PART
I
ITEM 1.
|
IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
Not
applicable.
ITEM 2.
|
OFFER
STATISTICS AND EXPECTED TIMETABLE
|
Not
applicable.
A.
|
Selected
Financial Data
|
The
selected consolidated financial data for the fiscal years set forth in the table below have been derived from our consolidated
financial statements and notes thereto. The selected consolidated statements of comprehensive loss data for the years ended December
31, 2016, 2017 and 2018, and the selected consolidated balance sheet data at December 31, 2017, and 2018, have been derived from
our audited consolidated financial statements and notes thereto set forth elsewhere in this annual report on Form 20-F. The selected
consolidated statements of comprehensive loss data for the years ended December 31, 2014 and 2015, and the selected consolidated
balance sheet data as of December 31, 2014, 2015 and 2016, have been derived from our audited consolidated financial statements
not included in this annual report on Form 20-F. The selected financial data should be read in conjunction with our consolidated
financial statements, and are qualified entirely by reference to such consolidated financial statements.
Consolidated
Statements of Comprehensive Loss Data
|
|
|
|
|
Convenience
translation(2)
|
|
|
|
Year
ended
December 31,
|
|
|
Year ended
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
NIS
in thousands except shares and share data
|
|
|
U.S.
dollars in thousands
|
|
Research and development expenses, net
|
|
|
3,058
|
|
|
|
5,893
|
|
|
|
8,256
|
|
|
|
11,503
|
|
|
|
13,513
|
|
|
|
3,605
|
|
General and administrative expenses
|
|
|
2,491
|
|
|
|
4,204
|
|
|
|
7,968
|
|
|
|
12,930
|
|
|
|
15,734
|
|
|
|
4,198
|
|
Other income
|
|
|
-
|
|
|
|
-
|
|
|
|
(280
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total operating expenses
|
|
|
5,549
|
|
|
|
10,097
|
|
|
|
15,944
|
|
|
|
24,433
|
|
|
|
29,247
|
|
|
|
7,803
|
|
Operating loss
|
|
|
5,549
|
|
|
|
10,097
|
|
|
|
15,944
|
|
|
|
24,433
|
|
|
|
29,247
|
|
|
|
7,803
|
|
Financial income
|
|
|
(37
|
)
|
|
|
(4
|
)
|
|
|
(660
|
)
|
|
|
(101
|
)
|
|
|
(9,154
|
)
|
|
|
(2,442
|
)
|
Financial expenses
|
|
|
39
|
|
|
|
79
|
|
|
|
33
|
|
|
|
3,892
|
|
|
|
20
|
|
|
|
6
|
|
Net loss
|
|
|
5,551
|
|
|
|
10,172
|
|
|
|
15,317
|
|
|
|
28,224
|
|
|
|
20,113
|
|
|
|
5,367
|
|
Total comprehensive loss
|
|
|
5,551
|
|
|
|
10,172
|
|
|
|
15,317
|
|
|
|
28,224
|
|
|
|
20,113
|
|
|
|
5,367
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share (1)
|
|
|
0.084
|
|
|
|
0.137
|
|
|
|
0.168
|
|
|
|
0.252
|
|
|
|
0.155
|
|
|
|
0.041
|
|
Basic and diluted loss per ADS
|
|
|
1.68
|
|
|
|
2.74
|
|
|
|
3.36
|
|
|
|
5.04
|
|
|
|
3.11
|
|
|
|
0.82
|
|
Weighted
average number of shares outstanding used to compute basic and diluted loss per share
|
|
|
65,968,768
|
|
|
|
74,475,109
|
|
|
|
91,128,516
|
|
|
|
111,968,663
|
|
|
|
129,426,091
|
|
|
|
129,426,091
|
|
Consolidated
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convenience
translation(2)
|
|
|
|
Year
ended
December
31,
|
|
|
Year
ended
December
31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
NIS
in thousands
|
|
|
U.S.
dollars in thousands
|
|
Cash and cash equivalents
|
|
|
2,122
|
|
|
|
3,913
|
|
|
|
6,279
|
|
|
|
13,734
|
|
|
|
17,809
|
|
|
|
4,752
|
|
Short term deposits
|
|
|
-
|
|
|
|
-
|
|
|
|
19,660
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Marketable securities
|
|
|
11,257
|
|
|
|
7,829
|
|
|
|
4,997
|
|
|
|
13,999
|
|
|
|
-
|
|
|
|
-
|
|
Other receivables
|
|
|
161
|
|
|
|
412
|
|
|
|
1,461
|
|
|
|
818
|
|
|
|
816
|
|
|
|
218
|
|
Restricted cash
|
|
|
20
|
|
|
|
20
|
|
|
|
140
|
|
|
|
305
|
|
|
|
337
|
|
|
|
90
|
|
Other long term receivables
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
173
|
|
|
|
132
|
|
|
|
35
|
|
Property, plant and equipment
|
|
|
234
|
|
|
|
1,187
|
|
|
|
1,373
|
|
|
|
1,344
|
|
|
|
1,544
|
|
|
|
412
|
|
Total assets
|
|
|
13,794
|
|
|
|
13,361
|
|
|
|
33,910
|
|
|
|
30,373
|
|
|
|
20,638
|
|
|
|
5,507
|
|
Trade payable
|
|
|
107
|
|
|
|
466
|
|
|
|
1,401
|
|
|
|
1,703
|
|
|
|
887
|
|
|
|
237
|
|
Other payables
|
|
|
728
|
|
|
|
2,394
|
|
|
|
2,084
|
|
|
|
2,396
|
|
|
|
4,012
|
|
|
|
1,070
|
|
Warrants to ADS
|
|
|
-
|
|
|
|
-
|
|
|
|
1,938
|
|
|
|
7,422
|
|
|
|
1,816
|
|
|
|
485
|
|
Total liabilities
|
|
|
835
|
|
|
|
2,860
|
|
|
|
5,423
|
|
|
|
11,521
|
|
|
|
6,715
|
|
|
|
1,792
|
|
Loan from controlling
shareholder
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’
equity
|
|
|
12,959
|
|
|
|
10,501
|
|
|
|
28,487
|
|
|
|
18,852
|
|
|
|
13,923
|
|
|
|
3,715
|
|
(1)
|
Data
on diluted loss per share were not presented separately in the financial statements because
the effect of the exercise of the options and warrants is anti-dilutive.
|
(2)
|
Calculated
using the exchange rate reported by the Bank of Israel for December 31, 2018 at the rate
of one U.S. dollar to NIS 3.748.
|
B.
|
Capitalization
and Indebtedness
|
Not
applicable.
C.
|
Reasons
for the Offer and Use of Proceeds
|
Not
applicable.
You
should carefully consider the risks described below, together with all of the other information in this annual report on Form
20-F. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us
or that we currently deem to be immaterial may also materially and adversely affect our business operations. If any of these risks
actually occurs, our business and financial condition could suffer and the price of our ADSs could decline.
Risks
Related to Our Financial Position and Capital Requirements
We
are an early stage company with a limited operating history.
Our
wholly-owned subsidiary commenced operations developing our functional stem cell selection ApoGraft technology in 2011. As such,
we have a limited operating history and our operations are subject to all of the risks inherent in the establishment of a new
business enterprise, including a lack of operating history. We cannot be certain that our business strategy will be successful
or that we will be solvent at any particular time. Our likelihood of success must be considered in light of the problems, expenses,
difficulties, complications and delays frequently encountered in connection with the establishment of any company. If we fail
to address any of these risks or difficulties adequately, our business will likely suffer. Because of the numerous risks and uncertainties
associated with developing and commercializing our ApoGraft technology platform, we are unable to predict the extent of any future
losses or when we will become profitable, if ever. We may never become profitable and you may never receive a return on an investment
in our securities. An investor in our securities must carefully consider the substantial challenges, risks and uncertainties inherent
in the attempted development and commercialization of procedures and products in the medical, cell therapy, biotechnology and
biopharmaceutical industries. We may never successfully commercialize ApoGraft and our business may fail.
We
have a history of losses and can provide no assurance of our future operating results.
Since
2011, we have been focused on research and development activities with a view to developing our ApoGraft technology platform.
We have financed our operations primarily through the sale of equity securities (both in private placements and in public offerings
on the TASE and also on the Nasdaq) and have incurred losses in each year since our inception. We have historically incurred substantial
net losses, including net losses of approximately NIS 20.1 million ($5.3 million) in 2018, NIS 28.2 million ($8.1 million) in
2017, and NIS 15.3 million ($4.0 million) in 2016. As of December 31, 2018, we had an accumulated deficit of approximately NIS
84.1 million ($22.4 million). We do not know whether or when we will become profitable. To date, we have not commercialized our
technology or generated any revenues and accordingly we do not have a revenue stream to support our cost structure. Our losses
have resulted principally from costs incurred in development and discovery activities. The opinion of our independent registered
public accounting firm on our audited financial statements as of and for the year ended December 31, 2018 contains an explanatory
paragraph regarding substantial doubt about our ability to continue as a going concern. We expect to continue to incur losses
for the foreseeable future, and these losses will likely increase as we:
|
●
|
initiate
and manage preclinical development and clinical trials for our ApoGraft technology platform and ApoTainer kit;
|
|
●
|
implement
internal systems and infrastructures;
|
|
●
|
seek
to license additional technologies to develop;
|
|
●
|
hire
management and other personnel; and
|
|
●
|
move
towards commercialization.
|
We
will need significant additional capital, which we may be unable to obtain. If we are unable to raise capital, we will be forced
to reduce or eliminate our operations.
As
of December 31, 2018, we had approximately NIS 17.8 million ($4.8 million) in cash and cash equivalents, a working capital of
NIS 13.7 million ($3.7 million) and an accumulated deficit of NIS 84.1 million ($22.4 million). Based on our current cash balances,
our management is of the opinion that without fund raising we have sufficient capital to finance our operations until the end
of the first quarter of 2020. We will need to raise significant additional capital, in one or more financings, and if we are unable
to obtain additional sufficient financing, we will be forced to reduce the scope of, or eliminate our operations which would have
a materially adverse effect on our business and results of operations.
Since
our inception, most of our resources have been dedicated to the development of ApoGraft. In particular, we have expended and believe
that we will continue to expend significant operating and capital expenditures for the foreseeable future developing our ApoGraft
technology platform and our ApoTainer collection kits. These expenditures will include, but are not limited to, costs associated
with research and development, manufacturing, conducting preclinical experiments and clinical trials, contracting manufacturing
organizations, hiring additional management and other personnel and obtaining regulatory approvals, as well as commercializing
any products approved for sale. Furthermore, we expect to incur additional costs associated with operating as a public company
in the United States. Because the outcome of our planned and anticipated clinical trials is highly uncertain, we cannot reasonably
estimate the actual amounts necessary to successfully complete the development and commercialization of our ApoGraft technology
platform, our ApoTainer collection kits and any other future product. In addition, other unanticipated costs may arise. As a result
of these and other factors currently unknown to us, we require substantial, additional funds through public or private equity
or debt financings or other sources, such as strategic partnerships and alliances and licensing arrangements. In addition, we
may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient
funds for our current or future operating plans. A failure to fund these activities may harm our growth strategy, competitive
position, quality compliance and financial condition.
Our
future capital requirements depend on many factors, including:
|
●
|
the
number and characteristics of products we develop from our ApoGraft technology platform;
|
|
●
|
the
scope, progress, results and costs of researching and developing our ApoGraft technology platform and any future products,
and conducting preclinical and clinical trials;
|
|
●
|
the
timing of, and the costs involved in, obtaining regulatory approvals;
|
|
●
|
the
cost of commercialization activities if any products are approved for sale, including marketing, sales and distribution costs;
|
|
●
|
the
cost of manufacturing any future product we successfully commercialize;
|
|
●
|
our
ability to establish and maintain strategic partnerships, licensing, supply or other arrangements and the financial terms
of such agreements;
|
|
●
|
the
costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation
costs and the outcome of such litigation;
|
|
●
|
the
costs of in-licensing further patents and technologies;
|
|
●
|
the
cost of development of in-licensed technologies;
|
|
●
|
the
timing, receipt and amount of sales of, or royalties on, any future products;
|
|
●
|
the
expenses needed to attract and retain skilled personnel; and
|
|
●
|
any
product liability or other lawsuits related to any future products.
|
Additional
funds may not be available when we need them, on terms that are acceptable to us, or at all. If adequate funds are not available
to us on a timely basis, we may be required to delay, limit, reduce or terminate preclinical studies, clinical trials or other
research and development activities for our ApoGraft technology platform or delay, limit, reduce or terminate our establishment
of sales and marketing capabilities or other activities that may be necessary to commercialize our ApoGraft technology platform,
our ApoTainer collection kits or any future products.
We
will need additional capital in the future. Raising additional capital may cause dilution to our existing shareholders, restrict
our operations or require us to relinquish rights to our technologies or product candidates.
We
will require additional capital in the future. We may seek additional capital through a combination of private and public equity
offerings, debt financings, strategic partnerships and alliances and licensing arrangements. To the extent that we raise additional
capital through the sale of equity or convertible debt securities, the ownership interests of existing shareholders will be diluted,
and the terms may include liquidation or other preferences that adversely affect shareholder rights and may cause the market price
of our shares to decline. Debt financing, if available, may involve agreements that include covenants limiting or restricting
our ability to take certain actions, such as incurring debt, making capital expenditures or declaring dividends. If we raise additional
funds through strategic partnerships and alliances and licensing arrangements with third parties, we may have to relinquish valuable
rights to our technologies or any products, or grant licenses on terms that are not favorable to us. If we are unable to raise
additional funds through equity or debt financing when needed, we may be required to delay, limit, reduce or terminate our product
development or commercialization efforts or grant rights to develop and market products that we would otherwise prefer to develop
and market ourselves.
Risks
Related to Product Development and Regulatory Approval
Our
product development program is based on a novel functional stem cell selection technology platform and is inherently risky.
We
are subject to the risks of failure inherent in the development of products based on new technologies. The novel nature of our
ApoGraft technology platform creates significant challenges in regard to product development and optimization, manufacturing,
government regulation, third-party reimbursement, and market acceptance, which makes it difficult to predict the time and cost
of any product development and subsequently obtaining regulatory approval. These challenges may prevent us from developing and
commercializing products on a timely or profitable basis or at all.
Our
ApoGraft technology platform is in an early stage of discovery and development, and we may fail to develop any commercially acceptable
or profitable products.
We
are concentrating our efforts on developing our first line of products, our ApoTainer collection kits, which is based on our ApoGraft
technology platform, to improve the safety and efficacy of allogeneic HSCT. To date, we have only begun to conduct clinical trials.
As such, we have yet to develop any products that have been approved for marketing, and our future success depends on the successful
proof of concept of the ApoGraft technology platform and development of our ApoTainer selection kits for HSCT. There can be no
assurance that any development problems we experience in the future related to our technology platform will not cause significant
delays or unanticipated costs, or that such development problems can be solved. We may also experience delays in developing a
sustainable, reproducible and scalable manufacturing process or transferring that process to commercial partners, which may prevent
us from completing our clinical trials or commercializing the ApoGraft technology platform and our ApoTainer selection kits on
a timely or profitable basis, if at all. Our ApoTainer selection kits are not expected to be commercially available for several
years, if at all.
If
the FDA classifies our ApoTainer selection kits as a drug, biologic or a combination product subject to the primary jurisdiction
of the Center for Drug Evaluation and Research or Center for Biologics Evaluation and Research, we may not be able to obtain the
necessary approval to market our ApoTainer selection kits or other products based on our ApoGraft technology platform in a timely
manner or at all. Even if we do obtain approval, the cost and delay could materially adversely affect our financial condition,
results of operations and cash flows.
We plan to bring our
ApoTainer selection kits to market for HSCT as a medical device subject to the primary jurisdiction of Center for Biologics Evaluation
and Research, or CBER. The classification of our ApoTainer selection kits by the FDA as a drug, a medical device or a combination
product depends upon, among other things, the regulatory definition of a drug and a device, their primary mode of action and the
indications for use or product claims. In February 2019, we filed a Pre-Request for Designation, or Pre-RFD to the FDA to designate
the Apotainer as a medical device under the regulation of the CBER. Under the Pre-RFD, the FDA will provide a preliminary, nonbinding
assessment of the regulatory identity or classification of our ApoTainer selection kits and an assessment of which Center will
regulate the product. We also believe that due to its novelty and being first in class this product could be classified as a “de-novo”
which could allow for less clinical data before marketing approval. However, if the FDA does not designate the ApoTainer as a
medical device or later changes the regulatory identity or classification or if it is not classified as “de novo,”
then we expect the approval process of our ApoTainer selection kits to be more burdensome and lengthy than if our ApoTainer selection
kits were classified as a medical device. The cost and delay in the approval process could materially adversely affect our financial
condition and results of operations and cash flows.
Future
results released from our ongoing open-label Phase I/II clinical trial may differ materially from interim or pre-clinical trial
results.
Clinical
trials are inherently risky and may reveal that our ApoGraft platform technology is ineffective or has unanticipated interactions
that may significantly decrease trial success. Our pre-clinical trial results and our interim results of our ongoing Phase I/II
clinical trial of ApoGraft or any other interim results may differ materially from final results and do not necessarily predict
favorable final results.
We
may face numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent commercialization of
our ApoGraft platform technology and ApoTainer selection kits or any future product. These clinical trials could be affected by
negative or inconclusive trial results, unexpected delays, unanticipated patient drop-out rates or adverse side effects and future
actions by regulatory authorities or additional expenses.
Clinical
trials necessary to demonstrate proof of concept of the ApoGraft technology platform and support approval for our ApoTainer selection
kits or any future products are expensive and could require the enrollment of large numbers of suitable patients, who could be
difficult to identify and recruit. Delays or failures in any necessary clinical trials could prevent us from commercializing our
ApoGraft technology platform and ApoTainer selection kits or any future product and could adversely affect our business, operating
results and prospects.
Initiating
and completing clinical trials necessary to demonstrate proof of concept of the ApoGraft technology platform and support approval
for our ApoTainer selection kits or any future products that we may develop, or additional safety and efficacy data that the FDA
may require for any new specific indications of our technology that we may seek, are time consuming and expensive with an uncertain
outcome.
Conducting
successful clinical trials could require the enrollment of large numbers of patients, and suitable patients could be difficult
to identify and recruit. To date, we have experienced delays in our ongoing Phase I/II clinical study largely related to slower
than expected recruitment. Patient enrollment in clinical trials and completion of patient participation and follow-up depends
on many factors, including the size of the patient population, the nature of the trial protocol, the attractiveness of, or the
discomforts and risks associated with, the treatments received by enrolled subjects, the availability of appropriate clinical
trial investigators and support staff, the proximity to clinical sites of patients that are able to comply with the eligibility
and exclusion criteria for participation in the clinical trial, and patient compliance. For example, patients could be discouraged
from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up
to assess the safety and effectiveness of our product candidates or if they determine that the treatments received under the trial
protocols are not attractive or involve unacceptable risks or discomforts. In addition, patients participating in clinical trials
may die before completion of the trial or suffer adverse medical events unrelated to our product candidates.
Development
of sufficient and appropriate clinical protocols to demonstrate safety and efficacy will be required and we may not adequately
develop such protocols to support clearance or approval. Further, the FDA could require us to submit data on a greater number
of patients than we originally anticipated and/or for a longer follow-up period or change the data collection requirements or
data analysis applicable to our clinical trials. Delays in patient enrollment or failure of patients to continue to participate
in a clinical trial could cause an increase in costs and delays in the approval and attempted commercialization of our product
candidates or result in the failure of the clinical trial. Such increased costs and delays or failures could adversely affect
our business, operating results and prospects.
The
results of our clinical trials may not support our product candidate claims or any additional claims we may seek for our products
and our clinical trials may result in the discovery of adverse side effects.
Even
if any clinical trial that we need to undertake is completed as planned, we cannot be certain that its results will support our
product candidate claims or any new indications that we may seek for our products or that the FDA or foreign authorities will
agree with our conclusions regarding the results of those trials. The clinical trial process may fail to demonstrate that our
products or a product candidate is safe and effective for the proposed indicated use, which could cause us to stop seeking additional
clearances or approvals for our ApoTainer selection kits, abandon our ApoGraft technology platform or delay development of other
product candidates. Any delay or termination of our clinical trials will delay the filing of our regulatory submissions and, ultimately,
our ability to commercialize a product candidate. It is also possible that patients enrolled in clinical trials will experience
adverse side effects that are not currently part of the product candidate’s profile.
We
might be unable to develop product candidates that will achieve commercial success in a timely and cost-effective manner, or ever.
Even
if regulatory authorities approve our ApoTainer selection kits or any other product we develop, they may not be commercially successful.
Our ApoTainer selection kits or any other product we develop may not be commercially successful because government agencies and
other third-party payors may not cover the product or the coverage may be too limited to be commercially successful; physicians,
researchers and others may not use or recommend our products, even following regulatory approval. A product approval, assuming
one issues, may limit the uses for which the product may be distributed thereby adversely affecting the commercial viability of
the product. Our expenses could increase beyond expectations if we are required by the FDA, the European Medicines Agency, or
the EMA, or other regulatory agencies, domestic or foreign, to change our manufacturing processes or assays, or to perform clinical,
nonclinical, or other types of studies in addition to those that we currently anticipate. Third parties may develop superior products
or have proprietary rights that preclude us from marketing our products. We also expect that at least some of our product candidates
will be expensive, if approved. Demand for any ApoTainer selection kits or any other product we develop 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, 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 our products.
If physicians, government agencies and other third-party payors do not accept our products, we will not be able to generate significant
revenue.
If
we fail to obtain regulatory approval in jurisdictions outside the United States, we will not be able to market our products in
those jurisdictions.
We
intend to seek regulatory approval for our ApoTainer selection kits in a number of countries outside of the United States and
expect that these countries will be important markets for our products, if approved. Marketing our products in these countries
will require separate regulatory approvals in each market and compliance with numerous and varying regulatory requirements. The
regulations that apply to the conduct of clinical trials and approval procedures vary from country to country and may require
additional testing. Moreover, the time required to obtain approval may differ from that required to obtain FDA approval. Approval
by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign
regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. The foreign
regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory
approvals on a timely basis, if at all. We may not be able to file for regulatory approvals and may not receive necessary approvals
to commercialize our products in any foreign market.
If
we fail to obtain or maintain orphan exclusivity for our products we will have to rely on our data and marketing exclusivity,
if any, and on our intellectual property rights, which may reduce the length of time that we can prevent competitors from selling
generic versions of our products.
In
September 2017, we announced that the FDA granted orphan drug designation for ApoGraft for the prevention of acute and chronic
GvHD in transplant patients. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug intended
to treat a rare disease or condition, defined, in part, as a patient population of fewer than 200,000 in the U.S.
In
the U.S., the company that first obtains FDA approval for a designated orphan drug for the specified rare disease or condition
receives orphan drug marketing exclusivity for that drug for a period of seven years. This orphan drug exclusivity prevents the
FDA from approving another application, including a full New Drug Application, or NDA, to market the same drug for the same orphan
indication, except in very limited circumstances. A designated orphan drug may not receive orphan drug exclusivity if it is approved
for a use that is broader than the indication for which it received orphan designation. In addition, orphan drug exclusive marketing
rights in the U.S. may be lost if the FDA later determines that the request for designation was materially defective or if the
manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition.
The
EMA grants orphan drug designation to promote the development of products that may offer therapeutic benefits for life-threatening
or chronically debilitating conditions affecting not more than five in 10,000 people in the E.U. Orphan drug designation from
the EMA provides ten years of marketing exclusivity following drug approval, subject to reduction to six years if the designation
criteria are no longer met.
Even
if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition
because different drugs can be approved for the same condition. Even after an orphan drug is approved, the FDA can subsequently
approve the same drug for the same condition if the FDA concludes that the later drug is safer, more effective or makes a major
contribution to patient care.
We
may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates
or indications that may be more profitable or for which there is a greater likelihood of success.
Although
we believe that our ApoGraft technology platform has broad application, because we have limited financial and managerial resources,
we are currently focused on development of our ApoTainer selection kits for HSCT in order to demonstrate commercial viability
of our technology platform. As a result, we may forego or delay pursuit of opportunities with other product candidates or for
other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail
to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and
development programs and product candidates for specific indications may not yield any commercially viable products. If we do
not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable
rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have
been more advantageous for us to retain sole development and commercialization rights to such product candidate.
We
will need to outsource and rely on third parties for the clinical development and manufacture, sales and marketing of our current
product candidates or any future product candidates that we may develop, and our future success will be dependent on the timeliness
and effectiveness of the efforts of these third parties.
We
do not have the required financial and human resources to carry out on our own all the preclinical and clinical development for
our ApoTainer selection kits or any other or future product candidates that we may develop, and do not have the capability and
resources to manufacture, market or sell our ApoTainer selection kits or any future product candidates that we may develop. Our
business model calls for the partial or full outsourcing of the clinical and other development and manufacturing, sales and marketing
of our product candidates in order to reduce our capital and infrastructure costs as a means of potentially improving our financial
position. Our success will depend on the performance of these outsourced providers. If such providers fail to perform adequately,
our development of product candidates may be delayed and any delay in the development of our product candidates would have a material
and adverse effect on our business prospects.
If
we or our contractors or service providers fail to comply with regulatory laws and regulations, we or they could be subject to
regulatory actions, which could affect our ability to develop, market and sell our product candidates and any other or future
product candidates that we may develop and may harm our reputation.
If
we or our manufacturers or other third-party contractors fail to comply with applicable federal, state or foreign laws or regulations,
we could be subject to regulatory actions, which could affect our ability to develop, market and sell our ApoTainer selection
kits or any future product candidates under development successfully and could harm our reputation and lead to reduced demand
for or non-acceptance of our proposed product candidates by the market. Even technical recommendations or evidence by the FDA
through letters, site visits, and overall recommendations to academia or biotechnology companies may make the manufacturing of
a product extremely labor intensive or expensive, making the product candidate no longer viable to manufacture in a cost efficient
manner. The mode of administration may make the product candidate not commercially viable. The required testing of the product
candidate may make that candidate no longer commercially viable. The conduct of clinical trials may be critiqued by the FDA, or
a clinical trial site’s Institutional Review Board or Institutional Biosafety Committee, which may delay or make impossible
clinical testing of a product candidate. The Institutional Review Board for a clinical trial may stop a trial or deem a product
candidate unsafe to continue testing. This may have a material adverse effect on the value of the product candidate and our business
prospects.
Disruptions
in our supply chain could delay any preclinical or clinical trials and the commercial launch of our product candidates.
Any
significant disruption in our supplier relationships could harm our business. We currently rely on a single source supplier for
the apoptotic inducing signal, Fas ligand, or FasL, that we use, and we may rely on a limited number of suppliers for other raw
material we use. We have experienced delays in the supply of FasL for our planned second human ApoGraft trial and while we believe
we have addressed these supply issues, there can be no assurance that we will not experience delays in supply of FasL in the future.
If our current supplier or any other supplier suffers a major natural or man-made disaster at its manufacturing facility, or if
they otherwise cease to supply to us, then this could result in further delays in our clinical studies and may delay product testing
and potential regulatory approval until a qualified alternative supplier is identified. With respect to other raw materials for
the ApoGraft technology platform, although alternative sources of supply exist, it could be expensive and take a significant amount
of time to arrange for alternative suppliers. If our manufacturers or we are unable to purchase any key materials after regulatory
approval has been obtained for our product candidates, the commercial launch of our product candidates would be delayed or there
would be a shortage in supply, which would impair our ability to generate revenues from the sale of our product candidates.
Should
our products be approved for commercialization, adverse changes in reimbursement policies and procedures by payors may impact
our ability to market and sell our products.
Healthcare
costs have risen significantly over the past decade, and there have been and continue to be proposals by legislators, regulators
and third-party payors to decrease costs. Third-party payors are increasingly challenging the prices charged for medical products
and services and instituting cost containment measures to control or significantly influence the purchase of medical products
and services. For example, in the United States, the Patient Protection and Affordable Care Act, as amended by the Health Care
and Education Reconciliation Act of 2010, or collectively, PPACA, among other things, reduced and/or limited Medicare reimbursement
to certain providers. The Budget Control Act of 2011, as amended by subsequent legislation, further reduces Medicare’s payments
to providers by 2% through fiscal year 2024. These reductions may reduce providers’ revenues or profits, which could affect
their ability to purchase new technologies. Furthermore, the healthcare industry in the United States has experienced a trend
toward cost containment as government and private insurers seek to control healthcare costs by imposing lower payment rates and
negotiating reduced contract rates with service providers. Legislation could be adopted in the future that limits payments for
our products from governmental payors. In addition, commercial payors, such as insurance companies, could adopt similar policies
that limit reimbursement for medical device manufacturers’ products. Therefore, we cannot be certain that our products or
the procedures or patient care performed using our products will be reimbursed at a cost-effective level. We face similar risks
relating to adverse changes in reimbursement procedures and policies in other countries where we may market our products. Reimbursement
and healthcare payment systems vary significantly among international markets. Our inability to obtain international reimbursement
approval, or any adverse changes in the reimbursement policies of foreign payors, could negatively affect our ability to sell
our products and have a material adverse effect on our business and financial condition.
Should
our products be approved for commercialization, our financial performance may be adversely affected by medical device tax provisions
in the healthcare reform laws.
PPACA
currently imposes, among other things, an excise tax of 2.3% on any entity that manufactures or imports medical devices offered
for sale in the United States. Under these provisions, the Congressional Research Service predicts that the total cost to the
medical device industry may be $38 billion over the next decade. The Internal Revenue Service issued final regulations implementing
the tax in December 2012, which requires, among other things, bi-monthly payments and quarterly reporting. Once we market products,
we will be subject to this or any future excise tax on our sales of certain medical devices in the United States. To the extent
our products are considered medical devices, we anticipate that primarily all of our sales, once commenced, of medical devices
in the United States will be subject to this 2.3% excise tax.
Public
perception of ethical and social issues surrounding the use of stem cell technology may limit or discourage the use of our technologies.
For
social, ethical, or other reasons, governmental authorities in the United States and other countries may call for limits on, or
regulation of the use of, stem cell technologies. Although our platform technology is designed to enrich the stem cell population
as an enabling technology rather than manufacture stem cells, claims that stem cell technologies are ineffective, unethical or
pose a danger to the environment may influence public attitudes. The subject of stem cell technologies in general has received
negative publicity and aroused public debate in the United States and some other countries. Ethical and other concerns about our
stem cell technology could materially hurt the market acceptance of our technologies.
Our
business and operations may be materially adversely affected in the event of computer system failures or security breaches.
Despite
the implementation of security measures, our internal computer systems, and those of our contract research organizations and other
third parties on which we rely, are vulnerable to damage from computer viruses, unauthorized access, cyber-attacks, natural disasters,
fire, terrorism, war, and telecommunication and electrical failures. If such an event were to occur and interrupt our operations,
it could result in a material disruption of our drug development programs. For example, the loss of clinical trial data from ongoing
or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover
or reproduce the data. To the extent that any disruption or security breach results in a loss of or damage to our data or applications,
loss of trade secrets or inappropriate disclosure of confidential or proprietary information, including protected health information
or personal data of employees or former employees, access to our clinical data, or disruption of the manufacturing process, we
could incur liability and the further development of our drug candidates could be delayed. We may also be vulnerable to cyber-attacks
by hackers or other malfeasance. This type of breach of our cybersecurity may compromise our confidential information and/or our
financial information and adversely affect our business or result in legal proceedings. Further, these cybersecurity breaches
may inflict reputational harm upon us that may result in decreased market value and erode public trust.
The
members of our management team and certain consultants are important to the efficient and effective operation of our business.
Failure to retain our management and consulting team could have a material adverse effect on our business, financial condition
or results of operations.
Our
senior management and technical personnel, as well as certain consultants, are important to the efficient and effective operation
of our business, particularly Dr. Shai Yarkoni, our Chief Executive Officer. Our failure to retain the personnel that have developed
much of the technology we utilize today, or any other key management and technical 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 of the date of this update, we do not have key-man insurance on any of our officers or consultants.
As
such, our future success highly depends on our ability to attract, retain and motivate personnel, including contractors, 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 employees or consultants. 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
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.
The
field of regenerative medicine is expanding rapidly, mainly in uses of stem cells but also in the development of cell-based therapies
and/or devices designed to isolate stem and progenitor cells from human tissues. As the field grows, we face, and will continue
to face, increased competition from pharmaceutical, biopharmaceutical, medical device and biotechnology companies, as well as
academic and research institutions and governmental agencies in the United States and abroad. 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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developing
stem cell selection technology;
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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;
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manufacturing
medical devices; and
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launching,
marketing and selling medical devices.
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We
are aware of two companies that lead the stem cell selection market with whom we directly compete. The first is Miltenyi Biotec,
or Miltenyi, which dominates the stem cell selection market, using biomarkers to either enrich stem cells (positive selection
by CD34) or deplete mature hematopoietic cells such as T cells from the biological sample (negative selection by monoclonal activity
against T-cell receptor), resulting in the enrichment of stem and progenitor cells. The second is Cytori Therapeutics, or Cytori,
which sells a medical device known as the Celution® System that enables bedside access to adult adipose-derived stem and regenerative
cells, or ADRCs, by automating and standardizing the extraction, washing, and concentration of a patient’s own ADRCs for
present and future clinical use. We believe that both technologies result in less than optimal cell population both in terms of
quantity and quality (purity) of the selected population of cells.
In
addition, since we are developing our ApoTainer selection kits to improve the safety and efficacy of allogeneic HSCT, we also
compete with companies developing treatments for GvHD, a life-threatening condition associated with allogeneic HSCT.
In
the general area of cell-based therapies, we may now or in the future compete on an indirect basis with a variety of companies,
most of whom are specialty medical products or biotechnology companies that provide a finished stem cell product that has already
undergone stem cell selection. We believe, however, that many of these companies have the potential to become customers in the
future of our ApoGraft technology platform in order to improve and enhance their in-house processes.
If
our competitors develop and commercialize products faster than we do, or develop and commercialize products that are superior
to our ApoGraft technology platform or ApoTainer selection kits, our commercial opportunities will be reduced or eliminated. Our
competitors may succeed in developing and commercializing products earlier and obtaining regulatory approvals from the FDA and
foreign regulatory authorities 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 candidate obsolete or non-competitive. If we cannot successfully compete with
new or existing products, our marketing and sales will suffer and we may never be profitable.
The
extent to which our product candidate achieves market acceptance will depend on competitive factors, many of which are beyond
our control. Competition in the field of regenerative medicine is intense and has been accentuated by the rapid pace of technology
development. Our competitors also compete with us to:
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attract
parties for acquisitions, joint ventures or other collaboration;
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license
proprietary technology that is competitive with ApoGraft technology platform or ApoTainer selection kits;
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attract
and hire scientific talent and other qualified personnel.
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Product
liability and other claims against us may in the future reduce demand for our products or result in substantial damages. We anticipate
that we will need to obtain and maintain additional or increased insurance coverage, and we may not be able to obtain or maintain
such coverage on commercially reasonable terms, if at all.
A
product liability claim, a clinical trial liability claim or other claim with respect to uninsured liabilities or for amounts
in excess of insured liabilities could have a material adverse effect on our business. Our business exposes us to potential liability
risks that may arise from any future clinical testing of our product candidates in human clinical trials and the manufacture and
sale of any approved products. Any clinical trial liability or product liability claim or series of claims or class actions brought
against us, with or without merit, could result in:
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liabilities
that substantially exceed any clinical trial liability or product liability insurance that we may obtain in the future, which
we would then be required to pay from other sources, if available;
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an
increase in the premiums we may pay for any clinical trial liability or product liability insurance we may obtain in the future
or the inability to renew or obtain clinical trial liability or product liability insurance coverage in the future on acceptable
terms, or at all;
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withdrawal
of clinical trial volunteers or patients;
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damage
to our reputation and the reputation of our products, including loss of any future market share;
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regulatory
investigations that could require costly recalls or product modifications;
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diversion
of management’s attention from managing our business.
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We
do not currently have product liability insurance because none of our product candidates has yet been approved for commercialization.
If any of our product candidates are sold commercially, we will seek product liability insurance coverage. We cannot assure you
that we will be able to maintain clinical trial or obtain and product liability insurance on commercially acceptable terms, if
at all, or that we will be able to maintain such insurance at a reasonable cost or in sufficient amounts to protect against potential
losses.
If
our employees commit fraud or other misconduct, including noncompliance with regulatory standards and requirements and insider
trading, our business may experience serious adverse consequences.
We
are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply
with FDA regulations, to provide accurate information to the FDA, to comply with manufacturing standards we have established,
to comply with federal and state health-care fraud and abuse laws and regulations, to report financial information or data accurately
or to disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry
are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices.
These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission,
customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information
obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation.
Our
board of directors has adopted a Code of Ethics which became effective upon the listing of our ADSs on Nasdaq. However, it is
not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity
may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations
or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are
instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant
impact on our business, including the imposition of significant fines or other sanctions.
In
addition, during the course of our operations, our directors, executives and employees may have access to material, nonpublic
information regarding our business, our results of operations or potential transactions we are considering. If a director, executive
or employee was to be investigated, or an action was to be brought against a director, executive or employee for insider trading,
it could have a negative impact on our reputation and the market price of the ADSs. Such a claim, with or without merit, could
also result in substantial expenditures of time and money, and divert attention of our management team from other tasks important
to the success of our business.
We
may encounter difficulties in managing our growth. Failure to manage our growth effectively will 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 will require 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 will not be able to successfully commercialize our ApoGraft technology platform, our
ApoTainer selection kits or any future product candidate. 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 we have 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 will 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.
Our
business will expose us to potential liability that results from risks associated with conducting any future clinical trials of
our ApoTainer selection kits or any future product candidate. A successful clinical trial liability claim, if any, brought against
us could have a material adverse effect on our business, prospects, financial condition and results of operations even though
clinical trial insurance is successfully maintained or obtained. Our planned insurance coverage may only mitigate a small portion
of a substantial claim against us. In addition, 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 us.
Recent
disruptions in the financial markets and economic conditions could affect our ability to raise capital.
In
recent years, the United States and global economies suffered dramatic downturns as the result of a deterioration in the credit
markets and related financial crisis as well as a variety of other factors including, among other things, extreme volatility in
security prices, severely diminished liquidity and credit availability, ratings downgrades of certain investments and declining
valuations of others. The United States and certain foreign governments have taken unprecedented actions in an attempt to address
and rectify these extreme market and economic conditions by providing liquidity and stability to the financial markets. If the
actions taken by these governments are not successful, the return of adverse economic conditions may cause a significant impact
on our ability to raise capital, if needed, on a timely basis and on acceptable terms or at all.
Our
current management team has limited experience in managing and operating a publicly traded U.S. company. Any failure to comply
or adequately comply with federal securities laws, rules or regulations could subject us to fines or regulatory actions, which
may materially adversely affect our business, results of operations and financial condition.
Our
current management team has a limited experience managing and operating a publicly traded U.S. company. Failure to comply or adequately
comply with any laws, rules or regulations applicable to our business may result in fines or regulatory actions, which may materially
adversely affect our business, results of operation or financial condition, and could result in delays in achieving the development
of an active and liquid trading market for the ADSs.
Risks
Related to Our Intellectual Property
We
rely upon patents to protect our technology.
The
patent position of biotechnology firms is generally uncertain and involves complex legal and factual questions. We do not know
whether any of our current or future patent applications will result in the issuance of any patents. Even issued patents may be
challenged, invalidated or circumvented. Patents may not provide a competitive advantage or afford protection against competitors
with similar technology. Competitors or potential competitors may have filed applications for, or may have received patents and
may obtain additional and proprietary rights to compounds or processes used by or competitive with ours.
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 U.S. Patent and Trademark Office (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 office 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 would have a material adverse effect on our business.
We
may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could be expensive, time-consuming
and ultimately unsuccessful.
Competitors
may infringe our issued patents or other intellectual property. To counter infringement or unauthorized use, we may be required
to file infringement claims, which can be expensive and time-consuming. Any claims we assert against perceived infringers could
provoke these parties to assert counterclaims against us alleging that we infringe their intellectual property. In addition, in
a patent infringement proceeding, a court may decide that a patent of ours is invalid or unenforceable, in whole or in part, construe
the patent’s claims narrowly or refuse to stop the other party from using the technology at issue on the grounds that our
patents do not cover the technology in question. An adverse result in any litigation proceeding could put one or more of our patents
at risk of being invalidated or interpreted narrowly, which could adversely affect us.
Third
parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which
would be uncertain and could have a material adverse effect on the success of our business.
Our
commercial success depends upon our ability to develop, manufacture, market and sell our platform technology without infringing
the proprietary rights of third parties. There is considerable intellectual property litigation in the medical device and pharmaceutical
industries. While no such litigation has been brought against us and we have not been held by any court to have infringed a third
party’s intellectual property rights, we cannot guarantee that our technology or use of our technology does not infringe
third-party patents. It is also possible that we have failed to identify relevant third-party patents or applications that may
have been issued or pending in the US or in a foreign jurisdiction. For example, applications filed before November 29, 2000 and
certain applications filed after that date that will not be filed outside the United States remain confidential until patents
issue. Patent applications in the United States and elsewhere are published approximately 18 months after the earliest date which
they are entitled to, which is referred to as the priority date. Therefore, it cannot be ruled out that patent applications covering
our technology were filed by others in the last 18 months about which we cannot have any knowledge. Additionally,
pending patent applications which have been published can, subject to certain limitations, be later amended in a manner that could
cover our technology.
We
may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with
respect to our technology, including inter parties review, interference, or derivation proceedings before the USPTO and similar
bodies in other countries. Third parties may assert infringement claims against us based on existing intellectual property rights
and intellectual property rights that may be granted in the future.
If
we are found to infringe a third party’s intellectual property rights, we could be required to obtain a license from such
third party to continue developing and marketing our technology. However, we may not be able to obtain any required license on
commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our
competitors access to the same technologies licensed to us. We could be forced, including by court order, to cease commercializing
the infringing technology. In addition, we could be found liable for monetary damages, including treble damages and attorneys’
fees if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing our
technology or force us to cease some of our business operations, which could materially harm our business. Claims that we have
misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.
We
may not be able to protect our intellectual property rights throughout the world.
Filing,
prosecuting and defending patents on product candidates in all countries throughout the world would be prohibitively expensive,
and our intellectual property rights in some countries outside the United States and Israel can be less extensive than those in
the United States and Israel. In addition, the laws of some foreign countries do not protect intellectual property to the same
extent as laws in the United States and Israel. Consequently, we may not be able to prevent third parties from practicing our
inventions in all countries outside the United States and Israel, or from selling or importing products made using our inventions
in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not
obtained patents to develop their own products and further, may export otherwise infringing products to territories where we have
patents, but enforcement is not as strong as that in the United States and Israel.
Many
companies have encountered significant problems in protecting and defending intellectual property in foreign jurisdictions. The
legal systems of certain countries, particularly China and certain other developing countries, do not favor the enforcement of
patents, trade secrets and other intellectual property, particularly those relating to medical devices and biopharmaceutical products,
which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of
our proprietary rights generally. To date, we have not sought to enforce any issued patents in these foreign jurisdictions. Proceedings
to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from
other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications
at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we
initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. The requirements for patentability
may differ in certain countries, particularly developing countries. Certain countries in Europe and developing countries, including
China and India, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties.
In those countries, we and our licensors may have limited remedies if patents are infringed or if we or our licensors are compelled
to grant a license to a third party, which could materially diminish the value of those patents. This could limit our potential
revenue opportunities. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate
to obtain a significant commercial advantage from the intellectual property that we develop or license.
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 enter into these types of agreements with
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 Powered by Cellect technology platform, our ApoTainer selection kits or any future product candidate. 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
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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Intellectual
property rights do not necessarily address all potential threats to our competitive advantage.
The
degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have
limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage. The following examples
are illustrative:
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others
may be able to develop technology that is similar to our Powered by Cellect technology platform, our ApoTainer selection kits
or any future product candidate, but that is not covered by the claims of the patents that we own;
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we
or any future strategic partners might not have been the first to make the inventions covered by the issued patent or pending
patent application that we own or have exclusively licensed;
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we
or any future strategic partners might not have been the first to file patent applications covering certain of our inventions;
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others
may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our
intellectual property rights;
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it
is possible that our pending patent applications will not lead to issued patents;
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issued
patents that we own or have exclusively licensed may not provide us with any competitive advantages, or may be held invalid
or unenforceable, as a result of legal challenges by our competitors;
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our
competitors might conduct research and development activities in countries where we do not have patent rights and then use
the information learned from such activities to develop competitive products for sale in our major commercial markets;
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we
may not develop additional proprietary technologies that are patentable; and
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the
patents of others may have an adverse effect on our business.
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We
may be subject to claims challenging the inventorship of our patents and other intellectual property.
We
may be subject to claims that former employees, collaborators or other third parties have an interest in our patents or other
intellectual property as an inventor or co-inventor. For example, we may have inventorship disputes arise from conflicting obligations
of consultants or others who are involved in developing our product candidates. Litigation may be necessary to defend against
these and other claims challenging inventorship. If we fail in defending any such claims, in addition to paying monetary damages,
we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property.
Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims,
litigation could result in substantial costs and be a distraction to management and other employees. In addition, the Israeli
Supreme Court ruled in 2012 that an employee who receives a patent or contributes to an invention during his employment may be
allowed to seek compensation for such contributions from his or her employer, even if the employee’s contract of employment
specifically states otherwise and the employee has transferred all intellectual property rights to the employer. The Israeli Supreme
Court ruled that the fact that a contract revokes an employee’s right for royalties and compensation does not rule out the
right of the employee to claim their right for royalties. As a result, it is unclear whether and, if so, to what extent our employees
may be able to claim compensation with respect to our future revenue. We may receive less revenue from future products if any
of our employees successfully claim for compensation for their work in developing our intellectual property, which in turn could
impact our future profitability.
Risks
Related to Our Operations in Israel
Potential
political, economic and military instability in the State of Israel, where our senior management, our head executive office, and
research and development facilities are located, may adversely affect our results of operations.
Our
head executive office, our research and development facilities, as well as some of our planned clinical sites, are or will be
located in Israel. All our officers and a majority of our 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. 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 the summer of 2006 and the fall of 2012, Israel was engaged in an armed
conflict with Hezbollah, a Lebanese Islamist Shiite militia group and political party. In December 2008, January 2009, November
2012 and July 2014, there were escalations in violence between Israel, on the one hand, and Hamas, the Palestinian Authority and/or
other groups, on the other hand, 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 and central Israel, including near Tel Aviv and at areas surrounding
Jerusalem. 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. Our offices and
laboratory, located in Kfar Saba, Israel, are within the range of the missiles and rockets that have been fired at Israeli cities
and towns from Gaza sporadically since 2006, with escalations in violence (such as the recent escalation in July 2014) during
which there were a substantially larger number of rocket and missile attacks aimed at Israel. In addition, 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 turbulence 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. This instability and any outside 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 causing additional conflicts in the region. In addition, Iran has threatened to attack Israel and
is widely believed to 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. Additionally, a violent jihadist
group named Islamic State of Iraq and Levant (ISIL) is involved in hostilities in Iraq and Syria and have been growing in influence.
Although ISIL’s activities have not directly affected the political and economic conditions in Israel, ISIL’s stated
purpose is to take control of the Middle East, including Israel. 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 may decline 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. 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.
Shareholders
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.
All
our officers and a majority of our directors are residents of Israel. Most of our directors’ and officers’ assets
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. 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 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 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
applicable U.S. and Israeli law, 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. In addition, employees may be entitled to
seek compensation for their inventions irrespective of their agreements with us, which in turn could impact our future profitability.
We
generally enter into non-competition agreements with our employees and key consultants. These agreements prohibit our employees
and key consultants, if they cease working for us, from competing directly with us or working for our competitors or clients for
a limited period of time. We may be unable to enforce these agreements under the laws of the jurisdictions in which our employees
work and it may be difficult for us to restrict our competitors from benefitting from the expertise our former employees or consultants
developed while working for us. For example, Israeli courts have required employers seeking to enforce non-compete undertakings
of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of
material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential
commercial information or the protection of its intellectual property. If we cannot demonstrate that such interests will be harmed,
we may be unable to prevent our competitors from benefiting from the expertise of our former employees or consultants and our
ability to remain competitive may be diminished.
In
addition, Chapter 8 to the Israeli Patents Law, 5727-1967, or the Patents Law, deals with inventions made in the course of an
employee’s service and during his or her term of employment, whether or not the invention is patentable, or service inventions.
Section 134 of the Patents Law sets forth that if there is no agreement which explicitly determines whether the employee is entitled
to compensation for the service inventions and the extent and terms of such compensation, such determination will be made by the
Compensation and Rewards Committee, a statutory committee of the Israeli Patents Office. The Israeli Supreme Court ruled in 2012
that an employee who contributes to a service invention during his or her employment may be allowed to seek compensation for such
contributions from his employer, even if the employee’s contract of employment specifically states otherwise and the employee
has assigned all intellectual property rights to the employer. The Israeli Supreme Court ruled that the fact that a contract revokes
the employee’s right for royalties and compensation in connection with service inventions does not rule out the right of
the employee to claim a right for royalties. Following such ruling, the Israeli Supreme Court remanded the proceedings to the
District Court for further discussion and therefore the ultimate outcome has yet to be resolved. As a result, it is unclear if,
and to what extent, our research and development employees may be able to claim compensation with respect to our future revenue.
As a result, we may receive less revenue from future products if such claims are successful, which in turn could impact our future
profitability.
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.
Since
we are incorporated under Israeli law, the rights and responsibilities of our shareholders are governed by our articles of association
and Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders
of U.S.-based corporations. In particular, a shareholder of an Israeli company, such as us, has a duty to act in good faith and
in a customary manner in exercising its rights and performing its obligations towards us and other shareholders and to refrain
from abusing its power in us, including, among other things, in voting at the general meeting of shareholders on certain matters,
such as an amendment to our articles of association, an increase of our authorized share capital, a merger and approval of related
party transactions that require shareholder approval. A shareholder also has a general duty to refrain from discriminating against
other shareholders. In addition, a controlling shareholder or a shareholder who knows that it possesses the power to determine
the outcome of a shareholders vote or to appoint or prevent the appointment of an office holder of ours or other power towards
us has a duty to act in fairness towards us. However, Israeli law does not define the substance of this duty of fairness. Since
Israeli corporate law underwent extensive revisions approximately 15 years ago, the parameters and implications of the provisions
that govern shareholder behavior have not been clearly determined. These provisions may be interpreted to impose additional obligations
and liabilities on our shareholders that are not typically imposed on shareholders of U.S. corporations.
Provisions
of Israeli law may delay, prevent or otherwise impede a merger with, or an acquisition of, our company, which could prevent a
change of control, even when the terms of such a transaction are favorable to us and our shareholders.
Israeli
corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special
approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant
to these types of transactions. For example, a merger may not be consummated unless at least 50 days have passed from the date
that a merger proposal was filed by each merging company with the Israel Registrar of Companies and at least 30 days from the
date that the shareholders of both merging companies approved the merger. In addition, the holder of a majority of each class
of securities of the target company must approve a merger. Moreover, a full tender offer can only be completed if the acquirer
receives at least 95% of the issued share capital (provided that a majority of the offerees that do not have a personal interest
in such tender offer shall have approved the tender offer, except that if the total votes to reject the tender offer represent
less than 2% of the company’s issued and outstanding share capital, in the aggregate, approval by a majority of the offerees
that do not have a personal interest in such tender offer is not required to complete the tender offer), and the shareholders,
including those who indicated their acceptance of the tender offer, may, at any time within six months following the completion
of the tender offer, petition the court to alter the consideration for the acquisition (unless the acquirer stipulated in the
tender offer that a shareholder that accepts the offer may not seek appraisal rights).
Furthermore,
Israeli tax considerations may make potential transactions unappealing to us or to those of our shareholders whose country of
residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. For example, Israeli tax law does
not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for
tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of numerous conditions, including a
holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating
companies are restricted. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and
when such time expires, the tax becomes payable even if no actual disposition of the shares has occurred.
These
and other similar provisions could delay, prevent or impede an acquisition of us or our merger with another company, even if such
an acquisition or merger would be beneficial to us or to our shareholders.
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.
Our
reporting and functional currency is the NIS, but some portion of our clinical trials and operations expenses are in the U.S.
dollar and Euro. As a result, we are exposed to some currency fluctuation risks. . For example, if the NIS strengthens against
either the U.S. dollar or the Euro, our reported revenues in NIS may be lower than anticipated. The Israeli rate of inflation
has not offset or compounded the effects caused by fluctuations between the NIS and the U.S. dollar or the Euro. To date, we have
not engaged in hedging transactions. Although the Israeli rate of inflation has not had a material adverse effect on our financial
condition during 2016, 2017, or 2018 to date, 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 NIS.
These measures, however, may not adequately protect us from adverse effects.
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.
Our
reporting and functional currency is the NIS, but some portion of our clinical trials and operations expenses are in the U.S.
dollar and Euro. As a result, we are exposed to some currency fluctuation risks.
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.
Risks
Related to Ownership of Our ADSs or Warrants
We
may not be able to raise additional funds unless we increase our authorized share capital.
As
of March 12, 2019, we have 500,000,000 authorized ordinary shares, out of which 224,087,799 ordinary shares are
outstanding (which excludes 2,641,693, shares held in treasury), 145,471,922 are reserved for future issuance under
outstanding options and warrants and under our 2014 Cellect Option Plan. Any equity financing necessary in order to fund our
operations may require us to increase our authorized share capital prior to initiating any such financing transaction.
Increasing our share capital is subject to the approval of our shareholders. In the event we fail to obtain the approval of
our shareholders to such increase in our authorized share capital, our ability to raise sufficient funds, if at all, might
be adversely effected.
We
do not know whether a market for our securities will be sustained or what the trading price of our securities will be and as a
result it may be difficult for you to sell our securities held by you.
Although
our ADSs and listed warrants now trade on Nasdaq, an active trading market for the ADSs or listed warrants may not be sustained.
It may be difficult for you to sell your ADSs, Pre-funded Warrants or Warrants without depressing the market price for the ADSs
or listed warrants. As a result of these and other factors, you may not be able to sell your ADSs, Pre-funded Warrants or Warrants.
Further, an inactive market may also impair our ability to raise capital by issuing securities and may impair our ability to enter
into strategic partnerships or acquire companies or products by using our equity as consideration.
If
we were to be characterized as a “passive foreign investment company” for U.S. tax purposes, U.S. holders of our ordinary
shares, ADSs or warrants could have adverse U.S. income tax consequences.
If
we were to be characterized as a passive foreign investment company, or PFIC, under the U.S. Internal Revenue Code of 1986, as
amended, or the Code, in any taxable year during which a U.S. Holder (as defined below) owns ordinary shares, ADSs, or warrants,
such U.S. Holder could be liable for additional taxes and interest charges upon certain distributions by us and any gain recognized
on a sale, exchange or other disposition, including a pledge, of our ordinary shares, ADSs, or warrants whether or not we continue
to be a PFIC. We believe that we were a PFIC for our 2018 taxable year. Because the PFIC determination is highly fact intensive,
there can be no assurance that we will not be a PFIC for 2019 or for any other taxable year. U.S. Holders who hold ordinary shares,
ADSs, or warrants during a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC, subject
to specified exceptions for U.S. Holders who made a “qualified electing fund” or “mark-to-market” election
with respect to our ordinary shares or ADSs. A U.S. Holder may be able to mitigate some of the adverse U.S. federal income tax
consequences with respect to owning ordinary shares or ADSs provided that such U.S. Holder is eligible to make, and successfully
makes, a “mark-to-market” election. U.S. Holders of our ordinary shares or ADSs could also mitigate some of the adverse
U.S. federal income tax consequences of us being classified as a PFIC by making a “qualified electing fund” election.
Such elections would be unavailable with respect to our warrants. Upon request, we expect to provide the information necessary
for U.S. Holders to make “qualified electing fund” elections if we are classified as a PFIC. U.S. Holders are strongly
urged to consult their tax advisors about the PFIC rules, including tax return filing requirements and the eligibility, manner,
and consequences to them of making a “qualified electing fund” or “mark-to-market” election with respect
to our ordinary shares, ADSs, and warrants in the event that we qualify as a PFIC.
Failure
to achieve and 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 the ADSs.
Effective
internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We will be required
to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley
Act, which requires annual management assessments of the effectiveness of our internal control over financial reporting. In addition,
if we fail to maintain the adequacy of our internal control, 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 control, 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 the ADSs. 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, which could make the ADSs or warrants less attractive to investors.
For
as long as we are deemed an emerging growth company, we are permitted to and intend to take advantage of specified reduced reporting
and other regulatory requirements that are generally unavailable to other public companies, including:
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exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting required
by Section 404 of the Sarbanes-Oxley Act; and
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an
exemption 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 financial statements.
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We
will be an emerging growth company until the earliest of: (i) the last day of the fiscal year during which we had 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 the ADSs 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
filer” as defined in Regulation S-K under the Securities Act of 1933, as amended (the “Securities Act”).
We
cannot predict if investors will find the ADSs or warrants less attractive because we may rely on these exemptions. If some investors
find the ADSs or warrants less attractive as a result, there may be a less active trading market for the ADSs or warrants and
the market price of the ADSs may be more volatile.
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 Securities
and Exchange Commission (the “SEC”). Under the Securities Exchange Act of 1934, as amended (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 a recent amendment to the regulations
promulgated under the Israeli Companies Law, as amended, or the Companies Law, as an Israeli public company listed overseas we
will be 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 prior to such amendment), 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 transactions and short-swing profit recovery required by 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 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 Nasdaq for domestic U.S. issuers. For instance, we follow home country
practice in Israel with regard to, among other things, board of directors independence requirements, director nomination procedures,
compensation committee matters. In addition, we will follow our home country law instead of the listing rules of Nasdaq 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 us, certain transactions other than a public offering
involving issuances of a 20% or greater interest in the 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 Nasdaq may provide less protection to you than what is accorded to investors under the listing rules of Nasdaq applicable to
domestic U.S. issuers.
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 traded securities, our
securities price and trading volume could be negatively impacted.
The
trading market for our securities will 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 the ADSs or listed warrants, or provide more favorable relative recommendations about our competitors,
the price of the ADSs or listed warrants 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 the price of the ADSs or listed warrants or their trading volume.
The
market price for our ADSs and listed warrants may be volatile.
The
market price for our ADSs and listed warrants is likely to be highly volatile and subject to wide fluctuations in response to
numerous factors including the following:
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our
failure to obtain the approvals necessary to commence 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 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 regenerative medicine or healthcare 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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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 our products that 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
or the ADSs or the warrants are covered by analysts;
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future
issuances of ordinary shares, ADSs or warrants or other securities;
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general
market conditions, including the volatility of market prices for shares of healthcare
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 the ADSs and warrants,
which would result in substantial losses by our investors. In addition, the securities market has from time to time experienced
significant price and volume fluctuations that are not related to the operating performance of any particular company. These market
fluctuations may also have a material adverse effect on the market price of the ADSs and warrants.
Substantial
future sales or perceived potential sales of our ordinary shares or ADSs or listed warrants in the public market could cause the
price of our ADSs or listed warrants to decline.
Substantial
sales of our ADSs or listed warrants on Nasdaq may cause the market price of our ADSs and listed warrants to decline. Sales by
us or our security holders of substantial amounts of our ADSs or listed warrants or the perception that these sales may occur
in the future, could cause a reduction in the market price of our shares ADSs or listed warrants. The issuance of any additional
ordinary shares or any additional ADSs or warrants, or any securities that are exercisable for or convertible into our ordinary
shares or ADSs, may have an adverse effect on the market price of our ADSs or listed warrants and will have a dilutive effect
on our existing shareholders and holders of ADSs or warrants.
We
have not paid, and do not intend to pay, dividends on our ordinary shares and, therefore, unless our traded securities appreciate
in value, our investors may not benefit from holding our securities.
We
have not paid any cash dividends on our ordinary shares since inception. We do not anticipate paying any cash dividends on our
ordinary shares in the foreseeable future. Moreover, the Companies Law imposes certain restrictions on our ability to declare
and pay dividends. As a result, investors in our ADSs or ordinary shares, or investors who exercise our warrants, will not be
able to benefit from owning these securities unless their market price becomes greater than the price paid by such investors and
they are able to sell such securities. We cannot assure you that you will ever be able to resell our securities at a price in
excess of the price paid.
You
may not receive the same distributions or dividends as those we make to the holders of our ordinary shares, and, in some limited
circumstances, you may not receive dividends or other distributions on our ordinary shares and you may not receive any value for
them, if it is illegal or impractical to make them available to you.
The
depositary for the ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary
shares or other deposited securities underlying the ADSs, after deducting its fees and expenses. You will receive these distributions,
if any, in proportion to the number of ordinary shares your ADSs represent. However, the depositary is not responsible if it decides
that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful
to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act, but
that are not properly registered or distributed under an applicable exemption from registration. In addition, conversion into
U.S. dollars from foreign currency that was part of a dividend made in respect of deposited ordinary shares may require the approval
or license of, or a filing with, any government or agency thereof, which may be unobtainable. In these cases, the depositary may
determine not to distribute such property and hold it as “deposited securities” or may seek to effect a substitute
dividend or distribution, including net cash proceeds from the sale of the dividends that the depositary deems an equitable and
practicable substitute. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other
securities received through such distributions. We also have no obligation to take any other action to permit the distribution
of ADSs, ordinary shares, rights or anything else to holders of ADSs. In addition, the depositary may withhold from such dividends
or distributions its fees and an amount on account of taxes or other governmental charges to the extent the depositary believes
it is required to make such withholding. This means that you may not receive the same distributions or dividends as those we make
to the holders of our ordinary shares, and, in some limited circumstances, you may not receive any value for such distributions
or dividends if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline
in the value of the ADSs.
Holders
of ADSs must act through the depositary to exercise their rights as our shareholders.
Holders
of the ADSs do not have the same rights of our shareholders and may only exercise the voting rights with respect to the underlying
ordinary shares in accordance with the provisions of the deposit agreement for the ADSs. Under Israeli law, the minimum notice
period required to convene a shareholders meeting is no less than 35 or 21 calendar days, depending on the proposals on the agenda
for the shareholders meeting. When a shareholder meeting is convened, holders of the ADSs may not receive sufficient notice of
a shareholders meeting to permit them to withdraw their ordinary shares to allow them to cast their vote with respect to any specific
matter. In addition, the depositary and its agents may not be able to send voting instructions to holders of the ADSs or carry
out their voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting
rights to holders of the ADSs in a timely manner, but we cannot assure holders that they will receive the voting materials in
time to ensure that they can instruct the depositary to vote their ADSs. Furthermore, the depositary and its agents will not be
responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect
of any such vote. As a result, holders of the ADSs may not be able to exercise their right to vote and they may lack recourse
if their ADSs are not voted as they requested. In addition, in the capacity as a holder of ADSs, they will not be able to call
a shareholders meeting.
You
may be subject to limitations on transfer of your ADSs.
Your
ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from
time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse
to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any
time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental
body, or under any provision of the deposit agreement, or for any other reason in accordance with the terms of the deposit agreement.
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.
ITEM 4.
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INFORMATION
ON THE COMPANY
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A.
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History
and Development of the Company
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Our
legal and commercial name is Cellect Biotechnology Ltd. We were established as a private company limited by shares under the laws
of the State of Israel on August 4, 1986, under the name Montiger Ltd. Between 1986 and 2013, we underwent several name changes,
most recently on August 28, 2013, when we changed our name from T.R.F. Capital Ltd. to Cellect Biomed Ltd. On May 16, 2016, we
obtained shareholder approval to change our name to Cellect Biotechnology Ltd. We formally changed our name to Cellect Biotechnology
Ltd. on July 21, 2016. On July 29, 2016, our ADSs and warrants, commenced trading on the Nasdaq Capital Market under the symbols
“APOP” and “APOPW”, respectively. From 1990 to September 3, 2017, our shares were traded on the TASE.
From
October 25, 2012 until July 1, 2013, we did not have any business operations, excluding administrative management. On June
30, 2013, a general meeting of our shareholders approved our merger by way of share exchange with Cellect Biotherapeutics
Ltd., or Cellect Biotherapeutics. As a result of the merger, which closed on July 1, 2013, Cellect Biotherapeutics became a
wholly owned subsidiary and we issued to shareholders of Cellect Biotherapeutics 44,887,373 ordinary shares, options (Series
1) exercisable for 227,358 ordinary shares, and options (Series 2) exercisable for 341,037 ordinary shares (all of such
341,037 options were subsequently exercised into ordinary shares), which constituted approximately 85% of our then
outstanding share capital and 85% of our then outstanding share capital on a fully diluted basis.
Cellect
Biotherapeutics was established as a private company limited by shares under the State of Israel on June 9, 2011 for the purpose
of developing novel and unique technologies that allow the functional selection of stem cells through the substantial reduction
of the complications that exist today in acceptable selection methods and increasing the chances of success of stem cell therapies.
Our principal offices
are located at 23 HaTa’as St., Kfar Saba, Israel 44425, and our telephone number is +972-9-974-1444. Our primary internet
address is www.cellect.co. None of the information on our website is incorporated by reference herein. Puglisi & Associates,
or Puglisi, serves as our authorized representative in the United States for certain limited matters. Puglisi’s address
is 850 Library Avenue, Newark, Delaware 19711.
We
use our website (http://www.cellect.co) as a channel of distribution of Company information. The information we post through this
channel may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases,
SEC filings and public conference calls and webcasts. The contents of our website and social media channels are not, however,
a part of this annual report.
We are an emerging
growth company, as defined in Section 2(a) of the Securities Act, as implemented under the JOBS Act. As such, we are eligible to,
and intend to, take advantage of certain exemptions from various reporting requirements applicable to other public companies that
are not emerging growth companies including but not limited to not being required to comply with the auditor attestation requirements
of the SEC rules under Section 404 of the Sarbanes-Oxley Act. We will be an emerging growth company until the earliest of: (i)
the last day of the fiscal year during which we had 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 the ADSs pursuant to an effective registration
statement (i.e. December 31, 2021), (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 filer” as defined in Regulation
S-K under the Securities Act, which means the market value of our ordinary shares that is held by non-affiliates exceeds $700 million
as of the prior June 30
th
.
We
are a foreign private issuer as defined by the rules under the Securities Act and the Exchange Act. Our status as a foreign private
issuer also exempts us from compliance with certain laws and regulations of the SEC and certain regulations of the Nasdaq Capital
Market, including the proxy rules, the short-swing profits recapture rules, and certain governance requirements such as independent
director oversight of the nomination of directors and executive compensation. In addition, we will not be required to file annual,
quarterly and current reports and financial statements with the SEC as frequently or as promptly as U.S. domestic companies registered
under the Exchange Act.
Our
capital expenditures for December 31, 2018, 2017 and 2016 amounted to NIS 0.7 million (approximately $0.2 million), NIS 0.3 million
(approximately $0.09 million), and NIS 0.6 million (approximately $0.15 million). Our purchases of fixed assets primarily include
laboratory equipment used for the development of our clinical treatment. We financed these expenditures primarily from cash on
hand.
We
are an emerging biotechnology company that has developed a novel technology platform known as ApoGraft that functionally selects
stem cells in order to improve the safety and efficacy of regenerative medicine and cell therapies. We aim to become the
standard enabling technology for the enrichment of the stem cell population for companies developing stem cell therapies, for physicians
practicing regenerative medicine and for researchers and academia engaged in cell based medicine and research.
We
believe our innovative technology platform represents a potential breakthrough in the field of regenerative medicine by using
functional selection of stem cells. Efficient selection enables retention of most of the stem cells from various starting bulk
of cells while neutralizing harmful mature cells from this bulk of raw material. Animal models suggest that this process results
in dramatic decrease of toxicity coupled with the enrichment of the stem cell population.
Our
ApoGraft technology platform takes advantage of a functional characteristic of stem cells relating to apoptosis. Apoptosis is
the process of programmed cell death and is a vital part of physiological development and homeostasis of all organisms. Stem cells
flourish in an environment where normal cells die because their major role is reconstitution of damaged tissue. Stem cells are
attracted to areas of cell death, areas typified by very high levels of apoptotic activity and apoptotic-inducing signals.
We
are currently developing our first product based on our ApoGraft technology platform, the ApoTainer selection kit that utilizes
FasL-coated paramagnetic beads. The ApoTainer selection kit is intended to be an easy to use, cost effective, off the shelf stem
cell selection kit. In October 2018, we announced that we optimized the beads size, coating technology, elimination of the release
of FasL into the medium, all while preserving the biological activity observed in our ongoing human clinical trial. Pre-clinical
proof of concept testing of the ApoTainer has shown that the use of FasL-coated paramagnetic beads significantly increases the
active surface allowing a dramatic increase of interactions between the selecting agent and the cells. Further, such testing showed
that the outcome increases specific elimination of certain (but not all) of the non-stem cells while full preservation of the
number and function of the stem and progenitor cells.
The
ApoGraft technology platform is being tested for clinical use in allogeneic (using stem cells from a donor) hematopoietic stem
cell transplantation, or HSCT for the treatment of hematological malignancies (blood cancers such as leukemia and lymphoma). HSCT,
also known as bone marrow transplantation, has for decades been curative for many patients with hematological malignancies. Clinical
trials have shown that HSCT can also be used for other non-malignant indications (such as autoimmune diseases) but is rarely used
due to severe toxicity. Application of allogeneic HSCT is limited by graft-versus-host-disease, or GvHD, a condition in which
the transplanted immune cells (populating the graft in much higher numbers then the stem cells) recognize the host cells and organs
as foreign and attack them. GvHD does not resolve by itself and is a major cause of transplant-related morbidity and mortality.
Despite improvements in the outcome of HSCT over recent years through improved supportive care, infection control and use of reduced
intensity and reduced toxicity conditioning regimens, HSCT is still associated with significant morbidity and mortality mainly
due to GvHD, and as such HSCT is restricted to patients with life threatening advanced diseases. Due to non-efficient selection
of stem cells for HSCT, the complex and expansive laboratory process performed using technologies currently available is able
to reduce toxicity only at a significant tradeoff — failure of engraftment, graft rejection, cancer reoccurrence and high
costs of treatment.
We
have chosen allogeneic HSCT for the treatment of hematological malignancies as our first target indication for our ApoGraft technology
platform in order to clinically validate that our technology can efficiently select stem cells resulting in neutralizing harmful
cells and their associated medical complications. We believe that demonstrating the safety of our technology for this indication
will validate the use of our ApoGraft technology platform for the treatment of other indications (e.g., nonmalignant bone marrow
failure, solid organ transplantation and auto-immune diseases) and consequently for the adoption of our ApoGraft technology platform
by stem cell therapeutic companies, academia, researchers and others seeking to enrich their stem cell population. In that regard,
we believe that after the first reported results of our human trials, as discussed further below, we will achieve validation of
our product’s safety profile, which may result in expediting further development of our technology for multiple indications
before marketing approval is obtained. In addition, we believe such validation of our proof of concept will provide us with the
opportunity to license our ApoGraft technology platform in the near term.
We currently plan to
bring our ApoTainer selection kits to market for HSCT as a medical device and regulated under Center for Biologics Evaluation and
Research, or CBER. In February 2019, we filed a Pre-Request for Designation, or Pre-RFD to the FDA to designate the Apotainer as
a medical device under the regulation of the CBER. Under the Pre-RFD, the FDA will provide a preliminary, nonbinding assessment
of the regulatory identity or classification of our ApoTainer selection kits and an assessment of which Center will regulate the
product.
In
September 2017, we announced that the FDA granted orphan drug designation for ApoGraft for the prevention of acute and chronic
GvHD in transplant patients. We plan in the future to apply for fast track and breakthrough technology, which, if received, would
result in a reduced cost of development and expedited marketing approvals, however there is no assurance that such designations
will ever be obtained.
Our
development efforts to date have primarily culminated in two studies performed on human HSCT grafts. The first study which began in 2015 and is ongoing. In this study we used small portions received under ethical committee approval from human donors to validate
and optimize the process and show robustness and repeatability of the process. More than 200 ApoGraft samples were analyzed for
the different effects on the various groups of cells (stem and mature immune) as well as their functional capabilities (such as
migration, colony formation and anti-cancer activity). The samples represented 5% of a graft used for transplantation into patients.
The grafts were processed in vitro and in vivo (mice) allowing stem cell production for transplantation using ApoGraft. The use
of the ApoGraft in the pre-clincal setting resulted in a significant increase in the death of certain subpopulations of mature
immune cells, primarily unique subsets of T Lymphocytes, without compromising the quantity and quality of stem cells.
The
second study, which was initiated in the first quarter of 2017, is a Phase I/II, dose escalating, 4-cohort, open label clinical
trial of up to twelve patients designed to evaluate the safety, tolerability and efficacy of functionally selected donor derived
mobilized peripheral blood cells that underwent our ApoGraft process and were transplanted into patients with hematological malignancies
in an allogeneic hematopoietic stem cell transplantation. The primary endpoint of the study is overall incidence, frequency and
severity of adverse events potentially related to ApoGraft at 180 days from transplantation. The first patient was recruited for
this trial in February, 2017 and in October 2018, we announced that the first six patients finished first month
follow up and all these patients have shown 100% engraftment with no procedure related adverse events and that the first three
patients of the trial completed the 180-day study period with full safety and tolerability. As of the date of this
annual report, 8 patients have been treated with ApoGraft in the study. We expect to report interim results from the trial in
the first half of 2019 and topline results from the trial in late 2019 or early 2020.
Patients
who complete the Phase I/II study are given the option to enroll in a non-interventional long-term follow-up study for up to two
years post-transplantation to assess incidence, grade and stage of acute GvHD and chronic GvHD, non-relapse related mortality,
disease relapse/recurrence and overall survival.
We
aim to commence a second human ApoGraft trial in the United States for patients with hematological malignancies in halploidentical
HSCT (donors and patients are half matched), or haplo-HSCT, by the end of 2019. To this end, we are collaborating with Washington
University for the initiation of this trial. The collaboration is being led by Professor John DiPersio, Director of the Center
for Gene and Cellular Immunotherapy at Washington University School of Medicine and President of the American Society for Blood
and Marrow Transplantation, and Professor Mark Schroeder, an expert in bone marrow transplantation in the Division of Oncology
at Washington University School of Medicine. This clinical study aims to determine the safety and tolerability of ApoGraft for
bone marrow transplantations with haplo-HSCT in a Phase I study.
Previously, in May
2017, we announced that the FDA provided us with pre-Investigational New Drug, or IND, meeting minutes supporting an IND submission
for ApoGraft. We plan to file an IND with the FDA during 2019.
We
are also conducting studies on mesenchymal stem cells, or MSC, derived from fat tissues. In October 2017, we announced
positive results from a more than 20-patient study on the use of our selection platform technology on stem cells
derived from fat tissues. The study comprised samples obtained via liposuction from over 20 adult patients and was conducted
in collaboration with the Plastic Surgery Department and the Microsurgery and Plastic Surgery Laboratory of the Tel-Aviv
Medical Center (Ichilov Hospital). Fat-derived stem cells were treated according to our protocols and have shown that our
selection platform technology led to both an expansion of cells and an improvement in their unique cell activity and
attributes. The ability of those cells to create colonies and differentiate into bone was enhanced significantly after only a
short incubation. In addition, in October 2018, we announced that we achieved positive results on the use of human fat
derived stem cells treated with the ApoGraft process in orthopedic treatments of animals.
We expect to announce
in 2019 pre-clinical results for the use of human fat derived stem cells treated with ApoGraft in animal models. Furthermore, we
plan on submitting an IND or IDE for the initiation of a Phase I/II trial of ApoGraft for anti-inflammatory indications and/or
an orthopedic indications.
Our
Strategy
We
have developed a novel technology, the ApoGraft technology platform, for the functional selection of adult cells.
This technology is expected to improve the safety and efficacy of regenerative medicine and stem cell therapies by allowing a
cost effective method of achieving stem cells for any indication, in quality, quantity and competitive price. We aim to become
the standard enabling technology for the enrichment of stem cells and manufacturing of any adult stem cells -based products for
companies developing stem cell therapies and for researchers and academia engaged in adult stem cell research.
Key
elements of our strategy to accomplish this objective include the following:
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Achieve
relatively quick validation of the use of our ApoGraft technology platform in a clinical
setting
. We have chosen allogeneic HSCT for the treatment of hematological malignancies
as our first target indication for our ApoGraft technology platform in order to clinically
validate that our technology can efficiently select stem cells while eliminating harmful
cells and consequently the medical complications such as GvHD. We believe hematopoietic
cells transplantation to patients undergoing allogeneic HSCT can be dramatically improved.
Based on our ApoGraft technology platform, we are currently developing the ApoTainer
selection kit, an off the shelf stem cell selection kit, which we believe may significantly
improve the therapeutic potential of allogeneic HSCT by addressing major complications
that currently contribute to the high morbidity and mortality of the procedure. We believe
that the concomitant reduction of toxicity of allogeneic HSCT will allow clinicians to
undertake HSCT earlier in the blood cancer treatment routine. Typically, medical devices
are expected to obtain relatively quicker validation from the FDA and the EMA when compared
to pharmaceutical/ biological products. Based on our initial consultations with our U.S.
and European regulatory consultants, we believe that we might only need to successfully
complete a single pivotal study with a relatively small number of patients to obtain
marketing approval of our ApoTainer selection kit for allogeneic HSCT. We believe such
a study can be completed in approximately two to three years. However, there is no guarantee
that the proposed pathway will be approved by the FDA or EMA, or that approval will occur
as quickly as we hope, if at all. In addition, we believe that our product may achieve
“breakthrough” designation with the FDA, enabling a fast track review and
approval process by the FDA. However, there is no assurance that such designations will
ever be obtained. Typically, the validation process for regular clinical development
for standard cell therapy can take between eight and ten years. In comparison to the
typical validation process timeline, we believe our technology platform may complete
the validation process relatively quickly.
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Leverage
our scientific, clinical and regulatory expertise to build and advance our ApoGraft technology
platform beyond the allogeneic HSCT setting
. Based on the validation of our ApoTainer
selection kit for clinical use in the allogeneic HSCT setting, we intend to collaborate
with other biotech companies to test the kit for other indications such as nonmalignant
failures of the bone marrow (i.e. aplastic anemia), solid organ transplantation and auto-immune
system disorders (such as Type 1 diabetes, Crohn’s disease, psoriasis, multiple
sclerosis and lupus). We also intend to develop our ApoGraft technology platform for
other sources of stem cells (e.g., cord blood and fat) and other types of stem cells
— most notably mesenchymal and neural. We believe that by expanding the various
applications, sources and types of stem cells that can be used with our technology, we
will establish broad use of our ApoGraft technology platform.
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Build
a diversified product portfolio
. Beginning with the development of our ApoTainer
selection kit as a medical device, which we believe will shorten the time to market,
we intend to expand our product development and build a diversified product portfolio
of ApoGraft based products for a broad spectrum of market segments, up to and including
all production and research processes for stem cell based products. The pipeline of products
is designed to address different markets beyond the clinical use such as products for
research purposes and tools for manufacturing facilities for cell therapies and especially
adult stem cells.
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Selectively
engage in strategic partnerships that establish our ApoGraft technology platform as the
standard enabling technology for the enrichment of the stem cell population
. We ultimately
seek to collaborate with other companies engaged in developing stem cell therapies. By
incorporating our ApoGraft technology into their manufacturing process we will be able
to significantly reduce their cost of manufacturing while improving the end products.
As we believe our ApoGraft technology will significantly increase the yields of the first
step of manufacturing (harvesting the stem cells) from any source of stem cells (i.e.
blood, bone marrow, fat) and will result in a more purified bulk of stem cells, the next
steps needed to reach the final products will be shorter, more efficient, less costly
and result in a better product. In May 2018, we incorporated a US subsidiary and hired
Andrew Sabatier as its Chief Business Officer to lead the business development activities
from the US.
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In
the short term, we are currently focused on achieving the following critical milestones:
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Advancing
our clinical development plan
: We are currently enrolling patients to a Phase I/II
study performed on cancer patients undergoing matched related allogeneic HSCT. This Phase
I/II trial was approved by the Israeli Ministry of Health and is being conducted at the Rambam Medical Center and Hadassah Medical Center. In addition,
we are preparing to commence a second human ApoGraft trial in collaboration with the
Washington University School of Medicine under the leadership of Professor Dipersio and
Professor Schroeder. This Phase I study using ApoGraft will be performed for the large
unmet need of GvHD prevention in bone marrow transplantation of cancer patients undergoing
haplo-HSCT.
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Pathway
to product prototype
: We are engaged in developing prototypes of our ApoTainer selection
kit. We demonstrated a proof of concept for the binding of the apoptotic protein to a
polymer while preserving the protein’s apoptotic activity. We tested a number of
polymers and binding methods and selected the one best suited for manufacturing the stem
cell selection kits.
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Patent
portfolio enhancement
: We are currently expanding our patent coverage from our current
nine patent families and are applying for additional patents. By applying for additional
patents for inventions created during development, we actively seek to widen and strengthen
our patent portfolio. In addition, we are seeking relevant patents available for in licensing.
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In
the long term, we are focused on leveraging our key assets, including our intellectual property, our development team and our
facilities, to advance our technologies and are pursuing strategic collaborations with members of academia and industry.
Regenerative
Medicine and Cell Therapy
Our
business focus is the development of technologies for the functional selection of stem cells in the field of regenerative medicine.
According to Mason & Dunnill in Regenerative Medicine (2008, 3(1), 1-5), regenerative medicine is the process of replacing
or regenerating human cells, tissues or organs to restore or establish normal function. Cell therapy as applied to regenerative
medicine holds the promise of regenerating damaged tissues and organs in the body by rejuvenating damaged tissue and by stimulating
the body’s own repair mechanisms to heal previously irreparable tissues and organs.
Medical
cell therapies are classified into two types: allogeneic (cells from a donor) or autologous (cells from one’s own body),
with each offering its own distinct advantages. Allogeneic cells are beneficial when the patient’s own cells, whether due
to disease or degeneration, are not as viable as those from a healthy donor. The use of healthy donors’ stem cells is severely
limited by the accompanied immune cells of the donor which may attack cells or organs of the transplanted patient. This rejection
is limited to adult cells with stem cells generally evading such rejection. Separation of the immune rejection causing cells from
the stem cells is therefore the bottle neck of all stem cell based therapies.
Regenerative
medicine can be categorized into major subfields as follows:
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Cell
Therapy
. Cell therapy involves the use of cells, whether derived from adults, children
or embryos, healthy donors or patients, from various parts of the body, for the treatment
of diseases or injuries. Therapeutic applications may include cancer vaccines, cell based
immune-therapy, arthritis, heart disease, diabetes, Parkinson’s and Alzheimer’s
diseases, vision impairments, orthopedic diseases and brain or spinal cord injuries.
This subfield also includes the development of growth factors and sera and natural reagents
that promote and guide cell development.
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Tissue
Engineering
. This subfield involves using a combination of cells with biomaterials
(also called “scaffolds”) to generate partially or fully functional tissues
and organs, or using a mixture of technology in a bioprinting process. Some natural materials,
like collagen, can be used as biomaterial, but advances in materials science have resulted
in a variety of synthetic polymers with attributes that would make them uniquely attractive
for certain applications. Therapeutic applications may include heart patch, bone re-growth,
wound repair, replacement neo-urinary conduits, saphenous arterial grafts, inter-vertebral
disc and spinal cord repair.
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Diagnostics
and Lab Services
. This subfield involves the production and derivation of cell lines that may be used for the development
of drugs and treatments for diseases or genetic defects. This sector also includes companies developing devices that are designed
and optimized for regenerative medicine techniques, such as specialized catheters for the delivery of cells, tools for the
extraction of stem cells and cell-based diagnostic tools.
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All
living complex organisms start as a single cell that replicates, differentiates (into various tissues and organs) and
perpetuates in an adult through its lifetime. Cell therapy is aimed at tapping into the power of cells to treat disease,
regenerate damaged or aged tissue and provide functional as well as esthetic/cosmetic applications. The most common type of
cell therapy has been the replacement of mature, functioning cells such as through blood and platelet transfusions. Since the
1970s, bone marrow and then blood and umbilical cord-derived stem cells have been used to restore immune system cells mainly
after chemotherapy and radiation used to treat many cancers. These types of cell therapies have been approved for use
world-wide and are typically reimbursed by insurance.
Researchers
around the globe are evaluating the effectiveness of cell therapy as a form of replacement or regeneration of cells for the treatment
of numerous organ diseases or injuries, including those of the brain and spinal cord. Cell therapies are also being evaluated
for safety and effectiveness to treat heart disease, autoimmune diseases such as diabetes, inflammatory bowel disease and bone
diseases. While no assurances can be given regarding future medical developments, we believe that the field of cell therapy is
a subset of biotechnology that holds promise to improve human health, help eliminate disease and minimize or ameliorate the pain
and suffering from many common degenerative diseases relating to aging.
Over
the past number of years, cell therapies have been in clinical development to attempt to treat an array of human diseases. The
use of autologous (self-derived) cells to create vaccines directed against tumor cells in the body has been demonstrated to be
effective and safe in clinical trials. Dendreon Corporation’s
Provenge
therapy for prostate cancer received FDA approval
in early 2010. Since then, there have been several additional approvals including, Cleveland Cord Blood Center which received
approval for Clevecord in 2016 indicated for use in unrelated donor hematopoietic progenitor cell transplantation procedures,
and Kite Pharma which received in 2017 approval for its CD19-directed genetically modified autologous T cell immunotherapy indicated
for the treatment of adult patients with relapsed or refractory large B-cell lymphoma. Kite Pharma was subsequently purchased
by Gilead Sciences for $11.9 billion. In 2018, Novartis launched Kymria - the first CAR-T cells product approved by the FDA and
Tigenix received EMA approval for Alofisel, a stem cell therapy for Crohn’s disease. Takeda Pharmaceutical completed the
acquisition of Tigenix in 2018 for approximately $600 million.
In
January 2019, the FDA Commissioner and Director of CBER announced that the FDA is witnessing a surge of cell and gene therapy
products entering early development, evidenced by a large upswing in the number of IND applications. Based on this activity, they
indicated that the FDA anticipates that the number of product approvals for cell and gene therapies will grow in the coming years
and that by 2020 the FDA will be receiving more than 200 INDs per year and that by 2025 they predict that the FDA will be approving
10 to 20 cell and gene therapy products a year. We believe that this will drive a huge surge in demand for cost-effective production
of raw materials and cells.
Market
for Cell-Based Therapies
According
to a 2017 report by Grand View Research, the world stem cell market is expected to grow to $15.6 billion in 2025 at a CAGR of
9.2%.
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The
global population is aging
. According to the United Nations Department of Economic and Social Affairs, 2 billion people
will be aged 60 and older by 2050, which means an increased prevalence of age-related disease in general and chronic disease
in particular. Heavily burdened healthcare systems are looking to regenerative medicine to provide therapies that treat the
root causes of chronic diseases rather than just their symptoms.
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Expansion
of stem cell therapies
. Stem cell therapies are being extended to new and prevalent indications such as cardiovascular
diseases, neurodegenerative diseases, and autoimmune diseases. The number of cell therapy companies that are currently in
Phase II and Phase III trials has been gathering momentum, and we anticipate that new cellular therapy products will appear
on the market within the next several years. As noted above, the FDA predicts that by 2025 the FDA will be approving 10 to
20 cell and gene therapy products a year.
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Potential
new source of stem cells
. The last decade has witnessed the emergence of umbilical cord cryopreservation for the storage
of newborn blood for future medical use. This new market already affects the field of transplantations with a growing share
of cord blood transplantations at the expense of autologous and allogeneic transplantations of hematopoietic cells. In addition,
another source of stem cells is fat used for treatment of bone, cartilage and skeleton related diseases as well as for esthetic
purposes.
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Increasing
government, strategic partner, and investor support for stem cell research and development
. According to the Alliance
for Regenerative Medicine, globally, companies active in gene and cell therapies, and other regenerative medicines raised
more than $2.8 billion in the third quarter of 2018, a 59% increase over the same period in 2017; and $10.7 billion in the
first three quarters of 2018, a 40% increase year-over-year.
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Our
Current Focus: Proof of Concept of Our ApoGraft Technology Platform through the Treatment of Hematological Malignancies
Hematological
malignancies (blood cancers) comprise a variety of lymphomas and leukemias. A very important treatment protocol for these malignancies
involves the use of HSCT. According to the Worldwide Network for Blood & Marrow Transplantation, more than 50,000 HSCTs are
performed yearly worldwide, of which 53% are autologous (using stem cells from the patient) and 47% are allogeneic (using stem
cells from a donor). In the treatment of leukemia, an allogeneic procedure is usually preferred over autologous due to a higher
risk of recurrence of the underlying disease.
HSCT,
also known as bone marrow transplantation, relies on the ability of infused hematopoietic stem cells to engraft in the patient’s
bone marrow, multiply and differentiate into mature blood cells. However, the success of allogeneic HSCT strongly depends upon
the degree of immune compatibility between the donor and the host cells. In the majority significantly high number of cases, the
unavailability of fully matching donors results in complications due to GvHD. In the majority of cases, the unavailability of
fully matching donors results in complications due to GvHD.
GvHD
is a complication that often develops after a bone marrow or stem cell transplant. GvHD happens when transplanted cells in the
donated bone marrow or stem cells (graft) regard the transplant patient’s native cells (host) as foreign and attack and destroy
them. Acute GvHD, which usually occurs up to 100 days post transplantation, is associated with diarrhea, rash, liver damage and,
in severe cases, can be life-threatening. Chronic GvHD, which usually appears later than three months post transplantation, is
associated with skin damage, oral and/or vaginal mucositis, and liver damage. GvHD is treated by repressing the immune system
using steroids and chemotherapy. The treatment’s adverse effects include increased exposure to infections, recurrent hospital
admissions, damage to vital organs and, in some cases, secondary cancers. Both quality of life and life expectancy are significantly
decreased in these patients. Unfortunately, many patients are nonresponsive to steroids. The patients that do respond to steroids
suffer from frequent infections leading to recurrent antibiotic treatments and hospitalizations. These complications are associated
with high mortality and morbidity and are a meaningful limiting factor for what would otherwise be the most suitable therapy for
cancer and autoimmune diseases.
GvHD
can be prevented by depletion of the T-cell population from the donor graft prior to transplantation. Methods used to capture
and purge T-cells out of the donor graft include using anti-thymocyte globulin or Alemtuzmab, suicide gene therapy, cytotoxic
agents and fusion proteins. However, T cells support HSCT engraftment and immune reconstitution and are potent initiators and
mediators of graft versus tumor, or GvT, reactions. As such, purging T cells can result in increased risks of graft failure or
delayed immune reconstitution leading to life threatening infection and/or reduced GvT response, increasing the chances of cancer
recurrence.
Due
to these and other complications and due to the extremely aggressive pre-treatment chemotherapy and irradiation conditioning regimens,
allogeneic HSCT is usually used only when the patient faces life-threatening danger. If allogeneic HSCT could be made safer, it
could be used far earlier and more frequently for even more effective treatment of blood cancers. There is widespread awareness
of the need for improved immune-system management technologies for HSCT — both to improve outcomes of transplantations that
have already taken place and to make transplantation safe enough to become appropriate for older patients and those with earlier-stage
diseases.
The
use of HSCT has been tested and found to be effective for autoimmune diseases, such as juvenile diabetes, Crohn’s disease
and lupus, with the inherent toxicity of HSCT being the major drawback from further use. A safer HSCT could be used for these
indications as well as creating immune tolerance for organ transplantation.
We
have therefore chosen allogeneic HSCT for the treatment of hematological malignancies as our first target indication for our ApoGraft
technology platform in order to clinically validate that our technology can efficiently select stem cells while eliminating harmful
cells and their associated medical complications caused by GvHD. However, while GvHD has a sizeable market share with an unmet
clinical need that we seek to address, we consider the validation of our technology as an important driver of a much broader utility
of our technology platform.
An
Unmet Need: Efficient Stem Cell Selection
Typically,
there is a very small number of stem cells in the source tissue and, once removed from the body, these cells have the propensity
to differentiate and lose their “stemness”. Generation of large quantities of stem cells is, therefore, very challenging.
This scarcity of stem cells within the biological donor samples is a serious obstacle to regenerative medicine and stem cell companies,
both in research and in production settings. In addition to stem cell scarcity, another critical problem is the presence in the
donor sample of mature cells that trigger immune response and create the major adverse effects associated with transplantation.
There
are currently two main methods for attaining a critical mass of stem cells:
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Morphological
stem cell selection
:
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Negative
selection approach
: Elimination of the cells including those that contribute to engraftment, usually T cells. It
uses T cell-specific antigens common to all T cells and therefore indiscriminately eliminates all T cells, including the ones
responsible for engraftment support and combating tumors. The clinical outcome is reduced engraftment and reoccurrence of the
tumor.
Positive
selection approach
: Retains the stem cells in the graft using only one of the determinants found on stem cells
and progenitor cells and therefore a significant number of reconstituting capable cells are discarded. It has been clinically
shown that the loss of reconstituting capable cells significantly reduces engraftment.
Both
of these approaches have a poor efficacy/toxicity ratio.
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Stem
cell population expansion
:
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Most
companies expand stem cell numbers in a culture. However, expansion of the reconstituting capable cells while maintaining their
level of differentiation is a major challenge. A high number of cells is required initially, as well as a very long culturing
time (weeks) during which sterility must be maintained and differentiation avoided. The methodology is very expensive and requires
specialized equipment that is not widely available. Moreover, the regulatory demands related to long-term culturing create a significant
challenge for these companies.
In
short, we believe the prevailing methodologies for stem cell enrichment/expansion in the graft do not adequately meet the need
to enrich and purify the biological sample prior to transplantation. We believe our novel ApoGraft technology platform that quickly
and effectively enriches the stem cell population while eliminating the unwanted cells in a biological sample will contribute
significantly to the growth of the stem cell therapy market.
Our
first target market for our ApoGraft technology platform is allogeneic HSCT for hematological malignancies. According to the Center
for International Blood & Marrow Transplant Research, over 8,000 allogeneic HSCTs were performed in the United States in 2015.
A 2013 survey conducted by the European Group for Bone Marrow Transplantation in 48 countries (39 European and 9 affiliated) showed
that over 10,500 allogeneic HSCTs were performed for leukemia and for lymphoma. We believe that beyond the value of proving and
validating our technology platform, these numbers represent a substantial market opportunity for us to prove the benefits of our
ApoGraft technology platform.
Our
Proprietary Stem Cell Technology Platform
We
believe our innovative ApoGraft technology platform represents a potential breakthrough in the field of regenerative medicine
through the functional selection of stem cells.
Our
technology is based on a decade of research in the field of stem cells in general and hematopoietic stem cells in particular conducted
by Dr. Nadir Askenasy, our former Chief Technology Officer. The concept of functional selection suggests that by using functional
assays, which are based on the physiological features of stem cells, one can achieve dual goals: (i) the elimination of non-stem
cells that are responsible for the immune triggering and most of the clinical adverse effects, and (ii) the achievement of a larger
and better population of stem cells. We believe this dual effect will allow for safer and improved clinical outcome of transplantations
and enable the whole regenerative (transplantation) segment to achieve its full potential.
Stem
cells flourish in an environment where there are signals of apoptosis. Apoptosis is the process of programmed cell death and is
a vital part of physiological development and maintenance. Because of their major role in the reconstitution of damaged tissue,
stem cells are attracted to what are often characterized as disaster areas in which there are very high levels of apoptotic activity
and apoptotic-inducing agents. Our research has demonstrated that stem cells are resistant to apoptotic stimulation by the physiological
molecules that cause mature cells to self-destruct. We have chosen this
functional
characteristic of stem cells
to use apoptosis-inducing proteins to more efficiently select stem cells while eliminating harmful cells and their associated
medical complications.
Our
preclinical studies to date have shown that the differential sensitivity to the apoptosis signals allows functional selection
of the stem cells. while stem and progenitor cells fully maintain their reconstitution and anti-tumor activity, the apoptosis
sensitive mature immune cells (mainly the T lymphocytes) are eliminated. We believe that this effect will be translated to reduction
of GvHD, improved graft acceptance and a reduction in treatment complications and costs.
The
ApoGraft Process
To
achieve functional selection of stem cells utilizing our ApoGraft technology platform, we have developed the ApoGraft process,
which is intended for the prevention of GvHD in patients with hematological malignancies receiving a transplant of allogeneic,
mobilized peripheral blood hematopoietic stem and progenitor cells. Following collection of the cells from a matched related donor,
the donor graft is incubated for 2 hours in the presence of FasL, washed twice and transplanted via intravenous administration.
FasL, also known as CD95L, is a type-II transmembrane protein that belongs to the tumor necrosis alpha family. The binding of
FasL with its receptor induces in mature cells apoptosis (programmed cell death) that plays an important role in the development,
homeostasis, and function of the immune system (and most cells of all multi-cellular organisms).
The
apoptotic inducer used in Cellect’s ApoGraft process is based on a FasL protein known by its commercial name Mega-FasL.
Apo010 (the Mega-FasL based clinical grade material) is a recombinant, soluble protein. This protein has been developed to mimic
the natural occurring FasL clustering that activates its receptor and leads to apoptosis in susceptible cell populations.
The
ApoGraft process is illustrated below:
ApoTainer Selection
Kit
Our
first product, the ApoTainer selection kit, is being developed as an easy to use, cost effective, off the shelf stem cell
selection kit for clinical use to reduce GvHD following human allogeneic HSCT.
With
internal apoptotic inducing capabilities and mimicking of the normal physiological conditions where stem cells can migrate to
areas of destruction (where apoptotic triggering molecules are abundant) and, once there, proliferate and differentiate into the
needed tissue and organ, the ApoTainer selection kit is designed to create a microenvironment intended to induce apoptosis by
thereby eliminating the mature immune cells and preserving the hematopoietic stem and progenitor cells.
Since
FasL is active when immobilized, we developed an ApoTainer selection kit where the FasL is immobilized to the surface of paramagnetic
beads thereby creating an enlarged surface where more FasL molecules are able to interact with the Fas receptor on the immune
cells. This immobilization to the paramagnetic beads also creates a unique advantage of being able to eliminate the need to discard
the FasL from the graft before transplantation thereby shortening and simplifying the whole ApoGraft manufacturing. We anticipate
that with the new ApoTainer we could reduce the donor-patient time to 3-4 hours, which may in turn improve the viability of the
graft and increase the efficiency of the bone marrow transplantation procedure. The fact that all the process will be carried
in a closed single compartment is expected to reduce the infrastructure needed today for bone marrow transplantation and allow
for the expansion of bone marrow transplantation usage.
The
ApoTainer selection kit is currently being designed to be used for allogeneic HSCT procedures for patients suffering from
hematological malignancies in which the donor graft of cells is incubated in the infusion bag for a number of hours and expected
to cause the mature GvHD-causing cells expressing the Fas receptor to bind to the beads-bound FasL and undergo apoptosis while
the hematopoietic stem cells remain viable. The ApoTainer selection kit thus is expected to harness the differential effect
of the apoptotic microenvironment on mature cell and stem cell populations, producing an enriched population of stem cells that
are then transfused to the patient.
Preliminary
studies conducted by us have shown that selective polymers coated with specific materials in a specific process create an optimal
container enabling positive biological activity of FasL while tightly bound. We believe that this polymer-binder-FasL complex
is the basis not only for the ApoTainer selection kit as currently in development, but also for a line of containers with
different designs and sizes to be used for different applications.
During
2018, we developed FasL-coated paramagnetic beads for the ApoTainer. The use of FasL-coated paramagnetic beads significantly increases
the active surface allowing a dramatic increase of interactions between the selecting agent and the cells. Further, such testing
showed that the outcome increases specific elimination of certain (but not all) of the non-stem cells while full preservation
of the number and function of the stem and progenitor cells. Further, during 2018 we were able to optimize the beads size, coating
technology, prevention of the release of FasL into the medium, all while preserving the biological activity observed in our ongoing
human clinical trial.
Preclinical
Studies
As
part of our in vitro studies, and prior to animal studies, we performed experiments to determine which apoptotic molecules have
the best differential effect on stem and non-stem cells. We have conducted 22 animal studies including murine to murine and human
cells to murine transplantation models measuring the relevant effects (GvHD, GvL, mortality and engraftment). We have also tested
various sources of human hematopoietic cells (mobilized peripheral blood, bone marrow and umbilical cord blood). Major preliminary
findings include the following:
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Resistance
to receptor-mediated apoptosis is an inherent characteristic of stem and progenitor cells;
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The
ApoGraft process preserves stem and progenitor cells;
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Preservation
of successful engraftment (95% engraftment in experiments performed by a CRO);
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Demonstrated
preservation of anti-tumor activity;
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Apoptosis-insensitive
progenitors are privileged for engraftment through competitive advantage over the apoptosis-sensitive differentiated cells;
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Using
the most stringent conditions for GvHD, there was a statistically significant reduction in mortality rate (20–100% to
<10%); and
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Significant
reduction of cells that attack the immune system.
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We
believe these preliminary findings support our product claim for:
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Selection
of stem and progenitor cells based on insensitivity to receptor-mediated apoptosis from all sources;
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Ex
vivo selective depletion of GvHD causing cells;
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Accelerated
engraftment by ex vivo treatment of umbilical cord blood; and
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Induction
of tolerance to grafts and suppression of autoimmunity.
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In
August 2015, we initiated a full preclinical Good Laboratory Practice toxicity study designed to test safety and engraftment outcome
in a murine model ahead of our first planned clinical trial. Complete biochemical and histology evaluation was performed by a
CRO as per regulatory requirements. In December 2015, we announced that results from this study showed that, while the control
group had a 50% death rate, the group that was transplanted with bone marrow that underwent our ApoGraft process had no deaths.
In addition, with respect to additional parameters, such as clinical signs, weight and histological analysis, no toxicity was
found.
Non-Interventional
Clinical Studies
We are performing a
study on human HSCT grafts. This study first began in 2015 and is ongoing. In this study we used small portions received under
ethical committee approval from human donors to validate and optimize the process and show robustness and repeatability of the
process. More than 200 ApoGraft samples were analyzed for the different effects on the various groups of cells (stem and mature
immune) as well as their functional capabilities (such as migration, colony formation and anti-cancer activity). The samples represented
5% of a graft used for transplantation into patients. The grafts were processed in vitro and in vivo (mice) allowing stem cell
production for transplantation using ApoGraft. The use of the ApoGraft in the pre-clincal setting resulted in a significant increase
in the death of certain subpopulations of mature immune cells, primarily unique subsets of T Lymphocytes, without compromising
the quantity and quality of stem cells.
We
are also conducting studies on MSC derived from fat tissues. In October 2017, we announced positive results from a more than
20-patient study on the use of our selection platform technology on stem cells derived from fat tissues. The study comprised
samples obtained via liposuction from over 20 adult patients and was conducted in collaboration with the Plastic
Surgery Department and the Microsurgery and Plastic Surgery Laboratory of the Tel-Aviv Medical Center (Ichilov Hospital).
Fat-derived stem cells were treated according to our protocols and have shown that our selection platform technology led to
both an expansion of cells and an improvement in their unique cell activity and attributes. The ability of those cells to
create colonies and differentiate into bone was enhanced significantly after only a short incubation. In addition, in October
2018, we announced that we achieved positive results on the use of human fat derived stem cells treated with the ApoGraft
process in orthopedic treatments of animals.
We expect to announce
in 2019 pre-clinical results for the use of human fat derived stem cells treated with ApoGraft in animal models. Furthermore, we
plan on submitting an IND for the initiation of a Phase I/II trial of ApoGraft for anti-inflammatory indications and/or
an orthopedic indications
First
In Man Clinical Study
On
September 12, 2016, we obtained the approval of the Israeli Ministry of Health to initiate a Phase I/II, dose escalating, 4-cohort,
open label clinical trial of up to twelve patients designed to evaluate the safety, tolerability and efficacy of functionally
selected donor derived mobilized peripheral blood cells that undergo our ApoGraft process in the prevention of acute GvHD in patients
suffering from hematological malignancies that are undergoing allogeneic HSCT. The primary endpoint of the study is overall incidence,
frequency and severity of adverse events potentially related to ApoGraft at 180 days from transplantation.
In
the study, the graft is taken from the donor through standard apheresis and then the cells are exposed to short ex-vivo incubation
with FasL and then undergo washing and centrifugation to remove the FasL. The resulting cells are then transfused to the patient
according to routine myeloablative procedures, or therapeutic modalities, including, but not limited to, chemotherapy, radiotherapy
and immunotherapy.
The study is being conducted in two tertiary bone marrow transplant centers in Israel (Rambam Medical
Center in Haifa, Israel and Hadassah Medical Center in Jerusalem, Israel). The clinical trial has been conducted under approval
from the local Institutional Review Board and the Israeli Ministry of Health at the medical centers compliant with the ICH-GCP,
applicable Israeli MoH guidelines (2016) for the conduct of clinical trials, World Medical Association Declaration of Helsinki
and applicable local regulations/guidelines.
The
first patient was recruited for this trial in February, 2017 and in October 2018, we announced that the first six patients (cohorts
I and II) finished first month follow up and all these patients have shown 100% engraftment with no procedure related adverse
events and that the first three patients of the trial (cohort I) completed the 180-day study period with full safety and tolerability.
As of the date of this annual report, 8 patients have been treated with ApoGraft in the study. We expect to report interim results
from the trial in the first half of 2019 and topline results from the trial in late 2019 or early 2020.
Patients
who complete the Phase I/II study are given the option to enroll in a non-interventional long-term follow-up study
for up to two years post-transplantation to assess incidence, grade and stage of acute GvHD and chronic GvHD, non-relapse related
mortality, disease relapse/recurrence and overall survival.
Planned
U.S. Study
We
aim to commence a second human ApoGraft trial in the United States for patients with hematological malignancies in halploidentical
HSCT (donors and patients are half matched), or haplo-HSCT, by the end of 2019. To this end, we are collaborating with Washington
University for the initiation of this trial. The collaboration is being led by Professor John DiPersio, Director of the Center
for Gene and Cellular Immunotherapy at Washington University School of Medicine and President of the American Society for Blood
and Marrow Transplantation, and Professor Mark Schroeder, an expert in bone marrow transplantation in the Division of Oncology
at Washington University School of Medicine. This clinical study aims to determine the safety and tolerability of ApoGraft for
bone marrow transplantations with haplo-HSCT in a Phase study.
Finding
a donor remains a challenge for patients in need of an urgent HSCT. The ability to obtain half matched stem cells from any family
member represents a significant breakthrough in the field. Haplo-HSCT is characterized by the nearly uniform and immediate better
availability of a donor and the availability of the donor for post-transplant cellular immunotherapy. However, haplo-HSCT carries
a high risk of GvHD and poor immune reconstitution when GvHD is treated prevented by all existing methods of vigorous ex vivo
or in vivo T-cell depletion. Different treatment approaches are currently being explored to mitigate complications such as graft
rejection, severe GvHD, and prolonged immune suppression. Our platform technology, ApoGraft, is based on certain findings to date
that GvHD can be prevented. We therefore believe that the combination of haplo-HSCT with the ApoGraft process has the potential
to improve the standard of care therapy in the field and potentially mitigate haplo-HSCT related complications.
Previously, in May
2017, we announced that the FDA provided us with pre-IND meeting minutes supporting an IND submission
for ApoGraft. We plan to file an IND with
the FDA during 2019.
MSC
Studies
We
are also conducting studies on MSC, derived from fat tissues. In October 2017, we announced positive results from a more than
20-patient study on the use of our selection platform technology on stem cells derived from fat tissues. The study comprised
samples obtained via liposuction from over 20 adult patients and was conducted in collaboration with the Plastic
Surgery Department and the Microsurgery and Plastic Surgery Laboratory of the Tel-Aviv Medical Center (Ichilov Hospital).
Fat-derived stem cells were treated according to our protocols and have shown that our selection platform technology led to
both an expansion of cells and an improvement in their unique cell activity and attributes. The ability of those cells to
create colonies and differentiate into bone was enhanced significantly after only a short incubation. In addition, in October
2018, we announced that we achieved positive results on the use of human fat derived stem cells treated with the ApoGraft
process in orthopedic treatments of animals.
We expect to announce
in 2019 pre-clinical results for the use of human fat derived stem cells treated with ApoGraft in animal models. Furthermore, we
plan on submitting an IND or IDE for the initiation of a Phase I/II trial of ApoGraft for anti-inflammatory indications and/or
an orthopedic indications.
Future
Studies
We
intend to undertake the following actions during the following twelve to eighteen months:
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File
an IND for a Phase I study with the FDA and initiate the study during 2019;
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Complete
a preclinical package for a Phase I/II ApoGraft clinical trial on stem cells derived from fat tissues;
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Complete
the preclinical development of the first ApoTainer selection kits;
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Develop
aseptic processing and determine ApoTainer selection kits shelf life;
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Produce
initial batches of the ApoTainer selection kits for clinical trials; and
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Meet
FDA and/or European regulatory authorities and submit a trial protocol for a clinical trial using the ApoTainer selection
kit.
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Regulatory
Status
We plan to bring our
ApoTainer selection kits to market for HSCT as a medical device subject to the primary jurisdiction of the CBER. The classification
of our ApoTainer selection kits by the FDA as a drug, a medical device or a combination product depends upon, among other things,
the regulatory definition of a drug and a device, their primary mode of action and the indications for use or product claims.
In February 2019, we filed a Pre-RFD to the FDA to designate the Apotainer as a medical device under the regulation of the CBER.
Under the Pre-RFD, the FDA will provide a preliminary, nonbinding assessment of the regulatory identity or classification of our
ApoTainer selection kits and an assessment of which Center will regulate the product. We also believe that due to its novelty
and being first in class this product could be classified as a “de-novo” which could allow for less clinical data
before marketing approval. In certain territories (e.g. Japan) due to favorable regulatory conditions conditional marketing approval
could be achieved before completion of full clinical development.
Collaborations
In
June 2018, we entered into a collaboration and material transfer agreement with the denovoMATRIX group of the Technische Universität
Dresden (TU Dresden), a leading center for stem cell research in Germany. According to the agreement, the team of denovoMATRIX
employed by TU Dresden have conducted examinations into the tentative synergy between our ApoGraft and denovoMAtrix technology
and evaluated collaborative development of products for regenerative medicine. The preliminary testing was performed and synergy
between the two technologies have been demonstrated. Data supported improved mesenchymal stem cells growth when exposed to FasL
embedded in denovoMAtrix matrix. Both sides agreed to negotiate in good faith a potential mutual development agreement, for the
development of a stem cell related product.
In
June 2018, we entered into a collaboration and material transfer agreement with the denovoMATRIX group of the Technische Universität
Dresden (TU Dresden), a leading center for stem cell research in Germany. According to the agreement, the team of denovoMATRIX
employed by TU Dresden will conduct examinations into the tentative synergy between our ApoGraft and denovoMAtrix technology for
the purpose of evaluating collaborative development of products for regenerative medicine. In the event of successful completion
of the evaluation stage, both sides agreed to negotiate in good faith a potential mutual development agreement, for the development
of a stem cell related product.
In
July 2018, we entered into a collaboration agreement with Cell2in Inc., a South Korean company focused on improving the quality
of cells. According to the agreement, the companies will conduct scientific evaluations combining ApoGraft with Cell2in’s proprietary
identification technology FreSHtracer™ which monitors stem cell quality by utilizing a fluorescent dye to characterize their
oxidative stress state. In December 2018, the Korea-Israel Industrial R&D Foundation (KORIL-RDF) approved a grant for the
collaboration between Cellect and Cell2in, providing financing for the joint project.
Preliminary
results from the collaboration include the following: (i) higher degree of stemness (both in Cell2in and standard assays) maintained
through repeated expansions of bone marrow and umbilical cord derived mesenchymal stem cell, (ii) improved expansion of adipose
derived mesenchymal stem cells in early and late passages, and significantly increased stemness of hematopoietic stem cells within
two hours of the ApoGraft process.
Future
Applications
Beyond
the use of our ApoGraft technology platform in the allogeneic HSCT setting for the treatment of hematological malignancies as
currently contemplated, we believe that our technology platform has the potential for a much broader set of usages:
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Use
of HSCT earlier in the blood cancer treatment protocol
. By reducing HSCT toxicity and other complications while increasing
efficacy, we believe that our stem cell selection kits will allow clinicians to undertake HSCT earlier in the blood cancer
treatment protocol.
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Broadened
use of HSCT to non-life threatening autoimmune disorders
. We are considering initiating clinical trials in autoimmune
conditions where HSCT was proven to be beneficial but it was seldom used because of the inherent toxicity. We believe that
if we are able to demonstrate significant reduction of inherent toxicity, this will help make HSCT eligible for treatment
of diseases such as Type 1 diabetes, lupus, psoriasis, Crohn’s disease and the like.
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Broadened
use of HSCT to organ transplants
. It has been known for some time that allogeneic HSCT taken from the same donor enhances
transplantation tolerance. This phenomenon has been observed not only in numerous animal models, but in humans as well. For
example, several clinical trials have reported that kidney transplantation accompanied by a previous HSCT from the same donor
was tolerated by the recipient’s immune system. We believe that our products could become the major adjunct therapy in any
solid organ transplantation to allow tolerance.
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Functional
selection of cord blood
. Stem cells from the cord blood of newborns can be collected immediately after birth and preserved
frozen. Currently, the main impediment of HSCT based on stem cells from cord blood is that the amount of cord blood is very
limited. In combination with inefficient selection methods, the quantity of the collected stem cells is minimal. Therefore,
the treatment is usually limited to children having low body mass. Physicians have tried using double cord blood and other
methods which have resulted in new immune related adverse effects. Under ethical review board approval, we examined more than
150 samples of cord blood and showed that we can achieve approximately 400 times more stem and progenitor cells from any given
samples. We believe this may open up the use of cord blood for adult patients in the future.
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Stem
cell expansion
. We already have preliminary indications that our ApoGraft technology platform greatly improves the efficiency
of the stem cell expansion process by increasing the initial number of cells that undergoes expansion. Therefore, we believe
that companies that currently use stem cell expansion will have a major advantage if our selection process is integrated as
the first step in their manufacturing process.
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Tissue
and organ engineering
. One of the objectives of regenerative medicine is to enable the use of stem cells as a reservoir
for organ and tissue engineering and, ultimately, transplantation. The goal is that the patient will be able to accept organs
or tissues engineered from foreign stem cells. These emerging technologies rely on a sufficient number of stem cells from
the donor and the separation of those cells from the donor’s immune system in order to avoid rejection. We believe that
our functional stem cell selection process can be the optimal solution for such needs.
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Mesenchymal stem
cells.
Develop the use of fat derived mesenchymal stem cells under FasL treatment for various indications including immune
tolerance, orthopedic and dermato-cosmetic indications.
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Reduce treatment
related toxicity of T cell immunotherapies such as CAR-T cells
. We have commenced a collaboration with a leading academic
group, in which the effect of the ApoGraft on reducing toxicity related to CAR-T treatment is tested.
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Research
and Development
Our
core technology was originally derived from research conducted by the research group of Dr. Nadir Askenasy. Our research and development
activities have been focused on additional animal models of a variety of diseases, experiments to determine the mechanism of action
of our ApoGraft technology platform, and toxicology testing. Based on these preclinical programs we have begun clinical testing
of products based on our ApoGraft technology platform in humans. During the years ended December 31, 2016, 2017 and 2018, we incurred
approximately $2.1 million, $3.3 million, $3.6 million respectively in expenses on company research and development activities.
Raw
Materials and Suppliers
Although
most raw materials for the ApoGraft technology platform is readily obtainable from multiple sources, we know of only two manufacturers
of clinical grade FasL (the apoptotis inducing signal), Oncology Ventures A/S and Swiss Biotech Center, or SBC. In July 2018,
we entered into a strategic manufacturing and supply agreement with SBC to secure production of clinical grade FasL protein in
which the clone is originated from Adipogen International. According to the agreement, SBC granted to us exclusivity to the FasL
protein developed by SBC for a period of five years and agreement further provided for the production of clinical batches of the
FasL protein for our planned US clinical trials. The parties contemplate expanding production capacity to meet future needs including
any marketing and collaborations with licensors of Cellect technology. In January 2019, we announced that we have concluded the
scale-up development and manufacturing of clinical grade FasL in collaboration with SBC. We believe we have secured sufficient
quantity of the FasL needed for the manufacturing for our clinical trial due to start in the U.S. by the end of 2019.
We
have previously experienced delays in the supply of FasL for our planned second human ApoGraft trial. If our current supplier
of FasL or any other supplier suffers a major natural or man-made disaster at its manufacturing facility, or if they otherwise
cease to supply to us, then this could result in further delays in our clinical studies and may delay product testing and potential
regulatory approval until a qualified alternative supplier is identified. With respect to other raw materials for the ApoGraft
technology platform, although multiple sources of supply exist, it could be expensive and take a significant amount of time to
arrange for alternative suppliers.
If
our manufacturers or we are unable to purchase any key materials after regulatory approval has been obtained for our product candidates,
the commercial launch of our product candidates would be delayed or there would be a shortage in supply, which would impair our
ability to generate revenues from the sale of our product candidates.
Manufacturing
We
do not own or operate, and currently have no current plans to establish, any manufacturing facilities. We rely on third-party
outsourcing arrangements for our ApoTainer selection kits that we are developing as well as other preclinical testing activities.
For clinical testing purposes, we intend to rely on third-party outsourcing arrangements as well. Upon completion of development,
we may either continue to rely on third-party outsourcing arrangements or build a manufacturing facility either on our own or
together with a strategic partner. We are no longer pursuing our collaboration with Entegris Inc. under a previously entered into
Joint Product Development Agreement.
Competition
The
field of regenerative medicine is expanding rapidly, in large part through the development of cell-based therapies and/or devices
designed to isolate cells from human tissues. As the field grows, we face, and will continue to face, increased competition from
pharmaceutical, biopharmaceutical, medical device and biotechnology companies, as well as academic and research institutions and
governmental agencies in the United States and globally. Most regenerative medicine efforts involve sourcing adult stem and regenerative
cells from tissues such as bone marrow, placental tissue, umbilical cord and peripheral blood. However, a growing number of companies
are using adipose tissue as a cell source.
With
the growing number of companies working in the cell therapy field, we, either now or in the future, will be forced to compete
across several areas, including equity and capital, clinical trial sites, enrollment of patients in clinical trials, corporate
partnerships, skilled and experienced personnel and commercial market share. Many of our competitors may have significantly greater
financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials,
obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical, biotechnology
and diagnostic industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller
or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large
and established companies. We cannot with any accuracy forecast when or if these companies are likely to bring cell therapies
to market for indications such as bone marrow transplants which we are also pursuing.
There
are currently two companies that lead the stem cell selection market with whom we directly compete. The first is Miltenyi, which
dominates the hematopoietic stem cell selection market, using biomarkers to either enrich stem cells (positive selection ofCD34+
cells) or deplete mature hematopoietic cells such as T cells from the biological sample (negative selection by monoclonal antibodies
specific against T-cell receptor α&β), or CD3/CD19 depletion or CD45RA depletion, resulting in the enrichment of
stem and progenitor cells. The second is Cytori, which sells a medical device known as the Celution® System that enables bedside
access to adult adipose derived regenerative cells, or ADRCs, by automating and standardizing the extraction, washing, and concentration
of a patient’s own ADRCs for present and future clinical use. While Miltenyi is using morphological markers of stem cells
to enrich the stem cell population, Cytori is using the physical properties of cells (in general) through centrifugal force for
separation. We believe that both technologies result in less than optimal cell population both in terms of quantity and quality
(purity) of the selected population of cells.
In
addition, since we are developing our ApoTainer selection kits to improve the safety and efficacy of allogeneic HSCT, we
also compete with companies developing treatments for GvHD. These companies include Athersys, Inc., Bellicum Pharmaceuticals Inc.,
Erytech Pharma SA, Fate Therapeutics Inc., Fortress Biotech Inc., (formerly Coronado Biosciences), Gamida Cell Ltd., or Gamida,
Kiadis Pharma N.V., or Kiadis, MEDIPOST Co., Ltd., Mesoblast Ltd., or Mesoblast, MolMed S.p.A., and Pluristem Therapeutics Inc.,
or Pluristem.
In
the general area of cell-based therapies, we may now or in the future compete on an indirect basis with a variety of companies,
most of whom are specialty medical products or biotechnology companies that provide a finished stem cell product that has already
undergone stem cell selection including, among others, Advanced Cell Technology, Inc., Arteriocyte Medical Systems Inc., Athersys,
Baxter International Inc., Bioheart Inc., Caladarius Biosciences Inc., Nuo Therapeutics, Inc., Fibrocell Science Inc., Gamida,
Genzyme Corporation, Harvest Technologies Corporation, In vivo Therapeutics Holdings Corp., Johnson & Johnson, Kiadis, Mesoblast,
Neuralstem Inc., Ocata Therapeutics Inc., Osiris Therapeutics, Inc., Pluristem, Tigenix NV, and others. We believe, however, that
many of these companies have the potential to become customers in the future of our ApoGraft technology platform in order to improve
and enhance their in-house processes.
Intellectual
Property
Our
success depends in large part on our ability to protect our proprietary technology and to operate without infringing on the proprietary
rights of third parties. We rely on a combination of patent, trade secret, copyright and trademark laws, as well as confidentiality
agreements, licensing agreements and other agreements, to establish and protect our proprietary rights. Our success also depends,
in part, on our ability to avoid infringing patents issued to others. If we were judicially determined to be infringing on any
third-party patent, we could be required to pay damages, alter our products or processes, obtain licenses or cease certain activities.
To
protect our proprietary functional cell selection technology platform and other scientific discoveries, we have a wide family
of patents and patent applications. These patents cover other stem cell related inventions but mainly our functional selection
methodology, products and methods of use. The full published domain is further described below:
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A
patent entitled “Method of Inducing Immune Tolerance via Blood/Lymph Flow-Restricted Bone Marrow Transplantation”
was granted in the United States. If the appropriate maintenance fees are paid, the patent is expected to expire in April
2024 (including a 571 day patent term adjustment granted by the USPTO).
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A
patent entitled “Methods of Selecting Stem Cells and Uses Thereof” was granted in the United States, Canada, Israel,
India and Europe (validated in Denmark, France, Germany, Ireland, Netherlands, Switzerland and the United Kingdom). If the
appropriate maintenance fees are paid, the patent is expected to expire in May 2027 in Israel, India and Europe and in September
2029 in the United States (including an 829 day patent term adjustment granted by the USPTO).
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A
patent application entitled “Regulatory Immune Cells with Enhanced Targeted Cell Death Effect” was filed as a
Patent Cooperation Treaty, or PCT, which entered national phase in the United States, Europe and Israel. A patent was granted
in the United States, Israel and Europe and was validated in France, Germany, Ireland, Switzerland and the United Kingdom.
If the appropriate maintenance fees are paid, the issued patents are expected to expire in July, 2031.
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A
patent application entitled “Devices and Methods for Selecting Apoptosis-Signaling Resistant Cells and Uses Thereof”
was filed as a PCT application and is now in national phase in Australia, Brazil, Canada, China, Europe, India, Japan, Korea,
Russia, USA and Israel. A patent was granted in the United States, Japan, Korea, Russia and Europe (validated in
Denmark, France, Germany, Ireland, Italy, Netherlands, Switzerland and the United Kingdom). With respect to the Australian
application, the Australian Patent Office issued a Notification of Acceptance. If the appropriate maintenance fees are paid,
these issued patents and the patents to be issued on the pending applications, if issued, are expected to expire in March,
2033.
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A
patent application entitled “Activation of Hematopoietic Progenitors by Pre-transplant Exposure to Death Ligands”
was filed as a PCT application and is now in national phase in Australia, Canada, China, Europe, India, Israel, Japan, Korea,
and USA. If patents are issued from these applications, and if the appropriate maintenance fees are paid, these patents are
currently expected to expire in October 2034.
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A
patent application entitled “Selective Surface for, and Methods of, Selecting a Population of Stem and Progenitor Cells,
and Uses Thereof” was filed as a PCT application and is now in national phase in Europe and USA. If patents are issued
from these applications, and if the appropriate maintenance fees are paid, these patents are currently expected to expire
in 2036.
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A
patent application entitled “Methods for propagating mesenchymal stem cells (MSC) for use in transplantation”
was filed as a PCT application and is now in national phase in Australia, Canada, China, Europe, India, Japan, Korea, Russia,
USA and Israel. If patents are issued from these applications, and if the appropriate maintenance fees are paid, these patents
are currently expected to expire in 2036.
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We
cannot assure that any of our pending patent applications will be issued, that we will develop additional proprietary products
that are patentable, that any patents issued to us will provide us with competitive advantages or will not be challenged by any
third parties, or that the patents of others will not prevent the commercialization of products incorporating our technology.
Furthermore, we cannot assure that others will not independently develop similar products, duplicate any of our products, or design
around our patents. U.S. patent applications are not immediately made public, so we might be surprised by the grant to someone
else of a patent on a technology we are actively using.
There
is a risk that any patent applications that we file and any patents that we hold or later obtain could be challenged by third
parties and declared invalid or infringing of third-party claims. For many of our pending applications, patent interference proceedings
may be instituted with the USPTO when more than one person files a patent application covering the same technology, or if someone
wishes to challenge the validity of an issued patent. At the completion of the interference proceeding, the USPTO will determine
which competing applicant is entitled to the patent, or whether an issued patent is valid. Patent interference proceedings are
complex and highly contested, and the USPTO’s decision is subject to appeal. This means that if an interference proceeding
arises with respect to any of our patent applications, we may experience significant expenses and delay in obtaining a patent,
and if the outcome of the proceeding is unfavorable to us, the patent could be issued to a competitor rather than to us. Third
parties can file post-grant proceedings in the USPTO, seeking to have issued patent invalidated, within nine months of issuance.
This means that patents undergoing post-grant proceedings may be lost, or some or all claims may require amendment or cancellation,
if the outcome of the proceedings is unfavorable to us. Post-grant proceedings are complex and could result in a reduction or
loss of patent rights.
There
is uncertainty in the patent laws within and outside the United States and Israel as these are undergoing constant review and
revisions through legislation and through court-made law. The laws of some countries may not sufficiently protect our proprietary
rights. Third parties may attempt to oppose the issuance of patents to us by initiating opposition proceedings or institute proceedings
to revoke the patents. Opposition or revocation proceedings against any of our patent application in one country could have an
adverse effect on our corresponding issued patents or pending application in another country, e.g. in the United States or Israel.
It may be necessary or useful for us to participate in proceedings intended to challenge and test the validity of our patents
or our competitors’ patents that have been issued in the United States, Israel and in many other jurisdictions. This could
result in substantial costs, divert our efforts and attention from other aspects of our business, and could have a material adverse
effect on our results of operations and financial condition.
In
addition to patent protection, we rely on unpatented trade secrets and proprietary technological expertise. We cannot assure you
that others will not independently develop or otherwise acquire substantially equivalent techniques, somehow gain access to our
trade secrets and proprietary technological expertise or disclose such trade secrets, or that we can ultimately protect our rights
to such unpatented trade secrets and proprietary technological expertise. We rely, in part, on confidentiality agreements with
our marketing partners, employees, advisors, vendors and consultants to protect our trade secrets and proprietary technological
expertise. We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach
or that our unpatented trade secrets and proprietary technological expertise will not otherwise become known or be independently
discovered by competitors.
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, radioactive and biological materials and
wastes and the cleanup of contaminated sites. 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. 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 testing facilities, however, entails risks in these areas. Significant expenditures could be required in the future if
these facilities are required to comply with new or more stringent environmental or health and safety laws, regulations or requirements.
Government
Regulation
Any
products we may develop and our research and development activities are subject to stringent government regulation. In the United
States, these regulations include the Federal Food, Drug, and Cosmetic Act, or FDCA, and other federal and state statutes and
regulations that govern the clinical and preclinical testing, manufacture, safety, effectiveness, approval, labeling, distribution,
sale, import, export, storage, record-keeping, reporting, advertising, and promotion of our products. Product development and
approval within this regulatory framework, if successful, will take many years and involve the expenditure of substantial resources.
Violations of regulatory requirements at any stage may result in various adverse consequences, including the FDA’s and other
health authorities’ delay in approving or refusal to approve a product. Violations of regulatory requirements also may result
in enforcement actions.
We
are currently in the early clinical development stage and none of our products have been approved for sale in any market.
United
States Regulatory Requirements
Regulation of Medical Devices Related
to Licensed Blood or Cellular Products
The FDA is divided
into various “Centers” by product type such as the Center for Drug Evaluation and Research, or CDER, CBER, or the Center
for Devices and Radiological Health, or CDRH. Different Centers review drug, biologic, or device applications.
CBER regulates medical
devices related to licensed blood and cellular products by applying appropriate medical device laws and regulations. Specifically,
CBER regulates the medical devices involved in the collection, processing, testing, manufacture and administration of licensed
blood, blood components and cellular products. The medical devices regulated by CBER are intimately associated with the blood collection
and processing procedures as well as the cellular therapies regulated by CBER. CBER has developed specific expertise in blood,
blood products and cellular therapies and the integral association of certain medical devices with those biological products supports
the regulation of those devices by CBER.
After receiving FDA
approval or clearance, an approved or cleared product must comply with postmarket safety reporting requirements applicable to the
product based on the application type under which it received marketing authorization. In the case of current good manufacturing
practices, or cGMP, the applicant may take one of two approaches: (1) complying with cGMP for each constituent part, or (2) a streamlined
approach specific to combination products, subject to certain limitations.
We submitted and are
awaiting feedback on a Pre-RFD submission to FDA made in February 2019. Under the Pre-RFD, the FDA will provide a preliminary,
nonbinding assessment of the regulatory identity or classification of our ApoTainer selection kits and an assessment of which Center
will regulate the product. Subject to the FDA’s response to our Pre-RFD, we plan to bring our ApoTainer selection kits
to market for HSCT as a medical device subject to the primary jurisdiction of the CBER. In addition, we believe that due to its
novelty and being first in class, this product could be classified as
de novo
, which could allow for less clinical data
before marketing approval.
FDA
Approval Process
The
FDA extensively regulates, among other things, the research, development, testing, manufacture, quality control, approval, labeling,
packaging, storage, record-keeping, promotion, advertising, distribution, marketing and import and export of medical products.
The FDA governs the following activities that we may perform or that may be performed on our behalf, to ensure that the medical
products we may in the future manufacture, promote and distribute domestically or export internationally are safe and effective
for their intended uses:
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product
design, preclinical and clinical development and manufacture;
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product
premarket clearance and approval;
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product
safety, testing, labeling and storage;
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recordkeeping
procedures;
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product
marketing, sales and distribution; and
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post-marketing
surveillance, complaint handling and adverse event reporting, including reporting of deaths, serious injuries, malfunctions
or other deviations; and
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recall
of products, including repairs or remediation.
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A new biologic must
be approved by the FDA through the biologics license application, or BLA, process before it may be legally marketed in the U.S.
The animal and other non-clinical data and the results of human clinical trials performed under an Investigational New Drug, or
IND, application and under similar foreign applications will become part of the BLA. A new medical device must be cleared or approved
by FDA through the premarket approval (PMA) or 510(k) clearance. For medical devices that require a PMA, clinical studies performed
under an Investigation Device Exemption, or IDE, will become part of a PMA for a medical device. A combination biologic/device
may be subject to standards of review for both CBER and CDRH. Although we have submitted a Pre-RFD for classification of the ApoTainer
as a medical device, we discuss the respective regulatory approval pathways for both biologics and medical devices.
In
the U.S., the FDA regulates biologics under the Public Health Service Act, or PHSA, and implementing regulations and medical devices
under the Federal Food, Drug, and Cosmetic Act, or FDCA, and implementing regulations, respectively. The process of obtaining
regulatory approvals and the subsequent compliance with applicable federal, state, local, and foreign statutes and regulations
require the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at
any time during the product development process, approval process or after approval, may subject an applicant to administrative
or judicial sanctions. These sanctions could include the FDA’s refusal to approve pending applications, withdrawal of an
approval, a clinical hold, warning letters, requesting product recalls, product seizures, total or partial suspension of production
or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement, or civil or criminal penalties.
Any agency or judicial enforcement action could have a material adverse effect on us. The process required by the FDA before a
biologic or medical device may be marketed in the U.S. generally involves the following, though a more specific discussion of
regulatory requirements for biologics and medical devices follows:
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completion
of preclinical laboratory tests, animal studies and formulation studies according to Good Laboratory Practices, or GLP, or
other applicable regulations;
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submission
to the FDA of an IND or IDE which must become effective before human clinical trials may begin;
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Approval
by an institutional review board, or IRB, representing each clinical trial site before each clinical trial may be initiated;
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performance
of adequate and well-controlled human clinical trials according to Good Clinical Practices, or GCP, to establish the safety
and efficacy of the proposed drug or device for its intended use;
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preparation
and submission of a BLA or PMA to the FDA;
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satisfactory
completion of an FDA inspection of the manufacturing facility or facilities at which
the drug is produced to assess compliance with current good manufacturing practice, or
cGMP, to assure that the facilities, methods and controls are adequate to preserve the
drug’s identity, strength, quality and purity; and
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satisfactory
completion of any FDA audits of the clinical study sites to assure compliance with GCP, and the integrity of clinical data
in support of the BLA or PMA;
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FDA
review and approval of the BLA or PMA.
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Once
a biologic product candidate is identified for development, it enters the preclinical testing stage. Preclinical tests include
laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. An IND sponsor must submit the
results of the preclinical tests, together with manufacturing information and analytical data, to the FDA as part of the IND.
The sponsor will also include a protocol detailing, among other things, the objectives of the first phase of the clinical trials,
the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated, if the first phase lends itself
to an efficacy evaluation. Some preclinical testing may continue even after the IND is submitted. The IND automatically becomes
effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, places the clinical trial on a clinical
hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Clinical
holds also may be imposed by the FDA at any time before or during studies due to safety concerns or non-compliance.
Once
a medical device product requiring a PMA is identified for development, it enters the feasibility study stage. For significant
risk devices, including devices that devices that are substantially important in diagnosing, curing, mitigating or treating disease
or in preventing impairment to human health, sponsors must submit an investigational plan to FDA as part of the IDE. The IDE automatically
becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, places the clinical trial on
a clinical hold. An IDE sponsor typically must submit results of feasibility studies to FDA to receive approval to proceed with
a pivotal study. A pivotal study is generally intended as the primary clinical support for a marketing application.
All
clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with GCP regulations.
They must be conducted under protocols detailing the objectives of the trial, dosing procedures, subject selection and exclusion
criteria and the safety and effectiveness criteria to be evaluated. Each protocol must be submitted to the FDA as part of the
IND or IDE, and progress reports detailing the results of the clinical trials must be submitted at least annually. In addition,
timely safety reports must be submitted to the FDA and the investigators for serious and unexpected adverse events. An institutional
review board, or IRB, responsible for the research conducted at each institution participating in the clinical trial must review
and approve each protocol before a clinical trial commences at that institution and must also approve the information regarding
the trial and the consent form that must be provided to each trial subject or his or her legal representative, monitor the study
until completed and otherwise comply with IRB regulations.
Human
clinical trials for biologics are typically conducted in three sequential phases that may overlap or be combined:
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Phase
I:
The product candidate is initially introduced into healthy human subjects and tested for safety, dosage
tolerance, absorption, metabolism, distribution and excretion. In the case of some products for severe or life-threatening
diseases, such as cancer, especially when the product may be too inherently toxic to ethically administer to healthy volunteers,
the initial human testing may be conducted in patients.
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Phase
II
: This phase involves studies in a limited patient population to identify possible adverse effects and safety
risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance
and optimal dosage.
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Phase
III
: Clinical trials are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded
patient population at geographically dispersed clinical study sites. These studies are intended to establish the overall risk-benefit
ratio of the product candidate and provide, if appropriate, an adequate basis for product labeling.
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Medical
devices, however, typically rely on one or a few pivotal studies rather than Phase I, II, and III clinical trials.
Clinical
trials are subject to extensive monitoring, recordkeeping and reporting requirements. Clinical trials must be conducted under
the oversight of an institutional review board, or IRB, for the relevant clinical trial sites and must comply with FDA regulations,
including, but not limited to, those relating to good clinical practices. To conduct a clinical trial, we also are required to
obtain the patient’s informed consent in a form and substance that complies with both FDA requirements and state and federal
privacy and human subject protection regulations.
The
FDA, the IRB, or we could suspend a clinical trial at any time for various reasons, including a belief that the risks to study
subjects outweigh the anticipated benefits or a finding that the research subjects or patients are being exposed to an unacceptable
health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial
is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious
harm to patients. Phase I, Phase II, and Phase III testing may not be completed successfully within any specified period, if at
all. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the
device or may otherwise not be sufficient to obtain FDA clearance or approval to market the product in the United States. Similarly,
in Europe, the clinical study must be approved by a local ethics committee and in some cases, including studies with high-risk
devices, by the ministry of health in the applicable country.
During
the development of a new medical product, sponsors are given opportunities to meet with the FDA at certain points. These points
may be prior to submission of an IND or IDE, at the end of Phase II, and before a BLA or PMA is submitted. Meetings at other times
may be requested. These meetings can provide an opportunity for the sponsor to share information about the data gathered to date,
for the FDA to provide advice, and for the sponsor and FDA to reach agreement on the next phase of development. Sponsors typically
use the end of Phase II meeting to discuss their Phase II clinical results and present their plans for the pivotal Phase III clinical
trial that they believe will support approval of the new biologic. Similarly, sponsors typically use the end of feasibility studies
to do the same for planning for their pivotal trial or trials for a medical device.
Clinical
research clinical research involving the transplantation of cells or test articles derived from human fetal tissue into human
recipients is subject to additional U.S. Department of Health and Human Services Office for Human Research Protections requirements.
Because our ApoTainer stem cell selection kit uses autologous stem cell treatments, stem cells that are extracted of the
patient and transplanted to the same patient, we believe these requirements do not apply to us.
Concurrent
with clinical trials, companies usually complete additional animal studies and must also develop additional information about
the chemistry and physical characteristics of a biologic and finalize a process for manufacturing the product in commercial quantities
in accordance with cGMP requirements. For biologics, the manufacturing process must be capable of consistently producing quality
batches of the product candidate and, among other things, the manufacturer must develop methods for testing the identity, strength,
quality and purity of the final product. Additionally, appropriate packaging must be selected and tested and stability studies
must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its shelf life. Before
approving a BLA or PMA, the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA will
not approve an application unless it determines that the manufacturing processes and facilities are in full compliance with cGMP
requirements and adequate to assure consistent production of the product within required specifications. The PHSA in particular
emphasizes the importance of manufacturing control for products like biologics whose attributes cannot be precisely defined.
Manufacturers
and others involved in the manufacture and distribution of products must also register their establishments with the FDA and certain
state agencies. Both domestic and foreign manufacturing establishments must register and provide additional information to the
FDA upon their initial participation in the manufacturing process. Any product manufactured by or imported from a facility that
has not registered, whether foreign or domestic, is deemed misbranded under the FDCA.
Establishments
may be subject to periodic unannounced inspections by government authorities to ensure compliance with cGMP and other laws. Manufacturers
may have to provide, on request, electronic or physical records regarding their establishments. Delaying, denying, limiting, or
refusing inspection by the FDA may lead to a product being deemed to be adulterated.
There
are also specific approval requirements for both biologics and medical device products, respectively. Biologics and medical devices
are also eligible for different forms of exclusivities and priority review, and combination products may be eligible for both.
We discuss both regulatory paradigms below, as our ApoTainer stem cell selection kits product will implicate elements of
each, largely at CBER’s discretion to involve CDRH in the review and approval process.
U.S.
Review and Approval of Biologics
In
order to obtain approval to market a biological product in the United States, a marketing application must be submitted to
the FDA that provides sufficient data establishing the safety, purity and potency of the proposed biological product for its intended
indication. 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. Data can come from company-sponsored clinical trials intended
to test the safety and effectiveness of a use of a product, or from a number of alternative sources, including studies initiated
by investigators. To support marketing approval, the data submitted must be sufficient in quality and quantity to establish the
safety, purity and potency of the biological product to the satisfaction of the FDA.
The
results of product development, preclinical studies and clinical trials, along with descriptions of the manufacturing process,
analytical tests conducted on the chemistry of the drug, proposed labeling, and other relevant information are submitted to the
FDA as part of a BLA requesting approval to market the product. The submission of a BLA is subject to the payment of user fees;
a waiver of such fees may be obtained under certain limited circumstances. The FDA initially reviews all BLAs submitted to ensure
that they are sufficiently complete for substantive review before it accepts them for filing. The FDA generally completes this
preliminary review within 60 calendar days. The FDA may request additional information rather than accept a BLA for filing. In
this event, the BLA must be resubmitted with the additional information. The resubmitted application also is subject to review
before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review.
FDA may refer the BLA to an advisory committee for review, evaluation and recommendation as to whether the application should
be approved and under what conditions. The FDA is not bound by the recommendation of an advisory committee, but it generally follows
such recommendations. The approval process is lengthy and often difficult, and the FDA may refuse to approve a BLA if the applicable
regulatory criteria are not satisfied or may require additional clinical or other data and information. Even if such data and
information are submitted, the FDA may ultimately decide that the BLA does not satisfy the criteria for approval. Data obtained
from clinical trials are not always conclusive and the FDA may interpret data differently than we interpret the same data. FDA
reviews a BLA to determine, among other things whether the product is safe, pure and potent and the facility in which it is manufactured,
processed, packed or held meets standards designed to assure the product’s continued safety, purity and potency. Before
approving a BLA, the FDA will inspect the facility or facilities where the product is manufactured. The FDA may issue a complete
response letter, which may require additional clinical or other data or impose other conditions that must be met in order to secure
final approval of the BLA, or an approval letter following satisfactory completion of all aspects of the review process.
BLAs
may receive either standard or priority review. Under current FDA review goals, standard review of an original BLA will be 10
months from the date that the BLA is filed. A biologic representing a significant improvement in treatment, prevention or diagnosis
of disease may receive a priority review of six months. Priority review does not change the standards for approval, but may expedite
the approval process.
If
a product receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the indications
for use may otherwise be limited, which could restrict the commercial value of the product. In addition, the FDA may require a
sponsor to conduct Phase IV testing which involves clinical trials designed to further assess a drug’s safety and effectiveness
after BLA approval, and may require testing and surveillance programs to monitor the safety of approved products which have been
commercialized.
The
Food and Drug Administration Safety and Innovation Act, or FDASIA, which was enacted in 2012, made permanent the Pediatric Research
Equity Act, or PREA, which requires a sponsor to conduct pediatric studies for most biologics with a new active ingredient, new
indication, new dosage form, new dosing regimen or new route of administration. Under PREA, BLAs and supplements thereto, must
contain a pediatric assessment unless the sponsor has received a deferral or waiver. The required assessment must assess the safety
and effectiveness of the product for the claimed indications in all relevant pediatric subpopulations and support dosing and administration
for each pediatric subpopulation for which the product is safe and effective. The sponsor or FDA may request a deferral of pediatric
studies for some or all of the pediatric subpopulations. A deferral may be granted for several reasons, including a finding that
the biologic is ready for approval for use in adults before pediatric studies are complete or that additional safety or effectiveness
data needs to be collected before pediatric studies can begin. After April 2013, the FDA must send a non-compliance letter to
any sponsor that fails to submit a required pediatric assessment within specified deadlines or fails to submit a timely request
for approval of a pediatric formulation, if required.
Biologics
Price Competition and Innovation Act of 2009
The
Biologics Price Competition and Innovation Act of 2009, or BPCIA, amended the PHSA to create an abbreviated approval pathway for
two types of “generic” biologics — biosimilars and interchangeable biologic products, and provides
for a twelve-year exclusivity period for the first approved biological product, or reference product, against which a biosimilar
or interchangeable application is evaluated; however if pediatric studies are performed and accepted by the FDA, the twelve-year
exclusivity period will be extended for an additional six months. A biosimilar product is defined as one that is highly similar
to a reference product notwithstanding minor differences in clinically inactive components and for which there are no clinically
meaningful differences between the biological product and the reference product in terms of the safety, purity and potency of
the product. An interchangeable product is a biosimilar product that may be substituted for the reference product without the
intervention of the health care provider who prescribed the reference product.
The
biosimilar applicant must demonstrate that the product is biosimilar based on data from (1) analytical studies showing that the
biosimilar product is highly similar to the reference product; (2) animal studies (including toxicity); and (3) one or more clinical
studies to demonstrate safety, purity and potency in one or more appropriate conditions of use for which the reference product
is approved. In addition, the applicant must show that the biosimilar and reference products have the same mechanism of action
for the conditions of use on the label, route of administration, dosage and strength, and the production facility must meet standards
designed to assure product safety, purity and potency.
U.S.
Review and Approval of Medical Devices
Unless
an exemption applies, medical device commercially distributed in the United States require either premarket notification, or 510(k)
clearance, or approval of a premarket approval, or PMA, application from the FDA. While we anticipate CBER will be the lead Center
in reviewing our product application, CDRH’s review standards will likely apply to significant portions of the application.
The
FDA classifies medical devices into one of three classes. Class I devices, considered to have the lowest risk, are those for which
safety and effectiveness can be assured by adherence to the FDA’s general regulatory controls for medical devices, which
include compliance with the applicable portions of the FDA’s Quality System Regulation, or QSR, facility registration and
product listing, reporting of adverse medical events, and appropriate, truthful and non-misleading labeling, advertising, and
promotional materials (General Controls). Class II devices are subject to the FDA’s General Controls, and any other special
controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device (Special Controls). Manufacturers
of most Class II and some Class I devices are required to submit to the FDA a premarket notification under Section 510(k) of the
FDCA, requesting permission to commercially distribute the device. This process is generally known as 510(k) clearance. Devices
deemed by the FDA to pose the greatest risks, such as life-sustaining, life-supporting or implantable devices, or devices that
have a new intended use, or use advanced technology that is not substantially equivalent to that of a legally marketed device,
are placed in Class III, requiring approval of a PMA. The submission of a 510(k) or PMA is subject to the payment of user fees;
a waiver of such fees may be obtained under certain limited circumstances.
510(k)
Clearance Pathway for Medical Devices
When
a 510(k) clearance is required, an applicant is required to submit a 510(k) application demonstrating that our proposed device
is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28,
1976 for which the FDA has not yet called for the submission of PMAs. By regulation, the FDA is required to clear or deny a 510(k)
premarket notification within 90 days of submission of the application. As a practical matter, clearance may take longer. The
FDA may require further information, including clinical data, to make a determination regarding substantial equivalence.
Once
filed, the FDA has 90 days in which to review the 510(k) application and respond. Typically, the FDA’s response after reviewing
a 510(k) application is a request for additional data or clarification. Depending on the complexity of the application and the
amount of data required, the process may be lengthened by several months or more. If additional data, including clinical data,
are needed to support our claims, the 510(k) application process may be significantly lengthened.
If
the FDA issues an order declaring the device to be Not Substantially Equivalent, or NSE, the device is placed into a Class III
or PMA category. At that time, a company can request a
de novo
classification of the product.
De novo
generally
applies where there is no predicate device and the FDA believes the device is sufficiently safe so that no PMA should be required.
The request must be in writing and sent within 30 days from the receipt of the NSE determination. The request should include a
description of the device, labeling for the device, reasons for the recommended classification and information to support the
recommendation. The de novo process has a 60-day review period. If the FDA classifies the device into Class II, a company will
then receive an approval order to market the device. This device type can then be used as a predicate device for future 510(k)
submissions. However, if the FDA subsequently determines that the device will remain in the Class III category, the device cannot
be marketed until the company has obtained an approved PMA.
Any
modification to a 510(k)-cleared device that would constitute a major change in its intended use, or any change that could significantly
affect the safety or effectiveness of the device, requires a new 510(k) clearance and may even, in some circumstances, require
a PMA if the change raises complex or novel scientific issues or the product has a new intended use. The FDA requires every manufacturer
to make the determination regarding the need for a new 510(k) submission in the first instance, but the FDA may review any manufacturer’s
decision. If the FDA were to disagree with any of our determinations that changes did not require a new 510(k) submission, it
could require us to cease marketing and distribution and/or recall the modified device until 510(k) clearance or PMA approval
is obtained. If the FDA requires us to seek 510(k) clearance or PMA approval for any modifications, we may be required to cease
marketing and/or recall the modified device, if already in distribution, until 510(k) clearance or PMA approval is obtained and
we could be subject to significant regulatory fines or penalties.
Premarket
Approval (PMA) Pathway for Medical Devices
While
we believe that the medical device component of our ApoTainer stem cell selection kits will be subject to the 510(k) clearance
pathway, FDA could evaluate our product under the PMA pathway if it believes the device component raises sufficiently complex
or novel scientific issues.
A
PMA application must be submitted to the FDA if the device cannot be cleared through the 510(k) process, or is not otherwise exempt
from the FDA’s premarket clearance and approval requirements. A PMA application must generally be supported by extensive
data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling, to demonstrate to the
FDA’s satisfaction the safety and effectiveness of the device for its intended use. During the review period, the FDA will
typically request additional information or clarification of the information already provided. Also, an advisory panel of experts
from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability
of the device. The FDA may or may not accept the panel’s recommendation. In addition, the FDA will generally conduct a pre-approval
inspection of our or our third-party manufacturers’ or suppliers’ manufacturing facility or facilities to ensure compliance
with the QSR. Once a PMA is approved, the FDA may require that certain conditions of approval be met, such as conducting a post-market
clinical trial.
New
PMAs or PMA supplements are required for modifications that affect the safety or effectiveness of the device, including, for example,
certain types of modifications to the device’s indication for use, manufacturing process, labeling and design. PMA supplements
often require submission of the same type of information as a PMA, except that the supplement is limited to information needed
to support any changes from the device covered by the original PMA and may not require as extensive clinical data or the convening
of an advisory panel.
Clinical
trials are generally required to support a PMA application and are sometimes required for 510(k) clearance. Such trials generally
require an application for an investigational device exemption, or IDE, which is approved in advance by the FDA for a specified
number of patients and study sites, unless the product is deemed a non-significant risk device eligible for more abbreviated IDE
requirements. A significant risk device is one that presents a potential for serious risk to the health, safety or welfare of
a patient and either is implanted, used in supporting or sustaining human life, substantially important in diagnosing, curing,
mitigating, or treating disease or otherwise preventing impairment of human health, or otherwise presents a potential for serious
risk to a subject.
Breakthrough
Device Designation
The
FDA grants Breakthrough expedite development, assessment and review of medical devices that “provide for more effective
treatment or diagnosis of life-threatening or irreversibly debilitating human disease or conditions; and that represent breakthrough
technologies; for which no approved or cleared alternatives exist; that offer significant advantages over existing approved or
cleared alternatives, or the availability of which is in the best interest of patients.”
This
status confers a number of benefits on the development path of medical devices. These include:
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a
dedicated FDA team, including senior management engagement, to facilitate development of the device
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a
defined process for resolving disputes that may arise between the sponsor and FDA
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a
commitment to interactive and timely communication between FDA and the sponsor
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increased
flexibility in clinical study design
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options
for data collection in the post-market setting, in place of a full clinical study prior to approval
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priority
review status, meaning that a sponsor’s submissions will be placed at the top of the relevant review queue and receive
additional FDA resources as needed
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expedited
review and potential deferral of manufacturing and quality systems compliance audits
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advance
disclosure to the sponsor of the topics of any consultation between the FDA and external experts or an advisory committee
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an
opportunity for the sponsor to recommend external experts for such consultations
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assignment
of FDA staff to address questions by institutional review committees concerning investigational use of the medical device
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any
additional steps FDA deems appropriate to expedite the development and review of the medical device.
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We
plan to apply for a Breakthrough Designation for the container component of our ApoTainer selection kit.
Patent
Term Restoration and Marketing Exclusivity
Depending
upon the timing, duration and specifics of FDA approval of our product, some of our U.S. patents may be eligible for limited patent
term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments.
The Hatch-Waxman Amendments permit a patent restoration term of up to five years as partial compensation for effective patent
term lost due to time spent during product development and the FDA regulatory review process. However, patent term restoration
cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term
restoration period is generally one-half the time between the effective date of an IND, and the submission date of a BLA, plus
the time between the submission date of a BLA and the approval of that application, except that the period is reduced by any time
during which the applicant failed to exercise due diligence. Only one patent applicable to an approved drug may be extended, and
the extension must be applied for prior to expiration of the patent. The USPTO, in consultation with the FDA, reviews and approves
the application for any patent term extension or restoration.
Pediatric
exclusivity is another type of marketing exclusivity available in the U.S. FDASIA made permanent the Best Pharmaceuticals for
Children Act, or BPCA, which provides, under certain circumstances, for an additional six months of marketing exclusivity if a
sponsor conducts clinical trials in children in response to a written request from the FDA, or a Written Request. If the Written
Request does not include studies in neonates, the FDA is required to include its rationale for not requesting those studies. The
FDA may request studies on approved or unapproved indications in separate Written Requests. The issuance of a Written Request
does not require the sponsor to undertake the described studies.
Orphan
Drug Designation
We
have received Orphan Drug Designation from FDA for our ApoGraft technology for the prevention of acute and chronic graft versus
host disease (GvHD) in transplant patients. Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug intended
to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in
the U.S., or more than 200,000 individuals in the U.S. and for which there is no reasonable expectation that the cost of developing
and making available in the U.S. a drug for this type of disease or condition will be recovered from sales in the U.S. for that
drug. Orphan drug designation must be requested before submitting an NDA or BLA. After the FDA grants orphan drug designation,
the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation
does not itself convey any advantage in or shorten the duration of the regulatory review and approval process. If a product that
has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the
product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications to market the
same drug for the same indication, except in very limited circumstances, for seven years. Orphan drug exclusivity, however, also
could block the approval of one of our product candidates for seven years if a competitor obtains approval of the same drug, for
the same designated orphan indication or if our product candidate is determined to be contained within the competitor’s
product for the same indication or disease.
The
FDA also administers a clinical research grants program, whereby researchers may compete for funding to conduct clinical trials
to support the approval of drugs, biologics, medical devices, and medical foods for rare diseases and conditions. A product does
not have to be designated as an orphan drug to be eligible for the grant program. An application for an orphan grant should propose
one discrete clinical study to facilitate FDA approval of the product for a rare disease or condition. The study may address an
unapproved new product or an unapproved new use for a product already on the market.
Post-Approval
Regulation of Biologics and Medical Devices
After
a product is placed on the market, numerous regulatory requirements continue to apply. In addition to the requirements below,
adverse event reporting regulations require that we report to the FDA any incident in which our product may have caused or contributed
to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would likely cause or
contribute to death or serious injury. Additional regulatory requirements include:
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product
listing and establishment registration, which helps facilitate FDA inspections and other regulatory action;
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cGMP
or QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, validation, testing,
control, documentation and other quality assurance procedures during all aspects of the design and manufacturing process;
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labeling
regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label use or indication;
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clearance
of product modifications that could significantly affect safety or effectiveness or that would constitute a major change in
intended use of one of our approved medical products;
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notice
or approval of product or manufacturing process modifications or deviations that affect the safety or effectiveness of one
of our approved medical products;
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post-approval
restrictions or conditions, including post-approval study commitments;
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post-market
surveillance regulations, which apply, when necessary, to protect the public health or to provide additional safety and effectiveness
data for the medical product;
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the
FDA’s recall authority, whereby it can ask, or under certain conditions order, device manufacturers to recall from the
market a product that is in violation of governing laws and regulations;
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regulations
pertaining to voluntary recalls; and
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notices
of corrections or removals.
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A
biologic product may also be subject to official lot release, meaning that the manufacturer is required to perform certain tests
on each lot of the product before it is released for distribution. If the product is subject to official lot release, the manufacturer
must submit samples of each lot, together with a release protocol showing a summary of the history of manufacture of the lot and
the results of all of the manufacturer’s tests performed on the lot, to the FDA. The FDA may in addition perform certain
confirmatory tests on lots of some products before releasing the lots for distribution. Finally, the FDA will conduct laboratory
research related to the safety, purity, potency and effectiveness of pharmaceutical products.
Advertising
and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the U.S. Federal Trade Commission,
or FTC, and by state regulatory and enforcement authorities. Promotional activities for FDA-regulated products of other companies
have been the subject of enforcement action brought under healthcare reimbursement laws and consumer protection statutes. Furthermore,
under the federal U.S. Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising
claims. In addition, we are required to meet regulatory requirements in countries outside the United States, which can change
rapidly with relatively short notice. If the FDA determines that our promotional materials or training constitutes promotion of
an unapproved or uncleared use, it could request that we modify our training or promotional materials or subject us to regulatory
or enforcement actions. It is also possible that other federal, state or foreign enforcement authorities might take action if
they consider our promotional or training materials to constitute promotion of an unapproved use, which could result in significant
fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement.
Failure
by us or by our third-party manufacturers and suppliers to comply with applicable regulatory requirements can result in enforcement
action by the FDA or other regulatory authorities, which may result in sanctions including, but not limited to:
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letters, warning letters, fines, injunctions, consent decrees and civil penalties;
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customer
notifications or repair, replacement, refunds, recall, detention or seizure of our products;
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operating
restrictions or partial suspension or total shutdown of production;
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refusing
or delaying requests for 510(k) clearance or PMA approvals of new products or modified products;
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withdrawing
510(k) clearances or PMA approvals that have already been granted;
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refusing
to grant export approval for our products; or
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Human
Cells, Tissues, and Cellular and Tissue-Based Products Regulation
Under
Section 361 of the PHSA, the FDA issued specific regulations governing the use of human cells, tissues and cellular and tissue-based
products, or HCT/Ps, in humans. Pursuant to Part 1271 of Title 21 of the Code of Federal Regulations, or Part 1271, the FDA established
a unified registration and listing system for establishments that manufacture and process HCT/Ps. The regulations also include
provisions pertaining to donor eligibility determinations; current good tissue practices covering all stages of production, including
harvesting, processing, manufacture, storage, labeling, packaging, and distribution; and other procedures to prevent the introduction,
transmission, and spread of communicable diseases.
The
HCT/P regulations strictly constrain the types of products that may be regulated solely under these regulations. Factors considered
include the degree of manipulation, whether the product is intended for a homologous function, whether the product has been combined
with noncellular or non-tissue components, and the product’s effect or dependence on the body’s metabolic function.
In those instances where cells, tissues, and cellular and tissue-based products have been only minimally manipulated, are intended
strictly for homologous use, have not been combined with noncellular or nontissue substances, and do not depend on or have any
effect on the body’s metabolism, the manufacturer is only required to register with the FDA, submit a list of manufactured
products, and adopt and implement procedures for the control of communicable diseases. If one or more of the above factors has
been exceeded, the product would be regulated as a drug, biological product, or medical device rather than an HCT/P.
Management
believes that Part 1271 requirements do not currently apply to us because we are not currently investigating, marketing or selling
cellular therapy products. If we were to change our business operations in the future, the FDA requirements that apply to us may
also change and we would we would potentially need to expend significant resources to comply with these requirements.
Federal
Regulation of Clinical Laboratories
The
Clinical Laboratory Improvement Amendments (“CLIA”) extends federal oversight to clinical laboratories that examine
or conduct testing on materials derived from the human body for the purpose of providing information for the diagnosis, prevention,
or treatment of disease or for the assessment of the health of human beings. CLIA requirements apply to those laboratories that
handle biological matter. CLIA requires that these laboratories be certified by the government, satisfy governmental quality and
personnel standards, undergo proficiency testing, be subject to biennial inspections, and remit fees. The sanctions for failure
to comply with CLIA include suspension, revocation, or limitation of a laboratory’s CLIA certificate necessary to conduct
business, fines, or criminal penalties. Additionally, CLIA certification may sometimes be needed when an entity desires to obtain
accreditation, certification, or license from non-government entities for cord blood collection, storage, and processing. However,
to the extent that any of our activities require CLIA certification, we intend to obtain and maintain such certification and/or
licensure.
Coverage,
Pricing and Reimbursement
Significant
uncertainty exists as to the coverage and reimbursement status of any products for which we obtain regulatory approval. Sales
of any of our products, if approved, will depend, in part, on the extent to which the costs of the products will be covered by
third-party payors, including government health programs such as Medicare and Medicaid, commercial health insurers and managed
care organizations. The process for determining whether a payor will provide coverage for a medical product may be separate from
the process for setting the price or reimbursement rate that the payor will pay for the medical product once coverage is approved.
Third-party payors may limit coverage to medical drug products on an approved list, or formulary, which might not include all
of the approved products for a particular indication.
In
order to secure coverage and reimbursement for any product that might be approved for sale, we may need to conduct expensive pharmacoeconomic
studies in order to demonstrate the medical necessity and cost-effectiveness of the product, in addition to the costs required
to obtain FDA or other comparable regulatory approvals. Our products may not be considered medically necessary or cost-effective.
A payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved.
Third-party reimbursement may not be sufficient to enable us to maintain price levels high enough to realize an appropriate return
on our investment in product development.
The
containment of healthcare costs has become a priority of federal, state and foreign governments, and the prices of medical products
have been a focus in this effort. Third-party payors are increasingly challenging the prices charged for medical products and
services and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety
and efficacy. If these third-party payors do not consider our products to be cost-effective compared to other available therapies,
they may not cover our products after approval as a benefit under their plans or, if they do, the level of payment may not be
sufficient to allow us to sell our products at a profit. The U.S. government, state legislatures and foreign governments have
shown significant interest in implementing cost containment programs to limit the growth of government-paid health care costs,
including price controls, restrictions on reimbursement and requirements for substitution of generic products for branded prescription
medical products. Adoption of such controls and measures, and tightening of restrictive policies in jurisdictions with existing
controls and measures, could limit payments for pharmaceuticals such as the drug candidates that we are developing and could adversely
affect our net revenue and results.
Pricing
and reimbursement schemes vary widely from country to country. Some countries provide that drug products may be marketed only
after a reimbursement price has been agreed. Some countries may require the completion of additional studies that compare the
cost-effectiveness of a particular product candidate to currently available therapies. For example, the European Union (EU) provides
options for its member states to restrict the range of drug products for which their national health insurance systems provide
reimbursement and to control the prices of medicinal products for human use. EU Member States may approve a specific price for
a drug product or may instead adopt a system of direct or indirect controls on the profitability of the company placing the drug
product on the market. Other member states allow companies to fix their own prices for drug products, but monitor and control
company profits. The downward pressure on health care costs in general, particularly prescription medical products, has become
very intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, in some countries,
cross-border imports from low-priced markets exert competitive pressure that may reduce pricing within a country. There can be
no assurance that any country that has price controls or reimbursement limitations for drug products will allow favorable reimbursement
and pricing arrangements for any of our products.
The
marketability of any products for which we receive regulatory approval for commercial sale may suffer if the government and third-party
payors fail to provide adequate coverage and reimbursement. In addition, an increasing emphasis on managed care in the United
States has increased and we expect will continue to increase the pressure on drug pricing. Coverage policies, third-party reimbursement
rates and drug pricing regulation may change at any time. In particular, the PPACA was enacted in the United States in March 2010
and contains provisions that may reduce the profitability of medical products, including, for example, increased rebates for drugs
sold to Medicaid programs, extension of Medicaid rebates to Medicaid managed care plans, mandatory discounts for certain Medicare
Part D beneficiaries and annual fees based on pharmaceutical companies’ share of sales to federal health care programs. Even if
favorable coverage and reimbursement status is attained for one or more products for which we receive regulatory approval, less
favorable coverage policies and reimbursement rates may be implemented in the future.
There
have been judicial and congressional challenges to the PPACA, as well as efforts by the Trump Administration to repeal or replace
certain aspects of the PPACA. Since January 2017, President Trump has signed two Executive Orders and other directives designed
to delay the implementation of certain provisions of the PPACA or otherwise circumvent some of the requirements for health insurance
mandated by the PPACA. However, to date, the Executive Orders have had limited effect and the Congressional activities have not
resulted in the passage of a law repealing or replacing the PPACA. If a law is enacted, many if not all of the provisions of the
PPACA may no longer apply to prescription medical products. While we are unable to predict what changes may ultimately be enacted,
to the extent that future changes affect how any future products are paid for and reimbursed by government and private payers
our business could be adversely impacted. On December 14, 2018, a federal district court in Texas ruled that the PPACA is unconstitutional
as a result of the Tax Cuts and Jobs Act, the federal income tax reform legislation previously passed by Congress and signed by
President Trump on December 22, 2017, that eliminated the individual mandate portion of the PPACA. The case, Texas, et al, v.
United States of America, et al., (N.D. Texas), is an outlier, and the ruling has been stayed by the ruling judge. We are not
able to state with any certainty what will be impact of this court decision on our business pending further court action and possible
appeals.
In
addition, other legislative changes have been proposed and adopted since the PPACA was enacted. In August 2011, President Obama
signed into law the Budget Control Act of 2011, which, among other things, created 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. If we ever obtain regulatory
approval and commercialization of ApoTainer or any future product candidates, these 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
ApoTainer or any future product candidates may be. Further, the Deficit Reduction Act of 2010, directed CMS to contract a vendor
to determine “retail survey prices for covered outpatient drugs and biologics that represent a nationwide average of consumer
purchase prices for such drugs and biologics, net of all discounts and rebates (to the extent any information with respect to
such discounts and rebates is available).” This survey information can be used to determine the National Average Drug Acquisition
Cost, or NADAC. Some states have indicated that they will reimburse based on the NADAC and this can result in further reductions
in the prices paid for various outpatient drugs and biologics.
On
December 14, 2018, a federal district court in Texas ruled that the PPACA is unconstitutional as a result of the Tax Cuts and
Jobs Act, the federal income tax reform legislation previously passed by Congress and signed by President Trump on December 22,
2017, that eliminated the individual mandate portion of the PPACA. The case, Texas, et al, v. United States of America, et al.,
(N.D. Texas), is an outlier, and the ruling has been stayed by the ruling judge. We are not able to state with any certainty what
will be impact of this court decision on our business pending further court action and possible appeals.
In
the fourth quarter of 2018, the Trump Administration announced initiatives that it asserted are intended to result in purportedly
lower drug prices. The first initiative, announced on October 15, 2018, involved the plan to a new federal regulation that would
require pharmaceutical manufacturers to disclose the list prices of their respective prescription drugs and biologics in their
television advertisements for their products if the list price is greater than $35. With respect to the second initiative, on
October 25, 2018, the Centers for Medicaid and Medicare Services gave Advance Notice of Proposed Rulemaking to propose the implementation
of an “International Pricing Index” model for Medicare Part B drugs and biologics (single source drugs, biologicals,
and biosimilars). Public comments were due on December 31, 2018 with a proposed rule theoretically being offered as early as Spring
2019 with target implementation of a five year pilot program beginning in Spring 2020. While these initiatives have not been put
into effect, we are not in a position to know at this time whether they will ever become law or what impact the enactment either
of these proposals would have on our business.
In
February 2019, the Department of Health and Human Services has proposed a regulation that would significantly restrict the availability
of certain regulatory safe harbors under the federal Anti-Kickback Statute that are used to facilitate certain types of transactions
between manufacturers and pharmacy benefits managers that play a significant role in the pharmaceutical distribution chain. These
changes to the Discount Safe Harbors available under the Anti-Kickback Statute would reduce some of the protections currently
available to manufacturers that pay negotiated rebates to pharmacy benefits managers in exchange for these “PBMs”
agreeing to include drugs and biologics on the formularies of the PBM’s downstream customers, primarily the health plans
that insure patients for both private commercial plans and government-sponsored plans. While we do not know whether the Trump
Administration will be successful in implementing this proposed regulation, its successful implementation could have an impact
on both our commercial supply arrangements with health plans and our supply arrangements to health plans that serve beneficiaries
of federal health care programs such as Medicare Part D.
As
part of its reform of the 340B discount drug program, on October 31, 2018, the Health Resources and Services Administration at
the U.S. Department of Health and Human Services, or HHS, issued a notice of proposed rulemaking to move up the effective date
of a final rule that would give HHS authority to impose Civil Monetary Penalties on pharmaceutical manufacturers who knowingly
and intentionally charged a covered entity more than the statutorily allowed ceiling price for a covered outpatient drug or biologic.
The final rule is intended to encourage compliance by manufacturers in offering the mandatory 340B ceiling purchase price to eligible
purchasers, such as certain qualified health systems or individual hospitals.
Various
states, such as California, have also taken steps to consider and enact laws or regulations that are intended to increase the
visibility of the pricing of pharmaceutical products with the goal of reducing the prices at which pharmaceutical products are
sold. Because these various actual and proposed legislative changes are intended to operate on a state-by-state level rather than
a national one, we cannot predict what the full effect of these legislative activities may be on our business in the future.
Although
we cannot predict the full effect on our business of the implementation of existing legislation 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, ApoTainer or any future product candidates, 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 ApoTainer
or any future product candidates. 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 any future product
sales.
Anti-Kickback
and False Claims Laws
In
addition to FDA restrictions on marketing of medical products, several other types of state and federal laws have been applied
to restrict certain marketing practices in the medical product industry in recent years. These laws include anti-kickback statutes
and false claims statutes. The federal Anti-Kickback Statute, or AKS, prohibits, among other things, knowingly and willfully offering,
paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase,
lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare
programs. This statute has been interpreted to apply to arrangements between medical product manufacturers on the one hand and
prescribers, purchasers and formulary managers on the other. Violations of the AKS are punishable by imprisonment, criminal fines,
civil monetary penalties and exclusion from participation in federal healthcare programs. Although there are a number of statutory
exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the
exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases
or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor.
The
Federal False Claims Act, or FCA, prohibits any person from knowingly presenting, or causing to be presented, a false claim for
payment to the federal government, or knowingly making, or causing to be made, a false statement to have a false claim paid. Recently,
several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly inflating drug prices
they report to pricing services, which in turn were used by the government to set Medicare and Medicaid reimbursement rates, and
for allegedly providing free products to customers with the expectation that the customers would bill federal programs for the
product. In addition, certain marketing practices, including off-label promotion, may also violate false claims laws. The majority
of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items
and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.
Other
Regulations
We
may from time to time become subject to various local, state and federal laws and regulations relating to safe working conditions,
laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous
substances, including chemicals, micro-organisms and various radioactive compounds used in connection with our research and development
activities. These laws include, but are not limited to, the U.S. Occupational Safety and Health Act, the U.S. Toxic Test Substances
Control Act and the U.S. Resource Conservation and Recovery Act. Although we believe that our safety procedures for handling and
disposing of these materials comply with the standards prescribed by state and federal regulations, there can be no assurances
that accidental contamination or injury to employees and third parties from these materials will not occur.
Foreign
Regulatory Requirements
International
sales of medical products are subject to foreign government regulations, which vary substantially from country to country. The
time required to obtain approval by a foreign country may be longer or shorter than that required for FDA clearance or approval,
and the requirements may differ.
In
order to conduct clinical testing on humans in the State of Israel, special authorization must first be obtained from the ethics
committee and general manager of the institution in which the clinical studies are scheduled to be conducted, as required under
the Guidelines for Clinical Trials in Human Subjects implemented pursuant to the Israeli Public Health Regulations (Clinical Trials
in Human Subjects), as amended from time to time, and other applicable legislation. These regulations require authorization by
the institutional ethics committee and general manager as well as from the Israeli Ministry of Health, except in certain circumstances,
and in the case of genetic trials, special fertility trials and complex clinical trials, an additional authorization of the Ministry
of Health’s overseeing ethics committee. The institutional ethics committee must, among other things, evaluate the anticipated
benefits that are likely to be derived from the project to determine if it justifies the risks and inconvenience to be inflicted
on the human subjects, and the committee must ensure that adequate protection exists for the rights and safety of the participants
as well as the accuracy of the information gathered in the course of the clinical testing. Since we intend to perform a portion
of our clinical studies in Israel, we are required to obtain authorization from the ethics committee and general manager of each
institution in which we intend to conduct our clinical trials, and in most cases, from the Israeli Ministry of Health.
In
the EU, the regulatory environment depends on the regulatory status of product. At this point, it is likely that the ApoTainer
selection kit would qualify as a medical device in the EU. However, the substance used in the ApoTainer may qualify as a pharmaceutical
product. The ApoTainer selection kit would have to undergo a conformity assessment procedure as a medical devices and the substance
would have to obtain a marketing authorization as a drug. It is also possible that treatment using the ApoTainer will be subject
to further regulatory requirements. In particular, it is possible that the stem cell treatment itself may be considered the production
of a drug and, therefore, would require a manufacturing authorization according to Dir. 2001/83/EC. Furthermore, the use of the
ApoTainer selection kit may be subject to Member States’ laws on transplantation.
With
regard to medical devices, the current legal regime is based on the MDD and its implementation in the Member States as well as
several guidance documents and regulating the design, manufacture, clinical trials, labeling, and adverse event reporting for
medical devices. Each EU Member State has implemented legislation applying these directives and standards at a national level.
Other countries such as Switzerland have voluntarily adopted laws and regulations that mirror those of the EU with respect to
medical devices. Devices that comply with the requirements of the laws of the relevant Member State applying the applicable EU
directive are entitled to bear a CE mark and, accordingly, can be distributed throughout EU Member States as well as in other
countries, e.g., Switzerland and Israel, that have mutual recognition agreements with the EU or have adopted the EU’s regulatory
standards.
The
method of assessing conformity with applicable regulatory requirements varies depending on the classification of the medical device,
which may be Class I, Class IIa, Class IIb or Class III. Normally, the method involves a combination of self-assessment by the
manufacturer of the safety and performance of the device, and a third-party assessment by a Notified Body, usually of the design
of the device and of the manufacturer’s quality system. A Notified Body is a private commercial entity that is designated
by the national government of a member state as being competent to make independent judgments about whether a device complies
with applicable regulatory requirements. An assessment by a Notified Body in one country with the EU is required in order for
a manufacturer to commercially distribute the device throughout the EU. In addition, compliance with ISO 13485, issued by the
International Organization for Standardization, among other standards establishes the presumption of conformity with the essential
requirements for CE marking. Certification to the ISO 13485 standard demonstrates the presence of a quality management system
that can be used by a manufacturer for design and development, production, installation and servicing of medical devices and the
design, development and provision of related services. In 2017, the new Regulation (EU) No. 745/2017 on medical devices (the Medical
Device Regulation, or MDR) has been published and will enter into force three years later, i.e., in 2020. The MDR will result
in several medical devices being classified in higher risk classes and therefore face elevated regulatory requirements. In addition,
the MDR will generally elevate regulatory requirements to medical devices. As a result, it is likely that it will become more
difficult to market medical devices and costs incurred for clinical evaluation, conformity assessment and post marketing surveillance
will increase.
If
one or more of our current or future products would have the status of a drug under the law of the EU or one or more of its Member
States, regulatory requirements for such product(s) would be significantly higher. In particular, a drug can only be placed on
the market if it has been authorized by the competent regulatory authority either under the EU centralized procedure, the decentralized
or mutual recognition procedure or under a member State’s national procedure. Marketing authorizations for drugs under all
of the different authorization procedures are expensive and time consuming.
Even
if the ApoGraft technology platform and/or the ApoTainer is considered a medical device, it is possible that the actions performed
by the products may be considered manufacture of a drug. While HSCT is considered to be subject to regulatory requirements for
medicinal products (drugs) in the EU, it is possible HSCT is also considered to be an advanced therapy medicinal product (ATMP),
subject to even stricter regulations. With regard to the most basic version of HSCT, the EMA, has issued an opinion stating that
it regarded these treatments as exempt from drug and ATMP regulations. This basic HSCT involves the extraction of adipose stem
cells from a patient’s subcutaneous area and their transplantation in the subcutaneous area elsewhere in the body of the
same patient, if the treatment is performed in one doctor visit, the cells have the same function where they are extracted as
where they are transplanted, and they are not treated in any way between extraction and transplantation. This opinion does not
apply to stem cell treatments that deviate from this basic version in one or several aspects. Consequently, other HSCT may qualify
as drug treatments or as tissue preparations and a market authorization or manufacturing approval may be required. If there is
doubt as to whether a stem cell treatment is considered a drug or tissue preparation, it is possible to obtain a statement with
regard to the product status from the EMA Committee for Advanced Therapies (CAT). Whether EMA CAT would qualify a HSCT as a drug
and/or an ATMP depends on several aspects, including the question whether the use of the stem cells is homologous and whether
or not the stem cells have been substantially manipulated between their extraction and their transplantation. Furthermore, the
treatment may be subject to EU laws on human tissues including Dir. 2004/23/EC setting standards of quality and safety for
the donation, procurement, testing, processing, preservation, storage and distribution of human tissues and cells
and related legal framework on EU and/or Member State level.
However,
even if EMA CAT does not consider the treatment a drug and/or an ATMP treatment, it is possible that competent authorities in
the Member States nevertheless qualify the treatment as a drug and/or an ATMP and make its performance subject to a marketing
authorization and/or manufacturing authorization on their territory.
Sales
and Marketing
During
2017, we launched a business development campaign. We believe that interim results from our ongoing Phase I/II study will help
validate our technology platform and qualify our technology for out licensing to companies interested in improving their manufacturing
process of adult stem-cell based products. In May 2018, we incorporated a US subsidiary and hired Andrew Sabatier as its Chief
Business Officer to lead the business development activities from the US. We are actively seeking to enter into licenses on a
non-exclusive basis to various stem cells based companies.
Legal
Proceedings
From
time to time, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business.
We are currently not a party to any material legal or administrative proceedings and except as set forth below, are not aware
of any pending or threatened material legal or administrative proceedings against us.
C.
|
Organizational
Structure
|
We
currently have one wholly owned significant subsidiary, Cellect Biotherapeutics Ltd., which is incorporated in the State of
Israel.
D.
|
Property,
Plant and Equipment
|
Our headquarters are
currently located in Kfar Saba, Israel and originally consisted of approximately 4,360 square feet of leased office space under
a lease until October 14, 2020. The monthly rental fee is NIS 26,000. In addition, we hold options to extend the lease for two
additional two-year periods each. On October 24, 2017, we leased a further 258 square feet of office space under a lease until
December 31, 2018, with options to extend for two additional two-year periods each. We subsequently cancelled this lease and on
March 21, 2018, we leased a further 1,500 square feet of office space, for a total leased space of 5,860 square feet, until September
23, 2019 with an option to extend for a further 18 months. The monthly rental fee for the additional space is NIS 8,000. We may
require additional space and facilities as our business expands.
ITEM 4A.
|
UNRESOLVED
STAFF COMMENTS
|
None.
ITEM 5.
|
OPERATING
AND FINANCIAL REVIEW AND PROSPECTS
|
The
following discussion and analysis should be read in conjunction with our financial statements and related notes included elsewhere
in this annual report on Form 20-F. This discussion and other parts of this annual report on Form 20-F contain forward-looking
statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of selected
events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including
those set forth under “Risk Factors” and elsewhere in this annual report in Form 20-F. We report financial information
under IFRS as issued by the IASB and none of the financial statements were prepared in accordance with generally accepted accounting
principles in the United States.
To
date, we have not generated revenue from the sale of any product, and we do not expect to generate significant revenue within
the next year at least. As of December 31, 2018, we had an accumulated deficit of NIS 84.0 million (approximately $22.4 million).
Our financing activities are described below under “
Finance Expense and Income
.”
Operating
Expenses
Our
current operating expenses consist of two components – research and development expenses, and general and administrative
expenses.
Research
and Development Expenses, net
Our
research and development expenses consist primarily of salaries and related personnel expenses, subcontractor expenses, patent
registration fees, materials, share-based payment and other related research and development expenses, net of grants.
The
following table discloses the breakdown of research and development expenses:
|
|
Year
ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
NIS
|
|
|
USD*
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll
|
|
|
3,711
|
|
|
|
5,486
|
|
|
|
6,629
|
|
|
|
1,769
|
|
Subcontractors
|
|
|
1,578
|
|
|
|
1,504
|
|
|
|
1,788
|
|
|
|
477
|
|
Patent registration
|
|
|
409
|
|
|
|
256
|
|
|
|
647
|
|
|
|
173
|
|
R&D related purchases
|
|
|
1,676
|
|
|
|
1,574
|
|
|
|
2,386
|
|
|
|
637
|
|
Share-based payment
|
|
|
253
|
|
|
|
1,940
|
|
|
|
807
|
|
|
|
215
|
|
Other expenses
|
|
|
629
|
|
|
|
743
|
|
|
|
1,256
|
|
|
|
334
|
|
|
|
|
8,256
|
|
|
|
11,503
|
|
|
|
13,513
|
|
|
|
3,605
|
|
*
|
USD
presented as convenience translation using December 31, 2018 NIS/USD exchange rate of
NIS 3.748.
|
General
and Administrative Expenses
General
and administrative expenses consist primarily of salaries, professional service fees, director fees, office expenses, taxes and
fees, share-based payment and other general and administrative expenses.
The
following table discloses the breakdown of general and administrative expenses:
|
|
Year
ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
NIS
|
|
|
USD*
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll
|
|
|
2,994
|
|
|
|
3,076
|
|
|
|
5,277
|
|
|
|
1,408
|
|
Professional services
|
|
|
2,074
|
|
|
|
3,745
|
|
|
|
3,785
|
|
|
|
1,010
|
|
Director fees
|
|
|
318
|
|
|
|
354
|
|
|
|
712
|
|
|
|
190
|
|
Office expense
|
|
|
466
|
|
|
|
449
|
|
|
|
325
|
|
|
|
87
|
|
Share-based payment
|
|
|
1,299
|
|
|
|
3,444
|
|
|
|
3,730
|
|
|
|
995
|
|
Other expenses
|
|
|
817
|
|
|
|
1,862
|
|
|
|
1,905
|
|
|
|
508
|
|
Total
|
|
|
7,968
|
|
|
|
12,930
|
|
|
|
15,734
|
|
|
|
4,198
|
|
*
|
USD
presented as convenience translation using December 31, 2018 NIS/USD exchange rate of
NIS 3.748.
|
Comparison
of the year ended December 31, 2018 to the year ended December 31, 2017 to the year ended December 31, 2016
Results
of Operations
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2016*
|
|
|
2017*
|
|
|
2018*
|
|
|
|
(in thousands of NIS)
|
|
|
(in thousands of USD)
|
|
Research and development expenses, net
|
|
|
8,256
|
|
|
|
11,503
|
|
|
|
13,513
|
|
|
|
2,147
|
|
|
|
3,318
|
|
|
|
3,605
|
|
General and administrative expenses
|
|
|
7,968
|
|
|
|
12,930
|
|
|
|
15,734
|
|
|
|
2,072
|
|
|
|
3,729
|
|
|
|
4,198
|
|
Other income
|
|
|
(280
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(73
|
)
|
|
|
-
|
|
|
|
-
|
|
Operating loss
|
|
|
15,944
|
|
|
|
24,433
|
|
|
|
29,247
|
|
|
|
4,146
|
|
|
|
7,047
|
|
|
|
7,803
|
|
Finance expense (income), net
|
|
|
(627
|
)
|
|
|
3,791
|
|
|
|
(9,134
|
)
|
|
|
(163
|
)
|
|
|
1,094
|
|
|
|
(2,436
|
)
|
Total comprehensive loss
|
|
|
15,317
|
|
|
|
28,224
|
|
|
|
20,113
|
|
|
|
3,983
|
|
|
|
8,141
|
|
|
|
5,367
|
|
Loss attributable to holders of Ordinary Shares
|
|
|
15,317
|
|
|
|
28,224
|
|
|
|
20,113
|
|
|
|
3,983
|
|
|
|
8,141
|
|
|
|
5,367
|
|
*
|
USD
presented as convenience translation using year end 2018, 2017, 2016 NIS/USD exchange rate of: NIS 3.748, NIS 3.467 and NIS
3.845, respectively.
|
Research
and Development Expenses, net
Our
research and development expenses for the year ended December 31, 2018 amounted to NIS 13.5 million (approximately $3.6 million),
representing an increase of NIS 2.0 million (approximately $0.3 million), or 17%, compared to NIS 11.5 million (approximately
$3.3 million) for the year ended December 31, 2017. The increase was primarily attributable to an increase of NIS 2.1 million
(approximately $0.3 million) from purchasing materials and an increase in salaries and related expenses reflecting the progress
in our research and development activities and the growth of our employees working on our research and development activities.
Our
research and development expenses for the year ended December 31, 2017 amounted to NIS 11.5 million (approximately $3.3 million),
representing an increase of NIS 3.2 million (approximately $1.2 million), or 39%, compared to NIS 8.3 million (approximately $2.1
million) for the year ended December 31, 2016. The increase was primarily attributable to an increase of NIS 1.7 million (approximately
$0.5 million) from share-based payment and an increase of salaries and related personnel expenses in an amount of NIS 1.8 million
(approximately $0.5 million) reflecting the growth in our activities resulting from an increase in the number of employees engaged
in research and development related activities from thirteen to eighteen.
General
and Administrative Expenses
Our
general and administrative expenses totaled NIS 15.7 million (approximately $ 4.2 million) for the year ended December 31, 2018,
an increase of NIS 2.8 million (approximately $0.5 million), or 22%, compared to 12.9 million (approximately $3.7 million) for
the year ended December 31, 2017. The increase resulted primarily from an increase of NIS 2.2 million (approximately $0.6 million)
in salaries and related personnel expenses due to an increase in the number of our business development personnel.
Our
general and administrative expenses totaled NIS 12.9 million (approximately $3.7 million) for the year ended December 31, 2017,
an increase of NIS 4.9 million (approximately $1.7 million), or 61%, compared to NIS 8.0 million (approximately $2.0 million)
for the year ended December 31, 2016. The increase resulted primarily from an increase of NIS 2.2 million (approximately $0.6
million) in share based payment, an increase of NIS 1.2 million (approximately $0.3 million) in professional services due to increase
in legal and investor and public relations expenses as the company was a Nasdaq company for the all year and an increase of NIS
1.6 million (approximately $0.5 million) from other expenses which mainly represent the company business development activities.
Operating
Loss
As
a result of the foregoing, our operating loss for the year ended December 31, 2018 was NIS 29.2 million (approximately $7.8million),
as compared to operating loss of NIS 24.4 million (approximately $7.0 million) for the year ended December 31, 2017, an increase
of NIS 4.8million (approximately $0.8 million), or 19.7%.
As
a result of the foregoing, our operating loss for the year ended December 31, 2017 was NIS 24.4 million (approximately $7.0 million),
as compared to an operating loss of NIS 15.9 million (approximately $4.1 million) for the year ended December 31, 2016, an increase
of NIS 8.5 million (approximately $2.9 million), or 53%.
Finance
Expense and Income
Finance
expense and income mainly consist of bank fees and other transactional costs, changes in the fair value of certain price adjustment
mechanisms in warrants that were issued to investors who participated in certain fund raising rounds, and exchange rate differences.
We
recognized net financial income of NIS 9.1 million (approximately $2.4 million) for the year ended December 31, 2018, compared
to net financial expenses of NIS 3.8 million (approximately $1.1 million) for the year ended December 31, 2017. The change is
primarily due to the change in the fair value of the listed warrants granted in our U.S. initial public offering, or IPO, in 2016
and to the unregistered warrants granted in our registered direct offerings in 2017 and in 2018.
We
recognized net financial expenses of NIS 3.8 million (approximately $1.1 million) for the year ended December 31, 2017, compared
to net financial income of NIS 0.6 million (approximately $0.16 million) for the year ended December 31, 2016. The change is primarily
due to the change in the fair value of the listed warrants granted in the IPO in 2016 and to the unregistered warrants granted
in our registered direct offering in 2017.
Total
Comprehensive Loss
As
a result of the foregoing, our comprehensive loss for the year ended December 31, 2018 was NIS 20.1 million (approximately $5.4
million), as compared to NIS 28.2 million (approximately $8.1 million) for the year ended December 31, 2017, decrease of NIS 8.1
million (approximately $2.8 million), or 29%.
As
a result of the foregoing, our comprehensive loss for the year ended December 31, 2017 was NIS 28.2 million (approximately $8.1
million), as compared to NIS 15.3 million (approximately $4.0 million) for the year ended December 31, 2016, an increase of NIS
12.9 million (approximately $4.1 million), or 84%.
Critical
Accounting Policies and Estimate
Our
management’s discussion and analysis of our financial condition and results of operations is based on our financial statements,
which we have prepared in accordance with IFRS as issued by the IASB. The preparation of these financial statements requires us
to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the reported expenses during the reporting periods.
Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies
are more fully described in Note 2 to our audited financial statements appearing elsewhere in this prospectus, we believe that
the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results
of operations.
Share-based
payment transactions
From
time to time, we grant to our employees and other service providers remuneration in the form of equity-settled share-based instruments,
such as options to purchase ordinary shares. The cost of equity-settled transactions with employees is measured at the fair value
of the equity instruments granted at grant date. The fair value is determined using an acceptable option pricing model. As for
other service providers, the cost of the transactions is measured at the fair value of the goods or services received as consideration
for equity instruments. In cases where the fair value of the goods or services received as consideration of equity instruments
cannot be measured, they are measured by reference to the fair value of the equity instruments granted.
The
cost of equity-settled transactions is recognized in profit or loss, together with a corresponding increase in equity, during
the period in which the performance or service conditions are satisfied, and ending on the date on which the relevant employees
become fully entitled to the award. No expense is recognized for awards that do not ultimately vest, except for awards where vesting
is conditional upon a market condition, which are treated as vested irrespective of whether the market condition is satisfied,
provided that all other vesting conditions (service and/or performance) are satisfied. When we change the conditions of the award
of equity-settled instruments, an additional expense is recognized beyond the original expense, calculated in respect of a change
that increases the total fair value of the remuneration granted or benefits the other service provider according to the fair value
on date of change. Cancellation of the award of equity-settled instruments is accounted for as having vested at the cancellation
date and the expense not yet recognized in respect of the award is recognized immediately. However, if the cancelled grant is
replaced by a new grant, and is intended as an alternate grant at the date awarded, the cancelled and new awards will both be
accounted for as a change to the original award, as described above.
Option
Valuations
The
determination of the grant date fair value of options using an option pricing model (we utilize the Black-Scholes model) is affected
by estimates and assumptions regarding a number of complex and subjective variables. These variables include the expected volatility
of our share price over the expected term of the options, share option exercise and cancellation behaviors, risk-free interest
rates and expected dividends, which are estimated as follows:
|
●
|
Volatility.
The expected share price volatility is based on the historical volatility in the trading price of our ordinary shares
as well as comparable companies on the Nasdaq Capital Market and benchmarks of related companies.
|
|
●
|
Expected
Term.
The expected term of options granted is based upon the contractual life of the options and represents the period
of time that options granted are expected to be outstanding.
|
|
●
|
Risk-Free
Rate.
The risk-free interest rate is based on the yield from Israeli government bonds with a term equivalent to the contractual
life of the options.
|
|
●
|
Expected
Dividend Yield.
We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the
foreseeable future. Consequently, we use an expected dividend yield of zero.
|
Impairment
of non-financial assets
We
evaluate the need to record an impairment of non-financial assets whenever events or changes in circumstances indicate that the
carrying amount is not recoverable.
If
the carrying amount of non-financial assets exceeds their recoverable amount, the assets are reduced to their recoverable amount.
The recoverable amount is the higher of fair value less costs of sale and value in use. In measuring value in use, the expected
future cash flows are discounted using a pre-tax discount rate that reflects the risks specific to the asset. The recoverable
amount of an asset that does not generate independent cash flows is determined for the cash-generating unit to which the asset
belongs. Impairment losses are recognized in profit or loss.
An
impairment loss of an asset, other than goodwill, is reversed only if there have been changes in the estimates used to determine
the asset’s recoverable amount since the last impairment loss was recognized. Reversal of an impairment loss, as above, shall
not be increased above the lower of the carrying amount that would have been determined (net of depreciation or amortization)
had no impairment loss been recognized for the asset in prior years and its recoverable amount. The reversal of impairment loss
of an asset presented at cost is recognized in profit or loss.
IFRS
16, Leases
In
January 2016, the IASB issued IFRS 16, “Leases”. According to IFRS 16, a lease is a contract, or part of a contract,
that conveys the right to use an asset for a period of time in exchange for consideration.
According
to IFRS 16:
|
●
|
Lessees
are required to recognize an asset and a corresponding liability in the statement of financial position in respect of all
leases (except in certain cases) similar to the accounting treatment of finance leases according to the existing IAS 17, “Leases”.
|
|
●
|
Lessees
are required to initially recognize a lease liability for the obligation to make lease payments and a corresponding right-of-use
asset. Lessees will also recognize interest and depreciation expenses separately.
|
|
●
|
Variable
lease payments that are not dependent on changes in the Consumer Price Index (“CPI”) or interest rates, but are
based on performance or use (such as a percentage of revenues) are recognized as an expense by the lessees as incurred and
recognized as income by the lessors as earned.
|
|
●
|
In
the event of change in variable lease payments that are CPI-linked, lessees are required to remeasure the lease liability
and the effect of the remeasurement is an adjustment to the carrying amount of the right-of-use asset.
|
|
●
|
IFRS
16 includes two exceptions according to which lessees are permitted to elect to apply a method similar to the current accounting
treatment for operating leases. These exceptions are leases for which the underlying asset is of low value and leases with
a term of up to one year.
|
|
●
|
The
accounting treatment by lessors remains substantially unchanged, namely classification of a lease as a finance lease or an
operating lease.
|
For leases existing
at the date of transition, IFRS 16 permits lessees to use either a full retrospective approach, or a modified retrospective approach,
with certain transition relief whereby restatement of comparative data is not required.
IFRS is effective for
annual periods beginning on or after January 1, 2019. We have made an initial evaluation of the impact of implementing this guidance
on our consolidated financial statements. Based on this, we believe that beginning in 2019, we will recognize an amount of NIS
868 as an asset and liability in our balance sheet at the date of recognition.
Financial
Liabilities
Financial
liabilities within the scope of IFRS 9 are initially measured at fair value. After initial recognition, other liabilities are
measured according to their terms at amortized cost using the effective interest method, taking into account directly attributable
transaction costs.
The
warrants were classified as a financial liability at fair value measured by quoted price and are marked to market
through profit or loss in accordance with IFRS 9, and after initial recognition, changes in fair value are recognized in
profit or loss.
Issue
of a Unit of Securities
The
issue of a unit of securities involves the allocation of the proceeds received (before issue expenses) to the securities issued
in the unit based on the following order: financial derivatives and other financial instruments measured at fair value in each
period. Then fair value is determined for financial liabilities that are measured at amortized cost. The proceeds allocated to
equity instruments are determined to be the residual amount. Issue costs are allocated to each component pro rata to the amounts
determined for each component in the unit.
B.
|
Liquidity
and Capital Resources
|
Overview
As
of December 31 2018, we had NIS 17.8 million (approximately $4.7 million) in cash and cash equivalents and marketable securities.
In February 2019, we raised NIS 22.9 million ($6.1 million) in net proceeds in a follow-on underwritten public offering.
The
table below presents our cash flows:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2016*
|
|
|
2017*
|
|
|
2018*
|
|
|
|
(in thousands of NIS)
|
|
|
(in thousands of USD)
|
|
Net cash used in operating activities
|
|
|
(14,412
|
)
|
|
|
(17,770
|
)
|
|
|
(23,635
|
)
|
|
|
(3,748
|
)
|
|
|
(5,126
|
)
|
|
|
(6,306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) Investing activities
|
|
|
(18,012
|
)
|
|
|
10,091
|
|
|
|
13,708
|
|
|
|
(4,684
|
)
|
|
|
2,910
|
|
|
|
3,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
34,924
|
|
|
|
15,813
|
|
|
|
12,759
|
|
|
|
9,083
|
|
|
|
4,562
|
|
|
|
3,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
2,366
|
|
|
|
7,455
|
|
|
|
4,075
|
|
|
|
615
|
|
|
|
2,150
|
|
|
|
1,088
|
|
*
|
USD
presented as convenience translation using year end 2018, 2017, 2016 NIS/USD exchange rate of: NIS 3.748, NIS 3.467 and NIS
3.845, respectively.
|
Operating
Activities
Net
cash used in operating activities was NIS 23.6 million (approximately $6.3 million) for the year ended December 31, 2018, compared
with net cash used in operating activities of approximately NIS 17.7 million (approximately $5.1 million) for the year ended December
31, 2017. The increases in such periods are primarily due to increases in research and development expenses.
Net
cash used in operating activities was NIS 17.7 million (approximately $5.1 million) for the year ended December 31, 2017, compared
with net cash used in operating activities of approximately NIS 14.4 million (approximately $3.7 million) for the year ended December
31, 2016. The increases in such periods are primarily due to increases in research and development expenses.
Investing
Activities
Net
cash provided by investing activities of NIS 13.7 million (approximately $3.6 million) during 2018 primarily reflects net proceeds
from short-term deposits and marketable securities.
Net
cash provided by investing activities of NIS 10.1 million (approximately $2.9 million) during 2017 primarily reflects net proceeds
from short-term deposits and marketable securities.
Net
cash used in investing activities of NIS 18.0 million (approximately $4.7 million) during 2016 primarily reflects increase in
short-term deposits.
Financing
Activities
Net
cash provided by financing activities in the years ended December 31, 2018, 2017 and 2016 consisted of NIS 12.8 million (approximately
$3.4 million), NIS 15.8 million (approximately $4.6 million), and NIS 34.9 million (approximately $9.1 million) respectively,
of net proceeds, mainly from the issuance of ordinary shares (including ordinary shares represented by ADSs) and warrants.
In
March 2016, we issued an aggregate of 5,783,437 ordinary shares pursuant to a private placement, at a price of NIS 1.39 (approximately
$0.36) per share. In addition, we issued warrants to purchase up to 1,927,801 ordinary shares, which had an exercise price of
NIS 2.1 (approximately $0.54) per warrant. The warrants expired on March 7, 2018.
In
August 2016, we issued an aggregate of 1,292,308 ADSs and listed warrants to purchase 1,035,121 ADSs in our IPO, at a price of
$6.50 per ADS resulting in gross proceeds of approximately $8.4 million.
On
September 11, 2017, we sold to certain accredited investors an aggregate of 531,136 ADSs in a registered direct offering at $8.10
per ADS resulting in gross proceeds of approximately $4.3 million. In addition, we issued to the investors unregistered warrants
to purchase 265,568 ADSs in a private placement.
On
January 31, 2018, we sold to certain institutional investors an aggregate of 484,848 ADSs in a registered direct offering at $8.25
per ADS resulting in gross proceeds of approximately $4.0 million. In addition, we issued to the investors unregistered warrants
to purchase 266,667 ADSs in a private placement.
On
February 12, 2019, in a follow-on underwritten public offering we sold an aggregate of 1,889,000 each consisting of (i) one ADS,
and (ii) one warrant to purchase one ADS, at a public offering price of $1.50 per unit, and (b) 2,444,800 pre-funded units, each
consisting of (i) one pre-funded to purchase one ADS, and (ii) one warrant, at a public offering price of $1.49 per Pre-funded
Unit. In connection with the offering, we granted the underwriters a 45-day option to purchase up to an additional 650,070 ADSs
and/or 650,070 warrants to purchase up to an additional 650,070 ADSs. The underwriters partially exercised their over-allotment
option to purchase an aggregate of 350,000 additional ADS and additional warrants to purchase 650,070 ADSs. Subsequently, of the
pre-funded warrants issued, we issued 2,108,000 ADSs upon exercise of pre-funded warrants.
Current
Outlook
We
have financed our operations to date primarily through proceeds from issuance of our ordinary shares and ordinary shares represented
by ADSs and warrants. We have incurred losses and generated negative cash flows from operations since July 2013. In addition,
we have an accumulated deficit of NIS 84.0 million (approximately $22.4 million) as of December 31, 2018. We have never generated
any revenue from the sale or licensing of our products and we do not expect to generate significant revenue within the next year
at least.
We
expect that our existing cash and cash equivalents will be sufficient to fund our current operations until the end of the first
quarter of 2020. We have expended and believe that we will continue to expend significant operating and capital expenditures for
the foreseeable future developing our ApoGraft technology platform and our ApoTainer collection kits. These expenditures
will include, but are not limited to, costs associated with research and development, manufacturing, conducting preclinical experiments
and clinical trials, contracting manufacturing organizations, hiring additional management and other personnel and obtaining regulatory
approvals, as well as commercializing any products approved for sale. Furthermore, we expect to incur additional costs associated
with operating as a public company in the United States. Because the outcome of our planned and anticipated clinical trials is
highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization
of our ApoGraft technology platform, our ApoTainer collection kits and any other future products. In addition, other unanticipated
costs may arise. As a result of these and other factors currently unknown to us, we require substantial, additional funds through
public or private equity or debt financings or other sources, such as strategic partnerships and alliances and licensing arrangements.
In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe
we have sufficient funds for our current or future operating plans. A failure to fund these activities may harm our growth strategy,
competitive position, quality compliance and financial condition.
Our
future capital requirements depend on many factors, including:
|
●
|
the
number and characteristics of products we develop from our ApoGraft technology platform;
|
|
●
|
the
scope, progress, results and costs of researching and developing our ApoGraft technology platform and any future products,
and conducting preclinical and clinical trials;
|
|
●
|
the
timing of, and the costs involved in, obtaining regulatory approvals;
|
|
●
|
the
cost of commercialization activities if any products are approved for sale, including marketing, sales and distribution costs;
|
|
●
|
the
cost of manufacturing any future product we successfully commercialize;
|
|
●
|
our
ability to establish and maintain strategic partnerships, licensing, supply or other arrangements and the financial terms
of such agreements;
|
|
●
|
the
costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation
costs and the outcome of such litigation;
|
|
●
|
the
costs of in-licensing further patents and technologies;
|
|
●
|
the
cost of development of in-licensed technologies;
|
|
●
|
the
timing, receipt and amount of sales of, or royalties on, any future products;
|
|
●
|
the
expenses needed to attract and retain skilled personnel; and
|
|
●
|
any
product liability or other lawsuits related to any future products.
|
Additional
funds may not be available when we need them, on terms that are acceptable to us, or at all. If adequate funds are not available
to us on a timely basis, we may be required to delay, limit, reduce or terminate preclinical studies, clinical trials or other
research and development activities for our ApoGraft technology platform or delay, limit, reduce or terminate our establishment
of sales and marketing capabilities or other activities that may be necessary to commercialize our ApoGraft technology platform,
our ApoTainer collection kits or any future products. These factors, among others, raise substantial doubt about our ability
to continue as a going concern. Our independent auditors, in their report on our audited financial statements for the year ended
December 31, 2018 expressed substantial doubt about our ability to continue as a going concern. The financial statements do not
include any adjustments to the carrying amounts and classifications of assets and liabilities that would result if we were unable
to continue as a going concern.
C.
|
Research
and Development, Patents and Licenses
|
See
above, under “Item 5. Operating and Financial Review and Prospects—A. Operating Results.”
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,
development or commercialization 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 sales or
revenues, income from continuing operations, profitability, 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 “Operating and Financial Review and Prospects.”
E.
|
Off-Balance
Sheet Arrangements
|
We
participated in programs sponsored by the BIRD Foundation for the support of research and development activities. We are obligated
to pay royalties to the BIRD Foundation, amounting to 5% of the gross sales of the products and other related revenues developed
from such activities, up to an amount of 150% from the grant received from the BIRD Foundation by us indexed to the U.S. consumer
price index.
As
of December 31, 2018, we received an aggregate grant of $120,000 from the BIRD Foundation in support of the development and commercialization
of our stem cell selection technology in collaboration with Entegris. We are no longer pursuing our collaboration with Entegris
under a previously entered into Joint Product Development Agreement.
F.
|
Contractual
Obligations
|
The
following table summarizes our significant contractual obligations at December 31, 2018:
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
More than
5 years
|
|
|
|
(in thousands)
|
|
Operating Lease Obligations in NIS
|
|
|
1,337
|
|
|
|
729
|
|
|
|
608
|
|
|
|
-
|
|
|
|
-
|
|
Operating Lease Obligations in $
|
|
|
357
|
|
|
|
195
|
|
|
|
162
|
|
|
|
-
|
|
|
|
-
|
|
The
operating lease obligations in the foregoing table include our commitments under the lease agreements for our facility in Kfar
Saba. See “Item 4. Information on the Company—D. Property, Plant and Equipment.”
ITEM 6.
|
DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
|
A.
|
Directors
and Senior Management
|
Directors
and Senior Management
We
are managed by a board of directors, which is currently comprised of eight members, and our senior management. Each of our members
of senior management is appointed by our board of directors. The table below sets forth our directors and senior management. The
business address for each of our directors and senior management is c/o Cellect Biotechnology Ltd. 23 Hata’as Street, Kfar
Saba, Israel 44425.
Name
|
|
Age
|
|
Position
|
Kasbian
Nuriel Chirich
|
|
60
|
|
Chairman
of the Board of Directors
|
Dr.
Shai Yarkoni
|
|
60
|
|
Chief
Executive Officer and Director
|
Eyal
Leibovitz
|
|
57
|
|
Chief
Financial Officer
|
Dr.
Ronit Bakimer-Kleiner
|
|
57
|
|
Chief
Development Officer
|
Andrew
Sabatier
(4)
|
|
51
|
|
Chief
Business Officer
|
Dr.
Amos Ofer
|
|
43
|
|
Vice
President of Operations
|
Dr.
Yael Kenan
|
|
56
|
|
Vice
President of Clinical Affairs
|
Smadar
Har Tuv
|
|
46
|
|
Quality
Assurance Director
|
Abraham
Nahmias
(1)(2)(3)
|
|
63
|
|
Director
|
Dr.
Ruth Ben Yakar
|
|
49
|
|
Director
|
Michael
Berelowitz
(1)
|
|
74
|
|
Director
|
Ruhama
Avraham
(1)(2)(3)
|
|
55
|
|
External
Director
|
David
Braun
(1)
|
|
47
|
|
Director
|
Jonathan
Burgin
(1)(2)(3)
|
|
57
|
|
External
Director
|
(1)
|
Indicates
independent director under the Nasdaq Capital Market rules.
|
|
|
(2)
|
Member
of our Audit Committee.
|
|
|
(3)
|
Member
of our Compensation Committee.
|
|
|
(4)
|
On March 14, 2019, we gave notice of termination to
Mr. Sabatier. His last day of employment is yet to be determined.
|
Kasbian
Nuriel Chirich
co-founded our subsidiary, Cellect Biotherapeutics, in 2011 and has served as Chairman of our board of
directors since 2013 and of our subsidiary since inception. Mr. Chirich is an entrepreneur and businessman with extensive financial
and business expertise with innovative ventures throughout East Africa and Israel. Mr. Chirich is a real estate developer and
was previously the founder and general manager of Leadcom Kasbian, which is credited, among other thing, with establishing the
national television of Tanzania and building the infrastructure of two cellular networks in Tanzania. Mr. Chirich serves as the
Honorary Consul of Tanzania in Israel.
Dr.
Shai Yarkoni
co-founded our subsidiary, Cellect Biotherapeutics, in 2011, and has served as our Chief Executive Officer
and a director since 2013 and of our subsidiary since inception. Dr. Yarkoni has over 15 years of clinical and management experience
in the biopharmaceutical industry. Dr. Yarkoni is a founder of Sne, an Israeli technology transfer company established in 2013.
Since 1999, Dr. Yarkoni has also been the Chief Executive Officer and Chairman of GASR Biotechnology, a life sciences consulting
and investing firm. From 2009 until 2013, Dr. Yarkoni served as Chief Executive Officer of BioNegev, an international innovation
center for biotechnology and life sciences in the Negev region. Prior to that he served as Chief Executive Officer of Target-In
Ltd., a developer of therapeutic recombinant proteins for cancer treatment and as Chief Technology Officer and Vice President
R&D of Collgard Biopharmaceutical, a tissue therapeutics company, and was an attending OB/GYN specialist practicing for approximately
thirteen years. Dr. Yarkoni holds an M.D and Ph.D from the Hadassah Medical School, Jerusalem
,
Israel, and is a board
certified OB/GYN. Dr. Yarkoni is the author of over 60 scientific papers and inventor of approximately 20 patents.
Eyal
Leibovitz
has served as our Chief Financial Officer since January 1, 2017. Mr. Leibovitz has over over 27 years of experience
in senior management, finance, investor relations, mergers and acquisitions business development in international pharma and biotech
companies. From September 2007 to October 2011, Mr. Leibovitz served as Chief Financial Officer of Kamada Ltd. (Nasdaq:KMDA),
from November 2011 to December 2015 as the Chief Financial Officer of N-trig Ltd and as Chief Financial Officer of Evogene Ltd.
(NYSE:EVGN) from December 2015 to December 2016. Among his achievements, he led Kamada Ltd. to a successful large scale fund raising
(including PIPE round, public rights offering, venture lending and public convertible debt) and led the sale of N-trig Ltd to
Microsoft. Mr. Leibovitz hold a BBA degree from the City University of New York.
Dr.
Ronit Bakimer-Kleiner
has served as our Chief Development Officer since November 2017. Prior to joining us, from 2008 to 2017,
Dr. Bakimer-Kleiner served as General Manager of Cognate Bioservices Israel, a contract bioservices organization focused on the
regenerative medicine and cell therapy market. Prior to that from 2006 to 2008, Dr. Bakimer-Kleiner was Laboratory Director at
the International Center for Cell Therapy & Cancer at Tel Aviv Sourasky Medical Center and from 1997 to 2006 held various
positions at Proneuron Biotechnologies including Director of Cell Therapy. Dr. Bakimer-Kleiner holds a B.Sc. in Life Sciences
from Tel Aviv University and a M.Sc. and Ph.D. in Immunology from Ben-Gurion University followed by 4 years post-doc at The Weizmann
Institute of Science.
Andrew
Sabatier
has served as our Chief Business Officer since May 2018. Mr. Sabatier has over 20 years of experience in the biotechnology
and life sciences market. Most recently, from March 2017 to May 2018, he was GE Healthcare’s Sales and Market Development
Leader for the United States and Canada, leading sales for GE Cell Therapy. From 2015 to 2017, Mr. Sabatier served as the Vice
President of Sales of BIOSAFE America which was acquired by GE Healthcare, and from 2012 to 2015 served as the Director of Sales
of BIOSAFE. Among his achievements, Mr. Sabatier was responsible for creating the cell processing market, which became the largest
market for BIOSAFE, and is currently the cornerstone of GE Healthcare’s cell therapy business. He has managed U.S. commercial
operations and built, trained and developed international sales teams across Asia, South America, Europe, Canada, and the United
States. Prior to joining BIOSAFE, Mr. Sabatier served in sales roles with Independent Health Care Consulting, Gambro, Genzyme,
Cook Medical and Toshiba. Mr. Sabatier holds a B.A. in international relations from Boston University.
Dr.
Amos Ofer
has served as our Vice President of Operations since June 2018. Prior to joining us, since 2014, Dr. Ofer has been
providing business consulting and project management services to companies in the biotechnology and pharmaceutical industries.
From August 2016 to January 2018, Dr. Ofer served as the Chief Operating Officer of Valin Technologies Ltd., a biotechnology company
focused on the research and development of innovative biological therapeutics and biosimilars. During this same time, Dr. Ofer
served as the General Manager of Pam-Bio Ltd., a biotechnology company focused on developing a drug therapy for the treatment
of hemorrhagic stroke. Prior to that, Dr. Ofer served as the Chief Executive Officer of Pam-Bio Ltd., from 2015 to 2016. He also
served as the Research Director of the Gastroenterology Institute of the Tel Aviv Medical Center, which is the largest department
of its kind in Israel. Dr. Ofer holds a B.Sc. in biology and a M.Sc. and Ph.D. in microbiology from Tel Aviv University and an
MBA following his completion of the executive MBA program at Tel Aviv University’s Recanati Business School.
Dr.
Yael Kenan
has served as our Vice President of Clinical Affairs since 2016. Dr. Kenan is an executive in the biotechnology,
pharmaceutical and medical device industries with almost 20 years of experience in drug development and clinical, medical, and
regulatory affairs. Dr. Kenan was formerly Chief Executive Officer of Lacrima Medical, Ltd., from 2013 to 2016, where she established
and managed a medical device startup company that develops innovative medical device for CNS indication. Previously she served
as the Chief Operating Officer of TransPharma Medical, Ltd and as Associate Director and Head of Global Clinical Drug Development
for Parkinson’s Disease and Clinical Trials Manager at Teva Pharmaceuticals Industries Ltd. Dr. Kenan holds a Ph.D. in biochemistry
from the Hebrew University of Jerusalem followed by 4 years post-doc at NIH as a visiting fellow. She also holds an MBA in finance
and marketing from The Technion – Israel Institute of Technology.
Smadar
Har Tuv
has served as our Quality Assurance Director since 2015. Prior to joining us, from 2012 to 2015, Ms. Har Tuv served
as the Quality Assurance Manager of Macrocure Ltd. Prior to that for over 10 years, she served in quality assurance and compliance
roles at Teva Pharmaceuticals Industries Ltd, including serving as the Regulatory Compliance Manager, Production Section Manager
and Quality Assurance Section Manager. Ms. Har Tuv also has experience serving as an Inspector for the National Food Services
of the Israeli Ministry of Health. She holds a B.Sc. in food engineering and biotechnology from The Technion – Israel Institute
of Technology
.
Abraham
Nahmias
has served as a member of our board of directors since July 2014. Since 1985, Mr. Nahmias has served as a founding
partner of Nahmias-Grinberg C.P.A., an accounting firm. Mr. Nahmias serves or has served as a member of the board of directors
of several private and public companies including Rotshtein Real Estate (TASE: ROTS), Orad Ltd., Allium Medical Ltd. (TASE: ALMD),
Nano Dimension Ltd. (Nasdaq: NNDM) and Eviation Aircraft Ltd. (OTC: EVTNF). Mr. Nahmias holds a B.A. degree in Economics and Accounting
from Tel Aviv University, and has had a C.P.A. license since 1982.
Dr.
Ruth Ben Yakar
has served as a member of our board of directors since July 2014. Dr. Ben Yakar has over 25 years of experience
in the biomedical field, including 18 years of management in the biotech industry, leading diverse corporate, business, operational,
financial, clinical development, and research activities. Since December 2014, Dr. Ben Yakar has served as the CEO and a director
at BioSight Ltd., a clinical-phase biotech company and on the board of directors of Biondvax (Nasdaq: BVXV) since 2016 and Maayan
Venture since 2018, and she is also a business consultant to several biomed companies, and a guest lecturer at Lahav, the Recannati
Business School of Tel-Aviv University. From 2012 until 2014, Dr. Ben Yakar served as the CEO of Procognia, a biotech company
traded on the TASE and from November 2014 to April 2017 she was a director at SHL Medicine (SIX Swiss Exchange: SHLTN). Additionally,
from 2012 until 2015, Dr. Ben Yakar was a director at Israel Advanced Technology Industries or IATI. Prior to that, Dr. Ben Yakar
served as the CEO of Thrombotech, where she led a multi-center phase II clinical trial and led the company to acquisition. She
also served as the Chief Business Officer of YEDA, the technology transfer company of the Weizmann Institute of Science, responsible
for the commercialization of the WIS technologies, and was Vice President in several biotech companies where she led diverse product
development activities and clinical and pre-clinical R&D projects. Dr. Ben Yakar holds a PhD Cum Laude from the Weizmann Institute
of Science. Her research, in the field of oncology, yielded several prestigious publications and awards.
Michael
Berelowitz
has served as a member of our board of directors since April 2017. Since 2011, Dr. Berelowtiz has been self-employed
as a biopharmaceutical consultant. From 2009 to 2011, Dr. Berelowitz served as Senior Vice President and Head of Clinical Development
and Medical Affairs in the Specialty Care Business Unit at Pfizer, Inc. From 1996 to 2009, he served in various other roles at
Pfizer, Inc., beginning as a Medical Director in the Diabetes Clinical Research team and then assuming positions of increasing
responsibility. Prior to 1996, Dr. Berelowitz spent a number of years in academia. Dr. Berelowitz also serves on the board of
directors of Recro Pharma Inc. (Nasdaq: REPH), a clinical stage specialty pharmaceutical company, Kamada Ltd. (Nasdaq: KMDA),
a plasma-derived protein therapeutics company focused on orphan indications, and previously served as a director of Oramed Pharmaceuticals
Inc. from June 2010 until August 30, 2016. Among his public activities, Dr. Berelowitz has served on the board of directors of
the American Diabetes Association, the Clinical Initiatives Committee of the Endocrine Society, and has chaired the Task Force
on Research of the New York State Council on Diabetes. He has also served on several editorial boards, including the Journal of
Clinical Endocrinology and Metabolism and Endocrinology, Reviews in Endocrine and Metabolic Disorders and Clinical Diabetes. Dr.
Berelowitz has authored and co-authored more than 100 peer-reviewed journal articles and book chapters in the areas of pituitary
growth hormone regulation, diabetes and metabolic disorders. Dr. Berelowitz holds adjunct appointments as Professor of Medicine
in the Divisions of Endocrinology and Metabolism at SUNY - Stony Brook and Mt. Sinai School of Medicine in New York.
Ruhama
Avraham
, has served as a member of our board of directors since December 2017. Ms. Avraham is a former member of the Knesset
with a distinguished political career. Since 2013, Ms. Avraham has been providing strategic support and consulting to enterprises
and organizations such as Manufacturers Association of Israel, Bank Hapoalim, Giza Singer Even Ltd., Coca Cola and Skylock, Nefesh
B’nefesh and World ORT. Since 2017, Ms. Avraham serves as external director of Minrav Holdings Ltd. and Canada’s Sky
Line and was previously an external director of B. Yair Building Corp. Prior to that after her election to the Knesset, from 2003
to 2013, Ms. Avraham served in various political and governmental roles in Israel including Minister of Tourism, Acting Minister
of the Interior, Deputy Knesset Speaker and Member of Knesset as the Opposition Chairwoman, Member of the Financial Committee
and Member of the Foreign Affairs and Defense Committee. She received her bachelor’s degree in social science from Bar-Ilan
University, and an MBA in Organizational Management and HR Management from the Peres Academic Center.
David
Braun
has served as a member of our board of directors since December 2017. Mr. Braun has nearly 20 years of experience
spanning across various roles in research and development, operations, business management, merger and acquisition integrations
and organizational transformation. Since 2015, Mr. Braun has been the Head of Medical Device Business at Merck KGaA Group. From
2011 to 2015, Mr. Braun was Director of Global Research and Development and Operations at Newell Brands. Prior to that from 2007
to 2011, he was the Vice President in Research and Development and Operations at Biosafe. Mr. Braun has also held various positions
in project management and system engineering. He received his Master of Science in applied physics and electro-optical engineering
in 1997 at the National High School of Physics of Strasbourg, and has participated in Executive leadership and general management
programs at IMD and at the Harvard Business School.
Jonathan
Burgin
has served as a member of our board of directors since October 2018. Mr. Bergin has served as the Chief Financial Officer
of Anchiano Therapeutics Ltd. (TASE: ANCN) (formerly BioCancell Ltd.) between June 2011 and June 2012, was Anchiano’s Chief
Executive Officer from June 2012 through October 2016, and has served as Anchiano’s Chief Financial Officer and Chief Operating
Officer since October 2016. Mr. Burgin was Chief Financial Officer of Radcom Ltd. (Nasdaq: RDCM), a service assurance provider,
from 2006 to 2011, and was Chief Financial Officer of XTL Biopharmaceuticals Ltd. (TASE: XTL, Nasdaq: XTLB), a drug development
company, from 1999 to 2006. Between 1997 and 1999, he was Chief Financial Officer of YLR Capital Markets Ltd., a publicly-traded
Israeli investment bank, and rose to become a Senior Manager at Kesselman & Kesselman, CPA (Israel), the Israeli member of
PricewaterhouseCoopers International, Ltd., between 1984 and 1997. Mr. Burgin earned an M.B.A. and a B.A. in accounting and economics
from Tel Aviv University and is certified in Israel as a Certified Public Accountant.
Our
Scientific Advisory Team
Our
Scientific Advisory Team includes specialists and experts in Israel, with experience in the fields of biochemistry, infectious
diseases and medical research. Our Scientific Advisory Team plays an active role in advising us with respect to our products,
technology development, clinical trials and safety. Our Scientific Advisory Team members are entitled, according to their work
and contribution to us, to either hourly or monthly consulting fees.
Our
Scientific Advisory Team is comprised of the following members:
Professor
Dov Zipori
is the Director of the Helen and Martin Kimmel Institute for Stem Cell Research at the WIS. Pluristem’s
technology is based on Prof. Zipori’s scientific research.
Dr.
Susan Alpert
has served as the Director of Medical Device Assessment in the FDA, as well as senior VP Regulatory at Medtronic
Inc. (NYSE:MDT) and C. R. BARD Inc.
Professor
Robert Negrin
is the Medical Director of the Clinical Bone Marrow Transplantation Laboratory and the Division Chief of
the Blood and Marrow Transplant Program at Stanford University.
Professor
John F. DiPersio
is Chief of Oncology at the Washington University School of Medicine in St. Louis. He specializes in
bone marrow transplantations, leukemia, gene therapy and GvHD.
Professor
Francesco Dazzi
is a specialist in Regenerative and Haematological Medicine and is KHP Lead for Cellular Therapies at
King’s College London. Professor Dazzi is also a member of editorial boards at leading scientific journals.
Professor
Corey Cutler
is a hematologist affiliated with the Dana-Farber Cancer Institute and the Brigham and Women’s Hospital.
He is also Associate Professor, Medicine at Harvard Medical School.
Family
Relationships
There
are no family relationships between any members of our executive management and our directors.
Arrangements
for Election of Directors and Members of Management
There
are no arrangements or understandings with major shareholders, customers, suppliers or others pursuant to which any of our executive
management or our directors were selected.
The aggregate compensation
expensed, including share-based compensation and other compensation expensed by us and our subsidiaries to our office holders
with respect to the year ended December 31, 2018 was approximately $2.6 million.
The term ‘office holder’ as defined in the Companies Law includes a general manager, chief
business manager, deputy general manager, vice general manager, any other person fulfilling or assuming the responsibilities of
any of the foregoing positions without regard to such person’s title, as well as a director, or a manager directly subordinate
to the general manager or the chief executive officer. As of March 12, 2018, in addition to the eight members of the board of directors
(including the Company's Chairman and Chief Executive Officer), the Company considers six other individuals, including its Chief
Financial Officer, Chief Development Officer, Chief Business Officer, Vice President of Operations, Vice President of Clinical
Affairs and Quality Assurance Director to be office holders.
The table below sets forth the compensation paid to our five most highly compensated senior office holders
during or with respect to the year ended December 31, 2018, in the disclosure format of Regulation 21 of the Israeli Securities
Regulations (Periodic and Immediate Reports), 1970. We refer to the five individuals for whom disclosure is provided herein as
our “Covered Executives.”
For
purposes of the table and the summary below, and in accordance with the above mentioned securities regulations, “compensation”
includes base salary, 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.
Name and Principal Position
|
|
Base Salary
(NIS in
thousands)
(including
social
allowance)
|
|
|
Variable
Compensation
(1)
(NIS in
thousands)
|
|
|
Equity-Based
Compensation
(2)
(NIS in
thousands)
|
|
|
Other
(NIS in
thousands)
|
|
|
Total
(3)
(NIS in
thousands)
|
|
|
Convenience
translation
into USD in
thousands
(4)
|
|
Kasbian Nuriel Chirich,
Chairman of the Board of Directors
|
|
|
643
|
|
|
|
126
|
|
|
|
957
|
|
|
|
14
|
|
|
|
1,740
|
|
|
|
464
|
|
Dr. Shai Yarkoni,
Chief Executive Officer & Director
|
|
|
1,160
|
|
|
|
309
|
|
|
|
1,356
|
|
|
|
8
|
|
|
|
2,833
|
|
|
|
756
|
|
Eyal Leibovitz,
Chief Financial Officer
|
|
|
922
|
|
|
|
187
|
|
|
|
505
|
|
|
|
21
|
|
|
|
1,635
|
|
|
|
436
|
|
Dr. Yael Kenan,
Vice President of Clinical Affairs
|
|
|
678
|
|
|
|
16
|
|
|
|
52
|
|
|
|
3
|
|
|
|
749
|
|
|
|
200
|
|
Dr. Ronit Bakimer-Kleiner
Chief Development Officer
|
|
|
628
|
|
|
|
23
|
|
|
|
46
|
|
|
|
8
|
|
|
|
705
|
|
|
|
188
|
|
(1)
|
Amounts
reported in this column refer to variable compensation such as commission, incentive and bonus payments for the year ended
December 31, 2018 (including any cash bonuses paid in 2019). Cash bonuses are intended to promote our work plan and business
strategy by rewarding senior office holders for achievement of business and financial goals through team work and collaboration.
Key performance indicators which are factored into cash bonus determinations are individual specific and may include: (i)
progress in our ongoing Phase I/II clinical trial, (ii) completion of a strategic transaction, (iii) submission of an IND,
(iv) raising funds, (v) FasL production of first clinical batch, and (vi) establishment of U.S. subsidiary.
|
|
|
(2)
|
Amounts
reported in this column represent the expense recorded in the Company’s financial statements for the year ended December
31, 2018 with respect to equity-based compensation. Assumptions and key variables used in the calculation of such amounts
are discussed in note 12 to the consolidated financial statements.
|
|
|
(3)
|
All
amounts reported in the table are in terms of cost to us.
|
|
|
(4)
|
Calculated
using the exchange rate reported by the Bank of Israel for December 31, 2018 at the rate of one U.S. dollar per NIS 3.748.
|
Compensation
of Directors
As
approved by our shareholders at our 2018 annual meeting of shareholders, in connection with their services as directors of the
Company and in accordance with the companies regulations (rules regarding compensation and expenses to external directors –
2000), each of our directors (other than Dr. Yarkoni and Mr. Chirich) from time to time, including external directors, is entitled
to an annual payment of NIS 34,200, plus value-added tax, or VAT, if applicable, payable quarterly at the end of each quarter.
In addition, each of our non-employee directors are entitled to receive an average payment of NIS 1,090 plus VAT, if applicable,
per each board meeting or board committee meetings they have participated in.
For
the outstanding equity-based awards granted to our directors, see below under “Item 6. Directors, Senior Management and
Employees—E. Share Ownership—Certain Information Concerning Equity Awards to Office Holders.”
Compensation
of External Directors
Each
of our external directors is entitled to an annual amount of NIS 34,200, plus VAT, if applicable, payable in quarterly installments
at the end of each quarter. In addition, in accordance with the companies regulations (rules regarding compensation and expenses
to external directors – 2000), each of our external directors are entitled to receive an average payment of NIS 1,090 plus
VAT, if applicable, per each board meeting or board committee meetings they have participated in. The compensation of external
directors is also subject to the provisions of the Israeli regulations promulgated pursuant to the Companies Law governing the
terms of compensation payable to external directors, or the Compensation Regulations, which provide that such compensation will
not be less than the Minimum Amount (as such term is defined in the Compensation Regulations). See also “Item 6. Directors,
Senior Management and Employees—C. Board Practices—External Directors & Financial Experts” below.
Employment Agreements with
Senior Management
Our
senior management are 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 member of senior management,
during which time such person will continue to receive base salary and benefits. These agreements also contain 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 Operations in Israel.”
For
a description of the terms of our options and option plans, see “Item 6. Directors, Senior Management and Employees—E.
Share Ownership” below.
Chairman
of the Board of Directors Agreement with Kasbian Nuriel Chirich
On
April 30, 2013, we entered into a Chairman of the board of directors agreement with Kasbian Nuriel Chirich, employing him on a
part-time basis as Chairman of the board of directors. Mr. Chirich’s terms of employment have been subsequently amended
on July 24, 2016 and July 5, 2018. Mr. Chirich’s current monthly salary is NIS 42,000 and he is entitled to a maximum bonus
of up to six monthly salaries. Mr. Chirich is also entitled to reimbursement for reasonable out-of-pocket expenses, including
travel expenses, and an allocation to a manager’s insurance policy, pension plan, study fund and disability insurance. The
agreement originally had a term of 36 months and was renewable for additional terms of 36 months subject to any approvals that
are required by law. The current term terminates on June 30, 2019. The agreement is terminable by either party upon 180 days prior
written notice and is terminable immediately by Cellect Biotherapeutics for cause as such term is defined in the employment agreement.
On
August 26, 2015, we granted options to purchase 72,000 ordinary shares to Mr. Chirich. The options are exercisable at NIS 1.90
per share and expire on August 26, 2025. The options vest each quarter from the date of grant over three years in twelve equal
installments.
On
February 28, 2017, we granted options to purchase 1,442,729 ordinary shares to Mr. Chirich. The options are exercisable at NIS
1.20 per share and expire on February 27, 2027. The options vest over a period of 48 months, with one quarter vesting 12 months
from the grant date and the remaining three quarters vesting over the remaining 36 months on a quarterly basis beginning 12 months
from the grant date.
On
July 5, 2018, we granted options to purchase 632,710 ordinary shares to Mr. Chirich. The options are exercisable at NIS 1.515
per share and expire on July 4, 2028. The options vest over a period of 48 months, with one quarter vesting on March 12, 2019
and the remaining three quarters vesting over the remaining 36 months on a quarterly basis beginning March 12, 2019.
Employment
Agreement with Shai Yarkoni
On
April 30, 2013, we entered into an employment agreement with Dr. Shai Yarkoni employing him on full-time basis as Chief
Executive Officer. Dr. Yarkoni’s terms of employment have been subsequently amended on July 24, 2016. Dr.
Yarkoni’s current monthly salary is NIS 70,000 and he is entitled to a maximum bonus of up to six monthly salaries. Dr. Yarkoni
is entitled to an allocation to a manager’s insurance policy and study fund. Dr. Yarkoni is also entitled
to reimbursement for reasonable out-of-pocket expenses, including travel expenses and a company car and mobile phone.
The agreement originally had a term of 36 months and was extended for a further 36 months. The current term terminates on
June 30, 2019. The agreement is terminable by either party upon 180 days prior written notice and terminable immediately by
us for cause as such term is defined in the employment agreement.
On
September 8, 2014, we granted options to purchase 1,200,000 ordinary shares to Dr. Yarkoni. The options are exercisable at a price
of NIS 1.40 per share. The options vested each quarter from the date of grant over three years in twelve equal installments and
are fully vested. The options expire on September 8, 2024.
On
August 26, 2015, we granted options to purchase 72,000 ordinary shares to Dr. Yarkoni. The options are exercisable at NIS 1.90
per share and expire on August 26, 2025. The options vest each quarter from the date of grant over three years in twelve equal
installments.
On
February 28, 2017, we granted options to purchase 3,024,040 ordinary shares to Dr. Yarkoni for his service on the board of directors.
The options are exercisable at NIS 1.20 per share and expire on February 27, 2027. The options vest over a period of 48 months,
with one quarter vesting 12 months from the grant date and the remaining three quarters vesting over the remaining 36 months on
a quarterly basis beginning 12 months from the grant date.
Employment
Agreement with Eyal Leibovitz
On
October 25, 2016, we entered into an employment agreement with Eyal Leibovitz, employing him on full-time basis as Chief Financial
Officer effective December 31, 2016. Mr. Leibovitz’s current monthly salary is NIS 52,500. In addition, Mr. Leibovitz will
be entitled to an annual bonus equal up to 5 months’ salary based upon the completion of certain targets to be determined
by the compensation committee and the board of directors, commencing in 2017 and thereafter. Mr. Leibovitz is entitled to an allocation
to a manager’s insurance policy and study fund. Mr. Leibovitz is also entitled to reimbursement for reasonable out-of-pocket
expenses, including travel expenses, professional fees, director and officer insurance and a company car and mobile phone. The
agreement is terminable by either party upon 90 days prior written notice and terminable immediately by us for cause as such term
is defined in the employment agreement.
In
addition, pursuant to the employment agreement, we granted to Mr. Leibovitz options to purchase 1,936,503 ordinary shares at an
exercise price of NIS 0.819 per share. The options vest on a quarterly basis in equal installments over 36 months. In the case
of termination of the employment agreement not due to a material breach as defined therein, the vested options shall be exercisable
for a period of 12 months from the date of termination. In addition, the employment agreement provided that upon the earlier of
one year from the date of the option grant or such time as an analyst from a reputable investment bank in the U.S. publishes a
favorable analyst report, Mr. Leibovitz will be entitled to an additional option to purchase 107,584 ordinary shares. These options
were granted on January 1, 2018.
Services
Agreement with Dr. Ruth Ben Yakar
In
September 2014, a special meeting of shareholders approved entering into a services agreement with Dr. Ruth Ben Yakar under which
Dr. Ben Yakar will provide up to 20 hours per month of assistance to our Chief Executive Officer in business development and raising
money for a monthly fee of NIS 6,000. In April 2015, our shareholders approved an increase to Dr. Ben Yakar’s monthly fee
to up to NIS 14,000, reflecting a maximum of 40 hours per month of services, effective November 15, 2014. During 2018, Dr. Ben
Yakar did not provide any consulting services to us.
In
addition, in September 2014, we granted to Dr. Ben Yakar options to purchase 100,000 ordinary shares at an exercise price of NIS
1.40 per share. The options vested on a quarterly basis in equal installments over 36 months and are fully vested. The options
expire on September 28, 2025.
On
August 26, 2015, we granted options to purchase 72,000 ordinary shares to Dr. Ben Yakar. The options are exercisable at NIS 1.90
per share and expire on August 26, 2025. The options vest each quarter from the date of grant over three years in twelve equal
installments.
On
February 28, 2017, we granted options to purchase 78,000 ordinary shares to Dr. Ben Yakar. The options are exercisable at NIS
1.20 per share and expire on February 27, 2027. The options vest over a period of 48 months, with one quarter vesting 12 months
from the grant date and the remaining three quarters vesting over the remaining 36 months on a quarterly basis beginning
12 months from the grant date.
Introduction
Board
of Directors
Under
the Companies Law and our articles of association, our board of directors directs our policy and supervises the performance of
our Chief Executive Officer. 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. All other executive officers are also appointed by our board of directors, and are subject to the
terms of any applicable employment or services agreements that we may enter into with them or with certain entities through which
we receive their services.
All
of our directors other than Dr. Shai Yarkoni, Kasbian Nuriel Chirich and Dr. Ruth Ben Yakar are independent under the Nasdaq Capital
Market 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 of directors 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 an ordinary 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 five and not more than twelve directors, including
at least two external directors required to be appointed under the Companies Law. Our board of directors currently consists of
eight members.
Under
a founders agreement among Kasbian Nuriel Chirich, our Chairman, Dr. Shai Yarkoni, our Chief Executive Officer and director, and
Dr. Nadir Askenasy, our former Chief Technology Officer, each founder holding at least 30% of our share capital shall be entitled
to recommend the appointment of one director (and remove any director so appointed). In addition, under a voting agreement among
Kasbian Nuriel Chirich and Dr. Shai Yarkoni, the parties agreed to coordinate their votes with respect to any vote taken of our
shareholders. See “Related Party Transactions” below. We are not a party to this founders agreement or voting agreement
and are not bound by it. Other than our two external directors, our directors are elected by an ordinary resolution at the annual
and/or special general meeting of our shareholders. 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”
below. 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 of association or any applicable law, subject to the maximum number of directors allowed
under the 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 the 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” below.
Under
the Companies Law, our board of directors must determine the minimum number of directors who are required to have accounting and
financial expertise. See “— External Directors.” 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 two. Our board of directors has determined that Jonathan Burgin and Abraham Nahmias
have accounting and financial expertise and possess professional qualifications as required under the Companies Law.
Chairman
of the Board
Our
articles of association provide that the Chairman of the board of directors is appointed by the members of the board of directors
and serves as Chairman of the board of directors throughout his term as a director, unless resolved otherwise by the board of
directors. Under the Companies Law, the Chief Executive Officer or a relative of the Chief Executive Officer may not serve as
the Chairman of the board of directors, and the Chairman or a relative of the Chairman may not be vested with authorities of the
Chief Executive Officer without shareholder approval consisting of 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 not controlling shareholders and do not
have a personal interest in such appointment, present and voting at such meeting (not including abstaining shareholders);
or
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the
total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in such appointment
voting against such appointment does not exceed 2% of the aggregate voting rights in the company.
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In
addition, a person subordinated, directly or indirectly, to the Chief Executive Officer may not serve as the Chairman of the board
of directors; the Chairman of the board of directors may not be vested with authorities that are granted to those subordinated
to the Chief Executive Officer; and the Chairman of the board of directors may not serve in any other position in the company
or a controlled company, except as a director or Chairman of a controlled company.
External
Directors
Under
the Companies Law, an Israeli company whose shares have been offered to the public or whose shares are listed for trading on a
stock exchange in or outside of Israel is required to appoint at least two external directors to serve on its board of directors.
External directors must meet stringent standards of independence.
According
to regulations promulgated under the Companies law, at least one of the external directors is required to have “financial
and accounting expertise,” unless another member of the audit committee, who is an independent director under the Nasdaq
Capital Market rules, has “financial and accounting expertise,” and the other external director or directors are required
to have “professional expertise”. An external director may not be appointed to an additional term unless: (1) such
director has “accounting and financial expertise;” or (2) he or she has “professional expertise,” and
on the date of appointment for another term there is another external director who has “accounting and financial expertise”
and the number of “accounting and financial experts” on the board of directors is at least equal to the minimum number
determined appropriate by the board of directors.
A
director has “professional expertise” if he or she holds an academic degree in certain fields or has at least five
years of experience in certain senior positions.
Ruhama
Avraham and Jonathan Burgin have served as our external directors since 2017 and 2018 respectively, and both have the requisite
accounting and financial expertise. Ruhama Avraham was elected to serve from December 13, 2017 to December 12, 2020. Jonathan
Burgin was elected to serve from October 25, 2018 to October 24, 2021.
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 the 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, a controlling shareholder is deemed to include 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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his
or her service for each such additional term is recommended by one or more shareholders holding at least 1% of the company’s
voting rights and is approved at a shareholders meeting by a disinterested majority, where the total number of shares held
by non-controlling, disinterested shareholders voting for such reelection exceeds 2% of the aggregate voting rights in the
company. In such event, the external director so reappointed may not be a Related or Competing Shareholder, as defined below,
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 Israel Securities Authority, or the ISA, may determine matters that under certain conditions will
not constitute a business relationship or competition with the company; or
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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).
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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 confirm 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 beneficial to 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 why the board
of directors and audit committee recommended the extension of his or her term.
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 shareholder vote percentage required for their election, after receiving the board of directors arguments
for such removal, 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 to 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 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.
External
directors may be compensated only in accordance with regulations adopted under the Companies Law.
Committees
of the Board of Directors
Our
board of directors has established four standing committees, the audit committee, the financial statement examination committee,
the strategic committee, and the compensation committee.
Audit
Committee
Our
audit committee consists of Abraham Nahmias along with our two external directors, Ruhama Avraham and Jonathan Burgin. Mr. Burgin
serves as Chairman of the audit committee.
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. Under the Companies Law, 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. In general, an “unaffiliated director” under the Companies Law is 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 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 of a controlling shareholder may attend the discussions of the committee, provided that any resolutions
approved at such meeting are voted on without his or her presence. A company’s legal advisor and company secretary who are
not the controlling shareholder or a relative of a controlling shareholder 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, at
least one of which is an external director.
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. Our board of directors has determined that Jonathan Burgin and Abraham
Nahmias are audit committee financial experts as defined by the SEC rules, have the requisite financial sophistication as required
by the Nasdaq Capital Market corporate governance rules.
Each
of the members of the audit committee is deemed “independent” as such term is defined in Rule 10A-3(b)(1) under the
Exchange Act, according to which an audit committee member is barred from accepting any consulting, advisory or other compensatory
fee from the company or any subsidiary thereof, other than in the member’s capacity as a member of the board of directors, and
may not be an affiliated person of the company or any subsidiary of the company apart from his or her capacity as a member of
the board of directors and any committee of the board of directors.
Our
board of directors has adopted an audit committee charter which became effective upon the listing of our ADSs and warrants 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, as well as the requirements for such committee under the Companies Law, including the following:
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overseeing
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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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 the board of directors to improve such practices;
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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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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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examining
the working plan of the internal auditor, where the board of directors approves such working plan, before its submission to
our board of directors and proposing amendments thereto;
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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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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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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” below), 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.
Financial
Statement Examination Committee
Under
the Israeli Companies Law, the board of directors of a public company must appoint a financial statement examination committee,
which consists of members with accounting and financial expertise or the ability to read and understand financial statements,
unless the board of directors of such company opts for an exemption under relevant regulations promulgated under the Israeli Companies
Law, as our board of directors has done. Accordingly, in July 2016, our board of directors adopted a resolution that our audit
committee is assigned the responsibilities and duties of the financial statements examination committee. From time to time, as
necessary and required to approve our financial statements, the audit committee holds separate meetings, prior to the scheduled
meetings of the entire board of directors regarding financial statement approval. The function of a financial statements examination
committee is to discuss and provide recommendations to its board of directors (including the report of any deficiency found) with
respect to the following issues: (1) estimations and assessments made in connection with the preparation of financial statements;
(2) internal controls related to the financial statements; (3) completeness and propriety of the disclosure in the financial statements;
(4) the accounting policies adopted and the accounting treatments implemented in material matters of the company; (5) value evaluations,
including the assumptions and assessments on which evaluations are based and the supporting data in the financial statements.
Our independent auditors and our internal auditors are invited to attend all meetings of audit committee when it is acting in
the role of the financial statements examination committee.
Strategic
Committee
Our
strategic committee consists of Dr. Michael Berelowitz, David Braun, Ruth Ben-Yakar, Nuriel Chirich Kasbian, Shai Yarkoni and
Jonathan Burgin. Mr. Berelowitz serves as Chairman of the strategic committee
The
strategic committee was established by our board of directors in May 2018 in order to determine our strategy for upcoming years.
The strategic committee is not a mandatory committee according to the Israeli Companies Law and has an advisory role.
Compensation
Committee and Compensation Policy
Our
compensation committee consists of Abraham Nahmias along with our two external directors, Ruhama Avraham and Jonathan Burgin.
Mr. Burgin serves as Chairman of the compensation committee.
The
duties of the compensation committee include the recommendation to the company’s board of directors of a policy regarding
the terms of engagement of office holders, to which we refer as a compensation policy. That policy must be adopted by the company’s
board of directors, after considering the recommendations of the compensation committee, and will need to be brought for approval
by the company’s shareholders, which approval requires a Special Approval for Compensation as described below under “— Approval
of Related Party Transactions under Israeli Law—Fiduciary Duties of Directors and Executive Officers”.
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 traded. 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. The compensation committee is
subject to the same Companies Law restrictions as the audit committee as to who may not be a member of the committee.
The
compensation policy must be based on certain considerations, must include certain provisions and must refer to 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 (1) 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 (2) 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 two percent or less of the voting power of the company.
To
the extent a compensation policy is not approved by shareholders at a duly convened shareholders meeting, 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 for the benefit 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 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 approval of only the compensation committee, if such committee
determines that the amendment is not material in relation to its existing terms.
Pursuant
to the Companies Law, following the recommendation of our compensation committee, our board of directors approved our compensation
policy, and our shareholders, in turn, approved our amended and restated compensation policy at our annual general meeting of
shareholders that was held in July 2018.
The
compensation policy must serve as the basis for decisions concerning the financial terms of employment or engagement of office
holders, including exculpation, insurance, indemnification or any monetary payment or obligation of payment in respect of employment
or engagement. The compensation policy must relate to certain factors, including advancement of the company’s objectives,
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:
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a
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 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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The
compensation committee is responsible for (a) recommending the compensation policy to a company’s board of directors for
its approval (and subsequent approval by its shareholders) and (b) fulfilling the duties related to the compensation policy and
to the compensation of a company’s office holders as well as functions previously fulfilled by a company’s audit committee
with respect to matters related to approval of the terms of engagement of office holders, including:
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recommending
whether a compensation policy should continue in effect, if the then-current policy has a term of greater than three years
(approval of either a new compensation policy or the continuation of an existing compensation policy must in any case occur
every three years);
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recommending
to the board of directors periodic updates to the compensation policy;
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assessing
implementation of the compensation policy; and
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determining
whether the compensation terms of the Chief Executive Officer of the company need not be brought to approval of the shareholders.
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Our
compensation committee’s responsibilities include:
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reviewing
and recommending overall compensation policies with respect to our Chief Executive Officer and other executive officers;
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reviewing
and approving corporate goals and objectives relevant to the compensation of our Chief Executive Officer and other executive
officers including evaluating their performance in light of such goals and objectives;
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reviewing
and approving the granting of options and other incentive awards; and
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reviewing,
evaluating and making recommendations regarding the compensation and benefits for our non-employee directors.
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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. An internal auditor may not be:
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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. On May 31, 2016, we appointed Sapir Guy as our internal auditor. Sapir Guy is a
certified internal auditor and a partner at Kesselman & Kesselman (PwC), a certified public accounting firm in Israel.
The
Chairman of the board of directors will be the direct supervisor of the internal auditor, unless the board of directors shall
determine otherwise, according to our articles of association and the Companies Law. The internal auditor is required to submit
his or her findings to the audit committee, unless specified otherwise by the board of directors.
Each
director, except external directors, will hold office until the annual general meeting of our shareholders for the year in which
his or her term expires, unless he or she is removed by a simple majority vote of our shareholders at a general meeting of our
shareholders or upon the occurrence of certain events, in accordance with the Companies Law and our amended and restated articles
of association.
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 in the table under “Directors
and Senior Management” above 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.
|
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 first by the company’s audit committee and subsequently by the board of directors. The compensation
of, or an undertaking to indemnify or insure, an office holder who is not a director requires approval first by the company’s
compensation committee, then by 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 office holder is the Chief
Executive Officer (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 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 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 approval of the compensation committee, board of directors
and shareholders by ordinary majority, in that order, 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, has 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 Israeli law, the disclosure requirements regarding personal interests that apply to directors and executive officers also apply
to a controlling shareholder of a public company. In the context of a transaction involving a shareholder of the company, a controlling
shareholder also includes a shareholder who holds 25% or more of the voting rights in the company if no other shareholder holds
more than 50% of the voting rights in the company. For this purpose, the holdings of all shareholders who have a personal interest
in the same transaction will be aggregated. 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 to as a 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 of a controlling
shareholder, or 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 and subject Company’s Compensation Policy.
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 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:
|
●
|
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.
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, which ours do:
|
●
|
financial
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 events which, in the opinion of the board of directors, can be reasonably
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;
|
|
●
|
reasonable
litigation expenses, including attorneys’ fees, incurred by the office holder (1) 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 (2) in connection with a monetary sanction; and
|
|
●
|
reasonable
litigation expenses, including attorneys’ fees, incurred by the office holder or imposed by a court in proceedings instituted
against him or her by the company, on its behalf, or by a third party, or in connection with criminal proceedings in which
the office holder was acquitted, or as a result of a conviction for an offense that does not require proof of criminal intent.
|
Under
the Companies Law and the Israeli Securities Law 5728-1968, or 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:
|
●
|
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;
|
|
●
|
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
|
|
●
|
a
financial liability imposed on the office holder in favor of a third party.
|
Under
our articles of association, we may insure an office holder against the aforementioned liabilities as well as the following liabilities:
|
●
|
a
breach of duty of care to the company or to a third party;
|
|
●
|
any
other action against which we are permitted by law to insure an office holder;
|
|
●
|
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,
or the Efficiency of Enforcement Procedures, and the Israeli Securities Law, which we refer to as an Administrative Enforcement
Procedure, and including reasonable litigation expenses and attorney fees; and
|
|
●
|
a
financial 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:
|
●
|
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;
|
|
●
|
a
breach of duty of care committed intentionally or recklessly, excluding a breach arising solely out of the negligent conduct
of the office holder;
|
|
●
|
an
act or omission committed with intent to derive illegal personal benefit; or
|
|
●
|
a fine,
civil fine, administrative fine or ransom or 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, including expenses incurred and/or paid by the office holder
in connection with an Administrative Enforcement Procedure.
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 will be 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 will be limited to an amount which shall not exceed 25% of our net assets based on our most recently
audited or reviewed 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.
As of December 31, 2018, we had twenty-eight full-time employees. These employees are comprised of nineteen
in research and development and nine employees in management, finance, business development and administration. From time to time,
we also employ independent contractors to support our operations. Our employees are not represented by any collective bargaining
agreements and we have never experienced an organized work stoppage. All of our employees are located in Israel other than one
employee who is located in the United States.
Stock
Option Plans
Equity
Compensation Plan
We maintain our 2014 Cellect Option Plan, which was originally adopted by our board of directors in February
2014 and is scheduled to expire in February 2024. The 2014 Cellect Option Plan provides for the grant of options to our directors,
officers, employees, consultants, advisers and service providers. As of December 31, 2018, options to purchase 13,014,147 ordinary
shares were outstanding and up to 1,548,784 ordinary shares are available for issuance. Of such outstanding options, options to
purchase 5,536,637 ordinary shares are exercisable as of December 31, 2018, with a weighted average exercise price of NIS 1.18
per share, and will expire ten years from the date of grant, during the years 2024 – 2028.
The
2014 Cellect Option Plan provides for options to be granted at the determination of our board of directors (which is entitled
to delegate its powers under the 2014 Cellect Option Plan to our compensation committee) in accordance with applicable laws. Upon
termination of employment for any reason, other than in the event of death or disability or for cause, all unvested options will
expire and all vested options at time of termination will generally be exercisable for 90 days following termination, subject
to the terms of the 2014 Cellect Option Plan and the governing option agreement. If we terminate a grantee for cause (as defined
in the 2014 Cellect Option Plan) the grantee’s right to exercise all vested and unvested the options granted to him or her
will expire immediately. Upon termination of employment due to death or disability, all the vested options at the time of termination
will be exercisable for 12 months after date of termination, subject to the terms of the 2014 Cellect Option Plan and the governing
option agreement.
Pursuant
to the 2014 Cellect Option Plan, we may award options pursuant to Section 102 of the Israeli Income Tax Ordinance, 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 our share capital, or to be entitled to 10% of our profits or to appoint a director
to our 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 us 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.
Options
granted under the 2014 Cellect Option Plan are subject to applicable vesting schedules and generally expire ten years from the
grant date.
In
the event that options allocated under the 2014 Cellect Option Plan expire or otherwise terminate in accordance with the provisions
of the 2014 Cellect Option Plan, such expired or terminated options will become available for future grant awards and allocations
under the 2014 Cellect Option Plan. We have registered the ordinary shares available for issuance under the 2014 Cellect Option
Plan pursuant to a Registration Statement on Form S-8.
See
also “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders” below.
ITEM 7.
|
MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
The
following table sets forth certain information regarding the beneficial ownership of our ordinary shares as of March 12, 2019
by:
|
●
|
each
of our directors and senior management;
|
|
●
|
all
of our directors and senior management as a group; and
|
|
●
|
each
person (or group of affiliated persons) known by us to be the beneficial owner of more than 5% of the outstanding ordinary
shares.
|
Beneficial
ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to ordinary
shares. Ordinary shares issuable under share options, warrants or other conversion rights currently exercisable or that are exercisable
within 60 days after March 12, 2019 are deemed outstanding for the purpose of computing the percentage ownership of the person
holding the options, warrants or other conversion rights, but are not deemed outstanding for the purpose of computing the percentage
ownership of any other person. Percentage of shares beneficially owned before this offering is based on 224,087,799 ordinary shares
outstanding (which excludes 2,641,693 shares held in treasury) on March 12, 2019.
Except
where otherwise indicated, and except pursuant to community property laws, we believe, based on information furnished by such
owners, that the beneficial owners of the shares listed below have sole investment and voting power with respect to, and the sole
right to receive the economic benefit of ownership of, such shares. The shareholders listed below do not have any different voting
rights from any of our other shareholders. We know of no arrangements that would, at a subsequent date, result in a change of
control of our Company.
|
|
Number of Shares Beneficially
|
|
|
Percentage Ownership
|
|
Directors and Senior Management
|
|
|
|
|
|
|
Kasbian Nuriel Chirich (1)
|
|
|
36,400,842
|
|
|
|
16.1
|
%
|
Dr. Shai Yarkoni (2)
|
|
|
36,400,842
|
|
|
|
16.0
|
%
|
Eyal Leibovitz (3)
|
|
|
1,656,783
|
|
|
|
*
|
|
Dr. Ronit Bakimer-Kleiner (4)
|
|
|
23,125
|
|
|
|
*
|
|
Andrew Sabatier (5)
|
|
|
120,000
|
|
|
|
*
|
|
Dr. Yael Kenan (6)
|
|
|
23,125
|
|
|
|
*
|
|
Dr. Amos Ofer (7)
|
|
|
-
|
|
|
|
-
|
|
Smadar Har Tuv (8)
|
|
|
100,000
|
|
|
|
*
|
|
Abraham Nahmias (9)
|
|
|
377,667
|
|
|
|
*
|
|
Ruth Ben Yakar (10)
|
|
|
211,000
|
|
|
|
*
|
|
Michael Berelowitz (11)
|
|
|
75,000
|
|
|
|
*
|
|
Ruhama Avraham (12)
|
|
|
46,875
|
|
|
|
*
|
|
David Braun (13)
|
|
|
46,875
|
|
|
|
*
|
|
Jonathan Burgin (14)
|
|
|
-
|
|
|
|
-
|
|
Directors and Senior Management as a group (14 persons)
|
|
|
39,081,292
|
|
|
|
17.2
|
%
|
More than 5% Shareholders
|
|
|
|
|
|
|
|
|
Ilan Holdings (M&I) Ltd. (15)
|
|
|
14,962,470
|
|
|
|
6.7
|
%
|
Anson Funds Management L.P. (16)
|
|
|
16,600,016
|
|
|
|
7.6
|
%
|
Sabby Volatility Warrant Master Fund, Ltd (17)
|
|
|
16,802,660
|
|
|
|
7.7
|
%
|
(1)
|
Represents
(i) 854,613 ADSs representing 17,092,267 ordinary shares owned by Mr. Chirich, (ii) 12,420 ADS representing 248,400 ordinary
shares issuable upon exercise of warrants at an exercise price of $7.50 per ADS and expiring on July 29, 2021, (iii) options
to purchase 72,000 ordinary shares at an exercise price of NIS 1.90 per share and expiring on August 25, 2025, (iv) options
to purchase 721,365 ordinary shares at an exercise price of NIS 1.20 per share and expiring on February 27, 2027, (v) options
to purchase 158,178 ordinary shares at an exercise price of NIS 1.515 per share and expiring on March 12, 2028, and (vi) 33,333
ADS representing 666,667 ordinary shares issuable upon exercise of warrants at an exercise price of $1.50 per ADS and expiring
on February 12, 2024 and (v) 17,441,967 ordinary shares beneficially owned by Dr. Yarkoni over which Mr. Chirich has shared
voting power pursuant to a voting agreement. Excludes options to purchase 1,195,897 ordinary shares that vest in more than
60 days from March 12, 2019.
|
(2)
|
Represents
(i) 711,454 ADSs representing 14,229,073 ordinary shares owned by Dr. Yarkoni, (ii) 14,777 ADS representing 295,540 ordinary
shares issuable upon exercise of warrants at an exercise price of $7.50 per ADS and expiring on July 29, 2021, (iii) options
to purchase 1,200,000 ordinary shares, at an exercise price of NIS 1.40 per share and expiring on September 8, 2024, (iv)
options to purchase 72,000 ordinary shares at an exercise price of NIS 1.90 per share and expiring on August 26, 2025, (v)
options to purchase 1,512,020 ordinary shares at an exercise price of NIS 1.20 per share and expiring on February 27, 2027,
and (vi) 6,667 ADS representing 133,333 ordinary shares issuable upon exercise of warrants at an exercise price of $1.50 per
ADS and expiring on February 12, 2024 and (v) 18,958,875 ordinary shares beneficially owned by Mr. Chirich over which Dr.
Yarkoni has shared voting power pursuant to a voting agreement. Excludes options to purchase 1,512,020 ordinary shares that
vest in more than 60 days from March 12, 2019.
|
(3)
|
Represents
(i) 3,708 ADSs representing 74,167 ordinary shares owned by Mr. Leibovitz, (ii) options to purchase 1,515,950 ordinary shares
at an exercise price of NIS 0.819 per share and expiring on October 26, 2026, (iii) options to purchase 1,515,950 ordinary
shares at an exercise price of NIS 0.819 per share and expiring on and November 20, 2027, and (iv) 3,333 ADS representing
66,667 ordinary shares issuable upon exercise of warrants at an exercise price of $1.50 per ADS and expiring on February 12,
2024. Excludes options to purchase 528,137 ordinary shares that vest in more than 60 days from March 12, 2019.
|
(4)
|
Represents
options to purchase 23,125 ordinary shares at an exercise price of NIS 1.444 per share and expiring on November 20, 2027.
Excludes options to purchase 50,875 ordinary shares that vest in more than 60 days from March 12, 2019.
|
|
|
(5)
|
Represents
(i) 3,000 ADSs representing 60,000 ordinary shares owned by Mr. Sabatier, and (ii) 3,000 ADS representing 60,000 ordinary
shares issuable upon exercise of warrants at an exercise price of $1.50 per ADS and expiring on February 12, 2024. Excludes
options to purchase 2,044,080 ordinary shares that vest in more than 60 days from March 12, 2019.
|
(6)
|
Represents
options to purchase 23,125 ordinary shares at an exercise price of NIS 1.361 per share and expiring on January 22, 2028. Excludes
options to purchase 50,875 ordinary shares that vest in more than 60 days from March 12, 2019.
|
|
|
(7)
|
Excludes
options to purchase 400,000 ordinary shares that vest in more than 60 days from March 12, 2019.
|
|
|
(8)
|
Represents
options to purchase 100,000 ordinary shares at an exercise price of NIS 0.631 per share and expiring on January 26, 2027.
|
(9)
|
Represents
(i) 133,333 ordinary shares owned by Mr. Abraham Nahmias, (ii) options to purchase 72,000 ordinary shares at an exercise price
of NIS 1.90 per share and expiring on August 26, 2025, (iii) options to purchase 39,000 ordinary shares at an exercise price
of NIS 1.20 per share and expiring on February 27, 2027, and (iv) 6,667 ADS representing 133,333 ordinary shares issuable
upon exercise of warrants at an exercise price of $1.50 per ADS and expiring on February 12, 2024. Excludes options to purchase
39,000 ordinary shares that vest in more than 60 days from March 12, 2019.
|
(10)
|
Represents
(i) options to purchase 100,000 ordinary shares at an exercise price of NIS 1.40 per share and expiring on September 28, 2024,
(ii) options to purchase 72,000 ordinary shares at an exercise price of NIS 1.90 per share and expiring on August 26, 2025,
and (iii) options to purchase 39,000 ordinary shares at an exercise price of NIS 1.20 per share and expiring on February 27,
2027. Excludes options to purchase 39,000 ordinary shares that vest in more than 60 days from March 12, 2019.
|
(11)
|
Represents
options to purchase 75,000 ordinary shares at an exercise price of NIS 1.20 per share and expiring on February 27, 2027. Excludes
options to purchase 75,000 ordinary shares that vest in more than 60 days from March 12, 2019.
|
(12)
(13)
|
Represents
options to purchase 46,875 ordinary shares at an exercise price of NIS 1.437 per share
and expiring on February 12, 2027. Excludes options to purchase 103,125 ordinary shares
that vest in more than 60 days from March 12, 2019.
Represents
options to purchase 46,875 ordinary shares at an exercise price of NIS 1.437 per share and expiring on February 12, 2027.
Excludes options to purchase 103,125 ordinary shares that vest in more than 60 days from March 12, 2019.
|
|
|
(14)
|
Excludes
options to purchase 150,000 ordinary shares that vest in more than 60 days from March
12, 2019
|
(15)
|
Based
on information contained in a Schedule 13G/A filed with the SEC on February 14, 2019 jointly by Ilan Holdings (M&I) Ltd.
and Arrow Pride (Eran Ilan) (together, the “Reporting Persons”), the Reporting Persons have the sole power to
vote amd dispose of 14,489,100 ordinary shares.
|
|
|
(16)
|
Based
on information contained in a Schedule 13G filed with the SEC on February 19, 2019 jointly by Anson Funds Management LP (d/b/a
Anson Group), or AFM,, Anson Management GP LLC or AM, Bruce R. Winson, the principal of AFM and AM, Anson Advisors Inc. (d/b/a
Anson Funds), or AA, Amin Nathoo, a director of AA, and Moez Kassam, a director of AA. AMF and AA serve as co-investment advisors
to a private fund, or the Fund and may direct the vote and disposition of the 16,600,016 ordinary shares represented by ADSs
held by the Fund. As the general partner of AFM, AM may direct the vote and disposition of the 16,600,016 ordinary shares
represented by ADSs held by the Fund. As the principal of AFM and AM, Mr. Winson may direct the vote and disposition of the
16,600,016 ordinary shares represented by ADSs held by the Fund. As directors of AA, Mr. Nathoo and Mr. Kassam may each direct
the vote and disposition of the 16,600,016 ordinary shares represented by ADSs held by the Fund.
|
|
|
(17)
|
Based
partially on information contained in a Schedule 13G filed with the SEC on February 12,
2019 jointly by Sabby Healthcare Master Fund, Ltd., or Sabby HMF, Sabby Volatility Warrant
Master Fund, Ltd., or Sabby VWMF, Sabby Management, LLC, or Sabby Management, and Hal
Mintz. Sabby HMF and Sabby VWMF beneficially own 0 and 16,802,660 Ordinary shares, respectively,
and Sabby Management and Mr.Mintz each beneficially own 16,802,660 ordinary shares. Sabby
Management and Mr. Mintz do not directly own any ordinary shares, but each indirectly
owns 16,802,660 ordinary shares. Sabby Management indirectly owns 16,802,660 ordinary
shares because it serves as the investment manager of Sabby HMF and Sabby VWMF. Mr. Mintz
indirectly owns 16,802,660 ordinary shares in his capacity as manager of Sabby Management.
|
To
our knowledge, from the date immediately prior to our U.S. initial public offering on August 3, 2016 to March 12, 2019, the
ownership percentage of Kasbian Nuriel Chirich decreased by 12.5% from 20.3% to 7.8%, the ownership percentage of Shai
Yarkoni decreased by 11.6% from 18.1% to 6.5% during such period (in each case of Mr. Chirich and Dr. Yarkoni without giving
effect to the voting agreement they are party to), the ownership percentage of Michael Ilan Management and Investments Ltd.
(assuming such entity is affiliated with Ilan Holdings (M&I) Ltd.) decreased by 14.3% from 20.9% to 6.7%, the ownership
percentage of Nadir Askenasy decreased from 16.9% to under 5%. Anson Funds Management L.P. and Sabby Volatility Warrant
Master Fund, Ltd became more than 5% shareholders as a result of their participation in our follow-on underwritten public
offering in February 2019. Sabby has held more than 5% of our outstanding shares in the past.
Bank
of New York Mellon, or BNY, is the holder of record for our ADR program, pursuant to which each ADS represents 20 ordinary shares.
As of March 12, 2019, BNY held 217,664,440 ordinary shares representing 97% of the outstanding share capital held at that date.
Certain of these ordinary shares were held by brokers or other nominees. As a result, the number of holders of record or registered
holders in the United States is not representative of the number of beneficial holders or of the residence of beneficial holders.
None
of our shareholders has different voting rights from other shareholders. To our knowledge, we are not owned or controlled, directly
or indirectly, by another corporation or by any foreign government. We are not aware of any arrangement that may, at a subsequent
date, result in a change of control of us.
B.
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Related
Party Transactions
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The
following is a description 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 “Board Practices — Approval of Related Party Transactions
under Israeli Law.”
Founders
Agreement and Voting Agreement
On
June 1, 2011, Kasbian Nuriel Chirich, our Chairman, Dr. Shai Yarkoni, our Chief Executive Officer and director, and Dr. Nadir
Askenasy, our former Chief Technology Officer entered into a founders agreement with respect to Cellect Biotherapeutics, our subsidiary.
Subsequently, on May 16, 2013, the parties to the founders agreement entered into an agreement pursuant to which it was agreed
that the founders agreement will apply to the parties with respect to us following the merger which closed on July 1, 2013.
Under
the founders agreement, each founder holding at least 30% of our share capital shall be entitled to recommend the appointment
of one director (and remove any director so appointed). The founders agreement also provides pre-emptive rights, rights of first
refusal, co-sale rights and bring along rights among the founders subject to certain permitted transfers.
Under
a voting agreement dated August 14, 2017, among Dr. Shai Yarkoni and Kasbian Nuriel, the parties agreed to coordinate their votes
with respect to any vote taken of our shareholders.
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.
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 offering,
to the extent such liabilities are not covered by insurance. See “Management Exculpation, Insurance and Indemnification
of Directors and Officers.”
Employment
and Service Agreements
We
have employment, service or related agreements with certain members of senior management and directors. See “Item 6. Directors,
Senior Management and Employees—B. Compensation”.
2019
Underwritten Public Offering
Certain
of our officers and directors participated in our follow on underwritten offering in February 2019. See “Item 10. Additional
Information—Material Contracts—2019 Underwritten Public Offering”.
Options
We
have granted options to purchase our ordinary shares to certain of our officers and directors. See “Item 6. Directors, Senior
Management and Employees—B. Compensation” and “Item 7. Major Shareholders and Related Party Transactions—A.
Major Shareholders”. We describe our option plans under “Item 6. Directors, Senior Management and Employees—E.
Share Ownership” and “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders”.
C.
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Interests
of Experts and Counsel
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Not
applicable.
ITEM 8.
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FINANCIAL
INFORMATION.
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A.
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Consolidated
Statements and Other Financial Information.
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See
“Item 18. Financial Statements.”
Legal
Proceedings
From
time to time, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business.
We are currently not a party to any material legal or administrative proceedings and except as set forth below, are not aware
of any pending or threatened material legal or administrative proceedings against us.
Dividends
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. In addition, the distribution of dividends is limited by Israeli law, which
permits the distribution of dividends only out of distributable profits. See “Item 10. Additional Information—B. Articles
of Association—Dividends.” See “Item 10. Additional Information—E. Taxation—Israeli Tax Considerations
and Government Programs.”
If
we pay any dividends, we will also pay such dividends to the ADS holders to the same extent as holders of our ordinary shares,
subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. No dividends will accrue for
any unexercised warrants. Cash dividends on our ordinary shares, if any, will be paid to ADS holders in U.S. dollars.
No
significant change, other than as otherwise described in this annual report on Form 20-F, has occurred in our operations since
the date of our consolidated financial statements included in this annual report on Form 20-F.
ITEM 9.
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THE
OFFER AND LISTING
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A.
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Offer
and Listing Details
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On
July 29, 2016, our ADSs and warrants, commenced trading on the Nasdaq Capital Market under the symbols “APOP” and
“APOPW”, respectively. From 1990 to September 3, 2017, our shares were traded on the TASE.
Not
applicable.
Our
ADSs and warrants are listed on the Nasdaq Capital Market.
Not
applicable.
Not
applicable.
Not
applicable.
ITEM 10.
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ADDITIONAL
INFORMATION
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Not
applicable.
B.
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Articles
of Association
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Our
registration number with the Israeli Registrar of Companies is 520036484.
Articles
of Association
The
following are summaries of material provisions of our articles of association, as amended from time to time, and the Companies
Law insofar as they relate to the material terms of our ordinary shares.
Purposes
and Objects of the Company
Our
purpose is set forth in Section 2 of our articles of association and includes every lawful purpose.
Registration
Number
Our
number with the Israeli Registrar of Companies is 520036484.
Voting
Rights
Holders
of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders at a shareholders
meeting. Shareholders may vote at shareholders meetings either in person, by proxy or by written ballot. Israeli law does not
allow public companies to adopt shareholder resolutions by means of written consent in lieu of a shareholders meeting. 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 the 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.
Transfer
of Shares
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.
See “Shares Eligible for Future Sale” with respect to the applicable U.S. law. 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.
The
Powers of the Directors
Our
board of directors directs our policy and supervises the performance of our Chief Executive Officer. 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.
Amendment
of Share Capital
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, require a resolution of our board of directors and court
approval.
Dividends
Under
Israeli 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 financial
statements, provided that the date of the 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
determines 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.
Shareholders
Meetings
Under
Israeli law, we are required to hold an annual general meeting of our shareholders once every calendar year and in any event no
later than 15 months after the date of the previous annual general meeting. All meetings other than the annual general meeting
of shareholders are referred to as special meetings. Our board of directors may call special meetings whenever it sees fit, at
such time and place, within or outside of Israel, as it may determine. In addition, the Companies Law and our articles of association
provide that our board of directors is required to convene a special meeting upon the written request of (1) any two of our directors
or one quarter of the directors then in office; or (2) one or more shareholders holding, in the aggregate either (a) 5% of our
issued share capital and 1% of our outstanding voting power, or (b) 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 and in accordance with the
Companies Law and its Regulations. 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:
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amendments
to our articles of association;
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appointment
or termination of our auditors;
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appointment
and dismissal of directors and external directors;
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approval
of acts and transactions requiring general meeting approval pursuant to the Companies Law;
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director
compensation, indemnification and change of the principal executive officer;
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increases
or reductions of our authorized share capital;
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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
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authorization
of 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 authorization of the company’s Chief Executive Officer or his relative to act as the Chairman of
the board of directors or act with such authority.
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The
Companies Law requires that a notice of any annual or special shareholders meeting be provided at least 21 days prior to the meeting.
In the event the agenda of the meeting includes the manners specified under bullets 3, 4, 5, 7 and 9 above, or the approval of
transactions with office holders or interested or related parties, a notice must be provided at least 35 days prior to the meeting.
The
Companies Law does not allow shareholders of publicly traded companies to approve corporate matters by written consent. Consequently,
our articles of association do not allow shareholders to approve corporate matters by written consent.
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 two or more shareholders present in person, by proxy or by
other voting instrument in accordance with the Companies Law and our articles of association who hold or represent, in the aggregate,
at least 33 1/3% 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, and within half an hour from the appointed
time, 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.
Israeli
law provides that 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:
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an
appointment or removal of directors;
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an
approval of transactions with office holders or interested or related parties, that require shareholder approval;
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an
approval of a merger;
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the
authorization of 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 the authorization of the company’s Chief Executive Officer or his relative to act as
the Chairman of the board of directors or act with such authority;
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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
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other
matters which may be prescribed by Israel’s Minister of Justice.
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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 vote and any shareholder who, under such company’s articles
of association, can appoint or prevent the appointment of an office holder or 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, articles of association, financial statements and any document
it is required by law to file publicly with the Israeli Companies Registrar and the ISA. Any of our shareholders may request 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 of a public Israeli company and who would as a result hold over 90% of the target company’s
issued and outstanding share capital is required by the Companies Law to make a tender offer to all of the company’s shareholders
for the purchase of all of the issued and outstanding shares of the company. A person wishing to acquire shares of a public Israeli
company and who would as a result hold over 90% of the issued and outstanding share capital of a certain class of shares is required
to make a tender offer to all of the shareholders who hold shares of the same class for the purchase of all of the issued and
outstanding shares of the same class. If the shareholders who do not accept the offer hold less than 5% of the issued and outstanding
share capital of the company or of the applicable class, all of the shares that the acquirer offered to purchase will be transferred
to the acquirer by operation of law (provided that a majority of the offerees that do not have a personal interest in such tender
offer shall have approved the tender offer except that if the total votes to reject the tender offer represent less than 2% of
the company’s issued and outstanding share capital, in the aggregate, approval by a majority of the offerees that do not
have a personal interest in such tender offer is not required to complete the tender offer). However, a shareholder that had its
shares so transferred may petition the court within six months from the date of acceptance of the full tender offer, whether or
not such shareholder agreed to the tender or not, to determine whether the tender offer was for less than fair value and whether
the fair value should be paid as determined by the court unless the acquirer stipulated in the tender offer that a shareholder
that accepts the offer may not seek appraisal rights, so long as prior to the acceptance of the full tender offer, the acquirer
and the company disclosed the information required by law in connection with the full tender offer. If the shareholders who did
not accept the tender offer hold 5% or more of the issued and outstanding share capital of the company or of the applicable class,
the acquirer may not acquire shares of the company that will increase its holdings to more than 90% of the company’s issued
and outstanding share capital or of the applicable class from shareholders who accepted the tender offer.
Special
Tender Offer
The
Companies Law provides that an acquisition of shares of a public Israeli company must be made by means of a special tender offer
if as a result of the acquisition the purchaser would become a holder of 25% or more of the voting rights in the company, unless
one of the exemptions in the Companies Law is met. This rule does not apply if there is already another holder of at least 25%
of the voting rights in the company. Similarly, the Companies Law provides that an acquisition of shares in a public company must
be made by means of a tender offer if as a result of the acquisition the purchaser would become a holder of 45% or more of the
voting rights in the company, if there is no other shareholder of the company who holds 45% or more of the voting rights in the
company, unless one of the exemptions in the Companies Law is met.
A
special tender offer must be extended to all shareholders of a company, but the offeror is not required to purchase shares representing
more than 5% of the voting power attached to the company’s outstanding shares, regardless of how many shares are tendered
by shareholders. A special tender offer may be consummated only if (i) at least 5% of the voting power attached to the company’s
outstanding shares will be acquired by the offeror and (ii) the number of shares tendered in the offer exceeds the number of shares
whose holders objected to the offer.
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 on Form 20-F, 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.
Shareholders voting in such meeting will be subject to the restrictions provided in the Companies Law as described above.
Except
as set forth below, we have not entered into any material contract within the two years prior to the date of this annual report
on Form 20-F, other than contracts entered into in the ordinary course of business, or as otherwise described herein in “Item 4.
Information on the Company—A. History and Development of the Company” above, “Item 4. Information on the
Company—B. Business Overview” above, and “Item 7. Major Shareholders and Related Party Transactions—A.
Major Shareholders” or “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions”
above.
September
2017 Financing
On
September 7, 2017, we entered into Securities Purchase Agreements, or the 2017 Purchase Agreements, with certain accredited investors
providing for the issuance of an aggregate of 531,136 ADSs in a registered direct offering at a purchase price of $8.10 per ADS
for aggregate gross proceeds of approximately $4.3 million. The offering closed on September 11, 2017.
In
addition, under the 2017 Purchase Agreements, the investors received unregistered warrants to purchase an aggregate of 265,568
ADSs. The warrants were exercisable immediately for a period of twelve months from the date of issuance at an exercise price of
$12.07 per ADS, subject to adjustment as set forth therein. The warrants could exercised on a cashless basis if there is no effective
registration statement registering the ADSs underlying the warrants. The warrants have since expired.
The
2017 Purchase Agreements also contained representations, warranties, indemnification and other provisions customary for transactions
of this nature.
We
also entered into a letter agreement with Wainwright dated September 6, 2017, pursuant to which Wainwright agreed to serve as
the placement agent for the Company in connection with the offering. We paid Wainwright a cash placement fee equal to 7% of the
aggregate purchase price for the ADSs placed by the placement agent, plus a non-accountable expense allowance of $15,000 and up
to $30,000 for certain expenses. Wainwright also received compensation warrants on substantially the same terms as the investors
in the offering, except the exercise price shall be $10.125 per ADS, in an amount equal to 5% of the aggregate number of ADSs
sold in the offering that were placed by the placement agent. Those warrants have since expired.
January
2018 Financing
On
January 29, 2018, we entered into Securities Purchase Agreements, or the 2018 Purchase Agreements, with certain institutional
investors providing for the issuance of an aggregate of 484,848 ADSs in a registered direct offering at a purchase price of $8.25
per ADS for aggregate gross proceeds of approximately $4.0 million. The offering closed on January 31, 2018.
In
addition, under the 2018 Purchase Agreements, the investors received unregistered warrants to purchase an aggregate of 266,667
ADSs. The warrants may be exercised immediately for a period of twelve months from the earlier of (i) the effectiveness date of
a registration statement registering the shares underlying the warrants, and (ii) 6 months from the issuance date of the warrants,
subject to adjustment as set forth therein. The warrants may be exercised on a cashless basis if there is no effective registration
statement registering the ADSs underlying the warrants.
Under
the 2018 Purchase Agreements, we agreed to use best efforts to file, as soon as practicable (and in any case by February 28, 2018),
a registration statement with the SEC registering the resale of the ordinary shares underlying the ADSs issuable upon exercise
of the warrants and to use best efforts to cause such registration statement to be declared effective within 60 days following
the closing date and to keep such registration statement effective at all times until no purchaser owns any underlying ordinary
shares issuable upon exercise of the warrants. If such registration statement is not declared effective within 60 days of the
closing date, we agreed to pay monthly registration delay payments of 1.5% of the purchase price paid by the investors up to an
aggregate of 8% until such time that the registration statement is declared effective by the SEC.
Further,
under the 2018 Purchase Agreements, we agreed not to enter into any agreement to issue or announce the issuance or proposed issuance
of any ADSs, ordinary shares or ordinary share equivalents for a period of 45 days following the closing of the offering, subject
to certain customary exceptions. In addition, the 2018 Purchase Agreements provide that for a period of one year following the
closing of the offering, we will not effect or enter into an agreement to effect a “variable rate transaction” as
defined in the 2018 Purchase Agreements.
The
2018 Purchase Agreements also contains representations, warranties, indemnification and other provisions customary for transactions
of this nature.
We
also entered into a letter agreement, or the 2018 Placement Agent Agreement, with Wainwright dated January 15, 2018, pursuant
to which Wainwright agreed to serve as the placement agent for us in connection with the offering. Under the letter agreement,
we paid the Placement Agent a cash placement fee equal to 7% of the aggregate purchase price for the ADSs placed by the placement
agent, plus a non-accountable expense allowance of $25,000. Wainwright also received compensation warrants on substantially
the same terms as the investors in the offering, except the exercise price shall be $10.31 per ADS, in an amount equal to 5% of
the aggregate number of ADSs sold in the offering that were placed by the placement agent.
2019
Underwritten Public Offering
On
February 7, 2019, we entered into an Underwriting Agreement, or the Underwriting Agreement, with A.G.P./Alliance Global Partners
as representative of the underwriters, relating to an underwritten public offering of (a) 1,889,000 units, consisting of (i) one
ADS, and (ii) one warrant to purchase one ADS, at a public offering price of $1.50 per unit, and (b) 2,444,800 pre-funded units,
each consisting of (i) one pre-funded warrant to purchase one ADS, and (ii) one Warrant, at a public offering price of $1.49 per
pre-funded unit. The offering of the units and the pre-funded units closed on February 12, 2019.
The
pre-funded units were issued and sold to purchasers whose purchase of units in the offering would otherwise result in the purchaser,
together with their affiliates and certain related parties, beneficially owning more than 4.99% (or at the election of the purchaser,
9.99%) of our outstanding ordinary shares immediately following the consummation of the offering, if they so choose. Each pre-funded
warrant contained in a pre-funded unit is immediately exercisable for one ADS at an exercise price of $0.01 per share and will
remain exercisable until exercised in full. The warrant included in the units and the pre-funded units is immediately exercisable
at a price of $1.50 per ADS, subject to adjustment in certain circumstances, and will expire five years from the date of issuance.
The ADSs included in the units or pre-funded warrants included in the pre-funded units, as the case may be, and the warrants were
offered together, but the securities contained in the units or pre-funded units were issued separately.
We
also granted the underwriters a 45-day option to purchase up to an additional 650,070 ADSs and/or 650,070 warrants to purchase
up to an additional 650,070 ADSs. The underwriters partially exercised their over-allotment option to purchase an aggregate of
350,000 additional ADS and additional warrants to purchase 650,070 ADSs.
The
Underwriting Agreement provided that we, our directors and our executive officers will not issue, enter into any agreement to
issue or announce the issuance or proposed issuance of any ADSs or ordinary shares or ordinary share equivalents, subject to certain
exceptions, for a period of 90 days after the date of the offering. The Underwriting Agreement also contained representations,
warranties, indemnification and other provisions customary for transactions of this nature.
In connection with the offering, the following office holders participated in the offering in the following
amounts: (i) Kasbian Nuriel Chirich purchased 33,333 ADSs and 33,333 warrants to purchase 33,333 ADSs, (ii) Shai Yarkoni purchased
6,667 ADSs and 6,667 warrants to purchase 6,667 ADSs, (iii) Avraham Nahmias purchased 6,667 ADSs and 6,667 warrants to purchase
6,667 ADSs, and (iv) Eyal Leibovitz purchased 3,333 ADSs and 3,333 warrants to purchase 3,000 ADSs, and (v) Andrew Sabatier purchased
3,000 ADSs and 3,000 warrants to purchase 3,000 ADSs.
There
are currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our ordinary
shares or the proceeds from the sale of the shares, except for the obligation of Israeli residents to file reports with the Bank
of Israel regarding certain transactions. However, legislation remains in effect pursuant to which currency controls can be imposed
by administrative action at any time.
The
ownership or voting of our ordinary shares by non-residents of Israel, except with respect to citizens of countries that are in
a state of war with Israel, is not restricted in any way by our memorandum of association or amended and restated articles of
association or by the laws of the State of Israel.
The
following description is not intended to constitute a complete analysis of all tax consequences relating to the ownership or disposition
of our ordinary shares or ADSs or warrants (all referred to below as the Shares). You should consult your own tax advisor concerning
the tax consequences of your particular situation, as well as any tax consequences that may arise under the laws of any state,
local, foreign, including Israeli, or other taxing jurisdiction
.
Israeli
Tax Considerations and Government Programs
The
following is a summary of the material Israeli income tax laws applicable to us. This section also contains a discussion of material
Israeli income tax consequences concerning the ownership and disposition of our Shares. This summary does not discuss all the
aspects of Israeli income 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 residents
of Israel or traders in securities who are subject to special tax regimes not covered in this discussion. To the extent that the
discussion is based on new tax legislation that has not yet been subject to judicial or administrative interpretation, we cannot
assure you that the appropriate tax authorities or the courts will accept the views expressed in this discussion. This summary
is based on laws and regulations in effect as of the date of this annual report and does not take into account possible future
amendments which may be under consideration.
General
corporate tax structure in Israel
Israeli
companies are generally subject to corporate tax on their taxable income. As of 2018-2019, the corporate tax rate is 23% (in 2017,
the corporate tax rate was 24%, in 2016, the corporate tax rate was 25% and in 2015, the corporate tax rate was 26.5%).
Capital
gains derived by an Israeli resident company are subject to tax at the same rate as the corporate tax rate. Under Israeli tax
legislation, a corporation will be considered as an “Israeli Resident” if it meets one of the following: (a) it was
incorporated in Israel; or (b) the control and management of its business are exercised in Israel.
Law
for the Encouragement of Industry (Taxes), 5729-1969
The
Law for the Encouragement of Industry (Taxes), 5729-1969, generally referred to as the Industry Encouragement Law, provides several
tax benefits for “Industrial Companies.” We believe that Cellect Biotherapeutics is currently qualified as an Industrial
Company within the meaning of the Industry Encouragement Law.
The
Industry Encouragement Law defines an “Industrial Company” as a company resident in Israel, of which 90% or more of
its income in any tax year, other than income from defense loans, is derived from an “Industrial Enterprise” owned
by it. An “Industrial Enterprise” is defined as an enterprise whose principal activity in a given tax year is industrial
production.
The
following corporate tax benefits, among others, are available to Industrial Companies:
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Amortization
of the cost of purchased a patent, rights to use a patent, and know-how, which are used for the development or advancement
of the company, over an eight-year period, commencing on the year in which such rights were first exercised;
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Under
limited conditions, an election to file consolidated tax returns with related Israeli
Companies; And expenses related to a public offering are deductible in equal amounts
over three years.
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Eligibility
for benefits under the Industry Encouragement Law is not contingent upon the approval of any governmental authority.
There
can be no assurance that Cellect Biotherapeutics will continue to qualify as an Industrial Company or that the benefits described
above will be available in the future.
Law
for the Encouragement of Capital Investments, 5719-1959
The
Law for the Encouragement of Capital Investments, 5719-1959, generally referred to as the Investment Law, provides certain incentives
for capital investments in production facilities (or other eligible assets) by “Industrial Enterprises” (as defined
under the Investment Law).
The
Investment Law was significantly amended effective amended as of January 1, 2011, or the 2011 Amendment.
The
2011 Amendment introduced benefits for income generated by a “Preferred Company” through its “Preferred Enterprise”
(as such terms are defined in the Investment Law) as of January 1, 2011. Pursuant to the 2011 Amendment, a Preferred Company is
entitled to a reduced corporate tax rate of 16% with respect to its income derived by its Preferred Enterprise unless the Preferred
Enterprise is located in a specified development zone (Cellect Biotherapeutics is not), in which case the rate will be 9%. Under
the 2011 Amendment, the corporate tax rate is 16% and 9% in 2014 and thereafter.
Tax
benefits are available under the 2011 Amendment to Industrial Enterprise, which are generally required to derive 25% or more of
their business income from export in a market that have 14 million residents; or its revenues in a tax year from sales in one
market does not exceed 75% percent of its entire sales in that tax year; or an industrial enterprise whose main activity is in
the field of biotechnology or nanotechnology, and has been approved by the Israeli Innovation Authority and meet additional criteria
stipulate in the amendment.
Dividends
paid out of income attributed to a Preferred Enterprise are generally subject to withholding tax at the rate of 20% or such lower
rate as may be provided in an applicable tax treaty. However, if such dividends are paid to an Israeli company, no tax is required
to be withheld (however, if afterward distributed to individuals or a non-Israeli company a withholding of 20%, or such lower
rate as may be provided in an applicable tax treaty, will apply).
In
December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget
Years), 2016 which includes Amendment 73 to the Law (“Amendment 73”) was published. According to Amendment 73, a preferred
enterprise located in development area A will be subject to a tax rate of 7.5% instead of 9% effective from January 1, 2017 and
thereafter (the tax rate applicable to preferred enterprises located in other areas remains at 16%).
The
new tax tracks under the Amendment are as follows: Technological preferred enterprise - an enterprise for which total consolidated
revenues of its parent company and all subsidiaries are less than NIS 10 billion. A technological preferred enterprise, as defined
in the Law, which is located in the center of Israel will be subject to tax at a rate of 12% on profits deriving from intellectual
property (in development area A - a tax rate of 7.5%). Special technological preferred enterprise - an enterprise for which total
consolidated revenues of its parent company and all subsidiaries exceed NIS 10 billion. Such enterprise will be subject to tax
at a rate of 6% on profits deriving from intellectual property, regardless of the enterprise’s geographical location.
The
Amendment also prescribes special tax tracks for technological enterprises, which are subject to regulations that were published
by the Minister of Finance on May 1, 2017.
Currently,
Cellect Biotherapeutics is in a loss position for tax purposes and therefore does not implement the tax benefits according to
the Investment Law. However, we believe that once Cellect Biotherapeutics will have taxable income, it will be eligible for a
reduced corporate tax rate according to the Investment Law.
Taxation
of our Israeli individual shareholders on receipt of dividends
Israeli
residents who are individuals are generally subject to Israeli income tax for dividends paid on our Shares (other than bonus shares
or share dividends) at a rate of 25%, or 30% if the recipient of such dividend is a “substantial shareholder” (as
defined below) at the time of distribution or at any time during the preceding 12-month period.
As
of January 1, 2013, an additional income tax at a rate of 2% is imposed on high earners whose annual income or gain exceeds NIS
810,720. As of January 2017, the tax rate will be 3% on high earners whose annual income or gain exceeds NIS 640,000.
A
“substantial shareholder” is generally a person who alone, or together with his relative or another person who collaborates
with him on a regular basis, holds, directly or indirectly, at least 10% of any of the “means of control” of the corporation.
“Means of control” generally include the right to vote, receive profits, nominate a director or an officer, receive
assets upon liquidation, or instruct someone who holds any of the aforesaid rights regarding the manner in which he or she is
to exercise such right(s), and all regardless of the source of such right.
The
term “Israeli resident” is generally defined under Israeli tax legislation with respect to individuals as a person
whose center of life is in Israel. The Ordinance provides that in order to determine the center of life of an individual, account
will be taken of the individual’s family, economic and social connections, including: (a) place of permanent home; (b) place
of residential dwelling of the individual and the individual’s immediate family; (c) place of the individual’s regular
or permanent occupation or the place of his permanent employment; (d) place of the individual’s active and substantial economic
interests; and (e) place of the individual’s activities in organizations, associations and other institutions. The center
of life of an individual will be presumed to be in Israel if: (a) the individual was present in Israel for 183 days or more in
the tax year; or (b) the individual was present in Israel for 30 days or more in the tax year, and the total period of the individual’s
presence in Israel in that tax year and the two previous tax years is 425 days or more. The presumption in this paragraph may
be rebutted either by the individual or by the assessing officer
.
Taxation
of Israeli Resident Corporations on Receipt of Dividends
Israeli
resident corporations are generally exempt from Israeli corporate income tax with respect to dividends paid on our Shares.
Capital
Gains Taxes Applicable to Israeli Resident Shareholders
The
income tax rate applicable to real capital gain (capital gain less the effect of inflation) derived by an Israeli individual from
the sale of shares which had been purchased after January 1, 2012, whether listed on a stock exchange or not, is 25%. However,
if such shareholder is considered a “Substantial Shareholder” (as defined above) at the time of sale or at any time
during the preceding 12-month period, such gain will be taxed at the rate of 30%. As of January 1, 2013, an additional tax at
a rate of 2% is imposed on high earners whose annual income or gains exceed NIS 810,720. As of January 2017, the tax rate will
be 3% on high earners whose annual income or gain exceeds NIS 640,000.
Moreover,
capital gains derived by a shareholder who is a dealer or trader in securities, or to whom such income is otherwise taxable as
ordinary business income, are taxed in Israel at ordinary income rates (
23% as of 2018 and up to 47%
for individuals as of 2017)
.
Taxation
of Non-Israeli Shareholders on Receipt of Dividends
Non-Israeli
residents are generally subject to Israeli income tax on the receipt of dividends paid on our Shares at the rate of 25% or 30%
if such recipient is a “substantial shareholder” at the time receiving the dividend or on any date in the 12 months
preceding such date. If the Shares are held by a nominee company, the nominee company or the financial institution will withhold
at the source a tax of 25% whether the recipient is a substantial shareholder or not. Otherwise, the withholding at the source
will be 25% or 30% in accordance with the above, unless a lower tax rate is provided in a tax treaty between Israel and the shareholder’s
country of residence.
A
non-Israeli resident who receives dividends from which tax was withheld is generally exempt from the duty to file returns in Israel
in respect of such income; provided such income was not derived from a business conducted in Israel by the taxpayer, and the taxpayer
has no other taxable sources of income in Israel.
For
example, under the Convention Between the Government of the United States of America and the Government of Israel with
Respect to Taxes on Income (Tax Treaty between Israel and US), as amended, Israeli withholding tax on dividends paid to a
U.S. resident for treaty purposes may not, in general, exceed 25%. Where the recipient is a U.S. corporation owning 10% or
more of the voting shares of the paying corporation during the part of the paying corporation’s taxable year which
precedes the date of payment of the dividend and during the whole of its prior taxable year (if any) and the dividend is not
paid from the profits of a Approved Enterprise, and not more than 25% of the gross income of the paying corporation consists
of interest or dividends (other than interest derived from the conduct of banking, insurance, or financing business or
interest received from subsidiary corporations, 50% or more of the outstanding shares of the voting stock of which is owned
by the paying corporation at the time such dividends or interest is received) the Israeli tax withheld may not exceed 12.5%,
subject to certain conditions. Subject to the mentioned conditions above, if the recipient is a US corporation,
according to the Tax Treaty between Israel and US the Israeli tax withheld may not exceed 15% in the case of dividends paid
out of the profits of an “Approved Enterprise”, subject to certain conditions.
Capital
gains income taxes applicable to non-Israeli shareholders.
Non-Israeli
resident shareholders are generally exempt from Israeli capital gains tax on any gains derived from the sale, exchange or disposition
of our Shares, provided that such gains were not derived from a permanent establishment or business activity of such shareholders
in Israel. However, non-Israeli corporations will not be entitled to the foregoing exemptions if Israeli residents (1) jointly
have a controlling interest of more than 25% in such non-Israeli corporation or (2) are the beneficiaries of or are entitled to
25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
Regardless
of whether shareholders may be liable for Israeli income tax on the sale of our Shares, the payment of the consideration may be
subject to withholding of Israeli tax at the source. Accordingly, 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.
Estate
and gift tax
Israeli
law presently does not impose estate or gift taxes.
EACH
PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE PARTICULAR ISRAELI TAX CONSEQUENCES OF PURCHASING, HOLDING,
AND DISPOSING OF OUR SHARES, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.
U.S.
Federal Income Tax Considerations
THE
FOLLOWING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION AND IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSIDERED TO BE, LEGAL
OR TAX ADVICE. EACH U.S. HOLDER SHOULD CONSULT WITH HIS OR HER OWN TAX ADVISOR AS TO THE PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES
OF THE PURCHASE, OWNERSHIP AND SALE OF ORDINARY SHARES, AMERICAN DEPOSITORY SHARES AND WARRANTS, INCLUDING THE EFFECTS OF APPLICABLE
STATE, LOCAL, FOREIGN OR OTHER TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS.
Subject
to the limitations described in the next paragraph, the following discussion summarizes the material U.S. federal income tax consequences
to a “U.S. Holder” arising from the purchase, ownership and disposition of the ordinary shares, ADSs and warrants.
For this purpose, a “U.S. Holder” is a beneficial owner of ordinary shares or ADSs or warrants that is: (1) an individual
citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States
or meets the substantial presence residency test under U.S. federal income tax laws; (2) a corporation (or entity treated as a
corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any state therein,
or the District of Columbia; (3) an estate, the income of which is includable in gross income for U.S. federal income tax purposes
regardless of source; (4) a trust if a court within the United States is able to exercise primary supervision over the administration
of the trust and one or more U.S. persons have authority to control all substantial decisions of the trust; and (5) a trust that
has a valid election in effect to be treated as a U.S. person to the extent provided in U.S. Treasury regulations.
This
summary is for general information purposes only and does not purport to be a comprehensive description of all of the U.S. federal
income tax considerations that may be relevant to a decision to purchase our ordinary shares or ADSs or warrants. This summary
generally considers only U.S. Holders that will own our ordinary shares or ADSs or warrants as capital assets (generally, property
held for investment). Except to the limited extent discussed below, this summary does not consider the U.S. federal tax consequences
to a person that is not a U.S. Holder, nor does it describe the rules applicable to determine a taxpayer’s status as a U.S.
Holder. This summary is based on the provisions of the Code, final, temporary and proposed U.S. Treasury regulations promulgated
thereunder, administrative and judicial interpretations thereof, and the U.S./Israel Income Tax Treaty, all as in effect as of
the date hereof and all of which are subject to change, possibly on a retroactive basis, and all of which are open to differing
interpretations. We will not seek a ruling from the Internal Revenue Service, or IRS, with regard to the U.S. federal income tax
treatment of an investment in our ordinary shares or ADSs or warrants by U.S. Holders and, therefore, can provide no assurances
that the IRS will agree with the conclusions set forth below.
This
discussion does not address all of the tax considerations that may be relevant to a particular U.S. Holder based on such holder’s
particular circumstances, or to U.S. Holders that are subject to special treatment under U.S. federal income tax law, including:
(1) banks, life insurance companies, regulated investment companies, or other financial institutions or “financial services
entities”; (2) brokers or dealers in securities or foreign currency; (3) persons who acquired our ordinary shares or ADSs
or warrants in connection with employment or other performance of services; (4) U.S. Holders that are subject to the U.S. alternative
minimum tax; (5) U.S. Holders that hold our ordinary shares or ADSs or warrants as a hedge or as part of a hedging, straddle,
conversion or constructive sale transaction or other risk-reduction transaction for U.S. federal income tax purposes; (6) tax-exempt
entities; (7) real estate investment trusts; (8) U.S. Holders that expatriate out of the United States or former long-term residents
of the United States; or (9) U.S. Holders having a functional currency other than the U.S. dollar. This discussion does not address
the U.S. federal income tax treatment of a U.S. Holder that owns, directly, indirectly or constructively, at any time, ordinary
shares or ADSs or warrants representing 10% or more of our voting power or value. This discussion also does not address any U.S.
state or local or non-U.S. tax considerations, any U.S. federal estate, gift, generation-skipping, transfer, or alternative minimum
tax considerations, or any U.S. federal tax consequences other than U.S. federal income tax consequences.
If
an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds our ordinary shares or ADSs or warrants,
the tax treatment of such entity or arrangement treated as a partnership and each person treated as a partner thereof generally
will depend upon the status and activities of the entity and such person. 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 our ordinary shares or ADSs or warrants.
Each
prospective investor is advised to consult his or her own tax adviser for the specific tax consequences to that investor of purchasing,
holding or disposing of our ordinary shares or ADSs or warrants, including the effects of applicable state, local, foreign or
other tax laws and possible changes in the tax laws.
Taxation
of Dividends Paid on Ordinary Shares or ADSs
We
do not intend to pay dividends in the foreseeable future. In the event that we do pay dividends, and subject to the discussion
under the heading “Passive Foreign Investment Companies” below, a U.S. Holder will be required to include in gross
income as ordinary income the amount of any distribution paid on ordinary shares or ADSs (including the amount of any Israeli
tax withheld on the date of the distribution), to the extent that such distribution does not exceed our current or accumulated
earnings and profits, as determined for U.S. federal income tax purposes. The amount of a distribution which exceeds our current
and accumulated earnings and profits will be treated first as a non-taxable return of capital, reducing the U.S. Holder’s
tax basis for the ordinary shares or ADSs to the extent thereof, and then as capital gain. Corporate holders generally will not
be allowed a deduction for dividends received.
In
general, preferential tax rates for “qualified dividend income” and long-term capital gains are applicable for U.S.
Holders that are individuals, estates or trusts. For this purpose, “qualified dividend income” means, inter alia,
dividends received from a “qualified foreign corporation.” A “qualified foreign corporation” is a corporation
that is entitled to the benefits of a comprehensive tax treaty with the United States, which includes an exchange of information
program. The IRS has stated that the Israel/U.S. Tax Treaty satisfies this requirement and we believe we are eligible for the
benefits of that treaty.
In
addition, our dividends will be qualified dividend income if our ordinary shares or ADSs are readily tradable on the Nasdaq Capital
Market or another established securities market in the United States. Dividends will not qualify for the preferential rate if
we are treated, in the year the dividend is paid or in the prior year, as a PFIC, as described below under “Passive Foreign
Investment Companies”. A U.S. Holder will not be entitled to the preferential rate: (1) if the U.S. Holder has not held
our ordinary shares or ADSs for at least 61 days of the 121 day period beginning on the date which is 60 days before the ex-dividend
date, or (2) to the extent the U.S. Holder is under an obligation to make related payments on substantially similar property.
Any days during which the U.S. Holder has diminished its risk of loss on our ordinary shares or ADSs are not counted towards meeting
the 61-day holding period. Finally, U.S. Holders who elect to treat the dividend income as “investment income” pursuant
to Code section 163(d)(4) will not be eligible for the preferential rate of taxation.
The
amount of a distribution with respect to our ordinary shares or ADSs will be measured by the amount of the fair market value of
any property distributed, and for U.S. federal income tax purposes, the amount of any Israeli taxes withheld therefrom. Cash distributions
paid by us in NIS will be included in the income of U.S. Holders at a U.S. dollar amount based upon the spot rate of exchange
in effect on the date the dividend is includible in the income of the U.S. Holder, and U.S. Holders will have a tax basis in such
NIS for U.S. federal income tax purposes equal to such U.S. dollar value. If the U.S. Holder subsequently converts the NIS into
U.S. dollars or otherwise disposes of it, any subsequent gain or loss in respect of such NIS arising from exchange rate fluctuations
will be U.S. source ordinary exchange gain or loss.
Distributions
paid by us will generally be foreign source income for U.S. foreign tax credit purposes and will generally be considered passive
category income for such purposes. Subject to the limitations set forth in the Code, U.S. Holders may elect to claim a foreign
tax credit against their U.S. federal income tax liability for Israeli income tax withheld from distributions received in respect
of the ordinary shares or ADSs. The rules relating to the determination of the U.S. foreign tax credit are complex, and U.S. Holders
should consult with their own tax advisors to determine whether, and to what extent, they are entitled to such credit. U.S. Holders
that do not elect to claim a foreign tax credit may instead claim a deduction for Israeli income taxes withheld, provided such
U.S. Holders itemize their deductions.
Taxation
of the Disposition of Ordinary Shares or ADSs or Warrants
Subject
to the discussion under the heading “Passive Foreign Investment Companies” below, upon the sale, exchange or other
taxable disposition of our ordinary shares or ADSs or warrants, a U.S. Holder generally will recognize capital gain or loss in
an amount equal to the difference between such U.S. Holder’s tax basis for the ordinary shares or ADSs or warrants in U.S.
dollars and the amount realized on the disposition in U.S. dollars (or its U.S. dollar equivalent determined by reference to the
spot rate of exchange on the date of disposition, if the amount realized is denominated in a foreign currency). The gain or loss
realized on the sale, exchange or other disposition of ordinary shares or ADSs or warrants will be long-term capital gain or loss
if the U.S. Holder has a holding period of more than one year at the time of the disposition. U.S. Holders 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.
Gain
realized by a U.S. Holder on a sale, exchange or other disposition of ordinary shares or ADSs or warrants will generally be treated
as U.S. source income for U.S. foreign tax credit purposes. A loss realized by a U.S. Holder on the sale, exchange or other disposition
of ordinary shares or ADSs or warrants is generally allocated to U.S. source income. The deductibility of a loss realized on the
sale, exchange or other disposition of ordinary shares or ADSs or warrants is subject to limitations.
Exercise
or Lapse of a Warrant
A
U.S. Holder generally will not recognize gain or loss upon the exercise of a warrant for cash. An ordinary share or ADS acquired
pursuant to the exercise of a warrant for cash generally will have a tax basis equal to the U.S. Holder’s tax basis in the
warrant, increased by the amount paid to exercise the warrant. Subject to the discussion under the heading “Passive Foreign
Investment Companies” below, the holding period of such share or ADS generally begins on the day after the date of exercise
of the warrant and will not include the period during which the U.S. Holder held the warrant. If a warrant is allowed to lapse
unexercised, a U.S. Holder generally will recognize a capital loss equal to such holder’s tax basis in the warrant. U.S.
Holders should consult their own tax advisors regarding the U.S. federal income tax consequences of the exercise of a warrant,
including with respect to whether the exercise is a taxable event, and their holding period and tax basis in the ordinary shares
or ADSs received.
Passive
Foreign Investment Companies
Special
U.S. federal income tax laws apply to U.S. taxpayers who owns shares of a corporation that is a PFIC. We will be treated as a
PFIC for U.S. federal income tax purposes for any taxable year in which either:
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75%
or more of our gross income (including our pro rata share of gross income for any company in which we are considered to own
25% or more of the shares by value) is passive; or
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at
least 50% of our assets, averaged quarterly over the year (including our pro rata share of the assets of any company in which
we are considered to own 25% or more of the shares by value) and generally determined based upon value are held
for the production of, or produce, passive income.
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For
this purpose, passive income generally consists of dividends, interest, rents, royalties, annuities and income from certain commodities
transactions and from notional principal contracts. Cash is treated as generating passive income.
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. We believe that we were a PFIC for our 2018
taxable year. Because the PFIC determination is highly fact intensive, there can be no assurance that we will not be a PFIC for
2019 or for any other taxable year. U.S. Holders who hold ordinary shares or ADSs or warrants during a period when we are a PFIC
will be subject to the foregoing rules, even if we cease to be a PFIC, subject to specified exceptions for U.S. Holders who made
a “qualified electing fund” or “QEF”, or “mark-to-market” election with respect to our ordinary
shares or ADSs. Upon request, we expect to provide the information necessary for U.S. Holders to make QEF elections if we are
classified as a PFIC.
If
we currently are or become a PFIC, each U.S. Holder who has not elected to treat us as a qualified electing fund by making a “QEF
election”, or who has not elected to mark the shares to market (as discussed below), 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. Holder on the ordinary shares or ADSs or warrants in a taxable year in excess of 125% of the average annual distributions
received by the non-electing U.S. Holder in the three preceding taxable years, or, if shorter, the non-electing U.S. Holder’s
holding period for the ordinary shares or ADSs or warrants), and (ii) any gain realized on the sale or other disposition of such
ordinary shares or ADSs or warrants. Under these rules:
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the
excess distribution or gain would be allocated ratably over the non-electing U.S. Holder’s holding period for such ordinary
shares or ADSs or warrants;
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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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In
addition, when shares of a PFIC are acquired by reason of death from a decedent that was a U.S. Holder, the tax basis of such
shares would not receive a step-up to fair market value as of the date of the decedent’s death, but instead would be equal
to the decedent’s basis if lower, unless all gain were recognized by the decedent. Indirect investments in a PFIC may also
be subject to these special U.S. federal income tax rules.
The
PFIC rules described above would not apply to a U.S. Holder of our ordinary shares or ADSs who makes a QEF election for all taxable
years that such U.S. Holder has held the ordinary shares or ADSs while we were a PFIC, provided that we comply with specified
reporting requirements. Instead, each U.S. Holder who has made such a QEF election is required for each taxable year that we are
a PFIC to include in income such U.S. Holder’s pro rata share of our ordinary earnings as ordinary income and such U.S.
Holder’s pro rata share of our net capital gains as long-term capital gain, regardless of whether we make any distributions
of such earnings or gain. In general, a QEF election is effective only if we make available certain required information. The
QEF election is made on a shareholder-by-shareholder basis and generally may be revoked only with the consent of the IRS. A U.S.
Holder may not make a QEF election with respect to our warrants.
In
addition, the PFIC rules described above would not apply if we were a PFIC and a U.S. Holder made a mark-to-market election with
respect to our ordinary shares or ADSs. A U.S. Holder of our ordinary shares or ADSs which are regularly traded on a qualifying
exchange, including Nasdaq, can elect to mark the ordinary shares or ADSs to market annually, recognizing as ordinary income or
loss each year an amount equal to the difference as of the close of the taxable year between the fair market value of the ordinary
shares or ADSs and the U.S. Holder’s adjusted tax basis in the ordinary shares or ADSs or warrants. Losses are allowed only
to the extent of net mark-to-market gain previously included income by the U.S. Holder under the election for prior taxable years.
Thus, a U.S. Holder may recognize taxable income without receiving any cash to pay its tax liability with respect to such income.
A U.S. Holder’s tax basis in our ordinary shares or ADSs would be adjusted to reflect any such income or loss amount. Gain
realized on the sale, exchange or other disposition of our ordinary shares or ADSs would be treated as ordinary income, and any
loss realized on the sale, exchange or other disposition of our ordinary shares or ADSs 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. Holder, 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. A U.S. Holder may not make a mark-to-market election
with respect to our warrants.
U.S.
Holders who do not make a timely QEF election or a mark-to-market election, and who hold our ordinary shares or ADSs or warrants
during a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC. U.S. Holders are strongly
urged to consult their tax advisors about the PFIC rules, including tax return filing requirements and the eligibility, manner,
and consequences to them of making a QEF or mark-to-market election with respect to our ordinary shares or ADSs in the event that
we are a PFIC.
Tax
on Investment Income
U.S.
Holders who are individuals, estates or trusts will generally be required to pay a 3.8% Medicare tax on their net investment income
(including dividends on and gains from the sale or other disposition of our ordinary shares and ADSs or warrants), or in the case
of estates and trusts on their net investment income that is not distributed. In each case, the 3.8% Medicare tax applies only
to the extent the U.S. Holder’s total adjusted income exceeds applicable thresholds.
Tax
Consequences for Non-U.S. Holders of Ordinary Shares or ADSs or Warrants
Except
as provided below, an individual, corporation, estate or trust that is not a U.S. Holder, referred to below as a non-U.S. Holder,
generally will not be subject to U.S. federal income or withholding tax on the payment of dividends on, and the proceeds from
the disposition of, our ordinary shares or ADSs or warrants.
A
non-U.S. Holder may be subject to U.S. federal income tax on a dividend paid on our ordinary shares or ADSs or warrants or gain
from the disposition of our ordinary shares or ADSs or warrants if: (1) such item is effectively connected with the conduct by
the non-U.S. Holder of a trade or business in the United States, or, if required by an applicable income tax treaty is attributable
to a permanent establishment or fixed place of business in the United States; or (2) in the case of a disposition of our ordinary
shares or ADSs or warrants, the individual non-U.S. Holder is present in the United States for 183 days or more in the taxable
year of the disposition and other specified conditions are met.
In
general, non-U.S. Holders will not be subject to backup withholding with respect to the payment of dividends on our ordinary shares
or ADSs or warrants if payment is made through a paying agent or office of a foreign broker outside the United States. However,
if payment is made in the United States or by a U.S. related person, non-U.S. Holders may be subject to backup withholding, unless
the non-U.S. Holder provides an applicable IRS Form W-8 (or a substantially similar form) certifying its foreign status, or otherwise
establishes an exemption.
The
amount of any backup withholding from a payment to a non-U.S. Holder will be allowed as a credit against such holder’s U.S.
federal income tax liability and may entitle such holder to a refund, provided that the required information is timely furnished
to the IRS.
Information
Reporting and Withholding
A
U.S. Holder may be subject to backup withholding at a rate of 24% with respect to dividends and proceeds from a disposition of
ordinary shares or ADSs or warrants. In general, backup withholding will apply only if a U.S. Holder fails to comply with specified
identification procedures. Backup withholding will not apply with respect to payments made to designated exempt recipients, such
as corporations and tax-exempt organizations. Backup withholding is not an additional tax and may be claimed as a credit against
the U.S. federal income tax liability of a U.S. Holder, provided that the required information is timely furnished to the IRS.
A
U.S. Holder with interests in “specified foreign financial assets” (including, among other assets, our ordinary shares
or ADSs or warrants, unless such ordinary shares or ADSs or warrants are held on such U.S. Holder’s behalf through a financial
institution) may be required to file an information report with the IRS if the aggregate value of all such assets exceeds $50,000
on the last day of the taxable year or $75,000 at any time during the taxable year (or such higher dollar amount as may be prescribed
by applicable IRS guidance). U.S. Holders should consult their tax advisors as to the possible obligation to file such information
reports in light of their particular circumstances.
F.
|
Dividends
and Paying Agents
|
Not
applicable.
Not
applicable.
We
are subject to certain information reporting requirements of the Exchange Act, applicable to foreign private issuers and under
those requirements will file reports with the SEC. The SEC maintains an internet site at http://www.sec.gov that contains
reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. We maintain
a corporate website www.cellect.co. Information contained on, or that can be accessed through, our website and the other websites
referenced above do not constitute a part of this annual report on Form 20-F. We have included these website addresses in this
annual report on Form 20-F solely as inactive textual references.
As
a foreign private issuer, we are exempt from the rules under the Exchange Act related to the furnishing and content of proxy statements,
and our officers, directors and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions
contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file annual, quarterly
and current reports and financial statements with the SEC as frequently or as promptly as U.S. domestic companies whose securities
are registered under the Exchange Act. However, we will file with the SEC, within 120 days after the end of each fiscal year,
or such applicable time as required by the SEC, an annual report on Form 20-F containing financial statements audited by an independent
registered public accounting firm, and may submit to the SEC, on a Form 6-K, unaudited quarterly financial information.
I.
|
Subsidiary
Information.
|
Not
applicable.
ITEM 11.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
In
the ordinary course of our operations, we are exposed to certain market risks, primarily changes in foreign currency exchange
rates and interest rates.
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. Our market risk exposure is primarily a result of interest
rates and foreign currency exchange rates.
Interest
Rate Risk
Following
the date of this annual report, 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. Following the date of this annual report, 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. Our investments
are exposed to market risk due to fluctuation in interest rates, which may affect our interest income and the fair market value
of our investments, if any. We manage this exposure by performing ongoing evaluations of our investments. Due to the short-term
maturities, if any, of our investments to date, their carrying value has always approximated their fair value. If we decide to
invest in investments other than cash and cash equivalents, it will be our policy to hold such investments to maturity in order
to limit our exposure to interest rate fluctuations.
Foreign
Currency Exchange Risk
Our
foreign currency exposures give rise to market risk associated with exchange rate movements of the NIS, our functional and reporting
currency, mainly against the U.S. dollar. Although the NIS is currently our functional currency, a small portion of our expenses
are denominated in U.S. dollars. Our U.S. dollar expenses consist principally of payments made to sub-contractors and consultants
for clinical trials and other research and development activities as well as payments made to purchase new equipment. We anticipate
that our expenses in U.S. dollar will increase in the future. If the NIS fluctuates significantly against the U.S. dollar, it
may have a negative impact on our results of operations. To date, fluctuations in the exchange rates have not materially affected
our results of operations or financial condition.
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.
ITEM 12.
|
DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
|
Not
applicable.
Not
applicable.
Not
applicable.
D.
|
American
Depositary Shares
|
Fees
and Expenses
Persons
depositing or withdrawing ordinary shares or ADS holders must pay:
|
|
For:
|
$5.00
(or less) per 100 ADSs (or portion of 100 ADSs)
|
|
Issuance
of ADSs, including issuances resulting from a distribution of ordinary shares or rights or other property
|
|
|
Cancellation
of ADSs for the purpose of withdrawal, including if the deposit agreement terminates
|
$.05
(or less) per ADS
|
|
Any
cash distribution to ADS holders
|
A
fee equivalent to the fee that would be payable if securities distributed to you had been ordinary shares and the ordinary
shares had been deposited for issuance of ADSs
|
|
Distribution
of securities distributed to holders of deposited securities (including rights) that are distributed by the depositary to
ADS holders
|
$.05
(or less) per ADS per calendar year
|
|
Depositary
services
|
Registration
or transfer fees
|
|
Transfer
and registration of ordinary shares on our share register to or from the name of the depositary or its agent when you deposit
or withdraw ordinary shares
|
Expenses
of the depositary
|
|
Cable,
telex and facsimile transmissions (when expressly provided in the deposit agreement); converting foreign currency to U.S.
dollars
|
Taxes
and other governmental charges the depositary or the custodian has to pay on any ADSs or ordinary shares underlying ADSs,
such as stock transfer taxes, stamp duty or withholding taxes
|
|
As
necessary
|
Any
charges incurred by the depositary or its agents for servicing the deposited securities
|
|
As
necessary
|
The
depositary collects its fees for delivery and surrender of ADSs directly from investors depositing ordinary shares or surrendering
ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions
to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the
fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing
investors or by charging the book-entry system accounts of participants acting for them. The depositary may collect any of its
fees by deduction from any cash distribution payable (or by selling a portion of securities or other property distributable) to
ADS holders that are obligated to pay those fees. The depositary may generally refuse to provide fee-attracting services until
its fees for those services are paid.
From
time to time, the depositary may make payments to us to reimburse us for costs and expenses generally arising out of establishment
and maintenance of the ADS program, waive fees and expenses for services provided to us by the depositary or share revenue from
the fees collected from ADS holders. In performing its duties under the deposit agreement, the depositary may use brokers, dealers,
foreign currency dealers or other service providers that are owned by or affiliated with the depositary and that may earn or share
fees, spreads or commissions.
The
depositary may convert currency itself or through any of its affiliates and, in those cases, acts as principal for its own account
and not as agent, advisor, broker or fiduciary on behalf of any other person and earns revenue, including, without limitation,
transaction spreads, that it will retain for its own account. The revenue is based on, among other things, the difference between
the exchange rate assigned to the currency conversion made under the deposit agreement and the rate that the depositary or its
affiliate receives when buying or selling foreign currency for its own account. The depositary makes no representation that the
exchange rate used or obtained in any currency conversion under the deposit agreement will be the most favorable rate that could
be obtained at the time or that the method by which that rate will be determined will be the most favorable to ADS holders, subject
to the depositary’s obligations under the deposit agreement. The methodology used to determine exchange rates used in currency
conversions is available upon request.