributions. Additionally, if
we are a PFIC, a U.S. holder who acquires Ordinary Shares from a deceased person who was a U.S. holder would not receive the step-up
of the income tax basis to fair market value for such Ordinary Shares. Instead, such U.S. holder would have a tax basis equal to
the deceased’s tax basis, if lower. Furthermore, non-corporate U.S. Holders will not be eligible for reduced rates of taxation
on any dividends received from us in a PFIC Year or in the taxable year following a PFIC Year.
If a U.S. holder has made
a QEF election covering all taxable years during which the holder holds Ordinary Shares and in which we are a PFIC, distributions
and gains will not be taxed as described above, nor will denial of a basis step-up at death described above apply. Instead, a U.S.
holder that makes a QEF election is required for each taxable year to include in income the holder’s pro rata share of the
ordinary earnings of the QEF as ordinary income and a pro rata share of the net capital gain of the QEF as capital gain, regardless
of whether such earnings or gain have in fact been distributed. Undistributed income is subject to a separate election to defer
payment of taxes. If deferred, the taxes will be subject to an interest charge. Where earnings and profits that were included in
income under this rule are later distributed, the distribution is not a dividend. The basis of a U.S. shareholder’s shares
in a QEF is increased by amounts that are included in income, and decreased by amounts distributed but not taxed as dividends.
In addition, if a U.S. holder makes a timely QEF election, our Ordinary Shares will not be considered shares in a PFIC in years
in which we are not a PFIC, even if the U.S. holder had held Ordinary Shares in prior years in which we were a PFIC.
In order to comply with
the requirements of a QEF election, a U.S. holder must receive certain information from us. The QEF election is made on a shareholder-by-shareholder
basis and can be revoked only with the consent of the IRS. A shareholder makes a QEF election by attaching a completed IRS Form
8621, including the information provided in the PFIC annual information statement, to a timely filed U.S. federal income tax return
and by filing a copy of the form with the IRS. There is no assurance that we will provide such information as the IRS may require
in order to enable U.S. holders to make the QEF election. Moreover, there is no assurance that we will have timely knowledge of
our status as a PFIC in the future. Even if a shareholder in a PFIC does not make a QEF election, if such shareholder is a U.S.
holder, such shareholder must annually file with the shareholder’s tax return and with the IRS a completed Form 8621.
If our Ordinary Shares
are “regularly traded” on a “qualified exchange or other market,” as provided in applicable Treasury Regulations,
a U.S. holder of our shares may elect to mark the shares to market annually, recognizing as ordinary income or loss each year an
amount equal to the difference between the shareholder’s adjusted tax basis in such shares and their fair market value. Losses
would be allowed only to the extent of net mark-to-market gain previously included by the U.S. holder under the election in previous
taxable years. The adjusted tax basis of a U.S. holder’s Ordinary Shares is increased by the amount included in gross income
under the mark-to-market regime, or is decreased by the amount of the deduction allowed under the regime. As with the QEF election,
a U.S. holder who makes a mark-to-market election would not be subject to the general excess distribution rules and the denial
of basis step-up at death described above. If a U.S. holder makes a mark-to-market election it will be effective for the taxable
year for which the election is made and all subsequent taxable years unless the shares are no longer regularly traded on a qualified
exchange or the Internal Revenue Service consents to the revocation of the election. U.S. holders are urged to consult their tax
advisor about the availability of the mark-to-market election, and whether making the election would be advisable in such holder’s
particular circumstances.
THE RULES DEALING WITH PFICS AND WITH THE
QEF AND MARK-TO-MARKET ELECTIONS ARE VERY COMPLEX AND ARE AFFECTED BY VARIOUS FACTORS IN ADDITION TO THOSE DESCRIBED ABOVE, INCLUDING
OUR OWNERSHIP OF ANY NON-U.S. SUBSIDIARIES. AS A RESULT, U.S. HOLDERS OF ORDINARY SHARES ARE STRONGLY ENCOURAGED TO CONSULT THEIR
TAX ADVISORS ABOUT THE PFIC RULES IN CONNECTION WITH THEIR PURCHASING, HOLDING OR DISPOSING OF ORDINARY SHARES.
Backup Withholding and Information Reporting
In general, information
reporting will apply to dividends in respect of our Ordinary Shares and the proceeds from the sale, exchange or redemption of our
Ordinary Shares that are paid to a U.S. holder within the United States (and in certain cases, outside the United States), unless
such holder is an exempt recipient. A backup withholding tax generally would apply to such payments if the U.S. holder fails to
provide a taxpayer identification number or certification of other exempt status or, in the case of dividend payments, fails to
report in full dividend and interest income.
Any amounts withheld under
the backup withholding rules will be allowed as a refund or a credit against a U.S. holder’s U.S. federal income tax liability
provided the required information is furnished to the Internal Revenue Service in a timely manner.
Under the Hiring Incentives
to Restore Employment Act of 2010, individuals that own “specified foreign financial assets” with an aggregate value
in excess of US$50,000 are required to file an information report with respect to such assets with their tax returns. “Specified
foreign financial assets” include any financial accounts maintained by foreign financial institutions, as well as any of
the following, but only if they are not held in accounts maintained by financial institutions: (i) stocks and securities issued
by non-U.S. persons; (ii) financial instruments and contracts held for investment that have non-U.S. issuers or counterparties;
and (iii) interests in foreign entities. U.S. holders that are individuals are urged to consult their tax advisors regarding the
application of this legislation to their ownership of our Ordinary Shares.
Tax on Net Investment Income
For tax years beginning
after December 31, 2012, certain U.S. holders that are individuals, estates or trusts whose income exceeds certain thresholds will
be required to pay an additional 3.8% tax on “net investment income”, which includes, among other things, dividends
and net gain from the sale or other disposition of property (other than property held in a trade or business), which may include
our Ordinary Shares. U.S. holders should consult their own tax advisors regarding the application of the tax on net investment
income to their particular circumstances.
PLAN OF DISTRIBUTION
Pursuant to an engagement
agreement, we have engaged Rodman & Renshaw, a unit of H.C. Wainwright & Co., LLC, or the Placement Agent, to act as our
exclusive placement agent in connection with this offering of our securities pursuant to this prospectus on a reasonable best efforts
basis. The terms of this offering were subject to market conditions and negotiations between us, the Placement Agent and prospective
investors. The engagement agreement does not give rise to any commitment by the Placement Agent to purchase any of our securities,
and the Placement Agent will have no authority to bind us by virtue of the engagement agreement. The Placement Agent may engage
sub-agents or selected dealers to assist with the offering.
Only certain institutional
investors purchasing the securities offered hereby will execute a securities purchase agreement with us, providing such investors
with certain representations, warranties and covenants from us, which representations, warranties and covenants will not be available
to other investors who will not execute a securities purchase agreement in connection with the purchase of the securities offered
pursuant to this prospectus. Therefore, those investors shall rely solely on this prospectus in connection with the purchase of
securities in the offering.
The Placement Agent is
not purchasing or selling any of the securities offered by us under this prospectus, nor is it required to arrange the purchase
or sale of any specific number or dollar amount of securities. The Placement Agent has agreed to use reasonable best efforts to
arrange for the sale of the securities. There is no required minimum number of securities that must be sold as a condition
to completion of this offering. Further, the Placement Agent does not guarantee that it will be able to raise new capital in any
prospective offering.
The securities purchase
agreement we entered with the investors provides that the obligations of the investors of the securities are subject to certain
conditions precedent, including, among other things, the absence of any material adverse change in our business and receipt of
customary legal opinions, letters and certificates. We will deliver the securities being issued to the investors upon receipt
of investor funds for the purchase of the securities offered pursuant to this prospectus. We expect to deliver the securities being
offered pursuant to this prospectus on or about , 2017.
The Placement Agent may
be deemed to be an underwriter within the meaning of Section 2(a)(11) of the Securities Act, and any commissions received by the
Placement Agent and any profit realized on the resale of the Ordinary Shares sold by the Placement Agent while acting as principal
might be deemed to be underwriting discounts or commissions under the Securities Act. As an underwriter, the Placement Agent would
be required to comply with the requirements of the Securities Act and the Exchange Act, including, without limitation, Rule 415(a)(4)
under the Securities Act and Rule 10b-5 and Regulation M under the Exchange Act. These rules and regulations may limit the timing
of purchases and sales of Ordinary Shares by the Placement Agent acting as principal. Under these rules and regulations, the Placement
Agent:
|
·
|
may not engage in any stabilization activity in connection with our securities; and
|
|
·
|
may not bid for or purchase any of our securities or attempt to induce any person to purchase any of our securities, other
than as permitted under the Exchange Act, until it has completed its participation in the distribution.
|
Commissions and Expenses
We have agreed to pay the
Placement Agent a total cash fee equal to 7.0% of the gross proceeds of this offering. We will also pay the Placement Agent a management
fee equal to 1.0% of the gross proceeds of this offering, a reimbursement for non-accountable expenses of $25,000 and a reimbursement
for the Placement Agent’s legal fees and expenses in the amount of up to $90,000. This fee will be distributed among the
Placement Agent and any selected-dealers that it has retained to act on their behalf in connection with this offering. We estimate
the total offering expenses of this offering that will be payable by us, excluding the placement agent fees and expenses, will
be approximately $ .
Placement Agent Warrants
In addition, we
have agreed to issue to the Placement Agent warrants to purchase up to Ordinary Shares (which represents 6.5% of the
aggregate number of Ordinary Shares sold in this offering, including the number of shares underlying the pre-funded warrants
being offered hereby) at an exercise price of $ per Ordinary Share (representing 125% of the public offering price for an
Ordinary Share and related warrant to be sold in this offering), exercisable for years from the date of the
effectiveness of this offering. The placement agent warrants will have substantially the same terms as the warrants being
sold to the investors in this offering. Pursuant to FINRA Rule 5110(g), the placement agent warrants and any Ordinary Shares
issued upon exercise of the placement agent warrants may not be sold, transferred, assigned, pledged or hypothecated, or be
the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic
disposition of the securities by any person for a period of 180 days immediately following the date of effectiveness or
commencement of sales of this offering, except the transfer of any security: (i) by operation of law or by reason of our
reorganization; (ii) to any FINRA member firm participating in the offering and the officers or partners thereof, if all
securities so transferred remain subject to the lock-up restriction set forth above for the remainder of the time period;
(iii) if the aggregate amount of our securities held by the Placement Agent or related persons do not exceed 1% of the
securities being offered; (iv) that is beneficially owned on a pro-rata basis by all equity owners of an investment fund,
provided that no participating member manages or otherwise directs investments by the fund and the participating members in
the aggregate do not own more than 10% of the equity in the fund; or (v) the exercise or conversion of any security, if all
securities remain subject to the lock-up restriction set forth above for the remainder of the time period. In the event the
Charter Amendment is not approved, the placement agent warrants will not be exercisable.
Right of First Refusal
We have also agreed to
give the Placement Agent, subject to the completion of this offering, certain right of first refusal until September 30, 2018 for
any further capital raising transactions undertaken by us and a twelve-month tail fee equal to the cash and warrant compensation
in this offering, if any investor who was contacted by the Placement Agent provides us with further capital during such twelve-month
period following the expiration or termination of our engagement with the Placement Agent.
Lock-up Agreements
Our executive officers
and directors have agreed, subject to certain exceptions, not to offer, sell, agree to sell, directly or indirectly, or otherwise
dispose of any Ordinary Shares, Ordinary Shares or warrants or any other securities convertible into or exchangeable for Ordinary
Shares except for the Ordinary Shares offered in this offering without the prior written consent of the representative for a period
of days after the consummation of this offering.
Indemnification
We have agreed to indemnify
the Placement Agent and specified other persons against certain liabilities relating to or arising out of the Placement Agent’s
activities under the placement agency agreement and to contribute to payments that the Placement Agent may be required to make
in respect of such liabilities.
Determination of offering
price
The offering price of the
securities we are offering was negotiated between us and the investors, in consultation with the Placement Agent based on the trading
of our Ordinary Shares prior to the offering, among other things. Other factors considered in determining the offering price of
the Ordinary Shares we are offering include the history and prospects of the company, the stage of development of our business,
our business plans for the future and the extent to which they have been implemented, an assessment of our management, general
conditions of the securities markets at the time of the offering and such other factors as were deemed relevant.
Listing
Our Ordinary Shares are
listed on The NASDAQ Capital Market under the trading symbol “ROSG.”
Other Relationships
From time to time, the
Placement Agent has provided, and may provide in the future, various advisory, investment and commercial banking and other services
to us in the ordinary course of business, for which they have received and may continue to receive customary fees and commissions.
However, except as disclosed in this prospectus, we have no present arrangements with the Placement Agent for any further services.
Selling Restrictions outside the United
States
This prospectus does not
constitute an offer to sell to, or a solicitation of an offer to buy from, anyone in any country or jurisdiction (i) in which such
an offer or solicitation is not authorized, (ii) in which any person making such offer or solicitation is not qualified to do so
or (iii) in which any such offer or solicitation would otherwise be unlawful. No action has been taken that would, or is intended
to, permit a public offer of the securities or possession or distribution of this prospectus or any other offering or publicity
material relating to the securities in any country or jurisdiction (other than the United States) where any such action for that
purpose is required. Accordingly, the Placement Agent has undertaken that it will not, directly or indirectly, offer or sell any
Ordinary Shares or have in its possession, distribute or publish any prospectus, form of application, advertisement or other document
or information in any country or jurisdiction except under circumstances that will, to the best of its knowledge and belief, result
in compliance with any applicable laws and regulations and all offers and sales of securities by it will be made on the same terms.
Israel
This document does not
constitute a prospectus under the Israeli Securities Law, 5728-1968, and has not been filed with or approved by the Israel Securities
Authority. In Israel, this prospectus may be distributed only to, and is directed only at, investors listed in the first addendum,
or the Addendum, to the Israeli Securities Law, consisting primarily of joint investment in trust funds; provident funds; insurance
companies; banks; portfolio managers, investment advisors, members of the Tel Aviv Stock Exchange Ltd., underwriters, each purchasing
for their own account; venture capital funds; entities with equity in excess of NIS 50 million and “qualified individuals,”
each as defined in the Addendum (as it may be amended from time to time), collectively referred to as qualified investors. Qualified investors shall be required to submit written confirmation
that they fall within the scope of the Addendum.
LEGAL MATTERS
Certain legal matters with respect to the
legality of the issuance of the securities offered by this prospectus will be passed upon for us by Amar Reiter Jeanne Shochatovitch
& Co., Lawyers, Ramat Gan, Israel. Certain matters of United States federal securities law relating to this offering will be
passed upon for us by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., San Francisco, California. Certain legal matters relating
to the offering will be passed upon for the Placement Agent by Zysman, Aharoni, Gayer and Sullivan & Worcester LLP,
New York, New York.
EXPERTS
The consolidated financial
statements of Rosetta Genomics Ltd. as of December 31, 2016 and 2015 and for each of the three years in the period ended December
31, 2016, appearing in this Prospectus and Registration Statement have been audited by Kost Forer Gabbay & Kasierer, a Member
of Ernst & Young Global, independent registered public accounting firm, as set forth in their report thereon (which contains
an explanatory paragraph describing conditions that raise substantial doubt about the Company's ability to continue as a going
concern as described in Note 1(e) to the consolidated financial statements) appearing elsewhere herein, and are included in reliance
upon such report given the authority of such firm as experts in accounting and auditing. The address of Kost Forer Gabbay &
Kasierer is 3 Aminadav St., Tel-Aviv, Israel 6706703.
EXPENSES
The following are the estimated
expenses of the issuance and distribution of the securities being registered under the registration statement of which this prospectus
forms a part, all of which will be paid by us.
SEC registration fee
|
|
$
|
1,810
|
|
FINRA filing fee
|
|
$
|
2,841.41
|
|
Legal fees and expenses*
|
|
|
|
|
Accounting fees and expenses*
|
|
|
|
|
Printing fees and expenses*
|
|
|
|
|
Miscellaneous*
|
|
|
|
|
Total*
|
|
$
|
|
|
*Estimated
INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE
The SEC allows us to “incorporate
by reference” the information we file with it, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered to be part of this prospectus. The documents we
are incorporating by reference as of their respective dates of filing are:
|
·
|
Annual Report on Form 20-F for the year ended December 31, 2016, filed on March 30, 2017 (File No. 001-33042)
|
|
·
|
Report on Form 6-K filed on January 26, 2017 (File No. 001-33042);
|
|
·
|
Report on Form 6-K filed on February 3, 2017 (File No. 001-33042);
|
|
·
|
Report on Form 6-K filed on February 14, 2017 (File No. 001-33042;
|
|
·
|
Report on Form 6-K filed on February 15, 2017 (File No. 001-33042);
|
|
·
|
Report on Form 6-K filed on February 23, 2017 (File No. 001-33042);
|
|
·
|
Report on Form 6-K filed on March 13, 2017 (File No. 001-33042);
|
|
·
|
Report on Form 6-K filed on March 16, 2017 (File No. 001-33042);
|
|
·
|
Report on Form 6-K filed on April 4, 2017 (File No. 001-33042);
|
|
·
|
the description of our Ordinary Shares contained in our Form 8-A filed on September 22, 2006 (File
No. 001-33042).
|
Any statement contained
in a document incorporated by reference herein shall be deemed to be modified or superseded for all purposes to the extent that
a statement contained in this prospectus, or in any other subsequently filed document which is also incorporated or deemed to be
incorporated by reference, modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this prospectus.
You may request, orally
or in writing, a copy of these documents, which will be provided to you at no cost, by contacting:
Ron Kalfus
Chief Financial Officer
Rosetta Genomics Ltd.
3711 Market Street, Suite 740
Philadelphia, PA 19104
215-382-9000
WHERE YOU CAN FIND ADDITIONAL INFORMATION
As required by the Securities
Act, we filed a registration statement on Form F-1 relating to the securities offered by this prospectus with the SEC. This prospectus
is a part of that registration statement, which includes additional information. You should refer to the registration statement
and its exhibits for additional information. Whenever we make reference in this prospectus to any of our contracts, agreements
or other documents, the references are not necessarily complete and you should refer to the exhibits attached to the registration
statement for copies of the actual contract, agreements or other document.
We are subject to the informational
requirements of the Exchange Act applicable to foreign private issuers. We, as a “foreign private issuer,” are exempt
from the rules under the Exchange Act prescribing certain disclosure and procedural requirements for proxy solicitations, 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, with respect to their purchases and sales of shares. In addition, we are not required
to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as United States
companies whose securities are registered under the Exchange Act. However, we anticipate filing with the SEC, within four months
after the end of each fiscal year, an annual report on Form 20-F containing financial statements audited by an independent accounting
firm.
You may read and copy
any document we file or furnish with the SEC at reference facilities at 100 F Street, N.E., Washington, DC 20549. You may also
obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E.,
Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities.
You can review our SEC filings and the registration statement by accessing the SEC’s internet site at
http://www.sec.gov
.
We maintain a website at www.rosettagx.com. You may access our SEC filings and the registration statement filed with SEC free
of charge at our website as soon as reasonably practicable after such material is electronically filed with, or furnished to,
the SEC. Our website and the information contained on that site, or connected to that site, are not incorporated into and are
not a part of this prospectus.
ENFORCEABILITY OF CIVIL LIABILITIES
We are incorporated under
the laws of the State of Israel. Service of process upon us and upon our directors and officers and the Israeli experts named in
this prospectus, substantially all of whom reside outside the United States, may be difficult to obtain within the United States.
Furthermore, because substantially all of our assets and substantially all of our directors and officers are located outside the
United States, any judgment obtained in the United States against us or any of our directors and officers may not be collectible
within the United States.
We have been informed by
our legal counsel in Israel that it may be difficult to assert U.S. securities law claims in original actions instituted in Israel.
Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws because Israel is not the most appropriate
forum to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and
not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved
as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law.
There is little binding case law in Israel addressing these matters.
Subject to specified time
limitations and legal procedures, Israeli courts may declare a foreign judgment in a civil matter, including a monetary or compensatory
judgment in a non-civil matter, enforceable if it finds that:
|
·
|
the judgment was rendered by a court which was, according to the laws of the state of the court,
competent to render the judgment;
|
|
·
|
the judgment may no longer be appealed;
|
|
·
|
the obligation imposed by the judgment is enforceable according to the rules relating to the enforceability
of judgments in Israel and the substance of the judgment is not contrary to public policy; and
|
|
·
|
the judgment is executory in the state in which it was given.
|
Notwithstanding the previous
sentence, an Israeli court will not declare a foreign civil judgment enforceable if:
|
·
|
the judgment was given in a state whose laws do not provide for the enforcement of judgments of
Israeli courts (subject to exceptional cases);
|
|
·
|
the enforcement of the judgment is likely to prejudice the sovereignty or security of the State
of Israel;
|
|
·
|
the judgment was obtained by fraud;
|
|
·
|
the possibility given to the defendant to bring its arguments and evidence before the court was
not reasonable in the opinion of the Israeli court;
|
|
·
|
the judgment was rendered by a court not competent to render it according to the laws of private
international law as they apply in Israel;
|
|
·
|
the judgment is contradictory to another judgment that was given in the same matter between the
same parties and that is still valid; or
|
|
·
|
at the time the action was brought in the foreign court, a lawsuit in the same matter and between
the same parties was pending before a court or tribunal in Israel.
|
We have irrevocably appointed
our wholly owned U.S. subsidiary, Rosetta Genomics Inc., as our agent to receive service of process in any action against us in
any U.S. federal or state court arising out of this offering or any purchase or sale of securities in connection with this offering.
If a foreign judgment is
enforced by an Israeli court, it generally will be payable in Israeli currency. Judgment creditors must bear the risk of unfavorable
exchange rate fluctuations.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons, we have been
informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is,
therefore, unenforceable.
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2016
U.S. DOLLARS IN THOUSANDS
INDEX
|
Kost
Forer Gabbay & Kasierer
3
Aminadav St.
Tel-Aviv
6706703, Israel
|
|
Tel:
+972-3-6232525
Fax:
+972-3-5622555
ey.com
|
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Shareholders
of Rosetta Genomics Ltd.
We have audited the accompanying
consolidated balance sheets of Rosetta Genomics Ltd. (the “Company”) and its subsidiaries as of December 31, 2016 and
2015, and the related consolidated statements of comprehensive loss, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements.
We were not engaged to perform an audit of the Company’s and its subsidiaries internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Company’s and
its subsidiaries internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated
financial statements referred to above, present fairly, in all material respects, the consolidated financial position of the Company
and its subsidiaries as of December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated
financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1e to
the consolidated financial statements, the Company has recurring losses from operations and has limited liquidity resources that
raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also
described in Note 1e. The consolidated financial statements do not include any adjustments that might result from the outcome of
this uncertainty.
Tel-Aviv, Israel
|
/s/ KOST FORER GABBAY & KASIERER
|
March 30, 2017
|
A Member of Ernst & Young Global
|
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
|
|
|
|
December 31,
|
|
|
|
Note
|
|
2016
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
$
|
6,163
|
|
|
$
|
12,447
|
|
Short-term bank deposits and restricted cash
|
|
4
|
|
|
130
|
|
|
|
1,098
|
|
Trade receivables
|
|
|
|
|
2,851
|
|
|
|
3,633
|
|
Other accounts receivable and prepaid expenses
|
|
5
|
|
|
369
|
|
|
|
2,192
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
|
|
9,513
|
|
|
|
19,370
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG TERM ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
6
|
|
|
2,442
|
|
|
|
2,975
|
|
Long-term bank deposits and other long-term receivables
|
|
|
|
|
6
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long term assets
|
|
|
|
|
2,448
|
|
|
|
3,053
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
$
|
11,961
|
|
|
$
|
22,423
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands (except share
and per share data)
|
|
|
|
December 31,
|
|
|
|
Note
|
|
2016
|
|
|
2015
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
Current maturity of long-term capital lease
|
|
7
|
|
$
|
55
|
|
|
$
|
-
|
|
Trade payables
|
|
|
|
|
1,574
|
|
|
|
1,070
|
|
Other accounts payable and accruals
|
|
8
|
|
|
2,175
|
|
|
|
1,733
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
3,804
|
|
|
|
2,803
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
Debentures and Warrants
|
|
3, 9
|
|
|
3,675
|
|
|
|
-
|
|
Long-term capital lease obligations
|
|
7
|
|
|
65
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term liabilities
|
|
|
|
|
3,740
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENT LIABILITIES
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
|
Share capital:
|
|
11
|
|
|
|
|
|
|
|
|
Ordinary Shares of NIS 7.2 par value: 5,000,000 shares authorized at December 31, 2016 and 2015, respectively; 1,842,704 and 1,709,900 shares issued at December 31, 2016 and 2015, respectively; 1,842,704 and 1,709,628 shares outstanding at December 31, 2016 and 2015, respectively
|
|
|
|
|
3,442
|
|
|
|
3,194
|
|
Additional paid-in capital
|
|
|
|
|
157,478
|
|
|
|
156,696
|
|
Accumulated deficit
|
|
|
|
|
(156,503
|
)
|
|
|
(140,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders’ equity
|
|
|
|
|
4,417
|
|
|
|
19,620
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
|
|
$
|
11,961
|
|
|
$
|
22,423
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
LOSS
U.S. dollars in thousands (except share
and per share data)
|
|
|
|
Year ended
December 31,
|
|
|
|
Note
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Clinical testing revenues
|
|
|
|
$
|
9,234
|
|
|
$
|
6,668
|
|
|
$
|
1,099
|
|
Licensing revenues
|
|
|
|
|
-
|
|
|
|
1,600
|
|
|
|
228
|
|
Total revenues
|
|
|
|
|
9,234
|
|
|
|
8,268
|
|
|
|
1,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of clinical testing revenues
|
|
|
|
|
7,439
|
|
|
|
6,192
|
|
|
|
1,310
|
|
Cost of licensing revenues
|
|
|
|
|
-
|
|
|
|
80
|
|
|
|
-
|
|
Total cost of revenues
|
|
|
|
|
7,439
|
|
|
|
6,272
|
|
|
|
1,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
1,795
|
|
|
|
1,996
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
2l
|
|
|
3,156
|
|
|
|
2,956
|
|
|
|
1,927
|
|
Sales, marketing and business development
|
|
|
|
|
6,806
|
|
|
|
7,350
|
|
|
|
6,848
|
|
General and administrative
|
|
|
|
|
7,497
|
|
|
|
7,566
|
|
|
|
5,494
|
|
Gain from bargain purchase related to acquisition of CynoGen, Inc.
|
|
1d
|
|
|
-
|
|
|
|
(155
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
|
|
17,459
|
|
|
|
17,717
|
|
|
|
14,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
|
|
15,664
|
|
|
|
15,721
|
|
|
|
14,252
|
|
Financial expenses, net
|
|
13
|
|
|
603
|
|
|
|
1,605
|
|
|
|
259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
|
|
16,267
|
|
|
|
17,326
|
|
|
|
14,511
|
|
Income tax (benefit) expense
|
|
12
|
|
|
(34
|
)
|
|
|
19
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
16,233
|
|
|
|
17,345
|
|
|
|
14,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per Ordinary Share
|
|
|
|
$
|
9.31
|
|
|
$
|
13.79
|
|
|
$
|
15.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of Ordinary Shares used to compute basic and diluted net loss per Ordinary Share
|
|
|
|
|
1,743,067
|
|
|
|
1,257,724
|
|
|
|
936,658
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY
U.S. dollars in thousands (except per share
data)
|
|
Number of
Ordinary
Shares
|
|
|
Share
capital
|
|
|
Additional
paid-in
capital
|
|
|
Accumulated
deficit
|
|
|
Total
equity
(deficit)
|
|
Balance as of December 31, 2013
|
|
|
872,520
|
|
|
$
|
1,609
|
|
|
$
|
130,423
|
|
|
$
|
(108,399
|
)
|
|
$
|
23,633
|
|
Issuance of shares in January 2014, at $43.68 per share, net of $33 issuance expenses
|
|
|
21,805
|
|
|
$
|
45
|
|
|
$
|
876
|
|
|
$
|
-
|
|
|
$
|
921
|
|
Issuance of shares in April 2014, at $61.08 per share, net of $9 issuance expenses
|
|
|
4,937
|
|
|
|
10
|
|
|
|
283
|
|
|
|
-
|
|
|
|
293
|
|
Issuance of shares in May 2014, at $48.36 per share, net of $8 issuance expenses
|
|
|
5,533
|
|
|
|
11
|
|
|
|
247
|
|
|
|
-
|
|
|
|
258
|
|
Issuance of shares in June 2014, at $50.76 per share, net of $45 issuance expenses
|
|
|
30,164
|
|
|
|
62
|
|
|
|
1,422
|
|
|
|
-
|
|
|
|
1,484
|
|
Issuance of shares in July 2014, at $54.24 per share, net of $48 issuance expenses
|
|
|
29,305
|
|
|
|
62
|
|
|
|
1,481
|
|
|
|
-
|
|
|
|
1,543
|
|
Issuance of shares in August 2014, at 45.84 per share, net of $6 issuance expenses
|
|
|
4,038
|
|
|
|
8
|
|
|
|
171
|
|
|
|
-
|
|
|
|
179
|
|
Issuance of shares in September 2014, at $45.72 per share, net of $10 issuance expenses
|
|
|
7,071
|
|
|
|
14
|
|
|
|
300
|
|
|
|
-
|
|
|
|
314
|
|
RSUs conversion
|
|
|
3,584
|
|
|
|
7
|
|
|
|
(7
|
)
|
|
|
-
|
|
|
|
-
|
|
Exercise of warrants
|
|
|
746
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
Employee options exercised
|
|
|
4
|
|
|
|
(*
|
)
|
|
|
(*
|
)
|
|
|
-
|
|
|
|
-
|
|
Issuance of shares to a former employee
|
|
|
500
|
|
|
|
1
|
|
|
|
22
|
|
|
|
-
|
|
|
|
23
|
|
Share-based compensation relating to options and RSUs issued to employees and directors
|
|
|
-
|
|
|
|
-
|
|
|
|
943
|
|
|
|
-
|
|
|
|
943
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,526
|
)
|
|
|
(14,526
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2014
|
|
|
980,202
|
|
|
$
|
1,830
|
|
|
$
|
136,160
|
|
|
$
|
(122,925
|
)
|
|
$
|
15,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares in February 2015, at $53.52 per share, net of $491 issuance expenses
|
|
|
183,731
|
|
|
|
344
|
|
|
|
8,994
|
|
|
|
-
|
|
|
|
9,338
|
|
Issuance of shares related to acquisition (Note 1)
|
|
|
51,667
|
|
|
|
94
|
|
|
|
1,856
|
|
|
|
-
|
|
|
|
1,950
|
|
Issuance of shares in July 2015, at $39.24 per share, net of $18 issuance expenses
|
|
|
15,457
|
|
|
|
29
|
|
|
|
560
|
|
|
|
-
|
|
|
|
589
|
|
Issuance of shares in August 2015, at $36.48 per share, net of $3 issuance expenses
|
|
|
2,844
|
|
|
|
6
|
|
|
|
95
|
|
|
|
-
|
|
|
|
101
|
|
Issuance of shares and exercise of warrants B related to the October 2015 placement, at $15.96 per share, net of $331 issuance expenses
|
|
|
472,209
|
|
|
|
884
|
|
|
|
1,750
|
|
|
|
-
|
|
|
|
2,634
|
|
Reclassification of Warrants A and B to shareholders’ equity
|
|
|
-
|
|
|
|
-
|
|
|
|
6,272
|
|
|
|
-
|
|
|
|
6,272
|
|
RSUs conversion
|
|
|
3,521
|
|
|
|
7
|
|
|
|
(7
|
)
|
|
|
-
|
|
|
|
-
|
|
Share-based compensation relating to options and RSUs issued to employees and directors
|
|
|
-
|
|
|
|
-
|
|
|
|
1,016
|
|
|
|
-
|
|
|
|
1,016
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(17,345
|
)
|
|
|
(17,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
|
|
1,709,628
|
|
|
$
|
3,194
|
|
|
$
|
156,696
|
|
|
$
|
(140,270
|
)
|
|
$
|
19,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares in November 2016, at $6 per share
|
|
|
91,250
|
|
|
|
171
|
|
|
|
(171
|
)
|
|
|
-
|
|
|
|
-
|
|
Issuance of warrants to placement agents related to November 2016 placement
|
|
|
-
|
|
|
|
-
|
|
|
|
152
|
|
|
|
-
|
|
|
|
152
|
|
Exercise of warrants B related to the October 2015 placement
|
|
|
27,776
|
|
|
|
51
|
|
|
|
(51
|
)
|
|
|
-
|
|
|
|
-
|
|
Conversion of debentures related to the November 2016 placement, at $6 per share
|
|
|
8,333
|
|
|
|
16
|
|
|
|
3
|
|
|
|
-
|
|
|
|
19
|
|
RSUs conversion
|
|
|
5,445
|
|
|
|
10
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
-
|
|
Share-based compensation relating to options and RSUs issued to employees and directors
|
|
|
-
|
|
|
|
-
|
|
|
|
859
|
|
|
|
-
|
|
|
|
859
|
|
Issuance of treasury shares
|
|
|
272
|
|
|
|
(*
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(*
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(16,233
|
)
|
|
|
(16,233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
|
1,842,704
|
|
|
$
|
3,442
|
|
|
$
|
157,478
|
|
|
|
(156,503
|
)
|
|
$
|
4,417
|
|
* Less than $1
**See note 1c for reverse split.
The accompanying notes are an integral part
of the consolidated financial statements.
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
|
|
Year ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(16,233
|
)
|
|
$
|
(17,345
|
)
|
|
$
|
(14,526
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
904
|
|
|
|
748
|
|
|
|
299
|
|
Gain from bargain purchase related to acquisition of CynoGen, Inc.
|
|
|
-
|
|
|
|
(155
|
)
|
|
|
-
|
|
Share-based compensation relating to options, RSUs, shares and warrants granted to employees, non-employees and directors
|
|
|
859
|
|
|
|
1,016
|
|
|
|
943
|
|
Issuance expenses of Debentures and Warrants classified as liabilities related to share purchase agreement
|
|
|
572
|
|
|
|
561
|
|
|
|
-
|
|
Revaluation losses (gain) of Debentures and Warrants related to share purchase agreements
|
|
|
(14
|
)
|
|
|
1,051
|
|
|
|
(79
|
)
|
Decrease (increase) in trade receivables
|
|
|
782
|
|
|
|
(1,256
|
)
|
|
|
(114
|
)
|
Decrease (increase) in other accounts receivable and prepaid expenses
|
|
|
1,817
|
|
|
|
(1,705
|
)
|
|
|
(170
|
)
|
Increase (decrease) in trade payables
|
|
|
504
|
|
|
|
101
|
|
|
|
(343
|
)
|
Decrease in deferred revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
(228
|
)
|
Increase in other accounts payables and accruals
|
|
|
442
|
|
|
|
51
|
|
|
|
616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(10,367
|
)
|
|
|
(16,933
|
)
|
|
|
(13,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(223
|
)
|
|
|
(273
|
)
|
|
|
(247
|
)
|
Acquisition of CynoGen, Inc. (a)
|
|
|
-
|
|
|
|
(2,122
|
)
|
|
|
-
|
|
Decrease (increase) in bank deposits and restricted cash
|
|
|
1,046
|
|
|
|
6,526
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
823
|
|
|
|
4,131
|
|
|
|
(258
|
)
|
The accompanying notes are an integral part
of the consolidated financial statements.
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
|
|
Year ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2013
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of capital lease
|
|
|
(28
|
)
|
|
|
-
|
|
|
|
-
|
|
Issuance of shares, debentures and warrants and proceed from exercise of warrants, net
|
|
|
3,288
|
|
|
|
17,320
|
|
|
|
5,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
3,260
|
|
|
|
17,320
|
|
|
|
5,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(6,284
|
)
|
|
|
4,518
|
|
|
|
(8,845
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
12,447
|
|
|
|
7,929
|
|
|
|
16,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
6,163
|
|
|
$
|
12,447
|
|
|
$
|
7,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Acquisition of CynoGen, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital, net (excluding cash and cash equivalents)
|
|
$
|
-
|
|
|
$
|
1,599
|
|
|
$
|
-
|
|
Property and equipment
|
|
|
-
|
|
|
|
2,628
|
|
|
|
-
|
|
Gain from bargain purchase
|
|
|
-
|
|
|
|
(155
|
)
|
|
|
-
|
|
Issuance of shares
|
|
|
-
|
|
|
|
(1,950
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
(2,122
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
Supplemental disclosure of non-cash activities
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share issuance for acquisition of CynoGen, Inc.
|
|
$
|
-
|
|
|
$
|
1,950
|
|
|
$
|
-
|
|
Reclassification of Warrants A and B to shareholders’ equity
|
|
$
|
-
|
|
|
$
|
6,272
|
|
|
$
|
-
|
|
Purchase of property and equipment under capital lease
|
|
$
|
148
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Conversion of Debentures to shares
|
|
$
|
19
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Supplemental disclosures of cash flow activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest received
|
|
$
|
10
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
a.
|
Rosetta Genomics Ltd. ("Rosetta Genomics" or the “Company”) commenced its operations on March 9, 2000. The Company’s integrative research platform combining bioinformatics and state-of-the-art laboratory processes has led to the discovery of hundreds of biologically validated novel human microRNAs. Building on its strong patent position and proprietary platform technologies, Rosetta Genomics is working on the application of these technologies in the development of a full range of microRNA-based diagnostic tools. The Company’s microRNA-based tests, RosettaGX Cancer Origin™, RosettaGX Reveal™, mi-LUNG™, and mi-KIDNEY™, are commercially available worldwide and all samples are processed in its Philadelphia-based, CAP-accredited, Clinical Laboratories Improvement Amendments (“CLIA”) certified lab. With the acquisition of CynoGen, Inc. (described in Note 1d below), the Company offers a broader menu of molecular and other assays for bladder, lung, prostate and breast cancer patients through its facility in Lake Forest, California.
|
|
b.
|
The Company has three wholly-owned subsidiaries in the United States: (1), Rosetta Genomics, Inc. (“Rosetta Inc.”), (2) Minuet Diagnostics, Inc. (“Minuet”), and (3) CynoGen, Inc. (“CynoGen” or “PersonalizeDx” and collectively with Rosetta Inc., and Minuet, the “U.S. Subsidiaries”). The principal business activities of the U.S. Subsidiaries are to commercialize the Company’s products, perform tests in its CLIA-approved laboratories and expand the business of the Company in the United States (see Note 1d).
|
|
|
On March 16, 2017, subsequent to the balance sheet date, the shareholders of the Company, at an Extraordinary General Meeting of Shareholders, approved a reverse stock split and consolidation of the registered (authorized) share capital of the Company as follows: every twelve (12) Ordinary Shares with a nominal (par) value of NIS 0.6 each were consolidated into one (1) Ordinary Share with a nominal (par) value of NIS 7.2 each. All Ordinary Shares, options, warrants and per share amounts, including loss per share, have been adjusted to give retroactive effect to this reverse split for all periods presented.
|
|
d.
|
Acquisition of CynoGen, Inc.:
|
On April 13, 2015, the Company,
through Rosetta Inc., acquired all of the outstanding shares of Minuet and CynoGen from Prelude Corporation, a Fjord Ventures portfolio
company. CynoGen is a molecular diagnostics and services company serving community-based pathologists, urologists, oncologists
and other reference laboratories across the United States. CynoGen is focused on the detection of genomic changes through Fluorescence
in situ Hybridization (“FISH”) technology, which helps to detect cancer, measure the potential aggressiveness of the
disease and identify patients most likely to respond to targeted therapies.
The purchase price included $2,122
in cash, 41,667 of the Company's Ordinary Shares, par value NIS 7.2 per share and the provision of certain assets and services
at cost to Prelude Corporation. Prelude Corporation has accepted 10,000 of the Company’s Ordinary Shares in lieu of the provision
of certain assets and services to it by the Company. The aggregate fair value of the 51,667 Ordinary Shares issued amounted to
approximately $1,950.
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The acquisition was accounted for
under the purchase method of accounting in accordance with Accounting Standard Codification (“ASC”) 805, “Business
Combinations.” Accordingly, the Company allocated the purchase price to assets acquired and liabilities assumed based on
a preliminary purchase price allocation study. Following the final purchase price allocation, the Company did not identify intangible
assets to be recorded upon acquisition. As a result, the Company recognized a bargain purchased gain of approximately $155.
Acquisition costs in the amount
of $707 consisted mainly of legal, tax and accounting fees and other external costs directly related to the acquisition and were
included in operating expenses, as acquisition related costs.
|
e.
|
Liquidity and Capital Resources:
|
The Company has incurred an accumulated
deficit of approximately $156,503 since inception, and incurred recurring operating losses and negative cash flows from operating
activities in each of the three years in the period ended December 31, 2016. As of December 31, 2016, the Company’s total
shareholders’ equity amounted to $4,417.
|
|
During the year ended December 31, 2016 the Company incurred operating losses and negative cash flow from operating activities amounting to $15,664 and $10,367, respectively. The Company will be required to obtain additional liquidity resources in the near term in order to support the commercialization of its products and maintain its research and development activities.
|
As of December 31, 2016, the Company's
cash position (cash and cash equivalents and short-term bank deposits) totaled approximately $6,241. The Company is addressing
its liquidity issues by implementing initiatives to allow the coverage of budget deficit. The Company's current operating plan
includes various assumptions concerning the level and timing of cash receipts from sales and cash outflows for operating activities
and capital expenditures. The Company's ability to successfully carry out its business plan, which includes a cost-reduction plan
should it be unable to raise sufficient additional capital, is primarily dependent upon its ability to (1) obtain sufficient additional
capital, (2) attract and retain knowledgeable employees, (3) increase its cash collections and (4) generate significant additional
revenues. There are no assurances, however, that the Company will be successful in obtaining an adequate level of financing needed
for the long-term development and commercialization of its products.
|
|
According to management estimates, liquidity resources as of December 31, 2016, will be sufficient to maintain the Company's operations into the third quarter of 2017. The Company's inability to raise funds to carry out its business plan will have a severe negative impact on its ability to remain a viable company.
|
These conditions raise
substantial doubt about the Company's ability to continue as a going concern. The audited consolidated financial statements
do not include any adjustments relating to the recoverability and classification of assets or liabilities that might be
necessary should the Company be unable to continue as a going concern.
|
|
On November 23, 2016, the Company entered into a securities purchase agreement (the “November 2016 placement”) with a prominent institutional healthcare investor to purchase (i) an aggregate of 91,250 of the Company’s Ordinary Shares (the “Shares”) at a purchase price of $6.00 per share and an aggregate principal amount of $3,160 unsecured convertible Debentures (the “Registered Debentures”) in a registered direct offering (the “Registered Direct Offering”) and (ii) warrants to purchase up to 833,334 Ordinary Shares with an initial exercise price of $10.20 per share (the “Warrants”) and an aggregate principal amount of $1,293 unsecured convertible Debentures (the “PIPE Debentures” and together with the Registered Debentures, the “Debentures”) in a concurrent private placement (the “Private Placement” and, together with the Registered Direct Offering, the “Offerings”). The initial closing of the Offerings occurred on November 29, 2016, at which the Company received gross proceeds of $3,708 for the Ordinary Shares, the Registered Debentures and Warrants. The second closing of the Offering occurred on February 23, 2017, at which the Company received gross proceeds of $1,292 for the PIPE Debentures.
|
|
|
The aggregate net proceeds to the Company from the Offerings, after deducting the Placement Agents’ fees and expenses as well as the Company’s offering expenses, were approximately $4,500.
|
|
|
The Debentures are non-interest bearing, have a term of 30 years and are convertible into Ordinary Shares at an initial conversion price of $6.00 per share. The Debentures are not subject to voluntary prepayment prior to maturity. In the event of a reverse stock split of the Company’s Ordinary Shares, the conversion price of the Debentures shall be reduced to the lesser of (x) the then conversion price, as adjusted and (y) the average of the two lowest volume weighted average prices of the Company’s Ordinary Shares during the 10 trading days immediately following the reverse stock split, which shall thereafter be the new conversion price. Additionally, subject to limited exceptions, for a period of 18 months following the effective date of a resale registration statement on Form F-1 covering the resale of the Ordinary Shares issuable upon exercise of the Warrants and conversion of the PIPE Debentures (the “Resale Registration Statement”), if the Company issues Ordinary Shares or securities that are convertible or exercisable into Ordinary Shares at a price that is less than the effective conversion price, then the conversion price shall be automatically reduced to the price at which the Company issued the Ordinary Shares or the underlying exercise price or conversion price of the securities. Under no circumstances will the adjusted conversion price of the Debentures be lower than $3.00. The Company’s payment obligations under the Debentures are guaranteed by its U.S. Subsidiaries.
|
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
The Warrants were immediately exercisable upon issuance and have a term of five years. The exercise price of the Warrants is subject to adjustment upon the occurrence of specific events, including stock dividends, stock splits, combinations and reclassifications of the Company’s Ordinary Shares and rights offerings and pro rata distributions with respect to all holders of the Company’s Ordinary Shares. Additionally, in the event of a reverse stock split of the Company’s Ordinary Shares, the exercise price will be reduced to the lesser of (x) the then exercise price, as adjusted and (y) the average of the two lowest volume weighted average prices of the Company’s Ordinary Shares during the 10 trading days immediately following the reverse stock split, which shall thereafter be the new exercise price. Additionally, subject to limited exceptions, for a period of 12 months following the effective date of the Resale Registration Statement, if the Company issues Ordinary Shares or securities that are convertible or exercisable into Ordinary Shares at a price that is less than the effective exercise price, then the exercise price shall be automatically reduced to the price at which the Company issued the Ordinary Shares or the underlying exercise price or conversion price of the securities.
|
|
|
The placement agents received (i) an aggregate cash fee equal to $350 ($260 at the initial closing in November 2016 and $90 at the second closing in February 2017), (ii) warrants to purchase up to 25,000 Ordinary Shares and (iii) reimbursement of expenses of $75. The placement agent warrants will become exercisable on November 29, 2017, will expire on November 29, 2021 and will have an exercise price of $7.50.
|
The Company also entered into a
Registration Rights Agreement with the investor, pursuant to which the Company filed a resale registration statement on Form F-1
which became effective on February 16, 2017.
|
|
On February 18, 2015, the Company entered into a Controlled Equity Offering
SM
Sales Agreement (the “2015 Cantor Sales Agreement”) with Cantor Fitzgerald & Co., as sales agent (“Cantor”), and filed a prospectus supplement with the SEC relating to the offer and sale of up to $14,400 of its Ordinary Shares. During 2015, the Company sold through the 2015 Cantor Sales Agreement an aggregate of 202,030 of its Ordinary Shares, and received gross proceeds of $10,540, before deducting issuance expenses in an amount of $ 512. The 2015 Cantor Sales Agreement was terminated on October 13, 2015.
|
|
|
In addition, on October 13, 2015, the Company entered into a Securities Purchase Agreement (the “2015 Securities Purchase Agreement”), pursuant to which the Company agreed to sell securities to various accredited investors (the “2015 Purchasers”) in a private placement transaction (the "2015 Private Placement"). The Private Placement closed on October 16, 2015 (the “Closing Date”). The net proceeds to the Company from the 2015 Private Placement, after deducting placement agent fees and expenses, the Company’s offering expenses and excluding the proceeds, if any, from the exercise of the 2015 Warrants, were approximately $7,293.
|
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Under the terms of the 2015 Private Placement, the Company issued an aggregate of 277,778 units at a purchase price of $28.80 per unit for gross proceeds of approximately $8,000. Each unit consisted of (i) one Ordinary Share (collectively, the “Shares”), (ii) a Series A Warrant to purchase one-half of an Ordinary Share at an exercise price of $33.00 per Ordinary Shares (subject to adjustment), exercisable for a period of five years from the Closing Date (the “2015 Series A Warrants”), and (iii) a partially pre-funded 2015 Series B Warrant (collectively and together with the 2015 Series A Warrants, the “2015 Warrants”). The 2015 Series B Warrants had an exercise price of NIS 7.2 (which has been prepaid) plus $0.0012 per share. The 2015 Series B Warrants were intended to reset the price of the units, and became exercisable for an aggregate of 222,223 shares based on 85% of the arithmetic average of the five lowest weighted average prices calculated during the ten trading days following the effective date of a resale registration statement registering the shares sold in the 2015 Private Placement for resale. The 2015 Series A Warrant exercise price has been adjusted to $19.752 per share, and all of the 2015 Series B Warrants have been exercised on a cashless basis, resulting in the issuance of 222,208 of the Company’s Ordinary Shares.
|
|
|
During 2014, the Company sold through the 2013 Cantor Sales Agreement an aggregate of 102,851 of its Ordinary Shares ("Ordinary Shares"), and received gross proceeds of $5,151 before deducting issuance expenses in an amount of $159. Sales of the Company's Ordinary Shares under the Cantor Sales Agreements were made in sales deemed to be "at-the-market" equity offerings as defined in Rule 415 promulgated under the Securities Act of 1933, as amended.
|
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES
|
The consolidated financial statements
have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).
The preparation of the consolidated
financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions. The Company’s
management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time
they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of expenses during the
reporting period. Actual results could differ from those estimates.
|
b.
|
Financial statements in U.S. dollars:
|
All of the Company’s revenues
are generated in U.S. dollars (“Dollar”). In addition, the majority of the Company’s costs and financing are
in Dollars. The Company's management believes that the Dollar is the currency of the primary economic environment in which the
Company and its subsidiaries have operated and expect to continue to operate in the foreseeable future. Therefore, the functional
currency of the Company and its subsidiaries is the Dollar.
The Company and its subsidiaries’
transactions and balances denominated in Dollars are presented at their original amounts. Non-Dollar transactions and balances
have been remeasured to Dollars in accordance with ASC 830, “Foreign Currency Matters”. All transaction gains and losses
from remeasurement of monetary balance sheet items denominated in non-Dollar currencies are reflected in the consolidated statement
of comprehensive loss as financial income or expenses, as appropriate.
|
c.
|
Principles of consolidation:
|
The consolidated financial statements
include the accounts of the Company and its Subsidiaries. Intercompany transactions and balances have been eliminated upon consolidation.
Cash equivalents are short-term
unrestricted, highly-liquid investments that are readily convertible to cash, with original maturities of three months or less
at acquisition.
Restricted cash is invested in a
bank deposit, which is pledged in favor of the bank that provides guarantees on behalf of the Company.
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
f.
|
Short-term bank deposits:
|
Short-term bank deposits are deposits
with maturities of more than three months at acquisition but less than one year at balance sheet date. The short-term bank deposits
are presented at their cost which approximates its market value.
|
g.
|
Business Combinations:
|
The Company applies ASC 805, “Business
Combinations”. ASC 805 requires recognition of assets acquired, liabilities assumed, and non-controlling interest in the
acquired entity at the acquisition date, measured at their fair values as of that date. This ASC also requires the fair value of
acquired in-process research and development (“IPR&D”) to be recorded as intangibles with indefinite lives, contingent
consideration to be recorded on the acquisition date, and restructuring and acquisition-related deal costs to be expensed as incurred.
Any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies are
to be recorded in earnings. In addition, changes in valuation allowance related to acquired deferred tax assets and in acquired
income tax position are to be recognized in earnings.
Leases are capitalized under the
criteria set forth in ASC 840, “Leases”, which establishes the four criteria of a capital lease. At least one of the
four following criteria must be met for a lease to be considered a capital lease: (1) a transfer of ownership of the property to
the lessee by the end of the lease term; (2) a bargain purchase option; (3) a lease term that is greater than or equal to 75 percent
of the economic life of the leased property; (4) present value of the future minimum lease payments equals or exceeds 90 percent
of the fair market value of the leased property. If none of the aforementioned criteria are met, the lease will be treated as an
operating lease.
At the commencement of the lease
term, the leased asset is measured at the lower of the fair value of the leased asset or the present value of the minimum lease
payments.
|
i.
|
Property and equipment, net:
|
Property and equipment are stated
at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives
of the assets at the following annual percentage rates:
|
%
|
Computer equipment
|
33
|
Office furniture and laboratory equipment
|
7 - 20 (mainly 15)
|
Leasehold improvements
|
Over the shorter of the lease
term or useful economic life
|
|
j.
|
Impairment of long-lived assets:
|
The Company’s long-lived assets
are reviewed for impairment in accordance with ASC 360, “Property, Plant and Equipment”, whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated
by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. As of December 31, 2016 and 2015, no impairment losses
have been identified.
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company generates its revenues
mainly from diagnosing patient tissue received from private patients or third-party distributors. The Company performs the diagnostic
testing in its labs in the U.S. Additionally, the Company generates revenues from research and development services provided to,
and licensing agreement with, third parties.
Revenues from sales of the Company’s
diagnostic services are recognized in accordance with ASC 605, “Revenue Recognition”, when (1) persuasive evidence
of an agreement exists, (2) delivery of the test result has occurred or services have been rendered, (3) the fee is fixed or determinable,
and (4) no further obligation exists and collectability is probable.
Criterion (1) is satisfied upon
receiving a test requisition form indicating medical necessity of the test ordered for the patient, which the Company needs so
it can bill the relevant payers. Criterion (2) is satisfied when the Company performs the test and delivers a report to the physician
or makes the patient report available to the patient. Determinations of criteria (3) and (4) are based on management’s judgments
regarding whether the fee charged for products or services delivered is fixed or determinable, and the collectability of those
fees under any contract or arrangement is probable. The Company assesses whether the fee is fixed or determinable based on the
nature of the fee charged for the services delivered and existing contractual arrangements.
The Company’s specialized
diagnostic services are performed based on a written test requisition form or electronic equivalent and revenues are recognized
once the diagnostic services have been performed, and the results have been delivered to the ordering physician or makes the patient
report available to the patient. These diagnostic services are billed to various payers, including Medicare, commercial insurance
companies, other directly billed healthcare institutions such as hospitals and clinics, and individuals. The Company reports revenues
from contracted payers, including Medicare, certain insurance companies and certain healthcare institutions, based on the contractual
rate, or in the case of Medicare, published fee schedules. The Company reports revenues from non-contracted payers, including certain
insurance companies and individuals, based on the amount expected to be collected. The difference between the amount billed and
the amount estimated to be collected from non-contracted payers is recorded as a contractual allowance to arrive at the reported
net revenues. The expected revenues from non-contracted payers are based on the historical collection data (when such historical
collection data is readily available and reliable) of each payer or payer group, as appropriate. The Company regularly reviews
its historical collection experience for non-contracted payers and adjusts its expected revenues for current and subsequent periods
accordingly.
Revenues from licensed technology
are recorded in accordance with the contract terms, when revenues can be reliably measured and collection of the funds is reasonably
assured.
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 31, 2015, the Company
entered into a Patent License Agreement (the “Agreement”) with Mirna Therapeutics (“Mirna”) for a worldwide
sublicense to the Company’s patents related to therapeutics uses of certain microRNA technologies (the “Licensed Patents”).
Under the terms of the agreement, the Company received an upfront payment of $1,600 from Mirna on January 4, 2016, and the Company
is eligible for low single-digit royalties on product sales and potential milestone payments (to be performed by Mirna) and sublicense
fees. The sublicensed patents are jointly owned by YEDA Research and Development Company Ltd. (“YEDA”), the commercial
arm of the Weizmann Institute of Science, and the Company. As such, YEDA is entitled to a portion of these and other proceeds the
Company may receive under the agreement with Mirna. The term of the agreement is for the life of the licensed patents. Mirna may
terminate the agreement without cause, and, in certain cases, may be subject to significant termination fees.
|
|
As of December 31, 2015, the effective date of the Agreement, Mirna had the right to use the Licensed Patents, and Company became entitled to the upfront fee. Accordingly, the Company recorded revenues of $1,600 in the consolidated statements of comprehensive loss associated with the transaction. The Company has no continuing involvement or other obligations to Mirna regarding the Licensed Patents.
|
Additional potential milestones
payments and royalties will be recognized upon the achievement of future events by Mirna, in accordance with ASC 450-30-25, “Gain
Contingencies”. As of December 31, 2016, no milestones were achieved, or royalty payments made, by Mirna.
Revenues from research and development
services to third parties are recognized in accordance with ASC topic 605-10, “Revenue recognition”, when delivery
has occurred, persuasive evidence of an arrangement exists, the fee is fixed or determinable, no future obligation exists, and
collectability is probable.
|
l.
|
Research and development expenses, net:
|
Research and development expenses
consist of costs of salaries and related expenses, various activities related to intellectual property, research materials and
supplies, and equipment depreciation. All such costs are expensed as incurred.
Royalty-bearing grants from the
Bi-national Industrial Research and Development Foundation (“BIRD”) and from the Israel Innovation Authority (formerly
known as the Office of the Chief of Scientist, "IIA" or "OCS") of the Ministry of Economy for funding approved
research and development projects, are recognized at the time the Company is entitled to such grants, on the basis of the research
and development expenses incurred. Such royalty -bearing grants arrangements are presented as a reduction from research and development
expenses in the consolidated statements of comprehensive loss in an amount of $114, $197 and $292, in the years 2016, 2015 and
2014, respectively.
|
m.
|
Accounting for share-based compensation:
|
The Company accounts for share-based
compensation in accordance with ASC 718, “Compensation - Stock Compensation”, which requires the measurement and recognition
of compensation expense based on estimated fair values for all share-based payment awards made to employees, directors and non-employees.
ASC 505-50, “Equity-Based Payments to Non-Employees”, requires companies to estimate the fair value of equity-based
payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected
to vest is recognized as an expense over the requisite service periods in the Company’s consolidated statement of comprehensive
loss.
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recognizes compensation
expenses for the value of its awards granted based on the straight line method over the requisite service period of each of the
awards, net of estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary,
in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on actual historical pre-vesting
forfeitures.
The Company selected the Black-Scholes-Merton
option pricing model as the most appropriate fair-value method for its share-option awards, and the Company values restricted share
units based on the market value of the underlying shares at the date of grant. The Company estimates the fair value of share options
granted with the following assumptions:
|
|
Year ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
113-116
|
%
|
|
|
116-126
|
%
|
|
|
113-125
|
%
|
Risk-free interest
|
|
|
1.42-1.79
|
%
|
|
|
1.74-1.96
|
%
|
|
|
1.62-2.27
|
%
|
Expected life
|
|
|
6.25 years
|
|
|
|
4.5-6.25 years
|
|
|
|
4.5-6.25 years
|
|
The dividend yield assumption is
based on the Company's historical experience and expectation of future dividend payouts. The Company has historically not paid
dividends and has no foreseeable plans to pay cash dividends in the future.
The computation of expected volatility
is based on realized historical share price volatility of the Company’s shares.
The risk-free interest rate assumption
is the implied yield currently available on the U.S treasury yield zero-coupon issues with a remaining term equal to the expected
life term of the Company’s options.
The Company determined the expected
life of the options according to the simplified method, average of vesting and the contractual term of the Company’s stock
options since the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate
expected term.
The Company applies ASC 505 with
respect to options and warrants issued to non-employees. ASC 505 requires the use of option valuation models to measure the fair
value of the options and warrants at the measurement date.
|
n.
|
Basic and diluted net loss per share:
|
Basic and diluted loss per Ordinary
Share are presented in conformity with ASC 260 “Earnings Per Share”, for all years presented. Basic loss per Ordinary
Share is computed by dividing net loss for each reporting period by the weighted average number of Ordinary Shares outstanding
during the period. Diluted loss per Ordinary Share is computed by dividing net loss for each reporting period by the weighted average
number of Ordinary Shares outstanding during the period plus any additional Ordinary Shares that would have been outstanding if
potentially dilutive securities had been exercised during the period, calculated under the treasury share method.
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31,
2016, 2015 and 2014, all outstanding options, Debentures Conversion Feature, RSUs, and warrants, have been excluded from the calculation
of the diluted net loss per share since their effect was anti-dilutive.
The Company accounts for income
taxes and uncertain tax positions in accordance with ASC 740, “Income Taxes” (“ASC 740”). ASC 740 prescribes
the use of the asset and liability method whereby deferred tax asset and liability account balances are determined based on the
differences between 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 to reduce
deferred tax assets to the amounts that are more likely-than-not to be realized.
The Company implements a two-step
approach to recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740. The first step is to evaluate
the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that
it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including
resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount
that is more than 50% likely to be realized upon ultimate settlement.
As of December 31, 2016 and 2015,
no liability for unrecognized tax benefits was recorded, as a result of the implementation of ASC 740.
The Company's Israeli employees
are included under Section 14 of the Israeli Severance Compensation Law (“Section 14”). Under Section 14, the Company’s
monthly deposits, at a rate of 8.33% of such employees’ monthly salary, are made on their behalf with insurance companies
on account of severance pay. Payments in accordance with Section 14 release the Israeli companies from any future severance payments
in respect of those employees. Deposits under Section 14 are not recorded as an asset in the Company’s balance sheet.
Severance expenses for the years
ended December 31, 2016, 2015, and 2014 were $88, $102 and $116, respectively.
Rosetta Inc., and CynoGen have a
401(k) defined contribution plan covering certain employees in the U.S. All eligible employees may elect to contribute to the plan.
The plan provides a 3% safe-harbor contribution up to the employee’s eligible compensation. In the years 2016, 2015, and
2014, the Company recorded an expense for matching contributions in the amount of $205, $180 and $112, respectively.
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
q.
|
Concentrations of credit risk:
|
Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, restricted cash, short-term
bank deposits, trade receivables and other accounts receivable.
The Company’s cash and cash
equivalents are deposited mainly in Dollars with major banks in Israel, the UK and the United States. Such deposits in the United
States may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions
that hold the Company’s investments are institutions with high credit standing, and accordingly, minimal credit risk exists
with respect to these investments.
Trade receivables are recorded from
two primary payors: Medicare and third party/private payors (“Private Payors”), all located mainly in the United States.
Trade receivables are recorded at contractual rates (or published rates for Medicare) less an allowance for contractual rates adjustment,
based on reporting models utilizing historical cash collection percentages and updated for current effective reimbursement factors.
Management performs ongoing valuations of trade receivable balances based on management's evaluation of historical collection experience
and industry trends. Concentration of credit risk with respect to trade receivables is also limited by credit limits, ongoing credit
evaluation and account monitoring procedures. Provision for bad debt expenses for the years ended December 31, 2016, 2015, and
2014 were $1,071, $0 and $0, respectively.
The Company has no significant off
balance sheet concentrations of credit risk.
|
r.
|
Fair value of financial instruments:
|
The carrying amounts of the Company’s
financial instruments, including cash and cash equivalents, restricted cash, short-term bank deposits, accounts receivable, other
accounts receivable, trade payables and other account payable and accruals, approximate fair value because of their generally short-term
maturities.
The estimated fair value of financial
instruments has been determined by the Company using available market information and valuation methodologies. Considerable judgment
is required in estimating fair values. Accordingly, the estimates may not be indicative of the amounts the Company could realize
in a current market exchange.
Fair value is an exit price, representing
the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would
use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820, “Fair Value Measurements and
Disclosures” establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in
measuring fair value:
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Level 1 –
|
quoted prices in active markets for identical assets or liabilities;
|
|
|
Level 2 –
|
inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or
|
|
|
Level 3 –
|
unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
The fair value hierarchy also requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company measures its Debentures
and Warrants related to the November 2016 placement (classified as liabilities) at fair value each reporting period until they
are exercised or expired, with changes in the fair values being recognized in the Company’s statement of comprehensive loss
as financial income or expense, as applicable (see Note 3).
The Company uses numerous iteration
of option pricing model (Black-Scholes-Merton) to determine the fair value of these Debentures and Warrants. Significant
inputs included an estimate of the fair value of the Company’s Ordinary Shares as of December 31, 2016, the remaining
contractual life of the warrants, a risk-free interest rate, and an estimate of the Company's share expected volatility. The fair
value of the Debentures and Warrants classified within Level 3. The fair value of the Debentures and Warrants at December 31, 2016
was $3,675. For the year ended December 31, 2016, the Company recognized a net gain of approximately $14 from the revaluation of
Debentures and Warrants which is recorded under “Financial expense, net” in the Company’s consolidated statements
of comprehensive loss (see Note 11).
|
s.
|
Recent Accounting Pronouncements:
|
In August 2014, the FASB issued
ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an
Entity’s Ability to Continue as a Going Concern.” ASU 2014-15 is intended to define management’s responsibility
to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern at least for
a period of twelve months from the date of issuing the consolidated financial statements and to provide related footnote disclosures.
The amendments in this ASU are effective for reporting periods ending after December 15, 2016, with early adoption permitted. The
Company adopted ASU 2014-15 for the year ended December 31, 2016 and updated the going concern disclosure accordingly.
In May 2014,
the FASB issued ASU 2014-09, "Revenue from Contract with Customers", which introduces a new five-step revenue recognition
model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also
requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows
arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant
judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. Numerous updates were
issued in 2016 that provide clarification on a number of specific issues as well as requiring additional disclosures. The new standard
is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. While
the Company has not yet completed its final review of the impact of the new standard, the Company does not currently anticipate
a material impact on its revenue recognition practices. The Company is still evaluating disclosure requirements under the new standard
and will continue to evaluate the standard as well as additional changes, modifications or interpretations which may impact the
Company's current conclusions.
The Company
expects to adopt the new standard using the modified retrospective method starting January 1, 2018.
In February 2016, the FASB issued
ASU 2016-02, “Leases (ASC 842)”, which sets out the principles for the recognition, measurement, presentation and disclosure
of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach,
classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed
purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method
or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset
and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term
of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors
to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing
leases and operating leases. The ASU is expected to impact the Company’s consolidated financial statements as the Company
has certain operating lease arrangements. ASC 842 supersedes the previous leases standard, ASC 840 Leases. The standard is effective
on January 1, 2019, with early adoption permitted. The Company is in the process of evaluating the impact of this new guidance.
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 2016, the FASB issued Accounting
Standards Update No. 2016-06, “Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments"
(ASU 2016-09) which requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives
if certain criteria are met, including the “clearly and closely related” criterion. The amendments in the Update clarify
the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments
are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments is required to assess
the embedded call (put) options solely in accordance with the four-step decision sequence. The guidance will be effective for fiscal
years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company
believes this guidance will not have significant effect on its consolidated financial statements.
In March 2016, the FASB issued Accounting
Standards Update No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting”
(ASU 2016-09), to simplify the accounting for share-based payment transactions, including the income tax consequences, an option
to recognize gross share-based compensation expense with actual forfeitures recognized as they occur, as well as certain classifications
on the statement of cash flows. This guidance will be effective for the Company in the first quarter of 2017, and early adoption
is permitted.
The Company believes this guidance will not have significant effect on its consolidated
financial statements
.
In November 2016, the FASB issued
Accounting Standards Update No 2016-18, “Statement of Cash Flows (230): Restricted Cash” (ASU 2016-18) which requires
that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents
when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance will
be effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption
is permitted. The Company believes this guidance will not have significant effect on its consolidated financial statements.
|
NOTE 3:-
|
FAIR VALUE MEASUREMENTS
|
The following table present liabilities
balances measured at fair value on a recurring basis as of December 31, 2016:
|
|
Fair value measurements
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures and Warrants
|
|
|
-
|
|
|
|
-
|
|
|
$
|
3,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Financial liabilities
|
|
|
-
|
|
|
|
-
|
|
|
$
|
3,675
|
|
The following table summarizes the
changes in the Company’s liabilities measured at fair value (Level 3), during the year ended December 31, 2016:
Total fair value as of January 1, 2016
|
|
$
|
-
|
|
Issuance of Debentures and Warrants related to November 2016 placement
|
|
|
5,519
|
|
Conversion of Debentures related to the November 2016 placement
|
|
|
(19
|
)
|
Gain from revaluation of Debentures and Warrants related to November 2016 placement
|
|
|
(1,825
|
)
|
Total fair value as of December 31, 2016
|
|
$
|
3,675
|
|
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 4:-
|
SHORT-TERM BANK DEPOSITS AND RESTRICTED CASH
|
As of December 31, 2016 and 2015,
the Company’s restricted cash and bank deposits are as follows:
December 31, 2016
|
Amount
|
|
Maturity date
|
|
Annual interest
|
|
Restricted cash
|
|
$
|
52
|
|
|
|
|
|
|
|
Short term bank deposit
|
|
|
78
|
|
|
December 30, 2017
|
|
|
0.35
|
%
|
|
|
$
|
130
|
|
|
|
|
|
|
|
December 31, 2015
|
Amount
|
|
Maturity date
|
|
Annual interest
|
|
Restricted cash
|
|
$
|
52
|
|
|
|
|
|
|
|
Short term bank deposit
|
|
|
547
|
|
|
December 31, 2016
|
|
|
1.04
|
%
|
|
|
|
499
|
|
|
March 7, 2016
|
|
|
0.70
|
%
|
|
|
$
|
1,098
|
|
|
|
|
|
|
|
|
NOTE 5:-
|
OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Prepaid expenses
|
|
$
|
226
|
|
|
$
|
322
|
|
Government authorities
|
|
|
32
|
|
|
|
47
|
|
Security deposits
|
|
|
73
|
|
|
|
65
|
|
Royalty-bearing grants
|
|
|
22
|
|
|
|
128
|
|
Amounts due from Patent License Agreement (Note 2k)
|
|
|
-
|
|
|
|
1,600
|
|
Other
|
|
|
16
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
369
|
|
|
$
|
2,192
|
|
|
NOTE 6:-
|
PROPERTY AND EQUIPMENT, NET
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cost:
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
1,680
|
|
|
$
|
1,575
|
|
Office furniture and laboratory equipment
|
|
|
3,545
|
|
|
|
3,281
|
|
Leasehold improvements
|
|
|
1,198
|
|
|
|
1,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,423
|
|
|
|
6,052
|
|
Accumulated depreciation:
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
|
1,403
|
|
|
|
1,081
|
|
Office furniture and laboratory equipment
|
|
|
1,804
|
|
|
|
1,396
|
|
Leasehold improvements
|
|
|
774
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,981
|
|
|
|
3,077
|
|
|
|
|
|
|
|
|
|
|
Depreciated cost
|
|
$
|
2,442
|
|
|
$
|
2,975
|
|
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation expenses for the years
ended December 31, 2016, 2015 and 2014 were $904, $748 and $299, respectively.
During 2016, the Company entered
into a three-year capital lease agreement in which it acquired lab equipment for its operations. The lease has a bargain purchase
option at the end of the original lease term, in 2019, and was classified as a capital lease. The leased lab equipment was included
in property and equipment and is being depreciated using the straight-line method over the estimated useful life of the equipment,
which is five years. The gross amount recognized as an asset was $148. Depreciation expense for the year ended December 31, 2016
was $22. As of December 31, 2016, the depreciated asset value was $126. In the years 2017, 2018 and 2019, the future minimum required
lease payments will be $55, $55 and $10, respectively.
|
NOTE 8:-
|
OTHER ACCOUNTS PAYABLE AND ACCRUALS
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Employees’ salaries and payroll accruals
|
|
$
|
1,324
|
|
|
$
|
1,017
|
|
Accrued vacation
|
|
|
189
|
|
|
|
199
|
|
Accrued expenses
|
|
|
662
|
|
|
|
517
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,175
|
|
|
$
|
1,733
|
|
|
NOTE 9:-
|
DEBENTURES AND WARRANTS
|
On November 23, 2016, the Company
entered into a securities purchase agreement (the “November 2016 Placement”) with a prominent institutional healthcare
investor to purchase (i) an aggregate of 91,250 of the Company’s Ordinary Shares (the “Shares”) at a purchase
price of $6.00 per share and an aggregate principal amount of $3,160 unsecured convertible Debentures (the “Registered Debentures”)
in a registered direct offering (the “Registered Direct Offering”) and (ii) warrants to purchase up to 833,334 Ordinary
Shares with an initial exercise price of $10.20 per share (the “Warrants”) and an aggregate principal amount of $1,293
unsecured convertible Debentures (the “PIPE Debentures” and together with the Registered Debentures, the “Debentures”)
in a concurrent private placement (the “Private Placement” and, together with the Registered Direct Offering, the “Offerings”).
The initial closing of the Offerings occurred on November 29, 2016, at which the Company received gross proceeds of $3,708 for
the Ordinary Shares, the Registered Debentures and Warrants. The second closing of the Offering occurred on February 23, 2017,
subsequent to the balance sheet date, at which time the Company received gross proceeds of $1,292 for the PIPE Debentures.
As part of the private placement,
the Company granted the Placement Agents: (i) a cash fee equal to approximately $350 (ii) warrants to purchase up to 25,000 Ordinary
Shares (the “Placement Agent Warrants”) and (iii) reimbursement of expenses of $75. The Placement Agent Warrants will
become exercisable on November 29, 2017 and will expire on November 29, 2021 and have an exercise price equal to $7.50.
The aggregate net proceeds to the
Company from the Offerings, after deducting the Placement Agents’ fees and other issuance expenses were approximately $4,490,
of which $3,288 was received in 2016.
Issuance expenses in the amount
of $572 were expensed in the consolidated statement of comprehensive loss included in “Financial expenses, net.”
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Debentures are non-interest
bearing, have a term of 30 years and are convertible into Ordinary Shares at an initial conversion price of $6.00 per share. The
Debentures are not subject to voluntary prepayment prior to maturity. In the event of a reverse stock split of the Company’s
Ordinary Shares, the conversion price of the Debentures will be reduced to the lesser of (x) the then conversion price, as adjusted,
and (y) the average of the two lowest volume weighted average prices of the Company’s Ordinary Shares during the 10 trading
days immediately following the reverse stock split, which will thereafter be the new conversion price. Additionally, subject to
limited exceptions, for a period of 18 months following the effective date of a resale registration statement on Form F-1 covering
the resale of the Ordinary Shares issuable upon exercise of the Warrants and conversion of the PIPE Debentures (the “Resale
Registration Statement”), if the Company issues Ordinary Shares or securities that are convertible or exercisable into Ordinary
Shares at a price that is less than the effective conversion price, then the conversion price shall be automatically reduced to
the price at which the Company issued the Ordinary Shares or the underlying exercise price or conversion price of the securities.
Under no circumstances will the adjusted conversion price of the Debentures be lower than $3.00. The Company’s payment obligations
under the Debentures are guaranteed by its U.S. Subsidiaries.
The Warrants were immediately exercisable
upon issuance and have a term of five years. The exercise price of the Warrants is subject to adjustment upon the occurrence of
specific events, including stock dividends, stock splits, combinations and reclassifications of the Company’s Ordinary Shares
and rights offerings and pro rata distributions with respect to all holders of the Company’s Ordinary Shares. Additionally,
in the event of a reverse stock split of the Company’s Ordinary Shares, the exercise price will be reduced to the lesser
of (x) the then exercise price, as adjusted and (y) the average of the two lowest volume weighted average prices of the Company’s
Ordinary Shares during the 10 trading days immediately following the reverse stock split, which will thereafter be the new exercise
price. Additionally, subject to limited exceptions, for a period of 12 months following the effective date of the Resale Registration
Statement, if the Company issues Ordinary Shares or securities that are convertible or exercisable into Ordinary Shares at a price
that is less than the effective exercise price, then the then exercise price shall be automatically reduced to the price at which
the Company issued the Ordinary Shares or the underlying exercise price or conversion price of the securities.
The Company has also entered into
a Registration Rights Agreement with the investor, pursuant to which the Company filed a resale registration statement on Form
F-1 which became effective on February 16, 2017.
The fair value of the Warrants was
measured using iterations of the Black-Scholes-Merton model (see Note 2r). In estimating the Warrants' fair value, the Company
used the following assumptions:
|
|
December 31,
|
|
|
Issuance
|
|
|
|
2016
|
|
|
date
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.91%-1.91%
|
|
|
|
0.86%-1.78%
|
|
Expected volatility
|
|
|
64.68%-83.15%
|
|
|
|
68.07%-79.66%
|
|
Expected life (in years)
|
|
|
1.16-4.92
|
|
|
|
1.25-5
|
|
Expected dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
Fair value:
|
|
|
|
|
|
|
|
|
Warrants
|
|
$
|
2,920
|
|
|
$
|
3,974
|
|
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of the Debentures
was measured using iterations of the Black-Scholes-Merton model (see Note 2r). In estimating the Debentures’ fair value,
the Company used the following assumptions:
|
|
December 31,
|
|
|
Issuance
|
|
|
|
2016
|
|
|
date
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.81
|
%
|
|
|
0.78
|
%
|
Expected volatility
|
|
|
65.13
|
%
|
|
|
65.7
|
%
|
Expected life (in years)
|
|
|
0.91
|
|
|
|
1
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Fair value:
|
|
|
|
|
|
|
|
|
Debentures
|
|
$
|
755
|
|
|
$
|
1,545
|
|
The Company accounted for the Debentures
according to the provisions of ASC 815 and for the Warrants according to the provisions of ASC 480 and based on terms of the Debentures
and the warrants classified them as liabilities. The Company elected to measure the Debentures and Warrants under the fair value
option in accordance with ASC 815. Under the fair value option both the Debentures and Warrants will be measured at fair value
in each reporting period until they will be converted, exercised or expired, with changes in the fair values being recognized in
the Company's consolidated statement of comprehensive loss as financial income or expense. In accordance with ASC 815, the proceeds
received for the issuance of the Debentures and Warrants were allocated at fair value conducted on an arm's-length basis. Accordingly,
at the issuance date the Company recorded the Debentures and Warrants at an aggregate fair value of $5,519, which is higher than
the gross proceeds in the amount of $3,708, resulting a loss in the amount of $1,811.
In
December 2016, 8,334 shares were issued in connection with the exercise of $50 principal amount of the Debentures. The fair value
of the shares issued following the Debentures exercise was $18.
As
of December 31, 2016, the Company re-measured the Warrants in the amount of $2,920 and the Debentures in the amount of $755. As
a result, for the year ended December 31, 2016, the Company recognized revaluation net income of approximately $14 in the consolidated
statement of comprehensive loss included in “Financial expenses, net.”
In
January and March 2017, subsequent to the balance sheet date, $530 principal amount of the Debentures were converted into of 123,502
Ordinary Shares of the Company.
|
NOTE 10:-
|
COMMITMENTS AND CONTINGENT LIABILITIES
|
As of December 31, 2016, restricted
cash was associated with bank guarantees to the landlords of the Company’s premises for the fulfillment of its lease commitments
in the amount of approximately $52. The restricted cash deposit is presented in “Short-term bank deposits and restricted
cash”.
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
b.
|
The facilities of the Company and its subsidiaries are rented under various operating lease agreements, the latest of which ends in 2018. Aggregate annual minimum lease commitments under the non-cancelable operating lease agreements as of December 31, 2016, are as follows:
|
2017
|
|
$
|
694
|
|
2018
|
|
|
555
|
|
|
|
|
|
|
Total
|
|
|
1,249
|
|
Total rent expenses for the years
ended December 31, 2016, 2015 and 2014 were $733, $725 and $511, respectively.
|
c.
|
The Company leases its motor vehicles under cancelable operating lease agreements. The minimum payment under these operating leases, upon cancellation of these lease agreements was $6 as of December 31, 2016.
|
Lease expenses for motor vehicles
for the years ended December 31, 2016, 2015, and 2014, were $37, $39 and $52, respectively.
|
d.
|
In May 2006, the Company signed a royalty-bearing, co-exclusive, worldwide license agreement with a third party. Under this agreement, the Company was granted the right to make, use and sell the third party’s proprietary microRNAs for diagnostic purposes including a limited right to sublicense. In consideration for this license the Company paid an initiation fee and will pay a fixed annual license maintenance fee, royalties based on net sales and a percentage of the Company’s revenues from any sublicense. The Company estimates that the minimum aggregate license maintenance fees over the term of this agreement through 2029 will be approximately $960, of which $520 will be paid after December 31, 2016. In each of the years ended December 31, 2016, 2015 and 2014 the Company paid fees in the amounts of $47, to the third party. The Company recorded the payments as research and development expenses.
|
|
e.
|
In June 2006, the Company signed a royalty-bearing, co-exclusive, worldwide license agreement with a third party. Under this agreement, the Company licensed from this third party the rights to its proprietary microRNAs for diagnostic purposes. In consideration for this license, the Company paid an initiation fee and will pay a fixed annual license maintenance fee, royalties based on net sales and a percentage of the Company’s revenue from any sublicense. The Company estimates that the minimum aggregate license maintenance fees over the term of this agreement through 2022 will be approximately $410, of which $189 will be paid after December 31, 2016. During the years ended December 31, 2016, 2015 and 2014, the Company paid fees in the amounts of $34, $37 and $41, respectively, to the third party. The Company recorded the payments as research and development expenses.
|
|
f.
|
In August 2006, the Company signed a royalty-bearing, exclusive, worldwide license agreement with a third party. Under this agreement, the Company has exclusively licensed from this third party the rights to its proprietary microRNAs for all fields and applications including a limited right to sublicense. In consideration for this license, the Company paid an initiation fee and will pay minimum annual royalties, royalties based on net sales and a percentage of the Company’s revenues from any sublicense. This agreement was amended and restated in August 2011 and is now on a non-exclusive basis. For the amendment, the Company paid an amendment fee. The Company estimates that until 2032 the aggregate minimum royalties over the term of this agreement through 2032 will be approximately $320, of which $160 will be paid after December 31, 2016. During the years ended December 31, 2016, 2015, and 2014, the Company paid fees in the amounts of $12, $12 and $10, respectively, to the third party. The Company recorded the payments as research and development expenses.
|
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
g.
|
In December 2006, the Company signed a royalty-bearing, non-exclusive, worldwide license agreement with a third party. Under this agreement the Company licensed from the third party its proprietary microRNAs for research purposes. In consideration for this license the Company paid an initiation fee and will be required to pay a fixed annual license maintenance fee, royalties based on net sales and a percentage of the Company’s revenues from any sublicenses. The Company estimates that the minimum aggregate license maintenance fees over the term of this agreement through 2022 will be approximately $252, of which $95 will be paid after December 31, 2016. During the years ended December 31, 2016, 2015 and 2014, the Company paid fees in the amounts of $17, $18 and $20, respectively, under this agreement. The Company recorded the payments as research and development expenses.
|
|
h.
|
In May 2007, the Company signed a royalty-bearing, co-exclusive, worldwide license agreement with a third party. Under this agreement, the Company has licensed from this third party the rights to its proprietary microRNAs for therapeutic purposes including a limited right to sublicense. In consideration for this license the Company paid an initiation fee and will pay a fixed annual license maintenance fee, payments based on milestones and royalties based on net sales and a percentage of the Company’s revenues from any sublicense. The Company estimates that the minimum aggregate maintenance fees over the term of this agreement through 2029 will be approximately $690, of which $390 will be paid after December 31, 2016.
|
|
|
In each of the years ended December 31, 2016, 2015 and 2014, the Company paid fees in the amount of $35, to the third party. The Company recorded the payments as research and development expenses.
|
|
i.
|
In January 2008, the Company signed a royalty-bearing, co-exclusive, worldwide license agreement with a third party. Under this agreement, the Company was granted the right to make, use and sell the third party’s proprietary microRNAs for research purposes including a limited right to sublicense. In consideration for this license the Company paid an initiation fee and will pay a fixed annual license maintenance fee, royalties based on net sales and a percentage of the Company’s revenues from any sublicense. The Company estimates that the minimum aggregate license maintenance fees over the term of this agreement through 2029 will be approximately $440, of which $260 will be paid after December 31, 2016. During the years ended December, 31, 2016, 2015 and 2014, the Company paid fees in the amounts of $20, $24 and $24, respectively, to the third party. The Company recorded the payments as research and development expenses.
|
|
j.
|
In July 2014, the Company signed a royalty-bearing joint research and license agreement with a third party. Under this agreement, the Company and the third party engage in joint research, and the Company was granted a non-exclusive, royalty bearing, non-transferable and non-sublicensable license to use the joint information, inventions and patents for the development, manufacture, commercialization, distribution and sale of products, while the third party was also granted a non-exclusive, sublicensable and a worldwide license. In consideration for this agreement, the Company will pay fixed annual license maintenance fees and royalties based on net sales. During 2016, the Company paid $10 under this agreement to the third party following the license agreement with Mirna, as detailed in Note 2k.
|
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 2011, the Company joined
the Rimonim Consortium, which is supported by the IIA. The purpose of the consortium is to develop RNA interference-based therapeutics.
As a member of this consortium, the Company is entitled to certain grants to support its research and development activities. Under
the terms applicable to members of the consortium, so long as the Company continues to meet the criteria for receiving these grants,
which criteria include the payment by the Company of part of the expenses for the activities funded by the grants and the timely
delivery to IIA of written reports regarding those activities, then the Company is not required to repay the grants. If the Company
ceases to meet these and other criteria, then the grant amounts for the year in which the Company ceased to meet the criteria become
immediately due and payable to IIA. 2016 was the last year of this consortium. During the years ended December 31, 2016 and 2015,
the Company received total grants of $105 and $131, respectively, from the IIA for its development within the consortium and continued
to meet the criteria to receive such grants.
In October 2013, the Company entered
into a sponsored research agreement with Ramot at Tel Aviv University (“Ramot”), a Company organized under the laws
of Israel and a wholly-owned subsidiary of Tel Aviv University, for the joint development of a nano-carrier system for miR mimetic
technology to treat cancer. The parties will perform joint research in accordance with a plan approved by, and jointly funded by,
the IIA and the Company, for an initial period of 12 months commencing on October 1, 2013 and an additional period of 12 months,
subject to approval by IIA, which was approved in November 2014. During 2015 the Company received an additional extension from
the IIA, which extended the plan to December 31, 2015. Under the applicable terms, so long as the Company continues to meet the
criteria for receiving IIA grants, which criteria includes the payment by the Company of part of the expenses for the activities
funded by the grants and the timely delivery to IIA of written reports regarding those activities, then the Company is not required
to repay the grants. If the Company ceases to meet these and other criteria, then the grant amounts for the year in which the Company
ceased to meet the criteria become immediately due and payable to IIA. During the years ended December 31, 2016 and 2015, the Company
received total grants of $115 and $18, respectively, from the IIA for its development within the consortium and continued to meet
the criteria to receive such grants. The obligation to pay royalties is contingent upon actual sales of products of the Company
and in the absence of such sales no payment is required.
|
NOTE 11:-
|
SHAREHOLDERS’ EQUITY
|
Ordinary Shares confer upon the
holders the right to receive notice to participate and vote in the general meetings of the Company, and the right to receive dividends,
if declared.
|
b.
|
Reverse stock split and increase in share capital:
|
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 16, 2017, subsequent to
the balance sheet date, the Company held an Extraordinary General Meeting of Shareholders on which the following proposals were
approved:
|
i)
|
To consolidate the registered (authorized) share capital of the Company as follows: every twelve (12) Ordinary Shares with a nominal (par) value of NIS 0.6 each will be consolidated into one (1) Ordinary Share with a nominal (par) value of NIS 7.2 each. All Ordinary Shares, warrants and options and per share amounts, including loss per share, have been adjusted to give retroactive effect to this reverse split for all periods presented.
|
|
ii)
|
To increase the registered (authorized) share capital of the Company to 7,500,000 Ordinary Shares with a nominal (par) value NIS 7.2 each.
|
|
c.
|
Investment agreements:
|
|
1.
|
On April 14, 2014, the Company issued an aggregate of 746 Ordinary Shares upon a cashless exercise of warrants issued in 2012.
|
|
2.
|
On September 18, 2014, the Company’s Board of Directors approved the issuance of 500 Ordinary Shares to a former employee. Accordingly, the Company recorded $23 as marketing and business development expense.
|
|
3.
|
On February 18, 2015, the Company entered into the 2015 Cantor Sales Agreement with Cantor, as sales agent, and filed a prospectus supplement with the SEC relating to the offer and sale of up to $14,400 of its Ordinary Shares. During 2015, the Company sold through the 2015 Cantor Sales Agreement an aggregate of 202,030 of its Ordinary Shares, and received gross proceeds of $10,540, before deducting issuance expenses in an amount of $512. The 2015 Cantor Sales Agreement was terminated on October 13, 2015. Sales of the Company’s Ordinary Shares under the 2015 Cantor Sales Agreement were made in sales deemed to be “at-the-market” equity offerings as defined in Rule 415 promulgated under the Securities Act of 1933, as amended.
|
|
4.
|
On October 13, 2015, the Company entered into the 2015 Securities Purchase Agreement, pursuant to which the Company agreed to sell securities to the 2015 Purchasers in the 2015 Private Placement. The 2015 Private Placement closed on October 16, 2015 (the “Closing Date”).
|
|
|
Under the terms of the 2015 Private Placement, the Company issued an aggregate of 277,778 units at a purchase price of $28.80 per unit for gross proceeds of approximately $8,000. Each unit consisted of (i) one Ordinary Share, (ii) a 2015 Series A Warrant to purchase one-half of an Ordinary Share at an exercise price of $33 per Ordinary Share (subject to adjustment), exercisable for a period of five years from the Closing Date, and (iii) a partially pre-funded 2015 Series B Warrant. The 2015 Series B Warrants had an exercise price of NIS 7.2 (which has been prepaid) plus $0.0012 per share. The 2015 Series B Warrants were intended to reset the price of the units, and became exercisable for an aggregate of 222,223 shares based on 85% of the arithmetic average of the five lowest weighted average prices calculated during the ten trading days following the effective date of a resale registration statement registering the shares sold in the 2015 Private Placement for resale. The 2015 Series A Warrant exercise price was adjusted to $19.752 per share, and all of the 2015 Series B Warrants was exercised on a cashless basis, resulting in the issuance of 222,208 of the Company’s Ordinary Shares. The net proceeds to the Company from the 2015 Private Placement, after deducting placement agent fees and expenses, the Company’s offering expenses, and excluding the proceeds, if any, from the exercise of the 2015 Warrants, were approximately $7,293. As part of the private placement the Company granted additional 8,334 2015 Series A Warrants to the placement agent.
|
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accounted for the
2015 Series A and 2015 Series B Warrants according to the provisions of ASC 815. Based on certain terms of the warrants, the
Company classified them as liabilities, measured at fair value in each reporting period until they are exercised, expired or
the terms of the warrants become fixed, with changes in the fair values being recognized in the Company’s consolidated
statement of comprehensive loss as financial income or expense.
The fair value of the 2015 Series
A and 2015 Series B Warrants was measured using the Black-Scholes-Merton model. In estimating the warrants’ fair value, the
Company used the following assumptions:
|
|
December 31, 2015
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.08%-1.72%
|
|
Expected volatility
|
|
|
50%-123%
|
|
Expected life (in years)
|
|
|
0.16-4.9
|
|
Expected dividend yield
|
|
|
0%
|
|
Fair value:
|
|
|
|
|
Warrants
|
|
$
|
15-18.24
|
|
For the year ended December 31,
2015, the Company recognized revaluation expenses of approximately $1,051 in the consolidated statement of comprehensive loss included
in “Financial expenses (income), net”.
During November 2015, following
the tenth trading day of the effective date of the resale registration statement, the exercise price was set, and the terms of
the 2015 Series A and B Warrants became fixed, resulting in the classification of the fair value of the 2015 Series A and 2015
B Warrants of $6,272 to shareholders’ equity. In addition, 194,445 2015 Series B Warrants were exercised.
In February 2016, the remaining
27,778 2015 Series B Warrants were exercised. As of December 31, 2016, 147,223 2015 Series A Warrants were outstanding.
|
5.
|
See Note 1e and Note 9 for details on the November 2016 placement.
|
|
1.
|
In July 2006, the Company adopted the 2006 Global Share Incentive Plan (the “2006 Plan”), pursuant to which options may be granted to the Company’s directors, employees, consultants and service providers.
|
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On November 12, 2014, at the Company’s
Annual Shareholder Meeting, the Company’s shareholders approved the addition of 75,000 Ordinary Shares to the shares authorized
for issuance under the 2006 Plan.
On December 3, 2015, at the Company’s
Annual Shareholder Meeting, the Company’s Shareholders approved the addition of 63,750 Ordinary Shares to the shares authorized
for issuance under the 2006 plan, bringing the total number of Ordinary Shares authorized for issuance under the 2006 Plan to 214,723.
As of December 31, 2016, a total of 32,165 Ordinary Shares remain available for future grants under the 2006 Plan.
Options granted under the 2006 Plan
typically vest over four years, but are subject to each optionee’s specific option agreement. Options are typically exercisable
for ten years from the date of grant. Options which are forfeited or unexercised become available for future grants. The exercise
price of the stock option equals the fair market value of the Company’s shares on the date of the grant.
During 2014, 3,584 RSUs became fully
vested and were converted into Ordinary Shares of the Company. During 2015, the Company granted 3,750 RSU and 20,334 options to
directors and officers of the Company.
|
2.
|
The following is a summary of the Company’s share options granted among the various plans:
|
|
|
Number of
options
|
|
|
Weighted-
average
exercise
price
|
|
|
Weighted-
average
remaining
contractual
term
(in years)
|
|
|
Aggregate
intrinsic
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2016
|
|
|
107,881
|
|
|
$
|
60.36
|
|
|
|
7
|
|
|
$
|
204
|
|
Granted
|
|
|
63,864
|
|
|
$
|
9.93
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(11,871
|
)
|
|
$
|
(12.63
|
)
|
|
|
|
|
|
|
|
|
Outstanding at the end of the year
|
|
|
159,874
|
|
|
$
|
43.75
|
|
|
|
6.66
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest
|
|
|
152,935
|
|
|
$
|
40.89
|
|
|
|
6.64
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at the end of the year
|
|
|
69,779
|
|
|
$
|
71.05
|
|
|
|
5.56
|
|
|
$
|
-
|
|
The weighted-average grant-date
fair value of options granted during the twelve months ended December 31, 2016, 2015 and 2014 was $8.47, $17.4 and $31.44, respectively.
The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the fair market value
of the Company’s Ordinary Shares on December 31, 2016 and the exercise price, multiplied by the number of in-the-money
options) that would have been received by the option holders had all option holders exercised their options on December 31, 2016.
This amount changes based on the fair market value of the Company’s shares.
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information
about options to employees and non-employees outstanding at December 31, 2016 under the Plans:
Exercise
price
|
|
|
Options
outstanding
at
December 31,
2016
|
|
|
Weighted
average
remaining
contractual
life (years)
|
|
|
Weighted
average
exercise price
|
|
|
Options
exercisable at
December 31,
2016
|
|
|
Average
exercise
price of
options
exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7.92-34.32
|
|
|
|
103,304
|
|
|
|
6.06
|
|
|
$
|
16.00
|
|
|
|
18,753
|
|
|
$
|
27.10
|
|
$
|
39.12-42.84
|
|
|
|
20,902
|
|
|
|
6.08
|
|
|
$
|
40.95
|
|
|
|
17,420
|
|
|
$
|
40.94
|
|
$
|
43.44-56.28
|
|
|
|
5,924
|
|
|
|
5.60
|
|
|
$
|
49.41
|
|
|
|
4,448
|
|
|
$
|
50.78
|
|
$
|
61.92-1,188
|
|
|
|
28,969
|
|
|
|
4.48
|
|
|
$
|
74.34
|
|
|
|
28,383
|
|
|
$
|
74.60
|
|
$
|
1,476-6,336.12
|
|
|
|
775
|
|
|
|
2.64
|
|
|
$
|
1,796.75
|
|
|
|
775
|
|
|
$
|
1,796.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159,874
|
|
|
|
|
|
|
|
|
|
|
|
69,779
|
|
|
|
|
|
The following table summarizes information
relating to RSUs, as well as changes to such awards during 2016:
|
|
Number of RSUs
|
|
|
|
|
|
Outstanding at January 1, 2016
|
|
|
7,831
|
|
Granted
|
|
|
1,250
|
|
Converted
|
|
|
(5,716
|
)
|
Forfeited
|
|
|
(625
|
)
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
2,740
|
|
As of December 31, 2016, there was
$1,101 of total compensation cost related to unvested options and RSUs. This amount is expected to be recognized over a weighted-average
period approximately one (1) year.
The following table sets forth the
total share-based compensation expense resulting from options and RSUs granted to employees, non-employees and directors included
in the Company's consolidated statement of comprehensive Loss:
|
|
Year ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
47
|
|
|
$
|
37
|
|
Research and development, net
|
|
|
116
|
|
|
|
100
|
|
Sales, marketing and business development
|
|
|
293
|
|
|
|
281
|
|
General and administrative
|
|
|
403
|
|
|
|
598
|
|
|
|
|
|
|
|
|
|
|
Total
share-based compensation expense
|
|
$
|
859
|
|
|
$
|
1,016
|
|
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
a.
|
Tax rates applicable to the income of the Company:
|
The Israeli corporate tax rate
was 26.5% in 2015 and 2014 and 25% in 2016.
In December 2016, the Israeli Parliament
approved the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years),
2016, which reduces the corporate income tax rate to 24% effective from January 1, 2017 and to 23% effective from January 1, 2018.
The Company estimates that the
effect of the change in the tax rate will not have material effect on the Company's financial position or results of operations.
|
b.
|
Tax benefits under Israel’s Law for the Encouragement of Industry (Taxes), 1969 (“the Tax Law”):
|
The Company is currently qualified
as an “Industrial Company”, as defined by the Tax Law, and as such, is entitled to certain tax benefits, mainly amortization
of costs relating to know-how and patents over eight years, the right to claim public issuance expenses over three years, and accelerated
depreciation.
|
c.
|
Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (the “Law”):
|
The Company's production facilities
in Israel have been granted “Approved Enterprise” status under the Law currently under separate investment programs.
Pursuant to the Law, the Company elected the "Alternative Benefits Track" and has waived Government grants in return
for tax exemption.
The main benefit arising from such
status is the reduction in tax rates on income derived from “Approved Enterprises”. Consequently, the Company is entitled
to a two-year tax exemption and five years of tax at a reduced rate (25%).
Additionally, if the Company becomes
a “foreign investors company”, as defined by the Law, it will be entitled to a reduced tax rate of 10%-25% (based on
the percentage of foreign ownership during each tax year) and an extension of three years for the benefit period. Since the Company
has had no taxable income, the benefits have not yet commenced for any of the programs.
The period of tax benefits, detailed
above, is subject to a limit of 12 years from the commencement of production, or 14 years from the approval date, whichever is
earlier.
The entitlement to the above benefits
is conditional upon the Company’s fulfilling the conditions stipulated by the Law, regulations published thereunder and the
letters of approval for the specific investments in “Approved Enterprises”. In the event of failure to comply with
these conditions, the benefits may be canceled and the Company would be required to refund the amount of tax benefits, plus a consumer
price index linkage adjustment and interest.
As of December 31, 2016, management
believes that the Company will be able to meet all of the aforementioned conditions.
If these retained tax-exempt profits
attributable to the “Approved Enterprise” are distributed in a manner other than in the complete liquidation of the
Company, they would be taxed at the applicable corporate tax rate in respect of the gross amount that the Company distributed.
In addition, the Company is required to withhold tax at the source at a rate of 15% from any dividends distributed from income
attributed to the exempted profits derived from the “Approved Enterprise”.
Income from sources other than the
“Approved Enterprise” during the benefit period will be subject to tax at the regular corporate tax rate (25% in 2016).
On April 1, 2005, an amendment to
the Law became effective (the “Amendment”) and significantly changed the provisions of the Law. The Amendment limits
the scope of enterprises that may be approved by the Investment Center by setting criteria for the approval of a facility as a
“Beneficiary Enterprise” such as provision generally requiring that at least 25% of the “Beneficiary Enterprise’s”
income will be derived from export. Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded
under the Law so that companies no longer require Investment Center approval in order to qualify for tax benefits.
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If the Company pays a dividend out
of income derived from the “Beneficiary Enterprise” during the tax exemption period, such income will be subject to
corporate tax at the applicable rate in respect of the gross amount of the dividend that the Company may be distributed. The Company
is required to withhold tax at the source at a rate of 15% from any dividends distributed from income derived from the “Beneficiary
Enterprise”. Under the Amendment, the benefit period for the Company will be extended until the earlier of (1) seven years
from the commencement year or (2) twelve years from the first day of the year of election. This period may be extended for a “Beneficiary
Enterprise” owned by a “foreign investor's company” during all or part of the benefit period.
However, the Amendment provides
that terms and benefits included in any letter of approval already granted will remain subject to the provisions of the Law as
they were on the date of such approval.
As of December 31, 2016, the Company
did not generate income under the Law prior to and after the Amendment.
In December 2010, the “Knesset”
(Israeli Parliament) passed the Law for Economic Policy for 2011 and 2012 (Amended Legislation), which prescribes amendments to
the Law. The amendment became effective as of January 1, 2011. Pursuant to this amendment, the benefit tracks in the Law were modified
and a flat tax rate applies to a company’s entire preferred income. The Company will be able to opt to apply (the waiver
is non-recourse) the amendment, and from then on it will be subject to the amended tax rates.
In August 2013, the Law for Changing
National Priorities (Legislative Amendments for Achieving Budget Targets for 2013 and 2014), 2013 which includes Amendment 71 to
the Law for the Encouragement of Capital Investments ("the Amendment") was enacted. According to the Amendment, the tax
rate on preferred income from a preferred enterprise in 2014 and thereafter will be 16% (in development area A – 9%).
In December 2016, the Economic Efficiency
Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which includes Amendment
73 to the Law for the Encouragement of Capital Investments (“the Amendment”) was published. According to the Amendment,
a preferred enterprise located in Development Zone A will be subject to a tax rate of 7.5% instead of 9% effective from January
1, 2017 and thereafter (the tax rate applicable to preferred enterprises located in other areas remains at 16%).
The new tax tracks under the Amendment
are as follows:
Technological preferred enterprise
- an enterprise for which total consolidated revenues of its parent company and all subsidiaries are less than NIS 10 billion.
A technological preferred enterprise, as defined in the Law, which is located in the center of Israel will be subject to tax at
a rate of 12% on profits deriving from intellectual property (in development area A - a tax rate of 7.5%).
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Any dividends distributed to “foreign
companies”, as defined in the Law, deriving from income from the technological enterprises will be subject to tax at a rate
of 4%.
A dividend distributed from income
which is attributed to a Preferred Enterprise/Special Preferred Enterprise will be subject to withholding tax at source at the
following rates: (i) Israeli resident corporation – 0%, (ii) Israeli resident individual – 20% in 2014 and onwards
and (iii) non-Israeli resident – 20% in 2014 and onwards, subject to a reduced tax rate under the provisions of an applicable
double tax treaty.
The Company examined the possible
effects of the amendments on its consolidated financial statements, if at all, and at this time does not believe it will opt to
apply the amendments.
|
d.
|
Income tax on U.S. Subsidiaries:
|
The U.S. Subsidiaries are taxed
under U.S. income tax laws. There are no significant provisions for U.S. federal, state or other taxes for any period, since no
taxable income was generated in all periods since inception.
|
e.
|
Deferred income taxes:
|
Deferred taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. The Company and its subsidiaries’ deferred tax assets are comprised of operating loss
carryforwards and other temporary differences. Significant components of the Company and its subsidiaries’ deferred tax assets
are as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Tax asset in respect of:
|
|
|
|
|
|
|
|
|
Operating and capital loss carryforward and deductions
|
|
$
|
39,340
|
|
|
$
|
42,443
|
|
Reserves, allowances and other
|
|
|
22
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset before valuation allowance
|
|
|
39,362
|
|
|
|
42,470
|
|
Valuation allowance
|
|
|
(39,362
|
)
|
|
|
(42,470
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company and its subsidiaries
have provided full valuation allowances in respect of deferred tax assets resulting from operating and capital loss carryforward
and other temporary differences. Management currently believes that because the Company and its subsidiaries have a history of
losses, it is more likely than not that the deferred tax regarding the loss carryforward and other temporary differences will not
be realized in the foreseeable future.
|
f.
|
Reconciliation of the theoretical tax expense (benefit) to the actual tax expense (benefit):
|
The main reconciling item between
the statutory tax rate of the Company and the effective tax rate is the recognition of valuation allowances in respect of deferred
taxes relating to accumulated net operating losses carried forward of the Company and its U.S. Subsidiaries due to the uncertainty
of the realization of such deferred taxes and few nondeductible expense.
|
g.
|
Net operating losses carryforward:
|
The Company has estimated accumulated
losses for tax purposes as of December 31, 2016, in the amount of approximately $121,825 which may be carried forward and offset
against taxable income in the future for an indefinite period.
As of December 31, 2016, the U.S.
Subsidiaries have estimated total available carryforward tax losses of approximately $27,654, to offset against future taxable
income which expires in the years 2027 to 2035.
Utilization of U.S. net operating
losses may be subject to substantial annual limitations due to the “change in ownership” provisions of the Internal
Revenue Code of 1986 and similar state law provisions. The annual limitations may result in the expiration of net operating losses
before utilization.
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Loss before income taxes is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
5,823
|
|
|
$
|
6,178
|
|
|
$
|
5,368
|
|
Foreign
|
|
|
10,444
|
|
|
|
11,148
|
|
|
|
9,143
|
|
|
|
$
|
16,267
|
|
|
$
|
17,326
|
|
|
$
|
14,511
|
|
ROSETTA GENOMICS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 13:-
|
FINANCIAL EXPENSE (INCOME), NET
|
|
|
Year ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Financial income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on short-term deposits
|
|
$
|
(10
|
)
|
|
$
|
(46
|
)
|
|
$
|
(111
|
)
|
Foreign currency adjustments gains and other
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
(3
|
)
|
Revaluation of Debentures and Warrants related to share purchase agreement, net
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
(79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial income:
|
|
|
(24
|
)
|
|
|
(55
|
)
|
|
|
(193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank and interest expenses
|
|
|
43
|
|
|
|
48
|
|
|
|
39
|
|
Foreign currency adjustments losses
|
|
|
12
|
|
|
|
-
|
|
|
|
408
|
|
Revaluation of warrants related to share purchase agreement, net
|
|
|
-
|
|
|
|
1,051
|
|
|
|
-
|
|
Issuance expenses of Debentures and Warrants classified as liabilities related to share purchase agreements
|
|
|
572
|
|
|
|
561
|
|
|
|
-
|
|
Foreign exchange futures transactions and others
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial expenses:
|
|
|
627
|
|
|
|
1,660
|
|
|
|
452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial expense (income), net
|
|
$
|
603
|
|
|
$
|
1,605
|
|
|
$
|
259
|
|
- - - - - - - - - - - - - - - - - - -
ROSETTA GENOMICS LTD.
Up to
Class
A Units consisting of
Ordinary Shares
and Series A
Warrants
and
Class B Units consisting of Pre-Funded Series B Warrants and Series A Warrants
(
Ordinary Shares underlying the Series A and Pre-Funded Series B Warrants)
Rodman & Renshaw
a unit of H.C. Wainwright & Co.
PRELIMINARY PROSPECTUS
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 6. Indemnification of Directors and
Officers
Article 67 of our articles
of association provides as follows:
“INDEMNITY AND INSURANCE
|
(a)
|
Subject to the provisions of the Companies Law and to the fullest extent permitted under the Companies
Law, as shall be in effect from time to time, the Company may:
|
|
(i)
|
enter into a contract for the insurance of the liability, in whole or in part, of any of its Office
Holders;
|
|
(ii)
|
undertake in advance to indemnify an Office Holder, under any circumstances, in respect of which
the Company may undertake in advance to indemnify an Office Holder under the Companies Law, subject to the limitations set forth
in the Companies Law;
|
|
(iii)
|
indemnify an Office Holder as permitted under the Companies Law;
|
|
(iv)
|
release and exculpate, in advance, any Office Holder from any liability from damages arising out
of a breach of a duty of care towards the Company.
|
|
(b)
|
Any amendment to the Companies Law adversely affecting the right of any Office Holder to be indemnified
or insured pursuant to this Article 67 shall be prospective in effect, and shall not affect the Company’s obligation or ability
to indemnify or insure an Office Holder for any act or omission occurring prior to such amendment, unless otherwise provided by
the Companies Law.
|
|
(c)
|
The provisions of this Article 67 are not intended, and shall not be interpreted so as to restrict
the Company, in any manner, in respect of the procurement of insurance and/or indemnification and/or exculpation, in favour of
any person who is not an Office Holder, including, without limitation, any employee, agent, consultant or contractor of the Company
who is not an Office Holder.”
|
Article 2 of our articles
of association defines “Office Holder” as “every director and every other person included in the definition of
“office holder” under the Companies Law, including the executive officers of the Company.”
The Companies Law provides
that a company may, if its articles of association include provisions which allow it to do so:
(1) enter
into a contract to insure the liability of an “office holder” (as defined) of the company by reason of acts committed
in his or her capacity as an office holder of the company for any of the below:
|
(a)
|
the breach of his or her duty of care to the company or any other person;
|
|
(b)
|
the breach of his or her duty of loyalty to the company to the extent he or she acted in good faith
and had a reasonable basis to believe that the act would not prejudice the interests of the company; and
|
|
(c)
|
monetary liabilities or obligations which may be imposed upon him or her in favor of other persons.
|
(2) indemnify
an office holder of the company for the following liabilities or expenses that may be imposed upon him or her or that he or she
may incur by reason of acts committed in his or her capacity as an office holder of the company, for:
|
(a)
|
monetary liabilities or obligations imposed upon him or her in favor of another person under a
court judgment, including a compromise judgment or an arbitrator’s decision approved by a court;
|
|
(b)
|
reasonable litigation expenses, including attorney’s fees, actually incurred by the office
holder pursuant to an inquiry or a proceeding brought against him or her by a competent authority, which was concluded without
the submission of an indictment against him or her and without any financial penalty being imposed on him or her as an alternative
to a criminal proceeding or which was concluded without the submission of an indictment against him or her but with a financial
penalty being imposed on him or her as an alternative to a criminal proceeding, in respect of a criminal offence which does not
require proof of criminal intent or with respect to monetary sanction;
|
In this subsection: (i) a proceeding
concluded without the submission of an indictment in a matter in respect to which a criminal investigation was initiated shall
mean the relevant case against him or her being closed in accordance with the provisions of Section 62 of the Israeli Criminal
Procedure Law [Consolidated Version], 5742-1982, or by virtue of a stay of proceedings by the Attorney General in accordance with
the provisions of Section 231 of the Israeli Criminal Procedure Law [Consolidated Version], 5742-1982; and (ii) “a financial
penalty imposed as an alternative to a criminal proceeding” means a monetary penalty imposed in accordance with law as an
alternative to a criminal proceeding, including an administrative fine in accordance with the Israeli Administrative Crimes Law,
5746-1985, a fine for a crime that is considered a crime in respect of which a fine may be imposed, in accordance with the provisions
of the Israeli Criminal Procedure Law [Consolidated Version], 5742-1982, a monetary sanction or a forfeit; and
|
(c)
|
reasonable litigation expenses, including attorney’s fees, actually incurred by the office
holder or imposed upon him or her by a court, in an action, suit or proceeding brought against him or her by or on behalf of the
company or by other persons, or in connection with a criminal action from which he or she was acquitted, or in connection with
a criminal action which does not require proof of criminal intent in which he or she was convicted.
|
(3) exempt
an office holder, in advance, from and against all or part of his or her liability for damages due to a breach of his or her duty
of care to it, provided that a company may not exempt a director in advance from his or her liability to it due to a breach of
his or her duty of care with respect to a ‘Distribution’ (as defined in Section 1 of the Companies Law).
The Companies Law provides
that a company’s articles of association may provide for indemnification of an office holder (X) post-factum; and (Y) may
also provide that a company may undertake to indemnify an office holder in advance as follows: (i) as detailed in section 2(a)
above, provided that the undertaking is limited to types of occurrences which, in the opinion of the company’s board of directors,
are, at the time of the undertaking, foreseeable in light of the activities of the company when the undertaking is given and to
an amount or a criteria that the board of directors has determined is reasonable in the circumstances, and that the undertaking
shall specify the occurrences which in the board of directors’ opinion are foreseeable as aforesaid, and the amount or criteria
set by the board of directors as reasonable in the circumstances (ii) as detailed in sections 2(b) and 2(c) above.
The Companies Law provides
that a provision in a company’s articles of association which permits the company to enter into a contract to insure the
liability of or to indemnify an office holder or to exempt an office holder from his or her liability to the company, or a resolution
of a company’s board of directors to indemnify an office holder with respect to the following will not be valid:
|
·
|
a breach of his or her duty of loyalty, other than, in respect of indemnification and insurance,
to the extent described in Section 1(b) above;
|
|
·
|
a breach of his or her duty of care that was done intentionally or recklessly, unless the breach
was done only in negligence;
|
|
·
|
an act or omission done with the intent to unlawfully realize personal gain; or
|
|
·
|
a fine, monetary sanction, forfeit or penalty imposed upon him or her.
|
The term “office
holder” (or “Noseh Misra” in Hebrew) is defined in the Companies Law as a managing director, chief executive
officer, executive vice president, vice president, any other person fulfilling or assuming any of the foregoing positions without
regard to such person’s title, as well as a director, or a manager directly subordinate to the managing director.
According to the Companies
Law, granting an exemption to, indemnification of, and procurement of insurance coverage for, an office holder of a company requires,
the approval of the company’s compensation committee and board of directors, and, in some circumstances, including if the
office holder is a director, the chief executive officer or a controlling shareholder, as defined for that purpose in the Companies
Law, the approval of the company’s shareholders, and in some cases,(such as in case of the chief executive officer, a controlling
shareholder, or approval of terms not consistent with the company’s compensation policy) with a special majority.
Our office holders are
currently covered by a directors’ and officers’ liability policy. We have also resolved to provide directors and certain
other office holders with our standard indemnification undertaking which provides for indemnification from any liability for damages
caused as a result of a breach of duty of care and provides an exemption, to the fullest extent permitted by law, all in accordance
with and pursuant to the terms set forth in the said indemnification undertaking.
Item 7. Recent Sales of Unregistered Securities
In the three years preceding
the filing of this registration statement, we have issued the following securities that were not registered under the Securities
Act of 1933, as amended, or the Securities Act:
1. On
April 14, 2015, we issued 500,000 Ordinary Shares in connection with our acquisition of CynoGen, Inc. (d/b/a PersonalizeDx). In
addition, on July 22, 2015, we issued an addition 120,000 Ordinary Shares in lieu of services that were to be provided to an affiliate
of CynoGen.
2. On
October 15, 2015, we closed a private placement transaction, pursuant to which we sold an aggregate 27,777 units at $2.40 per unit,
with each unit consisting of (i) one Ordinary Share, (ii) a Series A warrant to purchase one-half of an Ordinary Share at an exercise
price of $33 per Ordinary Share (subject to adjustment), and (iii) a partially pre-funded Series B warrant. Aegis Capital Corp.
served as placement agent. In connection with the private placement, we also issued to the placement agent and its affiliates warrants
to purchase a total of 8,333 Ordinary Shares on the same terms as the Series A warrants. All of the Series B warrants were exercised
on a cashless basis for an aggregate of 222,207 shares.
3. On
November 23, 2016, we entered into a securities purchase agreement (the “Purchase Agreement”) with a prominent institutional
healthcare investor to purchase (i) an aggregate of 91,250 of our Ordinary Shares (the “Shares”) at a purchase price
of $6.00 per share and an aggregate principal amount of $3.2 million of unsecured convertible debentures (the “Registered
Debentures”) in a registered direct offering (the “Registered Direct Offering”) and (ii) warrants to purchase
up to 833,334 Ordinary Shares with an initial exercise price of $10.20 per share (the “Warrants”) and an aggregate
principal amount of $1.3 million unsecured convertible debentures (the “PIPE Debentures” and together with the
Registered Debentures, the “Debentures”) in a concurrent private placement (the “Private Placement” and,
together with the Registered Direct Offering, the “2016 Offerings”). The initial closing of the 2016 Offerings occurred
on November 29, 2016, at which time we received gross proceeds of $3.7 million for the Ordinary Shares, the Registered Debentures
and Warrants. The closing of the private placement of the PIPE Debentures occurred on February 23, 2017. The closing involved the
sale of the PIPE Debentures (convertible into a maximum of 430,834 Ordinary Shares) for gross proceeds of $1.3 million. The aggregate
net proceeds to the Company from the 2016 Offerings, after deducting the placement agents’ fees and expenses and our estimated
offering expenses, were approximately $4.6 million.
All sales of securities
described above were exempt from the registration requirements of the Securities Act in reliance on Section 4(a)(2) of the Securities
Act or Regulation D promulgated under the Securities Act, relating to transactions by an issuer not involving a public offering.
Item 8. Exhibits and Financial Statement
Schedules
The following is a list
of exhibits filed as part of this Registration Statement.
Exhibit
Number
|
|
Description of Exhibit
|
1.1**
|
|
Form of Engagement Letter with Rodman & Renshaw, a unit of H.C. Wainwright & Co.
|
|
|
|
3.1(12)
|
|
Amended and Restated Articles of Association, as amended.
|
|
|
|
4.1**
|
|
Form of Series A Warrant.
|
|
|
|
4.2**
|
|
Form of Pre-Funded Series B Warrant
|
|
|
|
4.3(1)
|
|
Form of Share Certificate of Ordinary Share
|
|
|
|
5.1**
|
|
Opinion of Amar Reiter Jeanne Shochatovitch & Co.
|
|
|
|
5.2**
|
|
Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
|
|
|
|
10.1(1)@
|
|
License Agreement, dated as of May 4, 2006, by and between Rosetta Genomics Ltd. and The Rockefeller University.
|
|
|
|
10.2(2)@
|
|
License Agreement, dated effective as of May 1, 2007, by and between Rosetta Genomics Ltd. and The Rockefeller University.
|
|
|
|
10.3(1)
|
|
Lease Agreement, dated August 4, 2003, by and between Rosetta Genomics Ltd., as tenant, and Rorberg Contracting and Investments (1963) Ltd. and Tazor Development Ltd., as landlords, as amended in April 2004 and as extended on April 9, 2006 (as translated from Hebrew).
|
|
|
|
10.4(6)
|
|
Air Commercial Real Estate Association Standard Industrial/Commercial Single-Tenant Lease – Net, by and between Donna June Kitts Revocable Trust dated April 10, 2006 and CynoGen Inc., dated as of December 1, 2013, as amended.
|
|
|
|
10.5(4)
|
|
Lease Agreement from Wexford-UCSC II, L.P. to Rosetta Genomics Inc., dated July 7, 2008, and First Amendment thereto, dated August 11, 2008.
|
Exhibit
Number
|
|
Description of Exhibit
|
10.6(1)
|
|
2003 Israeli Share Option Plan.
|
|
|
|
10.7(7)
|
|
2006 Employee Incentive Plan (Global Share Incentive Plan).
|
|
|
|
10.8(1)
|
|
Form of Director and Officer Indemnification Agreement.
|
|
|
|
10.9(5)@
|
|
Amended and Restated License Agreement, dated as of March 3, 2009, by and between Rosetta Genomics Ltd. and Max Planck Innovation GmbH.
|
|
|
|
10.10(8)@
|
|
Amended and Restated License Agreement, dated August 14, 2011, by and between The Johns Hopkins University and Rosetta Genomics Ltd.
|
|
|
|
10.11(1)@
|
|
License Agreement, dated as of December 22, 2006, by and between Rosetta Genomics Ltd. and Max Planck Innovation GmbH.
|
|
|
|
10.12(1)@
|
|
Cooperation and Project Funding Agreement, dated effective as of May 1, 2006, by and among Rosetta Genomics Ltd., the Israel-United States Binational Industrial Research and Development Foundation and Isis Pharmaceuticals, Inc.
|
|
|
|
10.13(3)@
|
|
License Agreement, dated effective as of January 8, 2008, by and between Rosetta Genomics Ltd. and The Rockefeller University.
|
|
|
|
10.14(11)
|
|
Stock Purchase Agreement dated April 3, 2015, by and between Prelude Corporation and Rosetta Genomics Inc. and Rosetta Genomics Ltd.
|
|
|
|
10.15(9)
|
|
Securities Purchase Agreement, dated October 13, 2015, by and between Rosetta Genomics Ltd. and the investors in the October 2015 private placement.
|
|
|
|
10.16(10)
|
|
Securities Purchase Agreement, dated November 23, 2016, between the Company and the investors in the 2016 Offering.
|
|
|
|
10.17**
|
|
Form of Securities Purchase Agreement.
|
|
|
|
10.18*
|
|
Waiver by and among the Company and each investor that is a party to the Securities
Purchase Agreement, dated November 23, 2016 and Registration Rights Agreement, dated November 23, 2016.
|
|
|
|
21.1(13)
|
|
List of Subsidiaries.
|
|
|
|
23.1*
|
|
Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global.
|
|
|
|
23.2**
|
|
Consent of Amar Reiter Jeanne Shochatovitch & Co. (included in Exhibit 5.1).
|
|
|
|
23.3**
|
|
Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (included in Exhibit 5.2)
|
|
|
|
24.1
|
|
Power of Attorney (included in the signature page of the Registration Statement filed on
May 8, 2017)
|
|
|
|
101
|
|
The following materials are incorporated by reference to our registration statement on
Form F-1 filed on May 8, 2017 (File No. 333-217765), formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated
Balance Sheets, (ii) the Consolidated Statements of Comprehensive Loss, (iii) the Consolidated Statements of Changes in Stockholders’
Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks
of text and in detail.
|
|
**
|
To be provided by amendment.
|
|
@
|
Confidential portions of these documents have been filed separately with the SEC pursuant to a
grant of confidential treatment.
|
|
(1)
|
Incorporated by reference from the Registrant’s Registration Statement on Form F-1 (Reg.
No. 333-137095), initially filed with the SEC on September 1, 2006.
|
|
(2)
|
Incorporated by reference from the Registrant’s Form 6-K dated August 2, 2007 (Reg. No. 001-33042),
filed with the SEC on August 3, 2007.
|
|
(3)
|
Incorporated by reference from the Registrant’s Annual Report on Form 20-F for the year ended
December 31, 2007 (Reg. No. 001-33042), filed with the SEC on June 26, 2008.
|
|
(4)
|
Incorporated by reference from the Registrant’s Annual Report on Form 20-F for the year ended
December 31, 2008 (Reg. No. 001-33042), filed with the SEC on June 30, 2009.
|
|
(5)
|
Incorporated by reference from the Registrant’s Form 6-K dated August-September 2009 (Reg.
No. 001-33042), filed with the SEC on September 9, 2009.
|
|
(6)
|
Incorporated by reference from the Registrant’s Annual Report on Form 20-F for the year ended
December 31, 2013 (Reg. No. 001-33042), filed with the SEC on March 31, 2014.
|
|
(7)
|
Incorporated by reference from the Registrant’s Annual Report on Form 20-F for the year ended
December 31, 2012 (Reg. No. 001-33042), filed with the SEC on March 22, 2013.
|
|
(8)
|
Incorporated by reference from the Registrant’s Annual Report on Form 20-F for the year ended
December 31, 2011 (Reg. No. 001-33042), filed with the SEC on April 2, 2012.
|
|
(9)
|
Incorporated by reference from the Registrant’s Form 6-K dated October 2015 (Reg. No. 001-33042),
filed with the SEC on October 14, 2015.
|
|
(10)
|
Incorporated by reference from the Registrant’s Form 6-K dated November 2016 (Reg. No. 001-33042),
filed with the SEC on November 25, 2016.
|
|
(11)
|
Incorporated by reference from the Registrant’s Annual Report on Form 20-F for the year ended
December 31, 2015 (Reg. No. 001-33042), filed with the SEC on March 23, 2016.
|
|
(12)
|
Incorporated by reference from the Registrant’s Form 6-K dated September 2016 (Reg. No. 001-33042),
filed with the SEC on September 26, 2016.
|
|
(13)
|
Incorporated by reference from the Registrant’s Annual
Report on Form 20-F for the year ended December 31, 2016, (Reg. No. 001-33042) filed on March 30, 2017.
|
Item 9. Undertakings
|
(a)
|
The undersigned Registrant hereby undertakes:
|
1. To
file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
|
(i)
|
To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
|
|
(ii)
|
To reflect in the prospectus any facts or events arising after the effective date of the registration
statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum
aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;
|
|
(iii)
|
To include any material information with respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such information in the registration statement;
|
|
(2)
|
That, for the purpose of determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
|
|
(3)
|
To remove from registration by means of a post-effective amendment any of the securities being
registered which remain unsold at the termination of the offering.
|
|
(4)
|
To file a post-effective amendment to the registration statement to include any financial statements
required by Item 8.A. of Form 20-F at the start of any delayed offering or throughout a continuous offering. Financial statements
and information otherwise required by Section 10(a)(3) of the Act need not be furnished,
provided
, that the registrant includes
in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (a)(4) and
other information necessary to ensure that all other information in the prospectus is at least as current as the date of those
financial statements.
|
|
(5)
|
That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:
|
|
(A)
|
Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of
the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and
|
|
(B)
|
Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a
registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the
purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and
included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness
or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B,
for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new
effective date of the registration statement relating to the securities in the registration statement to which that prospectus
relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided,
however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in
a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement
that was made in the registration statement or prospectus that was part of the registration statement or made in any such document
immediately prior to such effective date; or (6) That, for the purpose of determining liability of the registrant under the Securities
Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary
offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method
used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following
communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities
to such purchaser:
|
|
(iii)
|
Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering
required to be filed pursuant to Rule 424;
|
|
(iii)
|
Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned
registrant or used or referred to by the undersigned registrant;
|
|
(iii)
|
The portion of any other free writing prospectus relating to the offering containing material information
about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and;
|
|
(iii)
|
Any other communication that is an offer in the offering made by the undersigned registrant to
the purchaser.
|
|
(b)
|
The undersigned Registrant hereby undertakes that, for purposes of determining any liability under
the Securities Act of 1933, each filing of the Registrant’s Annual Report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant
to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
|
|
(c)
|
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted
to directors, officers and controlling persons of the Registrant, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
|
|
(d)
|
The undersigned registrant hereby undertakes that:
|
|
(1)
|
For purposes of determining any liability under the Securities Act of 1933, the information omitted
from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this registration statement as of the time it was declared effective.
|
|
(2)
|
For the purpose of determining any liability under the Securities Act of 1933, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
|
|
(e)
|
The undersigned registrant hereby undertakes to deliver or cause to be delivered with the prospectus,
to each person to whom the prospectus is sent or given, the latest annual report to security holders that is incorporated by reference
in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange
Act of 1934; and, where interim financial information required to be presented by Article 3 of Regulation S-X are not set forth
in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly
report that is specifically incorporated by reference in the prospectus to provide such interim financial information.
|
SIGNATURES
Pursuant to the requirement
of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form F-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, the City of Rehovot, State of Israel on May 15, 2017.
|
ROSETTA GENOMICS LTD.
|
|
|
|
|
By:
|
/s/ Kenneth A. Berlin
|
|
|
Kenneth A. Berlin, Chief Executive Officer and President
|
Pursuant to the requirements
of the Securities Act, this registration statement on Form F-1 has been signed by the following persons in the capacities and on
the dates indicated.
Signature
|
|
Title(s)
|
|
Date
|
|
|
|
|
|
/s/ Kenneth A. Berlin
|
|
Chief Executive Officer and President
|
|
May 15, 2017
|
Kenneth A. Berlin
|
|
(principal executive officer)
|
|
|
|
|
|
|
|
/s/ Ron Kalfus
|
|
Chief Financial Officer
|
|
May 15, 2017
|
Ron Kalfus
|
|
(principal financial and accounting officer)
|
|
|
|
|
|
|
|
*
|
|
Chairman of the Board
|
|
May 15, 2017
|
Brian Markison
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
May 15, 2017
|
Roy N. Davis
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
May 15, 2017
|
Gerald Dogon
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
May 15, 2017
|
Joshua Rosensweig
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
May 15, 2017
|
David Sidransky, M.D.
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
May 15, 2017
|
Tali Yaron-Eldar
|
|
|
|
|
*
|
By:
|
/s/
Kenneth A. Berlin
|
|
|
|
Kenneth A. Berlin
|
|
|
Attorney-in-fact
|
SIGNATURE OF AUTHORIZED REPRESENTATIVE IN THE
UNITED STATES
Pursuant to the Securities
Act of 1933, as amended, the undersigned, Rosetta Genomics Inc., the duly authorized representative in the United States of Rosetta
Genomics Ltd., has signed this registration statement on May 15, 2017.
|
ROSETTA GENOMICS LTD.
|
|
|
|
|
By:
|
/s/ Kenneth A. Berlin
|
|
|
Kenneth A. Berlin, President
|
Rosetta Genomics (CE) (USOTC:ROSGQ)
Historical Stock Chart
From Aug 2024 to Sep 2024
Rosetta Genomics (CE) (USOTC:ROSGQ)
Historical Stock Chart
From Sep 2023 to Sep 2024