PART
I
ITEM 1.
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IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
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Not
applicable.
ITEM 2.
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OFFER
STATISTICS AND EXPECTED TIMETABLE
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Not
applicable.
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A.
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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. We derived the selected data under the caption “Consolidated Statements of Profit
and Loss” for the years ended December 31, 2018 and 2017 and the selected data under the caption “Consolidated
Statements of Financial Position” as of December 31, 2018 and 2017 from the audited consolidated financial statements
included elsewhere in this annual report, which have been prepared in accordance with IFRS. The selected data under the caption
“Consolidated Statements of Profit and Loss” for the years ended December 31, 2016 and 2015 and the selected
data under the caption “Consolidated Statements of Financial Position” as of December 31, 2016 and 2015 have
been derived from audited financial statements not included in this annual report. 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. All figures presented are in U.S. dollars. On December 31, 2017, we changed the financial statements presentation
currency from NIS and convenient translation to U.S. dollars to presentation currency of U.S. dollars. As a result, the December
31, 2015, 2016 and 2017 Consolidated Statements of Financial Position and the 2015, 2016 and 2017 Consolidated Statements of Profit
and Loss were represented in U.S. dollars. We omitted the presentation of selected financial data for our 2014 fiscal year because
such financial data cannot be presented in U.S. dollars without unreasonable effort or expense. Effective October 1, 2018, we
changed our functional currency from NIS to U.S. dollars. The change in functional currency is accounted from that date.
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December 31,
|
|
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2018(*)
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|
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2017(*)
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|
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2016(*)
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2015(*)
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Consolidated Statements of Profit and Loss
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(in thousands of U.S. dollars)
|
|
Research and development expenses, net
|
|
|
2,710
|
|
|
|
1,943
|
|
|
|
740
|
|
|
|
240
|
|
General and administrative expenses
|
|
|
6.579
|
|
|
|
3,810
|
|
|
|
1,268
|
|
|
|
1,363
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Other expense (income), net
|
|
|
425
|
|
|
|
1
|
|
|
|
(8
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)
|
|
|
961
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|
Operating loss
|
|
|
9,714
|
|
|
|
5,754
|
|
|
|
2,000
|
|
|
|
2,564
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Finance expenses (income), net
|
|
|
(705
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)
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|
|
490
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|
|
|
7
|
|
|
|
4
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Tax benefit
|
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(60
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)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
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Net loss
|
|
|
8,949
|
|
|
|
6,244
|
|
|
|
2,007
|
|
|
|
2,617
|
|
|
|
|
|
|
|
|
|
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|
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|
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Basic and diluted net loss per Ordinary Share attributable
to equity holders of the Company
|
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0.06
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|
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0.05
|
|
|
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0.05
|
|
|
|
0.11
|
|
Number of Ordinary Shares used in computing loss per
Ordinary Share- thousands
|
|
|
140,252,374
|
|
|
|
139,885,524
|
|
|
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37,457,538
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|
|
|
23,853,196
|
|
(*) Presented
according to the change in our functional currency from NIS to U.S. dollars, effective October 1, 2018. The change in functional
currency is accounted for that date. Accordingly, comparative profit or loss figures have been translated into U.S. dollars using
average exchange rates for the reporting periods.
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December 31,
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|
|
|
2018(*)
|
|
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2017(*)
|
|
|
2016(*)
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|
|
2015(*)
|
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Consolidated Statements of Financial Position
|
|
(in thousands of U.S. dollars)
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|
Cash and cash equivalents
|
|
|
1,485
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|
|
|
9,195
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|
|
|
676
|
|
|
|
1,573
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|
Total assets
|
|
|
4,560
|
|
|
|
9,566
|
|
|
|
1,245
|
|
|
|
1,666
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Total liabilities
|
|
|
4,483
|
|
|
|
672
|
|
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|
1,177
|
|
|
|
511
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Accumulated loss
|
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46,912
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|
|
|
38,389
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|
|
|
32,145
|
|
|
|
30,152
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Total equity
|
|
|
77
|
|
|
|
8,389
|
|
|
|
573
|
|
|
|
1,155
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(*) Presented
according to the change in our functional currency from NIS to U.S. dollars, effective October 1, 2018. The change in functional
currency is accounted from that date. Accordingly, comparative profit or loss figures and financial position have been translated
into U.S. dollars using average exchange rates for the reporting periods.
|
B.
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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 Condition and Capital Requirements
We
are a specialty clinical
-
stage pharmaceutical company and have a limited operating history on which to assess the
prospects for our business, have incurred significant losses since the date of our inception, and anticipate that we will continue
to incur significant losses until we are able to successfully commercialize our product candidates.
Since
our inception in 2004, we have been operating as a specialty pharmaceutical company and have a limited operating history on which
to assess the prospects for our business, have incurred significant losses, and anticipate that we will continue to incur significant
losses for the foreseeable future. We have only focused our business on developing a portfolio of approved drugs based on
cannabinoid molecules since August 2015.
We
have historically incurred substantial net losses; including net losses of approximately $8.9 million for the year ended December
31, 2018 and net losses of approximately $6.2 million in 2017. As of December 31, 2018 and December 31, 2017, we had an accumulated
deficit of approximately $46.9 million and approximately $38.4 million, respectively.
We
have devoted substantially all of our financial resources to develop our product candidates. We have financed our operations primarily
through the issuance of equity securities. The amount of our future net losses will depend, in part, on completing the development
of our product candidates, the demand for our product candidates, the rate of our future expenditures and our ability to obtain
funding through the issuance of our securities, strategic collaborations or grants. Pharmaceutical product development is a highly
speculative undertaking and involves a substantial degree of risk and we have only focused our business on the development of
cannabinoid molecules since August 2015. We are in the late stages of preclinical and at the early stages of clinical development
for our product candidates, we have not yet commenced pivotal clinical studies for any product candidate, and it may be several
years, if ever, before we complete pivotal clinical studies and have a product candidate approved for commercialization. Even
if we obtain regulatory approval to market a product candidate, our future revenue will depend upon the size of the markets for
which our product candidates may receive approval and our ability to achieve sufficient market acceptance, pricing, reimbursement
from third-party payors and adequate market share for our product candidates in those markets.
We
expect to continue to incur significant losses until we are able to commercialize our product candidates, which we may not be
successful in achieving. We anticipate that our expenses will increase substantially if and as we:
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continue
the research and development of our product candidates;
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expand
the scope of our current clinical studies for our product candidates;
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seek
regulatory and marketing approvals for our product candidates that successfully complete clinical studies;
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establish
a sales, marketing, and distribution infrastructure to commercialize our product candidates;
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seek
to identify, assess, acquire, license, and/or develop other product candidates and subsequent generations of our current product
candidates;
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seek
to maintain, protect, and expand our intellectual property portfolio;
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seek
to attract and retain skilled personnel; and
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create
additional infrastructure to support our operations as a public company and our product candidate development and planned
future commercialization efforts.
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We
have invested a significant amount in Therapix Healthcare Resources Inc., or THR, in which we hold approximately 80% of the issued
and outstanding share capital, during 2018 and 2019, which has commenced liquidation of its assets, and which could adversely
impact our reputation or divert management’s attention in the event of any material litigation or issues that prolong the
liquidation and dissolution process.
In
addition, we have invested an aggregate of approximately $2.31 million in THR during 2018 and 2019, through convertible loans.
Due in part to significant losses incurred by THR, as well as its failure to maintain required licenses to operate its facilities,
THR has commenced liquidation of its assets. The liquidation of THR’s remaining assets, or potential claims that may arise
from the liquidation and dissolution of THR may adversely affect our reputation or divert management’s attention in the
event of any material litigation or in the event that the liquidation process is prolonged. At this time, neither we nor THR are
able to estimate reliably the timing and results of the proposed liquidation or of any consequences that may occur as a result
thereof.
We
have not generated any revenue from the sale of our current product candidates and may never be profitable.
We
have not yet commercialized any of our product candidates and have not generated any revenue since the date of our inception.
We do not know whether or when we will become profitable. Our ability to generate revenue and achieve profitability depends
on our ability to successfully complete the development of, and to commercialize, our product candidates and on the demand for
our product candidates. Our ability to generate revenue and achieve profitability depends on our ability, alone or with strategic
collaboration partners, to successfully complete the development of, and obtain the regulatory and marketing approvals necessary
to commercialize, one or more of our product candidates. Our ability to generate future revenue from product candidate sales depends
heavily on our success in many areas, including but not limited to:
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completing
research and preclinical and clinical development of our product candidates;
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obtaining
regulatory and marketing approvals for product candidates for which we complete clinical studies;
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establishing
and maintaining supply and manufacturing relationships with third parties that can provide adequate (in amount and quality)
products to support market demand for our product candidates, if approved;
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launching
and commercializing product candidates if and when we obtain regulatory and marketing approval, either directly or with a
collaborator or distributor;
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obtaining
market acceptance of our product candidates as viable treatment options;
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addressing
any competing pharmaceutical or biotechnological and market developments;
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identifying,
assessing, acquiring and/or developing new product candidates;
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negotiating
favorable terms in any collaboration, licensing or other arrangements into which we may enter;
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maintaining,
protecting and expanding our portfolio of intellectual property rights, including patents, trade secrets and know-how; and
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attracting,
hiring and retaining qualified personnel.
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Even
if one or more of the product candidates that we develop is approved for commercial sale, we anticipate incurring significant
costs associated with commercializing any approved product candidate. 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 perform
clinical, nonclinical or other types of studies in addition to those that we currently anticipate. In cases where we are successful
in obtaining regulatory approvals to market one or more of our product candidates, our revenue will be dependent, in part, upon
the size of the markets in the territories for which we gain regulatory approval, the accepted price for the product candidate,
the ability to get reimbursement at an acceptable price and whether we own the commercial rights for that territory. If the number
of our addressable patients is not as significant as we estimate, the indication approved by regulatory authorities is narrower
than we expect, or the reasonably expected population for treatment is narrowed by competition, physician choice or treatment
guidelines, we may not generate significant revenue from sales of such product candidates, even if approved. Additionally, if
we are not able to generate revenue from the sale of any approved product candidates, we may be forced to cease operations.
We
expect that we will need to raise substantial additional funding before we can expect to become profitable from sales of our product
candidates. This additional financing may not be available on acceptable terms, or at all. Failure to obtain this necessary capital
when needed may force us to delay, limit or terminate our product candidate development efforts or other operations.
As
of December 31, 2018, our cash and cash equivalents were approximately $1.48 million, a negative working capital of approximately
$1.97 million and an accumulated deficit of approximately $46.85 million. Based upon our currently expected level of operating
expenditures, we expect that our existing cash and cash equivalents will be sufficient to fund operations at least through October
31, 2019. We expect that we will require substantial additional capital to commercialize our product candidates. In addition,
our operating plans may change as a result of many factors that may currently be unknown to us, and we may need to seek additional
funds sooner than planned. Our future funding requirements will depend on many factors, including but not limited to:
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the
scope, rate of progress, results and cost of product development, clinical studies, preclinical testing, and other related
activities;
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the
cost, timing and outcomes of regulatory approvals;
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the
cost and timing of establishing sales, marketing, and distribution capabilities; and
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the
terms and timing of any collaborative, licensing, and other arrangements that we may establish.
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Any
additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability
to develop and commercialize our product candidates. In addition, we cannot guarantee that future financing will be available
in sufficient amounts or on terms acceptable to us, if at all. Moreover, the terms of any financing may adversely affect the holdings
or the rights of holders of our securities and the issuance of additional securities, whether equity or debt, by us, or the possibility
of such issuance, may cause the market price of our Ordinary Shares or ADSs to decline. The incurrence of indebtedness could result
in increased fixed payment obligations, and we may be required to agree to certain restrictive covenants, such as limitations
on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and
other operating restrictions that could adversely impact our ability to conduct our business. We could also be required to seek
funds through arrangements with collaborative partners or otherwise at an earlier stage than otherwise would be desirable, and
we may be required to relinquish rights to some of our technologies or product candidates or otherwise agree to terms unfavorable
to us, any of which may have a material adverse effect on our business, operating results and prospects. Even if we believe that
we have sufficient funds for our current or future operating plans, we may seek additional capital if market conditions are favorable
or if we have specific strategic considerations.
If
we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more
of our research or development programs or the commercialization of any product candidates or be unable to expand our operations
or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition
and results of operations.
Raising
additional capital would cause dilution to our existing shareholders, and may affect the rights of existing shareholders.
We
may seek additional capital through a combination of private and public equity offerings, debt financings and collaborations and
strategic and licensing arrangements. To the extent that we raise additional capital through the issuance of equity or convertible
debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely
affect your rights as a holder of the ADSs.
The
report of our independent registered public accounting firm contains an explanatory paragraph regarding substantial doubt about
our ability to continue as a going concern, which could prevent us from obtaining new financing on reasonable terms or at all.
The
report of our independent registered public accounting firm on our audited consolidated financial statements for the period ended December
31, 2018, contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Our
consolidated financial statements do not include any adjustments to the carrying amounts and classifications of assets and liabilities
that might result from the outcome of the uncertainty regarding our ability to continue as a going concern. This going concern
opinion could materially limit our ability to raise additional funds through the issuance of equity or debt securities or otherwise.
Further reports on our consolidated financial statements may include an explanatory paragraph with respect to our ability to continue
as a going concern. Until we can generate significant recurring revenues, we expect to satisfy our future cash needs through debt
or equity financing. We cannot be certain that additional funding will be available to us on acceptable terms, if at all. If funds
are not available, we may be required to delay, reduce the scope of, or eliminate research or development plans for, or commercialization
efforts with respect to our products. This may raise substantial doubts about our ability to continue as a going concern.
Risks
Related to the Discovery and Development of Our Product Candidates
We
are heavily dependent on the success of our product candidates, which are in the late stages of pre-clinical development or early
stages of clinical development. We cannot give any assurance that any of our product candidates will receive regulatory approval,
which is necessary before they can be commercialized.
To
date, we have invested substantially all of our efforts and financial resources to design and develop our product candidates,
including conducting preclinical studies and providing general and administrative support for these operations. Our future success
is dependent on our ability to successfully develop, obtain regulatory approval for, and then successfully commercialize one or
more product candidates. We currently generate no revenue from sales of any product candidate, and we may never be able to develop
or commercialize a marketable product candidate.
Each
of our product candidates is in the late stages of pre-clinical development or early stages of development and will require additional
clinical development (and in some cases additional preclinical development), management of nonclinical, clinical and manufacturing
activities, regulatory approval, obtaining adequate manufacturing supply, building of a commercial organization and significant
marketing efforts before we generate any revenue from product candidate sales. It may be years before a pivotal study is initiated,
if at all. Any clinical trials in the United States will require the approval of an Investigational New Drug, or IND, application
by the FDA, and we cannot assure that we will obtain such approval in a timely manner, or at all. We are not permitted to market
or promote any of our product candidates before we receive regulatory approval from the FDA or comparable foreign regulatory authorities,
and we may never receive such regulatory approval for any of our product candidates.
We
as a company have never submitted marketing applications to the FDA or comparable foreign regulatory authorities. We cannot be
certain that any of our product candidates will be successful in clinical studies or receive regulatory approval or what regulatory
pathway the regulatory authorities shall designate for our product candidates. Further, our product candidates may not receive
regulatory approval even if they are successful in clinical studies. If we do not receive regulatory approvals for our product
candidates, we may not be able to continue our operations.
We
generally plan to seek regulatory approval to commercialize our product candidates in the United States, the European Union and
in additional foreign countries. To obtain regulatory approvals we must comply with the numerous and varying regulatory requirements
of such countries regarding safety, efficacy, chemistry, manufacturing and controls, clinical studies, commercial sales, pricing
and distribution of our product candidates. Even if we are successful in obtaining approval in one jurisdiction, we cannot ensure
that we will obtain approval in any other jurisdictions. If we are unable to obtain approval for our product candidates in multiple
jurisdictions, our revenue and results of operations would be negatively affected.
The
regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming and inherently unpredictable.
If we are ultimately unable to obtain regulatory approval for our product candidates, our business will be substantially harmed.
The
time required to obtain approval by the FDA and comparable foreign authorities is unpredictable, typically takes many years following
the commencement of clinical studies and depends upon numerous factors. In addition, approval policies, regulations or the type
and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development
and may vary among jurisdictions, which may cause delays in the approval or the decision not to approve an application. We have
not obtained regulatory approval for any product candidate, and it is possible that none of our existing product candidates or
any product candidates we may seek to develop in the future will ever obtain regulatory approval.
Applications
for our product candidates could fail to receive regulatory approval for many reasons, including but not limited to the following:
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the
FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical studies;
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we
may be unable to demonstrate to the FDA or comparable foreign regulatory authorities that a product candidate’s safety-benefit
ratio for its proposed indication is acceptable;
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the
FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical studies or
clinical studies;
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the
data collected from clinical studies of our product candidates may not be sufficient to support the submission of a New Drug
Application, or NDA, in the United States or elsewhere;
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the
FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes, test procedures and specifications
or facilities of third-party manufacturers with which we contract for clinical and commercial supplies; and
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the
approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner
rendering our clinical data insufficient for approval.
|
This
lengthy approval process, as well as the unpredictability of the results of clinical studies, may result in our failing to obtain
regulatory approval to market any of our product candidates, which would significantly harm our business, results of operations
and prospects.
Clinical
drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies may not be
predictive of future study results.
Clinical
testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time
during the clinical study process. The results of preclinical studies and early clinical studies of our product candidates may
not be predictive of the results of later-stage clinical studies. Product candidates that have shown promising results in early-stage
clinical studies may still suffer significant setbacks in subsequent advanced clinical studies. There is a high failure rate for
drugs proceeding through clinical studies, and product candidates in later stages of clinical studies may fail to show the desired
safety and efficacy traits despite having progressed satisfactorily through preclinical studies and initial clinical studies.
A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical studies due to lack
of efficacy or adverse safety profiles, notwithstanding promising results in earlier studies. Moreover, preclinical and clinical
data are often susceptible to varying interpretations and analyses. We do not know whether any Phase I, Phase II, Phase III
or other clinical studies we may conduct will demonstrate consistent or adequate efficacy and safety sufficient to obtain regulatory
approval to market our product candidates.
We
may find it difficult to enroll patients in our clinical studies. Difficulty in enrolling patients could delay or prevent clinical
studies of our product candidates.
Identifying
and qualifying patients to participate in clinical studies of our product candidates is critical to our success. The timing of
our clinical studies depends in part on the speed at which we can recruit patients to participate in testing our product candidates,
and we may experience delays in our clinical studies if we encounter difficulties in enrollment.
Some
of the conditions for which we plan to evaluate our current product candidates are for rare diseases. For example, based on a
study conducted by the CDC in 2011-2012, we estimate that approximately 138,000 children suffer from Tourette syndrome in the
United States. Accordingly, there is a limited patient pool from which to draw for clinical studies. Further, the eligibility
criteria of our clinical studies will further limit the pool of available study participants as we will require that patients
have specific characteristics that we can measure or to assure their disease is either severe enough or not too advanced to include
them in a study.
Additionally,
the process of finding patients may prove costly. We also may not be able to identify, recruit and enroll a sufficient number
of patients to complete our clinical studies because of the perceived risks and benefits of the product candidate under study,
the availability and efficacy of competing therapies and clinical studies, the proximity and availability of clinical study sites
for prospective patients and the patient referral practices of physicians. If patients are unwilling to participate in our studies
for any reason, the timeline for recruiting patients, conducting studies and obtaining regulatory approval of potential product
candidates will be delayed.
If
we experience delays in the completion or termination of any clinical study of our product candidates, the commercial prospects
of our product candidates will be harmed, and our ability to generate product candidate revenue from any of these product candidates
could be delayed or prevented. In addition, any delays in completing our clinical studies will increase our costs, slow down our
product candidate development and approval process and jeopardize our ability to commence product candidate sales and generate
revenue. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of
the factors that cause, or lead to, a delay in the commencement or completion of clinical studies may also ultimately lead to
the denial of regulatory approval of our product candidates.
If
the FDA does not conclude that our product candidates satisfy the requirements for the Section 505(b)(2) regulatory approval
pathway, or if the requirements for our product candidates under Section 505(b)(2) are not as we expect, the approval pathway
would likely take significantly longer, cost significantly more and entail significantly greater complications and risks than
anticipated and in either case may not be successful.
We
intend to seek FDA approval through the Section 505(b)(2) regulatory pathway for our product candidates. The Drug Price Competition
and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Amendments, added Section 505(b)(2) to the Federal
Food, Drug, and Cosmetic Act of 1938, as amended, or the FDC Act, or Section 505(b)(2). Section 505(b)(2) permits the
filing of an NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant
and for which the applicant has not obtained a right of reference.
If
the FDA does not allow us to pursue the Section 505(b)(2) regulatory pathway as anticipated, we may need to conduct additional
clinical trials, provide additional data and information and meet additional standards for regulatory approval. If this were to
occur, the time and financial resources required to obtain FDA approval, and complications and risks associated with FDA approval,
would substantially increase. We may need to obtain additional funding, which could result in significant dilution to the ownership
interests of our then existing shareholders to the extent we issue equity securities or convertible debt. We cannot assure you
that we would be able to obtain such additional financing on terms acceptable to us, if at all. Moreover, inability to pursue
the Section 505(b)(2) regulatory pathway could result in new competitive product candidates reaching the market faster than our product candidates,
which could materially adversely impact our competitive position and prospects. Even if we are allowed to pursue the Section 505(b)(2)
regulatory pathway, we cannot assure you that our product candidates will receive the requisite approvals for commercialization.
In
addition, notwithstanding the approval of a number of product candidates by the FDA under Section 505(b)(2) over the last
few years, some pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2).
For example, several companies have previously petitioned the FDA regarding the constitutionality of allowing others to rely upon
FDA findings that are based on their proprietary data. If the FDA’s interpretation of Section 505(b)(2) is successfully
challenged, the FDA may be required to change its 505(b)(2) policies and practices, which could require that we generate full
data regarding safety and effectiveness for previously approved active ingredients and delay or even prevent the FDA from approving
any NDA that we submit under Section 505(b)(2). In addition, the pharmaceutical industry is highly competitive, and Section
505(b)(2) NDAs are subject to special requirements designed to protect the patent rights of sponsors of previously approved drugs
that are referenced in a Section 505(b)(2) NDA. These requirements may give rise to patent litigation and mandatory delays in
approval of our potential future NDAs for up to 30 months depending on the outcome of any litigation. It is not uncommon for a
manufacturer of an approved product to file a citizen petition with the FDA seeking to delay approval of, or impose additional
approval requirements for, pending competing products. If successful, such petitions can significantly delay, or even prevent,
the approval of the new product. However, even if the FDA ultimately denies such a petition, the FDA may substantially delay approval
while it considers and responds to the petition. In addition, even if we are able to utilize the Section 505(b)(2) regulatory
pathway for our product candidates, there is no guarantee this would ultimately lead to faster product development or earlier
approval. Moreover, even if these product candidates are approved under the Section 505(b)(2) pathway, as the case may be, the
approval may be subject to limitations on the indicated uses for which the products may be marketed or to other conditions of
approval or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the
products. Our product candidates are at early stages of development and are subject to uncertainty over what we must do on our
development program in order to secure approval under Section 505(b)(2).
We
may encounter substantial delays in our clinical studies, or we may fail to demonstrate safety and efficacy to the satisfaction
of applicable regulatory authorities.
Before
obtaining marketing approval from regulatory authorities for the sale of our product candidates, we must conduct extensive clinical
studies to demonstrate the safety and efficacy of the product candidates in humans. Clinical testing is expensive, time consuming
and uncertain as to outcome. We cannot guarantee that any clinical studies will be conducted as planned or completed on schedule,
if at all. A failure of one or more clinical studies can occur at any stage of testing, and our future clinical studies may not
be successful. Events that may prevent successful or timely completion of clinical development include but are not limited to:
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inability
to generate sufficient preclinical, toxicology or other in vivo or in vitro data to support the initiation of human clinical
studies;
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delays
in reaching a consensus with regulatory agencies on study design;
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delays
in reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical study sites,
the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and clinical study
sites;
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delays
in obtaining required Institutional Review Board, or IRB, approval at each clinical study site;
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imposition
of a clinical hold by regulatory agencies, after review of an IND, application, or equivalent application, or an inspection
of our clinical study operations or study sites;
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delays
in recruiting suitable patients to participate in our clinical studies;
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difficulty
collaborating with patient groups and investigators;
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failure
by our CROs, other third parties or us to adhere to clinical study requirements;
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failure
to perform in accordance with the FDA’s Good Clinical Practices, or GCP, requirements, or applicable regulatory guidelines
in other countries;
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delays
in having patients complete participation in a study or return for post-treatment follow-up;
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patients
dropping out of a study;
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occurrence
of serious adverse events associated with the product candidate that are viewed to outweigh its potential benefits;
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changes
in regulatory requirements and guidance that require amending or submitting new clinical protocols;
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the
cost of clinical studies of our product candidates being greater than we anticipate;
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clinical
studies of our product candidates producing negative or inconclusive results, which may result in us deciding, or regulators
requiring us, to conduct additional clinical studies or abandon product candidate development programs; and
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delays
in manufacturing, testing, releasing, validating or importing/exporting sufficient stable quantities of our product candidates
for use in clinical studies or the inability to do any of the foregoing.
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Any
inability to successfully complete preclinical and clinical development could result in additional costs to us or impair our ability
to generate revenue. We may also be required to conduct additional safety, efficacy and comparability studies before we will be
allowed to start clinical studies with our repurposed drugs. Clinical study delays could also shorten any periods during which
our product candidates have patent protection and may allow our competitors to bring product candidates to market before we do,
which could impair our ability to obtain orphan exclusivity and successfully commercialize our product candidates and may harm
our business and results of operations.
In
respect of our product candidates targeting rare indications, orphan drug exclusivity may afford limited protection, and if another
party obtains orphan drug exclusivity for the drugs and indications we are targeting, we may be precluded from commercializing
our product candidates in those indications during that period of exclusivity
.
We
are seeking to obtain an orphan designation for some of our product candidates in the United States and in Europe. 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 United States, or a patient population greater than 200,000
in the United States where there is no reasonable expectation that the cost of developing the drug will be recovered from sales
in the United States. In the European Union, the EMA’s Committee for Orphan Medicinal Products (COMP), grants orphan drug
designation to promote the development of products that are intended for the diagnosis, prevention or treatment of a life-threatening
or chronically debilitating condition affecting not more than five in 10,000 persons in the European Union community. Additionally,
designation is granted for products intended for the diagnosis, prevention or treatment of a life-threatening, seriously debilitating
or serious and chronic condition and when, without incentives, it is unlikely that sales of the drug in the European Union would
be sufficient to justify the necessary investment in developing the drug.
In
the United States, the first NDA applicant with an orphan drug designation for a particular active moiety to treat a specific
disease or condition that receives FDA approval is entitled to a seven-year exclusive marketing period in the United States for
that product candidate, for that indication. In the European Union, orphan drug designation also entitles a party to financial
incentives such as reduction of fees or fee waivers and 10 years of market exclusivity is granted following drug approval. This
period may be reduced to six years if the orphan drug designation criteria are no longer met, including where it is shown that
the product is sufficiently profitable not to justify maintenance of market exclusivity.
In
June 2016, we submitted a request for orphan drug designation to the FDA for THX-110 for the treatment of Tourette syndrome. In
a letter dated September 29, 2016, the FDA informed us that our request could not be granted at such time, and is being held in
abeyance until and subject to us providing additional information pertaining to the overall prevalence of Tourette syndrome in
both children and adults, and further clinical data to support our scientific rationale for our request for orphan drug designation
within 12 months. In September 2017, we responded to such FDA letter within the designated time frame, and provided the FDA with
our articulated and reasoned responses including documentation and clinical data that supports it. On December 26, 2017, we received
the FDA’s response to our response. The FDA accepted that there is adequate scientific rationale for the treatment of Tourette
syndrome with THX-110 mainly through the preliminary results of ongoing clinical trials, suggesting that THX-110 may provide benefit
in treating Tourette syndrome. However, the FDA stated that it was unable to grant our request and indicated that we did not provide
adequate prevalence estimates, and any evidence to support our statement that only moderate to severe Tourette's patients would
require pharmacological treatment. We further responded in January 2018 by providing the requested information. We are currently
waiting for the FDA’s response. There is no assurance that we will successfully obtain orphan drug designation for Tourette
syndrome, any future rare indications or orphan exclusivity upon approval of any of our product candidates that have already obtained
designation.
Even
if we do obtain orphan exclusivity for any product candidate, the exclusive marketing rights 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. Moreover, a drug product candidate with an active moiety that is a different cannabinoid from that in our drug candidate
or, under limited circumstances, the same drug product candidate, may be approved by the FDA for the same indication during the
period of marketing exclusivity. The limited circumstances include a showing that the second drug is clinically superior to the
drug with marketing exclusivity through a demonstration of superior safety or efficacy or that it makes a major contribution to
patient care. In addition, if a competitor obtains approval and marketing exclusivity for a drug product candidate with an active
moiety that is the same as that in a product candidate we are pursuing for the same indication, approval of our product candidate
would be blocked during the period of marketing exclusivity unless we could demonstrate that our product candidate is clinically
superior to the approved product candidate. In addition, if a competitor obtains approval and marketing exclusivity for a drug
product candidate with an active moiety that is the same as that in a product candidate we are pursuing for a different orphan
indication, this may negatively impact the market opportunity for our product candidate.
There
have been legal challenges to aspects of the FDA’s regulations and policies concerning the exclusivity provisions of the
Orphan Drug Act, and future challenges could lead to changes that affect the protections afforded our product candidates in ways
that are difficult to predict. In a recent successful legal challenge, a court invalidated the FDA’s denial of orphan exclusivity
to a drug on the grounds that the drug was not proven to be clinically superior to a previously approved product candidate containing
the same ingredient for the same orphan use. In response to the decision, the FDA released a policy statement stating that the
court’s decision is limited just to the facts of that particular case and that the FDA will continue to require the sponsor
of a designated drug that is the “same” as a previously approved drug to demonstrate that its drug is clinically superior
to that drug upon approval in order to be eligible for orphan drug exclusivity, or in some cases, to even be eligible for marketing
approval. In the future, there is the potential for additional legal challenges to the FDA’s orphan drug regulations and
policies, and it is uncertain how such challenges might affect our business.
While
orphan drug product candidates are typically sold at a high price relative to other medications, the market may not be receptive
to high pricing of our product candidates.
We
develop our product candidates to treat rare diseases, a space where medications are usually sold at high prices compared with
other medications. However, our product candidates are repurposed drugs, which means, among other things, that they contain
drug substances available in pharmacies for the purpose of treating indications that are different from the indications for which
we plan to use. Accordingly, even if regulatory authorities approve our product candidates, the market may not be receptive to,
and it may be difficult for us to achieve, a per-patient per-year price high enough to allow us to realize a return on our investment.
Our
product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval,
limit the commercial profile of an approved label or result in significant negative consequences following marketing approval,
if any.
The
use of dronabinol has been associated with seizures, paranoia, rapid heart rate and unusual thoughts and behaviors. Undesirable
side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical studies
and could result in a more restrictive marketing label or the delay or denial of regulatory approval by the FDA or other comparable
foreign authorities. Potential side effects of our cannabinoid-based treatments may include: asthenia, palpitations, tachycardia,
vasodilation/facial flush, abdominal pain, nausea, vomiting, amnesia, anxiety/nervousness, ataxia, confusion, depersonalization,
dizziness, euphoria, hallucinations, paranoid reaction, somnolence and abnormal thinking. Results of our studies may identify
unacceptable severity and prevalence of these or other side effects. In such an event, our studies could be suspended or terminated,
and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny or withdraw approval
of our product candidates for any or all targeted indications.
Drug-related
side effects could affect patient recruitment, the ability of enrolled patients to complete the study or result in potential product
candidate liability claims.
Additionally,
if one or more of our product candidates receives marketing approval, and we or others later identify undesirable side effects
caused by such product candidates, a number of potentially significant negative consequences could result, including but not limited
to:
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regulatory
authorities may withdraw approvals of such product candidate;
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regulatory
authorities may require additional warnings on the label;
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we
may be required to create a Risk Evaluation and Mitigation Strategy, or REMS, plan, which could include a medication guide
outlining the risks of such side effects for distribution to patients, a communication plan for healthcare providers and/or
other elements to assure safe use;
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we
could be sued and held liable for harm caused to patients; and
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our
reputation may suffer.
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Any
of these events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved,
and could significantly harm our business, results of operations and prospects.
Even
if we obtain regulatory approval for a product candidate, our product candidates will remain subject to regulatory scrutiny.
If
our product candidates are approved, they will be subject to ongoing regulatory requirements for manufacturing, labeling, packaging,
storage, advertising, promotion, sampling, record-keeping, conduct of post-marketing studies and submission of safety, efficacy
and other post-market information, including both federal and state requirements in the United States. In addition, manufacturers
and manufacturers’ facilities are required to comply with extensive FDA requirements, including ensuring that quality control
and manufacturing procedures conform to current Good Manufacturing Practices, or cGMP, regulations and Quality System Regulation,
or QSR. As such, we and our contract manufacturers will be subject to continual review and inspections to assess compliance with
cGMP, QSR and adherence to commitments made in any NDA. Accordingly, we and others with whom we work must continue to expend time,
money and effort in all areas of regulatory compliance, including manufacturing, production and quality control.
Any
regulatory approvals that we receive for our product candidates may also be subject to limitations on the approved indicated uses
for which the product candidate may be marketed or to the conditions of approval, or contain requirements for potentially costly
post-marketing testing, including Phase 4 clinical trials and surveillance to monitor the safety and efficacy of the product
candidate. We will also be required to report certain adverse reactions and production problems, if any, to the FDA, and to comply
with requirements concerning advertising and promotion for our product candidates. Promotional communications with respect to
prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in
the product candidate’s approved label. As such, we may not promote our product candidates for indications or uses for which
they do not have FDA approval. The holder of an approved NDA must also submit new or supplemental applications and obtain FDA
approval for certain changes to the approved product candidate, product candidate labeling or manufacturing process. We could
also be asked to conduct post-marketing clinical studies to verify the safety and efficacy of our product candidates in general
or in specific patient subsets. If original marketing approval were obtained via the accelerated approval pathway, we could be
required to conduct a successful post-marketing clinical study to confirm clinical benefit for our product candidates. An unsuccessful
post-marketing study or failure to complete such a study could result in the withdrawal of marketing approval. Furthermore, any
new legislation addressing drug safety issues could result in delays in product candidate development or commercialization or
increased costs to assure compliance. Foreign regulatory authorities impose similar requirements.
If
a regulatory agency discovers previously unknown problems with a product candidate, such as adverse events of unanticipated severity
or frequency, or problems with the facility where the product candidate is manufactured, or disagrees with the promotion, marketing
or labeling of a product candidate, such regulatory agency may impose restrictions on that product candidate or us, including
requiring withdrawal of the product candidate from the market. If we fail to comply with applicable regulatory requirements, a
regulatory agency or enforcement authority may, among other things:
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issue
warning letters;
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impose
civil or criminal penalties;
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suspend
or withdraw regulatory approval;
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suspend
any of our ongoing clinical studies;
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refuse
to approve pending applications or supplements to approved applications submitted by us;
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impose
restrictions on our operations, including closing our contract manufacturers’ facilities; or
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seize
or detain product candidates, or require a product candidate recall.
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Any
government investigation of alleged violations of law could require us to expend significant time and resources in response and
could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely
affect our ability to commercialize and generate revenue from our product candidates. If regulatory sanctions are applied or if
regulatory approval is withdrawn, the value of our company and our operating results will be adversely affected.
We
are subject to numerous complex regulations and failure to comply with these regulations, or the cost of compliance with these
regulations, may harm our business.
The
research, testing, development, manufacturing, quality control, approval, labeling, packaging, storage, recordkeeping, promotion,
advertising, marketing, distribution, possession and use of our product candidates, among other things, are subject to regulation
by numerous governmental authorities in the United States and elsewhere. The FDA regulates drugs under the FDC Act, and implementing
regulations. Noncompliance with any applicable regulatory requirements can result in refusal to approve product candidates for
marketing, warning letters, product candidate recalls or seizure of product candidates, total or partial suspension of production,
prohibitions or limitations on the commercial sale of product candidates or refusal to allow the entering into of federal and
state supply contracts, fines, civil penalties and/or criminal prosecution. Additionally, the FDA and comparable governmental
authorities have the authority to withdraw product candidate approvals that have been previously granted. Moreover, the regulatory
requirements relating to our product candidates may change from time to time and it is impossible to predict what the impact of
any such changes may be.
We
are developing product candidates that are controlled substances as defined in the Controlled Substances Act of 1970, or CSA,
which establishes, among other things, certain registration, production quotas, security, recordkeeping, reporting, import, export
and other requirements administered by the Drug Enforcement Administration, or the DEA. The active ingredient in our product candidates
is dronabinol, which is a Schedule I controlled substance, meaning that any drug containing it cannot be marketed before it is
rescheduled by the DEA as a Schedule II, III, IV or V substance. See Item 4.B. “Business Overview—Government Regulation—Controlled
Substances” for additional information.
The
manufacture, shipment, storage, sale and use, among other things, of controlled substances that are pharmaceutical product candidates
are subject to a high degree of regulation. The DEA also conducts periodic inspections of registered establishments that handle
controlled substances. Facilities that conduct research, manufacture, distribute, import or export controlled substances must
be registered to perform these activities and have the security, control and inventory mechanisms required by the DEA to prevent
drug loss and diversion. Failure to maintain compliance, particularly non-compliance resulting in loss or diversion, can result
in regulatory action that could have a material adverse effect on our business, results of operations, financial condition and
prospects. The DEA may seek civil penalties, refuse to renew necessary registrations, or initiate proceedings to suspend or revoke
those registrations. In certain circumstances, violations could lead to criminal proceedings.
Individual
states also have controlled substances laws. Though state controlled substances laws often mirror federal law, because the states
are separate jurisdictions, they may separately schedule our product candidates as well. While some states automatically schedule
a drug when the DEA does so, other states schedule drugs through rulemaking or a legislative action. State scheduling may delay
commercial sale of any product candidate for which we obtain federal regulatory approval and adverse scheduling could have a material
adverse effect on the commercial attractiveness of such product candidate. We or our partners must also obtain separate state
registrations, permits or licenses in order to be able to obtain, handle, and distribute controlled substances for clinical trials
or commercial sale, and failure to meet applicable regulatory requirements could lead to enforcement and sanctions from the states
in addition to those from the DEA or otherwise arising under federal law.
Risks
Related to Our Reliance on Third Parties
We
rely on third parties to conduct our preclinical and clinical studies and perform other tasks for us. If these third parties do
not successfully carry out their contractual duties, meet expected deadlines or comply with regulatory requirements, we may not
be able to obtain regulatory approval for or commercialize our product candidates and our business could be substantially harmed.
We
have relied upon and plan to continue to rely upon third-party CROs to monitor and manage data for our ongoing preclinical and
clinical programs. (Target Health, Inc., FGK Clinical Research GmbH, or FGK, and others). We rely on these parties for execution
of our preclinical and clinical studies, and control only certain aspects of their activities. Nevertheless, we are responsible
for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific
standards and our reliance on the CROs does not relieve us of our regulatory responsibilities. We and our CROs and other vendors
are required to comply with current cGMP, GCP, QSR and Good Laboratory Practices, or GLP, which are regulations and guidelines
enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area, and comparable foreign regulatory
authorities for all of our product candidates in clinical development. Regulatory authorities enforce these regulations through
periodic inspections of study sponsors, principal investigators, study sites and other contractors. If we or any of our CROs or
vendors fail to comply with applicable regulations, the clinical data generated in our clinical studies may be deemed unreliable
and the FDA, EMA or comparable foreign regulatory authorities may require us to perform additional clinical studies before approving
our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority
will determine that any of our clinical studies comply with GCP regulations. In addition, our clinical studies must be conducted
with product candidates which are produced under cGMP regulations. Our failure to comply with these regulations may require us
to repeat clinical studies, which would delay the regulatory approval process.
If
any of our relationships with these third-party CROs terminate, we may not be able to enter into arrangements with alternative
CROs or do so on commercially reasonable terms. In addition, our CROs are not our employees, and except for remedies available
to us under our agreements with such CROs, we cannot control whether or not they devote sufficient time and resources to our on-going
clinical, nonclinical and preclinical programs. If CROs do not successfully carry out their contractual duties or obligations
or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised
due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical studies may
be extended, delayed or terminated and we may not be able to obtain regulatory approval for or successfully commercialize our
product candidates. CROs may also generate higher costs than anticipated. As a result, our results of operations and the commercial
prospects for our product candidates would be harmed, our costs could increase and our ability to generate revenue could be delayed.
Switching
or adding additional CROs involves additional cost and requires management time and focus. In addition, there is a natural transition
period when a new CRO commences work. As a result, delays may occur, which could materially impact our ability to meet our desired
clinical development timelines. Though we carefully manage our relationships with our CROs, there can be no assurance that we
will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse
impact on our business, financial condition and prospects.
We
will rely on third parties to manufacture our active pharmaceutical ingredient, or API, and formulations. Our business could be
harmed if those third parties fail to provide us with sufficient quantities of our needed supplies, or fail to do so at acceptable
quality levels or prices.
We
do not have the infrastructure or capability internally to manufacture the API formulations, and we lack the resources and the
capability to manufacture any of our product candidates on a clinical or commercial scale. We plan to rely on third parties for
such supplies. There are a limited number of manufacturers who have the ability to produce our API and there may be a need to
identify alternate manufacturers to prevent a possible disruption of our clinical studies. Any significant delay or discontinuity
in the supply of these components could considerably delay completion of our clinical studies, product candidate testing and potential
regulatory approval of our product candidates, which could harm our business and results of operations.
We
and our collaborators and contract manufacturers are subject to significant regulation with respect to manufacturing our product
candidates. The manufacturing facilities on which we rely may not continue to meet regulatory requirements and have limited capacity.
All
entities involved in the preparation of therapeutics for clinical studies or commercial sale, including our existing contract
manufacturers for our product candidates, are subject to extensive regulation. Components of a finished therapeutic product approved
for commercial sale or a product candidate used in late-stage clinical studies must be manufactured in accordance with cGMP. These
regulations govern manufacturing processes and procedures (including record keeping) and the implementation and operation of quality
systems to control and assure the quality of investigational product candidates and products approved for sale. Poor control of
production processes can lead to the introduction of contaminants or to inadvertent changes in the properties or stability of
our product candidates that may not be detectable in final product testing. We, our collaborators or our contract manufacturers
must supply all necessary documentation in support of an NDA, or Marketing Authorization Application, or MAA, on a timely basis
and must adhere to GLP and cGMP QSR regulations enforced by the FDA and other regulatory agencies through their facilities inspection
program. Some of our contract manufacturers have never produced a commercially approved pharmaceutical product and therefore have
not obtained the requisite regulatory authority approvals to do so. The facilities and quality systems of some or all of our collaborators
and third-party contractors must pass a pre-approval inspection for compliance with the applicable regulations as a condition
of regulatory approval of our product candidates or any of our other potential product candidates. In addition, the regulatory
authorities may, at any time, audit or inspect a manufacturing facility involved with the preparation of our product candidates
or our other potential product candidates or the associated quality systems for compliance with the regulations applicable to
the activities being conducted. We do not control the manufacturing process of, and are completely dependent on, our contract
manufacturing partners for compliance with the regulatory requirements. If these facilities do not pass a pre-approval plant inspection,
regulatory approval of the product candidates may not be granted or may be substantially delayed until any violations are corrected
to the satisfaction of the regulatory authority, if ever.
The
regulatory authorities also may, at any time following approval of a product candidate for sale, if ever, audit the manufacturing
facilities of our collaborators and third-party contractors. If any such inspection or audit identifies a failure to comply with
applicable regulations or if a violation of our product candidate specifications or applicable regulations occurs independent
of such an inspection or audit, we or the relevant regulatory authority may require remedial measures that may be costly and/or
time consuming for us or a third party to implement, and that may include the temporary or permanent suspension of a clinical
study or commercial sales, or the temporary or permanent closure of a facility. Any such remedial measures imposed upon us or
third parties with whom we contract could materially harm our business.
If
we, our collaborators, or any of our third-party manufacturers fail to maintain regulatory compliance, the FDA or other applicable
regulatory authority can impose regulatory sanctions including, among other things, refusal to approve a pending application for
a new drug product, withdrawal of an approval or suspension of production. As a result, our business, financial condition and
results of operations may be materially harmed.
Additionally,
if supply from one approved manufacturer is interrupted, an alternative manufacturer would need to be qualified through an NDA
or MAA amendment, or equivalent foreign regulatory filing, which could result in further delay. The regulatory agencies may also
require additional studies if a new manufacturer is relied upon for commercial production. Switching manufacturers may involve
substantial costs and is likely to result in a delay in our desired clinical and commercial timelines.
These
factors could cause us to incur higher costs and could cause the delay or termination of clinical studies, regulatory submissions,
required approvals or commercialization of our product candidates. Furthermore, if our suppliers fail to meet contractual requirements
and we are unable to secure one or more replacement suppliers capable of production at a substantially equivalent cost, our clinical
studies may be delayed or we could lose potential revenue.
Our
reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover
them or that our trade secrets will be misappropriated or disclosed.
Because
we rely on third parties to develop and manufacture our product candidates, we must, at times, share trade secrets with them.
We seek to protect our proprietary technology in part by entering into confidentiality agreements and, if applicable, material
transfer agreements, collaborative research agreements, consulting agreements or other similar agreements with our collaborators,
advisors, employees and consultants prior to beginning research or disclosing proprietary information. These agreements typically
limit the rights of the third parties to use or disclose our confidential information, such as trade secrets. Despite the contractual
provisions employed when working with third parties, the need to share trade secrets and other confidential information increases
the risk that such trade secrets become known by our competitors, are inadvertently incorporated into the technology of others,
or are disclosed or used in violation of these agreements. Given that our proprietary position is based, in part, on our know-how
and trade secrets, a competitor’s discovery of our trade secrets or other unauthorized use or disclosure would impair our
competitive position and may have a material adverse effect on our business.
Risks
Related to Commercialization of Our Product Candidates
If
the market opportunities for our product candidates are smaller than we believe they are, our revenue may be adversely affected,
and our business may suffer.
Our
projections of both the number of people who have our target diseases, as well as the subset of people with these diseases who
have the potential to benefit from treatment with our product candidates, are based on our beliefs and estimates. These estimates
have been derived from a variety of sources, including the scientific literature, surveys of clinics, patient foundations or market
research and may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of these diseases.
The number of patients may turn out to be lower than expected. The effort to identify patients with diseases we seek to treat
is in early stages, and we cannot accurately predict the number of patients for whom treatment might be possible. Additionally,
the potentially addressable patient population for each of our product candidates may be limited or may not be amenable to treatment
with our product candidates, and new patients may become increasingly difficult to identify or gain access to, which would adversely
affect our results of operations and our business.
We
face intense competition and rapid technological change and the possibility that our competitors may discover, develop or commercialize
therapies that are similar, more advanced or more effective than ours, which may adversely affect our financial condition and
our ability to successfully commercialize our product candidates.
The
biotechnology and pharmaceutical industries are highly competitive. There are many pharmaceutical companies, biotechnology companies,
public and private universities and research organizations actively engaged in the research and development of products that may
be similar to our product candidates.
The
first THC-based pharmaceutical, a pill sold under the commercial name of Marinol (scientific name: dronabinol), was developed
by a company called Unimed Pharmaceuticals, with funding provided by the National Cancer Institute. In 1985, Marinol received
FDA approval as a treatment for chemotherapy-related nausea and vomiting. Today, Marinol is marketed by AbbVie, Inc. Since the
introduction of Marinol into the market, other pharmaceuticals containing THC have also been developed. These include generic
oral capsules of dronabinol, such as those marketed by SVC Pharma LP and Akorn Inc., Insys Therapeutic Inc.’s Syndros, an
orally administered liquid formulation of dronabinol, Meda AB’s Cesamet (nabilone), a synthetic derivative of THC, and Sativex
(nabiximols), a whole cannabis extract administered as an oral spray. Furthermore, we are aware of multiple companies that are
working in the cannabis therapeutic area and are pursuing regulatory approval for their product candidates. For example,
GW Pharmaceuticals PLC, or GW, which markets Sativex, a botanical cannabinoid oral mucosal for the treatment of spasticity
due to multiple sclerosis is seeking FDA approval in the United States, and is developing Epidiolex, a liquid formulation of highly
purified cannabidiol extract, as a treatment for Dravet’s Syndrome, Lennox Gastaut Syndrome, and various childhood epilepsy
syndromes. In addition, GW develops a cannabidivarin, or CBDV, based therapy for autism spectrum disorders and therapy for neonatal
hypoxic-ischemic encephalopathy, glioblastoma and schizophrenia. Insys Therapeutics, Inc. is also seeking FDA approval for
an orally-administered liquid formulation of its synthetic cannabidiol compound as a treatment for Dravet’s Syndrome, Lennox
Gastaut Syndrome, and other childhood epilepsy syndromes and Prader-Willi syndrome. Zynerba Pharmaceuticals, Inc., or Zynerba,
is developing a transdermal formulation of cannabidiol for Fragile X and certain refractory epilepsies. In addition, Zynerba is
currently developing a transdermal formulation of pro-drug, which is a medication or compound that, after administration, is metabolized
(i.e., converted within the body) into a pharmacologically active drug, of THC for neuropsychiatric disorders including Tourette
syndrome. Nemus Bioscience, Inc., or Nemus, is focused on the discovery, development and commercialization of cannabis therapeutics.
Corbus Pharmaceuticals Holdings is seeking FDA approval for their synthetic cannabinoid for systemic sclerosis, cystic fibrosis,
dermatomyositis and systemic lupus erythematosus.
More
established companies may have a competitive advantage over us due to their greater size, cash flows and institutional experience.
Compared to us, many of our competitors may have significantly greater financial, technical and human resources. As a result of
these factors, our competitors may have an advantage in marketing their approved products and may obtain regulatory approval of
their product candidates before we are able to, which may limit our ability to develop or commercialize our product candidates.
Our competitors may also develop drugs that are safer, more effective, more widely used and less expensive than ours, and may
also be more successful than us in manufacturing and marketing their products. These advantages could materially impact our ability
to develop and commercialize our product candidates successfully.
Our
product candidates may also compete with medical and recreational marijuana, in markets where the recreational and/or medical
use of marijuana is legal. There is support in the United States for further legalization of marijuana. In markets where
recreational and/or medical marijuana is not legal, our product candidates may compete with marijuana purchased in the illegal
drug market. We cannot assess the extent to which patients may utilize marijuana obtained illegally for the treatment of the indications
for which we are developing our product candidates.
Even
if we successfully develop our product candidates, and obtain marketing approval for them, other treatments or therapeutics may
be preferred and we may not be successful in commercializing our product candidates or in bringing them to market.
Many
of our competitors have substantially greater financial, technical and other resources, such as larger research and development
staff and experienced marketing and manufacturing organizations. Additional mergers and acquisitions in the biotechnology and
pharmaceutical industries may result in even more resources being concentrated in our competitors. As a result, these companies
may obtain regulatory approval more rapidly than we are able to and may be more effective in selling and marketing their products
as well. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements
with large, established companies. Competition may increase further as a result of advances in the commercial applicability of
technologies and greater availability of capital for investment in these industries. Our competitors may succeed in developing,
acquiring or licensing on an exclusive basis, products that are more effective or less costly than any product candidate that
we may develop, or achieve earlier patent protection, regulatory approval, product commercialization and market penetration than
we do. Additionally, technologies developed by our competitors may render our potential product candidates uneconomical or obsolete,
and we may not be successful in marketing our product candidates against competitors.
We
currently have no marketing and sales organization. If we are unable to establish sales and marketing capabilities or enter into
agreements with third parties to market and sell our product candidates, we may be unable to generate any revenue.
Although
our employees may have sold other similar products in the past while employed at other companies, we as a company have no experience
selling and marketing our product candidates and we currently have no marketing or sales organization. To successfully commercialize
any products that may result from our development programs, we will need to develop these capabilities, either on our own or with
others. If our product candidates receive regulatory approval, we intend to establish a sales and marketing organization with
technical expertise and supporting distribution capabilities to commercialize our product candidates in major markets, which will
be expensive, difficult and time consuming. Any failure or delay in the development of our internal sales, marketing and distribution
capabilities would adversely impact the commercialization of our products.
Further,
given our lack of prior experience in marketing and selling pharmaceutical products, our initial estimate of the size of the required
sales force may be materially more or less than the size of the sales force actually required to effectively commercialize our
product candidates. As such, we may be required to hire substantially more sales representatives to adequately support the commercialization
of our product candidates or we may incur excess costs as a result of hiring more sales representatives than necessary. With respect
to certain geographical markets, we may enter into collaborations with other entities to utilize their local marketing and distribution
capabilities, but we may be unable to enter into such agreements on favorable terms, if at all. If our future collaborators do
not commit sufficient resources to commercialize our future products, if any, and we are unable to develop the necessary marketing
capabilities on our own, we will be unable to generate sufficient product revenue to sustain our business. We may be competing
with companies that currently have extensive and well-funded marketing and sales operations. Without an internal team or the support
of a third party to perform marketing and sales functions, we may be unable to compete successfully against these more established
companies.
The
commercial success of any current or future product candidate will depend upon the degree of market acceptance by physicians,
patients, third-party payors and others in the medical community.
Even
with the requisite approvals from the FDA and comparable foreign regulatory authorities, the commercial success of our product
candidates will depend in part on the medical community, patients and third-party payors accepting our product candidates as medically
useful, cost-effective and safe. Any product that we bring to the market may not gain market acceptance by physicians, patients,
third-party payors and others in the medical community. The degree of market acceptance of any of our product candidates, if approved
for commercial sale, will depend on a number of factors, including:
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the
safety and efficacy of the product as demonstrated in clinical studies and potential advantages over competing treatments;
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the
prevalence and severity of any side effects, including any limitations or warnings contained in a product’s approved
labeling;
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the
clinical indications for which approval is granted;
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relative
convenience and ease of administration;
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the
cost of treatment, particularly in relation to competing treatments;
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the
willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
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the
strength of marketing and distribution support and timing of market introduction of competitive products;
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publicity
concerning our products or competing products and treatments; and
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sufficient
third-party insurance coverage and reimbursement.
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Even
if a potential product displays a favorable efficacy and safety profile in preclinical and clinical studies, market acceptance
of the product will not be fully known until after it is launched. Our efforts to educate the medical community and third-party
payors on the benefits of the product candidates may require significant resources and may never be successful. If our product
candidates are approved but fail to achieve an adequate level of acceptance by physicians, patients, third-party payors and others
in the medical community, we will not be able to generate sufficient revenue to become or remain profitable.
The
insurance coverage and reimbursement status of newly-approved products is uncertain. Failure to obtain or maintain adequate coverage
and reimbursement for new or current products could limit our ability to market those products and decrease our ability to generate
revenue.
The
pricing, coverage and reimbursement of our product candidates, if approved, must be adequate to support our commercial infrastructure.
Our per-patient prices must be sufficient to recover our development and manufacturing costs and potentially achieve profitability.
Accordingly, the availability and adequacy of coverage and reimbursement by governmental and private payors are essential for
most patients to be able to afford expensive treatments such as ours, assuming approval. Sales of our product candidates will
depend substantially, both domestically and abroad, on the extent to which the costs of our product candidates will be paid for
by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or reimbursed by government
authorities, private health insurers and other third-party payors. If coverage and reimbursement are not available, or are available
only to limited levels, we may not be able to successfully commercialize our product candidates. Even if coverage is provided,
the approved reimbursement amount may not be high enough to allow us to establish or maintain pricing sufficient to realize a
return on our investment.
There
is significant uncertainty related to the insurance coverage and reimbursement of newly approved products. In the United States,
the principal decisions about coverage and reimbursement for new drugs are typically made by the Centers for Medicare &
Medicaid Services (formerly the Health Care Financing Administration), or CMS, an agency within the U.S. Department of Health
and Human Services, as CMS decides whether and to what extent a new drug will be covered and reimbursed under Medicare. Private
payors tend to follow the coverage reimbursement policies established by CMS to a substantial degree. It is difficult to predict
what CMS will decide with respect to reimbursement for products such as ours.
Outside
the United States, international operations are generally subject to extensive governmental price controls and other market regulations,
and we believe the increasing emphasis on cost-containment initiatives in Europe, Canada and other countries has and will continue
to put pressure on the pricing and usage of our product candidates. In many countries, the prices of medical products are subject
to varying price control mechanisms as part of national health systems. In general, the prices of medicines under such systems
are substantially lower than in the United States. Other countries allow companies to fix their own prices for medicinal products,
but monitor and control company profits. Additional foreign price controls or other changes in pricing regulation could restrict
the amount that we are able to charge for our product candidates. Accordingly, in markets outside the United States, the reimbursement
for our products may be reduced compared with the United States and may be insufficient to generate commercially reasonable revenue
and profits.
Moreover,
increasing efforts by governmental and third-party payors in the United States and abroad to cap or reduce healthcare costs may
cause such organizations to limit both coverage and the level of reimbursement for new products approved and, as a result, they
may not cover or provide adequate payment for our product candidates. We expect to experience pricing pressures in connection
with the sale of any of our product candidates due to the trend toward managed healthcare, the increasing influence of health
maintenance organizations and additional legislative changes. The downward pressure on healthcare costs in general, particularly
prescription drugs and surgical procedures and other treatments, has become very intense. As a result, increasingly high barriers
are being erected to the entry of new products.
Healthcare
legislative reform measures may have a material adverse effect on our business and results of operations.
In
the United States, there have been and continue to be a number of legislative initiatives to contain healthcare costs. For example,
in 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively,
the Affordable Care Act, was passed. The Affordable Care Act is a sweeping law intended to broaden access to health insurance,
reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements
for healthcare and the health insurance industry, impose new taxes and fees on the healthcare industry and impose additional health
policy reforms. This law revises the definition of “average manufacturer price” for reporting purposes, which could
increase the amount of Medicaid drug rebates to states once the provision is effective. Further, the law imposes a significant
annual fee on companies that manufacture or import branded prescription drug products. Substantial new provisions affecting compliance
have also been enacted, which may require us to modify our business practices with healthcare practitioners. While the U.S. Supreme
Court upheld the constitutionality of most elements of the Affordable Care Act in 2012, other legal challenges are still pending
final adjudication in several jurisdictions. In addition, Congress has also proposed a number of legislative initiatives, including
possible repeal of the Affordable Care Act. At this time, it remains unclear whether there will be any changes made to the Affordable
Care Act, whether to certain provisions or its entirety. We can provide no assurance that the Affordable Care Act, as currently
enacted or as amended in the future, will not adversely affect our business and financial results, and we cannot predict how future
federal or state legislative or administrative changes relating to healthcare reform will affect our business.
In
addition, other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted.
In 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select
Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years
2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several
government programs. This includes aggregate reductions of Medicare payments to providers up to 2% per fiscal year. In 2013,
the 2% Medicare payment reductions went into effect. Both Congress and the U.S. President have already taken some actions that
are intended to limit significantly the Affordable Care Act, and other proposals have been made and are being considered to further
modify or even repeal the Affordable Care Act. While some of these actions already appear to be limiting the scope of the Affordable
Care Act, it is not clear at this point whether the new proposals will be adopted (either in their current form or a modified
form) in the future. We expect that additional state and federal healthcare reform measures will be adopted in the future, any
of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could
result in reduced demand for our product candidates or additional pricing pressures.
Risks
Related to Our Intellectual Property
If
we are unable to obtain and maintain effective patent rights for our product candidates, we may not be able to compete effectively
in our markets. If we are unable to protect the confidentiality of our trade secrets or know-how, such proprietary information
may be used by others to compete against us.
Historically,
we have relied on trade secret protection and confidentiality agreements to protect the intellectual property related to our technologies
and product candidates. Since 2015, we have also sought patent protection for certain of our product candidates. Our success depends
in large part on our ability to obtain and maintain patent and other intellectual property protection in the United States and
in other countries with respect to our proprietary technology and new product candidates.
We
have sought to protect our proprietary position by filing patent applications in the United States and in other countries, with
respect to our novel technologies and product candidates, which are important to our business. Patent prosecution is expensive
and time consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable
cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development
output before it is too late to obtain patent protection.
Not
including patents and applications which we are in the process of being assigned we have a portfolio of two provisional patent
applications with the U.S. Patent and Trademark Office, or USPTO, and one patent application filed under the Patent Cooperation
Treaty of the World Intellectual Property Organization, or PCT . We also have three patent applications in National Phase Stage
in various national entities. We cannot offer any assurances about which, if any, patent applications will issue, the breadth
of any such patent or whether any issued patents will be found invalid and unenforceable or will be threatened by third parties.
Any successful opposition to our patents after issuance could deprive us of rights necessary for the successful commercialization
of any new product candidates that we may develop.
We
have exclusively licensed: (i) one U.S. patent from Dekel Pharmaceuticals Ltd., or Dekel, and (ii) one U.S. patent family from
Yissum Research Development Company of the Hebrew University of Jerusalem Ltd., or Yissum. We cannot assure you that we will ever
enter into definitive license agreements with any third party licensor. See Item 4.B. “Business Overview—Intellectual
Property—In-Licensed Patents and Patent Applications.” To the extent the licensed or future licensed patents are found
to be invalid or unenforceable, we may be limited in our ability to compete and market our product candidates. Moreover, the terms
of our licenses affect our ability to control the value of any of our product candidates. If we or any of the parties that control
the enforcement of licensed patents elect not to enforce any or all of the licensed patents it could significantly undercut the
value of any of our product candidates, which would materially adversely affect our future revenue, financial condition and results
of operations. Moreover, fluctuating currency rates may create inconsistencies in the royalty payments we are obligated to make
under our licenses.
Also,
there is no guarantee that the patent registration applications that were submitted by us with regard to our technologies will
result in patent registration. In the event of failure to complete patent registration, our developments will not be proprietary,
which might allow other entities to manufacture our product candidates and compete with them.
Further,
there is no assurance that all potentially relevant prior art relating to our patent applications has been found, which can invalidate
a patent or prevent a patent from issuing from a pending patent application. Even if patents do successfully issue, and even if
such patents cover our product candidates, third parties may challenge their validity, enforceability, or scope, which may result
in such patents being narrowed, found unenforceable or invalidated. Furthermore, even if they are unchallenged, our patent applications
and any future patents may not adequately protect our intellectual property, provide exclusivity for our new product candidates,
or prevent others from designing around our claims. Any of these outcomes could impair our ability to prevent competition from
third parties, which may have an adverse impact on our business.
If
we cannot obtain and maintain effective patent rights for our product candidates, we may not be able to compete effectively, and
our business and results of operations would be harmed.
We
may not be able to identify infringements of our patents and accordingly the enforcement of our intellectual property rights may
be difficult.
The
drug substance in some of our product candidates is repurposed, which means that it is available in other pharmaceutical products
for the purpose of treating indications that are different from the indications for our product candidates. It is possible that
if we receive regulatory approval to market and sell our drug candidates, some patients that receive a prescription could be sold
the same drug substance but not our product candidate. It would be difficult, if not impossible for us to identify such instances
that may constitute an infringement of our patents. In addition, because the drug substance of some of our product candidates
is repurposed, such substance may not be eligible for patent protection or data exclusivity.
If
we are unable to maintain effective proprietary rights for our product candidates, we may not be able to compete effectively in
our markets.
In
addition to the protection afforded by any patents currently owned and that may be granted, historically, we have relied on trade
secret protection and confidentiality agreements to protect proprietary know-how that is not patentable or that we elect not to
patent, processes that are not easily known, knowable or easily ascertainable, and for which patent infringement is difficult
to monitor and enforce and any other elements of our product candidate discovery and development processes that involve proprietary
know-how, information or technology that is not covered by patents. However, trade secrets can be difficult to protect. We seek
to protect our proprietary technology and processes, in part, by entering into confidentiality agreements with our employees,
consultants, scientific advisors, and contractors. We also seek to preserve the integrity and confidentiality of our data, trade
secrets and intellectual property by maintaining physical security of our premises and physical and electronic security of our
information technology systems. Agreements or security measures may be breached, and we may not have adequate remedies for any
breach. In addition, our trade secrets and intellectual property may otherwise become known or be independently discovered by
competitors.
We
cannot provide any assurances that our trade secrets and other confidential proprietary information will not be disclosed in violation
of our confidentiality agreements or that competitors will not otherwise gain access to our trade secrets or independently develop
substantially equivalent information and techniques. Also, misappropriation or unauthorized and unavoidable disclosure of our
trade secrets and intellectual property could impair our competitive position and may have a material adverse effect on our business.
Additionally, if the steps taken to maintain our trade secrets and intellectual property are deemed inadequate, we may have insufficient
recourse against third parties for misappropriating any trade secret.
Intellectual
property rights of third parties could adversely affect our ability to commercialize our product candidates, and we might be required
to litigate or obtain licenses from third parties in order to develop or market our product candidates. Such litigation or licenses
could be costly or not available on commercially reasonable terms.
It
is inherently difficult to conclusively assess our freedom to operate without infringing on third party rights. Our competitive
position may be adversely affected if existing patents or patents resulting from patent applications issued to third parties or
other third party intellectual property rights are held to cover our product candidates or elements thereof, or our manufacturing
or uses relevant to our development plans. In such cases, we may not be in a position to develop or commercialize product candidates
or our product candidates unless we successfully pursue litigation to nullify or invalidate the third party intellectual property
right concerned, or enter into a license agreement with the intellectual property right holder, if available on commercially reasonable
terms. There may also be pending patent applications that if they result in issued patents, could be alleged to be infringed by
our new product candidates. If such an infringement claim should be brought and be successful, we may be required to pay substantial
damages, be forced to abandon our new product candidates or seek a license from any patent holders. No assurances can be given
that a license will be available on commercially reasonable terms, if at all.
It
is also possible that we have failed to identify relevant third party patents or applications. For example, U.S. patent applications
filed before November 29, 2000 and certain U.S. patent 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 filing for which priority is claimed, with such earliest filing date being commonly referred to as
the priority date. Therefore, patent applications covering our new product candidates or platform technology could have been filed
by others without our knowledge. Additionally, pending patent applications which have been published can, subject to certain limitations,
be later amended in a manner that could cover our platform technologies, our new product candidates or the use of our new product
candidates. Third party intellectual property right holders may also actively bring infringement claims against us. We cannot
guarantee that we will be able to successfully settle or otherwise resolve such infringement claims. If we are unable to successfully
settle future claims on terms acceptable to us, we may be required to engage in or continue costly, unpredictable and time-consuming
litigation and may be prevented from or experience substantial delays in pursuing the development of and/or marketing our new
product candidates. If we fail in any such dispute, in addition to being forced to pay damages, we may be temporarily or permanently
prohibited from commercializing our new product candidates that are held to be infringing. We might, if possible, also be forced
to redesign our new product candidates so that we no longer infringe the third party intellectual property rights. Any of these
events, even if we were ultimately to prevail, could require us to divert substantial financial and management resources that
we would otherwise be able to devote to our business.
Third-party
claims of intellectual property infringement may prevent or delay our development and commercialization efforts.
Our
commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. Numerous
U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which
we are developing new product candidates. As our industries expand and more patents are issued, the risk increases that our product
candidates may be subject to claims of infringement of the patent rights of third parties.
Third
parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents
or patent applications with claims to materials, designs or methods of manufacture related to the use or manufacture of our product
candidates. There may be currently pending patent applications that may later result in issued patents that our product candidates
may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon
these patents.
If
any third-party patents were held by a court of competent jurisdiction to cover aspects of our formulations, processes for designs,
or methods of use, the holders of any such patents may be able to block our ability to develop and commercialize the applicable
product candidate unless we obtain a license or until such patent expires or is finally determined to be invalid or unenforceable.
In either case, such a license may not be available on commercially reasonable terms or at all.
Parties
making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further
develop and commercialize one or more of our product candidates. Defense of these claims, regardless of their merit, would involve
substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a
successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’
fees for willful infringement, pay royalties, redesign our infringing product candidates or obtain one or more licenses from third
parties, which may be impossible or require substantial time and monetary expenditure.
Patent
policy and rule changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and
the enforcement or defense of any issued patents.
Changes
in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value
of any patents that may issue from our patent applications, or narrow the scope of our patent protection. The laws of foreign
countries may not protect our rights to the same extent as the laws of the United States. Publications of discoveries in the scientific
literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically
not published until 18 months after filing, or in some cases not at all. We therefore cannot be certain that we were the first
to file the invention claimed in our owned and licensed patent or pending applications, or that we or our licensor were the first
to file for patent protection of such inventions. Assuming all other requirements for patentability are met, in the United States
prior to March 15, 2013, the first to make the claimed invention without undue delay in filing, is entitled to the patent, while
outside the United States, the first to file a patent application is entitled to the patent. After March 15, 2013, under the Leahy-Smith
America Invents Act, or the Leahy-Smith Act, the United States has moved to a first to file system. The Leahy-Smith Act also includes
a number of significant changes that affect the way patent applications will be prosecuted and may also affect patent litigation.
In general, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution
of our patent applications and the enforcement or defense of any issued patents, all of which could have a material adverse effect
on our business and financial condition.
We
may be involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time consuming, and unsuccessful.
Competitors
may infringe our intellectual property. If we were to initiate legal proceedings against a third party to enforce a patent covering
one of our new product candidates, the defendant could counterclaim that the patent covering our product candidate is invalid
and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability
are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including
lack of novelty, obviousness, or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone
connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during
prosecution. Under the Leahy-Smith Act, the validity of U.S. patents may also be challenged in post-grant proceedings before the
USPTO. The outcome following legal assertions of invalidity and unenforceability is unpredictable.
Derivation
proceedings initiated by third parties or brought by us may be necessary to determine the priority of inventions and/or their
scope with respect to our patent or patent applications or those of our licensors. An unfavorable outcome could require us to
cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed
if the prevailing party does not offer us a license on commercially reasonable terms. Our defense of litigation or interference
proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees.
In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds
necessary to continue our clinical trials, continue our research programs, license necessary technology from third parties, or
enter into development partnerships that would help us bring our new product candidates to market.
Furthermore,
because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that
some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public
announcements of the results of hearings, motions, or other interim proceedings or developments. If securities analysts or investors
perceive these results to be negative, it could have a material adverse effect on the price of our Ordinary Shares.
We
may be subject to claims challenging the inventorship of our intellectual property.
We
may be subject to claims that former employees, collaborators or other third parties have an interest in, or right to compensation,
with respect to our current patent and patent applications, future 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
or claiming the right to compensation. 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.
We
may not be able to protect our intellectual property rights throughout the world.
Filing,
prosecuting, and defending patents on product candidates, as well as monitoring their infringement in all countries throughout
the world would be prohibitively expensive, and our intellectual property rights in some countries can be less extensive than
those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the
same extent as federal and state laws in the United States.
Competitors
may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and may also
export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that
in the United States. These products may compete with our product candidates. Future patents or other intellectual property rights
may not be effective or sufficient to prevent them from competing.
Many
companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions.
The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade
secrets, and other intellectual property protection, which could make it difficult for us to stop the marketing of competing products
in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions, whether or
not successful, could result in substantial costs and divert our efforts and attention from other aspects of our business, could
put our future 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. Accordingly, our efforts to monitor and 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.
Actual
or perceived conflicts of interest may exist with respect to intellectual property rights that we license from an entity controlled
by Dr. Ascher Shmulewitz, our interim Chief Executive Officer and Chairman.
In
May 2015, we entered into a license agreement, which became effective in August 2015, with Dekel, an Israeli private company controlled
by Dr. Ascher Shmulewitz, the Chairman of our Board of Directors and interim Chief Executive Officer, under which we were granted
an irrevocable, worldwide, exclusive, royalty-bearing license to certain of Dekel’s technology. See Item 7.B. “Related
Party Transactions—Dekel License Agreement.”
We
do not have any agreement with Dr. Shmulewitz to present us with business opportunities he may wish to pursue, subject only to
his duties under Israeli law, and we do not have proprietary rights to Dr. Shmulewitz’ inventions that are not included
under the consulting and services agreement we entered into with him (pertaining solely to the field of immunomodulators including
cannabinoids to treat chronic pain and inflammation).
When
negotiating and entering into the agreement with Dekel, Dr. Shmulewitz faced an actual conflict of interest between achieving
the most favorable terms for Dekel, as holder of controlling interest in Dekel, and owing fiduciary duties to us, as a member
of our Board of Directors and interim Chief Executive Officer. Due to this conflict, we may not have obtained as favorable terms
for this license as with an unrelated party. Under applicable Israeli law, fiduciary duties include a duty of care and a duty
of loyalty. The approval of transactions with interested parties under the Israeli Companies Law, or the Companies Law, included
audit committee, board of directors’ approvals and under the relevant circumstances that applied then, also shareholders’
approval, which were obtained prior to the entering into the transaction. See Item 6 C. “Board Practices—Approval
of Related Party Transactions under Israeli Law.”
If
there is a dispute between us and Dekel, Dr. Shmulewitz will have a conflict of interest because he may, at the time of a prospective
dispute, simultaneously have a financial interest in and owe a fiduciary duty to Dekel and simultaneously have a financial interest
in and owe a fiduciary duty to us. If a contractual dispute arises between us and Dekel under the license agreement, Dr. Shmulewitz
may be in a position where he would benefit if Dekel prevails, to the detriment of our business or our investors, due to his controlling
interest in Dekel. We cannot assure you that any conflicts will be resolved in our favor, and as a result, our business could
be impeded or materially harmed. Furthermore, any future transactions that we enter into with Dekel may be considered as
related party transactions under Israeli law, and in many instances may require the approval of our shareholders. Seeking shareholder
approval can be a lengthy and costly process, and we cannot be certain that our shareholders will approve any such transactions.
Risks
Related to Our Business Operations
We
manage our business through a small number of employees and key consultants. We depend on them even more than similarly-situated
companies.
We
have a total of nine full-time employees and three dedicated consultants that work for us on a part-time basis. In addition, any
of our employees and consultants may leave our company at any time, subject to certain notice periods. The loss of the services
of any of our executive officers or any key employees or consultants would adversely affect our ability to execute our business
plan and harm our operating results.
We
do not currently carry “key person” insurance on the lives of members of management.
We
will need to expand our organization and we may experience difficulties in recruiting needed additional employees and consultants,
which could disrupt our operations.
As
our development and commercialization plans and strategies develop and because we are so leanly staffed, we will need additional
managerial, operational, sales, marketing, financial, legal and other resources. The competition for qualified personnel in the
pharmaceutical field is intense. Due to this intense competition, we may be unable to attract and retain qualified personnel necessary
for the development of our business or to recruit suitable replacement personnel.
Our
management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial
amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations,
which may result in weaknesses in our infrastructure, operational mistakes, loss of business opportunities, loss of employees
and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may
divert financial resources from other projects, such as the development of additional product candidates. If our management is
unable to effectively manage our growth, our expenses may increase more than expected, our ability to generate and/or grow revenue
could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to
commercialize product candidates and compete effectively will depend, in part, on our ability to effectively manage any future
growth.
We
may not be successful in our efforts to identify, license or discover additional product candidates.
Although
a substantial amount of our effort will focus on the continued clinical testing, potential approval and commercialization of our
existing product candidates, the success of our business also depends in part upon our ability to identify, license or discover
additional product candidates. Our research programs or licensing efforts may fail to yield additional product candidates for
clinical development for a number of reasons, including but not limited to the following:
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our
research or business development methodology or search criteria and process may be unsuccessful in identifying potential product
candidates;
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we
may not be able or willing to assemble sufficient resources to acquire or discover additional product candidates;
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our
product candidates may not succeed in preclinical or clinical testing;
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our
potential product candidates may be shown to have harmful side effects or may have other characteristics that may make the
products unmarketable or unlikely to receive marketing approval;
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competitors
may develop alternatives that render our product candidates obsolete or less attractive;
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product
candidates we develop may be covered by third parties’ patents or other exclusive rights;
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the
market for a product candidate may change during our program so that such a product may become unreasonable to continue to
develop;
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a
product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all; and
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a
product candidate may not be accepted as safe and effective by patients, the medical community or third-party payors.
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If
any of these events occur, we may be forced to abandon our development efforts for a program or programs, or we may not be able
to identify, license or discover additional product candidates, which would have a material adverse effect on our business and
could potentially cause us to cease operations. Research programs to identify new product candidates require substantial technical,
financial and human resources. We may focus our efforts and resources on potential programs or product candidates that ultimately
prove to be unsuccessful.
We
may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, false claims laws and health information
privacy and security laws. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.
If
we obtain FDA approval for any of our product candidates and begin commercializing those products in the United States, our operations
may be directly or indirectly through our customers, subject to various federal and state fraud and abuse laws, including, without
limitation, the federal Anti-Kickback Statute, the federal False Claims Act and physician sunshine laws and regulations. These
laws may impact, among other things, our proposed sales, marketing and education programs. In addition, we may be subject to patient
privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our
ability to operate include:
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the
federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving,
offering or paying remuneration, directly or indirectly, to induce, or in return for, the purchase or recommendation of an
item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs;
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federal
civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities
from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other third-party payors
that are false or fraudulent;
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the
Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes that prohibit
executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters;
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HIPAA,
as amended by the Health Information Technology and Clinical Health Act, and its implementing regulations, which imposes certain
requirements relating to the privacy, security and transmission of individually identifiable health information;
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the
federal physician sunshine requirements under the Affordable Care Act requires manufacturers of drugs, devices and medical
supplies to report annually to the U.S. Department of Health and Human Services information related to payments and other
transfers of value to physicians, other healthcare providers and teaching hospitals and ownership and investment interests
held by physicians and other healthcare providers and their immediate family members and applicable group purchasing organizations;
and
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state
law equivalents of each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or
services reimbursed by any third-party payor, including commercial insurers, state laws that require pharmaceutical companies
to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated
by the federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral
sources; state laws that require drug manufacturers to report information related to payments and other transfers of value
to physicians and other healthcare providers or marketing expenditures and state laws governing the privacy and security of
health information in certain circumstances, many of which differ from each other in significant ways and may not have the
same effect, thus complicating compliance efforts.
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Because
of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some
of our business activities could be subject to challenge under one or more of such laws. In addition, recent health care reform
legislation has strengthened these laws. For example, the Affordable Care Act, among other things, amends the intent requirement
of the federal anti-kickback and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge
of this statute or specific intent to violate it. Moreover, the Affordable Care Act provides that the government may assert that
a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent
claim for purposes of the False Claims Act.
If
our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply
to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from participation in
government health care programs, such as Medicare and Medicaid, imprisonment and the curtailment or restructuring of our operations,
any of which could adversely affect our ability to operate our business and our results of operations.
International
expansion of our business exposes us to business, regulatory, political, operational, financial and economic risks associated
with doing business outside of the United States or Israel.
Other
than our headquarters and other operations which are located in Israel (as further described below), we currently have limited
international operations, but our business strategy incorporates potentially significant international expansion, particularly
in anticipation of approval of our product candidates. We plan to maintain sales representatives and conduct physician and patient
association outreach activities, as well as clinical trials, outside of the United States and Israel. Doing business internationally
involves a number of risks, including but not limited to:
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multiple,
conflicting and changing laws and regulations such as privacy regulations, tax laws, export and import restrictions, employment
laws, regulatory requirements and other governmental approvals, permits and licenses;
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failure
by us to obtain regulatory approvals for the use of our products in various countries;
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additional
potentially relevant third-party patent rights;
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complexities
and difficulties in obtaining protection and enforcing our intellectual property;
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difficulties
in staffing and managing foreign operations;
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complexities
associated with managing multiple payor reimbursement regimes, government payors or patient self-pay systems;
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limits
in our ability to penetrate international markets;
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financial
risks, such as longer payment cycles, difficulty collecting accounts receivable, the impact of local and regional financial
crises on demand and payment for our products and exposure to foreign currency exchange rate fluctuations;
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natural
disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease, boycotts,
curtailment of trade and other business restrictions;
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certain
expenses including, among others, expenses for travel, translation and insurance; and
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regulatory
and compliance risks that relate to maintaining accurate information and control over sales and activities that may fall within
the purview of the U.S. Foreign Corrupt Practices Act, or FCPA, its books and records provisions or its anti-bribery provisions.
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Any
of these factors could significantly harm our future international expansion and operations and, consequently, our results of
operations.
If
we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or
incur costs that could have a material adverse effect on the success of our business.
Our
research and development activities and our third-party manufacturers’ and suppliers’ activities involve the controlled
storage, use and disposal of hazardous materials, including the components of our product candidates and other hazardous compounds.
We and our manufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage, handling and
disposal of these hazardous materials. In some cases, these hazardous materials and various wastes resulting from their use are
stored at our and our manufacturers’ facilities pending their use and disposal. We cannot eliminate the risk of contamination,
which could cause an interruption of our commercialization efforts, research and development efforts, business operations and
environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage,
handling and disposal of these materials and specified waste products. Although we believe that the safety procedures utilized
by our third-party manufacturers for handling and disposing of these materials generally comply with the standards prescribed
by these laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or
injury from these materials. In such an event, we may be held liable for any resulting damages and such liability could exceed
our resources and state or federal or other applicable authorities may curtail our use of certain materials and/or interrupt our
business operations. Furthermore, environmental laws and regulations are complex, change frequently and have tended to become
more stringent. We cannot predict the impact of such changes and cannot be certain of our future compliance. We do not currently
carry biological or hazardous waste insurance coverage.
The
use of any of our product candidates could result in product liability or similar claims that could be expensive, damage our reputation
and harm our business.
Our
business exposes us to an inherent risk of potential product liability or similar claims. The pharmaceutical industry has historically
been litigious, and we face financial exposure to product liability or similar claims if the use of any of our products were to
cause or contribute to injury or death. There is also the possibility that defects in the design or manufacture of any of our
products might necessitate a product recall. Although we plan to maintain product liability insurance, the coverage limits of
these policies may not be adequate to cover future claims. In the future, we may be unable to maintain product liability insurance
on acceptable terms or at reasonable costs and such insurance may not provide us with adequate coverage against potential liabilities.
A product liability claim, regardless of merit or ultimate outcome, or any product recall could result in substantial costs to
us, damage to our reputation, customer dissatisfaction and frustration and a substantial diversion of management attention. A
successful claim brought against us in excess of, or outside of, our insurance coverage could have a material adverse effect on
our business, financial condition and results of operations.
Security
breaches and other disruptions could compromise our information, expose us to liability and harm our reputation and business.
In
the ordinary course of our business we collect and store sensitive data, including intellectual property, personal information
and our proprietary business information. The secure maintenance and transmission of this information is critical to our operations
and business strategy. We rely on commercially available systems, software, tools and domestically available monitoring to provide
security for processing, transmitting and storing this sensitive data.
Hackers
may attempt to penetrate our computer systems, and, if successful, misappropriate personal or confidential business information.
In addition, an associate, contractor or other third-party with whom we do business may attempt to circumvent our security measures
in order to obtain such information, and may purposefully or inadvertently cause a breach involving such information. While we
continue to implement additional protective measures to reduce the risk of and detect cyber incidents, cyber-attacks are becoming
more sophisticated and frequent, and the techniques used in such attacks change rapidly.
Also,
our information technology networks and infrastructure may still be vulnerable to damage, disruptions or shutdowns due to attack
by hackers or breaches, employee error or malfeasance, power outages, computer viruses, telecommunication or utility failures,
systems failures, natural disasters or other catastrophic events. Any such compromise could disrupt our operations, damage our
reputation and subject us to additional costs and liabilities, any of which could adversely affect our business.
Risks
Related to the Ownership of Our ADSs
The
market price of our securities may be highly volatile, and you may not be able to resell your ADSs at or above the price you paid.
The
market price of the ADSs is volatile. The ADS price are and will continue to be subject to wide fluctuations in response to a
variety of factors, including the following:
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adverse
results or delays in preclinical studies or clinical trials;
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reports
of adverse events in our product candidates or clinical trial failures of our product candidates;
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inability
to obtain additional funding;
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any
delay in filing a regulatory submission for any of our product or product candidates and any adverse development or perceived
adverse development with respect to the review of that regulatory submission by the FDA or European or Asian authorities;
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failure
to successfully develop and commercialize our products or product candidates;
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failure
to enter into strategic collaborations;
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failure
by us or strategic collaboration partners to prosecute, maintain or enforce our intellectual property rights;
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changes
in laws or regulations applicable to future products;
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inability
to scale up our manufacturing capabilities through third-party manufacturers, inability to obtain adequate product supply
for our products or the inability to do so at acceptable prices;
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introduction
of new products or technologies by our competitors;
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failure
to meet or exceed financial projections we may provide to the public;
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failure
to meet or exceed the financial expectations of the investment community;
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announcements
of significant acquisitions, strategic partnerships, joint ventures or capital commitments by our competitors;
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disputes
or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent
protection for our platform technologies, technologies, products or product candidates;
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additions
or departures of key scientific or management personnel;
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significant
lawsuits, including patent or shareholder litigation;
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changes
in the market valuations of similar companies;
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sales
of our securities by us or our shareholders in the future; and
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trading
volumes of our securities.
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addition, companies trading in the stock market have experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the
market price of the ADSs, regardless of our actual operating performance.
Sales
of a substantial number of our ADSs or Ordinary Shares in the public market by our existing shareholders could cause our share
price to fall.
Sales
of a substantial number of the ADSs or Ordinary Shares in the public market, or the perception that these sales might occur, could
depress the market price of the ADSs or Ordinary Shares and could impair our ability to raise capital through the sale of additional
equity securities. We are unable to predict the effect that sales may have on the prevailing market price of the ADSs or Ordinary
Shares.
The
Jumpstart Our Business Startups Act of 2012, or the JOBS Act, will allow us to postpone the date by which we must comply with
some of the laws and regulations intended to protect investors and to reduce the amount of information we provide in our reports
filed with the Securities and Exchange Commission, or SEC, which could undermine investor confidence in our company and adversely
affect the market price of the ADSs or Ordinary Shares.
For
so long as we remain an “emerging growth company” as defined in the JOBS Act, we intend to take advantage of certain
exemptions from various requirements that are applicable to public companies that are not “emerging growth companies”
including:
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the
provisions of the Sarbanes-Oxley Act requiring that our independent registered public accounting firm provide an attestation
report on the effectiveness of our internal control over financial reporting;
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any
rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement
to the auditor’s report on the financial statements; and
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our
ability to furnish two rather than three years of income statements and statements of cash flows in various required filings.
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We
intend to take advantage of these exemptions until we are no longer an “emerging growth company.” We will remain an
emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the date
of our first sale of equity securities pursuant to an effective registration statement under the Securities Act of 1933, as amended,
or the Securities Act, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed
to be a large accelerated filer, which means the market value of our Ordinary Shares that is held by non-affiliates exceeds $700
million as of the prior June 30, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during
the prior three-year period.
We
cannot predict if investors will find the ADSs or Ordinary Shares less attractive because we may rely on these exemptions. If
some investors find the ADSs or Ordinary Shares less attractive as a result, there may be a less active trading market for the
ADSs or Ordinary Shares, and our market prices may be more volatile and may decline.
As
a “foreign private issuer” we are permitted to and 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.
Our
status as a foreign private issuer also exempts us from compliance with certain SEC laws and regulations and certain regulations
of the Nasdaq Stock 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 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, to file 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 and
we will generally be exempt from filing quarterly reports with the SEC. Also, although the Companies Law requires us to disclose
the annual compensation of our five most highly compensated senior officers on an individual basis, this disclosure is not as
extensive as that required of a U.S. domestic issuer. Furthermore, as a foreign private issuer, we are also 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 to which you are entitled as an investor.
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 control 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.
We
may be a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes in the current taxable
year or may become one in any subsequent taxable year. There generally would be negative tax consequences for U.S. taxpayers that
are holders of the ADSs or Ordinary Shares if we are or were to become a PFIC.
In
general, we will be treated as a PFIC for U.S. federal income tax purposes in any taxable year in which either (1) at least 75%
of our gross income is “passive income” or (2) on average at least 50% of our assets by value produce passive income
or are held for the production of passive income. Passive income for this purpose generally includes, among other things, certain
dividends, interest, royalties, rents and gains from commodities and securities transactions and from the sale or exchange of
property that gives rise to passive income. Passive income also includes amounts derived by reason of the temporary investment
of funds, including those raised in a public offering. In determining whether a non-U.S. corporation is a PFIC, a proportionate
share of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest (by value)
is taken into account. We believe that we may be deemed a PFIC for 2019. If we are a PFIC in any taxable year during which a U.S.
taxpayer holds the ADSs or Ordinary Shares, such U.S. taxpayer would be subject to certain adverse U.S. federal income tax rules.
In particular, if the U.S. taxpayer did not make an election to treat us as a “qualified electing fund,” or QEF, or
make a “mark-to-market” election, then “excess distributions” to the U.S. taxpayer, and any gain realized
on the sale or other disposition of the ADSs or Ordinary Shares by the U.S. taxpayer: (1) would be allocated ratably over the
U.S. taxpayer’s holding period for the ADSs or Ordinary Shares; (2) the amount allocated to the current taxable year and
any period prior to the first day of the first taxable year in which we were a PFIC would be taxed as ordinary income; and (3)
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. In addition, if the U.S. Internal Revenue Service, or the IRS, determines that
we are a PFIC for a year with respect to which we have determined that we were not a PFIC, it may be too late for a U.S. taxpayer
to make a timely QEF or mark-to-market election. U.S. taxpayers that have held the ADSs or Ordinary Shares during a period when
we were a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC in subsequent years, subject to exceptions
for U.S. taxpayer who made a timely QEF or mark-to-market election. A U.S. taxpayer can make a QEF election by completing the
relevant portions of and filing IRS Form 8621 in accordance with the instructions thereto. We intend to make available to U.S.
taxpayers upon request the information needed in order to complete IRS Form 8621 and to make and maintain a valid QEF election
for any year in which we or any of our subsidiaries are a PFIC. U.S. taxpayers that hold the ADSs or Ordinary Shares 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 the ADSs or Ordinary Shares in the event that
we are a PFIC. See “Item 10.E. Taxation—U.S. Federal Income Tax Considerations—Passive Foreign Investment Companies”
for additional information.
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 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 the ADSs or Ordinary Shares 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
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, 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. 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.
We
may be subject to securities litigation, which is expensive and could divert management attention.
In
the past, companies that have experienced volatility in the market price of their stock have been subject to securities class
action litigation. We may be the target of this type of litigation in the future. Litigation of this type could result in substantial
costs and diversion of management’s attention and resources, which could seriously hurt our business. Any adverse determination
in litigation could also subject us to significant liabilities.
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 shares, the share price
and trading volume of our securities could decline.
The
trading market for the ADSs or Ordinary Shares 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 our securities, or provide more favorable relative recommendations about our competitors,
the price of our securities 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 cause the price or
trading volume of our securities to decline.
ADSs
holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in
less favorable results to the plaintiff(s) in any such action.
The
deposit agreement governing the ADSs representing our Ordinary Shares provides that owners and holders of ADSs irrevocably waive
the right to a trial by jury in any legal proceeding arising out of or relating to the deposit agreement or the ADSs, including
claims under federal securities laws, against us or the depositary to the fullest extent permitted by applicable law. If this
jury trial waiver provision is prohibited by applicable law, an action could nevertheless proceed under the terms of the deposit
agreement with a jury trial. To our knowledge, the enforceability of a jury trial waiver under the federal securities laws has
not been finally adjudicated by a federal court. However, we believe that a jury trial waiver provision is generally enforceable
under the laws of the State of New York, which govern the deposit agreement, by a court of the State of New York or a federal
court, which have non-exclusive jurisdiction over matters arising under the deposit agreement, applying such law. In determining
whether to enforce a jury trial waiver provision, New York courts and federal courts will consider whether the visibility of the
jury trial waiver provision within the agreement is sufficiently prominent such that a party has knowingly waived any right to
trial by jury. We believe that this is the case with respect to the deposit agreement and the ADSs. In addition, New York courts
will not enforce a jury trial waiver provision in order to bar a viable setoff or counterclaim sounding in fraud or one which
is based upon a creditor’s negligence in failing to liquidate collateral upon a guarantor’s demand, or in the case
of an intentional tort claim (as opposed to a contract dispute), none of which we believe are applicable in the case of the deposit
agreement or the ADSs. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder
or owner of ADSs or by us or the depositary of compliance with any provision of the federal securities laws. If you or any other
holder or owner of ADSs brings a claim against us or the depositary in connection with matters arising under the deposit agreement
or the ADSs, you or such other holder or owner may not be entitled to a jury trial with respect to such claims, which may have
the effect of limiting and discouraging lawsuits against us and / or the depositary. If a lawsuit is brought against us and /
or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which
would be conducted according to different civil procedures and may result in different results than a trial by jury would have
had, including results that could be less favorable to the plaintiff(s) in any such action, depending on, among other things,
the nature of the claims, the judge or justice hearing such claims, and the venue of the hearing.
Risks
Related to Israeli Law and Our Operations in Israel
Our
operations are subject to currency and interest rate fluctuations.
We
incur expenses in U.S. dollars and NIS, but our financial statements are denominated in U.S. dollars. U.S. dollars is our functional
currency and is the currency that represents the principal economic environment in which we operate. As a result, we are affected
by foreign currency exchange fluctuations through both translation risk and transaction risk. As a result, we are exposed to the
risk that the NIS may appreciate relative to the dollar, or, if the NIS instead devalues relative to the dollar, that the inflation
rate in Israel may exceed such rate of devaluation of the NIS, or that the timing of such devaluation may lag behind inflation
in Israel. In any such event, the dollar cost of our operations in Israel would increase and our dollar-denominated results of
operations would be adversely affected.
Provisions
of Israeli law and our articles of association 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.
As
a company incorporated under the law of the State of Israel, we are subject to Israeli law. 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 such types of transactions.
For example, a merger may not be consummated unless at least 50 days have passed from the date on which a merger proposal is filed
by each merging company with the Israel Registrar of Companies and at least 30 days have passed from the date on which the shareholders
of both merging companies have approved the merger. In addition, a majority of each class of securities of the target company
must approve a merger. Moreover, a tender offer for all of a company’s issued and outstanding shares can only be completed
if the acquirer receives positive responses from the holders of at least 95% of the issued share capital and a majority of the
offerees that do not have a personal interest in the tender offer approves the tender offer, unless, following consummation of
the tender offer, the acquirer would hold at least 98% of the company’s outstanding shares. Under the Israeli law, a potential
bidder for the company’s shares, who would as a result of a purchase of shares hold either 25% of the voting rights in the
company when no other party holds 25% or more, or 45% of the voting rights in the company where no other shareholders holds 45%
of the voting rights, would be required to make a special purchase offer as set out in the provisions of the Israeli law. The
Israeli law requires a special purchase offer to be submitted to shareholders for a pre-approval vote. A majority vote is required
to accept the offer. An offeror who is regarded as a ‘controlling shareholder’ under Israeli law cannot vote on the
resolution and the procedure includes a secondary vote of the non-voting shareholders and the shareholders who rejected the offer
at pre-approval level. A special purchase offer may not be accepted unless shares that carry 5% of the voting rights in the target
company are acquired. Furthermore, the shareholders may, at any time within six months following the completion of the tender
offer, claim that the consideration for the acquisition of the shares does not reflect their fair market value, and petition an
Israeli court to alter the consideration for the acquisition accordingly, other than those who indicated their acceptance of the
tender offer in case the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek such appraisal
rights, and the acquirer or the company published all required information with respect to the tender offer prior to the tender
offer’s response date. See “Description of Share Capital—Provisions Restricting Change in Control of Our Company—Acquisitions
under Israeli Law” for additional information.
Israeli
tax considerations also may make potential transactions unappealing to us or to our shareholders whose country of residence does
not have a tax treaty with Israel exempting such shareholders from Israeli tax. For example, Israeli tax law does not recognize
tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral
in certain circumstances but makes the deferral contingent on the fulfillment of a number of conditions, including, in some cases,
a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating
companies may be subject to certain restrictions and additional terms. Moreover, with respect to certain share swap transactions,
the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no disposition of the shares
has occurred. See “Item 10.E. Taxation—Israeli Tax Considerations and Government Programs” for additional information.
It
may be difficult to enforce a judgment of a United States court against us and our officers and directors and the Israeli experts
named in this annual report on Form 20-F in Israel or the United States, to assert United States securities laws claims in Israel
or to serve process on our officers and directors and these experts.
We
were incorporated in Israel and our corporate headquarters are located in Israel. All of our executive officers and directors
and the Israeli experts named in this annual report on Form 20-F are located in Israel. All of our assets and most of the assets
of these persons are located in Israel. Therefore, a judgment obtained against us, or any of these persons, including a judgment
based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may
not necessarily be enforced by an Israeli court. It also may be difficult to affect service of process on these persons in the
United States or to assert U.S. securities law claims in original actions instituted in Israel. Additionally, it may be difficult
for an investor, or any other person or entity, to initiate an action with respect to United States securities laws in Israel.
Israeli courts may refuse to hear a claim based on an alleged violation of United States securities laws reasoning that Israel
is not the most appropriate forum in which 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 United States law is applicable to the claim. If United States law is found to be applicable,
the content of applicable United States law must be proven as a fact by expert witnesses, 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 that addresses
the matters described above. As a result of the difficulty associated with enforcing a judgment against us in Israel, you may
not be able to collect any damages awarded by either a United States or foreign court.
Our
headquarters and other significant operations are located in Israel, and, therefore, our results may be adversely affected by
political, economic and military instability in Israel.
Our
executive offices, corporate headquarters and principal research and development facilities are located in Israel. In addition,
the vast majority of our officers and directors are residents of Israel. Accordingly, political, economic and military conditions
in Israel and the surrounding region may directly affect our business. Since the establishment of the State of Israel in 1948,
a number of armed conflicts have taken place between Israel and its neighboring Arab countries, the Hamas militant group and the
Hezbollah. 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. Ongoing and revived hostilities or other Israeli political or
economic factors, such as, an interruption of operations at the Tel Aviv airport, could prevent or delay our regular operation,
product development and delivery of products. If continued or resumed, these hostilities may negatively affect business conditions
in Israel in general and our business in particular. In the event that hostilities disrupt the ongoing operation of our facilities
and our operations may be materially adversely affected.
In
addition, since 2010 political uprisings and conflicts in various countries in the Middle East, including Egypt and Syria, are
affecting the political stability of those countries. It is not clear how this instability will develop and how it will affect
the political and security situation in the Middle East. This instability has raised concerns regarding security in the region
and the potential for armed conflict. In Syria, a country bordering Israel, a civil war is taking place. In addition, it is widely
believed that Iran, which has previously threatened to attack Israel, has been stepping up its efforts to achieve nuclear capability.
Iran is also believed to have a strong influence among extremist groups in the region, such as Hamas in Gaza and Hezbollah in
Lebanon. Additionally, the Islamic State of Iraq and Levant, or ISIL, a violent jihadist group, is involved in hostilities in
Iraq and Syria. The tension between Israel and Iran and/or these groups may escalate in the future and turn violent, which could
affect the Israeli economy in general and us in particular. Any potential future conflict could also include missile strikes against
parts of Israel, including our offices and facilities. Such instability may lead to deterioration in the political and trade relationships
that exist between the State of Israel and certain other countries. Any armed conflicts, terrorist activities or political instability
in the region could adversely affect business conditions, could harm our results of operations and could make it more difficult
for us to raise capital. Parties with whom we do business may sometimes decline to invest in Israel or in Israeli companies, or
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. Several countries, principally in the Middle East, still restrict doing business
with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli
companies if hostilities in Israel or political instability in the region continues or increases. Similarly, Israeli companies
are limited in conducting business with entities from several countries. For instance, the Israeli legislature passed a law forbidding
any investments in entities that transact business with Iran. In addition, the political and security situation in Israel may
result in parties with whom we have agreements involving performance in Israel claiming that they are not obligated to perform
their commitments under those agreements pursuant to force majeure provisions in such agreements.
Our
employees and consultants in Israel, including members of our senior management, may be obligated to perform one month, and in
some cases longer periods, of military reserve duty until they reach the age of 40 (or older, for citizens who hold certain positions
in the Israeli armed forces reserves) and, in the event of a military conflict or emergency circumstances, may be called to immediate
and unlimited active duty. In the event of severe unrest or other conflict, individuals could be required to serve in the military
for extended periods of time. 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 similar large-scale military reserve duty call-ups in the future. Our
operations could be disrupted by the absence of a significant number of our officers, directors, employees and consultants related
to military service. Such disruption could materially adversely affect our business and operations. Additionally, the absence
of a significant number of the employees of our Israeli suppliers and contractors related to military service or the absence for
extended periods of one or more of their key employees for military service may disrupt their operations.
Our
insurance does not cover losses that may occur as a result of an event associated with the security situation in the Middle East
or for any resulting disruption in our operations. Although the Israeli government has in the past covered the reinstatement value
of direct damages that were caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will
be maintained or, if maintained, will be sufficient to compensate us fully for damages incurred and the government may cease providing
such coverage or the coverage might not suffice to cover potential damages. Any losses or damages incurred by us could have a
material adverse effect on our business. Any armed conflicts or political instability in the region would likely negatively affect
business conditions generally and could harm our results of operations and product development.
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 conditions or the expansion of our business. Similarly, Israeli corporations are limited in conducting
business with entities from several countries.
Your
rights and responsibilities as a holder of our securities will be governed by Israeli law, which differs in some material respects
from the rights and responsibilities of shareholders of U.S. companies.
The
rights and responsibilities of the holders of our Ordinary Shares (and therefore indirectly and the ADSs) are governed by our
articles of association and by Israeli law. These rights and responsibilities differ in some material respects from the rights
and responsibilities of shareholders in typical U.S.-based corporations. In particular, a shareholder of an Israeli company has
certain duties to act in good faith in a customary manner in exercising its rights and performing its obligations towards the
company and other shareholders and to refrain from abusing its power in the company including, among other things, in voting at
the general meeting of shareholders on certain matters, such as an amendment to the company’s articles of association, an
increase of the company’s authorized share capital, a merger of the company, 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 shareholder
vote or to appoint or prevent the appointment of an officer of the company has a duty to act in fairness towards the company with
regard to such vote or appointment. However, Israeli law does not define the substance of this duty of fairness. There is limited
case law available to assist us in understanding the nature of this duty or the implications of these provisions. These provisions
may be interpreted to impose additional obligations on holders of our Ordinary Shares that are not typically imposed on shareholders
of U.S. corporations.
We
received Israeli government grants for certain of our past research and development activities and programs, some of which we
sold or are in the process of selling. The terms of such grants may require us, in the future, to pay royalties and to satisfy
specific conditions if and to the extent we receive future royalties or in order to complete the sale of such grant based technologies
and programs. We may be required to pay penalties in addition to payment of the royalties.
Our research and
development efforts with respect to some of our past activities, including our previous immunotherapy programs such as the BBS
Technology, which was focused on developing an immunotherapeutic monoclonal antibody for the treatment of Alzheimer’s, which
we sold in March 2015, and our Anti-CD3 technology directed toward the treatment of inflammatory and autoimmune diseases, which
in part was returned and re-assigned to Hadasit Medical Research Services & Development Ltd., or Hadassit, and in part is still
in the process of being sold, were financed in part through royalty-bearing grants from the Israeli Innovation Authority, or the
IIA, formerly known as the Office of the Chief Scientist of the Ministry of Economy and Industry. As of December 31, 2018, we have
received the aggregate amount of approximately $4.1 million from the IIA for the development of our abovementioned technologies.
With respect to such grants, we are committed to pay certain royalties up to $1.1 million relating only to technologies in our
possession and excluding any royalties for technologies that we sold to third parties. We are required to comply with the requirements
of the Israeli Encouragement of Research, Development and Technological Innovation in the Industry Law, 5744-1984, as amended,
and related regulations, or the Research Law, with respect to these past grants. The discretionary approval of an IIA committee
would be required for any assignment and/or transfer to third parties inside or outside of Israel of know-how or transfer outside
of Israel of manufacturing or manufacturing rights related to those aspects of such activities and programs (including selling
it). The IIA may impose certain conditions on any arrangement under which it permits us to transfer or assign technology or development
in or out of Israel. If we fail to comply with the Research Law, we may be required to refund certain grants previously received
and/or to pay interest and penalties and we may become subject to criminal charges. None of our current projects in the field of
cannabinoid therapeutics are supported by the IIA, yet if eligible, we may apply for such support in the future.
We are in the process of selling one of our past research
and development activities which may not be completed due to factors not in our control, and we may be required to assume
the sale activity or abandon it, subject to certain payments and liabilities.
In June 2016, we entered into a share transfer
agreement with our former subsidiary, Orimmune Bio Ltd., or Orimmune, and Karma Link Ltd., or Karma Link, a private company incorporated
under the laws of the State of Israel. According to the agreement, we sold our holdings in Orimmune to Karma Link and will assist
the assignment of the antibody Anti-CD3 technology (which was in-licensed by us from Hadasit and certain internally developed assets
and technology relating thereto).
However, since certain intellectual property
related to the Anti-CD3 technology was developed with financing, in part, from the IIA, we have not been able to assign it to Orimmune,
as we have not been able to obtain the consent of the IIA, see Item 4.B. “Business Overview—Intellectual Property—Sales
of intellectual property assets” for additional information.
If we are not able to obtain the consent
of the IIA, then we may be required to assume the sale activity or abandon it, subject to certain payments and liabilities.
ITEM 4.
|
INFORMATION
ON THE COMPANY
|
|
A.
|
History
and Development of the Company
|
Our
legal and commercial name is Therapix Biosciences Ltd. We were incorporated in the State of Israel on August 23, 2004, and are
subject to the Companies Law. Our ADSs representing our Ordinary Shares currently trade in the United States on the Nasdaq Capital
Market under the symbol “TRPX.” From December 26, 2005 to August 9, 2018, our Ordinary Shares were traded on
the Tel Aviv Stock Exchange.
Our
registered office and principal place of business is located at 4 Ariel Sharon Street, HaShahar Tower, 16th Floor, Givatayim 5320047,
Israel. Our telephone number in Israel is: +972-3-6167055.
Our
website address is http://therapixbio.com. The information contained on our website or available through our website is not incorporated
by reference into and should not be considered a part of this annual report on Form 20-F, and the reference to our website in
this annual report on Form 20-F is an inactive textual reference only. The SEC also maintains an Internet website that contains
reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our
filings with the SEC will also be available to the public through the SEC’s website at www.sec.gov.
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 could remain an emerging growth company
until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the date of our first sale of
common equity securities pursuant to an effective registration statement under the Securities Act, (b) in which we have total
annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the
market value of our Ordinary Shares that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the
date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
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 Stock
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 2018, 2017 and 2016 amounted to $17,000, $44,000 and $4,000, respectively. These expenditures were primarily
for purchases of fixed assets. Our purchases of fixed assets primarily include, computers, and equipment used for the development
of our products, and we financed these expenditures primarily from cash on hand.
Overview
We
are a specialty clinical-stage pharmaceutical company led by an experienced team of senior executives and scientists, focused
on creating and enhancing a portfolio of technologies and assets based on cannabinoids pharmaceuticals. We are focusing on a drug
development program that we call
Joint Pharma
, which targets the treatment of the central nervous system and related indications
with our product candidate THX-110. As part of our Joint Pharma program, we are also developing THX-150 and THX-160, which target
multi drug resistant bacteria and pain, respectively.
THX-110
is a combination drug candidate based on two components: (1) dronabinol, the active ingredient in an FDA approved synthetic analog
of THC, which is the major cannabinoid molecule in the cannabis plant, and (2) PEA, which is an endogenous fatty acid amide that
belongs to the class of nuclear factor agonists, which are molecules that regulate the expression of genes. We believe that the
combination of THC and PEA may induce a reaction known as the “entourage effect,” which has strong potential to treat
Tourette syndrome, obstructive sleep apnea and pain.
The
basic tenet of the entourage effect is that cannabinoids work together, or possess synergy, and affect the body in a mechanism
similar to the body’s own cannabinoid system, which is a group of molecules and receptors in the brain that mediates the
psychoactive effects of cannabis. This entourage effect may account for the pharmacological actions of PEA. Based on an activity
enhancement of other physiological compounds, PEA may indirectly stimulate the cannabinoid receptors by potentiating their affinity
for their target ligand, which is an ion or molecule that binds to a central metal atom to form a complex (alternatively known
as a coordination entity), such as endocannabinoid anandamide or phytocannabinoid THC or by inhibiting their metabolic degradation,
and by doing so, may increase the uptake of cannabinoid compounds, such as THC. Thus, we believe that the presence of the PEA
molecule likely increases the efficacy of orally administered THC, while reducing the required dosage and decreasing associated
deleterious adverse events. We have developed a proprietary formulation of PEA which we call CannAmide
TM
.
THX-150
is a drug candidate intended for the treatment of infectious diseases. It consists of dronabinol (synthetic ∆9-tetrahydracannabinol)
and/or PEA and selected antibacterial agent and possesses antimicrobial synergy potential.
THX-160
is a novel pharmaceutical CB2 receptor agonist for the treatment of pain. Modulating CB2 receptor activity by selective CB2 receptor
agonists holds unique therapeutic potential for addressing pain conditions.
For
the development of THX-110 and THX-150, we intend to seek FDA approval for the commercialization of our drug candidates through
the Section 505(b)(2) regulatory pathway under the FDC Act. The FDA’s 505(b)(2) regulatory pathway permits the filing of
a NDA where at least some of the information required for approval comes from studies that were not conducted by or for the applicant,
and for which the applicant has not received a right of reference. This approach could expedite the development program for our
product candidates by potentially decreasing the amount of preclinical and clinical data that we would need to generate in order
to obtain FDA approval. In addition, with respect to Tourette syndrome, we are pursuing orphan drug designation in the United
States. In June 2016, we initially submitted a request for orphan drug designation to the FDA for THX-110 for the treatment of
Tourette syndrome. The request is still pending and we are in communication with FDA. The last communication was in December 2018
when we received a letter from the FDA questioning if the sub-group of Tourette syndrome that we are pursuing has a prevalence
of fewer than 200,000 individuals and thus eligible for orphan drug designation. There is no assurance that we will successfully
obtain orphan drug designation for Tourette syndrome, although we believe that we can provide adequate data to address recent
issues raised by the FDA.
The
Medical Cannabis Industry
The
medicinal cannabis market is an important and evolving segment in global medical therapy. The growing awareness of the medicinal
benefits of the active cannabinoids in the plant and its use for improving the quality of life of patients with numerous and diverse
indications (oncological patients, chronic pain conditions etc.), as well as the global trends of regulatory changes relating
to the use of the plant and of cannabinoids, have all led to a rapid growth in this market. The recent changes in the perception
of medicinal cannabis and the scientific and medical acknowledgement of its benefits have created a growing need for more efficient
drugs with an improved tolerance profile. The market for medicinal cannabis (and its medical substitutes) is estimated at approximately
$2 billion per year in the United States alone and is expected to continue showing significant growth in the coming years. A report
included in the Marijuana Business Factbook 2017 suggests that by 2021, annual retail marijuana sales in the United States could
top $17 billion, which would represent a 300% increase from 2016.
Our
Drug Development Programs
THX-110
– Tourette Syndrome, Obstructive Sleep Apnea and Pain
We
believe that our product candidate, THX-110, offers a safe and potentially effective solution for a variety of medical concerns.
Despite being in its early phases of clinical testing, the application of THX-110 has extended into several treatments, including
Tourette syndrome, obstructive sleep apnea, or OSA, and both acute and chronic pain.
Tourette
Syndrome
Tourette
syndrome is a neuropsychiatric disorder, characterized by physical (motor) tics and vocal (phonic) tics. Motor tics generally
precede the development of phonic tics in Tourette syndrome, and the onset of simple tics usually predates that of complex tics.
Tourette syndrome ranges from mild symptoms to loud noises and forceful movements that can result in self-injury (e.g. punching
oneself in the face, repeating other people’s words or involuntary swearing). Many with Tourette syndrome experience additional
neurobehavioral problems and comorbidities including inattention, hyperactivity and impulsivity, anger control problems, sleep
difficulties, and obsessive-compulsive symptoms. Pharmacotherapy is used when symptoms are more severe and interfere with the
ability to function. Furthermore, according to the CDC, in most cases, the prevalence of tics decreases during adolescence and
early adulthood, and sometimes disappears entirely; therefore, there are a limited number of adults with Tourette syndrome and
it is usually manifested mainly through moderate to severe symptoms.
Market
Size
The
exact number of people with Tourette syndrome is unknown. The prevalence of Tourette syndrome and Tourette syndrome symptoms is
greater in children than in adults. CDC scientists used data from the 2011-2012 National Survey on Children’s Health to
estimate that one out of every 360 children between the ages of six through 17 have been diagnosed with Tourette syndrome in the
United States. This accounts for an estimated 138,000 children. According to 2015 meta-analysis, the Tourette syndrome population
prevalence estimate was 0.52% (Scharf JM et al, 2015).
Current
Treatment
Pharmacological
intervention is considered the first line of therapy for Tourette syndrome, but is reserved for more severe symptoms that interfere
with the individual’s ability to function. Today, a full class of drugs that interact with dopamine and non-dopamine systems
in the brain are used in the treatment of Tourette syndrome symptoms. Many of the drugs used to treat Tourette syndrome are limited
to the treatment of a narrow range of Tourette syndrome symptoms (mainly tics), and are associated with severe side effects, both
of which limit their utility. Furthermore, several of these drugs have a black box warning on their label due to their potentially
lethal effect. A black box warning is the strictest warning put in the labeling of prescription drugs or drug products by the
FDA when there is reasonable evidence of an association of a serious hazard with the drug.
The
medications commonly used to treat symptoms of Tourette syndrome can be divided into the following groups:
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Antipsychotic
medications: belong to a class of drugs primarily used to manage psychosis (including haloperidol, pimozide and fluphenazine),
all of which are associated with severe side effects (including weight gain, sedation, akathisia (a state of agitation, distress,
and restlessness), nausea and tardive dyskinesia (involuntary movements of the face and jaw), among others).
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Alpha2
Adrenergic Agonists: belong to a class of drugs primarily used to manage hypertension and migraine headaches prevention (including
clonidine and guanfacine), which have limited utility despite common application to children with Attention Deficit Hyperactivity
Disorder, or ADHD. Similar to antipsychotic medications, these also are associated with several side effects, and some of
them, such as clonidine, might even be lethal.
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Benzodiazepines,
an anticonvulsant or antiepileptic drug: belong to a class of drugs primarily used to manage seizures, panic disorder and
movement disorders. Of these, cloazepam is used off-label for the reduction of tics in Tourette syndrome patients, which also
has associated negative side effects.
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As
the currently used medications are managing only a small number of disease symptoms with limited efficacy and questionable safety,
there is a clear unmet medical need for the management of Tourette syndrome.
Our
THX-110 Solution for Tourette syndrome
Our
THX-110 platform is a drug candidate for the treatment of Tourette syndrome.
On
April 4, 2018, we announced topline results of our Phase IIa investigator-initiated study at Yale University of THX-110 for the
treatment of Tourette syndrome. The study was a single-arm, open-label trial, in which each subject both received one daily treatment
of THX-110 via oral administration and was followed-up for a period of 12 weeks. 16 subjects participated in the study and received
THX-110 at the Yale University Child Study Center at Yale University. The primary endpoint of the study was to assess the performance
of THX-110 in the treatment of adult patients suffering from symptoms of Tourette syndrome, as measured by the Yale Global Tic
Severity Scale Total Tic Score, or YGTSS-TTS, the customary index for assessing symptom severity. Treatment was given in a dose
titration regimen with a maximum dose of THX-110 consisting of 10mg dronabinol and 800mg PEA.
The
topline results of the study showed that each of these 16 subjects with medication-refractory Tourette syndrome sustained a significant
reduction of tic symptoms (paired t-test: YGTSS-TTS mean difference (mean +/- SD) =7.9+/-8.4, t= 3.7, df=15, p=0.002) from baseline
(YGTSS-TTS: 38.4 +/- 8.3) to endpoint YGTSS-TTS: 30.5 +/- 10.9). This resulted in an average tic reduction of 21% across the entire
sample of 16 Tourette syndrome subjects. Six of the 16 medication-refractory Tourette syndrome subjects experienced a response
to treatment as defined by a reduction in YGTSS-TTS of greater than 25%. Improvement over time with treatment was also observed
when generalized linear models were used to analyze repeated measures data on the YGTSS-TTS. In the study, THX-110 demonstrated
no significant effects on comorbid ADHD, anxiety, depression or obsessive-compulsive disorder, or OCD, symptoms. The medication
was generally well-tolerated by the subjects with only two subjects stopping treatment early (one due to sedation and another
due to lack of improvement in tic symptoms). 12 of the 16 subjects elected to proceed with a 24-week extension phase of the trial,
which was also completed.
Following
the Phase IIa study, we initiated in August 2018 a randomized, double-blind, placebo controlled study to evaluate the safety,
tolerability and efficacy of daily oral THX-110 in treating adults with Tourette syndrome, with Hannover Medical School, Germany. The
study includes approximately 60 patients. Study patients are randomized to either oral THX-110 or placebo at a 1:1 ratio. The
overall estimated study duration is 24 months. We plan to also conduct further preclinical studies in parallel to our clinical
plans as part of registration process with the FDA and EMA. Following these studies, if successful, we intend to conduct a Phase
III, multinational, multicenter, randomized, double-blind, parallel-group, placebo controlled study to evaluate the safety, tolerability
and efficacy of up to twice daily oral THX-110 in treating Tourette syndrome.
In
June 2016, we submitted a request for orphan drug designation to the FDA for THX-110 for the treatment of Tourette syndrome. The
request is still pending and we are in communication with FDA. Our last communication was in December 2018 when we received a
letter from FDA questioning the prevalence calculation. There is no assurance that we will successfully obtain orphan drug designation
for Tourette syndrome, although we believe that we can provide adequate data to address all issues raised by the FDA.
If
the FDA does not allow us to pursue the Section 505(b)(2) regulatory pathway as anticipated, we may need to conduct additional
clinical trials, provide additional data and information and meet additional standards for regulatory approval. If this were to
occur, the time and financial resources required to obtain FDA approval, and complications and risks associated with FDA approval,
would substantially increase. In a pre-IND meeting we had with FDA in February 2018, the FDA did not oppose our plans to submit
an NDA via the 505(b)(2) pathway relying, in part, on clinical and nonclinical information from literature related to dronabinol
and the FDA’s previous finding of safety and efficacy for the reference listed drug (Marinol).
Obstructive
Sleep Apnea
OSA
is characterized by episodic sleep state–dependent collapse of the upper airway, resulting in periodic reductions or cessations
in ventilation, with consequent hypoxia, hypercapnia, or arousals from sleep. OSA severity is typically assessed with the apnea–hypopnea
index, or AHI, which is the number of apneas and hypopneas per hour of sleep.
Market
Size and Current Treatment
At
≥15 AHI (moderate and severe), the prevalence in the general adult population ranges from 6% to 17%, being as high as 49% in
the advanced ages. OSA prevalence was also greater in obese men and women (Senaratna CV et al, 2017). A majority of today’s
OSA treatments are in the form of medical devices known as C-PAPs. The global sleep apnea devices market size was valued at $5.10
billion in 2016 and is expected to grow at a compound annual growth rate, or CAGR, of 7.7% over the forecast period. According
to a market research report published by P&S Intelligence, the global sleep apnea devices market is expected to generate $6.8
billion of revenue by 2023. The increasing geriatric population due to increasing life expectancy is expected to increase the
prevalence of OSA. Sleep disorders increase with the increase in the age. Furthermore, the prevalence of apnea is high in geriatric
population because comorbidities associated with apnea are high in the elderly population. Another factor is the increase in the
arousal frequency. The rise in presence of OSA is attributed to the reduction in the size of upper airway lumen due to increasing
age factor (Sleep Apnea Devices Market Size, Share & Trends Analysis Report by Product (Single Channel Screening Devices,
Actigraphy Systems, PSG Devices, Respiratory Polygraph) By Region, And Segment Forecasts, 2012 – 2022 (https://www.grandviewresearch.com/industry-analysis/sleep-apnea-devices-market).
Additionally, and only if other therapies haven't been effective, surgery can be considered.
Our
THX-110 Solution for OSA
In
October 2017, we signed an agreement with Assuta Medical Center, or Assuta, to conduct a Phase IIa, sponsor-initiated trial for
the treatment of OSA THX-110. The study commenced in April 2018.
Within
the THX-110 platform, we initiated a proof of concept phase IIa for OSA in 2018, and we expect to complete enrollment by the third
quarter of 2019. The OSA trial, titled “Examining the Efficacy of a Therapeutic Combination of Dronabinol (synthetic ∆9-tetrahydracannabinol)
and Palmitoylethanolamide for Obstructive Sleep Apnea,” is conducted under the leadership of Prof. Yaron Dagan, head of
the Sleep Medicine Institute at Assuta. Thirty patients with a confirmed OSA diagnosis are evaluated for one month with the primary
efficacy endpoint evaluating a significant change in the AHI, which assesses the quality of sleep before and after treatment,
as well as safety of the treatment. Secondary efficacy measurements include a change in blood oxidation index before and after
the treatment, improvement in quality assessment index, improvement in fatigue and sleepiness based on the Epworth Sleepiness
Scale index.
Chronic
and Acute Pain (THX-110)
In
March 2018, the FDA cleared the Investigator-Initiated Investigational New Drug application, or the iIND, for THX-110 in the treatment
of chronic low back pain. As of the date hereof, we have not initiated a clinical trial under the iIND for THX-110. As such, we
are examining alternatives for conducting this program.
Anti-Bacterial
Antibiotics
revolutionized medicine in the 20th century, and have together with vaccinations led to the near eradication of diseases such
as tuberculosis in the developed world. However, this has led to widespread problems with antimicrobial and antibiotic resistance,
so much so that the World Health Organization has classified antimicrobial resistance as a "serious threat." Each year
in the United States, at least 2 million people become infected with bacteria that are resistant to antibiotics and at least 23,000
people die each year as a direct result of these infections. There are currently considerable challenges with the treatment of
infections caused by strains of clinically relevant bacteria that show multi-drug-resistance. New anti-bacterial agents are therefore
urgently needed, but only one new class of antibacterial has been introduced in the last 30 years. In addition, some antibiotics
have been associated with a range of adverse side effects. Side effects range from mild to very serious depending on the antibiotics
used, the microbial organisms targeted, and the individual patient. Pharmaceutical combinations of antimicrobial agents with other
molecules capable of increasing the potency of the antimicrobial agents could decrease the minimal therapeutic dosages of antimicrobial
agents required, thus minimizing the development of drug resistance, reducing antibiotics-associated side effects, preventing
biofilm formation and/or treating the established biofilms. We aim to elucidate the mechanism of action of cannabinoids and cannabinoid-mimetics
as potentiator for currently used antibiotics, as well as to provide an alternative remedy for the issue posed by antibiotic resistance.
The proposed application consists of the pharmaceutical combinations of current antimicrobial agents with our proprietary formulation
of a cannabinioid, THC, and a cannabinoid-like compound, PEA, in the hope to elucidate a new mechanism of action for the development
of antibiotic treatment, in particular for bacterial strains showing multi-drug-resistance.
Market
Size
Transparency
Market Research (TMR) has published a new report titled, “Gram-Positive Bacterial Infections Market - Global Industry Analysis,
Size, Share, Growth, Trends, and Forecast, 2018–2026.” Gram-positive bacterial are bacteria that give a positive result
in the Gram stain test, which is traditionally used to quickly classify bacteria into two broad categories according to their
cell wall. According to the report the global gram-positive bacterial infections market was valued at $58.7 billion in 2017. It
is projected to expand at a CAGR of 1.5% for the forecast period of 2018 to 2026. The gram-positive bacterial infections market
is projected to expand during the forecast period owing to an increase in the number of cases of gram-positive bacterial infections
and rapid rise in antibacterial resistance. Moreover, factors such as increased government initiatives and funding for R&D
activities and newer bacterial infection treatment and infection control in healthcare settings drive the global gram-positive
bacterial infections market. North America dominated the global gram-positive bacterial infections market and is expected to maintain
its position owing to a rise in the prevalence of bacterial infections, better diagnosis, and treatment rate in the region.
Current
Treatment
Gram-positive
bacterial infections drugs act against gram-positive bacterial infections such as Methycillin-resistant Staphylococcus aureus,
or MRSA, infections, sinusitis, cellulitis, and pneumonia. Antibiotics are widely used as the first line of treatment for these
infections. Antibacterial resistance is considered to be a serious threat in this century for the treatment of bacterial infections.
The market for gram-positive bacterial infections is expanding significantly due to a rise in the number of cases of bacterial
infections and rapid increase in antibacterial resistance. Furthermore, infection control in healthcare settings and increasing
government initiatives and funding for R&D activities have fueled the gram-positive bacterial infections market.
Our
THX-150 Anti-Bacterial Solution
In
January 2017, we initiated a program in the antimicrobial therapies area. Our objective is to use our entourage technology in
association with cannabinoids to increase the efficacy of existing antibiotic drugs, especially in antibiotic-resistant bacteria
strains. The resistance to antimicrobials has become a global hazard. We believe that there is an urgent need for the development
of novel antimicrobial agents. Cannabinoids such as THC have been shown to have a wide range of important biological activities,
including potential antibacterial activity. We are in the midst of our pre-clinical research stage for our proprietary drug candidate
THX-150. We have successfully performed an array of in-vitro studies intended to evaluate the synergistic effects of THX-150 components
in various strains of multi drug resistant bacteria. In addition we are assessing the efficacy of THX-150 in an animal model of
thigh infection.
Pain
(THX-160)
Pain
is the most common reason for physician consultation in most developed countries. It is a major symptom in many medical conditions,
and can interfere with a person’s quality of life and general functioning. Opioid medications can provide short, intermediate
or long acting analgesia depending upon the specific properties of the medication and whether it is formulated as an extended
release drug. Opioids are efficacious analgesics in chronic malignant pain and modestly effective in nonmalignant pain management.
However, there are associated adverse effects, especially during the commencement or change in dose. Prolonged opioid use may
cause drug tolerance, chemical dependency, diversion and addiction. The potency and availability of these substances, despite
their high risk of addiction and overdose, have made them popular both as formal medical treatments and as recreational drugs.
Due to their sedative effects on the medulla oblongata, opioids in high doses present the potential for respiratory depression,
and may cause respiratory failure and death. In a 2013 review study published in Fundamental & Clinical Pharmacology, various
studies were cited demonstrating that cannabinoids exhibit comparable effectiveness to opioids in models of acute pain and even
greater effectiveness in models of chronic pain. Cannabis produces several compounds with known analgesic activities known together
as cannabinoids, such as THC and cannabidiol (CBD). All cannabinoids bind and act through one of the two characterized cannabinoid
receptors: CB1 and CB2. However, activation of the CB1 receptor (as for example in the case of THC) leads to unwanted psychoactive
“high” and other adverse events, whereas activation of CB2 does not lead to any psychoactivity. In addition and unrelated
to the above sentence, the affinity of the cannabis derived cannabinoids to these receptors is limited and partial. Newly synthetic
cannabinoid HU-433, a specific CB2 agonist with full CB2 receptor affinity, was synthesized by Prof. Raphael Mechoulam from Hebrew
University of Jerusalem, and is our proprietary new chemical entity.
More
than 100 million Americans are suffering from pain. The annual economic burden of prescription opioids misuse in 2016 sums in
$78.5 million, while the total incremental cost of health care due to pain ranged from $261 to $300 billion.
Our
THX-160 Pain Solution
In
July 2018, we executed a license agreement with Yissum, the technology transfer company of the Hebrew University of Jerusalem,
for THX-160, a synthetic cannabinoid synthesized by Prof. Mechoulam. We completed two preliminary preclinical studies evaluating
analgesic and opioid-sparing effects of this compound in a rat model of acute and chronic pain. In the preclinical studies, THX-160
was well tolerated and did not cause any significant adverse clinical effects. In addition, efficacy studies demonstrated the
analgesic superiority of THX-160 over control and were comparable to high-dose morphine analgesic effects and in some instances
exerted greater potency. The efficacy and safety of THX-160 was shown for both acute and chronic pain.
Other
programs
Cannabis
and cannabinoids have great therapeutic potential and have been used for years for medicinal purposes. For example, cannabis
and cannabinoids are being used to improve the quality of life of patients with numerous and diverse indications (oncological
patients, chronic pain conditions, etc.). We believe that the novel approaches and unique mechanism of action of our proprietary
technology platforms, including our drug delivery systems and unique combination and specific dosages, may be expanded to treat
additional diseases and unmet medical needs. We have an additional program that we call
BrainBright Pharma,
with our product
candidate THX-130 which is a low dose THC treatment.
In
the future, we may consider expanding our pipeline to include these additional indications.
Therapix
Healthcare Resources, Inc.
On
July 26, 2018, and as amended in July, August and October 2018, we entered into an agreement for convertible loans, the Convertible
Loans Agreement, with THR. On July 31, 2018, THR entered into an asset purchase agreement with a third party for equipment, a
laboratory and patient medical records.
On
October 3, 2018, we converted an aggregate of approximately $1.63 million of convertible loans issued under the Convertible Loans
Agreement and, as a result of such conversion and other non-cash startup expenses previously provided to THR, we obtained an equity
ownership interest of 82.36% in THR. We currently have approximately $688,000 in convertible loans outstanding to THR.
THR
was engaged in operating pain treatment clinics to treat an assortment of different pains, including acute pain, spine pain, chronic
headaches, cancer pain, oral/maxillofacial pain, neuropathic pain and rheumatologic/myofascial pain.
Due
in part to significant losses incurred by THR, as well as its failure to maintain required licenses to operate its facilities,
THR has commenced liquidation of its assets. The liquidation of THR’s remaining assets, or potential claims that may arise
from the liquidation and dissolution of THR may adversely affect our reputation or divert management’s attention in the
event of any material litigation or in the event that the liquidation process is prolonged. At this time, neither we nor THR are
able to estimate reliably the timing and results of the proposed liquidation or of any consequences that may occur as a result
thereof.
Intellectual
Property
Our
intellectual property portfolio comprises three granted U.S. patents and seven pending patent applications, of which four applications
have either the PCT, pending status or have entered national stage and are under examination by national authorities. Of this
portfolio, we have exclusively licensed one granted U.S. patent from Dekel and one patent family from Yissum.
Internally
Developed Patent Applications
In
April 2015, we filed a provisional application with the USPTO for combinations of cannabinoids, n-acylethanolamines, and inhibitors
of n-acylethanolamine degradation, which, in April 2016 was converted into the international PCT stage and in October 2017 into
National Phase in the following state entities: U.S., EPO (European Patent Office), Israel, Australia, Canada, China and Japan.
The technology is based on the entourage effect paradigm, and is directed to utilizing the potentiating effect of n-acylethanolamines
on cannabinoids for any cannabinoid amenable indication, including but not limited to analgesia and Tourette syndrome. Any resulting
patent from this application would be expected to expire in April 2036.
In
May 2015, we filed a provisional application with the USPTO for combinations of opioids, n-acylethanolamines, and inhibitors of
n-acylethanolamines degradation, which, in May 2016 entered the PCT stage, and in November 2017 into National Phase in the following
state entities: U.S., EPO, Israel, Australia, Canada, China and Japan. The technology is also based on the entourage effect paradigm,
purposed with utilizing the potentiating effect of N-acylethanolamines on opioids for opioid amenable indications. Any resulting
patent from this application would be expected to expire in May 2036.
In
July 2016, we filed a provisional application with the USPTO for the technology which is based on potentiating the efficacy of
currently used antibiotics. This application converted to a non-provisional application PCT application in July 2017 and in January
2019 into National Phase in the following state entities: USA, EPO, and China. Any resulting patent from this application would
be expected to expire in July 2037.
In
January 2018, we filed a provisional application with the USPTO for the technology which describes methods of treating OSA. This
application converted to a non-provisional application PCT application in January 2019. Any resulting patent from this application
would be expected to expire in January 2039.
In
March 2013, we filed a provisional application with the USPTO for the technology of proprietary sequences of anti-CD3 antibody
and the utilization of the latter in various autoimmune diseases, as well as in hepato-pathologies. The provisional application
has been converted to a PCT and then entered a National Status in December 2014 in the US, EPO, China, Canada and Japan. In the
USA it has received a grant status in June 2018.
In-Licensed
Patents and Patent Applications
In
May 2015, we entered into an exclusive, irrevocable, worldwide license agreement with Dekel for certain technology and one granted
U.S. patent related to compositions and methods for treating inflammatory disorders. The agreement became effective in August
2015. Pursuant to the license agreement, we granted Dekel an option to purchase 3,876,000 of our Ordinary Shares at an exercise
price of NIS 0.5 per share, exercisable for 90 days. The option was fully exercised as of November 2015. We also granted Dekel
an additional option to purchase 11,926,154 of our Ordinary Shares at an exercise price of NIS 0.65 per share, exercisable for
12 months. To date, 65% of the second option (representing options to purchase 7,760,256 Ordinary Shares) has been exercised,
for aggregate consideration of NIS 5 million, and the remainder of the option has expired. Pursuant to the license agreement,
in May 2016 we issued Dekel 200,000 of our Ordinary Shares at a price per share of NIS 0.5 on account of future royalty payments.
This upfront payment of shares on account of future royalty payments was originally a pre-condition for the closing of the agreement
and was subject to TASE’s prior approval. This pre-condition was subsequently forfeited by Dekel under the first amendment
of the license agreement, to enable the agreement to enter into effect even prior to TASE approval, which was eventually obtained
later on. Also, pursuant to the license agreement, we are obligated to pay Dekel fees based on specific milestones and royalties
upon commercialization. The milestone payments include: (i) $25,000 upon the successful completion of preclinical trials (which
milestone was met in November 2016, resulting in this payment becoming due, and which was paid in March 2017); (ii) $75,000 upon
the successful completion of a Phase I/IIa trial (which was paid in April 2018); and (iii) $75,000 upon the earlier of generating
net revenues of at least $200,000 from the commercialization of the technology or the approval of the FDA / the EMA of a drug
based on the licensed assets. In each case, and subject to our discretion, the respective milestone payments are payable in cash
or equity based on a price per Ordinary Share of NIS 0.5. The royalty payments are 8% for commercialization and 35% pursuant to
a sub-license of the licensed assets. The patent expiration dates of any patents maturing from this application would likely be
2029.
On
July 29, 2018, we entered into an exclusive, worldwide, sublicensable, royalty-bearing license agreement with Yissum for a license
to make commercial use of the licensed technology, in order to develop, obtain regulatory approvals, manufacture, market, distribute
or sell products, or the Yissum License Agreement. According to the Yissum License Agreement, we shall pay Yissum royalties at
the rates of 3% of net sales, subject to the royalty reductions as described in the Yissum License Agreement. All right, title
and interest in and to the Yissum License Agreement shall vest solely in Yissum, and we shall hold and make use of the rights
granted. All rights in the development results shall be solely owned by us, except to the extent that an employee of the Yissum,
including the researcher, is considered an inventor of a patentable invention arising from the development results, in which case
such invention and all patent applications and/or patents claiming such invention shall be owned jointly by us and Yissum, as
appropriate, and Yissum’s share in such joint patents shall be automatically include in the Yissum License Agreements.
Other
Intellectual Property Protection
In
addition to patent protection, we intend to use other means to protect our proprietary rights, including pursuing marketing or
data exclusivity periods, orphan drug status, and similar rights that are available under regulatory provisions in certain countries,
including but not limited to the United States, Europe, Canada, Japan, and China.
We
also rely on trade secrets, know-how, and continuing innovation to develop and maintain our competitive position. We cannot be
certain that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications
filed by us in the future, nor can we be sure that any of our existing patents or any patents granted to us in the future will
be commercially useful in protecting our technology.
We
also seek regulatory approval for our products for indications with high unmet medical need, great market potential, and where
we have a proprietary position through patents covering various aspects of our products, including but not limited to: composition,
dosage, formulation, use, and manufacturing process. Our success depends, in part, on an intellectual property portfolio that
supports future revenue streams and erects barriers to our competitors. We are maintaining and building our patent portfolio through
filing new patent applications, prosecuting existing applications, and licensing and acquiring new patents and patent applications.
Despite
these measures, any of our intellectual property and proprietary rights could be challenged, invalidated, circumvented, infringed
or misappropriated. Intellectual property and proprietary rights may not be sufficient to permit us to take advantage of current
market trends or otherwise to provide competitive one. For more information, see Item 3D. “Risk Factors—Risks Related
to our Intellectual Property.”
Sales
of intellectual property assets
In
June 2016, we entered into a share transfer agreement with our former subsidiary, Orimmune, and Karma Link. According to the agreement,
we sold our holdings in Orimmune to Karma Link and will assist the assignment of the antibody Anti-CD3 technology (which was in-licensed
by us from Hadasit and certain internally developed assets and technology relating thereto). We have been assisting Karma Link
with the activities related to the assignment of the license with all relevant parties and authorities. During May 2017, we entered
into the Amendment with Karma Link and Orimmune, pursuant to which the parties acknowledged that our discussions with Hadasit
regarding the possibility of assigning the license to Orimmune, as contemplated in the transfer agreement, have yet to mature
into an agreement with Hadasit, due to Hadasit’s objection to the proposed assignment. We agreed to bear certain fees expenses
related to the license incurred prior to the date hereof in the amount of $60,000, which were paid to Orimmune. In addition, during
a period of six months commencing as of the date of the amendment, we agreed to bear certain additional fees and expenses related
to the license. It was determined that such additional amounts will not exceed $15,000. All such additional fees and expenses
shall be coordinated with our approval in advance. In consideration for such participation by us, it was agreed to increase the
percentages of the predetermined rate. Although failure to complete the assignment will not constitute a breach of the agreement
by us, such failure may obligate us to decide whether to continue with the program (including continuing the search for other
potential collaborators for the assignment of the license) or to abandon the license pursuant to the provisions of the original
license agreement with Hadasit. In either of such events, we may bear certain payments and liabilities to third parties including
the IIA.
The
IIA has declined our request for a joint ownership registration with Hadasit of the patent underlying the assets, according to
the license agreement with Hadasit due to the IIA’s claim that such registration is not in compliance with the IIA rules
regarding use of its grants. Following further discussions between Hadasit and us held during the second half of 2017, and through
the first quarter of 2018, after not succeeding in assigning the license to a buyer, we signed the Termination Agreement. According
to the Termination Agreement, Hadasit assigned to us the Therapix Patent, and we re-assigned to Hadasit all of its rights, title
and interest in the patents that developed by Hadasit prior to the Hadasit License.
On
April 18, 2018, we submitted an application with the IIA to approve the assignment of the Therapix Patent to Orimmune. We are
currently in discussions with the IIA in connection with the terms of approval of this request, which will
, inter
alia,
address a previous refusal received by the IIA to a request to recognize the registration of a joint patent with Hadasit, under
the license agreement, which according to the IIA did not comply with the rules and regulations with respect to use of funds received
under the IIA grant.
On
July 4, 2018, and according to the Termination Agreement, we paid Hadassit an amount of approximately $104,000 due to, inter alia,
accrued costs and expenses relating to the filing, prosecution and maintenance of the patent rights; license maintenance fee due
to Hadasit for the years 2016 and 2017 and unpaid related consultancy fees for work performed during 2015.
On
December 13, 2018, an additional amendment to the transfer agreement was signed, or the Additional Amendment, between us, Karma
Link and Orimmune, under which the parties acknowledged that despite our efforts and assistance in the discussions with Hadasit
regarding the possibility of assigning the license to Orimmune, Orimmune chose not to enter into an agreement with Hadasit. In
addition and notwithstanding the foregoing, we are willing to assign to Orimmune the entire right, title and interest in specific
patents, subject to fulfilment of certain conditions precedent which are in effect as of the date of this annual report.
Commercialization
We
intend to build a global commercial infrastructure to effectively support the commercialization of our product candidates, if
and when we believe regulatory approval of a product candidate in a particular geographic market appears imminent.
To
develop the appropriate commercial infrastructure, we will likely have to invest significant amounts of financial and management
resources, some of which we expect to commit prior to completing the regulatory process for our product candidates. Where appropriate,
we may elect in the future to utilize strategic partners, distributors, or contract sales forces to assist in the commercialization
of our products. In certain instances we may consider building our own commercial infrastructure.
Competition
The
biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong
emphasis on proprietary products. While we believe that our scientific knowledge, technology and development experience provide
us with competitive advantages, we face potential competition from many different sources, including major pharmaceutical, specialty
pharmaceutical and biotechnology companies, academic institutions, governmental agencies and public and private research institutions.
Any product candidates that we successfully develop and commercialize will compete with existing therapies and new therapies that
may become available in the future.
The
first THC-based pharmaceutical, a pill sold under the commercial name of Marinol (scientific name: dronabinol), was developed
by a company called Unimed Pharmaceuticals, with funding provided by the National Cancer Institute. In 1985, Marinol received
FDA approval as a treatment for chemotherapy-related nausea and vomiting. Today, Marinol is marketed by AbbVie, Inc. Since the
introduction of Marinol into the market, other pharmaceuticals containing THC have also been developed. These include generic
oral capsules of dronabinol, such as those marketed by SVC Pharma LP and Akorn Inc., Insys Therapeutic Inc.’s Syndros, an
orally administered liquid formulation of dronabinol, Meda AB’s Cesamet (nabilone), a synthetic derivative of THC, and Sativex
(nabiximols), a whole cannabis extract administered as an oral spray. Furthermore, we are aware of multiple companies that are
working in the cannabis therapeutic area and are pursuing regulatory approval for their product candidates. For example,
GW, which markets Sativex, a botanical cannabinoid oral mucosal for the treatment of spasticity due to multiple sclerosis is seeking
FDA approval in the United States, and is developing Epidiolex, a liquid formulation of highly purified cannabidiol extract, as
a treatment for Dravet’s Syndrome, Lennox Gastaut Syndrome, and various childhood epilepsy syndromes and Prader-Willi syndrome.
Insys Therapeutics, Inc. is also seeking FDA approval for an orally-administered liquid formulation of its synthetic cannabidiol
compound as a treatment for Dravet’s Syndrome, Lennox Gastaut Syndrome, and other childhood epilepsy syndromes. Zynerba
is developing a transdermal formulation of cannabidiol, and Nemus is focused on the discovery, development and commercialization
of cannabis therapeutics.
In
addition, GW develops a CBDV based therapy for autism spectrum disorders and therapy for neonatal hypoxic-ischemic encephalopathy,
glioblastoma and schizophrenia. Zynerba is developing a transdermal formulation of cannabidiol for Fragile X and certain refractory
epilepsies. In addition, Zynerba is currently developing a transdermal formulation of pro-drug of THC for neuropsychiatric disorders
including Tourette syndrome. Nemus is focused on the discovery, development and commercialization of cannabis therapeutics. Corbus
Pharmaceuticals is seeking FDA approval for their synthetic cannabinoid for systemic sclerosis, cystic fibrosis, dermatomyositis
and systemic lupus erythematosus.
Our
competitors, either alone or through their strategic partners, might have substantially greater name recognition and financial,
technical, manufacturing, marketing and human resources than we do and significantly greater experience and infrastructure in
researching and developing pharmaceutical products, obtaining FDA and other regulatory approvals of those products and commercializing
those products around the world. They may also have intellectual property portfolios that provide them with significant competitive
advantages or create substantial barriers in our target markets.
Manufacturing
We
currently expect to contract with third parties for the manufacturing and testing of our product candidates for preclinical trials
and clinical trials and intend to do so in the future. We do not own or operate manufacturing facilities for the production of
clinical quantities of our product candidates. The use of contracted manufacturing and reliance on collaboration partners is relatively
cost-efficient and has may eliminate the need to directly invest in manufacturing facilities and additional staff. Nevertheless,
we are looking into entering into transactions with a potential partner that owns or has clinical or commercial scale manufacturing
capabilities.
To
date, our third-party manufacturers have met our manufacturing requirements. We expect third-party manufacturers to be capable
of providing sufficient quantities of our product candidates to meet anticipated full scale commercial demands. To meet our projected
needs for commercial manufacturing, third parties with whom we currently work might need to increase their scale of production,
or we will need to secure alternate suppliers. We believe that there are alternate sources of supply that can satisfy our clinical
and commercial requirements, although we cannot be certain that identifying and establishing relationships with such sources,
if necessary, would not result in significant delay or material additional costs.
Government
Regulation
FDA
Approval Process
In
the United States, pharmaceutical product candidates are subject to extensive regulation by the FDA. The FDC Act, and other federal
and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping,
approval, labeling, promotion, and marketing, distribution, post-approval monitoring, and reporting, sampling, and import and
export of pharmaceutical product candidates. Failure to comply with applicable U.S. requirements regulations may subject a company
to a variety of administrative or judicial sanctions, such as FDA refusal to approve pending New Drug Applications (NDAs), warning
letters, product candidate recalls, product candidate seizures, total or partial suspension of production or distribution, injunctions,
fines, civil penalties and criminal prosecution.
Pharmaceutical
product candidate development in the United States typically involves pre-clinical laboratory and animal testing, the submission
to the FDA of an Investigational New Drug Application (IND), which must become effective before clinical testing may commence,
and adequate, well-controlled clinical trials to establish the safety and effectiveness of the drug for each indication for which
FDA approval is sought. Satisfaction of FDA pre-market approval requirements typically takes many years and the actual time required
may vary substantially based upon the type, complexity and novelty of the product candidate or disease.
Pre-clinical
tests include laboratory evaluation of drug substance and drug product’s candidate chemistry, formulation and toxicity,
as well as animal trials to assess the characteristics and potential safety and efficacy of the product candidate. The conduct
of the pre-clinical tests must comply with federal regulations and requirements, including GLP. The results of pre- clinical testing
are submitted to the FDA as part of an IND along with other information, including information about product candidate chemistry,
manufacturing and controls, and a proposed clinical trial protocol. Long term pre-clinical tests, such as animal tests of reproductive
toxicity and carcinogenicity, may continue after the IND is submitted.
A
30-day waiting period after the submission of each original IND is required prior to the commencement of clinical testing in humans.
If the FDA has not imposed a clinical hold on the IND or otherwise commented or questioned the IND within this 30-day period,
the proposed clinical trial proposed in the IND may begin.
Clinical
trials involve the administration of the investigational product to healthy volunteers or patients under the supervision of a
qualified investigator. Clinical trials must be conducted: (i) in compliance with federal regulations, (ii) in compliance with
GCP, an international standard meant to protect the rights and health of patients and to define the roles of clinical trial sponsors,
administrators and monitors. Clinical protocols and (iii) under protocols detailing the objectives of the trial, the parameters
to be used in monitoring safety, and the effectiveness criteria to be evaluated. Each protocol and any amendment involving testing
on of U.S. patients study subjects within the United States and subsequent protocol amendments must be submitted to the FDA as
part of the IND.
The
FDA may order the temporary, or permanent, discontinuation of a clinical trial at any time or impose other sanctions if the FDA
believes that the clinical trial either is not being conducted in accordance with FDA requirements regulations or presents an
unacceptable risk to the clinical trial subjects. The trial protocol and informed consent information for subjects in clinical
trials must also be submitted to an IRB for approval. An IRB may also require the clinical trial at the site to be halted, either
temporarily or permanently, for failure to comply with the IRB’s requirements or may impose other conditions.
505(b)(2)
Regulatory Approval Process
Section
505(b)(2) of the FDCA, or 505(b)(2), provides an alternate regulatory pathway to FDA approval for new or improved formulations
or new uses of previously approved drug products. Specifically, 505(b)(2) permits the filing of an NDA where at least some of
the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has
not obtained a right of reference or use from the person by or for whom the investigations were conducted. The applicant may rely
upon the FDA’s prior findings of safety and efficacy for an approved product that acts as the reference listed drug for
purposes of a 505(b)(2) NDA. The FDA may also require 505(b)(2) applicants to perform additional studies or measurements to support
any changes from the reference listed drug. The FDA may then approve the new product candidate for all or some of the labeled
indications for which the referenced product has been approved, as well as for any new indication sought by the 505(b)(2) applicant.
Orange
Book Listing
Section
505 of the FFDCA describes three types of marketing applications that may be submitted to the FDA to request marketing authorization
for a new drug. A Section 505(b)(1) NDA is an application that contains full reports of investigations of safety and efficacy.
A 505(b)(2) NDA is an application that contains full reports of investigations of safety and efficacy, but where at least some
of the information required for approval comes from investigations that were not conducted by or for the applicant and for which
the applicant has not obtained a right of reference or use from the person by or for whom the investigations were conducted. This
regulatory pathway enables the applicant to rely, in part, on the FDA’s prior findings of safety and efficacy for an existing
product, or published literature, in support of its application. Section 505(j) establishes an abbreviated approval process for
a generic version of approved drug products through the submission of an abbreviated new drug application, or ANDA. An ANDA provides
for marketing of a generic drug product that has the same active ingredients, dosage form, strength, route of administration,
labeling, performance characteristics and intended use, among other things, to a previously approved product. ANDAs are termed
“abbreviated” because they are generally not required to include preclinical and clinical data to establish safety
and efficacy. Instead, generic applicants must scientifically demonstrate that their product is bioequivalent to, or performs
in the same manner as, the innovator drug through in vitro, in vivo or other testing. The generic version must deliver the same
amount of active ingredients into a subject’s bloodstream in the same amount of time as the innovator drug and can often
be substituted by pharmacists under prescriptions written for the reference listed drug.
In
seeking approval for a drug through an NDA, including a 505(b)(2) NDA, applicants are required to list with the FDA patents whose
claims cover the applicant’s product. Upon approval of an NDA, each of the patents listed in the application for the drug
is then published in Approved Drug Products with Therapeutic Equivalence Evaluations, also known as the Orange Book. These products
may be cited by potential competitors in support of approval of an ANDA or 505(b)(2) NDA.
Any
applicant who submits an ANDA seeking approval of a generic equivalent version of a drug listed in the Orange Book or a 505(b)(2)
NDA referencing a drug listed in the Orange Book must certify to the FDA that (1) no patent information on the drug product that
is the subject of the application has been submitted to the FDA; (2) such patent has expired; (3) the date on which such patent
expires; or (4) such patent is invalid or will not be infringed upon by the manufacture, use or sale of the drug product for which
the application is submitted. This last certification is known as a Paragraph IV certification. Generally, the ANDA or 505(b)(2)
NDA cannot be approved until all listed patents have expired, except where the ANDA or 505(b)(2) NDA applicant challenges a listed
patent through a Paragraph IV certification. If the applicant does not challenge the listed patents or does not indicate that
it is not seeking approval of a patented method of use, the ANDA or 505(b)(2) NDA application will not be approved until all of
the listed patents claiming the referenced product have expired.
If
the competitor has provided a Paragraph IV certification to the FDA, the competitor must also send notice of the Paragraph IV
certification to the holder of the NDA for the reference listed drug and the patent owner once the application has been accepted
for filing by the FDA. The NDA holder or patent owner may then initiate a patent infringement lawsuit in response to the notice
of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of the receipt of a Paragraph IV
certification prevents the FDA from approving the application until the earlier of 30 months from the date of the lawsuit, expiration
of the patent, settlement of the lawsuit, a decision in the infringement case that is favorable to the applicant or such shorter
or longer period as may be ordered by a court. This prohibition is generally referred to as the 30-month stay. In instances where
an ANDA or 505(b)(2) NDA applicant files a Paragraph IV certification, the NDA holder or patent owner regularly take action to
trigger the 30-month stay, recognizing that the related patent litigation may take many months or years to resolve. Thus, approval
of an ANDA or 505(b)(2) NDA could be delayed for a significant period of time depending on the patent certification the applicant
makes and the reference drug sponsor’s decision to initiate patent litigation. The applicant may also elect to submit a
statement certifying that its proposed label does not contain, or carves out, any language regarding the patented method-of-use
rather than certify to a listed method-of-use patent.
Although
our product candidates are based on repurposed drugs, there are at present no patents or other exclusivities listed in the Orange
Book pertaining to a product containing the active ingredient dronabinol.
Exclusivity
The
FDA provides periods of regulatory exclusivity, which provides the holder of an approved NDA limited protection from new competition
in the marketplace for the innovation represented by its approved drug for a period of three or five years following the FDA’s
approval of the NDA. Five years of exclusivity are available to NCEs. An NCE is a drug that contains no active moiety that has
been approved by the FDA in any other NDA. An active moiety is the molecule or ion, excluding those appended portions of the molecule
that cause the drug to be an ester, salt, including a salt with hydrogen or coordination bonds, or other noncovalent, or not involving
the sharing of electron pairs between atoms, derivatives, such as a complex (i.e., formed by the chemical interaction of two compounds),
chelate (i.e., a chemical compound), or clathrate (i.e., a polymer framework that traps molecules), of the molecule, responsible
for the therapeutic activity of the drug substance. During the exclusivity period, the FDA may not accept for review or approve
an ANDA or a 505(b)(2) NDA submitted by another company that contains the previously approved active moiety. An ANDA or 505(b)(2)
application, however, may be submitted one year before NCE exclusivity expires if a Paragraph IV certification is filed.
If
a product is not eligible for the NCE exclusivity, it may be eligible for three years of exclusivity. Three-year exclusivity is
available to the holder of an NDA, including a 505(b)(2) NDA, for a particular condition of approval, or change to a marketed
product, such as a new formulation for a previously approved product, if one or more new clinical trials, other than bioavailability
or bioequivalence trials, was essential to the approval of the application and was conducted or sponsored by the applicant. This
three-year exclusivity period protects against FDA approval of ANDAs and 505(b)(2) NDAs for the condition of the new drug’s
approval. As a general matter, three-year exclusivity does not prohibit the FDA from approving ANDAs or 505(b)(2) NDAs for generic
versions of the original, unmodified drug product. Five-year and three-year exclusivity will not delay the submission or approval
of a full NDA; however, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all
of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and efficacy.
NDA
Submission and Review by the FDA
Assuming
successful completion of the required clinical and preclinical testing, among other items, the results of product development,
including chemistry, manufacture and controls, nonclinical studies and clinical trials are submitted to the FDA, along with proposed
labeling, as part of an NDA. The submission of an NDA requires payment of a substantial user fee to the FDA. These user fees must
be paid at the time of the first submission of the application, even if the application is being submitted on a rolling basis.
Fee waivers or reductions are available in some circumstances. One basis for a waiver of the application user fee is if the applicant
employs fewer than 500 employees, including employees of affiliates, the applicant does not have an approved marketing application
for a product that has been introduced or delivered for introduction into interstate commerce, and the applicant, including its
affiliates, is submitting its first marketing application.
The
cost of preparing and submitting an NDA is substantial. Under federal law, the submission of most NDAs is additionally subject
to a substantial application user fee; the fee in the fiscal year 2018 is $2,421,495$.
The
FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing based on the
agency’s threshold determination that it is sufficiently complete to permit substantive review. Once the submission is accepted
for filing, the FDA begins an in-depth review. The FDA has agreed to certain performance goals in the review of NDAs. Most such
applications for standard review drug product candidates are reviewed within 10 to 12 months, while most applications for priority
review drugs are reviewed in six to eight months. Priority review can be applied to drugs that the FDA determines offer major
advances in treatment, or provide a treatment where no adequate therapy exists. The review process for both standard and priority
review may be extended by FDA for three additional months to consider certain late-submitted information, or information intended
to clarify information already provided in the submission.
The
FDA may also refer applications for novel drug product candidates, or drug product candidates that present difficult questions
of safety or efficacy, to an advisory committee, which is typically a panel that includes clinicians and other experts, for review,
evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of
an advisory committee, but it generally follows such recommendations. Before approving an NDA, the FDA will typically inspect
one or more clinical sites to assure compliance with GCP. Additionally, the FDA will inspect the facility or the facilities at
which the drug substance and drug product is are manufactured. The FDA will not approve the product candidate product unless compliance
with or cGMP is satisfactory and the NDA contains data that provide substantial evidence that the drug is safe and effective in
the indication studied.
After
the FDA evaluates the NDA and the manufacturing facilities, it issues either an approval letter or a complete response letter.
A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing,
or information, in order for the FDA to reconsider the application. If, or when, those deficiencies have been addressed to the
FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. The FDA has committed to reviewing
such resubmissions in two or six months depending on the type of information included.
An
approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. As
a condition of NDA approval, the FDA may require a REMS plan to help ensure that the benefits of the drug outweigh the potential
risks. REMS can include medication guides, communication plans for health care professionals, and elements to assure safe use
(, or ETASU). An ETASU can include, but are not limited to, special training or certification for prescribing or dispensing, dispensing
only under certain circumstances, special monitoring, and the use of patient registries. The requirement for a REMS can materially
affect the potential market and profitability of the drug. Moreover, product candidate approval may require substantial post-approval
testing and surveillance to monitor the drug’s safety or efficacy. Once granted, product candidate approvals may be withdrawn
if compliance with regulatory standards is not maintained or problems are identified following initial marketing.
Disclosure
of Clinical Trial Information
Sponsors
of clinical trials of certain FDA-regulated product candidates, including prescription drugs, are required to register and disclose
certain clinical trial information on a public website (clinicaltrials.gov) maintained by the U.S. National Institutes of Health.
Information related to the product candidate product, patient population, phase of investigation, study sites and investigator,
and other aspects of the clinical trial is made public as part of the registration. Sponsors are also obligated to disclose the
results of these trials after completion. Disclosure of the results of these trials can be delayed until the product candidate
drug product or new indication being studied has been approved. Competitors may use this publicly available information to gain
knowledge regarding the design and progress of our development programs.
Fast
Track Designation and Accelerated Approval
Tourette’s
syndrome may be considered as a serious condition with a potentially disabling nature. The FDA has programs to facilitate the
development, and expedite the review, of drugs that are intended for the treatment of a serious or life-threatening disease or
condition for which there is no effective treatment and which demonstrate the potential to address unmet medical needs for the
condition. These therapies for serious conditions are approved and available to patients as soon as it can be concluded that the
therapies’ benefits justify their risk. Under the Fast Track Program, the sponsor of a new drug candidate may request that
FDA designate the drug candidate for a specific indication as a Fast Track drug concurrent with, or after, the filing of the IND
for the drug candidate. FDA must determine if the drug candidate qualifies for Fast Track designation within 60 days of receipt
of the sponsor’s request.
Under
the Fast Track Program and FDA’s accelerated approval regulations, FDA may approve a drug for a serious or life-threatening
illness that provides meaningful therapeutic benefit to patients over existing treatments based upon a surrogate endpoint that
is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity
or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit,
taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments.
In
clinical trials, a surrogate endpoint is a measurement of laboratory or clinical signs of a disease or condition that substitutes
for a direct measurement of how a patient feels, functions or survives. Surrogate endpoints can often be measured more easily
or more rapidly than clinical endpoints. A drug product approved on this basis is subject to rigorous
post-marketing compliance requirements, including the completion of Phase 4 or post-approval clinical trials to confirm the
effect on the clinical endpoint. Failure to conduct required post-approval studies, or confirm a clinical benefit during post-marketing
studies, will allow FDA to withdraw the drug from the market on an expedited basis. All promotional materials for drug candidates
approved under accelerated regulations are subject to prior review by FDA.
In
addition to other benefits such as the ability to use surrogate endpoints and engage in more frequent interactions with FDA, FDA
may initiate review of sections of a Fast Track drug’s NDA before the application is complete. This rolling review is available
if the applicant provides, and FDA approves, a schedule for the submission of the remaining information and the applicant pays
applicable user fees. However, FDA’s time period goal for reviewing an application does not begin until the last section
of the NDA is submitted. Additionally, the Fast Track designation may be withdrawn by FDA if FDA believes that the designation
is no longer supported by data emerging in the clinical trial process.
Patent
Term Extension
After
NDA approval, owners of relevant drug patents may apply for up to a five-year patent extension. The allowable patent term extension
is calculated as half of the drug’s testing phase, the time between IND submission and NDA submission, and all of the review
phase—the time between NDA submission and approval up to a maximum of five years. The time can be shortened if FDA determines
that the applicant did not pursue approval with due diligence. The total patent term after the extension may not exceed 14 years.
For
patents that might expire during the application phase, the patent owner may request an interim patent extension. An interim patent
extension increases the patent term by one year and may be renewed up to four times. For each interim patent extension granted,
the post-approval patent extension is reduced by one year. The director of the PTO must determine that approval of the drug covered
by the patent for which a patent extension is being sought is likely. Interim patent extensions are not available for a drug for
which an NDA has not been submitted.
Advertising
and Promotion
Once
an NDA is approved, a drug product will be subject to certain post-approval requirements. . Any products manufactured or distributed
by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including manufacturing, periodic reporting,
product sampling and distribution, advertising, promotion, drug shortage reporting, compliance with any post-approval requirements
imposed as a conditional of approval such as Phase 4 clinical trials, REMS and surveillance, recordkeeping and reporting requirements,
including adverse experiences. For instance, FDA closely regulates the post-approval marketing and promotion of drugs, including
standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational
activities and promotional activities involving the internet.
Drugs
may be marketed only for the approved indications and in accordance with the provisions of the approved labeling. Changes to some
of the conditions established in an approved application, including changes in indications, labeling, or manufacturing processes
or facilities, require submission and FDA approval of a new NDA or NDA supplement before the change can be implemented. An NDA
supplement for a new indication typically requires clinical data similar to that in the original application, and the FDA uses
the same procedures and actions in reviewing NDA supplements as it does in reviewing NDAs.
Adverse
Event Reporting and GMP Compliance
Adverse
event reporting and submission of periodic reports is required following FDA approval of an NDA. The FDA also may require post-marketing
testing, known as Phase 4 testing, REMS and surveillance to monitor the effects of an approved product candidate, or the
FDA may place conditions on an approval that could restrict the distribution or use of the product candidate. In addition, quality-control,
drug manufacture, packaging, and labeling procedures must continue to conform with cGMPs after approval. Drug manufacturers and
certain of their subcontractors are required to register their establishments with FDA and certain state agencies. Registration
with the FDA subjects entities to periodic unannounced inspections by the FDA, during which the agency inspects manufacturing
facilities to assess compliance with cGMPs. Accordingly, manufacturers must continue to expend time, money and effort in the areas
of production and quality control to maintain compliance with cGMPs. Regulatory authorities may withdraw product candidate approvals
or request product candidate recalls if a company fails to comply with regulatory standards, if it encounters problems following
initial marketing or if previously unrecognized problems are subsequently discovered.
Pediatric
Exclusivity and Pediatric Use
The
Best Pharmaceuticals for Children Act, or BPCA, provides NDA holders a six-month extension of any exclusivity—patent or
non-patent—for a drug if certain conditions are met. Conditions for exclusivity include a determination by the FDA that
information relating to the use of a new drug in the pediatric population may produce health benefits in that population; a written
request by the FDA for pediatric studies; and agreement by the applicant to perform the requested studies and the submission to
the FDA, and the acceptance by the FDA, of the reports of the requested studies within the statutory timeframe. Applications under
the BPCA are treated as priority applications.
In
addition, under the Pediatric Research Equity Act, or PREA, NDAs or supplements to NDAs must contain data to assess the safety
and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration
for each pediatric subpopulation for which the drug is safe and effective, unless the sponsor has received a deferral or waiver
from the FDA. Unless otherwise required by regulation, PREA does not apply to any drug for an indication for which orphan designation
has been granted. The required pediatric assessment must assess the safety and effectiveness of the product candidate for the
claimed indications in all relevant pediatric subpopulations and support dosing and administration for each pediatric subpopulation
for which the product candidate 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 drug is ready
for approval for use in adults before pediatric studies are complete or that additional safety or effectiveness data need to be
collected before the pediatric studies begin. Under PREA, the FDA must send a non-compliance letter requesting a response with
45 days to any sponsor that fails to submit the required assessment, keep a deferral current or fails to submit a request
for approval of a pediatric formulation.
Orphan
Drugs
Under
the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition—generally
a disease or condition with a prevalence of fewer than 200,000 individuals in the United States. Orphan drug designation must
be requested before submitting an NDA. After the FDA grants orphan drug designation, the generic identity of the drug and its
potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in, or shorten the
duration of, the regulatory review and approval process. The first NDA applicant to receive FDA approval for a particular active
ingredient to treat a particular disease with FDA orphan drug designation is entitled to a seven-year exclusive marketing period
in the United States for that product candidate, for that indication. During the seven-year exclusivity period, the FDA may not
approve any other applications to market the same drug for the same disease, except in limited circumstances, such as a showing
of clinical superiority to the product candidate with orphan drug exclusivity. Orphan drug exclusivity does not prevent the FDA
from approving a different drug for the same disease or condition, or the same drug for a different disease or condition. Among
the other benefits of orphan drug designation are tax credits for certain research and a waiver of the NDA application user fee.
In
June 2016, we submitted a request for orphan drug designation to the FDA for THX-110 for the treatment of Tourette syndrome. In
a letter dated September 29, 2016, the FDA informed us that our request could not be granted at such time, and is being held in
abeyance until and subject to us providing additional information pertaining to the overall prevalence of Tourette syndrome in
both children and adults, and further clinical data to support our scientific rationale for our request for orphan drug designation
within 12 months. In September 2017, we responded to such FDA letter within the designated time frame, and provided the FDA with
our articulated and reasoned responses including documentation and clinical data that supports it. On December 26, 2017, we received
the FDA’s response to our response. The FDA accepted that there is adequate scientific rationale for the treatment of Tourette
syndrome with THX-110 mainly through the preliminary results of ongoing clinical trials, suggesting that THX-110 may provide benefit
in treating Tourette syndrome. However, the FDA stated that it was unable to grant our request and indicated that we did not provide
adequate prevalence estimates, and any evidence to support our statement that only moderate to severe Tourette's patients would
require pharmacological treatment. We further responded in January 2018 by providing the requested information. We are currently
waiting for the FDA’s response. There is no assurance that we will successfully obtain orphan drug designation for Tourette
syndrome, although we believe that we can provide adequate data to address all issues raised by the FDA.
Special
Protocol Assessment
A
company may reach an agreement with the FDA under the Special Protocol Assessment, or SPA, process as to the required design and
size of clinical trials intended to form the primary basis of an efficacy claim. According to its performance goals, the FDA is
supposed to evaluate the protocol within 45 days of the request to assess whether the proposed trial is adequate, and that
evaluation may result in discussions and a request for additional information. An SPA request must be made before the proposed
trial begins, and all open issues must be resolved before the trial begins. If a written agreement is reached, it will be documented
and made part of the administrative record. Under the FDC Act and FDA guidance implementing the statutory requirement, an SPA
is generally binding upon the FDA except in limited circumstances, such as if the FDA identifies a substantial scientific issue
essential to determining safety or efficacy after the study begins, public health concerns emerge that were unrecognized at the
time of the protocol assessment, the sponsor and FDA agree to the change in writing, or if the study sponsor fails to follow the
protocol that was agreed upon with the FDA.
Controlled
Substances
Dronabinol,
the active ingredient in our product candidates is a Schedule I controlled substance. The CSA and its implementing regulations
establish a “closed system” of regulations for controlled substances. The CSA imposes registration, security, recordkeeping
and reporting, storage, manufacturing, distribution, importation and other requirements under the oversight of the U.S. DEA. The
DEA is the federal agency responsible for regulating controlled substances, and requires those individuals or entities that manufacture,
import, export, distribute, research, or dispense controlled substances to comply with the regulatory requirements in order to
prevent the diversion of controlled substances to illicit channels of commerce.
The
DEA categorizes controlled substances into one of five schedules—Schedule I, II, III, IV or V—with varying qualifications
for listing in each schedule. Schedule I substances by definition have a high potential for abuse, have no currently accepted
medical use in treatment in the United States and lack accepted safety for use under medical supervision. They may be used only
in federally approved research programs and may not be marketed or sold for dispensing to patients in the United States. Pharmaceutical
product candidates having a currently accepted medical use that are otherwise approved for marketing may be listed as Schedule II,
III, IV or V substances, with Schedule II substances presenting the highest potential for abuse and physical or psychological
dependence, and Schedule V substances presenting the lowest relative potential for abuse and dependence. The regulatory requirements
are more restrictive for Schedule II substances than Schedule III substances. For example, all Schedule II drug
prescriptions must be signed by a physician, physically presented to a pharmacist in most situations and cannot be refilled.
Following NDA
approval of a drug containing a Schedule I controlled substance, that substance must be rescheduled as a Schedule II, III,
IV or V substance before it can be marketed. On November 17, 2015, H.R. 639, Improving Regulatory Transparency for New Medical
Therapies Act, passed through both houses of Congress. On November 25, 2015 this bill was signed into law. The new law removes
uncertainty associated with timing of the DEA rescheduling process after NDA approval. Specifically, it requires DEA to issue
an “interim final rule,” pursuant to which a manufacturer may market its product candidate within 90 days of FDA approval.
The new law also preserves the period of orphan marketing exclusivity for the full seven years such that this period only begins
after DEA scheduling. This contrasts with the previous situation whereby the orphan “clock” began to tick upon FDA
approval, even though the product candidate could not be marketed until DEA scheduling was complete.
Facilities that
manufacture, distribute, import or export any controlled substance must register annually with the DEA. The DEA registration is
specific to the particular location, activity(ies) and controlled substance schedule(s). For example, separate registrations are
required for importation and manufacturing activities, and each registration authorizes which schedules of controlled substances
the registrant may handle. However, certain coincident activities are permitted without obtaining a separate DEA registration,
such as distribution of controlled substances by the manufacturer that produces them.
The DEA inspects
all manufacturing facilities to review security, recordkeeping, reporting and handling prior to issuing a controlled substance
registration. The specific security requirements vary by the type of business activity and the schedule and quantity of controlled
substances handled. The most stringent requirements apply to manufacturers of Schedule I and Schedule II substances.
Required security measures commonly include background checks on employees and physical control of controlled substances through
storage in approved vaults, safes and cages, and through use of alarm systems and surveillance cameras. An application for a manufacturing
registration as a bulk manufacturer (not a dosage form manufacturer or a repacker/relabeler) for a Schedule I or II substance
must be published in the Federal Register, and is open for 30 days to permit interested persons to submit comments, objections
or requests for a hearing. A copy of the notice of the Federal Register publication is forwarded by DEA to all those registered,
or applicants for registration, as bulk manufacturers of that substance. Once registered, manufacturing facilities must maintain
records documenting the manufacture, receipt and distribution of all controlled substances. Manufacturers must submit periodic
reports to the DEA of the distribution of Schedule I and II controlled substances, Schedule III narcotic substances,
and other designated substances. Registrants must also report any controlled substance thefts or significant losses, and must
obtain authorization to destroy or dispose of controlled substances. As with applications for registration as a bulk manufacturer,
an application for an importer registration for a Schedule I or II substance must also be published in the Federal Register,
which remains open for 30 days for comments. Imports of Schedule I and II controlled substances for commercial purposes
are generally restricted to substances not already available from domestic supplier or where there is not adequate competition
among domestic suppliers. In addition to an importer or exporter registration, importers and exporters must obtain a permit for
every import or export of a Schedule I and II substance or Schedule III, IV and V narcotic, and submit import or export
declarations for Schedule III, IV and V non-narcotics. In some cases, Schedule III non-narcotic substances may be subject
to the import/export permit requirement, if necessary to ensure that the United States complies with its obligations under international
drug control treaties.
For drugs manufactured
in the United States, the DEA establishes annually an aggregate quota for the amount of substances within Schedules I and
II that may be manufactured or produced in the United States based on the DEA’s estimate of the quantity needed to meet
legitimate medical, scientific, research and industrial needs. This limited aggregate amount of cannabis that the DEA allows to
be produced in the United States each year is allocated among individual companies, which, in turn, must annually apply to the
DEA for individual manufacturing and procurement quotas. The quotas apply equally to the manufacturing of the API and production
of dosage forms. The DEA may adjust aggregate production quotas a few times per year, and individual manufacturing or procurement
quotas from time to time during the year, although the DEA has substantial discretion in whether or not to make such adjustments
for individual companies.
The states also
maintain separate controlled substance laws and regulations, including licensing, recordkeeping, security, distribution, and dispensing
requirements. State Authorities, including Boards of Pharmacy, regulate use of controlled substances in each state. Failure to
maintain compliance with applicable requirements, particularly as manifested in the loss or diversion of controlled substances,
can result in enforcement action that could have a material adverse effect on our business, operations and financial condition.
The DEA may seek civil penalties, refuse to renew necessary registrations, or initiate proceedings to revoke those registrations.
In certain circumstances, violations could lead to criminal prosecution.
Europe/Rest of World Government Regulation
In addition to
regulations in the United States, we are and will be subject, either directly or through our distribution partners, to a variety
of regulations in other jurisdictions governing, among other things, clinical trials and any commercial sales and distribution
of our product candidates, if approved.
Whether or not
we obtain FDA approval for a product candidate, we must obtain the requisite approvals from regulatory authorities in non-U.S.
countries prior to the commencement of clinical trials or marketing of the product candidate in those countries. Certain countries
outside of the United States have a process that requires the submission of a clinical trial application, or CTA, much like an
IND prior to the commencement of human clinical trials. In Europe, for example, a CTA must be submitted to the competent national
health authority and to independent ethics committees in each country in which a company intends to conduct clinical trials. Once
the CTA is approved in accordance with a country’s requirements, clinical trial development may proceed in that country.
The requirements
and process governing the conduct of clinical trials, product candidate licensing, pricing and reimbursement vary from country
to country, even though there is already some degree of legal harmonization in the European Union member states resulting from
the national implementation of underlying E.U. legislation. In all cases, the clinical trials are conducted in accordance with
GCP and other applicable regulatory requirements.
To obtain regulatory
approval of an investigational drug under E.U. regulatory systems, we must submit a marketing authorization application. This
application is similar to the NDA in the United States, with the exception of, among other things, country-specific document requirements.
Drugs can be authorized in the European Union by using (i) the centralized authorization procedure, (ii) the mutual
recognition procedure, or MRP, (iii) the decentralized procedure or (iv) national authorization procedures. The initial
Sativex approvals were a consequence of an application under the De-Centralized Procedure, or DCP, to the E.U. member states of
the United Kingdom and Spain.
The EMA implemented
the centralized procedure for the approval of human drugs to facilitate marketing authorizations that are valid throughout the
European Union. This procedure results in a single marketing authorization granted by the European Commission that is valid across
the European Union, as well as in Iceland, Liechtenstein and Norway. The centralized procedure is compulsory for human drugs that
are: (i) derived from biotechnology processes, such as genetic engineering, (ii) contain a new active substance indicated
for the treatment of certain diseases, such as HIV/AIDS, cancer, diabetes, neurodegenerative diseases, autoimmune and other immune
dysfunctions and viral diseases, (iii) officially designated “orphan drugs” (drugs used for rare human diseases)
and (iv) advanced-therapy medicines, such as gene- therapy, somatic cell-therapy or tissue-engineered medicines. The centralized
procedure may at the request of the applicant also be used for human drugs which do not fall within the above mentioned categories
if the human drug (a) contains a new active substance which, on the date of entry into force of this Regulation, was not
authorized in the Community; or (b) the applicant shows that the medicinal product candidate constitutes a significant therapeutic,
scientific or technical innovation or that the granting of authorization in the centralized procedure is in the interests of patients
or animal health at the European Community level.
Under the centralized
procedure in the European Union, the maximum timeframe for the evaluation of a MAA by the EMA is 210 days (excluding clock
stops, when additional written or oral information is to be provided by the applicant in response to questions asked by the Committee
for Medicinal Product candidates for Human Use, or CHMP, with adoption of the actual marketing authorization by the European Commission
thereafter. Accelerated evaluation might be granted by the CHMP in exceptional cases, when a medicinal product candidate is expected
to be of a major public health interest from the point of view of therapeutic innovation, defined by three cumulative criteria:
the seriousness of the disease to be treated; the absence of an appropriate alternative therapeutic approach, and anticipation
of exceptional high therapeutic benefit. In this circumstance, EMA ensures that the evaluation for the opinion of the CHMP is
completed within 150 days and the opinion issued thereafter.
The MRP, for the
approval of human drugs is an alternative approach to facilitate individual national marketing authorizations within the European
Union. Basically, the MRP may be applied for all human drugs for which the centralized procedure is not obligatory. The MRP is
applicable to the majority of conventional medicinal product candidates, and is based on the principle of recognition of an already
existing national marketing authorization by one or more member states. Since the first approvals for Sativex were national approvals
in the United Kingdom and Spain (following a DCP), the only route open to us for additional marketing authorizations in the European
Union was the MRP.
The characteristic
of the MRP is that the procedure builds on an already‒existing marketing authorization in a member state of the E.U. that
is used as a reference in order to obtain marketing authorizations in other E.U. member states. In the MRP, a marketing authorization
for a drug already exists in one or more member states of the E.U. and subsequently MAAs are made in other European Union member
states by referring to the initial marketing authorization. The member state in which the marketing authorization was first granted
will then act as the reference member state. The member states where the marketing authorization is subsequently applied for act
as concerned member states.
The MRP is based
on the principle of the mutual recognition by European Union member states of their respective national marketing authorizations.
Based on a marketing authorization in the reference member state, the applicant may apply for marketing authorizations in other
member states. In such case, the reference member state shall update its existing assessment report about the drug in 90 days.
After the assessment is completed, copies of the report are sent to all member states, together with the approved summary of product
candidate characteristics, labeling and package leaflet. The concerned member states then have 90 days to recognize the decision
of the reference member state and the summary of product candidate characteristics, labeling and package leaflet. National marketing
authorizations shall be granted within 30 days after acknowledgement of the agreement.
Should any Member
State refuse to recognize the marketing authorization by the reference member state, on the grounds of potential serious risk
to public health, the issue will be referred to a coordination group. Within a timeframe of 60 days, member states shall,
within the coordination group, make all efforts to reach a consensus. If this fails, the procedure is submitted to an EMA scientific
committee for arbitration. The opinion of this EMA Committee is then forwarded to the Commission, for the start of the decision
making process. As in the centralized procedure, this process entails consulting various European Commission Directorates General
and the Standing Committee on Human Medicinal Product candidates or Veterinary Medicinal Product candidates, as appropriate. Since
the initial approvals of Sativex in the United Kingdom and Spain, there have been three “waves” of additional approvals
under three separate MRPs. Each of these procedures have been completed without any referral, and therefore without any delay.
For other countries
outside of the European Union, such as countries in Eastern Europe, Latin America or Asia, the requirements governing the conduct
of clinical trials, product candidate licensing, pricing and reimbursement vary from country to country. In all cases, again,
the clinical trials are conducted in accordance with GCP and the other applicable regulatory requirements.
If we fail to
comply with applicable foreign regulatory requirements, we may be subject to, among other things, fines, suspension of clinical
trials, suspension or withdrawal of regulatory approvals, product candidate recalls, seizure of product candidates, operating
restrictions and criminal prosecution.
In addition, most
countries are parties to the Single Convention on Narcotic Drugs 1961, which governs international trade and domestic control
of narcotic substances, including cannabis extracts. Countries may interpret and implement their treaty obligations in a way that
creates a legal obstacle to our obtaining marketing approval for Sativex and our other product candidates in those countries.
These countries may not be willing or able to amend or otherwise modify their laws and regulations to permit Sativex or our other
product candidates to be marketed, or achieving such amendments to the laws and regulations may take a prolonged period of time.
In that case, we would be unable to market our product candidates in those countries in the near future or perhaps at all.
Reimbursement
Sales of pharmaceutical
product candidates in the United States will depend, in part, on the extent to which the costs of the product candidates will
be covered by third-party payers, such as government health programs, commercial insurance and managed health care organizations.
These third-party payers are increasingly challenging the prices charged for medical product candidates and services. Additionally,
the containment of health care costs has become a priority of federal and state governments, and the prices of drugs have been
a focus in this effort. The United States government, state legislatures and foreign governments have shown significant interest
in implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution
of generic product candidates. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies
in jurisdictions with existing controls and measures, could further limit our net revenue and results. If these third-party payers
do not consider our product candidates to be cost-effective compared to other available therapies, they may not cover our product
candidates 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 product candidates on a profitable basis.
The Medicare Prescription
Drug, Improvement, and Modernization Act of 2003, or the MMA, imposed new requirements for the distribution and pricing of prescription
drugs for Medicare beneficiaries and included a major expansion of the prescription drug benefit under Medicare Part D. Under
Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private entities which will provide coverage
of outpatient prescription drugs. Part D plans include both stand-alone prescription drug benefit plans and prescription
drug coverage as a supplement to Medicare Advantage plans. Unlike Medicare Part A and B, Part D coverage is not standardized.
Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can
develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription
drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily
all the drugs in each category or class. Any formulary used by a Part D prescription drug plan must be developed and reviewed
by a pharmacy and therapeutic committee. Government payment for some of the costs of prescription drugs may increase demand for
product candidates for which we receive marketing approval. However, any negotiated prices for our product candidates covered
by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain. Moreover, while the MMA
applies only to drug benefits for Medicare beneficiaries, private payers often follow Medicare coverage policy and payment limitations
in setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments
from non-governmental payers.
On February 17,
2009, President Obama signed into law The American Recovery and Reinvestment Act of 2009. This law provides funding for the federal
government to compare the effectiveness of different treatments for the same illness. A plan for the research will be developed
by the Department of Health and Human Services, the Agency for Healthcare Research and Quality and the National Institutes for
Health, and periodic reports on the status of the research and related expenditures will be made to Congress. Although the results
of the comparative effectiveness studies are not intended to mandate coverage policies for public or private payers, it is not
clear how such a result could be avoided and what if any effect the research will have on the sales of our product candidates,
if any such product candidate or the condition that it is intended to treat is the subject of a study. It is also possible that
comparative effectiveness research demonstrating benefits in a competitor’s product candidate could adversely affect the
sales of our product candidates. Decreases in third-party reimbursement for our product candidates or a decision by a third-party
payer to not cover our product candidates could reduce physician usage of the product candidate and have a material adverse effect
on our sales, results of operations and financial condition.
The Affordable
Care Act is expected to continue to have a significant impact on the health care industry. With regard to pharmaceutical product
candidates, among other things, the Affordable Care Act may expand and increase industry rebates for drugs covered under Medicaid
programs and make changes to the coverage requirements under the Medicare D program. Since the enactment of the Affordable
Care Act, numerous regulations have been issued providing further guidance on its requirements. The Affordable Care Act continues
to be implemented through regulation and government activity but is subject to possible amendment, additional implementing regulations
and interpretive guidelines. Several states have decided not to expand their Medicaid programs and are seeking alternative reimbursement
models to provide care to the uninsured. The manner in which these issues are resolved could materially affect the extent to which
and the amount at which pharmaceuticals are reimbursed by government programs such as Medicare, Medicaid and Tricare.
Our ability to
commercialize any products successfully also will depend in part on the extent to which coverage and adequate reimbursement for
our products, once approved, and related treatments will be available from third-party payors, such as government health administration
authorities, private health insurers and managed care organizations. Third-party payors determine which medications they will
cover and separately establish reimbursement levels. Even if we obtain coverage for a given product by a third-party payor, the
third-party payor’s reimbursement rates may not be adequate to make the product affordable to patients or profitable to
us, or the third-party payors may require co-payments that patients find unacceptably high. Patients who are prescribed medications
for the treatment of their conditions, and their prescribing physicians, generally rely on third-party payors to reimburse all
or part of the costs associated with their prescription drugs. Patients are unlikely to use our products unless coverage is provided,
and reimbursement is adequate to cover all or a significant portion of the cost of our products. Therefore, coverage and adequate
reimbursement is critical to new product acceptance. Coverage decisions may depend upon clinical and economic standards that disfavor
new drug products when more established or lower cost therapeutic alternatives are already available or subsequently become available.
Government authorities
and other third-party payors are developing increasingly sophisticated methods of controlling healthcare costs, such as by limiting
coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that drug
companies provide them with predetermined discounts from list prices as a condition of coverage, are using restrictive formularies
and preferred drug lists to leverage greater discounts in competitive classes and are challenging the prices charged for medical
products. Further, no uniform policy for determining coverage and reimbursement for drug products exists among third-party payors
in the United States. Therefore, coverage and reimbursement for drug products can differ significantly from payor to payor. As
a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific
and clinical support for the use of our products to each payor separately, with no assurance that coverage and adequate reimbursement
will be applied consistently or obtained in the first instance.
We cannot be sure
that coverage and reimbursement will be available for any product that we commercialize and, if reimbursement is available, that
the level of reimbursement will be adequate. Coverage and reimbursement may impact the demand for, or the price of, any product
candidate for which we obtain marketing approval. If coverage and reimbursement are not available, or if reimbursement is available
only to limited levels, we may not successfully commercialize any product candidate for which we obtain marketing approval.
As a condition
of receiving Medicaid coverage for prescription drugs, the Medicaid Drug Rebate Program requires manufacturers to calculate and
report to CMS their Average Manufacturer Price, or AMP, which is used to determine rebate payments shared between the states and
the federal government and, for some multiple source drugs, Medicaid payment rates for the drug, and for drugs paid under Medicare
Part B, to also calculate and report their average sales price, which is used to determine the Medicare Part B payment rate for
the drug. In January 2016, CMS issued a final rule regarding the Medicaid Drug Rebate Program, effective April 1, 2016, that,
among other things, revises the manner in which the AMP is to be calculated by manufacturers participating in the program and
implements certain amendments to the Medicaid rebate statute created under the ACA. Drugs that are approved under a biologics
license application, or BLA, or an NDA, including a 505(b)(2) NDA, are subject to an additional requirement to calculate and report
the manufacturer’s best price for the drug and inflation penalties which can substantially increase rebate payments. For
BLA and NDA drugs, the Veterans Health Care Act requires manufacturers to calculate and report to the Department of Veterans Affairs
a different price called the Non-Federal AMP, offer the drugs for sale on the Federal Supply Schedule, and charge the government
no more than a statutory price referred to as the Federal Ceiling Price, which includes an inflation penalty. A separate law requires
manufacturers to pay rebates on these drugs when paid by the Department of Defense under its TRICARE Retail Pharmacy Program.
Knowingly submitting false pricing information to the government creates potential federal False Claims Act liability.
Further, there has been increasing legislative
and enforcement interest in the United States with respect to specialty drug pricing practices. Specifically, there have been
several recent U.S. Congressional inquiries and proposed and enacted legislation at the federal and state levels designed to,
among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient
programs, reduce the cost of drugs under Medicare, and reform government program reimbursement methodologies for drugs. At the
federal level, the Trump Administration’s budget proposal for fiscal year 2019 contains further drug price control measures
that could be enacted during the 2019 budget process or in other future legislation, including, for example, measures to permit
Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices
under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients. While any proposed measures will require
authorization through additional legislation to become effective, Congress and the Trump Administration have both stated that
it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures
have been increasingly passing legislation and implementing regulations designed to control pharmaceutical and biological product
pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing
cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk
purchasing. Additional health reform measures may continue and affect our business in unknown ways.
The Foreign Corrupt Practices
Act
The FCPA prohibits
any U.S. individual or business from paying, offering or authorizing payment or offering of anything of value, directly or indirectly,
to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity
in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities
are listed in the United States to comply with accounting provisions requiring the companies to maintain books and records that
accurately and fairly reflect all transactions of the companies, including international subsidiaries, and to devise and maintain
an adequate system of internal accounting controls for international operations.
Foreign Regulation
In addition to
regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial
sales and distribution of our products to the extent we choose to develop or sell any products outside of the United States. The
approval process varies from country to country and the time may be longer or shorter than that required to obtain FDA approval.
The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country
to country.
In addition, in
some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements
governing drug pricing vary widely from country to country. For example, the European Union provides options for its member states
to restrict the range of medicinal product candidates for which their national health insurance systems provide reimbursement
and to control the prices of medicinal product candidates for human use. A member state may approve a specific price for the medicinal
product candidate or it may instead adopt a system of direct or indirect controls on the profitability of our Company placing
the medicinal product candidate on the market. There can be no assurance that any country that has price controls or reimbursement
limitations for pharmaceutical product candidates will allow favorable reimbursement and pricing arrangements for any of our product
candidates. Historically, product candidates launched in the European Union do not follow price structures of the United States
and generally tend to be significantly lower.
Other Health Care Laws and Compliance Requirements
In the United
States, our activities are potentially subject to regulation by various federal, state and local authorities in addition to the
FDA, including the CMS, other divisions of the U.S. Department of Health and Human Services (e.g., the Office of Inspector
General), the U.S. Department of Justice and individual U.S. Attorney offices within the Department of Justice, and state and
local governments.
The federal Anti-Kickback
Statute prohibits, among other things, any person or entity, from knowingly and willfully offering, paying, soliciting or receiving
any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward, or in return for, the
referral of an individual for, or purchasing, leasing, ordering, or arranging for the purchase, lease or order of, any good, facility,
item or service reimbursable, in whole or in part, by Medicare, Medicaid or other federal healthcare programs. The term remuneration
has been interpreted broadly to include anything of value, including unlawful financial inducements paid to prescribers and beneficiaries,
as well as impermissible promotional practices. There are a number of statutory exceptions and regulatory safe harbors protecting
some common activities from prosecution, but the exceptions and safe harbors are drawn narrowly. Failure to meet all of the requirements
of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the federal
Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative
review of all of its facts and circumstances. Additionally, the Patient Protection and Affordable Care Act of 2010, as amended
by the Health Care and Education Reconciliation Act of 2010, or collectively the ACA, amended the intent requirement of the federal
Anti-Kickback Statute so that a person or entity no longer needs to have actual knowledge of the federal Anti-Kickback Statute,
or the specific intent to violate it, to have violated the statute. The ACA also provided that a violation of the federal Anti-Kickback
Statute is grounds for the government or a whistleblower to assert that a claim for payment of items or services resulting from
such violation constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act.
The federal civil
and criminal false claims laws, including the federal False Claims Act, prohibit, among other things, any person or entity from
knowingly presenting, or causing to be presented, a false claim for payment to, or for approval by, the federal government, including
the Medicare and Medicaid programs, or knowingly making, using, or causing to be made or used a false record or statement material
to a false or fraudulent claim to avoid, decrease or conceal an obligation to pay money to the federal government.
The civil monetary
penalties statute imposes penalties against any person or entity who, among other things, is determined to have presented or caused
to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not
provided as claimed or is false or fraudulent.
The federal Health
Insurance Portability and Accountability Act of 1996, or HIPAA, created additional federal criminal statutes that prohibit knowingly
and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including public and private
payors, or obtain, by means of false or fraudulent pretenses, representations or promises, any of the money or property owned
by, or under the custody or control of, any healthcare benefit program, regardless of whether the payor is public or private,
knowingly and willfully embezzling or stealing from a health care benefit program, willfully obstructing a criminal investigation
of a health care offense and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact
or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items or services
relating to healthcare matters. The ACA amended the federal health care fraud criminal statute implemented under HIPAA so that
a person or entity no longer needs to have actual knowledge of the statute, or the specific intent to violate it, to have violated
the statute.
Additionally,
the federal Open Payments program pursuant to the Physician Payments Sunshine Act, created under Section 6002 of the ACA and its
implementing regulations, require some manufacturers of drugs, devices, biologicals and medical supplies for which payment is
available under Medicare, Medicaid or the Children’s Health Insurance Program (with specified exceptions) to report annually
information related to specified payments or other transfers of value provided to physicians and teaching hospitals, or to entities
or individuals at the request of, or designated on behalf of, the physicians and teaching hospitals and to report annually specified
ownership and investment interests held by physicians and their immediate family members.
In addition, we
may be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business.
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing
regulations, impose requirements relating to the privacy, security and transmission of individually identifiable health information
on HIPAA covered entities and their business associates, including mandatory contractual terms and the implementation of certain
safeguards of such information. Among other things, HITECH makes HIPAA’s security standards directly applicable to business
associates, independent contractors or agents of covered entities that receive or obtain protected health information in connection
with providing a service on behalf of a covered entity. HITECH also created four new tiers of civil monetary penalties, amended
HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority
to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’
fees and costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security of health
information in some circumstances, many of which differ from each other in significant ways, may not have the same effect and
may not be preempted by HIPAA, thus complicating compliance efforts.
Many states have
also adopted laws similar to each of the above federal laws, which may be broader in scope and apply to items or services reimbursed
by any payor, including commercial insurers. We may also be subject to state laws that require pharmaceutical companies to comply
with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the
federal government, and/or state laws that require drug manufacturers to report information related to marketing expenditures
or payments and other transfers of value to physicians and other healthcare providers.
Enforcement actions
can be brought by federal or state governments or, in some cases, as “qui tam” actions brought by individual whistleblowers
in the name of the government. Depending on the circumstances, failure to comply with these laws can result in penalties, including
criminal, civil and/or administrative criminal penalties, damages, fines, disgorgement, debarment from government contracts, individual
imprisonment, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar
agreement to resolve allegations of non-compliance with these laws, exclusion from government programs, refusal to allow us to
enter into supply contracts, including government contracts, reputational harm, diminished profits and future earnings and the
curtailment or restructuring of our operations, any of which could adversely affect our business.
In order to distribute
product candidates commercially, we must comply with state laws that require the registration of manufacturers and wholesale distributors
of pharmaceutical product candidates in a state, including, in certain states, manufacturers and distributors who ship product
candidates into the state, even if such manufacturers or distributors have no place of business within the state. Some states
also impose requirements on manufacturers and distributors to establish the pedigree of product candidate in the chain of distribution,
including some states that require manufacturers and others to adopt new technology capable of tracking and tracing product candidate
as it moves through the distribution chain. Several states have enacted legislation requiring pharmaceutical companies to establish
marketing compliance programs, file periodic reports with the state, make periodic public disclosures on sales, marketing, pricing,
clinical trials and other activities or register their sales representatives. Other legislation has been enacted in certain states
prohibiting pharmacies and other health care entities from providing certain physician prescribing data to pharmaceutical companies
for use in sales and marketing, and prohibiting certain other sales and marketing practices. All of our activities are potentially
subject to federal and state consumer protection and unfair competition laws.
Expanded Access to Investigational Drugs
An investigational
drug may be eligible for clinical use outside the context of a manufacturer’s clinical trial of the drug. “Expanded
access” refers to the use of an investigational drug where the primary purpose is to diagnose, monitor, or treat a patient’s
disease or condition rather than to collect information about the safety or effectiveness of a drug. Expanded access INDs are
typically sponsored by individual physicians to treat patients who fall into one of three FDA-recognized categories of expanded
access: expanded access for individual patients, including for emergency use; expanded access for intermediate-size patient populations;
and expanded access for large patient populations under a treatment IND or treatment protocol. For all types of expanded access,
FDA must determine prior to authorizing expanded access that: (1) the patient or patients to be treated have a serious or life
threatening disease or condition and there is no comparable or satisfactory alternative therapy; (2) the potential patient benefit
justifies the potential risks of use and that the potential risks are not unreasonable in the context of the disease or condition
to be treated; and (3) granting the expanded access will not interfere with the initiation, conduct, or completion of clinical
studies in support of the drug’s approval. In addition, the sponsor of an expanded access IND must submit IND safety reports
and, in the cases of protocols continuing for one year or longer, annual reports to the FDA. Expanded access programs are not
intended to yield information relevant to evaluating a drug’s effectiveness for regulatory purposes. If a patient enrolled
in one of our clinical trials is not eligible or able to continue enrollment, we may be required to continue to provide our product
candidate to such patient through expanded access.
Grants from the IIA
Our research and
development efforts mainly with respect to our past activities (for example, with respect to immunotherapy programs such as the
BBS Technology and program and the Anti-CD3 program) were financed in part through royalty-bearing grants from the IIA. As of
December 31, 2018, we have received the aggregate amount of approximately $4.1 million from the IIA for the development of these
programs, which have since been sold. With respect to such grants we are committed to pay certain royalties up to an aggregate
amount of approximately $1.1 million relating only to technologies in our possession and excluding any royalties for technologies
that we sold to third parties. Regardless of any royalty payment, we are further required to comply with the requirements of the
Research Law, with respect to those past grants. When a company develops know-how, technology or products using IIA grants, the
terms of these grants and the Research Law restrict the transfer of such know-how inside or outside of Israel, and the transfer
outside of Israel of manufacturing or manufacturing rights of such products, technologies or know-how, without the prior approval
of the IIA. None of our current projects in the field of cannabinoid therapeutics are supported by the IIA, yet if eligible, we
might apply for such support in the future.
C.
|
Organizational
Structure
|
We have one, active, majority controlled
subsidiary, THR, and three inactive wholly-owned subsidiaries: Nasvax Inc., Evero Health Ltd. (previously known as Weex Biosciences
Ltd.) and Brain bright Ltd.
Therapix Healthcare Resources Inc.
is
a subsidiary incorporated in Delaware of which we own approximately 82.36% of its share capital. THR was engaged in operating
pain treatment clinics to treat an assortment of different pains, including, acute pain, spine pain, chronic headaches, cancer
pain, oral/maxillofacial pain, neuropathic pain and rheumatologic/myofascial pain. We converted an aggregate of approximately
$1.63 million of convertible loans issued under a convertible loans agreement and, as a result of such conversion and other non-cash
startup expenses previously provided to THR, we obtained an equity ownership interest of 82.36% in THR.
In addition, we own approximately 27% of Lara
Pharm Ltd., or Lara Pharm, a private company engaged in the field of medical cannabis and developing a formulation based on synthetic
cannabinoids, for the provision through an inhaler.
D.
|
Property,
Plants and Equipment
|
Our offices are located at 4 Ariel Sharon
Street, HaShahar Tower, 16th Floor, Givatayim 5320047, Israel, where we currently occupy approximately 1,800 square feet. We lease
our facilities and our lease ends on July 10, 2020. Our current monthly rent payment is NIS 19,500 (approximately $5,500). Our
subsidiary, THR, rents headquarters, lab and clinics in different cities in Tennessee. The main lease agreement is for THR’s
headquarters and lab in Brentwood, Tennessee, which is estimated at $31,000 per month and ends in August 2028. Our current total
monthly rent payment for THR’s seven operating lease agreements is approximately $80,874. THR is currently in default with
regards to the payment of each of its leases, including its headquarters, a lab and clinics in different cities in Tennessee.
We consider that our current office space
is sufficient to meet our anticipated needs for the foreseeable future and is suitable for the conduct of our business.
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 Item 3.D. “Risk Factors” and elsewhere in this annual report in Form 20-F. We report financial information
under IFRS as issued by the International Accounting Standards Board and none of the financial statements were prepared in accordance
with generally accepted accounting principles in the United States. Our discussion and analysis for the year ended December 31,
2016 can be found in our Annual Report on Form 20-F for the fiscal year ended December 31, 2017, filed with the SEC on March 26,
2018.
The following
financial data in this narrative are expressed in thousands, except for share and share data or as otherwise noted.
Overview
We are a specialty
clinical-stage pharmaceutical company led by an experienced team of senior executives and scientists, focused on creating and
enhancing a portfolio of technologies and assets based on cannabinoids pharmaceuticals. We are focusing on a drug development
program that we call
Joint Pharma
, which targets the treatment of the central nervous system and related indications with
our product candidate THX-110. As part of our Joint Pharma program, we are also developing THX-150 and THX-160, which target multi
drug resistant bacteria and pain, respectively.
THX-110 is a combination drug candidate
based on two components: (1) dronabinol, the active ingredient in an FDA approved synthetic analog of THC, which is the major
cannabinoid molecule in the cannabis plant, and (2) PEA, which is an endogenous fatty acid amide that belongs to the class of
nuclear factor agonists, which are molecules that regulate the expression of genes. We believe that the combination of THC and
PEA may induce a reaction known as the “entourage effect,” which has strong potential to treat Tourette syndrome,
OSA and pain. THX-150 is a drug candidate intended for the treatment of infectious diseases. It consists of dronabinol (synthetic
∆9-tetrahydracannabinol) and/or PEA and selected antibacterial agent and possesses antimicrobial synergy potential. THX-160
is a novel pharmaceutical CB2 receptor agonist for the treatment of pain.
We have not generated any revenues since
our inception.
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, share-based compensation expenses, consulting
and subcontractor expenses and other related research and development expenses.
The following
table discloses the breakdown of research and development expenses:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands of U.S. dollars)
|
|
Wages and related expenses
|
|
|
667
|
|
|
|
321
|
|
Share-based payments
|
|
|
109
|
|
|
|
103
|
|
Clinical studies
|
|
|
692
|
|
|
|
511
|
|
Research and preclinical studies
|
|
|
593
|
|
|
|
362
|
|
Chemistry and formulations
|
|
|
54
|
|
|
|
330
|
|
Regulatory and other expenses
|
|
|
595
|
|
|
|
276
|
|
|
|
|
2,710
|
|
|
|
1,943
|
|
We expect that
our research and development expenses will materially increase as we plan to start new clinical trials and develop new products.
General and Administrative Expenses
General and administrative
expenses consist primarily of salaries, share-based compensation expense, professional service fees for accounting, legal, bookkeeping,
facilities and other general and administrative expenses.
The following
table discloses the breakdown of general and administrative expenses:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands of U.S. dollars)
|
|
Wages and related expenses
|
|
|
1,866
|
|
|
|
808
|
|
Share-based payment
|
|
|
495
|
|
|
|
759
|
|
Professional and directors fees
|
|
|
1,407
|
|
|
|
1,007
|
|
Investor relations and business expenses
|
|
|
368
|
|
|
|
871
|
|
Office maintenance, rent and other expenses
|
|
|
768
|
|
|
|
211
|
|
Regulatory expenses
|
|
|
77
|
|
|
|
80
|
|
Expenses due to litigations & claims
|
|
|
250
|
|
|
|
-
|
|
Business development
|
|
|
1,348
|
|
|
|
74
|
|
Total
|
|
|
6,579
|
|
|
|
3,810
|
|
Comparison of the year ended December 31, 2018 to the year
ended December 31, 2017
Results of Operations
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands of U.S. dollars)
|
|
Research and development expenses
|
|
|
2,710
|
|
|
|
1,943
|
|
General and administrative expenses
|
|
|
6,579
|
|
|
|
3,810
|
|
Other expense (income), net
|
|
|
425
|
|
|
|
1
|
|
Operating loss
|
|
|
9,714
|
|
|
|
5,754
|
|
Financial Expense (income), net
|
|
|
(705
|
)
|
|
|
490
|
|
Tax benefit
|
|
|
(60
|
)
|
|
|
-
|
|
Net loss
|
|
|
8,949
|
|
|
|
6,244
|
|
Net loss attributable to holders of Ordinary Shares
|
|
|
8,523
|
|
|
|
6,244
|
|
Research and Development Expenses
Our research and development expenses for
the year ended December 31, 2018 amounted to $2,710, representing an increase of $767, or 39%, compared to $1,943 for the year
ended December 31, 2017. The increase was primarily attributable to an increase of $346 in wages and related expenses, an increase
of $319 in regulatory and other expenses, an increase of $231 in research and preclinical studies and a decrease of $276 in chemistry
and formulations, reflecting the continuance of clinical studies, research and preclinical studies. Research and development expenses
for the year ended December 31, 2018 reflect increased research and development operations due to the continuance of the cannabinoid
projects.
General and administrative expenses
Our general and administrative expenses
totaled $6,579 for the year ended December 31, 2018, representing an increase of $2,769 or 73%, compared to $3,810 for the year
ended December 31, 2017. The increase was primarily attributable to hiring new employees, rise in wages and related expenses,
business development expenses and professional and directors’ fees.
Other expense and income
Our other expense and income for the year
ended December 31, 2018 was $425, representing an increase of $424, or 425%, as compared to other expense and income of $1 for
the year ended December 31, 2017. The increase was primarily attributable to impairment of goodwill and intangible assets.
Operating loss
Our operating
loss for the year ended December 31, 2018 was $9,714, representing an increase of $3,960, or 69%, as compared to an operating
loss of $5,754 for the year ended December 31, 2017.
Financial expense and income
Financial expense
and income consist of exchange rate differences, bank fees, loans interest and other transactional costs.
We recognized
financial income net, for the year ended December 31, 2018, of $705, representing a change of $1,195, as compared to financial
expenses, net of $490 for the year ended December 31, 2017. The change was primarily due to changes in the fair value of financial
instruments, interest income and exchange rate valuation losses on dollar balances.
Total Comprehensive Loss
Our total comprehensive
loss for the year ended December 31, 2018 was $9,234, representing an increase of $3,451, or 60%, as compared to $5,783 for the
year ended December 31, 2017.
Critical Accounting Policies and Estimate
We describe our
significant accounting policies more fully in Note 2 to our financial statements for the year ended December 31, 2018. We believe
that the accounting policies below are critical in order to fully understand and evaluate our financial condition and results
of operations.
We prepare our
financial statements in accordance with IFRS. At the time of the preparation of the financial statements, our management is required
to use estimates, evaluations, and assumptions which affect the application of the accounting policy and the amounts reported
for assets, obligations, income, and expenses. Any estimates and assumptions are continually reviewed. The changes to the accounting
estimates are credited during the period in which the change to the estimate is made.
Contingent Liabilities
The evaluations
of provisions and contingent liabilities are based on best professional judgment, taking into consideration the stage of the proceedings,
as well as cumulative legal experience in the various topics. Whereas the results of the lawsuits shall be determined by the courts,
these results may differ from these evaluations.
Share-Based Compensation
Our employees
and other service providers are entitled to benefits by way of share-based compensation settled with company options to shares.
The cost of transactions with employees settled with capital instruments is measured based on the fair value of the capital instruments
on the granting date. The fair value is determined using an accepted options pricing model. The model is based on share price,
grant date and on assumptions regarding expected volatility, expected lifespan, expected dividend, and a no risk interest rate.
The cost of the
transactions settled with capital instruments is recognized in profit or loss together with a corresponding increase in the equity
over the period in which the performance and/or service takes place, and ending on the date on which the relevant employees are
entitled to the benefits, or the Vesting Period. The aggregate expense recognized for transactions settled with capital instruments
at the end of each reporting date and until the Vesting Period reflects the degree to which the Vesting Period has expired and
our best estimate regarding the number of options that have ultimately vested. The expense or income in profit or loss reflects
the change of the aggregate expense recognized as of the end of the reported period.
We selected the Black-Scholes-Merton option-pricing
model as a fair value method for our options awards. The option-pricing model requires a number of assumptions:
Expected dividend
yield
- The expected dividend yield assumption is based on our historical experience and expectation of no future dividend
payouts. We have historically not paid cash dividends and have no foreseeable plans to pay cash dividends in the future.
Volatility
- The expected volatility is based on fluctuations in the price of our ADS prices on the Nasdaq Capital Market.
Risk free interest
rate
- The risk free interest rate is based on the U.S. Treasury yield curve, in accordance with the option’s contractual
term.
Contractual
term
- An option’s contractual term must at least include the Vesting Period and the employees’ historical exercise
and post-vesting employment termination behavior for similar grants. If the amount of past exercise data is limited, that data
may not represent a sufficiently large sample on which to base a robust conclusion on expected exercise behavior.
Share price
- The share price is determined according to the last known or above closing price of our ADSs at the grant date.
B.
|
Liquidity and
Capital Resources
|
Overview
Since our inception
in 2004, and through December 31, 2018, we have funded our operations principally with $4,193 from the issuance of Ordinary Shares
(including ADSs) and warrants. As of December 31, 2018, we had $1,485 in cash and cash equivalents, and an additional amount of
$10 in short-term bank deposits.
The table below
presents our cash flows for the periods indicated:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands of U.S. dollars)
|
|
Operating activities
|
|
|
(7,132
|
)
|
|
|
(4,579
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
(2,094
|
)
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
1,536
|
|
|
|
13,175
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(20
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(7,710
|
)
|
|
|
8,519
|
|
Operating Activities
Net cash used in operating activities was
$7,132 during 2018 in comparison $4,579 during 2017. The increase of $2,553 was primarily attributable to an increase in research
and development and general and administrative expenses.
Investing Activities
Net cash used
in investing activities of $2,094 during the year ended December 31, 2018 primarily reflected the issuance of convertible loans
to Cure Pharmaceutical Holding Corp, or Cure and an investment in THR.
Net cash used
in investing activities of $53 during the year ended December 31, 2017 primarily reflected purchasing of equipment.
On April 17, 2018,
we lent Cure an amount of $0.5 million, or the Cure Loan, in a convertible loan agreement. According to the convertible loan agreement,
we had the option to instruct Cure, prior to the maturity date of the loan, to repay the loan amount together with all interest
accrued thereon. On December 31, 2018, we instructed Cure to repay the loan (with the accrued interest) on the maturity date.
The Cure Loan was fully repaid, including interest, on April 30, 2019, and the convertible loan agreement was terminated with
no further effect.
During 2018 and
2019, we lent THR approximately $2.31 million in THR, through convertible loans. On October 3, 2018, we converted an aggregate
of approximately $1.63 million of convertible loans issued and, as a result of the conversion and other non-cash startup expenses
previously provided to THR, we obtained an equity ownership interest of 82.36% in THR. We currently have approximately $688 in
convertible loans outstanding to THR.
Financing Activities
Net cash provided
by financing activities of $1,536 in the year ended December 31, 2018 consisted mainly of $1,481 of net proceeds from the issuance
of convertible debentures.
Net cash provided
by financing activities of $13,175 in the year ended December 31, 2017 consisted mainly of $13,800 of net proceeds from our U.S.
initial public offering, or U.S. IPO, offset by expenses relating to our U.S. IPO and listing on Nasdaq in March 2017, of $2,021.
In March 2017, we issued to an investor
5,357,143 Ordinary Shares in a private placement, at a price per share of NIS 0.70 (approximately $0.19). In addition, the investor
was entitled to price protection rights to participate in our future private placements or public offerings upon the same or lesser
terms offered to future investors, on a pro-rata basis to his holdings. Since we issued ADSs in the IPO which took place later
in March 2017 at a public offering price of $6.00 per ADS, which is less than $7.71 per ADS (approximately $0.19 per Ordinary
Share), we issued the investor an additional 1,529,910 Ordinary Shares.
On March 27, 2017, we issued an aggregate
of 2,000,000 ADSs and on April 3, 2017, we issued an aggregate of 300,000 ADSs, pursuant to our U.S. IPO and the exercise of the
underwriters’ option, respectively, at a price of $6.00 per ADS
.
On November 23, 2018, we entered into a
securities purchase agreement and a registration rights agreement with YA II PN Ltd., or YA II PN, a fund managed by Yorkville
Advisors Global L.P., for the sale in a private placement of up to $2.5 million in principal amount of unsecured convertible debentures,
or the Debentures. Interest on the Debentures will accrue at a rate of 5% per annum and is payable upon the maturity date of the
Debentures, being 12 months from the issuance of each Debenture. The first tranche of $1.5 million of the Debentures was issued
on November 23, 2018, and YA II PN received 9,171 ADSs as a commitment fee. The outstanding principal, together with accrued and
unpaid interest, will be convertible, at the option of the YA II PN, into ADSs at 95% of the lowest daily volume weighted average
price during the five consecutive trading days, immediately preceding the conversion date. Provided that the ADSs are trading
below $7.00, we have the right to redeem in cash the Debentures at 110% of the principal amount of the Debentures plus accrued
interest. To date, the outstanding debt under the Debenture is $1.25 million, after paying YA II PN approximately $0.25 million
in exchange of YA II PN participating in the April 2019 fundraising. On March 14, 2019, an amendment to the securities purchase
agreement was signed due to the fact that we did not comply with certain abovementioned conditions and accordingly deemed to be
in default by YA II PN. According to the amendment, YA II PN agreed to waive the requirements under the securities purchase agreement
and as such, we are not in default pursuant to the terms of the securities purchase agreement. In addition, we and YA II PN mutually
agreed to waive any and all requirements to hold a second closing or third closing.
On April 1, 2019, we issued 642,853 ADSs
in a public offering at a purchase price of $3.50 per ADS, and warrants to purchase 482,139 ADSs with an exercise price of $3.50
per ADS, in a concurrent private placement.
Current Outlook
We have financed
our operations to date primarily through proceeds from sales of our Ordinary Shares and ADSs exercises of warrants and options.
We have incurred losses and generated negative cash flows from operations since August 2004. Since August 2004, we have not generated
any revenue from the sale of product candidates and we do not expect to generate revenues from sale of our product candidates
in the next few years.
As of December
31, 2018, our cash and cash equivalents including short-term bank deposits were $10.
We believe that
our existing cash resources, including the funds that we raised in our April 2019 offering, will be sufficient to fund our current
operations at least until October 31, 2019; however, we expect that we will require substantial additional capital to complete
the development of, and to commercialize, our product candidates. In addition, our operating plans may change as a result of many
factors that may currently be unknown to us, and we may need to seek additional funds sooner than planned. Our future capital
requirements will depend on many factors, including:
|
●
|
the progress and costs of our research and development
activities;
|
|
|
|
|
●
|
the costs of manufacturing our product candidates;
|
|
|
|
|
●
|
the costs of filing, prosecuting, enforcing
and defending patent claims and other intellectual property rights;
|
|
|
|
|
●
|
the potential costs of contracting with third
parties to provide marketing and distribution services for us or for building such capacities internally; and
|
|
|
|
|
●
|
the magnitude of our general and administrative
expenses.
|
Until we can generate
significant recurring revenues, we expect to satisfy our future cash needs through equity financings (such as our April 2019 registered
direct offering of ADSs and private placement of warrants and other past fundraisings) and sales of technology. We cannot be certain
that additional funding will be available to us on acceptable terms, if at all. If funds are not available, we may be required
to delay, reduce the scope of, or eliminate research or development plans for, or commercialization efforts with respect to our
product candidates. This may raise substantial doubts about our ability to continue as a going concern.
E.
|
Off-Balance Sheet Arrangements
|
We currently do not have any off-balance
sheet arrangements.
F.
|
Tabular Disclosure of Contractual Obligations
|
The following
table summarizes our contractual obligations at December 31, 2018:
|
|
Total
|
|
|
Less than 1
year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
More than
5 years
|
|
|
|
(in thousands of U.S. dollars)
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License and contractual agreements (1-4)
|
|
|
1,219
|
|
|
|
223
|
|
|
|
996
|
|
|
|
|
|
|
|
|
|
Facility (5-6)
|
|
|
4,716
|
|
|
|
825
|
|
|
|
1,218
|
|
|
|
937
|
|
|
|
1,736
|
|
(1)
|
As of December 31,
2018, we had contractual obligations with respect to (1) clinical investigation and laboratory services contract with
Hannover Medical School to conduct a phase IIb clinical trial, in the amount of $835, (2) our agreement with Assuta to
conduct a Phase IIa, sponsor-initiated trial for the treatment of OSA using our proprietary cannabinoid-based technology,
THX-110, in the amount of $35, (3) license technology agreement with Yissum in order to develop, obtain regulatory approvals,
manufacture, market, distribute or sell products in the amount of $135, (4) our agreement with FGK to perform CRO activities
for the Tourette syndrome study, in the amount of $214, (5) our lease agreement with a third party for an area of
approximately 2,153 square feet, in the amount of $114, and (6) THR lease agreements with a third party in the aggregate of
approximately 53,417 square feet, in the amount of $4.602.
|
ITEM 6.
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
A.
|
Directors and Senior Management
|
The following
table sets forth information regarding our executive officers, key employees and directors as of May 13, 2019:
Name
|
|
Age
|
|
|
Position
|
Dr. Ascher Shmulewitz
|
|
|
63
|
|
|
Chairman of the Board of Directors and Interim Chief Executive Officer
|
Oz Adler
|
|
|
32
|
|
|
Chief Financial Officer
|
Dr. Adi Zuloff-Shani
|
|
|
50
|
|
|
Chief Technologies Officer
|
Amit Berger
(1)
(2) (3)
|
|
|
53
|
|
|
Director
|
Dr. Yafit Stark
(1)
(2) (3)
|
|
|
65
|
|
|
Director
|
Zohar Heiblum
(1)
(2) (3)
|
|
|
63
|
|
|
Director
|
Stephen M. Simes
(3)
|
|
|
67
|
|
|
Director
|
Eric So
(3)
|
|
|
43
|
|
|
Director
|
(1)
|
Member of the Compensation Committee
|
(2)
|
Member of the Audit Committee
|
(3)
|
Independent Director (as defined under Nasdaq
Stock Market rules)
|
Dr. Ascher
Shmulewitz
has served as our Chairman since January 2014 and on our Board of Directors since February 2013 and was appointed
our interim Chief Executive Officer on November 1, 2017. Dr. Shmulewitz is an inventor, investor and serial entrepreneur in biomedical
technologies. Dr. Shmulewitz has founded and invested in over two dozen life science companies including NeoVision Corp, Labcoat
Medical Ltd., Arteria Corp., Circulation Inc. and X-Cardia Inc., and has led multiple of these companies to successful exits,
including through merger and acquisition transactions with large medical device companies. Dr. Shmulewitz has vast experience
in the venture capital arena as an investor, manager and entrepreneur in dozens of companies and ventures. In 1995, Dr. Shmulewitz
co-founded San Francisco Science and the Incumed Group, companies that provide seed funding, and is the founder of Medgenesis
Partners Ltd., an Israeli private investment firm and incubator that has invested in over a dozen ventures. Dr. Shmulewitz previously
held senior executive positions at Advanced Technology Laboratories Inc. (from 1988 to 1992). Dr. Shmulewitz received an M.D.
degree from The Technion Medical School and a Ph.D. degree in Engineering from Tel Aviv University, Israel.
Mr. Oz Adler, CPA,
has served as
our Chief Financial Officer since April 24, 2018 and as our VP Finance from March 1, 2018 until April 24, 2018. He previously
served as our Controller commencing in September 2017. Mr. Adler has experience in a wide variety of managerial, financial, tax
and accounting. Since 2012, Mr. Adler was employed as a certified public accountant at Kost Forer Gabbay & Kasierer, a member
of Ernst & Young Global. Mr. Adler holds a B.A. degree in Accounting and Business management from The College of Management,
Israel.
Dr. Adi Zuloff-Shani
has served
as our Chief Technologies Officer since February 2016. Dr. Zuloff-Shani has more than 15 years of experience as a research and
development executive. Prior to joining us, and from 2012 to 2016, Dr. Zuloff-Shani served as a vice president development at
Macrocure Ltd. (Nasdaq: “MCUR”) where besides leading all research and development activities, she interacted
and was involved with the activities of all departments including clinical, operations, quality assurance, quality control, finance,
and regulatory affairs. Dr. Zuloff-Shani holds a Ph.D. in human biology and immunology from Bar- Ilan University, Israel.
Mr. Amit Berger
has served on our
Board of Directors since August 2014. Mr. Berger has significant expertise in financial markets, where he has held management
and board positions for over 25 years. Since 2009, Mr. Berger has served as the chief executive officer of Dolphin 1 Investment
Ltd. From 2002 to 2004, Mr. Berger served as the chairman of Dash Investments Ltd., and from 2005 to 2009, as the chairman and
a director of Enter Holdings 1 Ltd. Mr. Berger has also served on the boards of Mega Or Holdings Ltd., N.R. Spuntech Industries
Ltd., Itay Financial A.A. Investments Ltd., Ortam-Sahar Engineering Ltd., Hamashbir 365 Ltd. and Polar Investments Ltd. Mr. Berger
holds a B.A. degree in Economics from Tel Aviv University, Israel.
Dr. Yafit Stark
has served on our
Board of Directors since June 2015. Dr. Stark has served as Vice President Global Clinical Research at Teva Pharmaceutical
Industries Ltd. Dr. Stark has established and managed the Global Innovative Clinical Research Infrastructures at Teva and was
responsible for the clinical development of significant products, among them the Copaxone® for Multiple Sclerosis. Dr. Stark
is a pioneer in incorporating innovation and new technologies in clinical development. During her 31 years of work in large pharma,
she has built up expertise in multiple therapeutic areas and different types of medicinal products technologies. Dr. Stark serves
as a director of several biotechnology companies and associations. Dr. Stark holds a Ph.D. degree in Pathology from Tel Aviv University
and a Post-Doctorate in Immuno-Histopathology from Tel Aviv University and the Weizmann Institute of Science, Israel.
Mr. Zohar Heiblum
has served on
our Board of Directors since August 2013. In 1983, Mr. Heiblum co-founded Tefen IL (Israel) Ltd., a leading consulting firm in
Israel and led the company to an IPO on Tel Aviv Stock Exchange in 1994. Since then, Mr. Heiblum has been involved in various
companies as an investor, consultant, board member and active Chairman. Since 2001, Mr. Heiblum has been an active board member
and manager at Momentum Management LLP, which specializes in management and investments in turnaround and special situation activities,
and in his capacity served mostly in high-tech companies. From 1998 to 2001, Mr. Heiblum served as a director and Chairman of
the board at of Orex Computed Radiography Ltd., which was later sold to Eastern Kodak Company. From 1998 to 2001, Mr. Heiblum
served as a director of Biosonix Ltd., which executed a reverse merger with Neoprobe (today Navidea Biopharmaceutical Inc.) in
2002. From 2002 to 2004, Mr. Heiblum served as the general manager of the Israeli subsidiary of MobileAccess Networks Inc. (formally
Foxcom) which was sold to Corning Inc. (U.S.A) in 2011. From 2013 to 2014, Mr. Heiblum served as the acting chief executive officer
of Alvarion Ltd. (in receivership) and as chairman of Z. Roth Industries Ltd., which is a leading metal designer and producer
of products designed to be situated in public areas, and as of March 2016 acts as the manager of the pre research and development
plan on MATIMOP – the Israeli industry center for research and development, which acts as the executive agency of the Israel
Innovation Authority. Mr. Heiblum has a B.Sc. degree in Industrial Engineering and an M.B.A., both from Tel Aviv University, Israel.
Mr. Stephen M. Simes
has served
on our Board of Directors since December 2016. Mr. Simes currently serves as an advisor and consultant to biopharma companies.
Mr. Simes is a member of the Ops Team of SmartHealth Activator. Mr. Simes serves on the advisory board for NeuroLucent a
biotech company working on novel approaches for the treatment of Alzheimer’s disease, in addition to several other startup
biopharma companies in oncology and 3D bioprinting. From March 2014 until January 2016, Mr. Simes served as chief executive officer
and a member of the board of directors of RestorGenex Corporation, a company with a focus on oncology (acquired through merger
by Diffusion Pharmaceuticals, Inc.). Prior to such time, Mr. Simes served as Vice Chairman, President and chief executive officer
and a member of the board of directors of BioSante Pharmaceuticals, Inc. from 1998 until June 2013 when BioSante merged with and
renamed to ANI Pharmaceuticals, Inc. BioSante, whose common stock was listed on The Nasdaq Global Market, was a specialty pharmaceutical
company focused on developing products for women’s and men’s health. From 1994 to 1997, Mr. Simes was president and
chief executive officer and a member of the board of directors of Unimed Pharmaceuticals, Inc. (currently a wholly owned subsidiary
of AbbVie, Inc.), a company with a product focus on infectious diseases, AIDS, endocrinology and oncology. From 1989 to 1993,
Mr. Simes was chairman, president and chief executive officer of Gynex Pharmaceuticals, Inc., a company which concentrated on
the AIDS, endocrinology, urology and growth disorders markets. In 1993, Gynex was acquired by Savient Pharmaceuticals Inc. (formerly
Bio-Technology General Corp.), and from 1993 to 1994, Mr. Simes served as Senior Vice President and director of Savient Pharmaceuticals
Inc. Mr. Simes’s career in the pharmaceutical industry started with G.D. Searle & Co. (now a part of Pfizer Inc.). Mr.
Simes has a B.Sc. degree in Chemistry at Brooklyn College of the City University of New York and an M.B.A. in Marketing and Finance
from New York University.
Mr. Eric So
has served on our
Board of Directors since June 2017. Mr. So has over 15 years’ experience advising both private and public companies. He
has been the Managing Director, Co-founder and chief strategy officer for Globalive Technology Partners Inc. since December 2017
and has been chairman of HyperBlock Technologies Corp. since October 2017. Mr. So has served as chief legal and corporate
development officer, a private internet marketing company, since 2012. Mr. So served as a director of Riot Blockchain, Inc. from
October 2017 until February 2018. An alumnus of Torys LLP, Eric holds a Bachelor of Science from McGill University
and a law degree from the University of Windsor.
Scientific Advisory Board
We have a Scientific Advisory Board of
seven researchers in the field(s) of: psychiatry, Tourette syndrome, neurology, Alzheimer’s, psychology and pediatrics,
neurobiology, pharmacology, organic and medicinal chemistry, cannabinoids and drug discovery. We consult with the members of our
Scientific Advisory Board on a regular basis.
Prof. Raphael Mechoulam
is
a Professor Emeritus of the Department of Natural Products of the School of Pharmacy at the Faculty of Medicine of the Hebrew
University of Jerusalem, and a member of the Israel Academy of Sciences and Humanities. Prof. Mechoulam’s research in the
field of cannabis has led to his discovery of the endocannabinoid system. Additionally, Prof. Mechoulam was among the first to
complete the total synthesis of the major plant cannabinoids, THC, cannabidiol, cannabigerol, and others, and also played a key
role in the isolation of the first described endocannabinoid anandamid. Prof. Mechoulam’s research interests are in the
chemical and biological activity of natural products and medicinal agents, of which his primary contributions are in the field
of the constituents of cannabis, about which Prof. Mechoulam has published extensively. Prof. Mechoulam has received amongst others,
the Israel Prize in 2000, the European College of Neuropsychopharmacology Lifetime Achievement Award in 2006 and the Rothschild
Prize in 2012.
Dr. Yossi Tam
received his B.Med.Sc.,
M.Sc., Ph.D. and D.M.D. from the Hebrew University of Jerusalem. Dr. Tam did his postdoctoral training at the National Institutes
of Health (NIH), and in 2011, became a staff scientist at the NIH. In June 2014, Dr. Tam moved to the Hebrew University of Jerusalem,
where he heads the Obesity and Metabolism Laboratory at the Institute for Drug Research, and focuses on targeting the endocannabinoid
(eCB) system for Obesity, Diabetes and the metabolic syndrome. Dr. Tam also serves as the Director of the Hebrew University’s
Multidisciplinary Center on Cannabinoid Research and a Scientific Advisory Board Member of several biotech companies, which develop
a portfolio of non-psychoactive cannabinoid and cannabinoidmodulating medicines for unmet market needs. Dr. Tam won major national
and international grants, and authored over 40 peer-reviewed papers in leading journals, and two book chapters. Having a clinical
background with basic science training, Dr. Tam has always been interested in how science can directly improve people’s
everyday lives. Thus, he has strived unceasingly to integrate his clinical curiosity and experimental knowledge, in order to deepen
the understanding of clinically relevant research questions.
Prof. Elon Eisenberg,
is the Dean
of the Faculty of Medicine at the Technion - Israel Institute of Technology. Prof. Eisenberg is a Professor of Neurology and Pain
Medicine at the Faculty of Medicine and holds the Otto Barth Family Academic Chair in Biomedical Science. Prof. Eisenberg graduated
from Sackler School of Medicine, Tel-Aviv University in Israel. Prof. Eisenberg completed a residency in Neurology, at Rambam
Medical Center, Haifa, Israel, and Neurology - Pain Fellowship at Massachusetts General Hospital, Harvard Medical School in Boston,
USA. Prof. Eisenberg has been the director of the Institute of Pain Medicine at Rambam Health Care Campus, Haifa, Israel, and
the President of the Israeli Pain Association. Prof. Eisenberg is currently the director of the Pain Research Unit at the Institute
of Pain Medicine, Rambam Health Care Campus. H Prof. Eisenberg’s main areas of research include mechanisms and treatment
of pain with special emphasis on neuropathic pain, CRPS, cancer pain, opioids and cannabinoids. Prof. Eisenberg has published
about two-hundred articles, book chapters and other manuscripts in various areas of pain.
Prof. James Leckman, M.D.
is
the Neison Harris Professor of Child Psychiatry, Psychiatry, Psychology and Pediatrics at Yale University. Prof. Leckman has served
as director of Research for the Yale Child Study Center for more than twenty years. Prof. Leckman’s current research involves
exploring whether the strengthening of families and the enhancement of childhood development leads to peaceful results and the
prevention of violence. Additionally, Prof. Leckman has a longstanding interest in Tourette syndrome and OCD. Prof. Leckman is
the author or co-author of over 430 original articles published in peer-reviewed journals, twelve books, and 140 book chapters.
Prof. Michael Davidson
currently
serves, among other things, as Chairman of the Stuckinski Centre for Alzheimer’s Disease Research in Ramat Gan. Prof.
Davidson is also the editor of European Neuropsychopharmacology. Prof. Davidson served as Chief Psychiatrist at the Department
of Psychiatry of the Sheba Medical Centre in Tel-Hashomer for six years. Prof. Davidson holds a professorship at the Sackler
School of Medicine of Tel Aviv University and a secondary appointment at the Mount Sinai School of Medicine in New York. Prof.
Davidson is considered an international expert on Alzheimer’s and is the author of approximately 300 publications in scientific
literature.
Prof. Daniele Piomelli
serves
as the Louise Turner Arnold Chair in Neurosciences and Professor of Anatomy and Neurobiology, Pharmacology, and Biological Chemistry
at University of California, Irvine. Prof. Piomelli is also the founding director of the drug discovery and development unit (D3)
at the Italian Institute of Technology in Genoa, Italy, as well as the Editor in Chief of Cannabis and Cannabinoid Research of
Cannabis and Cannabinoid Research. Prof. Piomelli’s research has resulted in several contributions to the pharmacology of
lipid based signaling molecules including endocannabinoid substances and lipid amides. Prof. Piomelli is the author of more than
400 peer reviewed articles and books and has received several awards and honors. Prof. Piomelli studied Pharmacology and Neuroscience
at Columbia University, and the Rockefeller University, and earned his degree of Doctor of Pharmacy from University of Naples.
Prof. Kirsten Müller-Vahl
is
a Professor of Psychiatry at the Department of Psychiatry, Socialpsychiatry and Psychotherapy at the Hanover Medical School, Germany.
Prof. Müller-Vahl specialist in both neurology and adult psychiatry and has worked extensively at a specialized movement
disorder clinic. For six years, Prof. Müller-Vahl was a grant-holder for the German Government for scientific research related
to Tourette syndrome. Over the past eighteen years, Dr. Müller-Vahl has investigated more than 12000 patients with Tourette
syndrome, both children and adults, and has served as the head of the Tourette syndrome outpatient department for over twenty
years. Additionally, Prof. Müller-Vahl served on the scientific advisory board of the German Tourette Syndrome Association,
and, in 2011, she became the president of the German Society for the Study of Tourette Syndrome. Furthermore, Prof. Müller-Vahl
is a German representative member of the management committee and coordinator of the COST Action BM0905, which is involved the
study of Tourette syndrome, and the leader of Working Group 4, which is involved in outreach activities. Prof. Müller-Vahl
is a full partner in the EU funded FP7 program, the “European Multicentre Tics in Children Studies.”
Prof. Avi Weizman
is a Professor
of Child and Adult Psychiatry at the Sackler Faculty of Medicine of Tel Aviv University, a Director of the Felsentein Medical
Research Center and the head of a Laboratory for Biological Psychiatry and the head of a Research Unit at the Geha Mental Health
Center. Prof. Weizman’s research involves the investigation of brain mechanisms of mental disorders, and currently focuses
on neurodevelopmental disorders, development of new strategies for the treatment of psychotic disorders and the psychopharmacology
of mental disorders. Prof. Weizman is the author of more than 760 original papers, five full books, 28 book chapters and
60 review articles. After completing his residency in Psychiatry, Prof. Weizman spent two years as a visiting scientist at the
National Institute of Mental Health in Bethesda, MD.
Dr. Michael H. Bloch, M.D., M.S.
is the associate training director of the Child Study Center’s Solnit Integrated Program, which provides psychiatrists-in-training
with the opportunity to integrate general, child and research psychiatry during many stages of their career. Dr. Bloch’s
research interests focus on studying Tourette syndrome, OCD, and trichotillomania. Dr. Bloch’s current research involves
developing superior treatments for children and adults diagnosed with the aforementioned indications and examining predictors
of long-term outcomes with an emphasis on neuroimaging. Dr. Bloch has over 100 peer-reviewed publications and has received the
Keese Prize (Best Research Thesis by graduating medical student at Yale University), the Lustman Award (Best Research performed
by Psychiatry Resident at Yale University) and the AACAP Norbert and Charlotte Rieger Award for Scientific Achievement (Best Manuscript
Published in JAACAP by Child Psychiatrist). Dr. Bloch graduated from Yale School of Medicine, where he completed training in both
child and adult psychiatry.
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
We are not a party to, and there are no
arrangements or voting agreements that we are aware of for the election of our directors and members of management.
Compensation
The following table presents in the aggregate
all compensation we paid to all of our directors and senior management, as a group for the year ended December 31, 2018. The table
does not include any amounts we paid to reimburse any of such persons for costs incurred in providing us with services during
this period.
All amounts reported
in the tables below reflect the cost to the Company, in thousands of U.S. Dollars, for the year ended December 31, 2018.
|
|
Salary/
Fee and
Related
Benefits
|
|
|
Pension,
Retirement
and
Other
Similar
Benefits
|
|
|
Share
Based
Compensation
|
|
All directors and senior management as a group, consisting of 9 persons (*)
|
|
$
|
986
|
|
|
|
59
|
|
|
$
|
517
|
|
|
(*)
|
Includes Doron Ben
Ami, our former Chief Strategy Officer. Mr. Ben Ami resigned in May 2018.
|
In accordance
with the Companies Law, the table below reflects the compensation granted to our five most highly compensated officers during
or with respect to the year ended December 31, 2018.
Annual Compensation
(in thousands of U.S. dollars)
Executive Officer
|
|
Salary/ Fee and Related Benefits
|
|
|
Pension, Retirement and Other
Similar
Benefits
|
|
|
Share Based Compensation (1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Ascher Shmulewitz, Interim Chief Executive Officer and Chairman
|
|
$
|
401
|
|
|
$
|
-
|
|
|
$
|
273
|
|
|
$
|
674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Adi Zuloff-Shani, Chief Technologies Officer
|
|
$
|
224
|
|
|
$
|
34
|
|
|
$
|
51
|
|
|
$
|
309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oz Adler, Chief Financial Officer
|
|
$
|
184
|
|
|
$
|
25
|
|
|
$
|
21
|
|
|
$
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen Simes, Director
|
|
$
|
33
|
|
|
$
|
-
|
|
|
$
|
53
|
|
|
$
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other directors on an individual basis (2)
|
|
$
|
33
|
|
|
$
|
-
|
|
|
$
|
33
|
|
|
$
|
63
|
|
(1)
|
Share based compensation includes the cost of our non-cash share-based compensation in 2018.
|
(2)
|
Unless otherwise detailed in this table, all of our non-executive directors received the same amount of compensation for the year ended December 31, 2018.
|
Employment and Services Agreements with Executive Officers
We have entered into written employment
agreements and/or consulting agreements with each of our executive officers (including with our Chairman). All of these agreements
contain customary provisions regarding noncompetition, confidentiality of information and assignment of inventions. However, the
enforceability of the noncompetition provisions may be limited under applicable law. Most of these agreements are terminable by
either party upon 30 days’ prior written notice. However, a longer 90 day notice period is required with respect to our
Chairman and each of our executive officers. In addition, we have entered into agreements with each executive officer and director
pursuant to which we have agreed to indemnify each of them up to a certain amount and to the extent that these liabilities are
not covered by directors and officers insurance. Members of our senior management are eligible for bonuses each year, subject
to a pre-determined target-based bonus plan, which is usually set during the first quarter of each calendar year following the
recommendation of our compensation committee and the approval of our Board of Directors. The annual bonuses are payable upon meeting
objectives and targets that are set by our Chief Executive Officer and compensation committee and approved annually by our Board
of Directors that also set the bonus targets for our interim Chief Executive Officer and Chairman.
For a description of the terms of our options
and option plans, see Item 6.E. “Share Ownership
”
below.
Directors’ Service Contracts
Other than with
respect to our directors that are also executive officers, namely, our Chairman, we do not have written agreements with any director
providing for benefits upon the termination of his employment with our company.
Our Board of Directors presently consists
of six members. We believe that Mr. Berger, Mr. Heiblum, Dr. Stark, Mr. Simes and Mr. So are all “independent” for
purposes of the Nasdaq Stock Market rules. Our articles of association provide that the number of directors shall be set by the
general meeting of the shareholders provided that it will consist of not less than three and not more than 12 directors. Pursuant
to the Companies Law, the management of our business is vested in our Board of Directors. Our Board of Directors may exercise
all powers and may take all actions that are not specifically granted to our shareholders or to management. Our executive officers
are responsible for our day-to-day management and have individual responsibilities established by our Board of Directors. Our
Chief Executive Officer is appointed by, and serves at the discretion of, our Board of Directors. The terms of our interim Chief
Executive Officer and Chairman are currently subject to the services agreement that we have entered into with him (in his capacity
as an active Chairman), which terms were approved with the prior review and approval of our compensation committee, the Board
of Directors and the general meeting of our shareholders (see below regarding appointment of our Chairman as our interim Chief
Executive Officer for a term of three years). All other executive officers are appointed by the Board of Directors or by our interim
Chief Executive Officer, provided that he was authorized by the Board of Directors to do so. Their terms of employment are subject
to the approval of the Board of Directors’ compensation committee (see “—Compensation Committee
”
)
and of the Board of Directors (and in case the terms are not compatible with the provisions of the compensation policy, to our
shareholders’ approval as well), and are subject to the terms of any applicable employment agreements that we may enter
into with them.
Each director, except external directors,
to the extent required under applicable law (see the description of the External Directors Relief Resolution below, under “—External
Directors”), and whose term is set for a three-year term, 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 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 articles of
association.
In addition, our articles of association
allow our Board of Directors to appoint directors to fill vacancies on our Board of Directors or in addition to the acting directors
(subject to the limitation on the number of directors and their qualifications), until the next general meeting in which directors
may be appointed or such appointment terminated.
Under the Companies Law, nominations for
directors may be made by any shareholder holding at least 1% of our outstanding voting power. However, any such shareholder may
make such a nomination only if a written notice of such shareholder’s intent to make such nomination has been given to our
Board of Directors. Any such notice must include certain information, a description of all arrangements between the nominating
shareholder and the proposed director nominee(s) and any other person pursuant to which the nomination(s) are to be made by the
nominating shareholder, the consent of the proposed director nominee(s) to serve as our director(s) if elected and a declaration
signed by the nominee(s) declaring that there is no limitation under the Companies Law preventing their election and that all
of the information that is required to be provided to us in connection with such election under the Companies Law has been provided.
Under the Companies Law, our Board of Directors
must determine the minimum number of directors who are required to have accounting and financial expertise. Under Israeli applicable
regulations, a director with accounting and financial expertise is a director who, by reason of his or her education, professional
experience and skill, has a high level of proficiency in and understanding of business accounting matters and financial statements.
He or she must be able to thoroughly comprehend the financial statements of the company and initiate debate regarding the manner
in which financial information is presented. In determining the number of directors required to have such expertise, our Board
of Directors must consider, among other things, the type and size of the company and the scope and complexity of its operations.
Our Board of Directors has determined that the minimum number of directors of our company who are required to have accounting
and financial expertise is one.
Our Board of Directors is required to elect
one director to serve as the Chairman of the Board of Directors to preside at the meetings of the Board of Directors, and may
also remove that director as Chairman. Pursuant to the Companies Law, neither the chief executive officer nor any of his or her
relatives is permitted to serve as the chairman of the board of directors, and a company may not vest the chairman or any of his
or her relatives with the chief executive officer’s authorities. In addition, a person who reports, directly or indirectly,
to the chief executive officer may not serve as the chairman of the board of directors; the chairman may not be vested with authorities
of a person who reports, directly or indirectly, to the chief executive officer; and the chairman may not serve in any other position
in the company or a controlled company, but he or she may serve as a director or chairman of a controlled company. However, the
Companies Law permits the company’s shareholders to determine, for a period not exceeding three years from each such determination,
that the chairman or his or her relative may serve as chief executive officer or be vested with the chief executive officer’s
authorities, and that the chief executive officer or his or her relative may serve as chairman or be vested with the chairman’s
authorities. Such determination of a company’s shareholders requires either: (1) the approval of at least the majority of
the shares of those shareholders present and voting on the matter (other than controlling shareholders and those having a personal
interest in the determination); or (2) that the total number of shares opposing such determination does not exceed 2% of the total
voting power in the company. Currently, our Chairman is also acting as our interim Chief Executive Officer, which was approved
by our shareholders at our 2017 annual general meeting, for no additional compensation, for a term of no more than three years
(until November 1, 2020).
The Board of Directors
may, subject to the provisions of the Companies Law, delegate any or all of its powers to committees of the Board of Directors,
and it may, from time to time, revoke such delegation or alter the composition of any such committees, subject to certain limitations.
Unless otherwise expressly provided by the Board of Directors, the committees shall not be empowered to further delegate such
powers. The composition and duties of our audit committee, compensation committee, the research and development and clinical trials
committee are described below. See “—Committees of the Board of Directors” below.
Role of Board of Directors in Risk Oversight Process
The Board of Directors oversees how management
monitors compliance with our risk management policies and procedures, and reviews the adequacy of the risk management framework
in relation to the risks faced by us. Our Board of Directors encourages management to promote a culture that incorporates risk
management into our corporate strategy and day-to-day business operations. Management discusses strategic and operational risks
at regular management meetings, and conducts specific strategic planning and review sessions that include a focused discussion
and analysis of the risks we face. Senior management reviews these risks with the Board of Directors focusing on particular business
functions, operations or strategies, and presents the steps taken by management to mitigate or eliminate such risks. The Board
of Directors is assisted in its oversight role by an internal auditor. The internal auditor undertakes both regular and ad hoc
reviews of risk management controls and procedures, the results of which are reported to our audit committee. See “—Committees
of the Board of Directors—Internal Auditor” below.
Leadership Structure of the Board of Directors
In accordance with the Companies Law and
our articles of association, our Board of Directors is required to appoint one of its members to serve as Chairman of the Board
of Directors. Our Board of Directors has appointed Dr. Shmulewitz to serve as Chairman of the Board of Directors. The terms of
services as an active Chairman were approved by our compensation committee, the Board of Directors and the general meeting of
our shareholders.
Alternate Directors
Our articles of association provide, consistent
with the Companies Law, that any director, and with respect to external directors (to the extent required under applicable law
– see the description of the External Directors Relief Resolution under “—External Directors” below) –
only subject to certain preconditions, may appoint another person to serve as his alternate director, provided such person has
the qualifications prescribed under the Companies Law to be appointed and to serve as a director and is not already serving as
a director or an alternate director of the company. The term of an alternate director may be terminated at any time by the appointing
director and automatically terminates upon the termination of the term of the appointing director. An alternate director has the
same rights and responsibilities as a director. To date there are no alternate director appointments in effect.
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. Such external directors are not required
to be Israeli residents in case of a company listed on a foreign stock exchange (such as Nasdaq). External directors must meet
stringent standards of independence.
Notwithstanding the foregoing, in accordance
with the exemption available to certain Israeli public companies whose shares are traded on the Nasdaq, we chose as of April 27,
2017 and for as long the required conditions precedent are met (unless otherwise decided by our Board of Directors), not to follow
the requirements of the Companies Law with regard to the appointment of “external directors” as defined in the Companies
Law, and instead, we will follow the Nasdaq rules applicable to U.S. domestic companies with respect to the appointment of independent
directors, provided that when we appoint a director, both genders shall have representation in our Board, or the External Directors
Relief Resolution. As of the date hereof, the required conditions precedent of said External Directors Relief Resolution are still
satisfied.
In addition, in practice, the provisions
of our articles of association referring to nominating our external directors according to Israeli law shall have no impact for
as long as the foregoing External Directors Relief Resolution is in effect.
The definition of “independent director”
under Nasdaq Listing Rules and the definition of “external director” under the Companies Law overlap to a significant
degree such that we would generally expect any director serving as external directors under the Companies Law (if and to the extent
applicable) to satisfy the requirements to be independent under Nasdaq Listing Rules. The definition of “external director”
under the Companies Law includes a set of statutory criteria that must be satisfied, including criteria whose aim is to ensure
that there is no factor that would impair the ability of the external director to exercise independent judgment. The definition
of “independent director” under Nasdaq Listing Rules 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, external directors serve for a period of three years (and for no more
than two additional three-year terms) pursuant to the requirements of the Companies Law. However, a special majority of shareholders
must elect “external directors” while “independent directors” may be elected by an ordinary majority.
With respect to the committees of the Board,
see “Committees of the Board of Directors” below.
Fiduciary Duties of Office Holders
The Companies Law imposes a duty of care
and a duty of loyalty on all office holders of a company. “Office holders” includes the chief executive officer, general
manager, chief business manager, deputy general manager, vice general manager, any other person assuming the responsibilities
of any of the above positions regardless of that person’s title, and a director, or a manager directly subordinate to the
chief executive officer or general manager.
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 care of an office holder includes a duty to use reasonable means to obtain:
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information on the advisability of a given action
brought for his approval or performed by him by virtue of his position; and
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all other important information pertaining to
these actions.
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The duty of loyalty of an office holder
requires an office holder to act in good faith and for the benefit of the company, and includes a duty to:
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refrain from any conflict of interest between
the performance of his duties in the company and his performance of his other duties or personal affairs;
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refrain from any action that constitutes competition
with the company’s business;
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refrain from exploiting any business opportunity
of the company to receive a personal gain for himself 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 has received due to his position as an office holder.
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Approval of Related Party Transactions under Israeli
Law
General
Under the Companies Law, we may approve
an action by an office holder from which the office holder would otherwise have to refrain, as described above, if:
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the office holder acts in good faith and the
act or its approval does not cause harm to the company; and
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the office holder disclosed the nature of his
or her interest in the transaction (including any significant fact or document) to the company at a reasonable time before
the company’s approval of such matter.
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Disclosure of Personal Interests of an Office Holder
The Companies Law requires that an office
holder disclose to the company, promptly, and, in any event, not later than the board meeting at which the transaction is first
discussed, any direct or indirect personal interest that he or she may have and all related material information known to him
or her relating to any existing or proposed transaction by the company.
A “personal interest” 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.
If the transaction is an extraordinary
transaction, the office holder must also disclose any personal interest held by:
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the office holder’s relatives; or
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any corporation in which the office holder or
his or her relatives holds 5% or more of the shares or voting rights, serves as a director or general manager or has the right
to appoint at least one director or the general manager.
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An office holder
is not, however, obliged 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 a transaction:
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not in the ordinary course of business;
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not on market terms; or
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that is likely to have a material effect on
the company’s profitability, assets or liabilities.
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The Companies Law does not specify neither
to who within us nor the manner in which required disclosures are to be made. We require our office holders to make such disclosures
to our Board of Directors.
Under the Companies Law, once an office
holder complies with the above disclosure requirement, the board of directors may approve a transaction between the company and
an office holder, or a third party in which an office holder has a personal interest, unless the articles of association provide
otherwise and provided that the transaction is in the company’s interest and is performed by the office holder in good faith.
If the transaction is an extraordinary transaction, first the audit committee and then the board of directors, in that order,
must approve the transaction. Under specific circumstances, shareholder approval may also be required. Any director (and any person,
in general) who has a personal interest in an extraordinary transaction, which is considered at a meeting of the board of directors
or the audit committee, may not be present at this meeting or vote on this matter, unless the chairman of the relevant committee
or board of directors determines that he or she should be present in order to present the transaction that is subject to approval.
If a majority of the board of directors or the audit committee, as the case may be, 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)
on such transaction and the voting on approval thereof, but shareholder approval is also required for such transaction.
Under the Companies
Law, all arrangements as to compensation and indemnification or insurance of office holders require approval of the compensation
committee and board of directors, and compensation of office holders who are directors must be also approved, subject to certain
exceptions, by the shareholders, in that order. If shareholders of a company do not approve the compensation terms of office holders,
other than directors, the compensation committee and board of directors may override the shareholders’ decision, subject
to certain conditions.
Disclosure of Personal Interests of a Controlling Shareholder
Under the Companies Law, the disclosure
requirements that apply to an office holder also apply to a “controlling shareholder” of a public company. Extraordinary
transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, including a private
placement in which a controlling shareholder has a personal interest, as well as transactions for the provision of services whether
directly or indirectly by a controlling shareholder or his or her relative, or a company such controlling shareholder controls,
and transactions concerning the terms of engagement of a controlling shareholder or a controlling shareholder’s relative,
whether as an office holder or an employee, require the approval of the audit committee or the compensation committee, as the
case may be, the board of directors and a majority of the shares voted by the shareholders of the company participating and voting
on the matter in a shareholders’ meeting. In addition, the shareholder approval must fulfill one of the following requirements:
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at least a majority of the shares held by shareholders
who have no personal interest in the transaction and are voting at the meeting must be voted in favor of approving the transaction,
excluding abstentions; or
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the shares voted by shareholders who have no
personal interest in the transaction who vote against the transaction represent no more than 2% of the voting rights in the
company.
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In addition, any extraordinary transaction
with a controlling shareholder or in which a controlling shareholder has a personal interest with a term of more than three years
requires the abovementioned approval every three years; however, such transactions not involving the receipt of services or compensation
can be approved for a longer term, provided that the audit committee determines that such longer term is reasonable under the
circumstances.
Pursuant to regulations promulgated under
the Companies Law, certain transactions with a controlling shareholder or his or her relative, or with directors, that would otherwise
require approval of a company’s shareholders may be exempt from shareholder approval upon certain determinations of the
audit or compensation committee and board of directors.
The Companies Law requires that every shareholder
that participates, in person, by proxy or by voting instrument, in a vote regarding a transaction with a controlling shareholder,
must indicate in advance or in the ballot whether or not that shareholder has a personal interest in the vote in question. Failure
to so indicate will result in the invalidation of that shareholder’s vote.
The term “controlling shareholder”
is defined in the Companies Law as a shareholder with the ability to direct the activities of the company, other than by virtue
of being an office holder. A shareholder is presumed to 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. The
definition a “controlling shareholder” is deemed to include any shareholder that holds 25% or more of the voting rights
in a company if no other shareholder holds more than 50% of the voting rights in the company. For the purpose of determining the
holding percentage stated above, two or more shareholders who have a personal interest in a transaction that is brought for the
company’s approval are deemed as joint holders.
Duties of Shareholders
Under the Companies Law, a shareholder
has a duty to refrain from abusing its power in the company and to act in good faith and in an acceptable manner in exercising
its rights and performing its obligations to the company and other shareholders, including, among other things, voting at general
meetings of shareholders on the following matters:
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amendment of the articles of association;
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increase in the company’s authorized share
capital;
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merger; and
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the approval of “related party”
transactions and acts of office holders that require shareholder approval.
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A shareholder also has a general duty to
refrain from oppressing and discriminating against other shareholders.
The remedies generally available upon a
breach of contract will also apply to a breach of the above mentioned duties, and in the event of oppression of other shareholders,
additional remedies are available to the injured shareholder.
In addition, any controlling shareholder,
any shareholder that knows that its vote can determine the outcome of a shareholder vote and any shareholder that, under a company’s
articles of association, has the power to appoint or prevent the appointment of an office holder, or has another power with respect
to a company, is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this
duty except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach
of the duty to act with fairness, taking the shareholder’s position in the company into account.
Committees of the Board of Directors
Our Board of Directors has established
three standing committees: two of which (the audit committee and the compensation committee) are mandatory (and to date comprised
of the same members and combined into one functional committee).
Audit Committee
Under the Companies Law, we are required
to appoint an audit committee. Notwithstanding the foregoing, in accordance with the exemption available to certain Israeli public
companies whose shares are traded on Nasdaq, we chose as of April 27, 2017 and for as long the required conditions precedent are
met (unless otherwise decided by our Board of Directors), not to follow the requirements of the Companies Law with regard to the
composition of the audit committee (with respect to directorship of external directors) as provided for under the Companies Law,
and instead, we will follow the Nasdaq rules applicable to U.S. domestic companies with respect to the appointment and composition
of the audit committee.
In addition, in practice, the provisions
of our articles of association referring to the audit committee according to Israeli law should be referred to and read based
on the abovementioned exemption for as long as the External Directors Relief Resolution is in effect.
Our audit committee, acting pursuant to
a written charter, is comprised of Mr. Heiblum (chair), Mr. Berger and Dr. Stark.
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, and making recommendations to the Board of Directors to improve such practices;
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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 Item 6.C. “Board Practices—Board Practices—Approval
of Related Party Transactions under Israeli law”);
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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;
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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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determining whether certain acts of an office
holder not in accordance with his or her fiduciary duty owed to the company are extraordinary or material and to approve such
acts and certain related party transactions (including transactions in which an office holder has a personal interest) and
whether such transaction is extraordinary or material under the Companies Law (see Item 6.C. “Board Practices—Approval
of Related Party Transactions Under Israeli Law”);
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deciding whether to approve and to establish
the approval process (including by tender or other competitive proceedings) for certain transactions with a controlling shareholder
or in which a controlling shareholder has a personal interest; and
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determining the process of approving of transactions
that are not negligible, including determining the types of transactions that will be subject to the approval of the audit
committee.
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We have adopted an audit committee charter
setting forth among others, the responsibilities of the audit committee consistent with the rules of the SEC and Nasdaq Listing
Rules (in addition to the requirements for such committee under the Companies Law), including, among others, the following:
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considering and making recommendations to the
Board of Directors on our financial statements, reviewing and discussing the financial statements and presenting its recommendations
with respect to the financial statements to the Board of Directors prior to the approval of the financial statements by our
Board of Directors;
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oversight of our independent registered public
accounting firm and recommending the engagement, compensation or termination of engagement of our independent registered public
accounting firm to the Board of Directors in accordance with Israeli law;
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recommending the engagement or termination of
the person filling the office of our internal auditor, reviewing the services provided by our internal auditor and reviewing
effectiveness of our system of internal control over financial reporting;
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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; and
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reviewing and monitoring, if applicable, legal
matters with significant impact, reviewing regulatory authorities’ findings, receiving reports regarding irregularities
and legal compliance, acting according to “whistleblower policy” and recommending to our Board of Directors if
so required, and overseeing our policies and procedures regarding compliance with applicable financial and accounting related
standards, rules and regulations.
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Nasdaq Stock Market Requirements for Audit Committee
Under the Nasdaq Stock Market rules, we
are required to maintain an audit committee consisting of at least three members, all of whom are independent and are financially
literate and one of whom has accounting or related financial management expertise.
As noted above, currently the members of
our audit committee include Mr. Berger, Mr. Heiblum and Dr. Stark. All of the members of our audit committee are “independent,”
as such term is defined in under Nasdaq Stock Market rules. Mr. Heiblum serves as the Chairman of our audit committee. All members
of our audit committee meet the requirements for financial literacy under the Nasdaq Stock Market rules. Our Board of Directors
has determined that each member of our audit committee is an audit committee financial expert as defined by the SEC rules and
has the requisite financial experience as defined by the Nasdaq Stock Market rules.
Compensation Committee
Under the Companies Law, the board of directors
of any public company must establish a compensation committee. The compensation committee must be comprised of at least three
directors, including all of the external directors (if any), who must constitute a majority of the members of the compensation
committee, and one of whom 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 Stock Market, and who do not have a shareholder holding 25%
or more of the company’s share capital, 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. In accordance with the exemption available to certain Israeli public companies, whose shares are traded
on Nasdaq, we chose as of April 27, 2017 and for as long the required conditions precedent are met (unless otherwise decided by
our Board of Directors), not to follow the requirements of the Companies Law with regard to the composition of and the legal quorum
required for the discussion and adoption of resolution by the compensation committee (with respect to directorship of external
directors) as provided for under the Companies Law, and instead, we will follow the Nasdaq rules applicable to U.S. domestic companies
with respect to the appointment and composition of the compensation committee.
In addition, in practice, the provisions
of our articles of association referring to the compensation committee according to Israeli law should be referred to and read
based on the abovementioned exemption for as long as the External Directors Relief Resolution is in effect.
Our compensation committee is acting pursuant
to a written charter, and consists of Mr. Heiblum (chair), Mr. Berger and Dr. Stark, each of whom is “independent,”
as such term is defined under the Nasdaq Stock Market rules. Our compensation committee complies with the provisions of the Companies
Law, the regulations promulgated thereunder, and our articles of association (insofar as the provisions of our articles of association
referring to the compensation committee according to Israeli law should be referred to and read based on said exemption), on all
aspects referring to its independence, authorities and practice.
Our compensation committee reviews and
recommends to our Board of Directors: (1) the annual base compensation of our executive officers and directors; (2) annual incentive
bonus, including the specific goals and amount; (3) equity compensation; (4) employment agreements, severance arrangements, and
change in control agreements/provisions; (5) retirement grants and/or retirement bonuses; and (6) any other benefits, compensation,
compensation policies or arrangements.
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.” The compensation policy must be adopted by the company’s board
of directors, after considering the recommendations of the compensation committee. The compensation policy is then brought for
approval by our shareholders and is subject to special majority requirements. On March 24, 2014, our shareholders approved our
compensation policy and our shareholders approved an amended compensation policy at our 2017 annual general meeting of shareholders
on November 1, 2017.
Compensation Policy
The compensation policy must serve as the
basis for decisions concerning the financial terms of employment or engagement of executive officers and directors, including
exculpation, insurance, indemnification or any monetary payment or obligation of payment in respect of employment or engagement.
The compensation policy must be approved (or reapproved) not longer than every three years, and relate to certain factors, including
advancement of the company’s objectives, the company’s business and its long-term strategy, and creation of appropriate
incentives for executives. 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 (director or executive);
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the director’s or executive’s roles
and responsibilities and prior compensation agreements with him or her;
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the relationship between the terms offered and
the average and median compensation of the other employees of the company, including those employed through manpower companies;
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the impact of disparities in salary upon work
relationships in the company;
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the possibility of reducing variable compensation
at the discretion of the board of directors; and the possibility of setting a limit on the exercise value of non-cash variable
compensation; and
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as to severance compensation, the period of
service of the director or executive, the terms of his or her compensation during such service period, the company’s
performance during that period of service, the person’s contribution towards the company’s achievement of its
goals and the maximization of its profits, and the circumstances under which the person is leaving the company.
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The compensation policy must also include
the following principles:
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the link between variable compensation and long-term
performance and measurable criteria;
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the relationship between variable and fixed
compensation, and the ceiling for the value of variable compensation;
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the conditions under which a director or executive
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 policy must also consider
appropriate incentives from a long-term perspective and maximum limits for severance compensation.
The compensation committee is responsible
for (1) recommending the compensation policy to a company’s board of directors for its approval (and subsequent approval
by our shareholders) and (2) 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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Under the regulations
promulgated under the Companies Law, certain exemptions and reliefs with respect to the compensation committee are granted to
companies whose securities are traded outside of Israel. We may use these exemptions and reliefs during and for as long as our
ADSs are listed on the Nasdaq Capital Market.
Internal Auditor
Under the Companies Law, the board of directors
of an Israeli public company must also appoint an internal auditor nominated and supervised by the audit committee. Our internal
auditor is Mr. Daniel Shapira, who has been serving as our internal auditor since March 2006. Mr. Shapira is a Certified Public
Accountant and holds a B.A. degree in Economics and Accounting from Bar-Ilan University, Israel. The role of the internal auditor
is to examine whether a company’s actions comply with the law and proper business procedure. Our Chairman acts as the internal
auditor’s organizational supervisor. The internal auditor will submit his internal auditor’s work plan for the approval
of our audit committee. The internal auditor may not be an “interested party” or office holder, or a relative of any
interested party or office holder, and may not be a member of the company’s independent accounting firm or its representative.
The Companies Law defines an interested party as a holder of 5% or more of the shares or voting rights of a company, any person
or entity that has the right to nominate or appoint at least one director or the general manager of the company or any person
who serves as a director or as the general manager of a company. Our internal auditor is not our employee, but the managing partner
of a firm which specializes in internal auditing.
Remuneration of Directors
Under the Companies Law, remuneration of
directors is subject to the approval of the compensation committee, thereafter by the board of directors and thereafter by the
general meeting of the shareholders. In case the remuneration of the directors is in accordance with regulation applicable to
remuneration of the external directors then such remuneration shall be exempt from the approval of the general meeting. See “—Board
Practices—External Directors.”
Insurance
Under the Companies Law and our articles
of association, a company may obtain insurance for any of its office holders for:
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a breach of his or her duty of care to the company
or to another person, including a breach arising out of the negligent conduct of the office holder;
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a breach of his or her duty of loyalty to the
company, provided that the office holder acted in good faith and had reasonable cause to assume that his or her act would
not prejudice the company’s interests;
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a financial liability imposed upon him or her
in favor of another person concerning an act performed by such office holder in his or her capacity as an officer holder;
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any other insurable action in accordance with
the Companies Law;
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expenses incurred by an office holder relating
to an administrative enforcement proceeding conducted with respect to such office holder including reasonable litigation expenses
and attorneys’ fees; and
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payments to the party injured by the violation,
in accordance with the Securities Law.
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We have approved a five year framework,
where the yearly premium will not exceed the sum of $200,000 (allowing an annual increase of 15%), with a liability limit of up
to $25,000,000 per event per annum, and additional side A DIC liability limit of up to $10,000,000, and including an 84 months
run-off insurance under reasonable customary terms. In addition, we have a similar insurance framework included and in effect
under our compensation policy.
We currently have liability insurance, providing
total coverage of $15,000,000 per claim and in the aggregate for the benefit of all of our directors and officers and company
coverage for securities claim. In addition, we have total coverage of $5,000,000 Side A DIC only for our directors and officers.
Indemnification
The Companies Law and our articles of association
provide that we may indemnify an office holder against:
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a financial liability imposed on him or her
in favor of another person by any judgment concerning an act performed in his or her capacity as an office holder, 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 foreseen based on a 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 must detail the abovementioned foreseen events and amount or criteria;
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reasonable litigation expenses, including attorneys’
fees, incurred by the office holder: (i) as a result of an investigation or proceeding instituted against him or her by an
authority authorized to conduct such investigation or proceeding, provided that (a) no indictment (as defined in the Companies
Law) was filed against such office holder as a result of such investigation or proceeding; and (b) no financial liability
as a substitute for the criminal proceeding (as defined in the Companies Law) was imposed upon him or her as a result of such
investigation or proceeding, or, if such financial liability was imposed, it was imposed with respect to an offense that does
not require proof of criminal intent; and (ii) in connection with a monetary sanction;
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reasonable litigation expenses, including attorneys’
fees, expended by the office holder or charged to him or her by a court relating to an act performed in his or her capacity
as an office holder, in connection with: (1) proceedings that the company institutes, or that another person institutes on
the company’s behalf, against him or her; (2) a criminal charge of which he or she was acquitted; or (3) a criminal
charge for which he or she was convicted for a criminal offense that does not require proof of criminal thought;
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expenses incurred by an office holder relating
to an administrative enforcement proceeding conducted with regard to such office holder, including reasonable litigation expenses
and including attorneys’ fees;
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payment to the party injured by the violation;
and
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liability or expense otherwise permitted as
an indemnification by the Companies Law.
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Our articles of association allow us to
indemnify our office holders up to a certain amount. The Companies Law also permits a company to undertake in advance to indemnify
an office holder, provided that if such indemnification relates to financial liability imposed on him or her, as described above,
then the undertaking should be limited:
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to categories of events that the board of directors
determines are likely to occur in light of the operations of the company at the time that the undertaking to indemnify is
made; and
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in amount or criterion determined by the board
of directors, at the time of the giving of such undertaking to indemnify, to be reasonable under the circumstances.
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We have entered into indemnification agreements,
with each of our directors and with certain members of our senior management. Each such indemnification agreement provides the
office holder with indemnification to the fullest extent permitted under applicable law and up to a certain amount, and including
with respect to liabilities resulting from our initial public offering in the United States and any other subsequent public offerings,
and to the extent that the directors and officers insurance do not cover these liabilities.
Exculpation
Under the Companies Law, an Israeli company
may not exculpate an office holder from liability for a breach of his or her duty of loyalty, but may exculpate in advance an
office holder from his or her liability to the company, in whole or in part, and for damages caused to the company as a result
of a breach of his or her duty of care (other than in relation to distributions), but only if a provision authorizing such exculpation
is included in its articles of association. A company may not exculpate a director from liability arising out of a prohibited
dividend or distribution to shareholders. Our articles of association provide that we may exculpate any office holder from liability
to us to the fullest extent permitted by law.
We have entered into exculpation agreements
with each of our current directors and executive officers undertaking to exculpate and release our office holders from any and
all liability to us related to any breach by them of their duty of care to us to the fullest extent permitted by law and including
with respect to liabilities resulting from our initial public offering in the United States and any other subsequent public offerings.
Limitations
The Companies Law provides that we may
not exculpate or indemnify an office holder nor enter into an insurance contract that would provide coverage for any liability
incurred as a result of any of the following: (1) a breach by the office holder of his or her duty of loyalty unless (in the case
of indemnity or insurance only, but not exculpation) the office holder acted in good faith and had a reasonable basis to believe
that the act would not prejudice us; (2) a breach by the office holder of his or her duty of care if the breach was carried out
intentionally or recklessly (as opposed to merely negligently); (3) any action taken or omission committed with the intent to
derive an illegal personal benefit; or (4) any fine or forfeit levied against the office holder.
As of December 31, 2018, we had three members
of senior management (including our Chairman), all of whom are full-time employees. In addition, we had eight other full-time
employees, all located in Israel. None of our employees is represented by labor unions or covered by collective bargaining agreements.
We believe that we maintain good relations with all of our employees. However, in Israel, we are subject to certain Israeli labor
laws, regulations and national labor court precedent rulings, as well as certain provisions of collective bargaining agreements
applicable to us by virtue of extension orders issued in accordance with relevant labor laws by the Israeli and Industry of Economy
and which apply such agreement provisions to our employees even though they are not part of a union that has signed a collective
bargaining agreement.
All of our employment and consulting agreements
include employees’ and consultants’ undertakings with respect to non-competition and assignment to us of intellectual
property rights developed in the course of employment and confidentiality. The enforceability of such provisions is limited by
Israeli law.
The
following table lists as of May 13, 2019, the number of our shares beneficially owned by each of our directors, our executive
officers and our directors and executive officers as a group:
|
|
Number of Ordinary Shares Beneficially Owned (1)
|
|
|
Percent of Class (2)
|
|
Executive Officers and Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Ascher Shmulewitz
|
|
|
7,851,988
|
(3)
|
|
|
3.93
|
%
|
|
|
|
|
|
|
|
|
|
Oz Adler
|
|
|
216,668
|
(4)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Dr. Adi Zuloff-Shani
|
|
|
1,025,000
|
(5)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Stephen M. Simes
|
|
|
995,833
|
(6)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Amit Berger
|
|
|
437,500
|
(7)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Dr. Yafit Stark
|
|
|
437,500
|
(7)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Zohar Heiblum
|
|
|
437,500
|
(7)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Eric So
|
|
|
437,500
|
(7)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group (8 persons)
|
|
|
11,839,490
|
(8)
|
|
|
5.93
|
%
|
(1)
|
Beneficial ownership is determined in accordance
with the rules of the SEC and generally includes voting or investment power with respect to securities. Ordinary Shares relating
to options currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for computing
the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other
person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the
table above have sole voting and investment power with respect to all shares shown as beneficially owned by them.
|
(2)
|
The percentages shown are based on 199,561,352 Ordinary Shares issued and outstanding as of May 13, 2019 plus
Ordinary Shares relating to options and warrants currently exercisable or exercisable within 60 days of the date of this table,
which are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding
for computing the percentage of any other person.
|
|
|
(3)
|
Includes (i) 669,680 Ordinary Shares, options
to purchase 423,037 Ordinary Shares at an exercise price of NIS 0.79 (approximately $0.21) per share and options to purchase
250,000 Ordinary Shares at an exercise price of NIS 0.50 (approximately $0.14) per share, held directly by Dr. Shmulewitz,
(ii) 2,338,440 Ordinary Shares, held by Dekel, which is an Israel company controlled by Dr. Shmulewitz; and (iii) options
to purchase 1,983,331 Ordinary Shares at an exercise price of NIS 0.50 (approximately $0.14) per share, and options to purchase
2,187,500 Ordinary Shares at an exercise price of NIS 0.72 (approximately $0.19) per share held by Medgenesis Partners Ltd.,
which, to the best of our knowledge, is an Israeli company controlled by Dr. Shmulewitz.
|
|
|
(4)
|
Includes options to purchase 216,668 Ordinary
Shares at an exercise price of NIS 0.50 (approximately $0.14) per share.
|
|
|
(5)
|
Includes options to purchase 500,000 Ordinary
Shares at an exercise price of NIS 1.06 (approximately $0.28) per share and options to purchase 525,000 Ordinary Shares at
an exercise price of NIS 0.50 (approximately $0.14) per share.
|
|
|
(6)
|
Includes options to purchase 558,333 Ordinary
Shares at an exercise price of NIS 0.86 (approximately $0.23) per share and options to purchase 437,500 Ordinary Shares at
an exercise price of NIS 0.50 (approximately $0.14) per share.
|
|
|
(7)
|
Consists of options to purchase 437,500 Ordinary
Shares at an exercise price of NIS 0.50 (approximately $0.14) per share.
|
|
|
(8)
|
Includes options to purchase 8,831,370 Ordinary
Shares.
|
Equity Incentive Plans
Israeli Share Option Plan (2015); Israeli Share Option
Plan (2005)
In July 2005, we adopted the Israeli Share
Option Plan (2005), or the 2005 Plan, which was in force for a period of 10 years. Upon the expiration of the 2005 Plan, we adopted
the Israeli Share Option Plan (2015), or the 2015 Plan. Some of the options previously granted under the 2005 Plan remain outstanding,
and new options are granted under the 2015 Plan.
Under the plans, we grant options to purchase
our Ordinary Shares to our officers, employees, consultants and other service providers. As of May 13, 2019, 31,000,000 Ordinary
Shares were reserved for issuance under the plans, of which options to purchase 17,390,000 Ordinary Shares were issued and outstanding
thereunder. Of such outstanding options, options to purchase 10,438,024 Ordinary Shares were vested as of May 13, 2019, with a
weighted average exercise price of NIS 0.59 (approximately $0.17) per share.
The plans were designed to reflect the
provisions of the Israeli Income Tax Ordinance (New Version) 5721-1961, or the Ordinance, mainly Sections 102 and 3(i), which
afford certain tax advantages to Israeli employees, officers, and directors who are granted share options in accordance with its
terms. Section 102 of the Ordinance allows employees, directors, and officers, who are not controlling shareholders and who are
Israeli residents, to receive favorable tax treatment for compensation in the form of shares or share options. Section 102 of
the Ordinance includes two alternatives for tax treatment involving the issuance of share options or shares to a trustee for the
benefit of the grantees and also includes an additional alternative for the issuance of share options or shares directly to the
grantee. Sections 102(b)(2) and 102(b)(3) of the Ordinance, which provide the most favorable tax treatment for grantees, permit
the issuance to a trustee under the “capital gain” tax regime. In order to comply with the terms of the “capital
gain” tax regime, all share options granted under a specific plan and subject to the provisions of Section 102 of the Ordinance,
as well as the shares issued upon exercise of such share options and other shares received following any realization of rights
with respect to such share options, such as share dividends and share splits, must be registered in the name of a trustee selected
by the board of directors and held in trust for the benefit of the relevant employee, director, officer or service provider. The
trustee may not release these share options or shares to the relevant grantee before the second anniversary of the registration
of the share options in the name of the trustee. However, under this regime, our ability to deduct an expense with respect to
the issuance of the share options or shares might be limited. Section 3(i), which permits the issuance of share options under
the “income from labor” tax regime, does not provide for similar tax benefits.
The 2015 Plan may be administered by our
Board of Directors either directly or upon the recommendation of a committee appointed by our Board of Directors. Our compensation
committee recommends to the Board of Directors, and the Board of Directors determines or approves the eligible individuals who
receive share options under the 2015 Plan, the number of Ordinary Shares covered by those share options, the terms under which
such share options may be exercised, and other terms and conditions of the share options, all in accordance with the provisions
of the 2015 Plan. Share option holders may not transfer their share options except in the event of death or transfer in accordance
with law and the provisions of the 2015 Plan. Our compensation committee or Board of Directors may at any time amend or terminate
the 2015 Plan; however, any amendment or termination may not adversely affect any share options or shares granted under such 2105
Plan prior to such action. The share option exercise price is determined by the Board of Directors, following the recommendation
of the compensation committee, and specified in each option award agreement.
Awards under the 2015 Plan may be granted
until December 2025, ten years from December 2015. Share options granted under the 2005 and the 2015 Plans generally vest over
three years commencing on the date of grant such that the options shall vest on a quarterly basis in equal portions, unless otherwise
provided in a specific share option grant agreement and such option agreements may contain acceleration provisions upon certain
merger, acquisition, or change of control transactions. Share options, other than certain incentive share options, that are not
exercised within the term set forth under each award agreement shall expire, unless otherwise determined by our Board of Directors.
Except as otherwise determined by the Board of Directors or as set forth in an individual’s award agreement, in the event
of termination of employment or services for reasons of disability or death, the grantee, or in the case of death - his or her
legal successor, may exercise share options that have vested prior to termination within a period of twenty four months from the
date of disability or death. If we terminate a grantee’s employment or service for cause (as this term is defined under
the Plan), all of the grantee’s unvested share options will expire on the date of termination, yet share options which by
that date the offeree’s eligibility to exercise has already been formed shall remain exercisable. If a grantee’s employment
or service is terminated for any other reason other than for cause, the grantee may exercise his or her vested share options within
90 days of the date of termination, unless otherwise provided in a specific share option grant agreement. In the event of (i)
a sale of all or substantially all of our assets or (ii) our consolidation or merger in which we are not the ongoing or surviving
corporation, then, and unless otherwise determined in the agreement or by the Board of Directors, we shall be entitled to determine
that all of the outstanding unexercised share options held by or for the benefit of any grantee shall be assumed or substituted
for an appropriate number of share options of the successor company, provided that the aggregate amount of the exercise price
for such share options shall be equal to the aggregate amount of the exercise price of our unexercised share options held by each
grantee at such time. In addition, and unless otherwise determined by our Board of Directors, upon the occurrence of certain events,
as further described in the plans (among others, a merger transaction (or the like), liquidation and/or dissolution, recapitalization,
rights offering, distribution of bonus shares, dividends and capital reorganization), a grantee’s rights to purchase shares
under either of the plans shall be adjusted as provided therein.
ITEM
7.
|
MAJOR SHAREHOLDERS
AND RELATED PARTY TRANSACTIONS
|
As
of May 13, 2019, none of the holders of our Ordinary Shares had beneficial ownership of 5% or more
of our outstanding Ordinary Shares.
Changes in Percentage Ownership
by Major Shareholders
During the last three years, there were
no significant changes in percentage ownership by major shareholders (i.e., of or more than 5% of our issued and outstanding share
capital) except as detailed below:
|
-
|
Dr. Haim Amir invested approximately
$1,000,000 in March 2017, in consideration of an aggregate of 5,357,143 Ordinary Shares, constituting approximately
11.6% of our issued share capital after the investment, which reduced the beneficial ownership percentages of our
other major shareholders. Dr. Amir’s holdings were later reduced in our public offering in April 2017, as mentioned below.
|
|
-
|
We issued 2,300,000 ADSs in a public offering
in March and April 2017, constituting approximately 65.8% (in the aggregate) of our issued share capital after the offering,
which reduced the beneficial ownership percentages of our major shareholders.
|
Record
Holders
As
of May 13, 2019, there were six holders of record of our Ordinary Shares, one of which has a registered address in the United
States. Based upon a review of the information provided to us by The Bank of New York Mellon, the depository of the ADSs, as of
May 13, 2019, there were 69 holders of record of the ADSs on record with the Depository Trust Company.
These
numbers are not representative of the number of beneficial holders of our shares nor is it representative of where such beneficial
holders reside, since many of these shares were held of record by brokers or other nominees.
We are not controlled
by another corporation, by any foreign government or by any natural or legal persons except as set forth herein, and there are
no arrangements known to us which would result in a change in control at a subsequent date.
B.
|
Related
Party Transactions
|
Employment Agreements
We have entered
into written employment agreements with each of our executive officers. All of these agreements contain customary provisions regarding
noncompetition, confidentiality of information and assignment of inventions. However, the enforceability of the noncompetition
provisions may be limited under applicable law. Most of these agreements are terminable by either party upon 30 days’ prior
written notice. However, a longer 90 day notice period is required with respect to our Chief Executive Officer and Chairman. In
addition, we have entered into agreements with each executive officer and director pursuant to which we have agreed to indemnify
each of them up to a certain amount and to the extent that these liabilities are not covered by directors and officers insurance.
Members of our senior management are eligible for bonuses each year. The bonuses are payable upon meeting objectives and targets
that are set by our Chief Executive Officer and approved annually by our Board of Directors that also set the bonus targets for
our Chief Executive Officer. See Item 6.B. “Compensation—Employment and Service Agreements with Executive Officers”
and see the descriptions of exculpation and indemnification agreements and directors and officers insurance arrangements in Item
6.A. “Directors and Senior Management” and Item 6.C. “Board Practices—Insurance,” — “Indemnification”
and “—Exculpation.”
Options
Since our inception,
we have granted options to purchase our Ordinary Shares to our employees, officers, service providers and certain of our directors.
Such option agreements may contain acceleration provisions upon certain merger, acquisition, or change of control transactions.
We describe our option plans under Item 6.E. “Share Ownership—Equity Incentive Plans.” If the relationship between
us and an executive officer or a director is terminated, except for cause (as defined in the various option plan agreements),
options that are vested will generally remain exercisable for 90 days after such termination.
Dekel License Agreement
In May 2015, we
entered into a license agreement, which became effective in August 2015, with Dekel, an Israeli private company controlled by
Dr. Ascher Shmulewitz, the Chairman of our Board of Directors and our interim Chief Executive Officer, under which we were granted
an irrevocable, worldwide, exclusive, royalty-bearing license to certain of Dekel’s technology. See Item 4.B. “Business
Overview—Intellectual Property” for additional information. Pursuant to the license agreement, we granted options
to purchase 3,876,000 of our Ordinary Shares at an exercise price per share of NIS 0.50 and additional options to purchase 11,926,154
of our Ordinary Shares at an exercise price per share of NIS 0.65. Dekel subsequently transferred options to purchase 3,352,458
Ordinary Shares to Jay’s Thera Ltd., one of our former major shareholders, which exercised all of the options for aggregate
consideration of NIS 1,923,000.
In May 2016, we
issued Dekel 200,000 Ordinary Shares in consideration of an NIS 100,000 future royalty payment under the license agreement. Pursuant
to the license agreement, we are obligated to pay Dekel certain payments subject to a completion of milestones. During November
2016, we achieved the first milestone under the license agreement, success of pre-clinical studies with Dekel’s technology,
pursuant to which we paid Dekel the first milestone payment of $25,000 in cash in March 2017. On April 24, 2018, we paid to Dekel
the second milestone under the license agreement in the amount of $75,000 upon the successful completion of our Phase IIa trial.
Except as mentioned
above, no other milestone was achieved during 2018 and to the date hereof.
In addition, we
are required to pay a third milestone payment of $75,000 upon the earlier of: (i) generating net revenues of at least $200,000
from the commercialization of the technology, or (ii) the approval of the FDA / the EMA of a drug based on the licensed assets.
Subject to our discretion, the milestone payment is payable in cash or equity based on a price per Ordinary Share of NIS 0.5.
The royalty payments
are 8% for commercialization and 35% pursuant to a sub-license of the licensed assets. The patent expiration dates of any patents
maturing from this application would likely be 2029.
Yissum License Agreement
On July 29, 2018,
we entered into the Yissum License Agreement. According to the Yissum License Agreement, we shall pay Yissum royalties at the
rates of 3% of net sales, subject to the royalty reductions as described in the Yissum License Agreement. All of the reductions
in the royalties combined, in aggregate, shall be capped at, and not exceed, 50% of the respective royalty rate. We are also obligated
to pay sublicense fees, which will be paid at a rate of 20% of the sublicense consideration.
All right, title
and interest in and to the Yissum License Agreement shall vest solely in Yissum, and we shall hold and make use of the rights
granted. All rights in the development results shall be solely owned by us, except to the extent that an employee of the Yissum,
including the researcher, is considered an inventor of a patentable invention arising from the development results, in which case
such invention and all patent applications and/or patents claiming such invention shall be owned jointly by us and Yissum, as
appropriate, and Yissum’s share in such joint patents shall be automatically included in the Yissum License Agreement.
On October 4,
2018, we paid Yissum a total amount of $50,000 due under the Yissum License Agreement. We estimate that the expenses due to the
research program of the Yissum License Agreement and additional reimbursement for historical patent costs will be approximately
$135,000.
Private Placements of Ordinary Shares
On March 29, 2015
, we issued to Jesselson Investments Ltd., an Israeli company controlled by Benjamin Jesselson who is the father of our former
director Micha Jesselson, 4,400,000 Ordinary Shares, at a price per share of NIS 0.50 (approximately $0.12). As part of this transaction,
Jesselson Investments Ltd. is entitled to indemnification in case of breach or falsity of any representation or warranty by us
contained in the purchase agreement; and/or any fine or monetary sanction imposed on us by the ISA in connection with the administrative
proceedings conducted by the ISA. See Item 4.B. “Business Overview—Legal Proceedings.” The indemnification is
capped at the lesser of the amount actually invested by Jesselson Investments Ltd. or the loss as may be finally determined by
competent court as a result of a claim filed by Jesselson Investments Ltd. in connection with such liability. Furthermore, we
would only be liable in the event that any claims asserted against us regarding misrepresentation were brought before April 29,
2017 and exceed a sum of $50,000, and/or claims in connection with a monetary sanction pursuant to administrative proceedings
are brought before April 29, 2020 and exceed a sum of $20,000.
In March 2017,
as part of a private placement, we issued to Dr. Haim Amir 5,357,143 Ordinary Shares, at a price per share of NIS 0.70 (approximately
$0.19). Pursuant to the agreement, in the event that we raise additional funds by means of a private placements (excluding public
offerings) upon less favorable terms relating to the price per share, then we would be required to issue to Dr. Amir, for no additional
consideration, such number of Ordinary Shares reflecting the difference between the new price per share and the price per share
actually paid by Dr. Amir. In addition, in the event that we raise additional funds by means of a public offering of our Ordinary
Shares or ADSs upon less favorable terms relating to the price per share, then immediately following the closing of such public
offering, we would be required to pay Dr. Amir an amount, calculated as the number of his purchased shares (5,357,143 Ordinary
Shares) multiplied by the difference between NIS 0.70 and the future public offering price per share. Pursuant to our sole discretion,
we may choose to pay this sum in cash and/or in Ordinary Shares (at a price per share of such public offering). In addition, Dr.
Amir was entitled to price protection rights to participate in our future private placements upon the same terms offered to future
investors, on a pro-rata basis to his holdings. The foregoing anti-dilution rights have expired. Since we issued our ADSs in our
U.S. IPO on Nasdaq at a public offering price of $6.00 per ADS, which is less than $7.71 per ADS, we issued 1,529,910 Ordinary
Shares to Dr. Haim Amir according to the price protection provision mentioned above.
Investment in Therapix Healthcare Resources Inc.
On July 26, 2018,
and as amended in July, August and October 2018, we entered into an agreement for convertible loans, or the Convertible Loans
Agreement, with THR, a Delaware corporation, which was engaged in operating pain treatment clinics to treat an assortment of different
pains, including, acute pain, spine pain, chronic headaches, cancer pain, oral/maxillofacial pain, neuropathic pain and rheumatologic/myofascial
pain. On July 31, 2018, THR entered into an asset purchase agreement with a third party for equipment, a laboratory and patient
medical records.
On October 3,
2018, we converted an aggregate of approximately $1.65 million of convertible loans issued under the Convertible Loans Agreement
and, as a result of such conversion and other non-cash startup expenses previously provided to THR, we obtained an equity ownership
interest of 82.36% in THR. We currently have approximately $688,000 in convertible loans outstanding to THR.
Dr. Ascher Shmulewitz,
our Chairman and interim Chief Executive Officer, serves as the chairman of THR. Dr. Shmulewitz has not and currently does not
receive compensation in his capacity as chairman of THR.
C.
|
Interests
of Experts and Counsel
|
Not
applicable.
ITEM
8.
|
FINANCIAL INFORMATION.
|
A.
|
Consolidated
Statements and Other Financial Information.
|
See
Item 18. “Financial Statements.”
Legal Proceedings
Liquidation of Therapix Healthcare Resources, Inc.
On July 26, 2018,
and as amended in July, August and October 2018, we entered into an agreement for convertible loans, or the Convertible Loans
Agreement, with THR, a Delaware corporation. On July 31, 2018, THR entered into an asset purchase agreement with a third party
for equipment, a laboratory and patient medical records.
On October 3,
2018, we converted an aggregate of approximately $1.63 million of convertible loans issued under the Convertible Loans Agreement
and, as a result of such conversion and other non-cash startup expenses previously provided to THR, we obtained an equity ownership
interest of 82.36% in THR. We currently have approximately $688,000 in convertible loans outstanding to THR.
Due in part to
significant losses incurred by THR, as well as its failure to maintain required licenses to operate its facilities, THR has commenced
liquidation of its assets. The liquidation of THR’s remaining assets, or potential claims that may arise from the liquidation
and dissolution of THR may adversely affect our reputation or divert our management’s attention in the event of any material
litigation or in the event that the liquidation process is prolonged. At this time, neither we nor THR is able to estimate reliably
the timing and results of the proposed liquidation or of any consequences that may occur as a result thereof.
In addition, as
of December 31, 2018, several claims were filed against THR by different suppliers, due to the fact that THR, due to its economic
situation, was, and is not able to comply with the terms of the contracts signed with each specific supplier. The claims are in
an amount aggregating to approximately $789,000. THR is looking to settle all claims and as of December 31, 2018, has recorded
a provision of $250,000.
Dividends
We have never declared or paid any cash
dividends on our Ordinary Shares and do not anticipate paying any cash dividends in the foreseeable future. Payment of cash dividends,
if any, in the future will be at the discretion of our Board of Directors and will depend on then-existing conditions, including
our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors
our Board of Directors may deem relevant.
The distribution of dividends may also
be limited by the Companies Law, which permits the distribution of dividends only out of retained earnings or earnings derived
over the two most recent fiscal years, whichever is higher, provided that there is no reasonable concern that payment of a dividend
will prevent a company from satisfying its existing and foreseeable obligations as they become due.
Payment of dividends may be subject to
Israeli withholding taxes. See Item 10.E. “Taxation” for additional information.
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.
|
THE OFFER AND
LISTING
|
A.
|
Offer and Listing
Details
|
Our ADSs commenced trading on the OTC Markets
on October 6, 2014 under the symbol “THXBY.” On March 22, 2017, our ADSs, each of which represents forty of our Ordinary
Shares, commenced trading on the Nasdaq Capital Market under the symbol “TRPX.” From December 26, 2005 to August 9,
2018, our Ordinary Shares were traded on the TASE.
Not
applicable.
Our
ADSs are listed on the Nasdaq Capital Market.
Not
applicable.
Not
applicable.
Not
applicable.
ITEM
10.
|
ADDITIONAL INFORMATION
|
Not
applicable.
B.
|
Memorandum and
Articles of Association
|
Our
registration number with the Israeli Registrar of Companies is 51-358165-2.
Purposes and Objects of the Company
Our purpose is set forth in Section 2 of
our articles of association and includes every lawful purpose.
The Powers of the Directors
Our Board of Directors shall direct our
policy and shall supervise the performance of our Chief Executive Officer and his actions. 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 the Companies
Law or our articles of association to be exercised or taken by our shareholders, including the power to borrow money for Company
purposes.
Rights Attached to Shares
Our Ordinary Shares shall confer upon the
holders thereof:
|
●
|
equal right to attend and to vote at all of
our general meetings, whether regular or special, with each Ordinary Share entitling the holder thereof, which attend the
meeting and participate at the voting, either in person or by a proxy or by a written ballot, to one vote;
|
|
|
|
|
●
|
equal right to participate in distribution of
dividends, if any, whether payable in cash or in bonus shares, in distribution of assets or in any other distribution, on
a per share pro rata basis; and
|
|
|
|
|
●
|
equal right to participate, upon our dissolution,
in the distribution of our assets legally available for distribution, on a per share pro rata basis.
|
All Ordinary Shares have identical voting
and other rights in all respects.
Dividend and Liquidation Rights and Bonus Shares
We may declare a dividend to be paid to
the holders of our Ordinary Shares in proportion to their respective shareholdings. Under the Companies Law, dividend distributions
are determined by the Board of Directors and do not require the approval of the shareholders of a company unless the company’s
articles of association provide otherwise. Our articles of association do not require shareholder approval of a dividend distribution
and/or issuance of bonus shares and provide that our Board of Directors may, on its sole discretion, determine dividend distributions
and/or issuance of bonus shares. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends
in the foreseeable future.
Pursuant to the Companies Law, the distribution
amount is limited to the greater of retained earnings or earnings generated over the previous two years, according to our then
last reviewed or audited financial statements, provided that the date of the financial statements is not more than six months
prior to the date of the distribution, or we may otherwise distribute dividends that do not meet such criteria only with court
approval. In each case, we are only permitted to distribute a dividend if our Board of Directors and the court, if applicable,
determines that there is no reasonable concern that payment of the dividend will prevent us from satisfying our existing and foreseeable
obligations as they become due.
In the event of our liquidation, after
satisfaction of liabilities to creditors, our assets will be distributed to the holders of our Ordinary Shares in proportion to
their shareholdings. This right, as well as the right to receive dividends, may be affected by the grant of preferential dividend
or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future.
Access to Corporate Records
Under the Companies Law, shareholders are
provided access to: minutes of our general meetings; our shareholders register and principal shareholders register, articles of
association and financial statements; and any document that we are required by law to file publicly with the Israeli Companies
Registrar or the ISA. In addition, shareholders may request to be provided with any document related to an action or transaction
requiring shareholder approval under the related party transaction provisions of the Companies Law. We may deny this request if
we believe it has not been made in good faith or if such denial is necessary to protect our interest or protect a trade secret
or patent.
Transfer of Shares
Our fully paid Ordinary Shares are issued
in registered form and may be freely transferred under our articles of association, unless the transfer is restricted or prohibited
by another instrument, applicable law, or the rules of a stock exchange on which the shares are listed for trade. The ownership
or voting of our Ordinary Shares by non-residents of Israel is not restricted in any way by our articles of association or the
laws of the State of Israel, except for ownership by nationals of some countries that are, or have been, in a state of war with
Israel.
Election of Directors
Our Ordinary Shares do not have cumulative
voting rights for the election of directors. As a result, the holders of a majority of the voting power represented at a shareholders
meeting have the power to elect all of our directors. Pursuant to our articles of association, our directors are elected at an
annual general meeting and/or a special meeting of our shareholders and serve on the Board of Directors until the next annual
general meeting, except for external directors or until they resign or until they cease to act as board members pursuant to the
provisions of our articles of association or any applicable law, upon the earlier. Pursuant to our articles of association, the
vote required to appoint a director is a simple majority vote of holders of our voting shares, participating and voting at the
relevant meeting. A director whose tenure has ended may be reelected. In addition, our articles of association allow our Board
of Directors to appoint directors to fill vacancies or as an addition to the Board of Directors (subject to the maximum number
of directors) to serve until the next general meeting where directors are elected or earlier if required by our articles of association
or applicable law, upon the earlier. External directors are elected for an initial term of three years and may be removed from
office pursuant to the terms of the Companies Law (but see above the External Directors Relief Resolution, regarding adoption
of reliefs concerning the necessity of appointing external directors under Israeli law, for as long as our shares are listed on
Nasdaq). See Item 6.C. “Board Practices
–
External Directors.”
Annual and Special Meetings
Under the Companies Law, we are required
to hold an annual general meeting of our shareholders once every calendar year, at such time and place which shall be determined
by our Board of Directors, that must be 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 general 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, and upon
the written request of: (a) any two of our directors or such number of directors equal to one quarter of the directors present
at such a meeting; and/or (b) one or more shareholders holding, in the aggregate, either (a) 5% or more of our outstanding issued
shares and 1% of our outstanding voting power or (b) 5% of our outstanding voting power. One or more shareholders, holding 1%
or more of the outstanding voting power, may ask the board to add an item to the agenda of a prospective meeting, if the proposal
merits discussion at the general meeting.
Subject to the provisions of the Companies
Law and the regulations promulgated thereunder, shareholders entitled to participate and vote at general meetings are the shareholders
of record on a date to be decided by the board of directors, which may be between four and 40 days prior to the date of the meeting.
Furthermore, the Companies Law requires that resolutions regarding the following matters must be passed at a general meeting of
our shareholders:
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amendments to our articles of association;
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the exercise of our Board of Director’s
powers 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;
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appointment or termination of our auditors;
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appointment of directors, including external
directors (to the extent applicable) (see the above description of the External Directors Relief Resolution, regarding adoption
of reliefs concerning the necessity of appointing external directors under Israeli law, for as long as our shares are listed
on Nasdaq);
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approval of acts and transactions requiring
general meeting approval (namely certain related party transactions) pursuant to the provisions of the Companies Law and any
other applicable law;
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increases or reductions of our authorized share
capital; and
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a merger (as such term is defined in the Companies
Law).
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Notices
The Companies Law requires that a notice
of any annual or special shareholders meeting be provided at least 21 days prior to the meeting, and if the agenda of the meeting
includes certain matters prescribed under the Companies Law and the regulations promulgated thereafter, among others, the appointment
or removal of directors, the approval of transactions with office holders or interested or related parties, or an approval of
a merger, notice must be provided at least 35 days prior to the publications of such meeting.
Under the regulations of the Companies
Law, certain exemptions and reliefs with respect to the manner of announcing the convening of the general meeting of shareholders
are granted to companies whose securities are traded outside of Israel.
Under our articles
of association, shareholders are not permitted to take action via written consent in lieu of a meeting.
Quorum
As permitted under the Companies Law, and
our articles of association, the quorum required for our general meetings consists of at least three shareholders present in person,
by proxy or written ballot, who hold or represent between them at least thirty percent of the total outstanding voting rights
(instead of 33 1/3% of the issued share capital required under the Nasdaq Listing Rules). If within half an hour of the time appointed
for the general meeting a quorum is not present, the general meeting shall stand adjourned the same day of the following week,
at the same hour and in the same place, or to such other date, time and place as prescribed in the notice to the shareholders
and in such adjourned meeting, if no quorum is present within half an hour of the time arranged, any number of shareholders participating
in the meeting, shall constitute a quorum.
If a general meeting was summoned following
the request of a shareholder, then a quorum required in an adjourned general meeting, shall consist of at least one or more shareholders,
which holds and represents at least 5% of our issued and outstanding share capital and at least 1% of our voting rights, or one
or more shareholder, which holds at least 5% of our voting rights.
Adoption of Resolutions
Our articles of association provide that
all resolutions of our shareholders require a simple majority vote, unless otherwise required under the Companies Law or our articles
of association. A shareholder may vote in a general meeting in person, by proxy or by a written ballot. Under the Companies Law,
each of (i) the approval of an extraordinary transaction with a controlling shareholder, (ii) the terms of employment or other
engagement of the controlling shareholder of the company or such controlling shareholder’s relative (even if not extraordinary)
requires, the approval described above under “Board Practices — Approval of Related Party Transactions under Israeli
Law — Disclosure of Personal Interests of Controlling Shareholders,” and (iii) the approval of certain compensation-related
matters require the approval described above under “Board Practices — Committees of the Board of Directors —
Compensation Committee.” Under our articles of association, the alteration of the rights, privileges, preferences, or obligations
of any class of our shares requires a simple majority vote of the class so affected (or such other percentage of the relevant
class that may be set forth in the governing documents relevant to such class), in addition to the ordinary majority vote of all
classes of shares voting together as a single class at a shareholder meeting. An exception to the simple majority vote requirement
is a resolution for the voluntary winding up, or an approval of a scheme of arrangement or reorganization, of the company pursuant
to Section 350 of the Companies Law, which requires the approval of holders of 75% of the voting rights represented at the meeting,
in person, by proxy, or by voting deed and voting on the resolution. In addition, the general meeting of our shareholders can
decide to alter our articles of association, which decision requires - in addition to any other majority requirement and except
as expressly provided otherwise on our articles of association - a simple majority vote of the shareholders attending such general
meeting (without counting abstentions).
Changing Rights Attached to Shares
Unless otherwise provided by the terms
of the shares and subject to any applicable law, in order to change the rights attached to any class of shares, such change must
be adopted at a general meeting of the affected class or by a written consent of all the shareholders of the affected class.
The enlargement of an existing class of
shares or the issuance of additional shares thereof, shall not be deemed to modify the rights attached to the previously issued
shares of such class or of any other class, unless otherwise provided by the terms of the shares.
Registration Rights
None of our shareholders is entitled to
registration rights.
Provisions Restricting Change in Control of Our Company
- Acquisitions under Israeli Law
Merger
The Companies Law includes provisions that
allow a merger transaction and requires that each company that is a party to the merger have the transaction approved by its board
of directors and a vote of the majority of its shares (unless certain requirements described under the Companies Law are met)
and, in the case of the target company, a majority vote of each class of its shares, voted on the proposed merger at a shareholders
meeting.
For purposes of the shareholder vote of
each party, unless a court rules otherwise, the merger will not be deemed approved if shares representing a majority of the voting
power present at the shareholders meeting and which are not held by the other party to the merger (or by any person who holds
25% or more of the voting power or the right to appoint 25% or more of the directors of the other party) vote against the merger.
If, however, the merger involves a merger with a company’s own controlling shareholder or if the controlling shareholder
has a personal interest in the merger, then the merger is instead subject to the same special majority approval that governs all
extraordinary transactions with controlling shareholders (as described under “Board Practices — Approval of Related
Party Transactions under Israeli Law — Disclosure of Personal Interests of a Controlling Shareholder”).
If the transaction would have been approved
by the shareholders of a merging company but for the separate approval of each class or the exclusion of the votes of certain
shareholders as provided above, a court may still approve the merger upon the request of holders of at least 25% of the voting
rights of a company, if the court holds that the merger is fair and reasonable, taking into account the value of the parties to
the merger and the consideration offered to the shareholders of the target company.
Upon the request of a creditor of either
party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern
that as a result of the merger the surviving company will be unable to satisfy the obligations of 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
(1) 50 days have passed from the time that the requisite proposals for approval of the merger were filed with the Israeli Registrar
of Companies by each merging company and (2) 30 days have passed since the merger was approved by the shareholders of each merging
company.
Special Tender Offer
The Companies Law also provides that an
acquisition of shares in a public company must be made by means of a special tender offer if as a result of the acquisition (i)
the purchaser would become a 25% or greater shareholder of the company, unless there is already another 25% or greater shareholder
of the company or (ii) the purchaser would become a more than 45% shareholder of the company, unless there is already a shareholder
holding more than 45% of the company, subject to certain exceptions. These requirements do not apply if, in general, the acquisition
(i) was made in a private placement that received shareholder approval, (ii) was from a 25% or greater shareholder of the company
which resulted in the acquirer becoming a 25% or greater shareholder of the company, or (iii) was from a shareholder holding more
than 45% of the company’s issued and outstanding share capital which resulted in the acquirer becoming a holder of more
than 45% of the company’s issued and outstanding share capital.
A special tender
offer must be extended to all shareholders, but the offeror is not required to purchase more than 5% of the company’s outstanding
shares, regardless of how many shares are tendered by shareholders. In general, the tender offer may be consummated only if (i)
at least 5% of the company’s outstanding shares will be acquired by the offeror and (ii) the number of shares tendered in
the offer exceeds the number of shares whose holders objected to the offer (excluding the purchaser, controlling shareholders,
holders of 25% or more of the voting rights in the company or any person having a personal interest in the acceptance of the tender
offer). 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.
If a tender offer is not accepted in accordance
with the requirements set forth above, the acquirer may not acquire shares (either alone or together with others) that will increase
its holdings to 25% or more or above 45% (as may be the case) of the company’s issued and outstanding share capital or of
the applicable class and such shares shall not bestow upon such acquirer any rights and shall become treasury shares for as long
as the acquirer holds said shares. In addition, if a shareholder’s holding in a company increases to 25% or greater of the
company’s issued and outstanding share capital or above 45% of the company’s issued and outstanding share capital,
among others, as a result of the company’s shares becoming treasury shares following a distribution event, then such excess
shares shall not bestow upon their holder any voting rights for as long as the holder holds said excess shares.
Full Tender Offer
A person wishing to acquire shares of an
Israeli public company and who would as a result hold (either alone or together with others) 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 (either alone or together with others) over 90% of the issued and outstanding share capital
of a certain class of shares is required to make a tender offer to all of the shareholders who hold shares of the relevant class
for the purchase of all of the issued and outstanding shares of that class. If the shareholders who do not accept the offer hold
less than 5% of the issued and outstanding share capital of the company or of the applicable class, and more than half of the
shareholders who do not have a personal interest in the offer accept the offer, all of the shares that the acquirer offered to
purchase will be transferred to the acquirer by operation of law. However, a tender offer will also be accepted if the shareholders
who do not accept the offer hold less than 2% of the issued and outstanding share capital of the company or of the applicable
class of shares.
Upon a successful completion of such a
full tender offer, any shareholder that was an offeree in such tender offer, whether such shareholder accepted the tender offer
or not, may, within six months from the date of acceptance of the tender offer, petition an Israeli court to determine whether
the tender offer was for less than fair value and that the fair value should be paid as determined by the court. However, under
certain conditions, the offeror may include in the terms of the tender offer that an offeree who accepted the offer will not be
entitled to petition the Israeli court as described above.
If a tender offer is not accepted in accordance
with the requirements set forth above, the acquirer may not acquire shares from shareholders who accepted the tender offer that
will increase its holdings to more than 90% of the company’s issued and outstanding share capital or of the applicable class.
If a tender offer is not accepted in accordance
with the requirements set forth above, the acquirer may not acquire shares (either alone or together with others) that will increase
its holdings to more than 90% of the company’s issued and outstanding share capital or of the applicable class and such
shares shall not bestow upon such acquirer any rights and shall become treasury shares for as long as the acquirer holds said
shares.
Anti-Takeover Provisions under Israeli Law
For as long as our securities were traded
on the TASE, the Securities Law did not allow us to create and issue shares having rights different from those attached to our
Ordinary Shares, including shares providing certain preferred rights with respect to voting, distributions, or other matters and
shares having preemptive rights. The authorization and designation of a class of preferred shares will require an amendment to
our articles of association, which requires the prior approval of the holders of a majority of the voting power attaching to our
issued and outstanding shares at a general meeting. The convening of the meeting, the shareholders entitled to participate and
the majority vote required to be obtained at such a meeting will be subject to the requirements set forth in the Companies Law
as described above in “Description of Share Capital” and “Management.”
Lastly, Israeli tax law treats some acquisitions,
such as stock-for-stock exchanges between an Israeli company and a foreign company, less favorably than U.S. tax laws. For example,
Israeli tax law may, under certain circumstances, subject a shareholder who exchanges his Ordinary Shares for shares in another
corporation to taxation prior to the sale of the shares received in such stock-for-stock swap.
Changes in Our 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 meeting. In addition, transactions that have the effect of reducing
capital, such as the declaration and payment of dividends in the absence of sufficient retained earnings or profits, require the
approval of both our Board of Directors and an Israeli court.
The general meeting may, by a simple majority
vote of the shareholders attending the general meeting:
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increase our registered share capital by the
creation of new shares from the existing class or a new class, as determined by the general meeting;
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cancel any registered share capital which has
not been taken or agreed to be taken by any person;
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consolidate and divide all or any of our share
capital into shares of larger nominal value than our existing shares;
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subdivide our existing shares or any of them,
our share capital or any of it, into shares of smaller nominal value than is fixed;
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reduce our share capital subject to approval
required by the Companies Law; and
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modify, cancel, convert, extend, add to or otherwise
modify the rights, privileges, advantages, limitations and instructions related or unrelated to our shares at the time.
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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.A. History and Development
of the Company” above, “Item 4.B. Business Overview” above, or “Item 7.A. Major Shareholders” above.
There
are currently no Israeli currency control restrictions on remittances of dividends on our Ordinary Shares, proceeds from the sale
of the shares or interest or other payments to non-residents of Israel, except for shareholders who are subjects of countries
that are, or have been, in a state of war with Israel.
ISRAELI TAX CONSIDERATIONS AND GOVERNMENT PROGRAMS
The following
is a description of the material Israeli income tax consequences of the ownership of our Ordinary Shares or ADSs. The following
also contains a description of material relevant provisions of the current Israeli income tax structure applicable to companies
in Israel, with reference to its effect on us. To the extent that the discussion is based on new tax legislation which has not
been subject to judicial or administrative interpretation, there can be no assurance that the tax authorities will accept the
views expressed in the discussion in question. The discussion is not intended, and should not be taken, as legal or professional
tax advice and is not exhaustive of all possible tax considerations.
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 and ADSs. Shareholders should consult their own tax advisors concerning the tax consequences of their particular
situation, as well as any tax consequences that may arise under the laws of any state, local, foreign or other taxing jurisdiction.
General Corporate Tax Structure in Israel
Israeli resident
companies are generally subject to corporate tax, currently at the rate of 23% of a company’s taxable income. Capital gains
derived by an Israeli resident company are subject to tax at the prevailing corporate tax rate. Under Israeli tax legislation,
a corporation will be considered as an “Israeli resident company” if it meets one of the following: (i) it was incorporated
in Israel; or (ii) the control and management of its business are exercised in Israel.
The Encouragement of Research, Development and Technological
Innovations in the Industry Law, 5744-1984
Under the Research Law, research and development
programs which meet specified criteria and are approved by the IIA are eligible for grants of up to 50% of the project’s
expenditure, as determined by the research committee, in exchange for the payment of royalties from the revenues generated from
the sale of products and related services developed, in whole or in part pursuant to, or as a result of, a research and development
program funded by the IIA. The royalties are generally at a range of 3.0% to 5.0% of revenues until the entire IIA grant is repaid,
together with an annual interest generally equal to the 12 month London InterBank Offered Rate, or the LIBOR, applicable to dollar
deposits that is published on the first business day of each calendar year.
The terms of the Research Law also require
that the manufacture of products developed with government grants be performed in Israel. The transfer of manufacturing activity
outside Israel may not be transferred outside of Israel, unless the prior approval of the IIA is received, however, this does
not restrict the export of products that incorporate the funded technology. Under the regulations of the Research Law, assuming
we receive approval from the IIA to manufacture our IIA-funded products outside Israel, we may be required to pay increased royalties.
The increase in royalties depends upon the manufacturing volume that is performed outside of Israel as follows:
Manufacturing Volume Outside of Israel
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Royalties
to the IIA as
a Percentage
of Grant
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Up to 50%
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120
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between 50% and 90%
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150
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90% and more
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300
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If the manufacturing is performed outside
of Israel by us, the rate of royalties payable by us on revenues from the sale of products manufactured outside of Israel will
increase by 1% over the regular rates. If the manufacturing is performed outside of Israel by a third party, the rate of royalties
payable by us on those revenues will be equal to the ratio obtained by dividing the amount of the grants received from IIA and
our total investment in the project that was funded by these grants. The transfer of no more than 10% of the manufacturing capacity
in the aggregate outside of Israel is exempt under the Research Law from obtaining the prior approval of the IIA. A company requesting
funds from the IIA also has the option of declaring in its IIA grant application an intention to perform part of its manufacturing
outside Israel, thus avoiding the need to obtain additional approval. On January 6, 2011, the Research Law was amended to clarify
that the potential increased royalties specified in the table above will apply even in those cases where the IIA approval for
transfer of manufacturing outside of Israel is not required, namely when the volume of the transferred manufacturing capacity
is less than 10% of total capacity.
The know-how developed within the framework
of the IIA plan may not be transferred to third parties outside Israel without the prior approval of a governmental committee
charted under the Research Law. The approval, however, is not required for the export of any products developed using grants received
from the IIA. The IIA approval to transfer know-how created, in whole or in part, in connection with an IIA-funded project to
third party outside Israel where the transferring company remains an operating Israeli entity is subject to payment of a redemption
fee to the IIA calculated according to a formula provided under the Research Law that is based, in general, on the ratio between
the aggregate IIA grants to the company’s aggregate investments in the project that was funded by these IIA grants, multiplied
by the transaction consideration. The transfer of such know-how to a party outside Israel where the transferring company ceases
to exist as an Israeli entity is subject to a redemption fee formula that is based, in general, on the ratio between the aggregate
IIA grants to the total research and development expenses of the company, multiplied by the transaction consideration. According
to regulations promulgated following the 2011 amendment, the maximum amount payable to the IIA in case of transfer of know how
outside Israel, and in the event that the receiver of the grants ceases to be an Israeli corporation, shall not exceed six times
the value of the grants received plus interest, with a possibility to reduce such payment to up to three times the value of the
grants received plus interest if the research and development activity remains in Israel for a period of three years after payment
to the IIA, subject to additional conditions specified in the regulations.
Transfer of know-how within Israel is subject
to the IIA approval and to an undertaking of the recipient Israeli entity to comply with the provisions of the Research Law and
related regulations, including the restrictions on the transfer of know-how and the obligation to pay royalties, as further described
in the Research Law and related regulations.
The restrictions under the Research Law
will continue to apply even after we will repay the full amount of royalties payable pursuant to the grants. In addition, the
government of the State of Israel may from time to time audit sales of product candidates which it claims incorporate technology
funded via IIA programs and this may lead to additional royalties being payable on additional product candidates.
These restrictions may impair our ability
to outsource manufacturing or otherwise transfer our know-how outside Israel and may require us to obtain the approval of the
IIA for certain actions and transactions and pay additional royalties or other payments to the IIA. If we fail to comply with
the Research Law, we may be subject to criminal charges.
In August 2015, a new amendment to the
Research Law was enacted, or Amendment Seven, which came into effect on January 1, 2016 and has made it unclear whether the transfer
of manufacturing rights and transfer of know-how will continue to be subject to the same limitations and obligations as described
above. Amendment Seven abolishes, inter alia, the sections in the Research Law allowing for the transfer of know-how and transfer
of manufacturing rights overseas. However, there are certain savings provisions under Amendment Seven, which provide that until
new regulations are adopted by IIA (to be constituted by virtue of Amendment Seven), the Research Law as it was in effect before
the effective date of Amendment Seven and certain regulations, including inter alia, the regulations relating to royalty rates
and transfer of know-how overseas, will remain in effect. IIA should be fully constituted no later than August 10, 2018. New regulations
should be adopted by IIA no more than one year after the council is constituted. It is not possible to assess at this time the
effect of Amendment Seven until implementing regulations will be promulgated.
Tax Benefits for Research and Development under the Encouragement
of Industrial Research and Development Law, 5744-1984
Israeli tax law
allows, under certain conditions, a tax deduction for expenditures, including capital expenditures, for the year in which they
are incurred. Expenditures are deemed related to scientific research and development projects, if:
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The expenditures are approved by the relevant
Israeli government ministry, determined by the field of research;
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The research and development must be for the
promotion of the company; and
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The research and development is carried out
by or on behalf of the company seeking such tax deduction.
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The amount of
such deductible expenses is reduced by the sum of any funds received through government grants for the finance of such scientific
research and development projects. No deduction under these research and development deduction rules is allowed if such deduction
is related to an expense invested in an asset depreciable under the general depreciation rules of the Ordinance. Expenditures
not so approved are deductible in equal amounts over three years.
From time to time
we may apply the IIA for approval to allow a tax deduction for all research and development expenses during the year incurred.
There can be no assurance that such application will be accepted.
Taxation of our Shareholders
Capital Gains
Capital gain tax
is imposed on the disposal of capital assets by an Israeli resident, and on the disposal of such assets by a non-Israeli resident
if those assets are either (i) located in Israel; (ii) are shares or a right to a share in an Israeli resident corporation, or
(iii) represent, directly or indirectly, rights to assets located in Israel. The Ordinance distinguishes between “Real Gain”
and the “Inflationary Surplus.” Real Gain is the excess of the total capital gain over Inflationary Surplus computed
generally on the basis of the increase in the Israeli CPI between the date of purchase and the date of disposal. Inflationary
Surplus is not subject to tax in Israel.
Real Gain accrued
by individuals on the sale of our Ordinary Shares will be taxed at the rate of 24%. However, if the individual shareholder is
a “Controlling Shareholder” (i.e., a person who holds, directly or indirectly, alone or together with another, 10%
or more of one of the Israeli resident company’s means of control) at the time of sale or at any time during the preceding
12 months period, such gain will be taxed at the rate of 30%.
Real Gain derived
by corporations will be generally subject to the regular corporate tax rate (23% in 2018, and in 2019).
Individual and
corporate shareholder dealing in securities are taxed at the tax rates applicable to business income– 23% for corporations
in 2018 and a marginal tax rate of up to 50% in 2018 for individuals.
Capital Gains
Taxes is Applicable also to Non-Israeli Resident Shareholders
. A non-Israeli resident who derives capital gains from the sale
of shares in an Israeli resident company may be exempt from Israeli tax so long as the following cumulative conditions are met:
(i) the shares were purchased upon or after the registration of the securities on the stock exchange, (ii) the seller does not
have a permanent establishment in Israel to which the derived capital gain is attributed, and (iii) if the seller is a corporation,
less than 25% of its means of control are held, directly and indirectly, by Israeli resident shareholders. In addition, such exemption
would not be available to a person whose gains from selling or otherwise disposing of the securities are deemed to be business
income.
Additionally,
a sale of shares by a non-Israeli resident may be exempt from Israeli capital gains tax under the provisions of an applicable
tax treaty. For example, under Convention Between the Government of the United States of America and the Government of the State
of Israel with respect to Taxes on Income, as amended, or the United States-Israel Tax Treaty, the sale, exchange or other disposition
of shares by a shareholder who is a United States resident (for purposes of the treaty) holding the shares as a capital asset
and is entitled to claim the benefits afforded to such a resident by the U.S.-Israel Tax Treaty, or a Treaty U.S. Resident, is
generally exempt from Israeli capital gains tax unless: (i) the capital gain arising from such sale, exchange or disposition is
attributed to real estate located in Israel; (ii) the capital gain arising from such sale, exchange or disposition is attributed
to royalties; (iii) the capital gain arising from the such sale, exchange or disposition is attributed to a permanent establishment
in Israel, under certain terms; (iv) such Treaty U.S. Resident holds, directly or indirectly, shares representing 10% or more
of the voting capital during any part of the 12-month period preceding the disposition, subject to certain conditions; or (v)
such Treaty U.S. Resident is an individual and was present in Israel for 183 days or more during the relevant taxable year.
In some instances
where our shareholders may be liable for Israeli tax on the sale of their Ordinary Shares or ADSs, the payment of the consideration
may be subject to the withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from
tax on their capital gains in order to avoid withholding at source at the time of sale.
Either the purchaser,
the Israeli stockbrokers or financial institution through which the shares are held is obliged, subject to the above mentioned
exemptions, to withhold tax upon the sale of securities from the Real Gain at the rate of 25%.
At the sale of
securities traded on a stock exchange, a detailed return, including a computation of the tax due, must be filed and an advance
payment must be made on January 31 and July 31 of every tax year in respect of sales of securities made within the previous six
months. However, if all tax due was withheld at source according to applicable provisions of the Ordinance and regulations promulgated
thereunder, the aforementioned return need not be filed and no advance payment must be paid. Capital gain is also reportable on
the annual income tax return.
Dividends
A distribution of dividends from income,
to an Israeli resident individual, will generally be subject to income tax at a rate of 25%. However, a 30% tax rate will apply
if the dividend recipient is a “Controlling Shareholder” (as defined above) at the time of distribution or at any
time during the preceding 12 months period. If the recipient of the dividend is an Israeli resident corporation, such dividend
will be exempt from income tax provided the income from which such dividend is distributed was derived or accrued within Israel.
Non-Israeli residents are generally subject
to Israeli income tax on the receipt of dividends paid on our Ordinary Shares or ADSs at the rate of 25%, which tax will be withheld
at source, unless relief is provided in a treaty between Israel and the shareholder’s country of residence. With respect
to a person who is a controlling shareholder at the time of receiving the dividend or on any time during the preceding twelve
months, the applicable tax rate is 30%, unless a reduced tax rate is provided under an applicable tax treaty. For example, under
the United States-Israel Tax Treaty, the maximum rate of tax withheld at source in Israel on dividends paid to a holder of our
Ordinary Shares or ADSs who is a Treaty U.S. Resident is 25%. However, generally, the maximum rate of withholding tax on dividends,
not generated by a Preferred Enterprise, that are paid to a United States corporation holding 10% or more of the outstanding voting
capital throughout the tax year in which the dividend is distributed as well as during the previous tax year, is 12.5%, provided
that not more than 25% of the gross income for such preceding year consists of certain types of dividends and interest. Notwithstanding
the foregoing, dividends distributed from income attributed to an Preferred Enterprise are not entitled to such reduction under
the tax treaty but are subject to a withholding tax rate of 15% for a shareholder that is a U.S. corporation, provided that the
condition related to our gross income for the previous year (as set forth in the previous sentence) is met. If the dividend is
attributable partly to income derived from a Preferred Enterprise, and partly to other sources of income, the withholding rate
will be a blended rate reflecting the relative portions of the two types of income. We cannot assure you that we will designate
the profits that we may distribute in a way that will reduce shareholders’ tax liability.
Excess Tax
Individuals who are subject to tax in Israel
are also subject to an additional tax at a rate of 3% as of 2018 on annual income exceeding a certain threshold (NIS 641,880 for
2018 and thereafter), including, but not limited to income derived from dividends, interest and capital gains.
Foreign Exchange Regulations
Non-residents of Israel who hold our Ordinary
Shares are able to receive any dividends, and any amounts payable upon the dissolution, liquidation and winding up of our affairs,
repayable in non-Israeli currency at the rate of exchange prevailing at the time of conversion. However, Israeli income tax is
generally required to have been paid or withheld on these amounts. In addition, the statutory framework for the potential imposition
of currency exchange control has not been eliminated, and may be restored at any time by administrative action.
Estate and Gift Tax
Israeli law presently does not impose estate
or gift taxes.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
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 AND AMERICAN DEPOSITORY SHARES, 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 sale of the Ordinary Shares and ADSs. For this purpose, a “U.S. Holder” is
a holder of Ordinary Shares or ADSs 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) or a partnership (other
than a partnership that is not treated as a U.S. person under any applicable U.S. Treasury regulations) created or organized under
the laws of the United States or the District of Columbia or any political subdivision thereof; (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; or (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. This summary generally considers only U.S. Holders that
will own our Ordinary Shares or ADSs as capital assets. 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 Internal Revenue Code of 1986, as amended,
or the Code, final, temporary and proposed U.S. Treasury regulations promulgated thereunder, administrative and judicial interpretations
thereof, (including with respect to the TCJA, as defined below), 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 IRS with regard to the U.S. federal income tax treatment of an investment
in our Ordinary Shares or ADSs 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 aspects of U.S. federal income taxation that may be relevant to a particular U.S. holder based on such holder’s particular
circumstances and in particular does not discuss any estate, gift, generation-skipping, transfer, state, local, excise or foreign
tax considerations. In addition, this discussion does not address the U.S. federal income tax treatment of a U.S. Holder who is:
(1) a bank, life insurance company, regulated investment company, or other financial institution or “financial services
entity;” (2) a broker or dealer in securities or foreign currency; (3) a person who acquired our Ordinary Shares or ADSs
in connection with employment or other performance of services; (4) a U.S. Holder that is subject to the U.S. alternative minimum
tax; (5) a U.S. Holder that holds our Ordinary Shares or ADSs 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) a tax-exempt entity; (7) real estate
investment trusts or grantor trusts; (8) a U.S. Holder that expatriates out of the United States or a former long-term resident
of the United States; or (9) a person 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 or constructively, at any time, Ordinary Shares or
ADSs representing 10% or more of our voting power. Additionally, the U.S. federal income tax treatment of partnerships (or other
pass-through entities) or persons who hold Ordinary Shares or ADSs through a partnership or other pass-through entity are not
addressed.
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, 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 and the discussion of “qualified dividend income” below, a U.S. Holder, other than
certain U.S. Holder’s that are U.S. corporations, 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 and accumulated earnings and profits, as determined for U.S.
federal income tax purposes. The amount of a distribution which exceeds our 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 to the extent thereof, and then capital
gain. Corporate holders generally will not be allowed a deduction for dividends received, unless such corporate holders hold at
least 10% of our shares and are eligible for a dividend received deduction, as described below. We do not expect to maintain calculations
of our earnings and profits under U.S. federal income tax principles and, therefore, U.S. Holders should expect that the entire
amount of any distribution generally will be reported as dividend income.
On December 22, 2017, President Trump signed
into law the Tax Cuts and Jobs Act, or the TCJA. The TCJA provides a 100% deduction for the foreign-source portion of dividends
received from “specified 10-percent owned foreign corporations” by U.S. corporate holders, subject to a one-year holding
period. No foreign tax credit, including Israeli withholding tax (or deduction for foreign taxes paid with respect to qualifying
dividends) would be permitted for foreign taxes paid or accrued with respect to a qualifying dividend. This deduction would be
unavailable for “hybrid dividends.” The dividend received deduction enacted under the TCJA may not apply to dividends
from a passive foreign investment company, as discussed below.
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 and the TCJA, 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
Except as provided under the PFIC rules
described below under “Passive Foreign Investment Companies,” upon the sale, exchange or other disposition of our
Ordinary Shares or ADSs, a U.S. Holder 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 in U.S. dollars and the amount realized on the disposition in U.S. dollar
(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 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. Individuals who recognize long-term capital gains may be taxed on such gains at reduced rates of tax. The
deduction of capital losses is subject to various limitations.
Gain realized by a U.S. Holder on a sale,
exchange or other disposition of Ordinary Shares or ADSs 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 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 is subject to limitations. An additional 3.8% net investment income tax (described below) may apply to gains recognized
upon the sale, exchange or other taxable disposition of our Ordinary Shares or ADS by certain U.S. Holders who meet certain income
thresholds.
Passive Foreign Investment Companies
Special U.S. federal income tax laws apply
to U.S. taxpayers who own 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 that 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), in
a taxable year is passive; or
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At least 50% of our assets, averaged over the
year and generally determined based upon fair market value (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) 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.
We believe that we may have been a PFIC
during 2018 although we have not determined whether we will be a PFIC in 2019, or in future years. The tests for determining PFIC
status are applied annually, and it is difficult to make accurate projections of future income and assets which are relevant to
this determination. In addition, our PFIC status may depend in part on the market value of our Ordinary Shares. Accordingly, there
can be no assurance that we currently are not or will not become 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), would, upon receipt of certain distributions
by us and upon disposition of our Ordinary Shares or ADSs at a gain:
(1)
have such distribution or gain allocated ratably over the U.S. Holder’s holding period for the Ordinary Shares or ADSs,
as the case may be; (2) the amount allocated to the current taxable year and any period prior to the first day of the first taxable
year in which we were a PFIC would be taxed as ordinary income; and (3) 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. 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 who makes a QEF election for all taxable years that such U.S. Holder has held the Ordinary Shares or ADSs
while we are 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. We intend to furnish U.S. Holders upon request with information needed in order
to complete IRS Form 8621 and to make and maintain a valid QEF election for any year in which we or any of our Subsidiaries are
a PFIC. U.S. Holders should consult with their own tax advisors regarding eligibility, manner and advisability of making a QEF
election if we are treated as a PFIC.
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. A U.S. Holder of our Ordinary Shares or ADSs
which are regularly traded on a qualifying exchange, including the Nasdaq Capital Market, 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. 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. The mark-to-market election is made on a shareholder-by-shareholder
basis and generally may be revoked only with the consent of the IRS.
U.S. Holders who hold our Ordinary Shares
or ADSs 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 Net Investment Income
For taxable years beginning after December
31, 2013, 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 or ADSs), 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
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.
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 gain from the disposition of our Ordinary Shares or ADSs
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
and, 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, 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 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 cash dividends and proceeds from a disposition of Ordinary Shares or ADSs. 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.
Pursuant to recently enacted legislation,
a U.S. Holder with interests in “specified foreign financial assets” (including, among other assets, our Ordinary
Shares or ADSs, unless such Ordinary Shares or ADSs 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); and may be required to file a Report of Foreign Bank and Financial Accounts, or FBAR, if the aggregate value of
the foreign financial accounts exceeds $10,000 at any time during the calendar year. You should consult your own tax advisor as
to the possible obligation to file such information report.
Tax Cuts and Jobs Act
On December 22, 2017, President Trump signed
into law the TCJA. Although this is the most extensive overhaul of the United States tax regime in over thirty years, other than
for certain U.S. corporate holders, none of the provisions of the TCJA are expected to materially impact U.S. Holder’s with
respect to such holder’s ownership of our Ordinary Shares or the ADSs.
F.
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Dividends
and Paying Agents
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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 website that contains reports and other information regarding issuers that file electronically
with the SEC. Our filings with the SEC will also available to the public through the SEC’s website at www.sec.gov.
As a foreign private issuer, we are exempt
from the rules under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and
principal shareholders 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.
We maintain a corporate website at http://therapixbio.com.
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.
I.
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Subsidiary
Information.
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Not
applicable.
ITEM
11.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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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 due to adverse changes in financial market prices and rates. Our current investment policy is to invest available cash
in bank deposits with banks that have a credit rating of at least A-minus. However, a substantial majority of our cash and cash
equivalents is held in current bank accounts that do not bear interest. In the future, we intend to hold most of our cash and
cash equivalents in deposits that bear interest. Given the current low rates of interest we receive, once we begin to hold most
of our cash and cash equivalents in deposits that bear interest, we do not expect to be adversely affected if such rates are reduced.
Our market risk exposure is primarily a result of NIS/U.S. dollar exchange rates, which is discussed in detail in the following
paragraph.
Foreign Currency Exchange Risk
Our results of operations and cash flow
are subject to fluctuations due to changes mainly in NIS/U.S. dollar currency exchange rates. As of December 31, 2018, approximately
three-quarters of our liquid assets are held in U.S. dollars, and the majority of our expenses is denominated in U.S. dollars.
Changes of 5% and 10% in the U.S. Dollar/NIS exchange rate would decrease/increase our loss for 2018 by 2% and 1%, respectively.
However, these historical figures may not be indicative of future exposure, as we expect that the percentage of our NIS denominated
expenses will materially decrease in the near future, therefore reducing our exposure to exchange rate fluctuations. Beginning
October 1, 2018, our functional currency is the U.S. dollar.
We do not hedge
our foreign currency exchange risk. In the future, we may enter into formal 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.
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DESCRIPTION OF
SECURITIES OTHER THAN EQUITY SECURITIES
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Not applicable.
Not
applicable.
Not
applicable.
D.
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American
Depositary Shares
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Fees and Expenses
Persons depositing
or withdrawing shares or ADS holders must pay
:
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For:
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$5.00 (or less) per 100 ADSs (or portion of
100 ADSs).
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Issuance of ADSs, including issuances resulting from
a distribution of shares or rights or other property.
Cancellation of ADSs for the purpose of withdrawal,
including if the deposit agreement terminates.
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$.05 (or less) per ADS.
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Any cash distribution to ADS holders.
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A fee equivalent to the fee that would be payable
if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs.
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Distribution of securities distributed to holders
of deposited securities (including rights) that are distributed by the depositary to ADS holders.
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$.05 (or less) per ADS per calendar year.
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Depositary services.
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Registration or transfer fees.
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Transfer and registration of shares on our share
register to or from the name of the depositary or its agent when you deposit or withdraw shares.
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Expenses of the depositary.
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Cable and facsimile transmissions (when expressly provided
in the deposit agreement).
Converting foreign currency to U.S. dollars.
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Taxes and other governmental charges the depositary
or the custodian has to pay on any ADSs or shares underlying ADSs, such as stock transfer taxes, stamp duty or withholding
taxes.
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As necessary.
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Any charges incurred by the depositary or its
agents for servicing the deposited securities.
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As necessary.
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The depositary
collects its fees for delivery and surrender of ADSs directly from investors depositing 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 accompanying notes are an integral
part of the consolidated financial statements.
The accompanying notes are an integral
part of the consolidated financial statements.
The accompanying notes are an integral
part of the consolidated financial statements.
The accompanying notes are an integral
part of the consolidated financial statements.
The accompanying notes are an integral
part of the consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
a.
|
Therapix Biosciences Ltd. (“Therapix” or the “Company”), a pharmaceutical company,
was incorporated in Israel and commenced its operations on August 23, 2004. Until March 2014, Therapix and its subsidiaries at
the time (the “Group”) were mainly engaged in developing several innovative immunotherapy products and it owns patents
in the immunotherapy field. In August 2015, the Company revised its business strategy according to which it will focus on developing
a portfolio of approved drugs based on cannabinoid molecules. The Company’s main focus will be on developing an entourage
technology based cannabinoid drug for the Central Nervous System indications, including, but not limited, to Tourette syndrome,
Pain, Obstructive Sleep Apnea (“OSA”) and a cannabinoid based drug for Mild Cognitive Impairment using the low dose technology.
|
The Company
was a dual-listed company, which had its shares traded on the Tel-Aviv Stock Exchange (“TASE”) since December 26, 2005,
and on the Nasdaq Stock Market (“Nasdaq”) since March 27, 2017. On August 7, 2018, the Company delisted its shares from
the TASE. The Company completed an initial public offering (“IPO”) in the United States on March 27, 2017, and raised
approximately $13.7 million. Since the IPO, the Company has had its American Depository Shares (“ADSs”) registered with
the U.S. Securities and Exchange Commission (“SEC”) and has been listed on the Nasdaq.
The headquarters
of Therapix are located in the Tel Aviv district (Givataaim), Israel.
As of December
31, 2018, Therapix has four subsidiaries (the “Subsidiaries”):
|
-
|
NasVax Inc., a Delaware corporation - fully owned (100%);
|
|
-
|
Brain Bright Ltd., an Israeli company - fully owned (100%);
|
|
-
|
Evero Health Ltd. (previously Weex Biosciences Ltd.), an Israeli company - fully owned (100%);
|
|
-
|
Therapix Healthcare Resources Inc. (“THR”), a Delaware corporation, in which control
was achieved on October 3, 2018 - Therapix holds 82.36% of THR’s equity. THR was established on July 31, 2018 (see Note 5).
|
All the Subsidiaries
are private companies, and as of the date of these financial statements, except for THR, all other subsidiaries are inactive companies
with no assets or liabilities. Therefore, only THR’s financial statements are consolidated within the Group. Therapix also owns
approximately 27% of Lara Pharm Ltd.’s (“Lara”) share capital; however, the Company does not have significant influence
on Lara since it has no representation in Lara’s board of directors. The Company wrote-off the entire investment in Lara in
2015 (see Note 9a).
All information in the financial
statements regarding the ADSs is a presumption that all of the Company’s shares have been converted into ADS (Each ADS represents
forty (40) ordinary shares).
The consolidated financial
statements of the Group for the year ended December 31, 2018, were approved for issue on May 13, 2019 (the “Approval
Date”).
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
b.
|
Functional currency and presentation currency:
|
The functional
currency of the Company, which is the currency that best reflects the economic environment in which the Company operates and conducts
its transactions, was the New Israeli Shekel (“NIS”) until October 1, 2018, when the Company change the functional currency
to the U.S. Dollars (“USD” or “$”) after concluding that according to in IAS 21, “The Effects of Changes
in Foreign Exchange Rates” (“IAS 21”), the USD is the primary currency of the economic environment in which the
Company operates (see Note 2d).
The consolidated
financial statements are presented in USD since the Company believes that preparing the consolidated financial statements in USD
provides more relevant information to the investors.
|
c.
|
The Group incurred a net loss of approximately $9 million and had negative cash flows from operating
activities of approximately $7 million for the year ended December 31, 2018. As of December 31, 2018, the Group had an accumulated
deficit of approximately $47 million as a result of recurring operating losses. As discussed in Note 1a above, the Group’s
business strategy is to focus on developing an entourage technology based cannabinoid drug.
|
As of the Approval Date of
the consolidated financial statements, the Group has not yet started recognizing revenues from sales and its operation is dependent
on its ability to raise additional funds from existing and/or new investors in order to finance its activity. This dependency will
continue until the Group will be able to completely finance its operations by selling its products. In addition, as of the Approval
Date of the consolidated financial statements, the Group has not raised the necessary funding in order to continue its activity
in the foreseeable future.
These abovementioned factors
raise substantial doubt about the Group’s 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 might result should the Group be unable to continue
as a going concern.
The Company
|
-
|
Therapix Biosciences Ltd.
|
|
|
|
The Group
|
-
|
Therapix Biosciences Ltd. and its investees, as detailed in Note 1a.
|
|
|
|
Subsidiaries
|
-
|
Companies that are controlled by the Company, as defined IFRS 10, “Consolidated Financial Statements” (“IFRS 10”), and whose accounts are consolidated with those of the Company (if active).
|
|
|
|
Related parties
|
-
|
As defined in International Accounting Standard (“IAS”) 24, “Related Party Disclosures” (“IAS 24”).
|
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES
|
The following accounting policies
have been applied consistently in the financial statements for all periods presented, unless otherwise stated.
|
a.
|
Basis of presentation of the financial statements:
|
These financial
statements have been prepared in accordance with IFRS, as issued by the International Accounting Standards Board (“IASB”).
The Group’s
financial statements have been prepared on a cost basis, unless otherwise indicated.
The Group
has elected to present the profit or loss items using the function of expense method.
The financial statements are
presented in USD and all values are rounded to the nearest thousand (’000), except when otherwise indicated.
The
operating cycle of the Group is one year.
|
c.
|
Consolidated financial statements:
|
The
consolidated financial statements comprise the financial statements of companies that are controlled by the Company
(Subsidiaries). Control is achieved when the Company is exposed, or has rights, to variable returns from its involvement with
the investee and has the ability to affect those returns through its power over the investee. Potential voting rights are
considered when assessing whether an entity has control. The consolidation of the financial statements commences on the date
on which control is obtained and ends when such control ceases.
The financial statements of
the Company and of the Subsidiaries are prepared as of the same dates and periods. The consolidated financial statements are prepared
using uniform accounting policies by all companies in the Group. Significant intragroup balances and transactions and gains or
losses resulting from intragroup transactions are eliminated in full in the consolidated financial statements.
Non-controlling interests in
subsidiaries represent the equity in subsidiaries not attributable, directly or indirectly, to a parent. Non-controlling interests
are presented in equity separately from the equity attributable to the equity holders of the Company. Profit or loss and components
of other comprehensive income are attributed to the Company and to non-controlling interests. Losses are attributed to non-controlling
interests even if they result in a negative balance of non-controlling interests in the consolidated statement of financial position.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|
|
d.
|
Functional currency and foreign currency:
|
Effective
on October 1, 2018, due to changes in certain economic facts and circumstances that indicate that the functional currency has
changed from NIS to USD, the Company changed its functional currency from NIS to the USD. The Company accounted for the change
in functional currency prospectively.
The Company’s
management believes that since October 1, 2018, the USD is the primary currency of the economic environment in which the Company
operates. Thus, the functional and reporting currency of the Company is the USD. In determining the appropriate functional currency
that should be used, the Company followed the guidance in IAS 21.
As of October
1, 2018, all the Company’s assets and liabilities were translated using the current rate method, using the USD exchange rate as
of September 30, 2018, and equity was translated using the historical exchange rate at the relevant transaction date.
Until October
1, 2018, the financial statements were translated as follows:
|
a)
|
Assets and liabilities at the end of each reporting
period (including comparative data) are translated at the closing rate at the end of the reporting period;
|
|
b)
|
Income and expenses for each period included in profit
or loss (including comparative data) is translated at average exchange rates for the relevant periods; however, if exchange rates
fluctuate significantly, income and expenses are translated at the exchange rates at the date of the transactions;
|
|
c)
|
Share capital, capital reserves and other changes
in capital are translated at the exchange rate prevailing at the date of incurrence or at average exchange rates for the relevant
periods;
|
|
d)
|
Retained earnings are translated based on the opening
balance translated at the exchange rate at that date; and
|
|
e)
|
All resulting translation differences are recognized
as a separate component of other comprehensive income (loss) in equity “foreign currency translation reserve.”
|
Transactions denominated in
foreign currency (other than the functional currency) are recorded on initial recognition at the exchange rate at the date of the
transaction. After initial recognition, monetary assets and liabilities denominated in foreign currency are translated at each
reporting date into the functional currency at the exchange rate at that date. Non-monetary assets and liabilities denominated
in foreign currency and measured at fair value are retranslated into the functional currency using the exchange rate prevailing
at the date when the fair value was determined. Non-monetary assets and liabilities measured at cost are translated at the exchange
rate at the date of the transaction.
The functional currency of
THR is the USD as well.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|
|
e.
|
Business combinations and goodwill:
|
Business
combinations are accounted for by applying the acquisition method. The cost of the acquisition is measured at the fair value of
the consideration transferred on the acquisition date with the addition of non-controlling interests in the acquiree. In each business
combination, the Company chooses whether to measure the non-controlling interests in the acquiree based on their fair value on
the acquisition date or at their proportionate share in the fair value of the acquiree’s net identifiable assets.
Direct
acquisition costs are carried to the statement of profit or loss as incurred.
Goodwill
is initially measured at cost which represents the excess of the acquisition consideration and the amount of non-controlling interests
over the net identifiable assets acquired and liabilities assumed. If the resulting amount is negative, the acquirer recognizes
the resulting gain on the acquisition date.
Cash equivalents are considered
as highly liquid investments, including unrestricted short-term bank deposits with an original maturity of three months or less
from the date of investment or with a maturity of more than three months, but which are redeemable on demand without penalty and
which form part of the Group’s cash management.
Restricted deposit is cash
invested in a short-term deposit (between three months and one year) or in a long-term deposit (with a maturity of more than one
year from the date of investment).
Restricted deposits are designated
to secure the Company’s office facilities lease agreements and its credit cards.
Government
grants are recognized when there is reasonable assurance that the grants will be received and the Company will comply with the
attached conditions. Government grants received from Israel’s Innovation Authority (formerly: the Office of the Chief Scientist,
the “IIA”) are recognized upon receipt as a liability if future economic benefits are expected from the research project
that will result in royalty-bearing sales.
A liability
for the loan is first measured at fair value using a discount rate that reflects a market rate of interest. The difference between
the amount of the grant received and the fair value of the liability is accounted for as a government grant and recognized as a
reduction of research and development expenses. After initial recognition, the liability is measured at amortized cost using the
effective interest method. Royalty payments are treated as a reduction of the liability.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|
|
h.
|
Government grants: (Cont.)
|
If no economic
benefits are expected from the research activity, the grant receipts are recognized as a reduction of the related research and
development expenses. In that event, the royalty obligation is treated as a contingent liability in accordance with IAS 37, “Provisions,
Contingent Liabilities and Contingent Assets” (“IAS 37”). In each reporting date, the Company evaluates whether
there is reasonable assurance that the liability recognized, in whole or in part, will not be repaid (since the Company will not
be required to pay royalties) based on the best estimate of future sales and using the original effective interest method, and
if so, the appropriate amount of the liability is derecognized against a corresponding reduction in research and development expenses.
Amounts paid
as royalties are recognized as settlement of the liability.
|
i.
|
Fair value measurement:
|
Fair value is the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Fair value measurement is based on the assumption that the transaction will take place in the asset’s or the
liability’s principal market, or in the absence of a principal market, in the most advantageous market.
The fair value of an asset
or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming
that market participants act in their economic best interest.
Fair value measurement of a
non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest
and best use or by selling it to another market participant that would use the asset in its highest and best use.
The Group uses valuation techniques
that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use
of relevant observable inputs and minimizing the use of unobservable inputs.
All assets and liabilities
measured at fair value or for which fair value is disclosed are categorized into levels within the fair value hierarchy based on
the lowest level input that is significant to the entire fair value measurement:
Level 1
|
-
|
Quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
Level 2
|
-
|
Inputs other than quoted prices included within Level 1 that are observable directly or indirectly.
|
Level 3
|
-
|
Inputs that are not based on observable market data (valuation techniques which use inputs that are not based on observable market data).
|
THERAPIX BIOSCIENCES LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|
Current or
deferred taxes are recognized in profit or loss, except to the extent that they relate to items which are recognized in other comprehensive
income or equity.
A current
tax liability is measured using the tax rates and tax laws that have been enacted or substantively enacted by the reporting date
as well as adjustments required in connection with the tax liability in respect of previous years.
Deferred
taxes are computed in respect of temporary differences between the carrying amounts in the financial statements and the amounts
attributed for tax purposes.
Deferred
taxes are measured at the tax rate that is expected to apply when the asset is realized or the liability is settled, based on tax
laws that have been enacted or substantively enacted by the reporting date.
Deferred
tax assets are reviewed at each reporting date and reduced to the extent that it is not probable that they will be utilized. Deductible
carryforward losses and temporary differences for which deferred tax assets had not been recognized are reviewed at each reporting
date and a respective deferred tax asset is recognized to the extent that their utilization is probable.
Taxes that
would apply in the event of the disposal of investments in investees have not been taken into account in computing deferred taxes,
as long as the disposal of the investments in investees is not probable in the foreseeable future. Also, deferred taxes that would
apply in the event of distribution of earnings by investees as dividends have not been taken into account in computing deferred
taxes, since the distribution of dividends does not involve an additional tax liability or since it is the Company’s policy not
to initiate distribution of dividends from a subsidiary that would trigger an additional tax liability.
Taxes on
income that relate to distributions of an equity instrument and to transaction costs of an equity transaction are accounted for
pursuant to IAS 12, “Income Taxes” (“IAS 12”).
Deferred
taxes are offset if there is a legally enforceable right to offset a current tax asset against a current tax liability and the
deferred taxes relate to the same taxpayer and the same taxation authority.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|
The criteria
for classifying leases as finance or operating leases depend on the substance of the agreements and are made at the inception of
the lease in accordance with the following principles as set out in IAS 17, “Leases” (“IAS 17”).
The Group
as lessee:
Leases in
which substantially all the risks and rewards of ownership of the leased asset are not transferred to the Group are classified
as operating leases. Lease payments are recognized as an expense in profit or loss on a straight-line basis over the lease term.
|
l.
|
Property and equipment, net:
|
Property
is measured at cost, including directly attributable costs, less accumulated depreciation, accumulated impairment losses and any
related investment grants and excluding day-to-day servicing expenses.
Depreciation
is calculated on a straight-line basis over the useful life of the assets at annual rates as follows:
|
|
%
|
|
Mainly %
|
|
|
|
|
|
Lab equipment
|
|
6-50
|
|
33%
|
Computers
|
|
33-50
|
|
33%
|
Office furniture and equipment
|
|
20-33
|
|
25%
|
Vehicles
|
|
55
|
|
-
|
Leasehold improvements
|
|
see below
|
|
-
|
Leasehold
improvements are depreciated on a straight-line basis over the shorter of the lease term (including the extension option held by
a company and intended to be exercised) and the expected life of the improvement.
The useful
life, depreciation method and residual value of an asset are reviewed at least each year-end and any changes are accounted for
prospectively as a change in accounting estimate. Depreciation of an asset ceases at the earlier of the date that the asset is
classified as held for sale and the date that the asset is derecognized.
THERAPIX BIOSCIENCES LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|
Separately acquired intangible
assets are measured on initial recognition at cost including directly attributable costs. Intangible assets acquired in a business
combination are measured at fair value at the acquisition date. Expenditures relating to internally generated intangible assets,
excluding capitalized development costs, are recognized in profit or loss when incurred.
Intangible assets with a finite
useful life are amortized over their useful life and reviewed for impairment whenever there is an indication that the asset may
be impaired. The amortization period and the amortization method for an intangible asset are reviewed at least at each year end.
|
n.
|
Impairment of non-financial assets:
|
The Company evaluates 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.
|
o.
|
Financial instruments:
|
In July 2014, the IASB issued
the final and complete version of IFRS 9, “Financial Instruments” (“IFRS 9”), which replaces IAS 39, “Financial
Instruments: Recognition and Measurement” (“IAS 39”). IFRS 9 mainly focuses on the classification and measurement
of financial assets and it applies to all assets within the scope of IAS 39.
IFRS 9 has been applied for
the first time on January 1, 2018, using the modified retrospective approach with certain reliefs and without restatement of comparative
figures. After having evaluated the effects of the application of IFRS 9, the Group believes that the adoption has no material
effect on the Group’s financial statements.
The accounting
policy for financial instruments applied until December 31, 2017, is as follows:
Financial
assets within the scope of IAS 39 (accounts receivable) are initially recognized at fair value plus directly attributable transaction
costs.
After initial
recognition, accounts receivable are measured at amortized cost.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|
|
o.
|
Financial instruments: (Cont.)
|
|
2.
|
Financial liabilities:
|
Financial liabilities are initially
recognized at fair value. Loans and other liabilities measured at amortized cost are presented net of direct transaction costs.
After initial recognition,
the accounting treatment of financial liabilities is based on their classification as follows:
Financial
liabilities at amortized cost:
After initial recognition,
loans and other liabilities are measured based on their terms at amortized cost less directly attributable transaction costs using
the effective interest method.
|
3.
|
Offsetting of financial instruments:
|
Financial
assets and financial liabilities are offset and the net amount is presented in the consolidated statement of financial position
if there is a legal enforceable right to offset the recognized amounts and there is an intention either to settle on a net basis
or to realize the asset and settle the liability simultaneously.
The right of offset must be
legally enforceable not only during the ordinary course of business of the parties to the contract but also in the event of bankruptcy
or insolvency of one of the parties. In order for the right of offset to be currently available, it must not be contingent on a
future event, there may not be periods during which the right is not available, or there may not be any events that will cause
the right to expire.
|
4.
|
Issue of a unit of securities:
|
The issue
of a unit of securities involves the allocation of the proceeds received (before issuance 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. Issuance costs are allocated to each component pro rata to the amounts determined for
each component in the unit.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|
|
o.
|
Financial instruments: (Cont.)
|
|
5.
|
Derecognition of financial instruments:
|
a)
Financial assets - A financial asset is derecognized when the contractual rights to the cash flows from the financial asset
expire or the Company has transferred its contractual rights to receive cash flows from the financial asset or assumes an
obligation to pay the cash flows in full without material delay to a third party and has transferred substantially all the
risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset,
but has transferred control of the asset.
b)
Financial liabilities - A financial liability is derecognized when the obligation under the liability is discharged or
cancelled or expires.
|
6.
|
Impairment of financial assets:
|
The Company
assesses at each reporting date whether there is any objective evidence of impairment of a financial asset or group of financial
assets as follows:
Financial
assets carried at amortized cost
Objective
evidence of impairment exists when one or more events that have occurred after initial recognition of the asset have a negative
impact on the estimated future cash flows. The amount of the loss recorded in profit or loss is measured as the difference between
the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not
yet been incurred) discounted at the financial asset’s original effective interest rate. If the financial asset has a variable
interest rate, the discount rate is the current effective interest rate. In a subsequent period, the amount of the impairment loss
is reversed if the recovery of the asset can be related objectively to an event occurring after the impairment was recognized.
The amount of the reversal, up to the amount of any previous impairment, is recorded in profit or loss.
THERAPIX BIOSCIENCES LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|
|
o.
|
Financial instruments: (Cont.)
|
The accounting
policy, according to IFRS 9, for financial instruments applied commencing from January 1, 2018, is as follows:
Financial assets are measured
upon initial recognition at fair value plus transaction costs that are directly attributable to the acquisition of the financial
assets, except for financial assets measured at fair value through profit or loss in respect of which transaction costs are recorded
in profit or loss.
The Group classifies and measures
debt instruments in the financial statements based on the following criteria:
|
-
|
The Group’s business model for managing financial assets; and
|
|
-
|
The contractual cash flow terms of the financial asset.
|
|
a)
|
Debt instruments are measured at amortized cost when:
|
The Group’s business model
is to hold the financial assets in order to collect their contractual cash flows, and the contractual terms of the financial assets
give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
After initial recognition, the instruments in this category are measured according to their terms at amortized cost using the effective
interest rate method, less any provision for impairment.
On the date of initial recognition,
the Group may irrevocably designate a debt instrument as measured at fair value through profit or loss if doing so eliminates or
significantly reduces a measurement or recognition inconsistency, such as when a related financial liability is also measured at
fair value through profit or loss.
|
b)
|
Debt instruments are measured at fair value through profit or loss when:
|
A financial asset which is
a debt instrument does not meet the criteria for measurement at amortized cost or at fair value through other comprehensive income.
After initial recognition, the financial asset is measured at fair value and gains or losses from fair value adjustments are recognized
in profit or loss.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|
|
o.
|
Financial instruments: (Cont.)
|
|
1.
|
Financial assets: (Cont.)
|
|
c)
|
Equity instruments and other financial assets held for trading:
|
Investments in equity instruments
do not meet the above criteria and accordingly are measured at fair value through profit or loss.
Other financial assets held
for trading such as derivatives, including embedded derivatives separated from the host contract, are measured at fair value through
profit or loss unless they are designated as effective hedging instruments.
Dividends from investments
in equity instruments are recognized in profit or loss when the right to receive the dividends is established.
|
2.
|
Derecognition of financial assets:
|
A financial asset is derecognized
only when:
|
-
|
The contractual rights to the cash flows from the financial asset has expired;
|
|
-
|
The Group has transferred substantially all the risks and rewards deriving from the contractual
rights to receive cash flows from the financial asset or has neither transferred nor retained substantially all the risks and rewards
of the asset, but has transferred control of the asset; or
|
|
-
|
The Group has retained its contractual rights to receive cash flows from the financial asset but
has assumed a contractual obligation to pay the cash flows in full without material delay to a third party.
|
A transaction involving factoring
of accounts receivable and credit card vouchers is derecognized when the abovementioned conditions are met.
|
3.
|
Financial liabilities:
|
|
a)
|
Financial liabilities measured at amortized cost:
|
Financial liabilities are
initially recognized at fair value less transaction costs that are directly attributable to the issue of the financial liability.
After initial recognition,
the Group measures all financial liabilities at amortized cost using the effective interest rate method, except for Financial liabilities
at fair value through profit or loss such as derivatives;
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|
|
o.
|
Financial instruments: (Cont.)
|
|
3.
|
Financial liabilities: (Cont.)
|
|
b)
|
Financial liabilities measured at fair value through profit or loss:
|
At initial recognition, the
Group measures financial liabilities that are not measured at amortized cost at fair value. Transaction costs are recognized in
profit or loss.
After initial recognition,
changes in fair value are recognized in profit or loss.
|
4.
|
Derecognition of financial liabilities:
|
A financial liability is derecognized
only when it is extinguished, that is when the obligation specified in the contract is discharged or cancelled or expires. A financial
liability is extinguished when the debtor discharges the liability by paying in cash, other financial assets, goods or services,
or is legally released from the liability.
|
5.
|
Offsetting financial instruments:
|
Financial assets and financial
liabilities are offset and the net amount is presented in the statement of financial position if there is a legally enforceable
right to set off the recognized amounts and there is an intention either to settle on a net basis or to realize the asset and settle
the liability simultaneously. The right of set-off must be legally enforceable not only during the ordinary course of business
of the parties to the contract but also in the event of bankruptcy or insolvency of one of the parties. In order for the right
of set-off to be currently available, it must not be contingent on a future event, there may not be periods during which the right
is not available, or there may not be any events that will cause the right to expire.
|
6.
|
Compound financial instruments:
|
Convertible debentures which
contain both an equity/derivative component and a liability component are separated into two components. This separation is performed
by first determining the liability component based on the fair value of an equivalent non-convertible liability. The value of the
conversion component is determined to be the residual amount. Directly attributable transaction costs are apportioned between the
equity component and the liability component based on the allocation of proceeds to the equity and liability components.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|
|
o.
|
Financial instruments: (Cont.)
|
|
7.
|
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.
|
p.
|
Research and development expenditures:
|
Research
expenditures are recognized in profit or loss when incurred.
The conditions
enabling capitalization of development costs as an asset have not yet been met and, therefore, all development expenditures are
recognized in profit or loss when incurred.
The Group
has not yet generated any revenues from the sale of goods or from rendering services related to the sold products.
|
r.
|
Finance income and expenses:
|
Finance income
comprises interest income on amounts invested and exchange rate gains. Interest income is recognized as it accrues using the effective
interest method.
Finance expenses
comprise changes in the fair value of financial liabilities measured at fair value through profit or loss and exchange rate losses.
Borrowing costs are recognized in profit or loss using the effective interest method.
|
s.
|
Earnings (loss) per share/ADS:
|
Earnings
(loss) per share or per ADS are calculated by dividing the net income (loss) attributable to equity holders of the Company by the
weighted number of ordinary shares or ADSs outstanding during the period.
Basic loss
per share or ADS includes only shares or ADSs that were outstanding during the period.
Potential
ordinary shares or ADSs are included in the computation of diluted loss per share or per ADS when their conversion increases loss
per share or ADS from continuing operations.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|
|
t.
|
Share/ADS-based payment transactions:
|
The Company’s
employees and other service providers may receive remuneration in the form of share/ADS-based payments (“Equity-settled transactions”).
Equity-settled
transactions:
The Group’s
employees/other service providers may receive remuneration in the form of equity-settled share-based payment transactions.
Equity-settled transactions:
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 (“OPM”).
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 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 and/or service conditions are to be satisfied ending on the date on which the relevant employees become
entitled to the award (the “Vesting Period”). The cumulative expense recognized for equity-settled transactions at the
end of each reporting period until the vesting date reflects the extent to which the Vesting Period has expired and the Group’s
best estimate of the number of equity instruments that will ultimately vest.
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 vesting irrespective of whether the market condition is satisfied, provided that all other vesting conditions (service
and/or performance) are satisfied.
|
u.
|
Employee benefit liabilities:
|
The
Company has several employee benefit plans:
|
1.
|
Short-term employee benefits:
|
Short-term
employee benefits are benefits that are expected to be settled wholly before twelve months after the end of the annual reporting
period in which the employees render the related services. These benefits include salaries, paid annual leave, paid sick leave,
recreation and social security contributions and are recognized as expenses as the services are rendered. A liability in respect
of a cash bonus or a profit-sharing plan is recognized when the Group has a legal or constructive obligation to make such payment
as a result of past service rendered by an employee and a reliable estimate of the amount can be made.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|
|
u.
|
Employee benefit liabilities: (Cont.)
|
|
2.
|
Post-employment benefits:
|
The plans
are normally financed by contributions to insurance companies and classified as defined contribution plans or as defined benefit
plans.
The Group
has defined contribution plans to its employees according to the specific laws per country.
A provision in accordance with
IAS 37 is recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable
that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can
be made of the amount of the obligation. When the Group expects part or all of the expense to be reimbursed, for example under
an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain.
The expense is recognized in the statement of profit or loss net of any reimbursement.
Following are the types of
provisions included in the financial statements:
Legal claims:
A provision for claims is recognized
when the Group has a present legal or constructive obligation as a result of a past event, it is more likely than not that an outflow
of resources embodying economic benefits will be required by the Group to settle the obligation and a reliable estimate can be
made of the amount of the obligation.
THERAPIX BIOSCIENCES LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
|
NOTE 3:-
|
SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS
USED IN THE PREPARATION OF THE FINANCIAL STATEMENTS
|
In the process of applying the
significant accounting policies, the Group has made the following judgments which have the most significant effect on the amounts
recognized in the financial statements:
|
-
|
Classification of leases:
|
In order
to determine whether to classify a lease as a finance lease or an operating lease, the Group evaluates whether the lease transfers
substantially all the risks and rewards incidental to ownership of the asset. In this respect, the Group evaluates such criteria
as the existence of a bargain purchase option, the lease term in relation to the economic life of the asset and the present value
of the minimum lease payments in relation to the fair value of the asset.
The Company assesses whether
it controls a company in which it holds less than the majority of the voting rights, among others, by reference to the size of
its holding of voting rights relative to the size and dispersion of holdings of the other vote holders including voting patterns
at previous shareholders’ meetings.
|
-
|
Determining the fair value of share-based payment transactions:
|
The fair value of share-based
payment transactions is determined upon initial recognition by an acceptable OPM. The inputs to the model include share price,
exercise price and assumptions regarding expected volatility, expected life of share option and expected dividend yield.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 3:-
|
SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS
USED IN THE PREPARATION OF THE FINANCIAL STATEMENTS (CONT.)
|
|
b.
|
Estimates and assumptions:
|
The preparation of the financial
statements requires management to make estimates and assumptions that have an effect on the application of the accounting policies
and on the reported amounts of assets, liabilities, revenues and expenses. Changes in accounting estimates are reported in the
period of the change in estimate.
The key assumptions made in
the financial statements concerning uncertainties at the reporting date and the critical estimates computed by the Group that may
result in a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed
below.
Government grants received
from the IIA at the Ministry of Industry, Trade and Labor are recognized as a liability if future economic benefits are expected
from the research and development activity that will result in royalty-bearing sales. There is uncertainty regarding the estimated
future cash flows used to measure the amount of the liability.
In estimating the likelihood
of outcome of legal claims filed against the Company and its investees, the companies rely on the opinion of their legal counsel.
These estimates are based on the legal counsel’s best professional judgment, taking into account the stage of proceedings and legal
precedents in respect of the different issues. Since the outcome of the claims will be determined in courts, the results could
differ from these estimates.
|
-
|
Fair value of financial instruments:
|
When the fair values of financial
assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, their fair
value is determined using a variety of valuation techniques that include the use of valuation models. The inputs to these models
are taken from observable markets where possible, but where this is not feasible, estimation is required in establishing fair values.
The models are tested for validity by calibrating to prices from any observable current market transactions in the same instrument
when available.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 4:-
|
DISCLOSURE OF NEW STANDARDS IN THE PERIOD PRIOR TO THEIR
ADOPTION
|
In January
2016, the IASB issued IFRS 16, “Leases” (“IFRS 16”). 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.
The effects
of the adoption of the IFRS 16 are as follows:
|
-
|
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, see below) 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 expense 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
re-measure the lease liability and the effect of the re-measurement is an adjustment to the carrying amount of the right-of-use
asset.
|
|
-
|
The accounting treatment by lessors remains substantially unchanged, namely classification of a
lease as a finance lease or an operating lease.
|
IFRS 16 is
effective for annual periods beginning on or after January 1, 2019. Early adoption is permitted. At this stage, the Group does
not intend to early adopt IFRS 16.
IFRS 16 permits
lessees to use one of the following approaches:
|
1.
|
Full retrospective approach - according to this approach, the effect of the adoption of IFRS 16
at the beginning of the earliest period presented will be carried to equity. Also, the Group will restate the comparative figures
in its financial statements. The balance of the liability as of the date of initial adoption of IFRS 16 as per this approach will
be calculated using the interest rate implicit in the lease, unless this rate cannot be easily determined in which case the lessee’s
incremental borrowing rate of interest will be used.
|
|
2.
|
Modified retrospective approach - this approach does not require restatement of comparative data.
The balance of the liability as of the date of initial adoption of IFRS 16 will be calculated using the lessee’s incremental borrowing
rate of interest on the date of initial adoption of IFRS 16. As for the outstanding right-of-use asset, the Group may apply one
of the two following alternatives to account for each lease separately:
|
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 4:-
|
DISCLOSURE OF NEW STANDARDS IN THE PERIOD PRIOR TO THEIR
ADOPTION (CONT.)
|
|
a.
|
IFRS 16, “Leases”: (Cont.)
|
|
2.
|
Modified retrospective approach: (Cont.)
|
|
-
|
Recognizing an asset in the amount of the recognized liability, with certain adjustments; or
|
|
-
|
Recognizing an asset as if the asset had always been measured according to the provisions of IFRS
16.
|
Any difference
arising on the date of first-time adoption of IFRS 16 as a result of the modified retrospective approach will be carried to equity.
The Group
expects to use the modified retrospective approach for the first-time adoption of IFRS 16 by measuring the right-of-use asset equally
to the obligation to make lease payments as presented on the date of initiation.
The Group
has extensive lease contracts consisting of buildings. In the context of examining the potential impact of IFRS 16 on the financial
statements, the Group is reviewing the following issues:
|
-
|
The existence of lease extension options - according to IFRS 16, non-cancellable lease terms also
include periods that are covered by the lease extension options if it is likely that the lessee will exercise the option. The Group
is examining the existence of such options in its lease agreements and whether or not it is likely that they will be exercised
by it.
|
In the context of such examination,
the Group studies all the relevant facts and circumstances that are likely to create an economic incentive for exercising the option,
among others, significant leasehold improvements that have been or are expected to be performed, the significance of the leasehold
to the Group’s activity and past experience in connection with the exercise of such extension options. IFRS 16 incorporates two
exceptions, whereby lessees are entitled to account for leases according to the current accounting treatment of operating leases,
in the event of leases of assets of a low financial value or in the event of leases for a period of up to one year.
|
-
|
Separation of contract components - according to IFRS 16, all lease components of a contract should
be separated from non-lese components when the lessee is allowed the relief of choosing not to distinguish between such components
according to categories of base assets but rather jointly account for them as a single lease component. The Group is reviewing
the existence of non-lease components in its current lease contracts such as for the provision of management and maintenance services
and whether the above relief should be applied to each category of base assets.
|
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 4:-
|
DISCLOSURE OF NEW STANDARDS IN THE PERIOD PRIOR TO THEIR
ADOPTION (CONT.)
|
|
a.
|
IFRS 16, “Leases”: (Cont.)
|
|
-
|
Discount interest rate - the Group is examining how to determine the discount rate for measuring
a right-of-use asset on the date of initial adoption of IFRS 16, based on the initial adoption approach chosen by it. In this context,
the Group is also examining its ability to estimate the fair value of the leasehold and the lessor’s initial costs if it should
choose the retrospective approach, or alternatively estimate the lessee’s incremental borrowing rate of interest assuming that
the interest rate implicit in the lease cannot be determined using the full retrospective approach or if it should choose the modified
retrospective approach in view of the lease period and the nature of the leasehold.
|
The Group
is also evaluating the need for adjustments to its systems, internal control, policies and procedures that will be necessary in
order to apply the provisions of IFRS 16.
The
Group estimates that the effect of the initial adoption of IFRS 16 as of January 1, 2019, will result in an increase of
approximately $2.703 million in the Group’s total assets and liabilities. The above quantitative disclosures rely on
the effects as they are currently known to the Group based on existing data and parameters. The adoption of IFRS 16 may
require certain adjustments in the Group’s future financial statements for 2018, after specific policies have been
finalized with respect to the application issues currently under review.
In addition,
as a result of the initial adoption of IFRS 16, the Group estimates that in the year ending on December 31, 2019, there will be
a decrease of rental expenses of $684 thousand
,
an increase in depreciation and amortization
of $405 thousand and an increase in financing expenses of $454 thousand. Overall, the adoption of IFRS 16 is expected to result
in a decrease in the Group’s operating expenses of $279 and in an increase in the Group’s loss before taxes of $175 thousand. Also,
as a result of the IFRS 16 adoption, an increase in cash flow from operating activities of $230 thousand is expected.
THERAPIX BIOSCIENCES LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
|
NOTE 5:-
|
BUSINESS COMBINATIONS:
|
Acquisition
of Therapix Healthcare Resources Inc.:
On July 31,
2018, the Company entered into an agreement for convertible equity (the “Convertible Equity Agreement”) with THR, which
is a company that was incorporated in Delaware, on July 26, 2018, and an unaffiliated third party. Since July 31, 2018, THR was
engaged in operating pain treatment clinics, mainly in Tennessee, to treat an assortment of different pains, including, acute pain,
spine pain, chronic headaches, cancer pain, oral/maxillofacial pain, neuropathic pain and rheumatologic/myofascial pain. Under
the Convertible Equity Agreement, the Company loaned an aggregate amount of $1.625 million (the “THR Loan”) to THR. The
maturity date of the loan, which accrues interest at a rate of 9% per annum, will occur upon demand of the Company and under certain
conditions detailed in the Convertible Equity Agreement as follows:
|
-
|
The Company shall have the right to instruct THR in writing, no later than October 3, 2018 (the
“Execution Date”) to repay the THR Loan, together with all interest accrued in cash at the Execution Date.
|
|
-
|
The Company will have the right to convert the THR Loan, together with all interest accrued, into
that number of shares of the most senior class of shares of THR, existing at the time of such conversion, at a price per share
equal to the fair market value of such shares as shall be determined by THR’s board of directors. Notwithstanding anything
to the contrary, the Company shall not exercise any conversion rights under the Convertible Equity Agreement together with all
interest accrued unless and until, at least, one of the following conditions is met: (1) Three THR clinics become fully operational;
or (2) the directors of THR authorize the formal issuance of shares of THR at their initial meeting or in a resolution of lieu
of an initial meeting.
|
In the event
the terms mentioned above are not fulfilled within twelve months after the Execution Date, then the THR Loan will be converted
automatically. In addition, if the THR Loan will be converted by the Company, the Company shall have the right to appoint 50% of
the members of THR’s board of directors, including the chairman of the board of directors. According to THR’s certificate
of incorporation, the chairman of the board of directors shall cast the decisive vote in the event that voting of the board of
directors is tied.
On October
3, 2018 (the “Acquisition Date”), following the fact that the above mentioned conditions were met, the Company converted
the entire THR Loan and as a result holds 82.36% of THR’s equity, and accordingly achieved control over THR. Until December 31,
2018, no further changes were made to THR’s equity. In addition, since the Acquisition Date and until December 31, 2018, the Company
loaned to THR an additional amount of $487 thousand by four additional loans, which accrued interest at a rate of 9% per annum.
Also, since January 1, 2019, and until the date of Approval Date, the Company loaned to THR an additional amount of $202 thousand
by four additional loans under the same terms as the abovementioned loans.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 5:-
|
BUSINESS COMBINATIONS: (CONT.)
|
Acquisition
of Therapix Healthcare Resources Inc.: (Cont.)
Up and until
the Acquisition Date and the beginning of consolidation, the THR Loan was treated as a convertible loan (as a financial asset),
presented at its fair value through profit or loss pursuant to IFRS 9, plus accrued interest in the total amount of $22 thousand.
Accordingly, on the Acquisition Date, no adjustments were required to the value of the investment which represents the purchase
consideration of $1.647 million.
The Group
has elected to measure the non-controlling interests in THR at the proportionate share of the non-controlling interests of the
fair value of THR’s net identifiable assets.
The Company
recognized the fair value of the assets acquired and liabilities assumed in the business combination according to a provisional
measurement. The purchase consideration and the fair value of the acquired assets and liabilities may be adjusted within twelve
months from the Acquisition Date.
The
fair value of the identifiable assets and liabilities of THR on the Acquisition Date:
|
|
Fair value
|
|
|
|
USD
in thousands
|
|
|
|
|
|
Cash
|
|
$
|
14
|
|
Other accounts receivable
|
|
|
45
|
|
Property and equipment, net
|
|
|
2,192
|
|
Customer relationships, net
|
|
|
307
|
|
|
|
|
2,558
|
|
|
|
|
|
|
Trade payables
|
|
|
(445
|
)
|
Other accounts payable
|
|
|
(42
|
)
|
Related Parties
|
|
|
(206
|
)
|
Deferred taxes liability, net
|
|
|
(60
|
)
|
|
|
|
(753
|
)
|
|
|
|
|
|
Net identifiable assets
|
|
|
1,805
|
|
Non-controlling interests
|
|
|
(318
|
)
|
Goodwill arising on acquisition
|
|
|
160
|
|
|
|
|
|
|
Total purchase cost
|
|
$
|
1,647
|
|
The goodwill
arising from the acquisition is attributed to the expected benefits from the synergies of the combination of the activities of
the Company and THR.
THERAPIX BIOSCIENCES LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
|
NOTE 5:-
|
BUSINESS COMBINATIONS: (CONT.)
|
Acquisition
of Therapix Healthcare Resources Inc.: (Cont.)
Cash
outflow/inflow on the Acquisition Date:
|
|
USD
in
thousands
|
|
|
|
|
|
|
Cash paid
|
|
$
|
1,647
|
|
Cash acquired
with THR at the Acquisition Date
|
|
|
(14
|
)
|
|
|
|
|
|
Net cash
|
|
$
|
1,633
|
|
Since the
Acquisition Date until December 31, 2018, THR contributed a total loss in the amount of $2.335 million to the Group’s total loss
for the year ended on December 31, 2018 (the loss attributed to the non-controlling interests is $412 thousand).
On December
31, 2018, the Group reviewed the goodwill for impairment and due to significant losses incurred by THR, as well as its failure
to maintain required licenses to operate its facilities, the Group decided to fully impair the goodwill which have arisen from
THR’s acquisition. Accordingly, on December 31, 2018, the intangible asset due to THR’s customer relationships was fully impaired
as well.
On March 26,
2019, due in part to significant losses incurred by THR, as well as its failure to maintain required licenses to operate its facilities,
the Group’s management anticipates that THR will commence a liquidation process of its assets in the near future. The liquidation
of THR’s remaining assets, or potential claims that may arise from the liquidation and dissolution of THR may adversely affect
the Group’s reputation or divert management’s attention in the event of any material litigation. As of the date of
approval of the financial statements, the Group is not able to estimate reliably the timing and results of the proposed liquidation
or of any consequences that may occur as a result thereof, except for what is disclosed in these financial statements.
|
NOTE 6:-
|
CASH AND CASH EQUIVALENTS
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
USD in thousands
|
|
|
|
|
|
|
|
|
Cash for immediate withdrawal - in NIS
|
|
$
|
247
|
|
|
$
|
93
|
|
Cash for immediate withdrawal - in USD
|
|
|
1,238
|
|
|
|
9,102
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,485
|
|
|
$
|
9,195
|
|
THERAPIX BIOSCIENCES LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
|
NOTE 7:-
|
OTHER ACCOUNTS RECEIVABLE
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
USD in thousands
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
250
|
|
|
$
|
224
|
|
Government authorities
|
|
|
66
|
|
|
|
54
|
|
Other receivables
|
|
|
88
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
404
|
|
|
$
|
278
|
|
|
NOTE 8:-
|
CONVERTIBLE LOAN
|
On April 17,
2018, the Company entered into a convertible loan agreement with Cure Pharmaceutical Holding Corp. (“Cure” and the “Convertible
Loan Agreement,” respectively), a U.S.-based company. Under the Convertible Loan Agreement, the Company lent Cure an amount
of $500 thousand (the “Cure Loan”). The maturity date of the Cure Loan, together with an interest at a rate of 9% per
annum, was set as April 30, 2019 (the “Maturity Date”). In addition, according to the Convertible Loan Agreement, the
Company had the option to instruct Cure, prior to the Maturity Date, to repay the Cure Loan amount together with all interest accrued
thereon, in lieu of the conversion (described below), in which case Cure will effect such repayment on the Maturity Date. Conversion
of the Cure Loan could have been upon one out of several options mentioned in the Convertible Loan Agreement.
On December
31, 2018, the Company instructed Cure to repay the Cure Loan (with the accrued interest) on the Maturity Date. Therefore, the Cure
Loan balance as of December 31, 2018, was presented on a cost basis, with the accrued interest of 9% per annum. The Cure Loan was
fully repaid, including interest, on April 30, 2019, and the Convertible Loan Agreement was terminated with no further effect.
|
NOTE 9:-
|
INVESTMENT IN ASSOCIATE AND INVESTMENTS IN INVESTEES
|
On June 15,
2014, a definitive investment agreement was signed between the Company and Lara, an Israeli company that operates in the field
of medical cannabis, which determined, among others, that the Company will invest in Lara up to a total of $1.5 million, subject
to the fulfillment of several prerequisites (the “Investment Agreement”). Under the Investment Agreement, the Company
undertook to transfer to Lara an initial investment amount of $800 thousand against shares that will represent about 48% of Lara’s
issued and outstanding share capital (approximately 27% on a fully diluted basis). In May 2016, following various claims that the
parties held against each other, the Company and Lara signed a settlement and termination agreement (the “Settlement Agreement”).
Under the Settlement Agreement, the parties agreed that the Company will continue to hold approximately 27% of Lara’s share capital,
and that it will be released from making the remaining payments under the Investment Agreement and all other terms of the Investment
Agreement will have no further binding effect.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 9:-
|
INVESTMENT IN ASSOCIATE AND INVESTMENTS IN INVESTEES (CONT.)
|
|
a.
|
Investment in Lara: (Cont.)
|
Pursuant
to the Settlement Agreement, the Company’s representative on Lara’s board of directors resigned. Also, the Company doesn’t have
the right to appoint a director. Accordingly, the Company no longer has significant influence over Lara. As of December 31, 2018,
the balance of the investment in Lara is $0.
|
b.
|
Sale of Orimmune Bio Ltd. and the Termination of the Hadasit License Agreement:
|
On June 22, 2016, the Company
entered into a share transfer agreement (the “Transfer Agreement”) with its then wholly owned subsidiary, Orimmune
Bio Ltd. (“Orimmune”) and Karma Link Ltd. (the “Buyer”), whereby the Company will sell its interests in
Orimmune to the Buyer and use its best efforts transfer to Orimmune and assign its rights in the Anti-CD3 technology (which was
in-licensed by the Company from Hadasit Medical Research Services & Development Ltd., (“Hadasit”) and certain
internally developed assets and technology relating thereto) (the “License”), assist in obtaining all the necessary
approvals for such technology transfer, in return to a predetermined rate (which is a low double-digit number) of all receipts
which the Buyer will receive from Orimmune or from third parties in connection with the shares and/or assets of Orimmune, up to
an aggregate of approximately $10 million. For each receipt in excess of said aggregate amount, the Company will be entitled to
a lower rate determined therefrom (also a low double-digit number). During the interim period until the completion of the License
assignment process, among others, the Buyer will bear certain of the payments in respect of the License and/or resulting therefrom
(including payments for holding the patents under the License and including payments for a pending patent opposition proceeding
involving the License).
In August 2016, the Transfer
Agreement was executed, and no consideration was paid to the Company at such time. The Transfer Agreement included a mechanism
in which the Company is entitled to receive future compensation in the event of, and based on, Orimmune’s future sale to
a third party. As a result of the loss of control, the Company recorded a capital gain in the amount of $34 thousand.
During May 2017, an amendment
to the Transfer Agreement was signed (the “Orimmune Amendment”) between the Company, the Buyer and Orimmune, in which
the parties acknowledged that the Company’s discussions with Hadasit regarding the possibility of assigning the License to
Orimmune, as contemplated in the Transfer Agreement, have yet to mature into an agreement with Hadasit, due to Hadasit’s
objection to the proposed assignment. As a gesture of good faith, the Company agreed to bear certain fees expenses related to the
License incurred prior to the date hereof in the amount of $60 thousand, which were paid to Orimmune. In addition, during a period
of 6 months commencing as of the date of the Orimmune Amendment, the Company agreed to bear certain additional fees and expenses
related to the License. It was determined that such additional amounts will not exceed $15 thousand. All such additional fees and
expenses shall be coordinated and approved by Company in advance.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 9:-
|
INVESTMENT IN ASSOCIATE AND INVESTMENTS IN INVESTEES (CONT.)
|
|
b.
|
Sale of Orimmune Bio Ltd. and the Termination of the Hadasit License Agreement: (Cont.)
|
The Orimmune
Amendment further emphasized that in the event that the parties were unable to successfully assign the License within such 6-month
period, the Company would be deemed to have satisfied its obligation to use reasonable commercial efforts according to the Transfer
Agreement. In consideration of the foregoing, it was agreed to increase the percentages of the predetermined rate of all receipts
which the Buyer will receive from the Orimmune or from third parties in connection with the shares and/or assets of the Orimmune.
Following
further discussions between the Company and Hadasit held during 2017, and through the first quarter of 2018, after not succeeding
in assigning the License to the Buyer, on March 29, 2018, the Company and Hadasit signed a mutual termination agreement (the “Termination
Agreement”) of the License. According to the Termination Agreement, among others, the License (and its related historic consulting
agreements associated with the License) shall be terminated as of that date, and will not have any further force and effect, except
for certain matters as prescribed under the Termination Agreement. In addition, payment to Hadasit of outstanding amount was set,
and with respect to the transfer of IP rights, Hadasit will assign to the Company all of its rights in the Hadasit/Therapix patent
rights. Thereafter, the Company will re-assign to Hadasit all of its rights, title and interest in and to the Hadasit/Therapix
patent rights (“Assignment of IP”). The consummation of the Assignment of IP abovementioned shall be subject to receipt
of the necessary approval of the IIA.
On April 18, 2018, the Company
submitted an application with the IIA to approve the Assignment of IP (the “Application”). The Company had discussions
with the IIA in connection with the terms of approval of the Application, which will, inter alia, address a previous refusal received
by the IIA to a request to recognize the registration of a joint patent with Hadasit, under the License, which according to the
IIA did not comply with the rules and regulations with respect to use of funds received under the IIA grant. Following the above-mentioned
discussions, the IIA has approved an arrangement for the joint patent registration.
On July 4, 2018, and according
to the Termination Agreement, the Company paid Hadasit approximately $104 thousand due to, inter alia, accrued costs and expenses
relating to the filing, prosecution and maintenance of the patent rights, license maintenance fee due to Hadasit for the years
2016 and 2017, and unpaid related consultancy fees for work performed during 2015.
On December 13, 2018, an additional
amendment to the Transfer Agreement was signed (the “Additional Amendment”) between the Company, the Buyer and Orimmune,
under which the parties acknowledged that despite the Company’s efforts and assistance in the discussions with Hadasit regarding
the possibility of assigning the License to Orimmune, Orimmune chose not to enter into an agreement with Hadasit. In addition
and notwithstanding the foregoing, the Company is willing to assign to Orimmune the entire right, title and interest in specific
patents, subject to fulfilment of certain conditions precedent which are still in effect as of the date of this financial statement.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 10:-
|
PROPERTY AND EQUIPMENT, NET
|
|
|
Computers
|
|
|
Lab equipment
|
|
|
Office furniture and equipment
|
|
|
Leasehold
improvements
|
|
|
Vehicles
|
|
|
Total
|
|
|
|
USD in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2018
|
|
$
|
36
|
|
|
$
|
13
|
|
|
$
|
23
|
|
|
$
|
23
|
|
|
$
|
-
|
|
|
$
|
95
|
|
Initially consolidated company
|
|
|
42
|
|
|
|
2,031
|
|
|
|
111
|
|
|
|
-
|
|
|
|
8
|
|
|
|
2,192
|
|
Additions during the year
|
|
|
8
|
|
|
|
-
|
|
|
|
1
|
|
|
|
7
|
|
|
|
-
|
|
|
|
16
|
|
Disposals during the year
|
|
|
(20
|
)
|
|
|
(39
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(59
|
)
|
Adjustments arising from translating financial statements from functional currency to presentation currency
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
|
66
|
|
|
|
2,004
|
|
|
|
134
|
|
|
|
29
|
|
|
|
8
|
|
|
|
2,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2018
|
|
|
26
|
|
|
|
10
|
|
|
|
8
|
|
|
|
1
|
|
|
|
-
|
|
|
|
45
|
|
Additions during the year
|
|
|
12
|
|
|
|
88
|
|
|
|
8
|
|
|
|
4
|
|
|
|
1
|
|
|
|
113
|
|
Disposals during the year
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
Adjustments arising from translating financial statements from functional currency to presentation currency
|
|
|
(22
|
)
|
|
|
2
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
|
16
|
|
|
|
97
|
|
|
|
16
|
|
|
|
4
|
|
|
|
1
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciated cost at December 31, 2018
|
|
|
50
|
|
|
|
1,907
|
|
|
|
118
|
|
|
|
25
|
|
|
|
7
|
|
|
|
2,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciated cost at December 31, 2017
|
|
$
|
10
|
|
|
$
|
3
|
|
|
$
|
15
|
|
|
$
|
22
|
|
|
$
|
-
|
|
|
$
|
50
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
USD in thousands
|
|
|
|
|
|
|
|
|
Open debts
|
|
$
|
978
|
|
|
$
|
399
|
|
Accrued expenses
|
|
|
640
|
|
|
|
618
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,618
|
|
|
$
|
1,017
|
|
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 12:-
|
OTHER ACCOUNTS PAYABLE
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
USD in thousands
|
|
|
|
|
|
|
|
|
Employees and payroll accruals
|
|
$
|
484
|
|
|
$
|
130
|
|
Provisions due to litigations and claims (*)
|
|
|
250
|
|
|
|
-
|
|
Accrued vacation
|
|
|
52
|
|
|
|
30
|
|
Other payables
|
|
|
58
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
844
|
|
|
$
|
160
|
|
(
*)
Refer to Note 16j for more information in this matter.
|
NOTE 13:-
|
FINANCIAL INSTRUMENTS
|
|
a.
|
Classification of financial assets and financial liabilities:
|
The financial
assets and financial liabilities in the consolidated statements of financial position are classified by groups of financial instruments
pursuant to IFRS 9:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
USD in thousands
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and restricted deposits
|
|
$
|
1,518
|
|
|
$
|
9,219
|
|
Convertible loan (see Note 8)
|
|
|
531
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,049
|
|
|
|
9,219
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current financial liabilities carried at amortized cost
|
|
|
3,336
|
|
|
|
1,177
|
|
Credit from others (see Note 13b)
|
|
|
91
|
|
|
|
-
|
|
Convertible debenture (see Note 13c)
|
|
|
779
|
|
|
|
-
|
|
Conversion component of convertible debenture (see Note 13c)
|
|
|
277
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,483
|
|
|
$
|
1,177
|
|
On August
30, 2018, GLPS Staffing Solutions Professional LLC (“GLPS”), a related party of THR (see Note 22d.5), signed a Billing
Services Agreement (the “Billing Services Agreement”) with Anesthesia Business Consultants LLC. (“ABC”). According
to the Billing Services Agreement, ABC shall provide a credit line to THR or GLPS which shall not exceed $250 thousand (the “Credit
Line”). The Credit Line shall be repaid at the rate of $50 thousand for each twelve month period during the term of the Billing
Services Agreement.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 13:-
|
FINANCIAL INSTRUMENTS (CONT.)
|
|
b.
|
Credit from others: (Cont.)
|
The Credit
Line will bear an annual interest of 6.5% (the interest will change according to different terms under the Billing Services Agreement).
As of
December 31, 2018, the withdrawn balance of the Credit Line was $91 thousand (including interest, in which the withdrawal was made
on November 13, 2018), all classified under current liabilities due to the expected liquidation of THR (See Note 5).
|
c.
|
Convertible Debentures:
|
On November 23, 2018 (the “Issuance
Date”), the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) and a registration
rights agreement with YA II PN Ltd. (“Yorkville”), a fund managed by Yorkville Advisors Global L.P., for the
sale in a private placement of up to $2.5 million in principal amount of unsecured convertible debentures (the “Convertible
Debentures”). Interest on the Convertible Debentures will accrue at a rate of 5% per annum and can be repaid in cash with
an addition of an 10% redemption premium upon the maturity date of the Convertible Debentures, being 12 months from the issuance
of each Convertible Debenture.
The first tranche of $1.5
million of the Convertible Debentures was issued on November 26, 2018. In addition, $78 thousand were deducted due to issue expenses,
and Yorkville received 9,171 ADSs of the Company in return to additional commitment fees (valued at $75 thousand) (see Note 17e.3).
Also, an additional fee of $10 thousand was deducted from the $1.5 million due to payments to Yorkville’s legal counsels.
Two other tranches of $500 thousand each of the Convertible Debentures shall be purchased by Yorkville conditional on the passage
of time and/or certain triggering events as disclosed in the Securities Purchase Agreement. If the Company will not comply with
the triggering events mentioned, the Company will be deemed to be in default pursuant to the terms, and inter alia, the interest
on the Convertible Debentures will accrue up to a rate of 15% per annum. The Company shall pay Yorkville additional commitment
fees upon issuance of each such tranche, to be paid at the Company’s option in cash or ADSs of the Company. From and after
the date of issuance of the Convertible Debentures, the outstanding principal, together with accrued and unpaid interest, will
be convertible, at the option of Yorkville, into the Company’s ADSs at the lower of $7.00 or 95% of the lowest daily volume-weighted
average price (“VWAP”) during the five consecutive trading days immediately preceding the conversion date.
As of
December 31, 2018, the Convertible Debentures had not been converted.
On March 14, 2019, an amendment
to the Securities Purchase Agreement was signed due to the fact that the Company did not comply with certain abovementioned conditions
and accordingly deemed to be in default by Yorkville. According to the amendment, Yorkville agreed to waive the requirements under
the Securities Purchase Agreement and as such, the Company shall not be deemed to be in default pursuant to the terms of the Securities
Purchase Agreement. In addition, the Company and Yorkville mutually agreed to waive any and all requirements to hold a second closing
or third closing ($500 thousand each).
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 13:-
|
FINANCIAL INSTRUMENTS (CONT.)
|
|
c.
|
Convertible Debentures: (Cont.)
|
Valuation
process and techniques:
The Company’s management considers
the appropriateness of the valuation methods and inputs, and may request that alternative valuation methods are applied to support
the valuation arising from the method chosen.
The valuation of the Convertible
Debentures was set in accordance with IFRS 9 and IAS 32, “Financial Instruments: Presentation” (“IAS 32”).
IFRS 9 and IAS 32 determine the accepted method in allocating the consideration received from a bundle of securities. According
to the guidelines of IFRS 9 and IAS 32, the allocation is based on the method of the remainder of consideration, when there is
a hierarchy regarding the financial instruments measured at fair value and the financial instruments recognized as the remainder
of consideration.
According to IFRS 9 and IAS
32, the allocation is based on the following hierarchy:
|
-
|
Derivative and other financial instrument, measured at fair value through its contractual life.
|
|
-
|
Financial liabilities and other complex instruments which are not recognized at fair value.
|
IFRS 9 and IAS 32 also determine
that a derivative which may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed
number of the entity’s own equity instruments, will be defined as a financial liability, measured and presented at fair value
each period. Accordingly, and as mentioned in the Securities Purchase Agreement, in the event of conversion, the amount of shares
to be issued is unknown (not fixed). Therefore, according to the definition mentioned above, the conversion component is classified
as a financial liability that will be measured at fair value, through profit or loss, as of the Issuance Date and on any following
financial reporting date (accordingly, issue expenses related to the derivative will be recorded through profit or loss). The remainder
of the consideration will be attributed to the debt component and no consideration will be left to attribute to the equity instrument
(issuance of 9,171 ADSs mentioned above).
The valuation of the conversion
component of Convertible Debentures was set at fair value, as required in IFRS 9, and in accordance with IFRS 13, “Fair value
measurement,” and was categorized as Level 3 by the Company.
General
Overview of Valuation Approaches used in the Valuation:
Fair value is the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 13:-
|
FINANCIAL INSTRUMENTS (CONT.)
|
|
c.
|
Convertible Debentures: (Cont.)
|
Economic
methodology:
The convertible
component was calculated using the Monte Carlo Simulation Model, an OPM which takes into account six parameters as disclosed below
for each period valuated:
|
|
November 23,
2018
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
The price of the ADS as of the valuation date
|
|
$
|
7.46
|
|
|
$
|
3.25
|
|
The exercise price of the option (*)
|
|
$
|
7
|
|
|
$
|
7
|
|
The option contractual term
|
|
|
1 year
|
|
|
|
1 year
|
|
The expected volatility of the price of the ADS
|
|
|
91.3
|
%
|
|
|
99.33
|
%
|
The risk-free interest rate for the option contractual term
|
|
|
2.67
|
%
|
|
|
2.62
|
%
|
The expected dividends over the option’s expected term
|
|
|
0
|
%
|
|
|
0
|
%
|
(*) The
lower of $7.00 or 95% of the lowest daily VWAP during the five consecutive trading days immediately preceding the conversion date.
Hereinafter
is the attribution of the consideration of the Convertible Debentures:
|
|
USD in thousands
|
|
|
|
|
|
Conversion component of Convertible Debentures - measured at fair value
|
|
$
|
745
|
|
Convertible Debentures, net of issue expenses - measured at amortized cost
|
|
|
706
|
|
ADS issued
|
|
|
-
|
|
|
|
|
|
|
(*)
|
|
$
|
1,451
|
|
(*) Net of issue expenses in
the amount of $39 thousand due to the conversion component of Convertible Debentures which were recognized in profit or loss.
Reconciliation of the fair
value measurements that are categorized within Level 3 of the fair value hierarchy in financial instruments:
|
|
USD in thousands
|
|
|
|
|
|
Balance at November 23, 2018
|
|
$
|
745
|
|
Finance income
|
|
|
(468
|
)
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
277
|
|
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 13:-
|
FINANCIAL INSTRUMENTS (CONT.)
|
|
d.
|
Financial risk factors:
|
The Group’s
activities expose it to various financial risks such as market risks (foreign currency risk and interest risk), credit risk and
liquidity risk. The Group’s comprehensive risk management plan focuses on activities that reduce to a minimum any possible adverse
effects on the Group’s financial performance.
Risk management
is performed by management in accordance with the policies approved by the Company’s board of directors (the “Board”).
The Board establishes written principles for the overall risk management activities as well as specific policies with respect to
certain exposures to risks such as exchange rate risk, credit risk and the investments of surplus funds.
Foreign
currency risk:
The Group
is exposed to exchange rate risk resulting from the exposure to different currencies, mainly the USD until October 1, 2018, and
since then mainly the NIS (see Note 2d). Exchange rate risk arises from recognized liabilities that are denominated in a foreign
currency other than the functional currency.
All cash
and cash equivalents related to the Company are held in two banks in Israel which are considered financially solid. In regards
to THR, all cash and cash equivalents are also are held in two banks in the U.S., which are considered financially solid as well.
The Company
monitors the risk of a shortage of funds on a regular basis and acts to raise funds to satisfy its liabilities. As of December
31, 2018, The Company expects to settle all of its financial liabilities in less than one year. However, as mentioned in Note 5,
THR will commence a liquidation process of its assets in the near future.
The carrying
amounts of cash and cash equivalents, and all other financial assets and liabilities approximate their fair value.
Refer to
Note 1c for more information.
THERAPIX BIOSCIENCES LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
|
NOTE 14:-
|
EMPLOYEE BENEFIT LIABILITIES
|
Employee benefits
consist of short-term benefits and post-employment benefits.
Post-employment
benefits:
According
to the labor laws and the Israeli Severance Pay Law, 1963 (the “Severance Pay Law”), the Company is required to pay compensation
to an employee upon dismissal or retirement or to make current contributions in defined contribution plans pursuant to Section
14 of the Severance Pay Law, as specified below. The Company’s liability is accounted for as a post-employment benefit. The computation
of the Company’s employee benefit liability is made in accordance with a valid employment contract based on the employee’s salary
and employment term which establish the entitlement to receive the compensation.
The post-employment
benefits are normally financed by contributions classified as defined benefit plans or as defined contribution plans as detailed
below.
Defined
contribution plans:
Section 14
of the Severance Pay Law applies to a substantial part of the compensation payments, pursuant to which the fixed contributions
paid by the Company into pension funds and/or policies of insurance companies release the Company from any additional liability
to employees for whom said contributions were made. These contributions and contributions for compensation represent defined contribution
plans.
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
USD in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses in respect of defined contribution plans
|
|
$
|
65
|
|
|
$
|
52
|
|
|
$
|
31
|
|
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 15:-
|
TAXES ON INCOME
|
|
a.
|
Tax rates applicable to the Group:
|
Therapix incorporated in
Israel:
Presented hereunder are the
tax rates relevant to the Company in the years 2016 - 2018:
The Israeli statutory corporate
tax rate and real capital gains were 23% in 2018, 24% in 2017 and 25% in 2016.
In December
2016, the Israeli Parliament approved the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for
the 2017 and 2018 Budget Years), 2017, which reduces the corporate income tax rate to 24% (instead of 25%) effective from January
1, 2017 and to 23% effective from January 1, 2018.
THR incorporated in the
U.S.
On December 22, 2017, the U.S.
Tax Cuts and Jobs Act (the “TCJA”) was signed into law, permanently lowering the corporate federal income tax rate from
35% to 21%, effective January 1, 2018. THR is subject to U.S. Federal tax and State income tax where THR operates (mainly in the
state of Tennessee). The weighted tax rate in 2018 was 27.5%.
The change
in the tax rate had no effect on the financial statements in 2018.
The assessments
of the Company are deemed final through the 2013 tax year. However, as of December 31, 2018, THR has no final tax assessments.
|
c.
|
Carryforward tax losses and other temporary differences:
|
Therapix
and THR both have accumulated tax losses since their inceptions.
As of December
31, 2018, Therapix’s net carryforward tax losses are expected to grow to approximately $34 million ($30 million as of December
31, 2017). In addition, as of December 31, 2018, THR’s net carryforward tax losses are expected to be approximately $2.5 million.
Therapix
and THR are not expected to be profitable for tax purposes for tax year 2018.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 16:-
|
CONTINGENT LIABILITIES, COMMITMENTS, CLAIMS AND LIENS
|
|
a.
|
The Israel Securities Authority Administrative Letter of Claims against the Company:
|
From 2014
until 2017, the Company was subject to an administrative inquiry relating to the Company’s reports (quality and scope of
disclosure) to the Israel Securities Authority (“ISA”) and the TASE with respect to the termination of a license agreement
the Company had with Ramot at Tel-Aviv University Ltd. (“Ramot”) for certain technology covering the Company’s
Alzheimer’s technology and program, which was terminated in the beginning of 2014. In April 2017, the Company settled the
administrative inquiry and admitted to the following breaches: (i) failure to submit an immediate report about a material event
(the license agreement termination) in a timely and lawful manner; (ii) inclusion of a misleading detail in an immediate report;
and (iii) misleading the ISA in connection with such actions. The Company was required to pay a monetary sanction of $43 thousand
as an administrative penalty (the “Administrative Monetary Sum”) (and potentially an additional equal sum if the Company
is found to have committed the same breaches in the next 24 months). In addition, the Company’s chairman was subject to a
one year probationary condition, whereby if he was found to commit a similar violation, he will be prevented from serving as an
officer or director of a public company. As of December 31, 2018, the entire Administrative Monetary Sum was paid by the Company.
In connection
with the Administrative Monetary Sum, and because of a previous undertaking by the Company under a previous investment agreement
as of 2016 between the Company and Jesselson Investments Ltd. (“Jesselson”), whereby if monetary sanction by the ISA
is higher than $20 thousand, it will be imposed on the Company as a result of the abovementioned proceedings, the Company will
be required to compensate Jesselson on the entire amount by way of cash payment or by equity payment (i.e., issuing Jesselson additional
shares in an amount equal to the amount of the monetary sanctions divided by NIS 0.5 per share), at the discretion of Jesselson.
As of December 31, 2018, the Company’s debt to Jesselson is still outstanding, therefore a provision in the amount of $43
thousand was recorded.
In addition,
under a different settlement agreement, the Company’s Chairman also agreed under such proceedings, among others, to pay the
same amount as an administrative penalty only (and to be subject to a one year probationary condition, whereby if he is found to
have made similar alleged breaches, (which he was not), he would have been prevented from serving as an officer or director of
a public company.
|
b.
|
New License Agreement with Ramot at Tel Aviv University Ltd.:
|
In February 2016, the Company
entered into an exclusive, irrevocable, worldwide research and license agreement with Ramot for a patent application relating to
methods for treatment of cognitive decline with low doses of tetrahydrocannabinol. Pursuant to the agreement, the Company is obligated
to pay patent filing and prosecution expenses, including past expenses, and to fund further research in an amount of approximately
$62 thousand. Furthermore, the Company is obligated to pay fees (aggregating approximately $3.5 million) upon the occurrence of
certain milestones, including achieving the completion of a Phase II clinical trial, pivotal clinical trial, filing a new drug
application with the U.S. Food and Drug Administration (“FDA”), the receipt of regulatory approvals and the achievement
of worldwide sales which exceed certain thresholds. Pursuant to the agreement, the Company is obligated to pay royalties at a low
single digit percentage rate upon commercialization of a product based on licensed asset, and a percentage rate in the low twenties
pursuant to a sublicense of the licensed assets.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 16:-
|
CONTINGENT LIABILITIES, COMMITMENTS, CLAIMS AND LIENS
(CONT.)
|
|
b.
|
New License Agreement with Ramot at Tel Aviv University Ltd.: (Cont.)
|
Pursuant to the agreement,
the Company undertook to conduct technology research and the Company may terminate such obligation with no further obligation to
fund it should the principal investigator cease to supervise the research and Ramot will be unable to locate an alternative scientist
acceptable to the Company. The exclusivity under the license agreement expires and the agreement terminates upon expiration of
all of the Company payment obligations under the agreement, after which Ramot shall be entitled to freely use, sell, and otherwise
transfer the technology under the license and grant further licenses without accounting to the Company.
The patent expiration date
of any patent maturing from this application would likely be 2035. The Company expects the exclusivity period to end upon the earlier
of the termination of the license agreement or the patent expiration date.
On March
13, 2019, further to discussions between the Company and Ramot, the Company notified Ramot of its intent to terminate such agreement.
As of the date hereof, the Company does not believe that terminating the agreement will have a material effect on the Company’s
operations and business.
|
c.
|
License Agreement with Dekel Pharmaceuticals Ltd.:
|
In May 2015,
the Company entered into an exclusive, irrevocable, worldwide license agreement with Dekel Pharmaceuticals Ltd. (a private company
controlled by the Company’s chairman and interim Chief Executive Officer, Dr. Ascher Shmulewitz) (“Dekel”) for certain
technology and one granted U.S. patent related to compositions and methods for treating inflammatory disorders. The agreement became
effective in August 2015. The Company then granted Dekel an option to purchase 3,876,000 of its ordinary shares at an exercise
price of NIS 0.5 per share, exercisable for 90 days. The option was fully exercised as of November 2015.
The Company
also granted Dekel an additional option to purchase 11,926,154 of its ordinary shares at an exercise price of NIS 0.65 per share,
exercisable for 12 months. As of December 31, 2017, 65% of the second option (representing options to purchase 7,760,256 ordinary
shares) has been exercised, for aggregate consideration of NIS 5 million, and the remainder of the option has expired.
Pursuant
to the license agreement, in May 2016 the Company issued Dekel 200,000 of its ordinary shares at a price per share of NIS 0.5 on
account of future royalty payments. The Company also is obligated to pay Dekel fees based on specific milestones and royalties
upon commercialization. The milestone payments include: (i) $25 thousand upon the successful completion of preclinical trials (which
milestone was met in November 2016; this payment was paid in cash in March 2017); (ii) $75 thousand upon the successful completion
of a Phase I/IIa trial; and (iii) $75 thousand upon the earlier of generating net revenues of at least $200 thousand from the commercialization
of the technology or the approval of the FDA or the European Medicines Agency, of a drug based on the licensed assets. In each
case, and subject to the Company’s discretion, the respective milestone payments are payable in cash or equity based on a price
per ordinary share of NIS 0.5. The royalty payments are 8% for commercialization and 35% pursuant to a sub-license of the licensed
assets. The patent expiration dates of any patents maturing from this application would likely be 2029.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 16:-
|
CONTINGENT LIABILITIES, COMMITMENTS, CLAIMS AND LIENS
(CONT.)
|
|
c.
|
License Agreement with Dekel Pharmaceuticals Ltd.: (Cont.)
|
On April 24, 2018, the Company
paid the second milestone to the license agreement with Dekel in the amount of $75 thousand upon the successful completion of a
Phase IIa trial. No other milestones were achieved during 2018 (see Note 22d.1).
|
d.
|
Term sheet Agreement with Belvit Pharma LLC.:
|
On June
7, 2016 (the “Effective Date”), the Company entered into a binding term sheet-agreement with Belvit Pharma LLC. (“Belvit”)
for certain intellectual property rights, including a provisional patent application covering the method and formulation for the
sublingual administration of tetrahydrocannabinol (“THC”) with enhanced bioavailability. The Company initially intends
to exploit this technology with respect to Mild Cognitive Impairments. Pursuant to the term sheet, the Company will receive an
exclusive, irrevocable, worldwide, license to develop, manufacture, and commercialize a drug based on a low-dose of THC and a right
of first negotiation with respect to normal-dose technology within the twenty four months of the Effective Date of the term sheet.
The Company agreed to pay all costs and expenses related to the development of the technology, and to conduct, at the Company’s
expense, a pharmacokinetics (“PK”)/bioavailability study. The Company shall further pay Belvit a low single-digit royalty
rate upon commercialization of a product based on the licensed assets. Furthermore, Belvit shall have the right to use the study
results. Belvit shall pay the Company a low single-digit royalty rate from any income from other uses of the technology. While
the Company will be responsible for the development of the technology, Belvit will be responsible for the formulation development.
The term sheet further includes the development stages and estimated development costs. Filing and patent prosecution will be borne
by both parties. Entry into a definitive license agreement is subject to the Company’s successful completion of a PK/bioavailability
study. The patent expiration date of any patent maturing from this application would likely be 2037. On August 25, 2017, the Company
has received Chesapeake IRB (an Association for the Accreditation of Human Research Protection Programs-accredited company) approval
for the protocol and ICF for the above mention PK study. Accordingly, the Company paid approximately $89 thousand for the PK study.
On April
30, 2018, the Company notified Belvit of its intent to terminate the binding term sheet dated June 7, 2016, between the Company
and Belvit. Accordingly, the Company is discontinuing the development of its ultra-low dose THC via sublingual administration.
As of December 31, 2018, the Company has no other commitments regarding this study.
|
e.
|
On November 22, 2016, the Company entered into
an
investigator initiated study contract
with Yale University (“Yale”) to conduct
a phase IIa clinical trial. In December 2016, the first patient was enrolled. The proposed trial will evaluate the safety, tolerability
and efficacy of THX-110 in treating approximately 18 Tourette syndrome subjects aged 18 to 60.
The total agreement is estimating
in the amount of approximately $230 thousand.
|
On December 4, 2017, the enrolment
was completed. During 2018, the Company paid
Yale
$120 thousand and recorded a provision
in the amount of $11 thousand.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 16:-
|
CONTINGENT LIABILITIES, COMMITMENTS, CLAIMS AND LIENS
(CONT.)
|
|
f.
|
On November 16, 2017, the Company entered into an agreement with FGK Clinical Research GmbH (“FGK”)
to perform CRO activities for the Tourette syndrome study that was performed in Germany during 2018. FGK will provide, inter alia,
regulatory writing and submissions, CRF services, supervision of the study conduct, data management and statistical analysis. During
the year ended on December 31, 2018, the Company paid FGK $394 thousand due to the agreement. As of December 31, 2018, the agreement
was on hold. Additional payments in the aggregate amount of $214 thousand are expected in the future.
|
|
g.
|
License Agreement with Yissum Research Development Company
of the Hebrew University of Jerusalem Ltd:
|
In
March 2017, the Company entered into an exclusive, worldwide, sublicensable, royalty-bearing license (the “Yissum License
Agreement”) with Yissum Research Development Company of the Hebrew University of Jerusalem Ltd. (“Yissum”) for the
grant of a license to an issued U.S. patent, including foreign counterparts, that covers nasal delivery of cannabinoids, all subject
to a development plan to be approved by Yissum for the purpose of research, developing, and commercializing. Pursuant to the agreement,
Yissum will grant the Company an exclusive, worldwide, sublicensable, royalty-bearing license to the patents and the Company will
pay Yissum fees based on specific milestones (aggregating approximately $1 million) and medial single-digit royalties upon the
commercialization of a product based on the licensed assets.
On March
18, 2018, the Company agreed to terminate the
Yissum
License Agreement, effective
as of June 18, 2018, except for provisions which are expressly intended to survive termination. The Company did not make any regulatory
filings and there were no development results generated under the
Yissum
License Agreement. In
connection with such termination, the parties agreed to a mutual release. The Company estimates that the termination of the Yissum
License Agreement shall have no material effect on its on-going projects and activities. In addition, the main reasons for said
termination rest in the Company’s intentions on focusing on more advanced drug delivery projects that are already under development.
On July 29, 2018, the Company entered into exclusive, worldwide, sublicensable, royalty-bearing license
with Yissum for license to make commercial use of the licensed technology, in order to develop, obtain regulatory approvals, manufacture,
market, distribute or sell products, all within the field and the territory only, as determined in the agreement (the “New
License Agreement”). According to the New License Agreement, the Company shall pay Yissum royalties at the rates of future
net sales, subject to the royalty reductions as described in the New License Agreement. The Company is also obligated to pay sublicense
fees, out of the sublicense consideration. All right, title and interest in and to the New License Agreement shall vest solely
in Yissum, and the Company shall hold and make use of the rights granted. All rights in the development results shall be solely
owned by the Company, except to the extent that an employee of the Yissum, including the researcher, is considered an inventor
of a patentable invention arising from the development results, in which case such invention and all patent applications and/or
patents claiming such invention shall be owned jointly by the Company and Yissum, as appropriate, and Yissum’s share in such
joint patents shall be automatically included in the New License Agreements.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 16:-
|
CONTINGENT LIABILITIES, COMMITMENTS, CLAIMS AND LIENS
(CONT.)
|
|
g.
|
License Agreement with Yissum Research Development Company
of the Hebrew University of Jerusalem Ltd: (Cont.)
|
On October 4, 2018, the Company
paid Yissum a total amount of $50 thousand due to the New License Agreement. The Company estimates that the expenses due to the
research program of the New License Agreement and additional reimbursement for historical patent costs will be approximately $135
thousand.
|
h.
|
On April 11, 2017, the Company entered into an investigator initiated study contract with Hannover
Medical School (“MHH”)
to conduct during 2018 a phase IIb clinical trial titled
”
A Randomized, Double-Blind, Placebo controlled study to Evaluate the Safety, Tolerability and Efficacy of Up to Twice
Daily Oral THX-110 in Treating Adults with Tourette Syndrome
” in treating approximately
20 Tourette syndrome subjects aged 18 to 65.
Upon the execution of the agreement the Company paid the first installment
in the amount of $122 thousand out of a total estimated amount of approximately $776 thousand. Due to regulatory and strategic
reasons, the Company decided to change the study design from investigator initiated to an industry sponsored trial. During October
2017, a discussion was carried out between the Company and MHH and the latter was informed about this change and a termination
letter stating the above was sent to MHH on November 19, 2017. MHH acknowledges it will have to pay back parts of the first instalment
that were paid by the Company in accordions with the initial contract.
|
On August
13, 2018, the Company entered into an agreement with MHH to conduct a clinical investigation and laboratory services for a randomized,
double-blind, placebo-controlled proof of concept study to evaluate the safety, tolerability and efficacy of daily oral THX-110
in treating adults with Tourette syndrome in an estimated amount of $835 thousand.
|
i.
|
On October 3, 2017, the Company entered into an agreement with Assuta Medical Center (“Assuta”)
to conduct a Phase IIa, sponsor-initiated trial for the treatment of OSA using the Company’s proprietary cannabinoid-based
technology, THX-110. The study was commenced in the second quarter of 2018. The expenses that were paid to Assuta during 2018 amounted
to $20 thousand. The Company estimates that future expenses due to the agreement will aggregate to approximately $35 thousand.
|
|
j.
|
As of December 31, 2018, several claims were filed against THR by different suppliers, due to the
fact that THR, due to its economic situation (as discussed in Note 5), was, and as of the Approval Date of the consolidated financial
statements, is not able to comply with the terms of the contracts signed with each specific supplier. The claims are in an amount
aggregating to approximately $789 thousand. THR is looking to settle all claims and as of December 31, 2018, has recorded a provision
of $250 thousand.
|
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 16:-
|
CONTINGENT LIABILITIES, COMMITMENTS, CLAIMS AND LIENS
(CONT.)
|
|
k.
|
Operating lease commitments:
|
|
-
|
Therapix Operating Lease Agreements:
|
On July 10,
2017, a three-year (effective on August 1, 2017), lease agreement was signed with a third party (the “Lease Agreement”)
for an area of approximately 167 square meters in order to relocated the Company’s offices from the Azrieli Center in Tel-Aviv
to Hashahar tower in Givataaim. The monthly lease fee according to the Lease Agreement was set at approximately $6 thousand, linked
to the NIS and Israeli CPI. The total rent expenses for the year ended on December 31, 2018, were approximately $72 thousand. As
of December 31, 2018, the minimum lease payments for the following 19 months under the Lease Agreement are expected to be in the
total amount of approximately $114 thousand.
According
to the Lease Agreement, and in order to secure the Company’s obligation for the lease of the offices above mentioned, the Company
provided a bank guarantee of approximately $23 thousand in favor of the lessor. To secure the bank guarantee, the Company pledged
such amount in a bank account.
|
-
|
THR Operating Lease Agreements:
|
As of December
31, 2018, THR had seven operating lease agreements for its headquarters, lab and clinics in different states and cities in the
U.S., in which the main lease agreement is for THR’s headquarters and lab in Brentwood, Tennessee, which is estimated at $31 thousand
per month, and is the longest agreement signed, which secured THR’s usage of the buildings until August 2028. THR’s total rent
and related expenses since the Acquisition Date up until December 31, 2018, were approximately $253 thousand.
The future
minimum lease fees payable as of December 31, 2018, are as follows:
|
|
USD in thousands
|
|
|
|
|
|
For the year ended on December 31, 2019
|
|
$
|
753
|
|
For the year ended on December 31, 2020
|
|
|
588
|
|
For the year ended on December 31, 2021 and onwards until 2028
|
|
|
3,261
|
|
|
|
|
|
|
|
|
$
|
4,602
|
|
THR was not
requested to provide any bank guarantees due to the lease agreements.
THERAPIX BIOSCIENCES LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
|
a.
|
Composition of share capital:
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Authorized
|
|
|
Issued and outstanding
|
|
|
Authorized
|
|
|
Issued and outstanding
|
|
|
|
Number of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares of NIS 0.1 par value each
|
|
|
300,000,000
|
|
|
|
140,252,374
|
|
|
|
300,000,000
|
|
|
|
139,885,534
|
|
Capital
consolidation:
On January
1, 2014, the shareholders approved to consolidate the authorized share capital and the issued and outstanding share capital such
that 10 ordinary shares of NIS 0.01 par value each in the authorized share capital and the issued and outstanding share capital
of the Company were consolidated into one Ordinary share of the Company of NIS 0.1 par value. The number of the outstanding share
options was adjusted accordingly.
On December
12, 2016, the general meeting of the Company’s shareholders approved an increase of the Company’s authorized share capital to 300,000,000
ordinary shares.
Description
of American Depositary Shares (“ADSs”):
The Bank
of New York Mellon, as depositary, will register and deliver ADSs. Each ADS represents forty (40) ordinary shares [or the right
to receive forty (40) ordinary share] deposited with the principal Tel Aviv office of Bank HaPoalim, as custodian for the depositary.
Each ADS will also represent any other securities, cash or other property which may be held by the depositary.
|
b.
|
Changes in share capital:
|
Issued
and outstanding share capital:
|
|
Number of ordinary shares
|
|
|
NIS
par value
|
|
|
|
|
|
|
|
|
Balance at January 1, 2018
|
|
|
139,885,534
|
|
|
|
13,988,553
|
|
|
|
|
|
|
|
|
|
|
Issuance of share capital
|
|
|
366,840
|
|
|
|
36,684
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
|
140,252,374
|
|
|
|
14,025,237
|
|
|
c.
|
Rights attached to shares:
|
Voting
rights at the shareholders meeting, right to dividends, rights upon liquidation of the
Company
and right to nominate the directors in the Company.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
d.
|
Capital management in the Company:
|
The Company’s
capital management objectives are to preserve the Company’s ability to ensure business continuity thereby creating a return for
the shareholders, investors and other interested parties. The Company is not under any minimal equity requirements nor is it required
to attain a certain level of capital return.
|
1.
|
On March 6, 2017, as part of a private placement, the Company issued to a private investor (the
“Investor”) 5,357,143 ordinary shares, at a price per share of NIS 0.70 (approximately USD 0.19). Pursuant to the agreement,
in the event that the Company raises additional funds by means of private placements (excluding public offerings) upon less favorable
terms relating to the price per share, then the Company would be required to issue to the Investor, for no additional consideration,
such number of ordinary shares reflecting the difference between the new price per share and the price per share actually paid
by the Investor. In addition, in the event that the Company raises additional funds by means of a public offering of its ordinary
shares of ADSs upon less favorable terms relating to the price per share, then immediately following the closing of such public
offering, the Company would be required to pay the Investor an amount, calculated as the number of his purchased shares (5,357,143
ordinary shares) multiplied by the difference between NIS 0.70 and the future public offering price per share. Pursuant to the
Company’s sole discretion, the Company may choose to pay this sum in cash and/or in ordinary shares (at a price per share of such
public offering). In addition, the Investor is entitled to preemptive rights to participate in the Company’s future private
placements upon the same terms offered to future investors, on a pro-rata basis to his holdings. Since the Company has issued ADSs
in the IPO which took place in March 2017 at a public offering price of USD 6.00 per ADS, which is less than USD 7.71 per ADS (approximately
USD 0.19 per ordinary shares), the Company issued the Investor an additional 1,529,910 ordinary shares. These issuances had no
impact on the Company’s Profit or Loss for the year ended on December 31, 2017.
|
|
2.
|
On March 27, 2017, the Company announced the closing of
its IPO in the United States. The offering included 2,000,000 ADSs. Each ADS, representing 40 ordinary shares of the Company,
was issued at a price of USD 6.00. The gross proceeds from this offering were USD 12 million, prior to deducting underwriting
discounts, commissions and other offering expenses of approximately USD 1.7 million. The Company granted the underwriters a 45-day
option to purchase up to an additional 300,000 ADSs to cover over-allotments (“Green Shoe”), if any. The underwriters
decided to exercise their Green Shoe option and invested another USD 1.8 million in the Company, prior to deducting underwriting
discounts of approximately USD 0.1 million.
|
|
3.
|
Further to the matter discussed in Note 13c, on November 23, 2018, the Company issued to Yorkville
9,171 ADSs (equivalent to 366,840 ordinary shares).
|
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
Further to the matter discussed in Note 16c, on May 16, 2016, after obtaining the TASE approval
and as part of the conditions of the license agreement with Dekel, which became effective on August 19, 2016, and in order
to fulfill the contingent liability of the Company to Dekel under the license agreement, the Company issued to Dekel 200,000 ordinary
shares associated with the advance payment according to the license agreement.
|
|
2.
|
Further to the description in Note 16c, on August 18 and 19, 2016, the Company received exercise
notices for the exercise of 5,390,986 share options which were held by Dekel, under the license agreement signed with Dekel, to
purchase 5,390,986 ordinary shares, out of which Dekel exercised 993,846 share options, while the remaining were exercised by third
parties, to which, to the best of the Company’s knowledge, Dekel sold its share options. The consideration from the exercise of
the share options by Dekel and by third parties was NIS 3.5 million. The remaining share options held by Dekel expired on August
20, 2016, according to their original terms.
|
|
NOTE 18:-
|
SHARE-BASED PAYMENT TRANSACTIONS
|
|
a.
|
The expense recognized in the financial statements:
|
The expense recognized in the
Company’s financial statements for services received from employees and other service providers is shown in the following table:
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
USD in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense arising from equity-settled share-based payment transactions
|
|
$
|
604
|
|
|
$
|
862
|
|
|
$
|
301
|
|
|
1.
|
The share-based payment transactions that the Company granted to its employees and consultants
are described below.
|
During 2005, the Company’s
Board adopted the 2005 Employees Share Option Plan (the “2005 ESOP”). Ten years later, during 2015, the Company’s Board
adopted a new plan, the 2015 Employees Share Option Plan (the “2015 ESOP”). Under both the 2005 ESOP and 2015 ESOP, the
Company may grant its employees and other service providers options to purchase the Company’s ordinary shares (“Share
Options”). As of December 31, 2017, no Share Options under the 2005 ESOP were available for grant. On August 29, 2017, the
Board reserved an additional amount of 26,000,000 ordinary shares for the purposes of the 2015 ESOP (in addition to the originally
5,000,000 ordinary shares which were reserved under the plan), out of which a total of 8,280,475 were still available for grant
as of December 31, 2018. No Share Options were granted during the year ended December 31, 2018.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 18:-
|
SHARE-BASED PAYMENT TRANSACTIONS (CONT.)
|
|
a.
|
The
expense recognized in the financial statements: (Cont.)
|
|
2.
|
Further to the description in Note 22d.2, and following the completion of the Company’s IPO
(see Note 17e.2), the unvested Share Options granted to the Company’s former Chief Executive Officer (“CEO”) on
February 16, 2016, were fully vested. The total expenses recognized in respect of these Share Options were approximately $41
thousand, $80 thousand and $13 thousand during the year 2017, 2016 and 2015, respectively. In addition, as per the Company’s
former CEO employment terms, all installments of his Share Options (not including the Share Options above mentioned) that
have not vested yet, continued to vest until the end of his notice, by October 4, 2017. The total expenses recognized in
respect to these Share Options were approximately $4 thousand during the year ended on December 31, 2017, and $46 thousand
for the period stated on the dates of commencement of the CEO’s other grants up until December 31, 2016. All expenses, in the
amount of approximately $10 thousand, which were recognized in respect to the Share Options installments that have not vested
until October 4, 2017, were forfeited.
|
On January 4, 2018, after
not exercising any of the vested Share Options for the ninety days period granted according to the 2015 ESOP, the entire reserve
from share-based payment transactions due to grants to the former CEO in the total amount of approximately $174 thousand, expired.
|
3.
|
On August 29, 2017, the Company granted 413,750 ADS options (equal to 16,550,000 Share Options)
under the 2015 ESOP to directors (and former directors), officers, employees and consultants, some of which were approved at the
November 1, 2018, general meeting of the Company’s shareholders. In addition, On December 11, 2017, the Company granted 49,000
ADS options (equal to 1,960,000 Share Options) under the 2015 ESOP to employees and consultants.
|
The fair values of the ADS
options, which were approved in August and November 2017, were $4.01 and $3.46 per ADS option, respectively. One grantee’s grant
was valued at $3.24 per ADS option, due to a higher exercise price of $7.10 instead of $5.60 like all other grantees. The fair
value of the ADS options, which were approved on December 2017, was $3.81 per ADS option. One grantee’s grant (a consultant of
the Company) was valued at $3.45 per ADS option, due to a different expiration date. The exercised price is $5.60.
The fair value for ADS options
granted during 2017 was estimated using the Black-Scholes option pricing model with the following assumptions:
|
|
2017
|
|
|
|
August
|
|
|
November
|
|
|
December
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield (%)
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility (%)
|
|
|
76.52
|
|
|
|
77.01
|
|
|
|
73.12-76.16
|
|
Risk-free interest rate (%)
|
|
|
1.83
|
|
|
|
2.1
|
%
|
|
|
2.16-2.23
|
|
Expected life of share options
|
|
|
6 years
|
|
|
|
6 years
|
|
|
|
6 years
|
|
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 18:-
|
SHARE-BASED PAYMENT TRANSACTIONS (CONT.)
|
|
b.
|
Movement during the year:
|
|
1.
|
The following table lists the number of Share Options or ADS options (see Note 17a), the weighted
average exercise prices of Share Options or ADS options and changes in directors (and former directors), officers, employees and
consultants Share Options or ADS options during the current and previous year:
|
|
|
Number of share options
|
|
|
Weighted average exercise price
|
|
|
Number of ADS options
|
|
|
Weighted average exercise price
|
|
|
|
|
|
|
USD
|
|
|
|
|
|
USD
|
|
2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share/ADS options outstanding at the beginning of the year
|
|
|
22,719,525
|
|
|
$
|
0.17
|
|
|
|
567,988
|
|
|
$
|
6.72
|
|
Share/ADS options forfeited during the year
|
|
|
(750,000
|
)
|
|
|
0.14
|
|
|
|
(18,750
|
)
|
|
|
5.60
|
|
Share/ADS options expired during the year
|
|
|
(4,156,488
|
)
|
|
|
0.16
|
|
|
|
(103,912
|
)
|
|
|
6.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share/ADS options outstanding at the end of the year
|
|
|
17,813,037
|
|
|
|
0.15
|
|
|
|
445,326
|
|
|
|
6.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share/ADS options exercisable at the end of the year
|
|
|
9,138,863
|
|
|
|
0.16
|
|
|
|
228,472
|
|
|
|
6.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share/ADS options outstanding at the beginning of the year
|
|
|
4,365,279
|
|
|
|
0.22
|
|
|
|
109,132
|
|
|
|
8. 84
|
|
Share/ADS options granted during the year
|
|
|
18,510,000
|
|
|
|
0.17
|
|
|
|
462,750
|
|
|
|
6.73
|
|
Share/ADS options forfeited during the year
|
|
|
(155,754
|
)
|
|
|
0.26
|
|
|
|
(3,894
|
)
|
|
|
10.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share/ADS options outstanding at the end of the year
|
|
|
22,719,525
|
|
|
|
0.17
|
|
|
|
567,988
|
|
|
|
6.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share/ADS options exercisable at the end of the year
|
|
|
7,602,026
|
|
|
$
|
0.19
|
|
|
|
190,051
|
|
|
$
|
7.46
|
|
|
2.
|
No share/ADS options were granted during 2018. The weighted average fair value of the Options and
ADS options granted in 2017 was $0.09 and $3.51, respectively.
|
|
3.
|
The weighted average remaining contractual life of the share/ADS options outstanding was 4.99 years
and 5.28 years as of December 31, 2018 and 2017, respectively.
|
|
4.
|
The range of exercise prices of Share Options outstanding at the end of the year was $0.13 - $0.28
as of December 31, 2018, and $0.03 - $3.46 as of December 31, 2017. The range of exercise prices of ADS options outstanding at
the end of the year was $5.20 - $11.20 as of December 31, 2018, and $1.20 - $138.40 as of December 31, 2017.
|
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 19:-
|
ADDITIONAL INFORMATION TO THE ITEMS OF PROFIT OR LOSS
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
USD in thousands
|
|
a.
|
|
Research and development expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages and related expenses
|
|
$
|
667
|
|
|
$
|
321
|
|
|
$
|
195
|
|
|
|
Share-based payment
|
|
|
109
|
|
|
|
103
|
|
|
|
100
|
|
|
|
clinical studies
|
|
|
692
|
|
|
|
511
|
|
|
|
-
|
|
|
|
Regulatory and other expenses
|
|
|
595
|
|
|
|
316
|
|
|
|
40
|
|
|
|
Research and preclinical studies
|
|
|
593
|
|
|
|
362
|
|
|
|
387
|
|
|
|
Chemistry and formulations
|
|
|
54
|
|
|
|
330
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,710
|
|
|
|
1,943
|
|
|
|
740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
b.
|
|
General and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages and related expenses
|
|
|
1,866
|
|
|
|
808
|
|
|
|
399
|
|
|
|
Share-based payment
|
|
|
495
|
|
|
|
759
|
|
|
|
201
|
|
|
|
Professional and directors fees
|
|
|
1,407
|
|
|
|
1,007
|
|
|
|
495
|
|
|
|
Business development expenses
|
|
|
1,348
|
|
|
|
74
|
|
|
|
87
|
|
|
|
Office maintenance, rent and other expenses
|
|
|
768
|
|
|
|
211
|
|
|
|
58
|
|
|
|
Investor relations and business expenses
|
|
|
368
|
|
|
|
871
|
|
|
|
-
|
|
|
|
Expenses due to litigations and claims
|
|
|
250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Regulatory expenses
|
|
|
77
|
|
|
|
80
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,579
|
|
|
|
3,810
|
|
|
|
1,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
c.
|
|
Other (income) expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill
|
|
|
160
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Impairment of intangible assets
|
|
|
273
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Capital gain from sale of property and equipment
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
Share-based payment
|
|
|
-
|
|
|
|
-
|
|
|
|
26
|
|
|
|
Capital gain from sale of subsidiary
|
|
|
-
|
|
|
|
-
|
|
|
|
(34
|
)
|
|
|
Capital loss from sale of property and equipment
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
425
|
|
|
|
1
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
d.
|
|
Finance income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income due to the Convertible Debentures
|
|
|
(468
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
Exchange rate differences
|
|
|
(303
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
Finance income from the convertible loan
|
|
|
(35
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
Intercompany finance income
|
|
|
(22
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
Interest income on bank deposits
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(828
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
e.
|
|
Finance expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance expenses due to the Convertible Debentures
|
|
|
112
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Finance expenses from interest and commissions
|
|
|
11
|
|
|
|
5
|
|
|
|
1
|
|
|
|
Exchange rate differences
|
|
|
-
|
|
|
|
486
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
123
|
|
|
$
|
491
|
|
|
$
|
8
|
|
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 20:-
|
LOSS PER SHARE OR ADS
|
|
a.
|
Details of the number of shares and loss used in the computation of loss per share:
|
|
|
Year
ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
Weighted
number
of
shares
(*)
|
|
|
Loss
|
|
|
Weighted
number
of
shares
(*)
|
|
|
Loss
|
|
|
Weighted
number
of
shares
(*)
|
|
|
Loss
|
|
Amounts
used in the computation of basic and diluted loss
|
|
In
thousands
|
|
|
USD
in thousands
|
|
|
In
thousands
|
|
|
USD
in thousands
|
|
|
In
thousands
|
|
|
USD
in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
loss per share
|
|
|
139,924
|
|
|
$
|
(8,523
|
)
|
|
|
116,743
|
|
|
$
|
(6,244
|
)
|
|
|
37,458
|
|
|
$
|
(1,993
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of potential dilutive Ordinary shares (**)
|
|
|
19,433
|
|
|
|
(395
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
loss per share
|
|
|
159,357
|
|
|
$
|
(8,918
|
)
|
|
|
116,743
|
|
|
$
|
(6,244
|
)
|
|
|
37,458
|
|
|
$
|
(1,993
|
)
|
|
(*)
|
In order to calculate the weighted number of ADSs, the
weighted number of shares was divided by 40 (refer to Note 17a).
|
|
(**)
|
Due to the effect of the Convertible Debentures.
|
|
b.
|
The computation of diluted loss per share or ADS did not include the following convertible securities
since their inclusion would decrease the loss per share (anti-dilutive effect):
|
|
1.
|
Share or ADS options to employees, officers, directors and consultants.
|
|
2.
|
Non-marketable warrants to investor.
|
|
NOTE 21:-
|
OPERATING SEGMENTS
|
The Group
applies the principles of IFRS 8, “Operating Segments”
(“IFRS 8”), regarding operating segments.
The segment reporting is based on internal management reports of the Group’s management, which are regularly reviewed by the chief
operating decision maker to make decisions about resources to be allocated and assess performance. According to the principles
of IFRS 8, the Group’s management determined that since October 3, 2018, following the acquisition of THR (see Note 5), the Group
has two reportable segments:
|
1.
|
Development of drugs based on cannabinoid molecules to be approved by an official regulatory authority
(the Company’s operation); and
|
|
2.
|
Pain clinic services, including lab services (THR’s operation).
|
Due to the
fact that both segments do not generate any revenues, and the economic situation of THR (as described in Note 5), the Group decided
that a detailed note regarding operating segments will not add any material information to the financial statements, which was
not already disclosed in Note 5.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 22:-
|
TRANSACTIONS AND BALANCES WITH RELATED PARTIES
|
|
a.
|
Balances with related parties:
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Key management personnel
|
|
|
Other related parties
|
|
|
Key management personnel
|
|
|
Other related parties
|
|
|
|
USD in thousands
|
|
|
USD in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
$
|
511
|
|
|
$
|
629
|
|
|
$
|
54
|
|
|
$
|
92
|
|
|
b.
|
Transactions with related parties (not including amounts described in Note 22c):
|
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
USD in thousands
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses (Note 22d.1)
|
|
$
|
75
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses (Note 22d.5)
|
|
$
|
769
|
|
|
$
|
1
|
|
|
$
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
26
|
|
|
c.
|
Benefits to key management personnel (including directors):
|
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
USD in thousands
|
|
|
|
|
|
|
|
|
|
|
|
Short-term benefits
|
|
$
|
1,379
|
|
|
$
|
1,043
|
|
|
$
|
592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based payment (Note 18)
|
|
$
|
520
|
|
|
$
|
312
|
|
|
$
|
232
|
|
|
d.
|
Material agreements signed with related parties:
|
|
1.
|
Refer to Note 16c for information regarding the license agreement with Dekel, a private company
controlled by the Company’s chairman and interim CEO, Dr. Ascher Shmulewitz.
|
|
2.
|
On May 24, 2017, the Company announced that following a mutual decision of the Board and the Company’s
former Chief Executive Officer, Dr. Elran Haber, Dr. Haber would step down from his position as the Company’s Chief Executive Officer.
As per his employment terms, all installments of his Options, which were granted on May 4, 2014, and May 20, 2015, continued
to vest until the end of his notice, by October 4, 2017. See Note 18a.2 for further description in this matter.
|
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 22:-
|
TRANSACTIONS AND BALANCES WITH RELATED PARTIES (CONT.)
|
|
d.
|
Material agreements signed with related parties: (Cont.)
|
|
3.
|
On November 1, 2017, the general meeting of the Company’s shareholders appointed the Chairman of
the Board, Dr. Ascher Shmulewitz, as the Company’s Interim CEO, to be in this office for an initial period no longer than three
years.
|
|
4.
|
In May 2017, the Company entered into an employment agreement with a Chief Financial Officer (the
“Former CFO”) for a three months trial period. On December 19, 2017, the Company entered into a separation agreement
with the Former CFO as further detailed below. In addition, the Company’s former VP Finance, Mr. Guy Goldin, has ceased providing
on going services, and as of January 1, 2018, renders his financial services on an hourly basis (as a consultant to the Company).
Since December 2017, Mr. Oz Adler, served as the Company’s VP Finance, and during 2018 was appointed as the Company’s and
the Group’s CFO.
|
With
respect to the departure of the Former CFO, the Company entered into a mutually-amicable separation agreement (the “Separation
Agreement”) on December 19, 2017 (the “Effective Date”). Under the terms of the Separation Agreement (which are
similar in essence to his original termination terms under his employment agreement), the Former CFO received severance in the
amount of (i) three months’ salary through the end of the notice period following the Effective Date and (ii) a bonus equal
to two months of salary. In addition, all of the Former CFO’s outstanding options to purchase 47,500 ADSs of the Company
deemed fully vested as of the Effective Date and were exercisable until June 19, 2018. On June 19, 2018, all share options, in
respect of which expenses in the amount of approximately $160 thousand were recorded, expired.
|
5.
|
THR works jointly with GLPS based on a signed Service Agreement (the “GLPS Service Agreement”).
According to the GLPS Service Agreement, GLPS is the employer of the physicians and nurse practitioners operating THR’s pain management
clinics. The pain management clinics operate under the name of Therapix Medical Solutions. THR provides the corporate oversight
and management services (i.e. operational and financial: accounting, payroll, human resources etc.) to the clinics. THR only employees
the non-medical staff working at the clinics, as well as the corporate staff.
|
GLPS is a related party of
the Group due to the fact that GLPS in owned by the CEO and the Chief Medical Officer (“CMO”) of THR, which are also
Directors of THR.
As of December 31, 2018, the
balance due to GLPS for the services under the GLPS Service Agreement is in the amount of approximately $629 thousand.
THERAPIX BIOSCIENCES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 23:-
|
EVENTS AFTER THE REPORTING DATE
|
On March 28, 2019, the Company
entered into a definitive securities purchase agreement (the “Purchase Agreement”) with institutional investors to purchase
(i) 642,853 of the Company’s ADSs, representing 25,714,120 ordinary shares, at a purchase price of $3.50 per ADS, in a registered
direct offering (the “Registered Direct Offering”); and (ii) warrants to purchase up to 482,139 ADSs, representing 19,285,560
ordinary shares, with an initial exercise price of $3.50 per ADS (the “Warrants”), in a concurrent private placement
(the “Private Placement” and, together with the Registered Direct Offering, the “Offerings”).
The total
gross proceeds to the Company from the Offerings were approximately $2.25 million. The closing of the sale of the ADSs and Warrants
occurred on April 1, 2019.
The ADSs to be issued under
the Registered Direct Offering were issued pursuant to a prospectus supplement dated as of March 28, 2019, which was filed with
the SEC, in connection with a takedown from the Company’s shelf registration statement on Form F-3, which became effective
on July 20, 2018.
The Warrants which were issued
in the Private Placement, along with the ADSs issuable upon their exercise, were offered pursuant to Section 4(a)(2) under the
Securities Act of 1933, as amended, and Regulation D promulgated thereunder and may not be offered or sold in the United States
absent registration with the SEC or an applicable exemption from such registration requirements.
The Warrants
will be exercisable beginning immediately as of their issuance date and have a term of three years.
In addition, following a payment
of approximately $250 thousand to Yorkville as part of their participation in the Purchase Agreement, the outstanding debt under
the Securities Purchase Agreement mentioned in Note 13c, has decreased to $1.25 million.
F-62