PART
I
ITEM
1. Identity of Directors, Senior Management and Advisers.
Not
applicable.
ITEM
2. Offer Statistics and Expected Timetable.
Not
applicable.
ITEM
3. Key Information.
A.
Selected Financial Data.
The
following tables summarize our financial data. We have derived the selected statements of comprehensive loss data for the years
ended December 31, 2015, 2016 and 2017 and the statements of financial position as of December 31, 2016 and 2017 from our audited
consolidated financial statements included elsewhere in this annual report. The selected statements of comprehensive loss data
for the years ended December 2013 and 2014,
and
the statements of financial position
as of December 31, 2013, 2014 and 2015
have been derived from other
audited financial
statements
not included in this Form 20-F.
The following selected financial data
for our Company should be read in conjunction with the financial information, “Item 5. Operating and Financial Review and
Prospects” and other information provided elsewhere in this annual report on Form 20-F and our consolidated financial statements
and related notes. The selected financial data in this section is not intended to replace the consolidated financial statements
and is qualified in its entirety thereby.
Our
consolidated financial statements included in this annual report were prepared in accordance with IFRS, as issued by the IASB.
Our
functional and reporting currency for the years ended December 31, 2015 and earlier was the New Israeli Shekel. Effective January
1, 2016, our functional and reporting currency is the U.S. dollar as a result of the significant increase in our expenses denominated
in U.S. dollars, primarily due to expenses associated with our Phase III clinical trial. Due to the change in our functional and
reporting currency from the NIS to the U.S. dollar, effective January 1, 2016, the amounts for 2015 have been restated in U.S.
dollars using the methodology set forth in Note 2c to our consolidated financial statements for the year ended December 31,
2017.
Unless
otherwise noted, for the purposes of annual financial data, all conversions from NIS to U.S. dollars and from U.S. dollars to
NIS were made at a rate of 3.467 NIS to $1.00 U.S. dollar, the daily representative rate in effect as of December 31, 2017. For
the periods in which our functional currency was the NIS, the financial data presented in the following discussion has been translated
into U.S. dollars using the method of conversion used to translate our financial statements, see Note 2c to our consolidated financial
statements. No representation is made that the NIS amounts referred to in this annual report could have been or could be converted
into U.S. dollars at any particular rate or at all.
As
of December 31, 2017, the daily representative rate of NIS per U.S. dollars was 3.467. The following table sets forth information
regarding the exchange rates of NIS per U.S. dollars for the periods indicated. Average rates are calculated by using the daily
representative rates as reported by the Bank of Israel on the last day of each month during the periods presented.
|
|
|
NIS per U.S. $
|
|
Year Ended December 31,
|
|
|
High
|
|
|
Low
|
|
|
Average
|
|
|
Period
End
|
|
2017
|
|
|
|
3.860
|
|
|
|
3.467
|
|
|
|
3.600
|
|
|
|
3.467
|
|
2016
|
|
|
|
3.983
|
|
|
|
3.746
|
|
|
|
3.841
|
|
|
|
3.845
|
|
2015
|
|
|
|
4.053
|
|
|
|
3.761
|
|
|
|
3.884
|
|
|
|
3.902
|
|
2014
|
|
|
|
3.994
|
|
|
|
3.402
|
|
|
|
3.577
|
|
|
|
3.889
|
|
2013
|
|
|
|
3.791
|
|
|
|
3.471
|
|
|
|
3.609
|
|
|
|
3.471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NIS per U.S. $
|
|
Month Ended
|
|
|
High
|
|
|
Low
|
|
|
Average
|
|
|
Period
End
|
|
March 2018 (through March 7, 2018)
|
|
|
3.469
|
|
|
3.456
|
|
|
3.464
|
|
|
3.466
|
|
February 2018
|
|
|
|
3.535
|
|
|
|
3.427
|
|
|
|
3.494
|
|
|
|
3.485
|
|
January 2018
|
|
|
|
3.460
|
|
|
|
3.388
|
|
|
|
3.423
|
|
|
|
3.405
|
|
December 2017
|
|
|
|
3.550
|
|
|
|
3.467
|
|
|
|
3.5035
|
|
|
|
3.467
|
|
November 2017
|
|
|
|
3.544
|
|
|
|
3.499
|
|
|
|
3.5172
|
|
|
|
3.499
|
|
October 2017
|
|
|
|
3.542
|
|
|
|
3.491
|
|
|
|
3.5124
|
|
|
|
3.521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following selected financial data for the periods and as of the dates indicated are qualified by reference to and should be read
in conjunction with our consolidated financial statements and related notes and “Operating and Financial Review and Prospects,”
both of which are included elsewhere in this annual report.
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
USD in thousands
|
|
|
|
|
Statements of comprehensive loss data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
$
|
(5,065
|
)
|
|
$
|
(4,959
|
)
|
|
$
|
(7,533
|
)
|
|
$
|
(15,349
|
)
|
|
$
|
(21,492
|
)
|
Participation in (repayment of) research and development expenses
|
|
|
2,325
|
|
|
|
1,550
|
|
|
|
2,718
|
|
|
|
4,600
|
|
|
|
(2,803
|
)
|
Research and development expenses, net
|
|
|
(2,740
|
)
|
|
|
(3,409
|
)
|
|
|
(4,815
|
)
|
|
|
(10,749
|
)
|
|
|
(24,295
|
)
|
General and administrative expenses
|
|
|
(2,427
|
)
|
|
|
(2,609
|
)
|
|
|
(2,788
|
)
|
|
|
(3,097
|
)
|
|
|
(5,144
|
)
|
Other gains, net
|
|
|
131
|
|
|
|
234
|
|
|
|
19
|
|
|
|
34
|
|
|
|
218
|
|
Operating loss
|
|
|
(5,036
|
)
|
|
|
(5,784
|
)
|
|
|
(7,584
|
)
|
|
|
(13,812
|
)
|
|
|
(29,221
|
)
|
Financial income
|
|
|
120
|
|
|
|
318
|
|
|
|
633
|
|
|
|
466
|
|
|
|
358
|
|
Financial expenses
|
|
|
(180
|
)
|
|
|
(227
|
)
|
|
|
(229
|
)
|
|
|
(16
|
)
|
|
|
(201
|
)
|
Financial income, net
|
|
|
(60
|
)
|
|
|
91
|
|
|
|
404
|
|
|
|
450
|
|
|
|
157
|
|
Loss before taxes on income
|
|
|
(5,096
|
)
|
|
|
(5,693
|
)
|
|
|
(7,180
|
)
|
|
|
(13,362
|
)
|
|
|
(29,064
|
)
|
Taxes on income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(29
|
)
|
Net loss
|
|
|
(5,096
|
)
|
|
|
(5,693
|
)
|
|
|
(7,180
|
)
|
|
|
(13,362
|
)
|
|
|
(29,093
|
)
|
Other comprehensive income (loss)- currency translation differences
|
|
|
406
|
|
|
|
(805
|
)
|
|
|
(664
|
)
|
|
|
—
|
|
|
|
—
|
|
Comprehensive loss
|
|
$
|
(4,690
|
)
|
|
$
|
(6,498
|
)
|
|
$
|
(7,844
|
)
|
|
$
|
(13,362
|
)
|
|
$
|
(29,093
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per ordinary share
|
|
$
|
(1.18
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
(0.92
|
)
|
|
$
|
(1.17
|
)
|
|
$
|
(1.65
|
)
|
Number of ordinary shares used in computing loss per ordinary share (in thousands)
|
|
|
4,322
|
|
|
|
4,825
|
|
|
|
7,791
|
|
|
|
11,448
|
|
|
|
17,660
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
USD in thousands
|
|
|
|
|
Statement of financial position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,389
|
|
|
$
|
5,731
|
|
|
$
|
23,649
|
|
|
$
|
16,376
|
|
|
$
|
53,324
|
|
Short term bank deposits
|
|
|
—
|
|
|
|
—
|
|
|
|
5,000
|
|
|
|
—
|
|
|
|
—
|
|
Financial assets at fair value through profit or loss
|
|
|
5,153
|
|
|
|
2,011
|
|
|
|
2,024
|
|
|
|
1,852
|
|
|
|
1,825
|
|
Restricted bank deposits
|
|
|
75
|
|
|
|
75
|
|
|
|
62
|
|
|
|
62
|
|
|
|
69
|
|
Other receivables
|
|
|
744
|
|
|
|
288
|
|
|
|
2,361
|
|
|
|
2,384
|
|
|
|
1,125
|
|
Property and equipment
|
|
|
4,319
|
|
|
|
4,397
|
|
|
|
4,076
|
|
|
|
4,047
|
|
|
|
8,206
|
|
Total assets
|
|
|
13,680
|
|
|
|
12,502
|
|
|
|
37,172
|
|
|
|
24,721
|
|
|
|
64,549
|
|
Accounts payable and accruals
|
|
|
1,418
|
|
|
|
1,857
|
|
|
|
1,315
|
|
|
|
1,920
|
|
|
|
5,747
|
|
Derivative financial instruments
|
|
|
2,967
|
|
|
|
1,164
|
|
|
|
327
|
|
|
|
97
|
|
|
|
—
|
|
Total liabilities
|
|
|
4,385
|
|
|
|
3,021
|
|
|
|
1,642
|
|
|
|
2,017
|
|
|
|
5,747
|
|
Total equity
|
|
$
|
9,295
|
|
|
$
|
9,481
|
|
|
$
|
35,530
|
|
|
$
|
22,704
|
|
|
$
|
58,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B.
Capitalization and Indebtedness.
Not
applicable.
C.
Reasons for the Offer and Use of Proceeds.
Not
applicable.
D.
Risk Factors.
Risks
Related to Our Company and Its Business
An
investment in our securities involves a high degree of risk. We operate in a dynamic and rapidly changing industry that involves
numerous risks and uncertainties. You should carefully consider the factors described below, together with all of the other information
contained in this annual report on Form 20-F, including the audited consolidated financial statements and the related notes included
in this annual report beginning on page F-1, before deciding whether to invest in our ordinary shares. If any of the risks discussed
below actually occur, our business, financial condition, operating results and cash flows could be materially adversely affected.
The risks described below are not the only risks facing us. Additional risks and uncertainties not presently known to us or that
we currently deem immaterial also may impair our business operations. This could cause the trading price of our ordinary shares
to decline, and you may lose all or part of your investment.
We
are a clinical stage biopharmaceutical company with a history of operating losses, are not currently profitable, do not expect
to become profitable in the near future and may never become profitable.
We
are a clinical stage biopharmaceutical company that was incorporated in 2000. Since our incorporation, we have primarily focused
our efforts on research and development and clinical trials. Our two most advanced therapeutic candidates are in clinical stages.
We are not profitable and have incurred losses since inception, principally as a result of research and development, clinical
trials and general administrative expenses in support of our operations. We have not generated any revenue, expect to incur substantial
losses for the foreseeable future and may never become profitable. We also expect to incur significant operating and capital expenditures
and anticipate that our expenses and losses will increase substantially in the foreseeable future as we:
|
●
|
initiate and manage
preclinical development and clinical trials for our current and any new product candidates;
|
|
●
|
prepare new drug
applications, or NDAs, for our product candidates, assuming that the clinical trial data support an NDA;
|
|
●
|
seek regulatory
approvals for our current product candidates, or future product candidates, if any;
|
|
●
|
implement internal
systems and infrastructure;
|
|
●
|
seek to in-license
additional technologies for development, if any;
|
|
●
|
hire additional
management and other personnel; and
|
|
●
|
move towards commercialization
of our product candidates and future product candidates, if any.
|
We
may out-license our ability to generate revenue from one or more of our product candidates, depending on a number of factors,
including our ability to:
|
●
|
obtain favorable
results from and progress the clinical development of our product candidates;
|
|
●
|
develop and obtain
regulatory approvals in the countries and for the uses we intend to pursue for our product candidates;
|
|
●
|
subject to successful
completion of registration, clinical trials and perhaps additional clinical trials of any product candidate, apply for and
obtain marketing approval in the countries we intend to pursue for such product candidate; and
|
|
●
|
contract for the
manufacture of commercial quantities of our product candidates at acceptable cost levels, subject to the receipt of marketing
approval.
|
For
the years ended December 31, 2016 and 2017, we had net losses of $13.4 million and $29.1 million, respectively, and we expect
such losses to continue for the foreseeable future. As a result, we will ultimately need to generate significant revenues in order
to achieve and maintain profitability. We may not be able to generate these revenues or achieve profitability in the future. If
our product candidates fail in clinical trials or do not gain regulatory clearance or approval, or if our product candidates do
not achieve market acceptance, we may never become profitable. Our failure to achieve or maintain profitability, or substantial
delays in achieving profitability, could negatively impact the value of our ordinary shares and our ability to raise additional
financing. A substantial decline in the value of our ordinary shares would also affect the price at which we could sell shares
to secure future funding, which could dilute the ownership interest of current shareholders.
Even
if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Accordingly, it
is difficult to evaluate our business prospects. Moreover, our prospects must be considered in light of the risks and uncertainties
encountered by an early-stage company in highly regulated and competitive markets, such as the biopharmaceutical market, where
regulatory approval and market acceptance of our products are uncertain. There can be no assurance that our efforts will ultimately
be successful or result in revenues or profits. As a result, our 2017 annual consolidated financial statements note that there
is a substantial doubt about our ability to continue as a going concern.
Our
independent registered public accounting firm has expressed substantial doubt regarding our ability to continue as a going concern.
Our
independent registered public accounting firm has issued its report on our consolidated financial statements for the year ended
December 31, 2017 and included an explanatory paragraph stating that the Company has suffered recurring losses from operations
and negative cash outflows from operating activities that raise substantial doubt about our ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. We
have no current source of revenue to sustain our present activities, and we do not expect to generate revenue until, and unless,
the U.S. Food and Drug Administration, or the FDA, or other regulatory authorities approve, and we successfully commercialize,
our product candidates. Accordingly, our ability to continue as a going concern will require us to obtain additional financing
to fund our operations, such as public or private offerings. There can be no assurance that we will succeed in obtaining the necessary
financing to continue our operations. The perception that we might be unable to continue as a going concern may make it more difficult
for us to obtain financing for the continuation of our operations and could result in the loss of confidence by investors, suppliers
and employees. If we cannot successfully continue as a going concern, our shareholders may lose their entire investment in our
ordinary shares.
Because
of our limited operating history, we may not be able to successfully operate our business or execute our business plan.
We
have a limited operating history upon which to evaluate our proposed business and prospects. Our proposed business operations
will be subject to numerous risks, uncertainties, expenses and difficulties associated with early-stage enterprises. Such risks
include, but are not limited to, the following:
|
●
|
the absence of a
lengthy operating history;
|
|
●
|
insufficient capital
to fully realize our operating plan;
|
|
●
|
our ability to obtain
FDA approvals in a timely manner, if ever, or that the approved label indications are sufficiently broad to make sale of the
products commercially feasible;
|
|
●
|
expected continual
losses for the foreseeable future;
|
|
●
|
operating in an
environment that is highly regulated by a number of agencies;
|
|
●
|
social
and political unrest;
|
|
●
|
operating
in multiple currencies;
|
|
●
|
our ability to anticipate
and adapt to a developing market(s);
|
|
●
|
acceptance of our
Accordion Pill platform technology, or Accordion Pill, by the medical community and consumers;
|
|
●
|
limited marketing
experience;
|
|
●
|
a competitive environment
characterized by well-established and well-capitalized competitors;
|
|
●
|
the ability to identify,
attract and retain qualified personnel; and
|
|
●
|
reliance on key
personnel.
|
Because
we are subject to these risks, evaluating our business may be difficult, our business strategy may be unsuccessful and we may
be unable to address such risks in a cost-effective manner, if at all. If we are unable to successfully address these risks our
business could be harmed.
We
have not yet commercialized any products or technologies, and we may never become profitable.
We
have not yet commercialized any products or technologies, and we may never be able to do so. We do not know when or if we will
complete any of our product development efforts, obtain regulatory approval for any product candidates incorporating our technologies
or successfully commercialize any approved products. Even if we are successful in developing products that are approved for marketing,
we will not be successful unless these products gain market acceptance for appropriate indications at favorable reimbursement
rates. The degree of market acceptance of these products will depend on a number of factors, including, but not limited to:
|
●
|
the timing of regulatory
approvals in the countries, and for the uses, we intend to pursue with respect to the commercialization of our product candidates;
|
|
●
|
the competitive
environment;
|
|
●
|
the establishment
and demonstration in, and acceptance by, the medical community of the safety and clinical efficacy of our products and their
potential advantages over other therapeutic products;
|
|
●
|
our ability to enter
into strategic agreements with pharmaceutical and biotechnology companies with strong marketing and sales capabilities;
|
|
●
|
the adequacy and
success of distribution, sales and marketing efforts;
|
|
●
|
the establishment
of external, and potentially, internal, sales and marketing capabilities to effectively market and sell our product candidates
in the United States and other countries; and
|
|
●
|
the pricing and
reimbursement policies of government and third-party payors, such as insurance companies, health maintenance organizations
and other plan administrators.
|
Physicians,
patients, third-party payors or the medical community in general may be unwilling to accept, utilize or recommend, and in the
case of third-party payors, cover payment for, any of our current or future products or products incorporating our technologies.
As a result, we are unable to predict the extent of future losses or the time required to achieve profitability, if at all. Even
if we successfully develop one or more products that incorporate our technologies, we may not become profitable.
Our
business is currently in the research and development stage, and we have not yet generated revenues from our operations.
Our
business is currently in the research and development stage, and we have not yet generated revenues from our operations. Our consolidated
financial statements include a note describing our current operations and the incurrence of future losses from our research and
development activities. As of December 31, 2017, we had incurred cumulative losses of approximately $90.5 million. We have no
current source of revenue to sustain our present activities, and we do not expect to generate revenue until, and unless, the FDA
or other regulatory authorities approve one of our product candidates and/or we successfully commercialize (including out-licensing)
such product candidate. These factors raise substantial doubt about our ability to continue as a going concern. Accordingly, our
ability to continue as a going concern will require us to obtain additional financing to fund our operations. If we are unsuccessful
in raising capital, we may need to curtail or cease operations.
If
we are unable to establish sales, marketing and distribution capabilities or enter into successful relationships with third parties
to perform these services, we may not be successful in commercializing our product candidates if and when they are approved.
We
do not have a sales or marketing infrastructure and have no experience in the sale, marketing or distribution of products. To
achieve commercial success for any product for which we have obtained marketing approval, we will need to establish a sales and
marketing infrastructure or to out-license the product.
In
the future, we may consider building a focused sales and marketing infrastructure to market AP-CDLD and potentially other product
candidates in the United States, if and when they are approved (although we are not currently developing or seeking a partner
to develop AP-ZP and we have not presently budgeted any funds toward its development. In the future, we may consider viable partnership
opportunities for this product candidate). There are risks involved with establishing our own sales, marketing and distribution
capabilities. For example, recruiting and training a sales force could be expensive and time consuming and could delay any product
launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities
is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses.
This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.
Factors
that may inhibit our efforts to commercialize our products on our own include:
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our inability to
recruit, train and retain adequate numbers of effective sales and marketing personnel;
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the inability of
sales personnel to obtain access to physicians;
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the lack of adequate
numbers of physicians to prescribe any future products;
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the lack of complementary
products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more
extensive product lines; and
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unforeseen costs
and expenses associated with creating an independent sales and marketing organization.
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If
we are unable to establish our own sales, marketing and distribution capabilities or enter into successful arrangements with third
parties to perform these services, our product revenues and our profitability, may be materially adversely affected.
In
addition, we may not be successful in entering into arrangements with third parties to sell, market and distribute our product
candidates inside or outside of the United States or may be unable to do so on terms that are favorable to us. We likely will
have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell
and market our products effectively. If we do not establish sales, marketing and distribution capabilities successfully, either
on our own or in collaboration with third parties, we will not be successful in commercializing our product candidates.
The
members of our management team are important to the efficient and effective operation of our business, and we may need to add
and retain additional leading experts. Failure to retain our management team and add additional leading experts could have a material
adverse effect on our business, financial condition or results of operations.
Our
executive officers and our management team are important to the efficient and effective operation of our business. Our failure
to retain our management personnel, who have developed much of the technology we utilize today, or any other key management personnel,
could have a material adverse effect on our future operations. Our success is also dependent on our ability to attract, retain
and motivate highly-trained technical and management personnel, among others, to continue the development and commercialization
of our current and future products.
As
such, our future success highly depends on our ability to attract, retain and motivate personnel required for the development,
maintenance and expansion of our activities. There can be no assurance that we will be able to retain our existing personnel or
attract additional qualified personnel. The loss of personnel or the inability to hire and retain additional qualified personnel
in the future could have a material adverse effect on our business, financial condition and results of operation.
We
expect to face significant competition. If we cannot successfully compete with new or existing products, our marketing and sales
will suffer and we may never be profitable.
If
any of our products are approved, we expect to compete against fully-integrated pharmaceutical and biotechnology companies and
smaller companies that are collaborating with pharmaceutical companies, academic institutions, government agencies and other public
and private research organizations. In addition, many of these competitors, either alone or together with their collaborative
partners, operate larger research and development programs than we do, and have substantially greater financial resources than
we do, as well as significantly greater experience in:
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undertaking preclinical
testing and human clinical trials;
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obtaining FDA approvals
and addressing various regulatory matters and obtaining other regulatory approvals of drugs;
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formulating and
manufacturing drugs; and
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launching, marketing
and selling drugs.
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Our
competitors are likely to include companies with marketed products and/or an advanced research and development pipeline. The competitive
landscape of improving Levodopa for the treatment of Parkinson’s disease symptoms includes Novartis AG, Orion Corporation,
AbbVie, Impax Laboratories, Inc., XenoPort Inc., which was acquired by Arbor Pharmaceuticals in July 2016 and more. The competitive
landscape in the gastric retention system field includes Depomed, Inc., Merrion Pharmaceuticals, Flamel Technologies S.A., XenoPort
Inc., Sun Pharma and more. Management is not aware of any companies that are developing or planning to develop a drug delivery
system similar to our Accordion Pill platform technology.
There
is a substantial risk of product liability claims in our business. We currently do not maintain product liability insurance and
a product liability claim against us could adversely affect our business.
We
may incur substantial liabilities and may be required to limit commercialization of our products in response to product liability
lawsuits, which may result in substantial losses.
Any
of our product candidates could cause adverse events, including injury, disease or adverse side effects. These adverse events
may or may not be observed in clinical trials, but may nonetheless occur in the future. If any of these adverse events occur,
they may render our product candidates ineffective or harmful in some patients, and our sales would suffer, materially adversely
affecting our business, financial condition and results of operations.
In
addition, potential adverse events caused by our product candidates could lead to product liability lawsuits. If product liability
lawsuits are successfully brought against us, we may incur substantial liabilities and may be required to limit the marketing
and commercialization of our product candidates. Our business exposes us to potential product liability risks, which are inherent
in the testing, manufacturing, marketing and sale of pharmaceutical products. We may not be able to avoid product liability claims.
Product liability insurance for the pharmaceutical and biotechnology industries is generally expensive, if available at all. We
do not have product liability insurance (and currently have insurance coverage for each specific clinical trial, which covers
a certain number of trial participants and which varies based on the particular clinical trial) and if we are unable to obtain
sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims, we may be
unable to clinically test, market or commercialize our product candidates. A successful product liability claim brought against
us in excess of our insurance coverage, if any, may cause us to incur substantial liabilities, and, as a result, our business,
liquidity and results of operations would be materially adversely affected. In addition, the existence of a product liability
claim could affect the market price of our ordinary shares.
We
face continuous technological change, and developments by competitors may render our products or technologies obsolete or non-competitive.
If our new or existing product candidates are rendered obsolete or non-competitive, our marketing and sales will suffer and we
may never be profitable.
If
our competitors develop and commercialize products faster than we do, or develop and commercialize products that are superior
to our product candidates, our commercial opportunities could be reduced or eliminated. The extent to which any of our product
candidates achieve market acceptance will depend on competitive factors, many of which are beyond our control. Competition in
the biotechnology and biopharmaceutical industry is intense and has been accentuated by the rapid pace of technology development.
Our potential competitors include large integrated pharmaceutical companies, biotechnology companies that currently have drug
and target discovery efforts, universities, and public and private research institutions. Almost all of these entities have substantially
greater research and development capabilities and financial, scientific, manufacturing, marketing and sales resources than we
do. These organizations also compete with us to:
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attract parties
for acquisitions, joint ventures or other collaborations;
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license proprietary
technology that is competitive with the technology we are developing;
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attract and hire
scientific talent and other qualified personnel.
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Our
competitors may succeed in developing and commercializing products earlier and obtaining regulatory approvals from the FDA more
rapidly than we do. Our competitors may also develop products or technologies that are superior to those we are developing, and
render our product candidates or technologies obsolete or non-competitive. If we cannot successfully compete with new or existing
products, our marketing and sales could suffer and we may never be profitable.
We
may encounter difficulties in managing our growth. Failure to manage our growth effectively could have a material adverse effect
on our business, results of operations and financial condition.
We
may not be able to successfully grow and expand. Successful implementation of our business plan will require management of growth,
including potentially rapid and substantial growth, which will result in an increase in the level of responsibility for management
personnel and place a strain on our human and capital resources. To manage growth effectively, we will be required to continue
to implement and improve our operating and financial systems and controls to expand, train and manage our employee base. Our ability
to manage our operations and growth effectively requires us to continue to expend funds to enhance our operational, financial
and management controls, reporting systems and procedures and to attract and retain sufficient talented personnel. If we are unable
to scale up and implement improvements to our control systems in an efficient or timely manner, or if we encounter deficiencies
in existing systems and controls, then we may not be able to make available the products required to successfully commercialize
our technology. Failure to attract and retain sufficient talented personnel will further strain our human resources and could
impede our growth or result in ineffective growth. Moreover, the management, systems and controls currently in place or to be
implemented may not be adequate for such growth, and the steps taken to hire personnel and to improve such systems and controls
might not be sufficient. If we are unable to manage our growth effectively, it could have a material adverse effect on our business,
results of operations and financial condition.
If
we are unable to obtain adequate insurance, our financial condition could be adversely affected in the event of uninsured or inadequately
insured loss or damage. Our ability to effectively recruit and retain qualified officers and directors could also be adversely
affected if we experience difficulty in obtaining adequate directors’ and officers’ liability insurance.
We
may not be able to obtain insurance policies on terms affordable to us that would adequately insure our business and property
against damage, loss or claims by third parties. To the extent our business or property suffers any damages, losses or claims
by third parties, which are not covered or adequately covered by insurance, our financial condition may be materially adversely
affected.
We
may be unable to maintain sufficient insurance as a public company to cover liability claims made against our officers and directors.
If we are unable to adequately insure our officers and directors, we may not be able to retain or recruit qualified officers and
directors to manage our Company.
Global
economic, capital market and political conditions could affect our ability to raise capital and could disrupt or delay the performance
of our third-party contractors and suppliers.
Our
ability to raise capital may be adversely affected by changes in global economic conditions and geopolitical risks, including
credit market conditions, levels of consumer and business confidence, exchange rates, levels of government spending and deficits,
trade policies, political conditions, actual or anticipated default on sovereign debt and other challenges that could affect the
global economy. These economic conditions affect businesses such as ours in a number of ways. Tightening of credit in financial
markets could adversely affect our ability to obtain financing. Similarly, such tightening of credit may adversely affect our
supplier base and increase the potential for one or more of our suppliers to experience financial distress or bankruptcy. Our
global business is also adversely affected by decreases in the general level of economic activity, such as decreases in business
and consumer spending.
We
incur significant costs as a result of the listing of our ordinary shares for trading on the NASDAQ Capital Market and thereby
being a public company in the United States as well as in Israel, and our management is required to devote substantial additional
time to new compliance initiatives as well as to compliance with ongoing U.S. and Israeli reporting requirements.
As
a public company in both Israel and the U.S., we incur significant accounting, legal and other expenses in order to comply with
requirements of the Securities and Exchange Commission, or the SEC, and the NASDAQ Capital Market, including requirements under
Section 404 and other provisions of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. These rules and regulations have
increased our legal and financial compliance costs, introduced new costs such as investor relations, stock exchange listing fees
and shareholder reporting, and made some activities more time consuming and costly. Any future changes in the laws and regulations
affecting public companies in the United States, including Section 404 and other provisions of the Sarbanes-Oxley Act, the rules
and regulations adopted by the SEC and the NASDAQ Capital Market, for so long as they apply to us, will result in increased costs
to us as we respond to such changes.
Failure
to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse
effect on our business, results of operation or financial condition. In addition, current and potential shareholders could lose
confidence in our financial reporting, which could have a material adverse effect on the price of our ordinary shares.
Effective
internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We are required to
document and test our internal control procedures in order to satisfy the requirements of Section 404, which requires annual management
assessments of the effectiveness of our internal controls over financial reporting. If we fail to maintain the adequacy of our
internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that
we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section
404. Disclosing deficiencies or weaknesses in our internal controls, failing to remediate these deficiencies or weaknesses in
a timely fashion or failing to achieve and maintain an effective internal control environment may cause investors to lose confidence
in our reported financial information, which could have a material adverse effect on the price of our ordinary shares. If we cannot
provide reliable financial reports or prevent fraud, our operating results could be harmed.
As
an “emerging growth company” under the JOBS Act, we are permitted to, and intend to, rely on exemptions from certain
disclosure requirements.
As
an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we are permitted
to, and intend to, rely on exemptions from certain disclosure requirements. We are an emerging growth company until the earliest
of: (i) the last day of the fiscal year during which we have total annual gross revenues of $1.07 billion or more, (ii) the last
day of the fiscal year following the fifth anniversary of the date of the first sale of our ordinary shares pursuant to an effective
registration statement, (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in
non-convertible debt or (iv) the date on which we are deemed a “large accelerated issuer” as defined in Regulation
S-K of the Securities Act of 1933, as amended, or the Securities Act. For so long as we remain an emerging growth company, we
will not be required to:
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have an auditor
report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;
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comply with any
requirement that may be adopted by the Public Company Accounting Oversight Board, or PCAOB, regarding mandatory audit firm
rotation or a supplement to the auditor’s report providing additional information about the audit and the consolidated
financial statements (auditor discussion and analysis);
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submit certain executive
compensation matters to shareholders advisory votes pursuant to the “say on frequency” and “say on pay”
provisions (requiring a non-binding shareholder vote to approve compensation of certain executive officers) and the “say
on golden parachute” provisions (requiring a non-binding shareholder vote to approve golden parachute arrangements for
certain executive officers in connection with mergers and certain other business combinations) of the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010; and
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include detailed
compensation discussion and analysis in our filings under the Securities Exchange Act of 1934, as amended, or the Exchange
Act, and instead may provide a reduced level of disclosure concerning executive compensation.
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Although
we intend to rely on the exemptions provided in the JOBS Act, the exact implications of the JOBS Act for us are still subject
to interpretations and guidance by the SEC and other regulatory agencies. In addition, as our business grows, we may no longer
satisfy the conditions of an emerging growth company under the JOBS Act. We are currently evaluating and monitoring developments
with respect to these new rules and we cannot assure you that we will be able to take advantage of all of the benefits from the
JOBS Act.
In
addition, as an “emerging growth company,” we may elect under the JOBS Act to delay adoption of new or revised accounting
pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We are choosing
to “opt out” of this provision and, as a result, we will comply with new or revised pronouncements applicable to public
companies when they are required to be adopted by public companies. This decision to opt out of the extended transition period
under the JOBS Act is irrevocable.
We
are a “foreign private issuer” and have disclosure obligations that are different from those of U.S. domestic reporting
companies.
We
are a foreign private issuer and are not subject to the same requirements that are imposed upon U.S. domestic issuers by the SEC.
Under the Exchange Act, we will be subject to reporting obligations that, in certain respects, are less detailed and less frequent
than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements
that comply with the requirements applicable to U.S. domestic reporting companies. Furthermore, although under regulations promulgated
under the Israeli Companies Law, 5759-1999, or the Companies Law, as an Israeli public company listed overseas, we are required
to disclose the compensation of our five most highly compensated officers on an individual basis (rather than on an aggregate
basis, as was previously permitted for Israeli public companies listed overseas), however this disclosure will not be as extensive
as that required of U.S. domestic reporting companies. We will also have four months after the end of each fiscal year to file
our annual reports with the SEC and will not be required to file current reports as frequently or promptly as U.S. domestic reporting
companies. Furthermore, our officers, directors and principal shareholders will be exempt from the requirements to report short-swing
profit recovery contained in Section 16 of the Exchange Act. Also, as a “foreign private issuer,” we are not subject
to the requirements of Regulation FD (Fair Disclosure) promulgated under the Exchange Act. These exemptions and leniencies will
reduce the frequency and scope of information and protections available to you in comparison to those applicable to a U.S. domestic
reporting companies.
As
a “foreign private issuer,” we are permitted, and intend, to follow certain home country corporate governance practices
instead of otherwise applicable SEC and NASDAQ Capital Market requirements, which may result in less protection than is accorded
to investors under rules applicable to domestic U.S. issuers.
As
a “foreign private issuer,” we are permitted to follow certain home country corporate governance practices instead
of those otherwise required under the Listing Rules of the NASDAQ Capital Market for domestic U.S. issuers. For instance, we currently
follow home country practice in Israel with regard to director nomination procedures and quorum requirements. In addition, we
may follow our home country law instead of the Listing Rules of the NASDAQ Capital Market that require that we obtain shareholder
approval for certain dilutive events, such as the establishment or amendment of certain equity based compensation plans, an issuance
that will result in a change of control of our Company, certain transactions other than a public offering involving issuances
of a 20% or greater interest in our Company, and certain acquisitions of the stock or assets of another company. We may in the
future elect to follow home country corporate governance practices in Israel with regard to other matters. Following our home
country corporate governance practices as opposed to the requirements that would otherwise apply to a U.S. company listed on the
NASDAQ Capital Market may provide less protection to you than what is accorded to investors under the Listing Rules of the NASDAQ
Capital Market applicable to domestic U.S. issuers. See “Item 16G. Corporate Governance — NASDAQ Capital Market Listing
Rules and Home Country Practices.”
Were
we to lose our status as a “foreign private issuer,” the costs incurred and management time required in fulfilling
the additional regulatory requirements of a U.S. domestic company could be substantial.
In
order to maintain our current status as a “foreign private issuer”, more than 50% of our outstanding voting securities
must not be directly or indirectly owned by residents of the United States, and we must not have any of the following: (i) a majority
of our executive officers or directors being Untied States citizens or residents, (ii) more than 50% of our assets being located
in the United States, or (iii) our business being principally administered in the United States. If we were to lose our “foreign
private issuer” status:
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we
would no longer be exempt from certain of the provisions of U.S. securities laws, such
as Regulation FD and the Section 16 short swing profit rules;
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we
would be required to commence reporting on forms required of U.S. companies, such as
Forms 10-K, 10-Q and 8-K, rather than the forms currently available to us, such as Forms
20-F and 6-K; and
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we
may lose the ability to rely upon exemptions from NASDAQ Capital Market corporate governance
requirements that are available to foreign private issuers.
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“foreign private issuer” must determine its status on the last business day of its most recently completed second
fiscal quarter which in our case is June, and a change in status (if any) would take effect as of the first day of the following
fiscal year. If a “foreign private issuer” no longer satisfies these requirements, it will become subject to U.S.
domestic reporting requirements on the first day of its fiscal year immediately succeeding such determination.
The
regulatory and compliance costs to us under U.S. securities laws to comply with the reporting requirements applicable to a U.S.
domestic issuer may be significantly higher than the cost we would incur as a foreign private issuer.
Risks
Related to Our Intellectual Property
We
license our core technology on an exclusive basis from Yissum (Hebrew University), and we could lose our rights to this license
if a dispute with Yissum arises or if we fail to comply with the financial and other terms of the license.
We
license our core intellectual property from Yissum, an affiliate of Hebrew University. We initially entered into an exclusive
license agreement with Yissum in 2000 and, in 2004 and 2005, we amended the license, which we refer to, as amended, as the License
Agreement. According to the License Agreement, we hold an exclusive license for developing, manufacturing and/or world marketing
of products that are directly or indirectly based on the patent owned by Yissum and/or other related intellectual property (including
any information, research results and related know-how). Yissum is not permitted to transfer such intellectual property to third
parties without our prior written consent. Yissum may obtain future financing from other entities for its research, provided that
such entities will not be granted rights in its results (including other intellectual property rights) in a way prejudicing the
rights granted to us in accordance with the License Agreement. We are entitled to grant perpetual sublicenses of this intellectual
property to third parties, and such third parties will not be required to assume any undertaking towards Yissum. We are obligated
to research and develop products that are based on the intellectual property of Yissum and to pay Yissum from the date of first
sale an amount equal to 3% of our net sales of products based on the intellectual property and 15% from all other payments or
benefits received from any such sublicense. In addition, also in consideration of the exclusive license granted to us pursuant
to the License Agreement, we issued 5,618 ordinary shares to Yissum. As of the date of this annual report, no payments were paid
and/or are due under the License Agreement. The License Agreement will be in effect until the latest of: (1) the expiration of
the last registered patent within the relevant territory in November 2020; and (2) 15 years from the date of the first commercial
sale. We also contracted with Yissum for laboratory services. In January 2008, we signed an addendum to the License Agreement
to conduct an additional joint development and study regarding a technology, different from the Accordion Pill, for the gastric
retention, or GR, of a drug. This addendum provides that the intellectual property rights produced as a result of the joint development
and study will be jointly owned and we are entitled to receive a license for Yissum’s share in these rights in return for
payment of royalties. One patent application has been filed by Yissum and us as a result of the development related to that joint
project, but this patent application was abandoned.
The
License Agreement imposes certain payment, reporting, confidentiality and other obligations on us. In the event that we were to
breach any of our obligations under the License Agreement and fail to cure such breach, Yissum would have the right to terminate
the License Agreement upon 30 days’ notice. In addition, Yissum has the right to terminate the License Agreement upon our
bankruptcy or receivership. If any dispute arises with respect to our arrangement with Yissum, such dispute may disrupt our operations
and would likely have a material and adverse impact on us if resolved in a manner that is unfavorable to us. Most of our current
product candidates are partly based on the intellectual property licensed under the License Agreement, and if the License Agreement
was terminated, it would have a material adverse effect on our business, prospects and results of operations.
If
we fail to adequately protect, enforce or secure rights to the patents which were licensed to us or any patents we may own in
the future, the value of our intellectual property rights would diminish and our business and competitive position would suffer.
Our
success, competitive position and future revenues, if any, depend in part on our ability to obtain and successfully leverage intellectual
property covering our products and product candidates, know-how, methods, processes and other technologies, to protect our trade
secrets, to prevent others from using our intellectual property and to operate without infringing the intellectual property rights
of third parties.
The
risks and uncertainties that we face with respect to our intellectual property rights include, but are not limited to, the following:
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the degree and range
of protection any patents will afford us against competitors;
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if and when patents
will be issued;
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whether or not others
will obtain patents claiming aspects similar to those covered by our own or licensed patents and patent applications;
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we may be subject
to interference proceedings;
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we may be subject
to opposition or post-grant proceedings in foreign countries;
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any patents that
are issued may not provide sufficient protection;
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we may not be able
to develop additional proprietary technologies that are patentable;
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other companies
may challenge patents licensed or issued to us or our customers;
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other companies
may independently develop similar or alternative technologies, or duplicate our technologies;
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other companies
may design around technologies we have licensed or developed;
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enforcement of patents
is complex, uncertain and expensive; and
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we may need to initiate
litigation or administrative proceedings that may be costly whether we win or lose.
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If
patent rights covering our products and methods are not sufficiently broad, they may not provide us with any protection against
competitors with similar products and technologies. Furthermore, if the United States Patent and Trademark Office, or the USPTO,
or foreign patent offices issue patents to us or our licensors, others may challenge the patents or design around the patents,
or the patent office or the courts may invalidate the patents. Thus, any patents we own or license from or to third parties may
not provide any protection against our competitors.
We
cannot be certain that patents will be issued as a result of any pending applications, and we cannot be certain that any of our
issued patents or patents licensed from Yissum (or any other third party in the future), will give us adequate protection from
competing products. For example, issued patents, including the patents licensed by us, may be circumvented or challenged, declared
invalid or unenforceable, or narrowed in scope.
In
addition, since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot
be certain that we were the first to make our inventions or to file patent applications covering those inventions.
It
is also possible that others may obtain issued patents that could prevent us from commercializing our products or require us to
obtain licenses requiring the payment of significant fees or royalties in order to enable us to conduct our business. As to those
patents that we have licensed, our rights depend on maintaining our obligations to the licensor under the applicable license agreement,
and we may be unable to do so.
In
addition to patents and patent applications, we depend upon trade secrets and proprietary know-how to protect our proprietary
technology. We require our employees, consultants, advisors and collaborators to enter into confidentiality agreements that prohibit
the disclosure of confidential information to any other parties. We also require our employees and consultants to disclose and
assign to us their ideas, developments, discoveries and inventions. These agreements may not, however, provide adequate protection
for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure.
We
may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could
result in litigation and adversely affect our business.
A
significant portion of our intellectual property has been developed by our employees in the course of their employment for us.
Under the Israeli Patent Law, 5727-1967, or the Patent Law, inventions conceived by an employee in the course and as a result
of or arising from his or her employment with a company are regarded as “service inventions,” which belong to the
employer, absent a specific agreement between the employee and employer giving the employee service invention rights. The Patent
Law also provides that if there is no such agreement between an employer and an employee, the Israeli Compensation and Royalties
Committee, or the Committee, a body constituted under the Patent Law, shall determine whether the employee is entitled to remuneration
for his inventions. Case law clarifies that the right to receive consideration for “service inventions” can be waived
by the employee and that in certain circumstances, such waiver does not necessarily have to be explicit. The Committee will examine,
on a case-by-case basis, the general contractual framework between the parties, using interpretation rules of the general Israeli
contract laws. Further, the Committee has not yet determined one specific formula for calculating this remuneration (but rather
uses the criteria specified in the Patent Law). Although we generally enter into assignment-of-invention agreements with our employees
pursuant to which such individuals assign to us all rights to any inventions created in the scope of their employment or engagement
with us, we may face claims demanding remuneration in consideration for assigned inventions. As a consequence of such claims,
we could be required to pay additional remuneration or royalties to our current and/or former employees, or be forced to litigate
such claims, which could negatively affect our business.
Obtaining
and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other
requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for noncompliance
with these requirements.
Periodic
maintenance fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime
of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary,
fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be
cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance
can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights
in the relevant jurisdiction. Noncompliance events that could result in abandonment or lapse of a patent or patent application
include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and
failure to properly legalize and submit formal documents. In such an event, our competitors might be able to enter the market,
which could have a material adverse effect on our business.
Costly
litigation may be necessary to protect our intellectual property rights, and we may be subject to claims alleging the breach of
license or other agreements that we have entered into with third parties or the violation of the intellectual property rights
of others.
We
may face significant expense and liability as a result of litigation or other proceedings relating to patents and other intellectual
property rights of ours and others. In the event that another party has also filed a patent application or been issued a patent
relating to an invention or technology claimed by us in pending applications, we may be required to participate in an interference
proceeding declared by the USPTO to determine priority of invention, which could result in substantial uncertainties and costs
for us, even if the eventual outcome were favorable to us. We, or our licensors, also could be required to participate in interference
proceedings involving issued patents and pending applications of another entity. An adverse outcome in an interference proceeding
could require us to cease using the technology or to license rights from prevailing third parties.
We
have entered into license and collaboration agreements with other parties, including other pharmaceutical companies, and intend
to continue to do so in the future. We and our counterparties to these agreements have granted and may grant each other, and have
or may claim against each other, certain rights with respect to the other party’s intellectual property and the intellectual
property that we have or may jointly develop, including rights of co-ownership and rights of first refusal in the event that we
or our counterparties seek to subsequently license or sell such intellectual property. For instance, a former partner under a
terminated collaboration agreement previously indicated to us after the termination of such agreement that it believed it had
a right of first offer with respect to a future license by us of certain intellectual property that existed in 2008 and is contained
in AP-CDLD. We do not believe that this party has any such right. However, the cost to us of any litigation or other proceeding
relating to our license and collaboration agreements, our licensed patents or patent applications or other intellectual property,
even if resolved in our favor, could be substantial, divert management’s resources and attention and delay or impair our
ability to license or sell such intellectual property. Our ability to enforce our intellectual property protection could be limited
by our financial resources, and may be subject to lengthy delays. A third party may claim that we are using inventions claimed
by their intellectual property and may go to court to stop us from engaging in our normal operations and activities, such as research,
development and the sale of any future products. Such lawsuits are expensive and would consume time and other resources. There
is a risk that the court will decide that we are infringing the third party’s intellectual property and will order us to
stop the activities claimed by the intellectual property, redesign our products or processes to avoid infringement or obtain licenses
(which may not be available on commercially reasonable terms or at all). In addition, there is a risk that a court will order
us to pay the other party damages for having infringed their patents.
Moreover,
there is no guarantee that any prevailing patent or other intellectual property owner would offer us a license so that we could
continue to engage in activities claimed by the patent or other intellectual property, or that such a license, if made available
to us, could be acquired on commercially acceptable terms. In addition, third parties may, in the future, assert other intellectual
property infringement claims against us with respect to our product candidates, technologies or other matters. Any claims of infringement
or other breach of license or collaboration agreement asserted against us, whether or not successful, may have a material adverse
effect on us.
We
rely on confidentiality agreements that could be breached and may be difficult to enforce, which could result in third parties
using our intellectual property to compete against us.
Although
we believe that we take reasonable steps to protect our intellectual property, including the use of agreements relating to the
non-disclosure of confidential information to third parties, as well as agreements that purport to require the disclosure and
assignment to us of the rights to the ideas, developments, discoveries and inventions of our employees and consultants while we
employ them, the agreements can be difficult and costly to enforce. Although we seek to obtain these types of agreements from
our contractors, consultants, advisors and research collaborators, to the extent that employees and consultants utilize or independently
develop intellectual property in connection with any of our projects, disputes may arise as to the intellectual property rights
associated with our products. If a dispute arises, a court may determine that the right belongs to a third party. In addition,
enforcement of our rights can be costly and unpredictable. We also rely on trade secrets and proprietary know-how that we seek
to protect in part by confidentiality agreements with our employees, contractors, consultants, advisors or others. Despite the
protective measures we employ, we still face the risk that:
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these agreements
may be breached;
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these agreements
may not provide adequate remedies for the applicable type of breach;
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our trade secrets
or proprietary know-how will otherwise become known; or
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our competitors
will independently develop similar technology or proprietary information.
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International
patent protection is particularly uncertain, and if we are involved in opposition proceedings in foreign countries, we may have
to expend substantial sums and management resources.
Patent
law outside the United States may be different than in the United States. Further, the laws of some foreign countries may not
protect our intellectual property rights to the same extent as the laws of the United States, if at all. A failure to obtain sufficient
intellectual property protection in any foreign country could materially and adversely affect our business, results of operations
and future prospects. Moreover, we may participate in opposition proceedings to determine the validity of our foreign patents
or our competitors’ foreign patents, which could result in substantial costs and divert management’s resources and
attention. Additionally, due to uncertainty in patent protection law, we have not filed applications in many countries where significant
markets exist.
Risks
Related to the Regulation of our Company and Its Business
Our
product candidates are at various stages of preclinical and clinical development and may never be commercialized.
The
progress and results of any future preclinical testing or future clinical trials are uncertain, and the failure of our product
candidates and additional product candidates which we may license, acquire or develop in the future to receive regulatory approvals
could have a material adverse effect on our business, operating results and financial condition to the extent we are unable to
commercialize any such products. None of our product candidates have received regulatory approval for commercial sale. In addition,
we face the risks of failure inherent in developing therapeutic products. Our product candidates are not expected to be commercially
available for several years, if at all.
Our
product candidates are subject to extensive regulation and are at various stages of regulatory development and may never obtain
regulatory approval.
Our
product candidates must satisfy certain standards of safety and efficacy for a specific indication before they can be approved
for commercial use by the FDA or foreign regulatory authorities. The FDA and foreign regulatory authorities have full discretion
over this approval process. We will need to conduct significant additional research, including testing in animals and in humans,
before we can file applications for product approval. Typically, in the pharmaceutical industry, there is a high rate of attrition
for product candidates in preclinical testing and clinical trials. Also, even though we believe that some of our product candidates
may be eligible for FDA review under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act, or FDCA, the FDA may not agree
with that assessment, and may require us to submit the application under Section 505(b)(1) which usually requires more comprehensive
clinical data than applications submitted under Section 505(b)(2). Even under Section 505(b)(2), satisfying FDA’s requirements
typically takes many years, is dependent upon the type, complexity and novelty of the product and requires the expenditure of
substantial resources. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will
be successful. For example, a number of companies in the pharmaceutical industry, including biotechnology companies, have suffered
significant setbacks in advanced clinical trials, even after promising results in earlier trials. In addition, delays or rejections
may be encountered based upon additional government regulation, including any changes in legislation or FDA policy, during the
process of product development, clinical trials and regulatory reviews. After clinical trials are completed, the FDA has substantial
discretion in the drug approval process and may require us to conduct additional preclinical and clinical testing or to perform
post-marketing studies.
In
order to receive FDA approval or approval from foreign regulatory authorities to market a product candidate or to distribute our
products, we must demonstrate through preclinical testing and through human clinical trials that the product candidate is safe
and effective for its intended uses (e.g., treatment of a specific condition in a specific way subject to contradictions and other
limitations). We anticipate that some foreign regulatory agencies will have different testing and approval requirements from those
of the FDA. Even if we comply with all FDA requests, the FDA may ultimately reject or decline to approve one or more of our new
drug applications, or it may grant approval for a narrowly intended use that is not commercially feasible. We might not obtain
regulatory approval for our product candidates in a timely manner, if at all. Failure to obtain FDA approval of any of our product
candidates in a timely manner or at all could severely undermine our business by delaying or halting commercialization of our
products, imposing costly procedures, diminishing competitive advantages and reducing the number of salable products and, therefore,
corresponding product revenues.
We
have collected limited clinical data about the safety and efficacy of AP-CDLD in an open-label Phase II clinical trial that was
not conducted under an FDA issued IND and we may be unable to replicate these results in large-scale and double-blind controlled
clinical trials.
Although
the clinical trials performed to date using AP-CDLD have shown promising results, these results were generated from open-label
studies not performed under an FDA issued investigational new drug application, or IND, and were conducted at a limited number
of clinical sites on a limited number of patients. An “open-label” trial is one where both the patient and investigator
know whether the patient is receiving the test article or either an existing approved drug or placebo. Open-label trials are subject
to various limitations that may exaggerate any therapeutic effect as patients in open-label studies are aware that they are receiving
treatment. Open-label trials may be subject to a “patient bias” where patients perceive their symptoms to have improved
merely due to their awareness of receiving an experimental treatment. Patients selected for early clinical studies often include
the most severe sufferers and their symptoms may have been bound to improve notwithstanding the new treatment. In addition, open-label
trials may be subject to an “investigator bias” where those assessing and reviewing the physiological outcomes of
the clinical trials are aware of which patients have received treatment and may interpret the information of the treated group
more favorably given this knowledge.
Given
that these were open label studies, not conducted under an FDA issued IND, the FDA may decide not to consider the data that we
collected from these open-label studies, even though we are obligated to submit these data to the FDA. The FDA will accept a well-designed,
well-conducted, non-IND foreign study as support for an application for marketing approval if the study was conducted in accordance
with Good Clinical Practice, or GCP, and if the FDA is able to validate the data from the study through an onsite inspection,
if necessary. GCP is an international ethical and scientific quality standard for designing, conducting, recording, and reporting
trials that involve the participation of human subjects. Compliance with this standard provides public assurance that the rights,
safety, and well-being of study subjects are protected, and that the clinical trial data are credible. GCP includes review and
approval by an independent ethics committee, or IEC, such as an institutional review board, or IRB, before initiating a study.
It also includes continuing review of an ongoing study by an IEC, and obtaining the freely given informed consent of the subject
(or a subject’s legally authorized representative, if a subject is unable to provide informed consent) before initiating
a study.
Our
Phase II clinical trial for AP-CDLD was conducted at several medical centers in Israel. Patients in Israel are genetically similar
to European patients and U.S. patients of European descent, but there may be unidentified genetic differences that may result
in variable therapeutic response in certain subpopulations in these countries or in patients in other countries. Furthermore,
although our initial safety profile has been favorable, safety could be dependent on operator skills. It is possible that we may
experience a higher rate of adverse events in the future with wider application of our Accordion Pill technology in real-world
practice outside of clinical trials.
If
the FDA does not conclude that a given product candidate using our Accordion Pill technology satisfies the requirements for approval
under the Section 505(b)(2) regulatory approval pathway, or if the requirements for approval of our product candidates under Section
505(b)(2) are not as we expect, the approval pathway will likely take significantly longer, cost significantly more and entail
significantly greater complications and risks than anticipated, and in any case may not be successful.
We
intend to seek FDA approval for our product candidates implementing our Accordion Pill technology through the Section 505(b)(2)
regulatory pathway. Pursuant to Section 505(b)(2) of the FDCA, a NDA under Section 505(b)(2) is permitted to reference safety
and effectiveness data submitted by the sponsor of a previously approved drug as part of its NDA, or rely on FDA’s prior
conclusions regarding the safety and effectiveness of that previously approved drug, or rely in part on data in the public domain.
Reliance on data collected by others may expedite the development program for our product candidates by potentially decreasing
the amount of clinical data that we would need to generate in order to obtain FDA approval. If the FDA does not allow us to pursue
the Section 505(b)(2) regulatory pathway as anticipated, we may need to conduct additional clinical trials, provide additional
data and information, and meet additional standards for product approval. If this were to occur, the time and financial resources
required to obtain FDA approval, and complications and risks associated with regulatory approval of our product candidates, would
likely substantially increase. Moreover, our inability to pursue the Section 505(b)(2) regulatory pathway may result in new competitive
products reaching the market more quickly than our product, which would likely materially adversely impact our competitive position
and prospects. Even if we are able to utilize the Section 505(b)(2) regulatory pathway, there is no guarantee this will ultimately
lead to accelerated product development or earlier approval. A 505(b)(2) applicant may rely on the FDA’s finding of safety
and effectiveness for a previously approved drug only to the extent that the proposed product in the 505(b)(2) application shares
characteristics (e.g., active ingredient, dosage form, route of administration, strength, indication, conditions of use) in common
with the previously approved drug. To the extent that the previously approved drug and the drug proposed in the 505(b)(2) application
differ (e.g., a product with a different dosage form or route of administration), the 505(b)(2) application must include sufficient
data to support those differences.
In
addition, the pharmaceutical industry is highly competitive, and Section 505(b)(2) NDAs are subject to special requirements designed
to protect the patent rights of sponsors of previously approved drugs that may be referenced in a Section 505(b)(2) NDA. These
requirements may give rise to patent litigation and mandatory delays in approval of our NDA for up to 30 months or longer depending
on the outcome of any litigation. Further, it is not uncommon for a manufacturer of an approved product to file a citizen petition
with the FDA seeking to delay approval of, or impose additional approval requirements for, pending competing products. If successful,
such petitions can significantly delay, or even prevent, the approval of a new product. Even if the FDA ultimately denies such
a petition, the FDA may substantially delay approval while it considers and responds to the petition. Amendments to the FDCA attempt
to limit the delay that can be caused by a citizen petition to 150 days, although court action by a dissatisfied petitioner is
a possibility and this could, in theory, adversely affect the approval process.
Moreover,
even if product candidates implementing our Accordion Pill technology are approved under Section 505(b)(2), the approval may be
subject to limitations on the indicated uses for which the products may be marketed or to other conditions of approval, or may
contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the products.
We
will seek approval in the European Union, or the EU, on a product-by-product basis, either by ourselves or with a third-party
licensee.
A
fast track designation by the FDA may not actually lead to a faster development or regulatory review or approval process.
We
may seek fast track designation for some of our product candidates and may seek such designation for future product candidates.
The FDA has broad discretion whether to grant this designation, and even if we believe a particular product candidate is eligible
for this designation, we cannot assure you that the FDA would decide to grant it. Even if we apply for and receive fast track
designation for one or more of our product candidates or future product candidates, we may not experience a faster development
process, review or approval compared to conventional FDA procedures. The FDA may withdraw fast track designation if it believes
that the designation is no longer supported by data from our clinical development program.
We
might be unable to develop any of our product candidates to achieve commercial success in a timely and cost-effective manner,
or ever.
Even
if regulatory authorities approve any of our product candidates, they may not be commercially successful. Our product candidates
may not be commercially successful because government agencies or other third-party payors may not provide reimbursement for the
costs of the product or the reimbursement may be too low to be commercially successful. In addition, physicians and others may
not use or recommend our products candidates, even following regulatory approval. A product approval, even if issued, may limit
the uses for which such product may be distributed, which could adversely affect the commercial viability of the product. Moreover,
third parties may develop superior products or have proprietary rights that preclude us from marketing our products. We also expect
that our product candidates, if approved, will generally be more expensive than the non-Accordion Pill version of the same medication
available to patients. Physician and patient acceptance of, and demand for, any product candidates for which we obtain regulatory
approval or license will depend largely on many factors, including, but not limited to, the extent, if any, of reimbursement of
costs by government agencies and other third-party payors, pricing, competition, the effectiveness of our marketing and distribution
efforts, the safety and effectiveness of alternative products, and the prevalence and severity of side effects associated with
such products. If physicians, government agencies and other third-party payors do not accept the use or efficacy of our products,
we will not be able to generate significant revenue, if any.
We
cannot be certain that the results of our current or potential Phase III clinical trials, even if all endpoints are met, will
support regulatory approval of any of our product candidates for any indication.
Endpoints
for most Phase III clinical trials may vary from drug candidate to drug candidate and from indication to indication; therefore,
there are no universally accepted endpoints for Phase III clinical trials. It is possible that even if the results of our current
or potential Phase III clinical trial meet the primary endpoints, the FDA will require other data of our product candidates prior
to granting marketing approval.
Our
product candidates and future product candidates will remain subject to ongoing regulatory requirements even if they receive marketing
approval, and if we fail to comply with these requirements, we may not obtain such approvals or could lose those approvals that
have been obtained, and the sales of any approved commercial products could be suspended.
Even
if we receive regulatory approval to market a particular product candidate, any such product will remain subject to extensive
regulatory requirements, including requirements relating to manufacturing, labeling, packaging, adverse event reporting, storage,
advertising, promotion, distribution and record keeping. Even if regulatory approval of a product is granted, the approval may
be subject to limitations on the uses for which the product may be marketed or the conditions of approval, or may contain requirements
for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product, which could negatively impact
us or our collaboration partners by reducing revenues or increasing expenses, and cause the approved product candidate not to
be commercially viable. In addition, as clinical experience with a drug expands after approval, typically because it is used by
a greater number and more diverse group of patients after approval than during clinical trials, side effects and other problems
may be observed over time after approval that were not seen or anticipated during pre-approval clinical trials or other studies.
Any adverse effects observed after the approval and marketing of a product candidate could result in limitations on the use of
or withdrawal of FDA approval of any approved products from the marketplace. Absence of long-term safety data may also limit the
approved uses of our products, if any. If we fail to comply with the regulatory requirements of the FDA and other applicable U.S.
and foreign regulatory authorities, or previously unknown problems with any approved commercial products, manufacturers or manufacturing
processes are discovered, we could be subject to administrative or judicially imposed sanctions or other setbacks, including,
without limitation, the following:
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suspension or imposition
of restrictions on the products, manufacturers or manufacturing processes, including costly new manufacturing requirements;
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civil or criminal
penalties, fines and/or injunctions;
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product seizures
or detentions;
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import or export
bans or restrictions;
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voluntary or mandatory
product recalls and related publicity requirements;
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suspension or withdrawal
of regulatory approvals;
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total or partial
suspension of production; and
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refusal to approve
pending applications for marketing approval of new products or supplements to approved applications.
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If
we or our collaborators are slow to adapt, or are unable to adapt, to changes in existing regulatory requirements or adoption
of new regulatory requirements or policies, marketing approval for our product candidates may be lost or cease to be achievable,
resulting in decreased revenue from milestones, product sales or royalties, which would have a material adverse effect on our
business, financial condition or results of operations.
Clinical
trials are very expensive, time-consuming and difficult to design and implement, and, as a result, we may suffer delays or suspensions
to current or future trials which would have a material adverse effect on our ability to advance products and generate revenues.
Human
clinical trials are very expensive and difficult to design and implement, in part because they are subject to rigorous regulatory
requirements. Regulatory authorities, such as the FDA, may preclude clinical trials from proceeding. Additionally, the clinical
trial process is time-consuming, failure can occur at any stage of the trial and we may encounter problems that cause us to abandon
or repeat clinical trials. The commencement and completion of clinical trials may be delayed by several factors, including, but
not limited to:
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unforeseen safety
issues;
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clinical holds or
suspension of a clinical trial by the FDA, us, ethics committees, or the data safety monitoring board(DSMB) to determine proper
dosing;
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lack of effectiveness
or efficacy during clinical trials;
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failure of our contract
manufacturers to manufacture our product candidates in accordance with current Good Manufacturing Practices, or cGMP;
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failure of third
party suppliers to perform final manufacturing steps for the drug substance;
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slower than expected
rates of patient recruitment and enrollment;
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lack of healthy
volunteers and patients to conduct trials;
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inability to monitor
patients adequately during or after treatment;
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failure of third
party contract research organizations to properly implement or monitor the clinical trial protocols;
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failure of IRBs
to approve or renew approvals of our clinical trial protocols;
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inability or unwillingness
of medical investigators to follow our clinical trial protocols; and
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lack of sufficient
funding to finance the clinical trials.
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As
noted above, we, regulatory authorities, IRBs or DSMBs may suspend our clinical trials at any time if it appears that we are exposing
participants to unacceptable health risks or if the regulatory authorities find deficiencies in our regulatory submissions or
conduct of these trials. For example, a DSMB has been selected for the Phase III clinical trial of AP-CDLD and has been and will
continue to periodically review the safety data of the trial. Any suspension of clinical trials will delay possible regulatory
approval, if any, and adversely impact our ability to develop products and generate revenue.
We
may be forced to abandon development of certain products altogether, which will significantly impair our ability to generate product
revenues.
Upon
the completion of any clinical trial, if at all, the results of these trials might not support the claims sought by us. Further,
success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and the
results of later clinical trials may not replicate the results of prior clinical trials and preclinical testing. The clinical
trial process may fail to demonstrate that our product candidates are safe for humans and effective for its indicated uses. Any
such failure may cause us to abandon a product candidate and may delay development of other product candidates. Any delay in,
or termination or suspension of, our clinical trials will delay the requisite filings with the FDA and, ultimately, our ability
to commercialize our product candidates and generate product revenues. If the clinical trials do not support our drug product
claims, the completion of development of such product candidates may be significantly delayed or abandoned, which would significantly
impair our ability to generate product revenues and would materially adversely affect our business, financial condition or results
of operations.
Positive
results in the previous clinical trials of one or more of our product candidates may not be replicated in future clinical trials
of such product candidate, which could result in development delays or a failure to obtain marketing approval.
Positive
results in the previous clinical trials of one or more of our product candidates may not be predictive of similar results in future
clinical trials for such product candidate. Also, interim results during a clinical trial do not necessarily predict final results.
A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical
trials even after achieving promising results in early-stage development. Accordingly, the results from the completed preclinical
studies and clinical trials for our product candidates may not be predictive of the results we may obtain in later stage trials
of such product candidates. Our clinical trials may produce negative or inconclusive results, and we may decide, or regulators
may require us, to conduct additional clinical trials. Clinical trial results may be inconclusive, or contradicted by other clinical
trials, particularly larger clinical trials. Moreover, clinical data are often susceptible to varying interpretations and analyses,
and many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials
have nonetheless failed to obtain FDA or European Medicines Agency, or other applicable regulatory agency, approval for their
products.
Reimbursement
may not be available for our products, which could make it difficult for us to sell our products profitably.
Market
acceptance and sales of our products will depend on coverage and reimbursement policies and may be affected by healthcare reform
measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations,
decide which products they will pay for and establish reimbursement levels. We cannot be sure that coverage and reimbursement
will be available for our products. We also cannot be sure that the amount of reimbursement available, if any, will not reduce
the demand for, or the price of, our products. If reimbursement is not available or is available only at limited levels, we may
not be able to successfully compete through sales of our proposed products.
Specifically,
in both the United States and some foreign jurisdictions, there have been a number of legislative and regulatory proposals to
change the healthcare system in ways that could affect our ability to sell our products profitably. In the United States, the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003, also called the Medicare Modernization Act, or MMA, changed
the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by
the elderly and certain others. Prior to MMA, Medicare did not cover most outpatient prescription drugs. MMA created a new voluntary
Part D, which covers outpatient drugs for Medicare beneficiaries and is administered by private insurance plans that operate partially
at-risk under contract with the Centers for Medicare & Medicaid Services, or CMS. These private Part D plans have incentives
to keep costs down. MMA also introduced a new reimbursement methodology based on average sales prices for physician-administered
drugs. In addition, this legislation provided authority for limiting the number of certain outpatient drugs that will be covered
in any therapeutic class. As a result of this legislation and the expansion of federal coverage of drug products, we expect that
there will be additional pressure to contain and reduce costs. These and future cost-reduction initiatives could decrease the
coverage and price that we receive for our products, if approved, and could seriously harm our business. While the MMA applies
only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policies and payment limitations
in setting their own reimbursement rates, and any reduction in reimbursement under Medicare may result in a similar reduction
in payments from private payors.
In
March 2010, the Patient Protection and Affordable Care Act, as amended, or the Affordable Care Act, which was amended by the Health
Care and Education Affordability Reconciliation Act, or collectively, PPACA, became law in the United States. The goal of PPACA
is to reduce the cost of healthcare and substantially change the way healthcare is financed by both governmental and private insurers.
Among other measures, PPACA imposes increased rebates on manufacturers for certain covered drug products reimbursed by state Medicaid
programs. The PPACA remains subject to continuing legislative scrutiny, including efforts by Congress to repeal and amend a number
of its provisions, as well as administrative actions delaying the effectiveness of key provisions. In addition, there have been
lawsuits filed by various stakeholders pertaining to certain portions of the PPACA that may have the effect of modifying or altering
various parts of the law. Efforts to date to amend or repeal the PPACA have generally been unsuccessful. However, the 2016 Presidential
and Congressional elections resulting in the election of the Republican presidential nominee and the continuation of Republican
majorities in both chambers of Congress, have resulted in additional efforts to amend or delay implementation of parts of the
PPACA. In December 2017, new tax legislation was passed which repealed the part of PPACA that had imposed penalties against individuals
for failure to purchase health insurance, commonly known as the individual mandate. The nonpartisan Congressional Budget Office,
or CBO, has predicted that the repeal of the individual mandate will cause 13 million fewer Americans to be insured in 2027 compared
with the prior version of the law. We ultimately cannot predict with any assurance the ultimate effect of the PPACA or changes
to the PPACA on our Company, nor can we provide any assurance that its provisions will not have a material adverse effect on our
business, financial condition, results of operations, cash flows and the trading price of our ordinary shares. In addition, we
cannot predict whether new proposals will be made or adopted, when they may be adopted or what impact they may have on us if they
are adopted.
We
expect to experience pricing pressures in connection with the sale of our products generally due to the trend toward managed healthcare,
the increasing influence of health maintenance organizations, and additional legislative proposals. If we fail to successfully
secure and maintain adequate coverage and reimbursement for our future products or are significantly delayed in doing so, we will
have difficulty achieving market acceptance of our products and our business will be harmed.
We
are subject to extensive and costly government regulation.
The
products we are developing and planning to develop in the future are subject to extensive and rigorous domestic government regulation,
including regulation by the FDA, the CMS, other divisions of the U.S. Department of Health and Human Services, including its Office
of Inspector General, the Office of Civil Rights, which administers the privacy provisions of the Health Insurance Portability
and Accountability Act of 1996, or HIPAA, the U.S. Department of Justice, the Departments of Defense and Veterans Affairs, to
the extent our products are paid for directly or indirectly by those departments, state and local governments, and their respective
foreign equivalents. The FDA regulates the research, development, preclinical and clinical testing, manufacture, safety, effectiveness,
record keeping, reporting, labeling, storage, approval, advertising, promotion, sale, distribution, import and export of pharmaceutical
products under various regulatory provisions. If any drug products we develop are tested or marketed abroad, they will also be
subject to extensive regulation by foreign governments, whether or not we have obtained FDA approval for a given product and its
uses. Such foreign regulation may be equally or more demanding than corresponding U.S. regulation.
Government
regulation substantially increases the cost and risk of researching, developing, manufacturing, and selling our products. Our
failure to comply with these regulations could result in, by way of example, significant fines, criminal and civil liability,
product seizures, recalls, withdrawals, withdrawals of approvals, and exclusion and debarment from government programs. Any of
these actions, including the inability of our proposed products to obtain and maintain regulatory approval, would have a materially
adverse effect on our business, financial condition, results of operations and prospects.
In
addition to government regulation, rules and policies of professional and other quasi and non-governmental bodies and organizations
may impact the prescription of products, as well as the manner of their promotion, marketing, and education. Examples of such
bodies are the American Medical Association, the Accreditation Council of Continuing Medical Education, American College of Physicians
and the American Academy of Family Physicians.
The
recent Presidential and Congressional elections in the United States could result in significant changes in, and uncertainty with
respect to, legislation, regulation and government policy. While it is not possible to predict whether and when any such changes
will occur, changes at the federal level could significantly impact our business and the health care industry; we are currently
unable to predict whether any such changes would have a net positive or negative impact on our business. To the extent that such
changes have a negative impact on us or
the health
care industry,
including as a result of related uncertainty, these changes may materially and adversely
impact our business, financial condition, results of operations, cash flows and
the trading price of our ordinary shares
.
We
are subject to additional federal and state laws and regulations relating to our business, and our failure to comply with those
laws could have a material adverse effect on our results of operations and financial conditions.
In
the event that we were to market products in the United States, we would be subject to additional healthcare regulation and enforcement
by the federal government and the states in which we conduct or will conduct our business. The laws that may affect our ability
to operate include, but are not limited to, the following:
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the federal healthcare
program Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving,
offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual
for, or the purchase, order or recommendation of, any good or service for which payment may be made under government healthcare
programs such as the Medicare and Medicaid programs;
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the Anti-Inducement
Law, which prohibits persons from offering or paying remuneration to Medicare and Medicaid beneficiaries to induce them to
use items or services paid for in whole or in part by the Medicare or Medicaid programs;
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the Ethics in Patient
Referrals Act of 1989, commonly referred to as the Stark Law, prohibits physicians from referring Medicare or Medicaid patients
for certain designated items or services where that physician or family member has a financial interest in the entity provided
the designated item or service;
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federal false claims
laws that prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims
for payment from Medicare, Medicaid or other government healthcare programs that are false or fraudulent;
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federal criminal
laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare
matters;
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state law equivalents
of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed
by any third-party payer, including commercial insurers; and
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federal, state and
local taxation laws applicable to the marketing and sale of our products.
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Further,
the PPACA, among other things, amended the intent requirement of the federal anti-kickback and criminal healthcare fraud statutes.
A person or entity can now be found guilty of fraud or false claims under PPACA without actual knowledge of the statute or specific
intent to violate it. In addition, PPACA provides that the government may assert that a claim including items or services resulting
from a violation of the federal Anti-Kickback Statue constitutes a false or fraudulent claim for purposes of the false claims
statutes. Possible sanctions for violation of these anti-kickback laws include monetary fines, civil and criminal penalties, exclusion
from Medicare, Medicaid and other government programs and forfeiture of amounts collected in violation of such prohibitions. Any
violations of these laws, or any action against us for violation of these laws, even if we successfully defend against it, could
result in a material adverse effect on our reputation, business, results of operations and financial condition.
PPACA
also contains legislation commonly known as the Physician Payments Sunshine Act, or Sunshine Act, which requires CMS to annually
collect and display information reported by device and pharmaceutical manufacturers about payments to physicians and teaching
hospitals and ownership of their stock by physicians. Pursuant to the Sunshine Act, CMS created the federal Open Payments program,
under which data collected for each calendar year is published by CMS in June of the following calendar year. For example, data
that was submitted by applicable manufacturers for the 2016 calendar year was published on June 30, 2017. Failure to submit required
information may result in civil monetary penalties of up to an aggregate of $150,000 per year (or up to an aggregate of $1 million
per year for “knowing failures”), for all payments, transfers of value or ownership or investment interests that are
not reported.
The
2016 Presidential and Congressional elections resulting in the election of the Republican presidential nominee and the continuation
of Republican majorities in both chambers of Congress, have resulted in additional efforts to amend or delay implementation parts
of the PPACA. We ultimately cannot predict with any assurance the ultimate effect of the PPACA or changes to the PPACA on our
Company, nor can we provide any assurance that its provisions will not have a material adverse effect on our business, financial
condition, results of operations, cash flows and the trading price of our ordinary shares. In addition, we cannot predict whether
new proposals will be made or adopted, when they may be adopted or what impact they may have on us if they are adopted.
In
addition, there has been a recent trend of increased federal and state regulation of payments made to physicians for marketing.
Some states, such as California, Massachusetts and Vermont, mandate implementation of corporate compliance programs, along with
the tracking and reporting of gifts, compensation and other remuneration to physicians, and some states limit or prohibit such
gifts. Various trade associations, such as AdvaMed for devices and the Pharmaceutical Research and Manufacturers of America for
drugs, have adopted voluntary standards of ethical behavior that limit the amount of and circumstances under which payments made
be made to physicians.
The
scope and enforcement of these laws is uncertain and subject to change in the current environment of healthcare reform, especially
in light of the lack of applicable precedent and regulations. We cannot predict the impact on our business of any changes in these
laws. Federal or state regulatory authorities may challenge our current or future activities under these laws. Any such challenge
could have a material adverse effect on our reputation, business, results of operations, and financial condition. Any state or
federal regulatory review of us, regardless of the outcome, would be costly and time-consuming.
Changes
in regulatory requirements and guidance or unanticipated events during our clinical trials may occur, which may result in necessary
changes to clinical trial protocols, which could result in increased costs to us, delay our development timeline or reduce the
likelihood of successful completion of our clinical trials.
Changes
in regulatory requirements and guidance or unanticipated events during our clinical trials may occur, as a result of which we
may need to amend clinical trial protocols. Amendments may require us to resubmit our clinical trial protocols to IRBs for review
and approval, which may adversely affect the cost, timing and successful completion of a clinical trial. If we experience delays
in the completion of, or if we terminate, any of our clinical trials, the commercial prospects for our affected product candidates
would be harmed and our ability to generate product revenue would be delayed, possibly materially.
Our
product candidates are manufactured through a compounding, film casting and assembly process, and if we or one of our materials
suppliers encounters problems manufacturing our products or raw materials, our business could suffer.
We
and our contract manufacturers, if any, are, and will be, subject to extensive governmental regulation in connection with the
manufacture of any pharmaceutical products. The FDA and foreign regulators require manufacturers to register manufacturing facilities.
The FDA and foreign regulators also inspect these facilities to confirm compliance with cGMP or similar requirements that the
FDA or foreign regulators establish. We and our contract manufacturers must ensure that all of the processes, methods and equipment
are compliant with cGMP for drugs on an ongoing basis, as mandated by the FDA and other regulatory authorities, and conduct extensive
audits of vendors, contract laboratories and suppliers. The FDA will likely condition grant of any marketing approval, if any,
on a satisfactory on-site inspection of our manufacturing facilities.
We
currently manufacture our product candidates used in clinical testing and we order certain materials from single-source suppliers.
If the supply of any of these single-sourced materials is delayed or ceases, we may not be able to produce the related product
in a timely manner or in sufficient quantities, if at all, causing us to be unable to further develop our product candidates or
bring them to market or continue to develop our technology, which could materially and adversely affect our business. In addition,
a single-source supplier of a key component of one or more of our product candidates could potentially exert significant bargaining
power over price, quality, warranty claims or other terms relating to the single-sourced materials. Our materials suppliers may
face manufacturing or quality control problems causing product production and shipment delays or a situation where the supplier
may not be able to maintain compliance with the FDA’s cGMP requirements, or those of foreign regulators, necessary to continue
manufacturing our drug substance or raw materials. Drug manufacturers are subject to ongoing periodic unannounced inspections
by the FDA, the United States Drug Enforcement Agency, or DEA, and corresponding foreign regulatory agencies to ensure strict
compliance with cGMP requirements and other governmental regulations and corresponding foreign standards. Any failure by us or
our suppliers to comply with DEA requirements or FDA or foreign regulatory requirements could adversely affect our clinical research
activities and our ability to market and develop our products.
We
intend to manufacture our own product candidates for Phase III clinical trials and may, to some extent, manufacture our product
candidates for commercialization or rely on third parties to implement our manufacturing strategies. Manufacturing our product
candidates is subject to extensive governmental regulation. Our failure or the failure of these third parties in any respect (including
noncompliance with governmental regulations) could have a material adverse effect on our business, results of operations and financial
condition.
Completion
of any current or future Phase III clinical trial and commercialization of our product candidates will require access to, or
development of, facilities to manufacture a sufficient supply of our product candidates. There can be no assurance that our
product candidates, if approved, can be manufactured in sufficient commercial quantities, in compliance with regulatory
requirements and at an acceptable cost. Although we believe our facilities are sufficient to manufacture our product
candidate needs for Phase III clinical trials, we may be incorrect and we may not have the resources or facilities to
manufacture our product candidates for Phase III clinical trials or commercial purposes on our own, and we may not develop or
acquire facilities for the manufacture of product candidates for such purposes in the foreseeable future. We may rely on
contract manufacturers to produce sufficient quantities of our product candidates necessary for any Phase III clinical
testing we undertake in the future and for commercialization of our products. With respect to the future commercialization of
the AP-CDLD, we have decided to rely on third-party manufacturers, and currently are in advanced discussions with a
Commercial Manufacturing Organization (CMO). Such a manufacturing partner (or any other potential contract manufacturer(s) in
general) may be the sole source of production, and they may have limited experience at manufacturing, formulating, analyzing,
filling and finishing our types of product candidates. Establishing a manufacturing facility to produce commercial quantities
of our products will require a substantial investment by any party intending to manufacture our products. If our current and
future manufacturing and supply strategies are unsuccessful, we may be unable to conduct and complete any future Phase III
clinical trials or commercialize our product candidates in a timely manner, if at all.
Manufacturing
our product candidates is subject to extensive governmental regulation. See “Item 4. Information on the Company - Government
Regulation.” Future FDA, state and foreign inspections may identify compliance issues at our facilities or at the facilities
of our contract manufacturers, if any, that may disrupt production or distribution, or require substantial resources to correct.
In addition, discovery of previously unknown problems with a product or the failure to comply with applicable requirements may
result in restrictions on a product, manufacturer or holder of an approved NDA, including withdrawal or recall of the product
from the market or other voluntary, FDA-initiated or judicial action that could delay or prohibit further marketing. Newly discovered
or developed safety or effectiveness data may require changes to a product’s approved labeling, including the addition of
new warnings and contraindications, and also may require the implementation of other risk management measures. Also, new government
requirements, including those resulting from new legislation, may be established, or the FDA’s policies may change, which
could delay or prevent regulatory approval of our products under development. The FDA will likely condition grant of any marketing
approval, if any, on a satisfactory on-site inspection of our manufacturing facilities.
We
have limited experience manufacturing our product candidates at a commercial scale. We may not be able to manufacture our product
candidates in quantities sufficient for commercial launch of our product candidates, if our product candidates are approved, or
for any future commercial demand for our product candidates.
We
have only limited experience in manufacturing commercial quantities of our product candidates. If our product candidates are approved
for commercialization and marketing, we may be required to manufacture the product in large quantities to meet demand. Producing
products in commercial quantities requires developing and adhering to complex manufacturing processes that are different from
the manufacture of products in smaller quantities for clinical trials, including adherence to regulatory standards. Although we
believe that we have developed processes and protocols that will enable us or any third-party manufacturer that we select to manufacture
commercial-scale quantities of products at acceptable costs, we cannot provide assurance that such processes and protocols will
enable us to manufacture in quantities that may be required for commercialization of the applicable product with yields and at
costs that will be commercially attractive. If we or any third-party manufacturer that we select are unable to establish or maintain
commercial manufacture of the product or are unable to do so at costs that we currently anticipate, our business could be adversely
affected. With respect to the future commercialization of the AP-CDLD, we have decided to rely on third-party manufacturers, and
currently are in advanced discussions with a Commercial Manufacturing Organization (CMO).
If
we are unable to use our manufacturing facility for any reason, the manufacture of clinical supplies of our candidates would be
delayed, which would harm our business.
We
currently manufacture all clinical supply of all our product candidates at our own manufacturing facility. If we were to lose
the use of our facility or equipment, our manufacturing facility and manufacturing equipment would be difficult to replace and
could require substantial replacement lead time and substantial additional funds. Our facility may be affected by natural disasters,
such as floods or fire, or we may lose the use of our facility due to manufacturing issues that arise at our facility, such as
contamination or regulatory concerns following a regulatory inspection of our facility. We do not currently have back-up capacity.
In the event of a loss of the use of all or a portion of our facility or equipment for the reasons stated above or any other reason,
we would be unable to manufacture any of our product candidates until such time as our facility could be repaired, rebuilt or
we are able to address other manufacturing issues at our facility. Although we currently maintain property insurance with personal
property limits of up to NIS 40.0 million, business interruption insurance coverage of up to NIS 32.0 million for damage to our
property and the disruption of our business from fire and other casualties, and up to NIS 120.0 million for expenses related to
the ACCORDANCE study, our Phase III clinical trial for AP-CDLD, such insurance may not cover all occurrences of manufacturing
disruption or be sufficient to cover all of our potential losses in the event of occurrences that are covered and may not continue
to be available to us on acceptable terms, or at all.
We
may rely on third-party manufacturers to manufacture commercial quantities of our product candidates, if our products are approved,
and any failure by a third-party manufacturer or supplier may delay or impair our ability to commercialize our product candidates.
We
have manufactured our product candidates for our preclinical studies, Phase I clinical trials, Phase II clinical trials and
Phase III clinical trial in our own manufacturing facility, and with respect to the future commercialization of the AP-CDLD,
we have decided to rely on third-party manufacturers, and currently are in advanced discussions with a Commercial
Manufacturing Organization (CMO). We have relied, and we expect to continue to rely, on third-party manufacturers for certain
raw materials (excipients, solvents and active pharmaceutical ingredients, or APIs), and as noted, possibly also for the
commercial manufacturing of our AP-CDLD. Our reliance on third parties for the manufacture of these items increases the risk
that we will not have sufficient quantities of these items or will not be able to obtain such quantities at an acceptable
cost or quality, which could delay, prevent or impair our development or commercialization efforts. If the third-party
manufacturers on whom we rely fail to supply these items and we need to enter into alternative arrangements with a different
supplier, it could delay our product development activities, as we would have to requalify the casting and assembly processes
pursuant to FDA requirements. If this failure of supply were to occur after we received approval for and commenced
commercialization of AP-CDLD, we might be unable to meet the demand for this product and our business could be adversely
affected. In addition, because we do not have any control over the process or timing of the supply of the APIs used in
AP-CDLD, there is greater risk that we will not have sufficient quantities of these APIs at an acceptable cost or
quality, which could delay, prevent or impair our development or commercialization efforts.
Our
third-party manufacturers and suppliers may be subject to FDA inspection from time to time. Failure by our third-party manufacturers
to pass such inspections and otherwise satisfactorily complete the FDA approval regimen with respect to our product candidates
may result in regulatory actions such as the issuance of Form FDA 483 notices of observations, warning letters or injunctions
or the loss of operating licenses. Based on the severity of the regulatory action, our clinical or commercial supply of the items
manufactured by third-party manufacturers could be interrupted or limited, which could have a material adverse effect on our business.
If
we acquire or license additional technologies or product candidates, we may incur a number of additional costs, have integration
difficulties and/or experience other risks that could harm our business and results of operations.
We
may acquire and in-license additional product candidates and technologies. Any product candidate or technologies we in-license
or acquire will likely require additional development efforts prior to commercial sale, including extensive preclinical or clinical
testing, or both, and approval by the FDA and applicable foreign regulatory authorities, if any. All product candidates are prone
to risks of failure inherent in pharmaceutical product development, including the possibility that the product candidate or product
developed based on in-licensed technology will not be shown to be sufficiently safe and effective for approval by regulatory authorities.
In addition, we cannot assure you that any product candidate that we develop based on acquired or licensed technology that is
granted regulatory approval will be manufactured or produced economically, successfully commercialized or widely accepted or competitive
in the marketplace. Moreover, integrating any newly acquired or in-licensed product candidates could be expensive and time-consuming.
If we cannot effectively manage these aspects of our business strategy, our business may not succeed.
We
may be subject to extensive environmental, health and safety, and other laws and regulations in multiple jurisdictions.
Our
business involves the controlled use, directly or indirectly through our service providers, of hazardous materials, various biological
compounds and chemicals; therefore, we, our agents and our service providers may be subject to various environmental, health and
safety laws and regulations, including those governing air emissions, water and wastewater discharges, noise emissions, the use,
management and disposal of hazardous, radioactive and biological materials and wastes and the cleanup of contaminated sites. The
risk of accidental contamination or injury from these materials cannot be eliminated. If an accident, spill or release of any
regulated chemicals or substances occurs, we could be held liable for resulting damages, including for investigation, remediation
and monitoring of the contamination, including natural resource damages, the costs of 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 and chemicals. Although we maintain workers’
compensation insurance to cover the costs and expenses that may be incurred because of injuries to our employees resulting from
the use of these materials, this insurance may not provide adequate coverage against potential liabilities. Additional or more
stringent federal, state, local or foreign laws and regulations affecting our operations may be adopted in the future. We may
incur substantial capital costs and operating expenses and may be required to obtain consents to comply with any of these or certain
other laws or regulations and the terms and conditions of any permits or licenses required pursuant to such laws and regulations,
including costs to install new or updated pollution control equipment, modify our operations or perform other corrective actions
at our respective facilities or the facilities of our service providers. For instance, we have undergone inspections and obtained
approvals from various governmental agencies. We hold a business license with respect to testing, developing, storing and manufacturing
pharmaceutical products at our current location from the municipality of Jerusalem, which is accompanied by additional terms and
conditions approved by the Israeli Ministry of Environmental Protection, or the Ministry of Environmental Protection. The business
license is currently valid until April 1, 2018 and we are in the process of renewing it. We also hold a toxic substances permit
from the Ministry of Environmental Protection (the Hazardous Material Division) and a Certificate of GMP Compliance of a Manufacturer
from the Israeli Ministry of Health – Pharmaceutical Administration. Failure to renew any of the foregoing licenses and
permits may harm our on-going and future operations. In addition, fines and penalties may be imposed for noncompliance with environmental,
health and safety and other laws and regulations or for the failure to have, or comply with the terms and conditions of our business
license or, required environmental or other permits or consents.
We
are subject to government regulations and we may experience delays or may be unsuccessful in obtaining required regulatory approvals
within or outside of the United States to market our proposed product candidates, and even if we obtain approval, the approved
indications may impair our ability to successfully market the product or make commercial distribution not feasible.
Various
aspects of our operations are subject to federal, state or local laws, rules and regulations, any of which may change from time
to time. Costs arising out of any regulatory developments could be time-consuming and expensive and could divert management resources
and attention and, consequently, could adversely affect our business operations and financial performance.
Delays
in regulatory approval, limitations in regulatory approval and withdrawals of regulatory approval may have a material adverse
effect on us. If we experience significant delays in testing or receiving approvals or sign-offs to conduct clinical trials, our
product development costs, or our ability to license product candidates, will increase. If the FDA or other foreign regulatory
entities grant regulatory approval to market a product, this approval will be limited to those diseases and conditions for which
the product has demonstrated, through clinical trials, to be safe and effective. Any product approvals that we receive in the
future could also include significant restrictions on the use or marketing of our products. Product approvals, if granted, can
be withdrawn for failure to comply with regulatory requirements or upon the occurrence of adverse events following commercial
introduction of the products. Failure to comply with applicable FDA or other applicable regulatory requirements may result in
criminal prosecution, civil penalties, recall or seizure of products, total or partial suspension of production or injunction,
as well as other regulatory action against our product candidates or us. If approval is withdrawn for a product, or if a product
were seized or recalled, we would be unable to sell or license that product and our revenues would suffer. In addition, outside
the United States, our ability to market any of our potential products is contingent upon receiving market application authorizations
from the appropriate regulatory authorities. These foreign regulatory approval processes may include all of the risks associated
with the FDA approval process described above, if not more.
We
expect the healthcare industry to face increased limitations on reimbursement, rebates and other payments as a result of healthcare
reform, which could adversely affect third-party coverage of our products and how much or under what circumstances healthcare
providers will prescribe or administer our products.
In
both the United States and other countries, sales of our products will depend in part upon the availability of reimbursement from
third-party payors, which include governmental authorities, managed care organizations and other private health insurers. Third-party
payors are increasingly challenging the price and examining the cost effectiveness of medical products and services.
Increasing
expenditures for healthcare have been the subject of considerable public attention in the United States. Both private and government
entities are seeking ways to reduce or contain healthcare costs. Numerous proposals that would effect changes in the U.S. healthcare
system have been introduced or proposed in Congress and in some state legislatures, including reducing reimbursement for prescription
products and reducing the levels at which consumers and healthcare providers are reimbursed for purchases of pharmaceutical products.
In
the United States, the MMA changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare
coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for physician-administered
drugs. In recent years, Congress has considered further reductions in Medicare reimbursement for drugs administered by physicians.
CMS has issued and will continue to issue regulations to implement the law which will affect Medicare, Medicaid and other third-party
payors. Medicare, which is the single largest third-party payment program and which is administered by CMS, covers prescription
drugs in one of two ways. Medicare part B covers outpatient prescription drugs that are administered by physicians and Medicare
part D covers other outpatient prescription drugs, but through private insurers. Medicaid, a health insurance program for the
poor, is funded jointly by CMS and the states, but is administered by the states; states are authorized to cover outpatient prescription
drugs, but that coverage is subject to caps and to substantial rebates. CMS also has the authority to revise reimbursement rates
and to implement coverage restrictions for some drugs. Cost reduction initiatives and changes in coverage implemented through
legislation or regulation could decrease utilization of and reimbursement for any approved products, which in turn would affect
the price we can receive for those products. While the MMA and implementing regulations apply primarily to drug benefits for Medicare
beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement
rates. Therefore, any reduction in reimbursement that results from federal legislation or regulation may result in a similar reduction
in payments from private payors.
In
March 2010, President Obama signed into law the Affordable Care Act, a sweeping law intended to broaden access to health insurance,
reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements
for healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medical device manufacturers and
impose additional health policy reforms. As amended, the PPACA expanded manufacturers’ rebate liability to include covered
drugs dispensed to individuals who are enrolled in Medicaid managed care organizations, increased the minimum rebate due for innovator
drugs (both single source drugs and innovator multiple source drugs) from 15.1% of average manufacturer price, or AMP, to 23.1%
of AMP or the difference between the AMP and best price, whichever is greater. The total rebate amount for innovator drugs is
capped at 100.0% of AMP. The PPACA and subsequent legislation also narrowed the definition of AMP. Furthermore, the PPACA imposes
a significant annual, nondeductible fee on companies that manufacture or import certain branded prescription drug products. Substantial
new provisions affecting compliance have also been enacted, which may affect our business practices with healthcare practitioners,
and a significant number of provisions are not yet, or have only recently become, effective. Although it is too early to determine
the effect of the PPACA, it appears likely to continue to put pressure on pharmaceutical pricing, especially under the Medicare
program, and may also increase our regulatory burdens and operating costs. However, the 2016 Presidential and Congressional elections
resulting in the election of the Republican presidential nominee and the continuation of Republican majorities in both chambers
of Congress, have resulted in additional efforts to amend or delay implementation parts of the PPACA. We ultimately cannot predict
with any assurance the ultimate effect of the PPACA or changes to the PPACA on our Company, nor can we provide any assurance that
its provisions will not have a material adverse effect on our business, financial condition, results of operations, cash flows
and the trading price of our ordinary shares. In addition, we cannot predict whether new proposals will be made or adopted, when
they may be adopted or what impact they may have on us if they are adopted.
In
addition, other legislative changes have been proposed and adopted since the PPACA was enacted. In August 2011, then President
Obama signed into law the Budget Control Act of 2011, which, among other things, creates the Joint Select Committee on Deficit
Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit
reduction of an amount greater than $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic
reduction to several government programs. This includes aggregate reductions to Medicare payments to healthcare providers of up
to 2.0% per fiscal year, starting in 2013. In January 2013, President Obama signed into law the American Taxpayer Relief Act of
2012, which, among other things, reduced Medicare payments to several categories of healthcare providers and increased the statute
of limitations period for the government to recover overpayments to providers from three to five years. The Bipartisan Budget
Act of 2015, signed into law on November 2, 2015, increased the rebates that generic drug manufacturers are obligated to pay under
the Medicaid program by applying an inflation-based rebate formula to generic drugs that previously only applied to brand name
drugs. If we ever obtain regulatory approval and commercialization of any of our product candidates, these new laws may result
in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on our customers
and accordingly, our financial operations. Legislative and regulatory proposals have been made to expand post-approval requirements
and restrict sales and promotional activities for pharmaceutical products. We cannot be sure whether additional legislative changes
will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes
on the marketing approvals of our product candidates may be.
Although
we cannot predict the full effect on our business of the implementation of existing legislation, including the PPACA or the enactment
of additional legislation pursuant to healthcare and other legislative reform, we believe that legislation or regulations that
would reduce reimbursement for or restrict coverage of our products could adversely affect how much or under what circumstances
healthcare providers will prescribe or administer our products. This could materially and adversely affect our business by reducing
our ability to generate revenue, raise capital, obtain additional collaborators and market our products. In addition, we believe
the increasing emphasis on managed care in the United States has and will continue to put pressure on the price and usage of pharmaceutical
products, which may adversely impact product sales.
Our
AP-CBD/THC, AP-THC and AP-CBD product candidates (collectively “AP-Cannabinoids”) use Cannabidiol and 9-Tetrahydrocannabinol
individually or in combination, which are subject to U.S. and international controlled substance laws and regulations; our ability
to commercialize the product will depend in part on the ultimate classification of the product under these laws and regulations.
Our
AP-Cannabinoids product candidates for treatment of various indications, including low back pain, neuropathic pain and fibromyalgia,
uses Cannabidiol, or CBD, and 9-Tetrahydrocannabinol, or THC. These products are quite distinct from crude herbal “medical
marijuana,” and we intend to seek FDA approval for these products in accordance with the customary FDA approval process
and based on adequate and well-controlled clinical studies as contemplated by section 355 of the Food, Drug, and Cosmetic Act,
or FDCA. However, the active ingredients in our products are defined as controlled substances under the federal Controlled Substances
Act of 1970, or CSA. Under the CSA, the Drug Enforcement Administration of the United States Department of Justice, or DEA, places
each drug that has abuse potential into one of five categories. The five categories, referred to as Schedules I-V, carry different
degrees of restriction. Each schedule is associated with a distinct set of controls that affect manufacturers, researchers, healthcare
providers, and patients. The controls include registration with the DEA, labeling and packaging, production quotas, security,
recordkeeping, and dispensing. Schedule I is the most restrictive, covering drugs that have “no accepted medical use”
in the United States and that have high abuse potential.
If
and when any of our product candidates receive FDA approval, the DEA will make a scheduling determination and place the product
in a schedule other than Schedule I in order for it to be prescribed to patients in the United States. Accordingly, our ability
to ultimately commercialize the product will depend in part on the ultimate scheduling classification determination by DEA for
our product.
The
FDA has stated that it will continue to facilitate the work of companies interested in bringing safe, effective, and quality products
to market, including scientifically-based research concerning the medical uses of products derived from marijuana and the FDA
has approved synthetic compositions of the active ingredients found in marijuana. However, the use and abuse of controlled substances
is currently subject to political and social pressures from certain constituencies related to their usage which could result in
additional difficulty with respect to the approval of AP-Cannabinoids as a prescription pharmaceutical. For example, the FDA or
DEA may require us to generate more clinical data about the potential for abuse than that which is currently anticipated, which
could increase the cost and/or delay the launch of our product. In addition, DEA scheduling may limit our ability to achieve market
share in the United States due to restricted access and the disinclination of some physicians to prescribe more restrictive scheduled
controlled substances. For example, Schedule II drugs may not be refilled without a new prescription. These factors may limit
the commercial viability of AP-Cannabinoids in the United States.
Most
countries are parties to the Single Convention on Narcotic Drugs 1961, which governs international trade and domestic control
of narcotic substances, including the compounds in our AP-Cannabinoids product candidates. Countries may interpret and implement
their treaty obligations in a way that creates a legal obstacle to our obtaining approval to market our AP-Cannabinoids product
candidates. Approval to market in these countries could require amendments or modifications to existing laws and regulations that
such countries would be unwilling to undertake or may cause material delays in any marketing approval.
Risks
Related to Our Industry
Governments
outside the United States tend to impose strict price controls, which may adversely affect our revenues, if any.
In
some countries, particularly the countries comprising the EU the pricing of pharmaceuticals and certain other therapeutics is
subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable
time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we
may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies.
If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels,
our business could be materially harmed.
We
are subject to anti-kickback laws and regulations. Our failure to comply with these laws and regulations could have adverse consequences
to us.
There
are extensive U.S. federal and state laws and regulations prohibiting fraud and abuse in the healthcare industry that can result
in significant criminal and civil penalties. These federal laws include: the Anti-Kickback Statute, which prohibits certain business
practices and relationships, including the payment or receipt of compensation for the referral of patients whose care will be
paid by Medicare or other federal healthcare programs; the physician self-referral prohibition, commonly referred to as the Stark
Law; the anti-inducement law, which prohibits providers from offering anything to a Medicare or Medicaid beneficiary to induce
that beneficiary to use items or services covered by either program; the civil False Claims Act in 1986, or the False Claims Act,
which prohibits any person from knowingly presenting or causing to be presented false or fraudulent claims for payment by the
federal government, including the Medicare and Medicaid programs; and the Civil Monetary Penalties Law, which authorizes the U.S.
Department of Health and Human Services to impose civil penalties administratively for fraudulent or abusive acts. In addition,
the Sunshine Act requires device and drug manufacturers to report to the government any payments to physicians for consulting
services, research activities, educational programs, travel, food, entertainment and the like.
Sanctions
for violating these federal laws include criminal and civil penalties that range from punitive sanctions, damage assessments,
monetary penalties, imprisonment, denial of Medicare and Medicaid payments or exclusion from the Medicare and Medicaid programs,
or both, and debarment. As federal and state budget pressures continue, federal and state administrative agencies may also continue
to escalate investigation and enforcement efforts to reduce or eliminate waste and to control fraud and abuse in governmental
healthcare programs. Private enforcement of healthcare fraud has also increased, due in large part to amendments to the False
Claims Act that were designed to encourage private persons, known as relators, to file
qui tam
actions on behalf of the
government. The Fraud Enforcement and Recovery Act of 2009 further encouraged whistleblowers to file suit under the
qui tam
provisions of the False Claims Act. A violation of any of these federal and state fraud and abuse laws and regulations could
have a material adverse effect on our liquidity and financial condition. An investigation into the use by physicians of any of
our products, if ever commercialized, may dissuade physicians from either purchasing or using them, and could have a material
adverse effect on our ability to commercialize those products.
In
addition, we are subject to analogous foreign laws and regulations, which may apply to sales or marketing arrangements and claims
involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers; foreign
laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines
and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to
healthcare providers; foreign laws that require drug manufacturers to report information related to payments and other transfers
of value to physicians and other healthcare providers or marketing expenditures; and foreign laws governing the privacy and security
of health information in certain circumstances. Many of these laws differ from each other in significant ways and often are not
preempted by HIPAA, thus complicating compliance efforts.
Risks
Related to Our Operations in Israel
Potential
political, economic and military instability in the State of Israel, where some of our senior management, our head executive office,
research and development, and manufacturing facilities are located, may adversely affect our results of operations.
Our
head executive office, our research and development facilities, our current manufacturing facility, as well as some of our clinical
sites are located in Israel. Some of our officers and directors are residents of Israel. Accordingly, political, economic and
military conditions in Israel and the surrounding region may directly affect our business and operations. Since the establishment
of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries, as
well as terrorist acts committed within Israel by hostile elements. Any hostilities involving Israel or the interruption or curtailment
of trade between Israel and its trading partners could adversely affect our operations and results of operations. During November
2012 and from July through August 2014, Israel was engaged in an armed conflict with a militia group and political party who controls
the Gaza Strip, and during the summer of 2006, Israel was engaged in an armed conflict with Hezbollah, a Lebanese Islamist Shiite
militia group and political party. In December 2008 and January 2009 there was an escalation in violence among Israel, Hamas,
the Palestinian Authority and other groups, as well as extensive hostilities along Israel’s border with the Gaza Strip,
which resulted in missiles being fired from the Gaza Strip into Southern Israel. Similar hostilities accompanied by missiles being
fired from the Gaza Strip into Southern Israel, as well at areas more centrally located near Tel Aviv and at areas surrounding
Jerusalem, occurred during November 2012 and July through August 2014. These conflicts involved missile strikes against civilian
targets in various parts of Israel, including areas in which our employees and some of our consultants are located, and negatively
affected business conditions in Israel.
Since
February 2011, Egypt has experienced political turbulence and an increase in terrorist activity in the Sinai Peninsula following
the resignation of Hosni Mubarak as president. This included protests throughout Egypt, and the appointment of a military regime
in his stead, followed by the elections to parliament which brought groups affiliated with the Muslim Brotherhood (which had been
previously outlawed by Egypt), and the subsequent overthrow of this elected government by a military regime. Such political turbulence
and violence may damage peaceful and diplomatic relations between Israel and Egypt, and could affect the region as a whole. Similar
civil unrest and political turbulence has occurred in other countries in the region, including Syria which shares a common border
with Israel, and is affecting the political stability of those countries. Since April 2011, internal conflict in Syria has escalated,
and evidence indicates that chemical weapons have been used in the region. Intervention may be contemplated by outside parties
in order to prevent further chemical weapon use. This instability and any intervention may lead to deterioration of the political
and economic relationships that exist between the State of Israel and some of these countries, and may have the potential for
additional conflicts in the region. In addition, Iran has threatened to attack Israel and may be developing nuclear weapons. Iran
is also believed to have a strong influence among extremist groups in the region, such as Hamas in Gaza, Hezbollah in Lebanon,
and various rebel militia groups in Syria. These situations may potentially escalate in the future to more violent events which
may affect Israel and us. Any armed conflicts, terrorist activities or political instability in the region could adversely affect
business conditions and could harm our results of operations and could make it more difficult for us to raise capital. Parties
with whom we do business have sometimes declined to travel to Israel during periods of heightened unrest or tension, forcing us
to make alternative arrangements when necessary in order to meet our business partners face to face. In addition, the political
and security situation in Israel may result in parties with whom we have agreements involving performance in Israel claiming that
they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements.
Our
commercial 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 currently covers the reinstatement value of direct damages that are caused by terrorist
attacks or acts of war, we cannot assure you that this government coverage will be maintained or that it will sufficiently cover
our potential damages. 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.
Further,
in the past, the State of Israel and Israeli companies have been subjected to economic boycotts. Several countries still restrict
business with the State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse impact on
our operating results, financial condition or the expansion of our business. A campaign of boycotts, divestment and sanctions
has been undertaken against Israel, which could also adversely impact our business.
Our
operations may be disrupted as a result of the obligation of Israeli citizens to perform military service.
Many
Israeli citizens are obligated to perform several days, and in some cases more, of annual military reserve duty each year until
they reach the age of 40 (or older, for reservists who are military officers or who have certain occupations) and, in the event
of a military conflict, may 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 military reserve duty call-ups in the future.
Our operations could be disrupted by such call-ups, which may include the call-up of members of our management. Such disruption
could materially adversely affect our business, financial condition and results of operations.
Investors
may have difficulties enforcing a U.S. judgment, including judgments based upon the civil liability provisions of the U.S. federal
securities laws against us, or our executive officers and directors or asserting U.S. securities laws claims in Israel.
Not
all of our directors or officers are residents of the United States and most of their and our assets are located outside the United
States. Service of process upon us or our non-U.S. resident directors and officers and enforcement of judgments obtained in the
United States against us or our non-U.S. our directors and executive officers may be difficult to obtain within the United States.
We have been informed by our legal counsel in Israel that it may be difficult to assert claims under U.S. securities laws in original
actions instituted in Israel or obtain a judgment based on the civil liability provisions of U.S. federal securities laws. Israeli
courts may refuse to hear a claim based on a violation of U.S. securities laws against us or our non-U.S. officers and directors
because Israel may not be 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 the matters described
above. Israeli courts might not enforce judgments rendered outside Israel, which may make it difficult to collect on judgments
rendered against us or our non-U.S. officers and directors.
Moreover,
among other reasons, including but not limited to, fraud or absence of due process, or the existence of a judgment which is at
variance with another judgment that was given in the same matter if a suit in the same matter between the same parties was pending
before a court or tribunal in Israel, an Israeli court will not enforce a foreign judgment if it was given in a state whose laws
do not provide for the enforcement of judgments of Israeli courts (subject to exceptional cases) or if its enforcement is likely
to prejudice the sovereignty or security of the State of Israel.
Under
current Israeli law, we may not be able to enforce employees’ covenants not to compete and therefore may be unable to prevent
our competitors from benefiting from the expertise of some of our former employees.
We
generally enter into non-competition agreements with our key employees, in most cases within the framework of their employment
agreements. These agreements prohibit our key employees, if they cease working for us, from competing directly with us or working
for our competitors for a limited period. Under applicable Israeli law, we may be unable to enforce these agreements or any part
thereof. If we cannot enforce our non-competition agreements with our employees, then we may be unable to prevent our competitors
from benefiting from the expertise of our former employees, which could materially adversely affect our business, results of operations
and ability to capitalize on our proprietary information.
Your
rights and responsibilities as our shareholder will be governed by Israeli law, which may differ in some respects from the rights
and responsibilities of shareholders of U.S. corporations.
We
are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our articles
of association and the Companies Law. These rights and responsibilities differ in some respects from the rights and responsibilities
of shareholders in typical U.S. corporations. In particular, pursuant to the Companies Law each shareholder of an Israeli company
has to act in good faith in exercising his or her rights and fulfilling his or her obligations toward the Company and other shareholders
and to refrain from abusing his or her power in the Company, including, among other things, in voting at the general meeting of
shareholders and class meetings, on amendments to a company’s articles of association, increases in a company’s authorized
share capital, mergers, and transactions requiring shareholders’ approval under the Companies Law. In addition, a controlling
shareholder of an Israeli company or a shareholder who knows that it possesses the power to determine the outcome of a shareholder
vote or who has the power to appoint or prevent the appointment of a director or officer in the Company, or has other powers toward
the Company has a duty of fairness toward the Company. However, Israeli law does not define the substance of this duty of fairness.
Because Israeli corporate law has undergone extensive revision in recent years, there is little case law available to assist in
understanding the implications of these provisions that govern shareholder behavior.
Provisions
of Israeli law and our articles of association may delay, prevent or make undesirable an acquisition of all or a significant portion
of our shares or assets.
Certain
provisions of Israeli law and our articles of association could have the effect of delaying or preventing a change in control
and may make it more difficult for a third party to acquire us or for our shareholders to elect different individuals to our board
of directors, even if doing so would be beneficial to our shareholders, and may limit the price that investors may be willing
to pay in the future for our ordinary shares. For example, Israeli corporate law regulates mergers and requires that a tender
offer be effected when more than a specified percentage of shares in a company are purchased. Further, Israeli tax considerations
may make potential transactions undesirable to us or to some of our shareholders whose country of residence does not have a tax
treaty with Israel granting tax relief to such shareholders from Israeli tax. With respect to certain mergers, Israeli tax law
may impose certain restrictions on future transactions, including with respect to dispositions of shares received as consideration,
for a period of two years from the date of the merger. See “Item 10. Additional Information — Memorandum and Articles
of Association — Acquisitions under Israeli Law.”
Furthermore,
under the Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 (formerly known as
the Law for the Encouragement of Research and Development in Industry 5744-1984), and the regulations guidelines, rules, procedures
and benefit tracks thereunder, or the Innovation Law, to which we are subject due to our receipt of grants from the Israel Innovation
Authority, or IIA (formerly known as the Office of the Chief Scientist of the Ministry of Economy and Industry, or the OCS), a
recipient of IIA grants such as us must report to IIA regarding any change of control or any change in the holding of its means
of control of our Company which transforms any non-Israeli citizen or resident into an “interested party”, as defined
in the Israeli Securities Law 5728-1968, or the Israeli Securities Law, and in the latter event, the non-Israeli citizen or resident
shall execute an undertaking in favor of IIA, in a form prescribed by IIA.
Because
a certain portion of our expenses is incurred in currencies other than the U.S. Dollar, our results of operations may be harmed
by currency fluctuations and inflation.
Beginning
in 2016, our reporting and functional currency is the U.S. dollar, but some portion of our expenses is in the NIS and Euro. As
a result, we are exposed to some currency fluctuation risks. We may, in the future, decide to enter into currency hedging transactions
to decrease the risk of financial exposure from fluctuations in the exchange rate of the currencies mentioned above in relation
to the U.S. dollar. These measures, however, may not adequately protect us from adverse effects.
We
have received Israeli government grants for certain of our research and development activities. The terms of these grants may
require us to satisfy specified conditions in order to manufacture products and transfer technologies outside of Israel. We may
be required to pay penalties in addition to the repayment of the grants. Such grants may be terminated or reduced in the future,
which would increase our costs.
Under
the Innovation Law, research and development programs that meet specified criteria and are approved by a committee of the IIA
are eligible for grants. The grants awarded are typically up to 50% of the project’s expenditures, as determined by the
IIA committee and subject to the benefit track under which the grant was awarded. A company that receives a grant from the IIA,
or a Participating Company, is typically required to pay royalties to IIA on income generated from products incorporating know-how
developed using such grants (including income derived from services associated with such products), until 100% of the U.S. dollar-linked
grant plus annual LIBOR interest is repaid. The rate of royalties to be paid may vary between different benefits tracks, as shall
be determined by IIA. In general, the rate of royalties varies between 3% to 5% of the income generated from the IIA supported
products.
The
obligation to pay royalties is contingent on actual income generated from such products and services. In the absence of such income,
no payment of royalties is required. It should be noted that the restrictions under the Innovation Law will continue to apply
even after the repayment of such royalties in full by the Participating Company including restrictions on the sale, transfer or
assignment outside of Israel of know-how developed as part of the programs under which the grants were given.
The
terms of the grants under the Innovation Law also (generally) require that the products developed as part of the programs under
which the grants were given be manufactured in Israel and that the know-how developed thereunder may not be transferred outside
of Israel, unless prior written approval is received from the IIA (such approval is not required for the transfer of a portion
of the manufacturing capacity which does not exceed, in the aggregate, 10% of the portion declared to be manufactured outside
of Israel in the applications for funding (in which case only notification is required), and additional payments are required
to be made to IIA, as described below. It should be noted that this does not restrict the export of products that incorporate
the funded know-how.
Ordinarily,
as a condition to obtaining approval to manufacture outside Israel, we may be required to pay royalties at an increased rate and
up to an increased cap amount of three times the total amount of the IIA grants, plus interest accrued thereon, depending on the
manufacturing volume to be performed outside Israel. The IIA approved our request to transfer 100% of the manufacturing rights
of our AP-CDLD product candidate that was developed under one of the IIA funded programs to a non-Israeli manufacturer. As a result,
we will be required to pay the IIA royalties from revenue generated from the AP-CDLD product candidate at an increased rate, and
up to an increased cap amount. The IIA noted that the approval granted was exceptional and that the IIA will not approve manufacturing
of additional product candidates out of Israel.
The
Innovation Law restricts the ability to transfer know-how funded by IIA outside of Israel. Transfer of IIA-funded know-how outside
of Israel requires prior approval and is subject to payment of a redemption fee to the IIA calculated according to a formula provided
under the Innovation Law. A transfer for the purpose of the Innovation Law is generally interpreted very broadly and includes,
inter alia, any actual sale of the IIA-funded know-how, any license to develop the IIA-funded know-how or the products resulting
from such IIA-funded know-how or any other transaction, which, in essence, constitutes a transfer of the IIA-funded know-how.
Generally, a mere license solely to market products resulting from the IIA-funded know-how would not be deemed a transfer for
the purpose of the Innovation Law.
The
IIA approval to transfer know-how created, in whole or in part, in connection with an IIA-funded project to a third party outside
Israel where the transferring company remains an operating Israeli entity is subject to payment of a redemption fee to IIA calculated
according to a formula provided under the Innovation Law that is based, in general, on the ratio between the aggregate IIA grants
received by the company (including the accrued interest) and the company’s aggregate investments in the project that was
funded by these IIA grants, multiplied by the transaction consideration (taking into account any depreciation in accordance with
a formula set forth in the in the Innovation Law) less any royalties already paid to the IIA. The transfer of such know-how to
a party outside Israel where the transferring company ceases to exist as an Israeli entity is subject to a redemption fee formula
that is based, in general, on the ratio between aggregate IIA grants received by the company (including the accrued interest)
and the company’s aggregate research and development expenses, multiplied by the transaction consideration (taking into
account any depreciation in accordance with a formula set forth in the Innovation Law) less any royalties already paid to the
IIA. The Innovation Law establishes a maximum payment amount of the redemption fee paid to the IIA under the above mentioned formulas
and differentiates between two situations: (i) in the event that the company sells its IIA-funded know-how, in whole or in part,
or is sold as part of certain merger and acquisition transactions, and subsequently ceases to conduct business in Israel, the
maximum redemption fee under the above mentioned formulas shall be no more than six times the amount received (plus accrued interest)
for the applicable know-how being transferred; and (ii) in the event that following the transactions described above (i.e., asset
sale of IIA-funded know-how or transfer as part of certain merger and acquisition transactions), the company continues to conduct
its research activity in Israel (for at least three years following such transfer, keeps on staff at least 75% of the number of
research and development employees it had for the six months before the know-how was transferred and keeps the same scope of employment
of such research and development staff), then the company is eligible for a reduced cap of the redemption fee of no more than
three times the amounts received (plus accrued interest) for the applicable know-how being transferred. The obligation to pay
royalties mentioned above will no longer apply following the payment of the redemption fee, as described above.
Subject
to prior approval of the IIA, the Company may transfer the IIA-funded know-how to another Israeli company. If the IIA-funded know-how
is transferred to another Israeli entity, the transfer would still require IIA approval but will not be subject to the payment
of the redemption fee (although there will be an obligation to pay royalties to the IIA from the income of such sale transaction
as part of the royalty payment obligation). In such case, the acquiring company would have to assume all of the selling company’s
restrictions and obligations towards the IIA (including the restrictions on the transfer of know-how and manufacturing capacity
outside of Israel) as a condition to IIA approval.
Our
research and development efforts have been financed, partially, through grants that we have received from the IIA. We therefore
must comply with the requirements of the Innovation Law and related regulations. As of December 31, 2017, we had received approximately
NIS 50.2 million of such grants. However, in February 2018, the Company received a notice from the IIA to repay part of the grant
amounts received in 2016 in the amount of approximately NIS 8.0 million, including NIS 0.1 million of interest and linkage differences,
following a review and assessment by the IIA on the 2016 program. For more information see note 11c(1) in our consolidated financial
statements for the year ended December 31, 2017. As of the date of this annual report on Form 20-F, the Company has repaid
the IIA the total of approximately NIS 8.0 million. The Innovation Law restricts the ability to transfer know-how funded by the
IIA outside of Israel. Transfer of IIA-funded know-how outside of Israel requires the prior approval of the IIA and, under certain
circumstances, is subject to significant payments to IIA (calculated according to a formula set forth under the Innovation Law),
as further described above. Therefore, the discretionary approval of an IIA committee will be required for any transfer to third
parties outside of Israel of rights related to our Accordion Pill, which has been developed with IIA-funding. The restrictions
under the Innovation Law may impair our ability to enter into agreements which involve IIA-funded products or know-how without
the approval of IIA. We cannot be certain that any approval of IIA will be obtained on terms that are acceptable to us, or at
all. We may not receive the required approvals should we wish to transfer IIA-funded know-how, manufacturing and/or development
outside of Israel in the future. Furthermore, in the event that we undertake a transaction involving the transfer to a non-Israeli
entity of know-how developed with IIA-funding pursuant to a merger or similar transaction, the consideration available to our
shareholders may be reduced by the amounts we are required to pay to IIA. Any approval, if given, will generally be subject to
additional financial obligations. Failure to comply with the requirements under the Innovation Law may subject us to mandatory
repayment of grants received by us (together with interest and penalties), as well as expose us to criminal proceedings. In addition,
IIA may from time to time conduct royalties audits and such audits may lead to additional royalties being payable on additional
products. Such grants may be terminated or reduced in the future, which would increase our costs. IIA approval is not required
for the marketing of products resulting from the IIA-funded research or development in the ordinary course of business.
Risks
Related to Ownership of Our Ordinary Shares
If
securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or
if they adversely change their recommendations or publish negative reports regarding our business or our ordinary shares, our
share price and trading volume could be negatively impacted.
The
trading market for our ordinary shares could be influenced by the research and reports that industry or securities analysts may
publish about us, our business, our market or our competitors. We do not have any control over these analysts, and we cannot provide
any assurance that analysts will cover us or provide favorable coverage. If any of the analysts who may cover us adversely change
their recommendation regarding our ordinary shares, or provide more favorable relative recommendations about our competitors,
our share price would likely decline. If any analyst who may cover us were to cease coverage of our Company or fail to regularly
publish reports on us, we could lose visibility in the financial markets, which in turn could negatively impact our share price
or trading volume.
We
have not paid, and do not intend to pay, dividends on our ordinary shares and, therefore, unless our ordinary shares appreciate
in value, our investors may not benefit from holding our ordinary shares.
We
have not paid any cash dividends on our ordinary shares since inception. We do not anticipate paying any cash dividends our ordinary
shares in the foreseeable future. Moreover, the Companies Law imposes certain restrictions on our ability to declare and pay dividends.
See “Item 10. Additional Information— Memorandum and Articles of Association—Dividends” for additional
information. As a result, investors in our ordinary shares will not be able to benefit from owning our ordinary shares unless
the market price of our ordinary shares becomes greater than the price paid for the shares by such investors and they are able
to sell such shares. We cannot assure you that you will ever be able to resell our ordinary shares at a price in excess of the
price paid for the shares.
The
public trading market for our ordinary shares is volatile and may result in higher spreads in share prices, which may limit the
ability of our investors to sell their ordinary shares at a profit, if at all.
Our
ordinary shares currently trade on the NASDAQ Capital Market and the Tel Aviv Stock Exchange, or TASE. Our results of operations
and the value of our investments are affected by volatility in the securities markets. These difficulties and the volatility of
the securities markets in general, and specifically during economic slowdowns, have affected and may continue to affect our ability
to realize our investments or to raise financing, which in turn may result in us having to record impairment charges.
Our
ordinary shares are traded on more than one market and this may result in price variations.
Our
ordinary shares have been traded on the NASDAQ Capital Market since August 2015 and the TASE since 2010. Trading in our ordinary
shares on these markets will take place in different currencies (U.S. dollars on the NASDAQ Capital Market and NIS on the TASE),
and at different times (resulting from different time zones, trading days and public holidays in the United States and Israel).
The trading prices of our ordinary shares on these two markets may differ due to these and other factors. Any decrease in the
price of our ordinary shares on the TASE could cause a decrease in the trading price of our ordinary shares in the United States.
It
may be difficult for you to sell your ordinary shares at or above the purchase price therefor or at all.
Although
our ordinary shares now trade on the NASDAQ Capital Market and on the TASE, an active trading market for our ordinary shares may
not be sustained. The market price of our ordinary shares is highly volatile and could be subject to wide fluctuations in price
as a result of various factors, some of which are beyond our control. 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 at current market price or at all. Further, an inactive market may also impair our ability to
raise capital by selling our ordinary shares and may impair our ability to enter into strategic partnerships or acquire companies
or products by using our ordinary shares as consideration.
The
market price of our ordinary shares may fluctuate significantly, which could result in substantial losses by our investors.
The
market price of our ordinary shares may fluctuate significantly in response to numerous factors, some of which are beyond our
control, such as:
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inability to obtain
the approvals necessary to commence further clinical trials;
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results of clinical
and preclinical studies;
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announcements of
regulatory approval or the failure to obtain it, or specific label indications or patient populations for its use, or changes
or delays in the regulatory review process;
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announcements of
technological innovations, new products or product enhancements by us or others;
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adverse actions
taken by regulatory agencies with respect to our clinical trials, manufacturing supply chain or sales and marketing activities;
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changes or developments
in laws, regulations or decisions applicable to our product candidates or patents;
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any adverse changes
to our relationship with manufacturers or suppliers;
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announcements concerning
our competitors or the pharmaceutical or biotechnology industries in general;
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achievement of expected
product sales and profitability or our failure to meet expectations;
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our commencement
of or results of, or involvement in, litigation, including, but not limited to, any product liability actions or intellectual
property infringement actions;
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any major changes
in our board of directors, management or other key personnel;
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legislation in the
United States, Europe and other foreign countries relating to the sale or pricing of pharmaceuticals;
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announcements by
us of significant strategic partnerships, out-licensing, in-licensing, joint ventures, acquisitions or capital commitments;
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expiration or terminations
of licenses, research contracts or other collaboration agreements;
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public concern as
to the safety of therapeutics we, our licensees or others develop;
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success of research
and development projects;
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developments concerning
intellectual property rights or regulatory approvals;
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variations in our
and our competitors’ results of operations;
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changes in earnings
estimates or recommendations by securities analysts, if our ordinary shares are covered by analysts;
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future issuances
of ordinary shares or other securities;
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general market conditions,
including the volatility of market prices for shares of biotechnology companies generally, and other factors, including factors
unrelated to our operating performance; and
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the other factors
described in this “Risk Factors” section.
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These
factors and any corresponding price fluctuations may materially and adversely affect the market price of our ordinary shares,
which would result in substantial losses by our investors.
Further,
the stock market in general, the NASDAQ Capital Market and the market for biotechnology companies in particular, have experienced
extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies
like ours. Broad market and industry factors may negatively affect the market price of our ordinary shares regardless of our actual
operating performance. In addition, a systemic decline in the financial markets and related factors beyond our control may cause
our share price to decline rapidly and unexpectedly. Price volatility of our ordinary shares might be worse if the trading volume
of our ordinary shares is low. In the past, following periods of market volatility, shareholders have often instituted securities
class action litigation. If we were involved in securities litigation, it could have a substantial cost and divert resources and
attention of management from our business, even if we are successful. Future sales of our ordinary shares could also reduce the
market price of such shares.
Moreover,
the liquidity of our ordinary shares will be limited, not only in terms of the number of ordinary shares that can be bought and
sold at a given price, but by potential delays in the timing of executing transactions in our ordinary shares and a reduction
in security analyst and media’s coverage of our Company, if any. These factors may result in lower prices for our ordinary
shares than might otherwise be obtained and could also result in a larger spread between the bid and ask prices for our ordinary
shares. In addition, without a large float, our ordinary shares will be less liquid than the stock of companies with broader public
ownership and, as a result, the trading prices of our ordinary shares may be more volatile. In the absence of an active public
trading market, an investor may be unable to liquidate its investment in our ordinary shares. Trading of a relatively small volume
of our ordinary shares may have a greater impact on the trading price of our ordinary shares than would be the case if our public
float were larger. We cannot predict the prices at which our ordinary shares will trade in the future.
The
tax benefits that are available to us require us to continue to meet various conditions and may be terminated or reduced in the
future, which could increase our costs and taxes.
We
have obtained a tax ruling from the Israeli Tax Authority according to which our activity has been qualified as an “industrial
activity,” as defined in the Law for the Encouragement of Capital Investments, 1959, generally referred to as the Investment
Law, and is eligible for tax benefits as a “Benefited Enterprise,” which will apply to the turnover attributed to
such enterprise, for a period of up to ten years from the first year in which we generated taxable income. The tax benefits under
the Benefited Enterprise status are scheduled to expire at the end of 2023.
In
order to remain eligible for the tax benefits of a Benefited Enterprise, we must continue to meet certain conditions stipulated
in the Investment Law and its regulations, as amended. In addition, in order to remain eligible for the tax benefits available
to the Benefited Enterprise, we must also comply with the conditions set forth in the tax ruling. These conditions include, among
other things, that the production, directly or through subcontractors, of all our products should be performed within certain
regions of Israel. If we do not meet these requirements, the tax benefits would be reduced or canceled.
There
is no assurance that our future taxable income will qualify as Benefited Enterprise income or that the benefits described above
will be available to us in the future.
We
expect to be characterized as a passive foreign investment company for the taxable years ending December 31, 2017, and December
31, 2018, and, as such, our U.S. shareholders may suffer adverse tax consequences.
Generally,
if for any taxable year 75% or more of our gross income is passive income, or at least 50% of our assets are held for the production
of, or produce, passive income, we would be characterized as a passive foreign investment company, or PFIC, for U.S. federal income
tax purposes. For the taxable year ending December 31, 2017, we expect to be classified as a PFIC. We also expect to be classified
as a PFIC for 2018. Furthermore, because PFIC status is determined annually and is based on our income, assets and activities
for the entire taxable year, there can be no assurance that we will not be classified as a PFIC in any future year. If we were
to be characterized as a PFIC for U.S. federal income tax purposes in any taxable year during which a U.S. Investor, as defined
in “Item 10. Additional Information — Taxation — U.S. Federal Income Tax Consequences”, owns ordinary
shares, such U.S. Investor could face adverse U.S. federal income tax consequences, including having gains realized on the sale
of our ordinary shares classified as ordinary income, rather than as capital gain, the loss of the preferential rate applicable
to dividends received on our ordinary shares by individuals who are U.S. Investors, and having interest charges apply to distributions
by us and the proceeds of share sales. Certain elections exist that may alleviate some adverse consequences of PFIC status and
would result in an alternative treatment (such as “qualified electing fund” and “mark-to-market” treatment)
of our ordinary shares. Upon request, we expect to provide the information necessary for U.S. Investors to make “qualified
electing fund elections” if we are classified as a PFIC. See “Item 10. Additional Information — Taxation —
U.S. Federal Income Tax Consequences.”
U.S.
persons who own 10% or more of our ordinary shares may be subject to adverse U.S. tax consequences under the U.S. controlled foreign
corporation rules
If
we are or become a controlled foreign corporation, or “CFC,” “10% U.S. Shareholders” (as defined below)
may be taxed on their pro rata share of certain of our earnings, even if those earnings are not distributed by us. A non-U.S.
corporation is a “CFC” if more than 50% of its shares (by vote or value) are owned by “10% U.S. Shareholders.”
A U.S. person is a “10% U.S. Shareholder” if such person owns (directly, indirectly and/or constructively) 10% or
more of the total combined voting power of all classes of shares entitled to vote of such corporation or 10% more of the total
value of shares of all classes of stock of such corporation.
In
general, if a U.S. person sells or exchanges stock in a foreign corporation and such person is a “10% U.S. Shareholder”
at any time during the 5-year period ending on the date of the sale or exchange when such foreign corporation was a CFC, any gain
from such sale or exchange may be treated as a dividend to the extent of the corporation’s earnings and profits attributable
to such shares that were accumulated during the period that the shareholder held the shares while the corporation was a CFC (with
certain adjustments).
The
CFC rules are complex. The foregoing is merely a summary of certain potential application of these rules. No assurances can be
given that we are not or will not become a CFC, and certain changes to the CFC constructive ownership rules introduced by recent
U.S. tax legislation could, under certain circumstances, cause us to be classified as a CFC. Each investor is urged to consult
its tax advisor with respect to the possible application of the CFC rules.
Your
percentage ownership in us may be diluted by future issuances of share capital, which could reduce your influence over matters
on which shareholders vote.
Our
board of directors has the authority, in most cases without action or vote of our shareholders, to issue all or any part of our
authorized but unissued shares, including ordinary shares issuable upon the exercise of outstanding warrants and options. Issuances
of additional shares would reduce your influence over matters on which our shareholders vote.
The
sale of a substantial number of our ordinary shares may cause the market price of our ordinary shares to decline.
Sales
of a substantial number of ordinary shares in the public market, or the perception that these sales could occur, could cause the
market price of our ordinary shares to decline. We had 26,075,770 ordinary shares outstanding as of December 31, 2017 and 26,075,770
ordinary shares outstanding as of the date of this report. All of our ordinary shares outstanding as of December 31, 2017 are
freely tradable, without restriction, in the public markets in the United States and Israel. Any sales of our ordinary shares
or any perception in the market that such sales may occur could cause the trading price of our ordinary shares to decline.
In
March 2017, we completed a private placement of 2,289,638 of our ordinary shares at a price of $4.40 per share, with various investors
for gross proceeds of approximately $10 million. The chairman of our board of directors, Dr. John Kozarich, and two other (former)
directors, Messrs. Zvi Joseph and Giora Carni, participated in the private placement. On April 7, 2017, we filed a registration
statement under the Securities Act to register for resale most of the ordinary shares issued in the private placement.
In
August 2017, we completed an underwritten public offering of our ordinary shares on the NASDAQ Capital Market, pursuant to which
we issued 12,224,500 ordinary shares at a price of $4.70 per share. The net proceeds from the sale of shares, after deducting
underwriting discounts, commissions and other offering expenses, were approximately $53.6 million.
In
addition, up to 3,845,869 ordinary shares that are subject to outstanding options under the 2005 Share Option Plan, or the 2005
Plan, and outstanding options and reserved options for future issuance under our 2015 Incentive Compensation Plan, or the 2015
Plan, will be eligible for sale in the public market. We filed registration statements on Form S-8 under the Securities Act on
February 25, 2016, on August 1, 2016 and December 21, 2017 to register such ordinary shares.
If
these additional ordinary shares are sold, or if it is perceived that they will be sold, in the public market, the trading price
of our ordinary shares could decline.
Because
our ordinary shares may be, or become, a “penny stock,” it may be more difficult for investors to sell their ordinary
shares, and the market price of our ordinary shares may be adversely affected.
Our
ordinary shares may be, or become, a “penny stock” if, among other things, the share price is below $5.00 per share,
they are not listed on a national securities exchange or they have not met certain net tangible asset or average revenue requirements.
Broker-dealers who sell penny stocks must provide purchasers of these stocks with a standardized risk-disclosure document prepared
by the SEC. This document provides information about penny stocks and the nature and level of risks involved in investing in the
penny-stock market. A broker must also give a purchaser, orally or in writing, bid and offer quotations and information regarding
broker and salesperson compensation, make a written determination that the penny stock is a suitable investment for the purchaser,
and obtain the purchaser’s written agreement to the purchase. Broker-dealers must also provide customers that hold penny
stock in their accounts with such broker-dealer a monthly statement containing price and market information relating to the penny
stock. If a penny stock is sold to an investor in violation of the penny stock rules, the investor may be able to cancel its purchase
and get its money back.
If
applicable, the penny stock rules may make it difficult for investors to sell their ordinary shares. Because of the rules and
restrictions applicable to a penny stock, there is less trading in penny stocks and the market price of our ordinary shares may
be adversely affected. Also, many brokers choose not to participate in penny stock transactions. Accordingly, investors may not
always be able to resell their ordinary shares publicly at times and prices that they feel are appropriate and the market price
of our ordinary shares may be adversely affected.
We
must meet the NASDAQ Capital Market’s continued listing requirements and comply with the other NASDAQ rules, or we may risk
delisting. Delisting could negatively affect the price of our ordinary shares, which could make it more difficult for us to sell
securities in a financing and for you to sell your ordinary shares.
We
are required to meet the continued listing requirements of the NASDAQ Capital Market and comply with the other NASDAQ rules, including
those regarding director independence and independent committee requirements, minimum shareholders’ equity, minimum share
price and certain other corporate governance requirements. If we do not meet these continued listing requirements, our ordinary
shares could be delisted. Delisting of our ordinary shares from the NASDAQ Capital Market would cause us to pursue eligibility
for trading on other markets or exchanges, or on the pink sheets. In such case, our shareholders’ ability to trade, or obtain
quotations of the market value of, our ordinary shares would be severely limited because of lower trading volumes and transaction
delays. These factors could contribute to lower prices and larger spreads in the bid and ask prices for our securities. There
can be no assurance that our ordinary shares, if delisted from the NASDAQ Capital Market in the future, would be listed on a national
securities exchange or quoted on a national quotation service, the OTCBB or the pink sheets. Delisting from the NASDAQ Capital
Market, or even the issuance of a notice of potential delisting, would also result in negative publicity, make it more difficult
for us to raise additional capital, adversely affect the market liquidity of our ordinary shares, reduce security analysts’
coverage of us and diminish investor, supplier and employee confidence. In addition, as a consequence of any such delisting, our
share price could be negatively affected and our shareholders would likely find it more difficult to sell, or to obtain accurate
quotations as to the prices of, our ordinary shares.
ITEM
4. Information on the Company.
Historical
Background and Corporate Structure
Intec
Pharma Ltd. was established and incorporated in Israel on October 23, 2000 as a private Israeli company under the name Orly Guy
Ltd. In February 2001, our name was changed to Intec Pharmaceuticals (2000) Ltd. Our research and development activities began
originally through a private partnership, Intec Pharmaceutical Partnership I.P.P, a general Israeli partnership, formed on September
21, 2000. Its operations were transferred in full to us at the beginning of 2002 in return for the allocation of shares in our
Company to the partners in the partnership, pro rata with their ownership in the partnership. In March 2004, we changed our corporate
name to Intec Pharma Ltd. In February 2010, we successfully completed an initial public offering in Israel on the TASE. In September
2017, the Company incorporated a wholly-owned subsidiary in the United States of America in the State of Delaware – Intec
Pharma Inc.
We
completed our initial public offering of securities in Israel in February 2010. In connection with the offering, we raised approximately
NIS 35.3 million before issuance costs and issued 783,969 ordinary shares and registered warrants (Series 1) to purchase 313,588
of our ordinary shares. As of the date of this annual report, all warrants issued in our initial public offering in Israel have
expired.
We
completed our initial public offering of securities in the United States in August 2015. In connection with the offering, we raised
gross proceeds of approximately $34.0 million before deducting underwriting discounts and commissions and other offering expenses.
In August 2017, we completed an underwritten follow-on public offering in the United States in which we raised gross proceeds
of approximately $57.5 million before deducting underwriting discounts and commissions and other offering expenses.
Our
principal executive offices are located in Har Hotzvim at 12 Hartom Street, Jerusalem, Israel 9777512 and our telephone number
is (+972) (2) 586-4657.
Overview
We
are a clinical stage biopharmaceutical company focused on developing drugs based on our proprietary Accordion Pill platform technology,
which we refer to as the Accordion Pill. Our Accordion Pill is an oral drug delivery system that is designed to improve the efficacy
and safety of existing drugs and drugs in development by utilizing an efficient GR and specific release mechanism. Our product
pipeline currently includes several product candidates in various clinical trial stages. Our leading product candidate, Accordion
Pill Carbidopa/Levodopa, or AP-CDLD, is being developed for the indication of treatment of Parkinson’s disease symptoms
in advanced Parkinson’s disease patients. We have successfully completed a Phase II clinical trial for AP-CDLD for the treatment
of Parkinson’s disease symptoms in advanced Parkinson’s disease patients and have agreed with the FDA on the remaining
clinical development program for AP-CDLD for the treatment of Parkinson’s disease symptoms in advanced Parkinson’s
disease patients, including the main principles of the single required pivotal Phase III clinical trial in advanced Parkinson’s
disease patients. We enrolled the first patient in the ACCORDANCE study, the pivotal Phase III clinical trial for AP-CDLD, in
April 2016 and we currently expect to complete patient enrollment in the trial during the second half of 2018. In our correspondence
with the FDA, the FDA previously agreed that an acceptable regulatory pathway for AP-CDLD would be to file a new drug application,
or NDA, pursuant to Section 505(b)(2) of the FDCA, which is a streamlined approval pathway that may accelerate the time to commercialize
and decrease the costs of FDA approval for AP–CDLD, as compared to those typically associated with a new chemical entity,
or NCE.
In
addition, we have initiated a clinical development program for our Accordion Pill platform with the two primary cannabinoids
contained in cannabis sativa, which we refer to as AP-Cannabinoids. We are formulating and testing cannabidiol, or CBD, and
9-tetrahydrocannabinol, or THC, for the treatment of various indications, including low back pain, neuropathic pain and
fibromyalgia. AP-Cannabinoids are designed to extend the absorption phase of CBD and THC, resulting in more consistent levels
for an improved therapeutic effect which may address several major drawbacks of current methods of treatments, such as short
duration of effect, delayed onset, variability of exposure, variability of the administered dose and adverse events that
correlate with peak levels. In March 2017, we initiated a Phase I single-center, single-dose, randomized, three-way crossover
clinical trial in Israel to compare the safety, tolerability and pharmacokinetic (PK) of AP-THC/CBD, with
Sativex
®
, an oral buccal spray containing CBD and THC that is commercially available outside of the United
States. Initial results demonstrate that the Accordion Pill platform is well-suited to safely deliver CBD and THC with
significant improvements in exposure compared with Sativex.
Our
Accordion Pill Platform Technology
We
believe that our Accordion Pill technology has the potential to improve the performance of approved drugs and drugs in development,
including Levodopa, by providing several distinct advantages, including, but not limited to:
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increasing efficacy
of the drug incorporated into the Accordion Pill;
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improving safety
of the drug incorporated into the Accordion Pill by reducing the side effects of such drugs;
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reducing the number
of daily administrations required to achieve the same or superior therapeutic effect as the non-Accordion Pill version of
such drugs; and
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expanding the intellectual
protection period of the drug incorporated into the Accordion Pill.
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Our
anticipated ability to file NDAs pursuant to Section 505(b)(2) for our existing pipeline and future products increases the likelihood
of accelerating the time to commercialization of our products and decreasing costs when compared to those typically associated
with NCEs.
Our
Accordion Pill platform technology is designed to increase the time that drugs are retained in the stomach as compared to other
oral dosage forms, such as tablets and capsules. This capability is particularly important to drugs with a narrow absorption window
(“NAW”), which are absorbed mainly in the upper part of the gastrointestinal, or GI, tract. Regular controlled-release
formulations of such drugs currently on the market sometimes fail to provide an efficient solution, as once the regular dosage
form has passed the drug’s NAW in the upper GI tract, the drug is not, or is very poorly, absorbed in the distal parts of
the GI tract. The Accordion Pill platform technology is also designed for drugs with low solubility, which do not efficiently
dissolve in the GI tract, and drugs with low permeability, which do not efficiently penetrate the intestinal wall and reach the
blood stream, such as Biopharmaceutics Classification System, or BCS, Class II (low solubility, high permeability) and Class IV
(low solubility, low permeability) drugs. According to The AAPS Journal published by the American Association of Pharmaceutical
Scientists, of the top 200 oral drugs in the United States, Great Britain, Spain and Japan in 2006, approximately 30% to 35% were
BCS Class II drugs and approximately 5% to 10% were BCS Class IV drugs. Further, according to Drug Development & Delivery,
in 2006 approximately 90% of NCEs in development were either BCS Class II or Class IV drugs. Poorly soluble drugs are sometimes
characterized by low bioavailability, which is strongly affected by the drug’s solubility. In addition, the extent of absorption
of poorly soluble drugs can be dose dependent, leading to non-linear PK behavior. The Accordion Pill’s efficient GR and
specific release mechanism prolongs the absorption phase of drugs with an NAW, which can result in significantly more stable plasma
levels. In addition, the Accordion Pill has demonstrated an enhancement of the absorption of a poorly soluble, BCS Class II/IV
drug in a crossover PK clinical study in 12 healthy volunteers. For poorly soluble drugs, we believe that our technology acts
through the gradual delivery of an undissolved drug by the Accordion Pill in the stomach, which allows for the complete dissolution
of the drug dose in the stomach over the delivery period. The gradual passage of the drug from the stomach to the upper part of
the GI tract enables an increase in the amount of the drug that can be dissolved and thus absorbed, in the upper small bowel.
In addition, we believe that bile secretion in the upper part of the GI tract also improves the intestinal environment for better
absorption. Finally, the significant dilution of the drug solution in the small bowel caused by prolonged delivery increases the
amount of the drug available for absorption.
Our
clinical trials to date have demonstrated that the Accordion Pill is retained in the stomach for eight to 12 hours, as compared
to significantly shorter time periods, typically as little as two to three hours, when using other solid dosage forms. The efficient
GR and the predetermined release profile for each specific drug associated with our Accordion Pill technology demonstrated a significant
improvement in PK, which is the drug plasma level over time and a corresponding improvement in efficacy and safety.
The
following chart depicts the Accordion Pill’s capability to improve the PK of Levodopa, which is a drug characterized by
a narrow absorption window:
AP-CDLD
Phase II clinical trial — more stable Levodopa levels with statistically significant
reduced peak-to-trough fluctuations
Levodopa
plasma levels in n=8 advanced Parkinson’s disease patients following twice daily, or b.i.d, administration (eight hours
apart) of AP-CDLD 50/375 versus four times daily, or q.i.d, administration (four hours apart) of a commercial Carbidopa/Levodopa
formulation (equivalent daily Levodopa dose). The PK study was performed on day seven, following six days of drug administration
at home. No Levodopa medication was allowed for ten hours before the first administration at day seven. The PK results showed
that the peak to trough ratio, which measures the maximum average concentration relative to the minimum average concentration
of LD plasma levels, was reduced from 29.9 to 3.2 with the AP-CDLD. Demonstration of the clinical benefits of these peak to trough
ratios will be further studied and confirmed in the ACCORDANCE study.
The
following chart depicts the Accordion Pill’s capability to improve the PK of a BCS Class II/IV drug combined with our Accordion
Pill technology that is currently on the market and is characterized with poor solubility:
PK
results with the Accordion Pill with a BCS Class II/IV drug that is currently available
on the market in 12 healthy volunteers
The
results of our clinical trial have demonstrated approximately a 100% increase in bioavailability in 12 healthy volunteers with
our Accordion Pill technology, as compared to the commercial formulation of the drug. Furthermore, the results demonstrated that
the increase in bioavailability obtained when administering one Accordion Pill and two Accordion Pills was proportional to the
increase in dosage, or linear absorption, whereas the commercial formulation does not show linear absorption in these dosage ranges.
Although
there is no assurance that these results will be repeated in other instances, we believe that these results are important because
the enhancement of bioavailability of poorly soluble drugs is one of the main challenges facing the pharmaceutical industry. According
to The AAPS Journal published by the American Association of Pharmaceutical Scientists, of the top 200 oral drugs in the United
States, Great Britain, Spain and Japan in 2006, approximately 30% to 35% were BCS Class II drugs and approximately 5% to 10% were
BCS Class IV drugs. Further, according to Drug Development & Delivery, in 2006 approximately 90% of NCEs in development were
either BCS Class II or Class IV drugs.
Our
Accordion Pill technology enables us to combine active pharmaceutical ingredients, or APIs, which are also referred to as drugs,
and inactive ingredients that are included in the FDA’s list of approved inactive ingredients, into pharmaceutical-grade,
biodegradable polymeric films, welded into a planar structure, folded into the shape of an accordion and placed inside of a capsule.
While in the stomach, the capsule dissolves and the Accordion Pill unfolds and releases the drug in a predetermined profile. In
order to provide optimum results for each drug, each Accordion Pill drug differs and will likely differ in several ways, including
composition, structure and properties.
The
diagram below illustrates the general structure of the Accordion Pill:
All
of the ingredients in the Accordion Pill (active and inactive) are combined physically, not chemically, thus maintaining the chemical
composition of the active ingredients.
The
Accordion Pill has a drug release mechanism that is independent of the gastric retention mechanism. It can combine both immediate
and controlled release profiles, as well as more than one drug. We have demonstrated that the Accordion Pill has the ability to
carry a drug load of up to 550 mg. We have also demonstrated that the Accordion Pill fully degrades in the intestine once it is
expelled from the stomach.
We
have conducted more than 30 clinical trials to study the safety and efficacy of the Accordion Pill, including the Accordion Pill
platform alone and the Accordion Pill platform with various APIs. No significant adverse events related to the Accordion Pill
were reported in these clinical studies. These studies demonstrated that increasing gastro-retention time improves the performance
of certain NAW and BCS Class II/IV drugs.
Our
Product Pipeline
Our
product pipeline currently includes several product candidates in various clinical trial stages. Our leading pipeline product,
AP-CDLD, is focused on leveraging our Accordion Pill technology to improve the efficacy and safety of an approved drug for the
treatment of Parkinson’s disease symptoms in advanced Parkinson’s disease patients. We have agreed with the FDA on
the remaining clinical development program for AP-CDLD for the treatment of Parkinson’s disease symptoms in advanced Parkinson’s
disease patients, including the main principles of the ACCORDANCE study. We enrolled the first patient in the ACCORDANCE study
in April 2016 and we currently expect to complete patient enrollment in the trial during the second half of 2018. See “—
Current Regulatory Status of AP-CDLD.” We have also initiated a new clinical development program for our Accordion Pill
platform with the two primary cannabinoids contained in cannabis sativa, which we refer to as AP-AP-Cannabinoids. We are formulating
and testing cannabidiol, or CBD, and 9-tetrahydrocannabinol, or THC, for the treatment of various indications, including low back
neuropathic pain and fibromyalgia. The AP-Cannabinoids are currently in Phase I.
Our
Business Strategy
We
plan to leverage our Accordion Pill technology platform to become a leading specialty pharmaceutical company focused on developing,
manufacturing and commercializing improved proprietary versions of approved and development stage drugs for the treatment of various
diseases.
We
will continue to develop our existing product candidates while reviewing other drug candidates that may also benefit from our
platform technology. We seek to create global partnerships to assist us in the development and marketing of our products and may
also independently commercialize certain products in the U.S. We believe that our approach will allow us to continue to advance
our current product candidates and should allow us to avoid dependency on a small number of drugs.
Using
this approach, we have advanced our product candidates into various stages of clinical development. Specific elements of our current
strategy include the following:
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Continue to
advance our current pipeline by developing improved versions of drugs with reduced side effects and that enhance the efficacy
of existing drugs
. We expect that our products will potentially offer significant advantages over the original
versions of the drugs. Results from our completed Phase II clinical trial demonstrate that AP-CDLD can improve motor function
in patients suffering “off time” episodes. “Off time” refers to debilitating periods of decreased
motor and non-motor functions. We are pursuing the development and approval of AP-CDLD under the Section 505(b)(2) pathway,
which allows an abbreviated path to approval relying on a single pivotal Phase III clinical trial. We expect to complete patient
enrollment in the trial during the second half of 2018. If our pivotal Phase III clinical trial is successful, we intend to
file for regulatory approval in the United States.
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Utilize the
505(b)(2) regulatory pathway to leverage extensive existing clinical and regulatory experience with the original drugs and
bring our improved versions of these drugs to market more quickly
. An NDA submitted under Section 505(b)(2) of
the FDCA may be permitted to reference safety and effectiveness data submitted by the sponsor of a previously approved drug
as part of its NDA, be based on the FDA’s prior conclusions regarding the safety and effectiveness of that previously
approved drug, or rely in part on data in the public domain. Reliance on data collected by others may expedite the development
program for our product candidates by potentially decreasing the amount of clinical data that we would need to generate to
submit an NDA. As the FDA has previously agreed that our lead product, AP-CDLD, would likely be eligible to file under Section
505(b)(2), assuming the successful completion of the ACCORDANCE study, we believe that there is a strong likelihood that our
future products would similarly qualify. The factors related to this qualification are expected to reduce the time and costs
associated with clinical trials when compared to a traditional NDA for an NCE. We also believe the strategy of targeting drugs
with proven safety and efficacy provides a better prospect of clinical success of our proprietary development portfolio as
compared to de novo drug development. We estimate that the average time to market and cost of clinical trials for our products
could be less than that required to develop a new drug.
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Use our expertise
with our platform technology to evaluate drug development and commercialization opportunities
.
We
continuously seek attractive product candidates to develop and commercialize. We intend to focus on product candidates that
we believe would be synergistic with our Accordion Pill technology. We intend to use our expertise in our technology and our
pharmacological expertise to grow our product candidate portfolio.
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Seek attractive
partnership opportunities
. We believe that our Accordion Pill technology can be applied to many drugs that have
already been approved by the FDA, as well as developmental stage drugs. We believe that the proprietary rights provided by
our Accordion Pill technology, together with the clinical and compliance benefits, will be attractive to potential partners.
We will seek to build a portfolio of commercially attractive partnerships in a blend of co-developments and licenses. Where
possible, we will seek partnerships that allow us to participate significantly in the commercial success of each of the drugs.
Although we are currently developing most of our current pipeline, we are looking to partner with the owners of rights to
patented drugs in order to develop Accordion Pill versions of those drugs, and we may seek strategic partners to market our
Accordion Pill products worldwide. We may also seek arrangements with third parties to assist in the development and commercialization
of our products. These arrangements will allow us to share the high development cost, minimize the risk of failure and enjoy
our partners’ marketing capabilities, while also enabling us to treat a more significant number of patients.
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Develop products
that target significant commercial opportunities
.
Our existing product candidates are intended to direct at
diseases that have major global markets. Our intent is to continue to develop products that present significant market opportunities
by leveraging our According Pill technology.
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Maintain a
prominent intellectual property position
.
We believe our licensed and proprietary patents and patent
applications provide and will provide broad and comprehensive coverage for the use of our Accordion Pill technology for the
treatment of certain diseases, focusing on BCS Class II/IV and NAW drugs, or drugs where longer retention in the upper GI
could improve efficacy and absorption and reduce side effects. We seek to protect our proprietary position by, among other
methods, filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that
we believe are important to the development of our business. We also rely on know-how and continuing technological innovation
to develop and maintain our proprietary position. We have submitted and intend to continue to submit patent applications for
various Accordion Pill and drug combinations that we develop.
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AP-CDLD
for the Treatment of Parkinson’s Disease Symptoms in Advanced Parkinson’s Disease Patients
Parkinson’s
disease
Parkinson’s
disease is a progressive, degenerative disease characterized by movement symptoms such as involuntary tremor or trembling in the
hands, arms and legs; muscle rigidity of the limbs and trunk; slowness of and a decline in movement; and impaired balance and
coordination. In its advanced stages, the disease causes comprehensive dysfunction of the patient’s bodily systems, including
difficulties in swallowing, speech disorders and significant mental decline. Parkinson’s disease results from a continuing
loss of dopamine-producing nerve cells. Dopamine is required for normal functioning of the central nervous system and smooth,
coordinated function of the body’s muscles and movement. According to the National Parkinson’s Foundation, the symptoms
of Parkinson’s disease appear when approximately 60–80% of dopamine-producing cells are damaged.
Although
there is presently no cure for Parkinson’s disease, there are a number of medications that provide relief from the symptoms.
Dopamine replacement therapy with Levodopa is generally considered to be the most effective treatment for Parkinson’s disease.
After 50 years of clinical use, Levodopa therapy still offers the best symptomatic control of Parkinson’s disease and is
the most widely used therapy. Levodopa is converted into dopamine in the brain and is usually administered with Carbidopa, which
helps prevent Levodopa from converting to dopamine outside the brain. Levodopa helps reduce tremor, stiffness and slowness and
helps improve muscle control, balance and walking. Virtually all Parkinson’s disease patients will require Levodopa therapy
during the course of their disease.
Parkinson’s
disease patients typically experience a satisfactory response to initial treatment with Levodopa. However, at later stages of
Parkinson’s disease, there is a decline in the capacity of the nigrostriatal dopaminergic system, or the brain pathways
that moderate control of voluntary movement, to synthesize, store, and release dopamine. Therefore, the dopaminergic system becomes
more and more dependent on dopamine from external sources, such as Levodopa treatment.
As
the disease progresses, it becomes increasingly difficult to control the symptoms adequately by Levodopa treatment, and patients
develop motor complications, for the following reasons:
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The duration of
the response after each Levodopa dose declines, resulting in a “wearing off” effect, wherein the clinical benefits
of Levodopa are lost until the next dose reaches therapeutic levels.
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The patients suffer
from longer periods in which Levodopa does not provide symptom relief and patients’ movements are severely restricted
(i.e., off time).
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When Levodopa doses
are increased to address the loss of clinical benefit, involuntary movements or troublesome dyskinesia emerges.
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Recent
studies have reported that up to 50% of patients show the onset of motor fluctuations within two years of starting conventional
Levodopa therapy. For many patients with advanced Parkinson’s disease, the repeated emergence of off states can occupy up
to one-third or more of a typical waking day. The loss of consistent symptomatic control from Levodopa is a major challenge for
the long-term management of Parkinson’s disease. When Parkinson’s disease patients experience “wearing off”
between Levodopa doses, this short-duration response occurs in parallel to the drug’s peripheral PK profile. Therefore,
with the evolution of these short-duration responses, improving the consistency in Levodopa’s plasma levels becomes the
major factor for improving symptom control.
Oral
Levodopa formulations currently on the market do not provide satisfactory consistent Levodopa plasma levels. There are two major
challenges to maintaining consistency in Levodopa plasma levels: (i) the very short half-life of Levodopa (approximately 90 minutes)
and (ii) the fact that Levodopa’s absorption is confined to the upper part of the GI tract (i.e., it has an NAW). For drugs
with an NAW, conventional controlled release formulations are limited in providing long-acting performance, as once the drug has
passed through the upper GI tract, it will no longer be absorbed. These factors result in high peak-to-trough ratios of Levodopa
in the plasma, namely high variability of the concentration of the drug in the blood, rather than a consistent level being maintained,
reducing the clinical benefits of Levodopa therapy. Providing stable Levodopa plasma levels is therefore a major unmet need for
the long-term management of Parkinson’s disease.
Key
opinion leaders interviewed by Datamonitor, a market research provider, summarized the unmet needs in Parkinson’s disease
treatment to include, among others, greater efficacy in reducing motor complications, reducing side effects and reducing pill
burden.
Market
. According
to a 2015 report by Global Data, Parkinson’s disease is the second most common chronic progressive neurodegenerative disorder
in the elderly after Alzheimer’s disease, affecting 1%–2% of individuals worldwide over the age of 65. The EPDA estimated
in 2007 that 6.3 million people worldwide suffer from Parkinson’s disease. According to a 2015 report by Global Data, the
annual growth of Parkinson’s disease cases in individuals over the age of 65 from 2012 to 2022, in the Seven Major Markets
plus Brazil, is estimated to be 3.28%. According to Global Data, in 2012 the market for pharmaceutical treatments for Parkinson’s
disease was approximately $3.6 billion a year in the Seven Major Markets plus Brazil. Global Data estimates that the pharmaceutical
market for Parkinson’s disease will reach $4.67 billion in the Seven Major Markets plus Brazil by 2022.
We
have also retained a leading consulting firm to conduct a market assessment of AP-CDLD for the treatment of the symptoms associated
with advanced Parkinson’s disease. The initial assessment indicates there is a substantial market for AP-CDLD with hundreds
of thousands of patients suffering with Parkinson’s disease appropriate for AP-CDLD treatment.
Our
Solution — AP-CDLD
AP-CDLD,
our lead product candidate, is in development for the treatment of Parkinson’s disease symptoms. AP-CDLD is an Accordion
Pill that contains the generic drugs Carbidopa and Levodopa, which are currently approved for the treatment of Parkinson’s
disease symptoms. We have successfully completed a Phase II clinical trial, and the FDA has permitted us to initiate a Phase III
clinical trial of AP-CDLD. On May 5, 2015, we held an end of Phase II meeting with the FDA for AP-CDLD. We reached an agreement
with the FDA on the remaining clinical development program for AP-CDLD, and the following are the main principles of the single
required pivotal Phase III clinical trial:
|
●
|
A multicenter, randomized,
double-blind, double-dummy, parallel, active-controlled trial, comparing the efficacy and safety of AP-CDLD to Sinemet IR,
an immediate release CDLD, which is a conventional Levodopa medication for the treatment of Parkinson’s disease symptoms
that is currently on the market.
|
|
●
|
The total treatment
period for each patient is 25 weeks, composed of:
|
○
Six weeks open-label titration/ conversion to Sinemet IR (all patients);
○
Six weeks open-label titration/ optimization of AP-CDLD (all patients); and
○
13 weeks double-blind, double-dummy active comparator period, in which half of the patients are randomized to AP-CDLD and half
of the patients are randomized to Sinemet IR.
|
●
|
The primary efficacy
endpoint is the change from baseline to endpoint in the percent of daily off time during waking hours, based on Hauser home
diaries.
|
In
November 2017, we announced an expansion of the then-planned enrollment from 328 patients to 420 patients to account for a higher
than initially planned attrition rate during the open-label titration periods that precede patient randomization. As of the date
of this annual report on Form 20-F, more than 300 patients are enrolled to the ACCORDANCE study.
As
part of our agreement with FDA regarding the approval of the AP-CDLD product, we committed to perform additional safety studies
on the first 100 patients with a predefined safety stopping rule related to gastric ulcers. These additional safety evaluations
involved endoscopy procedures that would detect whether the AP was causing gastric ulcers of a predefined size that might be of
medical concern. By the time the safety study completed enrollment of 123 patients, we were able to obtain evaluable paired gastroscopies
(endoscopy procedures prior to AP treatment and at end of treatment) on 64 patients who completed all stages of the study. At
the second scheduled periodic meeting of the DSMB in February 2018, the DSMB determined that based on available results, there
did not appear to be a significantly increased rate of the prespecified gastric ulcers defined in the safety charter. At that
meeting, the DSMB recommended to continue the ACCORDANCE study without modification. The DSMB will continue to monitor adverse
events of special interest, and also recommended we submit its comments and findings to the FDA, which we intend to do.
Additionally,
we have undertaken measures to optimize study activities, including enhancing patient selection, providing better site engagement
to boost the rate of enrollment, eliminating selected clinical sites with low enrollment and, in some cases, opening new investigational
sites. Given the increased patient enrollment target, the trial is now expected to complete enrollment in the second half of 2018.
We
will also be required to submit evidence of the adequate safety experience of at least 100 patients receiving AP-CDLD for one
year, with at least 50% receiving the highest proposed dose of AP-CDLD, as is required for drugs intended for long-term treatment
of non-life-threatening conditions. We intend to collect this safety data, fully or partially, from an on-going open label extension
of the ACCORDANCE study.
We
also agreed, at the FDA’s request, to conduct an additional bioavailability study to compare the PK between Sinemet IR and
the to-be-marketed formulation of AP-CDLD because the formulation of AP-CDLD has changed from our previously completed comparative
bioavailability study. We currently intend to conduct this study during 2019. The FDA also strongly suggested that we conduct
additional dissolution testing and we anticipate doing so. See “— Current Regulatory Status of AP-CDLD.”
AP-CDLD
is designed to provide a combination of immediate release and a sustained release of Levodopa, in the stomach, in proximity to
its absorption site through our Accordion Pill technology. AP-CDLD is designed to provide stable Levodopa plasma therapeutic levels,
resulting in a reduction in total off time while also reducing or avoiding troublesome dyskinesia, or involuntary movements. The
stable therapeutic levels of Levodopa in a patient’s plasma provided by AP-CDLD are intended to significantly reduce the
motor complications because the motor complications which are associated with Levodopa treatment are strongly correlated with
the drug’s peripheral PK profile.
We
anticipate that AP-CDLD will be available in three dosages of Levodopa (200 mg, 400 mg and 500 mg), each provided in two release
profiles (immediate release and controlled release), along with 50 mg of Carbidopa that is included in AP-CDLD. This array of
dosages is designed to cover Parkinson’s disease patients in various stages of the disease. AP-CDLD is designed to be taken
b.i.d. and t.i.d.
AP-CDLD
– Clinical Trials
Phase
II Clinical Trial
Our
Phase II clinical trial with AP-CDLD was a multi-center, open-label, randomized, crossover, active control trial that included
five groups. Overall, 60 patients completed the trial per protocol, in several medical centers in Israel. The Phase II clinical
trial assessed safety, PK and pharmacodynamics/efficacy in patients with various stages of Parkinson’s disease compared
with their current Levodopa treatment. Each group of the clinical trial was deemed to initiate upon the first patient enrolling
in a group and to be completed upon the conclusion of data analysis. The initiation and completion dates for groups 1, 3, 4, 5
and 6 were August 2009 – December 2009, April 2010 – August 2010, December 2010 – July 2011, August 2011 –
November 2011 and December 2011 – October 2012, respectively. The following table details the structure, design and purpose
of the Phase II clinical trial:
Group
Number
|
|
Trial
Design
|
|
Trial
Purpose
|
|
Population
|
|
N
(PP)
|
|
Test
Treatment
|
|
Treatment
and
Duration*
|
Group 1
|
|
Open-label, multi-dose, multi-center, randomized
|
|
2-way crossover comparative PK trial
|
|
Early-stage PD patients
|
|
12
|
|
AP-CDLD 50/250 mg
|
|
b.i.d for 7 days
|
Group 2
|
|
This trial was originally planned
in early non-fluctuators with a dose of 50/375 mg b.i.d. In light of the satisfactory PK results with 50/250 mg b.i.d in this
population, the higher dose was considered unnecessary and therefore the trial was not performed.
|
Group 3
|
|
Open-label, multi-dose, multi-center, randomized
|
|
2-way crossover comparative PK and PHDS trial
|
|
Advanced PD patients
|
|
10
a
|
|
AP-CDLD 50/375 mg
|
|
b.i.d for 7 days
|
Group 4**
|
|
Open-label, multi-dose, multi-center, randomized
|
|
2-way crossover comparative PHDS trial
|
|
Advanced PD patients
|
|
16
|
|
AP-CDLD 50/375 mg
|
|
b.i.d for 21 days
|
Group 5
b
**
|
|
Open-label, multi-dose, multi-center, randomized
|
|
2-way crossover comparative PHDS trial
|
|
Advanced PD patients
|
|
4
|
|
AP-CDLD 50/500 mg
|
|
b.i.d for 21 days
|
Group 6**
|
|
Open-label, multi-dose, multi-center, randomized
|
|
2-way crossover comparative PHDS trial
|
|
Advanced PD patients
|
|
18
|
|
AP-CDLD 50/500 mg
|
|
b.i.d for 21 days
|
a
|
Eight patients completed
the PK trial.
|
b
|
Group 5 was terminated
early due to low enrollment.
|
d
= days; PP = Per Protocol; N = number of subjects; PD = Parkinson’s disease; PHDS = pharmacodynamics.
*
|
Not including add-on
dosing of immediate release Carbidopa/Levodopa, if needed.
|
**
Compared against each patient’s optimized current Levodopa treatment.
Pharmacokinetic
Results
Group
1 of our Phase II clinical trial with AP-CDLD was conducted with 12 male and female patients with non-fluctuating Parkinson’s
disease. The crossover design included the following treatment arms: (i) AP-CDLD 50/250 mg administered b.i.d and (ii) immediate
release CDLD 25/250 mg administered by half tablet q.i.d, resulting in a total daily dosage of 50/500mg. The treatments were administered
for six days, with the seventh day consisting of PK testing. On the PK day of the control period, patients were given an additional
50 mg of Carbidopa (12.5 mg q.i.d) to achieve the recommended daily 70 – 100 mg dose of Carbidopa. Immediately following
the PK testing on day seven, the patients crossed over to the other treatment to repeat the seven day process. This study concluded
that (i) the bioavailability of Levodopa when administered via AP-CDLD was similar to the immediate release reference; (ii) AP-CDLD
provided more stable plasma levels of Levodopa, with reduced peak-to-trough ratio, when compared to the immediate release reference;
and (iii) AP-CDLD provided higher morning Levodopa plasma levels than the immediate release reference.
Group
3 of our Phase II clinical trial with AP-CDLD was conducted with ten male and female patients with advanced, fluctuating Parkinson’s
disease, of which eight completed the PK trial per protocol. The crossover design included the following treatment arms: in the
AP-CDLD treatment arm, the AP-CDLD 50/375 mg was administered b.i.d for six at home days of treatment with up to an additional
three add-on immediate release Carbidopa/Levodopa, as needed, and on day seven, b.i.d administration of AP-CDLD 50/375 mg. In
the control arm, the patient’s current treatments were administered for six at home days and, on the seventh day, they were
given immediate release Carbidopa/Levodopa 18.75/187.5 mg q.i.d, resulting in a total dosage of 75/750 mg. On the seventh day
of each treatment regime, we conducted PK testing. Immediately following the PK testing on day seven, the patients were crossed
over to the other treatment to repeat the seven day process.
These
trials concluded that (i) the PK of AP-CDLD demonstrated an efficient controlled-release profile, with significantly more stable
Levodopa levels; (ii) the Levodopa absorption phase was increased more than six-fold versus the control treatment; (iii) the b.i.d
administration of AP-CDLD provided daily coverage of therapeutic Levodopa plasma levels; (iv) the peak-to-trough ratio in Levodopa
plasma levels was half of those of the control; (v) the morning, or pre-first dose, Levodopa plasma levels of AP-CDLD, were significantly
higher than the control; and (vi) Levodopa’s high bioavailability was preserved when using AP-CDLD.
The
following figure displays the concentrations of Levodopa in plasma of patients over time, comparing AP-CDLD (pink) to the reference
treatment (blue):
AP-CDLD
Phase II clinical trial — more stable Levodopa levels with statistically significant reduced
peak-to-trough fluctuations
The
PK results showed that peak to trough ratio, which measures the maximum average concentration relative to the minimum average
concentration of LD plasma levels, was reduced from 29.9 to 3.2 with the AP-CDLD. Cmax/Cmin with the AP-CDLD was 5.8. The average
LD plasma levels during time 0-16 hours was 1,038 ng/ml.
Pharmacodynamics
Results
The
following figure sets forth the structure of the Phase II clinical trial for Groups 4 and 6:
*
Patient’s optimized CD/LD regimen.
CD/LD
= Carbidopa/Levodopa
Groups
3, 4 and 6 of our Phase II clinical trial examined the pharmacodynamic effects of AP-CDLD. Each group assessed the effects in
patients with advanced Parkinson’s disease; ten, 16 and 18 patients completed the trials per protocol in Groups 3, 4 and
6, respectively. Groups 3 and 4 tested AP-CDLD in the 50/375 mg strength, administered b.i.d. with additional CDLD immediate release
tablets if needed; Group 6 tested the 50/500 mg strength administered b.i.d. with additional CDLD immediate release tablets if
needed. In these three trials, AP-CDLD was compared to the patients’ current Levodopa treatment (including a dopamine decarboxylase
inhibitor, such as Carbidopa). All three groups were cross-over, with Group 3 receiving the treatments as described above and
Groups 4 and 6 receiving each of their current treatment and AP-CDLD for 21 days, with the second tested treatment starting immediately
after completion of the first. In Groups 4 and 6, off time, on time and dyskinesia were assessed by patient-completed home diaries
during days 18 through 20 of each arm.
Because
Levodopa is usually prescribed for long-term treatment, three weeks of treatment with AP-CDLD was sufficient to demonstrate statistically
significant improvements in the primary endpoint, as well as most of the secondary endpoints. The statistical significance of
a result was captured by the associated “p-value”, or the estimated probability that the observed effect was by chance.
A “p-value” of less than 0.05 implied that there was less than a 5% probability that the observed effect was by chance,
and was generally accepted as a statistically significant event. These studies demonstrated that (i) total off time was decreased
when taking AP-CDLD versus the control, by 44% and 45% in Groups 4 and 6, respectively (statistically significant p<0.0001);
(ii) improvements in off time and on time without troublesome dyskinesia did not come at the expense of an increase of on time
with troublesome dyskinesia, and, moreover, with the AP-CDLD 50/500 mg troublesome dyskinesia was decreased by 0.5 hours (statistically
significant p = 0.002); (iii) the effect of AP-CDLD on total off time and on time with troublesome dyskinesia resulted in a total
increase of “good” on time (i.e., without troublesome dyskinesia) of 2.1 and 2.7 hours per day in Groups 4 and 6,
respectively (statistically significant p<0.0001); (iv) the improvements in treating symptoms with AP-CDLD were achieved with
fewer daily doses; and (v) the improvements in treating symptoms with AP-CDLD correlate with stable Levodopa plasma levels throughout
the day with appropriate therapeutic levels of the drug.
The
figure below reflects the mean total off time in hours over a 24 hour period during days 18 through 20 of Groups 4 and 6. The
average total off time was reduced by 1.9 hours and 2.3 hours with AP-CDLD 50/375 mg (Group 4) and 50/500 mg (Group 6), respectively.
This reduction is statistically significant (p<0.0001).
AP-CDLD
– Significant reduction of total off time compared to current Levodopa treatment
The
figure below reflects the mean total “good” on time (on time without troublesome dyskinesia) in hours over a 24 hour
period during days 18 through 20 of Groups 4 and 6. The average total “good” on time was increased by 2.1 hours and
2.7 hours with AP-CDLD 50/375 mg (Group 4) and 50/500 mg (Group 6), respectively. This reduction is statistically significant
(p<0.0001).
AP-CDLD
– Increase of total “good” on time compared to current Levodopa treatment
The
figure below reflects the mean total on time with troublesome dyskinesia in hours over a 24 hour period during days 18 through
20 of Groups 4 and 6. On time with troublesome dyskinesia was not changed and decreased by 0.5 hours (p = 0.002) with AP-CDLD
50/375 mg (Group 4) and 50/500 mg (Group 6), respectively.
AP-CDLD
– Reduction of total on time with dyskinesia compared to current Levodopa treatment
Finally,
the figure below displays the mean number of daily Levodopa administrations of the treatments in Groups 4 and 6.
AP-CDLD
–Number of daily Levodopa administrations compared to current Levodopa treatment
|
*
|
In the administration
of the AP-CDLD arm, patients received b.i.d AP-CDLD pills and were allowed to take additional commercially available immediate
release Carbidopa/Levodopa formulations, as add-ons when needed. As seen in the figure above, patients took, in addition to
the b.i.d AP-CDLD pills, one-and-a-half to two commercially available immediate-release Carbidopa/Levodopa formulations, in
Groups 4 and 6, respectively.
|
Demonstration
of the clinical benefits of these peak to trough ratios will be further studied and confirmed in the ACCORDANCE study.
Phase
I Clinical Trials
We
conducted four Phase I clinical trials - three to assess the PK profile of Levodopa when administered in several formulations
and one to measure the GR time of our Accordion Pill without an active ingredient.
The
first PK trial was conducted with early formulations in 24 healthy volunteers to assess the PK profile of Levodopa when administered
in the following three forms: (i) in an Accordion Pill with a dosage of 75/300 mg; (ii) in the immediate release form currently
on the market, Sinemet; and (iii) in the controlled release form currently on the market, Sinemet CR. This group underwent a partially
randomized open trial compared with immediate release Sinemet and controlled release Sinemet. The trial results indicated a significant
prolongation of Levodopa’s mean residence time, or MRT, in the blood when administered with the Accordion Pill compared
with the Sinemet and Sinemet CR. Furthermore, the study showed the level of Levodopa received with the Accordion Pill reached
treatment-relevant levels.
The
second PK trial was conducted with early formulations in 23 healthy volunteers to assess the PK profile of Levodopa when administered
in the following two forms: (i) an Accordion Pill in two formulations, 75/300 mg and 50/200 mg; and (ii) in the currently marketed
immediate release form, Sinemet. This was a randomized open trial, compared with immediate release Sinemet. The trial results
indicated a very significant increase in the MRT of Levodopa in the blood when administered with the Accordion Pill in both formulations,
and a very significant prolongation of the absorption phase (up to 12 hours) of Levodopa was demonstrated when administered with
the Accordion Pill compared with Sinemet (two hours).
The
third PK trial was conducted with the AP-CDLD 50/500 mg Phase II formulation in 18 healthy volunteers to assess the PK profile
of Levodopa when administered in the following two forms: (i) AP-CDLD 50/500 mg; and (ii) the currently marketed immediate release
form, Sinemet. This was a randomized open trial, compared with immediate release Sinemet. The trial results indicated that the
absorption phase of Levodopa was increased to approximately ten hours when administered with the Accordion Pill compared to approximately
two hours with Sinemet.
The
GR Phase I clinical trial was a MRI study conducted with 17 Parkinson’s patients to measure the GR time of the Accordion
Pill without an active pharmaceutical ingredient. This trial was a non-randomized open trial comparison of a few formulations.
The results indicated that GR of over 13 hours can be achieved in these patients using all three formulations.
Safety
AP-CDLD
was tested for safety on Göttingen minipigs in accordance with the FDA’s guidelines. The study was 180 days and a subgroup
of minipigs were kept for recovery for an additional 30 days without receiving any treatments. This study included the following
four arms: AP-CDLD 50/400 mg three times daily, AP-CDLD 50/500 mg b.i.d, a Carbidopa/Levodopa reference (Sinemet) and a placebo.
The study was completed in March 2014. The study evaluated (i) animal wellbeing as represented by behavior, food consumption and
weight, (ii) microscopic and macroscopic organ pathology, (iii) ophthalmic evaluation and (iv) electrocardiograms of the miniature
pigs, which is the recording of the electrical activity of the heart. This study’s results form an additional basis regarding
the safety of AP-CDLD.
In
the Phase I and Phase II clinical trials, AP-CDLD was well-tolerated with no serious adverse events that were related to the study
drug. Adverse events were generally mild in severity and resolved without intervention. The most common adverse events reported
included nausea, vomiting, diarrhea, abdominal pain, chest pain and fatigue, which are known adverse events associated with Levodopa
treatment.
Current
Regulatory Status of AP-CDLD
On
May 5, 2015, we held an end of Phase II meeting with the FDA for AP-CDLD. We reached an agreement with the FDA on the remaining
clinical development program for AP-CDLD, and the following are the main principles of the single required pivotal Phase III clinical
trial:
|
●
|
A multicenter, randomized,
double-blind, double-dummy, parallel, active-controlled trial, comparing the efficacy and safety of AP-CDLD to Sinemet IR,
an immediate release CDLD, which is a conventional Levodopa medication for the treatment of Parkinson’s disease symptoms
that is currently on the market.
|
|
●
|
The total treatment
period for each patient is 25 weeks, composed of:
|
○
Six weeks open-label titration / conversion to Sinemet IR (all patients);
○
Six weeks open-label titration / optimization of AP-CDLD (all patients); and
○
13 weeks double-blind, double-dummy active comparator period, in which half of the patients are randomized to AP-CDLD and half
of the patients are randomized to Sinemet IR.
|
●
|
The primary efficacy
endpoint is the change from baseline to endpoint in the percent of daily off time during waking hours, based on Hauser home
diaries.
|
In
November 2017, we announced an expansion of the then-planned enrollment from 328 patients to 420 patients to account for a higher
than initially planned attrition rate during the open-label titration periods that precede patient randomization.
As
part of our agreement with FDA regarding the approval of the AP-CDLD product, we committed to perform additional safety studies
on the first 100 patients with a predefined safety stopping rule related to gastric ulcers. These additional safety evaluations
involved endoscopy procedures that would detect whether the AP was causing gastric ulcers of a predefined size that might be of
medical concern. By the time the safety study completed enrollment of 123 patients, we were able to obtain evaluable paired gastroscopies
(endoscopy procedures prior to AP treatment and at end of treatment) on 64 patients who completed all stages of the study. At
the second scheduled periodic meeting of the DSMB in February 2018, the DSMB determined that based on available results, there
did not appear to be a significantly increased rate of the prespecified gastric ulcers defined in the safety charter. At that
meeting, the DSMB recommended to continue the ACCORDANCE study without modification. The DSMB will continue to monitor adverse
events of special interest, and also recommended we submit its comments and findings to the FDA, which we intend to do.
We
will also be required to submit evidence of the adequate safety experience of at least 100 patients receiving AP-CDLD for one
year, with at least 50% receiving the highest proposed dose of AP-CDLD, as is required for drugs intended for long-term treatment
of non-life-threatening conditions. We intend to collect this safety data, fully or partially, from an on-going open label extension
of the ACCORDANCE study.
We
also agreed, at the FDA’s request, to conduct an additional bioavailability study to compare the PK between Sinemet IR and
the to-be-marketed formulation of AP-CDLD because the formulation of AP-CDLD has changed from our previously completed comparative
bioavailability study. We currently intend to conduct this study during 2019. The FDA also strongly suggested that we conduct
additional dissolution testing and we anticipate doing so.
In addition, we intend to conduct, during
2018, a new PK study to determine the performance of the to-be-marketed formulation of AP-CDLD when dosed three time per day (t.i.d).
The PK study will compare Sinemet IR dosed five times per day to the AP-CDLD dosed t.i.d. We expect that the PK study results
will be available in the second half of 2018.
Development
of Accordion Pills with additional drugs
We
are continuously evaluating the possibilities of developing Accordion Pills with various additional specific drugs for its pipeline.
In August 2016, we announced the initiation of a new clinical development program for the Accordion Pill platform with the two
primary cannabinoids contained in
Cannabis Sativa
, Cannabidiol (CBD) and 9-Tetrahydrocannabinol (THC), for treatment of
various indications, including low back neuropathic pain and Fibromyalgia. The
Cannabis sativa
plant is used in treatment
of chronic pain and a variety of other indications. Previous clinical studies conducted using the whole plant or specific extracts
generated evidence of the cannabis analgesic activity. Furthermore, extracts containing known amounts of the active plant driven
compounds (mainly THC and CBD) or diverse synthetic THC derivatives are promising treatments for painful conditions that do not
respond properly to currently available treatments, such as chronic, neuropathic, and inflammatory pain.
We
believe that AP-Cannabinoids hold the potential to address several major drawbacks of current methods of use and treatment with
cannabis and cannabinoids, such as short duration of effect, delayed onset, variability of exposure, variability of the administered
dose and adverse events that correlate with peak levels. AP-Cannabinoids are designed to extend the absorption phase of CBD and
THC, resulting-in more consistent levels, for an improved therapeutic effect. We believe that the cannabis market has significant
commercial potential and is projected to represent approximately 10% of the specialty pharmaceutical market over the next five
years, or a market of at least $20 billion. According to Global Data, in 2016 the global low back neuropathic pain drug market
was $6.2 billion and the global Fibromyalgia drug market was $1.8 billion.
In
August 2017, we announced the results of a Phase I clinical trial that compared the safety, tolerability and PK of
AP-THC/CBD with Sativex
®
. This Phase I trial is a single-center, single-dose, randomized, three-way crossover
study in Israel to compare the safety, tolerability and PK of two formulations of AP-CBD/THC with Buccal
Sativex
®
in 21 normal healthy volunteers. The results showed that patients in the Accordion Pill CBD/THC arm
demonstrated significant improvements in exposure to CBD (290% to 330%) and THC (25% to 50%) compared with
Sativex
®
. The median time to peak concentration was 2-3 times longer than Sativex and absorption was
significantly higher. Additionally, the formation of THC metabolites was meaningfully reduced, and the drug was found to be
safe and well-tolerated with no serious adverse events reported. Sativex
®
is a commercially available oral
buccal spray containing CBD and THC. Following the Phase 1 clinical trial, we evaluated the program and decided as a next
step to develop two new Accordion Pills containing only the individual cannabinoid components, namely CBD and THC. Two Phase
1 PK studies are planned to be initiated in the second half of 2018. The Company believes exploring the individual components
will provide additional indications to pursue.
We
successfully completed a Phase II clinical trial for Accordion Pill Zaleplon, or AP–ZP, in November 2011 under an IND that
we submitted to the FDA for AP–ZP as a treatment for the induction and maintenance of sleep in patients suffering from insomnia.
The FDA also agreed that AP-ZP could also benefit from the streamlined pathway available through filing an NDA pursuant to Section
505(b)(2) of the FDCA. The FDA indicated in written correspondence to us that we may be able to design the development program
for AP–ZP in a manner that would allow us to obtain sufficient data for the NDA submission for AP–ZP in one pivotal
Phase III clinical trial. The details of such a trial were not determined or confirmed with the FDA. We are currently focusing
on the development of, and are employing almost all of our resources toward, AP-CDLD and AP-Cannabinoids. We are not currently
developing or seeking a partner to develop AP-ZP and we have not presently budgeted any funds toward its development. In the future,
we may consider viable partnership opportunities for this product candidate.
In
addition, in March 2016, we completed a Phase I clinical trial for one of our product candidates that is being developed for the
prevention and treatment of gastroduodenal and small bowel NSAID induced ulcers. The PK results demonstrated in the Phase I trial
were within the well-defined safety levels of the drug. At this time, we have not presently budgeted any funds toward the development
of this product candidate.
In
January 2018, we also entered into a Feasibility and Option Agreement with Novartis Pharmaceuticals to explore using the Accordion
Pill platform for a proprietary Novartis compound. Following potentially successful feasibility studies, including a Phase I PK
study, Novartis has the option to enter into negotiations with respect to a potential licensing agreement for employing Intec
Pharma Accordion Pill™ technology.
Manufacturing
We
currently manufacture the Accordion Pill in our production and packaging facility located in Har Hotzvim, in Jerusalem, Israel,
in the same building as our offices. This production and packaging facility granted the Certificate of GMP Compliance of Manufacturer
from the Israeli Ministry of Health in December 2015. This certificate applies in Israel, as well as in the EU, in accordance
with the Conformity Assessment and Acceptance of Industrial Products (CAA) agreement between the EU and Israel. The certificate
is valid until November 2018.
We
have the capacity to manufacture the required quantities for the ACCORDANCE study. Our fully automated assembly line enables
us to manufacture approximately two to three million capsules annually. With respect to the future commercialization of the
AP-CDLD, we have decided to rely on third-party manufacturers, and currently are in advanced discussions with a Commercial
Manufacturing Organization (CMO). We have not yet determined if we or one or more of our future commercial partners will
manufacture commercial quantities of our other product candidates. See “Risk Factors — Risks Related to Our
Operations in Israel.” We have received Israeli government grants for certain of our research and development
activities. The terms of these grants may require us to satisfy specified conditions in order to manufacture products and
transfer technologies outside of Israel. We may be required to pay penalties in addition to the repayment of the grants in
case we decide to manufacture outside of Israel. With respect to the manufacturing of the AP-CDLD, the IIA approved our
request to transfer 100% of the manufacturing rights to such product, which was developed under one of the IIA funded
programs, to a non-Israeli manufacturer. As a result, we will be required to pay the IIA royalties from revenue generated
from the AP-CDLD product candidate at an increased rate and up to an increased cap amount. The IIA noted that the approval
granted was exceptional and that the IIA will not approve manufacturing additional product candidates out of
Israel.
The
FDA will likely condition granting any marketing approval, if any, on a satisfactory on-site inspection of our manufacturing facilities.
See “Risk Factors — Risks Related to the Regulation of Our Company and its Business — Our product candidates
are manufactured through a compounding, film casting and assembly process, and if we or one of our materials suppliers encounters
problems manufacturing our products or raw materials, our business could suffer.”
As noted, we
anticipate that we will continue to produce our drug products for clinical trials and, we are currently in advanced discussions
with a Commercial Manufacturing Organization (CMO) to enter into an agreement whereby the CMO would manufacture the AP-CDLD capsules
using our proprietary production line. Establishing a manufacturing facility to produce commercial quantities of our products will
require a substantial investment by any party intending to manufacture our products
.
Our
manufacturing process consists of the following stages: compounding, which includes manufacturing of solutions and/or suspensions;
film casting, which involves manufacturing of specific layers of films, including films containing the applicable drug; assembly
and capsulation, which is processing and folding the films into an accordion shape and capsulation; and packaging, which entails
packaging the pills in plastic bottles or blister packs.
Raw
Materials and Supplies
With
the exception of three inactive ingredients, we believe the raw materials that we require to manufacture AP-CDLD and AP–Cannabinoids,
as well as the raw materials that we require for our research and development operations relating to our products, are widely
available from numerous suppliers and are generally considered to be generic pharmaceutical materials and supplies. Except as
described below, we do not rely on a single supplier for the current production of any product in development or for our research
and development operations relating to our products.
We
usually contract with suppliers in Israel and worldwide to purchase the materials required for the research and development operations
of our products. All the materials required in the research and development operations of our products are off-the-shelf pharmaceutical
products; special production or special requirements are not required to order these materials. We have no written agreements
with most of our suppliers. Rather, we submit purchase orders to our suppliers from time to time and as required.
Three
of our inactive ingredients used in our products have only one supplier of each such ingredient. The three suppliers are each
large, well-established suppliers (BASF, the Dow Chemical Company and Evonik), and most of the pharmaceutical industry relies
on these suppliers when they need to purchase certain pharmaceutical products such as these inactive ingredients. To avoid a shortfall
of these materials, we usually purchase sufficient material in advance for a period of at least one year. The pharmaceutical industry
usually relies on these three manufacturers as suppliers of specific materials. The prices of these commonly used raw materials
are not volatile.
Marketing
and Sales
We
do not currently have any marketing or sales capabilities. We intend to license to, or enter into strategic alliances with, companies
in the pharmaceutical business, which are equipped to market and/or sell our products, if any, through their well-developed marketing
and distribution networks. We may establish marketing and/or sales forces in the future in addition to licensing arrangements
or strategic alliances.
Competition
The
pharmaceutical and drug delivery technologies industries are characterized by rapidly evolving technology, intense competition
and a highly risky, costly and lengthy research and development process. Adequate protection of intellectual property, successful
product development, adequate funding and retention of skilled, experienced and professional personnel are among the many factors
critical to success in the pharmaceutical industry.
Depomed,
Inc. has several products on the market based on its GR technology. Several companies have reported research projects related
to systems designed for GR including Teva Pharmaceutical Industries, Flamel Technologies S.A., Sun Pharma and others, all of which
develop products delivered orally that are designed for GR. We are not aware of any approved drug delivery system currently on
the market that is similar to the Accordion Pill, nor are we aware of any product candidates that are similar to our Accordion
Pill with respect to mechanism of action.
Other
drug delivery technologies, other drugs on the market, new drugs under development (including drugs that are in more advanced
stages of development in comparison to our product pipeline) and additional drugs that were originally intended for other purposes,
but were found effective for the indications we target, may all be competitive to the current products in our pipeline. In fact,
some of these drug delivery systems and drugs are well-established and accepted among patients and physicians in their respective
markets, are orally bioavailable, can be efficiently produced and marketed, and are relatively safe and inexpensive. Moreover,
other companies of various sizes engage in activities similar to ours, including large pharmaceutical companies, such as Pfizer
and Novartis, who have established in-house capabilities for the development of drug delivery technologies. Most, if not all,
of our competitors have substantially greater financial and other resources available to them. Competitors include companies with
marketed products and/or an advanced research and development pipeline.
Current
Treatments on the Market and in Development for Parkinson’s Disease
The
current common treatments for Parkinson’s disease include Levodopa (usually used in conjunction with other drugs such as
Carbidopa), which is currently the standard and most efficient Parkinson’s medication used, and dopamine agonists, such
as bromocriptine, pergolide, pramipexole and ropinirole, as well as MAO inhibitors and COMT inhibitors. However, Levodopa therapy
is associated with “wearing-off”, a condition in which a treatment’s effects diminish over time as the disease
progresses, and dyskinesia, or involuntary disturbing movements.
We
believe our direct competition will include other technologies designed to address the need for more stable Levodopa levels. As
such, AP-CDLD will compete against other Levodopa-based Parkinson’s drugs that are already on the market, such as Sinemet,
a combination of Levodopa and Carbidopa, which is sold by Merck, as well as generic Sinemet, which is sold by various generic
manufacturers. In addition, other technologies and drug delivery systems designed to address the Levodopa blood concentration
problem currently exist. To our knowledge, based on publicly-filed documents, press releases and published studies, we believe
the companies described below would be our primary competition with respect to AP-CDLD.
Novartis
and Orion combine Levodopa and Carbidopa with Comtan (entacapone), a drug that inhibits the clearance of Levodopa from the blood,
thereby slowing the rapid drop in the Levodopa level in the blood. Additional drug candidates that are developed by Bial and Orion
are based on the same approach.
Solvay
Pharmaceuticals, which has been acquired by AbbVie Inc., introduced a drug delivery system based on implanting a tube in the duodenum
area attached to an external pump that releases Levodopa formulation directly to the NAW. This product has been approved for marketing
in the United States and Europe. The invasive nature of implanting a tube in patients, most of whom are elderly, as well as various
difficulties related to the system, are certain disadvantages of this technology.
Impax
Laboratories has developed a product, Rytary
TM
, or IPX066, a continuous release Levodopa capsule formulation. The product
was launched in April 2015. In addition, Impax Laboratories is developing IPX203, a new extended-release oral capsule formulation
of carbidopa and levodopa, as a potential treatment for symptoms of Parkinson’s disease. IPX203 has completed Phase II.
Civitas
Therapeutics, Inc., which was acquired by Acorda Therapeutics, Inc. in September 2014, has developed a product, INBRIJA
TM
,
or CVT-301, a self-administered, adjunctive, as needed, inhaled oral Levodopa, for the ability to rapidly and predictably treat
“off” episodes as they occur. In February 2018, Acorda announced that the FDA had accepted an NDA for INBRIJA
TM
.
NeuroDerm
Ltd., which was acquired by Mitsubishi Tanabe Pharma Corporation in October 2017, has the following subcutaneous product candidates,
ND0612H and ND0612L for the treatment of patients suffering from Parkinson’s disease. These product candidates have completed
Phase II clinical trials.
Other
technologies for delivering Levodopa, such as through the skin (transdermal administration) using a patch, injections or inhalations,
as well as new formulations and chemical modifications of Levodopa and/or complementary drugs, currently exist and might compete
with AP-CDLD as well, but, to our knowledge, these technologies, formulations and modifications have not yet been submitted for
approval.
Government
Regulation
In
the United States, the FDA regulates pharmaceuticals and biologics under the FDCA and the Public Health Service Act, or PHS Act,
and their implementing regulations. These products are also subject to other federal, state, and local statutes and regulations,
including federal and state consumer protection laws, laws protecting the privacy of health-related information, and laws prohibiting
unfair and deceptive acts and trade practices.
The
process required by the FDA before a new drug product may be marketed in the United States generally involves the following: completion
of extensive preclinical laboratory tests and preclinical animal studies, all performed in accordance with the FDA’s Good
Laboratory Practice, or GLP, regulations; submission to the FDA of an IND which FDA must allow to become effective before human
clinical trials may begin and must be updated annually; performance of adequate and well-controlled human clinical trials to establish
the safety and efficacy of the product candidate for each proposed indication; and submission to the FDA of an NDA for a drug,
and BLA for biological product, after completion of all pivotal clinical trials.
An
IND is a request for authorization from the FDA to administer an investigational drug product to humans. We currently have effective
INDs for two of our potential products: AP-CDLD for the treatment of Parkinson’s disease symptoms and AP–ZP for the
treatment of insomnia.
Clinical
trials involve the administration of the investigational drug to human subjects under the supervision of qualified investigators
in accordance with Current Good Clinical Practices, or cGCPs, which include the requirement that all research subjects provide
their informed consent for their participation in any clinical trial. A protocol for each clinical trial and any subsequent protocol
amendments must be submitted to the FDA as part of the IND. Additionally, approval must also be obtained from each clinical trial
site’s Institutional Review Board, or IRB, before the trials may be initiated, and the IRB must monitor the trial until
completed. There are also requirements governing the reporting of ongoing clinical trials and clinical trial results to public
registries.
Clinical
trials are usually conducted in three phases. Phase I clinical trials are normally conducted in small groups of healthy volunteers
to assess acute toxicity and find the potential dosing range. After an acceptable dose has been established, the drug is administered
to small populations of sick patients (Phase II) to look for initial signs of efficacy in treating the targeted disease or condition
and to continue to assess safety. Phase III clinical trials are usually multi-center, double-blind controlled trials in hundreds
or even thousands of subjects at various sites to assess as fully as possible both the safety and effectiveness of the drug.
The
FDA, the IRB, or the clinical trial sponsor may suspend or terminate a clinical trial at any time on various grounds, including
a finding that the research subjects are being exposed to an unacceptable health risk. Additionally, some clinical trials are
overseen by a DSMB. This group reviews unblinded data from clinical trials and provides authorization for whether or not a trial
may move forward at designated check points. A DSMB may order a trial halted if it believes the dangers posed by the trial are
unacceptable or the product is so effective as to make it unethical to administer placebos or alternate treatments to the non-treatment
arms. We may also suspend or terminate a clinical trial based on evolving business objectives and/or competitive climate.
Assuming
successful completion of all required testing in accordance with all applicable regulatory requirements, detailed investigational
drug product information is submitted to the FDA in the form of an NDA requesting approval to market the product for one or more
indications. The application includes all relevant data available from pertinent preclinical and clinical trials, including negative
or ambiguous results as well as positive findings, together with detailed information relating to the product’s chemistry,
manufacturing, controls and proposed labeling, among other things.
Once
the NDA submission has been accepted for filing, the FDA’s goal is to review applications within ten months of filing. However,
the review process is often significantly extended by FDA requests for additional information or clarification. The FDA may refer
the application to an advisory committee for review, evaluation and recommendation as to whether the application should be approved.
The FDA is not bound by the recommendation of an advisory committee, but it typically follows such recommendations.
After
the FDA evaluates the NDA and conducts inspections of manufacturing facilities where the drug product will be formulated and its
drug will be produced, it may issue an approval letter or, instead, a Complete Response Letter. An approval letter authorizes
commercial marketing of the drug with specific prescribing information for specific indications. A Complete Response Letter indicates
that the review cycle of the application is complete and the application is not ready for approval. A Complete Response Letter
may require additional clinical data or an additional pivotal Phase III clinical trial(s), or other significant, expensive and
time-consuming requirements related to clinical trials, preclinical studies or manufacturing, or any combination thereof. Even
if such additional information is submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval.
The FDA could also approve the NDA with restrictive indications, labeling that includes particular risk information, or a risk
evaluation and mitigation strategy, or REMS, which could include medication guides, physician communication plans, or elements
to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. The FDA also
may condition approval on, among other things, changes to proposed labeling, development of adequate controls and specifications,
or a commitment to conduct one or more post-market studies or clinical trials. Such post-market testing may include Phase IV clinical
trials and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization.
After
regulatory approval of a drug product is obtained, we are required to comply with a number of post-approval requirements. As a
holder of an approved NDA, we would be required to report, among other things, certain adverse reactions and production problems
to the FDA, to provide updated safety and efficacy information, and to comply with requirements concerning advertising and promotional
labeling for any of our products. Also, quality control and manufacturing procedures must continue to conform to cGMP after approval
to ensure and preserve the long term stability of the drug product. The FDA periodically inspects manufacturing facilities to
assess compliance with cGMP, which imposes extensive procedural, substantive, and record keeping requirements. In addition, changes
to the manufacturing process are strictly regulated, and, depending on the significance of the change, may require prior FDA approval
before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting
and documentation requirements upon us and any third-party manufacturers that we may decide to use. Accordingly, manufacturers
must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMP
and other aspects of regulatory compliance.
We
produce, and expect to continue to produce, the quantities of our product candidates required for our clinical trials, and we
do not yet have a need to produce our product candidates for commercial purposes. Future FDA and state inspections may identify
compliance issues at our facilities or at the facilities of our contract manufacturers or licensees that may disrupt production
or distribution, or require substantial resources to correct. In addition, discovery of previously unknown problems with a product
or the failure to comply with applicable requirements may result in restrictions on a product, manufacturer or holder of an approved
NDA, including withdrawal or recall of the product from the market or other voluntary withdrawal of the product’s approval,
seizure, or FDA-initiated judicial action that could delay or prohibit further marketing. Newly discovered or developed safety
or effectiveness data may require changes to a product’s approved labeling, including the addition of new warnings and contraindications,
and also may require the implementation of other risk management measures. Also, new government requirements, including those
resulting from new legislation, may be established, or the FDA’s policies may change, which could delay or prevent regulatory
approval of our products under development.
In
addition, as the NDA holder, we are responsible for legal and regulatory compliance for advertising and promotion of the drug
product. We are required to provide to the FDA copies of all drug promotion at the time of first use, and to ensure that all information
disseminated conforms to the product’s approved labeling and other FDA regulations and policies.
505(b)(2)
Applications
We
intend to submit NDAs for our proposed products, assuming that the clinical data justify submission, under Section 505(b)(2) of
the FDCA, and assuming the FDA agrees with our assessment that a given proposed product qualifies for review under that section.
If the FDA disagrees with that assessment or revises its decision at a later date, we would be compelled to file under section
505(b)(1), which is the normal route used for traditional new drugs where the data relied upon for the NDA filing have been developed
by the sponsor during its clinical trials. In contrast, Section 505(b)(2) permits the filing of an NDA when at least some of the
information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not
obtained a right of reference. The applicant may rely on published literature and the FDA’s findings of safety and effectiveness
based on certain pre-clinical or clinical studies conducted for an approved product. The FDA may also require companies to perform
additional studies or measurements to support the change from the approved product. The FDA may then approve the new product candidate
for all or some of the label indications for which the referenced product has been approved, as well as for any new indication
sought by the Section 505(b)(2) applicant. The abbreviated Section 505(b)(2) approval pathway increases the likelihood that the
timeframe and costs associated with commercializing products will be lower than under a typical Section 505(b)(1) approval pathway.
Upon
approval of an NDA or a supplement thereto, NDA sponsors are required to list with the FDA each patent with claims that cover
the applicant’s product or an approved method of using the product. Each of the patents listed by the NDA sponsor is published
in the Orange Book, which is an FDA resource listing approved drug products with therapeutic equivalence evaluations. When an
Abbreviated New Drug Application, or ANDA, applicant files its application with the FDA, the applicant is required to certify
to the FDA concerning any patents listed for the reference product in the Orange Book, except for patents covering methods of
use for which the ANDA applicant is not seeking approval. To the extent that the Section 505(b)(2) applicant is relying on studies
conducted for an already approved product, the applicant is required to certify to the FDA concerning any patents listed for the
approved product in the Orange Book to the same extent that an ANDA applicant would.
Specifically,
the applicant must certify with respect to each patent that:
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the required patent
information has not been filed;
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the listed patent
has expired;
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the listed patent
has not expired, but will expire on a particular date and approval is sought after patent expiration; or
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the listed patent
is invalid, unenforceable or will not be infringed by the new product.
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certification that the new product will not infringe the already approved product’s listed patents or that such patents
are invalid or unenforceable is called a Paragraph IV certification. If the applicant does not challenge the listed patents or
indicates that it is not seeking approval of a patented method of use, the ANDA application will not be approved until all the
listed patents claiming the referenced product have expired.
If
the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph
IV certification to the NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders
may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent
infringement lawsuit within 45 days after the receipt of a Paragraph IV certification automatically prevents the FDA from approving
the ANDA until the earlier of 30 months after the receipt of the Paragraph IV notice, expiration of the patent, or a decision
in the infringement case that is favorable to the ANDA applicant. This same procedure that applied to an ANDA applicant also applies
to an NDA applicant under Section 505(b)(2).
Patent
Term Restoration and Extension
A
patent claiming a new drug product may be eligible for a limited patent term extension under the Hatch-Waxman Act, which permits
a patent restoration of up to five years for the patent term lost during product development and the FDA regulatory review. The
restoration period granted is typically one-half the time between the effective date of an IND and the submission date of an NDA,
plus the time between the submission date of an NDA and the ultimate approval date. Patent term restoration cannot be used to
extend the remaining term of a patent past a total of 14 years from the product’s approval date. Only one patent applicable
to an approved drug product is eligible for the extension, and the application for the extension must be submitted prior to the
expiration of the patent in question. A patent that covers multiple drugs for which approval is sought can only be extended in
connection with one of the approvals. The USPTO reviews and approves the application for any patent term extension or restoration
in consultation with the FDA.
Marketing
Exclusivity
A
Section 505(b)(2) NDA applicant may be eligible for its own regulatory exclusivity period, such as three-year exclusivity. A Section
505(b)(2) NDA applicant for a new condition of use, or change to a marketed product, such as a new extended release formulation
for a previously approved product, may be granted a three-year market exclusivity if one or more clinical studies, other than
bioavailability or bioequivalence studies, were essential to the approval of the application and were conducted or sponsored by
the applicant. Should this occur, the FDA would be precluded from approving any other application for the same new condition of
use or for a change to the drug product that was granted exclusivity until after that three-year exclusivity period has run. Additional
exclusivities may also apply.
Other
U.S. Healthcare Laws and Compliance Requirements
For
products distributed in the United States, we will also be subject to additional healthcare regulation and enforcement by the
federal government and the states in which we conduct our business. Applicable federal and state healthcare laws and regulations
include the following:
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The federal healthcare
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 under federal healthcare
programs such as Medicare and Medicaid.
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The federal Anti-Inducement
Act which prohibits persons from offering remuneration to beneficiaries to induce them to use a particular item or service
payable in whole or in part by Medicare or Medicaid.
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The Ethics in Patient
Referrals Act of 1989, commonly referred to as the Stark Law, and its corresponding regulations, prohibit physicians from
referring patients for designated health services (including outpatient drugs) reimbursed under the Medicare or Medicaid programs
to entities with which the physicians or their family members have a financial relationship or an ownership interest, subject
to narrow regulatory exceptions, and prohibits those entities from submitting claims to Medicare or Medicaid for payment of
items or services provided to a referred beneficiary.
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The federal False
Claims Act imposes criminal and civil penalties, including 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.
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HIPAA imposes criminal
and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including
mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable
health information.
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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.
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Analogous state
laws and regulations, such as state anti-kickback and false claims laws, apply to sales or marketing arrangements and claims
involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and
some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines
and the relevant compliance guidance promulgated by the federal government.
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A PPACA provision,
generally referred to as the Physician Payments Sunshine Act or Open Payments Program, imposes reporting requirements for
applicable drug and device manufacturers of covered products with regard to payments or other transfers of value made to physicians,
dentists and teaching hospitals, and certain investment/ownership interests held by physicians in the reporting entity. These
disclosures are publicly disclosed by CMS.
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Efforts
to ensure that our business arrangements with third parties comply with applicable healthcare laws and regulations could be costly.
Although we believe our business practices are structured to be compliant with applicable laws, it is possible that governmental
authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law
involving applicable fraud and abuse or other healthcare laws and regulations. If our past or present operations, including activities
conducted by our sales team or agents, are found to be in violation of any of these laws or any other governmental regulations
that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion
from third party payor programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any
of the physicians, providers or entities with whom we do business are found to be not in compliance with applicable laws, they
may be subject to criminal, civil or administrative sanctions, including exclusion from government funded healthcare programs.
Many
aspects of these laws have not been definitively interpreted by the regulatory authorities or the courts, and their provisions
are open to a variety of subjective interpretations which increases the risk of potential violations. In addition, these laws
and their interpretations are subject to change. Any action against us for violation of these laws, even if we successfully defend
against it, could cause us to incur significant legal expenses, divert our management’s attention from the operation of
our business, and damage our reputation.
In
addition, from time to time in the future, we may become subject to additional laws or regulations administered by the U.S. Federal
Trade Commission, or FTC, or by other federal, state, local or foreign regulatory authorities, to the repeal of laws or regulations
that we generally consider favorable or to more stringent interpretations of current laws or regulations. We are not able to predict
the nature of such future laws, regulations, repeals or interpretations, and we cannot predict what effect additional governmental
regulation, if and when it occurs, would have on our business in the future. Such developments could, however, require reformulation
of certain products to meet new standards, recalls or discontinuance of certain products not able to be reformulated, additional
record-keeping requirements, increased documentation of the properties of certain products, additional or different labeling,
additional scientific substantiation, additional personnel or other new requirements. Any such developments could have a material
adverse effect on our business.
The
growth and demand for electronic commerce, or eCommerce, could result in more stringent consumer protection laws that impose additional
compliance burdens on online retailers. These consumer protection laws could result in substantial compliance costs and could
interfere with the conduct of our business.
There
is currently great uncertainty in many states whether or how existing laws governing issues such as property ownership, sales
and other taxes, and libel and personal privacy apply to the Internet and commercial online retailers. These issues may take years
to resolve. For example, tax authorities in a number of states, as well as a Congressional advisory commission, are currently
reviewing the appropriate tax treatment of companies engaged in online commerce and new state tax regulations may subject us to
additional state sales and income taxes. New legislation or regulation, the application of laws and regulations from jurisdictions
whose laws do not currently apply to our business, or a change in application of existing laws and regulations to the Internet
and commercial online services could result in significant additional taxes on our business. These taxes could have an adverse
effect on our results of operations.
Intellectual
Property
Our
success depends, at least in part, on our ability to protect our proprietary technology and intellectual property, and to operate
without infringing or violating the proprietary rights of others. We rely on a combination of patent, trademark, trade secret
and copyright laws, know-how, intellectual property licenses and other contractual rights (including confidentiality and invention
assignment agreements) to protect our proprietary technology and intellectual property, including related intellectual property
rights.
Patents
As
of December 31, 2017, we own or exclusively license six families of patents to use within our field of business. Five of the patent
families have granted us with patents which are registered in various countries, including the United States, Israel, Australia,
Canada, South Africa, France, Germany, Spain, Switzerland, Ireland, the United Kingdom and other countries. With the exception
of the first family of patents (IN-1) out of such five families, the remaining four families have active pending applications
under examination. Our patents and patent applications generally relate to gastroretentive drug delivery devices for oral intake,
the integration of the drugs into our delivery devices and their production, and are expected to expire at various dates between
2020 and 2036. The sixth patent family currently comprises one pending PCT application. We also rely on trade secrets to protect
certain aspects of our technology. The following discussion describes certain patents/patent applications which we consider to
be our material patents and patent applications.
IN-1
and Yissum License Agreement
At
present, among other patents, we consider our patent family that we exclusively license from Yissum (i.e., Gastroretentive Controlled
Release Pharmaceutical Dosage Forms) pursuant to the license agreement described below, or the License Agreement, and which we
refer to as IN-1, to be material to the operation of our business. This patent covers gastroretentive system/device for controlled
release of an active ingredient in the GI tract. This patent does not cover the implementation of the accordion technology with
respect to any particular drug or in a manner that is readily manufactured commercially, but it broadly covers folded gastroretentive
forms, and forms the basis for the accordion technology in its most basic form. The system is intended mainly for drugs with NAW,
drugs that act locally in the digestive system and drugs whose active receptors are in the upper part of the GI tract. The system
is intended for clinical use in humans and in animals. The patent is issued in the United States, Israel, Japan Australia, Canada,
South Africa, the United Kingdom and six other European countries, and expires in 2020.
In
the License Agreement, Yissum granted us an exclusive license for developing, manufacturing and marketing of products based, directly
or indirectly, on the IN-1 patent, the know-how and research results defined therein. Under the provisions of the License Agreement,
as amended, Yissum may not transfer its rights in the patent without our prior written consent. In consideration of the license,
we have undertaken to pay Yissum royalties equaling 3% of the total net revenues from the sale of products based on Yissum’s
patent and royalties equal to 15% of any payment or benefit whatsoever received by us from any sublicensee. At the current time
we have not commenced sales and have not granted any sublicenses to any third parties. The parties to the License Agreement are
entitled to terminate the agreement in case of bankruptcy or receivership of the other party, or a material breach (including
in respect of any payment obligations) that is not cured within 30 days. The License Agreement will remain in effect until the
later of the expiration date of the patent or 15 years from the first commercial sale on the basis of the license. We have the
right to assign our rights in the License Agreement with the prior consent of Yissum, not to be unreasonably withheld, and we
are entitled to grant sublicenses under the licensed intellectual property of Yissum to third parties in our sole discretion,
and any sublicensee(s) thereunder will not be required to assume any undertaking towards Yissum.
IN-3
An
additional patent family (i.e., Method and Apparatus for Forming Delivery Devices for Oral Intake of an Agent), which we refer
to as IN-3, covers various methods for making and folding the gastroretentive drug delivery system, and for folding it in an accordion
configuration allowing its integration into an ordinary oral capsule. The IN-3 family patents, which will expire in 2027, except
for the first United States patent of this family, which will expire in 2028, allow the Accordion Pill to be manufactured in mass
quantities and therefore to be more readily commercialized. We consider our licensed proprietary process for folding and cutting
the films forming the drug delivery system for integration in an accordion-like configuration into an ordinary oral capsule to
be material to our business. We have four granted patents in the U.S. and an additional pending patent application in connection
with IN-3, as well as granted patents in Israel (3 patents), Europe (granted patent validated in 15 countries and a pending divisional
application) and Japan. Importantly, the second IN-3 patent granted in the U.S. covers a specific embodiment of the Accordion
Pill, particularly suitable for insoluble or poorly soluble drugs. Similar divisional applications have been filed in other countries
and patents for these have already been granted in Israel and Japan.
IN-7
and IN-8
Two
additional patents families (i.e., “frameless” Accordion Pill, specifically but not limited to Levodopa as the
active drug (IN-7) and Accordion Pill with Zaleplon as the active ingredient (IN-8)) that we consider material to our
business are referred to as IN-7 and IN-8. The accordion technology covered by our other patents may sometimes need to be
specifically adapted for a given drug that might benefit from prolonged gastroretentive release. Thus, the layered structure
of an Accordion Pill may be varied and specially designed by reference to factors that are unique to any given drug and
indication, such as the quantity of active ingredient desired to be released, the length of time over which the active drug
is released, the relative solubility of a particular drug molecule, and other factors. IN-7 patents/patent applications
relate to a special Accordion Pill, which is “frameless”, and is suitable for carrying various active drugs,
including but not limited to Levodopa, optionally in combination with Carbidopa. IN-8 patents/patent applications protect the
integration of Zaleplon into an Accordion Pill. The IN-7 patent family relates to the Accordion Pill dosage form, the main
feature of which is the uniform inner drug-containing layer, which allows for, but does not require, high load of the drug,
while maintaining the requisite structural or mechanical strength of the Accordion Pill. These two patent families each
includes patents/patent applications filed in the United States, the European Patent Office, Japan and several other
countries in April 2009. We have four granted U.S. patents for an Accordion Pill with specific claims to Carbidopa/Levodopa
as the active ingredient(s) (IN-7), which will be in force until April 17, 2029, and have been granted IN-7 patents in China,
Japan, Hong Kong, Canada, Europe, Israel, South Africa and South Korea. Applications in Europe (divisional) and in India are
pending.
Patent
applications with respect to IN-8 are still pending in some countries. Patents for IN-8 in the United States, Europe, Japan, Israel,
South Africa and China were granted.
An
additional patent family, related to IN-7, which we refer to as IN-11, seeks protection for an Accordion Pill containing Levodopa
that is specifically formulated for treatment of Parkinson’s disease in a specific treatment regimen. We have been granted
two United States patents, and have pending applications in Canada, EPO, India and Israel. Any granted patent of IN-11 will expire
in November 2031.
IN-21
This
patent family is directed to Accordion Pill comprising cannabinoid/s as active drugs (including THC and CBD) currently includes
a pending, published PCT application. National phase entry is due by January 11, 2019.
General
We
intend to submit patent applications for each Accordion Pill and/or drug combination that we develop. The patent outlook for companies
like ours is generally uncertain and may involve complex legal and factual questions. Our ability to maintain and consolidate
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 or any patent applications that we license will result in
the issuance of any patents. Our issued patents and those that may be issued in the future, or patents that we exclusively license,
may be challenged, narrowed, circumvented or found to be invalid or unenforceable, which could limit our ability to stop competitors
from marketing related products or the length of term of patent protection that we may have for our products. We cannot be certain
that we were the first to invent the inventions claimed in our owned patents or patent applications, or that Yissum was the first
to invent the invention claimed in the patent that we exclusively license from Yissum. In addition, our competitors may independently
develop similar technologies or duplicate any technology developed by us, and the rights granted under any issued patents may
not provide us with any meaningful competitive advantages against these competitors. Furthermore, because of the extensive time
required for development, testing and regulatory review of a potential product, it is possible that, before any of our products
can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby
reducing any advantage of the patent.
Trademarks
We
rely on trade names, trademarks and service marks to protect our name brands. Our trademark/service mark ACCORDION PILL is registered
in Israel in Class 5. A more recent application in Israel in classes 5, 40 and 42 has been accepted and published. We are in the
process of registering the ACCORDION PILL trademark/ service mark in the United States and Europe.
Trade
Secrets and Confidential Information
In
addition to patents, we rely on trade secrets and know-how to develop and maintain our competitive position. Trade secrets and
know-how can be difficult to protect. We rely on, among other things, confidentiality and invention assignment agreements to protect
our proprietary know-how and other intellectual property that may not be patentable, or that we believe is best protected by means
that do not require public disclosure. For example, we require our employees to execute confidentiality agreements in connection
with their employment relationships with us, and to disclose and assign to us inventions conceived in connection with their services
to us. However, there can be no assurance that these agreements will be enforceable or that they will provide us with adequate
protection. We also seek to preserve the integrity and confidentiality of our data, trade secrets and know-how by maintaining
physical security of our premises and physical and electronic security of our information technology systems.
We
may be unable to obtain, maintain and protect the intellectual property rights necessary to conduct our business, and may be subject
to claims that we infringe or otherwise violate the intellectual property rights of others, which could materially harm our business.
For a more comprehensive summary of the risks related to our intellectual property, see “Risk Factors — Risks Related
to Our Intellectual Property.”
Properties
Our
principal executive offices are located in Har Hotzvim at 12 Hartom Street, Jerusalem, Israel 9777512. The space is in a commercial
office building and houses our office space of approximately 900 square meters, manufacturing facility for our clinical trials
of approximately 670 square meters, which includes production, packaging, warehousing and logistics areas, and our laboratory
facilities of approximately 200 square meters. In January 2018, we amended our lease agreement to add approximately 400 square
meters that will allow us to expand our research and development activities.
The
manufacturing and laboratory facilities are fully equipped for manufacturing and testing of the required quantities for Phase
III clinical trials, including, mixers, casting equipment, laminating equipment, capsulating equipment and analytical equipment
such as High Pressure/Performance Liquid Chromatography and dissolution testers. These facilities are cGMP compliant and approved
by Israeli and European regulatory authorities and qualified for Phase III manufacturing.
We
lease this space, which presently consists of a total area of approximately 2,170 square meters, from an unaffiliated third party,
pursuant to a lease agreement which, as amended, expires June 30, 2021. Pursuant to the lease, as amended, our annual rental costs
for 2017 were $490,000 (excluding VAT). We also lease four standard size offices, three offices in Modi’in, Israel and an
office in New York City for our U.S. subsidiary, Intec Pharma Inc. Our expected rental costs for 2018 are approximately $695,000
(excluding VAT).
Although
we will continue to produce product candidates ourselves for use in clinical trials, with respect to the future
commercialization of the AP-CDLD, we have decided to rely on third-party manufacturers, and currently are in advanced
discussions with a Commercial Manufacturing Organization (CMO).
Insurance
We
maintain directors’ and officers’ liability insurance with maximum coverage of $40.0 million in the aggregate for
the benefit of our office holders and directors. Such directors’ and officers’ liability insurance contains certain
standard exclusions.
We
also maintain insurance for our premises for a maximum of NIS 40.0 million, including coverage of equipment and lease improvements
against risk of loss (fire, natural hazard and allied perils, excluding damage from theft - hereinafter “named perils”)
and business interruption insurance coverage caused by named perils out of which up to NIS 32.0 million for fixed cost and up
to NIS 120.0 million for expenses related to the ACCORDANCE study, our Phase III clinical trial for AP-CDLD. In addition, we maintain
the following insurance: employer liability with coverage of NIS 20.0 million; third-party liability with coverage of NIS 20.0
million; and all risk coverage for machinery breakdown of our casting machine of approximately NIS 5.0 million.
We
also procure additional insurance for each specific clinical trial which covers a certain number of trial participants and which
varies based on the particular clinical trial. Certain of such policies are based on the Declaration of Helsinki, which is a set
of ethical principles regarding human experimentation developed for the medical community by the World Medical Association, and
certain protocols of the Israeli Ministry of Health.
We
believe our insurance policies are adequate and customary for a business of our kind. However, because of the nature of our business,
we cannot assure you that we will be able to maintain insurance on a commercially reasonable basis or at all, or that any future
claims will not exceed our insurance coverage.
Research
Grants
Grants
under the Innovation Law
Under
the Innovation Law, research and development programs that meet specified criteria and are approved by a committee of the IIA
are eligible for grants. The grants awarded are typically up to 50% of the project’s expenditures, as determined by the
IIA committee and subject to the benefit track under which the grant was awarded. A company that receives a grant from the IIA,
or a Participating Company, is typically required to pay royalties to the IIA on income generated from products incorporating
know-how developed using such grants (including income derived from services associated with such products), until 100% of the
U.S. dollars-linked grant plus annual LIBOR interest is repaid. The rate of royalties to be paid may vary between different benefits
tracks, as shall be determined by the IIA. Under the regular benefits tracks the rate of royalties varies between 3% to 5% of
the income generated from the IIA-supported products. The obligation to pay royalties is contingent on actual income generated
from such products and services. In the absence of such income, no payment of such royalties is required.
The
terms of the grants under the Innovation Law also (generally) require that the products developed as part of the programs under
which the grants were given be manufactured in Israel and that the know-how developed thereunder may not be transferred outside
of Israel, unless a prior written approval is received from the IIA (such approval is not required for the transfer of a portion
of the manufacturing capacity which does not exceed, in the aggregate, 10% of the portion declared to be manufactured outside
of Israel in the applications for funding, in which case only notification is required) and additional payments are required to
be made to the IIA. It should be noted, that this does not restrict the export of products that incorporate the funded know-how.
See “Risk Factors — Risks Related to Our Operations in Israel” for additional information.
The
IIA approved our request to transfer 100% of the manufacturing rights of a certain product that was developed under one of the
IIA funded programs to a non-Israeli manufacturer. As a result, we will be required to pay the IIA royalties from revenue generated
from the AP-CDLD product candidate at an increased rate and up to an increased cap amount. The IIA noted that the approval granted
was exceptional and that the IIA will not approve manufacturing additional product candidates out of Israel.
From
January 1, 2009 through December 31, 2016, we received from IIA approximately NIS 50.2. However, in February 2018, the Company
received a notice from the IIA to repay part of the grant amounts received in 2016 in the amount of approximately NIS 8.0 million,
including NIS 0.1 million of interest and linkage differences, following a review and assessment by the IIA on the 2016 program.
For more information see note 11c(1) in our consolidated financial statements for the year ended December 31, 2017. As of the
date of this annual report on Form 20-F, the Company has repaid the IIA the total of approximately NIS 8.0 million.
Environmental
Matters
We
are subject to various environmental, health and safety laws and regulations, including those governing air emissions, water and
wastewater discharges, noise emissions, the use, management and disposal of hazardous materials and wastes and the cleanup of
contaminated sites. In addition, all of our laboratory personnel participate in instruction on the proper handling of chemicals,
including hazardous substances before commencing employment, and during the course of their employment with us. In addition, all
information with respect to any chemical substance that we use is filed and stored as a Material Safety Data Sheet, as required
by applicable environmental regulations. Based on information currently available to us, we do not expect environmental costs
and contingencies to have a material adverse effect on us. The operation of our facilities, however, entails risks in these areas.
Significant expenditures could be required in the future if we are required to comply with new or more stringent environmental
or health and safety laws, regulations or requirements.
We
hold a business license from the Jerusalem Municipality with respect to manufacturing pharmaceutical products at 12 Hartom Street,
Har Hotzvim in Jerusalem. The license is currently valid until April 1, 2018 and we are in the process of renewing it. The business
license was granted after an inspection of our raw materials inventory, which we are permitted to maintain in our facilities and
warehouses located at 12 Hartom Street. We also hold a toxic substance permit from July 14, 2015, which is valid until July 29,
2018.
On
December 15, 2015, following our discussions with the Ministry of Environmental Protection to relax certain restrictions included
in our business license, including, among others, to remove certain conditions the compliance with which is not feasible in the
premises in which our facility is located, our business license was updated with additional terms which match our current activity.
We
believe that our business, operations and facilities are being operated in compliance in all material respects with applicable
environmental and health and safety laws and regulations.
Legal
Proceedings
From
time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business.
Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that
may harm our business. There are currently no pending material legal proceedings, and we are currently not aware of any legal
proceedings or claims against us or our property that we believe will have any significant effect on our business, financial position
or operating results. None of our officers or directors is a party against us in any legal proceeding.
ITEM
4A. Unresolved Staff Comments.
Not
applicable.
ITEM
5. Operating and Financial Review and Prospects.
You
should read the following discussion along with our consolidated financial statements and the related notes included in this annual
report. The following discussion contains forward-looking statements that are subject to risks, uncertainties and assumptions,
including those discussed under “Risk Factors.” Our actual results, performance and achievements may differ materially
from those expressed in, or implied by, these forward-looking statements. See “Cautionary Note Regarding Forward-Looking
Statements.” We have prepared our consolidated financial statements in accordance with IFRS, as issued by the IASB
.
Overview
We
are a clinical stage biopharmaceutical company focused on developing drugs based on our proprietary Accordion Pill platform technology,
which we refer to as the Accordion Pill. Our Accordion Pill is an oral drug delivery system that is designed to improve the efficacy
and safety of existing drugs and drugs in development by utilizing an efficient GR and specific release mechanism. Our product
pipeline currently includes several product candidates in various clinical trial stages. Our leading product candidate, Accordion
Pill Carbidopa/Levodopa, or AP-CDLD, is being developed for the indication of treatment of Parkinson’s disease symptoms
in advanced Parkinson’s disease patients. We have successfully completed a Phase II clinical trial for AP-CDLD for the treatment
of Parkinson’s disease symptoms in advanced Parkinson’s disease patients and have agreed with the U.S. Food and Drug
Administration, or the FDA, on the remaining clinical development program for AP-CDLD for the treatment of Parkinson’s disease
symptoms in advanced Parkinson’s disease patients, including the main principles of the single required pivotal Phase III
clinical trial in advanced Parkinson’s disease patients. We enrolled the first patient in the ACCORDANCE study, the pivotal
Phase III clinical trial for AP-CDLD, in April 2016 and we currently expect to complete patient enrollment in the trial during
the second half of 2018.
In
our correspondence with the FDA, the FDA previously agreed that an acceptable regulatory pathway for AP-CDLD would be to file
a new drug application, or NDA, pursuant to Section 505(b)(2) of the FDCA, which is a streamlined approval pathway that may accelerate
the time to commercialize and decrease the costs of FDA approval for AP–CDLD, as compared to those typically associated
with an NCE.
In
addition, we have initiated a new clinical development program for our Accordion Pill platform with the two primary cannabinoids
contained in cannabis sativa, which we refer to as AP-Cannabinoids. We are formulating and testing cannabidiol, or CBD, and 9-tetrahydrocannabinol,
or THC, for the treatment of various indications, including low back neuropathic pain and fibromyalgia. AP-CBD/THC is designed
to extend the absorption phase of CBD and THC, resulting in more consistent levels for an improved therapeutic effect which may
address several major drawbacks of current methods of treatment, such as short duration of effect, delayed onset, variability
of exposure, variability of the administered dose and adverse events that correlate with peak levels. In March 2017, we initiated
a Phase I single-center, single-dose, randomized, three-way crossover clinical trial in Israel to compare the safety, tolerability
and PK of AP-THC/CBD with Sativex
®
, a commercially available oral buccal spray containing CBD and THC. Initial
results demonstrate that the Accordion Pill platform is well suited to safely deliver CBD and THC with significant improvements
in exposure compared with Sativex
®
. In the trial, the median time of peak concentration for AP-THC/CBD was two
to three times longer than Sativex
®
and absorption was significantly higher.
Our
Accordion Pill platform technology is designed to increase the time that drugs are retained in the stomach as compared to other
oral dosage forms, such as tablets and capsules. This capability is particularly important to drugs with a NAW, which are absorbed
mainly in the upper part of the gastrointestinal, or GI, tract. Regular controlled-release formulations of such drugs currently
on the market sometimes fail to provide an efficient solution, as once the regular dosage form has passed the drug’s NAW
in the upper GI tract, the drug is not, or is very poorly, absorbed in the distal parts of the GI tract. The Accordion Pill platform
technology is also designed for drugs with low solubility, which do not efficiently dissolve in the GI tract, and drugs with low
permeability, which do not efficiently penetrate the intestinal wall and reach the blood stream, such as Biopharmaceutics Classification
System, or BCS, Class II (low solubility, high permeability) and Class IV (low solubility, low permeability) drugs. According
to The AAPS Journal published by the American Association of Pharmaceutical Scientists, of the top 200 oral drugs in the United
States, Great Britain, Spain and Japan in 2006, approximately 30% to 35% were BCS Class II drugs and approximately 5% to 10% were
BCS Class IV drugs. Further, according to Drug Development & Delivery, in 2006 approximately 90% of NCEs in development were
either BCS Class II or Class IV drugs. The Accordion Pill’s efficient GR and specific release mechanism prolongs the absorption
phase of drugs with an NAW, which can result in significantly more stable plasma levels. In addition, the Accordion Pill has demonstrated
an enhancement of the absorption of a poorly soluble, BCS Class II/IV drug in a crossover PK clinical study in 12 healthy volunteers.
For poorly soluble drugs, we believe that our technology acts through the gradual delivery of an undissolved drug by the Accordion
Pill in the stomach, which allows for the complete dissolution of the drug dose in the stomach over the delivery period. The gradual
passage of the drug from the stomach to the upper part of the GI tract enables an increase in the amount of the drug that can
be dissolved and thus absorbed, in the upper small bowel. In addition, we believe that bile secretion in the upper part of the
GI tract also improves the intestinal environment for better absorption. Finally, the significant dilution of the drug solution
in the small bowel caused by prolonged delivery increases the amount of the drug available for absorption.
Our
clinical trials to date have demonstrated that the Accordion Pill is retained in the stomach for eight to 12 hours, as compared
to significantly shorter time periods, typically as little as two to three hours, when using other solid dosage forms. The efficient
GR and the predetermined release profile for each specific drug associated with our Accordion Pill technology demonstrated a significant
improvement in PK, which is the drug plasma level over time and a corresponding improvement in efficacy and safety.
History
of Losses
Since
our inception, we have generated significant losses in connection with our research and development, including the clinical development
of AP-CDLD. As of December 31, 2017, we had an accumulated deficit of $90.5 million. We expect that additional losses will be
accumulated in the near future as a result of our research and development activities. Such research and development activities
will require further resources if we are to be successful. As a result, we may continue to incur operating losses, and we may
need to obtain additional funds to further develop our research and development programs and our product candidates.
As
a result of, among other things, our research and development activities, as well as the fact that we have not generated revenues
since our inception, for the year ended December 31, 2017, our net loss was approximately $29.1 million.
We
have funded our operations primarily through the sale of equity securities (both in private placements and in public offerings
on the NASDAQ Capital Market and the TASE as described above), funding received from the IIA and other funds, and reimbursements
received pursuant to collaborations with multinational pharmaceutical companies in connection with certain research and development
activities. Since our inception, we have raised approximately $158 million in various investment rounds, private placements, an
initial public offering in Israel in February 2010, various rights issuances, an initial public offering on the NASDAQ Capital
Market in August 2015 and a public offering on the NASDAQ Capital Market in August 2017. We received approximately $34 million
and $57.5 million from our initial U.S. public offering and U.S. follow-on public offering on the NASDAQ Capital Market, respectively.
As of December 31, 2017, we had approximately $55.2 million of cash, cash equivalents and financial assets at fair value.
Operating
Expenses
Our
current operating expenses consist of two components, research and development expenses and general and administrative expenses.
Research
and Development Expenses:
Our
research and development expenses during the 12 months ended 2015, 2016 and 2017 relate primarily to the development of AP–CDLD.
We record expenses for each product candidate on a direct cost basis only, rather than on a project basis. Direct costs, which
include contract research organization expenses, clinical trials and pre-clinical trials, consulting expenses, APIs, and other
similar expenses are recorded to the product candidate for which such expenses are incurred. However, salaries and related personnel
expenses, indirect materials and costs for facilities and equipment are considered overhead and are shared among all of our product
candidates and are not recorded on a product-by-product basis. Our direct costs related to product candidates other than AP–CDLD
for 2015, 2016 and 2017 were insignificant. We expect our research and development expense to remain our primary expense in the
near future as we continue to develop our products. Increases or decreases in research and development expenditures are primarily
attributable to the number and/or duration of the clinical studies that we conduct.
We
expect that a large percentage of our research and development expense in the future will be incurred in support of our current
and future clinical development projects. Due to the inherently unpredictable nature of clinical development processes, we are
unable to estimate with any certainty the costs we will incur in the continued development of our product candidates in our pipeline
for potential commercialization. Clinical development timelines, the probability of success and development costs can differ materially
from expectations. We expect to continue to conduct additional clinical trials for our product candidates.
While
we are currently focused on advancing our product development, our future research and development expenses will depend on the
clinical success of our product candidates, as well as ongoing assessments of the candidates’ commercial potential. As we
obtain results from clinical studies, we may elect to discontinue or delay clinical studies for one or more of our product candidates
in certain indications in order to focus our resources on more promising product candidates. Completion of clinical studies may
take several years or more, but the length of time generally varies according to the type, complexity, novelty and intended use
of a product candidate.
We
expect our research and development expenses to increase in the future from current levels as we continue the advancement of our
clinical product development. The lengthy process of completing clinical studies and seeking regulatory approval for our product
candidates requires the expenditure of substantial resources. Any failure or delay in completing clinical studies, or in obtaining
regulatory approvals, could cause a delay in generating product revenue and cause our research and development expenses to increase
and, in turn, have a material adverse effect on our operations. Because of the factors set forth above, we are not able to estimate
with any certainty when we would recognize any net cash inflows from our projects.
General
and Administrative Expenses:
Our
general and administrative expenses consist primarily of salaries and expenses related to employee benefits, including share-based
compensation, for our general and administrative employees, which includes employees in executive and operational roles, including
finance and human resources, as well as consulting, legal and professional services related to our general and administrative
operations.
Our
general and administrative expenses, such as accounting and legal fees, have increased since we have become a public company in
the United States.
Other
Gains, Net
Other
gains, net, consist of change in the fair value of the financial assets at fair value through profit or loss.
Financial
Expense and Income
Financial
expense and income consist of interest earned on our cash, cash equivalents and short-term bank deposits; bank fees and other
transactional costs; change in fair value of derivative financial instruments and expenses or income resulting from fluctuations
of the NIS and other currencies, in which a portion of our assets and liabilities are denominated, against the U.S. dollar (our
functional currency).
Results
of Operations
The
table below provides our results of operations for the periods indicated.
|
|
Year
ended December 31,
|
|
|
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
USD
in thousands
|
|
|
|
|
Statements
of comprehensive loss data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
$
|
(5,065
|
)
|
|
$
|
(4,959
|
)
|
|
$
|
(7,533
|
)
|
|
$
|
(15,349
|
)
|
|
$
|
(21,492
|
)
|
Participation
in (repayment of) research and development expenses
|
|
|
2,325
|
|
|
|
1,550
|
|
|
|
2,718
|
|
|
|
4,600
|
|
|
|
(2,803
|
)
|
Research
and development expenses, net
|
|
|
(2,740
|
)
|
|
|
(3,409
|
)
|
|
|
(4,815
|
)
|
|
|
(10,749
|
)
|
|
|
(24,295
|
)
|
General
and administrative expenses
|
|
|
(2,427
|
)
|
|
|
(2,609
|
)
|
|
|
(2,788
|
)
|
|
|
(3,097
|
)
|
|
|
(5,144
|
)
|
Other
gains, net
|
|
|
131
|
|
|
|
234
|
|
|
|
19
|
|
|
|
34
|
|
|
|
218
|
|
Operating
loss
|
|
|
(5,036
|
)
|
|
|
(5,784
|
)
|
|
|
(7,584
|
)
|
|
|
(13,812
|
)
|
|
|
(29,221
|
)
|
Financial
income
|
|
|
120
|
|
|
|
318
|
|
|
|
633
|
|
|
|
466
|
|
|
|
358
|
|
Financial
expenses
|
|
|
(180
|
)
|
|
|
(227
|
)
|
|
|
(229
|
)
|
|
|
(16
|
)
|
|
|
(201
|
)
|
Financial
income, net
|
|
|
(60
|
)
|
|
|
91
|
|
|
|
404
|
|
|
|
450
|
|
|
|
157
|
|
Loss
before taxes on income
|
|
|
(5,096
|
)
|
|
|
(5,693
|
)
|
|
|
(7,180
|
)
|
|
|
(13,362
|
)
|
|
|
(29,064
|
)
|
Taxes
on income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(29
|
)
|
Net
loss
|
|
|
(5,096
|
)
|
|
|
(5,693
|
)
|
|
|
(7,180
|
)
|
|
|
(13,362
|
)
|
|
|
(29,093
|
)
|
Other
comprehensive income (loss)- currency translation differences
|
|
|
406
|
|
|
|
(805
|
)
|
|
|
(664
|
)
|
|
|
—
|
|
|
|
—
|
|
comprehensive
loss
|
|
$
|
(4,690
|
)
|
|
$
|
(6,498
|
)
|
|
$
|
(7,844
|
)
|
|
$
|
(13,362
|
)
|
|
$
|
(29,093
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per ordinary share
|
|
$
|
(1.18
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
(0.92
|
)
|
|
$
|
(1.17
|
)
|
|
$
|
(1.65
|
)
|
Number
of ordinary shares used in computing loss per ordinary share (in thousands)
|
|
|
4,322
|
|
|
|
4,825
|
|
|
|
7,791
|
|
|
|
11,448
|
|
|
|
17,660
|
|
Year
Ended December 31, 2017 Compared to Year Ended December 31, 2016
Research
and Development Expenses, Net
Our
research and development expenses, net, for the year ended December 31, 2017 amounted to approximately $24.3 million, an increase
of $13.6 million, or approximately 127%, compared to approximately $10.7 million for the year ended December 31, 2016. The increase
was primarily due to an increase in expenses related to the progression of the ACCORDANCE study, our Phase III clinical trial
for AP-CDLD, payroll and related expenses, mostly due to an increase in headcount and salary raises. This was offset by a decrease
in the IIA’s participation in research and development expenses (which was due to the Company’s decision not to accept
the IIA grant for 2017, given its conditions) and by repayment to IIA of research and development expenses following IIA’s
notice to repay part of the grants received in 2016.
General
and Administrative Expenses
Our
general and administrative expenses for the year ended December 31, 2017 amounted to approximately $5.1 million, an increase of
$2.0 million, or approximately 65%, compared to approximately $3.1 million for the year ended December 31, 2016. The increase
was primarily due to the increase in professional services, share-based compensation to employees and payroll and related expenses
primarily related to the hiring of management personnel in the United States during 2017.
Other
Gains, Net
Our
other gains, net, for the year ended December 31, 2017 amounted to approximately $218,000, compared to approximately $34,000 for
the year ended December 31, 2016. The other gains, net consist of change in the fair value of financial assets.
Operating
Loss
As
a result of the foregoing, for the year ended December 31, 2017 our operating loss was approximately $29.2 million, an increase
of $15.4 million, or approximately 112%, compared to our operating loss for the year ended December 31, 2016 of approximately
$13.8 million. The increase was mainly due to an increase in research and development expenses, as detailed above.
Financial
Income, Net
For
the year ended December 31, 2017, we had financial income from interest on cash equivalents and bank deposits in the amount of
approximately $286,000 and foreign currency exchange income in the amount of approximately $72,000 offset by financial expenses
from change in fair value of derivative financial instruments in the amount of approximately $184,000 and bank fees.
Taxes
on income
During
2017 and 2016, we have not generated taxable income in Israel. However, in 2017 we had incurred tax expenses in our U.S. subsidiary
in the amount of $29,000.
Comprehensive
Loss
As
a result of the foregoing, for the year ended December 31, 2017 our loss and comprehensive loss was approximately $29.1 million,
an increase of $15.7 million, or approximately 117%, compared to our loss and comprehensive loss for the year ended December 31,
2016 of approximately $13.4 million. The increase was mainly due to an increase in research and development expenses, as detailed
above.
Year
Ended December 31, 2016 Compared to Year Ended December 31, 2015
Research
and Development Expenses, Net
Our
research and development expenses, net, for the year ended December 31, 2016 amounted to approximately $10.7 million, an increase
of $5.9 million, or approximately 123%, compared to approximately $4.8 million for the year ended December 31, 2015. The increase
was primarily due to an increase in expenses for the ACCORDANCE study, payroll and related expenses, which were partially offset
by an increase in participation in research and development expenses from the IIA received in 2016 compared to 2015.
General
and Administrative Expenses
Our
general and administrative expenses for the year ended December 31, 2016 amounted to approximately $3.1 million, an increase of
$0.3 million, or approximately 11%, compared to approximately $2.8 million for the year ended December 31, 2015. The increase
was primarily due to an increase in other expenses associated with being a public company in the United States since August 2015.
Other
Gains, Net
Our
other gains, net, for the year ended December 31, 2016 amounted to approximately $34,000, compared to approximately $19,000 for
the year ended December 31, 2015. The other gains, net consist of change in the fair value of financial assets.
Operating
Loss
As
a result of the foregoing, research and development, net, general and administrative expenses, and other gains, net, as well as
our failure to generate revenues since our inception, for the year ended December 31, 2016 our operating loss was approximately
$13.8 million, an increase of $6.2 million, or approximately 82%, compared to our operating loss for the year ended December 31,
2015 of approximately $7.6 million. This increase primarily resulted from an increase in expenses of the ACCORDANCE study, payroll
and related expenses and other expenses associated with being a public company in the United States since August 2015, which were
partially offset by an increase in participation in research and development expenses from the IIA received in 2016 compared to
2015.
Financial
Income, Net
For
the year ended December 31, 2016, we had financial income from interest on cash equivalents and bank deposits in the amount of
approximately $176,000, financial income from change in fair value of derivative financial instruments in the amount of approximately
$230,000 and foreign currency exchange income in the amount of approximately $60,000. In addition, we had financial expenses from
bank fees.
Other
comprehensive loss - currency translation differences
We
had no other comprehensive loss from currency translation differences for the year ended December 31, 2016. Our currency translation
differences for the year ended December 31, 2015 amounted to approximately $664,000. This currency translation difference resulted
from the change in functional currency from NIS to U.S. dollar, effective January 1, 2016.
Comprehensive
Loss
As
a result of the foregoing research and development, net, general and administrative expenses, other gains, net, financial expense/income,
net, and other comprehensive loss - currency translation differences, as well as our failure to generate revenues since our inception,
for the year ended December 31, 2016 our loss and comprehensive loss was approximately $13.4 million, an increase of $5.6 million,
or approximately 72%, compared to our loss and comprehensive loss for the year ended December 31, 2015 of approximately $7.8 million.
This increase primarily resulted from an increase in expenses of the ACCORDANCE study, payroll and related expenses and other
expenses associated with being a public company in the United States since August 2015, which were partially offset by an increase
in participation in research and development expenses from the IIA received in 2016 compared to 2015 and less other comprehensive
loss - currency translation differences which were recorded only in 2015.
Liquidity
and Capital Resources
Since
our inception, we have funded our operations primarily through public and private offerings (in Israel and in the U.S.) of our
equity securities, grants from the IIA and other grants from organizations such as the Michael J. Fox Foundation, and payments
received under the feasibility and related agreements we have entered into with multinational pharmaceutical companies, pursuant
to which we are entitled to full coverage of our development costs with regard to the projects specified in those agreements.
As
of December 31, 2017, we had cash and cash equivalents and financial assets at fair value through profit or loss of approximately
$55.2 million. As of December 31, 2016, we had cash and cash equivalents and financial assets at fair value through profit or
loss of approximately $18.2 million.
Net
cash used in operating activities was approximately $22.1 million for the year ended December 31, 2017 compared with net cash
used in operating activities of approximately $12.0 million for the year ended December 31, 2016. This increase primarily resulted
from an increase in our net loss of approximately $15.7 million, which was partially offset by a decrease in changes in operating
asset and liability items of approximately $4.7 million.
We
had negative cash flow from investing activities of approximately $4.7 million for the year ended December 31, 2017 compared to
positive cash flow from investing activities of approximately $ 4.7 million for the year ended December 31, 2016. The change resulted
primarily from the maturities of short-term deposits, net, in the amount of $5.0 million in 2016 and an increase in purchase of
property and equipment in the amount of approximately $4.5 million.
We
had the following major financing activities during 2017. In March 2017, we completed a private placement of 2,289,638 ordinary
shares of the Company, at a price of $4.40 per share, with various investors for gross proceeds of approximately $10 million,
and in August 2017, we completed an underwritten public offering of our ordinary shares on the NASDAQ Capital Market, pursuant
to which we issued 12,224,500 ordinary shares at a price of $4.70 per share for net proceeds of approximately $53.6 million.
Current
Outlook
As
of December 31, 2017, we believe that, without further fund raising, we will not have sufficient working capital to enable us
to continue advancing our activities, including the development, manufacturing and marketing of our products for a period of at
least 12 months from the date of approval of the consolidated financial statements. As a result, there is substantial doubt about
our ability to continue as a going concern. We expect to satisfy our future cash needs through submissions of applications for
grants from private funds, license agreements with third parties and capital raising from the public, private investors and institutional
investors, such as through the private placement of ordinary shares that we conducted in March 2017 and the public offering we
completed in August 2017. We may also engage with a partner in order to share the costs associated with the development and manufacturing
of our product candidates. For more information see note 1a(2) in our consolidated financial statements for the year ended December
31, 2017.
Developing
drugs, conducting clinical trials, obtaining commercial manufacturing capabilities and commercializing products is expensive and
we will need to raise substantial additional funds to achieve our strategic objectives. We will require significant additional
financing in the future to fund our operations, including if and when we progress into additional clinical trials of our product
candidates, obtain regulatory approval for one or more of our product candidates, obtain commercial manufacturing capabilities
and commercialize one or more of our product candidates. Our future capital requirements will depend on many factors, including,
but not limited to:
|
●
|
the progress and
costs of our clinical trials and other research and development activities;
|
|
●
|
the scope, prioritization
and number of our clinical trials and other research and development programs;
|
|
●
|
the amount of revenues
and contributions we receive under future licensing, collaboration, development and commercialization arrangements with respect
to our product candidates;
|
|
●
|
the costs of the
development and expansion of our operational infrastructure;
|
|
●
|
the costs and timing
of obtaining regulatory approval for one or more of our product candidates;
|
|
●
|
the ability of us,
or our collaborators, to achieve development milestones, marketing approval and other events or developments under our potential
future licensing agreements;
|
|
●
|
the costs of filing,
prosecuting, enforcing and defending patent claims and other intellectual property rights;
|
|
●
|
the costs and timing
of securing manufacturing arrangements for clinical or commercial production;
|
|
●
|
the costs of contracting
with third parties to provide sales and marketing capabilities for us or establishing such capabilities ourselves;
|
|
●
|
the costs of acquiring
or undertaking development and commercialization efforts for any future products, product candidates or technology;
|
|
●
|
the magnitude of
our general and administrative expenses; and
|
|
●
|
any cost that we
may incur under future in- and out-licensing arrangements relating to one or more of our product candidates.
|
Until
we can generate significant recurring revenues, we expect to satisfy our future cash needs through debt or equity financings or
by out-licensing applications of one or more of our product candidates. We cannot be certain that additional funding will be available
to us on acceptable terms, if at all. If funds are not available, we may be required to delay, reduce the scope of or eliminate
research or development plans for, or commercialization efforts with respect to, one or more of our product candidates and make
necessary change to our operations to reduce the level of our expenditures in line with available resources.
Contractual
Obligations
Our
significant contractual obligations as of December 31, 2017 included the following:
|
|
Total
|
|
|
Less
than
1 Year
|
|
|
1
– 3
Years
|
|
|
3
– 5
Years
|
|
|
More
than
5 Years
|
|
Operating
Lease Obligations in $ (payments due by June 30, 2021)
|
|
|
2,280,000
|
|
|
|
685,000
|
|
|
|
1,270,000
|
|
|
|
325,000
|
|
|
|
—
|
|
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements that have had or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors.
Trend
Information
We
are a development stage company and it is not possible for us to predict with any degree of accuracy the outcome of our research
and development efforts. As such, it is not possible for us to predict with any degree of accuracy any significant trends, uncertainties,
demands, commitments or events that are reasonably likely to have a material effect on our net loss, liquidity or capital resources,
or that would cause financial information to not necessarily be indicative of future operating results or financial condition.
However, to the extent possible, certain trends, uncertainties, demands, commitments and events are in this “Item 5. Operating
and Financial Review and Prospects.”
Critical
Accounting Policies
This
discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements,
which have been prepared in accordance with IFRS as issued by the IASB. The preparation of these consolidated financial statements
requires management to make estimates that affect the reported amounts of our assets, liabilities and expenses. Significant accounting
policies employed by us, including the use of estimates, are presented in the notes to the consolidated financial statements included
elsewhere in this annual report. We periodically evaluate our estimates, which are based on historical experience and on various
other assumptions that management believes to be reasonable under the circumstances. Critical accounting policies are those that
are most important to the portrayal of our financial condition and results of operations and require management’s subjective
or complex judgments, resulting in the need for management to make estimates about the effect of matters that are inherently uncertain.
If actual performance should differ from historical experience or if the underlying assumptions were to change, our financial
condition and results of operations may be materially impacted.
Share-based
payments
For
the purpose of the evaluation of the fair value and the manner of the recognition of share-based compensation, our management
is required to estimate, among others, various parameters that are included in the calculation of the fair value of the option
as well as our results and the number of options that will vest. Prior to our initial public offering in the United States, the
fair value of our ordinary shares used in the calculation of the fair value of the option was the market price of our ordinary
shares on the TASE. Since the completion of our initial public offering in the United States, the fair value of our ordinary shares
used in the calculation of the fair value of the option is the market price of our ordinary shares on the NASDAQ Capital Market.
The actual results and the estimates that are made in the future may be significantly different from the current estimates.
Jumpstart
Our Business Startups Act of 2012
We
are an emerging growth company within the meaning of the rules under the Securities Act, and we will utilize certain exemptions
from various reporting requirements that are applicable to public companies that are not emerging growth companies. Such exemptions
include, but are not limited to, (i) not being required to comply with the auditor attestation requirements of Section 404, (ii)
being exempt from adoption of new or revised financial accounting standards until they would apply to private companies, (iii)
being exempt from compliance with any new requirements adopted by the PCAOB requiring mandatory audit firm rotation or a supplement
to the auditor’s report in which the auditor would be required to provide additional information about our audit and our
consolidated financial statements and (iv) reduced disclosure obligations regarding executive compensation. We could remain an
“emerging growth company” for up to five years from the date of our first sale of common equity securities pursuant
to an effective registration statement under the Securities Act, or until the earliest of (a) the last day of the first fiscal
year in which our annual gross revenue exceeds $1.07 billion (as such amount is indexed for inflation every five years by the
SEC to reflect the change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics) or
more, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which
would occur if the market value of our ordinary shares that is held by non-affiliates exceeds $700.0 million as of the last business
day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1.0 billion in nonconvertible
debt during the preceding three year period.
The
JOBS Act also permits us, as an “emerging growth company,” to take advantage of an extended transition period to comply
with certain new or revised accounting standards if such standards apply to companies that are not issuers. We are choosing to
“opt out” of this provision and, as a result, we will comply with new or revised accounting standards when they are
required to be adopted by issuers. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
Government
Policies and Factors
We
believe certain governmental policies and factors could materially affect, directly or indirectly, our operations or your investment.
Please see “Risk Factors — Risks Related to Our Company and Its Business” and “Risk Factors — Risks
Related to the Regulation of Our Company and Its Business.”
ITEM
6. Directors, Senior Management and Employees.
A.
Directors and Senior Management.
We
are managed by a board of directors, which is currently comprised of six members, and our executive officers. Each of our executive
officers is appointed by our board of directors. The table below sets forth our directors and executive officers as of December
31, 2017. The business address for each of our executive officers and directors is c/o Intec Pharma Ltd., 12 Hartom Street, Har
Hotzvim, Jerusalem 9777512, Israel.
Name
|
|
Age
|
|
Position
|
Dr.
John W. Kozarich
|
|
68
|
|
Chairman
of the Board of Directors
|
Jeffrey
A. Meckler
|
|
51
|
|
Chief
Executive Officer and Vice Chairman of the Board of Directors
|
Dr.
Nadav Navon
|
|
49
|
|
Chief
Operating Officer
|
Walt
A. Linscott, Esq.
|
|
57
|
|
Chief
Administrative Officer
|
Nir
Sassi
|
|
42
|
|
Chief
Financial Officer
|
Dr.
R. Michael Gendreau
|
|
62
|
|
Chief
Medical Officer
|
Gil
Bianco
|
|
66
|
|
External
Director and Chairperson of the Audit Committee
|
Hila
Karah
|
|
49
|
|
Director
|
Issac
Silberman
|
|
66
|
|
External
Director and Chairperson of the Compensation Committee
|
Anthony
J. Maddaluna
|
|
65
|
|
Director
|
Our
Executive Officers and Directors
Dr.
John W. Kozarich
has been our Chairman of the board of directors since July 2016. Dr. Kozarich has nearly 40 years of experience
in the biopharmaceutical industry and academia. Dr. Kozarich currently serves as Chairman of Ligand Pharmaceuticals (NASDAQ: LGND).
From 2004 until April 2017, Dr. Kozarich served as Chairman and President of ActivX Biosciences, Inc., or ActivX, where he is
now a Distinguished Scientist. Prior to his role at ActivX, Dr. Kozarich was Vice President at Merck Research Laboratories where
he was responsible for a variety of drug discovery and development programs and external biotech collaborations. Dr. Kozarich
previously held full professorships at the University of Maryland and Yale School of Medicine. He was named Director of the Year
for 2014 by the Corporate Directors Forum, has been an American Cancer Society Faculty Research Awardee, and received the Distinguished
Scientist Award of the San Diego Section of the American Chemical Society. Dr. Kozarich currently serves as a director at Retrophin,
Inc., a publicly-traded biopharmaceutical company (NASDAQ: RTRX). From 2007 until April 2015, Dr. Kozarich served as a director
of Corium International, Inc., a publicly-traded commercial stage biopharmaceutical company (NASDAQ: CORI) and, from June 2012
until the company’s merger with Aegerion Pharmaceuticals, Inc. and Istope Acquisition Corp. in November 2016, Dr. Kozarich
served as a director of QLT, Inc., a biotechnology company (NASDAQ: QLTI). Dr. Kozarich holds a B.S. in chemistry from Boston
College and a Ph.D. in biological chemistry from the Massachusetts Institute of Technology and was an NIH Postdoctoral Fellow
at Harvard University.
Mr.
Jeffrey A. Meckler
has served as our Vice Chairman of the board of directors since April 2017 and as our Chief Executive Officer
since July 2017. Mr. Meckler has served on numerous public and private corporate boards and is currently a director of Retrophin,
Inc. (NASDAQ: RTRX). Mr. Meckler recently served as Chief Executive Officer and a Director of CoCrystal Pharma, Inc., a pharmaceutical
company, from April 2015 to July 2016. He has also served as a Director of QLT, Inc. (NASDAQ: QLTI), a biotechnology company,
from June 2012 to November 2016, as well as the Managing Director of The Andra Group, a life sciences consulting firm since 2009.
Mr. Meckler also served as Chief Executive Officer of Trieber Therapeutics from January 2017 to July 2017. Earlier in his career,
Mr. Meckler held a series of positions at Pfizer Inc. in manufacturing systems, market research, business development, strategic
planning and corporate finance, which included playing a significant role in acquisitions and divestitures. Mr. Meckler is the
past President and continues to serve on the board of directors of Children of Bellevue, a non-profit organization focused on
advocating and developing pediatric programs at Bellevue Hospital Center. Mr. Meckler holds a B.S. in Industrial Management and
M.S. in Industrial Administration from Carnegie Mellon University. In addition, Mr. Meckler received his J.D. from Fordham University
School of Law.
Dr.
Nadav Navon
has been with us since March 2006 and has served as our Chief Operating Officer since July 2017. Between March
2015 and July 2017, Dr. Navon served as our Executive Vice President of Research & Development and Operations. Before that
he served as our Vice President of Research & Development and Operations from May 2013 until March 2015. Prior to his service
with us, Dr. Navon headed the analytical and quality assurance operations at Sharon Laboratories Ltd., a chemical company that
develops and manufactures raw materials for the pharmaceutical, cosmetic and food industries, from 2001 to 2006. Prior to that,
Dr. Navon led a number of research and development projects in the Negev’s Nuclear Research Center. Dr. Navon has a Ph.D.
in inorganic and analytical chemistry, and an MBA and a BSc in chemistry, each from Ben-Gurion University in Be’er Sheva,
Israel.
Walt
A. Linscott, Esq.
has been our Chief Administrative Officer since October 2017. Prior to his service with us, Mr. Linscott
co-founded a global consulting enterprise in October 2014 providing strategic advice to developing companies and most recently
served as the President and Chief Operating Officer of Treiber Therapeutics, Inc. from March 2017. Mr. Linscott also has held
senior level executive positions at public and private medical device and pharmaceutical companies, Cocrystal Pharma, Inc., from
July 2015 to March 2017, Carestream Health, Inc., from January 2011 to January, 2015 and Solvay Pharmaceuticals, Inc., from 2001
to 2005. In addition to this experience, he was an associate and partner at Thompson Hine LLP from 1990 to 2001, and again as
a partner from 2005 to 2010 where he founded the firm’s Atlanta, Georgia office, served as Partner in Charge and Chair of
the firm’s Life Science Practice Group. Mr. Linscott holds a Postgraduate Diploma in Global Business from the University
of Oxford and a Postgraduate Diploma in Entrepreneurship from Cambridge University. He earned a bachelor’s degree from Syracuse
University and a Juris Doctor from the University of Dayton School of Law. Mr. Linscott served on active duty as an Officer in
the United States Marine Corps prior to attending law school.
Mr.
Nir Sassi
has been our Chief Financial Officer since August 2016. Prior to serving as our Chief Financial Officer, Mr. Sassi
served as our VP Finance commencing in January 2015 and as our Chief Financial Officer between March 2010 and January 2015. Prior
to his service with us, Mr. Sassi served as a Senior Manager at PricewaterhouseCoopers Israel, an accounting firm, from 2002 until
2010, including two years relocation to the PricewaterhouseCoopers New York office. Mr. Sassi is a certified public accountant
in Israel and has a bachelor’s degree in economics and accounting from Ben Gurion University in Be’er Sheva, Israel.
Dr.
R. Michael Gendreau
was named as our Chief Medical Officer in February 2018. In 2011, prior to joining Intec, Dr. Gendreau
founded Gendreau Consulting, LLC, a consulting firm providing strategic advice and operational leadership on the design and management
of clinical programs, strategic planning, and technology assessments for emerging pharmaceutical, diagnostic, and medical device
companies. He has served on various scientific advisory boards, executive strategic planning boards, and Data Safety Monitoring
Boards. Prior to his consulting career, Dr. Gendreau served from 1996 until 2011 as Chief Medical Officer at Cypress Bioscience,
Inc., a clinical-stage biotech company developing therapies for central nervous system disorders. Prior to Cypress Bioscience,
Dr. Gendreau was Chief Medical Officer of Microprobe Corporation from 1991 to 1994. Additionally, he has served as Chief Medical
Officer/Therapeutic Area Head at other institutions, including Battelle Memorial Institute. Dr. Gendreau received his B.S. in
Chemistry from Ohio University, and earned his M.D./Ph.D. from The Ohio State University.
Mr.
Gil Bianco
has served as one of our external directors since April 2010. From November 2009 to November 2012, Mr. Bianco served
as a director of D-Pharm Ltd., an Israeli public biopharmaceutical company, and from May 2007 to May 2010, Mr. Bianco served as
a director of BioLineRx Ltd. (NASDAQ: BLRX), a clinical-stage biopharmaceutical development company. From December 2003 to December
2009, Mr. Bianco served as an external director of the Tel Aviv Stock Exchange Ltd. Prior to that, from 2001 to 2003, Mr. Bianco
served as chief executive officer of Agis Industries Ltd., a pharmaceutical manufacturer. Mr. Bianco currently serves as an external
director at Mazor Robotics Ltd. (NASDAQ: MZOR and TASE: MZOR.TA), a medical device company. Mr. Bianco is also a director of several
private companies in the fields of biotech and medical devices. Mr. Bianco holds a B.A. in economics and accounting from Tel-Aviv
University in Tel-Aviv, Israel and is a certified public accountant in Israel.
Ms.
Hila Karah
has served as one of our directors since December 2009. Ms. Karah is the executive chairperson of FloraFotonica
Ltd., an Israeli Agro Tech startup. Ms. Karah is an experienced board director and independent business consultant to private
and public companies on strategy, operations, financing, regulatory and corporate governance. From 2006 until 2013, Ms. Karah
was the chief investment officer of Eurotrust Ltd., a family office, where she focused primarily on investments in life science,
internet and high-tech companies. Prior to joining Eurotrust, Ms. Karah served as a senior analyst at Perceptive Life Sciences
Ltd., a New York-based hedge fund. Prior to her position at Perceptive, Ms. Karah was a research analyst at Oracle Partners Ltd.,
a healthcare-focused hedge fund based in Connecticut. Ms. Karah currently serves as a director at Cyren Ltd. a cyber security
company (NASDAQ, TASE: CYRN), a director at Dario Health Corp., (NASDAQ: DRIO) a board observer at MyHeritage Ltd. (private company)
and a director at GR Dome Ltd. (private company). She has a BA in molecular and cell biology from the University of California,
Berkeley, and has studied at the UCSB – UCSF Joint Medical Program.
Mr.
Issac Silberman
has served as one of our external directors since April 2010. From 2007 through the end of 2016, Mr. Silberman
also served as a special investment advisor at Sullam Holdings L.R. Ltd., a financial services corporation in the Lenny Recanati
Group, focusing primarily on investments in high-tech, biotechnology and real estate companies. Mr. Silberman also serves as a
director in other private Israeli companies, and has over 20 years of prior experience as an executive officer of various public
and private companies. Mr. Silberman holds a B.A. in economics and accounting from Tel Aviv University in Tel Aviv, Israel, and
he is a certified public accountant in Israel.
Mr.
Anthony J. Maddaluna
has served as one of our directors since December 2017. Mr. Maddaluna has more than 40 years
of experience in the pharmaceutical manufacturing industry, including leadership positions in plants, regions and globally.
From January 2011 to December 2016, Mr. Maddaluna held a series of positions at Pfizer Inc., most recently serving as
the Executive Vice President and President of Pfizer Global Supply. Prior to that Mr. Maddaluna served as Senior Vice
President of Pfizer Global Manufacturing Strategy and Supply Network Transformation from 2008 until 2011, and as Vice
President of Pfizer Global Manufacturing Europe Area from 1998 until 2008. Mr. Maddaluna served as a director of Albany
Molecular Research Inc. from February 2016 until its acquisition by The Carlyle Group and GTCR in August 2017 and currently
serves on the board of managers for the private company. Mr. Maddaluna holds an B.S. in Chemical Engineering from Northeastern
University and an M.B.A. from Southern Illinois University.
Our
Scientific Advisory Team
Our
Scientific Advisory Team including specialists and experts from the United States, Europe and Israel, with experience in the fields
of the central nervous system, neurological diseases, and safety and regulation. Our Scientific Advisory Team plays an active
role in advising us with respect to our products, technology development, clinical trials and safety. The following sets forth
certain information with respect to our Scientific Advisory Team members.
Prof.
Nir Giladi
, a leader in the field of movement disorders, is an associate professor at the Sackler Faculty of Medicine at Tel
Aviv University and chairman of the Department of Neurology at the Tel Aviv Sourasky Medical Center. Prof. Giladi has been a member
of the International Movement Disorders Society (MDS) since 2010. Prof. Giladi is also a member of the International Board of
the Research Group of the World Health Organization on Parkinson’s Disease and other Movement Disorders. Prof. Giladi has
published extensively in peer-reviewed journals and has served on the editorial boards of the
Movement Disorders Journal, Parkinsonism
& Related Disorders
and the
Journal of Neural Transmission
(associate editor).
Dr.
Peter LeWitt
, a neurologist, is a professor of neurology at Wayne State University School of Medicine in Detroit and directs
the Parkinson’s Disease and Movement Disorders Program at Henry Ford Hospital in Detroit, Michigan, where he also maintains
a movement disorders subspecialty practice. His clinical and basic neuroscience research has targeted neurodegenerative and symptomatic
therapies for Parkinson’s disease and other neurological disorders, and his range of research interests has included animal
models of neurological disease, biomarkers, gene therapy and pharmacokinetic analysis. Dr. LeWitt is affiliated with the Parkinson
Study Group and other clinical research consortia, and has extensive experience in clinical trials and regulatory aspects of drug
development.
Dr.
Werner Poewe
, a neurologist, is a professor of neurology and director of the Department of Neurology at Innsbruck Medical
University in Innsbruck, Austria. Dr. Poewe’s main research interests are in the field of movement disorders with particular
emphasis on the clinical pharmacology of Parkinson’s disease and dystonia. He has authored and co-authored more than 550
original articles and reviews in the field of movement disorders. He served as President of the International Movement Disorder
Society from 2000 through 2002, as President of the Austrian Society of Neurology from 2002 to 2004 and is the past President
of the Austrian Parkinson’s Disease Society.
Most
of the members of our Scientific Advisory team are paid for their services to us at their hourly consulting fees. We paid members
of our Scientific Advisory Team an aggregate of approximately $38,000 for services rendered during 2017.
There
are no family relationships among our executive officers and directors.
B.
Compensation.
The
table below reflects the compensation granted to our five most highly compensated office holders (as defined in the Companies
Law) during or with respect to the year ended December 31, 2017. We refer to the five individuals for whom disclosure is provided
herein as our “Covered Executives.” For purposes of the table below, “compensation” includes amounts accrued
or paid in connection with salary cost, consultancy fees, bonuses, equity-based compensation, retirement or termination payments,
benefits and perquisites such as car, phone and social benefits and any undertaking to provide such compensation. All amounts
reported in the table are in terms of cost to the Company, as recognized in our consolidated financial statements for the year
ended December 31, 2017, plus compensation paid to such Covered Executives following the end of the year in respect of services
provided during the year. Each of the Covered Executives was covered by our director and officer liability insurance policy and
was entitled to indemnification and exculpation in accordance with applicable law and our articles of association.
Individual
Covered Executive Compensation
Name
and
Principal
Position
(1)
|
|
Salary
(2)
|
|
|
Bonus
|
|
|
Equity-Based
Compensation
(3)
USD
$
|
|
|
All
other compensation
(4)
|
|
|
Total
|
|
John W. Kozarich –
Chairman of the Board
|
|
|
80,000
|
|
|
|
|
|
|
|
181,185
|
|
|
|
|
|
|
|
261,185
|
|
Jeffrey A. Meckler – Chief Executive
Officer and Vice Chairman
|
|
|
150,413
|
|
|
|
385,000
|
|
|
|
419,143
|
|
|
|
|
|
|
|
954,556
|
|
Dr. Nadav Navon – Chief Operating
Officer
|
|
|
216,846
|
|
|
|
70,842
|
|
|
|
156,842
|
|
|
|
15,419
|
|
|
|
459,949
|
|
Nir Sassi – Chief Financial Officer
|
|
|
204,042
|
|
|
|
61,065
|
|
|
|
93,079
|
|
|
|
15,593
|
|
|
|
373,779
|
|
Giora Carni – Former Director
of Technology and Interim Chief Executive Officer (5)
|
|
|
159,755
|
|
|
|
|
|
|
|
47,092
|
|
|
|
15,942
|
|
|
|
222,789
|
|
(1)
All Covered Executives, except for Mr. Giora Carni, were employed on a full time (100%) basis during their term of employment
in 2017. Mr. Meckler was appointed to act as our Vice Chairman in April 2017 and as our chief executive officer in December 2017.
(2)
Salary includes the Covered Executive’s gross salary plus payment of social benefits made by us on behalf of such Covered
Executive. Such benefits may include, to the extent applicable to the Covered Executive, payments, contributions and/or allocations
for savings funds (e.g., managers’ life insurance policy), education funds (referred to in Hebrew as “keren hishtalmut”),
pension, severance, risk insurances (e.g., life, or work disability insurance), payments for social security and tax gross-up
payments, vacation, medical insurance and benefits, convalescence or recreation pay and other benefits and perquisites consistent
with our policies. The salary for Mr. Jeffrey Meckler includes $112,532 of directors fees.
(3)
Represents the share-based compensation expenses recorded in the Company’s consolidated financial statements for the year
ended December 31, 2017, based on the option’s fair value, calculated in accordance with accounting guidance for equity-based
compensation. For a discussion of the assumptions used in reaching this valuation, see Note 13 to our consolidated financial statements.
(4)
Includes mainly leased car and mobile phone expenses.
(5)
In May 2017, following the resignation of Mr. Weiss as our Chief Executive Officer, Mr. Carni (then Company’s Director of
Technology and a member of our board of directors) became our interim Chief Executive Officer until July 2017 when Mr. Meckler,
our current Chief Executive Officer was appointed. As of our general meeting of shareholders held on December 11, 2017, Mr. Carni
is no longer a director of the Company, and currently serves as a consultant (on a 50% basis).
Our
employees are employed under the terms prescribed in their respective personal contracts, in accordance with the decisions of
our management. Under these employment contracts, the employees are entitled to the social benefits prescribed by law and as otherwise
provided in their personal contracts. These employment contracts each contain provisions standard for a company in our industry
regarding non-competition, confidentiality of information and assignment of inventions. Under current applicable employment laws,
we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors from benefiting
from the expertise of some of our former employees. See “Risk Factors — Risks Related to Our Company and Its Business”
for a further description of the enforceability of non-competition clauses. We also provide certain of our employees with a company
car, which is leased from a leasing company.
Our
office holders are also employed under the terms and conditions prescribed in personal contracts. These personal contracts provide
for notice periods of varying duration for termination of the agreement by us or by the relevant executive officer, during which
time the executive officer will continue to receive base salary and benefits. These agreements also contain acceleration provisions
upon material events such as a change of control or entry into a material agreement, customary provisions regarding non-competition,
confidentiality of information and assignment of inventions. However, the enforceability of the non-competition and assignment
of inventions provisions may be limited under applicable law. See “Risk Factors — Risks Related to Our Company and
Its Business.”
Services
Agreement with Our Chairman of the Board of Directors
,
Dr. John W. Kozarich
Dr.
Kozarich was elected to serve as our chairman of the board of directors in June 2016, and started his tenure on July 1, 2016.
Under Dr. Kozarich’s service agreement, he is entitled to an annual fee of $80,000, paid in four quarterly payments, as
well as to reimbursement for out-of-pocket expenses incurred in connection with his services as chairman of the board of directors.
Dr. Kozarich’s service agreement is for a term of three years and can be terminated by either us or Dr. Kozarich upon 90
days’ prior written notice, or immediately if Dr. Kozarich no longer acts as our chairman of the board of directors. Dr.
Kozarich’s agreement also includes customary non-disclosure, non-compete and ownership assignment of intellectual property
undertakings.
As
of December 31, 2017, Dr. Kozarich held options to purchase 224,478 ordinary shares with an exercise price of $3.526, of which
74,826 were vested. Dr. Kozarich’s unvested options will vest in the event of a change of control (as such term is defined
in the service agreement).
Services
and Employment Agreements with Our Vice Chairman of the Board of Directors and Chief Executive Officer
,
Mr. Jeffrey
A. Meckler
Mr.
Meckler has served as our Vice Chairman of the board of directors since April 2017 until his appointment as our Chief Executive
Officer in July 2017. During the term of his employment as Chief Executive Officer, Mr. Meckler is entitled to receive a base
salary at the annual rate of $500,000. In addition, Mr. Meckler is entitled to (i) paid holidays as generally provided by the
Company to its personnel and (ii) five weeks of paid vacation each calendar year.
Mr.
Meckler is also entitled to an annual bonus. With respect to the period beginning on the date on which Mr. Meckler was appointed
Chief Executive Officer and ending on December 31, 2017, we paid Mr. Meckler a discretionary bonus of $135,000. Going forward,
for each calendar year beginning on or after January 1, 2018, during which Mr. Meckler’s term of employment continues through
December 31 of each such year, Mr. Meckler will be entitled to receive an annual bonus of up to 50% of his base salary. The annual
bonus will be paid, subject to the achievement by Mr. Meckler of certain goals to be set by our board of directors after consultation
with Mr. Meckler.
In
addition, for his role as the Company’s Chief Executive Officer, Mr. Meckler was granted options to purchase up to 380,000
of our ordinary shares, at an exercise price of $6.70 per share, which will vest over three years according to the following schedule:
33% of the options will vest and become exercisable on the first anniversary of the grant date, and the remaining portion of the
options vest and become exercisable on a pro rata basis in eight equal quarterly installments thereafter. The options will be
subject to a ten year expiration from the grant date, and such other terms and conditions set forth in the Company’s option
agreement and the provisions of our equity incentive plan. Previously, for his services as the Vice Chairman of the Company, Mr.
Meckler received a one-time grant of options to purchase up to 120,000 ordinary shares of the Company, at an exercise price of
$5.32 per share, with a 3-year vesting schedule (the options will vest in three equal annual tranches over a three-year period,
provided Mr. Meckler continues to be a member of the board of directors of the Company). In addition, Mr. Meckler received a one-time
grant of options to purchase up to 65,000 ordinary shares of the Company, at an exercise price of $5.32 per share, with a 9-month
vesting schedule (such options were granted in connection with certain services provided by Mr. Meckler to the Company related
to the financing activities of the Company in the United States).
The
agreement with Mr. Meckler will terminate upon the earliest to occur of (i) a termination by the Company without cause, subject
to 30 days’ prior notice, (ii) immediate termination by the Company for cause, (iii) a termination by Mr. Meckler for good
reason, subject to 30 days’ prior notice (which will also serve as a cure period) to be provided to the Company within 60
days of the occurrence of the event that constitutes good reason, (iv) a termination by Mr. Meckler without good reason, subject
to 90 days’ prior notice, (v) Mr. Meckler’s death, or (vi) a termination by the Company or Mr. Meckler by reason of
Mr. Meckler’s disability.
Upon
termination by the Company without cause, Mr. Meckler will be entitled to a severance amount payable in six equal monthly installments,
which will be equal to (i) 50% of Mr. Meckler’s annual base salary, (ii) one-twelfth (1/12th) of Mr. Meckler’s annual
bonus for each completed month of such fiscal year provided the termination date is following June 30 of such fiscal year, and
(iii) an amount equal to Mr. Meckler’s cost of continued health insurance coverage for six months (collectively, the “Severance
Amount”). In addition, if the termination by the Company without cause occurs following the first anniversary of the agreement,
any options that have not previously vested will become vested and exercisable immediately prior to such termination.
If
Mr. Meckler’s employment is terminated by the Company without cause or by Mr. Meckler for good reason during the one year
period immediately following a change in control, then Mr. Meckler will be entitled to receive a lump-sum payment equal to two
times the Severance Amount.
Mr.
Meckler’s employment agreement includes additional customary provisions, such as non-solicitation, confidentiality, intellectual
property assignment, participation in the Company’s medical and similar insurance plans and reimbursement of expenses.
As
of December 11, 2017 (the date on which the general meeting of our shareholders approved the terms of employment of Mr. Meckler
as our Chief Executive Officer), Mr. Meckler’s entitlement to receive compensation under his services agreement, dated August
29, 2017, which was previously approved by our shareholders on June 1, 2017, terminated. Notwithstanding the above, Mr. Meckler
retains the options to purchase ordinary shares previously granted to him as Vice Chairman of our board of directors.
As
of December 31, 2017, Mr. Meckler held options to purchase 565,000 ordinary shares with a weighted exercise price of US $6.25,
of which 50,556 were vested and 514,444 will vest over time. Subject to Mr. Meckler’s continued employment by the Company,
in the event of (i) a change in control or (ii) the entry into a “Material Agreement” (as will be defined by our compensation
committee and the board of directors) 380,000 options granted to Mr. Meckler in his capacity as chief executive officer that have
not previously vested will become vested and exercisable immediately prior to such event.
Services
and Employment Agreement with Our Chief Operating Officer
,
Dr. Nadav Navon
Dr.
Navon was promoted to serve as our Chief Operating Officer in July 2017, and prior to that, from March 2015, he had served as
our Executive Vice President of Research & Development and Operations. Under Dr. Navon’s current employment agreement
(amended as of January 2018), he is entitled to a monthly gross salary of NIS 62,500, and to social benefits, such as annual paid
vacation days, convalescent payment, manager’s insurance, sick leave vocational studies fund and disability insurance. In
addition, we provide Dr. Navon with a leased company car and a mobile phone. Dr. Navon’s employment agreement is terminable
by either us or Dr. Navon upon 90 days’ prior written notice. Dr. Navon’s employment agreement contains customary
provisions regarding noncompetition, confidentiality of information and assignment of inventions.
As
of December 31, 2017, Dr. Navon held options to purchase 210,500 ordinary shares with a weighted exercise price of $4.70, of which
35,531 were vested, 124,969 will vest over time and 50,000 will vest in the event that a material agreement, as defined in our
previous compensation policy, is signed between us and a third party.
Services
and Employment Agreement with Our Chief Financial Officer, Nir Sassi
Mr.
Sassi has served as our Chief Financial Officer since August 2016. Prior to serving as our Chief Financial Officer, he served
as our VP Finance commencing in January 2015 and as our Chief Financial Officer between March 2010 and January 2015. Under Mr.
Sassi’s current employment agreement (amended as of January 2018), he is entitled to a monthly gross salary of NIS 49,166,
and to social benefits, such as annual paid vacation days, convalescent payment, manager’s insurance, sick leave vocational
studies fund and disability insurance. In addition, we provide Mr. Sassi with a leased company car and a mobile phone. Mr. Sassi’s
employment agreement is terminable by either us or Mr. Sassi upon 90 days’ prior written notice. Mr. Sassi’s employment
agreement contains customary provisions regarding noncompetition, confidentiality of information and assignment of inventions.
As
of December 31, 2017, Mr. Sassi held options to purchase 5,422 ordinary shares with an exercise price of NIS 52.35, of which all
were vested. In addition, as of December 31, 2017, Mr. Sassi also held options to purchase 133,300 ordinary shares with a weighted
exercise price of $4.83, of which 13,944 were vested, 79,356 will vest over time and 40,000 will vest in the event that a material
agreement, as defined in our compensation policy, is signed between us and a third party.
Services
and Employment Agreement with Our Former Director of Technology
,
Giora Carni
Mr.
Carni served as our Director of Technology from October 2014 as well as member our board of directors since March 2016. In May
2017, following the resignation of Mr. Weiss, Mr. Carni became our interim Chief Executive Officer until July 2017 when Mr. Meckler,
our current Chief Executive Officer, was appointed. As of our general meeting of shareholders held on December 11, 2017, Mr. Carni’s
services as a director of the Company ended, and he currently serves as a consultant (on a 50% basis). Prior to his resignation
Mr. Carni was entitled to a monthly gross salary of NIS 35,000 (70% scope of employment), and to social benefits, such as annual
paid vacation days, severance pay, recuperation pay, manager’s insurance, sick leave and studies fund. In addition, we provided
Mr. Carni with a leased company car and a mobile phone.
In
December 2017, following the lapse of this tenure as a member our board of directors, we entered into a new employment agreement
with Mr. Carni. For more information, see “Item 7. Major Shareholders and Related Party Transactions – Related Party
Transaction – Employment and Consulting Agreements.”
As
of December 31, 2017, Mr. Carni held options to purchase 70,909 ordinary shares with a weighted exercise price of NIS 16.25, of
which all will vest in the event that a material agreement, as defined in our compensation policy, is signed between us and a
third party. In addition, as of December 31, 2017, Mr. Carni also held options to purchase 148,000 ordinary shares that will vest
over time with a weighted exercise price of $6.00, of which 80,000 will vest over time or immediately upon the earlier of: (i)
the closing of a merger agreement, as defined in our 2015 Plan, or (ii) if Mr. Carni is terminated without cause prior to June
11, 2019). None of these options were vested as of December 31, 2017.
Equity
Compensation Plans
We
maintain the 2005 Plan, which was adopted by our board of directors on September 19, 2005, that provides for granting options
to our directors, officers, employees, consultants, advisers and service providers. As of December 31, 2017, the 2005 Plan has
expired, however 349,152 options that were previously granted under the 2005 Plan are still outstanding and remain subject to
its terms and conditions. Such options will remain outstanding until the earlier of their exercise or expiration in accordance
with the terms of the 2005 Plan and the applicable grant agreement. In addition, as of December 31, 2017, we had outstanding options
to purchase 8,035 ordinary shares that were issued to consultants outside of the 2005 Plan; all of these options are vested and
outstanding. Of such outstanding options, options to purchase 171,215 ordinary shares were vested as of December 31, 2017, with
a weighted average exercise price of NIS 43.00 per share, and will expire between 2018 and 2020.
The
2005 Plan permitted options to be awarded to Participants (as such term is defined in the 2005 Plan) pursuant to Section 102 of
the Israeli Income Tax Ordinance (New Version) 1961, or the Ordinance, and Section 3(i) of the Ordinance, based on entitlement
and compliance with the terms for receiving options under these sections of the Ordinance. Section 102 of the Ordinance provides
to employees, directors and officers who are not controlling shareholders (i.e., such persons are not deemed to hold 10% of the
company’s share capital, or to be entitled to 10% of the company’s profits or to appoint a director to the company’s
board of directors) and are Israeli residents, favorable tax treatment for compensation in the form of shares or options issued
or granted, as applicable, to a trustee under the “capital gains track” for the benefit of the applicable employee,
director or officer and are (or were) to be held by the trustee for at least two years after the date of grant or issuance. Options
granted under Section 102 of the Ordinance will be deposited with a trustee appointed by the company in accordance with Section
102 of the Ordinance and the relevant income tax regulations and guidelines, and will be granted in the employee income track
or the capital gains track. The 2005 Plan is managed by our board of directors or any other committee or person that our board
of directors authorizes for this purpose. According to our board of directors’ resolution of September 19, 2005, the options
granted under Section 102 of the Ordinance were granted under the capital gains track. The 2005 Plan also permitted us to grant
options to U.S. residents, which may qualify as “incentive stock options” within the meaning of Section 422 of the
U.S. Internal Revenue Code of 1986, as amended, or the Code, and to residents of other jurisdictions.
Options
granted under the 2005 Plan are subject to applicable vesting schedules and generally for all awards granted after May 27, 2010,
expire six years from the grant date (however, generally, awards granted prior to such date, expire ten years from the grant date).
Upon
the termination of a Participant’s engagement with us for any reason other than death, retirement, disability or due cause,
all unvested options allocated will automatically expire 90 days after the termination, unless expired earlier due to their term.
If the Participant’s engagement was terminated for cause (as defined in the 2005 Plan), the Participant’s right to
exercise any unexercised options, awarded and allocated in favor of such Participant, whether vested or not, will immediately
cease and expire as of the date of such termination. If the Participant dies, retires or is disabled, any vested but unexercised
options will automatically expire 12 months from the termination of the engagement, unless expired earlier due to their term.
In
the event of (i) the sale of all or substantially all of our assets; (ii) a sale (including an exchange) of all or substantially
all of our share capital; or (iii) a merger, consolidation or like transaction of ours with or into another corporation, then,
subject to obtaining the applicable approvals of the Israeli tax authorities, the board of directors in its sole discretion shall
resolve: (a) if and how any unvested options shall be canceled, replaced or accelerated; (b) if and how any vested options (including
options with respect to which the vesting period has been accelerated according to the foregoing) shall be exercised, replaced
and/or sold by a trustee or us (as the case may be) on the behalf of the respective Israeli Participants; and (c) how any underlying
shares issued upon exercise of the options and held by a trustee on behalf any Israeli Participants shall be replaced and/or sold
by such trustee on behalf of the Israeli Participants.
On
January 6, 2016, our board of directors adopted the 2015 Equity Incentive Plan, or the 2015 Plan. Originally, the maximum number
of ordinary shares reserved for issuance under the 2015 Plan was 700,000, subject to future adjustments. On July 25, 2016, the
board of directors increased the aggregate number of shares issuable under the 2015 Plan by 700,000 shares and another increase
by 2,100,000 was approved by the general meeting of our shareholders on December 11, 2017. In connection with the aforementioned
increase of 2016, we did not obtain shareholder approval as required under NASDAQ Listing Rules and instead followed home practice
rules that do not require such approval. Similar to the 2005 Plan, the 2015 Plan permits options to be awarded to Participants
(as such term is defined in the 2015 Plan) pursuant to Section 102 of the Ordinance and Section 3(i) of the Ordinance, based on
entitlement and compliance with the terms for receiving options under these sections of the Ordinance. The 2015 Plan also permits
us to grant options to U.S. residents, which may qualify as “incentive stock options” within the meaning of Section
422 of the Code, and to residents of other jurisdictions.
Options
under the 2015 Plan are subject to applicable vesting schedules and will generally expire up to ten years from the grant date.
Upon
the termination of a Participant’s engagement with us for any reason other than death, retirement, disability or due cause,
any vested but unexercised options will automatically expire 90 days after termination, unless earlier expired due to their term,
and all unvested options will expire upon the date of termination. If the Participant’s engagement was terminated for cause
(as defined in the 2015 Plan), the Participant’s right to exercise any unexercised options, awarded and allocated in favor
of such Participant, whether vested or not, will immediately cease and expire as of the date of such termination. If the Participant
dies, retires or is disabled, any vested but unexercised options will automatically expire 12 months from the termination of the
engagement, unless expired earlier due to their term and all unvested options will expire upon the date of termination.
As
of December 31, 2017, outstanding awards under the 2015 Plan totaled 1,872,683 ordinary shares and an additional 1,615,999 awards
were available for grant. Of the 1,872,683 outstanding options, options to purchase 275,196 ordinary shares were vested as of
December 31, 2017, with a weighted average exercise price of $4.41 per share, and will expire between 2026 and 2027.
C.
Board Practices
Board
of Directors
Under
the Companies Law and our articles of association, the management of our business is vested in our board of directors. Our board
of directors may exercise all powers and may take all actions that are not specifically granted to our shareholders or to management.
Our executive officers are responsible for our day-to-day management and have individual responsibilities established by our board
of directors. Our Chief Executive Officer is appointed by, and serves at the discretion of, our board of directors, subject to
his personal contract with the Company. All other executive officers are also appointed by our board of directors, and are subject
to the terms of their personal employment agreements (as such may be updated from time to time).
Our
board of directors affirmatively determined that a majority of our directors are independent in accordance with the NASDAQ Capital
Market rules. Our board of directors determined that all of our directors other than Jeffrey A. Meckler are independent under
such rules. The definition of independent director under the NASDAQ Capital Market rules and external director under the Companies
Law overlap to a significant degree such that we would generally expect the two directors serving as external directors to satisfy
the requirements to be independent under the NASDAQ Capital Market rules. The definition of external director includes a set of
statutory criteria that must be satisfied, including criteria whose aim is to ensure that there is no factor which would impair
the ability of the external director to exercise independent judgment. The definition of independent director specifies similar,
if slightly less stringent, requirements in addition to the requirement that the board consider any factor which would impair
the ability of the independent director to exercise independent judgment. In addition, our external directors each serve for a
period of three years. However, external directors must be elected by a special majority of shareholders while independent directors
may be elected by a simple majority. See “— External Directors” below for a description of the requirements
under the Companies Law for a director to serve as an external director.
Under
our articles of association, our board of directors must consist of at least four and not more than nine directors, including
at least two external directors, which are required to be appointed under the Companies Law. Our board of directors currently
consists of six members, including our non-executive Chairman of the board of directors. Other than our two external directors,
our directors are elected at the annual and/or special general meeting of our shareholders by a simple majority. Because our ordinary
shares do not have cumulative voting rights in the election of directors, the holders of a majority of the voting power represented
at a shareholders meeting have the power to elect all of our directors, subject to the special approval requirements for external
directors (See “— External Directors”). We have held elections for each of our non-external directors at each
annual meeting of our shareholders since our initial public offering in Israel.
In
addition, our articles of association allow our board of directors to appoint directors to fill vacancies on our board of directors,
for a term of office ending on the earlier of the next annual general meeting of our shareholders, or the conclusion of the term
of office in accordance with our articles or any applicable law, subject to the maximum number of directors allowed under our
articles of association. External directors are elected for an initial term of three years and may be elected for up to two additional
three-year terms, provided that, for Israeli companies traded on NASDAQ Capital Market and certain other international exchanges,
such term may be extended indefinitely in increments of additional three-year terms. External directors may be removed from office
only under the limited circumstances set forth in the Companies Law. See “— External Directors.”
Under
the Companies Law, our board of directors must determine the minimum number of directors who are required to have accounting and
financial expertise. In determining the number of directors required to have such expertise, our board of directors must consider,
among other things, the type and size of the company and the scope and complexity of its operations. Our board of directors has
determined that the minimum number of directors of our Company who are required to have accounting and financial expertise is
one. Our board of directors has determined that Mr. Bianco and Mr. Silberman have accounting and financial expertise and possess
professional qualifications as required under the Companies Law.
External
Directors
Under
the Companies Law, we are required to appoint at least two external directors to our board of directors. According to regulations
promulgated under the Companies Law, a person may be appointed as an external director if such person has either professional
qualifications or accounting and financial expertise. In addition, at least one of the external directors must be determined by
our board of directors to have accounting and financial expertise. However, if at least one of our other directors (i) meets the
independence requirements under the Exchange Act, (ii) meets the standards of the NASDAQ Capital Market Listing Rules for membership
on the audit committee, and (iii) has accounting and financial expertise as defined under the Companies Law, then neither of our
external directors is required to possess accounting and financial expertise as long as each possesses the requisite professional
qualifications.
A
director with accounting and financial expertise is a director who, due to his or her education, experience and skills, possesses
an expertise in, and an understanding of, financial and accounting matters and financial statements, such that he or she is able
to understand the consolidated financial statements of the company and initiate a discussion about the presentation of financial
data. In determining whether the director has financial and accounting expertise the board of directors shall consider education,
experience and the knowledge in the following subjects: (i) accounting issues and internal auditing issues typical to the company’s
industry and to companies of the same size and complexity as the company; (ii) the nature of the Internal Auditor’s position
in the company and his or her duties; and (iii) the preparation of financial statements and their approval subject to the Companies
Law and the Israeli Securities Law.
A
director is deemed to have professional qualifications if he or she has any of (i) an academic degree in economics, business management,
accounting, law or public administration, (ii) an academic degree or has completed another form of higher education in the primary
field of business of the company or in a field which is relevant to his/her position in the company, or (iii) at least five years
of experience serving in one of the following capacities, or at least five years of cumulative experience serving in two or more
of the following capacities: (a) a senior business management position in a company with a significant volume of business; (b)
a senior position in a company’s primary field of business; or (c) a senior position in public administration or service.
The board of directors is charged with determining whether a director possesses financial and accounting expertise or professional
qualifications.
Gil
Bianco and Issac Silberman have served as our external directors since 2010. Mr. Bianco and Mr. Silberman were re-elected to serve
as external directors for a third term from April 2016 until April 2019. Our board of directors has determined that both Mr. Bianco
and Mr. Silberman have accounting and financial expertise and that Gil Bianco is an audit committee financial expert as defined
by the SEC rules and has the requisite financial experience as defined by the rules of the NASDAQ Capital Market.
The
provisions of the Companies Law set forth special approval requirements for the election of external directors. External directors
must be elected by a majority vote of the shares present and voting at a shareholders meeting, provided that either:
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such majority includes
at least a majority of the shares held by all shareholders who are non-controlling shareholders and do not have a personal
interest in the election of the external director (other than a personal interest not deriving from a relationship with a
controlling shareholder) that are voted at the meeting, excluding abstentions, to which we refer as a disinterested majority;
or
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the total number
of shares voted by non-controlling shareholders and by shareholders who do not have a personal interest in the election of
the external director, against the election of the external director, does not exceed 2% of the aggregate voting rights in
the company.
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The
term “controlling shareholder” is defined in the Companies Law as a shareholder with the ability to direct the activities
of the company, excluding such ability deriving solely from his or her position as a director of the company or from any other
position with the company. A shareholder is presumed to be a controlling shareholder if such shareholder holds 50% or more of
the voting rights in a company or has the right to appoint the majority of the directors of the company or its general manager.
With respect to certain matters, the term “controlling shareholder” is deemed to include, in addition to the foregoing,
a shareholder that holds 25% or more of the voting rights in a public company if no other shareholder holds more than 50% of the
voting rights in the company.
The
initial term of an external director is three years. Thereafter, an external director may be reelected by shareholders to serve
in that capacity for up to two additional three-year terms, except as provided below, provided that either:
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(i)
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his or her service
for each such additional term is recommended by one or more shareholders holding at least 1% of the company’s voting
rights and is approved at a shareholders’ meeting by a disinterested majority (other than a personal interest not deriving
from a relationship with a controlling shareholder), where the total number of shares held by non-controlling, disinterested
shareholders voting for such reelection exceeds 2% of the aggregate voting rights in the company. In such event, the external
director so reappointed may not be a Related or Competing Shareholder, or a relative of such shareholder, at the time of the
appointment, and is not and has not had any affiliation with a Related or Competing Shareholder, at such time or during the
two years preceding such person’s reappointment to serve an additional term as external director. The term “Related
or Competing Shareholder” means a shareholder proposing the reappointment or a shareholder holding 5% or more of the
outstanding shares or voting rights of the company, provided, that at the time of the reappointment, such shareholder, the
controlling shareholder of such shareholder, or a company controlled by such shareholder, have a business relationship with
the company or are competitors of the company. Additionally, the Israeli Minister of Justice, in consultation with the Israeli
Securities Authority, or the ISA, may determine matters that under certain conditions will not constitute a business relationship
or competition with the company;
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(ii)
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his or her
service for each such additional term is recommended by the board of directors and is approved at a shareholders meeting by
the same majority required for the initial election of an external director (as described above); or
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(iii)
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the external director
proposed his or her own nomination, and such nomination was approved in accordance to the requirements described in the paragraph
(i) above.
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The
term of office for external directors for Israeli companies traded on certain foreign stock exchanges, including the NASDAQ Capital
Market, may be extended indefinitely in increments of additional three-year terms, in each case provided that the audit committee
and the board of directors of the company determined that in light of the external director’s expertise and special contribution
to the work of the board of directors and its committees, the reelection for such additional period(s) is in the best interest
of the company, and provided that the external director is reelected subject to the same shareholder vote requirements as if elected
for the first time (as described above). Prior to the approval of the reelection of the external director at a general shareholders
meeting, the company’s shareholders must be informed of the term previously served by him or her and of the reasons, which
led the board of directors and audit committee to recommend the extension of his or her tenure.
External
directors may be removed from office by a special general meeting of shareholders called by the board of directors, which approves
such dismissal by the same majority vote required for their election or by a court, in each case, only under limited circumstances,
including ceasing to meet the statutory qualifications for appointment, or violating their duty of loyalty towards the company.
If an external directorship becomes vacant and there are fewer than two external directors on the board of directors at the time,
then the board of directors is required under the Companies Law to call a special shareholders’ meeting as soon as practicable
to appoint a replacement external director.
Each
committee of the board of directors that is authorized to exercise the powers of the board of directors must include at least
one external director, except that the audit committee and the compensation committee must include all external directors then
serving on the board of directors. Under the Companies Law, external directors of a company are prohibited from receiving, directly
or indirectly, any compensation from the company other than compensation and reimbursement of expenses amounts for their services
as external directors prescribed under the Companies Law and the regulations promulgated thereunder. Compensation of an external
director is determined prior to his or her appointment and may not be changed during his or her term (subject to certain exceptions).
The
Companies Law provides that a person is not qualified to serve as an external director if (i) the person is a relative of a controlling
shareholder of the company, or (ii) if that person or his or her relative, partner, employer, another person to whom he or she
was directly or indirectly subordinate, or any entity under the person’s control, has or had, during the two years preceding
the date of appointment as an external director: (a) any affiliation with the company, with any person or entity controlling the
company or a relative of such person on the date of appointment, or with any entity controlled by or under common control with
the company; or (b) in the case of a company with no shareholder holding 25% or more of its voting rights, had at the date of
appointment as an external director, any affiliation with a person then serving as chairman of the board or chief executive officer,
a holder of 5% or more of the issued share capital or voting power in the company or the most senior financial officer.
The
term “relative” is defined as a spouse, sibling, parent, grandparent or descendant; spouse’s sibling, parent
or descendant, and the spouse of each of the foregoing persons.
The
term “affiliation” includes (subject to certain exceptions):
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an employment relationship;
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a business or professional
relationship even if not maintained on a regular basis (excluding insignificant relationships);
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service as an office
holder, excluding service as a director in a private company prior to the initial public offering of its shares if such director
was appointed as a director of the private company in order to serve as an external director following the initial public
offering.
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Additionally,
the Israeli Minister of Justice, in consultation with the ISA, is authorized to determine that certain matters will not constitute
an affiliation.
The
term “office holder” is defined under the Companies Law as a general manager, chief business manager, deputy general
manager, vice general manager, any other person assuming the responsibilities of any of these positions regardless of that person’s
title, a director and any other manager directly subordinate to the general manager.
In
addition, a person may not serve as an external director of a company if: (i) that person’s position or professional or
other activities create, or may create, a conflict of interest with that person’s responsibilities as a director or otherwise
interfere with that person’s ability to serve as an external director; (ii) at the time of appointment, such person serves
as a director of another company and an external director of the other company is also a director of the company; (iii) the person
is an employee of the ISA or of an Israeli stock exchange; or (iv) such person received direct or indirect compensation from the
company in connection with such person’s services as an external director, other than as permitted by the Companies Law
and the regulations promulgated thereunder.
Following
the termination of an external director’s service on a board of directors, such former external director and his or her
spouse and children may not receive a direct or indirect benefit by the company, its controlling shareholder or any entity under
the control of its controlling shareholder. The foregoing includes engagement as an office holder or director of the company or
a company controlled by its controlling shareholder or employment by, or provision of services to, any such company for consideration,
either directly or indirectly, including through a corporation controlled by such former external director. This restriction extends
for a period of two years with regard to the former external director and his or her spouse or child and for one year with respect
to other relatives of the former external director.
If
at the time at which an external director is appointed all members of the board of directors who are not controlling shareholders
or relatives of controlling shareholders of the company are of the same gender, the external director to be appointed must be
of the other gender.
Under
regulations promulgated pursuant to the Companies Law, companies with no controlling shareholder whose shares are listed for trading
on specified exchanges outside of Israel, including the Nasdaq Capital Market, may adopt exemptions from various corporate governance
requirements of the Companies Law so long as the company satisfies the applicable foreign country laws and regulations, including
applicable stock exchange rules, that apply to companies organized in that country relating to the appointment of independent
directors and the composition of audit and compensation committees. Such exemptions include an exemption from the requirement
to appoint external directors and the requirement that an external director be a member of certain committees. We may rely on
these exemptions in the future.
Audit
Committee
Our
audit committee consists of Ms. Hila Karah, along with our two external directors, Gil Bianco and Issac Silberman. Mr. Bianco
serves as the Chairman of the audit committee.
Companies
Law Requirements
Under
the Companies Law, we are required to appoint an audit committee. The audit committee must be comprised of at least three directors,
including all of the external directors, one of whom must serve as chairman of the committee. The audit committee may not include
the chairman of the board of directors, a controlling shareholder of the company or a relative of a controlling shareholder, a
director employed by or providing services on a regular basis to the company, to a controlling shareholder or to an entity controlled
by a controlling shareholder or a director most of whose livelihood depends on a controlling shareholder.
In
addition, under the Companies Law, the audit committee of a publicly traded company must consist of a majority of unaffiliated
directors. An “unaffiliated director” under the Companies Law is generally defined as either an external director
or as a director who meets the following criteria:
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he or she meets
the qualifications for being appointed as an external director, except for the requirement that the director be an Israeli
resident (which does not apply to companies such as ours whose securities have been offered outside of Israel or are listed
outside of Israel); and
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he or she has not
served as a director of the company for a period exceeding nine consecutive years, provided that, for this purpose, a break
of less than two years in service shall not be deemed to interrupt the continuation of the service.
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The
Companies Law further requires that generally, any person who does not qualify to be a member of the audit committee may not attend
the audit committee’s meetings and voting sessions, unless such person was invited by the chairperson of the committee for
the purpose of presenting on a specific subject, provided, however, that an employee of the company who is not the controlling
shareholder or a relative thereof, may attend the discussions of the committee provided that the resolutions are resolved without
his or her presence. A company’s legal advisor and company secretary whom are not the controlling shareholder or a relative
thereof may attend the meeting and voting sessions, if required by the committee.
The
quorum required for the convening of meetings of the audit committee and for adopting resolutions by the audit committee is a
majority of the members of the audit committee, provided such majority is comprised of a majority of independent directors, and
at least one of those present is an external director.
Listing
Requirements
Under
the NASDAQ Capital Market corporate governance rules, we are required to maintain an audit committee consisting of at least three
independent directors, each of whom is financially literate and one of whom has accounting or related financial management expertise.
All
members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the
SEC and the NASDAQ Capital Market corporate governance rules. Prior to the consummation of our initial public offering in the
United States, our board of directors affirmatively determined that Gil Bianco is an audit committee financial expert as defined
by the SEC rules and has the requisite financial experience as defined by the NASDAQ Capital Market corporate governance rules.
Each
of the members of the audit committee is “independent” as such term is defined in Rule 10A-3(b)(1) under the Exchange
Act, which is different from the general test for independence of board and committee members.
Audit
Committee Role
Prior
to the consummation of our initial public offering in the United States, our board of directors adopted an audit committee charter
to be effective upon the listing of our shares on the NASDAQ Capital Market that sets forth the responsibilities of the audit
committee consistent with the rules of the SEC and the Listing Rules of the NASDAQ Capital Market, as well as the requirements
for such committee under the Companies Law, including the following:
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oversight of our
independent registered public accounting firm and recommending the engagement, compensation or termination of engagement of
our independent registered public accounting firm to the board of directors in accordance with Israeli law;
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recommending the
engagement or termination of the person filling the office of our internal auditor; and
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recommending the
terms of audit and non-audit services provided by the independent registered public accounting firm for pre-approval by our
board of directors.
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Our
audit committee provides assistance to our board of directors in fulfilling its legal and fiduciary obligations in matters involving
our accounting, auditing, financial reporting, internal control and legal compliance functions by pre-approving the services performed
by our independent accountants and reviewing their reports regarding our accounting practices and systems of internal control
over financial reporting. Our audit committee also oversees the audit efforts of our independent accountants and takes those actions
that it deems necessary to satisfy itself that the accountants are independent of management.
Under
the Companies Law, our audit committee is responsible for:
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(i)
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determining whether
there are deficiencies in the business management practices of our Company, including in consultation with our internal auditor
or the independent auditor, and making recommendations to our board of directors to improve such practices;
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(ii)
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determining the
approval process for transactions that are ‘non-negligible’ (i.e., transactions with a controlling shareholder
that are classified by the audit committee as non-negligible, even though they are not deemed extraordinary transactions),
as well as determining which types of transactions would require the approval of the audit committee, optionally based on
criteria which may be determined annually in advance by the audit committee;
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(iii)
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determining whether
to approve certain related party transactions (including transactions in which an office holder has a personal interest and
whether such transaction is extraordinary or material under Companies Law) (see “— Approval of Related Party Transactions
under Israeli Law”);
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(iv)
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where the board
of directors approves the working plan of the internal auditor, to examine such working plan before its submission to our
board of directors and proposing amendments thereto;
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(v)
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examining our internal
controls and internal auditor’s performance, including whether the internal auditor has sufficient resources and tools
to dispose of its responsibilities;
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(vi)
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examining the scope
of our auditor’s work and compensation and submitting a recommendation with respect thereto to our board of directors
or shareholders, depending on which of them is considering the appointment of our auditor; and
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(vii)
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establishing procedures
for the handling of employees’ complaints as to the management of our business and the protection to be provided to
such employees.
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Our
audit committee may not approve any actions requiring its approval (see “— Approval of Related Party Transactions
under Israeli Law”), unless at the time of the approval a majority of the committee’s members are present, which majority
consists of unaffiliated directors including at least one external director.
Pursuant
to an amendment to the Companies Law enacted on February 17, 2016, a company whose audit committee’s composition meets the
requirements set forth for the composition of a compensation committee (as further detailed below) is permitted to have one committee
acting as both an audit and compensation committee.
Compensation
Committee and Compensation Policy
Our
compensation committee currently consists of Ms. Hila Karah, Mr. Issac Silberman and Mr. Gil Bianco. Mr. Silberman serves as the
Chairman of the compensation committee.
Role
of the Compensation Committee
Under
the Companies Law, the board of directors of a public company must appoint a compensation committee and adopt a compensation policy.
The compensation committee must be comprised of at least three directors, including all of the external directors, who must constitute
a majority of the members of the compensation committee, and one of the external directors must serve as chairman of the committee.
However, subject to certain exceptions, Israeli companies whose securities are traded on stock exchanges such as the NASDAQ Capital
Market, and who do not have a controlling shareholder, do not have to meet this majority requirement; provided, however, that
the compensation committee meets other Companies Law composition requirements, as well as the requirements of the jurisdiction
where the company’s securities are listed. Each compensation committee member that is not an external director must be a
director whose compensation does not exceed an amount that may be paid to an external director (under the Companies Law and applicable
regulations). The compensation committee is subject to the same Companies Law restrictions as the audit committee as to who may
not serve as a member of the committee.
Under
the Companies Law, the compensation committee is responsible, among other things, for (i) recommending to the board of directors
regarding its approval of a compensation policy in accordance with the requirements of the Companies Law; (ii) overseeing the
development and implementation of such compensation policy and recommending to the board of directors regarding any amendments
or modifications that the compensation committee deems appropriate; (iii) determining whether to approve transactions concerning
the terms of engagement and employment of our officers and directors that require compensation committee approval under the Companies
Law; and (iv) resolving whether or not to exempt a transaction with a candidate for chief executive officer from shareholder’s
approval. In addition, any amendment of existing terms of office and employment of office holders (other than directors or controlling
shareholders and their relatives, who serve as office holders) requires the sole approval of the compensation committee, if the
committee determines that the amendment is not material in relation to its existing terms and if such amendment is in accordance
with the approved compensation policy of the company then in effect.
The
Compensation Policy
The
compensation policy must be based on certain considerations, must include certain provisions and needs to reference certain matters
as set forth in the Companies Law. The compensation policy must be approved by the company’s board of directors after considering
the recommendations of the compensation committee. In addition, the compensation policy needs to be approved by the company’s
shareholders by a simple majority, provided that (i) such majority includes a majority of the votes cast by the shareholders who
are not controlling shareholders and who do not have a personal interest in the matter, present and voting (abstentions are disregarded)
or (ii) the votes cast by shareholders who are not controlling shareholders and who do not have a personal interest in the matter
who were present and voted against the compensation policy, constitute 2% or less of the voting power of the company. Such majority
determined in accordance with clause (i) or (ii) is hereinafter referred to as the “Compensation Majority.”
To
the extent a compensation policy is not approved by shareholders at a duly convened shareholders meeting or by the Compensation
Majority, the board of directors of a company may override the resolution of the shareholders following a re-discussion of the
matter by the board of directors and the compensation committee and for specified reasons, and after determining that despite
the rejection by the shareholders, the adoption of the compensation policy is in the best interest of the company. A compensation
policy that is for a period of more than three years must be approved in accordance with the above procedure once in every three
years.
Notwithstanding
the above, the amendment of existing terms of office and employment of office holders (other than directors or controlling shareholders
and their relatives, who serve as office holders) requires the sole approval of the compensation committee, if such committee
determines that the amendment is not material in relation to its existing terms.
The
compensation policy must serve as the basis for decisions concerning the consolidated financial terms of employment or engagement
of office holders, including exculpation, insurance, indemnification or any monetary payment or obligation of payment in respect
of employment or engagement. The compensation policy must relate to certain factors, including advancement of the company’s
objectives, the company’s business plan and its long-term strategy, and creation of appropriate incentives for office holders.
It must also consider, among other things, the company’s risk management, size and the nature of its operations. The compensation
policy must furthermore consider the following additional factors:
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the knowledge, skills,
expertise and accomplishments of the relevant office holder;
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the office holder’s
roles and responsibilities and prior compensation agreements with him or her;
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the ratio between
the cost of the terms of employment of an office holder and the cost of the compensation of the other employees of the company,
including those employed through manpower companies, in particular the ratio between such cost and the average and median
compensation of the other employees of the company, as well as the impact such disparities may have on the work relationships
in the company;
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the possibility
of reducing variable compensation, if any, at the discretion of the board of directors; and the possibility of setting a limit
on the exercise value of non-cash variable equity-based compensation; and
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as to severance
compensation, if any, the period of service of the office holder, the terms of his or her compensation during such service
period, the company’s performance during that period of service, the person’s contribution towards the company’s
achievement of its goals and the maximization of its profits, and the circumstances under which the person is leaving the
company.
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The
compensation policy must also include the following principles:
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the link between
variable compensation and long-term performance and measurable criteria;
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the relationship
between variable and fixed compensation, and the ceiling for the value of variable compensation;
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the conditions under
which an office holder would be required to repay compensation paid to him or her if it was later shown that the data upon
which such compensation was based was inaccurate and was required to be restated in the company’s consolidated financial
statements;
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the minimum holding
or vesting period for variable, equity-based compensation; and
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maximum limits for
severance compensation.
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In
accordance with the Companies Law, and following the recommendation of our compensation committee, our board of directors approved
our compensation policy, and our shareholders, in turn, approved the compensation policy at our annual general meeting of shareholders
that was held in January 2014, and therefore in January 2017 our compensation policy has expired. Following the recommendation
of our compensation committee and our board of directors, our shareholders re-approved our compensation policy in June 2017, and
later approved an amendment of its terms (at the general meeting of shareholders held on December 11, 2017).
Internal
Auditor
Under
the Companies Law, the board of directors of an Israeli public company must appoint an internal auditor in accordance with the
recommendation of the audit committee. Each of the following may not be appointed as internal auditor:
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a person (or a relative
of a person) who holds more than 5% of the company’s outstanding shares or voting rights;
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a person (or a relative
of a person) who has the power to appoint a director or the general manager of the company;
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an office holder
(including a director) of the company (or a relative thereof); or
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a member of the
company’s independent accounting firm, or anyone on his or her behalf.
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The
role of the internal auditor is to examine, among other things, our compliance with applicable law and orderly business procedures.
The audit committee is required to oversee the activities and to assess the performance of the internal auditor as well as to
review the internal auditor’s work plan. Mr. Haim Halfon has been appointed as our internal auditor. Mr. Haim Halfon is
a certified internal auditor and a partner of Amit, Halfon CPA.
The
board of directors shall determine the direct supervisor of the internal auditor. The internal auditor is required to submit his
findings to the audit committee, unless specified otherwise by the board of directors.
Approval
of Related Party Transactions under Israeli Law
Fiduciary
Duties of Directors and Executive Officers
The
Companies Law codifies the fiduciary duties that office holders owe to a company. Each person listed as an officer in the table
under “Item 6. Directors, Senior Management and Employees — Directors and Senior Management” is an office holder
under the Companies Law.
An
office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires an office holder
to act with the level of care with which a reasonable office holder in the same position would have acted under the same circumstances.
The duty of loyalty requires that an office holder act in good faith and in the best interests of the company.
The
duty of care includes a duty to use reasonable means to obtain:
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information on the
advisability of a given action brought for his or her approval or performed by virtue of his or her position; and
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all other important
information pertaining to any such action.
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The
duty of loyalty includes a duty to:
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refrain from any
conflict of interest between the performance of his or her duties to the company and his or her other duties or personal affairs;
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refrain from any
activity that is competitive with the company;
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refrain from exploiting
any business opportunity of the company to receive a personal gain for himself or herself or others; and
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disclose to the
company any information or documents relating to the company’s affairs which the office holder received as a result
of his or her position as an office holder.
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Disclosure
of Personal Interests of an Office Holder and Approval of Certain Transactions
The
Companies Law requires that an office holder promptly disclose to the board of directors any personal interest that he or she
may be aware of and all related material information or documents concerning any existing or proposed transaction with the company.
An interested office holder’s disclosure must be made promptly and in any event no later than the first meeting of the board
of directors at which the transaction is considered. A personal interest includes an interest of any person in an act or transaction
of a company, including a personal interest of such person’s relative or of a corporate body in which such person or a relative
of such person is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least
one director or the general manager, but excluding a personal interest stemming from one’s ownership of shares in the company.
A personal interest furthermore includes the personal interest of a person for whom the office holder holds a voting proxy or
the personal interest of the office holder with respect to his or her vote on behalf of a person for whom he or she holds a proxy
even if such shareholder has no personal interest in the matter. An office holder is not however, obligated to disclose a personal
interest if it derives solely from the personal interest of his or her relative in a transaction that is not considered an extraordinary
transaction. Under the Companies Law, an extraordinary transaction is defined as any of the following:
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a transaction other
than in the ordinary course of business;
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a transaction that
is not on market terms; or
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a transaction that
may have a material impact on a company’s profitability, assets or liabilities.
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If
it is determined that an office holder has a personal interest in a transaction, approval by the board of directors is required
for the transaction, unless the company’s articles of association provide for a different method of approval. Our articles
of association do not provide otherwise. Further, so long as an office holder has disclosed his or her personal interest in a
transaction, the board of directors may approve an action by the office holder that would otherwise be deemed a breach of the
duty of loyalty. However, a company may not approve a transaction or action that is adverse to the company’s interest or
that is not performed by the office holder in good faith. An extraordinary transaction in which an office holder has a personal
interest requires approval of the company’s audit committee followed by the approval of the board of directors. The compensation
of, or an undertaking to indemnify or insure, an office holder who is not a director requires approval by the company’s
compensation committee, followed by the approval of the company’s board of directors, and, if such compensation arrangement
or an undertaking to indemnify or insure is inconsistent with the company’s stated compensation policy, or if the said office
holder is the chief executive officer of the company (apart from a number of specific exceptions), then such arrangement is subject
to the approval of a majority vote of the shares present and voting at a shareholders meeting, provided that either: (a) such
majority includes at least a majority of the shares held by all shareholders who are not controlling shareholders and do not have
a personal interest in the approval of such compensation arrangement (excluding abstaining shareholders); or (b) the total number
of shares of non-controlling shareholders and shareholders who do not have a personal interest in the approval of the compensation
arrangement and who vote against the arrangement does not exceed 2% of the company’s aggregate voting rights. We refer to
this as the Special Approval for Compensation. Arrangements regarding the compensation, indemnification or insurance of a director
require the approvals of the compensation committee, board of directors and shareholders by simple majority, and under certain
circumstances, a Special Approval for Compensation.
Generally,
a person who has a personal interest in a matter which is considered at a meeting of the board of directors or the audit committee
may not be present at such a meeting or vote on that matter unless the chairman of the relevant committee or board of directors,
as applicable, determines that he or she should be present in order to present the transaction that is subject to approval. Generally,
if a majority of the members of the audit committee or the board of directors, as applicable, have a personal interest in the
approval of a transaction, then all directors may participate in discussions of the audit committee or the board of directors,
as applicable. In the event a majority of the members of the board of directors have a personal interest in the approval of a
transaction, then the approval thereof shall also require the approval of the shareholders.
Disclosure
of Personal Interests of Controlling Shareholders and Approval of Certain Transactions
Pursuant
to the Companies Law, the disclosure requirements regarding personal interests that apply to directors and executive officers
also apply to a controlling shareholder of a public company. The approval of the audit committee or the compensation committee,
as the case may be, the board of directors and the shareholders of the company, in that order is required for (a) extraordinary
transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, (b) the engagement
with a controlling shareholder or his or her relative, directly or indirectly, for the provision of services to the company, (c)
the terms of engagement and compensation of a controlling shareholder or his or her relative who is not an office holder or (d)
the employment of a controlling shareholder or his or her relative by the company, other than as an office holder (collectively
referred as Transaction with a Controlling Shareholder). In addition, such shareholder approval requires one of the following,
which we refer to as a Special Majority:
|
●
|
at least a majority
of the shares held by all shareholders who do not have a personal interest in the transaction and who are present and voting
at the meeting approving the transaction, excluding abstentions; or
|
|
●
|
the shares voted
against the transaction by shareholders who have no personal interest in the transaction and who are present and voting at
the meeting do not exceed 2% of the voting rights in the company.
|
To
the extent that any such Transaction with a Controlling Shareholder is for a period extending beyond three years, approval is
required once every three years, unless, with respect to certain transactions, the audit committee determines that the duration
of the transaction is reasonable given the circumstances related thereto.
Arrangements
regarding the compensation, indemnification or insurance of a controlling shareholder in his or her capacity as an office holder
require the approval of the compensation committee, board of directors and shareholders by a Special Majority and the terms thereof
may not be inconsistent with the company’s stated compensation policy.
Pursuant
to regulations promulgated under the Companies Law, certain transactions with a controlling shareholder, a relative thereof, or
with a director, that would otherwise require approval of a company’s shareholders may be exempt from shareholder approval
upon certain determinations of the audit committee and board of directors.
The
Companies Law requires that every shareholder that participates, in person, by proxy or by voting instrument in a vote regarding
a transaction with a controlling shareholder, must indicate in advance or in the ballot whether or not that shareholder has a
personal interest in the vote in question. Failure to so indicate will result in the invalidation of that shareholder’s
vote.
Shareholder
Duties
Pursuant
to the Companies Law, a shareholder has a duty to act in good faith and in a customary manner toward the company and its other
shareholders and to refrain from abusing his or her power in the company, including, among other things, in voting at a general
meeting and at shareholder class meetings with respect to the following matters:
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●
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an amendment to
the company’s articles of association;
|
|
●
|
an increase of the
company’s authorized share capital;
|
|
●
|
the approval of
related party transactions and acts of office holders that require shareholder approval.
|
In
addition, a shareholder also has a general duty to refrain from discriminating against other shareholders.
In
addition, certain shareholders also have a duty of fairness toward the company. These shareholders include any controlling shareholder,
any shareholder who knows that he or she has the power to determine the outcome of a shareholder vote at a general meeting or
a shareholder class meeting, and any shareholder who has the power to appoint or to prevent the appointment of an office holder
of the company or other power towards the company. The Companies Law does not define the substance of the duty of fairness, except
to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty
to act with fairness.
Exculpation,
Insurance and Indemnification of Directors and Officers
Under
the Companies Law, a company may not exculpate an office holder from liability for a breach of the duty of loyalty. An Israeli
company may exculpate an office holder in advance from liability to the company, in whole or in part, for damages caused to the
company as a result of a breach of duty of care but only if a provision authorizing such exculpation is included in its articles
of association. Our articles of association include such a provision. The company may not exculpate in advance a director from
liability arising out of a prohibited dividend or distribution to shareholders.
Under
the Companies Law, a company may indemnify an office holder in respect of the following liabilities and expenses incurred for
acts performed by him or her as an office holder, either pursuant to an undertaking made in advance of an event or following an
event, provided its articles of association include a provision authorizing such indemnification:
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●
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monetary liability
imposed on him or her in favor of another person pursuant to a judgment, including a settlement or arbitrator’s award
approved by a court. However, if an undertaking to indemnify an office holder with respect to such liability is provided in
advance, then such an undertaking must be limited to certain events which, in the opinion of the board of directors, can be
foreseen based on the company’s activities when the undertaking to indemnify is given, and to an amount or according
to criteria determined by the board of directors as reasonable under the circumstances, and such undertaking shall detail
the abovementioned foreseen events and amount or criteria;
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●
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reasonable litigation
expenses, including attorneys’ fees, incurred by the office holder (i) 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 (A) no
indictment was filed against such office holder as a result of such investigation or proceeding; and (B) no financial liability,
such as a criminal penalty, was imposed upon him or her as a substitute for the criminal proceeding as a result of such investigation
or proceeding or, if such financial liability was imposed, it was imposed with respect to an offense that does not require
proof of criminal intent; and (ii) in connection with a monetary sanction; and
|
Under
the Companies Law and the Israeli Securities Law, a company may insure an office holder against the following liabilities incurred
for acts performed by him or her as an office holder if and to the extent provided in the company’s articles of association:
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●
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a breach of the
duty of loyalty to the company, provided that the office holder acted in good faith and had a reasonable basis to believe
that the act would not harm the company;
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●
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a breach of duty
of care to the company or to a third party, to the extent such a breach arises out of the negligent conduct of the office
holder; and
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●
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a monetary liability
imposed on the office holder in favor of a third party.
|
Under
our articles of association, we may insure and indemnify an office holder against the aforementioned liabilities as well as the
following liabilities:
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●
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a breach of duty
of care to the Company or to a third party;
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●
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any other action
which is permitted by law to insure an office holder against;
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●
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expenses incurred
and/or paid by the office holder in connection with an administrative enforcement procedure under any applicable law including
the Efficiency of Enforcement Procedures in the Securities Authority Law (legislation amendments), 5771-2011 and the Israeli
Securities Law, which we refer to as an Administrative Enforcement Procedure, and including reasonable litigation expenses
and attorney fees; and
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●
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a monetary liability
in favor or a victim of a felony pursuant to Section 52ND of the Israeli Securities Law.
|
Under
the Companies Law, a company may not indemnify, exculpate or insure an office holder against any of the following:
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●
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a breach of the
duty of loyalty, except for indemnification and insurance for a breach of the 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 harm the company;
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a breach of duty
of care committed intentionally or recklessly, excluding a breach arising solely out of the negligent conduct of the office
holder;
|
|
●
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an act or omission
committed with intent to derive illegal personal benefit; or
|
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●
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a civil or administrative
fine or forfeit levied against the office holder.
|
Under
the Companies Law, exculpation, indemnification and insurance of office holders in a public company must be approved by the compensation
committee and the board of directors and, with respect to certain office holders or under certain circumstances, also by the shareholders.
See “— Approval of Related Party Transactions under Israeli Law.”
Our
articles of association permit us to exculpate, indemnify and insure our office holders to the fullest extent permitted or to
be permitted by the Companies Law and the Israeli Securities Law.
We
have entered into agreements with each of our directors and executive officers exculpating them, to the fullest extent permitted
by law and our articles of association, and undertaking to indemnify them to the fullest extent permitted by law and our articles
of association. This indemnification is limited to events determined as foreseeable by the board of directors based on our activities,
and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances.
The
maximum indemnification amount set forth in such agreements is limited to an amount which shall not exceed 25% of our shareholders
equity based on our most recently audited or reviewed consolidated financial statements prior to actual payment of the indemnification
amount. Such maximum amount is in addition to any amount paid (if paid) under insurance and/or by a third-party pursuant to an
indemnification arrangement. In the opinion of the SEC, indemnification of directors and office holders for liabilities arising
under the Securities Act, however, is against public policy and therefore unenforceable.
We
have obtained directors’ and officers’ liability insurance for the benefit of our office holders and intend to continue
to maintain such coverage and pay all premiums thereunder to the fullest extent permitted by the Companies Law. In addition, prior
to the closing of our initial public offering in the United States, we entered into agreements with each of our office holders
undertaking to indemnify them to the fullest extent permitted by the Companies Law, including with respect to liabilities resulting
from the offering to the extent that these liabilities are not covered by insurance.
Code
of Ethics
In
November 2011, our board of directors adopted a Code of Ethics that was amended in April 2014, applicable to all of our directors,
officers, managers and employees, including our Chief Executive Officer, Chief Financial Officer, controller or principal accounting
officer, or other persons performing similar functions. Our board of directors further amended the Code of Ethics prior to the
effectiveness of the registration statement of our initial public offering in the United States so that the Code of Ethics qualifies
as a “code of ethics” as defined in Item 16B of Form 20-F promulgated by the SEC. Upon the effectiveness of the registration
statement of our initial public offering in the United States, the full text of the Code of Ethics was posted on our website at
www.intecpharma.com
. Information contained on, or that can be accessed through, our website does not constitute a part
of this annual report and is not incorporated by reference herein. If we make any amendment to the Code of Ethics or grant any
waivers, including any implicit waiver, from a provision of the Code of Ethics, we will disclose the nature of such amendment
or waiver on our website to the extent required by the rules and regulations of the SEC. Under Item 16B of the SEC’s Form
20-F, if a waiver or amendment of the Code of Ethics applies to our principal executive officer, principal financial officer,
principal accounting officer or controller and relates to standards promoting any of the values described in Item 16B(b) of Form
20-F, we are required to disclose such waiver or amendment on our website in accordance with the requirements of Instruction 4
to such Item 16B.
D.
Employees.
As
of December 31, 2017, we had 70 employees, four of whom were employed in management, seven of whom were employed in finance and
administration, 41 of whom were employed in research and development and operations, seven of whom were employed in clinical trials
and regulatory affairs and 11 of whom were employed in quality assurance. As of December 31, 2017, all of these employees are
located in Israel or the United States, where the Company employs two employees.
Israeli
labor laws principally govern the length of the workday, minimum wages for employees, procedures for hiring and dismissing employees,
determination of severance pay, annual leave, sick days, advance notice of termination of employment, equal opportunity and anti-discrimination
laws and other conditions of employment. Subject to certain exceptions, Israeli law generally requires severance pay upon the
retirement, death or dismissal of an employee, and requires us and our employees to make payments to the National Insurance Institute,
which is similar to the U.S. Social Security Administration. Our employees have defined benefit pension plans that comply with
applicable Israeli legal requirements, which also include the mandatory pension payments required by applicable law and allocations
for severance pay.
While
none of our employees are party to any collective bargaining agreements, certain provisions of the collective bargaining agreements
between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (including
the Industrialists’ Associations) are applicable to our employees by extension orders issued by the Israel Ministry of Economy
and Industry (previously the Israeli Ministry of Trade, Industry and Labor). These provisions primarily concern the length of
the workweek, pension fund benefits for all employees and for employees in the industry section, insurance for work-related accidents,
travel expenses reimbursement, holiday leave, convalescent payments and entitlement for vacation days. We generally provide our
employees with benefits and working conditions beyond the required minimums. We have never experienced any employment-related
work stoppages and believe our relationship with our employees is good.
E.
Share Ownership.
The
following table sets forth certain information regarding the beneficial ownership of our ordinary shares as of March 1, 2018 by:
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each of our directors
and executive officers;
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●
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all of our executive
officers and directors as a group; and
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●
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each person (or
group of affiliated persons) known by us to be the beneficial owner of more than 5% of the outstanding ordinary shares.
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Except
as otherwise indicated in the footnotes to this table, we believe the persons named in this table have sole voting and investment
power with respect to all the ordinary shares indicated.
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|
As
of March 1, 2018
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|
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|
Ordinary
Shares
|
|
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%
|
|
|
|
|
|
|
|
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Jeffrey A. Meckler
|
|
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126,761
|
(1)
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+
|
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Nadav Navon
|
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58,649
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(2)
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+
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Nir Sassi
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|
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24,572
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(3)
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+
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John W. Kozarich
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106,587
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(4)
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+
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|
Anthony J. Maddaluna
|
|
|
—
|
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|
—
|
|
Gil Bianco
|
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25,751
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(5)
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|
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+
|
|
Hila Karah
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|
18,251
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(6)
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|
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+
|
|
Issac Silberman
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25,751
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(5)
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+
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|
Walt A. Linscott
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|
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—
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(7)
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—
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R. Michael Gendreau
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|
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—
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(8)
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|
|
—
|
|
All executive officers and directors
as a group (10 people)
|
|
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386,322
|
(9)
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|
|
1.46
|
%
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Adage Capital Partners, L.P.
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|
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1,725,000
|
(10)
|
|
|
6.62
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%
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Meitav Dash Investments Ltd.
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|
|
2,191,705
|
(11)
|
|
|
8.41
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%
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venBio Select Advisor LLC
|
|
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2,195,705
|
(12)
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|
|
8.42
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%
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Acuta Capital Partners LLC
|
|
|
2,724,283
|
(13)
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10.44
|
%
|
*
|
Percentages and
number of ordinary shares calculated in accordance with SEC rules and based upon 26,075,770 ordinary shares issued and outstanding
as of March 1, 2018.
|
(1)
|
Consists of 21,761
ordinary shares and options to purchase 105,000 ordinary shares with an exercise price of $5.32 per share and with an expiration
date of April 10, 2027. All such options have vested or will vest within 60 days of March 1, 2018. Does not include 460,000
ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days of March 1, 2018.
|
(2)
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Consists of 14,024
ordinary shares, options to purchase 22,750 ordinary shares with an exercise price of $4.14 and with an expiration date of
March 27, 2026 and options to purchase 21,875 ordinary shares with an exercise price of $4.47 per share and with an expiration
date of July 25, 2026. All such options have vested or will vest within 60 days of March 1, 2018. Does not include 250,875
ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days of March 1, 2018.
|
(3)
|
Consists
of options to purchase 5,422 ordinary shares with an exercise price of NIS 52.35 per share and with an expiration date
of March 1, 2020, options to purchase 1,650 ordinary shares with an exercise price of $4.14 and with an expiration date
of March 27, 2026 and options to purchase 17,500 ordinary shares with an exercise price of $4.47 per share and with an
expiration date of July 25, 2026. All such options have vested or will vest within 60 days of March 1, 2018. Does not
include 164,150 ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days
of March 1, 2018.
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(4)
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Consists of 31,761
ordinary shares and options to purchase 74,826 ordinary shares with an exercise price of $3.526 per share and with an expiration
date of May 15, 2026. All such options have vested. Does not include 149,652 ordinary shares issuable upon exercise of outstanding
options that are not exercisable within 60 days of March 1, 2018.
|
(5)
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Consists of options
to purchase 10,751 ordinary shares with an exercise price of NIS 48.91 per share with an expiration date of July 1, 2020 and
options to purchase 15,000 ordinary shares with an exercise price of $6 per share and with an expiration date of April 21,
2026. All such options have vested or will vest within 60 days of March 1, 2018. Does not include 7,500 ordinary shares issuable
upon exercise of outstanding options that are not exercisable within 60 days of March 1, 2018.
|
(6)
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Consists
of options to purchase 10,751 ordinary shares with an exercise price of NIS 48.91 per share with an expiration date of
July 1, 2020 and options to purchase 7,500 ordinary shares with an exercise price of $6 per share and with an expiration
date of May 22, 2026. All such options have vested. Does not include 15,000 ordinary shares issuable upon exercise of
outstanding options that are not exercisable within 60 days of March 1, 2018.
|
(7)
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Does not include
200,000 ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days of March 1,
2018.
|
(8)
|
Does not include
250,000 ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days of March 1,
2018.
|
(9)
|
Consists of 67,546
ordinary shares and options to purchase 281,101 ordinary shares, which are currently exercisable and have vested or will become
vested within 60 days of March 1, 2018 with a weighted average exercise price of $ 4.71 and options to purchase 37,675 ordinary
shares, which are currently exercisable and have vested with a weighted average exercise price of NIS 49.1.
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|
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(10)
|
Based on a Schedule
13G filed with the SEC on August 25, 2017.
|
|
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(11)
|
Based
on a Schedule 13G filed with the SEC on January 8, 2018.
|
(12)
|
Based on a Schedule
13G filed with the SEC on February 12, 2018.
|
|
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(13)
|
Based on a Schedule
13G filed with the SEC on February 14, 2018.
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To
our knowledge, the significant changes in the percentage of ownership held by our major shareholders during the past three years
have been: (i) the increase in the percentage of ownership held by venBio Select Advisor LLC above 5% in 2017; (ii) the increase
in the percentage of ownership held by Acuta Capital Partners LLC above 5% in 2017; (iii) the increase in the percentage of ownership
held by Meitav Dash Investments Ltd. above 5% in 2017; (iv) the increase above 5% and later decrease below 5% in the percentage
of ownership held by Ayalim Mutual Funds Ltd.; (v) the increase in the percentage of ownership held by Adage Capital Partners,
L.P. above 5% in 2017; (vi) the increase above 5% and later decrease below 5% in the percentage of ownership held by Migdal Insurance
& Financial Holdings Ltd. in 2017, (vii) the increase above 5% and later decrease below 5% in the percentage of ownership
held by the Phoenix Holdings Ltd., Excellence Holdings Ltd., Itshak Sharon (Tshuva) and Delek Group Ltd. in 2016; (vii) the increase
in 2015 above 5% and later decrease in 2016 below 5% in the percentage of ownership held by Sabby Healthcare Master Fund, Ltd.;
(viii) the increase in 2015 above 5% and later decrease in 2016 below 5% in the percentage of ownership held by Opaleye Management
Inc.; and (iv) the increase in the percentage of ownership held by Cormorant Asset Management, LLC above 5% in 2015.
As
of March 1, 2018, our ordinary shares were held by one registered holder (not including CEDE & Co. and Registration Co, of
United Mizrahi Bank Ltd.). Based on the information provided to us by our transfer agent, as of March 1, 2018, one registered
holder was a U.S. domiciled holder and held approximately 0.08% of our outstanding ordinary shares.
ITEM
7. Major Shareholders and Related Party Transactions.
A.
Major Shareholders.
Except
as set forth in “Item 6. Directors, Senior Management and Employees—E. Share Ownership,” to the best of our
knowledge, no other person who we know beneficially owns 5.0% or more of the Company’s ordinary shares outstanding as of
March 1, 2018. None of our shareholders has different voting rights from other shareholders. Other than as described herein, to
the best of our knowledge, we are not owned or controlled, directly or indirectly, by another corporation, by any foreign government
or by any natural person or legal persons, severally or jointly, and we are not aware of any arrangement that may, at a subsequent
date, result in a change of control of our Company.
B.
Related Party Transactions
The
following is a description of some of the transactions with related parties to which we are party and which were in effect within
the past three fiscal years. The descriptions provided below are summaries of the terms of such agreements and do not purport
to be complete and are qualified in their entirety by the complete agreements.
We
believe that we have executed all of our transactions with related parties on terms no less favorable to us than those we could
have obtained from unaffiliated third parties. See “Item 6. Directors, Senior Management and Employees — C. Board
Practices — Approval of Related Party Transactions under Israeli Law.”
Indemnification
Agreements
Our
articles of association permit us to exculpate, indemnify and insure our directors and officeholders to the fullest extent permitted
by the Companies Law. We have obtained directors’ and officers’ insurance for each of our officers and directors and
have entered into indemnification agreements with all of our current officers and directors.
We
have entered into indemnification and exculpation agreements with each of our current office holders and directors exculpating
them to the fullest extent permitted by the law and our articles of association and undertaking to indemnify them to the fullest
extent permitted by the law and our articles of association, including with respect to liabilities resulting from this annual
report, to the extent such liabilities are not covered by insurance. See “Item 6. Directors, Senior Management and Employees
— C. Board Practices — Exculpation, Insurance and Indemnification of Directors and Officers.”
2017
Private Placement
In
March 2017, we completed a private placement of 2,289,638 of our ordinary shares with various investors at a price of $4.40 per
share, for gross proceeds of approximately $10 million. The chairman of our board of directors, Dr. John Kozarich, and two other
(former) directors, Messrs. Zvi Joseph and Giora Carni, participated in the private placement. On April 7, 2017, we filed a registration
statement under the Securities Act to register for resale most of the ordinary shares issued in the private placement for those
purchasers which elected to register their ordinary shares.
Employment
and Consulting Agreements
We
have entered into written employment agreements with each of our executive officers. These agreements provide for notice periods
of varying duration for termination of the agreement by us or by the relevant executive officer, during which time the executive
officer will continue to receive base salary and benefits. These agreements also contain customary provisions regarding confidentiality
of information and ownership of inventions. Since our inception we have granted options to purchase our ordinary shares to our
officers and certain of our directors. Such award agreements contain acceleration provisions upon certain events. We describe
our option plans under “Item 6.B. Compensation—Equity Compensation Plans” and the equity-based compensation
received by certain of our executive officers in “Item 6.B. Compensation— Employment and Service Agreements.”
Additionally,
we have entered into employment agreements with our former directors, Messrs. Zeev Weiss, Giora Carni and Zvi Joseph for their
continued service to the Company (on a reduced scope of work and for a limited term). Mr. Weiss’ agreement (40% scope of
employment) is for a term starting on October 1, 2017 and ending June 30, 2019 for a monthly fee of NIS 25,000, Mr. Carni’s
agreement (50% scope of employment) is for a term starting on December 12, 2017 and ending June 11, 2019 for a monthly fee of
NIS 35,000 and Mr. Joseph’s agreement (50% scope of employment) is for a term starting on December 12, 2017 and ending June
11, 2019 for a monthly fee of NIS 25,000. For additional information on Mr. Carni’s equity-based compensation see “Item
6.B. Compensation— Employment and Service Agreements.”
As
of December 31, 2017, Mr. Joseph held options to purchase 75,463 ordinary shares with a weighted exercise price of NIS 30.1, of
which 26,000 were vested and 49,463 will accelerate in the event that a material agreement, as defined in our previous compensation
policy, is signed between us and a third party. In addition, as of December 31, 2017, Mr. Joseph also held options to purchase
95,250 ordinary shares that will vest over time (or immediately upon the earlier of: (i) the closing of a merger agreement, as
defined in our 2015 Plan, or (ii) if Mr. Joseph is terminated without cause prior to June 11, 2019) with an exercise price of
$6.15 per share. None of these options were vested as of December 31, 2017. As of December 31, 2017, Mr. Weiss held options to
purchase 97,023 ordinary shares with a weighted exercise price of NIS 28.55, of which 40,000 were vested and 57,023 will vest
in the event that a material agreement, as defined in our previous compensation policy, is signed between us and a third party.
In addition, as of December 31, 2017, Mr. Weiss also held options to purchase 35,000 ordinary shares that will vest over time
(or immediately upon the earlier of: (i) the closing of a merger agreement, as defined in our 2015 Plan, or (ii) if Mr. Weiss
is terminated without cause prior to June 30, 2019) with an exercise price of $7.44 per share. None of these options were vested
as of December 31, 2017.
C.
Interests of Experts and Counsel.
Not
applicable.
ITEM
8. Financial Information.
A.
Financial Statements and Other Financial Information.
See
“Item 18. Financial Statements” for a list of all consolidated financial statements filed as part of this annual report
on Form 20-F.
Legal
Matters
We
are not, nor have we been in the last fiscal year, a party to any legal or arbitration proceedings, including those relating to
bankruptcy, receivership or similar proceedings and those involving any third-party, nor any governmental proceedings pending
or known to be contemplated, which may have, or have had in the recent past, significant effects on the company’s financial
position or profitability.
Dividend
Policy
We
have never declared or paid cash dividends to our shareholders. Currently we do not intend to pay cash dividends. We intend to
reinvest any earnings in developing and expanding our business. Any future determination relating to our dividend policy will
be at the discretion of our board of directors and will depend on a number of factors, including future earnings, our financial
condition, operating results, contractual restrictions, capital requirements, business prospects, applicable Israeli law and other
factors our board of directors may deem relevant. Accordingly, we have not appointed any paying agent.
In
addition, the distribution of dividends is limited by the Companies Law, which permits the distribution of dividends only out
of distributable profits. See “Item 10. Additional Information — B. Memorandum and Articles of Association. In addition,
if we pay a dividend out of income attributed to our Benefited Enterprise during the tax exemption period, we may be subject to
tax on the grossed-up amount of such income at the corporate tax rate which would have been applied to such Benefited Enterprise’s
income had we not enjoyed the exemption. See “Item 10. Additional Information—E. Taxation.”
B.
Significant Changes.
No
significant changes with respect to our consolidated financial statements have occurred since December 31, 2017.
ITEM
9. The Offer and Listing.
A.4
Offer and Listing Details
Our
ordinary shares have been listed on the Nasdaq Capital Market under the symbol “NTEC” since August 2015. Prior to
that date, there was no public trading market for our ordinary shares in the United States. Our initial public offering was priced
at $6.00 per share. The following table sets forth for the periods indicated the high and low sales prices per ordinary share
as reported on the NASDAQ Capital Market:
|
|
Low
|
|
|
High
|
|
Annual Information:
|
|
|
|
|
|
|
|
|
2015 (commencing as of August 4, 2015)
|
|
$
|
5.25
|
|
|
$
|
6.19
|
|
2016
|
|
|
3.03
|
|
|
|
6.36
|
|
2017
|
|
|
4.20
|
|
|
|
9.80
|
|
Quarterly Information
|
|
|
|
|
|
|
|
|
First Quarter 2016
|
|
$
|
3.05
|
|
|
$
|
5.21
|
|
Second Quarter 2016
|
|
|
3.03
|
|
|
|
4.91
|
|
Third Quarter 2016
|
|
|
4.14
|
|
|
|
6.36
|
|
Fourth Quarter 2016
|
|
|
4.45
|
|
|
|
6.10
|
|
First Quarter 2017
|
|
|
4.20
|
|
|
|
5.70
|
|
Second Quarter 2017
|
|
|
4.95
|
|
|
|
5.99
|
|
Third Quarter 2017
|
|
|
4.80
|
|
|
|
9.80
|
|
Fourth Quarter 2017
|
|
|
4.85
|
|
|
|
9.45
|
|
First Quarter 2018 (through March 7, 2018)
|
|
|
5.25
|
|
|
|
7.50
|
|
Monthly Information
|
|
|
|
|
|
|
|
|
October 2017
|
|
$
|
7.85
|
|
|
$
|
9.45
|
|
November 2017
|
|
|
5.35
|
|
|
|
8.55
|
|
December 2017
|
|
|
4.85
|
|
|
|
5.85
|
|
January 2018
|
|
|
5.25
|
|
|
|
7.50
|
|
February 2018
|
|
|
5.50
|
|
|
|
6.55
|
|
March 2018 (through March 7, 2018)
|
|
|
5.75
|
|
|
|
6.30
|
|
Our
ordinary shares have been listed on the TASE under the symbol “NTEC” since February 2010. Prior to that date, there
was no public trading market for our ordinary shares in Israel. Our initial public offering was priced at NIS 45.28* per share.
The following table sets forth for the periods indicated the high and low sales prices per ordinary share as reported on the TASE:
|
|
Low
|
|
|
High
|
|
Annual Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013*
|
|
|
NIS
|
|
|
|
32.70
|
|
|
|
NIS
|
|
|
|
79.40
|
|
2014*
|
|
|
|
|
|
|
17.50
|
|
|
|
|
|
|
|
53.45
|
|
2015
|
|
|
|
|
|
|
20.15
|
|
|
|
|
|
|
|
36.80
|
|
2016
|
|
|
|
|
|
|
11.50
|
|
|
|
|
|
|
|
24.49
|
|
2017
|
|
|
|
|
|
|
15.30
|
|
|
|
|
|
|
|
34.48
|
|
Quarterly Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter 2016
|
|
|
NIS
|
|
|
|
13.05
|
|
|
|
NIS
|
|
|
|
21.99
|
|
Second Quarter 2016
|
|
|
|
|
|
|
11.50
|
|
|
|
|
|
|
|
19.15
|
|
Third Quarter 2016
|
|
|
|
|
|
|
16.62
|
|
|
|
|
|
|
|
24.49
|
|
Fourth Quarter 2016
|
|
|
|
|
|
|
17.20
|
|
|
|
|
|
|
|
21.80
|
|
First Quarter 2017
|
|
|
|
|
|
|
15.30
|
|
|
|
|
|
|
|
21.70
|
|
Second Quarter 2017
|
|
|
|
|
|
|
18.11
|
|
|
|
|
|
|
|
20.50
|
|
Third Quarter 2017
|
|
|
|
|
|
|
17.42
|
|
|
|
|
|
|
|
34.48
|
|
Fourth Quarter 2017
|
|
|
|
|
|
|
17.00
|
|
|
|
|
|
|
|
33.44
|
|
First Quarter 2018 (through March 7, 2018)
|
|
|
|
|
|
|
17.99
|
|
|
|
|
|
|
|
26.70
|
|
Monthly Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2017
|
|
|
NIS
|
|
|
|
27.60
|
|
|
|
NIS
|
|
|
|
33.44
|
|
November 2017
|
|
|
|
|
|
|
20.67
|
|
|
|
|
|
|
|
30.61
|
|
December 2017
|
|
|
|
|
|
|
17.00
|
|
|
|
|
|
|
|
20.20
|
|
January 2018
|
|
|
|
|
|
|
17.99
|
|
|
|
|
|
|
|
26.70
|
|
February 2018
|
|
|
|
|
|
|
19.20
|
|
|
|
|
|
|
|
22.70
|
|
March 2018 (through March 7, 2018)
|
|
|
|
|
|
|
20.81
|
|
|
|
|
|
|
|
21.69
|
|
* adjusted to reflect a 50-to-1 reverse share split of the Company’s ordinary shares effect on March 29, 2015.
B.
Plan of distribution
Not
applicable.
C.
Market for Ordinary Shares
Our
ordinary shares have been quoted on the NASDAQ Capital Market since August 2015 under the symbol “NTEC” and on the
TASE since February 2010 under the symbol “NTEC”.
D.
Selling shareholders
Not applicable.
E.
Dilution
Not
applicable.
F.
Expenses of the issue
Not
applicable.
ITEM
10. Additional Information.
A.
Share Capital.
Not
applicable.
B.
Memorandum and Articles of Association.
The
following are summaries of material provisions of our articles of association and the Companies Law insofar as they relate to
the material terms of our ordinary shares.
Holders
of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders at a shareholder
meeting. Shareholders may vote at shareholder meetings either in person, by proxy or by written ballot. The Companies Law does
not allow public companies to adopt shareholder resolutions by means of written consent in lieu of a shareholder meeting, and
accordingly, our articles of association do not allow shareholders to approve corporate matters by written consent. The board
of directors shall determine and provide a record date for each shareholders meeting and all shareholders at such record date
may vote. Unless stipulated differently in the Companies Law or in our articles of association, all shareholders’ resolutions
shall be approved by a simple majority vote. Except as otherwise disclosed herein, an amendment to our articles of association
requires the prior approval of a simple majority of our shares represented and voting at a general meeting and of the holders
of a class of shares whose rights are being affected (or the consent in writing of all the holders of such class of shares). Our
number with the Israeli Registrar of Companies is 513022780. Our purpose is set forth in Section 3 of our articles of association
and includes every lawful purpose.
Our
ordinary shares that are fully paid for are issued in registered form and may be freely transferred under our articles of association,
unless the transfer is restricted or prohibited by applicable law or the rules of a stock exchange on which the shares are traded.
The ownership or voting of our ordinary shares by non-residents of Israel is not restricted in any way by our articles of association
or Israeli law, except for ownership by nationals of some countries that are, or have been, in a state of war with Israel.
Pursuant
to the Companies Law and our articles of association, our board of directors may exercise all powers and take all actions that
are not required under law or under our articles of association to be exercised or taken by our shareholders, including the power
to borrow money for company purposes.
Our
articles of association enable us to increase or reduce our share capital. Any such changes are subject to the provisions of the
Companies Law and must be approved by a resolution duly passed by our shareholders at a general or special meeting by voting on
such change in the capital. In addition, transactions that have the effect of reducing capital, such as the declaration and payment
of dividends in the absence of sufficient retained earnings and profits and an issuance of shares for less than their nominal
value, require a resolution of our board of directors and court approval.
Dividends
Under
the Companies Law, we may declare and pay dividends only if, upon the determination of our board of directors, there is no reasonable
concern that the distribution will prevent us from being able to meet the terms of our existing and foreseeable obligations as
they become due. Under the Companies Law, the distribution amount is further limited to the greater of retained earnings or earnings
generated over the two most recent years legally available for distribution according to our then last reviewed or audited consolidated
financial statements, provided that the date of the consolidated financial statements is not more than six months prior to the
date of distribution. In the event that we do not have retained earnings or earnings generated over the two most recent years
legally available for distribution, we may seek the approval of the court in order to distribute a dividend. The court may approve
our request if it is convinced that there is no reasonable concern that the payment of a dividend will prevent us from satisfying
our existing and foreseeable obligations as they become due.
Shareholder
Meetings
Under
the Companies Law, we are required to hold an annual general meeting of our shareholders once in every calendar year and no later
than 15 months following the date of the previous annual general meeting. All meetings other than the annual general meeting of
shareholders are referred to as special general meetings. Our board of directors may call special general meetings whenever it
deems fit, at such time and place, within or outside of Israel, as it may determine. In addition, the Companies Law and our articles
of association provide that our board of directors is required to convene a special meeting upon the written request of (i) any
two of our directors or one quarter of the directors then in office (ii) one or more shareholders holding, in the aggregate, 5%
of the our issued share capital and 1% of our outstanding voting power or 5% of our outstanding voting power.
Subject
to the provisions of the Companies Law and the regulations promulgated thereunder, shareholders entitled to participate and vote
at general meetings are the shareholders of record on a date to be decided by the board of directors. Furthermore, the Companies
Law and our articles of association require that resolutions regarding the following matters must be passed at a general meeting
of our shareholders:
|
●
|
amendments to our
articles of association;
|
|
●
|
appointment or termination
of our auditors;
|
|
●
|
appointment of directors
and appointment and dismissal of external directors;
|
|
●
|
approval of acts
and transactions requiring general meeting approval pursuant to the Companies Law;
|
|
●
|
director compensation,
indemnification and change of the principal executive officer;
|
|
●
|
increases or reductions
of our authorized share capital;
|
|
●
|
the exercise of
our board of directors’ powers by a general meeting, if our board of directors is unable to exercise its powers and
the exercise of any of its powers is required for our proper management; and
|
|
●
|
authorizing the
chairman of the board of directors or his relative to act as the company’s chief executive officer or act with such
authority; or authorize the company’s chief executive officer or his relative to act as the chairman of the board of
directors or act with such authority.
|
The
Companies Law requires that a notice of any annual or special shareholders meeting be provided at least 21 days prior to the meeting
and if the agenda of the meeting includes the appointment or removal of directors, the approval of transactions with office holders
or interested or related parties, or an approval of a merger, notice must be provided at least 35 days prior to the meeting.
Pursuant
to our articles of association, holders of our ordinary shares have one vote for each ordinary share held on all matters submitted
to a vote before the shareholders at a general meeting.
Quorum
The
quorum required for our general meetings of shareholders consists of at least two shareholders present in person, by proxy or
written ballot who hold or represent between them at least 25% of the total outstanding voting rights, within half an hour from
the appointed time.
A
meeting adjourned for lack of a quorum is adjourned to the same day in the following week at the same time and place or on a later
date if so specified in the summons or notice of the meeting. At the reconvened meeting, any number of our shareholders present
in person or by proxy shall constitute a lawful quorum.
Resolutions
Our
articles of association provide that all resolutions of our shareholders require a simple majority vote, unless otherwise required
by applicable law.
Under
the Companies Law, a shareholder of a public company may vote in a meeting and in a class meeting by means of a written ballot
in which the shareholder indicates how he or she votes on resolutions relating to the following matters:
|
●
|
an appointment or
removal of directors;
|
|
●
|
an approval of transactions
with office holders or interested or related parties, that require shareholder approval;
|
|
●
|
an approval of a
merger;
|
|
●
|
authorizing the
chairman of the board of directors or his relative to act as the company’s chief executive officer or act with such
authority; or authorize the company’s chief executive officer or his relative to act as the chairman of the board of
directors or act with such authority;
|
|
●
|
any other matter
that is determined in the articles of association to be voted on by way of a written ballot (our articles of association do
not stipulate any additional matters); and
|
|
●
|
other matters which
may be prescribed by Israel’s Minister of Justice.
|
The
provision allowing the vote by written ballot does not apply where the voting power of the controlling shareholder is sufficient
to determine the vote.
The
Companies Law provides that a shareholder, in exercising his or her rights and performing his or her obligations toward the company
and its other shareholders, must act in good faith and in a customary manner, and avoid abusing his or her power. This is required
when voting at general meetings on matters such as changes to the articles of association, increasing the company’s registered
capital, mergers and approval of certain interested or related party transactions. A shareholder also has a general duty to refrain
from depriving any other shareholder of its rights as a shareholder. In addition, any controlling shareholder, any shareholder
who knows that its vote can determine the outcome of a shareholder’s vote and any shareholder who, under such company’s
articles of association, can appoint or prevent the appointment of an office holder or has other power towards the company, is
required to act with fairness towards the company. The Companies Law does not describe the substance of this duty except that
the remedies generally available upon a breach of contract will also apply to a breach of the duty to act with fairness, and,
to the best of our knowledge, there is no binding case law that addresses this subject directly.
Under
the Companies Law, unless provided otherwise in a company’s articles of association, a resolution at a shareholders meeting
requires approval by a simple majority of the voting rights represented at the meeting, in person, by proxy or written ballot,
and voting on the resolution. Generally, a resolution for the voluntary winding up of the company requires the approval of holders
of 75% of the voting rights represented at the meeting, in person, by proxy or by written ballot and voting on the resolution.
In
the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of
our ordinary shares in proportion to their shareholdings. This right, as well as the right to receive dividends, may be affected
by the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential rights that
may be authorized in the future.
Access
to Corporate Records
Under
the Companies Law, all shareholders of a company generally have the right to review minutes of the company’s general meetings,
its shareholders register and principal shareholders register, its articles of association, its consolidated financial statements
and any document the company is required by law to file publicly with the Israeli Companies Registrar and the ISA. Any of our
shareholders may request access to review any document in our possession that relates to any action or transaction with a related
party, interested party or office holder that requires shareholder approval under the Companies Law. We may deny a request to
review a document if we determine that the request was not made in good faith, that the document contains a commercial secret
or a patent or that the document’s disclosure may otherwise prejudice our interests.
Acquisitions
under Israeli Law
Full
Tender Offer
A
person wishing to acquire shares or a class of shares of an Israeli public company and who would, as a result, own more than 90%
of the target company’s issued and outstanding share capital or of a certain class of its shares, is required by the Companies
Law to make a full tender offer (as defined in the Companies Law) to all of the company’s shareholders for the purchase
of all of the issued and outstanding shares of the company or class of shares. If either (i) the shareholders who do not accept
the offer hold, in the aggregate, less than 5% of the issued and outstanding share capital of the company or of the applicable
class, and more than half of the shareholders who do not have a personal interest in the offer accept the offer, or (ii) the shareholder
who do not accept the offer hold less than 2% of the issued and outstanding share capital of the company or of the applicable
class, then all of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law. However,
a shareholder that had its shares so transferred, whether or not it accepted the tender offer (unless otherwise provided in the
offering memorandum), may, within six months from the date of acceptance of the tender offer, petition the court to determine
that the tender offer was for less than fair value and that the fair value should be paid as determined by the court. If the shareholders
who did not accept the tender offer hold at least 5% of the issued and outstanding share capital of the company or of the applicable
class of shares, the acquirer may not acquire shares of the company that will increase its holdings to more than 90% of the company’s
issued and outstanding share capital or of the applicable class from shareholders who accepted the tender offer.
Special
Tender Offer
According
to the Companies Law, an acquisition pursuant to which a purchaser shall hold a “controlling stake”, that is defined
as 25% or more of the voting rights if no other shareholder holds a controlling stake, or an acquisition pursuant to which such
purchaser shall hold more than 45% of the voting rights of the company if no other shareholder owns more than 45% of the voting
rights, may not be performed by way of market accumulation, but only by way of a special tender offer (as defined in the Companies
Law) made to all of the company’s shareholders on a pro rata basis. A special tender offer may not be consummated unless
a majority of the shareholders who announced their stand on such offer have accepted it (in counting the total votes of such shareholders,
shares held by the controlling shareholders, shareholders who have personal interest in the offer, shareholders who own 25% or
more of the voting rights in the company, relatives or representatives of any of the above or the bidder and corporations under
their control, shall not be taken into account). A shareholder may be free to object to such an offer without such objection being
deemed as a waiver of his right to sell its respective shares if the transaction is approved by a majority of the company’s
shareholders despite his objection. Ordinary shares purchased not in accordance with those provisions shall become “dormant
shares” and shall not grant the purchaser any rights so long as they are held by the purchaser. If a special tender offer
is accepted, then the purchaser or any person or entity controlling it or under common control with the purchaser or such controlling
person or entity may not make a subsequent tender offer for the purchase of shares of the target company and may not enter into
a merger with the target company for a period of one year from the date of the offer, unless the purchaser or such person or entity
undertook to effect such an offer or merger in the initial special tender offer.
Under
regulations enacted pursuant to the Companies Law, the above special tender offer requirements may not apply to companies whose
shares are listed for trading on a foreign stock exchange if, among other things, the relevant foreign laws or the rules of the
stock exchange, include provisions limiting the percentage of control which may be acquired or that the purchaser is required
to make a tender offer to the public. However, the ISA’s opinion is that such leniency does not apply with respect to companies
whose shares are listed for trading on stock exchanges in the United States, including the NASDAQ Capital Market, which do not
provide for sufficient legal restrictions on obtaining control or an obligation to make a tender offer to the public, therefore
the special tender offer requirements shall apply to such companies.
Merger
The
Companies Law permits merger transactions if approved by each party’s board of directors and, unless certain requirements
described under the Companies Law are met, a majority of each party’s shares voted on the proposed merger at a shareholders’
meeting called with at least 35 days’ prior notice.
For
purposes of the shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if a majority of the
shares represented at the shareholders meeting that are held by parties other than the other party to the merger, or by any person
who holds 25% or more of the outstanding shares or the right to appoint 25% or more of the directors of the other party, vote
against the merger. If the transaction would have been approved but for the separate approval of each class or the exclusion of
the votes of certain shareholders as provided above, a court may still approve the merger upon the request of holders of at least
25% of the voting rights of a company, if the court holds that the merger is fair and reasonable, taking into account the value
of the parties to the merger and the consideration offered to the shareholders.
Upon
the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that
there exists a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations
of any of the parties to the merger, and may further give instructions to secure the rights of creditors.
In
addition, a merger may not be completed unless at least 50 days have passed from the date that a proposal for approval of the
merger was filed by each party with the Israeli Registrar of Companies and 30 days have passed from the date the merger was approved
by the shareholders of each party.
Antitakeover
Measures
The
Companies Law allows us to create and issue shares having rights different from those attached to our ordinary shares, including
shares providing certain preferred rights, distributions or other matters and shares having preemptive rights. As of the date
of this annual report, we do not have any authorized or issued shares other than our ordinary shares. In the future, if we do
create and issue a class of shares other than ordinary shares, such class of shares, depending on the specific rights that may
be attached to them, may delay or prevent a takeover or otherwise prevent our shareholders from realizing a potential premium
over the market value of their ordinary shares. The authorization of a new class of shares will require an amendment to our articles
of association which requires the prior approval of the holders of a majority of our shares at a general meeting. In addition,
the rules and regulations of the TASE also limit the terms permitted with respect to a new class of shares and prohibit any such
new class of shares from having voting rights. Shareholders voting in such meeting will be subject to the restrictions provided
in the Companies Law as described above.
C.
Material Contracts.
The
following are summary descriptions of certain material agreements to which we are a party. The descriptions provided below do
not purport to be complete and are qualified in their entirety by the complete agreements, which are attached as exhibits to this
annual report on Form 20-F.
For
a description of our material agreements relating to our strategic collaborations and research arrangements and other material
agreements, please refer to “Item 4. Information on the Company.”
Employment
Agreements
See
“Item 6. Directors, Senior Management and Employees—B. Compensation—Employment Agreements and Arrangements with
Directors and Related Parties.”
2017
Private Placement
See
“Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — 2017 Private Placement.”
Underwriting
Agreement
On
August 16, 2017, we entered into an Underwriting Agreement (the “Underwriting Agreement”) with Oppenheimer & Co
Inc., as representative of the several underwriters named therein (the “Underwriters”), relating to an underwritten
public offering of 10,630,000 of our ordinary shares at a public offering price of $4.70 per ordinary share. Under the terms of
the Underwriting Agreement, the Company granted the Underwriters a 30-day option to purchase up to an aggregate of 1,594,500 additional
ordinary shares, which option was exercised in full. The net proceeds to our Company from the offering was approximately $53.6
million, after deducting underwriting discounts and commissions and other offering expenses payable by us. The Underwriting Agreement
contains customary representations, warranties, covenants and indemnification rights for transactions of this type
D.
Exchange Controls.
There
are no Israeli government laws, decrees or regulations that restrict or that affect our export or import of capital or the remittance
of dividends, interest or other payments to non-resident holders of our securities, including the availability of cash and cash
equivalents for use by us and our wholly-owned subsidiaries, except for ownership by nationals of certain countries that are,
or have been, declared as enemies of Israel or otherwise as set forth under “Item 10. Additional Information—E. Taxation.”
E.
Taxation.
The
following is a summary of the material Israeli tax laws applicable to us, and some Israeli Government programs benefiting us.
This section also contains a discussion of some Israeli tax consequences to persons owning our ordinary shares. This summary does
not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment
circumstances or to some types of investors subject to special treatment under Israeli law. Examples of this kind of investor
include traders in securities or persons that own, directly or indirectly, 10% or more of our outstanding voting capital, all
of whom are subject to special tax regimes not covered in this discussion. Some parts of this discussion are based on a new tax
legislation which has not been subject to judicial or administrative interpretation. The discussion should not be construed as
legal or professional tax advice and does not cover all possible tax considerations.
SHAREHOLDERS
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE ISRAELI OR OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION
OF OUR ORDINARY SHARES, INCLUDING, IN PARTICULAR, THE EFFECT OF ANY FOREIGN, STATE OR LOCAL TAXES.
General
Corporate Tax Structure in Israel
Israeli
companies are generally subject to corporate tax on their taxable income at the rate of 24% for the 2017 tax year (23% in 2018
and thereafter). However, the effective tax rate payable by a company that derives income from an Approved Enterprise, a Benefited
Enterprise, a Preferred Enterprise or a Technology Enterprise (as discussed below) may be considerably less. Capital gains derived
by an Israeli resident company are subject to tax at the prevailing corporate tax rate.
Law
for the Encouragement of Industry (Taxes), 1969
The
Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law, defines an “Industrial Company”
as an Israeli resident company incorporated in Israel, of which 90% or more of its income in any tax year, other than income from
certain government loans, is derived from an “Industrial Enterprise” owned by it and located in Israel or in the “Area”,
in accordance with the definition in the section 3a of the Ordinance. An “Industrial Enterprise” is defined as an
enterprise which is held by an Industrial Company whose principal activity in any given tax year is industrial production.
The
following tax benefits, among others, are available to Industrial Companies:
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amortization over
an eight-year period of the cost of patents and rights to use a patent and know-how that were purchased in good faith and
are used for the development or advancement of the Industrial Enterprise, commencing from the tax year where the Industrial
Enterprise began to use them;
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under certain conditions,
the right to elect to file consolidated tax returns with Israeli Industrial Companies controlled by it; and
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expenses related
to a public offering are deductible in equal amounts over three years commencing on the year of the offering.
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We
believe that we qualify as an “Industrial Company” within the meaning of the Industry Encouragement Law. There can
be no assurance that we will continue to qualify as an Industrial Company or that the benefits described above will be available
to us in the future.
Tax
Benefits under the Law for the Encouragement of Capital Investments, 1959
Tax
benefits prior to the 2005 Amendment
The
Law for the Encouragement of Capital Investments, 1959, generally referred to as the “Investments Law”, provides that
a capital investment in eligible facilities may, upon application to the Israeli Authority for Investments and Development of
the Ministry of Economy and Industry of the State of Israel (“Investment Center”), be granted the status of an Approved
Enterprise. Each certificate of approval for an Approved Enterprise relates to a specific investment program delineated both by
its financial scope, including sources of funds, and by its physical characteristics of the facility or other assets, e.g., the
equipment to be purchased and utilized pursuant to the program.
The
tax benefits under the Investments Law also apply to income generated by a company from the grant of a usage right with respect
to know-how developed pursuant to the Approved Enterprise, income generated from royalties, and income derived from a service
which is auxiliary to such usage right or royalties, provided that such income is generated within the ordinary course of business
of the company investing in the Approved Enterprise.
If
a company has more than one approval or only a portion of its capital investments is approved, its effective tax rate is the result
of a weighted average of the applicable rates. The tax benefits under the Investments Law are not, generally, available with respect
to income derived from products manufactured outside of Israel. In addition, the tax benefits available to a company investing
in an Approved Enterprise are contingent upon the fulfillment of conditions stipulated in the Investments Law and related regulations
and the criteria set forth in the specific certificate of approval, as described above. In the event that a company does not meet
these conditions, it would be required to refund the amount of tax benefits, plus a consumer price index linked adjustment and
interest, or other monetary penalty.
A
company that has an Approved Enterprise program and which qualifies as a foreign investment company (a “FIC”) will
be eligible for a three-year extension of tax benefits following the expiration of the seven-year period referenced above. In
addition, in the event that the level of foreign ownership in an Approved Enterprise reaches 49% or higher, the corporate tax
rate applicable to income earned from the Approved Enterprise is reduced as follows:
% of Foreign
Ownership
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Tax
Rate
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49%
or more but less than 74%
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20
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%
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74% or more but
less than 90%
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15
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%
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90% or more
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10
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%
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Additionally,
a company may elect to forgo its entitlements to grants and tax benefits under the grant track and apply for alternative package
of tax benefits for a benefit period of between seven and ten years (the “Alternative Track”). Under the Alternative
Track, a company’s undistributed income derived from the Approved Enterprise will be exempt from corporate tax for a period
of between two and ten years, starting from the first year the company derives taxable income under the Approved Enterprise program.
The length of time of this exemption will depend on the geographic location of the Approved Enterprise within Israel. After the
exemption period lapses, the company is subject to tax at a reduced corporate tax rate of between 10% to 25% depending on the
level of foreign investment in the company in each year, as detailed above, for the remainder of the benefit period.
A
company that has elected the Alternative Track and subsequently pays a dividend out of income derived from the Approved Enterprise
during the tax exemption period will be subject to corporate tax on the amount which is determined by the distributed amount (grossed
up to reflect such pre-tax income that it would have had to earn in order to distribute the dividend) with the effective corporate
tax rate which would have been applied had the company not elected the Alternative Track, which is as referred above ranged between
10%-25% depending on the level of foreign investment in the company in each year as explained above. Under the Investments Law,
the transfer of funds from the Company to shareholders and other related parties may be deemed to be regarded as a dividend distribution
for this purpose in certain circumstances. Dividends paid out of any income derived from an Approved Enterprise are generally
subject to withholding tax at source at the reduced rate of 15% or at a lower rate provided under an applicable tax treaty (subject
to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate), if the dividend
is distributed during the tax exemption period or within 12 years thereafter. In the event, however, where the company qualifies
as a FIC, there is no such time limitation.
Under
the Investments Law, a company that has elected the Alternative Track is not obliged to distribute retained profits, and may generally
decide from which year’s profits to declare dividends.
The
Company is not entitled to an Approved Enterprise status.
Tax
benefits under the 2005 Amendment
An
amendment to the Investments Law, which effective as of April 1, 2005 (“2005 Amendment”), has changed certain provisions
of the Investments Law. An eligible investment program under the 2005 Amendment qualifies for benefits as a “Benefited Enterprise”
(rather than as an Approved Enterprise which status is still applicable for investment programs approved prior to December 31,
2004 and/or investment programs under the grant track). According to the 2005 Amendment, only Approved Enterprises receiving cash
grants require the prior approval of the Investment Center. Further, a company may claim the tax benefits offered by the Investment
Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set forth in the 2005 Amendment.
A company that has a Benefited Enterprise may, at its discretion, approach the Israel Tax Authority for a pre-ruling confirming
that it is in compliance with the provisions of the Investment Law.
The
duration of the tax benefits described herein is limited to the earlier of seven or ten years (depending on the geographic location
of the Benefited Enterprise within Israel) from the Commencement Year (as described below) or 12 years from the first day of the
year of election. Commencement Year is defined as the later of the first tax year in which a company had derived liable income
for tax purposes from the Benefited Enterprise, or the year of election which is the year in which a company requested to have
the tax benefits apply to the Benefited Enterprise. The tax benefits granted to a Benefited Enterprise are determined, depending
on the geographic location of the Benefited Enterprise within Israel, according to one of the following, which may be applicable
to us:
(i)
Similar to the currently available Alternative Track, exemption from corporate tax may be available on undistributed income for
a period of two to ten years, depending on the geographic location of the Benefited Enterprise within Israel, and a reduced corporate
tax rate of 10% to 25% for the remainder of the benefit period, depending on the level of foreign investment in each year. Benefits
may be granted for a term of seven to ten years, depending on the level of foreign investment in the company. If the company pays
a dividend out of income derived from the Benefited Enterprise during the tax exemption period, such income will be subject to
deferred corporate tax with respect to the amount distributed (grossed up to reflect such pre-tax income that it would have had
to earn in order to distribute the dividend) at the corporate tax rate which would have otherwise been applied. The company is
required to withhold tax on such distribution at a rate of 15%, or such lower rate may be provided in an applicable tax treaty
(subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate); or
(ii)
A special track which enables companies owning facilities in certain geographical locations in Israel to pay corporate tax at
a flat rate of 11.5% on income the Benefited Enterprise (the “Ireland Track”). The benefit period is for ten years.
Upon payment of dividends, the company is required to withhold tax on such dividend at a rate of 15% for Israeli residents and
at a rate of 4% for foreign residents.
Under
the Investments Law, we may be entitled to tax benefits, by virtue of our status as a “Benefited Enterprise,” which
was awarded to us in October 2007. We received the status of a plant under establishment in Development Region “A”
in a tax-exempt track, subject to compliance with the applicable requirements of the Investment Law. As of December 31, 2017,
we had not yet generated operating income that will allow us to benefit from the tax benefits under the Investment Law. The tax
benefits under the Investment Law will apply for a period of up to ten years from the first year in which taxable income will
be generated and are scheduled to expire at the end of 2023.
In
order to remain eligible for the tax benefits of a Benefited Enterprise, we must continue to meet certain conditions stipulated
in the Investment Law and its regulations, as amended. In addition, in order to remain eligible for the tax benefits available
to the Benefited Enterprise, we must also comply with the conditions set forth in the tax ruling. These conditions include, among
other things, that the production, directly or through subcontractors, of all our products should be performed within certain
regions of Israel. If we do not meet these requirements, the tax benefits would be reduced or canceled.
Tax
benefits under the 2011 Amendment
On
December 29, 2010, the Israeli Parliament approved the 2011 Amendment. The 2011 Amendment significantly revised the tax incentive
regime in Israel and commenced on January, 1 2011.
The
2011 Amendment introduced a new status of “Preferred Enterprise”, replacing the existed status of “Benefited
Enterprise” and introduced new benefits for income generated by a “Preferred Company” through its Preferred
Enterprise. A Preferred Company is an Industrial Company meeting certain conditions (including a minimum threshold of 25% export).
However, under the 2011 Amendment the requirement for a minimum investment in productive assets in order to be eligible for the
benefits granted under the Investments Law as with respect to “Benefited Enterprise” was cancelled.
A
Preferred Company is entitled to a reduced flat tax rate with respect to the income attributed to the Preferred Enterprise, at
the following rates:
Tax Year
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Development Region “A”
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Other Areas within Israel
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2011-2012
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10
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%
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15
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%
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2013
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7
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%
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12.5
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%
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2014-2016
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9
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%
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16
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%
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2017 onwards
*
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7.5
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%
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16
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%
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*
In December 2016, the Israeli Parliament (the Knesset) approved an amendment to the Investments Law pursuant to which the tax
rate applicable to Preferred Enterprises in Development Region “A” would be reduced to 7.5% as of January 1, 2017.
The
classification of income generated from the provision of usage rights in know-how or software that were developed in the Preferred
Enterprise, as well as royalty income received with respect to such usage, as Preferred Enterprise income is subject to the issuance
if a pre-ruling from the Israeli Tax Authority stipulates that such income is associated with the productive activity of the Preferred
Enterprise in Israel.
In
addition, the 2011 Amendment introduced a new status of “Special Preferred Company”, which is an Industrial Company
meeting, in addition to the conditions prescribed for “Preferred Company,” certain additional conditions (including
that the annual Preferred Enterprise income is at least NIS 1.5 billion in 2016, and NIS 1 billion in 2017 and thereafter). The
tax rate applicable for a period of ten years to income generated by such an enterprise will be reduced to 5%, if located in Development
Region “A”, or to 8%, if located in other area within the State of Israel. As of January 1, 2017, the definition for
‘Special Preferred Enterprise’ includes less stringent conditions.
Dividends
distributed from income which is attributed to a “Preferred Enterprise” or a “Special Preferred Enterprise”
will be subject to withholding tax at source at the following rates: (i) Israeli resident corporations – 0%, (although,
if such dividends are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such
lower rate as may be provided in an applicable tax treaty will apply (subject to the receipt in advance of a valid certificate
from the Israel Tax Authority allowing for a reduced tax rate)) (ii) Israeli resident individuals – 20%, and (iii) non-Israeli
residents - 20%, subject to a reduced tax rate under the provisions of an applicable double tax treaty (subject to the receipt
in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). In 2017-2019 dividends paid
out of preferred income attributed to a “Special Preferred Enterprise”, directly to a foreign parent company, are
subject to withholding tax at source at the rate of 5% (temporary provisions).
The
2011 Amendment also revised the grant track to apply only to the approved programs located in Development Region “A”
and shall provide not only cash grants (as prior to the 2011 Amendment) but also the granting of loans. The rates for grants and
loans shall not be fixed but up to 20% of the amount of the approved investment (may be increased with additional 4%). In addition,
a company owning a Preferred Enterprise under the grant track may be entitled also to the tax benefits which are prescribed for
a Preferred Enterprise.
The
provisions of the 2011 Amendment shall not apply to existing “Benefited Enterprises” or “Approved Enterprises”,
which will continue to be entitled to the tax benefits under the Investment Law, as has been in effect prior to the 2011 Amendment,
unless the company owning such enterprises had made an election to apply the provisions of the 2011 Amendment (such election cannot
be later rescinded), which is to be filed with the Israeli Tax Authority, not later than the date prescribed for the filing of
the company’s annual tax return for the respective year.
We
have examined the possible effect, if any, of the provisions of the 2011 Amendment on our consolidated financial statements and
have decided, at this time, not to apply for the new benefits under the 2011 Amendment.
New
Tax benefits under the 2017 Amendment that became effective on January 1, 2017.
The
2017 Amendment was enacted as part of the Economic Efficiency Law that was published on December 29, 2016, and is effective as
of January 1, 2017. The 2017 Amendment provides new tax benefits for two types of “Technology Enterprises”, as described
below, and is in addition to the other existing tax beneficial programs under the Investment Law.
The
2017 Amendment provides that a technology company satisfying certain conditions will qualify as a “Preferred Technology
Enterprise” and will thereby enjoy a reduced corporate tax rate of 12% on income that qualifies as “Preferred Technology
Income”, as defined in the Investment Law. The tax rate is further reduced to 7.5% for a Preferred Technology Enterprise
located in Development Region “A”. In addition, a Preferred Technology Company will enjoy a reduced corporate tax
rate of 12% on capital gain derived from the sale of certain “Benefitted Intangible Assets” (as defined in the Investment
Law) to a related foreign company if the Benefitted Intangible Assets were acquired from a foreign company on or after January
1, 2017 for at least NIS 200 million, and the sale receives prior approval from the IIA.
The
2017 Amendment further provides that a technology company satisfying certain conditions will qualify as a “Special Preferred
Technology Enterprise” and will thereby enjoy a reduced corporate tax rate of 6% on “Preferred Technology Income”
regardless of the company’s geographic location within Israel. In addition, a Special Preferred Technology Enterprise will
enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Benefitted Intangible Assets”
to a related foreign company if the Benefitted Intangible Assets were either developed by an Israeli company or acquired from
a foreign company on or after January 1, 2017, and the sale received prior approval from the IIA. A Special Preferred Technology
Enterprise that acquires Benefitted Intangible Assets from a foreign company for more than NIS 500 million will be eligible for
these benefits for at least ten years, subject to certain approvals as specified in the Investment Law.
Dividends
distributed by a Preferred Technology Enterprise or a Special Preferred Technology Enterprise, paid out of Preferred Technology
Income, are subject to withholding tax at source at the rate of 20%, and if distributed to a foreign company and other conditions
are met, the withholding tax rate will be 4%.
We
are examining the impact of the 2017 Amendment and the degree to which we will qualify as a Preferred Technology Enterprise or
Special Preferred Technology Enterprise, and the amount of Preferred Technology Income that we may have, or other benefits that
we may receive from the 2017 Amendment.
Taxation
of the Company Shareholders
Capital
Gains
Capital
gain tax is imposed on the disposal of capital assets by an Israeli resident, and on the disposal of such assets by a non-Israel
resident if those assets are either (i) located in Israel, (ii) are shares or a right to a share in an Israeli resident corporation,
or (iii) represent, directly or indirectly, rights to assets located in Israel, unless a tax treaty between Israel and the seller’s
country of residence provides otherwise. The Ordinance distinguishes between “Real Capital Gain” and the “Inflationary
Surplus”. Real Capital Gain is the excess of the total capital gain over Inflationary Surplus computed generally on the
basis of the increase in the Israeli CPI between the date of purchase and the date of disposal.
The
capital gain accrued by Israeli individuals residents on the sale of our ordinary shares (that were purchased after January 1,
2012, whether listed on a stock exchange or not) will be taxed at the rate of 25%. However, if such shareholder is a “Controlling
Shareholder” (i.e., a person who holds, directly or indirectly, alone or together with such person’s relative or another
person who collaborates with such person on a permanent basis, 10% or more of one of the Israeli resident company’s means
of control) at the time of sale or at any time during the preceding 12 months period and/or claims a deduction for interest and
linkage differences expenses in connection with the purchase and holding of such shares, such gain will be taxed at the rate of
30%.
The
Real Capital Gain derived by corporations will be generally subject to the ordinary corporate tax (24% in 2017 and to be reduced
to 23% in 2018 and thereafter).
Israeli
individual resident shareholders dealing in securities, or to whom such income is otherwise taxable as ordinary business income
are taxed in Israel at their marginal rates applicable to business income (up to 50% in 2017 and 2018, including Excess Tax as
detailed below).
Notwithstanding
the foregoing, capital gain derived from the sale of our ordinary shares by a non-Israeli resident (whether an individual or a
corporation) shareholder may be exempt under the Ordinance from Israeli taxation provided that such shareholders did not acquire
their shares prior to January 1, 2009 or acquired their shares after the Company was listed for trading on NASDAQ and such gains
were not derived from a permanent business or business activity of such shareholders in Israel. These provisions dealing with
capital gain are not applicable to a person whose gains from selling or otherwise disposing of the shares are deemed to be business
income. However, non-Israeli corporations will not be entitled to the foregoing exemptions if an Israeli resident (i) has a controlling
interest of more than 25% in such non-Israeli corporation or (ii) is the beneficiary of or is entitled to 25% or more of the revenues
or profits of such non-Israeli corporation, whether directly or indirectly.
In
addition, the sale of shares may be exempt from Israeli capital gain tax under the provisions of an applicable tax treaty (subject
to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for an exemption).
For
example, the U.S.-Israel Tax Treaty exempts U.S. resident from Israeli capital gain tax in connection with such sale, provided
(i) the U.S. resident owned, directly or indirectly, less than 10% of an Israeli resident company’s voting power at any
time within the 12 month period preceding such sale, subject to certain conditions; (ii) the seller, being an individual, is present
in Israel for a period or periods of less than 183 days in the aggregate at the taxable year; and (iii) the capital gain from
the sale, exchange or disposition was not derived through a permanent establishment that the U.S. resident maintains in Israel,
(iv) the capital gains arising from such sale, exchange or disposition is attributed to real estate located in Israel; or (v)
the capital gains arising from such sale, exchange or disposition is attributed to royalties. In any such case, the sale, exchange
or disposition of our ordinary shares would be subject to Israeli tax, to the extent applicable. However, under the income tax
treaty between the United States and Israel, or the U.S.-Israel Tax Treaty, such 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 U.S.-Israel Tax Treaty.
In
some instances where our shareholders may be liable for Israeli tax on the sale of their ordinary shares, the payment of the consideration
may be subject to withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from
tax on their capital gains in order to avoid withholding at source at the time of sale. Specifically, in transactions involving
a sale of all of the shares of an Israeli resident company, in the form of a merger or otherwise, the Israel Tax Authority may
require from shareholders who are not liable for Israeli tax to sign declarations in forms specified by this authority or obtain
a specific exemption from the Israel Tax Authority to confirm their status as non-Israeli resident, and, in the absence of such
declarations or exemptions, may require the purchaser of the shares to withhold taxes at source.
Either
the purchaser, the Israeli stockbrokers or financial institution through which the shares are held is obliged, subject to the
above mentioned exemptions, to withhold tax upon the sale of securities on the amount of the consideration paid upon the sale
of the securities (or on the real capital gain realized on the sale, if known), at the rate of 25% in respect of an individual,
or at a rate of corporate tax, in respect of a corporation (24% in 2017 and 23% in 2018 and thereafter).
At
the sale of securities traded on a stock exchange a detailed return, including a computation of the tax due, must be filed and
an advanced payment must be paid on January 31 and July 31 of every tax year in respect of sales of securities made within the
previous six months. However, if all tax due was withheld at source according to applicable provisions of the Ordinance and regulations
promulgated thereunder the aforementioned return need not be filed and no advance payment must be paid. Capital gain is also reportable
on the annual income tax return.
Dividends
A
distribution of dividends from income, which is not attributed to an Approved Enterprise/Benefited Enterprise/Preferred Enterprise
to an Israeli resident individual, will generally be subject to income tax at a rate of 25%. However, a 30% tax rate will apply
if the dividend recipient is a “Controlling Shareholder” (as defined above) at the time of distribution or at any
time during the preceding 12 month period.
Distribution
of dividends from income attributed to a Preferred Enterprise is generally subject to a tax at a rate of 20%. However, if such
dividends are distributed to an Israeli company, no tax is imposed (although, if such dividends are subsequently distributed to
individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable
tax treaty will apply). Dividends distributed from income attributed to an Approved Enterprise and/or a Benefited Enterprise are
subject to a tax rate of 15%. If the dividend is attributable partly to income derived from an Approved Enterprise, Benefited
Enterprise or Preferred Enterprise, and partly from other sources of income, the income tax rate will be a blended rate reflecting
the relative portions of the types of income.
If
the recipient of the dividend is an Israeli resident corporation, such dividend will be exempt from income tax provided the income
from which such dividend is distributed was derived or accrued within Israel.
The
Ordinance generally provides that a non-Israeli resident (either individual or corporation) is subject to an Israeli income tax
on the receipt of dividends at the rate of 25% (30% if the dividends recipient is a “Controlling Shareholder” (as
defined above), at the time of distribution or at any time during the preceding 12 month period); those rates are subject to a
reduced tax rate under the provisions of an applicable double tax treaty.
For
example, under the U.S.-Israel Tax Treaty the following rates will apply in respect of dividends distributed by an Israeli resident
company to a U.S. resident (for purposes of the U.S.-Israel Tax Treaty): (i) with regard to a dividend distributed from income
which is not attributed to an Approved Enterprise/ Benefited Enterprise/ Preferred Enterprise, if the U.S. resident is a corporation
which holds during that portion of the taxable year which precedes the date of payment of the dividend and during the whole of
its prior taxable year (if any), at least 10% of the outstanding shares of the voting stock of the Israeli resident paying corporation
and not more than 25% of the gross income of the Israeli resident paying corporation for such prior taxable year (if any) consists
of certain type of interest or dividends – the maximum tax rate of withholding is 12.5% if a certificate for a reduced withholding
tax rate would be provided in advance from the Israeli Tax Authority, (ii) with regard to a dividend distributed from income derived
from an Approved Enterprise/ Benefited Enterprise under the Investments Law, if the U.S. resident is a corporation which holds
during that portion of the taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable
year (if any), at least 10% of the outstanding shares of the voting stock of the Israeli resident paying corporation and not more
than 25% of the gross income of the Israeli resident paying corporation for such prior taxable year (if any) consists of certain
type of interest or dividends, the tax rate of withholding 15% will be applicable if a certificate for a reduced withholding tax
rate would be provided in advance from the Israeli Tax Authority, and (iii) in all other cases, the tax rate is 25%, or the domestic
rate (if such is lower). The aforementioned rates under the U.S.-Israel Tax Treaty will not apply if the dividend income was derived
through a permanent establishment that the U.S. resident maintains in Israel.
A
non-Israeli resident who receives dividend income derived from or accrued from Israel, from which the full amount of tax was withheld
at source, is generally exempt from the obligation to file tax returns in Israel with respect to such income, provided that (i)
such income was not generated from 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.
Payors
of dividends on our shares, including the Israeli stockbroker effectuating the transaction, or the financial institution through
which the securities are held, are generally required, subject to any of the foregoing exemption, reduced tax rates and the demonstration
of a shareholder of his, her or its foreign residency, to withhold taxes upon the distribution of dividends at a rate of 25%,
provided that the shares are registered with a Nominee Company (for corporations and individuals).
Excess
Tax
Individuals
who are subject to tax in Israel are also subject to an additional tax at a rate of 3% in 2017 and thereafter, on annual income
exceeding a certain threshold (NIS 640,000 for 2017 which amount is linked to the annual change in the Israeli consumer price
index), including, but not limited to income derived from dividends, interest and capital gains.
Foreign
Exchange Regulations
Non-residents
of Israel who hold our ordinary shares are able to receive any dividends, and any amounts payable upon the dissolution, liquidation
and winding up of our affairs, repayable in non-Israeli currency at the rate of exchange prevailing at the time of conversion.
However, Israeli income tax is generally required to have been paid or withheld on these amounts. In addition, the statutory framework
for the potential imposition of currency exchange control has not been eliminated, and may be restored at any time by administrative
action.
Estate
and Gift Tax
Israeli
law presently does not impose estate or gift taxes.
U.S.
Federal Income Tax Consequences
The
following is a general summary of what we believe to be certain material U.S. federal income tax consequences relating to the
purchase, ownership and disposition of our ordinary shares by U.S. Investors (as defined below) that hold such ordinary shares
as capital assets. This summary is based on the Code, the regulations of the U.S. Department of the Treasury issued pursuant to
the Code, or the Treasury Regulations, the U.S.-Israel Tax Treaty, and administrative and judicial interpretations thereof, all
as in effect on the date hereof and all of which are subject to change, possibly with retroactive effect, or to different interpretation.
No ruling has been sought from the IRS with respect to any U.S. federal income tax consequences described below, and there can
be no assurance that the IRS or a court will not take a contrary position. This summary is for general information purposes only,
it does not purport to be a complete analysis or listing of all potential U.S. federal income tax considerations that may apply
to a U.S. Investor as a result of the purchase, ownership, and disposition of our ordinary shares, and it does not constitute
tax advice. This summary does not address all of the tax considerations that may be relevant to specific U.S. Investors in light
of their particular circumstances or to U.S. Investors subject to special treatment under U.S. federal income tax law (including,
without limitation, banks, financial institutions, insurance companies, tax-exempt entities, retirement plans, tax-deferred accounts,
regulated investment companies, “S corporations,” grantor trusts, partnerships, dealers or traders in securities or
currencies, brokers, real estate investment trusts, certain former citizens or residents of the United States, persons who acquire
our ordinary shares as part of a straddle, hedge, conversion transaction or other integrated investment, persons subject to the
alternative minimum tax, persons who acquire our ordinary shares through the exercise or cancellation of employee stock options
or otherwise as compensation for their services, persons that have a “functional currency” other than the U.S. dollar,
persons that own (or are deemed to own, indirectly or by attribution) 10% or more (by vote or value) of our ordinary shares (other
than a brief discussion below of certain aspects of the controlled foreign corporation rules), persons that mark their securities
to market for U.S. federal income tax purposes, or persons holding our ordinary shares in connection with a trade or business
conducted outside the United States). This summary does not address any U.S. state or local or non-U.S. tax considerations or
any U.S. federal estate, gift, generation skipping or alternative minimum tax considerations or any U.S. federal tax consequences
other than U.S. federal income tax consequences.
As
used in this summary, the term “U.S. Investor” means a beneficial owner of our ordinary shares that is, for U.S. federal
income tax purposes, (i) an individual citizen or resident of the United States, (ii) 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, (iii) an estate the income of which is subject to U.S. federal income tax regardless of
its source or (iv) a trust with respect to which a court within the United States is able to exercise primary supervision over
its administration and one or more U.S. persons have the authority to control all of its substantial decisions, or that has a
valid election in effect under applicable Treasury Regulations to be treated as a “United States person.”
If
an entity treated as a partnership for U.S. federal income tax purposes holds our ordinary shares, the tax treatment of such partnership
and each partner thereof will generally depend upon the status and activities of the partnership and such partner. A holder that
is treated as a partnership for U.S. federal income tax purposes should consult its own tax advisor regarding the U.S. federal
income tax considerations applicable to it and its partners of the purchase, ownership and disposition of its ordinary shares.
Prospective
investors should be aware that this summary does not address the tax consequences to investors who are not U.S. Investors. Prospective
investors should consult their own tax advisors as to the particular tax considerations applicable to them relating to the purchase,
ownership and disposition of their ordinary shares, including the applicability of U.S. federal, state and local tax laws and
non-U.S. tax laws.
Taxation
of U.S. Investors
The
discussions under “— Distributions” and under “— Sale, Exchange or Other Disposition of Ordinary
Shares” below assumes that we will not be treated as a PFIC for U.S. federal income tax purposes. We expect that we were
classified as a PFIC for 2017 and we expect that we will be classified as a PFIC for 2018. It is also possible that we may be
classified as a PFIC in one or more subsequent years. For a discussion of the rules that would apply if we are treated as a PFIC,
see the discussion under “— Passive Foreign Investment Company.”
Distributions
. We
have no current plans to pay dividends. To the extent we pay any dividends, a U.S. Investor will be required to include in gross
income as a taxable dividend (without reduction for any Israeli tax withheld from such distribution) the amount of any distributions
made on our ordinary shares to the extent that those distributions are paid out of our current or accumulated earnings and profits
as determined for U.S. federal income tax purposes. Any distributions in excess of our earnings and profits will be applied against
and will reduce (but not below zero) the U.S. Investor’s tax basis in its ordinary shares (thereby increasing the amount
of gain, or decreasing the amount of loss, to be recognized by the U.S. Investor on a subsequent disposition of the ordinary shares),
and, to the extent they exceed that tax basis, will be treated as gain from the sale or exchange of those ordinary shares. We
do not expect to maintain calculations of our earnings and profits under U.S. federal income tax principles. Therefore, a U.S.
Investor should expect that the entire amount of any distribution generally may be treated as dividend income.
If
we were to pay dividends, we expect to pay such dividends in NIS. A dividend paid in NIS, including the amount of any Israeli
taxes withheld, will be includible in a U.S. Investor’s income as a U.S. dollar amount calculated by reference to the exchange
rate in effect on the date such dividend is received, regardless of whether the payment is in fact converted into U.S. dollars.
If the dividend is converted to U.S. dollars on the date of receipt, a U.S. Investor generally will not recognize a foreign currency
gain or loss. However, if the U.S. Investor converts the NIS into U.S. dollars on a later date, the U.S. Investor must include,
in computing its income, any gain or loss resulting from any exchange rate fluctuations. The gain or loss will be equal to the
difference between (i) the U.S. dollar value of the amount included in income when the dividend was received and (ii) the amount
received on the conversion of the NIS into U.S. dollars. Such gain or loss will generally be ordinary income or loss and United
States source for U.S. foreign tax credit purposes. U.S. Investors should consult their own tax advisors regarding the tax consequences
to them if we pay dividends in NIS or any other non-U.S. currency.
Subject
to certain significant conditions and limitations, including potential limitations under the U.S.-Israel Tax Treaty, any Israeli
income taxes paid on or withheld from distributions from us and not refundable to a U.S. Investor may be credited against the
investor’s U.S. federal income tax liability or, alternatively, may be deducted from the investor’s taxable income.
The election to deduct, rather than credit, foreign taxes, is made on a year-by-year basis and applies to all foreign taxes paid
by a U.S. Investor or withheld from a U.S. Investor that year. Dividends paid on our ordinary shares generally will constitute
income from sources outside the United States, which may be relevant in calculating a U.S. Investor’s foreign tax credit
limitation. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income.
For this purpose, dividends paid on our ordinary shares should generally be categorized as “passive category income”
or, in the case of some U.S. Investors, as “general category income” for U.S. foreign tax credit purposes.
Because
the rules governing foreign tax credits are complex, U.S. Investors should consult their own tax advisors regarding the availability
of foreign tax credits in their particular circumstances.
Dividends
paid on our ordinary shares will not be eligible for the “dividends-received” deduction generally allowed to corporate
U.S. Investors with respect to dividends received from U.S. corporations.
Certain
distributions treated as dividends that are received by an individual U.S. Investor from “qualified foreign corporations”
generally qualify for a 20% reduced maximum tax rate so long as certain holding period and other requirements are met. A non-U.S.
corporation (other than a corporation that is treated as a PFIC for the taxable year in which the dividend is paid or the preceding
taxable year) generally will be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive
tax treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for purposes
of this provision and which includes an exchange of information program, or (ii) with respect to any dividend it pays on stock
which is readily tradable on an established securities market in the United States. Dividends paid by us in a taxable year in
which we are not a PFIC and with respect to which we were not a PFIC in the preceding taxable year are expected to be eligible
for the 20% reduced maximum tax rate, although we can offer no assurances in this regard. However, any dividend paid by us in
a taxable year in which we are a PFIC or were a PFIC in the preceding taxable year will be subject to tax at regular ordinary
income rates (along with any applicable additional PFIC tax liability, as discussed below). As noted above, we expect that we
were classified as a PFIC for 2017 and we expect that we will be classified as a PFIC for 2018. It is also possible that we may
be classified as a PFIC in one or more subsequent years. In addition, a non-corporate U.S. Investor will not be eligible for reduced
U.S. federal income tax rate with respect to dividend distributions on ordinary shares if (a) such U.S. Investor has not held
the ordinary shares for at least 61 days during the 121-day period starting on the date which is sixty (60) days before, and ending
sixty (60) days after the ex-dividend date, (b) to the extent the U.S. Investor is under an obligation to make related payments
on substantially similar or related property or (c) with respect to any portion of a dividend that is taken into account by the
U.S. Investor as investment income under Section 163(d)(4)(B) of the Code. Any days during which the U.S. Investor has diminished
its risk of loss with respect to ordinary shares (for example, by holding an option to sell the ordinary shares) are not counted
towards meeting the 61-day holding period. Non-corporate U.S. Investors should consult their own tax advisors concerning whether
dividends received by them qualify for the reduced rate of tax.
On
December 22, 2017, President Trump signed into law H.R. 1, originally known as the “Tax Cuts and Jobs Act.” This new
legislation provides a 100% deduction for the foreign-source portion of dividends received from “specified 10-percent owned
foreign corporations” by U.S. corporate holders, subject to a one-year holding period. No foreign tax credit, including
for Israeli withholding taxes (or deduction for foreign taxes paid with respect to qualifying dividends) would be permitted for
foreign taxes paid or accrued with respect to a qualifying dividend. Deduction would be unavailable for “hybrid dividends.”
The dividend received deduction enacted under this new legislation may not apply to dividends from a PFIC, discussed below.
The
additional 3.8% net investment income tax (described below) may apply to dividends received by certain U.S. Investors who meet
the modified adjusted gross income thresholds.
Sale,
Exchange or Other Disposition of Ordinary Shares
. Subject to the discussion under “— Passive Foreign Investment
Company” below, a U.S. Investor generally will recognize capital gain or loss upon the sale, exchange or other disposition
of our ordinary shares in an amount equal to the difference between the amount realized on the sale, exchange or other disposition
and the U.S. Investor’s adjusted tax basis in such ordinary shares. The adjusted tax basis in an ordinary share generally
will be equal to the cost basis of such ordinary share. This capital gain or loss will be long-term capital gain or loss if the
U.S. Investor’s holding period in our ordinary shares exceeds one year. Preferential tax rates for long-term capital gain
(currently, with a maximum rate of 20%) will apply to individual U.S. Investors. The deductibility of capital losses is subject
to limitations. The gain or loss will generally be income or loss from sources within the United States for U.S. foreign tax credit
purposes, possibly subject to certain exceptions under the U.S.-Israel Tax Treaty. Additionally, certain losses may be treated
as foreign source to the extent certain dividends were received by the U.S. Investor within the 24-month period preceding the
date on which the U.S. Investor recognized the loss. The additional 3.8% net investment income tax (described below) may apply
to gains recognized upon the sale, exchange or other taxable disposition of our ordinary shares by certain U.S. Investors who
meet the modified adjusted gross income thresholds.
U.S.
Investors should consult their own tax advisors regarding the U.S. federal income tax consequences of receiving currency other
than U.S. dollars upon the disposition of their ordinary shares.
Passive
Foreign Investment Company
In
general, a corporation organized outside the United States will be treated as a PFIC for U.S. federal income tax purposes in any
taxable year in which either (i) at least 75% of its gross income is “passive income” or (ii) at least 50% of the
average quarterly value of its gross assets is attributable to assets that produce passive income or are held for the production
of passive income. Passive income for this purpose generally includes, among other things, certain dividends, interest, royalties,
rents and gains from commodities and securities transactions and from the sale or exchange of property that gives rise to passive
income. Passive income also includes amounts derived by reason of the temporary investment of funds, including those raised in
a public offering. Assets that produce or are held for the production of passive income include, among other things, cash, even
if held as working capital or raised in a public offering, marketable securities and other assets that may produce passive income.
In determining whether a non-U.S. corporation is a PFIC, a proportionate share of the income and assets of each corporation in
which it owns, directly or indirectly, at least a 25% interest (by value) is taken into account.
A
foreign corporation’s PFIC status is an annual determination that is based on tests that are factual in nature and our status
for any year will depend on our income, assets, and activities for such year, including, without limitation, how quickly we use
the cash proceeds from our initial public offering in the United States in our business. In addition, because the value of our
gross assets may be determined in part by reference to our market capitalization, a decline in the value of our ordinary shares
may result in our becoming a PFIC. We expect to have been classified as a PFIC for 2017 and to be classified as a PFIC for 2018,
but have not determined whether we will be a PFIC in future years. Because the PFIC determination is highly fact intensive, there
can be no assurance that we will not be a PFIC in any future year.
U.S.
Investors should be aware of certain tax consequences of investing directly or indirectly in us if we are a PFIC. A U.S. Investor
is subject to different rules depending on whether the U.S. Investor makes an election to treat us as a “qualified electing
fund,” known as a QEF election, makes a “mark-to-market” election with respect to the ordinary shares, or makes
neither election. An election to treat us as a QEF will not be available if we do not provide the information necessary to make
such an election. Upon request, we expect to provide U.S. Investors with the information necessary to make a QEF election.
QEF
Election
. One way in which certain of the adverse consequences of PFIC status can be mitigated is for a U.S. Investor
to make a QEF election. In addition, as discussed below, a mark-to-market election that may alleviate some of the adverse consequences
of PFIC status may also be available to a U.S. Investor.
A
U.S. Investor who makes a timely QEF election, referred to as an “Electing U.S. Investor,” with respect to us must
report for U.S. federal income tax purposes his, her, or its pro rata share of our ordinary earnings and net capital gain, if
any, for our taxable year that ends with or within the taxable year of the Electing U.S. Investor. The “net capital gain”
of a PFIC is the excess, if any, of the PFIC’s net long-term capital gains over its net short-term capital losses. The amount
so included in income generally will be treated as ordinary income to the extent of such Electing U.S. Investor’s allocable
share of the PFIC’s ordinary earnings and as long-term capital gain to the extent of such Electing U.S. Investor’s
allocable share of the PFIC’s net capital gains. Such Electing U.S. Investor generally will be required to translate such
income into U.S. dollars based on the average exchange rate for the PFIC’s taxable year with respect to the PFIC’s
functional currency. Such income generally will be treated as income from sources outside the United States for U.S. foreign tax
credit purposes. Amounts previously included in income by such Electing U.S. Investor under the QEF rules generally will not be
subject to tax when they are distributed to such Electing U.S. Investor. The Electing U.S. Investor’s tax basis in our ordinary
shares generally will increase by any amounts so included under the QEF rules and decrease by any amounts not included in income
when distributed.
An
Electing U.S. Investor will be subject to U.S. federal income tax on such amounts for each taxable year in which we are a PFIC,
regardless of whether such amounts are actually distributed to such Electing U.S. Investor. However, an Electing U.S. Investor
may, subject to certain limitations, elect to defer payment of current U.S. federal income tax on such amounts, subject to an
interest charge. If an Electing U.S. Investor is an individual, any such interest will be treated as non-deductible “personal
interest.”
Any
net operating losses or net capital losses of a PFIC will not pass through to the Electing U.S. Investor and will not offset any
ordinary earnings or net capital gain of a PFIC recognized by the Electing U.S. Investor in subsequent years. Nonetheless, such
losses would ultimately reduce the gain, or increase the loss recognized by the Electing U.S. Investor on its disposition of our
ordinary shares.
So
long as an Electing U.S. Investor’s QEF election with respect to us is in effect with respect to the entire holding period
for our ordinary shares, any gain or loss recognized by such Electing U.S. Investor on the sale, exchange or other disposition
of such shares generally will be long-term capital gain or loss if such Electing U.S. Investor has held such shares for more than
one year at the time of such sale, exchange or other disposition. Preferential tax rates for long-term capital gain (described
above) will apply to individual U.S. Investors. The deductibility of capital losses is subject to limitations.
The
QEF election must be made on or before the due date of the U.S Investor’s federal tax return for the taxable year for which
the election is made. A U.S. Investor makes a QEF election by completing the relevant portions of and filing IRS Form 8621 in
accordance with the instructions thereto. A QEF election will not be available if we do not provide the information necessary
to make such an election. Upon request, we expect to annually furnish U.S. Investors with information needed in order to complete
IRS Form 8621 (which form would be required to be filed with the IRS on an annual basis by the U.S. Investor) and to make and
maintain a valid QEF election for any year in which we or any of our subsidiaries are a PFIC.
A
QEF election will not apply to any taxable year during which we are not a PFIC, but will remain in effect with respect to any
subsequent taxable year in which we become a PFIC. If a U.S. Investor owns PFIC stock indirectly through another PFIC, separate
QEF elections must be made for the PFIC in which the U.S. Investor is a direct shareholder and the subsidiary PFIC in order for
the QEF rules to apply to both PFICs.
Each
U.S. Investor is encouraged to consult its own tax advisor with respect to tax consequences of an QEF election with respect to
us. Each U.S. Investor should also consult its own tax adviser with respect to the applicability of the 3.8% net investment income
tax (discussed below) where a QEF election is in effect.
Mark-to-Market
Election
. Alternatively, if our ordinary shares are treated as “marketable stock,” a U.S. Investor would
be allowed to make a “mark-to-market” election with respect to our ordinary shares, provided the U.S. Investor completes
and files IRS Form 8621 in accordance with the relevant instructions and related Treasury Regulations. If that election is made,
the U.S. Investor generally would include as ordinary income in each taxable year the excess, if any, of the fair market value
of our ordinary shares at the end of the taxable year over such holder’s adjusted tax basis in such ordinary shares. Thus,
the U.S. Investor may recognize taxable income without receiving any cash to pay its tax liability with respect to such income.
The U.S. Investor would also be permitted an ordinary loss in respect of the excess, if any, of the U.S. Investor’s adjusted
tax basis in our ordinary shares over their fair market value at the end of the taxable year, but only to the extent of the net
amount previously included in income as a result of the mark-to-market election. A U.S. Investor’s tax basis in our ordinary
shares would be adjusted to reflect any such income or loss amount. Gain realized on the sale, exchange or other disposition of
our ordinary shares would be treated as ordinary income, and any loss realized on the sale, exchange or other disposition of our
ordinary shares would be treated as ordinary loss to the extent that such loss does not exceed the net mark-to-market gains previously
included in income by the U.S. Investor, and any loss in excess of such amount will be treated as capital loss. Amounts treated
as ordinary income will not be eligible for the favorable tax rates applicable to qualified dividend income or long-term capital
gains.
Generally,
stock will be considered marketable stock if it is “regularly traded” on a “qualified exchange” within
the meaning of applicable Treasury Regulations. A class of stock is regularly traded on an exchange during any calendar year during
which such class of stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter. To
be marketable stock, our ordinary shares must be regularly traded on a qualifying exchange (i) in the United States that is registered
with the SEC or a national market system established pursuant to the Exchange Act or (ii) outside the United States that is properly
regulated and meets certain trading, listing, financial disclosure and other requirements. Our ordinary shares are expected to
constitute “marketable stock” as long as they remain listed on the NASDAQ Capital Market and are regularly traded.
A
mark-to-market election will not apply to our ordinary shares held by a U.S. Investor for any taxable year during which we are
not a PFIC, but will remain in effect with respect to any subsequent taxable year in which we become a PFIC. The election will
not remain in effect if the ordinary shares are no longer regularly traded on a qualified exchange or the IRS consents to the
revocation of the election. A mark-to-market election will not apply to any PFIC subsidiary that we own. Each U.S. Investor is
encouraged to consult its own tax advisor with respect to the availability and tax consequences of a mark-to-market election with
respect to our ordinary shares.
Each
U.S. investor should consult its own tax adviser with respect to the applicability of the “net investment income tax”
(discussed below) where a mark-to-market election is in effect.
Default
PFIC Rules
. A U.S. Investor who does not make a timely QEF election or a mark-to-market election, referred to in this
disclosure as a “Non-Electing U.S. Investor,” will be subject to special rules with respect to (i) any “excess
distribution” (generally, the portion of any distributions received by the Non-Electing U.S. Investor on the ordinary shares
in a taxable year in excess of 125% of the average annual distributions received by the Non-Electing U.S. Investor in the three
preceding taxable years, or, if shorter, the Non-Electing U.S. Investor’s holding period for the ordinary shares), and (ii)
any gain realized on the sale or other disposition of such ordinary shares. Under these rules:
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the excess distribution
or gain would be allocated ratably over the Non-Electing U.S. Investor’s holding period for such ordinary shares;
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the amount allocated
to the current taxable year and any year prior to us becoming a PFIC would be taxed as ordinary income; and
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the amount allocated
to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of
taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting
tax attributable to each such other taxable year.
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If
a Non-Electing U.S. Investor who is an individual dies while owning our ordinary shares, the Non-Electing U.S. Investor’s
successor would be ineligible to receive a step-up in tax basis of such ordinary shares. Non-Electing U.S. Investors should consult
their tax advisors regarding the application of the “net investment income tax” (described below) to their specific
situation.
To
the extent a distribution on our ordinary shares does not constitute an excess distribution to a Non-Electing U.S. Investor, such
Non-Electing U.S. Investor generally will be required to include the amount of such distribution in gross income as a dividend
to the extent of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) that are
not allocated to excess distributions. The tax consequences of such distributions are discussed above under “— Taxation
of U.S. Investors — Distributions.” Each U.S. Investor is encouraged to consult its own tax advisor with respect to
the appropriate U.S. federal income tax treatment of any distribution on our ordinary shares.
If
we are treated as a PFIC for any taxable year during the holding period of a Non-Electing U.S. Investor, we will continue to be
treated as a PFIC for all succeeding years during which the Non-Electing U.S. Investor is treated as a direct or indirect Non-Electing
U.S. Investor even if we are not a PFIC for such years. A U.S. Investor is encouraged to consult its tax advisor with respect
to any available elections that may be applicable in such a situation, including the “deemed sale” election of Section
1298(b)(1) of the Code (which will be taxed under the adverse tax rules described above).
We
may invest in the equity of foreign corporations that are PFICs or may own subsidiaries that own PFICs. If we are classified as
a PFIC, under attribution rules U.S. Investors will be subject to the PFIC rules with respect to their indirect ownership interests
in such PFICs, such that a disposition of the ordinary shares of the PFIC or receipt by us of a distribution from the PFIC generally
will be treated as a deemed disposition of such ordinary shares or the deemed receipt of such distribution by the U.S. Investor,
subject to taxation under the PFIC rules. There can be no assurance that a U.S. Investor will be able to make a QEF election with
respect to PFICs in which we invest, and a U.S. Investor may not make a mark-to-market election with respect to a PFIC in which
we invest. Each U.S. Investor is encouraged to consult its own tax advisor with respect to tax consequences of an investment by
us in a corporation that is a PFIC.
Under
Section 1291(f) of the Code, the IRS has issued proposed Treasury regulations that, subject to certain exceptions, would cause
a U.S. Investor that had not made a timely QEF election to recognize gain upon certain transfers of our ordinary shares that would
otherwise not be subject to U.S. federal income tax (e.g., gifts and exchanges pursuant to corporate reorganizations).
The
U.S. federal income tax rules relating to PFICs, QEF elections, and mark-to market elections are complex. U.S. Investors are urged
to consult their own tax advisors with respect to the purchase, ownership and disposition of our ordinary shares, any elections
available with respect to such ordinary shares and the IRS information reporting obligations with respect to the purchase, ownership
and disposition of our ordinary shares.
Controlled
Foreign Corporation Rules
A
foreign corporation is classified as a controlled foreign corporation, or CFC, if “10% U.S. Shareholders” (as defined
below) own (directly, indirectly, and/or by application of certain constructive ownership rules) more than 50% of the total combined
voting power of all classes of stock of such foreign corporation entitled to vote, or more than 50% of the total value of all
stock of such corporation. A “10% U.S. Shareholder” is a United States person (within the meaning of the Code) who
owns (directly, indirectly, and/or by application of certain constructive ownership rules) 10% or more of the total combined voting
power of all classes of stock entitled to vote of the foreign corporation or 10% more of the total value of shares of all classes
of stock of such foreign corporation.
Each
10% U.S. Shareholder of a foreign corporation that is a CFC who owns shares in the CFC, directly or indirectly, on the last day
of the CFC’s taxable year, must include in its gross income for U.S. federal income tax purposes its pro rata share of the
CFC’s “Subpart F income” for such year, even if the Subpart F income is not distributed. Subpart F income generally
includes passive income, but also includes certain other items of income, such as certain related party sales, manufacturing and
services income. For tax years beginning after December 31, 2017, H.R. 1, originally known as the “Tax Cuts and Jobs Act,”
requires U.S. Shareholders to include their pro rate share of the CFC’s “global intangible low-tax income.”
In addition, the 10% U.S. Shareholders of a CFC may be deemed to receive taxable distributions to the extent the CFC invests its
earnings in certain specified types of “United States property.”
Section
1248 of the Code generally provides that if a United States person sells or exchanges stock in a foreign corporation and such
person is a 10% U.S. Shareholder at any time during the 5-year period ending on the date of the sale or exchange when such foreign
corporation was a CFC, any gain from such sale or exchange may be treated as a dividend to the extent of the corporation’s
earnings and profits attributable to such shares that were accumulated during the period that the shareholder held the shares
while the corporation was a CFC (with certain adjustments).
The
CFC rules are complex. The foregoing is merely a summary of certain potential application of these rules. No assurances can be
given that we are not or will not become a CFC, and certain changes to the CFC constructive ownership rules introduced by H.R.
1, originally known as the “Tax Cuts and Jobs Act,” could under certain circumstances cause us to be classified as
a CFC. Each U.S. Investor is urged to consult its tax adviser with respect to the possible application of the CFC rules.
Certain
Reporting Requirements
Certain
U.S. Investors are required to file IRS Form 926, Return by U.S. Transferor of Property to a Foreign Corporation, and certain
U.S. Investors may be required to file IRS Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations,
reporting transfers of cash or other property to us and information relating to the U.S. Investor and us. These forms (if applicable)
must be filed together with the U.S. Investor’s federal income tax return. Substantial penalties may be imposed upon a U.S.
Investor that fails to comply.
In
any year in which we are classified as a PFIC, a U.S. Investor will be required to file IRS Form 8621 (Information Return by a
Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund). This form (if applicable) must be filed together
with the U.S. Investor’s U.S. federal income tax return.
Certain
U.S. Investors owning “specified foreign financial assets” with an aggregate value in excess of $50,000 (and in some
circumstances, a higher threshold) may be required to file IRS Form 8938, Statement of Specified Foreign Financial Assets, with
respect to such assets with their tax returns. “Specified foreign financial assets” generally 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, which may include our shares, (ii)
financial instruments and contracts held for investment that have non-U.S. issuers or counterparties and (iii) interests in foreign
entities. The IRS has issued guidance exempting “specified foreign financial assets” held in a financial account from
reporting under this provision (although the financial account itself, if maintained by a foreign financial institution, may remain
subject to this reporting requirement). The failure to file this form when required could result in substantial penalties.
Investors
who fail to report required information could become subject to substantial civil and criminal penalties. U.S. Investors should
consult their tax advisors regarding the possible implications of these reporting requirements on their investment in our ordinary
shares.
Disclosure
of Reportable Transactions
If
a U.S. Investor sells or disposes of our ordinary shares at a loss or otherwise incurs certain losses that meet certain thresholds,
such U.S. Investor may be required to file a disclosure statement with the IRS. Failure to comply with these and other reporting
requirements could result in the imposition of significant penalties.
Backup
Withholding Tax and Information Reporting Requirements
Generally,
information reporting requirements will apply to distributions on our ordinary shares or proceeds on the disposition of our ordinary
shares paid within the United States (and, in certain cases, outside the United States) to U.S. Investors other than certain exempt
recipients, such as corporations. Furthermore, backup withholding (currently at 24%) may apply to such amounts if the U.S. Investor
fails to (i) provide a correct taxpayer identification number, (ii) report interest and dividends required to be shown on its
U.S. federal income tax return, or (iii) make other appropriate certifications in the required manner. U.S. Investors who are
required to establish their exempt status generally must provide such certification on IRS Form W-9.
Backup
withholding is not an additional tax. Amounts withheld as backup withholding from a payment may be credited against a U.S. Investor’s
U.S. federal income tax liability and such U.S. Investor may obtain a refund of any excess amounts withheld by filing the appropriate
claim for refund with the IRS and furnishing any required information in a timely manner.
Medicare
Tax on Investment Income
Certain
U.S. persons, including individuals, estates and trusts, will be subject to an additional 3.8% Medicare tax, or “net investment
income tax,” on unearned income. For individuals, the additional net investment income tax applies to the lesser of (i)
“net investment income” or (ii) the excess of “modified adjusted gross income” over $200,000 ($250,000
if married and filing jointly or $125,000 if married and filing separately). “Net investment income” generally equals
the taxpayer’s gross investment income reduced by the deductions that are allocable to such income. Investment income generally
includes passive income such as interest, dividends, annuities, royalties, rents, and capital gains. U.S. Investors are urged
to consult their own tax advisors regarding the implications of the additional net investment income tax resulting from their
ownership and disposition of our ordinary shares.
Recent
U.S. Tax Legislation
On
December 22, 2017, President Trump signed into law H.R. 1, originally known as the “Tax Cuts and Jobs Act.” Although
this is the most extensive overhaul of the United States tax regime in over thirty years, other than for certain U.S. corporate
investors, the provisions of the new legislation are not expected to materially impact U.S. Investors with respect to their ownership
of our ordinary shares. However, each U.S. Investor should consult its own tax advisor about the consequences of this new legislation
with respect to the purchase, ownership and disposition of our ordinary shares.
THE
DISCUSSION ABOVE IS A GENERAL SUMMARY. IT DOES NOT COVER ALL TAX MATTERS RELATING TO THE PURCHASE, OWNERSHIP AND DISPOSITION OF
OUR ORDINARY SHARES. EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT ITS OWN TAX ADVISOR ABOUT THE TAX CONSEQUENCES TO IT OF RELATING
TO THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES IN LIGHT OF THE INVESTOR’S OWN CIRCUMSTANCES.
F.
Dividends and Paying Agents.
Not
applicable.
G.
Statements by Experts.
Not
applicable.
H.
Documents on Display.
You
may read and copy this annual report on Form 20-F, including the related exhibits and schedules, and any document we file with
the SEC without charge at the SEC’s public reference room at 100 F Street, N.E., Room 1580, 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., Room 1580, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.
The SEC also maintains an Internet website that contains reports and other information regarding issuers that file electronically
with the SEC. Our filings with the SEC are also available to the public through the SEC’s website at http://www.sec.gov.
As
a foreign private issuer, we will be exempt from the rules under the Exchange Act related to the furnishing and content of proxy
statements, and our officers, directors and principal shareholders will be exempt from the reporting and short-swing profit recovery
provisions contained in Section 16 of the Exchange Act. Furthermore, as a foreign private issuer, we are also not subject to the
requirements of Regulation FD (Fair Disclosure) promulgated under the Exchange Act. In addition, we will not be required under
the Exchange Act to file annual or other reports and consolidated financial statements with the SEC as frequently or as promptly
as U.S. companies whose securities are registered under the Exchange Act. Instead, we will file with the SEC, within 120 days
after the end of each fiscal year, or such other applicable time as required by the SEC, an annual report on Form 20-F containing
consolidated financial statements audited by an independent registered public accounting firm. We also intend to furnish certain
other material information to the SEC under cover of Form 6-K.
In
addition, because our ordinary shares are traded on the TASE, we have filed Hebrew language periodic and immediate reports with,
and furnish information to, the TASE and the ISA, as required under Chapter Six of the Israel Securities Law, 1968. Copies of
our filings with the ISA can be retrieved electronically through the MAGNA distribution site of the ISA (
www.magna.isa.gov.il
)
and the TASE website (
www.maya.tase.co.il
).
We
maintain a corporate website at
www.intecpharma.com.
Information contained on, or that can be accessed through, our website
does not constitute a part of this annual report on Form 20-F. We have included our website address in this annual report on Form
20-F solely as an inactive textual reference.
I.
Subsidiary Information.
Not
applicable.
ITEM
11. Quantitative and Qualitative Disclosures About Market Risk.
Quantitative
and Qualitative Disclosure About Market Risk
We
are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our
financial position, results of operations or cash flows due to adverse changes in financial market prices and rates, including
interest rates and foreign exchange rates, of financial instruments.
Foreign
Currency Exchange Risk
Effective
January 1, 2016 our reporting and functional currency is the U.S. dollar. However we pay a significant portion of our expenses
in NIS and Euro, i.e. payments to employees, sub-contractors and consultants for clinical trials and other research and development
activities, and we expect this to continue. If the U.S. dollar weakens against the NIS and Euro in the future, there may be a
negative impact on our results of operations.
To
date, we have not engaged in hedging transactions. In the future, we may enter into currency hedging transactions to decrease
the risk of financial exposure from fluctuations in the exchange rates of our principal operating currencies. These measures,
however, may not adequately protect us from the material adverse effects of such fluctuations.
Set
forth below is a sensitivity test to possible changes in U.S. dollars / NIS and U.S. dollars / Euro exchange rates as of December
31, 2017:
|
|
December 31, 2017
|
|
|
|
Income (loss) from
change in exchange
rate (U.S. dollars
in thousands)
|
|
|
Value
(U.S. dollars
in thousands)
|
|
|
Income (loss) from
change in exchange
rate (U.S. dollars
in thousands)
|
|
Sensitive instrument
|
|
Increase
|
|
|
|
|
|
Decrease
|
|
|
|
|
10
|
%
|
|
|
5
|
%
|
|
|
|
|
|
|
5
|
%
|
|
|
10
|
%
|
NIS-linked balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
(32
|
)
|
|
|
(17
|
)
|
|
|
353
|
|
|
|
19
|
|
|
|
39
|
|
Financial assets at fair value through profit or loss
|
|
|
(166
|
)
|
|
|
(87
|
)
|
|
|
1,825
|
|
|
|
96
|
|
|
|
203
|
|
Other receivable (except prepaid expenses and advances to suppliers)
|
|
|
(36
|
)
|
|
|
(19
|
)
|
|
|
398
|
|
|
|
21
|
|
|
|
44
|
|
Accounts payable and accruals
|
|
|
322
|
|
|
|
169
|
|
|
|
(3,545
|
)
|
|
|
(187
|
)
|
|
|
(394
|
)
|
Total NIS-linked balances
|
|
|
88
|
|
|
|
46
|
|
|
|
(969
|
)
|
|
|
(51
|
)
|
|
|
(108
|
)
|
Euro-linked balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
(265
|
)
|
|
|
(139
|
)
|
|
|
2,911
|
|
|
|
153
|
|
|
|
323
|
|
Accounts payable and accrued expenses
|
|
|
10
|
|
|
|
5
|
|
|
|
(109
|
)
|
|
|
(6
|
)
|
|
|
(12
|
)
|
Total Euro-linked balances
|
|
|
(255
|
)
|
|
|
(134
|
)
|
|
|
2,802
|
|
|
|
147
|
|
|
|
311
|
|
Total
|
|
|
(167
|
)
|
|
|
(88
|
)
|
|
|
1,833
|
|
|
|
96
|
|
|
|
203
|
|
Interest
Rate Risk
We
have an exposure to interest income sensitivity, which is affected by changes in the general level of Israeli interest rates.
We currently do not hedge against interest rate exposure. Because of the short-term maturities of our cash equivalents and investment
securities, we do not believe that an increase in market rates would have any significant impact on the realized value of our
investment securities. A 10% change in interest rates would not have a material effect on the fair value of our investment portfolio.
We
do not anticipate undertaking any significant long-term borrowings. At present, our investments consist primarily of cash and
cash equivalents and financial assets at fair value. We may invest in investment-grade marketable securities with maturities of
up to three years, including commercial paper, money market funds, and government/non-government debt securities. The primary
objective of our investment activities is to preserve principal while maximizing the income that we receive from our investments
without significantly increasing risk and loss.
ITEM
12. Description of Securities Other Than Equity Securities.
A.
Debt Securities.
Not
applicable.
B.
Warrants and Rights.
Not
applicable.
C.
Other Securities.
Not
applicable.
D.
American Depositary Shares.
Not
applicable.