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As filed with the Securities and Exchange Commission on January 23, 2018
Registration No. 333-220234
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 4
to
Form F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Sol-Gel Technologies Ltd.
(Exact Name of Registrant as Specified in its Charter)
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State of Israel
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2834
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Not Applicable
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(State or Other Jurisdiction of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer Identification No.)
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Sol-Gel Technologies Ltd.
7 Golda Meir St., Weizmann Science Park
Ness Ziona, 7403650, Israel
Tel: +972 8 931 3433
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
Cogency Global Inc.
10 E. 40th Street, 10th floor
New York, NY 10016
Telephone No.: +1 800 221-0102
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
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Joshua G. Kiernan
Nathan Ajiashvili
Latham & Watkins LLP
885 Third Avenue
New York, NY 10022
Tel: +1 212 906 1200
Fax: +1 212 751 4864
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Gene Kleinhendler
Perry Wildes
Gross, Kleinhendler,
Hodak, Halevy,
Greenberg & Co.
One Azrieli Center
Tel Aviv 670201, Israel
Tel: +972 3 607 4444
Fax: +972 3 607 4470
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Eric W. Blanchard
Brian K. Rosenzweig
Matthew T. Gehl
Covington & Burling LLP
The New York Times Building
620 Eighth Avenue
New York, NY 10018-1405
Tel: +1 212 841 1000
Fax: +1 212 841 1010
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Chaim Friedland
Ari Fried
Gornitzky & Co.
Zion House
45 Rothschild Blvd.
Tel Aviv 6578403, Israel
Tel: +972 3 710 9191
Fax: +972 3 560 6555
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Approximate date of commencement of proposed sale to the public: As soon as practicable after effectiveness of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933. Emerging growth company ☒
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion, dated January 23, 2018
Preliminary Prospectus
5,000,000 Ordinary Shares
Sol-Gel Technologies Ltd.
Ordinary Shares
This is the initial public offering of our ordinary shares.
No public market currently exists for our ordinary shares. The initial public offering price is expected to be between $11.00 and $13.00 per ordinary share.
We have applied to list our ordinary shares on The Nasdaq Global Market under the symbol “SLGL”.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 and will be subject to reduced public company reporting requirements. See “Prospectus Summary — Implications of Being an Emerging Growth Company and a Foreign Private Issuer.”
Upon the closing of this offering, we will be a “controlled company” within the meaning of Nasdaq’s corporate governance listing standards.
Investing in our ordinary shares involves a high degree of risk. See “Risk Factors” beginning on page
12 of this prospectus for a discussion of information that should be considered in connection with an investment in our ordinary shares.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
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Per
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Total
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Initial public offering price
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Underwriting discounts and commission (1)
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$ |
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$ |
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Proceeds to us (before expenses)
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$ |
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$ |
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(1)
We have agreed to reimburse the underwriters for certain expenses. See “Underwriting.”
Our controlling shareholder, M. Arkin Dermatology Ltd., which is wholly owned by the chairman of our board of directors, has indicated an interest in purchasing up to an aggregate of $25.0 million of our ordinary shares in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer or no ordinary shares offered in the offering to this shareholder, or this shareholder may determine to purchase more, fewer or no ordinary shares offered in the offering. The underwriters will receive the same underwriting discounts and commissions on any ordinary shares purchased by this shareholder as they will on any ordinary shares sold to the public in this offering. See “Prospectus Summary — The Offering.”
Delivery of the ordinary shares is expected to be made on or about , 2018. We have granted the underwriters an option for a period of 30 days to purchase up to an additional 750,000 ordinary shares. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us will be $ , and the total proceeds to us, before expenses, will be $ .
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Jefferies |
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BMO Capital Markets
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JMP Securities |
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Raymond James
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The date of this prospectus is , 2018
Table of Contents
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F-1 |
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Neither we nor any of the underwriters have authorized anyone to provide information different from that contained in this prospectus, any amendment or supplement to this prospectus or in any free writing prospectus prepared by us or on our behalf. When you make a decision about whether to invest in our ordinary shares, you should not rely upon any information other than the information in this prospectus, any amendment or supplement to this prospectus and any free writing prospectus prepared by us or on our behalf. Neither the delivery of this prospectus nor the sale of our ordinary shares means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or solicitation of an offer to buy these ordinary shares in any circumstances under which the offer or solicitation is unlawful.
For investors outside of the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.
PROSPECTUS SUMMARY
This summary does not contain all of the information you should consider before investing in our ordinary shares. You should read this summary together with the more detailed information appearing in this prospectus, including “Risk Factors,” “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and our financial statements and the related notes included at the end of this prospectus, before making an investment in our ordinary shares. All references to “Sol-Gel,” “Sol-Gel Technologies,” “we,” “us,” “our,” “the Company” and similar designations refer to Sol-Gel Technologies Ltd. The terms “shekels,” “Israeli shekels” and “NIS” refer to New Israeli Shekels, the lawful currency of the State of Israel, the terms “dollar,” “US$” or “$” refer to U.S. dollars, the lawful currency of the United States. Unless derived from our financial statements or otherwise indicated, U.S. dollar translations of NIS amounts presented in this prospectus are translated using the rate of NIS 3.845 and NIS 3.902 to $1.00, based on the exchange rates reported by the Bank of Israel on December 30, 2016 and December 31, 2015, respectively.
Overview
We are a clinical-stage dermatology company focused on identifying, developing and commercializing branded and generic topical drug products for the treatment of skin diseases. Our current product candidate pipeline consists of late-stage branded product candidates that leverage our proprietary, silica-based microencapsulation technology platform, and several generic product candidates across multiple indications. Our lead product candidate, TWIN, is a novel, once-daily, non-antibiotic topical cream that we are developing for the treatment of acne vulgaris, or acne. We recently completed a 726 subject, double-blind, placebo-controlled, six-arm, multi-center Phase II clinical trial designed to assess the safety and efficacy of TWIN in subjects with facial acne. In this trial, TWIN demonstrated statistically significant improvements in all pre-defined co-primary and secondary efficacy endpoints, as compared to vehicle. Subject to an End of Phase II meeting to be scheduled with the FDA, we plan to initiate two pivotal Phase III trials for TWIN in the United States in the second half of 2018 and expect to report top-line data from these trials in 2019. Our other branded product candidates are: SIRS-T, a topical cream containing encapsulated tretinoin for the potential treatment of acne; and VERED, a potential treatment for subtype II rosacea.
We designed our proprietary, silica-based microencapsulation technology platform to enhance the tolerability and stability of topical drugs while maintaining their efficacy. Topical drugs often struggle to balance achieving both high efficacy and high tolerability. Our technology platform entraps active ingredients in an inert, inorganic silica shell, which creates an unnoticeable barrier between the active ingredient and the skin. The resulting microcapsules are designed to allow the entrapped active ingredients to gradually migrate through the pores of the shell and deliver active ingredient doses onto the skin in a controlled manner, resulting in improved tolerability and stability without sacrificing efficacy. By separately encapsulating active ingredients within protective silica shells, our technology platform also enables the production of novel fixed-dose active ingredient combinations that otherwise would not be stable. We believe that our microencapsulation technology has the potential to be used for topical drug products to treat a variety of skin diseases. As a result of the FDA having already approved silica as a safe excipient for topical drug products, we expect the review process for each of our current branded product candidates to be conducted according to the FDA’s 505(b)(2) regulatory pathway, which may provide for a more efficient regulatory process by permitting us to rely, in part, upon the FDA’s previous findings of safety and efficacy of an approved product.
Each of our branded product candidates leverages our proprietary, silica-based microencapsulation technology platform. We maintain exclusive, worldwide commercial rights for all of our branded product candidates, which consist of:
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TWIN, a novel, once-daily, non-antibiotic topical cream, which we are developing for the treatment of acne, containing a fixed-dose combination of encapsulated benzoyl peroxide, or E-BPO, and encapsulated tretinoin. Acne is one of the three most prevalent skin
diseases in the world and is the most commonly treated skin disease in the United States, representing a $3.3 billion market for the 12 months ended November 30, 2017, according to IQVIA Holdings Inc. (formerly known as IMS), or IQVIA. According to IQVIA, dermatological drugs sales in the United States have grown at an annual rate of 7% since 2012. In July 2017, we reported positive top-line results from a double-blind, dose-ranging active- and placebo-controlled, six-arm, multi-center Phase II clinical trial of TWIN in the United States in 726 subjects, 128 of which subjects across six treatment groups did not complete the study. The clinical trial evaluated the efficacy, tolerability and safety of two TWIN concentrations, TWIN Low and TWIN High, each containing a lower or higher concentration, respectively, of encapsulated tretinoin and an identical concentration of E-BPO. In this trial, TWIN showed statistically significant improvements in all pre-defined co-primary and secondary efficacy endpoints, as compared to vehicle. The Investigator Global Assessment, or IGA, success rate, defined as achieving at least two-grade reduction in the IGA score and either “clear” or almost “clear” at week 12, was 39.68% for TWIN High (p-value of <0.001), 27.43% for TWIN Low (p-value = 0.006) and 12.27% for vehicle. In addition, TWIN was well tolerated with no treatment-related serious adverse events. Based on the efficacy data we observed in the Phase II trial, we believe TWIN, if approved, has the potential to become a preferred treatment for acne. In the second half of 2018, subject to an End of Phase II meeting to be scheduled with the FDA, we plan to initiate two pivotal Phase III trials for TWIN in the United States and expect to report top-line data from these trials in 2019.
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SIRS-T, a topical cream containing encapsulated tretinoin, which we are developing as a potential treatment for acne. Based on the results of the encapsulated tretinoin treatment groups in our recent Phase II TWIN study, we believe that microencapsulation of tretinoin using our technology platform will reduce the irritation typically associated with topical application of tretinoin. According to IQVIA, the overall sales of tretinoin products, including Retin-A Micro, Atralin and Retin-A, for the 12 months ended November 30, 2017 were $519 million. By leveraging our microencapsulation technology, we believe SIRS-T has the potential to become a leading tretinoin drug product and an attractive option for physicians who prefer a single active ingredient drug for the treatment of mild acne. We intend to utilize the data from the TWIN Phase II study in the development of SIRS-T. Subject to an End of Phase II meeting to be scheduled with the FDA with regard to the Phase II TWIN trial, we plan to commence a pivotal Phase III program for SIRS-T in the United States in 2020 and expect to report top-line data from this program in 2021.
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VERED, a topical cream containing 5% E-BPO, which we are developing for the treatment of subtype II (papulopustular) rosacea. Rosacea is a chronic skin disease characterized by facial redness, inflammatory lesions, burning and stinging. According to the U.S. National Rosacea Society, approximately 16 million people in the United States are affected by rosacea. According to a study we commissioned, approximately 4.8 million people in the United States experience subtype II symptoms. Subtype II rosacea resembles acne, except that comedones are absent, and patients may report associated burning and stinging sensations. We evaluated VERED in a double blind, randomized, dose-ranging Phase II clinical trial involving 92 adult subjects at ten centers in the United States. In this trial, VERED showed statistically significant improvements in the IGA pre-defined co-primary efficacy endpoint and in the percent change in inflammatory lesion count at week 12, as compared to vehicle. VERED was also well tolerated in the trial. If approved, we expect VERED to be the first product containing BPO that is marketed for the treatment of subtype II rosacea. Based on feedback received at our End of Phase II meeting with the FDA, we expect to commence two pivotal Phase III trials for VERED in the United States in the first half of 2018 and expect to report top-line data from these trials in 2019.
In addition to our late-stage branded product candidates, we are currently developing a portfolio of six generic topical dermatological products. Three of our generic product candidates are being developed in collaboration with Perrigo UK Finco Limited Partnership, or Perrigo, which has significant experience in the development of generic drugs.
Our most advanced generic product candidate is ivermectin cream, 1%, for the treatment of inflammatory lesions associated with rosacea, which is being developed in collaboration with Perrigo. In March 2017, Perrigo submitted an abbreviated new drug application, or ANDA, with a Paragraph IV certification for ivermectin cream, 1% to the FDA. This ANDA is currently on file with the FDA and is subject to a 30-month stay of approval, under the Hatch-Waxman amendments to the Federal Food, Drug, and Cosmetic Act. Pursuant to the guidelines of the Generic Drug User Fee Amendments of 2012, or GDUFA, we expect to receive feedback from the FDA in their review of this ANDA in the first half of 2018. Ivermectin cream, 1% is the active molecule in Soolantra, which is currently marketed in the United States by Galderma Laboratories LP. For the 12 months ended November 30, 2017, Soolantra achieved sales of $113 million according to IQVIA.
Our leadership team has considerable expertise in the identification and development of generic dermatological drug products and our intellectual property and formulation teams continue to seek to identify new opportunities to expand our pipeline of generic product candidates.
The following chart represents our current branded and generic product candidate pipeline:
Our Strengths
We believe we are well positioned to become a leading, pure-play dermatology company based on the following key characteristics:
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Diverse late-stage branded product pipeline with observed clinical benefits and favorable tolerability profiles. We have leveraged our knowledge of the dermatology market to establish a pipeline of diversified late-stage branded product candidates with the potential to address the need for improved drug therapies. We have observed favorable clinical results for our branded product candidates that have completed Phase II trials.
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Proprietary, silica-based microencapsulation drug delivery technology platform with broad applicability. We leverage our innovative silica-based microencapsulation drug delivery technology platform in the development of each of our branded product candidates. In addition, we believe our technology platform provides us with the potential to develop additional product candidates that can overcome the limitations of currently approved products for multiple skin diseases.
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Efficient FDA regulatory pathway for our current branded product pipeline. We expect the review process for TWIN, SIRS-T and VERED to be conducted according to the FDA’s 505(b)(2) regulatory pathway, which permits us to rely, in part, upon the FDA’s previous findings of safety and efficacy of an approved product. Silica, which forms the basis of our proprietary microencapsulation technology platform, is an inorganic inert excipient that is contained in other topical drug products approved by the FDA.
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Diversified pipeline of generic drug product candidates and established strategic collaborations. Our product pipeline includes six topical generic product candidates across multiple indications. We have established collaborations, including with Perrigo, to efficiently develop four of our generic product candidates.
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Comprehensive and broad intellectual property portfolio. We maintain exclusive, worldwide commercial rights for all of our branded product candidates. If patents issue from our patent applications, our branded product candidates, TWIN, SIRS-T and VERED, will have patent coverage until 2032, 2030 and 2032, respectively.
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Experienced leadership team with proven track record. Our leadership team has extensive experience in the development and commercialization of dermatology drug products. We believe that our leadership team is well-positioned to lead us through clinical development, regulatory approval and commercialization for our product candidates.
Our Strategy
Our strategy is to become a leading, pure-play dermatology company focused on identifying, developing and commercializing treatments for skin diseases in areas with the need for improved drug therapies. To achieve this objective, we intend to pursue the following:
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Complete clinical development of our late-stage branded product candidates and obtain regulatory approvals. We plan to advance our late-stage branded product candidates through clinical development and obtain regulatory approvals. Subject to an End of Phase II meeting to be scheduled with the FDA, we plan to commence two pivotal Phase III trials in the second half of 2018 for TWIN for the treatment of acne. We expect to commence two pivotal Phase III trials in the first half of 2018 for VERED for the treatment of subtype II rosacea. Subject to an End of Phase II meeting to be scheduled with the FDA, we plan to commence a pivotal Phase III program for SIRS-T in 2020.
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Maximize commercial potential of our late-stage branded product candidates. We intend to commercialize our late-stage branded product candidates in the United States, if approved, by building a specialized sales and marketing organization focused solely on dermatologists and their patients. Because the U.S. market is served by a relatively small number of practicing dermatologists, we believe a small and dedicated sales force can efficiently cover a significant portion of the target patient population.
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Selectively expand our branded product candidate pipeline. We continuously evaluate opportunities to leverage our proprietary silica-based microencapsulation technology platform to efficiently develop additional branded product candidates for the treatment of skin diseases in areas where we believe there is a need for improved drug therapies.
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Opportunistically broaden our generic pipeline. We intend to continue to develop and opportunistically broaden our generic pipeline with product candidates that we believe have the potential to capture significant share of attractive markets and geographies.
Dermatology Market Overview
We focus on medical dermatology, which includes many common skin diseases such as acne, rosacea, psoriasis, atopic dermatitis and actinic keratosis. These diseases can have significant,
multidimensional negative effects on patients’ quality of life, including their physical and emotional well-being and social acceptance.
The dermatology and skin care market has experienced significant growth in the last several years. Based on IQVIA data, the U.S. medical dermatology market (excluding biologics) was valued at over $10.7 billion in prescription pharmaceutical sales for the 12 months ended November 30, 2017, of which $8.6 billion represented sales of topical drugs. According to IQVIA, dermatological drugs sales in the United States have grown at an annual rate of 7% since 2012, while total prescriptions volume grew at an annual rate of 2% over the same period. We believe many factors are continuing to drive growth in the medical dermatological market, including population growth for prevalent age groups and growth in the number of physicians dispensing products. We believe patients’ willingness to pay for dermatology treatments out-of-pocket is a result of often visible symptoms from dermatological diseases, which further supports demand and pricing.
We believe dermatology offers a low cost commercialization opportunity compared to many other medical specialties due to the relatively small number of specialists. According to IQVIA, there are approximately 14,000 active dermatologists in the United States. Because the U.S. market is served by a relatively small number of practicing dermatologists, we believe a small and dedicated sales force can efficiently cover a significant portion of the targeted patient population.
Risks Associated with our Business
Investing in our ordinary shares involves risks. You should carefully consider the risks described in “Risk Factors” beginning on page
12 before making a decision to invest in our ordinary shares. The following is a summary of some of the principal risks we face:
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we have incurred significant losses since our inception and we expect to incur losses and negative cash flows over the next several years and may never achieve or maintain profitability;
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our recurring operating losses have raised substantial doubt regarding our ability to continue as a going concern;
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even if this offering is successful, we will need substantial additional funding to meet our financial obligations and to pursue our business objectives and if we are unable to raise capital when needed, we could be forced to curtail our planned operations and the pursuit of our growth strategy;
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our ability to complete the development of our product candidates and to meet our development timelines;
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we rely, and expect to continue to rely, on third parties to conduct our clinical trials and manufacture our product candidates for clinical testing, and those third parties may not perform satisfactorily, which could delay our product development activities;
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our ability to obtain and maintain regulatory approvals for our product candidates in our target markets and the possibility of adverse regulatory or legal actions relating to our product candidates even if regulatory approval is obtained;
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our ability to commercialize our product candidates;
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our ability to obtain and maintain adequate protection of our intellectual property;
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the possibility that we may face third-party claims of intellectual property infringement;
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acceptance of our product candidates by healthcare professionals and patients;
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we will face substantial competition, which may result in others discovering, developing or commercializing drugs before or more successfully than we do;
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loss or retirement of key executives and research scientists; and
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we expect to be treated as a PFIC for our current taxable year and possibly thereafter, which may result in adverse tax consequences for our U.S. securityholders.
Our Controlling Shareholder
As of the date of this prospectus, M.Arkin Dermatology Ltd., or Arkin Dermatology, owns 100% of our ordinary shares. Mr. Moshe Arkin, the chairman of our board of directors, owns 100% of the share capital of Arkin Dermatology. Upon completion of this offering, Arkin Dermatology will own approximately 70.1% of our ordinary shares, assuming the automatic conversion of our outstanding promissory note between us and Mr. Arkin into an aggregate of 5,444,825 ordinary shares immediately prior to the closing of this offering, and assuming an initial public offering price of $12.00 per ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus. The actual number of shares to be issued upon conversion of the promissory note will be determined by dividing the principal amount of the promissory note at the time of conversion by the initial public offering price per ordinary share in this offering. The foregoing analysis does not take into consideration any potential purchase by Arkin Dermatology of our ordinary shares in this offering. For more information see “Principal Shareholders” and “Certain Relationships and Related Party Transactions — Loan Agreements with Our Controlling Shareholder.”
Corporate Information
We were incorporated under the laws of the State of Israel on October 28, 1997. Our principal executive offices are located at Weizmann Science Park, 7 Golda Meir St., Ness Ziona, Israel 7403650, and our telephone number is +972 (8) 931-3433. Our website address is http://www.sol-gel.com. The information contained therein, or that can be accessed therefrom, is not and shall not be deemed to be incorporated into this prospectus or the registration statement of which it forms a part.
Implications of Being an Emerging Growth Company and a Foreign Private Issuer
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or JOBS Act. As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other publicly traded entities that are not emerging growth companies. These exemptions include:
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the option to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in this prospectus;
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we are not required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002;
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we are not required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board, or PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements; and
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we are not required to submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay,” “say-on-frequency” and “say-on-golden parachutes;” and we are not required to disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation.
We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the closing of this offering or such earlier time that we no longer qualify as an emerging growth company. As a result, the information we provide to our shareholders may be different than you might receive from other public reporting companies in which you hold equity interests.
Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of the Exchange Act, for complying with new or revised accounting standards. Accordingly, as an emerging growth company, we have elected to utilize this exemption and delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
We will remain an emerging growth company until the earliest of: (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion; (ii) the last day of the fiscal year following the fifth anniversary of the date of this offering; (iii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the aggregate market value of our ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter; or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during any three-year period.
Upon the closing of this offering, we will report under the Exchange Act as a non-U.S. company with foreign private issuer status. Even after we no longer qualify as an emerging growth company, for as long as we qualify as a foreign private issuer under the Exchange Act, we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including:
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the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;
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the sections of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and
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the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specific information, or current reports on Form 8-K, upon the occurrence of specified significant events.
Both foreign private issuers and emerging growth companies are also exempt from certain more stringent executive compensation disclosure rules. Thus, even if we no longer qualify as an emerging growth company, but remain a foreign private issuer, we will continue to be exempt from the more stringent compensation disclosures required of companies that are neither an emerging growth company nor a foreign private issuer.
The Offering
Ordinary shares offered by us
5,000,000 ordinary shares (or 5,750,000 ordinary shares if the underwriters exercise their option to purchase additional ordinary shares in full).
Ordinary shares to be outstanding after this offering
16,735,069 ordinary shares (or 17,485,069 ordinary shares if the underwriters exercise their option to purchase additional ordinary shares in full).
Option to purchase additional ordinary shares
We have granted the underwriters an option to purchase up to 750,000 additional ordinary shares from us within 30 days of the date of this prospectus.
We estimate that we will receive net proceeds from this offering of approximately $54.0 million, or approximately $62.4 million if the underwriters exercise their option to purchase additional ordinary shares in full, based on an assumed initial public offering price of $12.00 per ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
We intend to use the net proceeds from this offering to fund our planned clinical trials of our branded product candidates, TWIN and VERED, as well as the development of SIRS-T and our generic product candidates. The remaining proceeds will be used for other research and development activities, as well as for working capital and general corporate purposes. See “Use of Proceeds” for additional information.
See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our ordinary shares.
Because Arkin Dermatology will own more than 50% of the voting power of our outstanding voting share capital following the completion of this offering, we intend to avail ourselves of the “controlled company” exemptions under the rules of the Nasdaq.
Passive foreign investment
company
Based on our anticipated income and the composition of our income and assets, we expect to be a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes at least until we start generating a substantial amount of active revenue. If we are considered a PFIC, material adverse U.S. federal income tax consequences could apply to U.S. Holders (as defined in the section headed “Material Tax Considerations — U.S. Federal Income Tax Consequences”) of our ordinary shares with
respect to any “excess distribution” received from us and any gain from a sale or other disposition of our ordinary shares. Please see “Material Tax Considerations — U.S. Federal Income Tax Consequences.”
Proposed Nasdaq Global Market symbol
“SLGL”
Unless otherwise stated, the number of ordinary shares to be outstanding after this offering is based on 11,735,069 ordinary shares outstanding as of December 31, 2017, and excludes the following:
•
993,202 ordinary shares issuable upon the exercise of options to purchase ordinary shares outstanding under our 2014 Share Incentive Plan as of December 31, 2017, at a weighted average exercise price of $3.63 per ordinary share; and
•
an additional 356,798 ordinary shares reserved for future issuance under our amended and restated 2014 Share Incentive Plan, which will become effective upon the pricing of this offering.
Unless otherwise indicated, all information in this prospectus assumes or gives effect to:
•
the automatic conversion of our outstanding promissory note between us and our controlling shareholder into an aggregate of 5,444,825 ordinary shares immediately prior to the closing of this offering, and assuming an initial public offering price of $12.00 per ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus;
•
an assumed initial public offering price of $12.00 per ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus;
•
no exercise by the underwriters of their option to purchase up to 750,000 additional ordinary shares from us;
•
the adoption and effectiveness of our amended and restated articles of association; and
•
a 1-for-1.8 share split of our ordinary shares by means of a bonus share issuance, which was effected on January 19, 2018.
Summary Financial Data
The following tables present our summary statement of operations for the years ended December 31, 2015 and 2016 and the nine months ended September 30, 2016 and 2017, and our summary balance sheet data as of September 30, 2017. Our summary statement of operations for the years ended December 31, 2015 and 2016 has been derived from our audited financial statements included elsewhere in this prospectus. The statement of operations data for the nine months ended September 30, 2016 and 2017 and the summary balance sheet data as of September 30, 2017 have been derived from our unaudited financial statements included elsewhere in this prospectus and have been prepared on the same basis as the audited financial statements. In the opinion of management, the unaudited data reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial information in those statements. Our historical results are not necessarily indicative of the results that should be expected in the future, and results for the nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year ending December 31, 2017 or any other future period. We prepare our financial statements in accordance with U.S. Generally Accepted Accounting Principles, or U.S. GAAP. You should read this summary financial data together with “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and related notes included elsewhere in this prospectus.
| |
|
|
Year Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
| |
|
|
2015
|
|
|
2016
|
|
|
2016
|
|
|
2017
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
| |
|
|
(in thousands, except share and per share data )
|
|
| Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
|
$ |
7,184 |
|
|
|
|
$ |
17,023 |
|
|
|
|
$ |
13,097 |
|
|
|
|
$ |
21,389 |
|
|
|
General and administrative expenses
|
|
|
|
|
2,463 |
|
|
|
|
|
3,733 |
|
|
|
|
|
2,809 |
|
|
|
|
|
4,781 |
|
|
|
Total operating loss
|
|
|
|
|
9,647 |
|
|
|
|
|
20,756 |
|
|
|
|
|
15,906 |
|
|
|
|
|
26,170 |
|
|
|
Financial expenses, net
|
|
|
|
|
13 |
|
|
|
|
|
15 |
|
|
|
|
|
(1) |
|
|
|
|
|
(52) |
|
|
|
Loss for the year
|
|
|
|
$ |
9,660 |
|
|
|
|
$ |
20,771 |
|
|
|
|
$ |
15,905 |
|
|
|
|
$ |
26,118 |
|
|
|
Basic and diluted loss per ordinary share (1)
|
|
|
|
$ |
1.53 |
|
|
|
|
$ |
3.30 |
|
|
|
|
$ |
2.53 |
|
|
|
|
$ |
4.15 |
|
|
|
Weighted average number of ordinary shares outstanding – basic and diluted
|
|
|
|
|
6,290,242 |
|
|
|
|
|
6,290,242 |
|
|
|
|
|
6,290,242 |
|
|
|
|
|
6,290,244 |
|
|
|
Pro forma basic and diluted net loss per ordinary share (unaudited) (1)(2)
|
|
|
|
|
|
|
|
|
|
$ |
1.77 |
|
|
|
|
|
|
|
|
|
|
$ |
2.23 |
|
|
|
Pro forma weighted average number of ordinary shares outstanding – basic and diluted (unaudited) (2)
|
|
|
|
|
|
|
|
|
|
|
11,735,067 |
|
|
|
|
|
|
|
|
|
|
|
11,735,069 |
|
|
| |
(1)
Basic loss per ordinary share and diluted loss per ordinary share are the same because outstanding options would be anti-dilutive due to our net losses in these periods.
(2)
Reflects the automatic conversion of our outstanding promissory note between us and our controlling shareholder into an aggregate of 5,444,825 ordinary shares immediately prior to the closing of this offering, assuming an initial public offering price of $12.00 per ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus. The actual number of shares to be issued upon conversion of the promissory note will be determined by dividing the principal amount of the promissory note at the time of conversion by the initial public offering price per ordinary share in this offering. See “Certain Relationships and Related Party Transactions — Loan Agreements with Our Controlling Shareholder.”
| |
|
|
September 30, 2017
|
|
| |
|
|
Actual
|
|
|
Pro Forma (1)
|
|
|
Pro Forma As
Adjusted (2)
|
|
| |
|
|
(Unaudited, in thousands)
|
|
| Balance Sheet Data: |
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
$ |
12,491 |
|
|
|
|
$ |
12,491 |
|
|
|
|
$ |
66,491 |
|
|
|
Total assets
|
|
|
|
|
22,782 |
|
|
|
|
|
22,782 |
|
|
|
|
|
76,782 |
|
|
|
Total liabilities
|
|
|
|
|
71,767 |
|
|
|
|
|
6,429 |
|
|
|
|
|
6,429 |
|
|
|
Accumulated deficit
|
|
|
|
|
(89,811) |
|
|
|
|
|
(89,811) |
|
|
|
|
|
(89,811) |
|
|
|
Total shareholders’ equity (capital deficiency)
|
|
|
|
|
(48,985) |
|
|
|
|
|
16,353 |
|
|
|
|
|
70,353 |
|
|
(1)
The pro forma balance sheet data give effect to the automatic conversion of our outstanding promissory note between us and our controlling shareholder into an aggregate of 5,444,825 ordinary shares immediately prior to the closing of this offering, assuming an initial public offering price of $12.00 per ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus. The actual number of shares to be issued upon conversion of the promissory note will be determined by dividing the principal amount of the promissory note at the time of conversion by the initial public offering price per ordinary share in this offering. See “Certain Relationships and Related Party Transactions — Loan Agreements with Our Controlling Shareholder.”
(2)
The pro forma as adjusted balance sheet data give further effect to the issuance and sale of 5,000,000 ordinary shares by us in this offering at an assumed initial public offering price of $12.00 per ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
Each $1.00 increase or decrease in the assumed initial public offering price of $12.00 per ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the pro forma as adjusted amount of each of cash and cash equivalents, total assets and total shareholders’ equity by $4.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions. An increase or decrease of 1.0 million in the number of ordinary shares we are offering would increase or decrease, respectively, the pro forma as adjusted amount of cash and cash equivalents, total assets and total shareholders’ equity by $11.2 million, assuming the assumed initial public offering price per ordinary share, as set forth on the cover of this prospectus, remains the same. This pro forma as adjusted information is illustrative only and will depend on the actual initial public offering price and other terms of this offering determined at pricing.
RISK FACTORS
Investing in our ordinary shares involves a high degree of risk. You should carefully consider the risks described below and all other information contained in this prospectus before you decide to buy our ordinary shares. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected. In that event, the trading price of our ordinary shares would likely decline and you might lose all or part of your investment. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition, cash flows and results of operations.
Risks Related to Our Business and Industry
We are a clinical stage company and have incurred significant losses since our inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.
We are a clinical stage pharmaceutical company with a limited operating history. We have incurred net losses since our formation in 1997. In particular, we incurred net losses of $9.7 million in 2015 and $20.8 million in 2016, respectively, and $15.9 million and $26.1 million for the nine months ended September 30, 2016 and 2017, respectively. As of September 30, 2017, we had an accumulated deficit of $89.8 million. Our losses have resulted principally from expenses incurred in research and development of our product candidates and from general and administrative expenses that we have incurred while building our business infrastructure. We expect to continue to incur net losses for the foreseeable future as we continue to invest in research and development and seek to obtain regulatory approval and commercialization of our product candidates. The extent of our future operating losses and the timing of generating revenues and becoming profitable are highly uncertain, and we may never achieve or sustain profitability. We anticipate that our expenses will increase substantially as we:
•
initiate and conduct the Phase III clinical trials and long-term safety studies for TWIN, SIRS-T and VERED, which we refer to collectively as our branded product candidates, and continue the research and development of future branded product candidates;
•
continue the development, bioequivalence and other studies required for ANDA submissions for our generic product candidate ivermectin cream, 1% and other generic product candidates;
•
seek to enhance our technology platform;
•
seek regulatory approvals for any product candidate that successfully completes clinical development;
•
potentially establish a sales, marketing and distribution infrastructure and commercial manufacturing capabilities to commercialize any product candidates for which we may obtain regulatory approval;
•
maintain, expand and protect our intellectual property portfolio;
•
add clinical, scientific, operational, financial and management information systems and personnel, including personnel to support our product development and potential future commercialization efforts and to support our transition to being a public company; and
•
experience any delays or encounter any issues with any of the above, including but not limited to failed studies, complex results, safety issues or other regulatory challenges.
To date, we have financed our operations primarily through private placements of equity securities and loans from our controlling shareholder. We have devoted a significant portion of our financial resources and efforts to developing our product candidates and conducting pre-clinical
studies and our clinical trials for TWIN, VERED, and ivermectin cream, 1%. We have not completed development of any of our product candidates. To become and remain profitable, we must succeed in developing and eventually commercializing product candidates that generate significant revenue. This will require us to be successful in a range of challenging activities, including completing pre-clinical studies and clinical trials for our product candidates, discovering and developing additional product candidates, obtaining regulatory approval for any product candidates that successfully complete clinical trials, establishing manufacturing and marketing capabilities and ultimately selling any product candidates for which we may obtain regulatory approval. We are only in the preliminary stages of most of these activities. We may never succeed in these activities and, even if we do, may never generate revenue that is significant enough to achieve profitability.
Because of the numerous risks and uncertainties associated with pharmaceutical products, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. If we are required by the FDA or other regulatory authorities to perform studies in addition to those we currently anticipate, or if there are any delays in completing our clinical trials, our expenses could increase and revenue could be further delayed.
Even if we do generate revenue from product sales or product royalties, we may never achieve or sustain profitability on a quarterly or annual basis. Our failure to sustain profitability would depress the market price of our ordinary shares and could impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations. A decline in the market price of our ordinary shares also could cause you to lose all or a part of your investment.
Our recurring operating losses have raised substantial doubt regarding our ability to continue as a going concern.
We have not commercialized any products or generated any revenue from our product candidates. Our recurring operating losses raise substantial doubt about our ability to continue as a going concern. As a result, for the year ended December 31, 2016, our independent registered public accounting firm has issued its report on our financial statements and has expressed substantial doubt about our ability to continue as a going concern. We have no current source of revenue to sustain our present activities and we do not expect to generate revenue until, and unless, the FDA or other regulatory authorities approve, and we successfully commercialize, our product candidates. Accordingly, our ability to continue as a going concern will require us to obtain additional financing to fund our operations, such as the proceeds from this offering. The perception that we might be unable to continue as a going concern may make it more difficult for us to obtain financing for the continuation of our operations and could result in the loss of confidence by investors, suppliers and employees.
Even if this offering is successful, we will need substantial additional funding to meet our financial obligations and to pursue our business objectives. If we are unable to raise capital when needed, we could be forced to curtail our planned operations and the pursuit of our growth strategy.
Conducting pre-clinical studies and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain regulatory approval and achieve product sales. We expect to continue to incur significant expenses and operating losses over the next several years as we commence our Phase III clinical trials for TWIN, SIRS-T and VERED, seek marketing approval for TWIN, SIRS-T and VERED and advance our other product candidates. In addition, our product candidates, if approved, may not achieve commercial success. Our revenue, if any, will be derived from sales of products that we do not expect to be commercially available for a number of years, if at all. If we obtain marketing approval for TWIN, SIRS-T or VERED or any other product candidates that we develop, we expect to incur significant commercialization expenses related to product sales, marketing, distribution and manufacturing. We also expect an increase in our expenses associated with creating additional infrastructure to support operations as a public company. We expect that
our existing cash, cash equivalents and investments, together with anticipated net proceeds from this offering, will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. Our future capital requirements will depend on many factors, including:
•
the progress and results of our pivotal Phase III clinical trials for TWIN, SIRS-T and VERED ;
•
the scope, progress, results and costs of development, laboratory testing and clinical trials for our generic product candidates;
•
the cost of manufacturing clinical supplies and exhibition batches of our product candidates;
•
the costs, timing and outcome of regulatory reviews of any of our product candidates;
•
the costs and timing of future commercialization activities, including manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval;
•
the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims by third parties that we are infringing upon their intellectual property rights;
•
the amount of revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval; and
•
the extent to which we acquire or invest in businesses, product candidates and technologies, including entering into licensing or collaboration arrangements for any of our product candidates.
If we are unable to raise sufficient additional capital, we could be forced to curtail our planned operations and the pursuit of our growth strategy.
We are largely dependent on the success of our branded product candidates for the treatment of topical dermatological conditions.
We have invested a majority of our efforts and financial resources in the research and development of TWIN and SIRS-T for the treatment of acne and VERED for the treatment of subtype II rosacea. We are currently investing a majority of our efforts and resources to bring TWIN and VERED to a position to commence Phase III clinical trials in the United States during 2018. The success of our business depends largely on our ability to fund, execute and complete the development of, obtain regulatory approval for and successfully commercialize our branded product candidates in the United States in a timely manner.
We have not obtained regulatory approval for any of our product candidates in the United States or any other country.
We currently do not have any product candidates that have obtained regulatory approval for sale in the United States or any other country, and we cannot guarantee that we will ever obtain such approvals. Our business is substantially dependent on our ability to complete the development of, obtain regulatory approval for and successfully commercialize product candidates in a timely manner. We cannot commercialize our product candidates in the United States without first obtaining regulatory approval to market each product candidate from the FDA. Similarly, we cannot commercialize product candidates outside of the United States without obtaining regulatory approval from comparable foreign regulatory authorities.
Before obtaining regulatory approvals for the commercial sale of any product candidate for a target indication, we must demonstrate in pre-clinical studies and well-controlled clinical trials that the product candidate is safe and effective for use for its target indication and that the related manufacturing facilities, processes and controls are adequate. In the United States, we are required to submit and obtain the FDA’s approval of a new drug application, or NDA, before marketing our product candidates. An NDA must include extensive preclinical and clinical data and supporting information to establish the product candidate's safety and efficacy for each desired indication. We intend to submit NDAs that are subject to the requirements of section 505(b)(2) of the Food, Drug and Cosmetic Act, or FDCA, which will allow us to rely in part on published scientific literature and/or the FDA's prior findings of safety and efficacy in its approvals of similar products. The NDA must also include significant information regarding the chemistry, manufacturing and controls for the product candidate. The FDA will also inspect our manufacturing facilities to ensure that the facilities can manufacture each product candidate that is the subject of an NDA, in compliance with the applicable regulatory requirements, and may inspect our clinical trial sites to ensure that the clinical trials conducted at the inspected site were performed in accordance with good clinical practices, or GCP, and our clinical protocol.
Obtaining approval of an NDA is a lengthy, expensive and uncertain process, and approval is never guaranteed. Upon submission of an NDA, the FDA must make an initial determination that the application is sufficiently complete to accept the submission for filing. We cannot be certain that any submissions will be accepted for filing and review by the FDA, or ultimately be approved. If the application is not accepted for review or approval, the FDA may require that we conduct additional clinical trials or pre-clinical studies, or take other actions before it will reconsider our application. If the FDA requires additional studies or data, we would incur increased costs and delays in the marketing approval process, which may require us to expend more resources than anticipated or that we have available. In addition, the FDA may not consider any additional information to be complete or sufficient to support approval.
Regulatory authorities outside of the United States also have requirements for approval of drugs for commercial sale with which we must comply prior to marketing in those countries. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our product candidates. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and obtaining regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. However, the failure to obtain regulatory approval in one jurisdiction could have a negative impact on our ability to obtain approval in a different jurisdiction. Approval processes vary among countries and can involve additional product candidate testing, development, validation and additional administrative review periods. Seeking regulatory approval outside of the United States could require additional chemical manufacturing control data, pre-clinical studies or clinical trials, which could be costly and time consuming. Obtaining regulatory approval outside of the United States may include all of the risks associated with obtaining FDA approval.
Our business will be highly dependent on market perception of us and the safety and quality of our product candidates. Our business or products could be subject to negative publicity, which could have a material adverse effect on our business.
Market perception of our business is very important, especially market perception of the safety and quality of our product candidates. If any of our product candidates, if approved, or similar products that other companies distribute, or third-party products from which our product candidates are derived, are subject to market withdrawal or recall or are proven to be, or are claimed to be, harmful to consumers, it could have a material adverse effect on our business. Negative publicity associated with product quality, illness or other adverse effects resulting from, or perceived to result from, our product candidates could have a material adverse impact on our business.
Additionally, continuing and increasingly sophisticated studies of the proper utilization, safety and efficacy of pharmaceutical products are being conducted by the industry, government
agencies and others which could call into question the utilization, safety and efficacy of previously marketed products. In some cases, studies have resulted, and may in the future result, in the discontinuance of product marketing or other costly risk management programs such as the need for a patient registry.
We have a limited operating history in the dermatological prescription drug space which may make it difficult to evaluate the success of our business to date and to assess our future viability.
We have a limited operating history in the dermatological prescription drug space and have focused much of our efforts, to date, on the research and development of our product candidates, rather than commercialization. As such, we cannot provide you with any assurances as to when, if ever, we will obtain approvals or generate sufficient revenues to achieve sustained profitability. Our ability to successfully commercialize our product candidates and become profitable is subject to a number of challenges, including, among others, that:
•
we may not have adequate financial or other resources;
•
we may not be able to manufacture our product candidates in commercial quantities, in an adequate quality or at an acceptable cost;
•
we may not be able to establish adequate sales, marketing and distribution channels;
•
we may not be able to find suitable marketing partners;
•
healthcare professionals and patients may not accept our product candidates;
•
we may not be aware of possible complications from the continued use of our product candidates since we have limited clinical experience with respect to the actual use of our product candidates;
•
changes in the market, new alliances between existing market participants and the entrance of new market participants may interfere with our market penetration efforts;
•
third-party payors may not agree to reimburse patients for any or all of the purchase price of our product candidates, which may adversely affect patients’ willingness to purchase our product candidates;
•
uncertainty as to market demand may result in inefficient pricing of our product candidates;
•
we may face third-party claims of intellectual property infringement;
•
we may fail to obtain and maintain regulatory approvals for our product candidates in our target markets or may face adverse regulatory or legal actions relating to our product candidates even if regulatory approval is obtained;
•
we are dependent upon the results of ongoing clinical trials relating to our product candidates and the products of our competitors; and
•
we may become involved in lawsuits pertaining to our clinical trials.
The occurrence of any one or more of these events may limit our ability to successfully commercialize our product candidates, which in turn could have a material adverse effect on our business, financial condition and results of operations. Consequently, there can be no guaranty of the accuracy of any predictions about our future success or viability.
Raising additional capital may cause dilution to our shareholders, including purchasers of ordinary shares in this offering, restrict our operations or require us to relinquish rights to our technologies or product candidates.
Until such time, if ever, as we can generate substantial revenue, we may finance our cash needs through a combination of equity offerings, debt financings and license and collaboration agreements. We do not currently have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as an ordinary shareholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.
If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Even if we are able to generate revenues from our operations in the future, our revenues and operating income could fluctuate significantly.
Even if we are able to generate future revenues, our operating income, and results may vary significantly from year-to-year and quarter-to-quarter. Variations may result from, among other factors:
•
the timing of FDA or any other regulatory authority approvals;
•
the timing of process validation for particular product candidates;
•
the timing of product launches and market acceptance of such products launched;
•
changes in the amount we spend to research, develop, acquire, license or promote new product candidates;
•
the outcome of our research, development and clinical trial programs;
•
serious or unexpected health or safety concerns related to our product candidates or the branded product candidates we have genericized;
•
the introduction of new products by others that render our product candidates obsolete or noncompetitive;
•
the ability to maintain selling prices and gross margins on our product candidates;
•
the ability to comply with complex governmental regulations applicable to many aspects of our business;
•
changes in coverage and reimbursement policies of health plans and other health insurers, including changes to Medicare, Medicaid and similar government healthcare programs;
•
increases in the cost of raw materials used to manufacture our product candidates;
•
manufacturing and supply interruptions, including product rejections or recalls due to failure to comply with manufacturing specifications;
•
timing of revenue recognition related to our collaboration agreements;
•
the ability to protect our intellectual property and avoid infringing the intellectual property of others; and
•
the outcome and cost of possible litigation over patents with third parties.
Our business and operations would suffer in the event of computer system failures, cyber-attacks or deficiencies in our cyber-security.
Despite the implementation of security measures, our internal computer systems, and those of third parties on which we rely, are vulnerable to damage from computer viruses, malware, natural disasters, terrorism, war, telecommunication and electrical failures, cyber-attacks or cyber-intrusions over the Internet, attachments to emails, persons inside our organization, or persons with access to systems inside our organization. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our product development programs. For example, the loss of clinical trial data from completed or ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach was to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur material legal claims and liability, and damage to our reputation, and the further development of our product candidates could be delayed.
Risks Related to Development and Clinical Testing of Our Product Candidates
Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and clinical trials may not be predictive of future trial results, which could result in development delays or a failure to obtain marketing approval.
Clinical testing of generic products and the submission of new drug applications under the Section 505(b)(2) regulatory pathway is expensive, time consuming and has an inherently uncertain outcome. Failure can occur at any time during the clinical trial process, even with active ingredients that have been previously approved by the FDA as safe and effective. Favorable results in pre-clinical studies and early clinical trials for one or more of our product candidates may not be predictive of similar results in future clinical trials for such product candidate. Also, interim results during a clinical trial do not necessarily predict final results. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through pre-clinical studies and initial clinical trials. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving promising results in early-stage development. Accordingly, the results from the completed pre-clinical studies and clinical trials for our product candidates may not be predictive of the results we may obtain in later stage trials for such product candidates. Our clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials. Clinical trial results may be inconclusive, or contradicted by other clinical trials, particularly larger clinical trials. Moreover, clinical data are often susceptible to varying interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in pre-clinical studies and clinical trials have nonetheless failed to obtain FDA, or other applicable regulatory agency, approval for their products. Additionally if one or more of our product candidates receives marketing approval, and we or others later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including:
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regulatory authorities may withdraw approvals of such products;
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regulatory authorities may require additional warnings on the label;
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we may be required to create a medication guide outlining the risks of such side effects for distribution to patients;
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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.
Any of these events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved, and could significantly harm our business, results of operations and prospects. Our future clinical trial results may not be successful.
We may experience delays in our clinical trials and we do not know whether planned clinical trials will begin on time, need to be redesigned, enroll patients on time or be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including delays related to:
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obtaining regulatory approval to commence a trial;
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reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
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obtaining institutional review board, or IRB, approval at each site;
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recruiting suitable patients to participate in a trial;
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having patients complete a trial or return for post-treatment follow-up;
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clinical sites deviating from trial protocol or dropping out of a trial;
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adding new clinical trial sites; and
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manufacturing sufficient quantities of a product candidate for use in clinical trials.
Furthermore, we rely on CROs and clinical trial sites to ensure the proper and timely conduct of our clinical trials and while we have agreements governing their committed activities, we have limited influence over their actual performance.
We may also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted, by the Data Safety Monitoring Board, or DSMB, for such trial or by the FDA or other regulatory authorities. Such authorities may impose such a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. If we experience delays in the completion of any clinical trial for our product candidates or if any clinical trials are terminated, the commercial prospects of our product candidates will be harmed, and our ability to generate product revenues from any of these product candidates will be delayed.
Moreover, changes in regulatory requirements and guidance or unanticipated events during our clinical trials may occur, as a result of which we may need to amend clinical trial protocols. Amendments may require us to resubmit our clinical trial protocols for review and approval, which may adversely affect the cost, timing and successful completion of a clinical trial. If we experience delays in the completion of, or if we terminate, any of our clinical trials, the commercial prospects for our affected product candidates would be harmed and our ability to generate product revenue would be delayed, possibly materially.
In addition, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive compensation in connection with such services. Under certain circumstances, we may be required to report some of these relationships to the FDA or other regulatory authorities. The FDA or other regulatory authorities may conclude that a financial relationship between us and a principal investigator has created a conflict of interest or otherwise affected interpretation of the study. The FDA or other regulatory authorities may therefore question the integrity of the data generated at the applicable clinical trial site and the utility of the clinical trial itself may be jeopardized. This could result in a delay in approval or rejection of our marketing applications by the FDA or other regulatory authorities, as the case may be, and may ultimately lead to the denial of marketing approval of one or more of our product candidates.
Any delays in completing our clinical trials will increase our costs, slow down our product candidates’ development and regulatory review and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.
We have not evaluated SIRS-T in any clinical trials to date, and there can be no guarantee that the data obtained in our Phase II TWIN trial will be sufficient to support advancing SIRS-T into a Phase III clinical program.
SIRS-T is a topical cream containing silica-encapsulated tretinoin. We have not evaluated SIRS-T in any clinical trials to date. We evaluated silica-encapsulated tretinoin in two of the arms of our Phase II TWIN trial, and we intend to use this data to support the commencement of a Phase III clinical program in SIRS-T, subject to an End of Phase II meeting with the FDA. However, we expect that the tretinoin concentration that we select for SIRS-T will be different from the concentrations that we evaluated in the encapsulated tretinoin arms of the TWIN trial, in addition to other expected differences in the formulation. There can be no guarantee that the FDA will agree with our development plan for SIRS-T. If we are required to conduct additional clinical trials for SIRS-T, this would cause us to incur significant additional expense, delay the development of SIRS-T and may materially and adversely affect our business, financial condition and prospects.
The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our product candidates, our business will be substantially harmed.
The time required to obtain approval by the FDA and comparable foreign authorities is unpredictable but typically takes many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. It is possible that none of our existing product candidates or any product candidates we may seek to develop in the future will ever obtain regulatory approval.
Our product candidates could fail to receive regulatory approval for many reasons, including the following:
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the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;
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we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a product candidate is safe and effective for its proposed indication;
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the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval;
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we may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;
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the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from pre-clinical studies or clinical trials;
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the data collected from clinical trials of our product candidates may not be sufficient to support the submission of an NDA or other submission or to obtain regulatory approval in the United States or elsewhere;
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the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers with which we contract for clinical and commercial supplies; or
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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 future clinical trial results may result in our failing to obtain regulatory approval to market our product candidates, which would significantly harm our business, results of operations and prospects.
In addition, even if we were to obtain approval, regulatory authorities may approve any of our product candidates for fewer or more limited indications than we request, may not approve the price we intend to charge for our product candidates, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates.
We have limited experience using the 505(b)(2) regulatory pathway to submit an NDA or any similar drug approval filing to the FDA, and we cannot be certain that any of our product candidates will receive regulatory approval. If we do not receive regulatory approvals for our product candidates, we may not be able to continue our operations. Even if we successfully obtain regulatory approvals to market one or more of our product candidates, our revenue will be dependent, to a significant extent, upon the size of the markets in the territories for which we gain regulatory approval. If the markets for patients or indications that we are targeting are not as significant as we estimate, we may not generate significant revenue from sales of such products, if approved.
Adverse side effects or other safety risks associated with our product candidates could delay or preclude approval, cause us to suspend or discontinue clinical trials, abandon product candidates, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.
Undesirable side effects caused by our product candidates could result in the delay, suspension or termination of clinical trials by us, our collaborators, the FDA or other regulatory authorities for a number of reasons. For example, to date, patients treated with TWIN and VERED have experienced drug-related side effects including moderate local site irritation such as dryness, erythema, scaling, pruritus, itching, stinging and burning. Results of our clinical trials could reveal a high and unacceptable severity and prevalence of these or other side effects. In such an event, our clinical trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny approval of our product candidates for any or all targeted indications. The drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. If we elect or are required to delay, suspend or terminate any clinical trial for any
product candidates that we develop, the commercial prospects of such product candidates will be harmed and our ability to generate product revenues from any of these product candidates will be delayed or eliminated. Any of these occurrences may harm our business, prospects, financial condition and results of operations significantly.
We may find it difficult to enroll patients in our clinical trials, and patients could discontinue their participation in our clinical trials, which could delay or prevent clinical trials for our product candidates.
Identifying and qualifying patients to participate in clinical trials for our product candidates is critical to our success. The timing of our clinical trials depends on the speed at which we can recruit patients to participate in testing our product candidates. If patients are unwilling to participate in our clinical trials because of negative publicity from adverse events in the biotechnology or pharmaceutical industries or for other reasons, including competitive clinical trials for similar patient populations, the timeline for recruiting patients, conducting clinical trials and obtaining regulatory approval of potential product candidates may be delayed. These delays could result in increased costs, delays in advancing our product candidates development, delays in testing the effectiveness of our technology or termination of the clinical trials altogether.
Patient enrollment is a significant factor in the timing of clinical trials. We may not be able to recruit and enroll a sufficient number of patients, which would impact our ability to complete our clinical trials in a timely manner. Patient enrollment may be affected by numerous factors, including:
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severity of the disease under investigation;
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size and nature of the patient population;
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eligibility criteria for the trial;
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design of the trial protocol;
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perceived risks and benefits of the product candidate under study;
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physicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any drugs that may be approved for the same indications we are investigating;
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proximity to and availability of clinical trial sites for prospective patients;
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availability of competing therapies and clinical trials; and
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ability to monitor patients adequately during and after treatment.
We face intense competition with regard to patient enrollment in clinical trials from other dermatological companies which also seek to enroll subjects from the same patient populations. In addition, patients enrolled in our clinical trials may discontinue their participation at any time during the trial as a result of a number of factors, including withdrawing their consent or experiencing adverse clinical events, which may or may not be judged related to our product candidates under evaluation. For example, 128 patients, or 17.6% of patients enrolled in our TWIN Phase II clinical trial, did not complete the study protocol. The most common reasons for subjects not completing the study were the withdrawal of informed consent (42 subjects), loss to follow-up (56 subjects) and adverse events (18 subjects). As a result, the FDA may require that we conduct additional Phase II trials or increase enrollment in our planned Phase III clinical trials for TWIN to support an NDA filing for regulatory approval of TWIN. The discontinuation of patients in any one of our trials may cause us to delay or abandon our clinical trial, or cause the results from that trial not to be positive or sufficient to support a filing for regulatory approval of the applicable product candidate.
There is a substantial risk of product liability claims in our business. We currently do not maintain product liability insurance and a product liability claim against us would adversely affect our business.
Our business exposes us to significant potential product liability risks that are inherent in the development, manufacturing and marketing of our product candidates. Product liability claims could delay or prevent completion of our development programs. If we succeed in commercializing our product candidates, such claims could result in a recall of our product candidates or a change in the approved indications for which they may be used. While we intend to purchase and maintain product liability insurance that we believe is adequate for our operations upon commercialization of our product candidates, such coverage may not be adequate to cover any incident or all incidents. Furthermore, product liability insurance is becoming increasingly expensive. As a result, we may be unable to maintain sufficient insurance at a reasonable cost to protect us against losses that could have a material adverse effect on our business. These liabilities could prevent or interfere with our product development and commercialization efforts.
If the FDA does not conclude that our product candidates for which we intend to seek approval under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act satisfy the requirements of the Section 505(b)(2) regulatory approval pathway, or if the requirements for such product candidates under Section 505(b)(2) are not as we expect, the approval pathway for those product candidates will likely take significantly longer, cost significantly more and entail significantly greater complications and risks than anticipated, and in all cases may not be successful.
We are developing product candidates for which we intend to seek FDA approval through the Section 505(b)(2) regulatory pathway. The Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act, added Section 505(b)(2) to the FDCA. Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies that were not conducted by or for the applicant and for which the applicant has not obtained a right of reference. Section 505(b)(2), if applicable to us under the FDCA, would allow an NDA we submit to the FDA to rely in part on data in the public domain or the FDA’s prior conclusions regarding the safety and effectiveness of approved drugs, which could expedite the development program for our product candidates by potentially decreasing the amount of clinical data that we would need to generate in order to obtain FDA approval. If the FDA does not allow us to pursue the Section 505(b)(2) regulatory pathway as anticipated, we may need to conduct additional clinical trials, provide additional data and information, and meet additional standards for regulatory approval. If this were to occur, the time and financial resources required to obtain FDA approval for these product candidates, and complications and risks associated with these product candidates, would likely substantially increase. Moreover, any inability to pursue the Section 505(b)(2) regulatory pathway may result in new competitive products reaching the market more quickly than our product candidates, which would likely materially adversely impact our competitive position and prospects. Even if we are allowed to pursue the Section 505(b)(2) regulatory pathway, our product candidates may not receive the requisite approvals for commercialization.
In addition, notwithstanding the approval of a number of products by the FDA under Section 505(b)(2) over the last few years, certain brand-name pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA’s interpretation of Section 505(b)(2) is successfully challenged, the FDA may change its 505(b)(2) policies and practices, which could delay or even prevent the FDA from approving any NDA that we submit under Section 505(b)(2). In addition, the pharmaceutical industry is highly competitive, and Section 505(b)(2) NDAs are subject to special requirements designed to protect the patent rights of sponsors of previously approved drugs that are referenced in a Section 505(b)(2) NDA. These requirements may give rise to patent litigation and mandatory delays in approval of our NDAs for up to 30 months or longer depending on the outcome of any litigation. It is not uncommon for a manufacturer of an approved product to file a citizen petition with the FDA seeking to delay approval of, or impose additional approval requirements for, pending competing products. If
successful, such petitions can significantly delay, or even prevent, the approval of the new product. However, even if the FDA ultimately denies such a petition, the FDA may substantially delay approval while it considers and responds to the petition. In addition, even if we are able to utilize the Section 505(b)(2) regulatory pathway, there is no guarantee this would ultimately lead to accelerated product development or earlier approval.
Even if our branded product candidates or our generic product candidates receive marketing approval, we may continue to face future developmental and regulatory difficulties. In addition, we will be subject to ongoing obligations and continued regulatory review.
Even if we complete clinical testing and receive approval of any of our branded or generic product candidates, the FDA may grant approval contingent on the performance of additional post-approval clinical trials, risk mitigation requirements such as the implementation of Risk Evaluation and Mitigation Strategy, or REMS, and/or surveillance requirements to monitor the safety or efficacy of the product, which could negatively impact us by reducing revenues or increasing expenses, and cause the approved product candidate not to be commercially viable. Absence of long-term safety data may further limit the approved uses of our product candidates, if any.
The FDA also may approve branded product candidates or any of our generic product candidates for a more limited indication or a narrower patient population than we initially request, or may not approve the labeling that we believe is necessary or desirable for the successful commercialization of our product candidates. Furthermore, any such approved product will remain subject to extensive regulatory requirements, including requirements relating to manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion, distribution and recordkeeping. These requirements include registration with the FDA, listing of our product candidates, payment of annual fees, as well as continued compliance with GCP requirements for any clinical trials that we conduct post-approval. Application holders must notify the FDA, and depending on the nature of the change, obtain FDA pre-approval for product manufacturing changes. In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP requirements.
If we fail to comply with the regulatory requirements of the FDA or previously unknown problems with any approved commercial products, manufacturers or manufacturing processes are discovered, we could be subject to administrative or judicially imposed sanctions or other setbacks, including the following:
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the FDA could suspend or impose restrictions on operations, including costly new manufacturing requirements;
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the FDA could refuse to approve pending applications or supplements to applications;
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the FDA could suspend any ongoing clinical trials;
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the FDA could suspend or withdraw marketing approval;
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the FDA could seek an injunction or impose civil or criminal penalties or monetary fines;
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the FDA could ban or restrict imports and exports;
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the FDA could issue warning letters or untitled letters or similar enforcement actions alleging noncompliance with regulatory requirements; or
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the FDA or other governmental authorities could take other actions, such as imposition of product seizures or detentions, clinical holds or terminations, refusals to allow the import or export of products, disgorgement, restitution, or exclusion from federal healthcare programs.
In addition, if our branded product candidates or any of our other product candidates are approved, our product labeling, advertising and promotional materials would be subject to regulatory requirements and continuing review by the FDA. The FDA strictly regulates the promotional claims that may be made about prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA as reflected in the product’s approved labeling, a practice known as off-label promotion. If we receive marketing approval for any of our branded product candidates or any of our generic product candidates, physicians may nevertheless prescribe the products to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may become subject to significant liability and government fines. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant sanctions. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees of permanent injunctions under which specified promotional conduct is changed or curtailed.
Moreover, the FDA’s policies may change and additional government regulations may be enacted that could prevent, limit or delay marketing approval, and the sale and promotion of our branded product candidates or any of our other product candidates, if approved. For example, in December 2016, the 21th century Cures Act, or Cures Act, was signed into law. The Cures Act, among other things, is intended to modernize the regulation of drugs and spur innovation, but its ultimate implementation is unclear. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained, which would adversely affect our business, prospects and ability to achieve or sustain profitability. In addition, costs arising out of any regulatory developments could be time-consuming and expensive and could divert management resources and attention and, consequently, could adversely affect our business operations and financial performance.
We also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action, either in the United States or abroad. For example, certain policies of the Trump administration may impact our business and industry. The Trump administration has taken several executive actions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. Notably, on January 30, 2017, President Trump issued an Executive Order, applicable to all executive agencies, including the FDA, that requires that for each notice of proposed rulemaking or final regulation to be issued in fiscal year 2017, the agency shall identify at least two existing regulations to be repealed, unless prohibited by law. These requirements are referred to as the “two-for-one” provisions. This Executive Order includes a budget neutrality provision that requires the total incremental cost of all new regulations in the 2017 fiscal year, including repealed regulations, to be no greater than zero, except in limited circumstances. For fiscal years 2018 and beyond, the Executive Order requires agencies to identify regulations to offset any incremental cost of a new regulation and approximate the total costs or savings associated with each new regulation or repealed regulation. In interim guidance issued by the Office of Information and Regulatory Affairs within OMB on February 2, 2017, the administration indicates that the “two-for-one” provisions may apply not only to agency regulations, but also to significant agency guidance documents. It is difficult to predict how these requirements will be implemented, and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If these executive actions impose constraints on the FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted.
Even if our branded product candidates or our other product candidates receive regulatory approval, they may fail to achieve the broad degree of physician adoption and market acceptance necessary for commercial success.
Even if we obtain FDA approvals for our branded product candidates or any of our generic product candidates, the commercial success of such products will depend significantly on their broad adoption by dermatologists, pediatricians and other physicians for approved indications and other therapeutic or aesthetic indications that we may seek to pursue if approved.
The degree and rate of physician and patient adoption of our branded product candidates and any of our generic product candidates, if approved, will depend on a number of factors, including:
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the clinical indications for which the product is approved;
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the safety and efficacy of our product as compared to existing therapies for those indications;
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the prevalence and severity of adverse side effects;
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patient satisfaction with the results and administration of our product and overall treatment experience, including relative convenience, ease of use and avoidance of, or reduction in, adverse side effects;
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patient demand for the treatment of acne and rosacea or other indications;
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the cost of treatment in relation to alternative treatments, the extent to which these costs are reimbursed by third-party payors, and patients’ willingness to pay for our product candidates; and
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the effectiveness of our sales and marketing efforts, including any head-to-head studies, if conducted, especially the success of any targeted marketing efforts directed toward dermatologists, pediatricians, other physicians, clinics and any direct-to-consumer marketing efforts we may initiate.
We expend a significant amount of resources on research and development efforts that may not lead to successful product candidate introductions or the recovery of our research and development expenditures.
We conduct research and development primarily to enable us to manufacture and market topical dermatological creams containing drugs in accordance with FDA regulations as well as other regulatory authorities. We spent approximately $7.2 million and $17.0 million on research and development activities during the years ended December 31, 2015 and 2016, respectively. We are required to obtain FDA approval before marketing our product candidates in the United States. The FDA approval process is costly, time consuming and inherently risky.
We cannot be certain that any investment made in developing product candidates will be recovered, even if we are successful in commercialization. To the extent that we expend significant resources on research and development efforts and are not able to introduce successful new product candidates as a result of those efforts, we will be unable to recover those expenditures.
Our clinical trials for our branded product candidates were not, and will not be, conducted head-to-head with the applicable leading products of our competitors, and the comparison of our results to those of existing drugs, and the conclusions we have drawn from such comparisons, may be inaccurate.
Our clinical trials for branded product candidates were not, and will not be, conducted head-to-head with the drugs considered the applicable standard of care for the relevant indications. This means that none of the patient groups participating in these trials were, and will not in the future be, treated with the applicable standard of care drugs alongside the groups treated
with our product candidates. Instead, we have compared and plan to continue comparing the results of our clinical trials with historical data from prior clinical trials conducted by third parties for the applicable standard of care drugs, and which results are presented in their respective product labels.
Direct comparison generally provides more reliable information about how two or more drugs compare, and reliance on indirect comparison for evaluating their relative efficacy or other qualities is problematic due to lack of objective or validated methods to assess trial similarity. For example, the various trials were likely conducted in different countries with different demographic features and in patients with different baseline conditions and different hygiene standards, among other relevant asymmetries. Therefore, the conclusions we have drawn from comparing the results of our clinical trials with those published in the product labels for these current standard of care drugs, including conclusions regarding the relative efficacy and expediency of our branded product candidates, may be distorted by the inaccurate methodology of the comparison. Moreover, the FDA generally requires head-to-head studies to make labeling and advertising claims regarding superiority or comparability, and our failure to collect head-to-head data may limit the types of claims we may make for our product candidates, if approved.
We may be subject to risk as a result of international manufacturing operations.
Certain of our product candidates may be manufactured at third-party facilities located in Canada and New Zealand, in addition to our facility in Israel, and therefore our operations are subject to risks inherent in doing business internationally. Such risks include the adverse effects on operations from corruption, war, international terrorism, civil disturbances, political instability, governmental activities, deprivation of contract and property rights and currency valuation changes.
If in the future we acquire or in-license technologies or additional product candidates, we may incur various costs, may have integration difficulties and may experience other risks that could harm our business and results of operations.
In the future, we may acquire or in-license additional product candidates and technologies. Any product candidate or technologies we in-license or acquire will likely require additional development efforts prior to commercial sale, including extensive pre-clinical studies, clinical trials, or both, and approval by the FDA or other applicable foreign regulatory authorities, if any. All product candidates are prone to risks of failure inherent in pharmaceutical product development, including the possibility that the product candidate, or product developed based on in-licensed technology, will not be shown to be sufficiently safe and effective for approval by regulatory authorities. If intellectual property related to product candidates or technologies we in-license or our own know-how is not adequate, we may not be able to commercialize the affected product candidates even after expending resources on their development. In addition, we may not be able to manufacture economically or successfully commercialize any product candidate that we develop based on acquired or in-licensed technology that is granted regulatory approval, and such product candidates may not gain wide acceptance or be competitive in the marketplace. Moreover, integrating any newly acquired or in-licensed product candidates could be expensive and time-consuming. If we cannot effectively manage these aspects of our business strategy, our business may not succeed.
The time necessary to develop generic API or drug products may adversely affect whether, and the extent to which, we receive a return on our capital.
The development process, including drug formulation where applicable, testing, and FDA review and approval for generic drug products often takes many years. This process requires that we expend considerable capital to pursue activities that do not yield an immediate or near-term return. Also, because of the significant time necessary to develop a generic product, the actual market for a generic product at the time it is available for sale may be significantly less than the originally projected market for the generic product. If this were to occur, our potential return on
our investment in developing the generic product, if approved for marketing by the FDA, would be adversely affected and we may never receive a return on our investment in the generic product. It is also possible for the manufacturer of the brand-name product for which we are developing a generic drug to obtain approvals from the FDA to switch the brand-name drug from the prescription market to the over-the-counter, or OTC market. If this were to occur, we would be prohibited from marketing our generic product other than as an OTC drug, in which case our revenues could be significantly impacted.
Risks Related to Regulatory Matters
If we do not comply with laws regulating the protection of the environment and health and human safety, our business could be adversely affected.
Our research and development and manufacturing involve the use of hazardous materials and chemicals and related equipment. If an accident occurs, we could be held liable for resulting damages, which could be substantial. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures and the handling of biohazardous materials. We do not maintain insurance for environmental liability claims that may be asserted against us. Moreover, additional foreign and local laws and regulations affecting our operations may be adopted in the future. We may incur substantial costs to comply with such regulations and pay substantial fines or penalties if we violate any of these laws or regulations.
With respect to environmental, safety and health laws and regulations, we cannot accurately predict the outcome or timing of future expenditures that we may be required to make in order to comply with such laws as they apply to our operations and facilities. We are also subject to potential liability for the remediation of contamination associated with both present and past hazardous waste generation, handling, and disposal activities. We will be periodically subject to environmental compliance reviews by environmental, safety, and health regulatory agencies. Environmental laws are subject to change and we may become subject to stricter environmental standards in the future and face larger capital expenditures in order to comply with environmental laws which could have a material adverse effect on our business.
Healthcare reform in the United States may harm our future business.
Healthcare costs in the United States have risen significantly over the past decade. In March 2010, the “Patient Protection and Affordable Care Act,” as amended by the “Health Care and Education Reconciliation Act,” collectively referred to as the Affordable Care Act, was signed into law, which, among other things, required most individuals to have health insurance, established new regulations on health plans, created insurance exchanges and imposed new requirements and changes in reimbursement or funding for healthcare providers, device manufacturers and pharmaceutical companies. The Affordable Care Act also included a number of changes which may impact our product candidates, if approved:
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revisions to the Medicaid rebate program by: (a) increasing the rebate percentage for branded drugs to 23.1% of the average manufacturer price, or AMP, with limited exceptions, (b) increasing the rebate for outpatient generic, multiple source drugs dispensed to 13% of AMP; (c) changing the definition of AMP; and (d) extending the Medicaid rebate program to Medicaid managed care plans, with limited exceptions;
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the imposition of annual fees upon manufacturers or importers of branded prescription drugs, which fees will be in amounts determined by the Secretary of Treasury based upon market share and other data;
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providing a 50% discount on brand-name prescriptions filled in the Medicare Part D coverage gap beginning in 2011;
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imposing increased penalties for the violation of fraud and abuse laws and funding for anti-fraud activities;
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creating a new pathway for approval of biosimilar biological products and granting an exclusivity period of 12 years for branded drug manufacturers of biological products before biosimilar products can be approved for marketing in the United States; and
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expanding the definition of “covered entities” that purchase certain outpatient drugs in the 340B Drug Pricing Program of Section 340B of the Public Health Service Act.
While the Affordable Care Act may have increased the number of patients who have insurance coverage for our product candidates, if approved by the FDA, the Affordable Care Act also restructured payments to Medicare managed care plans and reduced reimbursement to many institutional providers. Accordingly, the timing of the insurance mandate, the change in the Medicaid rebate levels, the additional fees imposed upon us if we market branded drugs, other compliance obligations, and the reduced reimbursement levels to institutional providers may result in a loss of revenue and could adversely affect our business. In addition, the Affordable Care Act contemplates the promulgation of significant future regulatory action which may also further affect our business.
Since its enactment, there have been judicial and Congressional challenges to certain aspects of the Affordable Care Act. The new Presidential Administration and U.S. Congress have attempted and will likely continue to seek to modify, repeal, or otherwise invalidate all, or certain provisions of, the Affordable Care Act. Most recently, the Tax Cuts and Jobs Act was enacted, which, among other things, removes penalties for not complying with the Affordable Care Act’s individual mandate to carry health insurance. It is uncertain the extent to which any such changes may impact our business or financial condition.
Moreover, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. On August 2, 2011, the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions was signed into law. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This included reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013, and will remain in effect through 2025 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. Recently there has also been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed bills designed to, among other things, reform government program reimbursement methodologies. Individual states in the United States have also become increasingly active in passing legislation and implementing regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our product candidates, if approved, or additional pricing pressure.
Risks Related to Commercialization of Our Product Candidates
Our continued growth is dependent on our ability to successfully develop and commercialize new product candidates in a timely manner.
Our financial results depend upon our ability to introduce and commercialize additional product candidates in a timely manner. Generally, revenue from new products is highest
immediately following launch and then declines over time, as new competitors enter the market. Furthermore, the greatest revenue is generally experienced by the company that is able to bring its product to the market first. Our growth is therefore dependent upon our ability to successfully introduce and commercialize new product candidates.
The FDA and other regulatory authorities may not approve our product applications at all or in a timely fashion for our product candidates under development. Additionally, we may not successfully complete our development efforts for other reasons, such as poor results in clinical trials or a lack of funding to complete the required trials. Even if the FDA approves our product candidates, we may not be able to market them successfully or profitably. Our future results of operations will depend significantly upon our ability to timely develop, receive FDA approval for, and market new pharmaceutical product candidates or otherwise develop new product candidates or acquire the rights to other products.
Our product candidates, if approved, will face significant competition and our failure to compete effectively may prevent us from achieving significant market penetration and expansion.
The facial aesthetic market in general, and the market for acne and rosacea treatments in particular, are highly competitive and dynamic, and characterized by rapid and substantial technological development and product innovations. These markets are also characterized by competitors obtaining patents to protect what they consider to be their intellectual property. We anticipate that TWIN, SIRS-T and VERED, if approved, will face significant competition from other approved products, including topical drugs, topical anti-acne drugs such as Acanya, Ziana, Epiduo, Epiduo Forte, Benzaclin, Aczone, Onexton and Differin and topical drugs for the treatment of rosacea such as Metrogel, Finacea and Soolantra, oral drugs such as Solodyn, Doryx, Dynacin and Minocin. If approved, TWIN, SIRS-T and VERED may also compete with non-prescription anti-acne products, as well as unapproved and off-label treatments. In addition, if approved, TWIN may compete with drug products utilizing other technologies that can separate two drug substances, such as dual chamber tubes, dual pouches or dual sachets. To compete successfully in the facial aesthetic market, we will have to demonstrate that our product is safe and effective for the respective treatment and has advantages over existing therapies. Competing in the facial aesthetic market could result in price-cutting, reduced profit margins and loss of market share, any of which would harm our business, financial condition and results of operations.
Due to less stringent regulatory requirements in certain jurisdictions outside the United States, there are many more acne products and procedures available for use in those international markets than are approved for use in the United States. There are also fewer limitations on the claims that our competitors in international markets can make about the effectiveness of their products and the manner in which they can market them. As a result, we may face more competition in markets outside of the United States.
In addition, even if we are able to commercialize our product candidates, we may not be able to price them competitively with the current standards of care or other competing products for their respective indications or their price may drop considerably due to factors outside our control. If this happens or the price of materials and the cost to manufacture our product candidates increases dramatically, our ability to continue to operate our business would be materially harmed and we may be unable to commercialize our product candidates successfully.
We believe that our principal competitors are Valeant Pharmaceuticals International, Inc., Galderma S.A., Allergan plc, Bayer HealthCare AG and Mylan N.V. These competitors are large and experienced companies that enjoy significant competitive advantages over us, such as greater financial, research and development, manufacturing, personnel and marketing resources, greater brand recognition, and more experience and expertise in obtaining marketing approvals from the FDA and foreign regulatory authorities.
In addition to the above listed competitors, some of our product candidates might face internal competition with other product candidates of ours, for the same markets and patient populations,
due to overlap in the required treatment and/or symptoms. For example, TWIN may compete with SIRS-T for treatment of acne and VERED may compete with ivermectin cream, 1%, for treatment of rosacea.
With respect to generic pharmaceutical products, the FDA approval process often results in the FDA granting final approval to a number of ANDAs for a given product at the time a relevant patent for a corresponding branded product or other regulatory and/or market exclusivity expires. For example, on December 30, 2016, Actavis Ltd. submitted an ANDA for ivermectin, 1%, cream, and therefore we will only be able to commercialize this product after Actavis Ltd.’s six month exclusivity period expires. Thus, we expect, in accordance with the standard practices in the industry, to face immediate competition when we introduce a generic product into the market. As competition from other manufacturers intensifies, selling prices and gross profit margins often decline. Accordingly, the level of market share, revenue and gross profit attributable to a particular generic product that we develop is generally related to the number of competitors in that product’s market and the timing of that product’s regulatory approval and launch, in relation to competing approvals and launches. Additionally, ANDA approvals often continue to be granted for a given product subsequent to the initial launch of the generic product. These circumstances generally result in significantly lower prices and reduced margins for generic products compared to brand products. New generic market entrants generally cause continued price and margin erosion over the generic product life cycle.
In addition to the competition we face from other generic manufacturers, we face competition from brand-name manufacturers related to our generic product candidates. Branded pharmaceutical companies may sell their branded products as “authorized generics” (an industry term that describes instances when an approved brand name drug is marketed, either by the brand name drug company, or by another company with the brand company’s permission, as a generic product without the brand name on its label, and potentially sold at a lower price than the brand name drug). Further, branded pharmaceutical companies may seek to delay FDA approval of our ANDAs or reduce generic competition by, for example, obtaining new patents on drugs whose original patent protection is about to expire, filing patent infringement suits that could delay FDA approval of generics, developing new versions of their products to obtain FDA market exclusivity, filing “citizen petitions” contesting FDA approvals of generics such as on alleged health and safety grounds, developing “next generation” versions of products that reduce demand for generic versions we are developing, changing product claims and labeling, and seeking approval to market as OTC branded products.
Moreover, competitors may, upon the approval of an NDA, or an NDA supplement, obtain a three-year period of exclusivity for a particular condition of approval, or change to a marketed product, such as a new formulation for a previously approved product, if one or more new clinical trials (other than bioavailability or bioequivalence studies) was essential to the approval of the application and was conducted/sponsored by the applicant. Such exclusivity may prevent the FDA from approving one or more of our product candidates that are being developed, and for which we would seek the FDA’s approval under the 505(b)(2) regulatory pathway, if we were to seek approval for the same conditions of approval as that protected by the three-year period of exclusivity. Recent litigation against the FDA has affirmed the FDA’s interpretation of the scope of three-year exclusivity as preventing the approval of a 505(b)(2) NDA for the same change to a previously approved drug, regardless of whether or not the 505(b)(2) applicant relies on the competitor’s product as a listed drug in its 505(b)(2) application. Exclusivity determinations are highly fact-dependent and are made by the FDA on a case-by-case basis at the end of the review period for a 505(b)(2) NDA. As such, we may not know until very late in the FDA’s review of our 505(b)(2) product candidates whether or not approval may be delayed because of a competitor’s period of three-year exclusivity.
Other pharmaceutical companies may develop competing products for acne, rosacea and other indications we are pursuing and enter the market ahead of us.
Other pharmaceutical companies are engaged in developing, patenting, manufacturing and marketing healthcare products that compete with those that we are developing. These potential
competitors include large and experienced companies that enjoy significant competitive advantages over us, such as greater financial, research and development, manufacturing, personnel and marketing resources, greater brand recognition and more experience and expertise in obtaining marketing approvals from the FDA and foreign regulatory authorities.
Several of these potential competitors are privately-owned companies that are not bound by public disclosure requirements and closely guard their development plans, marketing strategies and other trade secrets. Publicly-traded pharmaceutical companies are also able to maintain a certain degree of confidentiality over their pipeline developments and other sensitive information. As a result, we do not know whether these potential competitors are already developing, or plan to develop other topical treatments for acne, rosacea or other indications we are pursuing, and we will likely be unable to ascertain whether such activities are underway in the future. These potential competitors may therefore introduce competing products without our prior knowledge and without our ability to take preemptive measures in anticipation of their commercial launch.
Furthermore, such potential competitors may enter the market before us, and their products may be designed to circumvent our granted patents and pending patent applications. They may also challenge, narrow or invalidate our granted patents or our patent applications, and such patents and patent applications may fail to provide adequate protection for our product candidates.
We currently have limited marketing capabilities and no sales organization. If we are unable to establish sales and marketing capabilities on our own or through third parties, we will be unable to successfully commercialize TWIN, VERED or any other of our other product candidates, if approved, or generate product revenues.
We currently have limited marketing capabilities and no sales organization. To commercialize TWIN, VERED or any other of our other product candidates, if approved, in the United States and other jurisdictions we may seek to enter, we must build our marketing, sales, distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services, and we may not be successful in doing so. For instance, if TWIN and VERED receive regulatory approval from the FDA, we intend to market them in the United States through a specialized internal sales force or a combination of our internal sales force and distributors, which will be expensive and time-consuming. Alternatively, we may choose to collaborate with third parties that have direct sales forces and established distribution systems, either to augment our own sales force and distribution systems or in lieu of our own sales force and distribution systems. If we are unable to enter into such arrangements on acceptable terms or at all, we may not be able to successfully commercialize TWIN, VERED or any of our other product candidates.
There are significant risks involved in building and managing a sales organization, including our ability to hire, retain and incentivize qualified individuals, generate sufficient sales leads, provide adequate training to sales and marketing personnel and effectively manage a geographically dispersed sales and marketing team. Any failure or delay in the development of our internal sales, marketing and distribution capabilities would adversely impact the commercialization of our product candidates.
If we are not successful in establishing sufficient sales and marketing capabilities to commercialize TWIN, VERED or any of our other product candidates, either on our own or through collaborations with one or more third parties, our revenues will suffer and we will incur significant additional losses.
Third-party payor coverage and adequate reimbursement may not be available for our product candidates, if approved, which could make it difficult for us to sell them profitably.
Sales of our product candidates, if approved, will depend, in part, on the extent to which the costs of our product candidates will be covered by third-party payors, such as government health programs, private health insurers and managed care organizations. Third-party payors generally
decide which drugs they will cover and establish certain reimbursement levels for such drugs. In particular, in the United States, private health insurers and other third-party payors often provide reimbursement for products and services based on the level at which the government (through the Medicare or Medicaid programs) provides reimbursement for such treatments. Patients who are prescribed treatments for their conditions and providers performing the prescribed services generally rely on third-party payors to reimburse all or part of the associated healthcare costs. Patients are unlikely to use our product candidates unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our product candidates. Sales of our product candidates, and any future product candidates, will therefore depend substantially on the extent to which the costs of our product candidates, and any future product candidates, will be paid by third-party payors. Additionally, the market for our product candidates, and any future product candidates, will depend significantly on access to third-party payors’ formularies without prior authorization, step therapy, or other limitations such as approved lists of treatments for which third-party payors provide coverage and reimbursement. Additionally, coverage and reimbursement for therapeutic products can differ significantly from payor to payor. One third-party payor’s decision to cover a particular medical product or service does not ensure that other payors will also provide coverage for the medical product or service, or will provide coverage at an adequate reimbursement rate. As a result, the coverage determination process will require us to provide scientific and clinical support for the use of our product candidates to each payor separately and will be a time-consuming process.
Third-party payors are developing increasingly sophisticated methods of controlling healthcare costs and increasingly challenging the prices charged for medical products and services. Additionally, the containment of healthcare costs has become a priority of federal and state governments and the prices of drugs have been a focus in this effort. The United States government, state legislatures and foreign governments have shown significant interest in implementing cost-containment programs, including price controls and transparency requirements, restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could limit our revenue and operating results. If these third-party payors do not consider our product candidates to be cost-effective compared to other therapies, they may not cover our product candidates once approved as a benefit under their plans or, if they do, the level of reimbursement may not be sufficient to allow us to sell our product candidates on a profitable basis. Decreases in third-party reimbursement for our product candidates once approved or a decision by a third-party payor to not cover our product candidates could reduce or eliminate utilization of our product candidates and have an adverse effect on our sales, results of operations and financial condition. In addition, state and federal healthcare reform measures have been and may be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our product candidates once approved or additional pricing pressures.
Our current and future relationships with investigators, health care professionals, consultants, third-party payors, and customers will be subject to applicable healthcare regulatory laws, which could expose us to penalties.
Our business operations and current and future arrangements with investigators, healthcare professionals, consultants, third-party payors and customers, may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations. These laws may constrain the business or financial arrangements and relationships through which we conduct our operations, including how we research, market, sell and distribute our product candidates for which we obtain marketing approval. Such laws include:
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the federal Anti-Kickback Statute prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of
an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service, for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it in order to have committed a violation; in addition, 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 civil False Claims Act;
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the federal false claims laws, including the civil False Claims Act, impose criminal and civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent, knowingly making, using or causing to be made or used, a false record or statement material to a false or fraudulent claim, or knowingly making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government; in addition, the government may assert that a claim including items and services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act;
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the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or making false or fraudulent statements relating to healthcare matters; similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;
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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and its implementing regulations, also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;
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the federal Physician Payment Sunshine Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the government information related to certain payments or other “transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and requires applicable manufacturers and group purchasing organizations to report annually to the government ownership and investment interests held by the physicians described above and their immediate family members and payments or other “transfers of value” to such physician owners. Covered manufacturers are required to submit reports to the government by the 90th day of each calendar year; and
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analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to our business practices, including but not limited to, research, distribution, sales and marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; and state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or that require the reporting of pricing information and marketing expenditures; and state and foreign laws governing the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
Efforts to ensure that our current and future business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices do not comply with current or future statutes, regulations, agency guidance or case law involving applicable healthcare laws. If our operations are found to be in violation of any of these or any other health regulatory laws that may apply to us, we may be subject to significant penalties, including the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, disgorgement, individual imprisonment, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs or similar programs in other countries or jurisdictions, contractual damages, reputational harm, diminished profits and future earnings, and curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations. Defending against any such actions can be costly, time-consuming and may require significant financial and personnel resources. Therefore, even if we are successful in defending against any such actions that may be brought against us, our business may be impaired.
The illegal distribution and sale by third parties of counterfeit versions of our product candidates or of stolen products could have a negative impact on our reputation and a material adverse effect on our business, results of operations and financial condition.
Third parties could illegally distribute and sell counterfeit versions of our product candidates, which do not meet the rigorous manufacturing and testing standards that our product candidates undergo. Counterfeit products are frequently unsafe or ineffective, and can be life-threatening. Counterfeit medicines may contain harmful substances, the wrong dose of the active pharmaceutical ingredient or no active pharmaceutical ingredient at all. However, to distributors and users, counterfeit products may be visually indistinguishable from the authentic version.
Reports of adverse reactions to counterfeit drugs similar to our product candidates or increased levels of counterfeiting such products could materially affect physician and patient confidence in our authentic product candidates. It is possible that adverse events caused by unsafe counterfeit products will mistakenly be attributed to our authentic product candidates. In addition, thefts of our inventory at warehouses, plant or while in-transit, which are not properly stored and which are sold through unauthorized channels could adversely impact patient safety, our reputation and our business.
Public loss of confidence in the integrity of our pharmaceutical products as a result of counterfeiting or theft could have a material adverse effect on our business, financial position and results of operations.
Risks Related to Dependence on Third Parties
Any collaborative arrangements that we have or may establish in the future may not be successful or we may otherwise not realize the anticipated benefits from these collaborations. We do not control third parties with whom we have or may have collaborative arrangements, and we will rely on them to achieve results which may be significant to us. In addition, any current or future collaborative arrangements may place the development and commercialization of our product candidates outside our control, may require us to relinquish important rights or may otherwise be on terms unfavorable to us.
We are currently party to collaborative arrangements with respect to the development, manufacture, study and commercialization of certain of our product candidates including arrangements with Perrigo and Douglas Pharmaceuticals. Any current or future potential collaborative arrangements may require us to rely on external consultants, advisors, and experts for assistance in several key functions, including clinical development, manufacturing, regulatory and intellectual property. We cannot and will not control these third parties, but we may rely on them to achieve results, which may be significant to us. Relying upon collaborative arrangements to develop and commercialize our product candidates subjects us to a number of risks, including:
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we may not be able to control the amount and timing of resources that our collaborators may devote to our product candidates;
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should a collaborator fail to comply with applicable laws, rules, or regulations when performing services for us, we could be held liable for such violations;
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our current or future collaborators may experience financial difficulties or changes in business focus;
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our current or future collaborators’ partners may fail to secure adequate commercial supplies of our product candidates upon marketing approval, if at all;
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our current or future collaborators’ partners may have a shortage of qualified personnel;
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we may be required to relinquish important rights, such as marketing and distribution rights;
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business combinations or significant changes in a collaborator’s business strategy may adversely affect a collaborator’s willingness or ability to complete its obligations under any arrangement;
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under certain circumstances, a collaborator could move forward with a competing product developed either independently or in collaboration with others, including our competitors;
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our current or future collaborators may utilize our proprietary information in a way that could expose us to competitive harm; and
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collaborative arrangements are often terminated or allowed to expire, which could delay the development and may increase the cost of developing our product candidates.
In addition, if disputes arise between us and our collaborators, it could result in the delay or termination of the development, manufacturing or commercialization of our product candidates, lead to protracted and costly legal proceedings, or cause collaborators to act in their own interest, which may not be in our interest. As a result, there can be no assurance that the collaborative arrangements that we have entered into, or may enter into in the future, will achieve their intended goals.
If any of these scenarios materialize, they could have an adverse effect on our business, financial condition or results of operations.
We also may have other product candidates where it is desirable or essential to enter into agreements with a collaborator who has greater financial resources or different expertise than us, but for which we are unable to find an appropriate collaborator or are unable to do so on favorable terms. If we fail to enter into such collaborative agreements on favorable terms, it could materially delay or impair our ability to develop and commercialize our product candidates and increase the costs of development and commercialization of such product candidates.
We currently contract with third-party manufacturers and suppliers for certain compounds and components necessary to produce our product candidates for clinical trials and expect to continue to do so to support commercial scale production, if any, of our product candidates is approved. This increases the risk that if any of our product candidates are approved, we may not have access to sufficient quantities or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.
We currently rely on third parties for the manufacture and supply of certain compounds and components necessary to produce our product candidates for our clinical trials, including API’s such as benzoyl peroxide and tretinoin and other active ingredients and excipients used in the formulation of our various product candidates, as well as primary and secondary packaging and labeling materials. We lack the resources and the capability to manufacture any of our product
candidates on a clinical or commercial scale, and we expect to continue to rely on third parties to support our commercial requirements if any of our product candidates is approved for marketing by the FDA or other foreign regulatory authorities.
The facilities used by our contract manufacturers to manufacture our product candidates must be approved by the FDA pursuant to inspections that will be conducted after we submit our marketing applications to the FDA. We do not control the manufacturing process of, and are completely dependent on, our contract manufacturing partners for compliance with the regulatory requirements, known as current good manufacturing practices, or cGMPs, for manufacture of both active drug substances and finished drug products. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or others, they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. In addition, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our product candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our product candidates, if approved.
Reliance on third-party manufacturers and suppliers entails a number of risks, including reliance on the third party for regulatory compliance and quality assurance, the possible breach of the manufacturing or supply agreement by the third party, the possibility that the supply is inadequate or delayed, the risk that the third party may enter the field and seek to compete and may no longer be willing to continue supplying, and the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us. If any of these risks transpire, we may be unable to timely retain an alternate manufacturer or suppliers on acceptable terms and with sufficient quality standards and production capacity, which may disrupt and delay our clinical trials or the manufacture and commercial sale of our product candidates, if approved.
Our failure or the failure of our third-party manufacturers and suppliers to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our product candidates that we may develop. Any failure or refusal to supply or any interruption in supply of the components for any of our product candidates could delay, prevent or impair our clinical development or commercialization efforts.
We rely on third parties and consultants to assist us in conducting our clinical trials. If these third parties or consultants do not successfully carry out their contractual duties or meet expected deadlines, we may be unable to obtain regulatory approval for or commercialize our product candidates and our business could be substantially harmed.
We do not have the ability to independently perform all aspects of our anticipated pre-clinical studies and clinical trials. We rely on medical institutions, clinical investigators, contract laboratories, collaborative partners and other third parties to assist us in conducting our clinical trials and studies for our product candidates. The third parties with whom we contract for execution of our clinical trials play a significant role in the conduct of these trials and the subsequent collection and analysis of data. However, these third parties are not employees, and except for contractual duties and obligations, we have limited ability to control the amount or timing of resources that they devote to our programs.
In addition, the execution of pre-clinical studies and clinical trials, and the subsequent compilation and analysis of the data produced, require coordination among these various third parties. In order for these functions to be carried out effectively and efficiently, it is imperative that these parties communicate and coordinate with one another, which may prove difficult to achieve. Moreover, these third parties may also have relationships with other commercial entities, some of which may compete with us. Our agreement with these third parties may inevitably enable them to terminate such agreements upon reasonable prior written notice under certain circumstances.
Although we rely on these third parties to conduct certain aspects of our clinical trials and other studies and clinical trials, we remain responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on these third parties does not relieve us of our regulatory responsibilities. Moreover, the FDA and foreign regulatory authorities require us to comply with GCPs, which are the regulations and standards for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate, and that the trial subjects are adequately informed of the potential risks of participating in clinical trials. We also rely on our consultants to assist us in the execution, including data collection and analysis of our clinical trials. If we or any of our third-party contractors fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials complies with GCP regulations. In addition, our clinical trials must be conducted with product produced under cGMP regulations. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process.
If the third parties or consultants that assist us in conducting our clinical trials do not perform their contractual duties or obligations, experience work stoppages, do not meet expected deadlines, terminate their agreements with us or need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical trial protocols, regulatory requirements or GCPs, or for any other reason, we may need to conduct additional clinical trials or enter into new arrangements with alternative third parties, which could be difficult, costly or impossible, and our clinical trials may be extended, delayed or terminated or may need to be repeated. If any of the foregoing were to occur, we may not be able to obtain, or may be delayed in obtaining, regulatory approval for the product candidates being tested in such trials, and will not be able to, or may be delayed in our efforts to, successfully commercialize these product candidates.
The manufacture of pharmaceutical products is complex and manufacturers often encounter difficulties in production. If we or any of our third-party manufacturers encounter any difficulties, our ability to provide product candidates for clinical trials or our product candidates to patients, once approved, and the development or commercialization of our product candidates could be delayed or stopped.
The manufacture of pharmaceutical products is complex and requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. We and our contract manufacturers must comply with cGMP requirements. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up and validating initial production and contamination controls. These problems include difficulties with production costs and yields, quality control, including stability of the product, quality assurance testing, operator error, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Furthermore, if microbial, viral or other contaminations are discovered in our product candidates or in the manufacturing facilities in which our product candidates are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination.
We cannot assure you that any stability or other issues relating to the manufacture of any of our product candidates will not occur in the future. Additionally, we and our third-party manufacturers may experience manufacturing difficulties due to resource constraints or as a result of labor disputes or unstable political environments. If we or our third-party manufacturers were to encounter any of these difficulties, our ability to provide any product candidates to patients in clinical trials and products to patients, once approved, would be jeopardized. Any delay or interruption in the supply of clinical trial supplies could delay the initiation or completion of clinical trials, increase the costs associated with maintaining clinical trial programs and,
depending upon the period of delay, require us to commence new clinical trials at additional expense or terminate clinical trials completely. Any adverse developments affecting clinical or commercial manufacturing of our product candidates may result in shipment delays, inventory shortages, lot failures, product withdrawals or recalls, or other interruptions in the supply of our product candidates. We may also have to take inventory write-offs and incur other charges and expenses for products that fail to meet specifications, undertake costly remediation efforts or seek more costly manufacturing alternatives. Accordingly, failures or difficulties faced at any level of our supply chain could materially adversely affect our business and delay or impede the development and commercialization of any of our product candidates and could have a material adverse effect on our business, prospects, financial condition and results of operations.
Risks Related to Our Intellectual Property
We depend on our intellectual property, and our future success is dependent on our ability to protect our intellectual property and not infringe on the rights of others.
Our success depends, in part, on our ability to obtain patent protection for our product candidates, maintain the confidentiality of our trade secrets and know how, operate without infringing on the proprietary rights of others and prevent others from infringing our proprietary rights. We try to protect our proprietary position by, among other things, filing U.S., European, and other patent applications related to our product candidates, inventions and improvements that may be important to the continuing development of our product candidates. While we generally apply for patents in those countries where we intend to make, have made, use, or sell patented products, we may not accurately predict all of the countries where patent protection will ultimately be desirable. If we fail to timely file a patent application in any such country, we may be precluded from doing so at a later date. In addition, we cannot assure you that:
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any of our future processes or product candidates will be patentable;
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our processes or product candidates will not infringe upon the patents of third parties; or
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we will have the resources to defend against charges of patent infringement or other violation or misappropriation of intellectual property by third parties or to protect our own intellectual property rights against infringement, misappropriation or violation by third parties.
Because the patent position of pharmaceutical companies involves complex legal and factual questions, we cannot predict the validity and enforceability of patents with certainty. Changes in either the patent laws or in interpretations of patent laws may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowable or enforceable in our patents (including patents owned by or licensed to us). Our issued patents may not provide us with any competitive advantages, may be held invalid or unenforceable as a result of legal challenges by third parties or could be circumvented. Our competitors may also independently develop formulations, processes and technologies or products similar to ours or design around or otherwise circumvent patents issued to, or licensed by, us. Thus, any patents that we own or license from others may not provide any protection against competitors. Our pending patent applications, those we may file in the future or those we may license from third parties may not result in patents being issued. If these patents are issued, they may not be of sufficient scope to provide us with meaningful protection. The degree of future protection to be afforded by our proprietary rights is uncertain because legal means afford relatively limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage.
Patent rights are territorial; thus, the patent protection we do have will only extend to those countries in which we have issued patents. Even so, the laws of certain countries do not protect our intellectual property rights to the same extent as do the laws of the United States and the European Union. Therefore, we cannot assure you that the patents issued, if any, as a result of our foreign patent applications will have the same scope of coverage as our U.S. patents. Competitors
may successfully challenge our patents, produce similar drugs or products that do not infringe our patents, or produce drugs in countries where we have not applied for patent protection or that do not respect our patents. Furthermore, it is not possible to know the scope of claims that will be allowed in published applications and it is also not possible to know which claims of granted patents, if any, will be deemed enforceable in a court of law.
After the completion of development and registration of our patents, third parties may still act to manufacture and/or market products in infringement of our patent protected rights, and we may not have adequate resources to enforce our patents. Any such manufacture and/or market of products in infringement of our patent protected rights is likely to cause us damage and lead to a reduction in the prices of our product candidates, thereby reducing our anticipated cash flows and profits, if any.
In addition, due to the extensive time needed to develop, test and obtain regulatory approval for our product candidates, any patents that protect our product candidates may expire early during commercialization. This may reduce or eliminate any market advantages that such patents may give us. Following patent expiration, we may face increased competition through the entry of competing products into the market and a subsequent decline in market share and profits.
We have granted, and may in the future grant, to third parties licenses to use our intellectual property. Generally, these licenses have granted rights to commercialize products outside the pharmaceutical field or to technology we no longer use or to otherwise use our intellectual property for a limited purpose outside the scope of our business interests. For example, in August 2013 we entered into an assignment agreement with Medicis Pharmaceutical Corporation (“Medicis”), according to which Medicis assigned to us its entire interest in one of the patents upon which we rely for our product candidate TWIN for the treatment of acne. As part of this assignment agreement, we granted to Medicis a non-exclusive, transferable, sub-licensable, royalty-free, perpetual, license to practice the inventions claimed under the patent.
However, our business interests may change or our licensees may disagree with the scope of our license grant. In such cases, such licensing arrangements may result in the development, manufacturing, marketing and sale by our licensees of products substantially similar to our products, causing us to face increased competition, which could reduce our market share and significantly harm our business, results of operations and prospects.
If we are unable to protect the confidentiality of our trade secrets or know-how, such proprietary information may be used by others to compete against us.
In addition to filing patent applications, we generally try to protect our trade secrets, know-how, technology and other proprietary information by entering into confidentiality or non-disclosure agreements with parties that have access to it, such as our development and/or commercialization partners, employees, contractors and consultants. We also enter into agreements that purport to require the disclosure and assignment to us of the rights to the ideas, developments, discoveries and inventions of our employees, advisors, research collaborators, contractors and consultants while we employ or engage them. However, we cannot assure you that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information because these agreements can be difficult and costly to enforce or may not provide adequate remedies. Any of these parties may breach the confidentiality agreements and willfully or unintentionally disclose our confidential information, or our competitors might learn of the information in some other way. The disclosure to, or independent development by, a competitor of any trade secret, know-how or other technology not protected by a patent could materially adversely affect any competitive advantage we may have over any such competitor.
To the extent that any of our employees, advisors, research collaborators, contractors or consultants independently develop, or use independently developed, intellectual property in connection with any of our projects, disputes may arise as to the proprietary rights to this type of
information. If a dispute arises with respect to any proprietary right, enforcement of our rights can be costly and unpredictable and a court may determine that the right belongs to a third party.
Legal proceedings or third-party claims of intellectual property infringement and other challenges may require us to spend substantial time and money and could prevent us from developing or commercializing our product candidates.
The development, manufacture, use, offer for sale, sale or importation of our product candidates may infringe on the claims of third-party patents or other intellectual property rights. The nature of claims contained in unpublished patent filings around the world is unknown to us and it is not possible to know which countries patent holders may choose for the extension of their filings under the Patent Cooperation Treaty, or other mechanisms. Therefore, there is a risk that we could adopt a technology without knowledge of a pending patent application, which technology would infringe a third-party patent once that patent is issued. We may also be subject to claims based on the actions of employees and consultants with respect to the usage or disclosure of intellectual property learned at other employers. The cost to us of any intellectual property litigation or other infringement proceeding, even if resolved in our favor, could be substantial. Any claims of patent infringement, even those without merit, could: be expensive and time consuming to defend; cause us to cease making, licensing or using products that incorporate the challenged intellectual property; require us to redesign, reengineer or rebrand our product candidates, if feasible; cause us to stop from engaging in normal operations and activities, including developing and marketing product candidates; and divert management’s attention and resources. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation or defense of intellectual property litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Intellectual property litigation and other proceedings may also absorb significant management time. Consequently, we are unable to guarantee that we will be able to manufacture, use, offer for sale, sell or import our product candidates in the event of an infringement action.
In the event of patent infringement claims, or to avoid potential claims, we may choose or be required to seek a license from a third party and would most likely be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we were able to obtain a license, the rights may be non-exclusive, which could potentially limit our competitive advantage. Ultimately, we could be prevented from commercializing a product or be forced to cease some aspect of our business operations if, as a result of actual or threatened patent infringement or other claims, we are unable to enter into licenses on acceptable terms. This inability to enter into licenses could harm our business significantly.
In addition, because of our developmental stage, claims that our product candidates infringe on the patent rights of others are more likely to be asserted after commencement of commercial sales incorporating our technology.
We may be subject to claims that our employees, consultants, or independent contractors have wrongfully used or disclosed confidential information of third parties or that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
We employ individuals who were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees, consultants, and independent contractors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants, or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of any of our employees’ former employers or other third parties. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely impact our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
Although we believe that we take reasonable steps to protect our intellectual property, including the use of agreements relating to the non-disclosure of confidential information to third parties, as well as agreements that purport to require the disclosure and assignment to us of the rights to the ideas, developments, discoveries and inventions of our employees and consultants while we employ them, the agreements can be difficult and costly to enforce. Although we seek to obtain these types of agreements from our contractors, consultants, advisors and research collaborators, to the extent that employees and consultants utilize or independently develop intellectual property in connection with any of our projects, disputes may arise as to the intellectual property rights associated with our product candidates. If a dispute arises, a court may determine that the right belongs to a third party. In addition, enforcement of our rights can be costly and unpredictable. We also rely on trade secrets and proprietary know-how that we seek to protect in part by confidentiality agreements with our employees, contractors, consultants, advisors or others. Despite the protective measures we employ, we still face the risk that:
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these agreements may be breached;
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these agreements may not provide adequate remedies for the applicable type of breach;
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our trade secrets or proprietary know-how will otherwise become known; or
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our competitors will independently develop similar technology or proprietary information.
International patent protection is particularly uncertain, and if we are involved in opposition proceedings in foreign countries, we may have to expend substantial sums and management resources.
Patent law outside the United States may be different than in the United States. Further, the laws of some foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States, if at all. A failure to obtain sufficient intellectual property protection in any foreign country could materially and adversely affect our business, results of operations and future prospects. Moreover, we may participate in opposition proceedings to determine the validity of our foreign patents or our competitors’ foreign patents, which could result in substantial costs and divert management’s resources and attention. Additionally, due to uncertainty in patent protection law, we have not filed applications in many countries where significant markets exist.
An NDA submitted under Section 505(b)(2) subjects us to the risk that we may be subject to a patent infringement lawsuit that would delay or prevent the review or approval of our product candidates.
In the United States, we expect to file NDAs for our product candidates for approval under Section 505(b)(2) of the FDCA. Section 505(b)(2) permits the submission of an NDA where at least some of the information required for approval comes from studies that were not conducted by, or for, the applicant and on which the applicant has not obtained a right of reference. The 505(b)(2) application would enable us to reference published literature and/or the FDA’s previous findings of safety and effectiveness for the branded reference drug. For NDAs submitted under Section 505(b)(2) of the FDCA, the patent certification and related provisions of the Hatch-Waxman Act apply. In accordance with the Hatch-Waxman Act, such NDAs may be required to include certifications, known as paragraph IV certifications, that certify that any patents listed in the Patent and Exclusivity Information Addendum of the FDA’s publication, Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book, with respect to any product referenced in the 505(b)(2) application, are invalid, unenforceable or will not be infringed by the manufacture, use or sale of the product that is the subject of the 505(b)(2) NDA.
Under the Hatch-Waxman Act, the holder of patents that the 505(b)(2) application references may file a patent infringement lawsuit after receiving notice of the paragraph IV certification. Filing of a patent infringement lawsuit against the filer of the 505(b)(2) applicant within 45 days of
the patent owner’s receipt of notice triggers a one-time, automatic, 30-month stay of the FDA’s ability to approve the 505(b)(2) NDA, unless patent litigation is resolved in the favor of the paragraph IV filer or the patent expires before that time. Accordingly, we may invest a significant amount of time and expense in the development of one or more product candidates only to be subject to significant delay and patent litigation before such product candidates may be commercialized, if at all. In addition, a 505(b)(2) application will not be approved until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, or NCE, listed in the Orange Book for the referenced product has expired. The FDA may also require us to perform one or more additional clinical trials or measurements to support the change from the branded reference drug, which could be time consuming and could substantially delay our achievement of regulatory approvals for such product candidates. The FDA may also reject our future 505(b)(2) submissions and require us to file such submissions under Section 505(b)(1) of the FDCA, which would require us to provide extensive data to establish safety and effectiveness of the drug for the proposed use and could cause delay and be considerably more expensive and time consuming. These factors, among others, may limit our ability to successfully commercialize our product candidates.
Companies that produce branded reference drugs routinely bring litigation against ANDA or 505(b)(2) applicants that seek regulatory approval to manufacture and market generic and reformulated forms of their branded products. These companies often allege patent infringement or other violations of intellectual property rights as the basis for filing suit against an ANDA or 505(b)(2) applicant. Likewise, patent holders may bring patent infringement suits against companies that are currently marketing and selling their approved generic or reformulated products.
Litigation to enforce or defend intellectual property rights is often complex and often involves significant expense and can delay or prevent introduction or sale of our product candidates. If patents are held to be valid and infringed by our product candidates in a particular jurisdiction, we would, unless we could obtain a license from the patent holder, be required to cease selling in that jurisdiction and may need to relinquish or destroy existing stock in that jurisdiction. There may also be situations where we use our business judgment and decide to market and sell our approved product candidates, notwithstanding the fact that allegations of patent infringement(s) have not been finally resolved by the courts, which is known as an “at-risk launch.” The risk involved in doing so can be substantial because the remedies available to the owner of a patent for infringement may include, among other things, damages measured by the profits lost by the patent owner and not necessarily by the profits earned by the infringer. In the case of a willful infringement, the definition of which is subjective, such damages may be increased up to three times. Moreover, because of the discount pricing typically involved with bioequivalent and, to a lesser extent, 505(b)(2), products, patented branded products generally realize a substantially higher profit margin than bioequivalent and, to a lesser extent, 505(b)(2), products, resulting in disproportionate damages compared to any profits earned by the infringer. An adverse decision in patent litigation could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our ordinary shares to decline.
Risks Related to Our Operations in Israel
Our headquarters, manufacturing and other significant operations are located in Israel and, therefore, our business and operations may be adversely affected by political, economic and military conditions in Israel.
Our business and operations will be directly influenced by the political, economic and military conditions affecting Israel at any given time. A change in the security and political situation in Israel and in the economy could impede the raising of the funds required to finance our research and development plans and to create joint ventures with third parties and could otherwise have a material adverse effect on our business, operating results and financial condition. Although Israel has entered into various agreements with Egypt, Jordan and the Palestinian
Authority, there have been times since October 2000 when Israel has experienced an increase in unrest and terrorist activity. The establishment in 2006 of a government in the Palestinian Authority by representatives of the Hamas militant group has created additional unrest and uncertainty in the region.
During the Second Lebanon War of 2006, between Israel and Hezbollah, a militant Islamic movement, thousands of rockets were fired from Lebanon up to 50 miles into Israel. In January 2009, Israel attacked, during three weeks, Hamas strongholds in the Gaza strip, in reaction to rockets that were fired from Gaza up to 25 miles into Israel. In November 2012, Israel launched a seven-day operation against Hamas operatives in the Gaza strip in response to Palestinian groups launching over 100 rockets at Israel over a 24-hour period. In July 2014, Israel launched an additional operation against Hamas operatives in the Gaza strip in response to Palestinian groups launching rockets at Israel. Major hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could result in damage to our facilities and likewise have a material adverse effect on our business, operating results and financial condition.
Popular uprisings in various countries in the Middle East and North Africa are affecting the political stability of those countries. Such instability may lead to deterioration in the political and trade relationships that exist between the State of Israel and these countries. Furthermore, several countries, principally in the Middle East, restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in the region continue or intensify. Such restrictions may seriously limit our ability to sell our product candidates to customers in those countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or significant downturns in the economic or financial condition of Israel, could adversely affect our operations and product development, cause our revenues to decrease and adversely affect the share price of publicly traded companies having operations in Israel, such as us. Similarly, Israeli corporations are limited in conducting business with entities from several countries.
Our commercial insurance does not cover losses that may occur as a result of an event associated with the security situation in the Middle East. Although the Israeli government is currently committed to covering the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, there can be no assurance that this government coverage will be maintained, or if maintained, will be sufficient to compensate us fully for damages incurred. Any losses or damages incurred by us could have a material adverse effect on our business, financial condition and results of operations.
Exchange rate fluctuations between the U.S. dollar, the New Israeli Shekel and other foreign currencies, may negatively affect our future revenues.
In the future, we expect that a substantial portion of our revenues will be generated in U.S. dollars, Euros and other foreign currencies, although we currently incur a significant portion of our expenses in currencies other than U.S. dollars, and mainly in NIS. Our financial records are maintained, and will be maintained, in U.S. dollars, which is our functional currency. As a result, our financial results may be affected by fluctuations in the exchange rates of currencies in the countries in which our prospective product candidates may be sold.
Our operations may be affected by negative labor conditions in Israel.
Strikes and work-stoppages occur relatively frequently in Israel. If Israeli trade unions threaten additional strikes or work-stoppages and such strikes or work-stoppages occur, those may, if prolonged, have a material adverse effect on the Israeli economy and on our business, including our ability to deliver products to our customers and to receive raw materials from our suppliers in a timely manner.
Our operations could be disrupted as a result of the obligation of our personnel to perform military service.
All of our executive officers and key employees reside in Israel and although most of them are no longer required to perform reserve duty, some may be required to perform annual military
reserve duty and may be called for active duty under emergency circumstances at any time. Our operations could be disrupted by the absence for a significant period of time of one or more of these officers or key employees due to military service. Any such disruption could adversely affect our business, results of operations and financial condition.
The termination or reduction of tax and other incentives that the Israeli Government provides to domestic companies may increase the costs involved in operating a company in Israel.
The Israeli government currently provides tax and capital investment incentives to domestic companies, as well as grant and loan programs relating to research and development and marketing and export activities. In recent years, the Israeli Government has reduced the benefits available under these programs and the Israeli Governmental authorities have indicated that the government may in the future further reduce or eliminate the benefits of those programs. We may take advantage of these benefits and programs in the future, however, there is no assurance that such benefits and programs would continue to be available in the future to us. If such benefits and programs were terminated or further reduced, it could have an adverse effect on our business, operating results and financial condition.
The Israeli government grants that we have received require us to meet several conditions and may restrict our ability to manufacture some of our product candidates and transfer relevant know-how outside of Israel and require us to satisfy specified conditions, which are at present uncertain due to the enactment of a new regulatory framework.
We have received royalty-bearing grants from the government of Israel through the National Authority for Technological Innovation, or the Innovation Authority (formerly known as the Office of the Chief Scientist of the Ministry of Economy and Industry, or the OCS), for the financing of a portion of our research and development expenditures in Israel. These Innovation Authority grants relate to a peripheral line of product candidates which forms a negligible part of our activities. When know-how is developed using Innovation Authority grants, the Encouragement of Research, Development and Technological Innovation in Industry Law 5744-1984, or the Innovation Law, the Innovation Authority’s rules and guidelines as well as the terms of these grants, restrict our ability to manufacture product candidates and transfer know-how developed as a result of the Innovation Authority’s funded R&D outside of Israel. Transfer of the Innovation Authority funded know-how outside of Israel where the transferring company remains an operating Israeli entity or where the transferring company ceases to exist as an Israeli entity, requires pre-approval by the Innovation Authority, which may, at its sole discretion, grant such approval and impose certain conditions, including payment of a redemption fee calculated according to the formulas provided in the Innovation Authority’s rules and guidelines, or Redemption Fee, which takes into account the consideration for such know-how paid to the transferring company in the transaction in which the know-how is transferred. The Innovation Authority’s rules and guidelines establish a maximum payment of the Redemption Fee under the formulas provided in the Innovation Authority’s rules and guidelines and differentiates between certain situations, as further detailed in such rules and guidelines. In addition, the product candidates may be manufactured outside of Israel by us or by another entity only if prior approval is received from the Innovation Authority (such approval is not required for the transfer of less than 10% of the manufacturing capacity in the aggregate). In addition to the obligation to receive prior approval to manufacture outside Israel, a company will be required to pay increased royalties, as defined under the Innovation Authority’s rules and guidelines. The total amount of the increased royalties to be repaid to the Innovation Authority shall not exceed, in the aggregate, 300% of the amount of the grant received (dollar linked), plus interest at annual rate based on LIBOR, depending on the manufacturing volume that is performed outside Israel less royalties already paid to the Innovation Authority.
A company also has the option of declaring in its Innovation Authority grant application its intention to exercise a portion of the manufacturing capacity abroad, thus avoiding the need to obtain additional approval following the receipt of the grant.
Recently, the Innovation Authority has published new rules and guidelines with respect to the grant to a foreign entity of the right to use know-how that was developed using the Innovation
Authority’s grants, or Funded Know-How. According to these rules, the grant to a foreign entity of a right to use the Funded Know-How (which does not entirely prevent the Innovation Authority funded company from using the Funded Know-How) is subject to receipt of the Innovation Authority’s prior approval. This approval is subject to payment to the Innovation Authority in accordance with the formulas stipulated in these rules.
The restrictions under the Innovation Authority’s rules and guidelines continue to apply even after payment of the full amount of royalties payable pursuant to the grants. In addition, the government of the State of Israel may from time to time audit sales of products which it claims incorporate Funded Know-How and this may lead to additional royalties being payable on additional product candidates. Following an audit conducted by the Innovation Authority, the Innovation Authority recently confirmed to us that products based on encapsulation technology of solid material are exempt from royalty payment obligations to the Innovation Authority. Our product candidates TWIN, SIRS-T and VERED fall within the category of products based on encapsulation technology of solid material. However, there can be no guarantee that the Innovation Authority will not in the future attempt to claim royalties with respect to these products, or that future products will not be subject to royalties.
These restrictions may impair our ability to enter into agreements for Funded Know-How product candidates or technologies without the approval of the Innovation Authority. We cannot be certain that any approval of the Innovation Authority will be obtained on terms that are acceptable to us, or at all. Furthermore, in the event that we undertake a transaction involving the transfer to a non-Israeli entity of Funded Know-How pursuant to a merger or similar transaction, or in the event we undertake a transaction involving the licensing of Funded Know-How, the consideration available to our shareholders may be reduced by the amounts we are required to pay to the Innovation Authority. Any approval, if given, will generally be subject to additional financial obligations. Failure to comply with the requirements under the Innovation Authority’s rules and guidelines and the Innovation Law may subject us to mandatory repayment of grants received by us (together with interest and penalties), as well as expose us to criminal proceedings.
In August 2015, a new amendment to the Innovation Law was enacted, or Amendment No. 7, which came into effect on January 1, 2016. Since Amendment No. 7 has entered into force, the Innovation Authority was appointed to act as the entity which is responsible for the activity which was previously under the OCS’ responsibility. The Innovation Authority was granted wide freedom of action, and among other things, the authority to amend the requirements and restrictions which were specified in the Innovation Law before Amendment No. 7 became effective with respect to the ownership of Funded Know-How (including with respect to the restrictions on transfer of the Funded Know-How and manufacturing activities outside of Israel) as well as with respect to royalty payment obligations which apply to companies that received grants from the Innovation Authority. Although the Innovation Authority recently published rules, which for the most part adopted the principal provisions and restrictions specified in the Innovation Law prior to the effectiveness of Amendment No. 7, as of the date of this prospectus, we are unable to assess the effect on our business of any future rules which may be published by the Innovation Authority. See “Business — Government Regulation — Innovation Authority.”
Enforcing a U.S. judgment against us and our current executive officers and directors, or asserting U.S. securities law claims in Israel, may be difficult.
We are incorporated in Israel. All of our current executive officers and directors reside in Israel (although one of our nominees to serve as an external director, Jerrold S. Gattegno, resides in the United States) and most of our assets reside outside of the United States. Therefore, a judgment obtained against us or any of these persons in the United States, including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by an Israeli court. It may also be difficult to effect service of process on these persons in the United States or to assert U.S. securities law claims in original actions instituted in Israel.
Even if an Israeli court agrees to hear such a claim, it may determine that Israeli, and not U.S., law is applicable to the claim. Under Israeli law, if U.S. law is found to be applicable to such a claim, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process, and certain matters of procedure would be governed by Israeli law. There is little binding case law in Israel addressing these matters. See “Enforceability of Civil Liabilities” for additional information on your ability to enforce civil claim against us and our executive officers and directors.
Provisions of our amended and restated articles of association and Israeli law and tax considerations may delay, prevent or make difficult an acquisition of us, which could prevent a change of control and negatively affect the price of our ordinary shares.
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for certain transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. These provisions of Israeli law may delay, prevent or make difficult an acquisition of us, which could prevent a change of control and therefore depress the price of our ordinary shares.
Our amended and restated articles of association provide that our directors (other than external directors) are elected on a staggered basis, such that a potential acquirer cannot readily replace our entire board of directors at a single annual general shareholder meeting.
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders, especially for those shareholders whose country of residence does not have a tax treaty with Israel which exempts such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of a number of conditions, including, in some cases, a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are subject to certain restrictions. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no disposition of the shares has occurred.
We may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could result in litigation and adversely affect our business.
We have entered into assignment of invention agreements with our employees pursuant to which such individuals agree to assign to us all rights to any inventions created during their employment or engagement with us. A significant portion of our intellectual property has been developed by our employees in the course of their employment for us. Under the Israeli Patent Law, 5727-1967, or the Patent Law, inventions conceived by an employee during the scope of his or her employment with a company and as a result thereof are regarded as “service inventions,” which belong to the employer, absent a specific agreement between the employee and employer giving the employee service invention rights. The Patent Law also provides that if there is no agreement between an employer and an employee with respect to the employee’s right to receive compensation for such “service inventions,” the Israeli Compensation and Royalties Committee, or the Committee, a body constituted under the Patent Law, shall determine whether the employee is entitled to remuneration for his or her service inventions and the scope and conditions for such remuneration. Although our employees have agreed to assign to us service invention rights, as a result of uncertainty under Israeli law with respect to the efficacy of waivers of service invention rights, we may face claims demanding remuneration in consideration for assigned inventions. As a consequence of such claims, we could be required to pay additional remuneration or royalties to our current and/or former employees, or be forced to litigate such claims, which could negatively affect our business.
The government tax benefits that we currently are entitled to receive require us to meet several conditions and may be terminated or reduced in the future.
Some of our operations in Israel may entitle us to certain tax benefits under the Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law, once we begin to
produce revenues. If we do not meet the requirements for maintaining these benefits, they may be reduced or cancelled and the relevant operations would be subject to Israeli corporate tax at the standard rate, which is set at 24% in 2017 and 23% in 2018 and thereafter. In addition to being subject to the standard corporate tax rate, we could be required to refund any tax benefits that we have already received, plus interest and penalties thereon. Even if we continue to meet the relevant requirements, the tax benefits that our current “Benefited Enterprise” is entitled to may not be continued in the future at their current levels or at all. If these tax benefits were reduced or eliminated, the amount of taxes that we pay would likely increase, as all of our operations would consequently be subject to corporate tax at the standard rate, which could adversely affect our results of operations. Additionally, if we increase our activities outside of Israel, for example, by way of acquisitions, our increased activities may not be eligible for inclusion in Israeli tax benefits programs. See “Material Tax Considerations — Israeli Tax Considerations and Government Programs — Tax Benefits Under the 2011 Amendment” for additional information concerning these tax benefits.
Your rights and responsibilities as a shareholder will be governed by Israeli law, which differs in some material respects from the rights and responsibilities of shareholders of U.S. companies.
The rights and responsibilities of the holders of our ordinary shares are governed by our amended and restated articles of association and by Israeli law. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders in U.S. corporations. For example, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders, and to refrain from abusing its power in the company, including, among other things, voting at a general meeting of shareholders on matters such as amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and acquisitions and related party transactions requiring shareholder approval. In addition, a shareholder who is aware that it possesses the power to determine the outcome of a shareholder vote or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company. There is limited case law available to assist us in understanding the nature of these duties or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations.
Risks Related to Employee Matters
If we are not able to retain our key management, or attract and retain qualified scientific, technical and business personnel, our ability to implement our business plan may be adversely affected.
Our success largely depends on the skill, experience and effort of our senior management. The loss of the service of any of these persons, including the chairman of our board of directors, Mr. Moshe Arkin, and our chief executive officer, Dr. Alon Seri-Levy, would likely result in a significant loss in the knowledge and experience that we possess and could significantly delay or prevent successful product development and other business objectives. There is intense competition from numerous pharmaceutical and biotechnology companies, universities, governmental entities and other research institutions, seeking to employ qualified individuals in the technical fields in which we operate, and we may not be able to attract and retain the qualified personnel necessary for the successful development and commercialization of our product candidates.
Under applicable employment laws, we may not be able to enforce covenants not to compete.
Our employment agreements generally include covenants not to compete. These agreements prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors for a limited period. We may be unable to enforce these agreements under the
laws of the jurisdictions in which our employees work. For example, Israeli courts have required employers seeking to enforce covenants not to compete to demonstrate that the competitive activities of a former employee will harm one of a limited number of material interests of the employer, such as the secrecy of a company’s confidential commercial information or the protection of its intellectual property. If we cannot demonstrate that such an interest will be harmed, we may be unable to prevent our competitors from benefiting from the expertise of our former employees and our competitiveness may be diminished.
Risks Related to the Offering and Our Ordinary Shares
The price of our ordinary shares may be volatile and may fluctuate due to factors beyond our control.
The share price of publicly traded emerging biopharmaceutical and drug discovery and development companies has been highly volatile and is likely to remain highly volatile in the future. The market price of our ordinary shares may fluctuate significantly due to a variety of factors, including:
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positive or negative results of testing and clinical trials by us, strategic partners and competitors;
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delays in entering into strategic relationships with respect to development and/or commercialization of our product candidates or entry into strategic relationships on terms that are not deemed to be favorable to us;
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technological innovations or commercial product introductions by us or competitors;
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changes in government regulations;
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developments concerning proprietary rights, including patents and litigation matters;
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public concern relating to the commercial value or safety of any of our product candidates;
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financing or other corporate transactions;
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publication of research reports or comments by securities or industry analysts;
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general market conditions in the pharmaceutical industry or in the economy as a whole; or
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other events and factors, many of which are beyond our control.
These and other market and industry factors may cause the market price and demand for our ordinary shares to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their ordinary shares and may otherwise negatively affect the liquidity of our ordinary shares. In addition, the stock market in general, and biopharmaceutical companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies.
You will experience immediate and substantial dilution in the net tangible book value of the ordinary shares you purchase in this offering.
The initial public offering price of our ordinary shares will substantially exceed the net tangible book value per share of our ordinary shares immediately after this offering. Therefore, based on the anticipated public offering price of $12.00 per ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus, if you purchase our ordinary shares in this offering, you will suffer, as of September 30, 2017, immediate dilution of $7.80 per ordinary share, or $7.50 if the underwriters exercise their option to purchase additional ordinary
shares, in net tangible book value after giving effect to the sale of 5,000,000 ordinary shares in this offering at the assumed initial public offering price of $12.00 per ordinary share (which is the midpoint of the price range set forth on the cover page of this prospectus), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. As a result of this dilution, as of September 30, 2017, investors purchasing ordinary shares from us in this offering will have contributed 38.6% of the total amount of our total gross funding to date but will own only 29.9% of our equity. In addition, if outstanding options to purchase our ordinary shares are exercised in the future, you will experience additional dilution. See “Dilution.”
There has been no prior public market for our ordinary shares, and an active trading market may not develop.
Prior to this offering, there has been no public market for our ordinary shares. We cannot predict the extent to which an active market for our ordinary shares will develop or be sustained after this offering, or how the development of such a market might affect the market price for our ordinary shares. The initial public offering price of our ordinary shares in this offering will be agreed upon between us and the underwriters based on a number of factors, including market conditions in effect at the time of the offering, which may not be indicative of the price at which our ordinary shares will trade following completion of the offering. Investors may not be able to sell their shares at or above the initial public offering price.
The controlling share ownership position of Arkin Dermatology will limit your ability to elect the members of our board of directors, may adversely affect our share price and will result in our non-affiliated investors having very limited, if any, influence on corporate actions.
Arkin Dermatology is currently our sole shareholder, and after this offering is completed, we will continue to be controlled by Arkin Dermatology. Upon the closing of this offering, Arkin Dermatology will beneficially own approximately 70.1% of the voting power of our outstanding ordinary shares, or approximately 69.0% if the underwriters exercise their option to purchase additional ordinary shares in full, assuming the automatic conversion of our outstanding promissory note between us and our controlling shareholder, into an aggregate of ordinary shares immediately prior to the closing of this offering, and assuming an initial public offering price of $12.00 per ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus. The Promissory Note will be assigned to Arkin Dermatology immediately prior to the automatic conversion thereof, and the ordinary shares issued pursuant to the automatic conversion will be held by Arkin Dermatology. Therefore, even after this offering, Arkin Dermatology will have the ability to substantially influence us and exert significant control through this ownership position. For example, Arkin Dermatology will be able to control elections of directors, amendments of our organizational documents, and approval of any merger, amalgamation, sale of assets or other major corporate transaction. Arkin Dermatology’s interests may not always coincide with our corporate interests or the interests of other shareholders, and it may exercise its voting and other rights in a manner with which you may not agree or that may not be in the best interests of our other shareholders. So long as it continues to own a significant amount of our equity, Arkin Dermatology will continue to be able to strongly influence and significantly control our decisions.
Arkin Dermatology has indicated an interest in purchasing up to an aggregate of $25.0 million of our ordinary shares in this offering. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, less or no ordinary shares offered in the offering to Arkin Dermatology, or Arkin Dermatology may determine to purchase more, less or no ordinary shares offered in this offering. The foregoing discussion does not reflect any potential purchases by Arkin Dermatology in this offering.
We will be a “controlled company” within the meaning of Nasdaq listing standards and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements.
As a result of the number of shares owned by Arkin Dermatology, after the completion of this offering, we will be a “controlled company” under the Nasdaq corporate governance rules. A
“controlled company” is a company of which more than 50% of the voting power is held by an individual, group or another company. Pursuant to the “controlled company” exemption, we are not required to, and intend to not comply with the requirements that: (1) a majority of our board of directors consist of independent directors and (2) we have a nominating committee composed entirely of independent directors with a written charter addressing such committee’s purpose and responsibilities. See “Management — Foreign Private Issuer and Controlled Company Status — Controlled Company.” Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the Nasdaq Global Market.
The market price of our ordinary shares could be negatively affected by future sales of our ordinary shares.
After this offering, there will be 16,735,069 ordinary shares outstanding. Sales by us or our shareholders of a substantial number of our ordinary shares in the public market following this offering, or the perception that these sales might occur, could cause the market price of our ordinary shares to decline or could impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity securities. Of our issued and outstanding shares, all of the ordinary shares sold in this offering will be freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act of 1933, as amended, or the Securities Act.
Upon the closing of this offering, approximately 11,735,069 of our outstanding ordinary shares will be beneficially owned by shareholders that have agreed with the underwriters that, subject to limited exceptions, for a period of 180 days after the date of this prospectus, they will not directly or indirectly offer, pledge, sell, contract to sell, sell any option or contract to purchase or otherwise dispose of any ordinary shares or any securities convertible into or exercisable or exchangeable for ordinary shares, or in any manner transfer all or a portion of the economic consequences associated with the ownership of ordinary shares, or cause a registration statement covering any ordinary shares to be filed, without the prior written consent of Jefferies LLC and BMO Capital Markets Corp., which may, at any time without notice, release all or any portion of the shares subject to the corresponding lock-up agreements. After the expiration of the lock-up period, these shares can be resold into the public markets in accordance with the requirements of Rule 144, subject to certain volume limitations.
In addition, we intend to file one or more registration statements on Form S-8 with the Securities and Exchange Commission, or the SEC, covering all of the ordinary shares issuable under our 2014 Share Incentive Plan or any other equity incentive plans that we may adopt, and such shares will be freely transferable, except for any shares held by “affiliates,” as such term is defined in Rule 144 under the Securities Act. The market price of our ordinary shares may drop significantly when the restrictions on resale by our existing shareholders lapse and these shareholders are able to sell our ordinary shares into the market.
Upon the filing of the registration statements and following the expiration of the lock-up restrictions described above, the number of ordinary shares that are potentially available for sale in the open market will increase materially, which could make it harder for the value of our ordinary shares to appreciate unless there is a corresponding increase in demand for our ordinary shares. This increase in available shares could result in the value of your investment in our ordinary shares decreasing.
In addition, a sale by us of additional ordinary shares or similar securities in order to raise capital might have a similar negative impact on the share price of our ordinary shares. A decline in the price of our ordinary shares might impede our ability to raise capital through the issuance of additional ordinary shares or other equity securities, and may cause you to lose part or all of your investment in our ordinary shares.
We have broad discretion as to the use of the net proceeds from this offering and may not use them effectively.
We intend to use the net proceeds from this offering to fund our planned clinical trials of our branded product candidates, TWIN, and VERED. The remaining proceeds will be used for the preparation and scale-up for our planned Phase III clinical program for SIRS-T, other research and development activities, including the development of our generic product candidates, as well as for working capital and general corporate purposes. For more information, see “Use of Proceeds.” However, our management will have broad discretion in the application of the net proceeds. Our shareholders may not agree with the manner in which our management chooses to allocate the net proceeds from this offering. The failure by our management to apply these funds effectively could have a material adverse effect on our business, financial condition and results of operation. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income.
We do not intend to pay dividends on our ordinary shares for at least the next several years following this offering.
We do not anticipate paying any cash dividends on our ordinary shares for at least the next several years following this offering. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our ordinary shares will be the investors’ sole source of gain for at least the next several years. In addition, Israeli law limits our ability to declare and pay dividends, and may subject us to certain Israeli taxes. For more information, see “Dividend Policy.”
If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our ordinary shares, the price of our ordinary shares could decline.
The trading market for our ordinary shares will rely in part on the research and reports that equity research analysts publish about us and our business. The price of our ordinary shares could decline if one or more securities analysts downgrade our ordinary shares or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.
As a foreign private issuer whose shares are listed on the Nasdaq Global Market, we intend to follow certain home country corporate governance practices instead of certain Nasdaq requirements.
As a foreign private issuer whose shares will be listed on The Nasdaq Global Market, we are permitted to follow certain home country corporate governance practices instead of certain requirements of the rules of The Nasdaq Global Market. Pursuant to the “foreign private issuer exemption”:
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we intend to establish a quorum requirement such that the quorum for any meeting of shareholders is two or more shareholders holding at least 331∕3% of our voting rights, which complies with Nasdaq requirements; however, if the meeting is adjourned for lack of quorum, the quorum for such adjourned meeting will be any number of shareholders, instead of 331∕3% of our voting rights;
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we also intend to adopt and approve material changes to equity incentive plans in accordance with Israeli Companies Law, 5759-1999, or with the Companies Law, which does not impose a requirement of shareholder approval for such actions. In addition, we intend to follow Israeli corporate governance practice in lieu of Nasdaq Marketplace Rule 5635(c), which requires shareholder approval prior to an issuance of securities in connection with equity-based compensation of officers, directors, employees or consultants;
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as opposed to making periodic reports to shareholders in the manner specified by the Nasdaq corporate governance rules, the Companies Law does not require us to distribute periodic reports directly to shareholders, and the generally accepted business practice in Israel is not to distribute such reports to shareholders but to make such reports available through a public website. We will only mail such reports to shareholders upon request; and
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we will follow Israeli corporate governance practice instead of Nasdaq requirements to obtain shareholder approval for certain dilutive events (such as issuances that will result in a change of control, certain transactions other than a public offering involving issuances of a 20% or greater interest in us and certain acquisitions of the stock or assets of another company). Accordingly, our shareholders may not be afforded the same protection as provided under Nasdaq corporate governance rules.
Otherwise, we intend to comply with the rules generally applicable to U.S. domestic companies listed on the Nasdaq Global Market. However, we may in the future decide to use the foreign private issuer exemption with respect to some or all of the other Nasdaq corporate governance rules. Following our home country governance practices as opposed to the requirements that would otherwise apply to a U.S. company listed on the Nasdaq Global Market may provide less protection than is accorded to investors of domestic issuers. See “Management — Foreign Private Issuer and Controlled Company Status.”
In addition, as a foreign private issuer, we will be exempt from the rules and regulations under the United States Securities Exchange Act of 1934, as amended, or the Exchange Act, related to the furnishing and content of proxy statements (including disclosures with respect to executive compensation), and our officers, directors, and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we will not be required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as domestic companies whose securities are registered under the Exchange Act.
We may lose our foreign private issuer status which would then require us to comply with the Exchange Act’s domestic reporting regime and cause us to incur significant legal, accounting and other expenses.
We are a foreign private issuer and therefore we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act applicable to U.S. domestic issuers. In order to maintain our current status as a foreign private issuer, either (a) a majority of our ordinary shares must be either directly or indirectly owned of record by non-residents of the United States or (b)(i) a majority of our executive officers or directors may not be U.S. citizens or residents, (ii) more than 50 percent of our assets cannot be located in the United States and (iii) our business must be administered principally outside the United States. If we were to lose this status, we would be required to comply with the Exchange Act reporting and other requirements applicable to U.S. domestic issuers, which are more detailed and extensive than the requirements for foreign private issuers. We may also be required to make changes in our corporate governance practices in accordance with various SEC and Nasdaq rules. The regulatory and compliance costs to us under U.S. securities laws if we are required to comply with the reporting requirements applicable to a U.S. domestic issuer may be significantly higher than the cost we would incur as a foreign private issuer. As a result, we expect that a loss of foreign private issuer status would increase our legal and financial compliance costs and would make some activities highly time consuming and costly. We also expect that if we were required to comply with the rules and regulations applicable to U.S. domestic issuers, it would make it more difficult and expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified members of our supervisory board.
We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.
As a public company whose ordinary shares are listed in the United States, and particularly after we no longer qualify as an emerging growth company, we will incur accounting, legal and other expenses that we did not incur as a private company, including costs associated with our reporting requirements under the Exchange Act. We also anticipate that we will incur costs associated with corporate governance requirements, including requirements under Section 404 and other provisions of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), as well as rules implemented by the SEC and the Nasdaq Global Market, and provisions of Israeli corporate law applicable to public companies. We expect that these rules and regulations will increase our legal and financial compliance costs, introduce new costs such as investor relations and stock exchange listing fees, and will make some activities more time-consuming and costly. Our board and other personnel will need to devote a substantial amount of time to these initiatives. We are currently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
As an “emerging growth company,” as defined in the JOBS Act, we may take advantage of certain temporary exemptions from various reporting requirements, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act (and the rules and regulations of the SEC thereunder). When these exemptions cease to apply, we expect to incur additional expenses and devote increased management effort toward ensuring compliance with them. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.
Pursuant to Section 404 of the Sarbanes-Oxley Act and the related rules adopted by the SEC and the Public Company Accounting Oversight Board, starting with the second annual report that we file with the SEC after the closing of this offering, our management will be required to report on the effectiveness of our internal control over financial reporting. In addition, once we no longer qualify as an “emerging growth company” under the JOBS Act and lose the ability to rely on the exemptions related thereto discussed above and depending on our status as per Rule 12b-2 of the Exchange Act, our independent registered public accounting firm may also need to attest to the effectiveness of our internal control over financial reporting under Section 404. We have not yet commenced the process of determining whether our existing internal controls over financial reporting systems are compliant with Section 404 and whether there are any material weaknesses or significant deficiencies in our existing internal controls. This process will require the investment of substantial time and resources, including by our chief financial officer and other members of our senior management. As a result, this process may divert internal resources and take a significant amount of time and effort to complete. In addition, we cannot predict the outcome of this determination and whether we will need to implement remedial actions in order to implement effective controls over financial reporting. The determination and any remedial actions required could result in us incurring additional costs that we did not anticipate, including the hiring of outside consultants. Irrespective of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation. As a result, we may experience higher than anticipated operating expenses, as well as higher independent auditor fees during and after the implementation of these changes. If we are unable to implement any of the required changes to our internal control over financial reporting effectively or efficiently or are required to do so earlier than anticipated, it could adversely affect our operations, financial reporting and/or results of operations and could result in an adverse opinion on internal controls from our independent auditors.
Changes in the laws and regulations affecting public companies will result in increased costs to us as we respond to their requirements. These laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We cannot predict or estimate the amount or timing of additional costs we may incur in order to comply with such requirements.
We are an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies may make our ordinary shares less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various requirements that are applicable to other public companies that are not “emerging growth companies.” Most of such requirements relate to disclosures that we would only be required to make if we also ceased to be a foreign private issuer in the future, for example, the requirement to hold stockholder advisory votes on executive and severance compensation and executive compensation disclosure requirements for U.S. companies. However, as a foreign private issuer, we could still be required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. We are exempt from such requirement for as long as we remain an emerging growth company, which may be up to five fiscal years after the date of this offering. We will remain an emerging growth company until the earliest of: (a) the last day of our fiscal year during which we have total annual gross revenues of at least $1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of the closing of this offering; (c) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. We may choose to take advantage of some or all of the available exemptions. When we are no longer deemed to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above. We cannot predict if investors will find our ordinary shares less attractive as a result of our reliance on exemptions under the JOBS Act. If some investors find our ordinary shares less attractive as a result, there may be a less active trading market for our ordinary shares and our share price may be more volatile.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, shareholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our ordinary shares.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404, or any subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our ordinary shares.
Our management will be required to assess the effectiveness of our internal controls and procedures and disclose changes in these controls on an annual basis. However, for as long as we are an “emerging growth company” under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404. We could be an “emerging growth company” for up to five years. An independent assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the expense of remediation.
We expect to be a passive foreign investment company for U.S. federal income tax purposes for the current tax year and possibly thereafter, which could result in materially adverse U.S. federal income tax consequences to U.S. Holders of our ordinary shares.
Based on our anticipated income and the composition of our income and assets, we expect to be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes at least until we start generating a substantial amount of active revenue. A non-U.S. entity treated as a
corporation for U.S. federal income tax purposes will be a PFIC for any taxable year if either (i) at least 75% of its gross income for such year is passive income or (ii) at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income. A separate determination has to be made after the close of each taxable year as to whether we were a PFIC for that year. Because the value of our assets for purposes of the PFIC test will generally be determined by reference to the market price of our ordinary shares, our PFIC status may depend in part on the market price of our ordinary shares, which may fluctuate significantly. In addition, there are certain ambiguities in applying the PFIC test to us. If we are considered a PFIC, material adverse U.S. federal income tax consequences could apply to U.S. Holders (as defined in the section headed “Material Tax Considerations — U.S. Federal Income Tax Consequences”) of our ordinary shares with respect to any “excess distribution” received from us and any gain from a sale or other disposition of our ordinary shares. Please see “Material Tax Considerations — U.S. Federal Income Tax Consequences.”
Special Note Regarding Forward-Looking Statements
We make forward-looking statements in this prospectus that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, results of operations, liquidity, plans and objectives. In some cases, you can identify forward-looking statements by terminology such as “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “potential,” or the negative of these terms or other similar expressions. Forward-looking statements are based on information we have when those statements are made or our management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:
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the adequacy of our financial and other resources, particularly in light of our history of recurring losses and the uncertainty regarding the adequacy of our liquidity to pursue our complete business objectives;
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our ability to complete the development of our product candidates;
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our ability to find suitable co-development partners;
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our ability to obtain and maintain regulatory approvals for our product candidates in our target markets and the possibility of adverse regulatory or legal actions relating to our product candidates even if regulatory approval is obtained;
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our ability to rely on data from our Phase II TWIN trial to advance the development of SIRS-T;
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our ability to commercialize our pharmaceutical product candidates;
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our ability to obtain and maintain adequate protection of our intellectual property;
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our ability to manufacture our product candidates in commercial quantities, at an adequate quality or at an acceptable cost;
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our ability to establish adequate sales, marketing and distribution channels;
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acceptance of our product candidates by healthcare professionals and patients;
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the possibility that we may face third-party claims of intellectual property infringement;
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the timing and results of clinical trials that we may conduct or that our competitors and others may conduct relating to our or their products;
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intense competition in our industry, with competitors having substantially greater financial, technological, research and development, regulatory and clinical, manufacturing, marketing and sales, distribution and personnel resources than we do;
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potential product liability claims;
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potential adverse federal, state and local government regulation in the United States, Europe or Israel; and
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loss or retirement of key executives and research scientists.
You should review carefully the risks and uncertainties described under the heading “Risk Factors” in this prospectus for a discussion of these and other risks that relate to our business and investing in our ordinary shares. The forward-looking statements contained in this prospectus are expressly qualified in their entirety by this cautionary statement. Except as required by law, we undertake no obligation to update publicly any forward-looking statements after the date of this prospectus to conform these statements to actual results or to changes in our expectations.
Trademarks, Service Marks and Trade Names
Solely for convenience, the trademarks, service marks, and trade names referred to in this prospectus are without the ® and ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and trade names. This prospectus contains additional trademarks, service marks and trade names of others, which are the property of their respective owners. All trademarks, service marks and trade names appearing in this prospectus are, to our knowledge, the property of their respective owners. We do not intend our use or display of other companies’ trademarks, service marks or trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
Market and Industry Data
This prospectus includes statistics and other data relating to markets, market sizes and other industry data pertaining to our business that we have obtained from industry publications and surveys and other information available to us. Industry publications and surveys generally state that the information contained therein has been obtained from sources believed to be reliable. Market data and statistics are inherently predictive and speculative and are not necessarily reflective of actual market conditions. Such statistics are based on market research, which itself is based on sampling and subjective judgments by both the researchers and the respondents, including judgments about what types of products and transactions should be included in the relevant market. In addition, the value of comparisons of statistics for different markets is limited by many factors, including that (i) the markets are defined differently, (ii) the underlying information was gathered by different methods, and (iii) different assumptions were applied in compiling the data. Accordingly, the market statistics included in this prospectus should be viewed with caution. We believe that information from these industry publications included in this prospectus is reliable.
Use of Proceeds
We estimate that the net proceeds from this offering will be approximately $54.0 million, or approximately $62.4 million if the underwriters exercise in full their option to purchase additional ordinary shares, based upon an assumed initial public offering price of $12.00 per ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
Each $1.00 increase (decrease) in the assumed initial public offering price of $12.00 per ordinary share would increase (decrease) the net proceeds we receive from this offering by $4.7 million, assuming that the number of ordinary shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions. We may also increase or decrease the number of ordinary shares we are offering. Each increase or decrease of 1.0 million in the number of ordinary shares we are offering would increase or decrease the net proceeds we receive from this offering by $11.2 million, assuming no change in the assumed initial public offering price and after deducting underwriting discounts and commissions.
We intend to use the net proceeds from this offering as follows:
•
approximately $26.0 million to fund our planned Phase III clinical trials for TWIN for the treatment of acne;
•
approximately $20.0 million to fund our planned Phase III clinical trials for VERED for the treatment of subtype II rosacea; and
•
the remainder for the preparation and scale-up for our planned Phase III clinical program for SIRS-T for the treatment of acne, to fund other research and development activities, including the development of our generic product candidates, and for working capital and other general corporate purposes.
Our expected use of net proceeds from this offering represents our current intentions based upon our present plans and business condition, which could change in the future as our plans and business conditions evolve. As of the date of this prospectus, we cannot predict with certainty any or all of the particular uses for the net proceeds to be received upon the closing of this offering, or the amounts, if any, that we will actually spend on the uses set forth above. The amounts and timing of our actual use of the net proceeds will vary depending on numerous factors, including our ability to obtain additional financing, if needed, the progress, cost and results of our pre-clinical and clinical development programs, and whether we are able to enter into future product development partnerships and technology license arrangements. As a result, our management will have broad discretion in the application of the net proceeds, which may include uses not set forth above, and investors will be relying on our judgment regarding the application of the net proceeds from this offering. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business. We do not plan to use any proceeds from this offering for the repayment of any indebtedness.
Pending their use, we plan to invest the net proceeds from this offering in short and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government or to hold such proceeds as cash.
We believe that the net proceeds of this offering, together with our existing cash resources, will be sufficient to enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months. Based on our current plans, we believe that the anticipated net proceeds from this offering, together with our existing cash resources, will be sufficient for the completion of (i) our planned Phase III clinical program for TWIN for the treatment of acne and (ii) our planned Phase III clinical program for VERED for the treatment of subtype II rosacea. We have based this estimate on assumptions that may prove to be incorrect, and we could use our available capital resources sooner than we currently expect.
Dividend Policy
We have never declared or paid any cash dividends on our ordinary shares and we anticipate that, for the foreseeable future, we will retain any future earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends for at least the next several years.
The distribution of dividends may also be limited by the Companies Law, which permits the distribution of dividends only out of retained earnings or earnings derived over the two most recent fiscal years, whichever is higher, provided that there is no reasonable concern that payment of a dividend will prevent a company from satisfying its existing and foreseeable obligations as they become due. Our amended and restated articles of association provide that dividends will be paid at the discretion of, and upon resolution by, our board of directors, subject to the provisions of the Companies Law.
Capitalization
The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2017, on:
•
an actual basis;
•
on a pro forma basis to give effect to (i) the automatic conversion of our outstanding promissory note between us and our controlling shareholder into an aggregate of 5,444,825 ordinary shares immediately prior to the closing of this offering, assuming an initial public offering price of $12.00 per ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus and (ii) the effectiveness of our amended and restated articles of association, adopted in connection with this offering; and
•
on a pro forma as adjusted basis, to give further effect to the issuance and sale of 5,000,000 ordinary shares in this offering at the assumed initial public offering price of $12.00 per ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
You should read this table in conjunction with our financial statements and related notes included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
| |
|
|
As of September 30, 2017
|
|
| |
|
|
Actual
|
|
|
Pro Forma
|
|
|
Pro Forma
As Adjusted
|
|
| |
|
|
(Unaudited)
(in thousands,
except share and per share data)
|
|
|
Cash and cash equivalents
|
|
|
|
$ |
12,491 |
|
|
|
|
$ |
12,491 |
|
|
|
|
$ |
66,491 |
|
|
|
Loans from the controlling shareholder
|
|
|
|
$ |
65,338 |
|
|
|
|
$ |
— |
|
|
|
|
$ |
— |
|
|
| Shareholders’ equity (capital deficiency): |
|
|
|
|
|
Ordinary shares of NIS 0.1 par value per share; 8,775,783 shares authorized and 6,290,244 shares issued and outstanding, actual; 50,000,000 shares authorized and 11,735,069 issued and outstanding, pro forma; 50,000,000 shares authorized and 16,735,069 issued and outstanding, pro forma as adjusted
|
|
|
|
|
148 |
|
|
|
|
|
275 |
|
|
|
|
|
393 |
|
|
|
Additional paid-in capital
|
|
|
|
|
40,678 |
|
|
|
|
|
105,889 |
|
|
|
|
|
159,771 |
|
|
|
Accumulated deficit
|
|
|
|
|
(89,811) |
|
|
|
|
|
(89,811) |
|
|
|
|
|
(89,811) |
|
|
|
Total shareholders’ equity (capital deficiency)
|
|
|
|
|
(48,985) |
|
|
|
|
|
16,353 |
|
|
|
|
|
70,353 |
|
|
|
Total capitalization
|
|
|
|
$ |
16,353 |
|
|
|
|
$ |
16,353 |
|
|
|
|
$ |
70,353 |
|
|
| |
Each $1.00 increase or decrease in the assumed initial public offering price of $12.00 per ordinary share (which is the midpoint of the price range set forth on the cover page of this prospectus) would increase or decrease the pro forma as adjusted amount of each of cash and cash equivalents, additional paid-in capital, total shareholders’ equity and total capitalization by approximately $4.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions. Each increase or decrease of 1.0 million in the number of ordinary shares we are offering would increase or decrease the pro forma as adjusted amount of each of cash and cash equivalents, additional paid-in capital, total shareholders’ equity and total capitalization by approximately $11.2 million, assuming no change in the assumed initial public offering price and after deducting the underwriting discounts and commissions.
The preceding table excludes (i) 991,402 ordinary shares issuable upon the exercise of options to purchase ordinary shares outstanding under our 2014 Share Incentive Plan as of September 30, 2017, at a weighted average exercise price of $3.63 per ordinary share; and (ii) an additional 358,598 ordinary shares reserved for future issuance under our amended and restated 2014 Share Incentive Plan, which will become effective upon the pricing of this offering.
Dilution
If you invest in our ordinary shares in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the net tangible book value per ordinary share after this offering. Our net tangible book value (deficit) as of September 30, 2017, was $(49.0) million, or $(7.79) per ordinary share. Net tangible book value per ordinary share was calculated by:
•
subtracting our liabilities from our tangible assets; and
•
dividing the difference by the number of ordinary shares outstanding.
Our pro forma net tangible book value as of September 30, 2017 was $16.4 million, corresponding to a pro forma net tangible book value of $1.39 per ordinary share. Pro forma net tangible book value per ordinary share represents our pro forma net tangible book value divided by the total number of our ordinary shares outstanding as of September 30, 2017, after giving effect to the assumed automatic conversion of our outstanding promissory note between us and our controlling shareholder into an aggregate of 5,444,825 ordinary shares immediately prior to the closing of this offering, assuming an initial public offering price of $12.00 per ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus.
After giving further effect to the issuance and sale of 5,000,000 ordinary shares in this offering at an assumed initial public offering price of $12.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value on September 30, 2017 would have been approximately $70.4 million, or $4.20 per ordinary share. This represents an immediate dilution in the pro forma as adjusted net tangible book value of $7.80 per ordinary share to investors purchasing our ordinary shares in this offering.
The following table illustrates the immediate dilution to new investors:
| |
|
|
|
Assumed initial public offering price per ordinary share
|
|
|
|
|
|
|
|
|
|
$ |
12.00 |
|
|
| |
|
|
|
Historical net tangible book value (deficit) per ordinary share as of September 30, 2017
|
|
|
|
|
(7.79) |
|
|
|
|
|
|
|
|
| |
|
|
|
Increase per ordinary share attributable to the conversion of promissory note as of September 30, 2017
|
|
|
|
|
9.18 |
|
|
|
| |
|
|
|
Pro forma net tangible book value per ordinary share
|
|
|
|
|
1.39 |
|
|
|
|
|
|
|
|
| |
|
|
|
Increase in pro forma net tangible book value per ordinary share attributable to the offering
|
|
|
|
|
2.81 |
|
|
|
|
|
|
|
|
| |
|
|
|
Pro forma as adjusted net tangible book value per share after this offering
|
|
|
|
|
4.20 |
|
|
|
| |
|
|
|
Dilution per ordinary share to new investors
|
|
|
|
|
|
|
|
|
|
$ |
7.80 |
|
|
| |
|
|
|
Percentage of dilution per ordinary share to new investors
|
|
|
|
|
|
|
|
|
|
|
65% |
|
|
| |
Each $1.00 increase or decrease in the assumed initial public offering price of $12.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the pro forma as adjusted net tangible book value as of September 30, 2017 by $0.28 per ordinary share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions.
Similarly, each increase or decrease of 1.0 million shares in the number of ordinary shares we are offering would increase or decrease the pro forma as adjusted net tangible book value as of September 30, 2017 by $0.39 or by $0.44 per ordinary share, respectively, assuming the assumed
initial public offering price remains the same, and after deducting underwriting discounts and commissions. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing.
If the underwriters’ option to purchase additional shares from us is exercised in full, and based on the assumed initial public offering price of $12.00 per ordinary share (which is the midpoint of the price range set forth on the cover page of this prospectus), the pro forma as adjusted net tangible book value would be $4.50 per ordinary share and the dilution per ordinary share to new investors in this offering would be $7.50, after deducting underwriting discounts and commissions.
The table below summarizes, as of September 30, 2017, on the pro forma as adjusted basis described above, the differences for our existing shareholder and new investors in this offering, with respect to the number of ordinary shares purchased from us, the total consideration paid and the average price per ordinary share paid before deducting fees and offering expenses.
| |
|
|
Shares purchased
|
|
|
Total consideration
|
|
|
Average
price per
share
|
|
| |
|
|
Number
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
Existing shareholder
|
|
|
|
|
11,735,069 |
|
|
|
|
|
70.1 |
|
|
|
|
$ |
95,531,592 |
|
|
|
|
|
61.4 |
|
|
|
|
$ |
8.14 |
|
|
|
|
New investors
|
|
|
|
|
5,000,000 |
|
|
|
|
|
29.9 |
|
|
|
|
|
60,000,000 |
|
|
|
|
|
38.6 |
|
|
|
|
|
12.00 |
|
|
|
|
Total
|
|
|
|
|
16,735,069 |
|
|
|
|
|
100 |
|
|
|
|
$ |
155,531,592 |
|
|
|
|
|
100 |
|
|
|
|
$ |
9.29 |
|
|
|
| |
Each $1.00 increase or decrease in the assumed initial public offering price of $12.00 per ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the total consideration paid by new investors by $4.7 million, and increase or decrease the percent of total consideration paid by new investors by assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.
The table and discussion above excludes (i) 991,402 ordinary shares issuable upon the exercise of options to purchase ordinary shares outstanding under our 2014 Share Incentive Plan as of September 30, 2017, at a weighted average exercise price of $3.63 per ordinary share; and (ii) an additional 358,598 ordinary shares reserved for future issuance under our amended and restated 2014 Share Incentive Plan, which will become effective upon the pricing of this offering.
Our controlling shareholder, Arkin Dermatology, which is owned by the chairman of our board of directors, has indicated an interest in purchasing up to an aggregate of $25.0 million of our ordinary shares in this offering on the same terms as the other purchasers in the offering. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer or no ordinary shares offered in the offering to Arkin Dermatology, or Arkin Dermatology may determine to purchase more, fewer or no ordinary shares offered in the offering. The underwriters will receive the same underwriting discount on any ordinary shares purchased by Arkin Dermatology as they will on any ordinary shares sold to the public in the offering. For dilution purposes, the shares purchased and consideration paid by the potential purchaser in this offering at the initial public offering price set forth in the foregoing discussion and tables are reflected as shares purchased and consideration paid by new investors.
To the extent any options are issued under our equity incentive plans, or we issue additional ordinary shares in the future, there will be further dilution to investors participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our shareholders.
Selected Financial Data
The following table sets forth our selected historical financial data, which is derived from our audited financial statements, which have been prepared in accordance with U.S. GAAP. The selected balance sheet data as of December 31, 2015 and 2016 and our selected statement of operations data for the years ended December 31, 2015 and 2016 is derived from our audited financial statements included elsewhere in this prospectus. The selected balance sheet data for the nine months ended September 30, 2016 and 2017 and the selected statement of operations data as of September 30, 2017 have been derived from our unaudited financial statements included elsewhere in this prospectus and have been prepared on the same basis as the audited financial statements. In the opinion of management, the unaudited data reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial information in those statements. Our historical results are not necessarily indicative of the results that should be expected in the future, and results for the nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year ending December 31, 2017 or any other future period. You should read this selected financial data in conjunction with, and it is qualified in its entirety by, reference to our historical financial information and other information provided in this prospectus including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and related notes included elsewhere in this prospectus.
| |
|
|
Year Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
| |
|
|
2015
|
|
|
2016
|
|
|
2016
|
|
|
2017
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
| |
|
|
(in thousands,
except share and per share data)
|
|
| Statement of Operations Data: |
|
|
|
|
|
|
Research and development expenses
|
|
|
|
$ |
7,184 |
|
|
|
|
$ |
17,023 |
|
|
|
|
$ |
13,097 |
|
|
|
|
$ |
21,389 |
|
|
|
General and administrative expenses
|
|
|
|
|
2,463 |
|
|
|
|
|
3,733 |
|
|
|
|
|
2,809 |
|
|
|
|
|
4,781 |
|
|
|
Total operating loss
|
|
|
|
|
9,647 |
|
|
|
|
|
20,756 |
|
|
|
|
|
15,906 |
|
|
|
|
|
26,170 |
|
|
|
Financial expenses, net
|
|
|
|
|
13 |
|
|
|
|
|
15 |
|
|
|
|
|
(1) |
|
|
|
|
|
(52) |
|
|
|
Loss for the year
|
|
|
|
$ |
9,660 |
|
|
|
|
$ |
20,771 |
|
|
|
|
$ |
15,905 |
|
|
|
|
$ |
26,118 |
|
|
|
Basic and diluted loss per ordinary share (1)
|
|
|
|
$ |
1.53 |
|
|
|
|
$ |
3.30 |
|
|
|
|
$ |
2.53 |
|
|
|
|
$ |
4.15 |
|
|
|
Weighted average number of ordinary shares outstanding – basic and diluted
|
|
|
|
|
6,290,242 |
|
|
|
|
|
6,290,242 |
|
|
|
|
|
6,290,242 |
|
|
|
|
|
6,290,244 |
|
|
|
Pro forma basic and diluted net loss per ordinary share (unaudited) (1)(2)
|
|
|
|
|
|
|
|
|
|
$ |
1.77 |
|
|
|
|
|
|
|
|
|
|
$ |
2.23 |
|
|
|
Pro forma weighted average number of ordinary shares outstanding – basic and diluted (unaudited) (2)
|
|
|
|
|
|
|
|
|
|
|
11,735,067 |
|
|
|
|
|
|
|
|
|
|
|
11,735,069 |
|
|
| |
(1)
Basic loss per ordinary share and diluted loss per ordinary share are the same because outstanding options would be anti-dilutive due to our net losses in these periods.
(2)
Reflects the automatic conversion of our outstanding promissory note between us and our controlling shareholder into an aggregate of 5,444,825 ordinary shares immediately prior to the closing of this offering, assuming an initial public offering price of $12.00 per ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus. The actual number of shares to be issued upon conversion of the promissory note will be determined by dividing the principal amount of the promissory note at the time of conversion by the initial public offering price per ordinary share in this offering. See “Certain Relationships and Related Party Transactions — Loan Agreements with Our Controlling Shareholder.”
| |
|
|
As of
|
|
| |
|
|
December 31,
2016
|
|
|
September 30,
2017
|
|
| |
|
|
|
|
|
|
|
|
(Unaudited)
|
|
| |
|
|
(in thousands)
|
|
| Balance Sheet Data: |
|
|
|
|
Cash and cash equivalents
|
|
|
|
$ |
7,001 |
|
|
|
|
$ |
12,491 |
|
|
|
Total assets
|
|
|
|
|
10,985 |
|
|
|
|
|
22,782 |
|
|
|
Total liabilities
|
|
|
|
|
42,322 |
|
|
|
|
|
71,767 |
|
|
|
Accumulated deficit
|
|
|
|
|
(63,693) |
|
|
|
|
|
(89,811) |
|
|
|
Total capital deficiency
|
|
|
|
|
(31,337) |
|
|
|
|
|
(48,985) |
|
|
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis should be read in conjunction with our financial statements and related notes included elsewhere in this prospectus. This discussion and other parts of the prospectus contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. See “Special Note Regarding Forward-Looking Statements.”
Overview
We are a clinical-stage dermatology company focused on identifying, developing and commercializing branded and generic topical drug products for the treatment of skin diseases. Our current product candidate pipeline consists of late-stage branded product candidates that leverage our proprietary, silica-based microencapsulation technology platform, and several generic product candidates across multiple indications. Our lead product candidate, TWIN, is a novel, once-daily, non-antibiotic topical cream that we are developing for the treatment of acne vulgaris, or acne. We recently completed a 726 subject, double-blind, placebo-controlled, six-arm, multi-center Phase II clinical trial designed to assess the safety and efficacy of TWIN in subjects with facial acne. In this trial, TWIN demonstrated statistically significant improvements in all pre-defined co-primary and secondary efficacy endpoints, as compared to vehicle. Subject to an End of Phase II meeting to be scheduled with the FDA, we plan to initiate two pivotal Phase III trials for TWIN in the United States in the second half of 2018 and expect to report top-line data from these trials in 2019. Our other branded product candidates are: SIRS-T, a topical cream containing encapsulated tretinoin for the potential treatment of acne; and VERED, a potential treatment for subtype II rosacea.
We designed our proprietary, silica-based microencapsulation technology platform to enhance the tolerability and stability of topical drugs while maintaining their efficacy. Topical drugs often struggle to balance achieving both high efficacy and high tolerability. Our technology platform entraps active ingredients in an inert, inorganic silica shell, which creates an unnoticeable barrier between the active ingredient and the skin. The resulting microcapsules are designed to allow the entrapped active ingredients to gradually migrate through the pores of the shell and deliver active ingredient doses onto the skin in a controlled manner, resulting in improved tolerability and stability without sacrificing efficacy. By separately encapsulating active ingredients within protective silica shells, our technology platform also enables the production of novel fixed-dose active ingredient combinations that otherwise would not be stable. We believe that our microencapsulation technology has the potential to be used for topical drug products to treat a variety of skin diseases. As a result of the FDA having already approved silica as a safe excipient for topical drug products, we expect the review process for each of our current branded product candidates to be conducted according to the FDA’s 505(b)(2) regulatory pathway, which may provide for a more efficient regulatory process by permitting us to rely, in part, upon the FDA’s previous findings of safety and efficacy of an approved product.
Since our inception, we have incurred significant operating losses. We incurred net losses of $9.7 million and $20.8 million for the years ended December 31, 2015 and 2016, respectively, and $15.9 million and $26.1 million for the nine months ended September 30, 2016 and 2017, respectively. As of September 30, 2017, we had an accumulated deficit of $89.8 million. We expect to incur significant expenses and operating losses for the foreseeable future as we advance our product candidates from formulation development through pre-clinical development and clinical trials, seek regulatory approval and pursue commercialization of any approved product candidate. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant expenses related to product manufacturing, marketing, sales and distribution. In addition, we may incur expenses in connection with the in-license or acquisition of additional product candidates. Furthermore, upon closing of this offering, we expect to incur additional expenses associated with operating as a U.S. public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.
On August 4, 2014, our former shareholders entered into a securities purchase agreement with our current sole shareholder, Arkin Dermatology, or the Purchase Agreement. The Purchase Agreement detailed the terms and conditions for the sale of the company to Arkin Dermatology in exchange for a cash payment in the amount of approximately $10.5 million in addition to an earn-out payment of up to $17.0 million based on the achievement of certain development and revenue-related milestones. In connection with the Purchase Agreement, our executive officers and certain employees were entitled, subject to certain research and development milestones and other conditions, to a special bonus in an aggregate amount of up to $3.0 million, all of which has been paid, with $1.0 million paid in each of the years 2014, 2016 and 2017 to our executive officers and certain employees.
Collaboration Agreements
Perrigo
On April 27, 2015, we entered into a development, manufacturing and commercialization agreement, as amended on October 26, 2015, with Perrigo UK to work toward the objective of obtaining all FDA approvals necessary for the commercialization of ivermectin cream, 1%, in the United States. Under the terms of the agreement, Perrigo UK will conduct all regulatory, scientific, clinical and technical activities necessary to develop ivermectin cream, 1%, prepare and file an ANDA with the FDA, and gain regulatory approval to market ivermectin cream, 1%, in the United States. We granted Perrigo UK the right, title and interest in and to ivermectin cream, 1%, and agreed on each party’s portion of the costs, including the allocation of costs related to development and litigation expenses associated with performance under the agreement. As soon as reasonably practical after final approval by the FDA of the ANDA, if approval is granted, Perrigo UK is required to use diligent efforts to commercialize ivermectin cream, 1%, in the United States. Perrigo UK has the sole and exclusive right to establish and control the prices and all other terms and conditions for the sales of ivermectin cream, 1%, in the United States and is required to do so in good faith without derogating from our right to benefit from the commercialization of ivermectin cream, 1%. We will be entitled to 50% of Perrigo UK’s gross profits related to the sale of ivermectin cream, 1%, on a quarterly basis, for a period of 20 years following the first commercial sale of ivermectin cream, 1%, in the United States. The agreement may be terminated in the event of a material breach by one of the parties, certain potential infringement claims by third parties or an uncured insolvency or bankruptcy procedure of one of the parties. In addition, the agreement may be terminated if the gross profits relating to the sale of the product do not exceed a certain threshold or if the potential market for the product has been significantly reduced due to regulatory changes.
Each party is responsible for its own costs in relation to performance under the agreement.
We are obligated to finance all out-of-pocket trial expenses (including materials), and Perrigo UK is required to reimburse us for 40% of the out-of-pocket clinical trial expenses as follows (a) if we obtain FDA approval, by financing our share of the out-of-pocket litigation expenses, or (b) if FDA approval is not obtained, by reimbursing us an amount equal to 40% of our out-of-pocket expenses.
In connection with the transfer of an in-process generic product candidate to us by Arkin Dermatology on August 22, 2017, we assumed an agreement with Perrigo UK for the development, manufacturing and commercialization of this generic product candidate. Under the terms of the agreement, Perrigo UK will conduct all regulatory, scientific, clinical and technical activities necessary to develop the generic product candidate, prepare and file an ANDA with the FDA, and gain regulatory approval to market the generic product candidate. As soon as reasonably practical after final approval by the FDA of the ANDA, if approval is granted, Perrigo UK is required to use diligent efforts to commercialize the product in the United States. Perrigo UK has the sole and exclusive right to establish and control the prices and all other terms and conditions for the sales of the generic product candidate in the United States and is required to do so in good faith without
derogating from our right to benefit from the commercialization of the generic product candidate. We are responsible for 80% of all out-of-pocket clinical study costs related to the generic product candidate. We will be entitled to 50% of Perrigo UK’s gross profits related to the sale of the generic product candidate, on a quarterly basis, for a period of 20 years following the first commercial sale of the generic product candidate. The agreement may be terminated in the event of a material breach by one of the parties, certain potential infringement claims by third parties or an uncured insolvency or bankruptcy proceeding of one of the parties. In addition, the agreement may be terminated if the gross profits relating to the sale of the generic product candidate do not exceed a certain threshold or if the potential market for the product has been significantly reduced to regulatory changes.
Douglas Pharmaceuticals
On June 7, 2017, we entered into a Development, License, Supply and Marketing Agreement, with Douglas with respect to the development and commercialization of a generic product candidate for a drug that already has generic substitutions. Douglas will manufacture the product for non-clinical and clinical trial uses, and once approved for marketing, for commercialization by us in the countries we elect to commercialize the product. Douglas will also be responsible for completing the formulation of the product and providing chemistry, manufacturing and control support, conducting all steps for production and quality controls of the product, formulation development of the product in final finished form and supporting the ANDA or any other applicable registration application. We will be responsible for conducting the legal and regulatory review process, performing bioequivalence and clinical studies to obtain marketing approval for the product in the United States and preparing and filing the regulatory filings to obtain marketing approval in the United States. We have the right to commercialize the product in all countries in North America and any other country agreed with Douglas, and Douglas has the right to commercialize the product in Australia, New Zealand, the Southeast, East and North Asia region and the Middle East and North Africa region and any other country agreed to by the US and Douglas.
Each party granted the other an exclusive royalty free license under its related intellectual property with the right to grant sublicenses, to use and commercialize the product in the countries in which the other party has the right to commercialize the product. Any new intellectual property generated in the development plan will be jointly owned. We are responsible for patent prosecution and Douglas is required to reimburse us for 50% of our patent expenses.
Each party is required to pay the other party 50% of its net profits from the sale of the products during the term of the agreement. In addition, we or the third party commercializing the product on our behalf will pay Douglas a transfer price based on the cost of goods for the manufacture of the products. The term of the agreement is ten years, and either party may terminate the agreement (i) for breach, (ii) if the joint steering committee established by the parties determines that it is unlikely that marketing approval will be achieved or determines that the commercialization of the product becomes unfeasible or uneconomic, (iii) a patent injunction permanently prohibits the future commercialization of the product or (iv) in the case of force majeure.
Financial Operations Overview
Revenues
Since 2013, we have not recognized any revenue and we do not expect to generate revenue from the sale of products in the near future.
Operating expenses
Our current operating expenses consist primarily of research and development as well as general and administrative expenses.
Research and development expenses
Research and development expenses consist principally of:
•
salaries for research and development staff and related expenses, including employee benefits and share-based compensation expenses;
•
expenses paid to suppliers of disposables and raw materials, including drug substances, and related expenses, such as, external laboratory testing and development of analytical methods;
•
expenses for production of our product candidates both in-house and by contract manufacturers;
•
expenses paid to contract research organizations and other third parties in connection with the performance of pre-clinical studies, clinical trials and related expenses;
•
expenses incurred under agreements with other third parties, including subcontractors, suppliers and consultants that conduct formulation development, regulatory activities and pre-clinical studies;
•
expenses incurred to acquire, develop and manufacture materials for use in pre-clinical and other studies;
•
expenses incurred from the purchase and transfer of product candidates; and
•
facilities, depreciation of fixed assets used to develop our product candidates, maintenance of equipment used to develop our product candidates and other expenses, including direct and allocated expenses for rent, maintenance of facilities, insurance and other operating expenses.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development expenses than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect our research and development expenses to increase significantly over the next several years as we increase personnel expenses, including share-based compensation, commence Phase III clinical trials for TWIN, SIRS-T and VERED and conduct pre-clinical studies and clinical trials and prepare regulatory filings for our product candidates.
Due to the inherently unpredictable and highly uncertain nature of clinical development processes, we cannot reasonably estimate the nature, timing and expenses of the efforts that will be necessary to complete the remainder of the development of our product candidates, or when, if ever, material net cash inflows may commence from any of our product candidates. Clinical development timelines, the probability of success and development expenses can differ materially from expectations. This is due to numerous risks and uncertainties associated with developing drugs, including the uncertainty of:
•
the scope, rate of progress and expense of our research and development activities;
•
clinical trials and early-stage results;
•
the terms and timing of regulatory requirements and approvals;
•
the expense of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; and
•
the ability to market, commercialize and achieve market acceptance of any product candidate that we are developing or may develop in the future.
While we are currently focused on advancing our product development, our future research and development expenses will depend on the clinical success of our product candidates, as well as ongoing assessments of the candidates’ commercial potential. As we obtain results from clinical trials, we may elect to discontinue or delay clinical trials for one or more of our product candidates in certain indications in order to focus our resources on more promising product candidates. Completion of clinical trials may take several years or more, but the length of time generally varies according to the type, complexity, novelty and intended use of a product candidate.
The lengthy process of completing clinical trials and seeking regulatory approval for our product candidates requires the expenditure of substantial resources. Any failure or delay in completing clinical trials, or in obtaining regulatory approvals, could cause a delay in generating product revenue and cause our research and development expenses to increase and, in turn, have a material adverse effect on our operations.
General and administrative expenses
Our general and administrative expenses consist primarily of salaries and related expenses, including employee benefits and share-based compensation expenses, legal and professional fees for auditors and other consulting expenses not related to research and development activities. Such expenses include the process of becoming a public company, patent registration expenses, depreciation of fixed assets related to general and administrative activities and other expenses, including rent, maintenance of facilities, insurance and office expenses.
We expect that our general and administrative expenses will increase as a result of increased personnel expenses, including share-based compensation, expanded infrastructure and higher consulting, legal and tax-related service fees associated with maintaining compliance with stock exchange listing and SEC requirements, accounting and audit fees, investor relations expenses and director and officer insurance premiums associated with being a public company. Additionally, if and when we believe a regulatory approval of a product candidate appears likely, we anticipate an increase in payroll and expense as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of our product candidates.
Financial expenses, net
Our financial expenses consist primarily of expenses related to bank charges and foreign currency exchange transactions.
Results of operations
The following table summarizes our results of operations for the indicated periods:
| |
|
|
For the Year Ended
December 31,
|
|
|
For the Nine Months Ended
September 30,
|
|
| |
|
|
2015
|
|
|
2016
|
|
|
2016
|
|
|
2017
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
| |
|
|
(in thousands)
|
|
|
Research and development expenses
|
|
|
|
$ |
7,184 |
|
|
|
|
$ |
17,023 |
|
|
|
|
$ |
13,097 |
|
|
|
|
$ |
21,389 |
|
|
|
General and administrative expenses
|
|
|
|
|
2,463 |
|
|
|
|
|
3,733 |
|
|
|
|
|
2,809 |
|
|
|
|
|
4,781 |
|
|
|
Total operating loss
|
|
|
|
|
9,647 |
|
|
|
|
|
20,756 |
|
|
|
|
|
15,906 |
|
|
|
|
|
26,170 |
|
|
|
Financial expenses (income), net
|
|
|
|
|
13 |
|
|
|
|
|
15 |
|
|
|
|
|
(1) |
|
|
|
|
|
(52) |
|
|
|
Loss for the period
|
|
|
|
$ |
9,660 |
|
|
|
|
$ |
20,771 |
|
|
|
|
$ |
15,905 |
|
|
|
|
$ |
26,118 |
|
|
| |
Nine months ended September 30, 2016 compared to nine months ended September 30, 2017
Research and development expenses
The following table describes the breakdown of our research and development expenses for the indicated periods:
| |
|
|
Nine Months Ended September 30,
|
|
| |
|
|
2016
|
|
|
2017
|
|
| |
|
|
(Unaudited)
|
|
| |
|
|
(in thousands)
|
|
|
Payroll and related expenses
|
|
|
|
$ |
2,785 |
|
|
|
|
$ |
4,194 |
|
|
|
Clinical trial expenses
|
|
|
|
|
6,347 |
|
|
|
|
|
12,106 |
|
|
|
Professional consulting and subcontracted work
|
|
|
|
|
2,476 |
|
|
|
|
|
3,797 |
|
|
|
Other
|
|
|
|
|
1,489 |
|
|
|
|
|
1,292 |
|
|
|
Total research and development expenses
|
|
|
|
$ |
13,097 |
|
|
|
|
$ |
21,389 |
|
|
| |
Our research and development expenses were $13.1 million for the nine months ended September 30, 2016, compared to $21.4 million for the nine months ended September 30, 2017. The increase of $8.3 million is mainly attributed to an increase of $5.8 million mainly due to acquiring an in-process research and development product candidate, offset by a decrease of $0.4 million in clinical trial expenses, as well as $1.4 million due to accrued bonus expense and share-based compensation.
General and administrative expenses
Our general and administrative expenses were $2.8 million for the nine months ended September 30, 2016, compared to $4.8 million for the nine months ended September 30, 2017. The increase of $2.0 million is mainly attributed to an increase of $1.1 million in professional fees and $0.9 million due to accrued bonus expense and share-based compensation.
Financial income, net
Our financial income, net, were immaterial for the nine months ended September 30, 2016 and 2017.
Year ended December 31, 2015 compared to year ended December 31, 2016
Research and development expenses
The following table describes the breakdown of our research and development expenses for the indicated periods:
| |
|
|
Year Ended December 31,
|
|
| |
|
|
2015
|
|
|
2016
|
|
| |
|
|
(in thousands)
|
|
|
Payroll and related expenses
|
|
|
|
$ |
2,647 |
|
|
|
|
$ |
3,629 |
|
|
|
Clinical trial expenses
|
|
|
|
|
517 |
|
|
|
|
|
9,686 |
|
|
|
Professional consulting and subcontracted work
|
|
|
|
|
2,001 |
|
|
|
|
|
1,830 |
|
|
|
In-process research and development acquired
|
|
|
|
|
431 |
|
|
|
|
|
— |
|
|
|
Other
|
|
|
|
|
1,588 |
|
|
|
|
|
1,878 |
|
|
|
Total research and development expenses
|
|
|
|
$ |
7,184 |
|
|
|
|
$ |
17,023 |
|
|
| |
Our research and development expenses were $7.2 million for the year ended December 31, 2015, compared to $17.0 million for the year ended December 31, 2016. The increase of $9.8 million is mainly attributed to an increase of $9.2 million in clinical trial expenses due to the Phase II clinical trials of TWIN and another product candidate no longer in development, the bioequivalence study of ivermectin cream, 1%, and to an increase of $1.0 million in payroll and related expenses due to an increase in the number of our employees, as well as to bonuses granted
and paid during 2016 and to salary increases. These increases in clinical trial expenses were partially offset by a decrease in share-based compensation expenses and a decrease of $0.4 million as a result of the transfer of an asset to us from an affiliated company in 2015.
General and administrative expenses
Our general and administrative expenses were $2.5 million for the year ended December 31, 2015, compared to $3.7 million for the year ended December 31, 2016. The increase of $1.2 million is mainly attributed to an increase of $0.7 million in professional fees due to the initial public offering process and to an increase of $0.4 million in payroll and related expenses due to bonuses that were recognized and paid during 2016 and salary raises that were partially offset by a decrease in share-based compensation expenses.
Financial expenses, net
Our financial expenses, net, were immaterial for the years ended December 31, 2015 and 2016.
Liquidity and Capital Resources
Overview
Since our inception, we have devoted substantially all of our resources to developing our product candidates, building our intellectual property portfolio, developing our supply chain, business planning, raising capital and providing for general and administrative support for these operations. We do not currently have any approved products.
From inception through September 30, 2017, we have funded our operations primarily through the issuance of equity securities and loans from our shareholder in the aggregate amount of $65.3 million, funding received from the Innovation Authority in the aggregate amount of approximately $1.4 million and from amounts received pursuant to past collaboration agreements in the aggregate amount of $28.5 million. We have agreed to automatically convert our outstanding promissory note between us and our controlling shareholder into an aggregate of ordinary shares immediately prior to the closing of this offering. For a description of the conversion of our shareholder loan agreement, see “Certain Relationships and Related Party Transactions — Loan Agreements with Our Controlling Shareholder.” As of September 30, 2017, our cash and cash equivalents was $12.5 million.
The table below summarizes our cash flow activities for the indicated periods:
| |
|
|
Year Ended
December 31,
|
|
|
Nine Months
Ended September 30,
|
|
| |
|
|
2015
|
|
|
2016
|
|
|
2016
|
|
|
2017
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
| |
|
|
(in thousands)
|
|
|
Net cash used in operating activities
|
|
|
|
$ |
(8,044) |
|
|
|
|
$ |
(18,495) |
|
|
|
|
$ |
(13,350) |
|
|
|
|
$ |
(17,065) |
|
|
|
Net cash used in investing activities
|
|
|
|
|
(210) |
|
|
|
|
|
(391) |
|
|
|
|
|
(334) |
|
|
|
|
|
(5,495) |
|
|
|
Net cash from financing activities
|
|
|
|
|
13,572 |
|
|
|
|
|
20,000 |
|
|
|
|
|
10,000 |
|
|
|
|
|
28,000 |
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
|
$ |
5,301 |
|
|
|
|
$ |
1,106 |
|
|
|
|
$ |
(3,625) |
|
|
|
|
$ |
5,490 |
|
|
| |
Operating Activities
Net cash used in operating activities was $13.4 million during the nine months ended September 30, 2016, compared to $17.1 million during the nine months ended September 30, 2017.
Net cash used in operating activities in the nine months ended September 30, 2017 primarily resulted from our loss for the period of $26.0 million during the period and $0.9 million used as advance payments for long-term receivables in connection with the collaboration agreement with
Perrigo for ivermectin cream. This amount was partially offset by $2.2 million of share-based compensation expenses, $0.3 million of depreciation of property and equipment, a net reduction of $1.4 million in working capital and $6.2 million from an acquired in-process research and development product candidate.
Net cash used in operating activities in the nine months ended September 30, 2016 primarily resulted from our loss of $15.9 million during the period, and from $0.9 million used as advance payments for long-term receivables in connection with the collaboration agreement with Perrigo for ivermectin cream, 1%. This amount was partially offset by $0.8 million of share-based compensation expenses, a net reduction of $1.8 million in working capital and $0.3 million of depreciation of property and equipment.
Net cash used in operating activities was $8.0 million during the year ended December 31, 2015, compared to $18.5 million during the year ended December 31, 2016.
Net cash used in operating activities in the year ended December 31, 2015 primarily resulted from our loss for the period of $9.7 million and $0.6 million used as an advanced payment to our CRO in connection with the Phase II clinical trial for TWIN, partially offset by $1.1 million of share-based compensation expenses, a net reduction of $0.4 million in working capital, $0.4 million in in-process research and development acquired due to the transfer of an asset and $0.3 million of depreciation of property and equipment.
Net cash used in operating activities in the year ended December 31, 2016 primarily resulted from our loss of $20.8 million during the period, and from $1.4 million used as advance payments for long-term receivables in connection with the Phase II clinical trial for TWIN and the collaboration agreement with Perrigo UK for ivermectin cream, 1%. This amount was partially offset by $1.0 million of share-based compensation expenses, a net reduction of $2.3 million in working capital and $0.4 million depreciation of property and equipment.
Investing Activities
Net cash used in investing activities was $0.3 million during the nine months ended September 30, 2016, compared to net cash used in investing activities of $5.5 million during the nine months ended September 30, 2017. Net cash used in investing activities during the nine months ended September 30, 2016 and 2017 was primarily related to investments in property and equipment.
Net cash used in investing activities was $0.2 million during the year ended December 31, 2015, compared to net cash used in investing activities of $0.4 million during the year ended December 31, 2016. Net cash used for investing activities during the years ended December 31, 2015 and 2016 was primarily related to the purchase of property and equipment.
Financing Activities
Net cash from financing activities was $10.0 million during the nine months ended September 30, 2016, compared to $28.0 million during the nine months ended September 30, 2017. Financing activities in these years consisted of loans received from our controlling shareholder.
Net cash from financing activities was $13.6 million during the year ended December 31, 2015, compared to $20.0 million during the year ended December 31, 2016. Financing activities in these years consisted of loans received from our controlling shareholder.
Funding Requirements
Our primary uses of cash have been to fund working capital requirements and research and development. We expect to continue to incur net losses for the foreseeable future as we continue to invest in research and development and seek to obtain regulatory approval for and commercialize
our product candidates. We believe that the net proceeds of this offering, together with our existing cash resources, will be sufficient to enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months. Based on our current plans, we believe that the anticipated net proceeds from this offering, together with our existing cash resources, will be sufficient for the completion of (i) our planned Phase III clinical program for TWIN for the treatment of acne and (ii) our planned Phase III clinical program for VERED for the treatment of subtype II rosacea. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. Our ability to continue as a going concern will depend on our ability to generate positive cash flow from operations and obtain additional financing, both of which are uncertain.
In its report accompanying our audited financial statements for the year ended December 31, 2016, included elsewhere in this prospectus, our independent registered accounting firm included an explanatory paragraph stating that our recurring losses from operations and lack of sufficient working capital raise substantial doubt as to our ability to continue as a going concern. In general, a “going concern” opinion means that our independent registered public accounting firm has substantial doubt about our ability to continue our operations without an additional infusion of capital from external sources, such as the proceeds from this offering. In addition, having a going concern qualification may make it less likely that investors or commercial banks will be willing to finance our operations. If we are unable to achieve these goals, our business will be in jeopardy and we may not be able to continue operations and may have to liquidate our assets. In such case, investors might receive less than the value at which those assets are carried on our financial statements, and it is likely that investors in this offering would lose all or a part of their investment.
Developing drugs, conducting clinical trials, obtaining commercial manufacturing capabilities and commercializing products is expensive and we will need to raise substantial additional funds to achieve our strategic objectives. We will require significant additional financing in the future to fund our operations, including if and when we progress into additional clinical trials for our product candidates, obtain regulatory approval for one or more of our product candidates, obtain commercial manufacturing capabilities and commercialize one or more of our product candidates. Our future funding requirements will depend on many factors, including, but not limited to:
•
the progress and expenses of our pre-clinical studies, clinical trials and other research and development activities;
•
the scope, prioritization and number of our clinical trials and other research and development programs;
•
the expenses and timing of obtaining regulatory approval, if any, for our product candidates;
•
the expenses of filing, prosecuting, enforcing and defending patent claims and other intellectual property rights;
•
the expenses of, and timing for, expanding our manufacturing agreements for production of sufficient clinical and commercial quantities of our product candidates; and
•
the potential expenses of contracting with third parties to provide marketing and distribution services for us or for building such capacities internally.
Until we can generate significant recurring revenues, we expect to satisfy our future cash needs through the net proceeds from this offering, debt or equity financings or by entering into collaborations with third parties in connection with one or more of our product candidates. We cannot be certain that additional funding will be available to us on acceptable terms, if at all. In addition, the terms of any securities we issue in future financings may be more favorable to new investors and may include preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have a further dilutive effect on the holders of any of our securities then outstanding. If we raise additional funds through collaborations with third parties, we may be required to relinquish valuable rights to our technologies, future revenue streams,
research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to obtain adequate funds on reasonable terms, we will need to curtail operations significantly, including possibly postponing anticipated clinical trials or entering into financing agreements with unattractive terms.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31, 2016:
| |
|
|
Total
|
|
|
Less than
1 year
|
|
|
1 – 3 years
|
|
|
3 – 5 years
|
|
|
More than
5 years
|
|
| |
|
|
(in thousands)
|
|
|
Operating lease obligations (1)
|
|
|
|
$ |
1,706 |
|
|
|
|
$ |
419 |
|
|
|
|
$ |
1,287 |
|
|
|
|
$ |
— |
|
|
|
|
$ |
— |
|
|
|
Total
|
|
|
|
$ |
1,706 |
|
|
|
|
$ |
419 |
|
|
|
|
$ |
1,287 |
|
|
|
|
$ |
— |
|
|
|
|
$ |
— |
|
|
| |
(1)
Operating lease obligations consist of payments pursuant to several lease agreements that are scheduled to expire on December 31, 2020. Starting from March 1, 2017, our total lease payments on all of our facilities increased to approximately $36,000 per month.
Under the specific terms of the funding arrangement between us and the Innovation Authority, royalties of 3.5% to 25% are payable on the sale of products developed with funding received from the Innovation Authority, which payments shall not exceed, in the aggregate, 300% of the amount of the grant received (dollar linked), plus interest at an annual rate based on LIBOR. Between the years 1998 and 2005, we received grants from the Innovation Authority in an aggregate amount of approximately $1.4 million (which, including accrued interest based on LIBOR, amounted to approximately $2.3 million as of February 14, 2017), and as of September 30, 2017, have paid royalties to the Innovation Authority in an aggregate amount of approximately $2.0 million (including amounts in respect of accrued interest).
Off-Balance Sheet Arrangements
We do not have any, and during the periods presented we did not have any, off-balance sheet arrangements as defined in the rules and regulations of the SEC.
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 market risk exposure is primarily a result of foreign currency exchange rates, which is discussed in detail below.
Interest Rate Risk
We do not anticipate undertaking any significant long-term borrowings. At present, our investments consist primarily of cash and cash equivalents. We may invest in investment-grade marketable securities with maturities of up to three years, including commercial paper, money market funds, and government/non-government debt securities. The primary objective of our investment activities is to preserve principal while maximizing the income that we receive from our investments without significantly increasing risk and loss. Our investments may be exposed to market risk due to fluctuation in interest rates, which may affect our interest income and the fair market value of our investments, if any.
Foreign Currency Exchange Risk
The U.S. dollar is our functional and reporting currency. Although a substantial portion of our expenses (mainly salaries and related costs) are denominated in NIS, accounting for almost half of our expenses in the year ended December 31, 2016, all of our financing has been in U.S. dollars
and the vast majority of our liquid assets are held in U.S. dollars. Furthermore, while we anticipate that a portion of our expenses, principally salaries and related personnel expenses in Israel, will continue to be denominated in NIS, we expect to incur an increasing amount of expenses in U.S. dollars as we progress in the development and the regulatory processes of our product candidates. Changes of 5% in the U.S. dollar/NIS exchange rate would have increased/decreased operating expenses by approximately 2% during the fiscal year ended on December 31, 2016. We also have expenses, although to a much lesser extent, in other non-U.S. dollar currencies, in particular the Euro.
Moreover, for the next few years we expect that the substantial majority of our revenues from the sale of our products in the United States, if any, will be denominated in U.S. dollars. Since a portion of our expenses is denominated in NIS and other non-U.S. currencies, we are exposed to risk associated with exchange rate fluctuations vis-à-vis the non-U.S. currencies. See “Risk Factors — Exchange rate fluctuations between the U.S. dollar, the New Israeli Shekel and other foreign currencies, may negatively affect our future revenues.” If the NIS fluctuates significantly against the U.S. dollar it may have a negative impact on our results of operations. As of the date of this prospectus and for the periods under review, fluctuations in the currencies exchange rates have not materially affected our results of operations or financial condition.
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.
Inflation-related risks
We do not believe that the rate of inflation in Israel has had a material impact on our business to date, however, our costs in Israel will increase if the inflation rate in Israel exceeds the devaluation of the NIS against the U.S. dollar or if the timing of such devaluation lags behind inflation in Israel.
Significant Accounting Policies and Estimates
We prepare our financial statements in conformity with U.S. GAAP. We describe our significant accounting policies and estimates more fully in Note 2 to our financial statements as of and for the year ended December 31, 2016, included elsewhere in this prospectus. We believe that the accounting policies and estimates below are critical in order to fully understand and evaluate our financial condition and results of operations. In preparing these financial statements, our management has made estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods recognized in our financial statements. Actual results may differ from these estimates. As applicable to the financial statements included in this prospectus, the most significant estimates and assumptions relate to the fair value of share-based compensation.
Share-based Compensation
Share-based compensation reflects the compensation expense of our share option programs granted to employees which compensation expense is measured at the grant date fair value of the options. The grant date fair value of share-based compensation is recognized as an expense over the requisite service period, net of estimated forfeitures. We recognize compensation expense for awards conditioned only on continued service that have a graded vesting schedule using the accelerated method based on the multiple-option award approach, and classify these amounts in our statement of operations based on the department to which the related employee reports.
Options Valuation
We selected the Black-Scholes option pricing model as the most appropriate method for determining the estimated fair value of the shared based compensation.
For the purpose of the evaluation of the fair value and the manner of the recognition of share-based compensation, our management is required to estimate, among others, various subjective and complex parameters that are included in the calculation of the fair value of the option as well as our results and the number of options that will vest. These parameters include the expected volatility of our share price over the expected term of the options, the risk-free interest rate assumption, the share option exercise and forfeitures behaviors and expected dividends.
Fair value of ordinary shares. Our ordinary shares are not publicly traded, thus, the fair value of the ordinary shares, for purpose of determining the exercise price for share-based payment awards, was determined in good faith by our management and approved by our board of directors. Our management considered the fair value of our ordinary shares based on a number of objective and subjective variables, consistent with the methodologies outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Private-Held-Company Equity Securities issued as Compensation, referred to as the AICPA Practice Aid.
Volatility. The expected share price volatility is based on the historical volatility of comparable companies.
Risk-free interest rate. The risk-free interest rate is based on observed interest rates appropriate for the expected term of the options granted in dollar terms.
Expected term. The expected term of options granted represents the period of time that the options are expected to be outstanding. Since adequate historical experience is not available to provide a reasonable estimate, the expected term was computed by averaging the vesting schedule of the options and the last available exercise date (the contracted expiry date).
Expected dividend yield. We have never declared or paid any cash dividends and we do not plan to pay cash dividends in the foreseeable future.
The underlying data used for computing the fair value of the options are as follows:
| |
|
|
For the Year Ended December 31,
|
|
|
For the
Nine Months Ended
September 30,
|
|
| |
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
Value of one ordinary share
|
|
|
$6.31
|
|
|
$11.99
|
|
|
$24.37
|
|
|
Dividend yield
|
|
|
0%
|
|
|
0%
|
|
|
0%
|
|
|
Expected volatility
|
|
|
62.46% – 66.22%
|
|
|
68.45% – 79.1%
|
|
|
72.91% – 76.63%
|
|
|
Risk-free interest rate
|
|
|
1.61% – 1.81%
|
|
|
0.95% – 1.34%
|
|
|
1.91% – 2.16%
|
|
|
Expected term
|
|
|
5.5 – 7.5 years
|
|
|
5 – 6.71 years
|
|
|
5 – 10 years
|
|
| |
These assumptions represent our best estimates and involve inherent uncertainties and the application of our judgment. As a result, if we use significantly different assumptions or estimates, our share-based compensation expense could be materially different.
The following table presents the grant dates, number of underlying shares and related exercise prices of options granted to employees and service providers, as well as the estimated fair value of the underlying ordinary shares on the grant date.
|
Date of grant
|
|
|
Number of
shares
subject to
awards
granted
|
|
|
Class of
shares
subject to
the awards
granted
|
|
|
Type of
equity
instrument
awarded
|
|
|
Exercise
price per
share
|
|
|
Estimated
fair value
per ordinary
share at
grant date
|
|
|
March 29, 2015
|
|
|
|
|
272,339 |
|
|
|
|
|
Ordinary |
|
|
|
|
|
options |
|
|
|
|
$ |
1.59 |
|
|
|
|
$ |
6.31 |
|
|
|
April 12, 2015
|
|
|
|
|
39,854 |
|
|
|
|
|
Ordinary |
|
|
|
|
|
options |
|
|
|
|
$ |
1.59 |
|
|
|
|
$ |
6.31 |
|
|
|
August 2, 2016
|
|
|
|
|
90,760 |
|
|
|
|
|
Ordinary |
|
|
|
|
|
options |
|
|
|
|
$ |
1.59 |
|
|
|
|
$ |
11.99 |
|
|
|
February 12, 2017
|
|
|
|
|
53,831 |
|
|
|
|
|
Ordinary |
|
|
|
|
|
options |
|
|
|
|
$ |
1.59 |
|
|
|
|
$ |
20.47 |
|
|
|
July 13, 2017
|
|
|
|
|
27,072 |
|
|
|
|
|
Ordinary |
|
|
|
|
|
options |
|
|
|
|
$ |
1.59 |
|
|
|
|
$ |
24.37 |
|
|
|
July 13, 2017
|
|
|
|
|
380,646 |
|
|
|
|
|
Ordinary |
|
|
|
|
|
options |
|
|
|
|
$ |
5.57 |
|
|
|
|
$ |
24.37 |
|
|
|
August 22, 2017
|
|
|
|
|
126,900 |
|
|
|
|
|
Ordinary |
|
|
|
|
|
options |
|
|
|
|
$ |
5.57 |
|
|
|
|
$ |
24.37 |
|
|
|
October 1, 2017
|
|
|
|
|
1,800 |
|
|
|
|
|
Ordinary |
|
|
|
|
|
options |
|
|
|
|
$ |
5.57 |
|
|
|
|
$ |
24.37 |
|
|
Based on the assumed initial public offering price of $12.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, the intrinsic value of the awards outstanding as of December 31, 2017 was $8.3 million, of which $3.3 million related to vested options and $5.0 million related to unvested options.
2015 awards. In March and April 2015, we granted 312,192 options to our executive officers to purchase ordinary shares. Our board of directors set an exercise price of $1.59 per share for these options. Twenty-five percent of the options vest on the first anniversary of the vesting commencement date (August 4, 2014) and the rest vest quarterly over the following three years. The options expire on the tenth anniversary of the grant date.
In preparation for our initial public offering, we performed in April 2016 a retrospective valuation, with the assistance of a third-party valuation firm, of our ordinary shares as of March and April 2015, which determined that their fair value at that time was $6.31 per share. For the purpose of determining our enterprise value, we used the discounted cash flow, or DCF, method. Under the DCF method, our projected after-tax cash flows available to return to holders of invested capital were discounted back to present value, using the discount rate. Since it is not possible to project our after-tax cash flows beyond a limited number of years, the DCF method relies on determining a “terminal value” representing the aggregate value of the future after-tax cash flows after the end of the period for which annual projections are possible. The discount rate, known as the weighted average cost of capital, or WACC, accounts for the time value of money and the appropriate degree of risk inherent in a business. The DCF method requires significant assumptions, in particular, regarding our projected cash flows and the discount rate applicable to our business. For the purpose of that valuation we applied a discount rate of 18%, and projected after-tax cash flows based on the probabilities of the realization of the scenario in which we receive FDA approval.
Having determined our enterprise value, we allocated it among the different elements of our share capital using the option pricing method, or OPM. Under the OPM, each security — ordinary shares and options — is treated as a call option having an exercise price based on the amount and optimal conversion price. The value of the call option is determined using the Black-Scholes option pricing model. The Black-Scholes model requires significant assumptions, in particular, the time until investors in our company would experience an exit event and the volatility of our ordinary shares.
2016 awards. In August 2016, we granted 90,760 options to our executive officers to purchase ordinary shares. Our board of directors set an exercise price of $1.59 per share for these options. Twenty-five percent of the options vest on the first anniversary of the vesting commencement date and the rest vest quarterly over the following three years. The options expire on the tenth anniversary of the grant date.
In September 2016, we performed a retrospective valuation, with the assistance of a third-party valuation firm, of our ordinary shares as of August 2016, which determined that their fair value at that time was $11.99 per share. For the purpose of determining our enterprise value, we used the discounted cash flow, or DCF, method. Under the DCF method, our projected after-tax cash flows available to return to holders of invested capital were discounted back to present value, using the discount rate. Since it is not possible to project our after-tax cash flows beyond a limited number of years, the DCF method relies on determining a “terminal value” representing the aggregate value of the future after-tax cash flows after the end of the period for which annual projections are possible. The discount rate, known as the weighted average cost of capital, or WACC, accounts for the time value of money and the appropriate degree of risk inherent in a business. The DCF method requires significant assumptions, in particular, regarding our projected cash flows and the discount rate applicable to our business. For the purpose of that valuation we applied a discount rate of 20%, and projected after-tax cash flows based on the probabilities of the realization of the scenario in which we receive FDA approval.
Having determined our enterprise value, we allocated it among the different elements of our share capital using the OPM. Under the OPM, each security — ordinary shares and options — is treated as a call option having an exercise price based on the amount and optimal conversion price. The value of the call option is determined using the Black-Scholes option pricing model. The Black-Scholes model requires significant assumptions, in particular, the time until investors in our company would experience an exit event and the volatility of our ordinary shares.
2017 awards. In February 2017, we granted 53,831 options to one of our executive officers to purchase ordinary shares. Our board of directors set an exercise price of $1.59 per share for these options. Twenty-five percent of the options vest on the first anniversary of the vesting commencement date and the rest vest quarterly over the following three years. Upon the occurrence of a merger or sale (as such term is defined in the option agreement), 100% of the then unvested options shall become fully vested, provided, that the grantee is an employee at such time. The options expire on the tenth anniversary of the grant date.
In July 2017, we granted 27,072 options to certain of our employees and service providers to purchase ordinary shares. Our board of directors set an exercise price of $1.59 per share for these options. In July and August 2017, we granted 507,546 options to certain of our executive officers, employees and service providers to purchase ordinary shares. Our board of directors set an exercise price of $5,57 for these options. Twenty-five percent of the options vest on the first anniversary of the vesting commencement date and the rest vest quarterly over the following three years. The options are subject to acceleration in the event of a change of control of our company. The options expire on the tenth anniversary of the grant date.
Future option awards. Following the completion of our initial public offering and the listing of our ordinary shares on the Nasdaq Global Market, the determination of the fair market value of our ordinary shares for purposes of setting the exercise price of future option awards or other share-based compensation to employees and other grantees will no longer require good faith estimates by our board of directors based on various comparisons or benchmarks.
Recent Accounting Pronouncements
We are currently evaluating the impact of the U.S. GAAP standards as issued by the FASB that are effective for the first time for the financial year beginning on or after January 1, 2016 on our financial statements. See Note 2 to our annual financial statements and Note 2 to our interim financial statements, both included elsewhere in this prospectus.
JOBS Act
On April 5, 2012, the JOBS Act was signed into law. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards.
This means that an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to utilize this exemption and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. In addition, as a result of this election, our future financial statements may not be comparable to those of public companies that are not emerging growth companies and are required to comply with public company effective dates for new or revised accounting standards.
Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we also elected or may elect to rely on other exemptions, including without limitation, not (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis). These exemptions will apply until the earliest of (a) the last day of our fiscal year during which we have total annual gross revenues of at least $1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of the closing of this offering; (c) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act.
Business
Overview
We are a clinical-stage dermatology company focused on identifying, developing and commercializing branded and generic topical drug products for the treatment of skin diseases. Our current product candidate pipeline consists of late-stage branded product candidates that leverage our proprietary, silica-based microencapsulation technology platform, and several generic product candidates across multiple indications. Our lead product candidate, TWIN, is a novel, once-daily, non-antibiotic topical cream that we are developing for the treatment of acne vulgaris, or acne. We recently completed a 726 subject, double-blind, placebo-controlled, six-arm, multi-center Phase II clinical trial designed to assess the safety and efficacy of TWIN in subjects with facial acne. In this trial, TWIN demonstrated statistically significant improvements in all pre-defined co-primary and secondary efficacy endpoints, as compared to vehicle. Subject to an End of Phase II meeting to be scheduled with the FDA, we plan to initiate two pivotal Phase III trials for TWIN in the United States in the second half of 2018 and expect to report top-line data from these trials in 2019. Our other branded product candidates are: SIRS-T, a topical cream containing encapsulated tretinoin for the potential treatment of acne; and VERED, a potential treatment for subtype II rosacea.
We designed our proprietary, silica-based microencapsulation technology platform to enhance the tolerability and stability of topical drugs while maintaining their efficacy. Topical drugs often struggle to balance achieving both high efficacy and high tolerability. Our technology platform entraps active ingredients in an inert, inorganic silica shell, which creates an unnoticeable barrier between the active ingredient and the skin. The resulting microcapsules are designed to allow the entrapped active ingredients to gradually migrate through the pores of the shell and deliver active ingredient doses onto the skin in a controlled manner, resulting in improved tolerability and stability without sacrificing efficacy. By separately encapsulating active ingredients within protective silica shells, our technology platform also enables the production of novel fixed-dose active ingredient combinations that otherwise would not be stable. We believe that our microencapsulation technology has the potential to be used for topical drug products to treat a variety of skin diseases. As a result of the FDA having already approved silica as a safe excipient for topical drug products, we expect the review process for each of our current branded product candidates to be conducted according to the FDA’s 505(b)(2) regulatory pathway, which may provide for a more efficient regulatory process by permitting us to rely, in part, upon the FDA’s previous findings of safety and efficacy of an approved product.
Each of our branded product candidates leverages our proprietary, silica-based microencapsulation technology platform. We maintain exclusive, worldwide commercial rights for all of our branded product candidates, which consist of:
•
TWIN, a novel, once-daily, non-antibiotic topical cream, which we are developing for the treatment of acne, containing a fixed-dose combination of encapsulated benzoyl peroxide, or E-BPO, and encapsulated tretinoin. Acne is one of the three most prevalent skin diseases in the world and is the most commonly treated skin disease in the United States, representing a $3.3 billion market for the 12 months ended November 30, 2017, according to IQVIA Holdings Inc. (formerly known as IMS), or IQVIA. According to the American Academy of Dermatology, acne affects approximately 40 to 50 million people in the United States, of which approximately 10% are treated with prescription medications. In July 2017, we reported positive top-line results from a double-blind, dose-ranging active- and placebo-controlled, six-arm, multi-center Phase II clinical trial of TWIN in the United States in 726 subjects, 128 of which subjects across six treatment groups did not complete the study. The clinical trial evaluated the efficacy, tolerability and safety of two TWIN concentrations, TWIN Low and TWIN High, each containing a lower or higher concentration, respectively, of encapsulated tretinoin and an identical concentration of E-BPO. Tretinoin and benzoyl peroxide, the two active components in TWIN, are both widely-used therapies for the treatment of acne that historically have not been
conveniently co-administered due to stability concerns. The trial also evaluated the contribution of encapsulated tretinoin and E-BPO, in the same concentrations as those in the respective TWIN treatment groups, to the efficacy of TWIN High and TWIN Low. In this trial, TWIN showed statistically significant improvements in all pre-defined co-primary and secondary efficacy endpoints, as compared to vehicle. In addition, TWIN was well tolerated with no treatment-related serious adverse events. Based on the efficacy data we observed in the Phase II trial, we believe TWIN, if approved, has the potential to become a preferred treatment for acne. In the second half of 2018, subject to an End of Phase II meeting to be scheduled with the FDA, we plan to initiate two pivotal Phase III trials for TWIN in the United States and expect to report top-line data from these trials in 2019.
•
SIRS-T, a topical cream containing encapsulated tretinoin, which we are developing as a potential treatment for acne. Based on the results of the encapsulated tretinoin treatment groups in our recent Phase II TWIN study, we believe that microencapsulation of tretinoin using our technology platform will reduce the irritation typically associated with topical application of tretinoin. According to IQVIA, the overall sales of tretinoin products, including Retin-A Micro, Atralin and Retin-A, for the 12 months ended November 30, 2017 were $519 million. SIRS-T is designed to provide a more tolerable tretinoin treatment option in order to improve patient compliance with treatment regimens. By leveraging our microencapsulation technology, we believe SIRS-T has the potential to become a leading tretinoin drug product and an attractive option for physicians who prefer a single active ingredient drug for the treatment of mild acne. We intend to utilize the data from the TWIN Phase II study in the development of SIRS-T. Subject to an End of Phase II meeting to be scheduled with the FDA with regard to the Phase II TWIN trial, we plan to commence a pivotal Phase III program for SIRS-T in the United States in 2020 and expect to report top-line data from this program in 2021.
•
VERED, a topical cream containing 5% E-BPO, which we are developing for the treatment of subtype II (papulopustular) rosacea. Rosacea is a chronic skin disease characterized by facial redness, inflammatory lesions, burning and stinging. According to the U.S. National Rosacea Society, approximately 16 million people in the United States are affected by rosacea. According to a study we commissioned, approximately 4.8 million people in the United States experience subtype II symptoms. Subtype II rosacea is characterized by small, dome-shaped erythematous papules, tiny surmounting pustules on the central aspects of the face, solid facial erythema and edema, and thickening/overgrowth of skin. Subtype II rosacea resembles acne, except that comedones are absent, and patients may report associated burning and stinging sensations. We evaluated VERED in a double blind, randomized, dose-ranging Phase II clinical trial involving 92 adult subjects at ten centers in the United States. In this trial, VERED showed statistically significant improvements in the Investigator Global Assessment, or IGA, pre-defined co-primary efficacy endpoint and in the percent change in inflammatory lesion count at week 12, as compared to vehicle. VERED was also well tolerated in this trial. Current topical therapies for subtype II rosacea are limited due to tolerability concerns. For example, BPO, a common therapy for acne, is not used for the treatment of subtype II rosacea due to side effects. As encapsulated BPO, VERED is designed to redefine the standard of care for the treatment of subtype II rosacea. If approved, we expect VERED to be the first product containing BPO that is marketed for the treatment of subtype II rosacea. Based on feedback received at our End of Phase II meeting with the FDA, we expect to commence two pivotal Phase III trials for VERED in the United States in the first half of 2018 and expect to report top-line data from these trials in 2019.
In addition to our late-stage branded product candidates, we are currently developing a portfolio of six generic topical dermatological products. Three of our generic product candidates are being developed in collaboration with Perrigo UK Finco Limited Partnership, or Perrigo. A
fourth generic product candidate is being developed in collaboration with Douglas Pharmaceuticals (New Zealand), or Douglas Pharmaceuticals. Both Perrigo and Douglas Pharmaceuticals have significant experience in the development of generic drugs.
Our most advanced generic product candidate is ivermectin cream, 1%, for the treatment of inflammatory lesions associated with rosacea, which is being developed in collaboration with Perrigo. In March 2017, Perrigo submitted an abbreviated new drug application, or ANDA, with a Paragraph IV certification for ivermectin cream, 1% to the FDA. This ANDA is currently on file with the FDA. Following notification from Perrigo, Galderma Laboratories, L.P., Galderma S.A., and Nestle Skin Health S.A., filed a patent litigation suit triggering the application of a 30-month stay on approval of the ANDA, under the Hatch-Waxman amendments to the Federal Food, Drug, and Cosmetic Act, or FDCA. Pursuant to the guidelines of the GDUFA, we expect to receive feedback from the FDA in their review of this ANDA in the first half of 2018. Ivermectin cream, 1% is the active molecule in Soolantra, which is currently marketed in the United States by Galderma Laboratories LP. For the 12 months ended November 30, 2017, Soolantra achieved sales of $113 million according to IQVIA.
Our leadership team has considerable expertise in the identification and development of generic dermatological drug products and our intellectual property and formulation teams continue to seek to identify new opportunities to expand our pipeline of generic product candidates.
The following chart represents our current branded and generic product candidate pipeline:
Our Strengths
We believe we are well positioned to become a leading, pure-play dermatology company based on the following key characteristics:
•
Diverse late-stage branded product pipeline with observed clinical benefits and favorable tolerability profiles. We have leveraged our knowledge of the dermatology market to establish a pipeline of diversified late-stage branded product candidates with the potential to address the need for improved drug therapies. We have observed favorable clinical results for our branded product candidates that have completed Phase II trials. We recently completed a Phase II clinical trial for TWIN in the United States in 726 subjects with acne, the results of which we also intend to use to support further development of SIRS-T. In the Phase II TWIN trial, we observed statistically significant improvements compared to vehicle in achieving the co-primary efficacy endpoints of “clear” or “almost clear” with two-grade reduction in IGA and in reducing absolute inflammatory and non-inflammatory lesion count at week 12. We also completed a Phase II clinical trial of
VERED in the United States in 92 subjects with subtype II rosacea in which we observed statistically significant results for the co-primary efficacy endpoint of “clear” or “almost clear” with a two-grade reduction in IGA. Subject to the TWIN and SIRS-T End of Phase II meeting to be scheduled with the FDA, we plan to commence two Phase III trials for each of TWIN and VERED in 2018 and for SIRS-T in 2020.
•
Proprietary, silica-based microencapsulation drug delivery technology platform with broad applicability. We leverage our innovative silica-based microencapsulation drug delivery technology platform in the development of each of our branded product candidates. In addition, we believe our technology platform provides us with the potential to develop additional product candidates that can overcome the limitations of currently approved products for multiple skin diseases. Our in-depth understanding of the chemical and physical parameters affecting the in-vitro release rate of active pharmaceutical ingredients from microcapsules made of silica allows us to create the desired, well-defined, in-vitro release profiles, including for novel fixed-dose active ingredient combinations, that otherwise would not be stable.
•
Efficient FDA regulatory pathway for our current branded product pipeline. We expect the review process for TWIN, SIRS-T and VERED to be conducted according to the FDA’s 505(b)(2) regulatory pathway, which permits us to rely, in part, upon the FDA’s previous findings of safety and efficacy of an approved product. Silica, which forms the basis of our proprietary microencapsulation technology platform, is an inorganic inert excipient that is contained in other topical drug products approved by the FDA.
•
Diversified pipeline of generic drug product candidates and established strategic collaborations. Our product pipeline includes six topical generic product candidates across multiple indications. We have established collaborations with Perrigo and Douglas Pharmaceuticals to efficiently develop four of our generic product candidates. We are collaborating with Perrigo in developing three of our generic product candidates, including ivermectin cream, 1%, for the treatment of inflammatory lesions associated with rosacea for which Perrigo filed an ANDA in March 2017. We are also developing a generic product candidate for a drug that already has generic substitutions in collaboration with Douglas Pharmaceuticals. We believe our strategic collaborations can help maximize the commercial potential of these generic product candidates.
•
Comprehensive and broad intellectual property portfolio. We maintain exclusive, worldwide commercial rights for all of our branded product candidates. We have granted patents covering TWIN and VERED, expiring in 2028 and 2032, respectively. If patents issue from our patent applications, TWIN, SIRS-T and VERED, will have patent coverage until 2032, 2030 and 2032, respectively. In addition, we believe our patent portfolio and considerable proprietary know-how creates a barrier to entry for generic drugs with comparable and bioequivalent in-vitro release profiles.
•
Experienced leadership team with proven track record. Our leadership team has extensive experience in the development and commercialization of dermatology drug products. Our chief executive officer and co-founder, Dr. Seri-Levy, has experience in the field of computer-aided drug design and more than 20 years of experience in the field of drug development. Mr. Arkin, who serves as the chairman of our board of directors and is our controlling shareholder, has held leadership roles in several innovative and generic drug companies. Mr. Arkin was the chairman of Agis Industries Ltd., expanding it into a leading pharmaceutical company in the United States until its acquisition by Perrigo Company plc, where he subsequently served as Vice Chairman. We believe that our leadership team is well-positioned to lead us through clinical development, regulatory approval and commercialization for our product candidates.
Our Strategy
Our strategy is to become a leading, pure-play dermatology company focused on identifying, developing and commercializing treatments for skin diseases in areas with the need for improved drug therapies. To achieve this objective, we intend to pursue the following:
•
Complete clinical development of our late-stage branded product candidates and obtain regulatory approvals. We plan to advance our late-stage branded product candidates through clinical development and obtain regulatory approvals. Subject to an End of Phase II meeting to be scheduled with the FDA, we plan to commence two pivotal Phase III trials in the second half of 2018 for TWIN for the treatment of acne. We expect to commence two pivotal Phase III trials in the first half of 2018 for VERED for the treatment of subtype II rosacea. In addition, we intend to use TWIN’s Phase II trial results in order to select the preferred dose for SIRS-T as a potential treatment for acne. Subject to an End of Phase II meeting to be scheduled with the FDA, we plan to commence a pivotal Phase III program for SIRS-T in 2020.
•
Maximize commercial potential of our late-stage branded product candidates. We intend to commercialize our late-stage branded product candidates in the United States, if approved, by building a specialized sales and marketing organization focused solely on dermatologists and their patients. Because the U.S. market is served by a relatively small number of practicing dermatologists, we believe a small and dedicated sales force can efficiently cover a significant portion of the target patient population. In other markets, we may selectively pursue strategic collaborations with third parties in order to maximize the commercial potential of our late-stage branded product candidates, if approved.
•
Selectively expand our branded product candidate pipeline. We continuously evaluate opportunities to leverage our proprietary silica-based microencapsulation technology platform to efficiently develop additional branded product candidates for the treatment of skin diseases in areas where we believe there is a need for improved drug therapies. We may also seek to in-license, acquire or develop additional branded product candidates for dermatological indications from other companies by leveraging the expertise and experience of our leadership team. We intend to focus on branded product candidates that we believe have streamlined regulatory pathways.
•
Opportunistically broaden our generic pipeline. We intend to continue to develop and opportunistically broaden our generic pipeline with product candidates that we believe have the potential to capture significant share of attractive markets and geographies. In certain cases, such as ivermectin cream, 1%, which we are developing in collaboration with Perrigo, we may seek strategic collaborations with pharmaceutical companies in order to expedite the development process, obtain regulatory approvals and commercialize our generic drug product candidates.
Dermatology Market Overview
We focus on medical dermatology, which includes many common skin diseases such as acne, rosacea, psoriasis, atopic dermatitis and actinic keratosis. These diseases can have significant, multidimensional negative effects on patients’ quality of life, including their physical and emotional well-being and social acceptance.
The dermatology and skin care market has experienced significant growth in the last several years. Based on IQVIA data, the U.S. medical dermatology market (excluding biologics) was valued at over $10.7 billion in prescription pharmaceutical sales for the 12 months ended November 30, 2017, of which $8.6 billion represented sales of topical drugs. According to IQVIA, dermatological drugs sales in the United States have grown at an annual rate of 7% since 2012. We believe many factors are continuing to drive growth in the medical dermatological market, including population
growth for prevalent age groups and growth in the number of physicians dispensing products. We believe patients’ willingness to pay for dermatology treatments out-of-pocket is a result of often visible symptoms from dermatological diseases, which further supports demand and pricing.
We believe dermatology offers a low cost commercialization opportunity compared to many other medical specialties due to the relatively small number of specialists. According to IQVIA, there are approximately 14,000 active dermatologists in the United States. Because the U.S. market is served by a relatively small number of practicing dermatologists, we believe a small and dedicated sales force can efficiently cover a significant portion of the targeted patient population.
Our Branded Product Candidates
Our Acne Product Candidates: TWIN and SIRS-T
Using our proprietary, silica-based microencapsulation technology platform, we are developing TWIN and SIRS-T to become preferred treatments for acne by dermatologists and their patients.
TWIN Overview
TWIN is a novel, once-daily, non-antibiotic topical cream containing a fixed-dose combination of E-BPO and encapsulated tretinoin that we are developing for the treatment of acne. Studies have shown that benzoyl peroxide and tretinoin are effective in treating acne as monotherapies, but a drug-drug interaction that causes the degradation of tretinoin has previously prohibited the development of a combination therapy. By encapsulating the two agents separately through the use of our technology platform, TWIN is designed to be a fixed-dose combination that otherwise would not be stable. Similar to other combination drug products containing retinoids, such as tretinoin, and benzoyl peroxide, we expect TWIN to be kept refrigerated throughout the supply chain and then stored in ambient conditions upon its distribution to patients. Pre-clinical data suggests that TWIN may be more tolerable than generic tretinoin gel 0.1% and Epiduo, a branded fixed-dose combination of benzoyl peroxide and adapalene, without a corresponding loss in efficacy. In addition, Epiduo and its successor Epiduo Forte contain adapalene as opposed to tretinoin, which is widely considered to be more effective than adapalene, but generally causes greater irritation. We expect that TWIN, if approved, will compete directly with Epiduo and Epiduo Forte. Epiduo and Epiduo Forte achieved sales of $396 million for the 12 months ended June 30, 2017. We expect to utilize the FDA’s 505(b)(2) regulatory pathway in seeking approval of TWIN in the United States.
In July 2017, we completed a 726 subject, randomized, multi-center, double-blind, placebo-controlled Phase II clinical trial of TWIN in the United States that demonstrated statistically significant improvements compared to vehicle in the co-primary efficacy endpoints of “clear” or “almost clear” with a two-grade reduction in IGA and in reducing absolute inflammatory and non-inflammatory lesion counts at week 12. Of the 726 subjects enrolled in the trial, 128 subjects across six treatment groups did not complete the study. The most common reasons for subjects not completing the study were the withdrawal of informed consent (42 subjects), loss to follow-up (56 subjects) and adverse events (18 subjects). Based on the results of this trial, we intend to schedule an End of Phase II meeting with the FDA and expect to commence two Phase III trials for TWIN in the second half of 2018.
SIRS-T Overview
SIRS-T is a topical cream containing a single active pharmaceutical ingredient, encapsulated tretinoin, that we are developing for the treatment of acne. By utilizing our technology platform to encapsulate tretinoin in a silica shell, we believe SIRS-T can be a more tolerable tretinoin-based treatment of acne. The silica shell in SIRS-T is designed to create a barrier between the drug substance and the skin and to control its release rate into the skin. As a result, we expect our silica-based technology platform to reduce irritation typically associated with topical application of tretinoin. Based on our recent Phase II TWIN study, we believe our technology platform can
create a more tolerable tretinoin-based drug as compared to currently available tretinoin-based treatments. We intend to leverage the data from the TWIN Phase II study in the development of SIRS-T. We believe SIRS-T has the potential to be an attractive option for physicians who prefer a single active ingredient drug for the treatment of mild acne. Subject to an End of Phase II meeting to be scheduled with the FDA, we plan to commence a pivotal Phase III clinical program for SIRS-T in 2020. We expect that SIRS-T, if approved, will compete directly with Retin-A Micro, Atralin and Retin-A, which contain tretinoin as well as with generic tretinoin. Topical tretinoin products are currently available in strengths ranging from 0.025% to 0.1%. According to IQVIA, the majority of sales unit for these products are for the 0.05% strength. The overall sales of tretinoin products, including Retin-A Micro, Atralin and Retin-A, for the 12 months ended November 30, 2017 were $519 million. We expect to utilize the FDA’s 505(b)(2) regulatory pathway in seeking approval of SIRS-T in the United States.
Acne Market Opportunity
cne is a disease characterized by areas of scaly red skin, non-inflammatory blackheads and whiteheads, inflammatory lesions, papules and pustules and occasionally boils and scarring that occur on the face, neck, chest, back, shoulders and upper arms. The development of acne lesions is caused by genetic and environmental factors that arise from the interplay of the following pathogenic factors:
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blockage of hair follicles through abnormal keratinization in the follicle, which narrows pores;
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increase in oils, or sebum production, secreted by the sebaceous gland;
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overgrowth of naturally occurring bacteria caused by the colonization by the anaerobic lipohilic bacterium Propionibacterium acnes, or P. acnes;
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inflammatory response due to relapse of pro-inflammatory mediators into the skin.
Due to the frequency of recurrence and relapse, acne is characterised as a chronic inflammatory disease, which may require treatment over a prolonged period of time. Acne is one of the three most prevalent skin diseases in the world and is the most commonly treated skin disease in the United States. According to the American Academy of Dermatology, acne affects approximately 40 to 50 million people in the United States and approximately 85% of people between the ages of 12 and 24 experience some form of acne. Acne patients suffer from the appearance of lesions on areas of the body with a large concentration of oil glands, such as the face, chest, neck and back. These lesions can be inflamed (papules, pustules, nodules) or non-inflamed (comedones). Early effective treatment is recommended to lessen the overall long-term impact. For most people, acne diminishes over time and tends to disappear, or at least to decrease, by the age of 25. There is, however, no way to predict how long it will take for symptoms to disappear entirely, and some individuals continue to suffer from acne well into adulthood.
Acne Market Size
According to IQVIA data, the U.S. acne market was valued at $3.3 billion in pharmaceutical sales for the 12 months ended November 30, 2017 and has grown at an annual rate of 10% since 2012. For the 12 months ended November 30, 2017, $2.3 billion in sales were attributable to branded products and $2.8 billion were attributed to either branded or generic topical therapies. The acne market represented approximately 31% of the total U.S. medical dermatology market for the 12 months ended November 30, 2017, and approximately 15% of the total U.S. dermatology drug prescriptions market.
Current Treatment Landscape for Acne
The treatment options for acne depend on the severity of the disease and consist of topical and oral drugs:
•
Mild acne: characterized by few papules or pustules (both comedonal and inflammatory); treated with an over-the-counter product or topical prescription therapies.
•
Moderate acne: characterized by multiple papules and pustules with moderate inflammation and seborrhea (scaly red skin); treated with a combination of oral antibiotics and topical therapies.
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Severe acne: characterized by substantial papulopustular disease, many nodules and/or cysts and significant inflammation and seborrhea; treated with oral and topical combination therapies and photodynamic therapy as a third-line treatment.
Topical therapies dominate the acne market as physicians and patients often prefer therapies that act locally on the skin, while minimizing side effects. For more pronounced symptoms, patients are typically treated with a combination of topical and oral therapies.
The acne prescription treatment landscape is comprised of four classes of topical products and two classes of oral products:
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Topical over-the-counter monotherapies such as adapalene 0.1%, benzoyl peroxide and salicylic acid, in different concentrations, are the most commonly used therapies. These are generally tolerable first-line treatments for mild acne, but less efficacious than prescription therapies.
•
Topical prescription antibiotic monotherapies such as clindamycin and erythromycin that are most commonly used as topical therapies in cases of mild-to-moderate acne.
•
Topical prescription retinoid monotherapies such as tretinoin, adapalene 0.3% and tazarotene. Physicians view retinoids as moderately efficacious, but they have high rates of skin irritation.
•
Topical prescription combination products such as combinations of BPO/adapalene, BPO/clindamycin, BPO/erythromycin and clindamycin/tretinoin. These target multiple components that contribute to the development of acne, though topical side effects are common.
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Oral prescription antibiotics such as doxycycline and minocycline. These are typically used as step-up treatments for more severe cases of acne, with risk of systemic side effects.
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Oral prescription isotretinoin, which is primarily used for severe cystic acne and acne that has not responded to other treatments. The use of oral prescription isotretinoin is tightly controlled due to tolerability issues.
Our Solutions for Acne — TWIN and SIRS-T
Using our proprietary, silica-based microencapsulation technology platform, we are developing TWIN and SIRS-T to become preferred treatments for acne by dermatologists and their patients. Our silica-based proprietary delivery system is designed to enhance the tolerability and stability of topical drugs while maintaining their efficacy. Topical drugs often struggle to balance achieving both high efficacy and high tolerability. Our technology platform entraps active ingredients in an inert silica shell, which creates an unnoticeable barrier between the active ingredient and the skin. The resulting microcapsules are designed to allow the entrapped active ingredients to gradually migrate through the pores of the shell and deliver active ingredient doses into the skin in a controlled manner, resulting in improved tolerability and stability without sacrificing efficacy.
We believe that TWIN, a fixed-dose combination of a cream containing E-BPO and encapsulated tretinoin, has the potential to solve the industry-wide challenge of stabilizing tretinoin in the presence of benzoyl peroxide, a combination known to be effective in acne therapy, but not previously conveniently co-administered. While benzoyl peroxide slows the proliferation of P. acnes, tretinoin regulates hyperkeratinization and abnormal desquamation of follicular epithelium. This creates a synergistic combination which has the potential to overcome the challenges faced by currently approved products.
•
We designed TWIN to protect tretinoin from oxidative decomposition, which occurs when it is combined with benzoyl peroxide, with the goal of enhancing stability without reducing efficacy. We believe this could allow for a suitable clinical and commercial shelf life.
•
The silica shell creates a barrier between the two drug substances and the skin. As a result, we believe TWIN can reduce irritation typically associated with topical application of benzoyl peroxide and tretinoin, leading to greater tolerability to acne-affected skin.
By encapsulating tretinoin in our proprietary technology platform, we believe SIRS-T has the potential to be a more tolerable tretinoin-based drug as a treatment for acne and would improve patients’ compliance with treatment regimens. We believe SIRS-T has the potential to become a leading tretinoin-based drug product on the market and an attractive option for physicians who prefer to prescribe a single active ingredient drug for the treatment of mild acne.
•
We designed SIRS-T to be a more tolerable tretinoin-based acne treatment for patients with mild acne who can be treated with a single agent.
•
The silica shell in SIRS-T creates a barrier between the drug substances and the skin, which we believe can reduce irritation typically associated with topical application of tretinoin.
TWIN Phase II Trial Design
In May 2016, we commenced a Phase II, multi-center, six-arm, randomized, double-blind, placebo-controlled study designed to assess the efficacy, tolerability and safety of two TWIN concentrations, TWIN Low and TWIN High. Each TWIN concentration contained identical concentrations of E-BPO. TWIN Low contained a lower concentration of encapsulated tretinoin, while TWIN High contained a higher concentration of encapsulated tretinoin. The trial also evaluated the contribution of each of the encapsulated forms of both the lower and higher concentrations of tretinoin, or E-ATRA High and E-ATRA Low, and of E-BPO. A total of 726 subjects were enrolled in the trial at 36 sites in the United States of which 598 subjects completed the trial. We reported topline results of the trial in July 2017. Subjects were equally randomized into six treatment groups: TWIN High, TWIN Low, E-ATRA High, E-ATRA Low, E-BPO and vehicle. The age of the subjects ranged from 10 to 59, with a mean age of 22. Gender distribution was 37% male and 63% female, with patients of a variety of skin types. Inclusion criteria required 20 to 50 inflammatory lesions and 25 to 100 non-inflammatory lesions and an IGA score of 3 or 4 (“moderate” or “severe”) on a five-point scale that ranges from a score of zero, representing “clear” skin, to a score of 4, representing “severe” disease. Subjects were also required to have two or fewer cysts or nodules. The evaluation period spanned 12 weeks after initial treatment. Subjects were instructed to apply the drug once daily before bedtime.
The primary and secondary efficacy endpoints were assessed at the end of the 12-week treatment period. Three primary efficacy endpoints were defined for this trial:
•
the proportion of subjects who achieve at least a two-grade reduction in the IGA score and either “clear” or “almost clear” at week 12;
•
the mean absolute change from baseline in the number of inflammatory acne lesions at week 12; and
•
the mean absolute change from baseline in the number of non-inflammatory acne lesions at week 12.
The two secondary efficacy endpoints measured the percent change in inflammatory and non-inflammatory lesion count at week 12.
All statistical analyses and data shown for TWIN are on the intent-to-treat, or ITT, population. Randomized clinical trials analyzed by the ITT approach provide unbiased comparisons among the treatment groups. In an ITT population, subjects are analyzed according to the randomization scheme. In other words, for the purposes of ITT analysis, everyone who is randomized in the trial is considered to be part of the trial regardless of whether he or she is dosed at all or completes the trial per protocol for the recommended duration of treatment. The ITT population for TWIN High consisted of 116 subjects, 102 of which had moderate acne and 14 of which had severe acne. The ITT population for TWIN Low consisted of 117 subjects, 104 of which had moderate acne and 13 of which had severe acne.
Discontinuations were treated statistically with the last observation carry forward methodology for the TWIN data sets shown below. P-value is a conventional statistical method for measuring the statistical significance of clinical results. A p-value of less than 0.05 is generally considered to represent statistical significance, meaning that there is a less than five percent likelihood that the observed results occurred by chance. Unless otherwise specified, the p-values shown herein represent a comparison of each active group to the pooled vehicle treatment groups.
TWIN Phase II Trial Results
As outlined below, TWIN demonstrated statistically significant improvements relative to vehicle in all primary and secondary efficacy endpoints. The IGA success rate, defined as achieving at least a two-grade reduction in the IGA score and either “clear” or “almost clear” at week 12, was 39.68% for TWIN High (p-value of <0.001), 27.43% for TWIN Low (p-value = 0.006) and 12.27% for vehicle.
At baseline across all treatment groups, the mean inflammatory lesion count was 26 to 29, the mean non-inflammatory lesion count was 42 to 43, and 86% to 91% of the subjects had an IGA score of “moderate”, or 3, while the remainder had an IGA score of “severe”, or 4. The absolute mean change from baseline in the number of non-inflammatory lesions was -23.6 for TWIN High, -23.7 for TWIN Low and -13.7 for vehicle, with a p-value of <0.001. The absolute mean change from baseline in the number of inflammatory lesions was -16.9 for TWIN High, -17.0 for TWIN Low and -11.5 for vehicle, with a p-value of <0.001.
Percent change in lesion counts from baseline at week 12 was statistically significantly compared to vehicle for both non-inflammatory and inflammatory lesions for each TWIN treatment group. Percent change from baseline at week 12 in the number of non-inflammatory lesions was 53.30% for TWIN High, 54.90% for TWIN Low and 32.40% for vehicle, with a p-value for each TWIN treatment group of <0.001. Percent change from baseline at week 12 in the number of inflammatory lesions was 64.04% for TWIN High, 60.75% for TWIN Low and 42.17% for vehicle, with a p-value for each TWIN treatment group of <0.001.
The following chart presents the proportion of subjects in the ITT population in each treatment group who achieved a successful improvement in the severity of their disease at week 12, as assessed using the IGA.
The following chart presents the mean absolute change from baseline in the number of inflammatory acne lesions at week 12.
The following chart presents the mean absolute change from baseline in the number of non-inflammatory acne lesions at week 12.
The following chart presents the secondary efficacy endpoint of the percent reduction in inflammatory lesion count from baseline to the end of the 12-week treatment period in the ITT population.
The following chart presents the secondary efficacy endpoint of the percent reduction in non-inflammatory lesion count from baseline to the end of the 12-week treatment period in the ITT population.
We also assessed cutaneous tolerability by recording the erythema (redness), scaling, pigmentation, itching, burning and stinging on a four-point scale from 0 to 3 at baseline and at each visit. These measurements are either measured by the physician or reported by the subject. Overall, TWIN was generally well tolerated. The majority of cutaneous adverse events were mild. The remaining treatment groups were also generally well tolerated by treated subjects, which we believe demonstrates that encapsulation of tretinoin may provide a tolerable solution.
Of the 726 subjects who enrolled in the study, 128 subjects across the six treatment groups did not complete the study. The most common reasons for subjects not completing the study were the withdrawal of informed consent (42 subjects), loss to follow-up (56 subjects) and adverse events (18 subjects). For TWIN High and TWIN Low, five subjects (4.2%) and eight subjects (6.6%) withdrew informed consent, respectively, compared to six subjects (5.0%) for vehicle, seven subjects (5.7%) for E-ATRA High, eight subjects (6.6%) for E-ATRA Low and eight subjects (6.6%) for E-BPO. Eleven subjects (9.2%) in the TWIN High group and six subjects (5.0%) in the TWIN Low group were lost to follow-up, compared to nine subjects (7.6%) for vehicle, 17 subjects (13.9%) for E-ATRA High, six subjects (4.9%) for E-ATRA Low and seven subjects (5.7%) for E-BPO. For TWIN High and TWIN Low, five subjects (4.2%) and three subjects (2.5%) did not complete the trial due to adverse events, respectively, compared to no subjects for vehicle, four subjects (3.3%) for E-ATRA High, two subjects (1.6%) for E-ATRA Low and four subjects (3.3%) for E-BPO.
Phase III Clinical Development Plan
Subject to an End of Phase II meeting to be scheduled with the FDA, we plan to initiate a pivotal Phase III clinical program for TWIN in the United States in the second half of 2018, which we expect to include two, multi-center, placebo-controlled trials, each enrolling 400 subjects, with identical endpoints to our recently reported successful Phase II trial. We expect to report top-line data from this program in 2019. We intend to design the clinical program to demonstrate the efficacy of treatment with TWIN relative to vehicle for the treatment of acne. Prior to, or in parallel with, our planned Phase III clinical program, we intend to complete a pharmacokinetics safety study and expect to commence additional safety studies. We also intend to conduct a long-term safety study.
Additionally, we intend to use TWIN’s Phase II trial results in order to select the preferred dose for SIRS-T in our planned Phase III clinical program for SIRS-T. Subject to an End of Phase II meeting to be scheduled with the FDA, we plan to commence a Phase III clinical program for SIRS-T in 2020, as well as standard safety studies, with top-line results anticipated in 2021.
VERED for Subtype II Rosacea
VERED Overview
VERED is a once-daily topical cream containing 5% E-BPO that we are developing for the treatment of subtype II rosacea. We believe VERED has the potential to become the first product to contain E-BPO for the treatment of subtype II rosacea and, if approved, has the potential to redefine the standard of care for the treatment of inflammatory lesions associated with subtype II rosacea. Subtype II rosacea is characterized by small, dome-shaped erythematous papules, tiny surmounting pustules on the central aspects of the face, solid facial erythema and edema, and thickening/overgrowth of skin. Subtype II rosacea resembles acne, except that comedones are absent, and patients may report associated burning and stinging sensations. In 2012, we completed a 92 subject, randomized, multi-center, double-blind, vehicle-controlled Phase II trial for VERED in the United States that demonstrated statistically significant improvements compared to vehicle in achieving the IGA success co-primary efficacy endpoint and in reducing papulopustular-lesions based on the percentage change in the inflammatory lesion count from baseline at week 12. In addition, the tolerability profile of VERED was similar to that of vehicle. We expect that VERED, if approved, will compete directly with Soolantra. Soolantra was launched in 2015 and achieved U.S. sales of $113 million for the 12 months ended November 30, 2017. We expect to utilize the FDA’s 505(b)(2) regulatory pathway in seeking approval of VERED in the United States.
Subtype II Rosacea Market Opportunity
Rosacea is a chronic skin disease characterized by persistent facial erythema (redness) and temporary inflammatory lesions (papules, pustules or both). Often misdiagnosed as acne vulgaris due to similarities between inflammatory acne lesions and rosacea lesions and the potential for disfigurement, rosacea is gradually increasing in visibility as a disease. The most prominent age group affected includes adults age 30 and above, with stronger prevalence across women and adults with fair-skin.
According to a study we commissioned, rosacea affects approximately 16 million people in the United States alone. Studies show that approximately 30% of people suffering from rosacea in the United States, or 4.8 million people, suffer from subtype II rosacea. We estimate that 43% of the subtype II rosacea population suffers from the mild form of the disease, while 41% and 16% suffer from moderate and severe forms of the disease, respectively. According to IQVIA, the topical drugs approved by the FDA to treat subtype II rosacea generated aggregate revenues of approximately $395 million in the United States for the 12 months ended November 30, 2017.
Subtype II Rosacea Market Size
The U.S. subtype II rosacea market is estimated at approximately $564 million in pharmaceutical sales for the 12 months ended November 30, 2017, according to IQVIA. The U.S. subtype II rosacea market represented approximately 5% of the total U.S. medical dermatology market in 2016.
Though not life threatening, rosacea can have a significant adverse effect on patients. Among the prevalent patient population, approximately 70% said the disease had adversely affected their professional interactions.
Current Treatment Landscape for Subtype II Rosacea
As there is no cure for rosacea, treatment is largely focused on managing the disease. We believe that a significant market opportunity exists for a subtype II rosacea treatment option that can provide both efficacy and higher tolerability than existing treatments. There are currently four approved drugs for the treatment of subtype II rosacea: Soolantra, Metrogel, Oracea and generic metronidazole. In certain cases, dermatologists often prescribe oral antibiotics either as monotherapies or in conjunction with approved medications.
Our Solution for Subtype II Rosacea — VERED
Benzoyl peroxide is approved by the FDA for the treatment of acne and is widely considered to be safe and effective. Currently, there is no approved benzoyl peroxide product in the rosacea treatment landscape as a result of potential tolerability issues, despite clinical studies showing that treatment with benzoyl peroxide could be efficacious. According to a published study, benzoyl peroxide was found to be an effective treatment for rosacea but caused irritation. Using our proprietary, silica-based microencapsulation technology platform, we believe our VERED candidate for the treatment of subtype II rosacea can improve on current subtype II rosacea treatments in the following ways:
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VERED creates a silica-based barrier between benzoyl peroxide crystals and the skin and, as a result, can reduce irritation typically associated with topical application of benzoyl peroxide, increasing the potential for more tolerable application to rosacea-affected skin.
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VERED’s release of the drug can reduce irritation while maintaining efficacy.
VERED is an innovative topical cream, and if approved, would be the first product containing benzoyl peroxide for the treatment of subtype II rosacea.
VERED Phase II Trial Design
In August 2012, we completed a multi-center, three-arm, randomized, double-blind, placebo-controlled study designed to assess the efficacy, tolerability and safety of two VERED
concentrations, VERED 1% (E-BPO 1%) and VERED 5% (E-BPO 5%). A total of 92 subjects were enrolled in the trial at ten sites in the United States. Subjects were equally randomized into three separate arms: VERED 1%, VERED 5% and vehicle and each group received a once-daily dose. All subjects were 18 years of age or older, with a mean age of 51. Gender distribution was 27% male and 73% female. Inclusion criteria required facial rosacea with 12 or more inflammatory lesions at enrolment and a score of 2, 3 or 4 (“mild”, “moderate” or “severe”) on a five-point IGA scale that ranges from a score of 0, representing “clear skin,” to a score of 4, representing a “severe” disease. The evaluator also rated the following signs and symptoms of local skin irritation on a scale of 0 to 3 (“none”, “mild”, “moderate”, “severe”): dryness, scaling, pruritus, stinging and burning. The evaluation period spanned 12 weeks after initial treatment. At baseline across all treatment groups, the mean inflammatory lesion count was 19.9, 28.6 and 22.9 for vehicle, VERED 1% and VERED 5%, respectively. 73.9% of the subjects had an IGA score of “moderate”, or 3, while the remainder had an IGA score of “mild”, or 2 and “severe”, or 4.
Two primary efficacy endpoints were defined for this trial:
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the proportion of subjects who achieve at least a two-grade reduction in the IGA score and either “clear” or “almost clear” at week 12; and
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the reduction in the mean inflammatory lesion count from baseline at week 12.
All statistical analyses and data shown for VERED are on the ITT population. The ITT population for VERED 1% consisted of 32 subjects, 3 of which had mild rosacea, 24 of which had moderate rosacea and 5 of which had severe rosacea. The ITT population for VERED 5% consisted of 30 subjects, 4 of which had mild rosacea, 21 of which had moderate rosacea and 5 of which had severe rosacea.
In this trial, we defined “clear” as no inflammatory lesions present with no or very mild erythema immediately localized to and around where inflammatory lesions were present, and “almost clear” as very mild erythema immediately localized to and around inflammatory lesions with very few small papules/pustules. The FDA required a modification to our definition of “clear” on the IGA scale such that the category of ”clear” represented the absence of the disease at the end of the trial. Out of the 11 subjects that were defined as “mild” at baseline, there was only one subject that was treated with VERED and reached “clear” at the end of the trial.
VERED Phase II Trial Results
As outlined below, VERED 5% demonstrated statistically significant improvement in the IGA co-primary efficacy endpoints. The IGA success rate, defined as having at least a two-grade reduction in the IGA score and either “clear” or “almost clear” at week 12, was 53.3% for VERED 5% (p-value of 0.0013 vs. vehicle), 37.5% for VERED 1% (p-value of 0.0836 vs. vehicle) and 20.0% for vehicle, indicating a successful dose-ranging study. The mean change from baseline in the absolute number of inflammatory lesions was -14.1 for VERED 5%, -21.6 for VERED 1% and -7.4 for vehicle. The median change from baseline in the absolute number of inflammatory lesions was -15.0 for VERED 5%, -12.5 for VERED 1% and -10.0 for vehicle.
The following table summarizes the efficacy results for VERED.
|
VERED Phase II Efficacy Results at Week 12 (ITT)
|
|
|
Vehicle
(N=30)
|
|
|
VERED 1%
(N=32)
|
|
|
VERED 5%
(N=30)
|
|
| Dichotomized IGA – Primary Success |
|
|
|
|
|
Success
|
|
|
6 (20.0%)
|
|
|
12 (37.5%)
|
|
|
16 (53.3%)
|
|
|
Failure
|
|
|
24 (80.0%)
|
|
|
20 (62.5%)
|
|
|
14 (46.7%)
|
|
|
p-value relative to vehicle
|
|
|
|
|
|
0.0836
|
|
|
0.0013
|
|
| Inflammatory Lesion Count – Change from Baseline |
|
|
|
|
|
Mean
|
|
|
-7.4
|
|
|
-21.6
|
|
|
-14.1
|
|
|
Median
|
|
|
-10.0
|
|
|
-12.5
|
|
|
-15.0
|
|
|
p-value relative to vehicle
|
|
|
|
|
|
0.0276
|
|
|
0.0037
|
|
|
LOCF (last observation carried forward) used to impute mission observations
|
|
|
|
|
|
0.0836
|
|
|
0.0013
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The following chart presents results for the IGA efficacy endpoint from baseline to the end of the 12-week treatment period in the ITT population.
The following chart presents the success in the mean and median reduction in inflammatory lesion counts from baseline to the end of the 12-week treatment period in the ITT population.
The high reduction in the mean absolute number of inflammatory lesions in VERED 1% is a result of no upper limit on the number of inflammatory lesions at baseline and therefore we believe only the median change from baseline in the absolute number of inflammatory lesions should be examined to assess dose-ranging efficacy.
We also assessed cutaneous tolerability by recording the dryness, scaling, pruritus, stinging and burning on a four-point scale from 0 to 3 at baseline and at each visit. These measurements are either measured by the physician or reported by the subject. Overall, both of VERED 1% and VERED 5% were well tolerated.
Of the 92 subjects that were randomized, 28 subjects in each treatment group completed the study. Two subjects in the vehicle group discontinued the study early: one subject withdrew consent and one subject was lost to follow-up. Four subjects in the VERED 1% group discontinued the study early: two subjects withdrew consent and two subjects discontinued the study due to “application site dermatitis”, which was moderate in severity, and “cyst”, which was deemed not related to the local application of VERED. Two subjects in the VERED 5% group discontinued the study early: one subject was lost to follow-up, and one subject was discontinued due to an “application site reaction”.
Ultimately, the Phase II trial found that both VERED 1% and VERED 5% had a favorable effect on subtype II rosacea. As a result of these findings, we selected VERED 5% for further development.
Phase III Clinical Development Plan.
Based on feedback received at our End of Phase II meeting with the FDA, we expect to commence a pivotal Phase III clinical program for VERED in the United States in the first half of 2018, which we expect to include two, multi-center, placebo controlled trials, each enrolling 350
subjects. We expect to report top-line data from this program in 2019. In parallel with our planned Phase III clinical program, we intend to complete a long-term safety study. We intend to design the Phase III program to demonstrate the efficacy and safety of treatment with VERED relative to vehicle for the treatment of subtype II rosacea.
Generic Drug Product Candidates
In addition to our branded product candidates, we have a current portfolio of six generic topical dermatological products, with three of our generic product candidates, including ivermectin cream, 1%, being developed in collaboration with Perrigo and another being developed in collaboration with Douglas Pharmaceuticals. Both Perrigo and Douglas Pharmaceuticals have significant experience in the development of generic drugs.
Our most advanced generic product candidate is ivermectin cream, 1%, for the treatment of inflammatory lesions associated with rosacea, which we are developing in collaboration with Perrigo. In March 2017, Perrigo submitted an abbreviated new drug application, or ANDA, for ivermectin cream, 1% to the FDA and received approval for filing. This ANDA is currently on file with the FDA. Following notification from Perrigo, Galderma Laboratories, L.P., Galderma S.A., and Nestle Skin Health S.A., filed a patent litigation suit triggering the application of a 30-month stay on approval of the ANDA, under the Hatch-Waxman amendments to the Federal Food, Drug, and Cosmetic Act. Pursuant to the guidelines of the GDUFA, we expect to receive feedback from the FDA in their review of this ANDA in the first half of 2018. Ivermectin cream, 1% is the active molecule in Soolantra which is currently marketed in the United States by Galderma Laboratories LP. For the 12 months ended November 30, 2017, Soolantra achieved sales of $113 million according to IQVIA.
Our Proprietary Silica-Based Microencapsulation Technology Platform
Encapsulation of a drug substance can be made using a variety of techniques, such as solvent evaporation, coacervation, and interfacial polymerization. Most encapsulations involve organic polymers, such as poly-methyl methacrylate, chitosan and cellulose. The resultant encapsulated drug substance can be an aqueous dispersion of varying payload and volume fraction or a dried powder. Control over the encapsulation process when organic polymers are used is challenging and is mainly limited to shell thickness. Other properties of the organic polymer encapsulating material are hard to control.
In contrast, we use proprietary ‘sol-gel’ processes to shape silica on site to form microcapsule shells of almost any size and in-vitro release profile. Sol-gel is a chemical process whereby amorphous silica, or other metal oxides, are made by forming interconnections among colloidal particles (the “sol”) under increasing viscosity until a rigid silica shell (the “gel”) is formed. The drug substance that is added during the sol-gel reaction is encapsulated, using a patented technique, by which a core-shell structure is formed. The drug substance is in the core and the silica is the capsule shell. At the end of the process, the microcapsules are in the shape of small beads ranging from 1 – 40 mm in size. This process results in an aqueous suspension in which the drug substances are entrapped in silica particles.
We intend to leverage our technology platform to take advantage of the fact that the FDA has already approved drugs containing silica excipients for topical administration and utilizes our expertise in micro encapsulation processes to potentially expedite the approval process of drugs that are based on our technology platform.
Collaboration Agreements
On April 27, 2015, we entered into a development, manufacturing and commercialization agreement with Perrigo, as amended on October 26, 2015, to work toward the objective of obtaining all FDA approvals necessary for the commercialization of ivermectin cream, 1%, in the United States. Perrigo will conduct all regulatory, scientific, clinical and technical activities
necessary to develop ivermectin cream, 1%, prepare and file an ANDA with the FDA, and gain regulatory approval to market ivermectin cream, 1%, in the United States. We granted Perrigo the right, title and interest in and to ivermectin cream, 1%, and agreed on each party’s portion of the costs associated with performance under the agreement. Perrigo also owns intellectual property created in connection with the development of ivermectin cream, 1%. As soon as reasonably practical after final approval by the FDA of the ANDA, if approval is granted, Perrigo is required to use diligent efforts to commercialize ivermectin cream, 1%, in the United States. Perrigo has the sole and exclusive right to establish and control the prices and all other terms and conditions for the sales of ivermectin cream, 1%, in the United States and is required to do so in good faith without derogating from our right to benefit from the commercialization of ivermectin cream, 1%. We will be entitled to 50% of Perrigo’s gross profits related to the sale of ivermectin cream, 1%, on a quarterly basis, for a period of 20 years following the first commercial sale of the ivermectin cream, 1%, in the United States. The agreement may be terminated in the event of a material breach by one of the parties, certain potential infringement claims by third parties or an uncured insolvency or bankruptcy proceeding of one of the parties. In addition, the agreement may be terminated if the gross profits relating to the sale of the product do not exceed a certain threshold or if the potential market for the product has been significantly reduced due to regulatory changes.
In connection with the transfer of an in-process generic product candidate to us by Arkin Dermatology on August 22, 2017, we assumed an agreement with Perrigo UK for the development, manufacturing and commercialization of this generic product candidate. Under the terms of the agreement, Perrigo UK will conduct all regulatory, scientific, clinical and technical activities necessary to develop the generic product candidate, prepare and file an ANDA with the FDA, and gain regulatory approval to market the generic product candidate. As soon as reasonably practical after final approval by the FDA of the ANDA, if approval is granted, Perrigo UK is required to use diligent efforts to commercialize the product in the United States. Perrigo UK has the sole and exclusive right to establish and control the prices and all other terms and conditions for the sales of the generic product candidate in the United States and is required to do so in good faith without derogating from our right to benefit from the commercialization of the generic product candidate. We are responsible for 80% of all out-of-pocket clinical study costs related to the generic product candidate. We will be entitled to 50% of Perrigo UK’s gross profits related to the sale of the generic product candidate, on a quarterly basis, for a period of 20 years following the first commercial sale of the generic product candidate. The agreement may be terminated in the event of a material breach by one of the parties, certain potential infringement claims by third parties or an uncured insolvency or bankruptcy proceeding of one of the parties. In addition, the agreement may be terminated if the gross profits relating to the sale of the generic product candidate do not exceed a certain threshold or if the potential market for the product has been significantly reduced to regulatory changes.
On June 7, 2017, we entered into a Development, License, Supply and Marketing Agreement, with Douglas with respect to the development and commercialization of a generic product candidate for a drug that already has generic substitutions. Douglas will manufacture the product for non-clinical and clinical trial uses, and once approved for marketing, for commercialization by us in the countries we elect to commercialize the product. Douglas will also be responsible for completing the formulation of the product and providing chemistry, manufacturing and control support, conducting all steps for production and quality controls of the product, formulation development of the product in final finished form and supporting the ANDA or any other applicable registration application. We will be responsible for conducting the legal and regulatory review process, performing bioequivalence and clinical studies to obtain marketing approval for the product in the United States and preparing and filing the regulatory filings to obtain marketing approval in the United States. We have the right to commercialize the product in all countries in North America and any other country agreed to with Douglas, and Douglas has the right to commercialize the product in Australia, New Zealand, the Southeast, East and North Asia region and the Middle East and North Africa region and any other country agreed to by us and Douglas.
Each party granted the other an exclusive royalty free license under its related intellectual property with the right to grant sublicenses, to use and commercialize the product in the countries
in which the other party has the right to commercialize the product. Any new intellectual property generated in the development plan will be jointly owned. We are responsible for patent prosecution and Douglas is required to reimburse us for 50% of our patent expenses.
Each party is required to pay the other party 50% of its net profits from the sale of the products during the term of the agreement. In addition, we or the third party commercializing the product on our behalf will pay Douglas a transfer price based on the cost of goods for the manufacture of the products. The term of the agreement is ten years, and either party may terminate the agreement (i) for breach, (ii) if the joint steering committee established by the parties determines that it is unlikely that marketing approval will be achieved or determines that the commercialization of the product becomes unfeasible or uneconomic, (iii) a patent injunction permanently prohibits the future commercialization of the product or (iv) in the case of force majeure.
Intellectual Property
Our intellectual property and proprietary technology are directed to the development, manufacture and sale of our branded product candidates: TWIN, SIRS-T and VERED. We seek to protect our intellectual property, core technologies and other know-how, through a combination of patents, trademarks, trade secrets, non-disclosure and confidentiality agreements, assignments of invention and other contractual arrangements with our employees, consultants, partners, suppliers, customers and others.
We will be able to protect our technology from unauthorized use by third parties only to the extent it is covered by valid and enforceable patents or is effectively maintained as trade secrets. Patents and other proprietary rights are an essential element of our business. If any of the below described applications are not approved, or any of the below described patents are invalidated, deemed unenforceable or otherwise successfully challenged, such loss would have a material effect on the commercialization of our product candidates and our future prospects.
Our patent portfolio that is directed to our branded product candidates includes 51 patents and patent applications and claims processes for manufacture (including silica microencapsulation platform and other technologies), formulations, composition of matter, and methods of use. Of these 51 patents and patent applications, 27 are granted patents (2 in the United States and 25 in other countries) and 24 are pending applications (9 in the United States (2 of which are provisional applications) and 15 in other countries).
For our TWIN product candidate, we have obtained patent protection for the composition of matter in the United States, Canada, Japan, Mexico (with a term until 2028) and we have a pending application claiming composition of matter in the European Patent Office. There are four patent families protecting the process for the encapsulation of the active agents of our TWIN product candidate (one patent family has patents granted in Canada, India, and Japan (with a term until 2028) and applications pending in the United States, Europe and Mexico; the second patent family has a patent granted in Mexico (with a term until 2029) and pending applications in the United States and Canada; and the third patent family has patents granted in Europe (validated in France, Germany, Ireland, Italy, Spain, Switzerland, United Kingdom), China, India, Japan and Mexico (with a term until 2030) and pending applications in the United States and Canada); and the fourth patent family has patents granted in Canada, China, Israel, India and Mexico and an application pending in the United States. We own pending patents for the formulation of our TWIN product candidate in the United States, Canada, Europe, China, India and Mexico and a granted patent in Japan (with a term until 2032). We have three pending unpublished U.S. applications for the administration method and regimen of our TWIN product candidate.
For our VERED product candidate, we have obtained a patent in the United States (with a term until 2032) covering the composition for topical treatment of rosacea. We have further pending applications for this composition in the United States, Canada, Europe, Japan, China, Mexico. There are two patent families directed to the process for encapsulation of the active agents of our
VERED product candidate (one patent family has granted patents in Canada, India, and Japan (with a term until 2028) and pending applications in the United States, Europe and Mexico; and the second patent family has patents granted in Canada, China, Israel, India and Mexico and an application pending in the United States).
For our SIRS-T product candidate, we have a pending unpublished U.S. application claiming the composition and method of treatment. Furthermore, there are two patent families protecting the process for the preparation of our SIRS-T product candidate (one patent family granted in Mexico (with a term until 2029) and pending in the United States and Canada; and the second patent family granted in Europe (validated in France, Germany, Ireland, Italy, Spain, Switzerland, United Kingdom), China, India, Japan and Mexico (with a term until 2030) and pending in the United States and Canada).
We have four accepted trademark applications in Israel, one registered trademark in the United States and four trademark applications pending in the United States and Canada. These registrations and pending applications, if approved, will cover potential brand names for our VERED product candidate in Israel, Canada and the United States.
Competition
The pharmaceutical industry is subject to intense competition as well as rapid technological changes. Our ability to compete is based on a variety of factors, including product efficacy, safety, cost-effectiveness, patient compliance, patent position and effective product promotion. Competition is also based upon the ability of a company to offer a broad range of other product offerings, large direct sales forces and long-term customer relationships with target physicians.
There are numerous companies that have branded or generic products or product candidates in the dermatology market. Among them are Aclaris Therapeutics, Inc., Akorn, Inc., Allergan plc, Aqua Pharmaceuticals LLC, Bayer HealthCare AG, Cassiopea SpA, Dermira, Inc., Foamix Pharmaceuticals Ltd., Galderma Pharma S.A., Glenmark Pharmaceuticals Ltd., G&W Laboratories, Inc., LEO Pharma A/S, Mylan N.V., Novan, Inc., Novartis AG, Novum Pharma, LLC, Perrigo Company plc, Pfizer, Inc., Sienna Biopharmaceuticals, Inc., Spear Therapeutics, Ltd., Sun Pharmaceutical Industries Ltd., Teligent, Inc., Teva Pharmaceutical Industries Ltd., and Valeant Pharmaceuticals International, Inc.
In order for our approved product candidates, if any, to compete successfully in the dermatology market, we will have to demonstrate that their efficacy, safety and cost-effectiveness provide an attractive alternative to existing therapies, some of which are widely known and accepted by physicians and patients, as well as to future new therapies. Such competition could lead to reduced market share for our product candidates and contribute to downward pressure on the pricing of our product candidates, which could harm our business, financial condition, operating results and prospects.
Many of the companies, academic research institutions, governmental agencies and other organizations involved in the field of dermatology have substantially greater financial, technical and human resources than we do, and may be better equipped to discover, develop, test and obtain regulatory approvals for products that compete with ours. They may also be better equipped to manufacture, market and sell products. These companies, institutions, agencies and organizations may develop and introduce products and drug delivery technologies competitive with or superior to ours which could inhibit our market penetration efforts.
TWIN, SIRS-T and VERED target the well-established acne and rosacea markets. If approved, we expect them to compete with current standard-of-care treatments, whether branded, generic or over-the-counter, as well as with new treatments to be approved in the future. The current standard-of-care for acne includes topical anti-bacterial drugs such as benzoyl peroxide that are broadly available over-the-counter, prescription drug products that are based on single retinoid drug products such as Differin, Atralin, Retin-A, Retin-A Micro and Tazorac, fixed-dose
combinations of benzoyl peroxide and adapalene such as Epiduo and Epiduo Forte, fixed-dose combinations of benzoyl peroxide and clindamycin such as Duac, Benzaclin, Onexton and Acanya, fixed-dose combinations of tretinoin and clindamycin such as Ziana and Veltin, and topical antibiotics such as Aczone. The current standard of care for rosacea includes Metrogel, Finacea and the recently launched Soolantra, as well as oral Oracea (doxycycline embedded in a technology platform). As a fixed-dose combination product candidate, TWIN may also compete with drug products utilizing other technologies that can separate two drug substances, such as dual chamber tubes, dual pouches or dual sachets. In addition to these products, our generic drug product candidates, including ivermectin cream, 1%, is expected to face direct competition from branded drugs and authorized generics which are prescription drugs produced by the branded pharmaceutical companies and marketed under a private label, at generic prices. On December 30, 2016, Actavis Ltd. submitted an ANDA for ivermectin, 1%, cream, and therefore we will only be able to commercialize this product after Actavis Ltd.'s six month exclusivity period expires.
Marketing, Sales and Distribution
We currently do not have any sales, marketing or distribution capabilities. In order to commercialize our product candidates, if approved for commercial sale, we must either develop a sales and marketing infrastructure or collaborate with third parties that have sales and marketing experience. We intend to commercialize our late-stage branded product candidates in the United States, if approved, by building a specialized sales and marketing organization focused solely on dermatologists and their patients. Because the U.S. market is served by a relatively small number of practicing dermatologists, we believe a small and dedicated sales force can efficiently cover a significant portion of that targeted patient population. In other markets, we may selectively pursue strategic collaborations with third parties in order to maximize the commercial potential of our product candidates.
Manufacturing
We rely on and expect to continue to rely on third-party contract manufacturing organizations, or CMOs, for the supply of current good manufacturing practice-grade, or cGMP-grade, clinical trial materials and commercial quantities of our product candidates and products, if approved. We currently do not have any agreements for the commercial production of raw materials we use. We believe that the manufacturing process for the raw materials we purchase can be transferred to a number of other CMOs for the production of clinical and commercial supplies of our product candidates in the ordinary course of business.
Government Regulation
Our business is subject to extensive government regulation. We have been voluntarily certified by the Israel notified body, the Standards Institution of Israel for the design, development and production of pharmaceutical products, a partner of IQNet. Regulation by governmental authorities in the United States and other jurisdictions is a significant factor in the development, manufacture and commercialization of our product candidates and in our ongoing research and development activities.
Product Approval Process in the United States
Review and approval of drugs
In the United States, pharmaceutical products are subject to extensive regulation by the FDA. The FDCA and other federal and state statutes and implementing regulations govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion and marketing, distribution, post-approval monitoring and reporting, sampling, and import and export of pharmaceutical products. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval may subject an applicant to a variety of administrative or judicial sanctions and
enforcement actions brought by the FDA, the Department of Justice or other governmental entities. Possible sanctions may include the FDA’s refusal to approve pending applications, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters or untitled letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement and civil or criminal penalties.
FDA approval of a new drug application is required before any new unapproved drug or dosage form, can be marketed in the United States. Section 505 of the FDCA describes three types of new drug applications: (1) an application that contains full reports of investigations of safety and effectiveness (section 505(b)(1)); (2) an application that contains full reports of investigations of safety and effectiveness but where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference (section 505(b)(2)); and (3) an application that contains information to show that the proposed product is identical in active ingredient, dosage form, strength, route of administration, labeling, quality, performance characteristics, and intended use, among other things, to a previously approved product (section 505(j)). Section 505(b)(1) and 505(b)(2) new drug applications are referred to as NDAs, and section 505(j) applications are referred to as ANDAs. We believe that the applications for our late-stage branded product candidates will be section 505(b)(2) NDAs and that those for our generic product candidates will be section 505(j) ANDAs.
In general, the process required by the FDA prior to marketing and distributing a new drug, as opposed to a generic drug subject to section 505(j), in the United States usually involves the following:
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completion of pre-clinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s good laboratory practices, or GLP, requirements or other applicable regulations;
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submission to the FDA of an investigational new drug application, or IND, which must become effective before human clinical trials in the United States may begin;
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approval by an independent institutional review board, or IRB, at each clinical site before each trial may be initiated;
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performance of adequate and well-controlled human clinical trials in accordance with good clinical practice, or GCP, requirements to establish the safety and efficacy of the proposed drug for its intended use;
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preparation and submission to the FDA of an NDA;
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satisfactory completion of an FDA advisory committee review, if applicable;
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satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities at which the product or components thereof are produced, to assess compliance with current good manufacturing practices, or cGMPs, and to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity;
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satisfactory completion of FDA audits of clinical trial sites to assure compliance with GCPs and the integrity of the clinical data;
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payment of user fees and FDA review and approval of the NDA; and
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compliance with any post-approval requirements, including the potential requirement to implement a Risk Evaluation and Mitigation Strategy, or REMS, and the potential requirement to conduct post-approval studies.
Pre-clinical studies
Pre-clinical studies include laboratory evaluation or product chemistry, formulation and toxicity, as well as animal studies to assess the potential safety and efficacy of the product candidate. Pre-clinical safety tests must be conducted in compliance with the FDA regulations. The results of the pre-clinical studies, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND which must become effective before clinical trials may commence. Long-term pre-clinical studies, such as animal tests of reproductive toxicity and carcinogenicity, may continue after the IND application is submitted.
Clinical trials
Clinical trials involve the administration of an investigational product to human subjects under the supervision of qualified investigators in accordance with GCP requirements, which include, among other things, the requirement that all research subjects provide their informed consent in writing before their participation in any clinical trial. Clinical trials are conducted under written trial protocols detailing, among other things, the objectives of the trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. A protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND.
An IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to a proposed clinical trial and places the trial on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. In addition, information about certain clinical trials must be submitted within specific timeframes to the National Institutes of Health, or NIH, for public dissemination on the NIH-maintained website, www.clinicaltrials.gov.
An IRB representing each institution participating in the clinical trial must review and approve the plan for any clinical trial before it commences at that institution, and the IRB must conduct continuing review at least annually. The IRB must review and approve, among other things, the trial protocol information to be provided to trial subjects. An IRB must operate in compliance with FDA regulations. Information about certain clinical trials must be submitted within specific timeframes to the NIH for public dissemination on the NIH-maintained website, www.clinicaltrials.gov.
Clinical trials are typically conducted in three sequential phases, which may overlap or be combined:
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Phase I: The drug is initially introduced into healthy human subjects or patients with the target disease or condition and tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an early indication of its effectiveness and to determine optimal dosage.
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Phase II: The drug is administered to a limited patient population to identify possible short-term adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.
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Phase III: The drug is administered to an expanded patient population, generally at geographically dispersed clinical trial sites, in well-controlled clinical trials to generate enough data to statistically evaluate the efficacy and safety of the product for approval, to establish the overall risk-benefit profile of the product, and to provide adequate information for the labeling of the product.
In most cases of an ANDA, the proposed generic drug must be shown to be bioequivalent to the reference listed drug (RLD, or reference product) and in other cases, the bioequivalent study is being conducted in in-vitro and not in clinical trials. The FDCA provides that a generic drug is
bioequivalent to the listed drug if: the rate and extent of absorption of the drug do not show a significant difference from the rate and extent of absorption of the listed drug when administered at the same molar dose of the therapeutic ingredient under similar experimental conditions in either a single dose or multiple doses. During bioequivalence studies, an applicant compares the systemic exposure profile of a test drug product to that of the RLD on the target population at the same regimen and exposure period as the RLD were the resulted efficacy outcomes are being compared to demonstrate being equivalent.
Submission of an NDA to the FDA
The results of the pre-clinical studies and clinical trials, together with other detailed information, including information on the manufacture, control and composition of the product, are submitted to the FDA as part of an NDA requesting approval to market the product candidate for a proposed indication. Under the Prescription Drug User Fee Act, as amended, applicants are required to pay fees to the FDA for reviewing an NDA. These user fees, as well as the annual fees required for commercial manufacturing establishments and for approved products, can be substantial. The NDA review fee alone can exceed $2 million, subject to certain limited deferrals, waivers and reductions that may be available.
The FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing based on the agency’s threshold determination that it is sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an NDA for filing. In this event, the NDA must be resubmitted with the additional information and is subject to payment of additional user fees. The resubmitted application is also subject to review before the FDA accepts it for filing. If found complete, the FDA will accept the NDA for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review.
Under the Prescription Drug User Fee Act, the FDA has agreed to certain performance goals in the review of NDAs through a two-tiered classification system, Standard Review and Priority Review. Review. Priority Review designation is given to drugs that offer major advances in treatment, or provide a treatment where no adequate therapy exists. The FDA endeavors to review applications subject to Standard Review within approximately 10 to 12 months of receipt, whereas the FDA’s goal is to review Priority Review applications within approximately six to eight months of receipt, depending on whether the drug is a new molecular entity. The FDA, however, may not approve a drug within these established goals, and its review goals are subject to change from time to time.
Before approving an NDA, the FDA inspects the facilities at which the product is manufactured or facilities that are significantly involved in the product development and distribution process, and will not approve the product unless cGMP compliance is satisfactory. Additionally, the FDA will typically inspect one or more clinical sites to assure compliance with GCP requirements. The FDA may also refer applications for novel drug products or drug products which present difficult questions of safety or efficacy to an advisory committee for review, evaluation and recommendation as to whether the application should be approved and under what conditions.
After the FDA evaluates the NDA and the manufacturing facilities, it issues either an approval letter or a complete response letter to indicate that the review cycle for an application is complete and that the application is not ready for approval. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing, or information, in order for the FDA to reconsider the application. Even with submission of this additional information, the FDA may ultimately decide that an application does not satisfy the regulatory criteria for approval. If, or when, the deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications.
If a product is approved, the approval will impose limitations on the indicated uses for which the product may be marketed, may require that warning statements be included in the product
labeling, may require that additional studies or trials be conducted following approval as a condition of the approval, may impose restrictions and conditions on product distribution, prescribing or dispensing in the form of a risk management plan, or impose other limitations. For example, as a condition of NDA approval, the FDA may require a risk evaluation and mitigation strategy, or REMS, to ensure that the benefits of the drug outweigh the potential risks. If the FDA determines a REMS is necessary during review of the application, the drug sponsor must agree to the REMS plan at the time of approval. A REMS may be required to include various elements, such as a medication guide or patient package insert, a communication plan to educate healthcare providers of the drug’s risks, limitations on who may prescribe or dispense the drug, or other elements to assure safe use, such as special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring and the use of patient registries. In addition, the REMS must include a timetable to periodically assess the strategy. The requirement for a REMS can materially affect the potential market and profitability of a drug.
Further changes to some of the conditions established in an approved application, including changes in indications, labeling, or manufacturing processes or facilities, require submission and FDA approval of a new NDA or NDA supplement before the change can be implemented, which may require us to develop additional data or conduct additional pre-clinical studies and clinical trials. An NDA supplement for a new indication typically requires clinical data similar to that in the original application, and the FDA uses the similar procedures in reviewing NDA supplements as it does in reviewing NDAs.
Post-Approval Requirements
Any drug products for which we receive FDA approval will be subject to continuing regulation by the FDA. Certain requirements include, among other things, record-keeping requirements, reporting of adverse experiences with the product, providing the FDA with updated safety and efficacy information on an annual basis or more frequently for specific events, product sampling and distribution requirements, complying with certain electronic records and signature requirements and complying with FDA promotion and advertising requirements. These promotion and advertising requirements include standards for direct-to-consumer advertising, prohibitions against promoting drugs for uses or patient populations that are not described in the drug’s approved labeling, known as “off-label use,” and other promotional activities, such as those considered to be false or misleading. Failure to comply with FDA requirements can have negative consequences, including the immediate discontinuation of noncomplying materials, adverse publicity, enforcement letters from the FDA, mandated corrective advertising or communications with doctors, and civil or criminal penalties. Such enforcement may also lead to scrutiny and enforcement by other government and regulatory bodies.
Although physicians may prescribe legally available drugs for off-label uses, manufacturers may not encourage, market or promote such off-label uses. As a result, “off-label promotion” has formed the basis for litigation under the Federal False Claims Act, violations of which are subject to significant civil fines and penalties. In addition, manufacturers of prescription products are required to disclose annually to the Center for Medicaid and Medicare any payments made to physicians in the United States under the Sunshine Act of 2012. These payments could be in cash or kind, could be for any reason, and are required to be disclosed even if the payments are not related to the approved product. A failure to fully disclose or not report in time could lead to penalties of up to $1 million per year.
The manufacturing of any of our product candidates will be required to comply with applicable FDA manufacturing requirements contained in the FDA’s cGMP regulations. The FDA’s cGMP regulations require, among other things, quality control and quality assurance, as well as the corresponding maintenance of comprehensive records and documentation. Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are also required to register their establishments and list any products they make with the FDA and to comply with related requirements in certain states. Changes to the manufacturing process are
strictly regulated and often require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP requirements and impose reporting and documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use. These entities are further subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain cGMP compliance.
Discovery of problems with a product after approval may result in serious and extensive restrictions on a product, manufacturer or holder of an approved NDA, as well as lead to potential market disruptions. These restrictions may include recalls, suspension of a product until the FDA is assured that quality standards can be met, and continuing oversight of manufacturing by the FDA under a “consent decree,” which frequently includes the imposition of costs and continuing inspections over a period of many years, as well as possible withdrawal of the product from the market. In addition, changes to the manufacturing process generally require prior FDA approval before being implemented. Other types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to further FDA review and approval. There also are continuing, annual user fee requirements for any marketed products and the establishments at which such products are manufactured, as well as new application fees for supplemental applications with clinical data.
The FDA also may require post-marketing testing, or Phase IV testing, as well as risk minimization action plans and surveillance to monitor the effects of an approved product or place conditions on an approval that could otherwise restrict the distribution or use of our product candidates.
Once approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in mandatory revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a REMS program. Other potential consequences include, among other things:
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restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;
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fines, warning letters or holds on post-approval clinical trials;
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refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product approvals;
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product seizure or detention, or refusal to permit the import or export of products; or
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injunctions or the imposition of civil or criminal penalties.
Pediatric trials and exclusivity
Even when not pursuing a pediatric indication, under the Pediatric Research Equity Act of 2003, an NDA or supplement thereto must contain data that is adequate to assess the safety and effectiveness of the drug product for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. With the enactment of the Food and Drug Administration Safety and Innovation Act, or the FDASIA, in 2012, sponsors must also submit pediatric trial plans prior to the assessment data. Those plans must contain an outline of the proposed pediatric trials the applicant plans to conduct, including trial objectives and design, any deferral or waiver
requests, and other information required by regulation. The applicant, the FDA, and the FDA’s internal review committee must then review the information submitted, consult with each other, and agree upon a final plan. The FDA or the applicant may request an amendment to the plan at any time.
The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from the pediatric data requirements. Additional requirements and procedures relating to deferral requests and requests for extension of deferrals are contained in the FDASIA.
Separately, in the event the FDA makes a written request for pediatric data relating to a drug product, an NDA sponsor who submits such data may be entitled to pediatric exclusivity. Pediatric exclusivity is another type of non-patent marketing exclusivity in the United States. and, if granted, provides for the attachment of an additional six months of marketing protection to the term of any existing exclusivity.
The Hatch-Waxman Amendments
ANDA Approval Process
The Drug Price Competition and Patent Term Restoration Act of 1984 (also known as the Hatch-Waxman Amendments), established abbreviated FDA approval procedures for drugs that are shown to be equivalent to proprietary drugs previously approved by the FDA through its NDA process. Approval to market and distribute these drugs is obtained by submitting an ANDA with the FDA. An ANDA is a comprehensive submission that contains, among other things, data and information pertaining to the active pharmaceutical ingredient, drug product formulation, specifications and stability of the generic drug, as well as analytical methods, manufacturing process validation data, and quality control procedures. Premarket applications for generic drugs are termed abbreviated because they generally do not include pre-clinical and clinical data to demonstrate safety and effectiveness. Instead, a generic applicant must demonstrate that its product is bioequivalent to the innovator drug. In certain situations, an applicant may obtain ANDA approval of a generic product with a strength or dosage form that differs from a referenced innovator drug pursuant to the filing and approval of an ANDA Suitability Petition. The FDA will approve the generic product as suitable for an ANDA application if it finds that the generic product does not raise new questions of safety and effectiveness as compared to the innovator product. A product is not eligible for ANDA approval if the FDA determines that it is not bioequivalent to the referenced innovator drug, if it is intended for a different use, or if it is not subject to an approved Suitability Petition. However, such a product might be approved under an NDA, with supportive data from clinical trials. We are developing certain of our product candidates as generic drugs, for which we intend to submit ANDAs to the FDA.
505(b)(2) NDAs
Section 505(b)(2) was enacted as part of the Hatch-Waxman Amendment, and permits the filing of an NDA where at least some of the information required for approval comes from studies or trials not conducted by or for the applicant and for which the applicant has not obtained a right of reference. As an alternative path to FDA approval for modifications to formulations or uses of products previously approved by the FDA, an applicant may submit an NDA under Section 505(b)(2) of the FDCA. Section 505(b)(2) was enacted as part of the Hatch-Waxman Amendment, and permits the filing of an NDA where at least some of the information required for approval comes from studies or trials not conducted by or for the applicant and for which the applicant has not obtained a right of reference. If the 505(b)(2) applicant can establish that reliance on the FDA’s previous findings of safety and effectiveness is scientifically appropriate, it may eliminate the need to conduct certain pre-clinical studies or clinical trials for the new product. The FDA may also require companies to perform additional studies or measurements, including clinical trials, to support the change from the approved branded reference drug. The FDA may then approve the
new product candidate for all, or some, of the labeled indications for which the branded reference drug has been approved, as well as for any new indication sought by the 505(b)(2) applicant. We are developing our late-stage branded product candidates with the expectation that we will submit 505(b)(2) NDAs to FDA for these products.
Orange Book Listing
In seeking approval for a drug through an NDA, including a 505(b)(2) NDA, applicants are required to list with the FDA certain patents whose claims cover the applicant’s product. Upon approval of an NDA, each of the patents listed in the application for the drug is then published in the FDA’s Publication of Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the “Orange Book.” Any applicant who submits an ANDA seeking approval of a generic equivalent of a drug listed in the Orange Book or a Section 505(b)(2) NDA referencing a drug listed in the Orange Book must certify to the FDA 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. The applicant may also elect to submit a “section viii” statement certifying that its proposed label does not contain (or carves out) any language regarding the patented method-of-use rather than certify to a listed method-of-use patent.
If the applicant does not challenge one or more listed patents through a Paragraph IV certification, the FDA will not approve the ANDA or Section 505(b)(2) NDA until all the listed patents claiming the referenced product have expired. Further, the FDA will also not approve, as applicable, an ANDA or Section 505(b)(2) NDA until any non-patent exclusivity, as described in greater detail below, has expired.
If the ANDA or Section 505(b)(2) NDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the owner of the referenced NDA for the previously approved product and relevant patent holders within 20 days after the ANDA or Section 505(b)(2) NDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement suit against the ANDA or Section 505(b)(2) applicant. Under the FDCA, the filing of a patent infringement lawsuit within 45 days of receipt of the notification regarding a Paragraph IV certification automatically prevents the FDA from approving the ANDA or Section 505(b)(2) NDA until the earliest to occur of 30 months beginning on the date the patent holder receives notice, expiration of the patent, settlement of the lawsuit, or until a court deems the patent unenforceable, invalid or not infringed. Even if a patent infringement claim is not brought within the 45-day period, a patent infringement claim may be brought under traditional patent law, but it does not invoke the 30-month stay.
Moreover, in cases where an ANDA or Section 505(b)(2) application containing a Paragraph IV certification is submitted after the fourth year of a previously approved drug’s five-year NCE exclusivity period, as described more fully below, and the patent holder brings suit within 45 days of notice of the Paragraph IV certification, the 30-month period is automatically extended to prevent approval of the Section 505(b)(2) application until the date that is seven and one-half years after approval of the previously approved reference product that has the five-year NCE exclusivity. The court also has the ability to shorten or lengthen either the 30-month or the seven and one-half year period if either party is found not to be reasonably cooperating in expediting the litigation.
Notwithstanding the approval of many products by the FDA pursuant to Section 505(b)(2), over the last few years, some pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA changes its interpretation of Section 505(b)(2), or if the FDA’s interpretation is successfully challenged in court, this could delay or even prevent the FDA from approving any Section 505(b)(2) NDA that we submit.
Non-Patent Exclusivity
In addition to patent exclusivity, the holder of the NDA for the listed drug may be entitled to a period of non-patent exclusivity, during which the FDA cannot approve an ANDA or 505(b)(2)
application that relies on the listed drug. For example, a pharmaceutical manufacturer may obtain five years of non-patent exclusivity upon NDA approval of a new chemical entity, or NCE, which is a drug that contains an active moiety that has not been approved by FDA in any other NDA. An “active moiety” is defined as the molecule or ion responsible for the drug substance’s physiological or pharmacologic action. During the five year exclusivity period, the FDA cannot accept for filing any ANDA seeking approval of a generic version of that drug or any 505(b)(2) NDA for the same active moiety and that relies on the FDA’s findings regarding that drug, except that FDA may accept an application for filing after four years if the follow-on applicant makes a paragraph IV certification.
Another form of non-patent exclusivity is clinical investigation exclusivity. A drug, including one approved under Section 505(b)(2), may obtain a three-year period of exclusivity for a particular condition of approval, or change to a marketed product, such as a new formulation for a previously approved product, if one or more new clinical trials (other than bioavailability or bioequivalence studies) was essential to the approval of the application and was conducted/sponsored by the applicant. Should this occur, the FDA would be precluded from approving any ANDA or 505(b)(2) application for the protected modification until after that three-year exclusivity period has run. However, unlike NCE exclusivity, the FDA can accept an application and begin the review process during the exclusivity period.
Patent Term Restoration and Extension
A patent claiming a new drug product may be eligible for a limited patent term extension under the Hatch-Waxman Act, or PTE, which permits an extended patent term of up to five years for the developed pharmaceutical to compensate for patent term lost during product development and the FDA regulatory review. The PTE period granted is typically one-half the time between the effective date of an IND and the submission date of an NDA, plus the time between the submission date of a NDA and the ultimate approval date. However, the PTE cannot be used to extend the remaining term of a patent past a total of 14 years from the product’s approval date. Only one patent applicable to an approved drug product is eligible for the extension, and the application for the extension must be submitted prior to the expiration of the patent in question. A patent that covers multiple drugs for which approval is sought can only be extended in connection with one of the approvals. The U.S. Patent and Trademark Office reviews and approves the PTE application in consultation with the FDA.
Review and Approval of Drug Products Outside the United States
In addition to regulations in the United States, if we target non-U.S. markets, we will be subject to a variety of foreign regulations governing manufacturing, clinical trials, commercial sales and distribution of our future product candidates. Whether or not we obtain FDA approval for a product candidate, we must obtain approval of the product by the comparable regulatory authorities of foreign countries before commencing clinical trials or marketing in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.
Under European Union regulatory systems, marketing authorizations may be submitted either under a centralized, decentralized or mutual recognition procedure. The centralized procedure provides for the grant of a single marketing authorization that is valid for all European Union member states. The decentralized procedure includes selecting one “reference member state,” or RMS, and submitting to more than one member state at the same time. The RMS National Competent Authority conducts a detailed review and prepares an assessment report, to which concerned member states provide comment. The mutual recognition procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marketing authorization may submit an application to the remaining member states post-initial approval. Within 90 days of receiving the applications and assessment report, each member state must decide whether to recognize the approval.
Pharmaceutical Coverage, Pricing and Reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we obtain regulatory approval. In the United States and other markets, sales of any product candidates for which we receive regulatory approval for commercial sale will depend in part on the availability of coverage and reimbursement from third-party payors. Third-party payors include government health administrative authorities, managed care providers, private health insurers and other organizations. The process for determining whether a payor will provide coverage for a drug product may be separate from the process for setting the price or reimbursement rate that the payor will pay for the drug product. Third-party payors may limit coverage to specific drug products on an approved list, or formulary, which might not include all of the FDA-approved drug products for a particular indication.
Third-party payors are increasingly challenging the price and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of VERED and TWIN, in addition to the costs required to obtain the FDA approvals. For example, VERED and TWIN may not be considered medically necessary or cost-effective. A payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.
In March 2010, the President of the United States signed the Affordable Care Act, one of the most significant healthcare reform measures in decades. The Affordable Care Act substantially changed the way healthcare is financed by both governmental and private insurers, and significantly impacted the pharmaceutical industry. The comprehensive $940 billion dollar overhaul is expected to extend coverage to approximately 32 million previously uninsured Americans. The Affordable Care Act contained a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse, which impacted existing government healthcare programs and will result in the development of new programs, including Medicare payment for performance initiatives and improvements to the physician quality reporting system and feedback program.
Additionally, the Affordable Care Act:
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increased the minimum level of rebates payable by manufacturers of brand-name drugs from 15.1% to 23.1%; and
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imposed a non-deductible annual fee on pharmaceutical manufacturers or importers who sell “branded prescription drugs” to specified federal government programs.
Since its enactment, there have been judicial and Congressional challenges to certain aspects of the Affordable Care Act. The new Presidential Administration and U.S. Congress have attempted and will likely continue to seek to modify, repeal, or otherwise invalidate all, or certain provisions of, the Affordable Care Act. Most recently, the Tax Cuts and Jobs Act was enacted, which, among other things, removes penalties for not complying with the Affordable Care Act’s individual mandate to carry health insurance. It is uncertain the extent to which any such changes may impact our business or financial condition.
In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. In August 2011, the President signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. These included reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will stay in effect
through 2025 unless additional Congressional action is taken. Additionally, in January 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. Recently there has also been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed bills designed to, among other things, reform government program reimbursement methodologies. Individual states in the United States have also become increasingly active in passing legislation and implementing regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. We expect that additional state and federal healthcare initiatives will be adopted in the future, any of which could impact the coverage and reimbursement for drugs, including our product candidates, if approved.
In the European Union, pricing and reimbursement schemes vary widely from country to country. Some countries provide that drug products may be marketed only after a reimbursement price has been agreed. Some countries may require the completion of additional studies or trials that compare the cost-effectiveness of a particular product candidate to currently available therapies. For example, the European Union provides options for its member states to restrict the range of drug products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. European Union member states may approve a specific price for a drug product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the drug product on the market. Other member states allow companies to fix their own prices for drug products, but monitor and control company profits. The downward pressure on health care costs in general, particularly prescription drugs, has become intense. As a result, there are increasingly high barriers to entry for new products. In addition, in some countries, cross-border imports from low-priced markets exert competitive pressure that may reduce pricing within a country. Any country that has price controls or reimbursement limitations for drug products may not allow favorable reimbursement and pricing arrangements.
Healthcare Laws and Regulations
Although we currently do not have any product candidates on the market, our current and future business operations may be subject to additional healthcare regulation and enforcement by the federal government and by authorities in the states and foreign jurisdictions in which we conduct our business. Such laws include, without limitation, state and federal anti-kickback, fraud and abuse, false claims, privacy and security, price reporting and physician sunshine laws. Some of our pre-commercial activities are subject to some of these laws.
The federal Anti-Kickback Statute makes it illegal for any person or entity, including a prescription drug manufacturer or a party acting on its behalf to knowingly and willfully, directly or indirectly solicit, receive, offer, or pay any remuneration that is intended to induce the referral of business, including the purchase, order, lease of any good, facility, item or service for which payment may be made under a federal healthcare program, such as Medicare or Medicaid. The term “remuneration” has been broadly interpreted to include anything of value. The Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, formulary managers, and beneficiaries on the other. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a
cumulative review of all its facts and circumstances. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the Anti-Kickback Statute has been violated. In addition, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. Violations of this law are punishable by up to five years in prison, and can also result in criminal fines, civil money penalties and exclusion from participation in federal healthcare programs. Moreover, a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act.
The federal civil False Claims Act prohibits, among other things, any person or entity from knowingly presenting, or causing to be presented, for payment to, or approval by, federal programs, including Medicare and Medicaid, claims for items or services, including drugs, that are false or fraudulent or not provided as claimed. Persons and entities can be held liable under these laws if they are deemed to “cause” the submission of false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers or promoting a product off-label. In addition, our future activities relating to the reporting of wholesaler or estimated retail prices for our product candidates, the reporting of prices used to calculate Medicaid rebate information and other information affecting federal, state and third-party reimbursement for our product candidates, and the sale and marketing of our product candidates, are subject to scrutiny under this law. Penalties for federal civil False Claims Act violations may include up to three times the actual damages sustained by the government, plus mandatory civil penalties for each separate false claim, the potential for exclusion from participation in federal healthcare programs, and, although the federal False Claims Act is a civil statute, False Claims Act violations may also implicate various federal criminal statutes.
HIPAA created new federal criminal statutes that prohibit among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Like the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
The civil monetary penalties statute imposes penalties against any person or entity that, among other things, is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.
Also, many states have similar fraud and abuse statutes or regulations that may be broader in scope and may apply regardless of payor, in addition to items and services reimbursed under Medicaid and other state programs. Additionally, to the extent that any of our product candidates are sold in a foreign country, we may be subject to similar foreign laws.
HIPAA, as amended by HITECH, and their implementing regulations, including the final omnibus rule published on January 25, 2013, mandates, among other things, the adoption of uniform standards for the electronic exchange of information in common healthcare transactions, as well as standards relating to the privacy and security of individually identifiable health information, which require the adoption of administrative, physical and technical safeguards to protect such information. Among other things, HITECH makes HIPAA’s security standards directly applicable to business associates, defined as independent contractors or agents of covered entities that create, receive or obtain protected health information in connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities and business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal
HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions. In addition, certain state laws govern the privacy and security of health information in certain circumstances, some of which are more stringent than HIPAA and many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. Failure to comply with these laws, where applicable, can result in the imposition of significant civil and/or criminal penalties.
The Affordable Care Act imposed, among other things, new annual reporting requirements for covered manufacturers for certain payments and other transfers of value provided to physicians and teaching hospitals, as well as certain ownership and investment interests held by physicians and their immediate family members. Failure to submit timely, accurately and completely the required information for all payments, transfers of value and ownership or investment interests may result in civil monetary penalties. Certain states also mandate implementation of compliance programs, impose restrictions on drug manufacturer marketing practices, require reporting of marketing expenditures and pricing information and/or require the tracking and reporting of gifts, compensation and other remuneration to physicians.
Because we intend to commercialize products that could be covered by a federal healthcare program and other governmental healthcare programs, we intend to develop a comprehensive compliance program that establishes internal controls to facilitate adherence to the rules and program requirements to which we will or may become subject. Although the development and implementation of compliance programs designed to establish internal controls and facilitate compliance can mitigate the risk of investigation, prosecution, and penalties assessed for violations of these laws, the risks cannot be entirely eliminated.
If our operations are found to be in violation of any of such laws or any other governmental regulations that apply to us, we may be subject to penalties, including, without limitation, administrative, civil and criminal penalties, damages, fines, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, the curtailment or restructuring of our operations, exclusion from participation in federal and state healthcare programs and individual imprisonment, any of which could adversely affect our ability to operate our business and our financial results.
Innovation Authority
We have received royalty-bearing grants from the government of Israel through the Innovation Authority, for the financing of a portion of our research and development expenditures in Israel.
Under the Innovation Law and the Innovation Authority’s rules and guidelines, recipients of grants, or Recipient Company(ies), are subject to certain obligations including, the following:
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In general, the Recipient Company is obligated to pay the Innovation Authority royalties from the revenues generated from the sale of products (and related services) developed (in all or in part) as a result of, a research and development program funded by the Innovation Authority at rates which are determined under the Innovation Authority’s rules and guidelines (currently a yearly rate of 1.3% to 5% on sales of products or services developed under the approved programs, depending on the type of the Recipient Company — i.e., whether it is a “Small Company,” a “Large Company” or a “Traditional Industrial Company” as such terms are defined in the Innovation Authority’s rules and guidelines), up to the aggregate amount of the total grants received by the Innovation Authority, plus annual interest (as determined in the Innovation Authority’s rules and guidelines);
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Products developed as a result of the Innovation Authority funded R&D must, as a general matter, be manufactured in Israel. The Recipient Company is prohibited from manufacturing products developed using these Innovation Authority grants outside of the State of Israel without receiving prior approval from the Innovation Authority (except for
the transfer of less than 10% of the manufacturing capacity in the aggregate which requires only a notice). If the Recipient Company receives approval to manufacture products developed with government grants outside of Israel, it will be required to pay increased royalties to the Innovation Authority, up to 300% of the grant amount plus interest, depending on the manufacturing volume that is performed outside of Israel. The Recipient Company may also be subject to an accelerated royalty repayment rates. A Recipient Company also has the option of declaring in its Innovation Authority grant application its intention to exercise a portion of the manufacturing capacity abroad, thus avoiding the need to obtain additional approval following the receipt of the grant; and
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Under the Innovation Authority’s rules and guidelines, a Recipient Company is prohibited from transferring the Innovation Authority-financed know-how and related intellectual property rights outside of Israel except under limited circumstances, and only with the approval of the Research Committee and subject to certain payments to the Innovation Authority calculated according to formulas provided under the Innovation Authority’s rules and guidelines (which are capped to amounts specified under such rules and guidelines).
We have received grants from the Innovation Authority in connection with our research and development of a peripheral line of product candidates, which forms a negligible part of our activities, and therefore, we are subject to the aforementioned restrictions with respect to such product candidates. Such restrictions continue to apply even after payment of the full amount of royalties payable pursuant to the grants. For additional information on our royalty obligations related to Innovation Authority grants, see Note 5a to our financial statements for the year ended December 31, 2016, contained elsewhere in this prospectus.
Even if our Innovation Authority funded know-how is transferred to another Israeli entity, the transfer would require the Innovation Authority’s approval but will not be subject to the payment of a redemption fee (we note that there will be an obligation to pay royalties to the Innovation Authority from the income of such sale transaction as part of the royalty payment obligation). In such case, the acquiring company would have to assume all of our responsibilities towards the Innovation Authority as a condition to the Innovation Authority’s approval.
The government of Israel does not own intellectual property rights in technology developed with Innovation Authority funding and there is no restriction on the export of products manufactured using technology developed with Innovation Authority funding. However, the know-how is subject to transfer of know-how and manufacturing rights restrictions as described above. The Innovation Authority’s approval is not required for the export of any products resulting from the Innovation Authority research or development grants. In addition, the Innovation Authority has recently published new rules and guidelines for the granting of licenses to use know-how developed as a result of research financed by the Innovation Authority to foreign entities. According to such rules, we will be required to receive the Innovation Authority’s prior approval for the grant of such use rights, and we will be subject to the Innovation Authority in accordance with the formula stipulated under these rules and guidelines.
Pursuant to Amendment No. 7 of the Innovation Law, the Innovation Authority is authorized to change the restrictions imposed on the recipients of grants that were stipulated under the Innovation Law prior to the effectiveness of Amendment No. 7 with a new set of arrangements in connection with ownership obligations of know-how (including with respect to restrictions on transfer of know-how and manufacturing activities outside of Israel), as well as royalties obligations associated with approved programs. Amendment No. 7 also includes new provisions with respect to sanctions imposed for violations of the Innovation Law. Although the Innovation Authority recently published rules which for the most part adopted the principal provisions and restrictions specified in the Innovation Law prior to the effectiveness of Amendment No. 7, as of the date of this prospectus, we are unable to assess the effect on our business of any future rules which may be published by the Innovation Authority.
We may not receive the required approvals for any actual proposed transfer and, if received, we may be required to pay the Innovation Authority a portion of the consideration that we receive upon any sale of the Innovation Authority funded know-how to a non-Israeli entity. The scope of the support received, the royalties that we have already paid to the Innovation Authority, the amount of time that has elapsed between the date on which the know-how was transferred and the date on which the Innovation Authority grants were received and the sale price and the form of transaction will be taken into account in calculating the amount of the payment to the Innovation Authority.
Employees
As of December 31, 2017, we had 47 employees, all based in Israel. We have never experienced any employment-related work stoppages and believe our relationships with our employees are good.
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Area of Activity
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As of
December 31,
2017
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Administrative
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5 |
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Research, development and quality assurance
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42 |
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Total
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47 |
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Facilities
Our principal executive offices are located in a leased facility in Weizmann Science Park, Ness Ziona 7403650, Israel. The facility houses our offices, warehouse, laboratories and production area. Our lease will expire on December 31, 2020.
We intend to add new facilities or expand our existing facilities as we add employees, and we believe that suitable additional or substitute space will be available as needed to accommodate any such expansion of our operations.
Environmental, Health and Safety Matters
We are subject to extensive environmental, health and safety laws and regulations in a number of jurisdictions including Israel. These laws and regulations govern, among other things, (i) the use, storage, registration, handling, emission and disposal of chemicals, waste materials and sewage and (ii) chemical, air, water and ground contamination, air emissions and the cleanup of contaminated sites, including any contamination that results from spills due to our failure to properly dispose of chemicals, waste materials and sewage. Our operations at our Ness Ziona facility use chemicals and produce waste materials and sewage. Our activities require permits from various governmental authorities, including local municipal authorities, the Ministry of Environmental Protection and the Ministry of Health. The Ministry of Environmental Protection and the Ministry of Health, local authorities and the municipal water and sewage company conduct periodic inspections in order to review and ensure our compliance with the various regulations. As of the date of this prospectus, we hold a valid poison permit for our activity in Ness Ziona (in effect until April 13, 2018), and a valid business license in effect until December 31, 2019.
These laws, regulations and permits could potentially require the expenditure by us of significant amounts for compliance or remediation. If we fail to comply with such laws, regulations or permits, we may be subject to fines and other civil, administrative or criminal sanctions, including the revocation of permits and licenses necessary to continue our business activities. In addition, we may be required to pay damages or civil judgments in respect of third-party claims, including those relating to personal injury (including exposure to hazardous substances we use, store, handle, transport, manufacture or dispose of), property damage or contribution claims. Some environmental, health and safety laws allow for strict, joint and several
liability for remediation costs, regardless of comparative fault. We may be identified as a responsible party under such laws. Such developments could have a material adverse effect on our business, financial condition and results of operations.
In addition, laws and regulations relating to environmental, health and safety matters are often subject to change. In the event of any changes or new laws or regulations, we could be subject to new compliance measures or to penalties for activities which were previously permitted.
The operations of our subcontractors and suppliers are also subject to various Israeli and foreign laws and regulations relating to environmental, health and safety matters, and their failure to comply with such laws and regulations could have a material adverse effect on our business and reputation, result in an interruption or delay in the development or manufacture of our product candidates, or increase the costs for the development or manufacture of our product candidates.
Legal Proceedings
We are not subject to any material legal proceedings.
Management
Executive officers, directors and director nominees
The following table sets forth information concerning our executive officers, directors and director nominees, including their ages, as of the date of this prospectus:
|
Name
|
|
|
Age
|
|
|
Position
|
|
| Moshe Arkin |
|
|
65
|
|
|
Chairman of the Board of Directors |
|
| Alon Seri-Levy (1) |
|
|
56
|
|
|
Chief Executive Officer and Director Nominee |
|
| Gilad Mamlok |
|
|
49
|
|
|
Chief Financial Officer |
|
| Ofer Toledano |
|
|
52
|
|
|
Vice President Research and Development |
|
| Ofra Levy-Hacham |
|
|
51
|
|
|
Vice President Quality and Regulatory Affairs |
|
| Karine Neimann |
|
|
46
|
|
|
Vice President Projects and Planning, Chief Chemist |
|
| Itzik Yosef |
|
|
41
|
|
|
Vice President Operations |
|
| Dov Zamir |
|
|
64
|
|
|
Vice President Special Projects |
|
| Itai Arkin (1) |
|
|
29
|
|
|
Director Nominee |
|
| Shmuel Ben Zvi (1) |
|
|
57
|
|
|
Director Nominee |
|
| Hani Lerman (1) |
|
|
45
|
|
|
Director Nominee |
|
| Yael Baratz (1) |
|
|
61
|
|
|
Director Nominee |
|
| Ran Gottfried (1)(2) |
|
|
73
|
|
|
External Director Nominee |
|
| Jerrold S. Gattegno (1)(2) |
|
|
65
|
|
|
External Director Nominee |
|
(1)
Will be appointed to the board of directors immediately following the pricing of this offering.
(2)
Proposed to serve as an external director under the Companies Law subject to ratification of his election as an external director under the Companies Law by our shareholders within three months following this offering.
Mr. Moshe Arkin has served as chairman of our board of directors since 2014. Mr. Arkin currently sits on the board of directors of several health care companies including Exalenz Bioscience Ltd., a developer of advanced systems for gastrointestinal and liver disorders since 2006, Quiet Therapeutics Ltd., a cancer drug discovery and development and SoniVie Ltd., a private company developing systems for the treatment of pulmonary arterial hypertension. From 2005 to 2008, Mr. Arkin served as the head of generics at Perrigo Company and from 2005 until 2011 as the vice chairman of its board of directors. Prior to joining us, Mr. Arkin served as a director of cCAM Biotherapeutics Ltd., a company focused on the discovery and development of novel immunotherapies to treat cancer from 2012 until its acquisition in 2015 by Merck & Co., Inc. Mr. Arkin served as chairman of Agis Industries Ltd. from its inception in 1972 until its acquisition by Perrigo Company in 2005. Mr. Arkin holds a B.A. in psychology from the Tel Aviv University, Israel.
Dr. Alon Seri-Levy co-founded Sol-Gel and has served as our chief executive officer since our inception in 1997 and as a member of our board of directors until 2014. Prior to founding Sol-Gel, Dr. Seri-Levy established the computer-aided drug design department at Peptor Ltd., an Israeli research and development company that specialized in the development of peptide-based drug products. Dr. Seri-Levy holds a Ph.D. in Chemistry (summa cum laude) from The Hebrew University of Jerusalem, Israel, and conducted his post-doctoral studies at Oxford University, United Kingdom. Dr. Seri-Levy will be appointed to our board of directors immediately following the pricing of this offering.
Mr. Gilad Mamlok has served as our chief financial officer since March 2017. From August 2015 to January 2017, Mr. Mamlok served as the chief financial officer for Medigus Ltd., a medical device company dual listed on Nasdaq and the Tel Aviv Stock Exchange, or the TASE. From September 2005 to March 2015, Mr. Mamlok served as senior vice president, global finance and
accounting of Given Imaging Ltd., a medical device company dual listed on Nasdaq and TASE, acquired by Covidien plc in February 2014. From January 2002 to September 2005, Mr. Mamlok served as chief financial officer of two other medical device companies. Mr. Mamlok holds a Master’s degree in business economics from Tel-Aviv University and a B.A. in economics (magna cum laude) from Tel-Aviv University, Israel.
Dr. Ofer Toledano has served as our vice president of research and development since 2004. Prior to joining Sol-Gel, Dr. Toledano served as manager of the formulation department at ADAMA Agricultural Solutions Ltd. (formerly known as Makhteshim Agan Industries Ltd.), an Israeli manufacturer and distributor of crop protection products from 1998 until 2004. Dr. Toledano holds a Ph.D. in chemistry from The Hebrew University of Jerusalem, Israel.
Dr. Ofra Levy-Hacham has served as our vice president of quality and regulatory affairs since 2011. Prior to joining Sol-Gel, Dr. Levy-Hacham served as a scientific specialist and project manager at Biotechnology General Ltd., a fully integrated biopharmaceutical services private company from 2010 until 2011. From 2008 until 2010, Dr. Levy-Hacham served as vice president chemistry, manufacturing and controls at HealOr Ltd., a private company engaging in the development of therapeutics for the treatment of various skin lesions and conditions. Dr. Levy-Hacham holds a Ph.D. in chemistry from The Technion - Israel Institute of Technology, Israel.
Dr. Karine Neimann has served as our vice president of projects and planning and chief chemist since September 2016. Since joining us in 2008, Dr. Neimann held various positions, including as chief chemist and laboratory manager. Dr. Neimann holds a Ph.D. in chemistry from The Hebrew University of Jerusalem, Israel.
Dr. Itzik Yosef has served as our vice president of operations since August 2016. Since joining us in 2010, Dr. Yosef held various positions including as head of operations. Dr. Yosef holds a Ph.D. in chemistry from The Hebrew University of Jerusalem, Israel.
Dr. Dov Zamir has served as our vice president special projects since August 2016. Prior to joining us, Dr. Zamir lead the R&D group in Cima NanoTech Ltd., a private company developing sophisticated nanotechnology based coating formulations from 2007 until 2016. From 2004 to 2007, Dr. Zamir was VP of Pharma and Analytical R&D at Taro Pharmaceutical Industries in Haifa, and for three years prior to that he managed its Analytical R&D lab. Dr. Zamir holds a Ph.D. in organic chemistry from Tel-Aviv University, Israel.
Mr. Itai Arkin will become a member of our board of directors immediately following the pricing of this offering. Mr. Itai Arkin currently serves as Investment Manager at Arkin Holdings Ltd. and on the board of directors of Exalenz Bioscience Ltd. Mr. Itai Arkin is an investment committee member of both Accelmed, a leading Israeli MedTech investment firm since March 2014, and of Sphera Global Healthcare, a leading healthcare hedge fund. Mr. Itai Arkin holds a B.A. in business administration (cum laude) from Interdisciplinary Center, Herzliya, Israel. Mr. Itai Arkin is the son of Mr. Moshe Arkin, the chairman of our board of directors and sole beneficial owner of Arkin Dermatology, our controlling shareholder.
Dr. Shmuel (Muli) Ben Zvi will become a member of our board of directors immediately following pricing of this offering. Dr. Ben Zvi is currently a board member and member of the audit, risk management and strategy committees at Bank Leumi. From 2004 to 2014, Dr. Ben Zvi held various managerial positions at Teva Pharmaceuticals Industries Ltd., including Vice President of Finance and Vice President of Strategy. From 2000 to 2004, Dr. Ben Zvi was the financial advisor to the Chief of General Staff of the Israel Defense Forces and head of the Defense Ministry budget department. Dr. Ben Zvi holds a Ph.D. in economics from Tel-Aviv University, Israel and participated in the Harvard Business School Advanced Management Program (AMP).
Ms. Hani Lerman will become a member of our board of directors immediately following pricing of this offering. Ms. Lerman has served as chief financial officer at Arkin Holdings since 2015. From 2010 until 2014, Ms. Lerman served as chief financial officer of Sansa Security (f/k/a
Discretix Technologies), and from 2006 until 2010, she served as chief financial officer of Storwize, which was acquired by IBM in 2010. She serves as a board member of Exalenz Bioscience and Medical Compression Systems. She holds a Master's degree in business administration with a major in finance from Tel-Aviv University, Israel, and a B.A. in economics and accounting from Tel-Aviv University, Israel.
Ms. Yael Baratz will become a member of our board of directors immediately following pricing of this offering. Ms. Baratz is a Senior Partner and Chair of the Corporate & Licensing Group at the international law firm of Pearl Cohen Zedek Latzer Baratz and works out of its Tel-Aviv office. Ms. Baratz has been in private practice since 1992 and currently serves as the co-chair of the Israel Bar Association’s science and technology committee. Ms. Baratz holds an L.L B. from Tel-Aviv University, Israel.
Mr. Ran Gottfried will become a member of our board of directors immediately following the pricing of this offering and will serve as an external director under the Companies Law subject to the ratification of his appointment at a general meeting of our shareholders to be held following the completion of this offering. Since 1975, Mr. Gottfried has served as a chief executive officer, consultant and director of private companies in Israel and Europe in the areas of retail and distribution of pharmaceuticals, consumer and household products. Mr. Gottfried served as a director of Perrigo Company from 2006 until 2015. From 2006 until 2008, Mr. Gottfried served as chairman and chief executive officer of Powerpaper Ltd., a leading developer and manufacturer of micro electrical cosmetic and pharmaceutical patches. From 2005 until 2010, Mr. Gottfried served as a director of Bezeq, Israel’s leading telecommunications provider and from 2003 until its acquisition by Perrigo Company in 2005, Mr. Gottfried served as a director of Agis Industries Ltd.
Mr. Jerrold S. Gattegno will become a member of our board of directors immediately following the pricing of this offering and will serve as an external director under the Companies Law subject to the ratification of his appointment at a general meeting of our shareholders to be held following the completion of this offering. Mr. Gattegno worked in the New York, Washington D.C. and London offices of Deloitte Touche Tohmatsu Limited, a public accounting firm, from 1973 until 2015, where he served in various senior positions, including as the founding partner of Deloitte’s multistate tax practice and as a managing partner in Deloitte’s Washington National Tax Office. Mr. Gattegno has served as a member of the Hispanic Association of Colleges and Universities finance and audit committee from 2012 until 2015. Mr. Gattegno is a certified public accountant and holds a B.S. in accounting (cum laude) from the City University of New York and an M.B.A. in taxation (with honors) from Pace University, New York.
Compensation of Executive Officers and Directors
The aggregate compensation paid by us to our executive officers and directors for the year ended December 31, 2017 was approximately $2.5 million. This amount includes approximately $0.1 million set aside or accrued to provide pension, severance, retirement or similar benefits or expenses, but does not include business travel, relocation, professional and business association dues and expenses reimbursed to officers, and other benefits commonly reimbursed or paid by companies in Israel.
Foreign Private Issuer and Controlled Company Status
Foreign Private Issuer
After the consummation of this offering, we will be a “foreign private issuer” under the U.S. securities laws and the Nasdaq corporate governance rules. As a foreign private issuer, we will be exempt from the rules under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. Also, we are not required to comply with Regulation FD, which restricts the selective disclosure of material information. However, we intend to file with the SEC, within 120 days after the end of
each fiscal year, or such applicable time as required by the SEC, an annual report on Form 20-F containing financial statements audited by an independent registered public accounting firm, and we intend to submit to the SEC from time to time, on Form 6-K, reports of information that would likely be material to an investment decision in our securities.
As a foreign private issuer, we are permitted to follow certain Israeli corporate governance practices instead of the Nasdaq corporate governance rules, provided that we disclose which requirements we are not following and the equivalent Israeli requirement. Pursuant to the “foreign private issuer exemption”:
•
we intend to establish a quorum requirement such that the quorum for any meeting of shareholders is two or more shareholders holding at least 331∕3% of our voting rights, which complies with Nasdaq requirements, however, if the meeting is adjourned for lack of quorum, the quorum for such adjourned meeting will be any number of shareholders, instead of 331∕3% of our voting rights;
•
we intend to adopt and approve material changes to equity incentive plans in accordance with the Companies Law, which does not impose a requirement of shareholder approval for such actions. In addition, we intend to follow Israeli corporate governance practice in lieu of Nasdaq Marketplace Rule 5635(c), which requires shareholder approval prior to an issuance of securities in connection with equity based compensation of officers, directors, employees or consultants;
•
as opposed to making periodic reports to shareholders and proxy solicitation materials available to shareholders in the manner specified by the Nasdaq corporate governance rules, the Companies Law does not require us to distribute periodic reports directly to shareholders, and the generally accepted business practice in Israel is not to distribute such reports to shareholders but to make such reports available through a public website. We will only mail such reports to shareholders upon request; and
•
we will follow Israeli corporate governance practice instead of Nasdaq requirements to obtain shareholder approval for certain dilutive events (such as issuances that will result in a change of control, certain transactions other than a public offering involving issuances of a 20% or greater interest in us and certain acquisitions of the stock or assets of another company).
Otherwise, we intend to comply with the rules generally applicable to U.S. domestic companies listed on the Nasdaq Global Market. We may in the future decide to use the foreign private issuer exemption with respect to some or all of the other Nasdaq corporate governance rules. Following the closing of this offering, we also intend to comply with Israeli corporate governance requirements under the Companies Law applicable to public companies.
Controlled Company
As a result of the number of shares owned by Arkin Dermatology, after the completion of this offering, we will be a “controlled company” under the Nasdaq corporate governance rules. A “controlled company” is a company of which more than 50% of the voting power is held by an individual, group or another company. Pursuant to the “controlled company” exemption, we are not required to, and will not, comply with the requirements that: (1) a majority of our board of directors consist of independent directors; and (2) we have a nominating committee composed entirely of independent directors with a written charter addressing such committee’s purpose and responsibilities. See “Management — Board of Directors and Officers.” Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the Nasdaq Global Market.
Board of Directors and Officers
Upon the closing of this offering, our board of directors will consist of eight directors, including two directors who are intended to qualify as external directors, and whose appointment
fulfills the requirements of the Companies Law for the company to have two external directors (see “Management — External Directors”). These two directors, as well as one additional director, will qualify as independent directors under the corporate governance standards of the Nasdaq corporate governance rules and the independence requirements of Rule 10A-3 of the Exchange Act.
Under our amended and restated articles of association, the number of directors on our board of directors will be no less than five (5) and no more than nine (9), including any external directors required to be appointed under the Companies Law. The minimum and maximum number of directors may be changed, at any time and from time to time, by a special 662∕3% majority shareholder vote.
Other than external directors, for whom special election requirements apply under the Companies Law, as detailed below, our directors are divided into three classes with staggered three-year terms. Each class of directors consists, as nearly as possible, of one-third of the total number of directors constituting the entire board of directors (other than the external directors). At each annual general meeting of our shareholders, the election or re-election of directors following the expiration of the term of office of the directors of that class of directors will be for a term of office that expires on the third annual general meeting following such election or re-election, such that from 2019 and after, at each annual general meeting the term of office of only one class of directors will expire. Each director holds office until the third annual general meeting of our shareholders and until his or her successor is duly appointed, unless the tenure of such director expires earlier pursuant to the Companies Law or unless removed from office as described below, except that our external directors have a term of office of three years under Israeli law. See “— External directors — Election and Dismissal of External Directors.”
Our directors who are not external directors will be divided among the three classes as follows:
•
Class I directors will consist of Ms. Baratz and Dr. Ben Zvi, who are both independent directors, and their term will expire at our annual general meeting of our shareholders to be held in 2019;
•
Class II directors will consist of Ms. Lerman and Dr. Seri-Levy, and their term will expire at our annual general meeting of our shareholders to be held in 2020; and
•
Class III directors will consist of Mr. Itai Arkin and Mr. Moshe Arkin, and their term will expire at our annual general meeting of our shareholders to be held in 2021.
Mr. Gattegno and Mr. Gottfried will serve as our external directors and will each have a term of three years.
Under our amended and restated articles of association, our board of directors may elect new directors if the number of directors is below the maximum provided therein. External directors are elected for an initial term of three years and may be elected for up to two additional three-year terms (or more) under the circumstances described below. External directors may be removed from office only under the limited circumstances set forth in the Companies Law. See “— External Directors” for a description of the procedure for the election of external directors.
Under Israeli law, the chief executive officer of a public company may not serve as the chairman of the board of directors of the company unless approved by a special majority of our shareholders as required under the Companies Law.
In addition, under the Companies Law, our board of directors must determine the minimum number of directors who are required to have financial and accounting expertise. Under applicable regulations, a director with financial and accounting expertise is a director who, by reason of his or her education, professional experience and skill, has a high level of proficiency in and understanding of business accounting matters and financial statements. See “— External Directors — Qualifications of External Directors.” He or she must be able to thoroughly
comprehend the financial statements of the company and initiate debate regarding the manner in which financial information is presented. In determining the number of directors required to have such expertise, the board of directors must consider, among other things, the type and size of the company and the scope and complexity of its operations. Our board of directors has determined that we require at least one director with the requisite financial and accounting expertise and that has such expertise.
There are no family relationships among any of our office holders (including directors), other than Mr. Itai Arkin who is the son of Mr. Moshe Arkin.
Alternate Directors
Our amended and restated articles of association provide, as allowed by the Companies Law, that any director may, by written notice to us, appoint another person who is qualified to serve as a director to serve as an alternate director. The alternate director will be regarded as a director. Under the Companies Law, a person who is not qualified to be appointed as a director, a person who is already serving as a director or a person who is already serving as an alternate director for another director, may not be appointed as an alternate director. Nevertheless, a director who is already serving as a director may be appointed as an alternate director for a member of a committee of the board of directors as long as he or she is not already serving as a member of such committee, and if the alternate director is to replace an external director, he or she is required to be an external director and to have either “financial and accounting expertise” or “professional expertise,” depending on the qualifications of the external director he or she is replacing. The term of appointment of an alternate director may be for one meeting of the board of directors or until notice is given of the cancellation of the appointment. A person who does not have the requisite “financial and accounting experience” or the “professional expertise,” depending on the qualifications of the external director he or she is replacing, may not be appointed as an alternate director for an external director.
External Directors
Qualifications of External Directors
Under the Companies Law, companies incorporated under the laws of the State of Israel that are “public companies,” including companies with shares listed on The Nasdaq Global Market, are generally required to appoint at least two external directors who meet the qualification requirements set forth in the Companies Law. The appointment of external directors must be made by a general meeting of our shareholders no later than three months following the closing of this offering, and therefore we intend to hold a shareholders’ meeting within three months of the closing of this offering for the appointment of two external directors.
A person may not be appointed as an external director if the person is a relative of a controlling shareholder or if on the date of the person’s appointment or within the preceding two years the person or his or her relatives, partners, employers or anyone to whom that person is subordinate, whether directly or indirectly, or entities under the person’s control have or had any affiliation with any of (each an “Affiliated Party”): (1) us; (2) any person or entity controlling us on the date of such appointment; (3) any relative of a controlling shareholder; or (4) any entity controlled, on the date of such appointment or within the preceding two years, by us or by a controlling shareholder. If there is no controlling shareholder or any shareholder holding 25% or more of voting rights in the company, a person may not be appointed as an external director if the person has any affiliation to the chairman of the board of directors, the general manager (chief executive officer), any shareholder holding 5% or more of the company’s shares or voting rights or the senior financial officer as of the date of the person’s appointment.
The term “controlling shareholder” means a shareholder with the ability to direct the activities of the company, other than by virtue of being an office holder. A shareholder is presumed to have “control” of the company and thus to be a controlling shareholder of the company if the
shareholder holds 50% or more of the “means of control” of the company. “Means of control” is defined as (1) the right to vote at a general meeting of a company or a corresponding body of another corporation; or (2) the right to appoint directors of the corporation or its general manager. For the purpose of approving related-party transactions, the term also includes any shareholder that holds 25% or more of the voting rights of the company if the company has no shareholder that owns more than 50% of its voting rights. For the purpose of determining the holding percentage stated above, two or more shareholders who have a personal interest in a transaction that is brought for the company’s approval are deemed as joint holders.
The term affiliation includes:
•
an employment relationship;
•
a business or professional relationship maintained on a regular basis;
•
control; and
•
service as an office holder, excluding service as a director in a private company prior to the first offering of its shares to the public if such director was appointed as a director of the private company in order to serve as an external director following the initial public offering.
The term “relative” is defined as a spouse, sibling, parent, grandparent, descendant, spouse’s descendant, sibling and parent and the spouse of each of the foregoing.
The term “office holder” is defined as a general manager, chief business manager, deputy general manager, vice general manager, director or manager directly subordinate to the general manager or any other person assuming the responsibilities of any of the foregoing positions, without regard to such person’s title.
A person may not serve as an external director if that person or that person’s relative, partner, employer, a person to whom such person is subordinate (directly or indirectly) or any entity under the person’s control has a business or professional relationship with any entity that has an affiliation with any Affiliated Party, even if such relationship is intermittent (excluding insignificant relationships). Additionally, any person who has received compensation intermittently (excluding insignificant relationships) other than compensation permitted under the Companies Law may not continue to serve as an external director.
No person can serve as an external director if the person’s position or other affairs create, or may create, a conflict of interest with the person’s responsibilities as a director or may otherwise interfere with the person’s ability to serve as a director or if such a person is an employee of the Israeli Securities Authority or of an Israeli stock exchange. If at the time an external director is appointed all current members of the board of directors, who are not controlling shareholders or relatives of controlling shareholders, are of the same gender, then the external director to be appointed must be of the other gender. In addition, a person who is a director of a company may not be elected as an external director of another company if, at that time, a director of the other company is acting as an external director of the first company.
The Companies Law provides that an external director must meet certain professional qualifications or have financial and accounting expertise and that at least one external director must have financial and accounting expertise. However, if at least one of our other directors (1) meets the independence requirements of the Exchange Act, (2) meets the standards of the Nasdaq corporate governance rules for membership on the audit committee and (3) has financial and accounting expertise as defined in the Companies Law and applicable regulations, then neither of our external directors is required to possess financial and accounting expertise as long as both possess other requisite professional qualifications. The determination of whether a director possesses financial and accounting expertise is made by the board of directors. A director with financial and accounting expertise is a director who by virtue of his or her education, professional
experience and skill, has a high level of proficiency in and understanding of business accounting matters and financial statements so that he or she is able to fully understand our financial statements and initiate debate regarding the manner in which the financial information is presented.
The regulations promulgated under the Companies Law define an external director with requisite professional qualifications as a director who satisfies one of the following requirements: (1) the director holds an academic degree in either economics, business administration, accounting, law or public administration, (2) the director either holds an academic degree in any other field or has completed another form of higher education in the company’s primary field of business or in an area which is relevant to his or her office as an external director in the company, or (3) the director has at least five years of experience serving in any one of the following, or at least five years of cumulative experience serving in two or more of the following capacities: (a) a senior business management position in a company with a substantial scope of business, (b) a senior position in the company’s primary field of business or (c) a senior position in public administration.
Until the lapse of a two-year period from the date that an external director of a company ceases to act in such capacity, the company in which such external director served, and its controlling shareholder or any entity under control of such controlling shareholder may not, directly or indirectly, grant such former external director, or his or her spouse or child, any benefit, including via (i) the appointment of such former director or his or her spouse or his child as an officer in the company or in an entity controlled by the company’s controlling shareholder, (ii) the employment of such former director, and (iii) the engagement, directly or indirectly, of such former director as a provider of professional services for compensation, directly or indirectly, including via an entity under his or her control. With respect to a relative who is not a spouse or a child, such limitations shall only apply for one year from the date such external director ceased to be engaged in such capacity.
Election and Dismissal of External Directors
Under Israeli law, external directors are elected by a majority vote at a shareholders’ meeting, provided that either:
•
the majority of the shares that are voted at the meeting in favor of the election of the external director, excluding abstentions, include at least a majority of the votes of shareholders who are not controlling shareholders and do not have a personal interest in the appointment (excluding a personal interest that did not result from the shareholder’s relationship with the controlling shareholder); or
•
the total number of shares held by non-controlling shareholders or any one on their behalf that are voted against the election of the external director does not exceed two percent of the aggregate voting rights in the company.
Under Israeli law, the initial term of an external director of an Israeli public company is three years. The external director may be re-elected, subject to certain circumstances and conditions, for up to two additional terms of three years each, and thereafter, subject to conditions set out in the regulations promulgated under the Companies Law, to further three year terms, each re-election subject to one of the following:
•
his or her service for each such additional term is recommended by one or more shareholders holding at least 1% of the company’s voting rights and is approved at a shareholders meeting by a disinterested majority, where the total number of shares held by non-controlling, disinterested shareholders voting for such reelection exceeds 2% of the aggregate voting rights in the company and subject to additional restrictions set forth in the Companies Law with respect to the affiliation of the external director nominee;
•
the external director proposed his or her own nomination, and such nomination was approved in accordance with the requirements described in the paragraph above; or
•
his or her service for each such additional term is recommended by the board of directors and is approved at a meeting of shareholders by the same majority required for the initial election of an external director (as described above).
An external director may be removed by the same special majority of the shareholders required for his or her election, if he or she ceases to meet the statutory qualifications for appointment or if he or she violates his or her fiduciary duty to the company. An external director may also be removed by order of an Israeli court if the court finds that the external director is permanently unable to exercise his or her office, has ceased to meet the statutory qualifications for his or her appointment, has violated his or her fiduciary duty to the company, or has been convicted by a court outside Israel of certain offenses detailed in the Companies Law.
If the vacancy of an external directorship causes a company to have fewer than two external directors, the company’s board of directors is required under the Companies Law to call a special general meeting of the company’s shareholders as soon as possible to appoint such number of new external directors so that the company thereafter has two external directors.
Additional Provisions
Under the Companies Law, each committee authorized to exercise any of the powers of the board of directors is required to include at least one external director and its audit and compensation committees are required to include all of the external directors.
An external director is entitled to compensation and reimbursement of expenses in accordance with regulations promulgated under the Companies Law and is prohibited from receiving any other compensation, directly or indirectly, in connection with serving as a director except for certain exculpation, indemnification and insurance provided by the company, as specifically allowed by the Companies Law.
Audit Committee
Companies Law Requirements
Under the Companies Law, the board of directors of any public company must also appoint an audit committee comprised of at least three directors, including all of the external directors. The audit committee may not include:
•
the chairman of the board of directors;
•
a controlling shareholder or a relative of a controlling shareholder;
•
any director employed by us or by one of our controlling shareholders or by an entity controlled by our controlling shareholders (other than as a member of the board of directors); or
•
any director who regularly provides services to us, to one of our controlling shareholders or to an entity controlled by our controlling shareholders.
According to the Companies Law, the majority of the members of the audit committee, as well as the majority of members present at audit committee meetings, will be required to be “independent” (as defined below) and the chairman of the audit committee will be required to be an external director. Any persons disqualified from serving as a member of the audit committee may not be present at the audit committee meetings, unless the chairman of the audit committee has determined that such person is required to be present at the meeting or if such person qualifies under one of the exemptions of the Companies Law.
The term “independent director” is defined under the Companies Law as an external director or a director who meets the following conditions and who is appointed or classified as such according to the Companies Law: (1) the conditions for his or her appointment as an external director (as described above) are satisfied and the audit committee approves the director having met such conditions and (2) he or she has not served as a director of the company for over nine consecutive years with any interruption of up to two years of his or her service not being deemed a disruption to the continuity of his or her service.
Nasdaq Listing Requirements
Under the Nasdaq corporate governance rules, we are required to maintain an audit committee consisting of at least three independent directors, all of whom are financially literate and one of whom has accounting or related financial management expertise.
Our audit committee will consist of Ran Gottfried, Jerrold S. Gattegno and Shmuel Ben Zvi. Jerrold S. Gattegno will serve as Chairman of the committee. All members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and the Nasdaq corporate governance rules. Our board of directors has determined that Jerrold S. Gattegno is an audit committee financial expert as defined by SEC rules and has the requisite financial experience as defined by the Nasdaq corporate governance rules.
Each of the members of the audit committee is “independent” as such term is defined in Rule 10A-3(b)(1) under the Exchange Act.
Approval of Transactions with Related Parties
The approval of the audit committee is required to effect specified actions and transactions with office holders and controlling shareholders and their relatives, or in which they have a personal interest. See “Management — Fiduciary Duties and Approval of Specified Related Party Transactions and Compensation under Israeli Law.” The audit committee may not approve an action or a transaction with a controlling shareholder or with an office holder unless at the time of approval the audit committee meets the composition requirements under the Companies Law.
Audit Committee Role
Our board of directors has adopted an audit committee charter to be effective immediately after the pricing of this offering setting forth the responsibilities of the audit committee consistent with the rules of the SEC and the Nasdaq corporate governance rules, which include:
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retaining and terminating our independent auditors, subject to board of directors and shareholder ratification;
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overseeing the independence, compensation and performance of the Company’s independent auditors;
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the appointment, compensation, retention and oversight of any accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit services;
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pre-approval of audit and non-audit services to be provided by the independent auditors;
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reviewing with management and our independent directors our financial statements prior to their submission to the SEC; and
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approval of certain transactions with office holders and controlling shareholders, as described below, and other related party transactions.
Additionally, under the Companies Law, the role of the audit committee includes the identification of irregularities in our business management, among other things, by consulting with the internal auditor or our independent auditors and suggesting an appropriate course of action to
the board of directors. In addition, the audit committee or the board of directors, as set forth in the articles of association of the company, is required to approve the yearly or periodic work plan proposed by the internal auditor. The audit committee is required to assess the company’s internal audit system and the performance of its internal auditor. The Companies Law also requires that the audit committee assess the scope of the work and compensation of the company’s external auditor. In addition, the audit committee is required to determine whether certain related party actions and transactions are “material” or “extraordinary” for the purpose of the requisite approval procedures under the Companies Law and whether certain transactions with a controlling shareholder will be subject to a competitive procedure. The audit committee charter states that in fulfilling its role the committee is empowered to conduct or authorize investigations into any matters within its scope of responsibilities. A company whose audit committee’s composition also meets the requirements set for the composition of a compensation committee (as further detailed below) may have one committee acting as both audit and compensation committees.
Compensation Committee
Under the Companies Law, public companies are required to appoint a compensation committee in accordance with the guidelines set forth thereunder.
The compensation committee must consist of at least three members. All of the external directors must serve on the committee and constitute a majority of its members. The chairman of the compensation committee must be an external director. The remaining members are not required to be external directors, but must be directors who qualify to serve as members of the audit committee (as described above).
The compensation committee, which will consist of Ran Gottfried, Jerrold S. Gattegno and Shmuel Ben Zvi, will assist the board of directors in determining compensation for our directors and officers. Ran Gottfried will serve as Chairman of the committee. Under SEC and Nasdaq rules, there are heightened independence standards for members of the compensation committee, including a prohibition against the receipt of any compensation from us other than standard supervisory board member fees. Although foreign private issuers are not required to meet this heightened standard, our board of directors has determined that all of our expected compensation committee members meet this heightened standard.
In accordance with the Companies Law, the roles of the compensation committee are, among others, as follows:
(1)
to recommend to the board of directors the compensation policy for directors and officers, and to recommend to the board of directors once every three years whether the compensation policy that had been approved should be extended for a period of more than three years;
(2)
to recommend to the board of directors updates to the compensation policy, from time to time, and examine its implementation;
(3)
to decide whether to approve the terms of office and employment of directors and officers that require approval of the compensation committee; and
(4)
to decide whether the compensation terms of the chief executive officer, which were determined pursuant to the compensation policy, will be exempted from approval by the shareholders because such approval would harm the ability to engage the chief executive officer.
In addition to the roles mentioned above our compensation committee also makes recommendations to our board of directors regarding the awarding of employee equity grants.
In general, under the Companies Law, a public company must have a compensation policy approved by the board of directors after receiving and considering the recommendations of the compensation committee. In addition, the compensation policy requires the approval of the
general meeting of the shareholders. In public companies such as our company, shareholder approval requires one of the following: (i) the majority of shareholder votes counted at a general meeting including the majority of all of the votes of those shareholders who are non-controlling shareholders and do not have a personal interest in the approval of the compensation policy, who vote at the meeting (excluding abstentions) or (ii) the total number of votes against the proposal among the shareholders mentioned in paragraph (i) does exceed two percent (2%) of the voting rights in the company. Under special circumstances, the board of directors may approve the compensation policy despite the objection of the shareholders on the condition that the compensation committee and then the board of directors decide, on the basis of detailed arguments and after discussing again the compensation policy, that approval of the compensation policy, despite the objection of the meeting of shareholders, is for the benefit of the company.
If a company initially offer its securities to the public, like us, adopts a compensation policy in advance of its initial public offering, and describes it in its prospectus, then such compensation policy shall be deemed a validly adopted policy in accordance with the Companies Law requirements described above. Furthermore, if the compensation policy is set in accordance with the aforementioned relief, then it will remain in effect for term of five years from the date such company has become a public company.
The compensation policy must be based on certain considerations, include certain provisions and needs to reference certain matters as set forth in the Companies Law.
The compensation policy must serve as the basis for decisions concerning the financial terms of employment or engagement of office holders, including exculpation, insurance, indemnification or any monetary payment or obligation of payment in respect of employment or engagement. The compensation policy must relate to certain factors, including advancement of the company’s objectives, business plan and long-term strategy, and creation of appropriate incentives for office holders. It must also consider, among other things, the company’s risk management, size and the nature of its operations. The compensation policy must furthermore consider the following additional factors:
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the education, skills, experience, expertise and accomplishments of the relevant office holder;
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the office holder’s position, responsibilities and prior compensation agreements with him or her;
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the ratio between the cost of the terms of employment of an office holder and the cost of the employment of other employees of the company, including employees employed through contractors who provide services to the company, in particular the ratio between such cost, the average and median salary of the employees of the company, as well as the impact of such disparities on the work relationships in the company;
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if the terms of employment include variable components — the possibility of reducing variable components at the discretion of the board of directors and the possibility of setting a limit on the value of non-cash variable equity-based components; and
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if the terms of employment include severance compensation — the term of employment or office of the office holder, the terms of his or her compensation during such period, the company’s performance during the such period, his or her individual contribution to the achievement of the company goals and the maximization of its profits and the circumstances under which he or she is leaving the company.
The compensation policy must also include, among others:
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with regards to variable components:
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with the exception of office holders who report directly to the chief executive officer, determining the variable components on long-term performance basis and on
measurable criteria; however, the company may determine that an immaterial part of the variable components of the compensation package of an office holder’s shall be awarded based on non-measurable criteria, if such amount is not higher than three monthly salaries per annum, while taking into account such office holder contribution to the company;
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the ratio between variable and fixed components, as well as the limit of the values of variable components at the time of their grant.
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a condition under which the office holder will return to the company, according to conditions to be set forth in the compensation policy, any amounts paid as part of his or her terms of employment, if such amounts were paid based on information later to be discovered to be wrong, and such information was restated in the company’s financial statements;
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the minimum holding or vesting period of variable equity-based components to be set in the terms of office or employment, as applicable, while taking into consideration long-term incentives; and
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a limit to retirement grants.
Our compensation policy, which will become effective immediately after the pricing of this offering, is designed to promote retention and motivation of directors and executive officers, incentivize superior individual excellence, align the interests of our directors and executive officers with our long-term performance and provide a risk management tool. To that end, a portion of an executive officer compensation package is targeted to reflect our short and long-term goals, as well as the executive officer’s individual performance. On the other hand, our compensation policy includes measures designed to reduce the executive officer’s incentives to take excessive risks that may harm us in the long-term, such as limits on the value of cash bonuses and equity-based compensation, limitations on the ratio between the variable and the total compensation of an executive officer and minimum vesting periods for equity-based compensation.
Our compensation policy also addresses our executive officer’s individual characteristics (such as his or her respective position, education, scope of responsibilities and contribution to the attainment of our goals) as the basis for compensation variation among our executive officers, and considers the internal ratios between compensation of our executive officers and directors and other employees. Pursuant to our compensation policy, the compensation that may be granted to an executive officer may include: base salary, annual bonuses and other cash bonuses (such as a signing bonus and special bonuses with respect to any special achievements, such as outstanding personal achievement, outstanding personal effort or outstanding company performance), equity-based compensation, benefits and retirement and termination of service arrangements. All cash bonuses are limited to a maximum amount linked to the executive officer’s base salary. In addition, the total variable compensation components (cash bonuses and equity based compensation) may not exceed 85% of each executive officer’s total compensation package with respect to any given calendar year.
An annual cash bonus may be awarded to executive officers upon the attainment of pre-set periodic objectives and individual targets. The annual cash bonus that may be granted to our executive officers other than our chief executive officer will be based on performance objectives and a discretionary evaluation of the executive officer’s overall performance by our chief executive officer and subject to minimum thresholds. The annual cash bonus that may be granted to executive officers other than our chief executive officer may be based entirely on a discretionary evaluation. Furthermore, our chief executive officer will be entitled to recommend performance objectives, and such performance objectives will be approved by our compensation committee (and, if required by law, by our board of directors).
The performance measurable objectives of our chief executive officer will be determined annually by our compensation committee and board of directors, will include the weight to be assigned to each achievement in the overall evaluation. A less significant portion of the chief executive officer’s annual cash bonus may be based on a discretionary evaluation of the chief executive officer’s overall performance by the compensation committee and the board of directors based on quantitative and qualitative criteria.
The equity-based compensation under our compensation policy for our executive officers (including members of our board of directors) is designed in a manner consistent with the underlying objectives in determining the base salary and the annual cash bonus, with its main objectives being to enhance the alignment between the executive officers’ interests with our long-term interests and those of our shareholders and to strengthen the retention and the motivation of executive officers in the long term. Our compensation policy provides for executive officer compensation in the form of share options or other equity-based awards, such as restricted shares and restricted share units, in accordance with our share incentive plan then in place. All equity-based incentives granted to executive officers shall be subject to vesting periods in order to promote long-term retention of the awarded executive officers. The equity-based compensation shall be granted from time to time and be individually determined and awarded according to the performance, educational background, prior business experience, qualifications, role and the personal responsibilities of the executive officer.
In addition, our compensation policy contains compensation recovery provisions which allows us under certain conditions to recover bonuses paid in excess, enables our chief executive officer to approve an immaterial change in the terms of employment of an executive officer (provided that the changes of the terms of employment are in accordance our compensation policy) and allows us to exculpate, indemnify and insure our executive officers and directors subject to certain limitations set forth thereto.
Our compensation policy also provides for compensation to the members of our board of directors either (i) in accordance with the amounts provided in the Companies Regulations (Rules Regarding the Compensation and Expenses of an External Director) of 2000, as amended by the Companies Regulations (Relief for Public Companies Traded in Stock Exchange Outside of Israel) of 2000, as such regulations may be amended from time to time, or (ii) in accordance with the amounts determined in our compensation policy.
Our compensation policy, which was approved by our board of directors and our controlling shareholder on October 2, 2017, will become effective upon the pricing of this offering and is filed as an exhibit to the registration statement of which this prospectus forms a part.
Internal Auditor
Under the Companies Law, the board of directors of a public company must appoint an internal auditor based on the recommendation of the audit committee. The role of the internal auditor is, among other things, to examine whether a company’s actions comply with applicable law and orderly business procedure. Under the Companies Law, the internal auditor may not be an interested party or an office holder or a relative of an interested party or of an office holder, nor may the internal auditor be the company’s independent auditor or the representative of the same.
An “interested party” is defined in the Companies Law as (i) a holder of 5% or more of the issued share capital or voting power in a company, (ii) any person or entity who has the right to designate one or more directors or to designate the chief executive officer of the company, or (iii) any person who serves as a director or as a chief executive officer of the company. As of the date of this prospectus, we have not yet appointed our internal auditor.
Fiduciary Duties and Approval of Specified Related Party Transactions and Compensation under Israeli Law
Fiduciary Duties of Office Holders
The Companies Law imposes a duty of care and a fiduciary duty on all office holders of a company. The duty of care of an office holder is based on the duty of care set forth in connection
with the tort of negligence under the Israeli Torts Ordinance (New Version) 5728-1968. This duty of care requires an office holder to act with the degree of proficiency with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of care includes, among other things, a duty to use reasonable means, in light of the circumstances, to obtain:
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information on the business advisability of a given action brought for his or her approval or performed by virtue of his or her position; and
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all other important information pertaining to such action.
The fiduciary duty incumbent on an office holder requires him or her to act in good faith and for the benefit of the company, and includes, among other things, the duty to:
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refrain from any act involving a conflict of interest between the performance of his or her duties in the company and his or her other duties or personal affairs;
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refrain from any activity that is competitive with the business of the company;
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refrain from exploiting any business opportunity of the company for the purpose of gaining a personal advantage for himself or herself or others; and
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disclose to the company any information or documents relating to the company’s affairs which the office holder received as a result of his or her position as an office holder.
We may approve an act specified above which would otherwise constitute a breach of the office holder’s fiduciary duty, provided that the office holder acted in good faith, the act or its approval does not harm the company, and the office holder discloses his or her personal interest a sufficient time before the approval of such act. Any such approval is subject to the terms of the Companies Law, setting forth, among other things, the appropriate bodies of the company entitled to provide such approval, and the methods of obtaining such approval.
Disclosure of Personal Interests of an Office Holder and Approval of Transactions
The Companies Law requires that an office holder promptly disclose to the company any personal interest that he or she may have and all related material information or documents relating to any existing or proposed transaction by the company. An interested office holder’s disclosure must be made promptly and in any event no later than the first meeting of the board of directors at which the transaction is considered. An office holder is not obliged to disclose such information if the personal interest of the office holder derives solely from the personal interest of his or her relative in a transaction that is not considered an extraordinary transaction.
Under the Companies Law, once an office holder has complied with the above disclosure requirement, a company may approve a transaction between the company and the office holder or a third party in which the office holder has a personal interest. However, a company may not approve a transaction or action that is not to the company’s benefit.
Under the Companies Law, unless the articles of association of a company provide otherwise, a transaction with an office holder or with a third party in which the office holder has a personal interest, which is not an extraordinary transaction, requires approval by the board of directors. Our amended and restated articles of association provide that such a transaction, which is not an extraordinary transaction, shall be approved by the board of directors or a committee of the board of directors or any other body or person (which has no personal interest in the transaction) authorized by the board of directors. If the transaction considered is an extraordinary transaction with an office holder or third party in which the office holder has a personal interest, then audit committee approval is required prior to approval by the board of directors. For the approval of compensation arrangements with directors and executive officers, see “Management — Disclosure of Compensation of Directors and Executive Officers.”
Any persons who have a personal interest in the approval of a transaction that is brought before a meeting of the board of directors or the audit committee may not be present at the meeting or vote on the matter. However, if the chairman of the board of directors or the chairman of the audit committee has determined that the presence of an office holder with a personal interest is required, such office holder may be present at the meeting for the purpose of presenting the matter. Notwithstanding the foregoing, a director who has a personal interest may be present at the meeting and vote on the matter if a majority of the directors or members of the audit committee have a personal interest in the approval of such transaction. If a majority of the directors at a board of directors meeting have a personal interest in the transaction, such transaction also requires approval of the shareholders of the company.
A “personal interest” is defined under the Companies Law as the personal interest of a person in an action or in a transaction of the company, including the personal interest of such person’s relative or the interest of any other corporate body in which the person and/or such person’s relative is a director or general manager, a 5% shareholder or holds 5% or more of the voting rights, or has the right to appoint at least one director or the general manager, but excluding a personal interest stemming solely from the fact of holding shares in the company. A personal interest also includes (1) a personal interest of a person who votes according to a proxy of another person, including in the event that the other person has no personal interest, and (2) a personal interest of a person who gave a proxy to another person to vote on his or her behalf regardless of whether or not the discretion of how to vote lies with the person voting.
An “extraordinary transaction” is defined under the Companies Law as any of the following:
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a transaction other than in the ordinary course of business;
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a transaction that is not on market terms; or
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a transaction that may have a material impact on the company’s profitability, assets or liabilities.
Disclosure of Personal Interests of a Controlling Shareholder and Approval of Transactions
The Companies Law also requires that a controlling shareholder promptly disclose to the company any personal interest that he or she may have and all related material information or documents relating to any existing or proposed transaction by the company. A controlling shareholder’s disclosure must be made promptly and in any event no later than the first meeting of the board of directors at which the transaction is considered. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, including a private placement in which a controlling shareholder has a personal interest, and the terms of engagement of the company, directly or indirectly, with a controlling shareholder or a controlling shareholder’s relative (including through a corporation controlled by a controlling shareholder), regarding the company’s receipt of services from the controlling shareholder, and if such controlling shareholder is also an office holder or employee of the company, regarding his or her terms of employment, require the approval of each of (i) the audit committee or the compensation committee with respect to the terms of the engagement of the company, (ii) the board of directors and (iii) the shareholders, in that order. In addition, the shareholder approval must fulfill one of the following requirements:
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a majority of the shares held by shareholders who have no personal interest in the transaction and are voting at the meeting must be voted in favor of approving the transaction, excluding abstentions; or
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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 two percent (2%) of the voting rights in the company.
In addition, an extraordinary transaction with a controlling shareholder or in which a controlling shareholder has a personal interest, and an engagement of the company, directly or indirectly, with a controlling shareholder or a controlling shareholder’s relative (including through a corporation controlled by a controlling shareholder), regarding the company’s receipt of services from the controlling shareholder, and if such controlling shareholder is also an office holder or employee of the company, regarding his or her terms of employment, in each case with a term of more than three years requires the abovementioned approval every three years, however, transactions not involving the receipt of services or compensation can be approved for a longer term, provided that the audit committee determines that such longer term is reasonable under the circumstances. In addition, transactions with a controlling shareholder or a controlling shareholder’s relative who serves as an officer in a company, directly or indirectly (including through a corporation under his control), involving the receipt of services by a company or their compensation can have a term of five years from the company's initial public offering under certain circumstances.
The Companies Law requires that every shareholder that participates, in person, by proxy or by voting instrument, in a vote regarding a transaction with a controlling shareholder, must indicate in advance or in the ballot whether or not that shareholder has a personal interest in the vote in question. Failure to so indicate will result in the invalidation of that shareholder’s vote.
Disclosure of Compensation of Executive Officers
For so long as we qualify as a foreign private issuer, we are not required to comply with the proxy rules applicable to U.S. domestic companies, including the requirement applicable to emerging growth companies to disclose the compensation of our chief executive officer and other two most highly compensated executive officers on an individual, rather than an aggregate, basis. Nevertheless, regulations promulgated under the Companies Law will require us, after we become a public company, to disclose the annual compensation of our five most highly compensated office holders on an individual basis, rather than on an aggregate basis. This disclosure will not be as extensive as that required of a U.S. domestic issuer. We intend to commence providing such disclosure, at the latest, in the proxy statement for our first annual general meeting of shareholders following this offering, which will be furnished under cover of a Form 6-K and we may elect to provide such information at an earlier date.
Compensation of Directors and Executive Officers
Directors. Under the Companies Law, the compensation of our directors requires the approval of our compensation committee, the subsequent approval of the board of directors and, unless exempted under regulations promulgated under the Companies Law, the approval of the shareholders at a general meeting. If the compensation of our directors is inconsistent with our stated compensation policy, then, those provisions that must be included in the compensation policy according to the Companies Law must have been considered by the compensation committee and board of directors, and shareholder approval will also be required, provided that:
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at least a majority of the shares held by all shareholders who are not controlling shareholders and do not have a personal interest in such matter, present and voting at such meeting, are voted in favor of the compensation package, excluding abstentions; or
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the total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in such matter voting against the compensation package does not exceed two percent (2%) of the aggregate voting rights in the company.
Executive officers other than the chief executive officer. The Companies Law requires the approval of the compensation of a public company’s executive officers (other than the chief executive officer) in the following order: (i) the compensation committee, (ii) the company’s board of directors, and (iii) if such compensation arrangement is inconsistent with the company’s stated compensation policy, the company’s shareholders (by a special majority vote as discussed above
with respect to the approval of director compensation). However, if the shareholders of the company do not approve a compensation arrangement with an executive officer that is inconsistent with the company’s stated compensation policy, the compensation committee and board of directors may override the shareholders’ decision if each of the compensation committee and the board of directors provide detailed reasons for their decision.
Chief executive officer. Under the Companies Law, the compensation of a public company’s chief executive officer is required to be approved by: (i) the company’s compensation committee; (ii) the company’s board of directors, and (iii) the company’s shareholders (by a special majority vote as discussed above with respect to the approval of director compensation). However, if the shareholders of the company do not approve the compensation arrangement with the chief executive officer, the compensation committee and board of directors may override the shareholders’ decision if each of the compensation committee and the board of directors provide a detailed report for their decision. The approval of each of the compensation committee and the board of directors should be in accordance with the company’s stated compensation policy; however, in special circumstances, they may approve compensation terms of a chief executive officer that are inconsistent with such policy provided that they have considered those provisions that must be included in the compensation policy according to the Companies Law and that shareholder approval was obtained (by a special majority vote as discussed above with respect to the approval of director compensation). In addition, the compensation committee may waive the shareholder approval requirement with regards to the approval of the engagement terms of a candidate for the chief executive officer position, if they determine that the compensation arrangement is consistent with the company’s stated compensation policy, and that the chief executive officer did not have a prior business relationship with the company or a controlling shareholder of the company and that subjecting the approval of the engagement to a shareholder vote would impede the company’s ability to employ the chief executive officer candidate.
Duties of Shareholders
Under the Companies Law, a shareholder has a duty to refrain from abusing its power in the company and to act in good faith and in an acceptable manner in exercising its rights and performing its obligations to the company and other shareholders, including, among other things, when voting at meetings of shareholders on the following matters:
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an amendment to the articles of association;
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an increase in the company’s authorized share capital;
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a merger; and
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the approval of related party transactions and acts of office holders that require shareholder approval.
A shareholder also has a general duty to refrain from discriminating against other shareholders.
The remedies generally available upon a breach of contract will also apply to a breach of the shareholder duties mentioned above, and in the event of discrimination against other shareholders, additional remedies may be available to the injured shareholder.
In addition, any controlling shareholder, any shareholder that knows that its vote can determine the outcome of a shareholder vote and any shareholder that, under a company’s articles of association, has the power to appoint or prevent the appointment of an office holder, or any other power with respect to a company, is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this duty except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty to act with fairness, taking the shareholder’s position in the company into account.
Approval of Private Placements
Under the Companies Law and the regulations promulgated thereunder, a private placement of securities does not require approval at a general meeting of the shareholders of a company; provided however, that in special circumstances, such as a private placement which is intended to obviate the need to conduct a special tender offer (see “Description of Share Capital — Acquisitions under Israeli Law”) or a private placement which qualifies as a related party transaction (see “Management — Fiduciary Duties and Approval of Specified Related Party Transactions and Compensation under Israeli Law”), approval at a general meeting of the shareholders of a company is required.
Exculpation, Insurance and Indemnification of Directors and Officers
Under the Companies Law, a company may not exculpate an office holder from liability for a breach of the fiduciary duty. An Israeli company may exculpate an office holder in advance from liability to the company, in whole or in part, for damages caused to the company as a result of a breach of duty of care but only if a provision authorizing such exculpation is included in its articles of association. Our amended and restated articles of association include such a provision. The company may not exculpate in advance a director from liability arising due to the breach of his or her duty of care in the event of a prohibited dividend or distribution to shareholders.
Under the Companies Law and the Israeli Securities Law, 5728-1968 (the “Securities Law”) a company may indemnify an office holder in respect of the following liabilities, payments and expenses incurred for acts performed by him or her as an office holder, either in advance of an event or following an event, provided its articles of association include a provision authorizing such indemnification:
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a monetary liability incurred by or imposed on the office holder in favor of another person pursuant to a court judgment, including pursuant to a settlement confirmed as judgment or arbitrator’s decision approved by a competent court. However, if an undertaking to indemnify an office holder with respect to such liability is provided in advance, then such an undertaking must be limited to events which, in the opinion of the board of directors, can be foreseen based on the company’s activities when the undertaking to indemnify is given, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and such undertaking shall detail the abovementioned foreseen events and amount or criteria;
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reasonable litigation expenses, including reasonable attorneys’ fees, which were incurred by the office holder as a result of an investigation or proceeding filed against the office holder by an authority authorized to conduct such investigation or proceeding, provided that such investigation or proceeding was either (i) concluded without the filing of an indictment against such office holder and without the imposition on him of any monetary obligation in lieu of a criminal proceeding; (ii) concluded without the filing of an indictment against the office holder but with the imposition of a monetary obligation on the office holder in lieu of criminal proceedings for an offense that does not require proof of criminal intent; or (iii) in connection with a monetary sanction;
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a monetary liability imposed on the office holder in favor of a payment for a breach offended at an Administrative Procedure (as defined below) as set forth in Section 52(54)(a)(1)(a) to the Securities Law;
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expenses expended by the office holder with respect to an Administrative Procedure under the Securities Law, including reasonable litigation expenses and reasonable attorneys’ fees;
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reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or which were imposed on the office holder by a court (i) in a proceeding instituted against
him or her by the company, on its behalf, or by a third party, (ii) in connection with criminal indictment of which the office holder was acquitted, or (iii) in a criminal indictment which the office holder was convicted of an offense that does not require proof of criminal intent; and
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any other obligation or expense in respect of which it is permitted or will be permitted under applicable law to indemnify an office holder, including, without limitation, matters referenced in Section 56H(b)(1) of the Securities Law.
An “Administrative Procedure” is defined as a procedure pursuant to chapters H3 (Monetary Sanction by the Israeli Securities Authority), H4 (Administrative Enforcement Procedures of the Administrative Enforcement Committee) or I1 (Arrangement to prevent Procedures or Interruption of procedures subject to conditions) to the Securities Law.
Under the Companies Law and the Securities Law, a company may insure an office holder against the following liabilities incurred for acts performed by him or her as an office holder if and to the extent provided in the company’s articles of association:
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a breach of the fiduciary duty to the company, provided that the office holder acted in good faith and had a reasonable basis to believe that the act would not harm the company;
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a breach of duty of care to the company or to a third party, to the extent such a breach arises out of the negligent conduct of the office holder;
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a monetary liability imposed on the office holder in favor of a third party;
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a monetary liability imposed on the office holder in favor of an injured party at an Administrative Procedure pursuant to Section 52(54)(a)(1)(a) of the Securities Law; and
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expenses incurred by an office holder in connection with an Administrative Procedure, including reasonable litigation expenses and reasonable attorneys’ fees.
Under the Companies Law, a company may not indemnify, exculpate or insure an office holder against any of the following:
•
a breach of the fiduciary duty, except for indemnification and insurance for a breach of the fiduciary duty to the company to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
•
a breach of duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder;
•
an act or omission committed with intent to derive illegal personal benefit; or
•
a fine or forfeit levied against the office holder.
Under the Companies Law, exculpation, indemnification and insurance of office holders must be approved by the compensation committee and the board of directors and, with respect to directors or controlling shareholders, their relatives and third parties in which controlling shareholders have a personal interest, also by the shareholders.
Our amended and restated articles of association permit us to exculpate, indemnify and insure our office holders to the fullest extent permitted or to be permitted by law. Our office holders are currently covered by a directors’ and officers’ liability insurance policy. As of the date of this prospectus, no claims for directors’ and officers’ liability insurance have been filed under this policy and we are not aware of any pending or threatened litigation or proceeding involving any of our office holders, including our directors, in which indemnification is sought.
Employment and Consulting Agreements with Executive Officers
We have entered into written employment or service agreements with each of our executive officers. See “Certain Relationships and Related Party Transactions — Employment Agreements” for additional information.
Directors’ Service Contracts
There are no arrangements or understandings between us, on the one hand, and any of our directors, on the other hand, providing for benefits upon termination of their employment or service as directors of our company.
2014 Share Incentive Plan
On December 2, 2014, we adopted the 2014 Share Incentive Plan, or the Plan, and, in connection with this offering, we intend to amend and restate the Plan which will become effective immediately after the pricing of this offering. The Plan is intended to afford an incentive to our and any of our affiliate’s employees, directors, officers, consultants, advisors and any other person or entity who provides services to the Company, to continue as service providers, to increase their efforts on our and our affiliates behalf and to promote our success, by providing such persons with opportunities to acquire a proprietary interest in us.
Under the Plan, as amended and restated, we may issue up to 1,350,000 of our ordinary shares, subject to adjustment if particular capital changes affect our share capital or such other number as our board of directors may determine from time to time. Ordinary shares subject to outstanding awards under the Plan that subsequently expire, are cancelled, forfeited or terminated for any reason before being exercised will be automatically, and without any further action, returned to the “pool” of reserved shares and will again be available for grant under the Plan.
A share option is the right to purchase a specified number of ordinary shares in the future at a specified exercise price and subject to the other terms and conditions specified in the option agreement and the Plan. The exercise price of each share option granted under the Plan will be determined in accordance with the limitations set forth under the Plan. The exercise price of any share options granted under the Plan may be paid in cash, through the surrender of ordinary shares by the option holder or any other method that may be approved by our compensation committee, which may include procedures for cashless exercise.
Our compensation committee may also grant, or recommend that our board of directors grant, other forms of equity incentive awards under the Plan, such as restricted shares, restricted share units, and other forms of share-based compensation.
Israeli participants in the Plan may be granted options subject to Section 102 of the Israeli Income Tax Ordinance (New Version), 1961, or the Israeli Tax Ordinance. Section 102 of the Israeli Tax Ordinance allows employees, directors and officers who are not controlling shareholders (as defined for those purposes under the Israeli Tax Ordinance) and are considered Israeli residents to receive favorable tax treatment for compensation in the form of shares or options. Our non-employee service providers and controlling shareholders may only be granted options under another section of the Israeli Tax Ordinance, which does not provide for similar tax benefits. Section 102 includes two alternatives for tax treatment involving the issuance of options or shares to a trustee for the benefit of the grantees and also includes an additional alternative for the issuance of options or shares directly to the grantee. The most favorable tax treatment for the grantees is under Section 102(b)(2) of the Israeli Tax Ordinance, the issuance to a trustee under the “capital gain track.” However, under this track we are not allowed to deduct an expense with respect to the issuance of the options or shares. Any options granted under the Plan to participants in the United States will be either “incentive stock options,” which may be eligible for special tax treatment under the Internal Revenue Code of 1986, or options other than incentive stock options (referred to as “nonqualified stock options”), as determined by our compensation committee or our board of directors and stated in the option agreement.
Our compensation committee will administer the Plan, or if determined otherwise by our board of directors, the Plan will be administered by our board of directors or other designated committee on its behalf. Even if the compensation committee or any other committee was appointed by our board of directors in order to administrate the Plan, our board of directors may, subject to any legal limitations, exercise any powers or duties of the compensation committee or any other committee concerning the Plan. The compensation committee will, among others, select which eligible persons will receive options or other awards under the Plan and will determine, or recommend to our board of directors, the number of ordinary shares covered by those options or other awards, the terms under which such options or other awards may be exercised (however, options generally may not be exercised later than ten years from the grant date of an option) or may be settled or paid, and the other terms and conditions of such options and other awards under the Plan. All awards granted under the Plan shall not be transferable other than by will or by the laws of descent and distribution, unless otherwise determined by our compensation committee.
To the extent permitted under applicable law, our compensation committee will have the authority to accelerate the vesting of any outstanding awards at such time and under such circumstances as it, in its sole discretion, deems appropriate. In the event of a change of control, as defined in the Plan, any award then outstanding shall be assumed or an equivalent award shall be substituted by the successor corporation of the merger or sale or any parent or affiliate thereof as determined by our board of directors. In the event that the awards are not assumed or substituted, our compensation committee may, in its discretion, accelerate the vesting, exercisability of the outstanding award, or provide for the cancellation of such award and payment of cash, as determined to be fair in the circumstances.
Subject to particular limitations specified in the Plan and under applicable law, our board of directors may amend or terminate the Plan, and the compensation committee may amend awards outstanding under the Plan. In addition, an amendment to the Plan that requires shareholder approval under applicable law will not be effective unless approved by the requisite vote of shareholders. In addition, in general, no suspension, termination, modification or amendment of the Plan may adversely affect any award previously granted without the written consent of grantees holding a majority in interest of the awards so affected. The Plan will continue in effect until all ordinary shares available under the Plan are delivered and all restrictions on those shares have lapsed, unless the Plan is terminated earlier by our board of directors. No awards may be granted under the Plan on or after the tenth anniversary of the date of adoption of the plan unless our board of directors chooses to extend the term.
Any equity award to an office holder, director or controlling shareholder, whether under the Plan or otherwise, may be subject to further approvals in addition to the approval of the compensation committee as described above. As of December 31, 2017, options to purchase 993,202 ordinary shares, at a weighted average exercise price of $3.63 per share, were outstanding under our Plan.
Principal Shareholders
The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of December 31, 2017 by:
•
each person or entity known by us to own beneficially 5% or more of our outstanding ordinary shares;
•
each of our directors, executive officers and director nominees; and
•
all of our executive officers, directors and director nominees as a group.
The beneficial ownership of our ordinary shares is determined in accordance with the rules of the SEC. Under these rules, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or to direct the voting of the security, or investment power, which includes the power to dispose of or to direct the disposition of the security. For purposes of the table below, we deem ordinary shares issuable pursuant to options that are currently exercisable or exercisable within 60 days as of December 31, 2017, if any, to be outstanding and to be beneficially owned by the person holding the options or warrants for the purposes of computing the percentage ownership of that person, but we do not treat them as outstanding for the purpose of computing the percentage ownership of any other person. The percentage of ordinary shares beneficially owned prior to the offering is based on 11,735,069 ordinary shares outstanding as of December 31, 2017, assuming the automatic conversion of our outstanding promissory note between us and our controlling shareholder into an aggregate of 5,444,825 ordinary shares immediately prior to the closing of this offering and assuming an initial public offering price of $12.00 per ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus. The percentage of ordinary shares beneficially owned after the offering is based on the number of shares outstanding prior to the offering plus the ordinary shares that we are selling in this offering.
The percentages of ordinary shares beneficially owned after the offering assume that the underwriters will not exercise their option to purchase additional ordinary shares in the offering. Except where otherwise indicated, we believe, based on information furnished to us by such owners, that the beneficial owners of the ordinary shares listed below have sole investment and voting power with respect to such shares.
Upon the closing of this offering, none of our shareholders will have different voting rights from other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
As of December 31, 2017, there were no U.S. persons that were holders of record of our ordinary shares.
Unless otherwise noted below, the address for each beneficial owner is c/o Sol-Gel Technologies Ltd., 7 Golda Meir St., Weizmann Science Park, Ness Ziona, 7403650 Israel.
Our controlling shareholder, Arkin Dermatology, which is wholly-owned by the chairman of our board of directors, has indicated an interest in purchasing up to an aggregate of $25.0 million of our ordinary shares in this offering on the same terms as the other purchasers in the offering. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer or no ordinary shares offered in the offering to Arkin Dermatology, or Arkin Dermatology may determine to purchase more, fewer or no ordinary shares offered in the offering. The following table does not reflect any potential purchases by Arkin Dermatology in this offering.
| |
|
|
Shares Beneficially
Owned Prior to the
Offering
|
|
|
Shares Beneficially
Owned After the
Offering
|
|
|
Name of Beneficial Owner
|
|
|
Number
|
|
|
Percentage
|
|
|
Number
|
|
|
Percentage
|
|
| 5% or greater shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
M.Arkin Dermatology Ltd. (1)
|
|
|
|
|
11,735,069 |
|
|
|
|
|
100.0% |
|
|
|
|
|
11,735,069 |
|
|
|
|
|
70.1% |
|
|
|
Directors, director nominees and executive officers
|
|
|
|
|
|
|
Moshe Arkin (1)
|
|
|
|
|
11,735,069 |
|
|
|
|
|
100.0% |
|
|
|
|
|
11,735,069 |
|
|
|
|
|
70.1% |
|
|
|
Alon Seri-Levy (2)
|
|
|
|
|
118,633 |
|
|
|
|
|
1.0% |
|
|
|
|
|
118,633 |
|
|
|
|
|
* |
|
|
|
Gilad Mamlok
|
|
|
|
|
* |
|
|
|
|
|
* |
|
|
|
|
|
* |
|
|
|
|
|
* |
|
|
|
Ofer Toledano
|
|
|
|
|
* |
|
|
|
|
|
* |
|
|
|
|
|
* |
|
|
|
|
|
* |
|
|
|
Ofra Levy-Hacham
|
|
|
|
|
* |
|
|
|
|
|
* |
|
|
|
|
|
* |
|
|
|
|
|
* |
|
|
|
Karine Neimann
|
|
|
|
|
* |
|
|
|
|
|
* |
|
|
|
|
|
* |
|
|
|
|
|
* |
|
|
|
Itzik Yosef
|
|
|
|
|
* |
|
|
|
|
|
* |
|
|
|
|
|
* |
|
|
|
|
|
* |
|
|
|
Dov Zamir
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
Itai Arkin
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
Ran Gottfried
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
Jerrold S. Gattegno
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
Shmuel Ben Zvi
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
Hani Lerman
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
Yael Baratz
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
All directors, director nominees and executive officers as a group (15 persons) (1)(3)
|
|
|
|
|
11,991,699 |
|
|
|
|
|
100% |
|
|
|
|
|
11,991,699 |
|
|
|
|
|
70.6% |
|
|
| |
*
Less than 1%.
(1)
Consists of (i) 6,290,244 ordinary shares directly owned by Arkin Dermatology, and (ii) and 5,444,825 ordinary shares, to be issued immediately prior to the closing of this offering upon the automatic conversion of our outstanding promissory note between us and our controlling shareholder into an aggregate of 5,444,825 ordinary shares immediately prior to the closing of this offering and assuming an initial public offering price of $12.00 per ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus. The promissory note will be assigned to M.Arkin Dermatology Ltd. immediately prior to the conversion, and all ordinary shares will be held by M.Arkin Dermatology Ltd. The actual number of shares to be issued upon conversion of the promissory note will be determined by dividing the principal amount of the promissory note at the time of conversion by the initial public offering price per ordinary share in this offering. Mr. Moshe Arkin, the chairman of our board of directors, owns 100% of the outstanding share capital of Arkin Dermatology. As a result, Mr. Arkin has sole power to vote or to direct the vote and sole power to dispose or to direct the disposition of, all shares owned by Arkin Dermatology. Mr. Arkin disclaims beneficial ownership in the ordinary shares except to the extent of his pecuniary interest therein. The foregoing does not take into consideration any potential purchase by Arkin Dermatology of our ordinary shares in this offering.
(2)
Consists of options to purchase 118,633 ordinary shares currently exercisable or exercisable within 60 days of December 31, 2017.
(3)
Includes options to purchase 256,630 ordinary shares currently exercisable or exercisable within 60 days of December 31, 2017.
Certain Relationships and Related Party Transactions
Employment Agreements
We have entered into written employment agreements with each of our executive officers. These agreements provide for notice periods of varying duration for termination of the agreement by us or by the relevant executive officer, during which time the executive officer will continue to receive base salary and benefits. These agreements also contain customary provisions regarding noncompetition, confidentiality of information and assignment of inventions. However, the enforceability of the noncompetition provisions may be limited under applicable law. See “Risk Factors — Risks Related to Employee Matters — Under applicable employment laws, we may not be able to enforce covenants not to compete” for a further description of the enforceability of non-competition clauses.
Securities Purchase Agreement
On August 4, 2014, our former shareholders entered into a securities purchase agreement with our controlling shareholder, Arkin Dermatology, or the Purchase Agreement. The Purchase Agreement detailed the terms and conditions for the sale of the company to Arkin Dermatology in exchange for a cash payment in the amount of approximately $10.5 million in addition to an earn out payment of up to $17.0 million based on the achievement of certain development and revenue-related milestones. In connection with the Purchase Agreement, certain of our employees, including our chief executive officer, are entitled, subject to the achievement of certain research and development milestones and other conditions, to a special bonus in an aggregate amount of up to $3.0 million, all of which has been paid.
Project Transfers From Our Controlling Shareholder
On December 31, 2015, we assumed, following entering into a transfer agreement with M. Arkin (1999) Ltd., an affiliate of our controlling shareholder, an agreement with Perrigo Israel for the development, manufacturing and commercialization of a product candidate no longer in development. The consideration for the transfer of the project, in the amount of $431,000, was paid to the related company during 2015 by utilizing a loan from our controlling shareholder.
On August 22, 2017, our controlling shareholder, Arkin Dermatology, transferred an in-process research and development generic product candidate to us, in consideration of one ordinary share (two ordinary shares after giving effect to the stock split).
Loan Agreements with Our Controlling Shareholder
Since January 1, 2014, we have received several loans in an aggregate principal amount of approximately $65.35 million from Mr. Arkin, our controlling shareholder. These loans are denominated in U.S. dollars, bear no interest and are backed by a promissory note, or the Promissory Note. The Promissory Note is an unsecured note, has no repayment date and is subject to acceleration in certain events of default.
The Promissory Note will automatically convert into an aggregate of 5,444,825 ordinary shares immediately prior to the closing of this offering. The actual number of shares to be issued upon conversion of the promissory note will be determined by dividing the principal amount of the promissory note at the time of conversion by the initial public offering price per ordinary share in this offering. The Promissory Note will be assigned to Arkin Dermatology immediately prior to the automatic conversion thereof, and the ordinary shares issued pursuant to the automatic conversion of the Promissory Note will be held by Arkin Dermatology. Mr. Arkin, the chairman of our board of directors, owns 100% of the share capital of Arkin Dermatology.
Directors and Officers Insurance Policy and Indemnification Agreements
Our amended and restated articles of association permit us to exculpate, indemnify and insure each of our directors and officers to the fullest extent permitted by the Companies Law. We have
obtained Directors and Officers insurance for each of our executive officers and directors. For further information, see “Management — Exculpation, Insurance and Indemnification of Directors and Officers.”
We intend to enter into agreements with each of our current directors and officers exculpating them from a breach of their duty of care to us to the fullest extent permitted by law, subject to limited exceptions, and undertaking to indemnify them to the fullest extent permitted by law, subject to limited exceptions, including, with respect to liabilities resulting from this offering, to the extent that these liabilities are not covered by insurance. This indemnification is limited, with respect to any monetary liability imposed in favor of a third party, to events determined as foreseeable by the board of directors based on our activities. The maximum aggregate amount of indemnification that we may pay to our directors and officers based on such indemnification agreement is the greater of (1) 25% of our shareholders’ equity pursuant to our audited financial statements for the year preceding the year in which the event in connection of which indemnification is sought occurred, and (2) $40 million (as may be increased from time to time by shareholders’ approval). Such indemnification amounts are in addition to any insurance amounts. Each director or officer who agrees to receive this letter of indemnification also gives his approval to the termination of all previous letters of indemnification that we have provided to him or her in the past, if any.
Registration Rights Agreement
In connection with the closing of this offering, we intend to enter into a registration rights agreement, pursuant to which we intend to grant demand registration rights, short-form registration rights and piggyback registration rights to Arkin Dermatology, our controlling shareholder. All fees, costs and expenses of underwritten registrations are expected to be borne by us. No registration rights to be granted pursuant to this registration rights agreement shall be exercisable until expiration of the 180-day lock-up agreement entered into by Arkin Dermatology in connection with this offering.
Description of Share Capital
The following description of our share capital and provisions of our amended and restated articles of association are summaries and do not purport to be complete.
General
Upon the closing of this offering, our authorized share capital will consist of 50,000,000 ordinary shares, par value NIS 0.1 per share, of which, upon the closing of this offering, 16,735,069 shares will be issued and outstanding (assuming that the underwriters do not exercise their option to purchase additional ordinary shares).
All of our outstanding ordinary shares will be validly issued, fully paid and non-assessable. Our ordinary shares are not redeemable and do not have any preemptive rights.
Registration Number and Purposes of the Company
Our registration number with the Israeli Registrar of Companies is 51-254469-3. Our purpose as set forth in our amended and restated articles of association is to engage in any lawful activity.
Voting Rights and Conversion
All ordinary shares will have identical voting and other rights in all respects.
Transfer of Shares
Our fully paid ordinary shares are issued in registered form and may be freely transferred under our amended and restated articles of association, unless the transfer is restricted or prohibited by another instrument, applicable law or the rules of a stock exchange on which the shares are listed for trade. The ownership or voting of our ordinary shares by non-residents of Israel is not restricted in any way by our amended and restated articles of association or the laws of the State of Israel, except for ownership by nationals of some countries that are, or have been, in a state of war with Israel.
Liability to Further Capital Calls
Our board of directors may make, from time to time, such calls as it may deem fit upon shareholders with respect to any sum unpaid with respect to shares held by such shareholders which is not payable at a fixed time. Such shareholder shall pay the amount of every call so made upon him. Unless otherwise stipulated by the board of directors, each payment in response to a call shall be deemed to constitute a pro rata payment on account of all shares with respect to which such call was made. A shareholder shall not be entitled to his rights as shareholder, including the right to dividends, unless such shareholder has fully paid all the notices of call delivered to him, or which according to our amended and restated articles of association are deemed to have been delivered to him, together with interest, linkage and expenses, if any, unless otherwise determined by the board of directors.
Election of Directors
Our ordinary shares do not have cumulative voting rights for the election of directors. As a result, the holders of a majority of the voting power represented at a shareholders meeting have the power to elect all of our directors, subject to the special approval requirements for external directors under the Companies Law described under “Management — External Directors.”
Under our amended and restated articles of association, our board of directors must consist of not less than five (5) but no more than nine (9) directors, including any external directors required to be appointed by the Companies Law. Pursuant to our amended and restated articles of association, other than the external directors, for whom special election requirements apply under the Companies Law, the vote required to appoint a director is a simple majority vote of holders of
our voting shares participating and voting at the relevant meeting. In addition, our amended and restated articles of association allow our board of directors to appoint new directors to fill vacancies on the board of directors if the number of directors is below the maximum number provided in our amended and restated articles. Furthermore, under our amended and restated articles of association our directors other than external directors are divided into three classes with staggered three-year terms. For a more detailed description on the composition of our board of election procedures of our directors, other than our external directors, see “Management — Corporate Government Practices — Board of Directors and Officers.” External directors are elected for an initial term of three years, may be elected for additional terms of three years each under certain circumstances, and may be removed from office pursuant to the terms of the Companies Law. For further information on the election and removal of external directors, see “Management — External Directors — Election and Dismissal of External Directors.”
Dividend and Liquidation Rights
We may declare a dividend to be paid to the holders of our ordinary shares in proportion to their respective shareholdings. Under the Companies Law, dividend distributions are determined by the board of directors and do not require the approval of the shareholders of a company unless the company’s articles of association provide otherwise. Our amended and restated articles of association do not require shareholder approval of a dividend distribution and provide that dividend distributions may be determined by our board of directors.
Pursuant to the Companies Law, the distribution amount is limited to the greater of retained earnings or earnings generated over the previous two years, according to our then last reviewed or audited financial statements, provided that the date of the financial statements is not more than six months prior to the date of the distribution, or we may distribute dividends that do not meet such criteria only with court approval. In each case, we are only permitted to distribute a dividend if our board of directors and the court, if applicable, determines that there is no reasonable concern that payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due.
In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of our ordinary shares in proportion to their shareholdings. This right, as well as the right to receive dividends, may be affected by the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future.
Exchange Controls
There are currently no Israeli currency control restrictions on remittances of dividends on our ordinary shares, proceeds from the sale of the shares or interest or other payments to non-residents of Israel, except for shareholders who are subjects of certain countries that are considered to be in a state of war with Israel at such time.
Shareholder Meetings
Under Israeli law, we are required to hold an annual general meeting of our shareholders once every calendar year that must be held no later than 15 months after the date of the previous annual general meeting. All general meetings other than the annual meeting of shareholders are referred to in our amended and restated articles of association as special meetings. Our board of directors may call special meetings whenever it sees fit, at such time and place, within or outside of Israel, as it may determine. In addition, the Companies Law provides that our board of directors is required to convene a special meeting upon the written request of (i) any two of our directors or one-quarter of the members of our board of directors or (ii) one or more shareholders holding, in the aggregate, either (a) 5% or more of our outstanding issued shares and 1% or more of our outstanding voting power or (b) 5% or more of our outstanding voting power. This is different from the Delaware General Corporation Law, or the DGCL, which allows such right of shareholders to be denied by a provision in a company’s certificate of incorporation.
Under Israeli law, one or more shareholders holding at least 1% of the voting rights at the general meeting may request that the board of directors include a matter in the agenda of a general meeting to be convened in the future, provided that it is appropriate to discuss such a matter at the general meeting.
Subject to the provisions of the Companies Law and the regulations promulgated thereunder, shareholders entitled to participate and vote at general meetings are the shareholders of record on a date to be decided by the board of directors, which may be between four and 40 days prior to the date of the meeting. Furthermore, the Companies Law requires that resolutions regarding the following matters must be passed at a general meeting of our shareholders:
•
amendments to our amended and restated articles of association;
•
appointment or termination of our auditors;
•
appointment of external directors;
•
approval of certain related party transactions;
•
increases or reductions of our authorized share capital;
•
mergers; and
•
the exercise of our board of director’s powers by a general meeting, if our board of directors is unable to exercise its powers and the exercise of any of its powers is required for our proper management.
Under our amended and restated articles of association, we are not required to give notice to our registered shareholders pursuant to the Companies Law, unless otherwise required by law. The Companies Law requires that a notice of any annual general meeting or special general meeting be provided to shareholders at least 21 days prior to the meeting and if the agenda of the meeting includes the appointment or removal of directors, the approval of transactions with office holders or interested or related parties, or an approval of a merger, or as otherwise required under applicable law, notice must be provided at least 35 days prior to the meeting. Under the Companies Law, shareholders are not permitted to take action by written consent in lieu of a meeting. Our amended and restated articles of association provide that a notice of general meeting shall be published by us on Form 6-K at a date prior to the meeting as required by law.
Voting Rights
Quorum Requirements
Pursuant to our amended and restated articles of association, holders of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote before the shareholders at a general meeting. Under our amended and restated articles of association, the quorum required for general meetings of shareholders must consist of at least two shareholders present in person or by proxy (including by voting deed) holding 331∕3% or more of the voting rights in the Company, which complies with the quorum requirements for general meetings under the Nasdaq Marketplace Rules. A meeting adjourned for lack of a quorum will generally be adjourned to the same day of the following week at the same time and place, or to such other day, time or place as indicated by our board of directors if so specified in the notice of the meeting. At the reconvened meeting, any number of shareholders present in person or by proxy shall constitute a lawful quorum, instead of 331∕3% of the issued share capital as required under the Nasdaq Marketplace Rules.
Vote Requirements
Our amended and restated articles of association provide that all resolutions of our shareholders require a simple majority vote, unless otherwise required by the Companies Law or by our amended and restated articles of association. Pursuant to our amended and restated articles
of association, an amendment to our amended and restated articles of association regarding any change of the composition or election procedures of our directors will require a special majority vote (662∕3%). Under the Companies Law, each of (i) the approval of an extraordinary transaction with a controlling shareholder and (ii) the terms of employment or other engagement of the controlling shareholder of the company or such controlling shareholder’s relative (even if not extraordinary) requires the approval described above under “Management — Fiduciary Duties and Approval of Specified Related Party Transactions and Compensation under Israeli Law — Disclosure of Personal Interests of a Controlling Shareholder and Approval of Transactions.” Certain transactions with respect to remuneration of our office holders and directors require further approvals described above under “Management — Fiduciary Duties and Approval of Specified Related Party Transactions and Compensation under Israeli Law — Compensation of Directors and Executive Officers.” Under our amended and restated articles of association, any change to the rights and privileges of the holders of any class of our shares requires a simple majority of the class so affected (or such other percentage of the relevant class that may be set forth in the governing documents relevant to such class), in addition to the ordinary majority vote of all classes of shares voting together as a single class at a shareholder meeting. Another exception to the simple majority vote requirement is a resolution for the voluntary winding up, or an approval of a scheme of arrangement or reorganization, of the company pursuant to Section 350 of the Companies Law, which requires the approval of holders of 75% of the voting rights represented at the meeting, in person, by proxy or by voting deed and voting on the resolution.
Access to Corporate Records
Under the Companies Law, shareholders are provided access to minutes of our general meetings, our shareholders register and principal shareholders register, our amended and restated articles of association, our financial statements and any document that we are required by law to file publicly with the Israeli Companies Registrar or the Israel Securities Authority. In addition, shareholders may request to be provided with any document related to an action or transaction requiring shareholder approval under the related party transaction provisions of the Companies Law. We may deny this request if we believe it has not been made in good faith or if such denial is necessary to protect our interest or protect a trade secret or patent.
Modification of Class Rights
Under the Companies Law and our amended and restated articles of association, the rights attached to any class of share, such as voting, liquidation and dividend rights, may be amended by adoption of a resolution by the holders of a majority of the shares of that class present at a separate class meeting, or otherwise in accordance with the rights attached to such class of shares, in addition to the ordinary majority vote of all classes of shares voting together as a single class at a shareholder meeting, as set forth in our amended and restated articles of association.
Registration Rights
For a discussion of registration rights we intend to grant to our controlling shareholder in connection with the closing of this offering, please see “Certain Relationships and Related Party Transactions — Registration Rights Agreement.”
Acquisitions under Israeli Law
Full Tender Offer
A person wishing to acquire shares of an Israeli public company and who would as a result hold over 90% of the target company’s issued and outstanding share capital is required by the Companies Law to make a tender offer to all of the company’s shareholders for the purchase of all of the issued and outstanding shares of the company. A person wishing to acquire shares of a public Israeli company and who would as a result hold over 90% of the issued and outstanding share capital of a certain class of shares is required to make a tender offer to all of the shareholders
who hold shares of the relevant class for the purchase of all of the issued and outstanding shares of that class. If the shareholders who do not accept the offer hold less than 5% of the issued and outstanding share capital of the company or of the applicable class, and more than half of the shareholders who do not have a personal interest in the offer accept the offer, all of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law. However, a tender offer will also be accepted if the shareholders who do not accept the offer hold less than 2% of the issued and outstanding share capital of the company or of the applicable class of shares.
Upon a successful completion of such a full tender offer, any shareholder that was an offeree in such tender offer, whether such shareholder accepted the tender offer or not, may, within six months from the date of acceptance of the tender offer, petition an Israeli court to determine whether the tender offer was for less than fair value and that the fair value should be paid as determined by the court. However, under certain conditions, the offeror may include in the terms of the tender offer that an offeree who accepted the offer will not be entitled to petition the Israeli court as described above.
If (a) the shareholders who did not respond or accept the tender offer hold at least 5% of the issued and outstanding share capital of the company or of the applicable class or the shareholders who accept the offer constitute less than a majority of the offerees that do not have a personal interest in the acceptance of the tender offer, or (b) the shareholders who did not accept the tender offer hold 2% or more of the issued and outstanding share capital of the company (or of the applicable class), the acquirer may not acquire shares of the company that will increase its holdings to more than 90% of the company’s issued and outstanding share capital or of the applicable class from shareholders who accepted the tender offer.
Special Tender Offer
The Companies Law provides that an acquisition of shares of an Israeli public company must be made by means of a special tender offer if as a result of the acquisition the purchaser would become a holder of 25% or more of the voting rights in the company. This requirement does not apply if there is already another holder of at least 25% of the voting rights in the company. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a special tender offer if as a result of the acquisition the purchaser would become a holder of more than 45% of the voting rights in the company, if there is no other shareholder of the company who holds more than 45% of the voting rights in the company, subject to certain exceptions.
A special tender offer must be extended to all shareholders of a company but the offeror is not required to purchase shares representing more than 5% of the voting power attached to the company’s outstanding shares, regardless of how many shares are tendered by shareholders. A special tender offer may be consummated only if (i) at least 5% of the voting power attached to the company’s outstanding shares will be acquired by the offeror and (ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer (excluding the purchaser and its controlling shareholder, holders of 25% or more of the voting rights in the company or any person having a personal interest in the acceptance of the tender offer or any other person acting on their behalf, including relatives and entities under such person’s control). If a special tender offer is accepted, then the purchaser or any person or entity controlling it or under common control with the purchaser or such controlling person or entity may not make a subsequent tender offer for the purchase of shares of the target company and may not enter into a merger with the target company for a period of one year from the date of the offer, unless the purchaser or such person or entity undertook to effect such an offer or merger in the initial special tender offer.
Under the DGCL there are no provisions relating to mandatory tender offers.
Merger
The Companies Law permits merger transactions if approved by each party’s board of directors and, unless certain requirements described under the Companies Law are met, by a majority vote
of each party’s shares, and, in the case of the target company, a majority vote of each class of its shares voted on the proposed merger at a shareholders meeting.
For purposes of the shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if a majority of the votes of the shares represented at the shareholders meeting that are held by parties other than the other party to the merger, or by any person (or group of persons acting in concert) who holds (or hold, as the case may be) 25% or more of the voting rights or the right to appoint 25% or more of the directors of the other party, vote against the merger. If, however, the merger involves a merger with a company’s own controlling shareholder or if the controlling shareholder has a personal interest in the merger, then the merger is instead subject to the same special majority approval that governs all extraordinary transactions with controlling shareholders (as described under “Management — Fiduciary Duties and Approval of Specified Related Party Transactions and Compensation under Israeli Law — Disclosure of Personal Interests of a Controlling Shareholder and Approval of Transactions”).
If the transaction would have been approved by the shareholders of a merging company but for the separate approval of each class or the exclusion of the votes of certain shareholders as provided above, a court may still approve the merger upon the request of holders of at least 25% of the voting rights of a company, if the court holds that the merger is fair and reasonable, taking into account the value to the parties to the merger and the consideration offered to the shareholders of the company.
Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of the merging entities, and may further give instructions to secure the rights of creditors.
In addition, a merger may not be consummated unless at least 50 days have passed from the date on which a proposal for approval of the merger was filed by each party with the Israeli Registrar of Companies and at least 30 days have passed from the date on which the merger was approved by the shareholders of each party.
Anti-Takeover Measures under Israeli Law
The Companies Law allows us to create and issue shares having rights different from those attached to our ordinary shares, including shares providing certain preferred rights with respect to voting, distributions or other matters and shares having preemptive rights. As of the closing of this offering, no preferred shares will be authorized under our amended and restated articles of association. In the future, if we do authorize, create and issue a specific class of preferred shares, such class of shares, depending on the specific rights that may be attached to it, may have the ability to frustrate or prevent a takeover or otherwise prevent our shareholders from realizing a potential premium over the market value of their ordinary shares. The authorization and designation of a class of preferred shares will require an amendment to our amended and restated articles of association, which requires the prior approval of the holders of a majority of the voting power attaching to our issued and outstanding shares at a general meeting. The convening of the meeting, the shareholders entitled to participate and the majority vote required to be obtained at such a meeting will be subject to the requirements set forth in the Companies Law as described above in “— Voting Rights.”
As an Israeli company we are not subject to the provisions of Section 203 of the DGCL, which in general prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. For purposes of Section 203, a “business combination” includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an “interested stockholder” is a person who, together with affiliates and associates, owns, or within three years prior did own, 15% or more of the voting stock of a corporation.
Borrowing Powers
Pursuant to the Companies Law and our amended and restated articles of association, our board of directors may exercise all powers and take all actions that are not required under law or under our amended and restated articles of association to be exercised or taken by our shareholders, including the power to borrow money for company purposes.
Changes in Capital
Our amended and restated articles of association enable us to increase or reduce our share capital. Any such changes are subject to the provisions of the Companies Law and must be approved by a resolution duly adopted by our shareholders at a general meeting. In addition, transactions that have the effect of reducing capital, such as the declaration and payment of dividends in the absence of sufficient retained earnings or profits, require the approval of both our board of directors and an Israeli court.
Establishment
We were incorporated under the laws of the State of Israel on October 28, 1997. We are registered with the Israeli Registrar of Companies in Jerusalem.
Transfer Agent and Registrar
The transfer agent and registrar for our ordinary shares is American Stock Transfer & Trust Company, LLC.
Listing
We have applied to list our ordinary shares on The Nasdaq Global Market under the symbol “SLGL.”
Home Country Practices
As a foreign private issuer whose shares will be listed on The Nasdaq Global Market, we are permitted to follow certain home country corporate governance practices instead of certain requirements of the rules of The Nasdaq Global Market. Pursuant to the “foreign private issuer exemption”:
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we intend to establish a quorum requirement such that the quorum for any meeting of shareholders is two or more shareholders holding at least 331∕3% of our voting rights, which complies with Nasdaq requirements; however, if the meeting is adjourned for lack of quorum, the quorum for such adjourned meeting will be any number of shareholders, instead of 331∕3% of the our voting rights;
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we intend to adopt and approve material changes to equity incentive plans in accordance with the Israeli Companies Law, 5759-1999, or Companies Law, which does not impose a requirement of shareholder approval for such actions. In addition, we intend to follow Israeli corporate governance practice in lieu of Nasdaq Marketplace Rule 5635(c), which requires shareholder approval prior to an issuance of securities in connection with equity based compensation of officers, directors, employees or consultants;
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as opposed to making periodic reports to shareholders and proxy solicitation materials available to shareholders in the manner specified by the Nasdaq corporate governance rules, the Companies Law does not require us to distribute periodic reports directly to shareholders, and the generally accepted business practice in Israel is not to distribute such reports to shareholders but to make such reports available through a public website. We will only mail such reports to shareholders upon request; and
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we will follow Israeli corporate governance practice instead of Nasdaq requirements to obtain shareholder approval for certain dilutive events (such as issuances that will result in a change of control, certain transactions other than a public offering involving issuances of a 20% or greater interest in us and certain acquisitions of the stock or assets of another company). Accordingly, our shareholders may not be afforded the same protection as provided under Nasdaq corporate governance rules.
Otherwise, we intend to comply with the rules generally applicable to U.S. domestic companies listed on the Nasdaq Global Market. However, we may in the future decide to use the foreign private issuer exemption with respect to some or all of the other Nasdaq corporate governance rules.
Shares Eligible for Future Sale
Prior to this offering, no public market existed for our ordinary shares. Sales of substantial amounts of our ordinary shares following this offering, or the perception that these sales could occur, could adversely affect prevailing market prices of our ordinary shares and could impair our future ability to obtain capital, especially through an offering of equity securities. Assuming that the underwriters do not exercise their option to purchase additional ordinary shares in this offering and assuming no exercise of options outstanding following this offering and assuming the automatic conversion of our outstanding promissory note between us and our controlling shareholder into an aggregate of 5,444,825 ordinary shares immediately prior to the closing of this offering, and further assuming an initial public offering price of $12.00 per ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus, we will have an aggregate of 16,735,069 ordinary shares outstanding upon the closing of this offering. Of these shares, the 5,000,000 ordinary shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless purchased by “affiliates” (as that term is defined under Rule 144 of the Securities Act), who may sell only the volume of shares described below and whose sales would be subject to additional restrictions described below.
The remaining 11,735,069 ordinary shares will be held by our existing shareholders and will be deemed to be “restricted securities” under Rule 144. Restricted securities may only be sold in the public market pursuant to an effective registration statement under the Securities Act or pursuant to an exemption from registration such as under Rule 144 under the Securities Act. These rules are summarized below.
Eligibility of Restricted Shares for Sale in the Public Market
As a result of contractual restrictions described below and the provisions of Rules 144 and 701, the ordinary shares sold in this offering and the restricted securities will be available for sale in the public market as follows:
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all the ordinary shares sold in this offering will be eligible for immediate sale upon the closing of this offering; and
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11,735,069 ordinary shares will be eligible for sale in the public market upon expiration of lock-up agreements 180 days after the date of this prospectus, subject in certain circumstances to the volume, manner of sale and other limitations under Rule 144 and Rule 701.
Lock-up Agreements
All of our directors, executive officers and shareholders have signed lock-up agreements pursuant to which, subject to certain exceptions, such persons have agreed not to sell or otherwise dispose of ordinary shares or any securities convertible into or exchangeable for ordinary shares for a period of 180 days after the date of this prospectus without the prior written consent of Jefferies LLC and BMO Capital Markets Corp., who may, at any time upon requisite notice, release all or any portion of the ordinary shares from the restrictions in any such agreement.
Rule 144
Shares Held For Six Months
In general, under Rule 144 as currently in effect, and subject to the terms of any lock-up agreement, commencing 90 days following the closing of this offering, a person, including an affiliate, who has beneficially owned our ordinary shares for six months or more, including the holding period of any prior owner other than one of our affiliates (i.e., commencing when the shares were acquired from us or from an affiliate of us as restricted securities), is entitled to sell our ordinary shares, subject to the availability of current public information about us (which information will be deemed to be available as long as we continue to file required reports with the
SEC). In the case of an affiliate shareholder, the right to sell is also subject to the fulfillment of certain additional conditions, including manner of sale provisions, notice requirements, and a volume limitation that limits the number of shares that may be sold thereby, within any three-month period, to the greater of:
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1% of the number of ordinary shares then outstanding; or
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the average weekly trading volume of our ordinary shares on the Nasdaq Global Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.
Rule 144 also provides that affiliates that sell our ordinary shares that are not restricted securities must nonetheless comply with the same restrictions applicable to restricted securities, other than the holding period requirement.
Shares Held by Non-Affiliates for One Year
Under Rule 144 as currently in effect, a person who is not considered to have been one of our affiliates at any time during the three months preceding a sale and who has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than one of our affiliates, is entitled to sell his, her or its shares under Rule 144 without complying with the provisions relating to the availability of current public information or with any other conditions under Rule 144. Therefore, unless subject to a lock-up agreement or otherwise restricted, such shares may be sold immediately upon the closing of this offering.
Rule 701
In general, under Rule 701 as currently in effect, each of our employees, consultants or advisors who purchases our ordinary shares from us in connection with a compensatory stock plan or other written agreement executed prior to the closing of this offering is eligible to resell such ordinary shares in reliance on Rule 144, but without compliance with some of the restrictions, as described below.
Rule 701 will apply to the options granted under our 2014 Share Incentive Plan prior to the closing of this offering, along with the shares acquired upon exercise of these options, including exercises following the closing of this offering. Securities issued in reliance on Rule 701 are restricted securities and may be sold beginning 90 days following the closing of this offering in reliance on Rule 144 by:
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persons other than affiliates, without restriction; and
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affiliates, subject to the manner-of-sale, current public information and filing requirements of Rule 144,
in each case, without compliance with the six-month holding period requirement of Rule 144.
Form S-8 Registration Statements
We intend to file one or more registration statements on Form S-8 under the Securities Act to register, in the aggregate, ordinary shares, issued or reserved for issuance under our 2014 Share Incentive Plan. The registration statement on Form S-8 will become effective automatically upon filing. Ordinary shares issued upon exercise of a share option or other award and registered pursuant to the Form S-8 registration statement will, subject to vesting provisions and Rule 144 volume limitations applicable to our affiliates, be available for sale in the open market immediately unless they are subject to the 180-day lock-up or, if subject to the lock-up, immediately after the 180-day lock-up period expires.
Registration Rights
In connection with the closing of this offering, we intend to enter into a registration rights agreement, pursuant to which we intend to grant demand registration rights, short-form registration rights and piggyback registration rights to Arkin Dermatology, our controlling shareholder. For more information on these registration rights, see “Certain Relationships and Related Party Transactions — Registration Rights Agreement.” No registration rights to be granted pursuant to this registration rights agreement shall be exercisable until expiration of the 180-day lock-up agreement entered into by Arkin Dermatology in connection with this offering.
Material Tax Considerations
The following description is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition of our ordinary shares. You should consult your own tax advisor concerning the tax consequences of your particular situation, as well as any tax consequences that may arise under the laws of any state, local, foreign or other taxing jurisdiction.
Israeli Tax Considerations and Government Programs
The following is a summary of the material Israeli tax laws applicable to us, and some Israeli Government programs benefiting us. This section also contains a discussion of some Israeli tax consequences to persons owning our ordinary shares. This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law. Examples of this kind of investor include traders in securities or persons that own, directly or indirectly, 10% or more of our outstanding voting capital, all of whom are subject to special tax regimes not covered in this discussion. Some parts of this discussion are based on new tax legislation which has not been subject to judicial or administrative interpretation. The discussion should not be construed as legal or professional tax advice and does not cover all possible tax considerations.
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE ISRAELI OR OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES, INCLUDING, IN PARTICULAR, THE EFFECT OF ANY FOREIGN, STATE OR LOCAL TAXES.
General Corporate Tax Structure in Israel
Israeli resident companies are generally subject to corporate tax at the rate of 24% of a company’s taxable income in 2017, which was reduced to 23% in 2018 and thereafter. However, the effective tax rate payable by a company that derives income from a Benefited Enterprise or a Preferred Enterprise (as discussed below) may be considerably less. Capital gains derived by an Israeli resident company are subject to tax at the prevailing corporate tax rate.
Under Israeli tax legislation, a corporation will be considered as an “Israeli resident company” if it meets one of the following: (i) it was incorporated in Israel; or (ii) the control and management of its business are exercised in Israel.
Law for the Encouragement of Industry (Taxes), 5729-1969
The Law for the Encouragement of Industry (Taxes), 5729-1969, generally referred to as the Industry Encouragement Law, provides several tax benefits for “Industrial Companies.”
The Industry Encouragement Law defines an “Industrial Company” as a company resident in Israel and which was incorporated in Israel of which 90% or more of its income in any tax year, other than income from defense loans, is derived from an “Industrial Enterprise” owned by it and which is located in Israel. An “Industrial Enterprise” is defined as an enterprise whose principal activity in a given tax year is industrial production.
The following corporate tax benefits, among others, are available to Industrial Companies:
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amortization over an eight-year period of the cost of purchased know-how and patents and rights to use a patent and know-how which are used for the development or advancement of the Industrial Enterprise;
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under limited conditions, an election to file consolidated tax returns with related Israeli Industrial Companies; and
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expenses related to a public offering are deductible in equal amounts over three years.
Although as of the date of this prospectus, we do not have industrial production activities, we may qualify as an Industrial Company in the future and may be eligible for the benefits described above.
Tax Benefits and Grants for Research and Development
Israeli tax law allows, under certain conditions, a tax deduction for expenditures, including capital expenditures, for the year in which they are incurred. Expenditures are deemed related to scientific research and development projects, if:
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The expenditures are approved by the relevant Israeli government ministry, determined by the field of research;
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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.
The amount of such deductible expenses is reduced by the sum of any funds received through government grants for the financing of such scientific research and development projects. No deduction under these research and development deduction rules is allowed if such deduction is related to an expense invested in an asset depreciable under the general depreciation rules of the Israeli Tax Ordinance, 1961. Expenditures not so approved are deductible in equal amounts over three years.
From time to time we may apply to the Innovation Authority for approval to allow a tax deduction for all research and development expenses during the year incurred. There can be no assurance that such application will be accepted.
Law for the Encouragement of Capital Investments, 5719-1959
The Law for the Encouragement of Capital Investments, 5719-1959, generally referred to as the Investment Law, provides certain incentives for capital investments in production facilities (or other eligible assets) by “Industrial Enterprises” (as defined under the Investment Law).
Tax Benefits Prior to the 2005 Amendment
An investment program that is implemented in accordance with the provisions of the Investment Law prior to an amendment that became effective in April 2005, or the 2005 Amendment, referred to as an “Approved Enterprise,” is entitled to certain benefits. A company that wished to receive benefits as an Approved Enterprise must have received approval from the Investment Center of the Israeli Ministry of Economy and Industry, or the Investment Center. Each certificate of approval for an Approved Enterprise relates to a specific investment program in the Approved Enterprise, delineated both by the financial scope of the investment and by the physical characteristics of the facility or the asset.
In general, an Approved Enterprise is entitled to receive a grant from the Government of Israel or an alternative package of tax benefits, known as the alternative benefits track. The tax benefits from any certificate of approval relate only to taxable profits attributable to the specific Approved Enterprise. Income derived from activity that is not integral to the activity of the Approved Enterprise does not enjoy tax benefits.
In addition, a company that has an Approved Enterprise program is eligible for further tax benefits if it qualifies as a Foreign Investors’ Company, or FIC, which is a company with a level of foreign investment, as defined in the Investment Law, of more than 25%. The level of foreign investment is measured as the percentage of rights in the company (in terms of shares, rights to profits, voting and appointment of directors), and of combined share and loan capital, that are owned, directly or indirectly, by persons who are not residents of Israel. The determination as to whether a company qualifies as an FIC is made on an annual basis.
We are currently not entitled to tax benefits for Approved Enterprise.
Tax Benefits Subsequent to the 2005 Amendment
The 2005 Amendment applies to new investment programs and investment programs commencing after 2004, but does not apply to investment programs approved prior to April 1, 2005. The 2005 Amendment provides that terms and benefits included in any certificate of approval that was granted before the 2005 Amendment became effective (April 1, 2005) will remain subject to the provisions of the Investment Law as in effect on the date of such approval. Pursuant to the 2005 Amendment, the Investment Center will continue to grant Approved Enterprise status to qualifying investments. The 2005 Amendment, however, limits the scope of enterprises that may be approved by the Investment Center by setting criteria for the approval of a facility as an Approved Enterprise, such as provisions generally requiring that at least 25% of the Approved Enterprise’s income be derived from exports.
The 2005 Amendment provides that Approved Enterprise status will only be necessary for receiving cash grants. As a result, it was no longer necessary for a company to obtain Approved Enterprise status in order to receive the tax benefits previously available under the alternative benefits track. Rather, a company may claim the tax benefits offered by the Investment Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set forth in the amendment. Companies are entitled to approach the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the Investment Law, as amended.
In order to receive the tax benefits, the 2005 Amendment states that a company must make an investment which meets all of the conditions, including exceeding a minimum investment amount specified in the Investment Law. Such investment allows a company to receive “Benefited Enterprise” status, and may be made over a period of no more than three years from the end of the year in which the company requested to have the tax benefits apply to its Benefited Enterprise. Where the company requests to apply the tax benefits to an expansion of existing facilities, only the expansion will be considered to be a Benefited Enterprise and the company’s effective tax rate will be the weighted average of the applicable rates. In this case, the minimum investment required in order to qualify as a Benefited Enterprise is required to exceed a certain percentage of the value of the company’s production assets before the expansion.
The extent of the tax benefits available under the 2005 Amendment to qualifying income of a Benefited Enterprise depend on, among other things, the geographic location in Israel of the Benefited Enterprise. The location will also determine the period for which tax benefits are available. Such tax benefits include an exemption from corporate tax on undistributed income for a period of between two to 10 years, depending on the geographic location of the Benefited Enterprise in Israel, and a reduced corporate tax rate of between 10% and the applicable corporate tax for the remainder of the benefits period, depending on the level of foreign investment in the company in each year. A company qualifying for tax benefits under the 2005 Amendment which pays a dividend out of income derived by its Benefited Enterprise during the tax exemption period will be subject to corporate tax in respect of the gross amount of the dividend at the otherwise applicable corporate tax rate or a lower rate in the case of a qualified FIC which is at least 49% owned by non-Israeli residents. Dividends paid out of income attributed to a Benefited Enterprise are generally subject to withholding tax at source at the rate of 15% or such lower rate as may be provided in an applicable tax treaty.
The benefits available to a Benefited Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations. If a company does not meet these conditions, it may be required to refund the amount of tax benefits, as adjusted by the Israeli consumer price index, and interest, or other monetary penalties.
We applied for tax benefits as a “Benefited Enterprise” with 2012 as a “Year of Election.” We may be entitled to tax benefits under this regime once we are profitable for tax purposes and subject to the fulfillment of all the relevant conditions. If we do not meet these conditions, the tax
benefits may not be applicable which would result in adverse tax consequences to us. Alternatively, and subject to the fulfillment of all the relevant conditions, we may elect in the future to irrevocably waive the tax benefits available for Benefited Enterprise and claim the tax benefits available to Preferred Enterprise under the 2011 Amendment (as detailed below).
Tax Benefits Under the 2011 Amendment
The Investment Law was significantly amended as of January 1, 2011, or the 2011 Amendment. The 2011 Amendment introduced new benefits to replace those granted in accordance with the provisions of the Investment Law in effect prior to the 2011 Amendment.
The 2011 Amendment introduced new tax benefits for income generated by a “Preferred Company” through its “Preferred Enterprise,” in accordance with the definition of such term in the Investment Law, which generally means that a “Preferred Company” is an industrial company meeting certain conditions (including a minimum threshold of 25% export).
A Preferred Company is entitled to a reduced flat tax rate with respect to the income attributed to the Preferred Enterprise, at the following rates:
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Tax Year
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Development Region “A”
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Other Areas within Israel
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2011 – 2012
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10% |
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15% |
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2013
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7% |
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12.5% |
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2014 – 2016 |
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9% |
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16% |
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2017 and thereafter
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7.5% |
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16% |
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Dividends distributed from income which is attributed to a “Preferred Enterprise” will be subject to withholding tax at source at the following rates: (i) Israeli resident corporations — 0%, (ii) Israeli resident individuals — 20% in 2017 (iii) non-Israeli residents — 20% in 2017, subject to a reduced tax rate under the provisions of an applicable double tax treaty.
Under the 2011 Amendment, a company located in Development Region “A” may be entitled to cash grants and the provision of loans under certain conditions, if approved. The rates for grants and loans shall not be fixed, but up to 20% of the amount of the approved investment (may be increased with additional 4%). In addition, a company owning a Preferred Enterprise under the Grant Track may be entitled also to the tax benefits which are prescribed for a Preferred Company.
The termination or substantial reduction of any of the benefits available under the Investment Law could materially increase our tax liabilities.
We are currently not entitled to tax benefits for a Preferred Enterprise.
Taxation of Our Shareholders
Capital Gains
Capital gain tax is imposed on the disposition of capital assets by an Israeli resident, and on the disposition of such assets by a non-Israeli resident if those assets are either (i) located in Israel; (ii) are shares or a right to a share in an Israeli resident corporation, or (iii) represent, directly or indirectly, rights to assets located in Israel. The Israeli Tax Ordinance distinguishes between “Real Gain” and the “Inflationary Surplus.” Real Gain is the excess of the total capital gain over Inflationary Surplus computed generally on the basis of the increase in the Israeli consumer price index between the date of purchase and the date of disposition. Inflationary Surplus is not currently subject to tax in Israel.
Real Gain accrued by individuals on the sale of our ordinary shares will be taxed at the rate of 25%. However, if the individual shareholder is a “Controlling Shareholder” (i.e., a person who holds, directly or indirectly, alone or together with another, 10% or more of one of the Israeli resident company’s means of control) at the time of sale or at any time during the preceding 12-month period, such gain will be taxed at the rate of 30%.
Real Gain derived by corporations will be generally subject to the corporate tax rate of 24% in 2017, which was reduced to 23% in 2018 and thereafter.
Individual and corporate shareholder dealing in securities in Israel are taxed at the tax rates applicable to business income — 24% for corporations in 2017, which was reduced to 23% in 2018 and thereafter, and a marginal tax rate of up to 50% in 2017 for individuals, including an excess tax.
Notwithstanding the foregoing, capital gain derived from the sale of our ordinary shares by a non-Israeli shareholder may be exempt under the Israeli Tax Ordinance from Israeli capital gain tax provided that the seller does not have a permanent establishment in Israel to which the derived capital gain is attributed. However, non-Israeli corporations will not be entitled to the foregoing exemption if more than 25% of its means of control are held, directly and indirectly, by Israeli residents, and Israeli residents are entitled to 25% or more of the revenues or profits of the corporation, directly or indirectly. In addition, such exemption would not be available to a person whose gains from selling or otherwise disposing of the securities are deemed to be business income.
In addition, the sale of shares may be exempt from Israeli capital gain tax under the provisions of an applicable tax treaty. For example, the U.S.-Israel Double Tax Treaty exempts U.S. residents from Israeli capital gain tax in connection with such sale, provided (i) the U.S. resident owned, directly or indirectly, less than 10% of an Israeli resident company’s voting power at any time within the 12-month period preceding such sale; (ii) the seller, being an individual, is present in Israel for a period or periods of less than 183 days during the taxable year; and (iii) the capital gain from the sale was not derived through a permanent establishment of the U.S. resident in Israel.
In some instances where our shareholders may be liable for Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at source at a rate of 25% if the seller is an individual and at the corporate tax rate (24% in 2017, reduced to 23% in 2018 and thereafter) if the seller is a corporation. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at source at the time of sale.
At the sale of securities traded on a stock exchange a detailed return, including a computation of the tax due, must be filed and an advanced payment must be paid on January 31 and June 30 of every tax year in respect of sales of securities made within the previous six months. However, if all tax due was withheld at source according to applicable provisions of the Israeli Tax Ordinance and regulations promulgated thereunder, the aforementioned return need not be filed and no advance payment must be paid. Capital gain is also reportable on the annual income tax return.
Dividends
We have never paid cash dividends. A distribution of a dividend by our company from income attributed to a Benefited Enterprise will generally be subject to withholding tax in Israel at a rate of 15% unless a reduced tax rate is provided under an applicable tax treaty. A distribution of a dividend by our company from income attributed to a Preferred Enterprise will generally be subject to withholding tax in Israel at the following tax rates: Israeli resident individuals — 20% with respect to dividends to be distributed as of 2017; Israeli resident companies — 0% for a Preferred Enterprise; Non-Israeli residents — 20% with respect to dividends to be distributed as of 2017, subject to a reduced rate under the provisions of any applicable double tax treaty. A distribution of dividends from income, which is not attributed to a Preferred Enterprise to an Israeli resident individual, will generally be subject to withholding tax at a rate of 25%, or 30% if the dividend recipient is a “Controlling Shareholder” (as defined above) at the time of distribution or at any time during the preceding 12-month period. If the recipient of the dividend is an Israeli resident corporation, such dividend will not be subject to Israeli tax provided the income from which such dividend is distributed was derived or accrued within Israel.
The Israeli Tax Ordinance provides that a non-Israeli resident (either individual or corporation) is generally subject to Israeli withholding tax on the receipt of dividends at the rate of 25% (30% if the dividends recipient is a “Controlling Shareholder” (as defined above), at the time of distribution or at any time during the preceding 12-month period); those rates may be subject to a reduced rate under the provisions of an applicable double tax treaty. Under the U.S.-Israel Double Tax Treaty, the following withholding rates will apply in respect of dividends distributed by an Israeli resident company to a U.S. resident: (i) if the U.S. resident is a corporation which holds during that portion of the taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10% of the outstanding shares of the voting share capital of the Israeli resident paying corporation and not more than 25% of the gross income of the Israeli resident paying corporation for such prior taxable year (if any) consists of certain type of interest or dividends — the rate is 12.5%, (ii) if both the conditions mentioned in clause (i) above are met and the dividend is paid from an Israeli resident company’s income which was entitled to a reduced tax rate applicable to an Approved Enterprise — the rate is 15% and (iii) in all other cases, the rate is 25%. The aforementioned rates under the Israel U.S. Double Tax Treaty will not apply if the dividend income was derived through a permanent establishment of the U.S. resident in Israel.
A non-Israeli resident who receives dividends from which tax was withheld is generally exempt from the obligation to file tax returns in Israel with respect to such income, provided that (i) such income was not generated from a business conducted in Israel by the taxpayer, and (ii) the taxpayer has no other taxable sources of income in Israel with respect to which a tax return is required to be filed.
Dividends are generally subject to Israeli withholding tax at a rate of 25% so long as the shares are registered with a nominee company (whether or not the recipient is a “Controlling Shareholder,” as defined above), unless relief is provided in a treaty between Israel and the shareholder’s country of residence and provided that a certificate from the Israel Tax Authority allowing for a reduced withholding tax rate is obtained in advance.
Excess Tax
Individuals who are subject to tax in Israel are also subject to an additional tax at a rate of 3% in 2017 and thereafter on annual income exceeding NIS 640,000 for 2017 and thereafter, linked to the annual change in the Israeli consumer price index, including, but not limited to income derived from, dividends, interest and capital gains.
Foreign Exchange Regulations
Non-residents of Israel who hold our ordinary shares are able to receive any dividends, and any amounts payable upon the dissolution, liquidation and winding up of our affairs, repayable in non-Israeli currency at the rate of exchange prevailing at the time of conversion. However, Israeli income tax is generally required to have been paid or withheld on these amounts. In addition, the statutory framework for the potential imposition of currency exchange control has not been eliminated, and may be restored at any time by administrative action.
Estate and Gift Tax
Israeli law presently does not impose estate or gift taxes.
U.S. Federal Income Tax Consequences
The following discussion describes certain material U.S. federal income tax consequences to U.S. Holders (as defined below) under present law of an investment in our ordinary shares. This discussion applies only to U.S. Holders that hold our ordinary shares as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”), that have acquired their ordinary shares in this offering and that have the U.S. dollar as their functional currency.
This discussion is based on the tax laws of the United States, including the Code, as in effect on the date hereof and on U.S. Treasury regulations as in effect or, in some cases, as proposed, on the date hereof, as well as judicial and administrative interpretations thereof available on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below. This summary does not address any estate or gift tax consequences, the alternative minimum tax, the Medicare tax on net investment income or any state, local, or non-U.S. tax consequences.
The following discussion neither deals with the tax consequences to any particular investor nor describes all of the tax consequences applicable to persons in special tax situations such as:
•
banks;
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certain financial institutions;
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insurance companies;
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regulated investment companies;
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real estate investment trusts;
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broker-dealers;
•
traders that elect to mark to market;
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U.S. expatriates;
•
tax-exempt entities;
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persons holding our ordinary shares as part of a straddle, hedging, constructive sale, conversion or integrated transaction;
•
persons that actually or constructively own 10% or more of the total combined voting power of all classes of our voting share capital;
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persons that are resident or ordinarily resident in or have a permanent establishment in a jurisdiction outside the United States;
•
persons who acquired our ordinary shares pursuant to the exercise of any employee share option or otherwise as compensation;
•
persons subject to special tax accounting rules as a result of any item of gross income with respect to our ordinary shares being taken into account in an applicable financial statement; or
•
pass-through entities, or persons holding our ordinary shares through pass-through entities.
INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S. FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL, NON-U.S. AND OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES.
The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are the beneficial owner of our ordinary shares and you are, for U.S. federal income tax purposes,
•
an individual who is a citizen or resident of the United States;
•
a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the laws of the United States, any state thereof or the District of Columbia;
•
an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
•
a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
If an entity or other arrangement treated as a partnership for U.S. federal income tax purposes holds our ordinary shares, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. A person that would be a U.S. Holder if it held our ordinary shares directly and that is a partner of a partnership holding our ordinary shares is urged to consult its own tax advisor.
Passive Foreign Investment Company
Based on our anticipated income and the composition of our income and assets, we expect to be a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes at least until we start generating a substantial amount of active revenue. A non-U.S. entity treated as a corporation for U.S. federal income tax purposes will generally be a PFIC for U.S. federal income tax purposes for any taxable year if either:
•
at least 75% of its gross income for such year is passive income (such as interest income); or
•
at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income.
For this purpose, we will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other entity treated as a corporation for U.S. federal income tax purposes in which we own, directly or indirectly, 25% or more (by value) of the stock.
A separate determination must be made after the close of each taxable year as to whether we were a PFIC for that year. Because the value of our assets for purposes of the PFIC test will generally be determined by reference to the market price of our ordinary shares, our PFIC status may depend in part on the market price of our ordinary shares, which may fluctuate significantly. In addition, there may be certain ambiguities in applying the PFIC test to us. No rulings from the U.S. Internal Revenue Service (the “IRS”), however, have been or will be sought with respect to our status as a PFIC.
If we are a PFIC for any taxable year during which you hold our ordinary shares, we generally will continue to be treated as a PFIC with respect to your investment in our ordinary shares for all succeeding years during which you hold our ordinary shares, unless we cease to be a PFIC and you make a “deemed sale” election with respect to our ordinary shares. If such election is made, you will be deemed to have sold our ordinary shares you hold at their fair market value on the last day of the last taxable year in which we were a PFIC, and any gain from such deemed sale would be subject to the consequences described below. After the deemed sale election, your ordinary shares with respect to which the deemed sale election was made will not be treated as shares in a PFIC unless we subsequently become a PFIC.
For each taxable year that we are treated as a PFIC with respect to you, you will be subject to special tax rules with respect to any “excess distribution” (as defined below) you receive and any gain you realize from a sale or other disposition (including a pledge) of our ordinary shares, unless you make a valid “mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for our ordinary shares will be treated as an excess distribution. Under these special tax rules:
•
the excess distribution or gain will be allocated ratably over your holding period for our ordinary shares;
•
the amount allocated to the current taxable year, and any taxable years in your holding period prior to the first taxable year in which we were a PFIC, will be treated as ordinary income; and
•
the amount allocated to each other taxable year will be subject to the highest tax rate in effect for individuals or corporations, as applicable, for each such year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.
The tax liability for amounts allocated to taxable years prior to the year of disposition or excess distribution cannot be offset by any net operating losses, and gains (but not losses) realized on the sale of our ordinary shares cannot be treated as capital gains, even if you hold our ordinary shares as capital assets.
If we are treated as a PFIC with respect to you for any taxable year, to the extent any of our subsidiaries are also PFICs, you may be deemed to own shares in such lower-tier PFICs that are directly or indirectly owned by us in that proportion which the value of our ordinary shares you own bears to the value of all of our ordinary shares, and you may be subject to the adverse tax consequences described above with respect to the shares of such lower-tier PFICs you would be deemed to own. As a result, you may incur liability for any excess distribution described above if we receive a distribution from our lower-tier PFICs or if any shares in such lower-tier PFICs are disposed of (or deemed disposed of). You should consult your tax advisor regarding the application of the PFIC rules to any of our subsidiaries.
A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax treatment discussed above. If you make a valid mark-to-market election for our ordinary shares, you will include in income for each year that we are treated as a PFIC with respect to you an amount equal to the excess, if any, of the fair market value of our ordinary shares as of the close of your taxable year over your adjusted basis in such ordinary shares. You will be allowed a deduction for the excess, if any, of the adjusted basis of our ordinary shares over their fair market value as of the close of the taxable year. However, deductions will be allowable only to the extent of any net mark-to-market gains on our ordinary shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of our ordinary shares, will be treated as ordinary income. Ordinary loss treatment will also apply to the deductible portion of any mark-to-market loss on our ordinary shares, as well as to any loss realized on the actual sale or disposition of our ordinary shares, to the extent the amount of such loss does not exceed the net mark-to-market gains for such ordinary shares previously included in income. Your basis in our ordinary shares will be adjusted to reflect any such income or loss amounts. If you make a mark-to-market election, any distributions we make would generally be subject to the rules discussed below under “— Taxation of dividends and other distributions on our ordinary shares,” except the lower rates applicable to qualified dividend income would not apply.
The mark-to-market election is available only for “marketable stock,” which is stock that is regularly traded on a qualified exchange or other market, as defined in applicable U.S. Treasury regulations. We expect our ordinary shares will be listed on Nasdaq. Because a mark-to-market election cannot be made for equity interests in any lower-tier PFICs we own, you generally will continue to be subject to the PFIC rules with respect to your indirect interest in any investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes. Nasdaq is a qualified exchange, but there can be no assurance that the trading in our ordinary shares will be sufficiently regular to qualify our ordinary shares as marketable stock. You should consult your tax advisor as to the availability and desirability of a mark-to-market election, as well as the impact of such election on interests in any lower-tier PFICs.
Alternatively, if a non-U.S. entity treated as a corporation is a PFIC, a holder of shares in that entity may avoid taxation under the PFIC rules described above regarding excess distributions and recognized gains by making a “qualified electing fund” election to include in income its share of the entity’s income on a current basis. However, you may make a qualified electing fund election with respect to your ordinary shares only if we furnish you annually with certain tax information, and we currently do not intend to prepare or provide such information.
A U.S. Holder of a PFIC may be required to file an IRS Form 8621. If we are a PFIC, you should consult your tax advisor regarding any reporting requirements that may apply to you. You are urged to consult your tax advisor regarding the application of the PFIC rules to the acquisition, ownership and disposition of our ordinary shares.
YOU ARE STRONGLY URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE IMPACT OF OUR BEING A PFIC ON YOUR INVESTMENT IN OUR ORDINARY SHARES AS WELL AS THE APPLICATION OF THE PFIC RULES AND THE POSSIBILITY OF MAKING A MARK-TO-MARKET ELECTION.
Taxation of Dividends and Other Distributions on our Ordinary Shares
Subject to the PFIC rules discussed above, the gross amount of any distributions we make to you (including the amount of any tax withheld) with respect to our ordinary shares generally will be includible in your gross income as dividend income on the date of receipt by the holder, but only to the extent the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). The dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations. To the extent the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), such excess amount will be treated first as a tax-free return of your tax basis in your ordinary shares, and then, to the extent such excess amount exceeds your tax basis in your ordinary shares, as capital gain. We currently do not, and we do not intend to, calculate our earnings and profits under U.S. federal income tax principles. Therefore, you should expect that a distribution will generally be reported as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.
With respect to certain non-corporate U.S. Holders, including individual U.S. Holders, dividends may be taxed at the lower capital gain rates applicable to “qualified dividend income,” provided (1) our ordinary shares are readily tradable on an established securities market in the United States (such as Nasdaq), (2) we are neither a PFIC nor treated as such with respect to you (as discussed above) for either the taxable year in which the dividend was paid or the preceding taxable year, (3) certain holding period requirements are met and (4) you are not under an obligation to make related payments with respect to positions in substantially similar or related property. As discussed above under “Passive foreign investment company,” there is a significant risk that we will be a PFIC for U.S. federal income tax purposes, and, as a result, the qualified dividend rate may be unavailable with respect to dividends we pay.
The amount of any distribution paid in a currency other than U.S. dollars will be equal to the U.S. dollar value of such currency on the date such distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars at that time. The amount of any distribution of property other than cash will be the fair market value of such property on the date of distribution.
Any dividends will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will in general be limited to the gross amount of the dividend, multiplied by the reduced tax rate applicable to qualified dividend income and divided by the highest tax rate normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to
specific classes of income. For this purpose, dividends distributed by us with respect to our ordinary shares will generally constitute “passive category income” but could, in the case of certain U.S. Holders, constitute “general category income.”
If Israeli withholding taxes apply to any dividends paid to you with respect to our ordinary shares, subject to certain conditions and limitations, such withholding taxes may be treated as foreign taxes eligible for credit against your U.S. federal income tax liability. Instead of claiming a credit, you may elect to deduct such taxes in computing taxable income, subject to applicable limitations. If a refund of the tax withheld is available under the applicable laws of Israel or under the Israel-U.S. income tax treaty (the “Treaty”), the amount of tax withheld that is refundable will not be eligible for such credit against your U.S. federal income tax liability (and will not be eligible for the deduction against your U.S. federal taxable income). The rules relating to the determination of the foreign tax credit are complex, and you should consult your tax advisor regarding the availability of a foreign tax credit in your particular circumstances, including the effects of the Treaty.
Taxation of Disposition of Ordinary Shares
Subject to the PFIC rules discussed above, upon a sale or other disposition of ordinary shares, you will generally recognize capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized (including the amount of any tax withheld) and your tax basis in such ordinary shares. If the consideration you receive for our ordinary shares is not paid in U.S. dollars, the amount realized will be the U.S. dollar value of the payment received determined by reference to the spot rate of exchange on the date of the sale or other disposition. However, if our ordinary shares are treated as traded on an “established securities market” and you are either a cash basis taxpayer or an accrual basis taxpayer that has made a special election (which must be applied consistently from year to year and cannot be changed without the consent of the IRS), you will determine the U.S. dollar value of the amount realized in a non-U.S. dollar currency by translating the amount received at the spot rate of exchange on the settlement date of the sale. If you are an accrual basis taxpayer that is not eligible to or does not elect to determine the amount realized using the spot rate on the settlement date, you will recognize foreign currency gain or loss to the extent of any difference between the U.S. dollar amount realized on the date of sale or disposition and the U.S. dollar value of the currency received at the spot rate on the settlement date.
Your tax basis in our ordinary shares generally will equal the cost of such ordinary shares. Any gain or loss on the sale or other disposition of our ordinary shares will generally be treated as U.S. source income or loss, and treated as long-term capital gain or loss if your holding period in our ordinary shares at the time of the disposition exceeds one year. Accordingly, in the event any Israeli tax (including withholding tax) is imposed upon the sale or other disposition, you may not be able to utilize foreign tax credit unless you have foreign source income or gain in the same category from other sources. Long-term capital gain of non-corporate U.S. Holders generally will be subject to U.S. federal income tax at reduced tax rates. The deductibility of capital losses is subject to significant limitations.
Information Reporting and Backup Withholding
Dividend payments with respect to ordinary shares and proceeds from the sale, exchange or redemption of ordinary shares may be subject to information reporting to the IRS and possible U.S. backup withholding. Backup withholding will not apply, however, to a U.S. Holder that furnishes a correct taxpayer identification number and makes any other required certification or that is otherwise exempt from backup withholding. U.S. Holders that are required to establish their exempt status generally must provide such certification on IRS Form W-9. You should consult your tax advisor regarding the application of the U.S. information reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS and furnishing any required information in a timely manner.
Information with respect to Foreign Financial Assets
Certain U.S. Holders may be required to report information relating to an interest in our ordinary shares, subject to certain exceptions (including an exception for ordinary shares held in accounts maintained by certain financial institutions). Penalties can apply if U.S. Holders fail to satisfy such reporting requirements. You should consult your tax advisor regarding the effect, if any, of this requirement on your ownership and disposition of our ordinary shares.
THE SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES SET OUT ABOVE IS FOR GENERAL INFORMATIONAL PURPOSES ONLY. INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S. FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL, NON-U.S. AND OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES.
Underwriting
Subject to the terms and conditions set forth in the underwriting agreement, dated , 2018, among us and Jefferies LLC, 520 Madison Avenue, New York, New York 10022, and BMO Capital Markets Corp., 3 Times Square, 25th Floor, New York, New York 10036, as the representatives of the underwriters named below and the joint book-running managers of the offering, we have agreed to sell to the underwriters, and each of the underwriters has agreed, severally and not jointly, to purchase from us, the respective number of ordinary shares shown opposite its name below:
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Underwriter
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Number of
Ordinary Shares
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Jefferies LLC
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BMO Capital Markets Corp.
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JMP Securities LLC
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Raymond James & Associates, Inc.
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Total
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5,000,000 |
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The underwriting agreement provides that the obligations of the several underwriters are subject to certain conditions precedent such as the receipt by the underwriters of officers’ certificates and legal opinions and approval of certain legal matters by their counsel. The underwriting agreement provides that the underwriters will purchase all of the ordinary shares if any of them are purchased. If an underwriter defaults, the underwriting agreement provides that the purchase commitments of the nondefaulting underwriters may be increased or the underwriting agreement may be terminated. We have agreed to indemnify the underwriters and certain of their controlling persons against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that the underwriters may be required to make in respect of those liabilities.
The underwriters have advised us that, following the completion of this offering, they currently intend to make a market in the ordinary shares as permitted by applicable laws and regulations. However, the underwriters are not obligated to do so, and the underwriters may discontinue any market-making activities at any time without notice in their sole discretion. Accordingly, no assurance can be given as to the liquidity of the trading market for the ordinary shares, that you will be able to sell any of the ordinary shares held by you at a particular time or that the prices that you receive when you sell will be favorable.
The underwriters are offering the ordinary shares subject to their acceptance of the ordinary shares from us and subject to prior sale. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part. In addition, the underwriters have advised us that they do not intend to confirm sales to any account over which they exercise discretionary authority.
Commission and Expenses
The underwriters have advised us that they propose to offer the ordinary shares to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers, which may include the underwriters, at that price less a concession not in excess of $ per ordinary share. The underwriters may allow, and certain dealers may reallow, a discount from the concession not in excess of $ per ordinary share to certain brokers and dealers. After the offering, the initial public offering price, concession and reallowance to dealers may be reduced by the representatives. No such reduction will change the amount of proceeds to be received by us as set forth on the cover page of this prospectus.
The following table shows the initial public offering price, the underwriting discounts and commissions that we are to pay the underwriters and the proceeds, before expenses, to us in connection with this offering. Such amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional ordinary shares.
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Per Ordinary Share
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Total
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Without
Option to
Purchase
Additional
Ordinary
Shares
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With
Option to
Purchase
Additional
Ordinary
Shares
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Without
Option to
Purchase
Additional
Ordinary
Shares
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With
Option to
Purchase
Additional
Ordinary
Shares
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Initial public offering price
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$ |
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$ |
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$ |
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$ |
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Underwriting discounts and commissions paid by us
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$ |
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$ |
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$ |
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$ |
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Proceeds to us, before expenses
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$ |
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$ |
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$ |
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$ |
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|
We estimate expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $1.8 million. We also have agreed to reimburse the underwriters for up to $35,000 for certain expenses incurred in connection with this offering, including for their FINRA counsel fee. In accordance with FINRA Rule 5110, these reimbursed expenses are deemed underwriting compensation for this offering.
Our controlling shareholder, Arkin Dermatology, which is wholly-owned by the chairman of our board of directors, has indicated an interest in purchasing up to an aggregate of $25.0 million of our ordinary shares in this offering on the same terms as the other purchasers in the offering. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer or no ordinary shares offered in the offering to Arkin Dermatology, or Arkin Dermatology may determine to purchase more, fewer or no ordinary shares offered in the offering. The underwriters will receive the same underwriting discount on any ordinary shares purchased by Arkin Dermatology as they will on any ordinary shares sold to the public in the offering.
Determination of Offering Price
Prior to this offering, there has not been a public market for our ordinary shares. Consequently, the initial public offering price for our ordinary shares will be determined by negotiations between us and the representatives. Among the factors to be considered in these negotiations will be prevailing market conditions, our financial information, market valuations of other companies that we and the underwriters believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant.
We offer no assurances that the initial public offering price will correspond to the price at which the ordinary shares will trade in the public market subsequent to the offering or that an active trading market for the ordinary shares will develop and continue after the offering.
Listing
We have applied to have our ordinary shares listed on the Nasdaq Global Market under the trading symbol “SLGL”.
Stamp Taxes
If you purchase ordinary shares offered in this prospectus, you may be required to pay stamp taxes and other charges under the laws and practices of the country of purchase, in addition to the offering price listed on the cover page of this prospectus.
Option to Purchase Additional Ordinary Shares
We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase, from time to time, in whole or in part, up to an aggregate of 750,000
ordinary shares from us at the initial public offering price set forth on the cover page of this prospectus, less underwriting discounts and commissions. If the underwriters exercise this option, each underwriter will be obligated, subject to specified conditions, to purchase a number of additional ordinary shares proportionate to that underwriter’s initial purchase commitment as indicated in the table above. This option may be exercised only if the underwriters sell more ordinary shares than the total number set forth on the cover page of this prospectus.
No Sales of Similar Securities
We, our officers, directors and holders of all of our outstanding share capital have agreed, subject to specified exceptions, not to directly or indirectly:
•
sell, offer, contract or grant any option to sell (including any short sale), pledge, transfer, establish an open “put equivalent position” within the meaning of Rule 16a-l(h) under the Securities Exchange Act of 1934, as amended, or
•
otherwise dispose of any ordinary shares, options or warrants to acquire ordinary shares, or securities exchangeable or exercisable for or convertible into ordinary shares currently or hereafter owned either of record or beneficially, or
•
publicly announce an intention to do any of the foregoing for a period of 180 days after the date of this prospectus without the prior written consent of Jefferies LLC and BMO Capital Markets Corp.
This restriction terminates after the close of trading of the ordinary shares on and including the 180th day after the date of this prospectus.
The restrictions above will not apply to certain transactions, including:
•
transfers by gift, will or operation of law;
•
transfers to certain related entities;
•
the exercise or conversion of options or convertible notes;
•
the establishment of 10b5-1 trading plans, provided no sales can occur during the 180-day lock-up period;
•
the transfer of ordinary shares acquired on the open market following this offering;
•
the transfer of ordinary shares to the Company to satisfy tax withholding obligations in connection with the vesting or exercise of equity awards; and
•
transfers pursuant to a bona fide third-party tender offer for all outstanding shares of the Company, merger, consolidation or other similar transaction made to all holders of the Company’s securities involving a change of control of the Company.
Jefferies LLC and BMO Capital Markets Corp. may, in their sole discretion and at any time or from time to time before the termination of the 180-day period release all or any portion of the securities subject to lock-up agreements. There are no existing agreements between the underwriters and any of our shareholders who will execute a lock-up agreement, providing consent to the sale of ordinary shares prior to the expiration of the lock-up period.
Stabilization
The underwriters have advised us that, pursuant to Regulation M under the Securities Exchange Act of 1934, as amended, certain persons participating in the offering may engage in short sale transactions, stabilizing transactions, syndicate covering transactions or the imposition
of penalty bids in connection with this offering. These activities may have the effect of stabilizing or maintaining the market price of the ordinary shares at a level above that which might otherwise prevail in the open market. Establishing short sales positions may involve either “covered” short sales or “naked” short sales.
“Covered” short sales are sales made in an amount not greater than the underwriters’ option to purchase additional shares of our ordinary shares in this offering. The underwriters may close out any covered short position by either exercising their option to purchase additional ordinary shares or purchasing ordinary shares in the open market. In determining the source of ordinary shares to close out the covered short position, the underwriters will consider, among other things, the price of ordinary shares available for purchase in the open market as compared to the price at which they may purchase ordinary shares through the option to purchase additional ordinary shares.
“Naked” short sales are sales in excess of the option to purchase additional ordinary shares. The underwriters must close out any naked short position by purchasing ordinary shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the ordinary shares in the open market after pricing that could adversely affect investors who purchase in this offering.
A stabilizing bid is a bid for the purchase of ordinary shares on behalf of the underwriters for the purpose of fixing or maintaining the price of the ordinary shares. A syndicate covering transaction is the bid for or the purchase of ordinary shares on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with the offering. Similar to other purchase transactions, the underwriter’s purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our ordinary shares or preventing or retarding a decline in the market price of our ordinary shares. As a result, the price of our ordinary shares may be higher than the price that might otherwise exist in the open market. A penalty bid is an arrangement permitting the underwriters to reclaim the selling concession otherwise accruing to a syndicate member in connection with the offering if the ordinary shares originally sold by such syndicate member are purchased in a syndicate covering transaction and therefore have not been effectively placed by such syndicate member.
Neither we, nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our ordinary shares. The underwriters are not obligated to engage in these activities and, if commenced, any of the activities may be discontinued at any time.
The underwriters may also engage in passive market making transactions in our ordinary shares on The Nasdaq Global Market in accordance with Rule 103 of Regulation M during a period before the commencement of offers or sales of our ordinary shares in this offering and extending through the completion of distribution. A passive market maker must display its bid at a price not in excess of the highest independent bid of that security. However, if all independent bids are lowered below the passive market maker’s bid, that bid must then be lowered when specified purchase limits are exceeded.
Electronic Distribution
A prospectus in electronic format may be made available by e-mail (or on the web sites) or through online services maintained by one or more of the underwriters or their affiliates. In those cases, prospective investors may view offering terms online and may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of ordinary shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the underwriters on the same basis as other allocations. Other than the prospectus in electronic format, the information on the underwriters’ web sites and any information contained in any other web site maintained by any of the underwriters is not part of this prospectus, has not been approved and/or endorsed by us or the underwriters and should not be relied upon by investors.
Other Activities and Relationships
The underwriters and certain of their affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. The underwriters and certain of their affiliates have, from time to time, performed, and may in the future perform, various commercial and investment banking and financial advisory services for us and our affiliates, for which they received or will receive customary fees and expenses.
In the ordinary course of their various business activities, the underwriters and certain of their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities and/or instruments issued by us and our affiliates. If the underwriters or their respective affiliates have a lending relationship with us, they routinely hedge their credit exposure to us consistent with their customary risk management policies. The underwriters and their respective affiliates may hedge such exposure by entering into transactions which consist of either the purchase of credit default swaps or the creation of short positions in our securities or the securities of our affiliates, including potentially the ordinary shares offered hereby. Any such short positions could adversely affect future trading prices of the ordinary shares offered hereby. The underwriters and certain of their respective affiliates may also communicate independent investment recommendations, market color or trading ideas and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.
Disclaimers About Non-U.S. Jurisdictions
Australia
This prospectus is not a disclosure document for the purposes of Australia’s Corporations Act 2001 (Cth) of Australia, or Corporations Act, has not been lodged with the Australian Securities & Investments Commission and is only directed to the categories of exempt persons set out below. Accordingly, if you receive this prospectus in Australia:
You confirm and warrant that you are either:
•
a “sophisticated investor” under section 708(8)(a) or (b) of the Corporations Act;
•
a “sophisticated investor” under section 708(8)(c) or (d) of the Corporations Act and that you have provided an accountant’s certificate to the company which complies with the requirements of section 708(8)(c)(i) or (ii) of the Corporations Act and related regulations before the offer has been made;
•
a person associated with the Company under Section 708(12) of the Corporations Act; or
•
a “professional investor” within the meaning of section 708(11)(a) or (b) of the Corporations Act.
To the extent that you are unable to confirm or warrant that you are an exempt sophisticated investor, associated person or professional investor under the Corporations Act any offer made to you under this prospectus is void and incapable of acceptance.
You warrant and agree that you will not offer any of the shares issued to you pursuant to this prospectus for resale in Australia within 12 months of those securities being issued unless any such resale offer is exempt from the requirement to issue a disclosure document under section 708 of the Corporations Act.
European Economic Area
In relation to each member state of the European Economic Area which has implemented the Prospectus Directive, each referred to herein as a Relevant Member State, no offer of any securities which are the subject of the offering contemplated by this prospectus has been or will be made to the public in that Relevant Member State, except that with effect from and including the Relevant Implementation Date, an offer of such securities may be made to the public in that Relevant Member State:
•
to any legal entity which is a “qualified investor” as defined in the Prospectus Directive;
•
to fewer than 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the representatives of the underwriters for any such offer; or
•
in any other circumstances falling within Article 3(2) of the Prospectus Directive,
provided that no such offer of securities shall require the company or any of the underwriters to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive.
For the purposes of this provision, the expression “offer to the public” in relation to any securities in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the securities to be offered so as to enable an investor to decide to purchase or subscribe the securities, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State, and the expression “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including Directive 2010/73/EU, the “2010 PD Amending Directive”), and includes any relevant implementing measure in the Relevant Member State, and the expression “2010 PD Amending Directive” means Directive 2010/73/EU.
Hong Kong
No securities have been offered or sold, and no securities may be offered or sold, in Hong Kong, by means of any document, other than to persons whose ordinary business is to buy or sell shares or debentures, whether as principal or agent; or to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance; or in other circumstances which do not result in the document being a “prospectus” as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32) or the Securities and Futures Ordinance (Cap. 571) of Hong Kong. No document, invitation or advertisement relating to the securities has been issued or may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted under the securities laws of Hong Kong) other than with respect to securities which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance.
This prospectus has not been registered with the Registrar of Companies in Hong Kong. Accordingly, this prospectus may not be issued, circulated or distributed in Hong Kong, and the securities may not be offered for subscription to members of the public in Hong Kong. Each person acquiring the securities will be required, and is deemed by the acquisition of the securities, to confirm that he is aware of the restriction on offers of the securities described in this prospectus and the relevant offering documents and that he is not acquiring, and has not been offered any securities in circumstances that contravene any such restrictions.
Japan
The offering has not been and will not be registered under the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948 of Japan, as amended), or FIEL, and the underwriters will not offer or sell any securities, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means, unless otherwise provided herein, any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to or for the benefit of a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the FIEL and any other applicable laws, regulations and ministerial guidelines of Japan.
Singapore
This prospectus has not been and will not be lodged or registered with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or the invitation for subscription or purchase of the securities may not be issued, circulated or distributed, nor may the securities be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore, or the SFA, (ii) to a relevant person as defined under Section 275(1), or any person pursuant to Section 275(1A) of the SFA, and in accordance with the conditions, specified in Section 275 of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of any other applicable provision of the SFA.
Where the securities are subscribed or purchased under Section 275 of the SFA by a relevant person which is:
•
a corporation (which is not an accredited investor as defined under Section 4A of the SFA) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or
•
a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an individual who is an accredited investor,
securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred for six months after that corporation or that trust has acquired the securities pursuant to an offer made under Section 275 of the SFA except:
•
to an institutional investor under Section 274 of the SFA or to a relevant person defined in Section 275(2) of the SFA, or to any person pursuant to an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA;
•
where no consideration is given for the transfer;
•
where the transfer is by operation of law;
•
as specified in Section 276(7) of the SFA; or
•
as specified in Regulation 32 of the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005 of Singapore.
Switzerland
The securities may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange, or SIX, or on any other stock exchange or regulated trading facility in Switzerland. This prospectus has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the
disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this prospectus nor any other offering or marketing material relating to the securities or the offering may be publicly distributed or otherwise made publicly available in Switzerland.
Neither this prospectus nor any other offering or marketing material relating to the offering, the company or the securities have been or will be filed with or approved by any Swiss regulatory authority. In particular, this prospectus will not be filed with, and the offer of securities will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA, or FINMA, and the offer of securities has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes, or CISA. The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of securities.
United Kingdom
This prospectus is only being distributed to, and is only directed at, persons in the United Kingdom that are qualified investors within the meaning of Article 2(1)(e) of the Prospectus Directive that are also (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended, referred to herein as the Order, and/or (ii) high net worth entities falling within Article 49(2)(a) to (d) of the Order and other persons to whom it may lawfully be communicated. Each such person is referred to herein as a Relevant Person.
This prospectus and its contents are confidential and should not be distributed, published or reproduced (in whole or in part) or disclosed by recipients to any other persons in the United Kingdom. Any person in the United Kingdom that is not a Relevant Person should not act or rely on this document or any of its contents. Any investment or investment activity to which this prospectus relates is available only to Relevant Persons and will be engaged in only with Relevant Persons.
Israel
This document does not constitute a prospectus under the Israeli Securities Law, 5728-1968, or the Securities Law, and has not been filed with or approved by the Israel Securities Authority. In the State of Israel, this document is being distributed only to, and is directed only at, and any offer of the ordinary shares is directed only at, (i) a limited number of persons in accordance with the Securities Law and (ii) investors listed in the first addendum, or the Addendum, to the Israeli Securities Law, consisting primarily of joint investment in trust funds, provident funds, insurance companies, banks, portfolio managers, investment advisors, members of the Tel Aviv Stock Exchange, underwriters, venture capital funds, entities with equity in excess of NIS 50 million and “qualified individuals,” each as defined in the Addendum (as it may be amended from time to time), collectively referred to as qualified investors (in each case purchasing for their own account or, where permitted under the Addendum, for the accounts of their clients who are investors listed in the Addendum). Qualified investors will be required to submit written confirmation that they fall within the scope of the Addendum, are aware of the meaning of same and agree to it.
Canada
(A) Resale Restrictions
The distribution of ordinary shares in Canada is being made only in the provinces of Ontario, Quebec, Alberta and British Columbia on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of these securities are made. Any resale of the ordinary shares in Canada must be made under applicable securities laws which may vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the securities.
(B) Representations of Canadian Purchasers
By purchasing ordinary shares in Canada and accepting delivery of a purchase confirmation, a purchaser is representing to us and the dealer from whom the purchase confirmation is received that:
•
the purchaser is entitled under applicable provincial securities laws to purchase the ordinary shares without the benefit of a prospectus qualified under those securities laws as it is an “accredited investor” as defined under National Instrument 45-106 — Prospectus Exemptions,
•
the purchaser is a “permitted client” as defined in National Instrument 31-103 — Registration Requirements, Exemptions and Ongoing Registrant Obligations,
•
where required by law, the purchaser is purchasing as principal and not as agent, and
•
the purchaser has reviewed the text above under Resale Restrictions.
(C) Conflicts of Interest
Canadian purchasers are hereby notified that each of the underwriters are relying on the exemption set out in section 3A.3 or 3A.4, if applicable, of National Instrument 33-105 — Underwriting Conflicts from having to provide certain conflict of interest disclosure in this document.
(D) Statutory Rights of Action
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if the prospectus (including any amendment thereto) such as this document contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser of these securities in Canada should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.
(E) Enforcement of Legal Rights
All of our directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon us or those persons. All or a substantial portion of our assets and the assets of those persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against us or those persons in Canada or to enforce a judgment obtained in Canadian courts against us or those persons outside of Canada.
(F) Taxation and Eligibility for Investment
Canadian purchasers of ordinary shares should consult their own legal and tax advisors with respect to the tax consequences of an investment in the ordinary shares in their particular circumstances and about the eligibility of the ordinary shares for investment by the purchaser under relevant Canadian legislation.
Expenses Related to Offering
The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by us in connection with the offer and sale of ordinary shares in this offering. All amounts listed below are estimates except the SEC registration fee, Nasdaq listing fee and the Financial Industry Regulatory Authority, Inc., or FINRA, filing fee.
|
Itemized expense
|
|
|
Amount
|
|
|
SEC registration fee
|
|
|
|
$ |
9,996 |
|
|
|
FINRA filing fee
|
|
|
|
|
13,438 |
|
|
|
Nasdaq Global Market listing fee
|
|
|
|
|
25,000 |
|
|
|
Printing and engraving expenses
|
|
|
|
|
150,000 |
|
|
|
Legal fees and expenses
|
|
|
|
|
1,250,000 |
|
|
|
Transfer agent and registrar fees
|
|
|
|
|
10,000 |
|
|
|
Accounting fees and expenses
|
|
|
|
|
300,000 |
|
|
|
Miscellaneous
|
|
|
|
|
41,566 |
|
|
|
Total
|
|
|
|
$ |
1,800,000 |
|
|
| |
Legal Matters
The validity of the ordinary shares being offered by this prospectus and other legal matters concerning this offering relating to Israeli law will be passed upon for us by Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co., Tel-Aviv, Israel. Certain legal matters in connection with this offering relating to U.S. federal law will be passed upon for us by Latham & Watkins LLP, New York, New York. Legal counsel to the underwriters are Gornitzky & Co., Tel Aviv, Israel, with respect to Israeli law, and Covington & Burling LLP, New York, New York, with respect to U.S. law.
Experts
The financial statements as of December 31, 2016 and 2015 and for each of the two years in the period ended December 31, 2016 included in this prospectus have been so included in reliance on the report (which contains an explanatory paragraph relating to the Company’s ability to continue as a going concern as described in Note 1 to the financial statements) of Kesselman and Kesselman, an independent registered public accounting firm and member firm of PricewaterhouseCoopers International Limited, given on the authority of said firm as experts in auditing and accounting. The offices of Kesselman and Kesselman are located at Trade Tower, 25 Hamered Street, Tel Aviv 68125, Israel.
Enforceability of Civil Liabilities
We are incorporated under the laws of the State of Israel. Service of process upon us and upon our directors and officers and the Israeli experts named in this prospectus, substantially all of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, because substantially all of our assets and substantially all of our directors and officers are located outside the United States, any judgment obtained in the United States against us or any of our directors and officers may not be collectible within the United States.
We have irrevocably appointed Cogency Global Inc. as our agent to receive service of process in any action against us in any U.S. federal or state court arising out of this offering or any purchase or sale of securities in connection with this offering. The address of our agent is 10 East 40th Street, 10th floor, New York, New York 10016.
We have been informed by our legal counsel in Israel, Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co., that it may be difficult to initiate an action with respect to U.S. securities law in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws reasoning that Israel is not the most appropriate forum to hear such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact by expert witnesses which can be a time-consuming and costly process. Certain matters of procedure may also be governed by Israeli law.
Subject to certain time limitations and legal procedures, Israeli courts may enforce a U.S. judgment in a civil matter which, subject to certain exceptions, is non-appealable, including judgments based upon the civil liability provisions of the Securities Act and the Exchange Act and including a monetary or compensatory judgment in a non-civil matter, provided that:
•
the judgment was rendered by a court which was, according to the laws of the state of the court, competent to render the judgment;
•
the obligation imposed by the judgment is enforceable according to the rules relating to the enforceability of judgments in Israel and the substance of the judgment is not contrary to public policy; and
•
the judgment is executory in the state in which it was given.
Even if these conditions are met, an Israeli court will not declare a foreign civil judgment enforceable if:
•
the judgment was given in a state whose laws do not provide for the enforcement of judgments of Israeli courts (subject to exceptional cases);
•
the enforcement of the judgment is likely to prejudice the sovereignty or security of the State of Israel;
•
the judgment was obtained by fraud;
•
the opportunity given to the defendant to bring its arguments and evidence before the court was not reasonable in the opinion of the Israeli court;
•
the judgment was rendered by a court not competent to render it according to the laws of private international law as they apply in Israel;
•
the judgment is contradictory to another judgment that was given in the same matter between the same parties and that is still valid; or
•
at the time the action was brought in the foreign court, a lawsuit in the same matter and between the same parties was pending before a court or tribunal in Israel.
If a foreign judgment is enforced by an Israeli court, it generally will be payable in Israeli currency, which can then be converted into non-Israeli currency and transferred out of Israel. The usual practice in an action before an Israeli court to recover an amount in a non-Israeli currency is for the Israeli court to issue a judgment for the equivalent amount in Israeli currency at the rate of exchange in force on the date of the judgment, but the judgment debtor may make payment in foreign currency. Pending collection, the amount of the judgment of an Israeli court stated in Israeli currency ordinarily will be linked to the Israeli consumer price index plus interest at the annual statutory rate set by Israeli regulations prevailing at the time. Judgment creditors must bear the risk of unfavorable exchange rates.
Where You Can Find Additional Information
We have filed with the SEC a registration statement on Form F-1 under the Securities Act relating to this offering of our ordinary shares. This prospectus does not contain all of the information contained in the registration statement. The rules and regulations of the SEC allow us to omit certain information from this prospectus that is included in the registration statement. Statements made in this prospectus concerning the contents of any contract, agreement or other document are summaries of all material information about the documents summarized, but are not complete descriptions of all terms of these documents. If we filed any of these documents as an exhibit to the registration statement, you may read the document itself for a complete description of its terms.
You may read and copy the registration statement, including the related exhibits and schedules, and any document we file with the SEC without charge at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC also maintains an Internet site that contains reports and other information regarding issuers that file electronically with the SEC. Our filings with the SEC are also available to the public through this web site at http://www.sec.gov.
We are not currently subject to the informational requirements of the Exchange Act. As a result of this offering, we will become subject to the informational requirements of the Exchange Act applicable to foreign private issuers and will fulfill the obligations of these requirements by filing reports with the SEC. As a foreign private issuer, we will be exempt from the rules under the Exchange Act relating 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 will not be required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we intend to file with the SEC, within 120 days after the end of our fiscal year, an annual report on Form 20-F containing financial statements which will be audited and reported on, with an opinion expressed, by an independent registered public accounting firm. We also intend to file with the SEC reports on Form 6-K containing unaudited financial information for the first three quarters of each fiscal year.
We maintain a corporate website at www.sol-gel.com. Information contained on, or that can be accessed through, our website does not constitute a part of this prospectus. We have included our website address in this prospectus solely as an inactive textual reference.
Index to Financial Statements
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|
|
|
|
|
|
|
| UNAUDITED CONDENSED FINANCIAL STATEMENTS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders of
SOL-GEL TECHNOLOGIES LTD.
In our opinion, the accompanying balance sheets and the related statements of operations, changes in capital deficiency and cash flows present fairly, in all material respects, the financial position of Sol-Gel Technologies Ltd. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by the Board of Directors and management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, in recent years the Company has not generated any revenues and is therefore dependent on the continuing support of its controlling shareholder. The Company has an accumulated deficit of approximately $63.7 million as of December 31, 2016 and does not have sufficient cash to meet its liquidity requirements for the following twelve months. Consequently, there is substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| |
Tel-Aviv, Israel |
|
|
/s/ Kesselman & Kesselman |
|
| |
March 30, 2017, except for the effects of the stock split discussed in Note 10(b) to the financial statements, as to which the date is January 19, 2018 |
|
|
Certified Public Accountants (Isr.)
A member firm of PricewaterhouseCoopers International Limited |
|
SOL-GEL TECHNOLOGIES LTD.
BALANCE SHEETS
(U.S. dollars in thousands, except share and per share data)
| |
|
|
December 31
|
|
| |
|
|
2015
|
|
|
2016
|
|
|
Assets
|
|
|
|
| CURRENT ASSETS: |
|
|
|
|
Cash and cash equivalents
|
|
|
|
$ |
5,895 |
|
|
|
|
$ |
7,001 |
|
|
|
Prepaid expenses and other current assets
|
|
|
|
|
244 |
|
|
|
|
|
472 |
|
|
|
Advance payment
|
|
|
|
|
— |
|
|
|
|
|
823 |
|
|
| TOTAL CURRENT ASSETS |
|
|
|
|
6,139
|
|
|
|
|
|
8,296
|
|
|
| NON-CURRENT ASSETS: |
|
|
|
|
Advance payment
|
|
|
|
|
625 |
|
|
|
|
|
— |
|
|
|
Long term receivables
|
|
|
|
|
— |
|
|
|
|
|
1,190 |
|
|
|
Restricted long term deposits
|
|
|
|
|
92 |
|
|
|
|
|
107 |
|
|
|
Property and equipment, net
|
|
|
|
|
785 |
|
|
|
|
|
798 |
|
|
|
Funds in respect of employee rights upon retirement
|
|
|
|
|
603 |
|
|
|
|
|
594 |
|
|
| TOTAL NON-CURRENT ASSETS |
|
|
|
|
2,105
|
|
|
|
|
|
2,689
|
|
|
|
TOTAL ASSETS
|
|
|
|
$ |
8,244 |
|
|
|
|
$ |
10,985 |
|
|
|
Liabilities net of capital deficiency
|
|
|
|
| CURRENT LIABILITIES: |
|
|
|
|
Accounts payable
|
|
|
|
$ |
311 |
|
|
|
|
$ |
667 |
|
|
|
Accrued expenses and other
|
|
|
|
|
1,487 |
|
|
|
|
|
3,623 |
|
|
|
Loans from the controlling shareholder
|
|
|
|
|
17,338 |
|
|
|
|
|
37,338 |
|
|
| TOTAL CURRENT LIABILITIES |
|
|
|
|
19,136
|
|
|
|
|
|
41,628
|
|
|
| LONG-TERM LIABILITIES – |
|
|
|
|
Liability for employee rights upon retirement
|
|
|
|
|
626 |
|
|
|
|
|
694 |
|
|
|
TOTAL LONG-TERM LIABILITIES
|
|
|
|
|
626 |
|
|
|
|
|
694 |
|
|
|
COMMITMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
|
$ |
19,762 |
|
|
|
|
$ |
42,322 |
|
|
| CAPITAL DEFICIENCY: |
|
|
|
|
Ordinary shares, NIS 0.1 par value – authorized: 8,775,783 as of December 31, 2015 and 2016; issued and outstanding: 6,290,242 as of December 31, 2015 and 2016
|
|
|
|
|
82 |
|
|
|
|
|
82 |
|
|
|
Additional paid-in capital
|
|
|
|
|
31,322 |
|
|
|
|
|
32,274 |
|
|
|
Accumulated deficit
|
|
|
|
|
(42,922) |
|
|
|
|
|
(63,693) |
|
|
|
TOTAL CAPITAL DEFICIENCY
|
|
|
|
|
(11,518) |
|
|
|
|
|
(31,337) |
|
|
|
TOTAL LIABILITIES NET OF CAPITAL DEFICIENCY
|
|
|
|
$ |
8,244 |
|
|
|
|
$ |
10,985 |
|
|
| |
The accompanying notes are an integral part of these financial statements.
SOL-GEL TECHNOLOGIES LTD.
STATEMENTS OF OPERATIONS
(U.S. dollars in thousands, except share and per share data)
| |
|
|
Year ended December 31,
|
|
| |
|
|
2015
|
|
|
2016
|
|
|
RESEARCH AND DEVELOPMENT EXPENSES
|
|
|
|
$ |
7,184 |
|
|
|
|
$ |
17,023 |
|
|
|
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
|
|
2,463 |
|
|
|
|
|
3,733 |
|
|
|
TOTAL OPERATING LOSS
|
|
|
|
|
9,647 |
|
|
|
|
|
20,756 |
|
|
|
FINANCIAL EXPENSES, NET
|
|
|
|
|
13 |
|
|
|
|
|
15 |
|
|
|
LOSS FOR THE YEAR
|
|
|
|
$ |
9,660 |
|
|
|
|
$ |
20,771 |
|
|
|
BASIC AND DILUTED LOSS PER ORDINARY SHARE
|
|
|
|
$ |
1.53 |
|
|
|
|
$ |
3.30 |
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING USED IN COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE
|
|
|
|
|
6,290,242 |
|
|
|
|
|
6,290,242 |
|
|
| |
The accompanying notes are an integral part of these financial statements.
SOL-GEL TECHNOLOGIES LTD.
STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
(U.S. dollars in thousands, except share data)
| |
|
|
Ordinary shares
|
|
|
Additional
paid-in
capital
|
|
|
Accumulated
deficit
|
|
|
Total
|
|
| |
|
|
Number
of shares
|
|
|
Amounts
|
|
|
Amounts
|
|
|
BALANCE AS OF JANUARY 1, 2015
|
|
|
|
|
6,290,242 |
|
|
|
|
$ |
82 |
|
|
|
|
$ |
30,193 |
|
|
|
|
$ |
(33,262) |
|
|
|
|
$ |
(2,987) |
|
|
| CHANGES DURING 2015: |
|
|
|
|
|
|
|
Loss for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,660) |
|
|
|
|
|
(9,660) |
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,129 |
|
|
|
|
|
|
|
|
|
|
|
1,129 |
|
|
|
BALANCE AS OF DECEMBER 31, 2015
|
|
|
|
|
6,290,242 |
|
|
|
|
|
82 |
|
|
|
|
|
31,322 |
|
|
|
|
|
(42,922) |
|
|
|
|
|
(11,518) |
|
|
| CHANGES DURING 2016: |
|
|
|
|
|
|
|
Loss for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,771) |
|
|
|
|
|
(20,771) |
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
952 |
|
|
|
|
|
|
|
|
|
|
|
952 |
|
|
|
BALANCE AS OF DECEMBER 31, 2016
|
|
|
|
|
6,290,242 |
|
|
|
|
$ |
82 |
|
|
|
|
|
32,274 |
|
|
|
|
$ |
(63,693) |
|
|
|
|
$ |
(31,337) |
|
|
| |
The accompanying notes are an integral part of these financial statements.
SOL-GEL TECHNOLOGIES LTD.
STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
| |
|
|
Year ended December 31
|
|
| |
|
|
2015
|
|
|
2016
|
|
| CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
Loss
|
|
|
|
$ |
(9,660) |
|
|
|
|
$ |
(20,771) |
|
|
|
Adjustments required to reconcile loss to net cash used in operating activities:
|
|
|
|
|
Depreciation
|
|
|
|
|
300 |
|
|
|
|
|
359 |
|
|
|
Changes in accrued liability for employee rights upon retirement
|
|
|
|
|
(86) |
|
|
|
|
|
68 |
|
|
|
Share-based compensation
|
|
|
|
|
1,129 |
|
|
|
|
|
952 |
|
|
|
In-process research and development acquired
|
|
|
|
|
431 |
|
|
|
|
|
— |
|
|
|
Finance expenses, net
|
|
|
|
|
17 |
|
|
|
|
|
8 |
|
|
|
Changes in operating asset and liabilities:
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
|
|
1 |
|
|
|
|
|
(228) |
|
|
|
Accounts payable, accrued expenses and other
|
|
|
|
|
449 |
|
|
|
|
|
2,505 |
|
|
|
Advance payment
|
|
|
|
|
(625) |
|
|
|
|
|
(198) |
|
|
|
Long term receivables
|
|
|
|
|
— |
|
|
|
|
|
(1,190) |
|
|
|
Net cash used in operating activities
|
|
|
|
|
(8,044) |
|
|
|
|
|
(18,495) |
|
|
| CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
Purchase of property and equipment
|
|
|
|
|
(291) |
|
|
|
|
|
(385) |
|
|
|
Long term deposits
|
|
|
|
|
(8) |
|
|
|
|
|
(15) |
|
|
|
Amounts funded in respect of employee rights upon retirement, net
|
|
|
|
|
89 |
|
|
|
|
|
9 |
|
|
|
Net cash used in investing activities
|
|
|
|
|
(210) |
|
|
|
|
|
(391) |
|
|
| CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
Loans received from the controlling shareholder
|
|
|
|
|
13,572 |
|
|
|
|
|
20,000 |
|
|
|
Net cash provided by financing activities
|
|
|
|
|
13,572 |
|
|
|
|
|
20,000 |
|
|
|
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS
|
|
|
|
|
(17)
|
|
|
|
|
|
(8)
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
|
|
5,301 |
|
|
|
|
|
1,106 |
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR
|
|
|
|
|
594
|
|
|
|
|
|
5,895
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF THE YEAR
|
|
|
|
$ |
5,895 |
|
|
|
|
$ |
7,001 |
|
|
|
SUPPLEMENTARY INFORMATION ON INVESTING AND FINANCING ACTIVITIES NOT INVOLVING CASH FLOWS:
|
|
|
|
|
Purchase of property and equipment
|
|
|
|
$ |
23 |
|
|
|
|
$ |
10 |
|
|
|
Acquisition of in-process research and development product candidate
|
|
|
|
$ |
431 |
|
|
|
|
$ |
— |
|
|
| |
The accompanying notes are an integral part of these financial statements.
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share amounts)
NOTE 1 — NATURE OF OPERATIONS
Sol-Gel Technologies Ltd. (hereafter — the Company) is an Israeli Company incorporated in 1997.
The Company is a clinical stage specialty pharmaceutical company focused on developing and commercializing topical dermatological drug products. The Company’s lead product candidates are based upon its proprietary microencapsulation delivery system, consisting of microcapsules made of precipitated silica. In addition to these novel product candidates, the Company’s product pipeline includes generic product candidates.
In 2007, the Company granted rights to a third party for use and commercialization of a product for skin protection. Under this agreement, the Company is entitled to royalties during the years 2016 to 2024. Based on current sales, royalties are not material.
On August 4, 2014, 100% of the Company’s shares were acquired by its current controlling shareholder (the “controlling shareholder”).
The Company has an accumulated deficit of approximately $63.7 million and its activities have been funded mainly by its shareholders.
The Company has been engaged in development activities since its incorporation.
Since its acquisition by the controlling shareholder, the Company has not generated any material revenues and is therefore dependent on the continuing support of its controlling shareholder. As a result, management cannot determine with reasonable certainty if and when the Company will obtain the required funds in order to complete the clinical development of its main product candidates and continue operations. Consequently, there is no assurance that the Company’s business will generate positive cash flows and there is substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that may be necessary should the Company be unable to continue as a going concern. If the Company is unable to obtain the appropriate funds, the Company will need to curtail or cease operations.
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
a.
Basis of presentation
The Company’s financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).
b.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates.
As applicable to these financial statements, the most significant estimates and assumptions relate to the fair value of share-based compensation.
c.
Functional and presentation currency
The U.S. dollar (“dollar”) is the currency of the primary economic environment in which the operations of the Company are conducted. The Company’s financing has been provided in dollars,
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
revenues are expected to be primarily in dollars and a significant part of expenses are incurred in dollars. The financial statements are presented in dollars, which is the Company’s functional and presentation currency.
Transactions and balances originally denominated in dollars are presented at their original amounts. Balances in non-dollar currencies are translated into dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. For non-dollar transactions and other items in the statements of operations (indicated below), the following exchange rates are used: (I) for transactions — exchange rates at transaction dates or average rates; and (ii) for other items (derived from non-monetary balance sheet items such as depreciation) — historical exchange rates. Currency transaction gains and losses are presented in financial income or expenses, as appropriate.
d.
Cash and cash equivalents
The Company considers as cash equivalents all short-term, highly liquid investments, which include short-term bank deposits with original maturities of three months or less from the date of purchase that are not restricted as to withdrawal or use and are readily convertible to known amounts of cash.
e.
Property and equipment:
1)
Property and equipment are stated at cost, net of accumulated depreciation and amortization.
2)
The Company’s property and equipment are depreciated utilizing the straight-line method on the basis of their estimated useful life.
Annual rates of depreciation are as follows:
| |
|
|
|
|
|
|
%
|
|
| |
|
|
|
Laboratory equipment |
|
|
10 – 33 (mainly 15 – 25)
|
|
| |
|
|
|
Office equipment and furniture |
|
|
7 – 15
|
|
| |
|
|
|
Computers and related equipment |
|
|
33
|
|
Leasehold improvements are amortized utilizing the straight-line method over the shorter of the expected lease term or the estimated useful life of the improvements.
f.
Impairment of long-lived assets
The Company tests long-lived assets for impairment whenever events or circumstances present an indication of impairment. If the sum of expected future cash flows (undiscounted and without interest charges) of the assets is less than the carrying amount of such assets, an impairment loss would be recognized. The assets would then be written down to their estimated fair values.
For the two years ended December 31, 2016, the Company did not recognize an impairment loss for its long-lived assets.
g.
Share-based compensation
The Company accounts for employees’ share-based payment awards classified as equity awards using the grant-date fair value method. The fair value of share-based payment transactions is recognized as an expense over the requisite service period, net of estimated forfeitures.
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company elected to recognize compensation costs for awards conditioned only on continued service that have a graded vesting schedule using the accelerated method based on the multiple-option award approach.
h.
Research and development expenses
Research and development expenses include costs directly attributable to the conduct of research and development programs, including the cost of salaries, share-based compensation expenses, payroll taxes and other employee benefits, lab expenses, consumable equipment and consulting fees. All costs associated with research and developments are expensed as incurred.
Grants received from the National Authority for Technological Innovation (hereafter — “ NATI”), formerly known as the Office of the Chief Scientist of the Ministry of Economy and Industry, or OCS are recognized when the grant becomes receivable, provided there is reasonable assurance that the Company will comply with the conditions attached to the grant and there is reasonable assurance the grant will be received. The grant is deducted from the research and development expenses as the applicable costs are incurred. As of December 31, 2016, the Company does not have a royalty liability to the NATI (see note 5a).
Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. The Company out sources its clinical trial activities utilizing external entities such as clinical research organizations, independent clinical investigators, and other third-party service providers to assist the Company with the execution of its clinical trials. Clinical trial costs are expensed as incurred.
i.
Income taxes:
1)
Deferred taxes
Income taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is recognized to the extent that it is more likely than not that the deferred taxes will not be realized in the foreseeable future. The Company has provided a full valuation allowance with respect to its deferred tax assets.
2)
Uncertainty in income taxes
The Company follows a two-step approach in recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the available evidence indicates that it is more likely than not that the position will be sustained based on technical merits. If this threshold is met, the second step is to measure the tax position as the largest amount that has more than a 50% likelihood of being realized upon ultimate settlement.
j.
Loss per share
Basic loss per share is computed on the basis of the net loss for the period divided by the weighted average number of ordinary shares outstanding during the period. Diluted loss per share is based upon the weighted average number of ordinary shares and of ordinary shares equivalents outstanding when dilutive. Ordinary share equivalents include outstanding stock options, which
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
are included under the treasury stock method when dilutive. The calculation of diluted loss per share does not include 130,775 and 194,300 options for the years ended December 31, 2015 and 2016, respectively, because the effect would be anti-dilutive.
k.
Fair value measurement
Fair value is based on the price that would be received from the sale of an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, the guidance establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described as follows:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers counterparty credit risk in its assessment of fair value.
The carrying amount of the cash and cash equivalents and accrued expenses and other liabilities approximates their fair value.
l.
Concentration of credit risks
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents and third party credit exposure as part of long-term receivables. The Company deposits cash and cash equivalents with highly rated financial institutions (Israeli banks). The Company has not experienced any credit losses in these accounts and does not believe it is exposed to significant credit risk on these instruments. The Company assesses risk associated with the quality of the third party credit by evaluating the third party’s financial standing and other factors.
m.
Newly issued and recently adopted accounting pronouncements:
1) In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements — Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” Continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. Prior to this, there was no guidance under U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this update provide that guidance. The amendments in this ASU are effective for the annual period ending after December 15, 2016. Therefore, the Company has prospectively adopted this new standard on December 15, 2016. The adoption of this standard did not have a material impact on our consolidated financial statements as of December 31, 2016.
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
In doing so, the amendments reduce diversity in the timing and content of footnote
disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). For the period ended December 31, 2016, management evaluated the Company’s ability to continue as a going concern and concluded that there is substantial doubt of its ability to continue as a going concern.
2) In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Company is currently evaluating the impact of this new standard on its financial statements.
3) In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation (Topic 718). ASU No. 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted but all of the guidance must be adopted in the same period. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.
NOTE 3 — PROPERTY AND EQUIPMENT
| |
|
|
December 31
|
|
| |
|
|
2015
|
|
|
2016
|
|
| Cost: |
|
|
|
|
Laboratory equipment
|
|
|
|
$ |
1,065 |
|
|
|
|
$ |
1,263 |
|
|
|
Office equipment and furniture
|
|
|
|
|
182 |
|
|
|
|
|
234 |
|
|
|
Computers and software
|
|
|
|
|
222 |
|
|
|
|
|
282 |
|
|
|
Leasehold improvements
|
|
|
|
|
466 |
|
|
|
|
|
528 |
|
|
| |
|
|
|
|
1,935 |
|
|
|
|
|
2,307 |
|
|
| Less: |
|
|
|
|
Accumulated depreciation and amortization
|
|
|
|
|
(1,150) |
|
|
|
|
|
(1,509) |
|
|
|
Property and equipment, net
|
|
|
|
$ |
785 |
|
|
|
|
$ |
798 |
|
|
| |
Depreciation and amortization expense totaled $300 and $359 for the years ended December 31, 2015 and 2016, respectively.
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 4 — EMPLOYEE SEVERANCE BENEFITS
The Company is required to make severance payments upon dismissal of an employee or upon termination of employment in certain circumstances. The severance payment liability to the employees (based upon length of service and the latest monthly salary — one month’s salary for each year employed) is recorded on the Company’s balance sheet under “Liability for employee rights upon retirement.” The liability is recorded as if it were payable at each balance sheet date on an undiscounted basis.
In accordance with the current employment terms starting in August 2014 with all of its employees, the Company makes regular deposits with certain insurance companies for accounts controlled by each applicable employee in order to secure the employee’s retirement benefit obligation. The Company is fully relieved from any severance pay liability with respect to each such employee after it makes the payments on behalf of the employee. The liability accrued in respect of these employees and the amounts funded, as of the respective agreement dates, are not reflected in the Company balance sheet, as the amounts funded are not under the control and management of the Company and the pension or severance pay risks have been irrevocably transferred to the applicable insurance companies (the “Contribution Plan”).
With regard to the period before August 2014, the liability is funded in part from the purchase of insurance policies or by the establishment of pension funds with dedicated deposits in the funds. The amounts used to fund these liabilities are included in the balance sheets under “Funds in respect of employee rights upon retirement.” These policies are the Company’s assets.
The amounts of severance payment expenses were $162 and $261 for the years ended December 31, 2015 and 2016, respectively, of which $159 and $185 in the years ended December, 2015 and 2016, respectively, were in respect of the Contribution Plan.
The Company expects to contribute approximately $193 in the year ending December 31, 2017 to insurance companies in connection with its expected severance liabilities for that year.
NOTE 5 — COMMITMENTS
a.
Royalty Commitments
The Company is obligated to pay royalties to the NATI on proceeds from the sale of products developed from research and development activities that were funded, partially, by grants from the NATI.
Under the terms of the funding arrangements with the NATI, royalties of 3.5% to 25% are payable on the sale of products developed from product candidates funded by the NATI, which payments shall not exceed, in the aggregate, 300% of the amount of the grant received (dollar linked), plus interest at annual rate based on LIBOR.
As of December 31, 2016, the Company had recognized and received grants from the NATI in the amount of $1,431. Through December 31, 2016, the Company recorded an accumulated royalty expense of $1,997, of which an amount of $492 was paid during 2016, as royalties to the NATI with respect to revenue recognized until 2013. As of December 31, 2016, the Company does not have any liabilities to the NATI.
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 5 — COMMITMENTS (continued)
The Company did not receive any grants from the NATI for the years ended December 31, 2015 and 2016.
1.
The Company has an agreement, that was amended several times (hereafter — the agreements) with Yissum Research Development Company (hereafter — “Yissum”), the technology-licensing arm of the Hebrew University of Jerusalem.
According to the agreements, the Company received from Yissum an exclusive and a non-exclusive license for the commercialization of certain Yissum patents. According to the agreements the Company shall pay Yissum:
i.
Royalties of 1.5% of net sales related to certain patents.
ii.
1.5% – 8% of proceeds received by the Company for the sub-license or license of certain patents.
The term of the above mentioned agreements terminated on May 4, 2013. According to the agreements, the Company may continue commercial use of certain Yissum’s patents in connection with the products and subject to the obligation to pay Yissum the royalties and the sub-license fees.
The Company granted rights to a third party for use and commercialization of certain Yissum patents. As of December 31, 2016 and 2015, the Company does not have any liability regarding these patents.
b.
Lease Agreements
The Company leases office spaces and research and development facilities under several agreements. These agreements are linked to the change in the Israeli consumer price index and expire in December 2020.
On January 13, 2016 (and for a term ending on February 28, 2017) the Company entered into a sub-lease agreement with one of the tenants in the facility in which the offices are located for the leasing of additional office space.
The annual lease expenses for the years ended December 31, 2015 and 2016 were approximately $256 and $316, respectively.
As of December 31, 2016, future minimum lease commitments under these operating lease agreements are as follows:
| |
|
|
|
Year
|
|
|
Amount
|
|
| |
|
|
|
2017
|
|
|
|
$ |
419 |
|
|
| |
|
|
|
2018
|
|
|
|
|
429 |
|
|
| |
|
|
|
2019
|
|
|
|
|
429 |
|
|
| |
|
|
|
2020
|
|
|
|
|
429 |
|
|
| |
|
|
|
Total
|
|
|
|
$ |
1,706 |
|
|
As security for its obligation under the lease agreements the Company deposited $99 in an amount equal to four monthly lease payments, which are classified as restricted long-term deposits.
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 5 — COMMITMENTS (continued)
c.
Vehicle Lease Agreements
The Company has entered into operating lease agreements for vehicles used by its employees for a period of 3 years. The annual lease expenses for the years ended December 31, 2015 and 2016 were $163 and $156, respectively.
The expected annual lease payments under this agreement for the next three years are $122, $40 and $6 for the years ending December 31, 2017, 2018 and 2019, respectively.
As security for its obligation under the lease agreements the Company deposited $20, $8 of which is classified as restricted long term deposits.
d. In connection with the acquisition of the Company, as described in note 1, the Executive Officers and certain employees are entitled, subject to certain research and development milestones and other conditions, as set forth in the agreement, to a special bonus in an aggregate amount of up to $3,000, of which $873 and $127 were paid in each of the years 2014 and 2016 to Executive Officers and certain employees, respectively. As of December 31, 2016 the remaining milestones were not yet achieved and the Company has not recorded a liability regarding this special bonus.
e. In June 2008, the Company entered into a Master Clinical Trial Services Agreement with a third party, which was later amended in April 2016, to retain its services as a clinical research organization for certain product candidate subject to task work orders to be issued by the Company. As consideration for its services the Company will pay a total amount of approximately $3,919 during the term of the engagement and based on achievement of certain milestones, $1,730 of which were recognized as an expense through December 31, 2016.
f. In March 2015, the Company entered into a Clinical Development Master Services Agreement (which was amended during 2016) with a third party, to retain it as another clinical research organization, for its Phase II clinical trial for acne. As consideration for its services the Company will pay a total amount of approximately $7,230 during the term of the engagement and based on achievement of certain milestones, $191 and $4,707 of which were recognized as an expense through December 31, 2015 and 2016, respectively.
In addition, as security for its obligation under this agreement, the Company made an advance payment in the amount of $823, which is expected to be used by the end of the clinical trial (in 2017) and therefore it is classified as a current asset.
g. In April 2015, the Company entered into a development, manufacturing and commercialization agreement, as amended on October 26, 2015, with a third party, to work towards the objective of obtaining all FDA approvals necessary for the commercialization of one of its product candidates in the U.S. Under this agreement, the third party is obligated to conduct all regulatory, scientific, clinical and technical activities necessary to develop the product and prepare and file an abbreviated new drug application, or ANDA, with the FDA and gain regulatory approval. As soon as reasonably practical after FDA approval, the third party has exclusive rights and is required to use diligent efforts to commercialize this product in the U.S., including all required sales, marketing and distributing activities associated with the agreement. The Company is entitled to 50% of the third party’s gross profits related to the sale of this product, as such term is defined in the agreement, on a quarterly basis, for a period of 20 years following the first commercial sale of this product in the U.S.
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 5 — COMMITMENTS (continued)
Each party is responsible for its own costs in relation to performance under the agreement. The Company will finance all out-of-pocket clinical trial expenses (including materials), and the third party will reimburse the Company for 40% of the out-of-pocket clinical trial expenses as follows (a) in case of success of obtaining the FDA approval, by financing the Company’s share in the out-of-pocket litigation expenses (and by a cash payment if such financing is less than the reimbursement owed to the Company), or (b) in case of failure to obtain the required FDA approval for the commercialization of the product candidate, by paying back the Company an amount equal to 40% of its out-of-pocket expenses. The Company recognized the third party’s obligation in an amount of $1,190 as long term receivables.
The total consideration for the clinical trial is approximately $5,157 during the term of the engagement, of which the Company will recognize 60% as an expense. During the year ended December 31, 2016, the Company recognized $1,785 as an expense.
h. On May 28, 2015, the Company entered into a Product Development, Manufacturing and Supply Agreement with a third party (hereafter — the CMO), a manufacturer of pharmaceutical drug products for consumer use, for the development, manufacture and supply of clinical materials for our Phase III trial of one of the products candidates.
CMO will develop an acceptable, scaled-up formulation and manufacturing process for this product. Unless earlier terminated, the initial term of the agreement is set for a period of five years which automatically renews thereafter for additional two year periods except if either party provides a notice of non-renewal not less than 12 months prior to the end of the then applicable renewal term. Until the Company determines at its sole discretion that an acceptable stable, scaled-up formulation and manufacturing process has been developed for each product, either party may terminate the agreement by providing 120 days’ prior written notice to the other party. The CMO will manufacture, deliver and sell to the Company pursuant to written purchase orders at the times and quantities specified by the Company, $797 and $580 of which were recognized as an expense through December 31, 2015 and 2016, respectively.
i. On December 31, 2015, the Company assumed, following the transfer of an in-process research and development product candidate (hereafter — the product) from a related party, an agreement with a third party for the development, manufacturing and commercialization of this product. According to this agreement, the third party will conduct all regulatory, scientific, clinical and technical activities necessary to develop the product. The Company will be responsible to pay all out-of-pocket expenses incurred by the third party in performing its services under the development plan. The Company will pay the third party approximately $2,000 upon NDA submission of the product, and approximately $3,000 upon the approval of the FDA on the first NDA for the product. In addition, the Company will be required to pay royalties to the third party on the net sales of the product (as defined in the agreement) ranging from 5.5% to 6.5% depending on the net sale volume of the product. See also note 9d. As of the date of these financial statements, none of the agreed upon milestones have been met.
j. In June 2016, the Company entered into a development, manufacturing and commercialization agreement, with a third party, to work towards the objective of obtaining all FDA approvals necessary for the commercialization of one of its product candidates in the U.S. Under this agreement, the third party is obligated to conduct all regulatory, scientific, clinical and technical activities necessary to develop the product and prepare and file an abbreviated new drug application, or ANDA, with the FDA and gain regulatory approval. The Company is obligated for sourcing the active pharmaceutical ingredient (API) during the development phase. As soon as
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 5 — COMMITMENTS (continued)
reasonably practical after FDA approval, the third party has exclusive rights and is required to use diligent efforts to commercialize this product in the U.S., including all required sales, marketing and distributing activities associated with the agreement. The Company is entitled to 50% of the third party’s gross profits related to the sale of this product, as such term is defined in the agreement, on a quarterly basis, for a period of 20 years following the first commercial sale of this product in the U.S. As of the date of these financial statements, none of the agreed upon milestones have been met.
NOTE 6 — LOANS FROM THE CONTROLLING SHAREHOLDER
Until December 31, 2014, the Company received loans from its controlling shareholder in the amount of $3,335.
In 2015 and 2016, the Company received additional loans from its controlling shareholder in the amounts of $13,572 and $20,000, respectively.
In addition, the consideration for the transfer in 2015, as detailed in note 9d, was added to the loans.
The loans are classified as a current liability and denominated in US dollars, bear no interest and are backed by a promissory note. The Promissory Note is an unsecured note, has no repayment date and is subject to acceleration in certain events of default.
NOTE 7 — SHARE CAPITAL
a.
Rights of the Company’s ordinary shares
Each ordinary share is entitled to one vote. The holder of the ordinary shares is also entitled to receive dividends whenever funds are legally available, when and if declared by the Board of Directors. Since its inception, the Company has not declared any dividends.
b.
Share-based compensation:
1)
Option plan
In December, 2014, the Company’s Board of Directors approved a Share Incentive Plan (hereafter — the Plan) and reserved a pool of 629,024 ordinary shares, par value NIS 0.1 each, or such other number as the Board may determine, subject to certain terms and conditions as defined in the Plan. According to the Plan, the Company may issue shares or restricted shares, may grant options or restricted share units and other share-based awards (hereafter — the awards) to the Company employees, consultants, directors and other service providers.
The Plan is designed to enable the Company to grant awards to purchase Ordinary Shares under various and different tax regimes including, without limitation: pursuant and subject to Section 102 of the Israeli Tax Ordinance and pursuant and subject to Section 3(i) of the Israeli Tax Ordinance.
The awards may be exercised after vesting and in accordance with vesting schedules which will be determined by the Board of Directors for each grant. The maximum term of the awards is 10 years. The fair value of each option granted under this Plan is estimated using the Black-Scholes option pricing method. Expected volatility is based on the historical volatility of comparable peer companies.
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 7 — SHARE CAPITAL (continued)
The risk-free interest rate assumption is based on observed interest rates appropriate for the expected term of the options granted in dollar terms. The expected term of the options is estimated based on the simplified method.
As of December 31, 2016, 226,073 ordinary shares remain available for grant under the Plan.
2)
Options granted to employees:
a. In March and April 2015, the Company granted 312,192 options to the Executive Officers of the Company to purchase ordinary shares at an exercise price of $1.59 per share. 25% of the options vest on the first anniversary of the vesting commencement date (August 4, 2014) and the rest vest quarterly over the following three years. The options expire on the tenth anniversary of the grant date.
b. In August 2016, the Company granted 90,760 options to the Executive Officers of the Company to purchase shares of NIS 0.1 par value ordinary shares of the Company at an exercise price of $1.59 per share. 25% of the options vest on the first anniversary of the vesting commencement date and the rest vest quarterly over the following three years. The options expire on the tenth anniversary of the grant date.
The fair value of options granted to employees in 2015 and 2016 were $1,618 and $986, respectively. The underlying data used for computing the fair value of the options are as follows:
| |
|
|
|
|
|
|
2015
|
|
|
2016
|
|
| |
|
|
|
Value of one ordinary share
|
|
|
$6.31
|
|
|
$11.99
|
|
| |
|
|
|
Dividend yield
|
|
|
0%
|
|
|
0%
|
|
| |
|
|
|
Expected volatility
|
|
|
62.46% – 66.22%
|
|
|
68.46% – 79.1%
|
|
| |
|
|
|
Risk-free interest rate
|
|
|
1.61% – 1.81%
|
|
|
0.95% – 1.34%
|
|
| |
|
|
|
Expected term
|
|
|
5.5 – 7.5 years
|
|
|
5 – 6.71 years
|
|
| |
The total unrecognized compensation cost of employee options at December 31, 2016 is $523, which is expected to be recognized over a period of 2.8 years.
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 7 — SHARE CAPITAL (continued)
c. The following table summarizes the number of options outstanding under the Plan for the years ended December 31, 2015 and 2016, and related information:
| |
|
|
|
|
|
|
Year ended December 31
|
|
| |
|
|
|
|
|
|
2015
|
|
|
2016
|
|
| |
|
|
|
|
|
|
Number of
options
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
remaining
contractual
life
|
|
|
Number of
options
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
remaining
contractual
life
|
|
| |
|
|
|
Options outstanding at the beginning of the year
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
312,192 |
|
|
|
|
$ |
1.59 |
|
|
|
|
|
9.25 |
|
|
| |
|
|
|
Granted
|
|
|
|
|
312,192 |
|
|
|
|
$ |
1.59 |
|
|
|
|
|
9.25 |
|
|
|
|
|
90,760 |
|
|
|
|
$ |
1.59 |
|
|
|
|
|
9.59 |
|
|
| |
|
|
|
Options outstanding at the end of the year
|
|
|
|
|
312,192 |
|
|
|
|
$ |
1.59 |
|
|
|
|
|
9.25 |
|
|
|
|
|
402,952 |
|
|
|
|
$ |
1.59 |
|
|
|
|
|
8.55 |
|
|
| |
|
|
|
Options exercisable at the end of the year
|
|
|
|
|
97,560 |
|
|
|
|
$ |
1.59 |
|
|
|
|
|
9.25 |
|
|
|
|
|
192,337 |
|
|
|
|
$ |
1.59 |
|
|
|
|
|
9.59 |
|
|
| |
The aggregate intrinsic value of the total outstanding and of total exercisable options as of December 31, 2016 is approximately $4,193 and $2,001, respectively.
d. The following table illustrates the effect of share-based compensation on the statements of operations:
| |
|
|
|
|
|
|
Year ended
December 31
|
|
| |
|
|
|
|
|
|
2015
|
|
|
2016
|
|
| |
|
|
|
Research and development expenses
|
|
|
|
$ |
468 |
|
|
|
|
$ |
541 |
|
|
| |
|
|
|
General and administrative expenses
|
|
|
|
|
661 |
|
|
|
|
|
411 |
|
|
| |
|
|
|
|
|
|
|
$ |
1,129 |
|
|
|
|
$ |
952 |
|
|
| |
NOTE 8 — TAXES ON INCOME
The Company is taxed under Israel tax laws:
a.
Tax rates
The income of the Company and the Capital gains, other than income from Benefitted Enterprises (see b. below), are subject to the normal corporate tax rates (26.5% for 2015 and 25% for 2016).
In December 2016, the Economic Efficiency Law (Legislative Amendments for Implementing the Economic Policy for the 2017 and 2018 Budget Year), 2016 was published, introducing a gradual reduction in corporate tax rate from 25% to 23%. As a result, the regular tax rate will be 24% in 2017 and 23% in 2018 and thereafter.
b.
Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (the “Investment Law”)
Under the Investment Law, including Amendment No. 60 to the Investment Law that was published in April 2005, by virtue of the Benefited Enterprise program for certain of its facilities; the Company may be entitled to various tax benefits.
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 8 — TAXES ON INCOME (continued)
The main benefit arising from such status is the reduction in tax rates on income derived from a Benefited Enterprise. The extent of such benefits depends on the location of the enterprise. Since the Company’s facilities are not located in “national development zone A,” income derived from Benefited Enterprises will be tax exempt for a period of two years and then have a reduced tax rate for a period of up to an additional eight years.
The period of tax benefits, as described above, is limited to 12 years from the beginning of the Benefited Enterprise election year (2012). As of December 31, 2016, the period of benefits has not yet commenced.
In the event of distribution of cash dividends from income which was tax exempt as above, the amount distributed will be subject to the tax rate it was exempted from. The Company is entitled to claim accelerated depreciation in respect of equipment used by the approved enterprises during five tax years.
Entitlement to the above benefits is conditioned upon the Company fulfilling the conditions stipulated by the Investment Law and regulations published thereunder.
In the event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the amount of the benefits, in whole or in part, with the addition of linkage differences to the Israeli consumer price index and interest.
The Investment Law was amended as part of the Economic Policy Law for the years 2011 – 2012 (the “Amendment”), which became effective on January 1, 2011.
The Amendment sets alternative benefit tracks to the ones currently in place under the provisions of the Investment Law, including a reduced corporate tax rate. Tax rate for “Preferred Enterprise” income of companies not located in national development zone A, is 16% for fiscal year 2014 and thereafter.
The benefits are granted to companies that qualify under criteria set forth in the Investment Law; for the most part, those criteria are similar to the criteria that have existed in the Investment Law prior to its amendment and the benefit period is unlimited in time. However, in accordance with the Amendment, the classification of licensing income as Preferred income is subject to the issuance of a pre-ruling by the Israel Tax Authority.
Under the transitional provisions of the Investment Law, a company is allowed to continue to enjoy the tax benefits available under the Investment Law prior to its amendment until the end of the period of benefits, as defined in the Investment Law.
In each year during the period of benefits of its Benefitted Enterprise, the Company will be able to opt for application of the Amendment, thereby making available to itself the tax rate described above. The Company’s election to apply the Amendment is irrevocable.
As of December 31, 2016, the Company’s management decided not to adopt the application of the Amendment.
There is no assurance that future taxable income of the Company will qualify as Benefited or Preferred income or that the benefits described above will be available to the Company in the future.
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 8 — TAXES ON INCOME (continued)
c.
Tax assessments
Tax assessments filed by the Company through the year 2012 are considered to be final.
d.
Losses for tax purposes carried forward to future years
As of December 31, 2016, the Company had approximately $47.4 million of net carry forward tax losses which are available to reduce future taxable income with no limited period of use.
e.
Deferred income taxes:
| |
|
|
As of December 31
|
|
| |
|
|
2015
|
|
|
2016
|
|
| In respect of: |
|
|
|
|
Net operating loss carry forward
|
|
|
|
$ |
9,468 |
|
|
|
|
$ |
10,912 |
|
|
|
Research and development expenses
|
|
|
|
|
1,377 |
|
|
|
|
|
2,935 |
|
|
|
Other
|
|
|
|
|
43 |
|
|
|
|
|
152 |
|
|
|
Less – valuation allowance
|
|
|
|
|
(10,888) |
|
|
|
|
|
(13,999) |
|
|
|
Net deferred tax assets
|
|
|
|
$ |
— |
|
|
|
|
$ |
— |
|
|
| |
f.
Reconciliation of theoretical tax expenses to actual expenses
The primary reconciling items between the statutory tax rate of the Company and the effective rate are the full valuation allowance of deferred tax assets and nondeductible expenses.
g.
Provision for uncertain tax positions
As of December 31, 2015 and 2016, the Company does not have a provision for uncertain tax positions.
NOTE 9 — RELATED PARTIES
a. Related parties include the controlling shareholder and companies under his control, the Board of Directors and the Executive Officers of the Company.
b. As to bonus to Executive Officers, see note 5d.
c. As to options granted to Executive Officers, see note 7b2.
d. On December 31, 2015, a related company (wholly owned by the Company’s controlling shareholder) transferred an in-process research and development product candidate (hereafter — the product) to the Company, together with a collaboration agreement with third party to research, develop and manufacture the product, in consideration of $431.
This was considered a transaction between entities under common control and thus it was recorded on historical cost basis and therefore the Company recognized the consideration of $431 as a research and development expense in 2015. The amount was paid to the related company during 2015 by utilizing a loan from the controlling shareholder.
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 10 — SUBSEQUENT EVENTS
a. On February 12, 2017, the Company granted 53,831 options to one of its Executive Officers to purchase ordinary shares at an exercise price of $1.59 per share. 25% of the options vest on the first anniversary of the vesting commencement date and the rest vest quarterly over the following three years. Upon the occurrence of a merger or sale (as such term is defined in the agreement), 100% of the then unvested options shall become fully vested, provided, that the grantee is an Employee of the Company at such time.
The options expire on the tenth anniversary of the grant date.
b.
1. On October 2, 2017, the Company increased its authorized capital to 50,000,000 shares, NIS 0.01 par value.
2. On January 19, 2018, the Company executed a 1-for-1.8 share split of the Company’s shares by way of an issuance of bonus shares for each share. Upon the effectiveness of the share split, (i) 0.8 bonus shares were issued for each outstanding share, (ii) the number of ordinary shares into which each outstanding option to purchase ordinary shares is exercisable was proportionally increased, and (iii) the exercise price of each outstanding option to purchase ordinary shares was proportionately decreased. Unless otherwise indicated, and except for authorized capital, all of the share numbers, loss per share amounts, share prices and option exercise prices in these financial statements have been adjusted, on a retroactive basis, to reflect this 1-for-1.8 share split.
SOL-GEL TECHNOLOGIES LTD.
UNAUDITED BALANCE SHEETS
(U.S. dollars in thousands, except share and per share data)
| |
|
|
December 31,
2016
|
|
|
September 30,
2017
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| CURRENT ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
$ |
7,001 |
|
|
|
|
$ |
12,491 |
|
|
|
Bank deposit
|
|
|
|
|
— |
|
|
|
|
|
4,000 |
|
|
|
Prepaid expenses and other current assets
|
|
|
|
|
472 |
|
|
|
|
|
372 |
|
|
|
Advance payment
|
|
|
|
|
823 |
|
|
|
|
|
823 |
|
|
|
TOTAL CURRENT ASSETS
|
|
|
|
|
8,296 |
|
|
|
|
|
17,686 |
|
|
| NON-CURRENT ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term receivables
|
|
|
|
|
1,190 |
|
|
|
|
|
2,089 |
|
|
|
Restricted long-term deposits
|
|
|
|
|
107 |
|
|
|
|
|
107 |
|
|
|
Property and equipment, net
|
|
|
|
|
798 |
|
|
|
|
|
2,252 |
|
|
|
Funds in respect of employee rights upon retirement
|
|
|
|
|
594 |
|
|
|
|
|
648 |
|
|
|
TOTAL NON-CURRENT ASSETS
|
|
|
|
|
2,689 |
|
|
|
|
|
5,096 |
|
|
|
TOTAL ASSETS
|
|
|
|
$ |
10,985 |
|
|
|
|
$ |
22,782 |
|
|
|
Liabilities net of capital deficiency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
|
|
667 |
|
|
|
|
|
1,393 |
|
|
|
Accrued expenses and other
|
|
|
|
|
3,623 |
|
|
|
|
|
4,238 |
|
|
|
Loans from the controlling shareholder
|
|
|
|
|
37,338 |
|
|
|
|
|
65,338 |
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
|
$ |
41,628 |
|
|
|
|
$ |
70,969 |
|
|
| LONG-TERM LIABILITIES – |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for employee rights upon retirement
|
|
|
|
|
694 |
|
|
|
|
|
798 |
|
|
|
TOTAL LONG-TERM LIABILITIES
|
|
|
|
|
694 |
|
|
|
|
|
798 |
|
|
| COMMITMENTS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
|
$ |
42,322 |
|
|
|
|
$ |
71,767 |
|
|
| CAPITAL DEFICIENCY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares, NIS 0.1 par value – authorized: 8,775,783 as of December 31, 2016 and September 30, 2017; issued and outstanding: 6,290,242 and 6,920,244 as of December 31, 2016 and September 30, 2017, respectiveley
|
|
|
|
|
82 |
|
|
|
|
|
82 |
|
|
|
Additional paid-in capital
|
|
|
|
|
32,274 |
|
|
|
|
|
40,744 |
|
|
|
Accumulated deficit
|
|
|
|
|
(63,693) |
|
|
|
|
|
(89,811) |
|
|
|
TOTAL CAPITAL DEFICIENCY
|
|
|
|
|
(31,337) |
|
|
|
|
|
(48,985) |
|
|
|
TOTAL LIABILITIES NET OF CAPITAL DEFICIENCY
|
|
|
|
$ |
10,985 |
|
|
|
|
$ |
22,782 |
|
|
| |
The accompanying notes are an integral part of these unaudited condensed financial statements.
SOL-GEL TECHNOLOGIES LTD.
UNAUDITED STATEMENTS OF OPERATIONS
(U.S. dollars in thousands, except share and per share data)
| |
|
|
Nine months ended
September 30,
|
|
| |
|
|
2016
|
|
|
2017
|
|
|
RESEARCH AND DEVELOPMENT EXPENSES
|
|
|
|
$ |
13,097 |
|
|
|
|
$ |
21,389 |
|
|
|
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
|
|
2,809 |
|
|
|
|
|
4,781 |
|
|
|
TOTAL OPERATING LOSS
|
|
|
|
$ |
15,906 |
|
|
|
|
$ |
26,170 |
|
|
|
FINANCIAL (INCOME) EXPENSES, net
|
|
|
|
|
(1) |
|
|
|
|
|
(52) |
|
|
|
LOSS FOR THE PERIOD
|
|
|
|
$ |
15,905 |
|
|
|
|
$ |
26,118 |
|
|
|
BASIC AND DILUTED LOSS PER ORDINARY SHARE
|
|
|
|
$ |
2.53 |
|
|
|
|
$ |
4.15 |
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING USED IN COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE
|
|
|
|
|
6,290,242 |
|
|
|
|
|
6,290,244 |
|
|
| |
The accompanying notes are an integral part of these unaudited condensed financial statements.
SOL-GEL TECHNOLOGIES LTD.
UNAUDITED STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
(U.S. dollars in thousands, except share data)
| |
|
|
Ordinary shares
|
|
|
Additional
paid-in
capital
|
|
|
Accumulated
deficit
|
|
|
Total
|
|
| |
|
|
Number of
shares
|
|
|
Amounts
|
|
|
Amounts
|
|
|
BALANCE AS OF JANUARY 1, 2016
|
|
|
|
|
6,290,242 |
|
|
|
|
$ |
82 |
|
|
|
|
$ |
31,322 |
|
|
|
|
$ |
(42,922) |
|
|
|
|
$ |
(11,518) |
|
|
|
CHANGES DURING THE NINE MONTHS ENDED SEPTEMBER 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,905) |
|
|
|
|
|
(15,905) |
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
786 |
|
|
|
|
|
|
|
|
|
|
|
786 |
|
|
|
BALANCE AT SEPTEMBER 30, 2016
|
|
|
|
|
6,290,242 |
|
|
|
|
$ |
82 |
|
|
|
|
$ |
32,108 |
|
|
|
|
$ |
(58,827) |
|
|
|
|
$ |
(26,637) |
|
|
|
BALANCE AS OF JANUARY 1, 2017
|
|
|
|
|
6,290,242 |
|
|
|
|
$ |
82 |
|
|
|
|
$ |
32,274 |
|
|
|
|
$ |
(63,693) |
|
|
|
|
$ |
(31,337) |
|
|
|
CHANGES DURING THE NINE MONTHS ENDED SEPTEMBER 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,118) |
|
|
|
|
|
(26,118) |
|
|
|
Issuance of shares due to in-process research and development acquired
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
6,232 |
|
|
|
|
|
|
|
|
|
|
|
6,232 |
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,238 |
|
|
|
|
|
|
|
|
|
|
|
2,238 |
|
|
|
BALANCE AT SEPTEMBER 30, 2017
|
|
|
|
|
6,290,244 |
|
|
|
|
$ |
82 |
|
|
|
|
$ |
40,744 |
|
|
|
|
$ |
(89,811) |
|
|
|
|
$ |
(48,985) |
|
|
| |
The accompanying notes are an integral part of these unaudited condensed financial statements.
SOL-GEL TECHNOLOGIES LTD.
UNAUDITED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
| |
|
|
Nine months ended
September 30,
|
|
| |
|
|
2016
|
|
|
2017
|
|
| CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
|
|
$ |
(15,905) |
|
|
|
|
$ |
(26,118) |
|
|
|
Adjustments required to reconcile loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
266 |
|
|
|
|
|
307 |
|
|
|
Changes in accrued liability for employee rights upon retirement, net
|
|
|
|
|
80 |
|
|
|
|
|
51 |
|
|
|
Share-based compensation
|
|
|
|
|
786 |
|
|
|
|
|
2,238 |
|
|
|
In-process research and development acquired
|
|
|
|
|
- |
|
|
|
|
|
6,232 |
|
|
|
Financial income, net
|
|
|
|
|
(59) |
|
|
|
|
|
(50) |
|
|
|
Changes in operating asset and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
|
|
104 |
|
|
|
|
|
100 |
|
|
|
Accounts payable, accrued expenses and other
|
|
|
|
|
2,431 |
|
|
|
|
|
1,074 |
|
|
|
Advance payment
|
|
|
|
|
(119) |
|
|
|
|
|
- |
|
|
|
Long-term receivables
|
|
|
|
|
(934) |
|
|
|
|
|
(899) |
|
|
|
Net cash used in operating activities
|
|
|
|
|
(13,350) |
|
|
|
|
|
(17,065) |
|
|
| CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
|
|
(305) |
|
|
|
|
|
(1,495) |
|
|
|
Long-term deposits
|
|
|
|
|
(29) |
|
|
|
|
|
(4,000) |
|
|
|
Net cash used in investing activities
|
|
|
|
|
(334) |
|
|
|
|
|
(5,495) |
|
|
| CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans received from the controlling shareholder
|
|
|
|
|
10,000 |
|
|
|
|
|
28,000 |
|
|
|
Net cash provided by financing activities
|
|
|
|
|
10,000 |
|
|
|
|
|
28,000 |
|
|
|
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS
|
|
|
|
|
59
|
|
|
|
|
|
50
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
|
|
(3,625) |
|
|
|
|
|
5,490 |
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNINGOF THE PERIOD
|
|
|
|
|
5,895
|
|
|
|
|
|
7,001
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD
|
|
|
|
$ |
2,270 |
|
|
|
|
$ |
12,491 |
|
|
|
SUPPLEMENTARY INFORMATION ON INVESTING AND FINANCING ACTIVITIES NOT INVOLVING CASH FLOWS -
|
|
|
|
|
Purchase of property and equipment
|
|
|
|
$ |
38 |
|
|
|
|
$ |
276 |
|
|
|
Acquisition of in-process research and development product candidate
|
|
|
|
|
|
|
|
|
|
$ |
6,232 |
|
|
| |
The accompanying notes are an integral part of these unaudited condensed financial statements.
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share amounts)
NOTE 1 — NATURE OF OPERATIONS
Sol-Gel Technologies Ltd. (hereafter - the Company) is an Israeli Company incorporated in 1997.
The Company is a clinical stage specialty pharmaceutical company focused on developing and commercializing topical dermatological drug products. The Company’s lead product candidates are based upon its proprietary microencapsulation delivery system, consisting of microcapsules made of precipitated silica. In addition to these novel product candidates, the Company’s product pipeline includes generic product candidates.
In 2007, the Company granted rights to a third party for use and commercialization of a product for skin protection. Under this agreement, the Company is entitled to royalties during the years 2016 to 2024. Based on current sales, royalties are not material.
On August 4, 2014, 100% of the Company’s shares were acquired by its current controlling shareholder (the “controlling shareholder”).
As of September 30, 2017, the Company has an accumulated deficit of approximately $89.8 million and its activities have been funded mainly by its shareholder.
The Company has been engaged in development activities since its incorporation.
Since its acquisition by the controlling shareholder, the Company has not generated any material revenues and is therefore dependent on the continuing support of its controlling shareholder. As a result, management cannot determine with reasonable certainty if and when the Company will obtain the required funds in order to complete the clinical development of its main product candidates and continue operations. Consequently, there is no assurance that the Company’s business will generate positive cash flows and there is substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that may be necessary should the Company be unable to continue as a going concern. If the Company is unable to obtain the appropriate funds, the Company will need to curtail or cease operations.
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES:
a.
Basis of Presentation
The unaudited condensed financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.GAAP”) for interim financial statements. Accordingly, they do not include all of the information and notes required by U.S. GAAP for annual financial statements. In the opinion of management, these unaudited condensed interim financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of the Company’s financial position as of September 30, 2017, the results of operations, statements of changes in capital deficiency and cash flows for the nine-month periods ended September 30, 2016 and 2017.
The results for the nine month period ended September 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017.
These unaudited condensed financial statements should be read in conjunction with the audited financial statements of the Company for the year ended December 31, 2016. The comparative balance sheet at December 31, 2016 has been derived from the audited financial statements at that date but does not include all disclosures required by U.S. GAAP.
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES: (continued)
b.
Share-based compensation
The Company accounts for employees’ share-based payment awards classified as equity awards using the grant-date fair value method. The fair value of share-based payment transactions is recognized as an expense over the requisite service period, net of estimated forfeitures.
The Company elected to recognize compensation costs for awards conditioned only on continued service that have a graded vesting schedule using the accelerated method based on the multiple-option award approach.
When options are granted as consideration for services provided by consultants and other non- employees, the grant is accounted for based on the fair value of the consideration received or the fair value of the options issued, whichever is more reliably measurable. The fair value of the options granted is measured on a final basis at the end of the related service period and is recognized over the related service period using the straight-line method.
c.
Loss per share
Basic loss per share is computed on the basis of the net loss for the period divided by the weighted average number of ordinary shares outstanding during the period. Diluted loss per share is based upon the weighted average number of ordinary shares and of ordinary shares equivalents outstanding when dilutive. Ordinary share equivalents include outstanding stock options, which are included under the treasury stock method when dilutive. The calculation of diluted loss per share does not include 184,337 and 325,046 options for the nine months ended September 30, 2016 and 2017, respectively, because the effect would be anti-dilutive.
d.
Bank deposits
Bank deposits with original maturity dates of more than three months but less than one year are included in short-term deposits. Bank deposits with maturity of more than one year are considered long-term.
e.
Newly issued and recently adopted accounting pronouncements
1.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Company is currently evaluating the impact of this new standard on its financial statements.
2.
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718). ASU No. 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years,
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES: (continued)
beginning after December 15, 2016. Early adoption is permitted but all of the guidance must be adopted in the same period. The adoption of this standard does not have an impact on the Company’s financial statements.
NOTE 3 — LOANS FROM THE CONTROLLING SHAREHOLDER
Until September 30, 2017, the Company received loans from its controlling shareholder in the aggregated amount of $65,338, including loans received during the nine months ended September 30, 2016 and 2017 in the amounts of $10,000 and $28,000, respectively.
The loans are classified as a current liability and denominated in U.S. dollars, bear no interest and are backed by a promissory note. The promissory note is an unsecured note, has no repayment date and is subject to acceleration in certain events of default.
On August 22, 2017, the Company amended the loan to automatically convert the principal amount into a number of the Company’s ordinary shares in connection with an initial public offering. The number of ordinary shares to be issued upon the automatic conversion will be equal to the principal amount divided by the price per ordinary share paid by investors in the initial public offering.
NOTE 4 — STOCK-BASED COMPENSATION
a.
Option Plan
On July 13, 2017 the Company’s Board of Directors approved an increase of the ordinary shares that may be issued under the Company’s “2014 Share Incentive Plan” by reserving an additional amount of 720,976 ordinary shares of the Company with a value of NIS 0.1 per share. As of September 30, 2017, 358,598 ordinary shares remain available for future grants under the Plan.
b.
Options grants
During the nine months ended September 30, 2017, the Company granted 326,916 options to employees and non-employees.
1)
Option granted to employees
i.
On February 12, 2017 the Company granted 53,830 options to one of its executive officer to purchase ordinary shares at an exercise price of $1.59 per share.
ii.
In July and August 2017, the Company granted options to its executive officers and several employees as follows:
1.
Grant of 260,809 and 138,593 options to executive officers and several employees, respectively, to purchase ordinary shares at an exercise price of $5.57 per share.
2.
Grant of 13,536 options to an executive officer to purchase ordinary shares at an exercise price of $1.59 per share. The vesting commencement date is October 1, 2015.
The options vest over a period of 4 years; 25% of the options vest on the first anniversary of the vesting commencement date (as described in each agreement) and the rest vest quarterly over the following three years. The options expire on the tenth anniversary of their grant date.
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 4 — STOCK-BASED COMPENSATION (continued)
Upon the occurrence of a merger or sale, 100% of the unvested options shall become fully vested, provided, that the grantee is an employee of the Company at such time.
The fair value of the options granted to executive officers and several employees in 2017 were $6,871 and $2,932 , respectively. The underlying data used for computing the fair value of the options are as follows:
| |
|
|
|
|
|
|
February
2017
|
|
|
July-August
2017
|
|
| |
|
|
|
Value of one ordinary share
|
|
|
$20.47
|
|
|
$24.37
|
|
| |
|
|
|
Dividend yield
|
|
|
0%
|
|
|
0%
|
|
| |
|
|
|
Expected volatility
|
|
|
73.74% – 78.71%
|
|
|
72.91 – 76.63%
|
|
| |
|
|
|
Risk-free interest rate
|
|
|
1.57% – 2.23%
|
|
|
1.91% – 2.16%
|
|
| |
|
|
|
Expected term
|
|
|
5.47 – 6.97 years
|
|
|
5 – 7years
|
|
| |
2)
Option granted to non-employees
In July and August 2017, the Company granted options to several non-employees as follows:
i. Grant of 108,144 options to non-employees to purchase ordinary shares at an exercise price of $5.57 per share.
ii. Grant of 13,536 options to a non-employee to purchase ordinary shares at an exercise price of $1.59 per share. The vesting commencement date is July 10, 2016.
The options vest over a period of 4 years; 25% of the options vest on the first anniversary of the vesting commencement date (as described in each agreement) and the rest vest quarterly over the following three years. The options expire on the tenth anniversary of their grant date.
Upon the occurrence of a merger or sale, 100% of the unvested options shall become fully vested, provided, that the grantee is continuously a service provider of the Company at such time.
The fair value of options granted to non-employees was $2,600. The underlying data used for computing the fair value of the options are as follows:
| |
|
|
|
|
|
|
2017
|
|
| |
|
|
|
Value of one ordinary share
|
|
|
$24.37
|
|
| |
|
|
|
Dividend yield
|
|
|
0%
|
|
| |
|
|
|
Expected volatility
|
|
|
72.91 – 76.63%
|
|
| |
|
|
|
Risk-free interest rate
|
|
|
1.91% – 2.16%
|
|
| |
|
|
|
Expected term
|
|
|
10 years
|
|
| |
The total unrecognized compensation cost of employee options at September 30, 2017 is $10,560, which is expected to be recognized over a period of 3.8 years.
NOTE 5 — RELATED PARTIES:
a.
Related parties include the controlling shareholder and companies under his control, the board of directors and the executive officers of the Company.
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 5 — RELATED PARTIES: (continued)
b.
As to loans received from controlling shareholder, see note 3.
c.
As to options granted to executive officers during the nine months period ended September 30, 2017, see note 4.
d.
On August 22, 2017, a related company (wholly owned by the Company’s controlling shareholder) transferred an in-process research and development product candidate (hereafter - the Product) to the Company, together with a collaboration agreement with third party to research, develop and manufacture the Product, in consideration of 2 shares. This was considered a transaction between entities under common control and thus it was recorded on historical cost basis and therefore the Company recognized an amount of $6,232 as a research and development expense in 2017.
NOTE 6 — MATERIAL EVENTS DURING THE PERIOD:
a.
In connection with the acquisition of the Company, as described in note 1, the executive officers and certain employees are entitled, subject to certain research and development milestones and other conditions, as set forth in the agreement, to a special bonus in an aggregate amount of up to $3,000, out of which $2,000 were paid in 2014 and 2016.
During the third quarter of 2017, upon the achievement of the remaining milestone, the Company paid an additional $1,000 to the executive officers and employees.
b.
On August 22, 2017, the Company assumed, following the transfer of an in-process research and development product candidate (hereafter - the Product) from a related party, an agreement with a third party for the development, manufacturing and commercialization of the Product. According to this agreement, the third party will conduct all regulatory, scientific, clinical and technical activities necessary to develop the Product. The Company will be responsible to pay 80% of the out-of-pocket clinical study expenses incurred by the third. The Company is entitled to 50% of future gross profit of the Product sold by the third party. See also note 5d.
NOTE 7 — SUBSEQUENT EVENTS:
a.
For the issuance of the unaudited interim financial statements as of September 30, 2017, and the nine months ended September 30, 2016 and 2017, the Company has evaluated subsequent events through December 26, 2017, the date on which the unaudited interim financial statements were available to be issued except for the effect of the stock split described in Note 7(b), as to which the date is January 19, 2018.
b.
1.
On October 2, 2017, the Company increased its authorized capital to 50,000,000 shares, NIS 0.01 par value.
2.
On January 19, 2018, the Company executed a 1-for-1.8 share split of the Company’s shares by way of an issuance of bonus shares for each share. Upon the effectiveness of the share split, (i) 0.8 bonus shares were issued for each outstanding share, (ii) the number of ordinary shares into which each outstanding option to purchase ordinary shares is exercisable was proportionally increased, and (iii) the exercise price of each outstanding option to purchase ordinary shares was proportionately decreased. Unless otherwise indicated, and except for authorized capital, all of the share numbers, loss per share amounts, share prices and option exercise prices in these financial statements have been adjusted, on a retroactive basis, to reflect this 1-for-1.8 share split.
5,000,000 Ordinary Shares
Sol-Gel Technologies Ltd.
Ordinary Shares
Jefferies
BMO Capital Markets
JMP Securities
Raymond James
Until and including , 2018, 25 days after the date of this prospectus, all dealers that buy, sell or trade our ordinary shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as underwriters and with respect to unsold allotments or subscriptions.
Part II
Information Not Required in Prospectus
Item 6. Indemnification of Office Holders (including Directors).
Under the Companies Law, a company may not exculpate an office holder from liability for a breach of a fiduciary duty. An Israeli company may exculpate an office holder in advance from liability to the company, in whole or in part, for damages caused to the company as a result of a breach of duty of care but only if a provision authorizing such exculpation is included in its articles of association. Our amended and restated articles of association include such a provision. The company may not exculpate in advance a director from liability arising due to the breach of his or her duty or care in the event of a prohibited dividend or distribution to shareholders.
Under the Companies Law and the Israeli Securities Law, 5728-1968, or the Securities Law, a company may indemnify an office holder in respect of the following liabilities, payments and expenses incurred for acts performed by him as an office holder, either in advance of an event or following an event, provided its articles of association include a provision authorizing such indemnification:
•
a monetary liability incurred by or imposed on the office holder in favor of another person pursuant to a court judgment, including pursuant to a settlement confirmed as judgment or arbitrator’s decision approved by a competent court. However, if an undertaking to indemnify an office holder with respect to such liability is provided in advance, then such an undertaking must be limited to events which, in the opinion of the board of directors, can be foreseen based on the company’s activities when the undertaking to indemnify is given, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and such undertaking shall detail the abovementioned foreseen events and amount or criteria;
•
reasonable litigation expenses, including reasonable attorneys’ fees, which were incurred by the office holder as a result of an investigation or proceeding filed against the office holder by an authority authorized to conduct such investigation or proceeding, provided that such investigation or proceeding was either (i) concluded without the filing of an indictment against such office holder and without the imposition on him of any monetary obligation in lieu of a criminal proceeding; (ii) concluded without the filing of an indictment against the office holder but with the imposition of a monetary obligation on the office holder in lieu of criminal proceedings for an offense that does not require proof of criminal intent; or (iii) in connection with a monetary sanction;
•
a monetary liability imposed on the office holder in favor of all the injured parties by the breach in an Administrative Procedure (as defined below) as set forth in Section 52(54)(a)(1)(a) to the Securities Law;
•
expenses expended by the office holder with respect to an Administrative Procedure under the Securities Law, including reasonable litigation expenses and reasonable attorneys’ fees; and
•
reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or which were imposed on the office holder by a court (i) in a proceeding instituted against him or her by the company, on its behalf, or by a third party, (ii) in connection with criminal indictment of which the office holder was acquitted, or (iii) in a criminal indictment which the office holder was convicted of an offense that does not require proof of criminal intent.
•
any other obligation or expense in respect of which it is permitted or will be permitted under applicable law to indemnify an office holder, including, without limitation, matters referenced in Section 56H(b)(1) of the Securities Law.
An “Administrative Procedure” is defined as a procedure pursuant to chapters H3 (Monetary Sanction by the Israeli Securities Authority), H4 (Administrative Enforcement Procedures of the Administrative Enforcement Committee) or I1 (Arrangement to prevent Procedures or Interruption of procedures subject to conditions) to the Securities Law.
Under the Companies Law and the Securities Law, a company may insure an office holder against the following liabilities incurred for acts performed by him or her as an office holder if and to the extent provided in the company’s articles of association:
•
a breach of the duty of loyalty to the company, provided that the office holder acted in good faith and had a reasonable basis to believe that the act would not harm the company;
•
a breach of duty of care to the company or to a third party, to the extent such a breach arises out of the negligent conduct of the office holder;
•
a monetary liability imposed on the office holder in favor of a third party;
•
a monetary liability imposed on the office holder in favor of an injured party at an Administrative Procedure pursuant to Section 52(54)(a)(1)(a) of the Securities Law; and
•
expenses incurred by an office holder in connection with an Administrative Procedure, including reasonable litigation expenses and reasonable attorneys’ fees.
Under the Companies Law, a company may not indemnify, exculpate or insure an office holder against any of the following:
•
a breach of the duty of loyalty, except for indemnification and insurance for a breach of the duty of loyalty to the company to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
•
a breach of duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder;
•
an act or omission committed with intent to derive illegal personal benefit; or
•
a fine or forfeit levied against the office holder.
Under the Companies Law, exculpation, indemnification and insurance of office holders in a public company must be approved by the compensation committee and the board of directors and, with respect to directors or controlling shareholders, their relatives and third parties in which controlling shareholders have a personal interest, also by the shareholders.
Our amended and restated articles of association permit us to exculpate, indemnify and insure our office holders to the fullest extent permitted or to be permitted by law. Our office holders are currently covered by a directors’ and officers’ liability insurance policy. As of the date of this registration statement, no claims for directors’ and officers’ liability insurance have been filed under this policy and we are not aware of any pending or threatened litigation or proceeding involving any of our office holders, including our directors, in which indemnification is sought.
We have entered into agreements with each of our current office holders exculpating them from a breach of their duty of care to us to the fullest extent permitted by law, subject to limited exceptions, and undertaking to indemnify them to the fullest extent permitted by law, subject to limited exceptions, including, with respect to liabilities resulting from this offering, to the extent that these liabilities are not covered by insurance. This indemnification is limited, with respect to any monetary liability imposed in favor of a third party, to events determined as foreseeable by the board of directors based on our activities. The maximum aggregate amount of indemnification that we may pay to our office holders based on such indemnification agreement is the greater of (1) 25% of our shareholders’ equity pursuant to our audited consolidated financial statements for the year preceding the year in which the event in connection of which indemnification is sought occurred, and (2) $40 million (as may be increased from time to time by shareholders’ approval).
Such indemnification amounts are in addition to any insurance amounts. Each office holder who agrees to receive this letter of indemnification also gives his approval to the termination of all previous letters of indemnification that we have provided to him or her in the past, if any. However, in the opinion of the SEC, indemnification of office holders for liabilities arising under the Securities Act is against public policy and therefore unenforceable.
Item 7. Recent Sales of Unregistered Securities.
In August 2014, we issued a total of 3,388,359 ordinary shares to Arkin Dermatology in connection with the conversion of outstanding preferred shares into ordinary shares following the execution of the Purchase Agreement. In connection with the foregoing conversion, the par value of the ordinary shares (in the amount of approximately $80) was paid.
In August 2017, we issued one ordinary share to Arkin Dermatology in connection with the transfer of an in-process research and development generic product candidate (two ordinary shares after giving effect to the stock split).
All of the foregoing issuances were made outside of the United States pursuant to Regulation S or to U.S. entities pursuant to Section 4(a)(2) of the Securities Act.
Item 8. Exhibits and Financial Statement Schedules.
(a)
Exhibits. See the Exhibit Index attached to this registration statement, which is incorporated by reference herein.
(b)
Financial Statement Schedules. Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto.
Item 9. Undertakings.
a.
The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
b.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
c.
The undersigned registrant hereby undertakes that:
1.
For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
2.
For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
EXHIBIT INDEX
|
Exhibit No.
|
|
|
Description
|
|
| 1.1 |
|
|
Form of Underwriting Agreement. |
|
| 3.1 |
|
|
Amended and Restated Memorandum of Association of the Registrant. |
|
| 3.2** |
|
|
Articles of Association of the Registrant (currently in effect). |
|
| 3.3 |
|
|
Form of Amended and Restated Articles of Association of the Registrant to become effective in connection with this offering. |
|
| 4.1** |
|
|
Form of Specimen Share Certificate. |
|
| 5.1 |
|
|
Opinion of Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co., Israeli counsel to the Registrant, as to the validity of the ordinary shares. |
|
| 10.1#** |
|
|
Form of Amended and Restated 2014 Share Incentive Plan. |
|
| 10.2 |
|
|
Form of Registration Rights Agreement. |
|
| 10.3+** |
|
|
Development, Manufacturing and Commercialization Agreement between Perrigo UK Finco Limited Partnership and Sol-Gel Technologies Ltd., dated as of April 27, 2015. |
|
| 10.4+** |
|
|
Amendment to the Development, Manufacturing and Commercialization Agreement between the Registrant and Perrigo UK Finco Limited Partnership, dated as of October 26, 2015. |
|
| 10.5** |
|
|
Form of Indemnification Agreement. |
|
| 10.6# |
|
|
Compensation Policy. |
|
| 10.7∞** |
|
|
Lease Agreement by and between the Registrant and Rachel Zacks, dated as of October 10, 2007. |
|
| 10.8∞** |
|
|
Lease Agreement by and between the Registrant and Rachel Zacks, dated as of September 29, 2014. |
|
| 10.9∞** |
|
|
Lease Agreement by and between the Registrant and Rachel Zacks, dated as of March 30, 2016. |
|
| 10.10∞** |
|
|
Lease Agreement by and between the Registrant and Rachel Zacks, dated as of September 20, 2016. |
|
| 10.11∞** |
|
|
Lease Agreement by and between the Registrant and Rachel Zacks, dated as of January 30, 2017. |
|
| 10.12** |
|
|
Promissory Note by and between the Registrant and Moshe Arkin, dated as of August 2, 2016. |
|
| 10.13** |
|
|
Schedule A, as amended, of Promissory Note by and between the Registrant and Moshe Arkin, dated as of June 28, 2017. |
|
| 10.14** |
|
|
Instrument of Conversion of Promissory Note by and between the Registrant and Moshe Arkin, dated as of August 22, 2017. |
|
| 10.15** |
|
|
Assignment Agreement between the Registrant and Medicis Pharmaceutical Corporation, dated August 16, 2013. |
|
| 23.1 |
|
|
Consent of Kesselman and Kesselman, Member Firm of PricewaterhouseCoopers International Limited. |
|
| 23.2 |
|
|
Consent of Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co., Israeli counsel to the Registrant (included in Exhibit 5.1). |
|
| 24.1** |
|
|
Power of Attorney (included in the signature page of the Registration Statement). |
|
*
To be filed by amendment
**
Previously filed
∞
Informal English translation of the original Hebrew document
+
Confidential treatment to be requested
#
Indicates management contract or compensatory plan
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Ness Ziona, State of Israel on January 23, 2018.
| |
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|
|
Sol-Gel Technologies Ltd. |
|
| |
|
|
|
By: |
|
|
/s/ Alon Seri-Levy |
|
| |
|
|
|
|
|
|
Name: Alon Seri-Levy |
|
| |
|
|
|
|
|
|
Title: Chief Executive Officer |
|
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
|
Signatures
|
|
|
Title
|
|
|
Date
|
|
|
/s/ Alon Seri-Levy
Alon Seri-Levy
|
|
|
Chief Executive Officer |
|
|
January 23, 2018 |
|
|
*
Gilad Mamlok
|
|
|
Chief Financial Officer |
|
|
January 23, 2018 |
|
|
*
Moshe Arkin
|
|
|
Director |
|
|
January 23, 2018 |
|
|
*By
/s/ Alon Seri-Levy
Alon Seri-Levy
Attorney-in-fact
|
|
|
|
|
|
|
|
Signature of authorized representative in the United States
Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant’s duly authorized representative has signed this registration statement on Form F-1 on this 23rd day of January, 2018.
| |
|
|
|
By: |
|
|
/s/ Colleen A. DeVries
|
|
| |
|
|
|
|
|
|
Name: Colleen A. DeVries |
|
| |
|
|
|
|
|
|
Title: Senior Vice-President on behalf
of Cogency Global Inc. |
|
Exhibit 1.1
Sol-Gel Technologies Ltd.
[●] Ordinary Shares
(Par Value NIS 0.1 Per Share)
UNDERWRITING AGREEMENT
[●], 2018
JEFFERIES LLC
BMO CAPITAL MARKETS CORP.
As Representatives of the several Underwriters
c/o JEFFERIES LLC
520 Madison Avenue
New York, New York 10022
c/o BMO CAPITAL MARKETS CORP.
3 Times Square, 25th Floor
New York, NY 10036
Ladies and Gentlemen:
Introductory. Sol-Gel Technologies
Ltd., a company organized under the laws of the State of Israel (the “Company”), proposes to issue and sell
to the several underwriters named in Schedule A (the “Underwriters”) an aggregate of [●] ordinary
shares of the Company, par value NIS 0.1 per share (the “Ordinary Shares”). The [●] Ordinary Shares to
be sold by the Company are called the “Firm Shares.” In addition, the Company has granted to the Underwriters
an option to purchase up to an additional [●] Ordinary Shares as provided in Section 2. The additional [●] Ordinary
Shares to be sold pursuant to such option are called the “Optional Shares.” The Firm Shares and, if and to the
extent such option is exercised, the Optional Shares are collectively called the “Offered Shares.” Jefferies
LLC (“Jefferies”) and BMO Capital Markets Corp. (“BMO”) have agreed to act as representatives
of the several Underwriters (in such capacity, the “Representatives”) in connection with the offering and sale
of the Offered Shares.
The Company has prepared
and filed with the Securities and Exchange Commission (the “Commission”) a registration statement on Form F-1,
File No. 333-220234 which contains a form of prospectus to be used in connection with the public offering and sale of the Offered
Shares. Such registration statement, as amended, including the financial statements, exhibits and schedules thereto, in the form
in which it became effective under the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder
(collectively, the “Securities Act”), including any information deemed to be a part thereof at the time of effectiveness
pursuant to Rule 430A under the Securities Act, is called the “Registration Statement.” Any registration statement
filed by the Company pursuant to Rule 462(b) under the Securities Act in connection with the offer and sale of the Offered Shares
is called the “Rule 462(b) Registration Statement,” and from and after the date and time of filing of any such
Rule 462(b) Registration Statement the term “Registration Statement” shall include the Rule 462(b) Registration Statement.
The Company has prepared and filed, in accordance with Section 12 of the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder (collectively, the “Exchange Act”), a registration statement (as amended, the “Exchange
Act Registration Statement”) on Form 8-A (File No. [●]) under the Exchange Act to register, under Section 12(b)
of the Exchange Act, the class of securities consisting of the Ordinary Shares. The prospectus, in the form first used by the Underwriters
to confirm sales of the Offered Shares or in the form first made available to the Underwriters by the Company to meet requests
of purchasers pursuant to Rule 173 under the Securities Act is called the “Prospectus.” The preliminary prospectus
dated [●]. describing the Offered Shares and the offering thereof is called the “Preliminary Prospectus,”
and the Preliminary Prospectus and any other prospectus in preliminary form that describes the Offered Shares and the offering
thereof and is used prior to the filing of the Prospectus is called a “preliminary prospectus.” As used herein,
“Applicable Time” is [●][a.m.][p.m.] (New York City time) on [●]. As used herein, “free
writing prospectus” has the meaning set forth in Rule 405 under the Securities Act, and “Time of Sale Prospectus”
means the Preliminary Prospectus, together with the free writing prospectuses, if any, identified in Schedule B hereto and
the pricing information identified in Schedule C hereto. As used herein, “Road Show” means a “road
show” (as defined in Rule 433 under the Securities Act) relating to the offering of the Offered Shares contemplated hereby
that is a “written communication” (as defined in Rule 405 under the Securities Act). As used herein, “Section
5(d) Written Communication” means each written communication (within the meaning of Rule 405 under the Securities Act)
that is made in reliance on Section 5(d) of the Securities Act by the Company or any person authorized to act on behalf of the
Company to one or more potential investors that are qualified institutional buyers (“QIBs”) and/or institutions
that are accredited investors (“IAIs”), as such terms are respectively defined in Rule 144A and Rule 501(a)
under the Securities Act, to determine whether such investors might have an interest in the offering of the Offered Shares; “Section
5(d) Oral Communication” means each oral communication, if any, made in reliance on Section 5(d) of the Securities Act
by the Company or any person authorized to act on behalf of the Company made to one or more QIBs and/or one or more IAIs to determine
whether such investors might have an interest in the offering of the Offered Shares; “Marketing Materials” means
any materials or information provided to investors by, or with the approval of, the Company in connection with the marketing of
the offering of the Offered Shares, including any roadshow or investor presentations made to investors by the Company (whether
in person or electronically); and “Permitted Section 5(d) Communication” means the Section 5(d) Written Communication(s)
and Marketing Materials listed on Schedule D attached hereto.
All references in this
Agreement to (i) the Registration Statement, any preliminary prospectus (including the Preliminary Prospectus) or the Prospectus,
or any amendments or supplements to any of the foregoing, or any free writing prospectus, shall include any copy thereof filed
with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”) and (ii)
the Prospectus shall be deemed to include any “electronic Prospectus” provided for use in connection with the offering
of the Offered Shares as contemplated by Section 3(n) of this Agreement.
The Company hereby confirms its agreements
with the Underwriters as follows:
Section
1. Representations and Warranties of the Company. The Company
hereby represents, warrants and covenants to each Underwriter, as of the date of this Agreement, as of the First Closing Date (as
hereinafter defined) and as of each Option Closing Date (as hereinafter defined), if any, as follows:
(a) Compliance
with Registration Requirements. The Registration Statement has become effective under the Securities Act. The Exchange
Act Registration Statement has become effective under the Exchange Act. The Company has complied, to the Commission’s satisfaction,
with all requests of the Commission for additional or supplemental information, if any. No stop order suspending the effectiveness
of the Registration Statement is in effect and no proceedings for such purpose have been instituted or are pending or, to the best
knowledge of the Company, are contemplated or threatened by the Commission. The Company is a “foreign private issuer”
within the meaning of Rule 405 under the Securities Act.
(b) Disclosure.
Each preliminary prospectus and the Prospectus when filed complied in all material respects with the Securities Act and, if filed
by electronic transmission pursuant to EDGAR, was identical (except as may be permitted by Regulation S-T under the Securities
Act) to the copy thereof delivered to the Underwriters for use in connection with the offer and sale of the Offered Shares. Each
of the Registration Statement and any post-effective amendment thereto, at the time it became or becomes effective, complied and
will comply in all material respects with the Securities Act and did not and will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading.
As of the Applicable Time, the Time of Sale Prospectus (including any preliminary prospectus wrapper) did not, and at the First
Closing Date (as defined in Section 2) and at each applicable Option Closing Date (as defined in Section 2), will not, contain
any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading. The Prospectus (including any Prospectus wrapper), as of its date,
did not, and at the First Closing Date and at each applicable Option Closing Date, will not, contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. The representations and warranties set forth in the three immediately preceding sentences
do not apply to statements in or omissions from the Registration Statement or any post-effective amendment thereto, or the Prospectus
or the Time of Sale Prospectus, or any amendments or supplements thereto, made in reliance upon and in conformity with written
information relating to any Underwriter furnished to the Company in writing by the Representatives expressly for use therein, it
being understood and agreed that the only such information consists of the information described in Section 9(b) below. There are
no contracts or other documents required to be described in the Time of Sale Prospectus or the Prospectus or to be filed as an
exhibit to the Registration Statement which have not been described or filed as required.
(c) Free
Writing Prospectuses; Road Show. As of the determination date referenced in Rule 164(h) under the Securities Act, the Company
was not, is not or will not be (as applicable) an “ineligible issuer” in connection with the offering of the Offered
Shares pursuant to Rules 164, 405 and 433 under the Securities Act. Each free writing prospectus that the Company is required to
file pursuant to Rule 433(d) under the Securities Act has been, or will be, filed with the Commission in accordance with the requirements
of the Securities Act. Each free writing prospectus that the Company has filed, or is required to file, pursuant to Rule 433(d)
under the Securities Act or that was prepared by or on behalf of or used or referred to by the Company complies or will comply
in all material respects with the requirements of Rule 433 under the Securities Act, including timely filing with the Commission
or retention where required and legending, and each such free writing prospectus, as of its issue date and at all subsequent times
through the completion of the public offer and sale of the Offered Shares did not, does not and will not include any information
that conflicted, conflicts or will conflict with the information contained in the Registration Statement, the Prospectus or any
preliminary prospectus and not superseded or modified. Except for the free writing prospectuses, if any, identified in Schedule
B, and electronic road shows, if any, furnished to you before first use, the Company has not prepared, used or referred to,
and will not, without your prior written consent, prepare, use or refer to, any free writing prospectus. Each Road Show, when considered
together with the Time of Sale Prospectus, did not, as of the Applicable Time, contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were
made, not misleading.
(d) Distribution
of Offering Material by the Company. Prior to the later of (i) the expiration or termination of the option granted to the
several Underwriters in Section 2, (ii) the completion of the Underwriters’ distribution of the Offered Shares and (iii)
the expiration of 25 days after the date of the Prospectus, the Company has not distributed and will not distribute any offering
material in connection with the offering and sale of the Offered Shares other than the Registration Statement, the Time of Sale
Prospectus, the Prospectus or any free writing prospectus reviewed and consented to by the Representatives, the free writing prospectuses,
if any, identified on Schedule B hereto and any Permitted Section 5(d) Communications.
(e) The
Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by the Company.
(f) Authorization
of the Offered Shares. The Offered Shares have been duly authorized for issuance and sale pursuant to this Agreement and,
when issued and delivered by the Company against payment therefor pursuant to this Agreement, will be validly issued, fully paid
and nonassessable, and the issuance and sale of the Offered Shares is not subject to any preemptive rights, rights of first refusal
or other similar rights to subscribe for or purchase the Offered Shares or any other securities of the Company. Upon the sale and
delivery to the Underwriters of the Offered Shares, and payment therefor, the Underwriters will acquire good, marketable and valid
title to such Offered Shares, free and clear of all pledges, liens, security interests, charges, claims or encumbrances.
(g) No
Applicable Registration or Other Similar Rights. There are no persons with registration or other similar rights to have
any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by
this Agreement, except for such rights as have been duly waived.
(h) No
Material Adverse Change. Except as otherwise disclosed in the Registration Statement, the Time of Sale Prospectus and the
Prospectus, subsequent to the respective dates as of which information is given in the Registration Statement, the Time of Sale
Prospectus and the Prospectus: (i) there has been no material adverse change, or any development that would reasonably be expected
to result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business, properties, operations,
assets, liabilities or prospects, whether or not arising from transactions in the ordinary course of business, of the Company (any
such change being referred to herein as a “Material Adverse Change”); (ii) the Company has not incurred any
material liability or obligation, indirect, direct or contingent, including without limitation any losses or interference with
its business from fire, explosion, flood, earthquakes, accident or other calamity, whether or not covered by insurance, or from
any strike, labor dispute or court or governmental action, order or decree, that are material, individually or in the aggregate,
to the Company or has entered into any transactions not in the ordinary course of business; and (iii) there has not been any material
decrease in the share capital or any material increase in any short-term or long-term indebtedness of the Company and there has
been no dividend or distribution of any kind declared, paid or made by the Company or any repurchase or redemption by the Company
of any class of share capital.
(i) Independent
Accountants. Kesselman & Kesselman, a member firm of PricewaterhouseCoopers International Limited, which has expressed
its opinion with respect to the financial statements (which term as used in this Agreement includes the related notes thereto)
filed with the Commission as a part of the Registration Statement, the Time of Sale Prospectus and the Prospectus, is (i) an independent
registered public accounting firm as required by the Securities Act, the Exchange Act, and the rules of the Public Company Accounting
Oversight Board (“PCAOB”), (ii) in compliance with the applicable requirements relating to the qualification
of accountants under Rule 2-01 of Regulation S-X under the Securities Act and (iii) a registered public accounting firm as defined
by the PCAOB whose registration has not been suspended or revoked and who has not requested such registration to be withdrawn.
(j) Financial
Statements. The financial statements filed with the Commission as a part of the Registration Statement, the Time of Sale
Prospectus and the Prospectus present fairly the consolidated financial position of the Company as of the dates indicated and the
results of their operations, changes in shareholders’ equity and cash flows for the periods specified. Such financial statements
have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) applied on a consistent
basis throughout the periods involved, except as may be expressly stated in the related notes thereto. No other financial statements
or supporting schedules are required to be included in the Registration Statement, the Time of Sale Prospectus or the Prospectus.
The financial data set forth in each of the Registration Statement, the Time of Sale Prospectus and the Prospectus under the captions
“Prospectus Summary—Summary Financial Data,” “Selected Financial Data” and “Capitalization”
fairly present, in all material respects, the information set forth therein on a basis consistent with that of the audited financial
statements contained in the Registration Statement, the Time of Sale Prospectus and the Prospectus. All disclosures contained in
the Registration Statement, any preliminary prospectus or the Prospectus and any free writing prospectus that constitute non-GAAP
financial measures (as defined by the rules and regulations under the Securities Act and the Exchange Act) comply with Regulation
G under the Exchange Act and Item 10 of Regulation S-K under the Securities Act, as applicable. To the Company’s knowledge,
no person who has been suspended or barred from being associated with a registered public accounting firm, or who has failed to
comply with any sanction pursuant to Rule 5300 promulgated by the PCAOB, has participated in or otherwise aided the preparation
of, or audited, the financial statements, supporting schedules or other financial data filed with the Commission as a part of the
Registration Statement, the Time of Sale Prospectus and the Prospectus.
(k) Company’s
Accounting System. The Company makes and keeps accurate books and records and maintains a system of internal accounting
controls designed and which the Company reasonably believes is sufficient to provide reasonable assurance that: (i) transactions
are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability
for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
(l) Disclosure
Controls and Procedures; Deficiencies in or Changes to Internal Control Over Financial Reporting. The Company has established
and maintains disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 under the Exchange Act), which (i) are
designed to ensure that material information relating to the Company is made known to the Company’s principal executive officer
and its principal financial officer by others within those entities; (ii) have been evaluated by management of the Company for
effectiveness as of the end of the Company’s most recent fiscal quarter; and (iii) are effective in all material respects
to perform the functions for which they were established. Since the end of the Company’s most recent audited fiscal year,
there have been no significant deficiencies or material weakness in the Company’s internal control over financial reporting
(whether or not remediated) and no change in the Company’s internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company
is not aware of any change in its internal control over financial reporting that has occurred during its most recent fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial
reporting.
(m) Incorporation
and Good Standing of the Company. The Company has been duly organized and is validly existing as a company under the laws
of the State of Israel and has the corporate power and authority to own, lease and operate its properties and to conduct its business
as described in the Registration Statement, the Time of Sale Prospectus and the Prospectus and to enter into and perform its obligations
under this Agreement. The Company is duly qualified to transact business and is in good standing in each other jurisdiction in
which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except
for such failure to be so qualified or in good standing as could not be expected, individually or in the aggregate, to have a material
adverse effect on the condition (financial or other), earnings, business, properties, operations, assets, liabilities or prospects
of the Company (a “Material Adverse Effect”). The Company has not been designated as a “breaching company”
(within the meaning of the Israeli Companies Law 5759-1999) by the Registrar of Companies of the State of Israel. The certificate
of incorporation, memorandum of association, articles of association and other organizational documents of the Company comply with
the requirements of applicable Israeli law and are in full force and effect.
(n) Capitalization
and Other Share Capital Matters. The authorized, issued and outstanding share capital of the Company is as set forth in
the Registration Statement, the Time of Sale Prospectus and the Prospectus under the caption “Capitalization” (other
than for subsequent issuances, if any, pursuant to employee benefit plans, or upon the exercise of outstanding options or warrants,
in each case described in the Registration Statement, the Time of Sale Prospectus and the Prospectus). The share capital of the
Company, including the Ordinary Shares and the Offered Shares, conforms in all material respects to each description thereof contained
in the Time of Sale Prospectus. All of the issued and outstanding Ordinary Shares have been duly authorized and validly issued,
are fully paid and nonassessable and have been issued in compliance with all federal, state and local, including Israeli, securities
laws. None of the outstanding Ordinary Shares was issued in violation of any preemptive rights, rights of first refusal or other
similar rights to subscribe for or purchase securities of the Company. The form of certificates for the Ordinary Shares conforms
to the corporate law of the jurisdiction of the Company’s organization and to any requirements of the Company’s organizational
documents. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights
to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any share capital of the Company
other than those described in the Registration Statement, the Time of Sale Prospectus and the Prospectus. The descriptions of the
Company’s equity compensation plans or arrangements, and the options or other rights granted thereunder, set forth in the
Registration Statement, the Time of Sale Prospectus and the Prospectus accurately and fairly present, in all material respects,
the information required to be shown with respect to such plans, arrangements, options and rights.
(o) Stock
Exchange Listing. The Offered Shares have been approved for listing on The NASDAQ Global Market (the “NASDAQ”),
subject only to official notice of issuance.
(p) Non-Contravention
of Existing Instruments; No Further Authorizations or Approvals Required. The Company is not in violation of its memorandum
of association or its articles of association, nor is it in default (or, with the giving of notice or lapse of time, would be in
default) (“Default”) under any indenture, loan, credit agreement, note, lease, license agreement, contract,
franchise or other instrument (including, without limitation, any pledge agreement, security agreement, mortgage or other instrument
or agreement evidencing, guaranteeing, securing or relating to indebtedness) to which the Company is a party or by which any of
them may be bound, or to which any of their respective properties or assets are subject, including any instrument of approval granted
to any of them by the Israel Innovation Authority of the Israeli Ministry of Economy and Industry (the “IIA”)
(each, an “Existing Instrument”), except for such Defaults as could not be expected, individually or in the
aggregate, to have a Material Adverse Effect. The Company’s execution, delivery and performance of this Agreement, consummation
of the transactions contemplated hereby and by the Registration Statement, the Time of Sale Prospectus and the Prospectus and the
issuance and sale of the Offered Shares (including the use of proceeds from the sale of the Offered Shares as described in the
Registration Statement, the Time of Sale Prospectus and the Prospectus under the caption “Use of Proceeds”) (i) have
been duly authorized by all necessary corporate action and will not result in any violation of the provisions of the memorandum
of association or articles of association of the Company (ii) will not conflict with or constitute a breach of, or Default or a
Debt Repayment Triggering Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company pursuant to, or require the consent of any other party to, any Existing Instrument,
except as could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect and (iii) will
not result in any violation of any law, administrative regulation or administrative or court decree applicable to the Company,
except as could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. No consent, approval,
authorization or other order of, or registration or filing with, any court or other governmental or regulatory authority or agency,
is required for, or in connection with, the Company’s execution, delivery and performance of this Agreement and consummation
of the transactions contemplated hereby and by the Registration Statement, the Time of Sale Prospectus and the Prospectus, except
(A) such as have been obtained or made by the Company and are in full force and effect under the Securities Act and such as may
be required under applicable state securities or blue sky laws or FINRA and (B) following the First Closing Date and each Option
Closing Date (as applicable), the obligation to file certain notices with the Registrar of Companies of the State of Israel regarding
the issuance of the Offered Shares and the Company becoming a “public company” (within the meaning of the Israeli Companies
Law 5759-1999) and certain information with the Authority for Investment and Development of Industry and the Economy of the State
of Israel (formerly known as the Investment Center) of the Israeli Ministry of Economy and Industry (the “Investment Center”)
and the IIA. Subject to the Underwriters’ compliance with their obligations under Section 5(b) hereof, the Company is not
required to publish a prospectus in the State of Israel under the laws of the State of Israel with respect to the offer or sale
of the Offered Shares. As used herein, a “Debt Repayment Triggering Event” means any event or condition which
gives, or with the giving of notice or lapse of time would give, the holder of any note, debenture or other evidence of indebtedness
(or any person acting on such holder’s behalf) the right to require the repurchase, redemption or repayment of all or a portion
of such indebtedness by the Company.
(q) Compliance
with Laws. The Company has been and is in compliance with all applicable laws, rules and regulations, except where failure
to be so in compliance would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect.
(r) No
Material Actions or Proceedings. There is no action, suit, proceeding, inquiry or investigation brought by or before any
governmental entity now pending or, to the knowledge of the Company, threatened, against or affecting the Company, which would
reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect or materially and adversely affect
the consummation of the transactions contemplated by this Agreement or the performance by the Company of its obligations hereunder;
and the aggregate of all pending legal or governmental proceedings to which the Company is a party or of which any of its respective
properties or assets is the subject, including ordinary routine litigation incidental to their business, if determined adversely
to the Company, would not reasonably be expected to have a Material Adverse Effect. No material labor dispute with the employees
of the Company, or with the employees of any principal supplier, manufacturer, customer or contractor of the Company, exists or,
to the knowledge of the Company, is threatened or imminent.
(s) Intellectual
Property Rights. The Company owns, or possesses sufficient legal rights to all inventions, patent applications, patents,
trademarks, trade names, service names, copyrights, trade secrets and other intellectual property described in the Registration
Statement, the Time of Sale Prospectus and the Prospectus as being owned or licensed by them or which are necessary for the conduct
of their respective businesses as currently conducted or as currently proposed to be conducted (collectively, “Intellectual
Property”). To the Company’s knowledge: (i) other than commercially available software products under standard
end-user object code licensing agreements and other than intellectual property of third parties disclosed in the Registration Statement,
the Time of Sale Prospectus or the Prospectus, there are no third parties who have rights to any Intellectual Property; and (ii)
there is no infringement by third parties of any Intellectual Property. There is no pending or, to the Company’s knowledge,
threatened action, suit, proceeding or claim by others: (A) challenging the Company’s rights in or to any Intellectual Property,
and the Company is unaware of any facts which would form a reasonable basis for any such action, suit, proceeding or claim and
which would be expected to have, individually or in the aggregate, a Material Adverse Effect; (B) challenging the validity, enforceability
or scope of any Intellectual Property, and the Company is unaware of any facts which would form a reasonable basis for any such
action, suit, proceeding or claim and which would be expected to have, individually or in the aggregate, a Material Adverse Effect;
or (C) asserting that the Company infringes or otherwise violates, or would, upon the commercialization of any product or service
described in the Registration Statement, the Time of Sale Prospectus or the Prospectus as under development, infringe or violate,
any patent, trademark, trade name, service name, copyright, trade secret or other proprietary rights of others, and the Company
is unaware of any facts which would form a reasonable basis for any such action, suit, proceeding or claim and which would be expected
to have, individually or in the aggregate, a Material Adverse Effect. The Company has complied with the terms of each agreement
pursuant to which Intellectual Property has been licensed to the Company, and all such agreements are in full force and effect,
except as would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. The product candidates
described in the Registration Statement, the Time of Sale Prospectus and the Prospectus as under development by the Company fall
within the scope of the claims of one or more patents owned by, or exclusively licensed to, the Company.
(t) All
Necessary Permits, etc. The Company possesses such valid and current certificates, authorizations or permits required by
state, federal or foreign, including Israeli, regulatory agencies or bodies to conduct their respective businesses as currently
conducted and as described in the Registration Statement, the Time of Sale Prospectus or the Prospectus (“Permits”),
except where failure to possess such Permits would not reasonably be expected, individually or in the aggregate, to result in a
Material Adverse Effect. The Company is not in violation of, or in default under, any of the Permits and has not received any notice
of proceedings relating to the revocation or modification of, or non-compliance with, any Permits, which individually or in the
aggregate, would reasonably be expected to result in a Material Adverse Effect. The Company has not received any written notice
denying, revoking or modifying any grants or benefits from the IIA or the Investment Center (including, in all such cases, notice
of proceedings or investigations related thereto). All information supplied by the Company with respect to the applications or
notifications relating to grants and benefits from the IIA and/or the Investment Center was true, correct and complete in all material
respects when supplied to the appropriate authorities.
(u) Title
to Properties. The Company has good and marketable title to all of the real and personal property and other assets reflected
as owned in the financial statements referred to in Section 1(j) above (or elsewhere in the Registration Statement, the Time of
Sale Prospectus or the Prospectus), in each case free and clear of any security interests, mortgages, liens, encumbrances, equities,
adverse claims and other defects, except such as would not reasonably be expected, individually or in the aggregate, to have a
Material Adverse Effect. The real property, improvements, equipment and personal property held under lease by the Company are held
under valid and enforceable leases, with such exceptions as are not material and do not materially interfere with the use made
or proposed to be made of such real property, improvements, equipment or personal property by the Company.
(v) Tax
Law Compliance. The Company is not, and has not been, required to file any United States (federal, state and local), or
non-Israeli income and franchise tax returns. The Company has filed all material Israeli income tax returns and has properly requested
extensions thereof and has paid all taxes required to be paid by it and, if due and payable, any related or similar assessment,
fine or penalty levied against it except, in each case, to the extent the requirement to file such tax returns or pay such taxes
is being contested in good faith and by appropriate proceedings or the failure to do so could not be expected, individually or
in the aggregate, to have a Material Adverse Effect. The Company has made adequate charges, accruals and reserves in the applicable
financial statements referred to in Section 1(j) above in respect of all Israeli income taxes for all periods as to which the tax
liability of the Company has not been finally determined except to the extent the failure to do so could not be expected, individually
or in the aggregate, to have a Material Adverse Effect. No transaction, stamp or other issuance or transfer taxes or duties, and
assuming that the Underwriters are not otherwise subject to taxation in Israel due to Israeli tax residence or the existence of
a permanent establishment in Israel, then no capital gains, income, withholding or other taxes are payable by or on behalf of the
Underwriters to the State of Israel or to any political subdivision or authority thereof or therein in connection with (i) the
issuance, sale and delivery of the Offered Shares by the Company; (ii) the purchase from the Company, and the initial sale and
delivery by the Underwriters of the Offered Shares to purchasers thereof; (iii) the holding or transfer of the Offered Shares;
or (iv) the execution and delivery of this Agreement or any other document to be furnished hereunder.
(w) Insurance.
Except as otherwise disclosed in the Registration Statement, the Time of Sale Prospectus and the Prospectus, the Company is insured
by recognized, financially sound and reputable institutions with policies in such amounts and with such deductibles and covering
such risks as are generally deemed adequate and customary for their businesses including, but not limited to, policies covering
real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and earthquakes
and policies covering the Company for product liability claims and clinical trial liability claims. The Company has no reason to
believe that it or any of its subsidiaries will not be able (i) to renew its existing insurance coverage as and when such policies
expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business
as now conducted and at a cost that would not reasonably be expected to have a Material Adverse Effect. The Company has not been
denied any insurance coverage which it has sought or for which it has applied.
(x) Compliance
with Environmental Laws. Except as would not reasonably be expected, individually or in the aggregate, to have a Material
Adverse Effect: (i) the Company is not in violation of any applicable Israeli or United States (federal, state or local) or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation
thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human
health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata)
or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, “Hazardous
Materials”) or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling
of Hazardous Materials (collectively, “Environmental Laws”); (ii) the Company has all permits, authorizations
and approvals required under any applicable Environmental Laws and are each in compliance with their requirements; (iii) there
are no pending or threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices
of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company; and (iv) there
are no events or circumstances that might reasonably be expected to form the basis of an order for clean-up or remediation, or
an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company relating to
Hazardous Materials or any Environmental Laws.
(y) Periodic
Review of Costs of Environmental Compliance. In the ordinary course of its business, the Company conducts a periodic review
of the effect of Environmental Laws on the business, operations and properties of the Company, in the course of which it identifies
and evaluates associated costs and liabilities (including, without limitation, any capital or operating expenditures required for
clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints
on operating activities and any potential liabilities to third parties). No facts or circumstances have come to the Company’s
attention that could result in costs or liabilities that could be expected, individually or in the aggregate, to have a Material
Adverse Effect.
(z) Benefit
Plan Compliance. Each benefit, pension and compensation plan, agreement policy and arrangement that is maintained, administered
or contributed to by the Company for current or former employees or directors of the Company, or with respect to which any of such
entities could reasonably be expected to have any current, future or contingent liability or responsibility, has been maintained
in compliance with its terms and the requirements of any applicable statutes, orders, rules and regulations, except as would not
individually or in the aggregate be expected to have a Material Adverse Effect and except with respect to matters over which none
of the Company has control; the Company has complied with all applicable statutes, orders, rules and regulations in regard to such
plans, agreements, policies and arrangements, except as would not individually or in the aggregate be expected to have a Material
Adverse Effect; the fair market value of the assets of each such plan, agreement, policy and arrangement which is required or intended
to be funded (excluding for these purposes accrued but unpaid contributions) exceeds the present value of all benefits accrued
or earned or payments due under such plan, agreement, policy or arrangement determined using reasonable actuarial assumptions,
except as would not be expected to have, individually or in the aggregate, a Material Adverse Effect. The liabilities reflected
on the relevant entity’s financial statements with respect to each such plan, agreement, policy and arrangement which is
not required or intended to be funded accurately reflects the present value of all benefits earned or accrued or payments due under
such plan, agreement, policy or arrangement determined using reasonable actuarial assumptions.
(aa) Compliance
with the Sarbanes-Oxley Act. The Company has taken all necessary actions to ensure that, upon the effectiveness of the
Registration Statement, it will be in compliance in all material respects with all provisions of the Sarbanes-Oxley Act of 2002
and all rules and regulations promulgated thereunder or implementing the provisions thereof (collectively, the “Sarbanes-Oxley
Act”) that are then in effect and with which the Company is required to comply as of the effectiveness of the Registration
Statement, and is or will be taking steps to ensure that it will be in compliance in all material respects with other provisions
of the Sarbanes-Oxley Act not currently in effect, upon the effectiveness of such provisions, or which will become applicable to
the Company at all times after the effectiveness of the Registration Statement.
(bb) Company
Not an “Investment Company.” The Company is not, and will not be, either after receipt of payment for the Offered
Shares or after the application of the proceeds therefrom as described under “Use of Proceeds” in the Registration
Statement, the Time of Sale Prospectus or the Prospectus, required to register as an “investment company” under the
Investment Company Act of 1940, as amended (the “Investment Company Act”).
(cc) No
Price Stabilization or Manipulation; Compliance with Regulation M. The Company has not taken, directly or indirectly, any
action designed to or that would reasonably be expected to cause or result in stabilization or manipulation of the price of the
Offered Shares or of any “reference security” (as defined in Rule 100 of Regulation M under the Exchange Act (“Regulation
M”)) with respect to the Offered Shares, whether to facilitate the sale or resale of the Offered Shares or otherwise,
and has taken no action which would directly or indirectly violate Regulation M. In addition, the Company has not engaged in any
form of solicitation, advertising or other action constituting an offer or a sale under the Israeli Securities Law 5728-1968, as
amended (the “Israeli Securities Law”) and the regulations promulgated thereunder in connection with the transactions
contemplated hereby which would require the Company to publish a prospectus in the State of Israel under the laws of the State
of Israel.
(dd) Related-Party
Transactions. There are no business relationships or related-party transactions involving the Company or any other person
required to be described in the Registration Statement, the Time of Sale Prospectus or the Prospectus that have not been described
as required.
(ee) FINRA
Matters. All of the information provided to the Underwriters or to counsel for the Underwriters by the Company and its
officers and directors and, to the Company’s knowledge, its counsel and the holders of any securities (debt or equity) or
options to acquire any securities of the Company in connection with the offering of the Offered Shares is true, complete, correct
in all material respects and compliant with FINRA’s rules and any letters, filings or other supplemental information provided
to FINRA pursuant to FINRA Rules or NASD Conduct Rules is true, complete and correct in all material respects.
(ff) Parties
to Lock-Up Agreements. The Company has furnished to the Underwriters a letter agreement in the form attached hereto as
Exhibit A (the “Lock-up Agreement”) from each of the persons listed on Exhibit B and all other
securityholders of the Company. Such Exhibit B lists under an appropriate caption the directors and executive officers of
the Company. If any additional persons shall become directors or executive officers of the Company prior to the end of the Company
Lock-up Period (as defined below), the Company shall cause each such person, prior to or contemporaneously with their appointment
or election as a director or executive officer of the Company, to execute and deliver to the Representatives a Lock-up Agreement.
(gg) Statistical
and Market-Related Data. All statistical, demographic and market-related data included in the Registration Statement, the
Time of Sale Prospectus or the Prospectus are based on or derived from sources that the Company believes, after reasonable inquiry,
to be reliable and accurate in all material respects. To the extent required, the Company has obtained the written consent to the
use of such data from such sources.
(hh) No
Unlawful Contributions or Other Payments. Neither the Company nor, to the Company’s knowledge, any employee or agent
of the Company, has made any contribution or other payment to any official of, or candidate for, any federal, state or foreign
office in violation of any law or of the character required to be disclosed in the Registration Statement, the Time of Sale Prospectus
or the Prospectus.
(ii) Foreign
Corrupt Practices Act. Neither the Company nor any director or officer of the Company, nor, to the knowledge of the Company,
any agent, employee, affiliate or other person acting on behalf of the Company has, in the course of its actions for, or on behalf
of, the Company (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating
to political activity; (ii) made any direct or indirect unlawful payment to any domestic government official, “foreign official”
(as defined in the U.S. Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (collectively,
the “FCPA”) or employee from corporate funds; (iii) violated or is in violation of any provision of the FCPA
or any applicable non-U.S. anti-bribery statute or regulation; or (iv) made any unlawful bribe, rebate, payoff, influence payment,
kickback or other unlawful payment to any domestic government official, such foreign official or employee; and the Company and,
to the knowledge of the Company, the Company’s affiliates have conducted their respective businesses in compliance with the
FCPA and have instituted and maintain policies and procedures designed to ensure, and which are reasonably expected to continue
to ensure, continued compliance therewith. The foregoing representation and warranty shall also be deemed given regarding laws
of non-U.S. jurisdictions similar to the FCPA, including, without limitation, Sections 291 and 291A of the Israel Penal Law 5737-1977
and the rules and regulations thereunder.
(jj) Money
Laundering Laws. The operations of the Company are, and have been conducted at all times, in compliance with applicable
financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended,
the money laundering statutes of all applicable jurisdictions, the rules and regulations thereunder and any related or similar
applicable rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the “Money
Laundering Laws”) and no action, suit or proceeding by or before any court or governmental agency, authority or body
or any arbitrator involving the Company with respect to the Money Laundering Laws is pending or, to the best knowledge of the Company,
threatened.
(kk) OFAC.
Neither the Company nor any director or officer of the Company or any of its subsidiaries, nor, to the knowledge of the Company,
after due inquiry, any agent, employee, affiliate or person acting on behalf of the Company is currently subject to any sanctions
administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”), the United Nations
Security Council (“UNSC”), the European Union, Her Majesty’s Treasury (“HMT”), or similar
laws or rules of the State of Israel (collectively, “Sanctions”), nor is the Company located, organized or resident
in a country or territory that is the subject of Sanctions; and the Company will not directly or indirectly use the proceeds of
this offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, or any joint venture partner or
other person or entity, for the purpose of financing the activities of or business with any person, or in any country or territory,
that currently is the subject to any Sanctions, or in any other manner that will result in a violation by any person (including
any person participating in the transaction whether as underwriter, advisor, investor or otherwise) of such Sanctions.
(ll) Brokers.
Except pursuant to this Agreement, there is no broker, finder or other party that is entitled to receive from the Company any
brokerage or finder’s fee or other fee or commission as a result of any transactions contemplated by this Agreement.
(mm) Submission
to Jurisdiction. The Company has the power to submit, and pursuant to Section 18 of this Agreement, has legally, validly,
effectively and irrevocably submitted, to the personal jurisdiction of each United States federal court and New York state court
located in the Borough of Manhattan, in the City of New York, New York, U.S.A. (each, a “New York Court”), and
the Company has the power to designate, appoint and authorize, and pursuant to Section 18 of this Agreement, has legally, validly,
effectively and irrevocably designated, appointed and authorized an agent for service of process in any action arising out of or
relating to this Agreement or the Offered Shares in any New York Court, and service of process effected on such authorized agent
will be effective to confer valid personal jurisdiction over the Company as provided in Section 18 hereof.
(nn) No
Rights of Immunity. Except as provided by laws or statutes generally applicable to transactions of the type described in
this Agreement, neither the Company nor any of its respective properties, assets or revenues has any right of immunity under the
laws of the State of Israel, New York or United States law, from any legal action, suit or proceeding, from the giving of any relief
in any such legal action, suit or proceeding, from set-off or counterclaim, from the jurisdiction of any Israeli, New York or United
States federal court, from service of process, attachment upon or prior judgment, or attachment in aid of execution of judgment,
or from execution of a judgment, or other legal process or proceeding for the giving of any relief or for the enforcement of a
judgment, in any such court, with respect to its obligations, liabilities or any other matter under or arising out of or in connection
with this Agreement. To the extent that the Company or any of its respective properties, assets or revenues may have or may hereafter
become entitled to any such right of immunity in any such court in which proceedings may at any time be commenced, the Company
waives or will waive such right to the extent permitted by law and has consented to such relief and enforcement as provided in
Section 18 of this Agreement.
(oo) Forward-Looking
Statements. Each financial or operational projection or other “forward-looking statement” (as defined by Section
27A of the Securities Act or Section 21E of the Exchange Act) contained in the Registration Statement, the Time of Sale Prospectus
or the Prospectus (i) was so included by the Company in good faith and with reasonable basis after due consideration by the Company
of the underlying assumptions, estimates and other applicable facts and circumstances and (ii) is accompanied by meaningful cautionary
statements identifying those factors that could cause actual results to differ materially from those in such forward-looking statement.
No such statement was made with the knowledge of an executive officer or director of the Company that it was false or misleading.
(pp) Emerging
Growth Company Status. From the time of initial confidential submission of the Registration Statement to the Commission
(or, if earlier, the first date on which the Company engaged in any Section 5(d) Written Communication or any Section 5(d) Oral
Communication) through the date hereof, the Company has been and is an “emerging growth company,” as defined in Section
2(a) of the Securities Act (an “Emerging Growth Company”).
(qq) Communications.
The Company (i) has not alone engaged in communications with potential investors in reliance on Section 5(d) of the Securities
Act, other than Permitted Section 5(d) Communications with the consent of the Representatives with entities that are QIBs or IAIs,
and (ii) has not authorized anyone other than the Representatives to engage in such communications; the Company reconfirms that
the Representatives have been authorized to act on its behalf in undertaking Marketing Materials, Section 5(d) Oral Communications
and Section 5(d) Written Communications; as of the Applicable Time, each Permitted Section 5(d) Communication, when considered
together with the Time of Sale Prospectus, did not, as of the Applicable Time, include an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they
were made, not misleading; and each Permitted Section 5(d) Communication, if any, does not, as of the date hereof, conflict with
the information contained in the Registration Statement, the Preliminary Prospectus and the Prospectus; and the Company has filed
publicly on EDGAR at least 15 calendar days prior to any “road show” (as defined in Rule 433 under the Securities Act),
any confidentially submitted registration statement and registration statement amendments relating to the offer and sale of the
Offered Shares.
(rr) Clinical
Data and Regulatory Compliance. The preclinical tests and clinical trials, and other studies (collectively, “studies”)
that are described in, or the results of which are referred to in, the Registration Statement, the Time of Sale Prospectus or the
Prospectus were and, if still pending, are being conducted in all material respects in accordance with the protocols, procedures
and controls designed and approved for such studies and with standard medical and scientific research procedures and the applicable
laws, rules and regulations of the Food and Drug Administration of the U.S. Department of Health and Human Services (“FDA”);
each description of the results of such studies is accurate and complete in all material respects and fairly presents the data
derived from such studies, and the Company has no knowledge of any other studies the results of which are inconsistent with, or
otherwise call into question, the results described or referred to in the Registration Statement, the Time of Sale Prospectuses
or the Prospectus; the Company has made all such filings and obtained all such approvals as may be required by the Israeli Ministry
of Health, the FDA or any committee thereof or from any other U.S., Israeli or foreign government or drug or medical device regulatory
agency, or health care facility Institutional Review Board (collectively, the “Regulatory Agencies”); the Company
has not received any notice of, or correspondence from, any Regulatory Agency requiring the termination, suspension or modification
of any clinical trials that are described or referred to in the Registration Statement, the Time of Sale Prospectus or the Prospectus;
and the Company has operated and currently are in compliance in all material respects with all applicable rules, regulations and
policies of the Regulatory Agencies.
(ss) No
Rights to Purchase Preferred Stock. The issuance and sale of the Offered Shares as contemplated hereby will not cause any
holder of any share capital, securities convertible into or exchangeable or exercisable for share capital or options, warrants
or other rights to purchase share capital or any other securities of the Company to have any right to acquire any preferred shares
of the Company.
(tt) No
Contract Terminations. The Company has not sent or received any communication regarding termination of, or intent not to
renew, any of the contracts or agreements referred to or described in any preliminary prospectus, the Prospectus or any free writing
prospectus, or referred to or described in, or filed as an exhibit to, the Registration Statement, and no such termination or non-renewal
has been threatened by the Company or, to the Company’s knowledge, any other party to any such contract or agreement, which
threat of termination or non-renewal has not been rescinded as of the date hereof.
(uu) Compliance
with Israeli Law. All corporate approvals on the part of the Company, including under Chapter 5 of Part VI of the Israeli
Companies Law 5759-1999, for the offer or sale of Offered Shares and the transactions contemplated hereby have been obtained.
(vv) Company
Stock Plans. With respect to the stock options (the “Stock Options”) granted pursuant to the stock-based
compensation plans of the Company (the “Company Stock Plans”), (i) each grant intended to qualify for the “capital
gains track” of Section 102 of the Israel Tax Ordinance so qualifies, (ii) each grant of a Stock Option has been duly authorized,
approved or ratified by all necessary corporate action, including, as applicable, approval or ratification by the board of directors
of the Company and any required shareholder approval, and the award agreement governing such grant (if any) was duly executed and
delivered by each party thereto, (iii) each such grant was made in accordance with the terms of the Company Stock Plans and all
other applicable laws and regulatory rules or requirements, and (iv) each such grant was properly accounted for in accordance
with GAAP in the financial statements (including the related notes) of the Company.
(ww) Subsidiaries.
The Company has no subsidiaries (as defined in Rule 405 under the Securities Act).
Any certificate signed
by any officer of the Company and delivered to any Underwriter or to counsel for the Underwriters in connection with the offering,
or the purchase and sale, of the Offered Shares shall be deemed a representation and warranty by the Company to each Underwriter
as to the matters covered thereby.
The Company has a reasonable
basis for making each of the representations set forth in this Section 1. The Company acknowledges that the Underwriters and, for
purposes of the opinions to be delivered pursuant to Section 6 hereof, counsel to the Company and counsel to the Underwriters,
will rely upon the accuracy and truthfulness of the foregoing representations and hereby consents to such reliance.
Section
2. Purchase, Sale and Delivery of the Offered Shares.
(a) The
Firm Shares. Upon the terms herein set forth, the Company agrees to issue and sell to the several Underwriters an aggregate
of [●] Firm Shares. On the basis of the representations, warranties and agreements herein contained, and upon the terms but
subject to the conditions herein set forth, the Underwriters agree, severally and not jointly, to purchase from the Company the
respective number of Firm Shares set forth opposite their names on Schedule A. The purchase price per Firm Share to be paid
by the several Underwriters to the Company shall be $[●] per share.
(b) The
First Closing Date. Delivery of certificates for the Firm Shares to be purchased by the Underwriters and payment therefor
shall be made at the offices of Covington & Burling LLP (or such other place as may be agreed to by the Company and the Representatives)
at 9:00 a.m. New York City time, on [●], or such other time and date not later than 1:30 p.m. New York City time,
on [●]1 as the Representatives shall designate by notice to the Company (the time and date of such closing are
called the “First Closing Date”). The Company hereby acknowledges that circumstances under which the Representatives
may provide notice to postpone the First Closing Date as originally scheduled include, but are not limited to, any determination
by the Company or the Representatives to recirculate to the public copies of an amended or supplemented Prospectus or a delay as
contemplated by the provisions of Section 11.
(c) The
Optional Shares; Option Closing Date. In addition, on the basis of the representations, warranties and agreements herein
contained, and upon the terms but subject to the conditions herein set forth, the Company hereby grants an option to the several
Underwriters to purchase, severally and not jointly, up to an aggregate of [●] Optional Shares from the Company at the purchase
price per share to be paid by the Underwriters for the Firm Shares. The option granted hereunder may be exercised at any time and
from time to time in whole or in part upon notice by the Representatives to the Company, which notice may be given at any time
within 30 days from the date of this Agreement. Such notice shall set forth (i) the aggregate number of Optional Shares as to which
the Underwriters are exercising the option and (ii) the time, date and place at which certificates for the Optional Shares will
be delivered (which time and date may be simultaneous with, but not earlier than, the First Closing Date; and in the event that
such time and date are simultaneous with the First Closing Date, the term “First Closing Date” shall refer to
the time and date of delivery of certificates for the Firm Shares and such Optional Shares). Any such time and date of delivery,
if subsequent to the First Closing Date, is called an “Option Closing Date,” shall be determined by the Representatives
and shall not be earlier than three or later than five full business days after delivery of such notice of exercise. If any Optional
Shares are to be purchased, each Underwriter agrees, severally and not jointly, to purchase the number of Optional Shares (subject
to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the
total number of Optional Shares to be purchased as the number of Firm Shares set forth on Schedule A opposite the name of
such Underwriter bears to the total number of Firm Shares. Jefferies and BMO may cancel the option at any time prior to its expiration
by giving written notice of such cancellation to the Company.
(d) Public
Offering of the Offered Shares. The Representatives hereby advise the Company that the Underwriters intend to offer for
sale to the public, initially on the terms set forth in the Registration Statement, the Time of Sale Prospectus and the Prospectus,
their respective portions of the Offered Shares as soon after this Agreement has been executed and the Registration Statement has
been declared effective as the Representatives, in their sole judgment, has determined is advisable and practicable.
(e) Payment
for the Offered Shares. (i) Payment for the Offered Shares shall be made at the First Closing Date (and,
if applicable, at each Option Closing Date) by wire transfer of immediately available funds to the order of the Company.
(ii) It
is understood that the Representatives have been authorized, for their own account and the accounts of the several Underwriters,
to accept delivery of and receipt for, and make payment of the purchase price for, the Firm Shares and any Optional Shares the
Underwriters have agreed to purchase. Each of Jefferies and BMO, individually and not as the Representative of the Underwriters,
may (but shall not be obligated to) make payment for any Offered Shares to be purchased by any Underwriter whose funds shall not
have been received by the Representatives by the First Closing Date or the applicable Option Closing Date, as the case may be,
for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any of its obligations under
this Agreement.
1 NTD: to be the date that is ten business days after
the initially contemplated first closing date.
(f) Delivery
of the Offered Shares. The Company shall deliver, or cause to be delivered, through the facilities of The Depository Trust
Company (“DTC”) unless the Representatives shall otherwise instruct, to the Representatives for the accounts of the
several Underwriters the Firm Shares to be sold by them at the First Closing Date, against release of a wire transfer of immediately
available funds for the amount of the purchase price therefor. The Company shall also deliver, or cause to be delivered, through
the facilities of DTC unless the Representatives shall otherwise instruct, to the Representatives for the accounts of the several
Underwriters, the Optional Shares the Underwriters have agreed to purchase from them at the First Closing Date or the applicable
Option Closing Date, as the case may be, against the release of a wire transfer of immediately available funds for the amount of
the purchase price therefor. The Offered Shares shall be registered in such names and denominations as the Representatives shall
have requested at least two full business days prior to the First Closing Date (or the applicable Option Closing Date, as the case
may be) and shall be made available for inspection on the business day preceding the First Closing Date (or the applicable Option
Closing Date, as the case may be). Time shall be of the essence, and delivery at the time and place specified in this Agreement
is a further condition to the obligations of the Underwriters.
Section
3. Additional Covenants of the Company. The Company further
covenants and agrees with each Underwriter as follows:
(a) Delivery
of Registration Statement, Time of Sale Prospectus and Prospectus. The Company shall furnish to you in New York City, without
charge, prior to 10:00 a.m. New York City time on the business day next succeeding the date of this Agreement and during the period
when a prospectus relating to the Offered Shares is required by the Securities Act to be delivered (whether physically or through
compliance with Rule 172 under the Securities Act or any similar rule) in connection with sales of the Offered Shares, as many
copies of the Time of Sale Prospectus, the Prospectus and any supplements and amendments thereto or to the Registration Statement
as you may reasonably request.
(b) Representatives’
Review of Proposed Amendments and Supplements. During the period when a prospectus relating to the Offered Shares is required
by the Securities Act to be delivered (whether physically or through compliance with Rule 172 under the Securities Act or any similar
rule), the Company (i) will furnish to the Representatives for review, a reasonable period of time prior to the proposed time of
filing of any proposed amendment or supplement to the Registration Statement or the Exchange Act Registration Statement, a copy
of each such amendment or supplement and (ii) will not amend or supplement the Registration Statement without the Representatives’
prior written consent, which shall not be unreasonably withheld, conditioned or delayed. Prior to amending or supplementing any
preliminary prospectus, the Time of Sale Prospectus or the Prospectus, the Company shall furnish to the Representatives for review,
a reasonable amount of time prior to the time of filing or use of the proposed amendment or supplement, a copy of each such proposed
amendment or supplement. The Company shall not file or use any such proposed amendment or supplement without the Representatives’
prior written consent, which shall not be unreasonably withheld, conditioned or delayed. The Company shall file with the Commission
within the applicable period specified in Rule 424(b) under the Securities Act any prospectus required to be filed pursuant to
such Rule.
(c) Free
Writing Prospectuses. The Company shall furnish to the Representatives for review, a reasonable amount of time prior to
the proposed time of filing or use thereof, a copy of each proposed free writing prospectus or any amendment or supplement thereto
prepared by or on behalf of, used by, or referred to by the Company, and the Company shall not file, use or refer to any proposed
free writing prospectus or any amendment or supplement thereto without the Representatives’ prior written consent, which
shall not be unreasonably withheld, conditioned or delayed. The Company shall furnish to each Underwriter, without charge, as many
copies of any free writing prospectus prepared by or on behalf of, used by or referred to by the Company as such Underwriter may
reasonably request. If at any time when a prospectus is required by the Securities Act to be delivered (whether physically or through
compliance with Rule 172 under the Securities Act or any similar rule) in connection with sales of the Offered Shares (but in any
event if at any time through and including the First Closing Date) there occurred or occurs an event or development as a result
of which any free writing prospectus prepared by or on behalf of, used by, or referred to by the Company conflicted or would conflict
with the information contained in the Registration Statement or included or would include an untrue statement of a material fact
or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances
prevailing at such time, not misleading, the Company shall promptly amend or supplement such free writing prospectus to eliminate
or correct such conflict so that the statements in such free writing prospectus as so amended or supplemented will not include
an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the
light of the circumstances prevailing at such time, not misleading, as the case may be; provided, however, that prior to
amending or supplementing any such free writing prospectus, the Company shall furnish to the Representatives for review, a reasonable
amount of time prior to the proposed time of filing or use thereof, a copy of such proposed amended or supplemented free writing
prospectus, and the Company shall not file, use or refer to any such amended or supplemented free writing prospectus without the
Representatives’ prior written consent, which shall not be unreasonably withheld, conditioned or delayed.
(d) Filing
of Underwriter Free Writing Prospectuses. The Company shall not take any action that would result in an Underwriter or
the Company being required to file with the Commission pursuant to Rule 433(d) under the Securities Act a free writing prospectus
prepared by or on behalf of such Underwriter that such Underwriter otherwise would not have been required to file thereunder.
(e) Amendments
and Supplements to Time of Sale Prospectus. If the Time of Sale Prospectus is being used to solicit offers to buy the Offered
Shares at a time when the Prospectus is not yet available to prospective purchasers, and any event shall occur or condition exist
as a result of which it is necessary to amend or supplement the Time of Sale Prospectus so that the Time of Sale Prospectus does
not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein,
in the light of the circumstances when delivered to a prospective purchaser, not misleading, or if any event shall occur or condition
exist as a result of which the Time of Sale Prospectus conflicts with the information contained in the Registration Statement,
or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Time of Sale Prospectus to comply
with applicable law, the Company shall (subject to Section 3(b) and Section 3(c) hereof) promptly prepare, file with the Commission
and furnish, at its own expense, to the Underwriters and to any dealer upon request, either amendments or supplements to the Time
of Sale Prospectus so that the statements in the Time of Sale Prospectus as so amended or supplemented will not include an untrue
statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of
the circumstances when delivered to a prospective purchaser, not misleading or so that the Time of Sale Prospectus, as amended
or supplemented, will no longer conflict with the information contained in the Registration Statement, or so that the Time of Sale
Prospectus, as amended or supplemented, will comply with applicable law.
(f) Certain
Notifications and Required Actions. After the date of this Agreement and until such time as the Underwriters are no longer
required to deliver a Prospectus in order to confirm sales of Offered Securities, the Company shall promptly advise the Representatives
in writing of: (i) the receipt of any comments of, or requests for additional or supplemental information from, the Commission;
(ii) the time and date of any filing of any post-effective amendment to the Registration Statement or the Exchange Act Registration
Statement or any amendment or supplement to any preliminary prospectus, the Time of Sale Prospectus, any free writing prospectus
or the Prospectus; (iii) the time and date that any post-effective amendment to the Registration Statement or the Exchange Act
Registration Statement becomes effective; and (iv) the issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement or any post-effective amendment thereto or the Exchange Act Registration Statement or any post-effective
amendment thereto or any amendment or supplement to any preliminary prospectus, the Time of Sale Prospectus or the Prospectus or
of any order preventing or suspending the use of any preliminary prospectus, the Time of Sale Prospectus, any free writing prospectus
or the Prospectus, or of any proceedings to remove, suspend or terminate from listing or quotation the Offered Shares from any
securities exchange upon which they are listed for trading or included or designated for quotation, or of the threatening or initiation
of any proceedings for any of such purposes. If the Commission shall enter any such stop order at any time, the Company will use
its best efforts to obtain the lifting of such order as soon as possible. Additionally, the Company agrees that it shall comply
with all applicable provisions of Rule 424(b), Rule 433 and Rule 430A under the Securities Act and will use its reasonable efforts
to confirm that any filings made by the Company under Rule 424(b) or Rule 433 were received in a timely manner by the Commission.
(g) Amendments
and Supplements to the Prospectus and Other Securities Act Matters. If any event shall occur or condition exist as a result
of which it is necessary to amend or supplement the Prospectus so that the Prospectus does not include an untrue statement of a
material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances
when the Prospectus is delivered (whether physically or through compliance with Rule 172 under the Securities Act or any similar
rule) to a purchaser, not misleading, or if in the opinion of the Representatives or counsel for the Underwriters it is otherwise
necessary to amend or supplement the Prospectus to comply with applicable law, the Company agrees (subject to Section 3(b) and
Section 3(c) hereof) to promptly prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to
any dealer upon request, amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or
supplemented will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances when the Prospectus is delivered (whether physically or through compliance
with Rule 172 under the Securities Act or any similar rule) to a purchaser, not misleading or so that the Prospectus, as amended
or supplemented, will comply with applicable law. Neither the Representatives’ consent to, nor delivery of, any such amendment
or supplement shall constitute a waiver of any of the Company’s obligations under Section 3(b) or Section 3(c).
(h) Blue
Sky Compliance. The Company shall cooperate with the Representatives and counsel for the Underwriters to qualify or register
the Offered Shares for sale under (or obtain exemptions from the application of) the state securities or blue sky laws or Canadian
provincial securities laws (or other foreign laws) of those jurisdictions designated by the Representatives, shall comply with
such laws and shall continue such qualifications, registrations and exemptions in effect so long as required for the distribution
of the Offered Shares. The Company shall not be required to qualify as a foreign corporation or to take any action that would subject
it to general service of process in any such jurisdiction where it is not presently qualified or where it would be subject to taxation
as a foreign corporation. The Company will advise the Representatives promptly of the suspension of the qualification or registration
of (or any such exemption relating to) the Offered Shares for offering, sale or trading in any jurisdiction or any initiation or
threat of any proceeding for any such purpose, and in the event of the issuance of any order suspending such qualification, registration
or exemption, the Company shall use its best efforts to obtain the withdrawal thereof as soon as possible.
(i) Use
of Proceeds. The Company shall apply the net proceeds from the sale of the Offered Shares sold by it in the manner described
under the caption “Use of Proceeds” in the Registration Statement, the Time of Sale Prospectus and the Prospectus.
(j) Earnings
Statement. The Company will make generally available to its security holders and to the Representatives as soon as practicable
an earnings statement (which need not be audited) covering a period of at least twelve months beginning with the first fiscal quarter
of the Company commencing after the date of this Agreement that will satisfy the provisions of Section 11(a) of the Securities
Act and the rules and regulations of the Commission thereunder.
(k) Continued
Compliance with Securities Laws. The Company will comply with the Securities Act and the Exchange Act so as to permit the
completion of the distribution of the Offered Shares as contemplated by this Agreement, the Registration Statement, the
Time of Sale Prospectus and the Prospectus. Without limiting the generality of the foregoing, the Company will, during the period
when a prospectus relating to the Offered Shares is required by the Securities Act to be delivered (whether physically or through
compliance with Rule 172 under the Securities Act or any similar rule), file on a timely basis with the Commission and the NASDAQ
all reports and documents required to be filed under the Exchange Act. Additionally, the Company shall report the use of proceeds
from the issuance of the Offered Shares as may be required under Rule 463 under the Securities Act.
(l) Compliance
with Israeli Securities Laws. The Company acknowledges, understands and agrees that the Offered Shares may be offered and
sold in Israel only by the Underwriters and only to such Israeli investors listed in the First Addendum to the Israeli Securities
Law (the “Addendum”) who submit written confirmation to the Underwriters and the Company that such investor
(A) falls within the scope of the Addendum, is aware of the meaning of same and agrees to it and (B) is acquiring the Offered Shares
for investment for its own account or, if applicable, for investment for clients who are investors listed in the Addendum and in
any event not as a nominee, market maker or agent and not with a view to, or for the resale in connection with, any distribution
thereof (“Israeli Accredited Investors”).2
(m) Listing.
The Company will use its best efforts to list, subject to notice of issuance, the Offered Shares on the NASDAQ.
(n) Company
to Provide Copy of the Prospectus in Form That May be Downloaded from the Internet. If requested by the Representatives,
the Company shall cause to be prepared and delivered, at its expense, within one business day from the effective date of this Agreement,
to the Representatives an “electronic Prospectus” to be used by the Underwriters in connection with the offering
and sale of the Offered Shares. As used herein, the term “electronic Prospectus” means a form of Time of Sale
Prospectus, and any amendment or supplement thereto, that meets each of the following conditions: (i) it shall be encoded in an
electronic format, satisfactory to the Representatives, that may be transmitted electronically by the Representatives and the other
Underwriters to offerees and purchasers of the Offered Shares; (ii) it shall disclose the same information as the paper Time of
Sale Prospectus, except to the extent that graphic and image material cannot be disseminated electronically, in which case such
graphic and image material shall be replaced in the electronic Prospectus with a fair and accurate narrative description or tabular
representation of such material, as appropriate; and (iii) it shall be in or convertible into a paper format or an electronic format,
satisfactory to the Representatives, that will allow investors to store and have continuously ready access to the Time of Sale
Prospectus at any future time, without charge to investors (other than any fee charged for subscription to the Internet as a whole
and for on-line time). The Company hereby confirms that it has included or will include in the Prospectus filed pursuant to EDGAR
or otherwise with the Commission and in the Registration Statement at the time it was declared effective an undertaking that, upon
receipt of a request by an investor or his or her representative, the Company shall transmit or cause to be transmitted promptly,
without charge, a paper copy of the Time of Sale Prospectus.
2 NTD: if a directed share program is re-added, 35-person
Non-Accredited Israeli Investor cap language will need to be re-added as well.
(o) Agreement
Not to Offer or Sell Additional Shares. During the period commencing on and including the date hereof and continuing through
and including the 180th day following the date of the Prospectus (such period, as extended as described below, being referred to
herein as the “Lock-up Period”), the Company will not, without the prior written consent of the Representatives
(which consent may be withheld in their sole discretion), directly or indirectly: (i) sell, offer to sell, contract to sell or
lend any share capital of the Company, whether in the form of ordinary shares, preferred shares or otherwise (“Share Capital”)
or Related Securities (as defined below); (ii) effect any short sale, or establish or increase any “put equivalent position”
(as defined in Rule 16a-1(h) under the Exchange Act) or liquidate or decrease any “call equivalent position” (as defined
in Rule 16a-1(b) under the Exchange Act) of any Share Capital or Related Securities; (iii) pledge, hypothecate or grant any security
interest in any Share Capital or Related Securities; (iv) in any other way transfer or dispose of any Share Capital or Related
Securities; (v) enter into any swap, hedge or similar arrangement or agreement that transfers, in whole or in part, the economic
risk of ownership of any Share Capital or Related Securities, regardless of whether any such transaction is to be settled in securities,
in cash or otherwise; (vi) announce the offering of any Share Capital or Related Securities; (vii) file any registration statement
under the Securities Act in respect of any Share Capital or Related Securities (other than as contemplated by this Agreement with
respect to the Offered Shares); or (viii) publicly announce the intention to do any of the foregoing; provided, however,
that the Company may (A) effect the transactions contemplated hereby, (B) issue Share Capital of the Company or options to purchase
Share Capital of the Company, or issue Share Capital of the Company upon exercise of options, pursuant to any share option, share
bonus or other equity incentive or employee share purchase plan described in the Registration Statement, the Time of Sale Prospectus
and the Prospectus, but only if the holders of such capital stock of the Company or options agree in writing with the Underwriters
not to sell, offer, dispose of or otherwise transfer any such capital stock or options during such Lock-up Period without the prior
written consent of the Representatives (which consent may be withheld in their sole discretion), and (C) issue Share Capital of
the Company in connection with any joint venture, commercial or collaborative relationship or the acquisition or license by the
Company of the securities, businesses, property or other assets of another person or entity or pursuant to any employee benefit
plan as assumed by the Company in connection with any such acquisition, provided, however, in the case of this clause
(C), (x) such Share Capital shall not in the aggregate exceed [●]3 and (y) the recipients thereof provide to the
Representatives a Lock-Up Agreement. For purposes of the foregoing, “Related Securities” shall mean any options
or warrants evidencing Share Capital of the Company or other rights to acquire Share Capital of the Company or any securities exchangeable
or exercisable for or convertible into Share Capital of the Company, or to acquire other securities or rights ultimately exchangeable
or exercisable for, or convertible into, Share Capital of the Company.
(p) Future
Reports to the Representatives. During the period of five years hereafter, the Company will furnish to the Representatives,
c/o Jefferies, at 520 Madison Avenue, New York, New York 10022, Attention: Global Head of Syndicate; and c/o BMO Capital Markets
Corp., at 3 Times Square, 25th Floor, New York, NY 10036, Attention: Equity Capital Markets Syndicate Desk: (i) as soon as practicable
after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of
the close of such fiscal year and statements of income, shareholders’ equity and cash flows for the year then ended and the
opinion thereon of the Company’s independent public or certified public accountants; (ii) as soon as practicable after the
filing thereof, copies of each Annual Report on Form 20-F, Report on Form 6-K or other report filed by the Company with the Commission
or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company furnished or made
available generally to holders of its share capital; provided, however, that the requirements of this Section 3(p) shall
be satisfied to the extent that such reports, statements, communications, financial statements or other documents are available
on EDGAR.
3 NTD: to be the number of ordinary shares equal
to 5% of the Company’s outstanding Share Capital immediately following the consummation of the offering of the Firm Shares.
(q) Investment
Limitation. The Company shall not invest or otherwise use the proceeds received by the Company from its sale of the Offered
Shares in such a manner as would require the Company to register as an investment company under the Investment Company Act.
(r) No
Stabilization or Manipulation; Compliance with Regulation M. The Company will not take, and will ensure that no affiliate
of the Company will take, directly or indirectly, any action designed to or that might cause or result in stabilization or manipulation
of the price of the Offered Shares or any reference security with respect to the Offered Shares, whether to facilitate the sale
or resale of the Offered Shares or otherwise, and the Company will, and shall cause each of its affiliates to, comply with all
applicable provisions of Regulation M. In addition, the Company will not engage in any form of solicitation, advertising or other
action constituting an offer or a sale under the Israeli Securities Law and the regulations promulgated thereunder in connection
with the transactions contemplated hereby, which would require the Company to publish a prospectus in the State of Israel under
the laws of the State of Israel.
(s) Enforce
Lock-Up Agreements. During the Lock-up Period, the Company will enforce all agreements between the Company and any of its
security holders that restrict or prohibit, expressly or in operation, the offer, sale or transfer of Share Capital or Related
Securities or any of the other actions restricted or prohibited under the terms of the form of Lock-up Agreement. In addition,
the Company will direct the transfer agent to place stop transfer restrictions upon any such securities of the Company that are
bound by such “lock-up” agreements for the duration of the periods contemplated in such agreements, including, without
limitation, “lock-up” agreements entered into by the Company’s officers and directors and securityholders pursuant
to Section 6(k) hereof.
(t) Company
to Provide Interim Financial Statements. Prior to the First Closing Date and each applicable Option Closing Date, the Company
will furnish the Underwriters, as soon as practicable after they have been prepared by or are available to the Company, a copy
of any unaudited interim financial statements of the Company for any period subsequent to the period covered by the most recent
financial statements appearing in the Registration Statement and the Prospectus.
(u) Tax
Indemnity. The Company will indemnify and hold harmless the Underwriters against any documentary, stamp or similar issue
tax, including any interest and penalties, on the creation, issue and sale of the Offered Shares and on the execution and delivery
of this Agreement.
(v) Transfer
Agent. The Company agrees to maintain a transfer agent and, if necessary under the jurisdiction of organization of the
Company, a registrar for the Ordinary Shares.
(w) Amendments
and Supplements to Permitted Section 5(d) Communications. If at any time following the distribution of any Permitted Section
5(d) Communication, during the period when a prospectus relating to the Offered Securities is required by the Securities Act to
be delivered (whether physically or through compliance with Rule 172 under the Securities Act or any similar rule), there occurred
or occurs an event or development as a result of which such Permitted Section 5(d) Communication included or would include an untrue
statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein,
in the light of the circumstances existing at that subsequent time, not misleading, the Company will promptly notify the Representatives
and will promptly amend or supplement, at its own expense, such Permitted Section 5(d) Communication to eliminate or correct such
untrue statement or omission.
(x) Emerging
Growth Company Status. The Company will promptly notify the Representatives if the Company ceases to be an Emerging Growth
Company at any time prior to the later of (i) the time when a prospectus relating to the Offered Shares is not required by the
Securities Act to be delivered (whether physically or through compliance with Rule 172 under the Securities Act or any similar
rule) and (ii) the expiration of the Lock-Up Period (as defined herein).
(y)
Announcement Regarding Lock-ups. The Company agrees to announce the Underwriters’ intention to release any director
or “officer” (within the meaning of Rule 16a-1(f) under the Exchange Act) of the Company from any of the restrictions
imposed by any Lock-Up Agreement, by issuing, through a major news service, a press release in form and substance satisfactory
to the Representatives promptly following the Company’s receipt of any notification from the Representatives in which such
intention is indicated, but in any case not later than the close of the third business day prior to the date on which such release
or waiver is to become effective; provided, however, that nothing shall prevent the Representations, on behalf of the Underwriters,
from announcing the same through a major news service, irrespective of whether the Company has made the required announcement;
and provided, further, that no such announcement shall be made of any release or waiver granted solely to permit
a transfer of securities that is not for consideration and where the transferee has agreed in writing to be bound by the terms
of a Lock-Up Agreement in the form set forth as Exhibit A hereto.
The Representatives,
on behalf of the several Underwriters, may, in their sole discretion, waive in writing the performance by the Company of any one
or more of the foregoing covenants or extend the time for their performance.
Section
4. Payment of Expenses. The Company agrees to pay
all costs, fees and expenses incurred in connection with the performance of its obligations hereunder and in connection with the
transactions contemplated hereby, including without limitation (i) all expenses incident to the issuance and delivery of the Offered
Shares (including all printing and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Ordinary
Shares, (iii) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Offered Shares
to the Underwriters, (iv) all fees and expenses of the Company’s counsel, independent public or certified public accountants
and other advisors, (v) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution
of the Registration Statement (including financial statements, exhibits, schedules, consents and certificates of experts), the
Exchange Act Registration Statement, the Time of Sale Prospectus, the Prospectus, each free writing prospectus prepared by or on
behalf of, used by, or referred to by the Company, and each preliminary prospectus, each Permitted Section 5(d) Communication,
and all amendments and supplements thereto, and this Agreement, (vi) all filing fees, attorneys’ fees and expenses incurred
by the Company or the Underwriters in connection with qualifying or registering (or obtaining exemptions from the qualification
or registration of) all or any part of the Offered Shares for offer and sale under the state securities or blue sky laws or the
provincial securities laws of Canada, and, if requested by Jefferies or BMO, preparing and printing a “Blue Sky Survey”
or memorandum (such fees and expenses of counsel relating to such qualification or registration not to exceed $5,000) and a “Canadian
wrapper”, and any supplements thereto, advising the Underwriters of such qualifications, registrations and exemptions, (vii)
the costs, fees and expenses incurred by the Underwriters in connection with determining their compliance with the rules and regulations
of FINRA related to the Underwriters’ participation in the offering and distribution of the Offered Shares, including any
related filing fees and the legal fees of, and disbursements by, counsel to the Underwriters (such fees and expenses of counsel
in an amount not to exceed $35,000), (viii) the costs and expenses of the Company relating to investor presentations on any “road
show”, any Permitted Section 5(d) Communication or any Section 5(d) Oral Communication undertaken in connection with the
offering of the Offered Shares, including, without limitation, expenses associated with the preparation or dissemination of any
electronic road show, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants
engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expenses of the
representatives, employees and officers of the Company and any such consultants, and 50% of the cost of any aircraft chartered
in connection with the road show (the remaining 50% of the cost of such aircraft to be paid by the Underwriters), and (ix) the
fees and expenses associated with listing the Ordinary Shares on the NASDAQ. Except as provided in this Section 4 or in Section
7, Section 9 or Section 10 hereof, the Underwriters shall pay their own expenses, including the fees and disbursements of their
counsel and their travel and lodging expenses.
Section
5. Covenant of the Underwriters.
(a) Each
Underwriter severally and not jointly covenants with the Company not to take any action that would result in the Company being
required to file with the Commission pursuant to Rule 433(d) under the Securities Act a free writing prospectus prepared by or
on behalf of such Underwriter that otherwise would not, but for such actions, be required to be filed by the Company under Rule
433(d).
(b) The
Underwriters, severally and not jointly, acknowledge, understand and agree that the Offered Shares may be offered and sold in Israel
by the Underwriters only to Israeli Accredited Investors.
Section
6. Conditions of the Obligations of the Underwriters.
The respective obligations of the several Underwriters hereunder to purchase and pay for the Offered Shares as provided herein
on the First Closing Date and, with respect to the Optional Shares, each Option Closing Date, shall be subject to the accuracy
of the representations and warranties on the part of the Company set forth in Section 1 hereof as of the date hereof and as of
the First Closing Date as though then made and, with respect to the Optional Shares, as of each Option Closing Date as though then
made, to the timely performance by the Company of its covenants and other obligations hereunder, and to each of the following additional
conditions:
(a) Comfort
Letter. On the date hereof, the Representatives shall have received from Kesselman & Kesselman, a member firm of PricewaterhouseCoopers
International Limited, independent registered public accountants for the Company, a letter dated the date hereof addressed to the
Underwriters, in form and substance satisfactory to the Representatives, containing statements and information of the type ordinarily
included in accountant’s “comfort letters” to underwriters, delivered according to Auditing Standard 6101 (or
any successor bulletin), with respect to the audited and unaudited financial statements and certain financial information contained
in the Registration Statement, the Time of Sale Prospectus, and each free writing prospectus, if any.
(b) Compliance
with Registration Requirements; No Stop Order; No Objection from FINRA.
(i) The
Company shall have filed the Prospectus with the Commission (including the information required by Rule 430A under the Securities
Act) in the manner and within the time period required by Rule 424(b) under the Securities Act.
(ii) No
stop order suspending the effectiveness of the Registration Statement or any post-effective amendment to the Registration Statement
or the Exchange Act Registration Statement or any post-effective amendment to the Exchange Act Registration Statement shall be
in effect, and no proceedings for such purpose shall have been instituted or threatened by the Commission.
(iii) FINRA
shall have raised no objection to the fairness and reasonableness of the underwriting terms and arrangements.
(c) No
Material Adverse Change. For the period from and after the date of this Agreement and through and including the First Closing
Date and, with respect to any Optional Shares purchased after the First Closing Date, each Option Closing Date in the judgment
of the Representatives there shall not have occurred any Material Adverse Change.
(d) Opinion
of U.S. Counsel for the Company. On each of the First Closing Date and each Option Closing Date, the Representatives shall
have received the opinion of Latham & Watkins LLP, U.S. counsel for the Company, in form and substance satisfactory to the
Underwriters, dated as of such date.
(e) Opinion
of Israeli Counsel for the Company. On each of the First Closing Date and each Option Closing Date, the Representatives
shall have received the opinion of Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co., Israeli counsel for the Company, in
form and substance satisfactory to the Underwriters, dated as of such date.
(f) Opinion
of IP Counsel for the Company. On each of the First Closing Date and each Option Closing Date, the Representatives shall
have received the opinion of (i) Pearl Cohen Zedek Latzer Baratz LLP and (ii) Morgan, Lewis & Bockius LLP, counsel for the
Company with respect to intellectual property, in form and substance satisfactory to the Underwriters, dated as of such date.
(g) Opinion
of U.S. Counsel for the Underwriters. On each of the First Closing Date and each Option Closing Date, the Representatives
shall have received the opinion of Covington & Burling LLP, U.S. counsel for the Underwriters in connection with the offer
and sale of the Offered Shares, in form and substance satisfactory to the Underwriters, dated as of such date.
(h) Opinion
of Israeli Counsel for the Underwriters. On each of the First Closing Date and each Option Closing Date, the Representatives
shall have received the opinion of Gornitzky & Co., Israeli counsel for the Underwriters in connection with the offer and sale
of the Offered Shares, in form and substance satisfactory to the Underwriters, dated as of such date.
(i) Officers’
Certificate. On each of the First Closing Date and each Option Closing Date, the Representatives shall have received a
certificate executed by the Chief Executive Officer of the Company and the Chief Financial Officer of the Company, dated as of
such date, to the effect set forth in Section 6(b)(ii) and further to the effect that:
(i) for
the period from and including the date of this Agreement through and including such date, there has not occurred any Material Adverse
Change;
(ii) the
representations, warranties and covenants of the Company set forth in Section 1 of this Agreement are true and correct with the
same force and effect as though expressly made on and as of such date; and
(iii) the
Company has complied with all the agreements hereunder and satisfied all the conditions on its part to be performed or satisfied
hereunder at or prior to such date.
(j) Bring-down
Comfort Letter. On each of the First Closing Date and each Option Closing Date the Representatives shall have received
from Kesselman & Kesselman, a member firm of PricewaterhouseCoopers International Limited, independent registered public accountants
for the Company, a letter dated such date, in form and substance satisfactory to the Representatives, which letter shall: (i) reaffirm
the statements made in the letter furnished by them pursuant to Section 6(a), except that the specified date referred to therein
for the carrying out of procedures shall be no more than three business days prior to the First Closing Date or the applicable
Option Closing Date, as the case may be; and (ii) cover certain financial information contained in the Prospectus.
(k) Lock-Up
Agreements. On or prior to the date hereof, the Company shall have furnished to the Representatives an agreement in the
form of Exhibit A hereto from each of the persons listed on Exhibit B hereto and all securityholders of the Company,
and each such agreement shall be in full force and effect on each of the First Closing Date and each Option Closing Date.
(l) Rule
462(b) Registration Statement. In the event that a Rule 462(b) Registration Statement is filed in connection with the offering
contemplated by this Agreement, such Rule 462(b) Registration Statement shall have been filed with the Commission on the date of
this Agreement and shall have become effective automatically upon such filing.
(m) Approval
of Listing. At the First Closing Date, the Offered Shares shall have been approved for listing on the NASDAQ, subject only
to official notice of issuance.
(n) Additional
Documents. On or before each of the First Closing Date and each Option Closing Date, the Representatives and counsel for
the Underwriters shall have received such information, documents and opinions as they may reasonably request for the purposes of
enabling them to pass upon the issuance and sale of the Offered Shares as contemplated herein, or in order to evidence the accuracy
of any of the representations and warranties, or the satisfaction of any of the conditions or agreements, herein contained; and
all proceedings taken by the Company in connection with the issuance and sale of the Offered Shares as contemplated herein and
in connection with the other transactions contemplated by this Agreement shall be satisfactory in form and substance to the Representatives
and counsel for the Underwriters.
If any condition specified
in this Section 6 is not satisfied when and as required to be satisfied, this Agreement may be terminated by notice from the Representatives
to the Company at any time on or prior to the First Closing Date and, with respect to the Optional Shares, at any time on or prior
to the applicable Option Closing Date, which termination shall be without liability on the part of any party to any other party,
except that Section 4, Section 7, Section 9 and Section 10 shall at all times be effective and shall survive such termination.
Section
7. Reimbursement of Underwriters’ Expenses.
If this Agreement is terminated by the Representatives pursuant to Section 6, Section 11 or Section 12, or if the sale to the Underwriters
of the Offered Shares on the First Closing Date is not consummated because of any refusal, inability or failure on the part of
the Company to perform any agreement herein or to comply with any provision hereof, the Company agrees to reimburse the Representatives
and the other Underwriters (or such Underwriters as have terminated this Agreement with respect to themselves), severally, upon
demand for all out-of-pocket expenses that shall have been reasonably incurred by the Representatives and the Underwriters in connection
with the proposed purchase and the offering and sale of the Offered Shares, including, but not limited to, fees and disbursements
of counsel, printing expenses, travel expenses, postage, facsimile and telephone charges.
Section
8. Effectiveness of this Agreement. This Agreement
shall become effective upon the execution and delivery hereof by the parties hereto.
Section
9. Indemnification.
(a) Indemnification
of the Underwriters. The Company agrees to indemnify and hold harmless each Underwriter, its affiliates, directors, officers,
employees and agents, and each person, if any, who controls any Underwriter within the meaning of the Securities Act or the Exchange
Act against any loss, claim, damage, liability or expense, as incurred, to which such Underwriter or such affiliate, director,
officer, employee, agent or controlling person may become subject, under the Securities Act, the Exchange Act, other federal or
state statutory law or regulation, or the laws or regulations of foreign jurisdictions where Offered Shares have been offered or
sold or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written
consent of the Company), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated
below) arises out of or is based upon (A) (i) any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement, or any amendment thereto, or the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading; or (ii) any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus, the Time of Sale Prospectus, any free writing prospectus that
the Company has used, referred to or filed, or is required to file, pursuant to Rule 433(d) of the Securities Act, any Marketing
Material, any Section 5(d) Written Communication or the Prospectus (or any amendment or supplement to the foregoing), or the omission
or alleged omission to state therein a material fact necessary in order to make the statements, in the light of the circumstances
under which they were made, not misleading; ; and to reimburse each Underwriter and each such affiliate, director, officer, employee,
agent and controlling person for any and all expenses (including the fees and disbursements of counsel) as such expenses are incurred
by such Underwriter or such affiliate, director, officer, employee, agent or controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however,
that the foregoing indemnity agreement shall not apply to any loss, claim, damage, liability or expense to the extent, but only
to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made
in reliance upon and in conformity with information relating to any Underwriter furnished to the Company by the Representatives
in writing expressly for use in the Registration Statement, any preliminary prospectus, the Time of Sale Prospectus, any such free
writing prospectus, any Marketing Material, any Section 5(d) Written Communication or the Prospectus (or any amendment or supplement
thereto), it being understood and agreed that the only such information consists of the information described in Section 9(b) below.
The indemnity agreement set forth in this Section 9(a) shall be in addition to any liabilities that the Company may otherwise have.
(b) Indemnification
of the Company, its Directors and Officers. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls
the Company within the meaning of the Securities Act or the Exchange Act, against any loss, claim, damage, liability or expense,
as incurred, to which the Company, or any such director, officer or controlling person may become subject, under the Securities
Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement
of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such loss, claim, damage,
liability or expense (or actions in respect thereof as contemplated below) arises out of or is based upon (i) any untrue statement
or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, or the omission
or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein
not misleading or (ii) any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus,
the Time of Sale Prospectus, any free writing prospectus that the Company has used, referred to or filed, or is required to file,
pursuant to Rule 433 of the Securities Act, any Section 5(d) Written Communication or the Prospectus (or any such amendment or
supplement) or the omission or alleged omission to state therein a material fact necessary in order to make the statements, in
the light of the circumstances under which they were made, not misleading, in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement,
such preliminary prospectus, the Time of Sale Prospectus, such free writing prospectus, such Section 5(d) Written Communication
or the Prospectus (or any such amendment or supplement), in reliance upon and in conformity with information relating to such Underwriter
furnished to the Company by the Representatives in writing expressly for use therein; and to reimburse the Company, or any such
director, officer or controlling person for any and all expenses (including the fees and disbursements of counsel) as such expenses
are incurred by the Company, or any such director, officer or controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or action. The Company hereby acknowledges that the only
information that the Representatives have furnished to the Company expressly for use in the Registration Statement, any preliminary
prospectus, the Time of Sale Prospectus, any free writing prospectus that the Company has filed, or is required to file, pursuant
to Rule 433(d) of the Securities Act, any Section 5(d) Written Communication or the Prospectus (or any amendment or supplement
to the foregoing) are the statements set forth in the first sentence of the third paragraph and the first and third sentences of
the fourth paragraph under the caption “Underwriting,” the first two sentences of the first paragraph below the title
“Commission and Expenses,” the first sentence of the first paragraph, the third sentence of the second paragraph and
the first sentence of the sixth paragraph below the title “Stabilization” and the first sentence of the paragraph below
the title “Electronic Distribution,” in each case under the caption “Underwriting” in the Preliminary Prospectus
and the Prospectus. The indemnity agreement set forth in this Section 9(b) shall be in addition to any liabilities that each Underwriter
may otherwise have.
(c) Notifications
and Other Indemnification Procedures. Promptly after receipt by an indemnified party under this Section 9 of notice of
the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying
party under this Section 9, notify the indemnifying party in writing of the commencement thereof, but the omission to so notify
the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party to
the extent the indemnifying party is not materially prejudiced as a proximate result of such failure and shall not in any event
relieve the indemnifying party from any liability that it may have otherwise than on account of this indemnity agreement. In case
any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an
indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it shall elect, jointly
with all other indemnifying parties similarly notified, by written notice delivered to the indemnified party promptly after receiving
the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified
party; provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying
party and the indemnified party shall have reasonably concluded that a conflict may arise between the positions of the indemnifying
party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it
and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified
party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in
the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to
such indemnified party of such indemnifying party’s election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 9 for any
legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified
party shall have employed separate counsel in accordance with the proviso to the preceding sentence (it being understood, however,
that the indemnifying party shall not be liable for the fees and expenses of more than one separate counsel (together with local
counsel), representing the indemnified parties who are parties to such action), which counsel (together with any local counsel)
for the indemnified parties shall be selected by the Representatives (in the case of counsel for the indemnified parties referred
to in Section 9(a) above) or by the Company (in the case of counsel for the indemnified parties referred to in Section 9(b) above))
or (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of commencement of the action or (iii) the indemnifying party has authorized in writing
the employment of counsel for the indemnified party at the expense of the indemnifying party, in each of which cases the fees and
expenses of counsel shall be at the expense of the indemnifying party and shall be paid as they are incurred.
(d) Settlements.
The indemnifying party under this Section 9 shall not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify
the indemnified party against any loss, claim, damage, liability or expense by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified
party for fees and expenses of counsel as contemplated by Section 9(c) hereof, the indemnifying party shall be liable for any settlement
of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by
such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party
in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement, compromise or consent to the entry of judgment in any pending or threatened action,
suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity was or could have been
sought hereunder by such indemnified party, unless such settlement, compromise or consent includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding and does not
include an admission of fault or culpability or a failure to act by or on behalf of such indemnified party.
Section
10. Contribution. If the indemnification provided for in
Section 9 is for any reason held to be unavailable to or otherwise insufficient to hold harmless an indemnified party in respect
of any losses, claims, damages, liabilities or expenses referred to therein, then each indemnifying party shall contribute to the
aggregate amount paid or payable by such indemnified party, as incurred, as a result of any losses, claims, damages, liabilities
or expenses referred to therein (i) in such proportion as is appropriate to reflect the relative benefits received by the Company,
on the one hand, and the Underwriters, on the other hand, from the offering of the Offered Shares pursuant to this Agreement or
(ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand,
and the Underwriters, on the other hand, in connection with the statements or omissions which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the
Company, on the one hand, and the Underwriters, on the other hand, in connection with the offering of the Offered Shares pursuant
to this Agreement shall be deemed to be in the same respective proportions as the total proceeds from the offering of the Offered
Shares pursuant to this Agreement (before deducting expenses) received by the Company, and the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth on the front cover page of the Prospectus, bear to the aggregate
initial public offering price of the Offered Shares as set forth on such cover. The relative fault of the Company, on the one hand,
and the Underwriters, on the other hand, shall be determined by reference to, among other things, whether any such untrue or alleged
untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by
the Company, on the one hand, or the Underwriters, on the other hand, and the parties’ relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission.
The amount paid or
payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in Section 9(c), any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any action or claim. The provisions set forth in Section 9(c) with respect to notice
of commencement of any action shall apply if a claim for contribution is to be made under this Section 10; provided, however,
that no additional notice shall be required with respect to any action for which notice has been given under Section 9(c) for purposes
of indemnification.
The Company and the
Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 10 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does
not take account of the equitable considerations referred to in this Section 10.
Notwithstanding the
provisions of this Section 10, no Underwriter shall be required to contribute any amount in excess of the underwriting discounts
and commissions received by such Underwriter in connection with the Offered Shares underwritten by it and distributed to the public.
No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled
to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters’ obligations to
contribute pursuant to this Section 10 are several, and not joint, in proportion to their respective underwriting commitments as
set forth opposite their respective names on Schedule A. For purposes of this Section 10, each affiliate, director, officer,
employee and agent of an Underwriter and each person, if any, who controls an Underwriter within the meaning of the Securities
Act or the Exchange Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each
officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning
of the Securities Act and the Exchange Act shall have the same rights to contribution as the Company.
Section
11. Default of One or More of the Several Underwriters.
If, on the First Closing Date or any Option Closing Date any one or more of the several Underwriters shall fail or refuse to purchase
Offered Shares that it or they have agreed to purchase hereunder on such date, and the aggregate number of Offered Shares which
such defaulting Underwriter or Underwriters agreed but failed or refused to purchase does not exceed 10% of the aggregate number
of the Offered Shares to be purchased on such date, the Representatives may make arrangements satisfactory to the Company for the
purchase of such Offered Shares by other persons, including any of the Underwriters, but if no such arrangements are made by such
date, the other Underwriters shall be obligated, severally and not jointly, in the proportions that the number of Firm Shares set
forth opposite their respective names on Schedule A bears to the aggregate number of Firm Shares set forth opposite the
names of all such non-defaulting Underwriters, or in such other proportions as may be specified by the Representatives with the
consent of the non-defaulting Underwriters, to purchase the Offered Shares which such defaulting Underwriter or Underwriters agreed
but failed or refused to purchase on such date. If, on the First Closing Date or any Option Closing Date any one or more of the
Underwriters shall fail or refuse to purchase Offered Shares and the aggregate number of Offered Shares with respect to which such
default occurs exceeds 10% of the aggregate number of Offered Shares to be purchased on such date, and arrangements satisfactory
to the Representatives and the Company for the purchase of such Offered Shares are not made within 48 hours after such default,
this Agreement shall terminate without liability of any party to any other party except that the provisions of Section 4, Section
7, Section 9 and Section 10 shall at all times be effective and shall survive such termination. In any such case either the Representatives
or the Company shall have the right to postpone the First Closing Date or the applicable Option Closing Date, as the case may be,
but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus
or any other documents or arrangements may be effected.
As used in this Agreement,
the term “Underwriter” shall be deemed to include any person substituted for a defaulting Underwriter under
this Section 11. Any action taken under this Section 11 shall not relieve any defaulting Underwriter from liability in respect
of any default of such Underwriter under this Agreement.
Section
12. Termination of this Agreement. Prior to the purchase
of the Firm Shares by the Underwriters on the First Closing Date, this Agreement may be terminated by the Representatives by notice
given to the Company if at any time: (i) trading or quotation in any of the Company’s securities shall have been suspended
or limited by the Commission or by the NASDAQ, or trading in securities generally on either the NASDAQ or the NYSE shall have been
suspended or limited, or minimum or maximum prices shall have been generally established on any of such stock exchanges; (ii) a
general banking moratorium shall have been declared by any of federal, New York or Israeli authorities; (iii) there shall have
occurred any outbreak or escalation of national or international hostilities or any crisis or calamity, or any change in the United
States or international financial markets, or any substantial change or development involving a prospective substantial change
in United States’ or international political, financial or economic conditions, as in the judgment of the Representatives
is material and adverse and makes it impracticable to market the Offered Shares in the manner and on the terms described in the
Time of Sale Prospectus or the Prospectus or to enforce contracts for the sale of securities; (iv) in the judgment of the Representatives
there shall have occurred any Material Adverse Change; or (v) the Company shall have sustained a loss by strike, fire, flood, earthquake,
accident or other calamity of such character as in the judgment of the Representatives may interfere materially with the conduct
of the business and operations of the Company regardless of whether or not such loss shall have been insured. Any termination pursuant
to this Section 12 shall be without liability on the part of (a) the Company to any Underwriter, except that the Company shall
be obligated to reimburse the expenses of the Representatives and the Underwriters pursuant to Section 4 or Section 7 hereof or
(b) any Underwriter to the Company; provided, however, that the provisions of Section 9 and Section 10 shall at all times
be effective and shall survive such termination.
Section
13. No Advisory or Fiduciary Relationship. The Company acknowledges
and agrees that (a) the purchase and sale of the Offered Shares pursuant to this Agreement, including the determination of the
public offering price of the Offered Shares and any related discounts and commissions, is an arm’s-length commercial transaction
between the Company, on the one hand, and the several Underwriters, on the other hand, (b) in connection with the offering contemplated
hereby and the process leading to such transaction, each Underwriter is and has been acting solely as a principal and is not the
agent or fiduciary of the Company, or its shareholders, creditors, employees or any other party, (c) no Underwriter has assumed
or will assume an advisory or fiduciary responsibility in favor of the Company with respect to the offering contemplated hereby
or the process leading thereto (irrespective of whether such Underwriter has advised or is currently advising the Company on other
matters) and no Underwriter has any obligation to the Company with respect to the offering contemplated hereby except the obligations
expressly set forth in this Agreement, (d) the Underwriters and their respective affiliates may be engaged in a broad range of
transactions that involve interests that differ from those of the Company, and (e) the Underwriters have not provided any legal,
accounting, regulatory or tax advice with respect to the offering contemplated hereby and the Company has consulted its own legal,
accounting, regulatory and tax advisors to the extent it deemed appropriate.
Section
14. Representations and Indemnities to Survive Delivery.
The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers and of
the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, officers or directors or
any controlling person, as the case may be, and, anything herein to the contrary notwithstanding, will survive delivery of and
payment for the Offered Shares sold hereunder and any termination of this Agreement.
Section
15. Notices. All communications hereunder shall be in writing
and shall be mailed, hand delivered or telecopied and confirmed to the parties hereto as follows:
| If to the Representatives: | Jefferies LLC
520 Madison Avenue
New York, New York 10022
Facsimile: +1 646 619-4437
Attention: General Counsel |
BMO Capital Markets Corp.
3 Times Square, 25th Floor
New York, NY 10036
Facsimile: +1 212 885-4165
Attention: Equity Capital Markets
Syndicate Desk
with a copy to:
Facsimile: +1 212 702-1205
Attention: Legal Department
with a copy to (which shall not
constitute notice):
Covington & Burling LLP
620 Eighth Avenue
New York, New York 10018
Facsimile: +1 646 441-9111
Attention: Eric W. Blanchard and Brian Rosenzweig
Gornitzky & Co.
Zion Building, 45 Rothschild Blvd
Tel Aviv, 6578403, Israel
Facsimile: +972 3 560-6555
Attention: Chaim Friedland and Ari Fried
| If to the Company: | Sol-Gel Technologies Ltd.
7 Golda Meir St., Weizmann Science Park
Ness Ziona, 7403650, Israel
Facsimile: +972 153 523044444
Attention: Gilad Mamlok |
with a copy to (which shall not
constitute notice):
Latham & Watkins LLP
99 Bishopsgate
Museum Tower
London EC2M 3XF
Facsimile: +44-20-7374-4460
Attention: Joshua G. Kiernan and Nathan Ajiashvili
Gross, Kleinhendler, Hodak, Halevy,
Greenberg & Co.
One Azrieli Center
Tel-Aviv 6423806, Israel
Facsimile: +972-3-607-4470
Attention: Gene Kleinhendler
Any party hereto may change the address
for receipt of communications by giving written notice to the others.
Section
16. Successors. This Agreement will inure to the
benefit of and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 11 hereof, and to
the benefit of the affiliates, directors, officers, employees, agents and controlling persons referred to in Section 9 and Section
10, and in each case their respective successors, and no other person will have any right or obligation hereunder. The term “successors”
shall not include any purchaser of the Offered Shares as such from any of the Underwriters merely by reason of such purchase.
Section
17. Partial Unenforceability. The invalidity or unenforceability
of any section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other section,
paragraph or provision hereof. If any section, paragraph or provision of this Agreement is for any reason determined to be invalid
or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it
valid and enforceable.
Section
18. Governing Law Provisions; Currency Provisions.
This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York applicable to agreements
made and to be performed in such state. Any legal suit, action or proceeding arising out of or based upon this Agreement or the
transactions contemplated hereby (“Related Proceedings”) may be instituted in the federal courts of the United
States of America located in the Borough of Manhattan in the City of New York or the courts of the State of New York in each case
located in the Borough of Manhattan in the City of New York (collectively, the “Specified Courts”), and each
party irrevocably submits to the exclusive jurisdiction (except for proceedings instituted in regard to the enforcement of a judgment
of any such court (a “Related Judgment”), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. Service of any process, summons, notice or document by mail to such party’s address
set forth above shall be effective service of process for any suit, action or other proceeding brought in any such court. The parties
irrevocably and unconditionally waive any objection to the laying of venue of any suit, action or other proceeding in the Specified
Courts and irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such suit, action or
other proceeding brought in any such court has been brought in an inconvenient forum. The Company and each other party not located
in the United States has irrevocably appointed Cogency Global Inc., which currently maintains a New York City office at 10 E. 40th
Street, 10th floor, New York, NY 10016, United States of America, as its agent to receive service of process or other legal summons
for purposes of any such suit, action or proceeding that may be instituted in any state or federal court in the Borough of Manhattan
in the City of New York, United States of America.
With respect to any
Related Proceeding, each party irrevocably waives, to the fullest extent permitted by applicable law, all immunity (whether on
the basis of sovereignty or otherwise) from jurisdiction, service of process, attachment (both before and after judgment) and execution
to which it might otherwise be entitled in the Specified Courts, and with respect to any Related Judgment, each party waives any
such immunity in the Specified Courts or any other court of competent jurisdiction, and will not raise or claim or cause to be
pleaded any such immunity at or in respect of any such Related Proceeding or Related Judgment, including, without limitation, any
immunity pursuant to the United States Foreign Sovereign Immunities Act of 1976, as amended.
The obligations of
the Company pursuant to this Agreement in respect of any sum due to any Underwriter shall, notwithstanding any judgment in a currency
other than United States dollars, not be discharged until the first business day, following receipt by any Underwriter of any sum
adjudged to be so due in such other currency, on which such Underwriter may in accordance with normal banking procedures purchase
United States dollars with such other currency. If the United States dollars so purchased are less than the sum originally due
to such Underwriter in United States dollars hereunder, the Company agrees as a separate obligation and notwithstanding any such
judgment, to indemnify such Underwriter against such loss. If the United States dollars so purchased are greater than the sum originally
due to such Underwriter hereunder, such Underwriter agrees to pay to the Company an amount equal to the excess of the dollars so
purchased over the sum originally due to such Underwriter hereunder.
All payments made or
deemed to be made by the Company to the Underwriters, their respective affiliates, directors, officers, employees and agents or
to any person controlling any Underwriter under this Agreement, if any, will be made without withholding or deduction for or on
account of any present or future taxes, duties, assessments or governmental charges of whatever nature (other than taxes on net
income or similar taxes) imposed or levied by or on behalf of the State of Israel or any political subdivision or any taxing authority
thereof or therein unless the Company is or becomes required by law to withhold or deduct such taxes, duties, assessments or other
governmental charges. In such event, the Company will pay such additional amounts as will result, after such withholding or deduction,
in the receipt by each Underwriter, their respective affiliates, directors, officers, employees and each person controlling any
Underwriter, as the case may be, of the amounts that would otherwise have been receivable in respect thereof.
Section
19. General Provisions. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings
and negotiations with respect to the subject matter hereof. This Agreement may be executed in two or more counterparts, each one
of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This
Agreement may not be amended or modified unless in writing by all of the parties hereto, and no condition herein (express or implied)
may be waived unless waived in writing by each party whom the condition is meant to benefit. The section headings herein are for
the convenience of the parties only and shall not affect the construction or interpretation of this Agreement.
Each of the parties
hereto acknowledges that it is a sophisticated business person who was adequately represented by counsel during negotiations regarding
the provisions hereof, including, without limitation, the indemnification provisions of Section 9 and the contribution provisions
of Section 10, and is fully informed regarding said provisions. Each of the parties hereto further acknowledges that the provisions
of Section 9 and Section 10 hereof fairly allocate the risks in light of the ability of the parties to investigate the Company,
its affairs and its business in order to assure that adequate disclosure has been made in the Registration Statement, any preliminary
prospectus, the Time of Sale Prospectus, each free writing prospectus and the Prospectus (and any amendments and supplements to
the foregoing), as contemplated by the Securities Act and the Exchange Act.
If the foregoing is
in accordance with your understanding of our agreement, kindly sign and return to the Company the enclosed copies hereof, whereupon
this instrument, along with all counterparts hereof, shall become a binding agreement in accordance with its terms.
| |
Very truly yours, |
| |
|
| |
SOL-GEL TECHNOLOGIES LTD. |
| |
|
|
| |
By: |
|
| |
|
Name: |
| |
|
Title: |
The foregoing Underwriting
Agreement is hereby confirmed and accepted by the Representatives in New York, New York as of the date first above written.
| JEFFERIES LLC |
|
| BMO CAPITAL MARKETS CORP. |
|
Acting individually and as Representatives
of the several Underwriters named in
the attached Schedule A. |
|
| |
|
| JEFFERIES LLC |
|
| |
|
|
| By: |
|
|
| |
Name: |
|
| |
Title: |
|
| |
|
|
| BMO CAPITAL MARKETS CORP. |
|
| |
|
|
| By: |
|
|
| |
Name: |
|
| |
Title: |
|
Schedule A
|
Underwriters |
|
Number of
Firm Shares
to be Purchased |
| Jefferies LLC |
|
[●] |
| BMO Capital Markets Corp. |
|
[●] |
| JMP Securities LLC |
|
[●] |
| Raymond James & Associates, Inc. |
|
[●] |
| |
|
|
| Total |
|
[●] |
Schedule B
Free Writing Prospectuses Included
in the Time of Sale Prospectus
[None.]
Schedule C
Pricing Information
Price to Public:
$[ ● ] per Ordinary Share
Number of Firm Shares:
[ ● ]
Number of Optional Shares:
[ ● ]
Schedule D
Permitted Section 5(d) Communications
[None.]
Exhibit A
Form of Lock-up Agreement
________, 2018
JEFFERIES LLC
BMO CAPITAL MARKETS CORP.
As Representatives of the several Underwriters
c/o JEFFERIES LLC
520 Madison Avenue
New York, New York 10022
c/o BMO CAPITAL MARKETS CORP.
3 Times Square, 25th Floor
New York, NY 10036
RE: Sol-Gel Technologies Ltd. (the “Company”)
Ladies & Gentlemen:
The undersigned is an executive officer or director of the Company
or an owner of ordinary shares, par value NIS 0.1 per share, of the Company (collectively, the “Shares”), or
of securities convertible into or exchangeable or exercisable for Shares. The Company proposes to conduct a public offering of
ordinary shares of the Company (the “Offering”), for which Jefferies LLC (“Jefferies”) and
BMO Capital Markets Corp. (“BMO”) will act as the representatives of the underwriters. The undersigned recognizes
that the Offering will benefit each of the Company and the undersigned. The undersigned acknowledges that the underwriters are
relying on the representations and agreements of the undersigned contained in this letter agreement in conducting the Offering
and, at a subsequent date, in entering into an underwriting agreement (the “Underwriting Agreement”) and other
underwriting arrangements with the Company with respect to the Offering.
Annex A sets forth definitions for capitalized terms used in
this letter agreement that are not defined in the body of this agreement. Those definitions are a part of this agreement.
In consideration of the foregoing, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned hereby agrees that, during the Lock-up
Period, the undersigned will not (and will cause any Family Member not to), without the prior written consent of Jefferies and
BMO, which may withhold their consent in their sole discretion:
| · | Sell or Offer to Sell any Shares or Related Securities currently or hereafter owned either of record or beneficially (as defined
in Rule 13d-3 under the Exchange Act) by the undersigned or such Family Member, |
| · | make any demand for, or exercise any right with respect to, the registration under the Securities Act of the offer and sale
of any Shares or Related Securities, or cause to be filed a registration statement, prospectus or prospectus supplement (or an
amendment or supplement thereto) with respect to any such registration, or |
| · | publicly announce any intention to do any of the foregoing. |
The foregoing will not apply to the registration of the offer
and sale of Shares, and the sale of Shares to the underwriters, in each case as contemplated by the Underwriting Agreement. In
addition, the foregoing restrictions shall not apply to:
(i) the transfer of Shares or Related Securities by
gift, or by will or intestate succession to a Family Member or to a trust whose beneficiaries consist exclusively of one or more
of the undersigned and/or a Family Member; (ii) (x) transfers or dispositions of Shares or Related Securities to any corporation,
partnership, limited liability company or other legal entity, all of the beneficial ownership interests of which are held by the
undersigned or any Family Member or (y) if the undersigned is a corporation, partnership, limited liability company, trust or other
business entity, the transfer of Shares or Related Securities to another corporation, partnership, limited liability company, trust
or other business entity that is a direct or indirect affiliate (as defined in Rule 405 promulgated under the Securities Act),
or one or more limited partners, general partners, limited liability company members or stockholders or other equityholders of
the undersigned, provided that, in each case, any such transfer or distribution shall not involve a disposition for value; and
(iii) the transfer of Shares or Related Securities by operation of law, including pursuant to a domestic order or negotiated divorce
settlement; provided, however, that in any such transfer or distribution pursuant to (i), (ii) or (iii) above, it shall be a condition
to such transfer that:
| · | each donee, transferee or distributee executes and delivers to Jefferies and BMO an agreement in form and substance satisfactory
to Jefferies and BMO stating that such donee, transferee or distributee is receiving and holding such Shares and/or Related Securities
subject to the provisions of this letter agreement and agrees not to Sell or Offer to Sell such Shares and/or Related Securities,
engage in any Swap or engage in any other activities restricted under this letter agreement except in accordance with this letter
agreement (as if such donee, transferee or distributee had been an original signatory hereto), and |
| · | prior to the expiration of the Lock-up Period, no public disclosure or filing under the Exchange Act by any party to the transfer
(donor, donee, transferor or transferee, distributor or distributee) shall be required, or made voluntarily, reporting a reduction
in beneficial ownership of Shares or Related Securities in connection with such transfer or distribution. |
Furthermore, notwithstanding the restrictions imposed by this
letter agreement, the undersigned may:
(i) exercise an option or other equity award to purchase
Shares granted under any of the Company’s equity incentive plans or equity purchase plans described in the Prospectus (as
defined in the Underwriting Agreement), whether for cash or by net exercise or “cashless” exercise, insofar as such
option or other equity award is outstanding as of the date of the Prospectus, provided that the underlying Shares shall continue
to be subject to the restrictions on transfer set forth in this letter agreement;
(ii) exercise a convertible note to purchase Shares
existing as of the date hereof and described in the Prospectus, provided that the underlying Shares shall continue to be
subject to the restrictions on transfer set forth in this letter agreement and provided further that, if required, any public
report or filing shall clearly indicate in the footnotes thereto that the filing relates to the exercise of a convertible note,
that no Shares were sold by the reporting person and that Shares received upon exercise of the convertible note are subject to
this letter agreement;
(iii) establish a trading plan pursuant to Rule 10b5-1
under the Exchange Act for the transfer of Shares, provided that, such plan does not provide for any transfers of Shares
or Related Securities during the Lock-up Period and the entry into such plan is not publicly disclosed during the Lock-up Period;
(iv) transfer or dispose of Shares acquired on the
open market following the Offering, provided that no public report or filing shall be required, or made voluntarily, in
connection with such transfer or disposition during the Lock-Up Period;
(v) transfer Shares to the Company as forfeitures
to satisfy tax withholding obligations of the undersigned in connection with the vesting or exercise of equity awards by the undersigned
pursuant to the Company’s equity incentive plans described in the Prospectus, insofar as such equity awards are outstanding
as of the date of the Prospectus, provided that, if required, any public report or filing shall clearly indicate in the
footnotes thereto that the purpose of such transfer was to cover tax obligations of the undersigned in connection with such vesting
or exercise; or
(vi) pursuant to a bona fide third-party tender offer
for all outstanding shares of the Company, merger, consolidation or other similar transaction made to all holders of the Company’s
securities involving a change of control of the Company (including, without limitation, the entering into any lock-up, voting or
similar agreement pursuant to which the undersigned may agree to transfer, sell, tender or otherwise dispose of Shares or other
such securities in connection with such transaction, or vote any Shares or other such securities in favor of any such transaction),
provided that, in the event that such tender offer, merger, consolidation or other such transaction is not completed, such
securities held by the undersigned shall remain subject to the provisions of this letter agreement.
If the undersigned is an officer or director of the Company,
the undersigned further agrees that the foregoing provisions shall be equally applicable to any Company-directed Shares the undersigned
may purchase or otherwise receive in the Offering (including pursuant to a directed share program).
In addition, if the undersigned is an officer or director of
the Company, (i) Jefferies and BMO agree that, at least three business days before the effective date of any release or waiver
of the foregoing restrictions in connection with a transfer of Shares, Jefferies and BMO will notify the Company of the impending
release or waiver, and (ii) the Company (in accordance with the provisions of the Underwriting Agreement) will announce the impending
release or waiver by press release through a major news service at least two business days before the effective date of the release
or waiver. Any release or waiver granted by Jefferies and BMO hereunder to any such officer or director shall only be effective
two business days after the publication date of such press release. The provisions of this paragraph will not apply if both (a)
the release or waiver is effected solely to permit a transfer not for consideration and (b) the transferee has agreed in writing
to be bound by the same terms described in this letter agreement that are applicable to the transferor to the extent and for the
duration that such terms remain in effect at the time of the transfer.
The undersigned also agrees and consents to the entry of stop
transfer instructions with the Company’s transfer agent and registrar against the transfer of Shares and/or Related Securities
held by the undersigned and the undersigned’s Family Members, if any, except in compliance with the foregoing restrictions.
With respect to the Offering only, the undersigned waives any
registration rights relating to registration under the Securities Act of the offer and sale of any Shares and/or any Related Securities
owned either of record or beneficially by the undersigned, including any rights to receive notice of the Offering.
The undersigned confirms that the undersigned has not, and has
no knowledge that any Family Member has, directly or indirectly, taken any action designed to or that might reasonably be expected
to cause or result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale of the
Shares. The undersigned will not, and will cause any Family Member not to take, directly or indirectly, any such action.
Whether or not the Offering occurs as currently contemplated
or at all depends on market conditions and other factors. The Offering will only be made pursuant to the Underwriting Agreement,
the terms of which are subject to negotiation between the Company and the underwriters.
If (i) the Company, on the one hand, or Jefferies and BMO, on
the other hand, notifies the other in writing that it does not intend to proceed with the Offering, (ii) the Company files an application
to withdraw the registration statement related to the Offering, (iii) the Underwriting Agreement is not executed on or before February
28, 2018, or (iv) the Underwriting Agreement (other than the provisions thereof that survive termination) terminates or is terminated
prior to the Closing Date, then in each case, this letter agreement shall terminate automatically, and without any action on the
part of any other party, terminate and be of no further force and effect, and the undersigned shall automatically be released from
the obligations under this letter agreement.
The undersigned hereby represents and warrants that the undersigned
has full power, capacity and authority to enter into this letter agreement. This letter agreement is irrevocable and will be binding
on the undersigned and the successors, heirs, personal representatives and assigns of the undersigned.
This letter agreement shall be governed by, and construed in
accordance with, the laws of the State of New York.
| |
|
| Signature |
|
| |
|
| |
|
| Printed Name of Person Signing |
|
| |
|
| (Indicate capacity of person signing if signing as custodian or trustee, or on behalf of an entity) |
|
Certain Defined Terms
Used in Lock-up Agreement
For purposes of the letter agreement to which this Annex A is
attached and of which it is made a part:
| · | “Call Equivalent Position” shall have the meaning set forth in Rule 16a-1(b) under the Exchange Act. |
| · | “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended. |
| · | “Family Member” shall mean the spouse of the undersigned, an immediate family member of the undersigned
or an immediate family member of the undersigned’s spouse, in each case living in the undersigned’s household or whose
principal residence is the undersigned’s household (regardless of whether such spouse or family member may at the time be
living elsewhere due to educational activities, health care treatment, military service, temporary internship or employment or
otherwise). “Immediate family member” as used above shall have the meaning set forth in Rule 16a-1(e) under
the Exchange Act. |
| · | “Lock-up Period” shall mean the period beginning on the date hereof and continuing through the close of
trading on the date that is 180 days after the date of the Prospectus (as defined in the Underwriting Agreement). |
| · | “Put Equivalent Position” shall have the meaning set forth in Rule 16a-1(h) under the Exchange Act. |
| · | “Related Securities” shall mean any options or warrants or other rights to acquire Shares or any securities
exchangeable or exercisable for or convertible into Shares, or to acquire other securities or rights ultimately exchangeable or
exercisable for or convertible into Shares. |
| · | “Securities Act” shall mean the Securities Act of 1933, as amended. |
| · | “Sell or Offer to Sell” shall mean to: |
| - | sell, offer to sell, contract to sell or lend, |
| - | effect any short sale or establish or increase a Put Equivalent
Position or liquidate or decrease any Call Equivalent Position |
| - | pledge, hypothecate or grant any security interest in,
or |
| - | in any other way transfer or dispose of, |
in each case whether effected directly or
indirectly.
| · | “Swap” shall mean any swap, hedge or similar arrangement or agreement that transfers, in whole or in part,
the economic risk of ownership of Shares or Related Securities, regardless of whether any such transaction is to be settled in
securities, in cash or otherwise. |
Capitalized terms not defined in this Annex A shall have the
meanings given to them in the body of this lock-up agreement.
Exhibit B
[Lock-Up Parties]
Exhibit 3.1
THE COMPANIES LAW 5759-1999
A COMPANY LIMITED BY SHARES
AMENDED AND RESTATED MEMORANDUM OF ASSOCIATION
OF
SOL-GEL TECHNOLOGIES LTD.
ADOPTED: October 2, 2017
In English: Sol-Gel Technologies Ltd.
In
Hebrew: סול-ג'ל טכנולוגיות בע"מ
| 2. | Object and Purpose of the Company |
The purpose of the Company is to engage
in any lawful activity.
| 3. | Limitation of Liability |
The liability of the shareholders for the
Company’s obligations is limited to the unpaid sum, if any, owing to the Company in consideration for the issuance of the
shares by the Company to such shareholder, subject to the provisions of the Companies Law.
The registered share capital of the Company
is NIS 5,000,000 (five million new Israeli shekels) divided into 50,000,000 Ordinary (fifty million) Shares, par value of NIS 0.1
each (the “Share Capital”).
| 5. | Changes to the Memorandum |
The Company may, by a simple majority of
the votes cast (abstentions being disregarded), in person, by proxy or by proxy card (including by voting deed), or by such other
majority as shall be set forth in its Articles of Association from time to time, change its name; change its purposes; and change
its Share Capital (including, without limitation, by increasing its registered (authorized) share capital by creating new shares
in such amount and of such nominal (par) values and with such rights, preferences and restrictions as the resolution approving
the creation of such shares shall provide; consolidating its share capital (issued or unissued) or any portion thereof and dividing
it into shares of larger nominal (par) value than the nominal (par) value of its existing shares; subdividing its shares (issued
or unissued) or any of them into shares of smaller nominal (par) value; canceling any unissued shares, provided there is no obligation
of the Company, including a contingent obligation, to issue them, and reducing in such manner its share capital by the amount of
the shares so cancelled; and/or reducing its share capital in any manner, subject to any authorization or consent required by law).
* * * * * * * * * *
Exhibit 3.3
Sol-Gel
Technologies Ltd.
AMENDED
AND RESTATED ARTICLES OF ASSOCIATION
Effective
as of: _________, 2018
| TABLE OF CONTENTS |
| |
|
| INTERPRETATION |
1 |
| NAME OF THE COMPANY |
2 |
| OBJECTIVES |
2 |
| PUBLIC COMPANY |
2 |
| LIMITED LIABILITY |
3 |
| CAPITAL, SHARES AND RIGHTS |
3 |
| REGISTERED HOLDER |
4 |
| TRANSFER OF SHARES |
4 |
| TRANSMISSION OF SHARES |
5 |
| CALLS ON SHARES |
5 |
| ALTERATIONS OF THE REGISTERED SHARE CAPITAL |
6 |
| MODIFICATION OF CLASS RIGHTS |
7 |
| BORROWING POWERS |
7 |
| GENERAL MEETINGS |
7 |
| NOTICE OF GENERAL MEETINGS |
8 |
| PROCEEDINGS AT GENERAL MEETINGS |
8 |
| QUORUM |
8 |
| CHAIRMAN OF THE GENERAL MEETING |
9 |
| VOTE OF SHAREHOLDERS |
10 |
| DIRECTORS |
11 |
| POWERS, NUMBER OF DIRECTORS, COMPOSITION & ELECTION |
11 |
| REMUNERATION |
12 |
| CHAIRMAN OF THE BOARD |
13 |
| PROCEEDINGS OF THE DIRECTORS |
13 |
| QUORUM |
13 |
| METHODS OF ATTENDING MEETINGS |
13 |
| ALTERNATE DIRECTOR |
14 |
| COMMITTEES |
14 |
| APPROVAL OF CERTAIN TRANSACTIONS WITH RELATED PARTIES |
15 |
| RECORDS AND VALIDITY OF ACTS |
15 |
| CHIEF EXECUTIVE OFFICER |
15 |
| INSURANCE, EXCULPATION, AND INDEMNITY |
15 |
| INSURANCE OF OFFICE HOLDERS |
15 |
| INDEMNITY OF OFFICE HOLDERS |
16 |
| ADVANCE INDEMNITY |
17 |
| RETROACTIVE INDEMNITY |
17 |
| EXCULPATION |
17 |
| INSURANCE, EXCULPATION AND INDEMNITY – GENERAL |
18 |
| APPOINTMENT OF AN AUDITOR |
18 |
| INTERNAL AUDITOR |
18 |
| MERGER AND REORGANIZATION |
18 |
| SIGNATORIES |
18 |
| DISTRIBUTIONS |
19 |
| REDEEMABLE SECURITIES |
19 |
| DONATIONS |
19 |
| NOTICES |
19 |
AMENDED
AND RESTATED ARTICLES OF ASSOCIATION
of
SOL-GEL TECHNOLOGIES LTD.
INTERPRETATION
| 1. | In these Articles the following terms shall bear the meanings set
opposite to them, unless the context otherwise requires: |
| TERMS |
|
MEANINGS |
| Articles |
|
These Amended and Restated Articles of Association as may be amended from time to time. |
| |
|
|
| Auditor (Roeh Cheshbon Mevaker) |
|
As defined under the Law. |
| |
|
|
| Board |
|
The Board of Directors of the Company. |
| |
|
|
| CEO |
|
Chief Executive Officer, also referred to under the Law as the general manager. |
| |
|
|
| Class Meeting |
|
A meeting of the holders of a class of shares. |
| |
|
|
| Chairman |
|
Chairman of the Board. |
| |
|
|
| Company |
|
Sol-Gel Technologies Ltd. |
| |
|
|
| Companies Regulations |
|
All regulations promulgated from time to time under the Companies Law. |
| |
|
|
| Distribution |
|
As defined under the Law. |
| |
|
|
| External Director |
|
As defined under the Law. |
| |
|
|
| Internal Auditor |
|
An internal auditor appointed to the Company in accordance with Section 146(a) of the Companies Law. |
| |
|
|
| The Law or the Companies Law |
|
The Israeli Companies Law, 5759 – 1999 and the Companies Regulations, or any other law and regulations which may come in their stead, in each case, as amended from time to time. |
| |
|
|
| NIS |
|
New Israeli Shekel, the lawfully denominated currency of the State of Israel. |
| |
|
|
| The Office |
|
The registered office of the Company from time to time. |
| Office Holder |
|
As defined under the Law. |
| |
|
|
| Ordinary Share(s) |
|
The Company’s Ordinary Shares, NIS 0.1 par value each. |
| |
|
|
| Register |
|
The Company’s shareholders register, maintained in accordance with the Companies Law. |
| |
|
|
| Simple Majority |
|
A majority of more than fifty percent (50%) of the votes cast by those shareholders voting in person or by proxy (including by voting deed), not taking into consideration abstaining votes. |
| |
|
|
| Special Majority |
|
A majority of sixty six and two thirds percent (66-2∕3%) or more of the votes cast by those shareholders voting in person or by proxy (including by voting deed), not taking into consideration abstaining votes. |
| |
|
|
| The Statutes |
|
The Law and to the extent applicable to the Company, the Israeli Companies Ordinance (New Version) 1983, the Securities Law, 5728 – 1968 (the “Securities Law”) and all applicable laws and regulations applicable in any relevant jurisdiction (including without limitation U.S. federal laws and regulations), and rules of any stock market in which the Company’s shares are registered for trading as shall be in force from time to time. |
Subject to the provisions of
this Article 1 and unless the context necessitates another meaning, terms and expressions in these Articles which have been
defined in the Companies Law shall have the meanings ascribed to them therein.
| 2. | Words importing the singular shall include the plural, and vice
versa. Any pronoun shall include the corresponding masculine, feminine and neuter forms; and words importing persons shall
include corporate bodies. |
Any provision or part thereof
of these Articles, prohibited by applicable law, shall be ineffective, without invalidating any other part of these Articles.
NAME OF THE COMPANY
| 3. | The name of the Company is Sol-Gel Technologies Ltd. (and in Hebrew:
סול-ג'ל טכנולוגיות
בע"מ). |
| 4. | The objectives of the Company shall be to engage in any lawful activity.
|
PUBLIC
COMPANY
| 5. | The Company is a public company as such term is defined under the
Companies Law. |
LIMITED
LIABILITY
| 6. | The liability of each shareholder for the Company’s obligations
is limited to the unpaid sum, if any, owing to the Company in consideration for the issuance of the shares by the Company to such
shareholder, subject to the provisions of the Companies Law. |
CAPITAL,
SHARES AND RIGHTS
| 7. | The registered share capital of the Company consists of 50,000,000
Ordinary Shares, par value NIS 0.10 per share. |
| 8. | All issued and outstanding shares of the Company of the same class
are of equal rights between them for all intents and purposes concerning the rights set forth below. |
| 9. | Each issued Ordinary Share entitles its holder to the rights as described
below: |
| 9.1. | The equal right to participate in and vote at the Company's general meetings, whether ordinary
meetings or special meetings, and each of the shares in the Company shall entitle the holder thereof, who is present at the meeting
and participating in the vote, whether in person, or by proxy, to one vote. |
| 9.2. | The equal right to participate in any Distribution or distribution of bonus shares. |
| 9.3. | The equal right to participate in the distribution of assets available for distribution in the
event of liquidation of the Company. |
| 10.1. | If two or more persons are registered as joint holders of any shares, any one of such persons may
give effectual receipts for any dividend or other monies in respect of such share and his or her confirmation will bind all holders
of such share. |
| 10.2. | Any payment for a share shall be initially credited against the par value of said share and any
excess amount shall be credited as a premium for said share, unless determined otherwise in the conditions of the allocation. |
SHARE CERTIFICATES
| 11. | A shareholder who is registered in the Register is entitled to receive
from the Company, without payment and at such shareholder’s request, within a period of three months after the allocation
or registration of the transfer, one share certificate with respect to all the shares registered in his name, which shall specify
the aggregate number of the shares held by such shareholder. In the event of a jointly held share, the Company shall issue one
share certificate for all the joint holders of the share, and the delivery of such certificate to one of the joint holders shall
be deemed to be delivery to all of them. Every certificate shall bear the Company’s stamp or seal or a facsimile copy thereof
and be signed by an Office Holder of the Company, a director of the Company, the Company's secretary or by any other person appointed
by the Board for such purpose. |
| 12. | The Company may issue a new certificate in lieu of a certificate
that was issued and was lost, defaced, or destroyed, on the basis of such proof and guarantees as the Company may require, and
after payment of an amount that shall be prescribed by the Company, and the Company may also replace existing certificates with
new certificates, free of charge, subject to such conditions as the Company shall stipulate. |
REGISTERED HOLDER
| 13. | Except as otherwise provided in these Articles, the Company shall
be entitled to treat the registered holder of any share as the absolute owner thereof, and, accordingly, shall not, except as ordered
by a court of competent jurisdiction, or as required by statute, be bound to recognize any equitable or other claim to, or interest
in such share on the part of any other person. |
| 14. | To the extent required by the Law a trustee must inform the Company
of the fact that such trustee is holding shares of the Company in trust for another person at such time as may be required by the
Law. The Company shall register that fact in the Register in respect of such shares. The trustee shall be deemed to be the sole
holder of said shares. |
TRANSFER
OF SHARES
| 15. | Subject to the Statutes, and subject to any applicable agreements
or undertakings of any specific shareholder, the shares shall be freely transferable. |
| 16. | A transfer of registered shares shall be made in writing or any other
manner, in a form specified by the Board or the transfer agent appointed by the Company, and such transfer form should be signed
by both the transferee and the transferor and delivered to the Office or to such transfer agent, together with the certificates
of the shares due to be transferred, if such certificates have been issued. The Board may approve other methods of recognizing
the transfer of shares in order to facilitate the trading of the Company’s shares on the Nasdaq Global Market or on any other
stock exchange. The transferee shall be deemed to be the shareholder with respect to the transferred shares only from the date
of registration of his name in the Register. |
| 17. | Notwithstanding anything to the contrary herein, shares registered
in the name of The Depository Trust Company or its nominee shall be transferrable in accordance with the policies and procedures
of The Depository Trust Company. |
| 18. | The Board may close the Register and suspend the registration of
transfers for such period of time as the Board shall deem fit, provided that the period of closure of any such book shall not exceed
30 days each year. The Company shall notify the shareholders of such decision. |
TRANSMISSION
OF SHARES
| 19. | In the case of the death, liquidation, bankruptcy, dissolution, winding-up
or a similar occurrence of a shareholder, the legal successors, receivers or liquidators (as the case may be) of such shareholder
shall be the only persons recognized by the Company as having any title to such shares, but nothing herein contained shall release
the estate of the predecessor from any liability in respect of such shares. |
| 20. | The legal successors may, upon producing such evidence of title as
the Board shall require, be registered themselves as holders of the shares, or subject to the provisions as to transfers herein
contained, transfer the same to some other person. |
CALLS ON SHARES
| 21. | The Board may, from time to time, make such calls as it may deem
appropriate upon shareholders with respect to any sum unpaid in respect of shares held by such shareholders which is not, by the
terms of allotment thereof or otherwise, payable at a fixed time, and each shareholder shall pay the amount of every call so made
upon him (and of each installment thereof if the same is payable in installments), to the person(s) and at the time(s) and place(s)
designated by the Board, as any such time(s) may be thereafter extended and/or such person(s) or place(s) changed. Unless otherwise
stipulated by the Board (and in the notice hereafter referred to), each payment in response to a call shall be deemed to constitute
a pro rata payment on account of all shares in respect of which such call was made. |
| 22. | Notice of any call shall be given in writing to the applicable shareholder(s)
not less than fourteen (14) days prior to the time of payment, specifying the time and place of payment, and designating the person
to whom and the place where such payment shall be made; provided, however, that before the time for any such payment,
the Board may, by notice in writing to such shareholder(s), revoke such call in whole or in part, extend such time, or alter such
designated person and/or place. In the event of a call payable in installments, only one notice thereof need be given. |
| 23. | If, by the terms of allotment of any share or otherwise, any amount
is made payable at any fixed time, every such amount shall be payable at such time as if it were a call duly made by the Board
and of which due notice had been given, and all the provisions herein contained with respect to calls shall apply to each such
amount. |
| 24. | The joint holders of a share shall be jointly and severally liable
to pay all calls in respect thereof and all interest payable thereon. |
| 25. | Any amount unpaid in respect of a call shall bear interest from the
date on which it is payable until actual payment thereof, at such rate (not exceeding the then prevailing debtor rate charged by
leading commercial banks in Israel), and at such time(s) as the Board may prescribe. |
| 26. | A shareholder shall not be entitled to his rights as shareholder,
including the right to dividends, unless such shareholder has fully paid all the notices of call delivered to him, or which according
to these Articles are deemed to have been delivered to him, together with interest, linkage and expenses, if any, unless otherwise
determined by the Board. Upon the allotment of shares, the Board may provide for differences among the allottees of such shares
as to the amount of calls and/or the times of payment thereof. |
ALTERATIONS OF THE REGISTERED SHARE
CAPITAL
| 27. |
(a) | Subject to the Statutes, a general meeting of shareholders may from time to
time resolve to: |
| (1) | alter or add classes of shares that shall constitute the Company's registered capital, including
shares with preference rights, deferred rights, conversion rights or any other special rights or limitations; |
| (2) | increase the Company's registered share capital by creating new shares either of an existing class
or of a new class; |
| (3) | consolidate and/or split all or any of its share capital into shares of larger or smaller par value
than the existing shares; |
| (4) | cancel any registered shares not yet allocated, provided that the Company has made no commitment
to allocate such shares; and |
| (5) | reduce the Company’s share capital and any reserved fund for redemption of capital. |
| (b) | In executing any resolution adopted according to Article 27(a) above, the Board may, at its discretion,
resolve any related issues. |
| (c) | If as a result of a consolidation or split of shares authorized under these Articles, fractions
of a share will stand to the credit of any shareholder, the Board is authorized at its discretion, to act as follows: |
| (1) | Determine that fractions of shares that do not entitle their owners to a whole share, will be sold
by the Company and that the consideration for the sale be paid to the beneficiaries, on terms the Board may determine; |
| (2) | Allot to every shareholder, who holds a fraction of a share resulting from a consolidation and/or
split, shares of the class that existed prior to the consolidation and/or split, in a quantity that, when consolidated with the
fraction, will constitute a whole share, and such allotment will be considered valid immediately prior to the consolidation or
split; |
| (3) | Determine the manner for paying the amounts to be paid for shares allotted in accordance with Article
27(c)(2) above, including on account of bonus shares; and/or |
| (4) | Determine that the owners of fractions of shares will not be entitled to receive a whole Share
in respect of a share fraction or that they may receive a whole share with a different par value than that of the fraction of a
share. |
| 28. | Except as otherwise provided by or pursuant to these Articles or
by the conditions of issue, any new share capital shall be considered as part of the original share capital, and shall be subject
to the same provisions of these Articles with reference to payment of calls, lien, transfer, transmission, forfeiture and otherwise,
which applies to the original share capital. |
MODIFICATION OF CLASS RIGHTS
| 29. | If at any time the share capital is divided into different classes
of shares, any change to the rights and privileges of the holders of any such class of shares shall require the approval of a Class
Meeting of such class of shares by a Simple Majority (unless otherwise provided by the Statutes or by the terms of issue of the
shares of that class), in addition to the Simple Majority of all classes of shares voting together as a single class at a shareholder
meeting. |
| 30. | The rights and privileges of the holders of any class of shares shall
not be deemed to have been altered by creating or issuing shares of any class, including a new class (unless otherwise provided
by the terms of issue of the shares of that class). |
BORROWING POWERS
| 31. | The Company may, by resolution of the Board, from time to time, raise
or borrow or secure the payment of any sum or sums of money for the purposes of the Company. The Company, by resolution of the
Board, may also raise or secure the payment or repayment of such sum or sums in such manner and upon such terms and conditions
in all respects as it deems fit, and in particular by the issue of debentures or debenture stock of the Company charged upon all
or any part of the property of the Company (both present and future) including its unissued and/or its uncalled capital for the
time being. Issuance of any series of debentures shall require Board approval. |
GENERAL MEETINGS
| 32. | Annual general meetings shall be held at least once a calendar year,
at such place and time as determined by the Board, but not later than fifteen (15) months after the last annual general meeting.
Such general meetings shall be called “Annual Meetings” and all other general meetings of the Company shall be called
“Special Meetings”. The Annual Meeting shall review the Company's financial statements and shall transact any other
business required pursuant to these Articles or the Law, and any other matter as shall be determined by the Board. |
| 33. | The Board may convene a Special Meeting by its resolution, and is
required to convene a Special Meeting should it receive a request, in writing, from a person or persons entitled, under the Companies
Law, to request such meeting. |
Any request for convening a
meeting must specify the purposes for which the meeting is to be called, shall be signed by the persons requesting the meeting,
and shall be delivered to the Company's registered offices.
| 34. | In addition, subject to the Law, the Board may accept a request of
a shareholder holding not less than 1% of the voting rights at the general meeting to include a subject in the agenda of a general
meeting, provided that such subject is a proper subject for action by shareholders under the Law and these Articles and only if
the request also sets forth: (a) the name and address of the shareholder making the request; (b) a representation that the shareholder
is a holder of record of shares of the Company, holding not less than 1% of the voting rights at the general meeting and intends
to appear in person or by proxy at the meeting; (c) a description of all arrangements or understandings between the shareholder
and any other person or persons (naming such person or persons) in connection with the subject which is requested to be included
in the agenda; and (d) a declaration that all the information that is required under the Law and any other applicable law to be
provided to the Company in connection with such subject, if any, has been provided. In addition, if such subject includes a nomination
to the Board in accordance with the Articles, the request shall also set forth the consent of each nominee to serve as a director
of the Company if so elected and a declaration signed by each nominee declaring that there is no limitation under the Law for the
appointment of such nominee. Furthermore, the Board, may, in its discretion to the extent it deems necessary, request that the
shareholders making the request provide additional information necessary so as to include a subject in the agenda of a general
meeting, as the Board may reasonably require. |
| 35. | Subject to applicable law, the Board shall determine the agenda of
any general meeting. |
Notice of General Meetings
| 36. | Unless otherwise required by the Law and these Articles, the Company
is not required to give notice under Section 69 of the Companies Law. A notice of general meeting shall be published by the Company
on the website of (i) the United States Securities and Exchange Commission, and (ii) the Company, as a Current Report on Form 6-K
(or such other form prescribed by the Statutes), at least 21 days prior to the general meeting (or earlier if so required under
the Statutes). |
PROCEEDINGS AT GENERAL MEETINGS
Quorum
| 37. | No business shall be transacted at any general meeting of the Company
unless a quorum of shareholders is present at the opening of the general meeting. |
Except as provided in the following
Article with regard to an adjourned general meeting, the quorum for any general meeting shall be the presence of at least two shareholders
in person or by proxy (including by voting deed) holding 33 1/3% or more of the voting rights in the Company. For this purpose,
abstaining shareholders shall be deemed present at the general meeting.
| 38. | If within half an hour from the time appointed for the holding of
a general meeting a quorum is not present, the general meeting shall stand adjourned to the same day in the following week at the
same time and place or to such other day, time and place as the Board may indicate in a notice to the shareholders. At such adjourned
general meeting any number of shareholders shall constitute a quorum for the business for which the original general meeting was
called. |
Chairman of the General Meeting
| 39. | The Chairman shall preside as the chairman at every general meeting,
but if there shall be no such Chairman or if at any meeting the Chairman shall not be present within fifteen (15) minutes after
the time appointed for holding the same, or shall be unwilling to act as chairman, then the Board members present at the meeting
shall choose one of the Board members as chairman of the meeting and if they shall not do so then the shareholders present shall
choose a Board member, or if no Board member be present or if all the Board members present decline to take the chair, they shall
choose any other person present to be chairman of the meeting. |
| 40. | The chairman of the general meeting may, with the consent of a general
meeting at which a quorum is present, and shall if so directed by the general meeting, adjourn any meeting, discussion or the resolution
with respect to a matter that is on the agenda, from time to time and from place to place as the meeting shall determine. Except
as may be required by the Law, no shareholder shall be entitled to any notice of an adjournment or of the business to be transacted
at an adjourned meeting. No business shall be transacted at any adjourned meeting other than the business which might have been
transacted at the meeting from which the adjournment took place. |
| 41. | A vote in respect of the election of the chairman of the meeting
or regarding a resolution to adjourn the meeting shall be carried out immediately. All other matters shall be voted upon during
the meeting at such time and order as decided by the chairman of the general meeting. |
VOTE OF SHAREHOLDERS
| 42. | All resolutions proposed at any general meeting will require a Simple
Majority, unless otherwise required by the Statutes or these Articles. Except as otherwise required by the Statutes or these Articles,
alteration or amendment of these Articles shall require a Simple Majority. |
| 43. | A declaration by the chairman of the meeting that a resolution has
been carried, or has been carried unanimously or by a particular majority, or rejected, or not carried by a particular majority
and an entry to that effect in the minutes of the meeting shall be prima facie evidence thereof. |
| 44. | The chairman of the meeting will not have a second and/or a casting
vote. If the vote is tied with regard to a certain proposed resolution such proposal shall be deemed rejected. |
| 45. | If two or more persons are jointly entitled to a share, the vote
of the senior one who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other
registered holders of the share, and for this purpose seniority shall be determined by the order in which the names stand in the
Register. |
| 46. | A proxyholder need not be a shareholder of the Company. |
| 47. | The instrument appointing a proxy shall be in writing signed by the
appointer or of his attorney-in-fact duly authorized in writing. A corporate entity shall vote by a representative duly appointed
in writing by such entity. Any instrument appointing a proxy or a representative of a corporate entity (whether for a specified
meeting or otherwise) shall be in a form satisfactory to the Company. |
Such instrument shall be duly
signed by the appointer or his duly authorized attorney or, if such appointer is a company or other corporate body, under its common
seal, stamp or printed name or the hand of its duly authorized agent(s) or attorney(s).
| 48. | Unless otherwise determined by the Board, the instrument of appointment
must be submitted to the Office no later than 48 hours prior to the general meeting to be attended by such proxy or representative.
Notwithstanding the above, the chairman of the meeting shall have the right to waive the time requirement provided above with respect
to all instruments of appointment and to accept any and all instruments of appointment until the beginning of a general meeting.
|
| 49. | A proxy may be appointed in respect of only some of the shares held
by a shareholder, and a shareholder may appoint more than one proxy, each empowered to vote by virtue of a portion of the shares. |
| 50. | A shareholder being of unsound mind or pronounced to be unfit to
vote by a competent court of law may vote through a legally appointed guardian or any other representative appointed by a court
of law to vote on behalf of such shareholder. |
| 51. | A shareholder entitled to vote may signify in writing his approval
of, or dissent from, or may abstain from any resolution included in a proxy instrument furnished by the Company. A proxy instrument
may include resolutions pertaining to such issues which are permitted to be included in a proxy instrument according to the Statutes,
and such other issues which the Board may decide, in a certain instance or in general, to allow voting through a proxy. A shareholder
voting or abstaining through a proxy instrument shall be taken into account in determining the presence of a quorum as if such
shareholder is present at the meeting. |
| 52. | The chairman of the general meeting shall be responsible for recording
the minutes of the general meeting and any resolution adopted. |
| 53. | The provisions of these Articles relating to general meetings shall,
mutatis mutandis, apply to Class Meetings. |
DIRECTORS
Powers, Number of Directors, Composition
& Election
| 54. | The Board shall have and execute all powers and/or responsibilities
allocated to the Board by the Statutes and these Articles, including setting the Company’s policies and supervision over
the execution of the powers and responsibilities of the CEO. The Board may execute any power of the Company that is not specifically
allocated by the Statutes or by these Articles to another organ of the Company. |
| 55. | The number of directors on the Board shall be no less than five (5)
but no more than nine (9), including any External Directors required to be appointed by the Companies Law (if required). A reduction
of the maximum number of directors on the Board under this Article 55, shall not affect the term in office of serving directors
determined prior to such reduction. |
| 56. | The directors, excluding the External Directors, shall be classified,
with respect to the term for which they each severally hold office, into three classes, as nearly equal in number as practicable,
hereby designated as Class I, Class II and Class III. The Board may assign members of the Board already in office to such classes
at the time such classification becomes effective. |
| 56.1. | The term of office of the initial Class I directors shall expire at the first Annual Meeting to
be held in 2019 and when their successors are elected and qualified, |
| 56.2. | The term of office of the initial Class II directors shall expire at the first Annual Meeting following
the Annual Meeting referred to in Article 56.1 above and when their successors are elected and qualified, and |
| 56.3. | The term of office of the initial Class III directors shall expire at the first Annual Meeting
following the Annual Meeting referred to in Article 56.2 above and when their successors are elected and qualified. |
| 57. | At each Annual Meeting, commencing with the Annual Meeting to be
held in 2019, each of the successors elected to replace the directors of a Class whose term shall have expired at such Annual Meeting
shall be elected to hold office until the third Annual Meeting next succeeding his or her election and until his or her respective
successor shall have been elected and qualified. Notwithstanding anything to the contrary, each director shall serve until his
or her successor is elected and qualified or until such earlier time as such director’s office is vacated. |
| 58. | The Board may at any time and from time to time appoint any person
as a director to fill a vacancy (whether such vacancy is due to a director no longer serving or due to the number of directors
serving being less than the maximum number stated in Article 55 above). In the event of one or more such vacancies in the Board,
the continuing directors may continue to act in every matter; provided, however, that if their number is less than the minimum
number provided for pursuant to Article 55 above, they may only act in an emergency or to fill the office of a director which has
become vacant up to a number equal to the minimum number provided for pursuant to Article 55 above. The office of a director that
was appointed by the Board to fill any vacancy shall only be for the remaining period of time during which the director whose service
has ended was filled would have held office, or in case of a vacancy due to the number of directors serving being less than the
maximum number stated in Article 55 above, the Board shall determine at the time of appointment the class pursuant to Article 56
above, to which the additional director shall be assigned. Other than as provided in this Article 58, directors may be elected
only at Annual Meetings. |
| 59. | The term of office of a director shall commence on the date of such
director’s election by the Annual Meeting or by the Board or on a later date, should such date be determined in the resolution
of appointment of the Annual Meeting or of the Board. An Annual Meeting may dismiss a director
during the term only by a Special Majority vote (except for External Directors, who may be dismissed only as set forth under the
Law). |
| 60. | An amendment to Articles 54-60 shall require a Special Majority. |
Remuneration
| 61. | The Company shall determine the remuneration of the directors, if
any, in accordance with the Law. |
Chairman
of the Board
| 62. | The Board shall appoint one of its members to serve as the Chairman
and may replace the Chairman from time to time. The Chairman shall preside at meetings of the Board, but if at any meeting the
Chairman is not present within fifteen (15) minutes after the time appointed for holding the meeting, the present directors shall
choose a present director to be chairman of such meeting. |
PROCEEDINGS
OF THE DIRECTORS
| 63. | The directors shall meet together for the dispatch of business, adjourn
and otherwise regulate their meetings as they deem fit, subject to these Articles. |
Unless otherwise determined
by the Board, written notice of any meeting of the Board and the agenda setting out the matters to be discussed at such meeting,
shall be given to all directors at least seventy two (72) hours (or such shorter notice as all the directors may agree) before
the meeting. In urgent cases, a majority of the members of the Board may decide to hold a meeting without such notice.
Quorum
| 64. | No business shall be transacted at any meeting of the Board unless
a quorum of directors is present when a meeting is called to order. A quorum shall be deemed to exist when there are present personally
or represented by an alternate director at least half of the directors then in office. |
If a quorum is not present
at the meeting of the Board within half an hour after the time scheduled for the meeting, the meeting may be adjourned to another
time as shall be decided by the Chairman, or in his absence, the directors present at the meeting, provided that notice of no less
than twenty four (24) hours in advance shall be given to all the directors of the time of the adjourned meeting. The directors
may waive the necessity of such notice either beforehand or retrospectively. The quorum for the commencement of the adjourned meeting
shall be at least one member of the Board.
Methods of Attending Meetings
| 65. | Some or all of the directors may attend meetings of the Board through
computer network, telephone or any other media of communication, enabling the directors to communicate with each other, in the
deemed presence of all of them, provided that due prior notice detailing the time and manner of holding a given meeting is served
upon all the directors. The directors may waive the necessity of such notice either beforehand or retrospectively. |
Any resolution
adopted by the Board in such a meeting, pursuant to the provisions of these Articles, will be recorded in writing and signed by
the Chairman (or in his absence by the chairman of the meeting), and shall be valid as if adopted at a meeting of the Board duly
convened and held.
| 66. | A resolution in writing signed by all of the directors eligible to
participate in the discussion and vote on such resolution, or in respect of which all such directors have agreed (in writing by
mail, fax or electronic mail) not to convene, shall be as valid and effective for all purposes as if passed at a meeting of the
Board duly convened and held. |
Any such resolution may consist
of several counterparts, each signed by one or more directors. Such resolution in writing shall be effective as of the last date
appearing on the resolution, or if the resolution is signed in two or more counterparts, as of the last date appearing on the counterparts.
| 67. | While exercising his/her voting right, each director shall have one
vote. Resolutions of the Board will be decided by a simple majority of the directors present and voting, not taking into consideration
abstaining votes, except as otherwise provided in these Articles or by the Statutes. In the event the vote is tied, the Chairman
of the Board shall not have a casting vote, and such resolution shall be deemed rejected. |
Alternate Director
| 68. | Subject to the Law, a director shall be entitled at any time and
from time to time to appoint in writing any person who is qualified to serve as a director, to act as his/her alternate and to
terminate the appointment of such person. The appointment of an alternate director does not negate the responsibility of the appointing
director and such responsibility shall continue to apply to such appointing director - taking into account the circumstances of
the appointment. |
Alternate directors shall be
entitled, while holding office, to receive notices of meetings of the Board and to attend and vote as a director at any meetings
at which the appointing director is not present and generally to exercise all the powers, rights, duties and authorities and to
perform all functions of the appointing director.
The document appointing an
alternate director must be submitted to the Chairman of the Board at least 48 hours before the opening of the first Board meeting
to be attended by such alternate director.
Committees
| 69. | The Board may set up committees and appoint members to these committees
subject to the Statutes. A resolution passed or an act done by such a committee pursuant to an authority granted to such committee
by the Board shall be treated as a resolution passed or act done by the Board, unless expressly otherwise prescribed by the Board
or the Statutes for a particular matter or in respect of a particular committee. |
| 70. | Meetings of committees and proceedings thereat (including the convening
of the meetings, the election of the chairman and the votes) shall be governed by the provisions herein contained for regulating
the meetings and proceedings of the Board so far as the same are applicable thereto and unless otherwise determined by the Board,
including by an adoption of a charter governing the committee proceedings. |
Approval of Certain Transactions with
Related Parties
| 71. | Subject to the Law and pursuant to Section 271 of the Law, a transaction
between the Company and an Office Holder (other than with respect to the compensation terms of such Office Holder), and a transaction
between the Company and another entity in which an Office Holder of the Company has a personal interest, which is not an Extraordinary
Transaction (as defined by Law), shall be approved by the Board or a committee of the Board or any other body or person (who has
no personal interest in the transaction) authorized by the Board. Such authorization, as well as the actual approval by the authorized
body or person, may be for a particular transaction or more generally for specific type of transactions. |
Records and Validity of Acts
| 72. | The resolutions of the Board shall be recorded in the Company's Minutes
Book, as required under the Statutes, signed by the Chairman or the chairman of a certain meeting. Such signed minutes shall be
deemed prima facie evidence of the meeting and the resolutions resolved therein. |
| 73. | All acts done bona fide by any meeting of the Board or of a committee
of the Board or by any person acting as a director, shall, notwithstanding it be afterwards discovered that there was some defect
in the appointment of any such director or person acting as aforesaid, or that they or any of them were disqualified, be as valid
as if every such person had been duly appointed and was qualified to be a director. |
Chief Executive Officer
| 74. | The Board shall appoint at least one CEO, for such period and upon
such terms as the Board deems fit. |
| 75. | The CEO shall have all managing and execution powers within the policies
and guidelines set forth by the Board, and shall be under the supervision of the Board. The CEO may delegate any of his powers
to his subordinates, subject to the approval of the Board. |
INSURANCE, EXCULPATION, AND INDEMNITY
Insurance of Office Holders
| 76. | The Company may insure the liability of an Office Holder, to the
fullest extent permitted under the Statutes. |
| 77. | Without derogating from the aforesaid, the Company may enter into
a contract to insure the liability of an officer therein for an obligation imposed on him in consequence of an act done in his
capacity as an Office Holder, in any of the following cases: |
| 77.1. | A breach of the duty of care vis-a-vis the Company or vis-a-vis another person; |
| 77.2. | A breach of the fiduciary duty vis-a-vis the Company, provided that the Office Holder acted in
good faith and had a reasonable basis to believe that the act would not harm the Company; |
| 77.3. | A monetary obligation imposed on him in favor of another person; |
| 77.4. | A monetary liability imposed on such Office Holder in favor of a payment to a breach offended at
an Administrative Procedure as set forth in Section 52(54)(a)(1)(a) to the Securities Law and expenses regarding Administrative
Procedures conducted in connection with such Office Holder and/or in connection with a monetary sanction, including reasonable
litigation expenses and reasonable attorney’s fees; |
| 77.5. | Any other matter in respect of which it is permitted or will be permitted under applicable law
to insure the liability of an Office Holder in the Company. |
Indemnity of Office Holders
| 78. | The Company may indemnify an Office Holder, to the fullest extent
permitted under the Statutes. Without derogating from the aforesaid, the Company may indemnify an Office Holder for a liability
or expense imposed on him in consequence of an act done in his capacity as an Office Holder in the Company, as follows: |
| 78.1. | a monetary liability incurred by or imposed on the Office Holder in favor of another person pursuant
to a court judgment, including pursuant to a settlement confirmed as judgment or arbitrator’s decision approved by a competent
court; |
| 78.2. | reasonable litigation expenses, including reasonable attorneys’ fees, which were incurred
by the Office Holder as a result of an investigation or proceeding filed against the Office Holder by an authority authorized to
conduct such investigation or proceeding, provided that such investigation or proceeding was either (i) concluded without the filing
of an indictment against such Office Holder and without the imposition on him of any monetary obligation in lieu of
a criminal proceeding; (ii) concluded without the filing of an indictment against the Office Holder but with the imposition of
a monetary obligation on the Office Holder in lieu of criminal proceedings for an offense that does not require proof of criminal
intent; or (iii) in connection with a monetary sanction; |
| 78.3. | reasonable litigation expenses, including attorneys’ fees, incurred by the Office Holder
or which were imposed on the Office Holder by a court (i) in a proceeding instituted against the Office Holder by the Company,
on its behalf, or by a third party, or (ii) in connection with criminal indictment of which the Office Holder was acquitted, or
(iii) in a criminal indictment which the Office Holder was convicted of an offense that does not require proof of criminal intent; |
| 78.4. | a monetary liability imposed on the Office Holder in favor of all the injured parties by the breach
in an Administrative Procedure as set forth in Section 52(54)(a)(1)(a) to the Securities Law; |
| 78.5. | expenses expended by the Office Holder with respect to an Administrative Procedure under the Securities
Law, including reasonable litigation expenses and reasonable attorneys’ fees; and |
| 78.6. | any other obligation or expense in respect of which it is permitted or will be permitted under
applicable law to indemnify an Office Holder. |
Advance Indemnity
| 79. | The Company may give an advance undertaking to indemnify an Office
Holder therein in respect of the following matters: |
| 79.1. | matters as detailed in Article 78.1, provided however, that the undertaking is restricted to events,
which in the opinion of the Board, are anticipated in light of the Company’s activities at the time of granting the obligation
to indemnify and is limited to a sum or measurement determined by the Board as reasonable under the circumstances. The indemnification
undertaking shall specify such events and sum or measurement; and |
| 79.2. | matters as detailed in Articles 78.2 through 78.6. |
Retroactive Indemnity
| 80. | The Company may indemnify an Office Holder retroactively with respect
of the matters as detailed in Article 78, subject to any applicable law. |
Exculpation
| 81. | The Company may exempt an Office Holder in advance for all or any
of his liability for damage in consequence of a breach of the duty of care vis-a-vis the Company, to the fullest extent permitted
under the Statutes. However, the Company may not exempt a director in advance from his liability toward the Company due to the
breach of his/her duty of care in a Distribution. |
Insurance, Exculpation and Indemnity
– General
| 82. | The above provisions with regard to insurance, exemption and indemnity
are not and shall not limit the Company in any way with regard to its entering into an insurance contract and/or with regard to
the grant of indemnity and/or exemption in connection with a person who is not an Office Holder of the Company, including employees,
contractors or consultants of the Company, all subject to any applicable law. |
| 83. | The Company may enter into a contract in relation to exemption, indemnification
and insurance of Office Holders in companies under its control, related companies and other companies in which it has any interest,
to the maximum extent permitted under the Statutes, and in this context the foregoing provisions in relation to exemption, indemnification
and insurance of Office Holders in the Company shall apply, mutatis mutandis. |
| 84. | An undertaking in relation to exemption, indemnification and insurance
of an Office Holder as aforesaid may also be valid after the office of such Office Holder in the Company has terminated. |
APPOINTMENT OF AN AUDITOR
| 85. | Subject to the Statutes, the Annual Meeting shall appoint an Auditor
for a period ending at the next Annual Meeting, or for a longer period, but no longer than until the third Annual Meeting after
the meeting at which the Auditor has been appointed. The same Auditor may be re-appointed. |
Subject to
the Statutes, the terms of service of the Auditor for the audit services shall be determined by the Board, at its discretion, or
a committee of the Board if such determination was delegated to a committee, including undertakings or payments to the Auditor.
The Board shall report the fees of the Auditor to the Annual Meeting.
INTERNAL AUDITOR
| 86. | So long as the Company is a Public Company, the Board shall appoint
an Internal Auditor pursuant to the recommendation of the Audit Committee. |
| 87. | The organizational superior of the Internal Auditor shall be the
Chairman. The Internal Auditor shall submit a proposed annual or periodic work plan to the Audit Committee or the Board of Directors,
which will approve such plan with changes as it deems fit, at its discretion. |
MERGER AND REORGANIZATION
| 88. | Notwithstanding the provisions of Section 327(a) of the Companies
Law, the majority required for the approval of a merger by the general meeting or by a class meeting shall be a Simple Majority. |
SIGNATORIES
| 89. | Signatory rights on behalf of the Company shall be determined from
time to time by the Board. |
DISTRIBUTIONS
| 90. | The Board may decide on a Distribution, subject to the provisions
set forth under the Law and these Articles. |
| 91. | The Board will determine the method of payment of any Distribution.
The receipt of the person whose name appears on the record date on the Register as the owner of any share, or in the case of joint
holders, of any one of such joint holders, shall serve as confirmation with respect to all the payments made in connection with
that share and in respect of which the receipt was received. All dividends unclaimed after having been declared may be invested
or otherwise used by the Directors for the benefit of the Company until claimed, provided however that the Company shall not be
required to accept any claim made following the 7th anniversary of the declaration date, or an earlier date as may be
determined by the Board. No unpaid dividend shall bear interest or accrue linkage differentials. |
| 92. | For the purpose of implementing any resolution concerning any Distribution,
the Board may settle, as it deems fit, any difficulty that may arise with respect to the Distribution, including determining the
value for the purpose of the said Distribution of certain assets, and deciding that payments in cash shall be made to the shareholders
based on the value so determined, and determining provisions with respect to fractions of shares or with respect to the non-payment
of small sums. |
REDEEMABLE SECURITIES
| 93. | The Company shall be entitled to issue redeemable securities which
are, or at the option of the Company may be, redeemed on such terms and in such manner as shall be determined by the Board. Redeemable
securities shall not constitute part of the Company's capital, except as provided in the Law. |
| 94. | The Company may make donations of reasonable amounts of money for
purposes which the Board deems to be worthy causes, even if the donations are not made in relation to business considerations for
increasing the Company's profits. |
| 95. | Subject to the Statutes, notice or any other document which the Company
shall deliver and which it is entitled or required to give pursuant to the provisions of these Articles and/or the Statutes shall
be delivered by the Company to any person, in any one of the following manners as the Company may choose: in person, by mail, transmission
by fax or by electronic form. |
Any notice or other document
which shall be sent shall be deemed to have reached its destination on the third day after the day of mailing if sent by registered
mail or regular mail, or on the first day after transmission if delivered in person, transmitted by fax or electronic form.
Should it be required to prove
delivery, it shall be sufficient to prove that the notice or document sent contains the correct mailing, e-mail, or fax details
as registered in the Register or any other address which the shareholder submitted in writing to the Company as the address and
fax or e-mail details for the submission of notices or other documents.
Subject to the provisions of
the Statutes, a notice to a shareholder may be served, as a general notice to all shareholders, published by the Company on the
website of (i) the United States Securities and Exchange Commission, and (ii) the Company, in accordance with applicable rules
and regulations of any stock market upon which the Company’s shares are listed.
In cases where it is necessary
to give advance notice of a particular number of days or notice which shall remain in effect for a particular period, the day the
notice was sent shall be excluded and the scheduled day of the meeting or the last date of the period shall be included in the
count.
The Company shall not be required
to give notice to its registered shareholders pursuant to the Companies Law, unless otherwise required by Statutes. Subject to
the Statutes, the Company shall not be required to send notices to any shareholder who is not registered in the Register or has
not provided the Company with accurate and sufficient mailing details.
| 96. | Any notice to be given to the shareholders shall be given, with respect
to joint shareholders, to the person whose name appears first in the Register as the holder of the said share, and any notice so
given shall be sufficient notice for all holders of the said share. |
| 97. | Any notice or other document served upon or sent to any shareholder
in accordance with these Articles shall, notwithstanding that he be then deceased or bankrupt, and whether the Company received
notice of his death or bankruptcy or not, be deemed to be duly served or sent in respect of any shares held by him (either alone
or jointly with others) until some other person is registered in his stead as the holder or joint holder of such shares, and such
service or sending shall be a sufficient service or sending on or to his heirs, executors, administrators or assigns and all other
persons (if any) interested in such share. |
| 98. | The accidental omission to give notice to any shareholder or the
non-receipt of any such notice shall not cancel or annul any action made in reliance on the notice. |
**********************
Exhibit 5.1
| |
Tel Aviv, January 23, 2018 |
| |
Our ref: 13096/2001 |
Sol-Gel Technologies Ltd.
7 Golda Meir St.
Ness Ziona 7403650, Israel
Re: Registration Statement on
Form F-1
Ladies and Gentlemen:
We have acted as Israeli
counsel for Sol-Gel Technologies Ltd., an Israeli company (the “Company”), in connection with the registration
by the Company of ordinary shares, par value NIS 0.1 per share of the Company (“Ordinary Shares”), including
Ordinary Shares that are subject to an option granted by the Company to the underwriters of the offering to purchase additional
shares, with a proposed maximum aggregate offering price of $74,750,000 (the “Offering Shares”). Such Offering
Shares are registered by the Company in connection with the underwritten initial public offering of the Company (the “Offering”).
This opinion letter is rendered pursuant to Item 8(a) of Form F-1 promulgated by the SEC and Items 601(b)(5) and
(b)(23) of the Securities and Exchange Commission’s (the “SEC”) Regulation S-K promulgated under
the United States Securities Act of 1933, as amended (the “Securities Act”).
In connection herewith,
we have examined the originals, or photocopies or copies, certified or otherwise identified to our satisfaction, of: (i) the
form of the registration statement on Form F-1 filed by the Company with the SEC (as amended through the date hereof, the
“Registration Statement”) and to which this opinion is attached as an exhibit; (ii) a copy of the articles
of association of the Company, as currently in effect; (iii) a draft of the amended articles of association of the Company,
to be in effect immediately following the pricing of the Offering (the “Amended Articles”); (iv) resolutions
of the board of directors (the “Board”) and the shareholders of the Company which have heretofore been approved
and, in each case, which relate to the Registration Statement and other actions to be taken in connection with the Offering (the
“Resolutions”); (v) the form of Underwriting Agreement between the Company and Jefferies LLC and BMO Capital
Markets Corp., as representatives of the several underwriters; and (vi) such other corporate records, agreements, documents and
other instruments, and such certificates or comparable documents of public officials and of officers and representatives of the
Company as we have deemed relevant and necessary as a basis for the opinions hereafter set forth. We have also made inquiries
of such officers and representatives as we have deemed relevant and necessary as a basis for the opinions hereafter set forth.
In such examination,
we have assumed the genuineness of all signatures, the legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, confirmed as
photostatic copies and the authenticity of the originals of such latter documents. As to all questions of fact material
to these opinions that have not been independently established, we have relied upon certificates or comparable documents of officers
and representatives of the Company.
Based upon and subject
to the foregoing and the effectiveness of the Amended Articles, we are of the opinion that (i) the Offering Shares have been duly
authorized for issuance by all necessary corporate action by the Company; and (ii) upon payment to the Company of the consideration
in such amount and form as shall be determined by the board of directors of the Company, the Offering Shares, when issued and sold
in the Offering as described in the Registration Statement, will be validly issued, fully paid and non-assessable.
Members of our
firm are admitted to the Bar in the State of Israel, and we do not express any opinion as to the laws of any other jurisdiction.
This opinion is limited to the matters stated herein and no opinion is implied or may be inferred beyond the matters expressly
stated.
We consent to the filing
of this opinion as an exhibit to the Registration Statement and to the reference to our firm appearing under the caption “Legal
Matters” and “Enforceability of Civil Liabilities” in the prospectus forming part of the Registration Statement.
In giving this consent, we do not thereby admit that we are within the category of persons whose consent is required under Section 7
of the Securities Act, the rules and regulations of the SEC promulgated thereunder or Item 509 of the SEC’s Regulation
S-K promulgated under the Securities Act.
This opinion letter
is rendered as of the date hereof and we disclaim any obligation to advise you of facts, circumstances, events or developments
that may be brought to our attention after the effective date of the Registration Statement that may alter, affect or modify the
opinions expressed herein.
| |
Sincerely Yours, |
| |
|
| |
/s/ Gross, Kleinhendler, Hodak, Halevy, Greenberg and Co. |
| |
|
| |
Gross, Kleinhendler, Hodak, Halevy, Greenberg and Co. |
Exhibit 10.2
REGISTRATION RIGHTS AGREEMENT
AGREEMENT dated as of , 2018
(this “Agreement”) among Sol-Gel Technologies Ltd., a company incorporated under the laws of the Israel (the
“Company”), and M. Arkin Dermatology Ltd.
In consideration of the mutual
promises made herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.01. Definitions. (a) The
following terms, as used herein, have the following meanings:
“Affiliate”
means, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with
such Person, provided that no security holder of the Company shall be deemed an Affiliate of any other security
holder solely by reason of any investment in the Company. For the purpose of this definition, the term “control”
(including, with correlative meanings, the terms “controlling”, “controlled by” and “under
common control with”), as used with respect to any Person, shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities,
by contract or otherwise.
“Business Day”
means any day except a Friday or a Saturday or other day on which most Israeli banking institutions are not open for business.
“Company Securities”
means the Ordinary Shares held on the date hereof or acquired after the date hereof.
“Exchange Act”
means the Securities Exchange Act of 1934, as amended.
“FINRA”
means the Financial Industry Regulatory Authority (formerly, the National Association of Securities Dealers, Inc.) and any successor
thereto.
“Initial Public Offering”
means the Company’s initial underwritten public offering of Ordinary Shares pursuant to an effective registration statement
under the Securities Act.
“Ordinary Shares”
means ordinary shares, par value NIS 0.1 per share, of the Company and any shares into which such Ordinary Shares may thereafter
be converted or changed.
“Permitted Transferee”
means in the case of any Shareholder, a Person to whom Registrable Securities or any other securities of the Company convertible
or exercisable into or exchangeable for Company Securities are Transferred by such Shareholder; provided that (i) such
Transfer does not violate any agreements between such Shareholder and the Company or any of the Company’s subsidiaries, (ii) such
Transfer is not made in a registered offering or pursuant to Rule 144, and (iii) such transferee is (A) an Affiliate
of the Shareholder or (B) acquires at least 20% of the Shareholder’s Registrable Securities (including for these purposes
Company Securities that are issuable upon the conversion, exercise or exchange of any other securities of the Company).
“Person”
means an individual, corporation, limited liability company, partnership, association, trust or other entity or organization, including
a government or political subdivision or an agency or instrumentality thereof.
“Public Offering”
means an underwritten public offering of Company Securities (or any securities representing Company Securities) pursuant to an
effective registration statement under the Securities Act, other than pursuant to a registration statement on Form S-4, Form F-4
or Form S-8 or any similar or successor form.
“Registrable Securities”
means, at any time, any Company Securities and any other securities issued or issuable by the Company or any of its successors
or assigns in respect of any such Company Securities by way of conversion, exchange, exercise, dividend, split, reverse split,
combination, recapitalization, reclassification, merger, amalgamation, consolidation, sale of assets, other reorganization or otherwise,
in each case held on the date hereof or acquired after the date hereof, until (i) a registration statement covering such Company
Securities or such other securities has been declared effective by the SEC and such Company Securities or such other securities
have been disposed of pursuant to such effective registration statement, (ii) such Company Securities or such other securities
are sold under circumstances in which all of the applicable conditions of Rule 144 are met or (iii) all of such Company Securities
and such other securities held by the holder thereof are eligible for sale by such holder under Rule 144 without any limitation
thereunder (including with respect to volume or manner of sale) or need for current public information.
“Registration Expenses”
means any and all expenses incident to the performance of, or compliance with, any registration or marketing of securities (other
than transfer taxes, if any), including without limitation all (i) registration and filing fees, and all other fees and expenses
payable in connection with the listing of securities on any securities exchange or automated interdealer quotation system, (ii) fees
and expenses of compliance with any securities or “blue sky” laws (including reasonable fees and disbursements of counsel
in connection with “blue sky” qualifications of the securities registered), (iii) expenses in connection with
the preparation, printing, mailing and delivery of any registration statements, prospectuses and other documents in connection
therewith and any amendments or supplements thereto, (iv) security engraving and printing expenses, (v) internal expenses
of the Company (including all salaries and expenses of its officers and employees performing legal or accounting duties), (vi) reasonable
fees and disbursements of counsel for the Company and customary fees and expenses for independent certified public accountants
retained by the Company (including the expenses relating to any comfort letters or costs associated with the delivery by independent
certified public accountants of any comfort letters requested pursuant to Section 2.04(h)), (vii) reasonable fees and
expenses of any special experts retained by the Company in connection with such registration, (viii) reasonable fees and
disbursements of one counsel for all of the Shareholders participating in the offering selected by the Shareholders holding the
majority of the Registrable Securities to be sold for the account of all Shareholders in the offering, in an amount not to exceed
$50,000, (ix) fees and expenses in connection with any review by FINRA of the underwriting arrangements or other terms of
the offering, and all fees and expenses of any “qualified independent underwriter,” including the fees and expenses
of any counsel thereto, (x) fees and disbursements of underwriters customarily paid by issuers, but excluding any underwriting
fees, discounts and commissions attributable to the sale of Registrable Securities, (xi) costs of printing and producing any
agreements among underwriters, underwriting agreements, any “blue sky” or legal investment memoranda and any selling
agreements and other documents in connection with the offering, sale or delivery of the Registrable Securities, (xii) transfer
agents’ and registrars’ fees and expenses and the fees and expenses of any other agent or trustee appointed in connection
with such offering, (xiii) expenses relating to any analyst or investor presentations or any “road shows” undertaken
in connection with the registration, marketing or selling of the Registrable Securities, and (xiv) all out-of-pocket costs
and expenses incurred by the Company or its appropriate officers in connection with their compliance with Section 2.04(m).
Except as set forth in clause (viii) above, Registration Expenses shall not include any out-of-pocket expenses of the Shareholders
(or the agents who manage their accounts).
“Rule 144”
means Rule 144 (or any successor or similar provisions) under the Securities Act.
“SEC” means
the Securities and Exchange Commission.
“Securities Act”
means the Securities Act of 1933, as amended.
“Shareholder”
means at any time, any Person (other than the Company) who shall then be a party to or bound by this Agreement (including without
limitation any Permitted Transferees who become a party to this Agreement pursuant to Section 5.01(b)), so long as such Person
shall “beneficially own” (as such term is defined in Rule 13d-3 of the Exchange Act) any Company Securities.
“Transfer”
means, with respect to any Company Securities or any other securities of the Company that are convertible or exercisable into or
exchangeable for Company Securities, (i) when used as a verb, to sell, assign, dispose of, exchange, pledge, encumber, hypothecate
or otherwise transfer such Company Securities or any participation or interest therein, whether directly or indirectly, or agree
or commit to do any of the foregoing and (ii) when used as a noun, a direct or indirect sale, assignment, disposition, exchange,
pledge, encumbrance, hypothecation, or other transfer of such Company Securities or any participation or interest therein or any
agreement or commitment to do any of the foregoing.
Section 1.02. Other
Definitional and Interpretative Provisions. The words “hereof”, “herein” and “hereunder”
and words of like import used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of
this Agreement. The captions herein are included for convenience of reference only and shall be ignored in the construction or
interpretation hereof. Any singular term in this Agreement shall be deemed to include the plural, and any plural term the singular.
Whenever the words “include”, “includes” or “including” are used in this Agreement, they shall
be deemed to be followed by the words “without limitation”, whether or not they are in fact followed by those words
or words of like import.
ARTICLE 2
REGISTRATION RIGHTS
Section 2.01. Demand
Registration. (a) If at any time following completion of the Initial Public Offering, subject to the terms of any “lock-up”
agreement entered into with one or more underwriters (unless waived by such underwriter(s)), the Company shall receive a request
(each such request shall be referred to herein as a “Demand Registration”) from a Shareholder or group of Shareholders
(the requesting Shareholder(s) shall be referred to herein as the “Requesting Shareholder”), holding at least
thirty percent (30%) of the Registrable Securities then outstanding, that the Company effect the registration under the Securities
Act (i) for the first Public Offering of the Company after the completion of the Initial Public Offering (the “Follow-On
Offering”), at least twenty percent (20%) of the Requesting Shareholder’s Registrable Securities then outstanding
(or any lesser percentage if the anticipated aggregate offering price, net of underwriting discounts and commissions, would exceed
$10,000,000), or (ii) after the completion of the Follow-On Offering, all or any portion of the Requesting Shareholder’s
Registrable Securities and, in each case, specifying the intended method of disposition thereof, then the Company shall as promptly
as practicable following the date of receipt by the Company of such request give notice of such Demand Registration at least fifteen
(10) days after receipt of such Demand Registration to the other Shareholders, if any, and thereupon shall (i) as soon as
practicable, and in any event within forty five (45) days after the date the Demand Registration is given by the Requesting Shareholder,
file a registration statement under the Securities Act, and (ii) use its commercially reasonable efforts to effect, as expeditiously
as possible, and in any event within one hundred twenty (120) days after the date the Demand Registration is given by the
Requesting Shareholder, the effectiveness of the registration statement, in each case covering:
(i) subject to
the restrictions set forth in Sections 2.01(e), all Registrable Securities for which the Requesting Shareholder has requested registration
under this Section 2.01, and
(ii) subject to
the restrictions set forth in Sections 2.01(e), all other Registrable Securities of the same class as those requested to be registered
by the Requesting Shareholder that any other Shareholders (all such Shareholders, together with the Requesting Shareholder, the
“Registering Shareholders”), if any, have requested the Company to register pursuant to this Section 2.01,
by request received by the Company within seven Business Days after such Shareholders receive the Company’s notice of the
Demand Registration,
all to the extent necessary to permit the disposition
(in accordance with the intended methods thereof as aforesaid) of the Registrable Securities so to be registered, provided that,
the Company shall not be obligated to effect a Demand Registration unless the aggregate proceeds expected to be received from the
sale of the Registrable Securities requested to be included in such Demand Registration equals or exceeds $10,000,000. In no event
shall the Company be required to effect more than two (2) Demand Registrations pursuant to this Section 2.01.
(b) Promptly after the expiration
of the seven-Business Day period referred to in Section 2.01(a)(ii), the Company will notify all Registering Shareholders
of the identities of the other Registering Shareholders and the number of shares of Registrable Securities requested to be included
therein. At any time prior to the effective date of the registration statement relating to such registration, the Requesting Shareholder
may revoke such request, without liability, by providing a notice to the Company revoking such request. Notwithstanding clause
(d) below, a request, so revoked, shall be considered to be a Demand Registration unless (i) such revocation arose out
of the fault of the Company (in which case the Company shall be obligated to pay all Registration Expenses in connection with such
revoked request) or (ii) the Requesting Shareholder reimburses the Company for all Registration Expenses (other than the expenses
set forth under clause (v) of the definition of the term Registration Expenses) of such revoked request.
(c) The Company shall be liable
for and shall pay all Registration Expenses in connection with any Demand Registration, regardless of whether such Registration
is effected, unless the Requesting Shareholder elects to pay such Registration Expenses as described in the last sentence of Section 2.01(b).
(d) A Demand Registration
shall not be deemed to have occurred unless the registration statement relating thereto (i) has become effective under the
Securities Act and (ii) has remained effective for a period of at least 180 days (or such shorter period in which all Registrable
Securities of the Registering Shareholders included in such registration have actually been sold thereunder), provided that
a Demand Registration shall not be deemed to have occurred if, after such registration statement becomes effective, such registration
statement is interfered with by any stop order, injunction or other order or requirement of the SEC or other governmental agency
or court.
(e) If the Requesting Shareholder
intends to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the
Company as part of their request pursuant to section 2.01, and the Company shall include such information in their notice to the
other Shareholders. If a Demand Registration involves an underwritten Public Offering and the managing underwriter advises the
Company and the Requesting Shareholder that, in its view, the number of shares of Registrable Securities requested to be included
in such registration (including any securities that the Company proposes to be included that are not Registrable Securities) exceeds
the largest number of shares that can be sold without having an adverse effect on such offering, including the price at which such
shares can be sold (the “Maximum Offering Size”), the Company shall include in such registration, in the priority
listed below, up to the Maximum Offering Size:
(i) first, all
Registrable Securities requested to be included in such registration by all Registering Shareholders (allocated, if necessary for
the offering not to exceed the Maximum Offering Size, pro rata among such Shareholders on the basis of the relative number of Registrable
Securities held by each such Shareholder, or in such other proportion as shall mutually be agreed to by all such Registering Shareholders);
and
(ii) second, any
securities proposed to be registered by the Company (including for the benefit of any other Persons not party to this Agreement).
(f) The Company may postpone
effecting a registration pursuant to this Section 2.01 on two occasions during any period of twelve consecutive months for
a reasonable time specified in the notice but not exceeding 90 days in the aggregate in any period of twelve consecutive months
(which period may not be extended or renewed), if the Company furnishes to the Requesting Shareholder a certificate signed by the
Company’s chief executive officer stating that (i) effecting the registration would materially and adversely interfere with
a significant acquisition, corporate reorganization, or other similar transaction involving the Company or (ii) effecting
the registration would require the premature disclosure of material information that the Company has a bona fide business purpose
to preserve as confidential. In addition, the Company shall not be obligated to effect, or to take any action to effect, any registration
pursuant to Section 2.01 during the period that is thirty (30) days before the Company’s good faith estimate of the date
of filing of, and ending on a date that is ninety (90) days after the effective date of, a Company-initiated registration (other
than a registration on Form S-8 or any successor or similar forms), provided that the Company is actively employing in good faith
commercially reasonable efforts to cause such registration statement to become effective.
Section 2.02. Piggyback
Registration. (a) If at any time after the completion of the Initial Public Offering the Company proposes to register
any Company Securities under the Securities Act (other than (i) a Shelf Registration (defined below), which will be subject
to the provisions of Section 2.03; provided that any Underwritten Takedown (defined below) will be subject
to this Section 2.02, or (ii) a registration on Form S-8, F-4 or S-4, or any successor or similar forms, relating to
Ordinary Shares issuable upon exercise of employee stock options or in connection with any employee benefit or similar plan of
the Company or in connection with a direct or indirect acquisition by the Company of another Person), whether or not for sale for
its own account, the Company shall each such time give prompt notice at least ten (10) Business Days prior to the anticipated
filing date of the registration statement relating to such registration to each Shareholder, which notice shall set forth such
Shareholder’s rights under this Section 2.02 and shall offer such Shareholder the opportunity to include in such registration
statement the number of Registrable Securities of the same class or series as those proposed to be registered as each Shareholder
may request (a “Piggyback Registration”), subject to the provisions of Section 2.02(b). Upon the request
of any such Shareholder made within five (5) Business Days after the receipt of notice from the Company (which request shall
specify the number of Registrable Securities intended to be registered by such Shareholder), the Company shall use all commercially
reasonable efforts to effect the registration under the Securities Act of all Registrable Securities that the Company has been
so requested to register by all such Shareholders, to the extent required to permit the disposition of the Registrable Securities
so to be registered, provided that (A) if such registration involves an underwritten Public Offering, all
such Shareholders requesting to be included in the Company’s registration must sell their Registrable Securities to the underwriters
selected as provided in Section 2.04(f) on the same terms and conditions as apply to the Company, and (B) if, at any
time after giving notice of its intention to register any Company Securities pursuant to this Section 2.02(a) and prior to
the effective date of the registration statement filed in connection with such registration, the Company shall determine for any
reason not to register such securities, the Company shall give notice to all such Shareholders and, thereupon, shall be relieved
of its obligation to register any Registrable Securities in connection with such registration. No registration effected under this
Section 2.02 shall relieve the Company of its obligations to effect a Demand Registration to the extent required by Section 2.01
or a Shelf Registration to the extent required by Section 2.03. The Company shall pay all Registration Expenses in connection
with each Piggyback Registration.
(b) If a Piggyback Registration
involves an underwritten Public Offering and the managing underwriter advises the Company that, in its view, the number of Shares
that the Company and the Shareholders intend to include in such registration exceeds the Maximum Offering Size, the Company shall
include in such registration, in the following priority, up to the Maximum Offering Size:
(i) first, so much
of the Company Securities proposed to be registered for the account of the Company (or, if such registration is pursuant to a demand
by a Person that is not a Shareholder, for the account of such other Person) as would not cause the offering to exceed the Maximum
Offering Size,
(ii) second, all
Registrable Securities requested to be included in such registration by any Shareholders pursuant to this Section 2.02 (allocated,
if necessary for the offering not to exceed the Maximum Offering Size, pro rata among such Shareholders on the basis of the relative
number of Registrable Securities held by each such Shareholder, or in such other proportion as shall mutually be agreed to by all
such Registering Shareholders), and
(iii) third, any
securities proposed to be registered for the account of any other Persons with such priorities among them as the Company shall
determine;
provided that, notwithstanding the
foregoing, in no event shall the number of Registrable Securities included in the underwritten Public Offering be reduced below
25% of the total number of securities included in such Public Offering.
Section 2.03. Shelf
Registration. (a) At any time after the first anniversary of the Initial Public Offering, if the Company is eligible to
use Form F-3 or Form S-3, a Shareholder or group of Shareholders (referred to herein as the “Shelf Requesting Shareholder”)
may request the Company to effect a registration of some or all of the Registrable Securities held by such Shelf Requesting Shareholder
under a Registration Statement pursuant to Rule 415 under the Securities Act (or any successor or similar rule) (a “Shelf
Registration”); provided that, the Company shall not be obligated to effect a Shelf Registration unless
the aggregate proceeds expected to be received from the sale of the Registrable Securities requested to be included in such Shelf
Registration equals or exceeds $5,000,000 (net of discounts and commissions). A Shareholder or group of Shareholders whose Registrable
Securities are included in such Shelf Registration or may be included therein without the need for an amendment to such Shelf Registration
(other than an automatically effective amendment) may demand that the Company to effectuate a Public Offering from such Shelf Registration
(an “Underwritten Takedown”), provided that the Company shall only be required to effectuate two Underwritten
Takedowns within any twelve-month period. The provisions of Section 2.01 shall apply mutatis mutandis to
each Underwritten Takedown, with references to “filing of the registration statement” or “effective date”
being deemed references to filing of a prospectus or supplement for such offering and references to “registration”
being deemed references to the offering; provided that Registering Shareholders shall only include Shareholders
whose Registrable Securities are included in such Shelf Registration or may be included therein without the need for an amendment
to such Shelf Registration (other than an automatically effective amendment). So long as the Shelf Registration is effective, no
Shareholder may request any Demand Registration pursuant to Section 2.01 with respect to Registrable Shares that are registered
on such Shelf Registration but instead shall have the right to request an Underwritten Takedown as set forth above.
(b) If the Company shall receive
a request from a Shelf Requesting Shareholder that the Company effect a Shelf Registration, then the Company shall as promptly
as practicable following the date of receipt by the Company of such request give notice of such requested registration and at least
ten (10) Business Days prior to the anticipated filing date of the registration statement relating to such Shelf Registration
to the other Shareholders and thereupon shall (i) as soon as practicable, and in any event within forty five (45) days after the
date the request for a Shelf Registration is given by the Shelf Requesting Shareholder, file a registration statement on Form F-3
or S-3, as applicable, under the Securities Act, and (ii) use its reasonable best efforts to effect, as expeditiously as possible,
and in any event within one hundred (120) days after the date the request for a Shelf Registration is given by the Shelf Requesting
Shareholder, the effectiveness of a registration statement under the Securities Act, in each case covering:
(i) all Registrable Securities
for which the Shelf Requesting Shareholder has requested registration under this Section 2.03, and
(ii) all other Registrable
Securities of the same class as those requested to be registered by the Shelf Requesting Shareholder that any other Shareholders
(all such Shareholders, together with the Shelf Requesting Shareholder, the “Shelf Registering Shareholders”)
have requested the Company to register by request received by the Company within five (5) Business Days after such Shareholders
receive the Company’s notice of the Shelf Registration, all to the extent necessary to permit the registration of the Registrable
Securities so to be registered on such Shelf Registration.
(c) At any time prior to the
effective date of the registration statement relating to such Shelf Registration, the Shelf Requesting Shareholder may revoke such
request, without liability, by providing a notice to the Company revoking such request.
(d) The Company shall be liable
for and pay all Registration Expenses in connection with any Shelf Registration.
(e) The Company may postpone
effecting a registration or an Underwritten Takedown pursuant to this Section 2.03 on two occasions during any period of twelve
consecutive months for a reasonable time specified in the notice but not exceeding 90 days in the aggregate in any period of twelve
consecutive months (which period may not be extended or renewed), if the Company furnishes to Requesting Shareholder a certificate
signed by the Company’s chief executive officer stating that (i) effecting the registration would materially and adversely
interfere with a significant acquisition, corporate reorganization, or other similar transaction involving the Company or (ii) effecting
the registration would require the premature disclosure of material information that the Company has a bona fide business purpose
to preserve as confidential. In addition, the Company shall not be obligated to effect, or to take any action to effect, any registration
or any Underwritten Takedown pursuant to Section 2.03 during the period that is thirty (30) days before the Company’s good
faith estimate of the date of filing of, and ending on a date that is ninety (90) days after the effective date of, a Company-initiated
registration (other than a registration on Form S-8 or any successor or similar forms), provided that the Company is actively employing
in good faith commercially reasonable efforts to cause such registration statement to become effective.
Section 2.04. Registration
Procedures. In connection with Section 2.01, 2.02 and 2.03, subject to the provisions of such Sections, the Company shall
use all commercially reasonable efforts to effect the registration and the sale of such Registrable Securities in accordance with
the intended method of disposition thereof as quickly as practicable, and, in connection with any such request:
(a) The Company shall as expeditiously
as possible prepare and file with the SEC a registration statement on any form for which the Company then qualifies or that counsel
for the Company shall deem appropriate and which form shall be available for the sale of the Registrable Securities to be registered
thereunder in accordance with the intended method of distribution thereof, and use all commercially reasonable efforts to cause
such filed registration statement to become and remain effective for a period of not less than 180 days or in the case of a Shelf
Registration, three years (or such shorter period in which all of the Registrable Securities of the Shareholders included in such
registration statement shall have actually been sold thereunder or cease to be Registrable Securities). Any such registration statement
shall be an automatically effective registration statement to the extent permitted by the SEC’s rules and regulations.
(b) Prior to filing a registration
statement or prospectus or any amendment or supplement thereto (other than any report filed pursuant to the Exchange Act that is
incorporated by reference therein), the Company shall, if requested, furnish to each participating Shareholder and each underwriter,
if any, of the Registrable Securities covered by such registration statement copies of such registration statement as proposed
to be filed, and thereafter the Company shall furnish to such Shareholder and underwriter, if any, such number of copies of such
registration statement, each amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated
by reference therein), the prospectus included in such registration statement (including each preliminary prospectus and any summary
prospectus) and any other prospectus filed under Rule 424, Rule 430A, Rule 430B or Rule 430C under the Securities Act and such
other documents as such Shareholder or underwriter may reasonably request in order to facilitate the disposition of the Registrable
Securities owned by such Shareholder.
(c) After the filing of the
registration statement, the Company shall (i) cause the related prospectus to be supplemented by any required prospectus supplement
and, as so supplemented, to be filed pursuant to Rule 424 under the Securities Act, (ii) comply with the provisions of the
Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement during the
applicable period in accordance with the intended methods of disposition by the Shareholders thereof set forth in such registration
statement or supplement to such prospectus and (iii) promptly notify each Shareholder holding Registrable Securities covered
by such registration statement of any stop order issued or threatened by the SEC or any state securities commission and take all
reasonable actions required to prevent the entry of such stop order or to remove it if entered.
(d) The Company shall use
all commercially reasonable efforts to (i) register or qualify the Registrable Securities covered by such registration statement
under such other securities or “blue sky” laws of such jurisdictions in the United States as any Registering Shareholder
or Shelf Registering Shareholder holding such Registrable Securities reasonably (in light of such Shareholder’s intended
plan of distribution) requests and (ii) cause such Registrable Securities to be registered with or approved by such other
governmental agencies or authorities as may be necessary by virtue of the business and operations of the Company and do any and
all other acts and things that may be reasonably necessary or advisable to enable such Shareholder to consummate the disposition
of the Registrable Securities owned by such Shareholder, provided that the Company shall not be required to (A) qualify
generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 2.04(d),
(B) subject itself to taxation in any such jurisdiction or (C) consent to general service of process in any such jurisdiction.
(e) The Company shall promptly
notify each Shareholder holding such Registrable Securities covered by such registration statement, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, of the occurrence of an event requiring the preparation
of a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities,
such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein in the light of the circumstances under which they were made at such
time not misleading and promptly prepare and make available to each such Shareholder and file with the SEC any such supplement
or amendment.
(f) The Company shall have
the right to select an underwriter or underwriters in connection with any Public Offering resulting from any exercise of a Demand
Registration (including any Underwritten Takedown), which underwriter or underwriters shall be reasonably acceptable to the Requesting
Shareholder. In connection with any Public Offering, the Company shall enter into customary agreements (including an underwriting
agreement in customary form) and take such all other actions as are reasonably required in order to expedite or facilitate the
disposition of such Registrable Securities in any such Public Offering, including the engagement of a “qualified independent
underwriter” in connection with the qualification of the underwriting arrangements with FINRA.
(g) Upon execution of confidentiality
agreements in form and substance reasonably satisfactory to the Company, the Company shall, in connection with a Public Offering
make available for inspection by any Shareholder and any underwriter participating in any disposition pursuant to a registration
statement being filed by the Company pursuant to this Agreement and any attorney, accountant or other professional retained by
any such Shareholder or underwriter (collectively, the “Inspectors”), all financial and other records, pertinent
corporate documents and properties of the Company (collectively, the “Records”) as shall be reasonably necessary
or desirable to enable any of the Inspectors to exercise its due diligence responsibility, and cause the Company’s officers,
directors and employees to supply all information reasonably requested by any Inspectors in connection with such registration statement.
Records that the Company determines, in good faith, to be confidential and that it notifies the Inspectors are confidential shall
not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a material misstatement
or omission in such registration statement or (ii) the release of such Records is ordered pursuant to a subpoena or other
order from a court of competent jurisdiction. Each Shareholder agrees that information obtained by it as a result of such inspections
shall be deemed confidential and shall not be used by it or its Affiliates as the basis for any market transactions in the Company
Securities unless and until such information is made generally available to the public. Each Shareholder further agrees that, upon
learning that disclosure of such Records is sought in a court of competent jurisdiction, it shall give notice to the Company and
allow the Company, at its expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential.
(h) In connection with any
Public Offering, the Company shall use its reasonable best efforts to furnish to each underwriter, if any, a signed counterpart,
addressed to such underwriter, of (i) an opinion or opinions of counsel to the Company and (ii) a comfort letter or comfort
letters from the Company’s independent public accountants, each in customary form and covering such matters of the kind customarily
covered by opinions or comfort letters, as the case may be, as the managing underwriter therefor reasonably requests.
(i) The Company shall otherwise
use its reasonable best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security
holders, as soon as reasonably practicable, an earnings statement or such other document covering a period of twelve months, beginning
within three months after the effective date of the registration statement, which earnings statement satisfies the requirements
of Rule 158 under the Securities Act.
(j) The Company may require
each Shareholder promptly to furnish in writing to the Company such information regarding the distribution of the Registrable Securities
as the Company may from time to time reasonably request and such other information as may be legally required in connection with
such registration. In connection with a Shelf Registration, any Shareholder that does not provide such information within five
(5) Business Days of a request by the Company (which request is made before filing of the Shelf Registration) may have its
Registrable Securities excluded from such Shelf Registration; provided that such securities shall be added within
fifteen Business Days after the Shareholder provides such information if the Company may add such securities to such Shelf Registration
without the need for a post-effective amendment (other than an automatically effective amendment) to the Shelf Registration.
(k) Each Shareholder agrees
that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 2.04(e),
such Shareholder shall forthwith discontinue disposition of Registrable Securities pursuant to the registration statement covering
such Registrable Securities until such Shareholder’s receipt of the copies of the supplemented or amended prospectus contemplated
by Section 2.04(e), and, if so directed by the Company, such Shareholder shall deliver to the Company all copies, other than
any permanent file copies then in such Shareholder’s possession, of the most recent prospectus covering such Registrable
Securities at the time of receipt of such notice. If the Company shall give such notice, the Company shall extend the period during
which such registration statement shall be maintained effective (including the period referred to in Section 2.04(a)) by the
number of days during the period from and including the date of the giving of notice pursuant to Section 2.04(e) to the date
when the Company shall make available to such Shareholder a prospectus supplemented or amended to conform with the requirements
of Section 2.04(e).
(l) The Company shall use
its reasonable best efforts to list all Registrable Securities covered by such registration statement on any securities exchange
or quotation system on which the Ordinary Shares are then listed or traded.
(m) In any Public Offering
pursuant to a Demand Registration, the Company shall have appropriate officers of the Company (i) prepare and make presentations
at any “road shows” and before analysts and (ii) otherwise use their reasonable best efforts to cooperate as reasonably
requested by the underwriters in the offering, marketing or selling of the Registrable Securities.
(n) Each Shareholder agrees
that, in connection with any offering pursuant to this Agreement, it will not prepare or use or refer to, any “free writing
prospectus” (as defined in Rule 405 of the Securities Act) without the prior written authorization of the Company (which
authorization shall not be unreasonably withheld), and will not distribute any written materials in connection with the offer or
sale of the Registrable Securities pursuant to any registration statement hereunder other than the prospectus and any such free
writing prospectus so authorized.
Section 2.05. Participation
In Public Offering. No Shareholder may participate in any Public Offering hereunder unless such Shareholder (a) agrees
to sell such Shareholder’s Registrable Securities on the basis provided in any underwriting arrangements approved by the
Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney,
indemnities, underwriting agreements, “lock-up” agreements and other documents reasonably required under the terms
of such underwriting arrangements that are in customary form and consistent with the provisions of this Agreement in respect of
registration rights.
Section 2.06. Rule
144 Sales; Cooperation By The Company. If any Shareholder shall transfer any Registrable Securities pursuant to Rule 144,
the Company shall cooperate, to the extent commercially reasonable, with such Shareholder and shall provide to such Shareholder
such information as such Shareholder shall reasonably request. Without limiting the foregoing, the Company shall at any time after
any of the Company’s Ordinary Shares are registered under the Securities Act or the Exchange Act, use commercially reasonable
efforts to: (i) make and keep available public information, as those terms are contemplated by Rule 144; (ii) timely
file with the SEC all reports and other documents required to be filed under the Securities Act and the Exchange Act; and (iii) furnish
to each Shareholder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements
of the Securities Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company, and such other
information as such Shareholder may reasonably request in order to avail itself of any rule or regulation of the SEC allowing such
Shareholder to sell any Registrable Securities without registration.
ARTICLE 3
INDEMNIFICATION AND CONTRIBUTION
Section 3.01. Indemnification
by the Company. To the extent permitted by law, the Company will indemnify and hold harmless each Shareholder beneficially
owning any Registrable Securities covered by a registration statement, its officers, directors, employees, partners, members. agents,
legal counsel and accountants, and any underwriter (as defined under the Securities Act) for such Shareholder and its officers
and directors, and each Person, if any, who controls such Shareholder or underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages, liabilities and expenses
(including reasonable expenses of investigation and reasonable attorneys’ fees and expenses) (collectively, “Damages”)
and the Company will pay to each such Holder, underwriter, controlling Person, or other aforementioned Person any legal or other
expenses reasonably incurred thereby in connection with investigating or defending any claim or proceeding from which Damages may
result, as such expenses are incurred, caused by or relating to any untrue statement or alleged untrue statement of a material
fact contained in any registration statement or prospectus relating to the Registrable Securities (as amended or supplemented if
the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus or free-writing prospectus
(as defined in Rule 405 under the Securities Act), or caused by or relating to any omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation or alleged
violation by the indemnifying party (or any of its agents or Affiliates) of the Securities Act, the Exchange Act, any state securities
law, or any rule or regulation promulgated under the Securities Act, the Exchange Act, or any state securities law, except insofar
as such Damages are caused by or related to any such untrue statement or omission or alleged untrue statement or omission so made
in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of such Shareholder, underwriter,
controlling Person or other aforementioned Person expressly for use therein.
Section 3.02. Indemnification
by Participating Shareholders. To the extent permitted by law, each Shareholder holding Registrable Securities included in
any registration statement agrees, severally but not jointly, will indemnify and hold harmless the Company, its officers, directors,
agents, legal counsel and accountants, any underwriter (as defined in the Securities Act) and its officers and directors, any other
Shareholder selling securities in such registration statement, and each Person, if any, who controls the Company, such underwriter
or other Shareholder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act to the
same extent as the indemnity from the Company to such Shareholder provided in Section 3.01, but only to the extent such Damages
arise out of or are based upon actions and omissions made in reliance upon and in conformity with information about such Shareholder
furnished in writing by or on behalf of such Shareholder expressly for use in any registration statement or prospectus relating
to the Registrable Securities, or any amendment or supplement thereto, or any preliminary prospectus or free-writing prospectus.
No Shareholder shall be liable under this Section 3.02 for any Damages in excess of the net proceeds realized by such Shareholder
in the sale of Registrable Securities of such Shareholder to which such Damages relate, except in the case of fraud or willful
misconduct by such Shareholder.
Section 3.03. Conduct
of Indemnification Proceedings. If any proceeding (including any governmental investigation) shall be brought or asserted against
any Person in respect of which indemnity may be sought pursuant to this Article 3, such Person (an “Indemnified Party”)
shall promptly notify the Person against whom such indemnity may be sought (the “Indemnifying Party”) in writing
and the Indemnifying Party shall assume the defense thereof, including the employment of counsel satisfactory to such Indemnified
Party, and shall assume the payment of all fees and expenses, provided that the failure of any Indemnified Party
so to notify the Indemnifying Party shall not relieve the Indemnifying Party of its obligations hereunder except to the extent
that the Indemnifying Party is materially prejudiced by such failure to notify. In any such proceeding, any Indemnified Party shall
have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (a) the Indemnifying Party and the Indemnified Party shall have mutually agreed to the retention of such counsel,
(b) in the reasonable judgment of such Indemnified Party representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them, including one or more defenses or counterclaims that are different
from or in addition to those available to the Indemnifying Party, or (c) the Indemnifying Party shall have failed to assume
the defense within 30 days of notice pursuant to this Section 3.03. It is understood that, in connection with any proceeding
or related proceedings in the same jurisdiction, the Indemnifying Party shall not be liable for the reasonable fees and expenses
of more than one separate firm of attorneys (in addition to one local counsel per jurisdiction) at any time for all such Indemnified
Parties, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for
the Indemnified Parties, such firm shall be designated in writing by the Indemnified Parties. The Indemnifying Party shall not
be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent, or if there
be a final judgment for the plaintiff, the Indemnifying Party shall indemnify and hold harmless such Indemnified Parties from and
against any loss or liability (to the extent stated above) by reason of such settlement or judgment. Without the prior written
consent of the Indemnified Party, no Indemnifying Party shall effect any settlement of any pending or threatened proceeding in
respect of which any Indemnified Party is or could have been a party and indemnity could have been sought hereunder by such Indemnified
Party, unless such settlement (A) includes an unconditional release of such Indemnified Party from all liability arising out
of such proceeding, and (B) does not include any injunctive or other equitable or non-monetary relief applicable to or affecting
such Indemnified Person.
Section 3.04. Contribution.
If the indemnification provided for in this Article 3 is unavailable to or unenforceable by the Indemnified Parties in respect
of any Damages, then each Indemnifying Party, in lieu of indemnifying the Indemnified Parties, shall contribute to the amount paid
or payable by such Indemnified Party, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party
and Indemnified Party in connection with the actions, statements or omissions that resulted in such Damages as well as any other
relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference
to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or
omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying
Party or Indemnified Party, and the parties’ relative intent, knowledge, access to information and opportunity to correct
or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Damages shall be deemed
to include, subject to the limitations set forth in this Agreement, any reasonable attorneys’ or other reasonable fees or
expenses incurred by such party in connection with any proceeding to the extent such party would have been indemnified for such
fees or expenses if the indemnification provided for in this Article 3 was available to such party in accordance with its terms.
The parties hereto agree that
it would not be just and equitable if contribution pursuant to this Section 3.04 were determined by pro rata allocation or
by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section 3.04, no Shareholder shall be required to contribute, in the aggregate,
any amount in excess of the amount by which the proceeds actually received by such Shareholder from the sale of the Registrable
Securities subject to the proceeding exceeds the amount of any damages that such Shareholder has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged omission, except in the case of fraud by such Shareholder.
Each Shareholder’s obligation to contribute pursuant to this Section 3.03 is several in the proportion that the proceeds
of the offering received by such Shareholder bears to the total proceeds of the offering received by all such Shareholders and
not joint.
No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation. The indemnity and contribution agreements contained in this Article 3
are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties.
Section 3.05. Other
Indemnification. Indemnification similar to that provided in this Article 3 (with appropriate modifications) shall be given
by the Company and each Shareholder participating therein with respect to any required registration or other qualification of securities
under any foreign, federal or state law or regulation or governmental authority other than the Securities Act.
ARTICLE 4
TERMINATION OF REGISTRATION RIGHTS
Section 4.01. Termination
of Registration Rights. The rights of any Shareholder to request registration or inclusion of Registrable Securities in any
registration pursuant to this Agreement shall terminate upon the earlier to occur of: (a) the fifth anniversary of the Initial
Public Offering, and (b) such time as Rule 144 or another similar exemption under the Securities Act is available for the
sale of all such Shareholder’s Company Securities without limitation during a three-month period without registration.
ARTICLE 5
MISCELLANEOUS
Section 5.01. Binding
Effect; Assignability; Benefit. (a) This Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective heirs, successors, legal representatives and permitted assigns. Any Shareholder that ceases to own
beneficially any Registrable Securities shall cease to be bound by the terms hereof (other than (i) the provisions of Article
3 applicable to such Shareholder with respect to any offering of Registrable Securities completed before the date such Shareholder
ceased to own any Registrable Securities and (ii) this Article 5).
(b) Neither this Agreement
nor any right, remedy, obligation or liability arising hereunder or by reason hereof shall be assignable by any party hereto pursuant
to any Transfer of Registrable Securities or otherwise, except that each Shareholder may assign rights hereunder to any Permitted
Transferee of such Shareholder. Any such Permitted Transferee shall (unless already bound hereby) execute and deliver to the Company
an agreement to be bound by this Agreement in the form of Exhibit A hereto (a “Joinder Agreement”) and shall
thenceforth be a “Shareholder”.
(c) Nothing in this Agreement,
expressed or implied, is intended to confer on any Person other than the parties hereto, and their respective heirs, successors,
legal representatives and permitted assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement.
Section 5.02. Notices.
All notices, requests and other communications (each, a “Notice”) to any party shall be in writing and shall
be delivered in person, mailed by certified or registered mail, return receipt requested, or sent by facsimile transmission or
email transmission so long as receipt of such email is requested and received,
if to the Company to:
Sol-Gel Technologies Ltd.
7 Golda Meir St., Weizmann
Science Park
Ness Ziona, 7403650 Israel
Fax: +972 8 931 3434
Attention: Gilad Mamlok
Email: [email protected]
with a copy to:
Gross, Kleinhendler, Hodak,
Halevy, Greenberg & Co.
One Azrieli Center
Tel Aviv 67021, Israel
Facsimile: +972 3 607 4411
Attention: Gene Kleinhendler,
Adv.
Email: [email protected]
if to any Shareholder, at
the address for such Shareholder listed on the signature pages below or otherwise provided to the Company as set forth below.
Any Notice shall be deemed
received on the date of receipt by the recipient thereof if received prior to 5:00 p.m. in the place of receipt and such day is
a Business Day in the place of receipt. Otherwise, such Notice shall be deemed not to have been received until the next succeeding
Business Day in the place of receipt. Any Notice sent by facsimile transmission also shall be confirmed by certified or registered
mail, return receipt requested, posted within one Business Day after the date of the sending of such facsimile transmission, or
by personal delivery, whether courier or otherwise, made within two Business Days after the date of such facsimile transmission.
Any Person that becomes a
Shareholder after the date hereof shall provide its address, fax number and email address to the Company.
Section 5.03. Waiver;
Amendment. (a) The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified
or supplemented, and waivers or consents to departures from the provisions hereof may not be given without the written consent
of holders of a majority of the Registrable Securities then outstanding; provided, however, that in no event shall
the obligations of any holder of Registrable Securities be materially increased or the rights of any Shareholder be adversely affected
(without similarly adversely affecting the rights of all Shareholders), except upon the written consent of such holder. Notwithstanding
the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the
rights of holders of Registrable Securities whose securities are being sold pursuant to a Registration Statement and that does
not directly or indirectly affect the rights of other holders of Registrable Securities may be given by holders of at least a majority
of the Registrable Securities being sold by such holders pursuant to such Registration Statement.
Section 5.04. Governing
Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Israel, without
regard to the conflicts of laws rules.
Section 5.05. Jurisdiction.
The parties hereby agree that any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising
out of or in connection with, this Agreement or the transactions contemplated hereby shall be brought in the competent courts located
in Tel Aviv-Jaffa, and that any cause of action arising out of this Agreement shall be deemed to have arisen from a transaction
of business in the State of Israel, and each of the parties hereby irrevocably consents to the jurisdiction of such courts (and
of the appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullest extent
permitted by law, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding
in any such court or that any such suit, action or proceeding which is brought in any such court has been brought in an inconvenient
form. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without
the jurisdiction of any such court. Without limiting the foregoing, each party agrees that service of process on such party as
provided in Section 5.02 shall be deemed effective service of process on such party.
Section 5.06. Specific
Enforcement. Each party hereto acknowledges that the remedies at law of the other parties for a breach or threatened breach
of this Agreement would be inadequate and, in recognition of this fact, any party to this Agreement, without posting any bond or
furnishing other security, and in addition to all other remedies that may be available, shall be entitled to obtain equitable relief
in the form of specific performance, a temporary restraining order, a temporary or permanent injunction or any other equitable
remedy that may then be available.
Section 5.07. Counterparts;
Effectiveness. This Agreement may be executed (including by facsimile or other electronic image scan transmission) with counterpart
signature pages or in any number of counterparts, each of which shall be deemed to be an original, and all of which shall, taken
together, be considered one and the same agreement, it being understood that each party need not sign the same counterpart. This
Agreement shall become effective when each party hereto shall have executed and delivered this Agreement. Until and unless each
party has executed and delivered this Agreement, this Agreement shall have no effect and no party shall have any right or obligation
hereunder (whether by virtue of any other oral or written agreement or other communication).
Section 5.08. Entire
Agreement. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes all prior
and contemporaneous agreements and understandings, both oral and written, among the parties hereto with respect to the subject
matter hereof.
Section 5.09. Severability.
If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority
to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall
remain in full force and effect and shall in no way be affected, impaired or invalidated so long as the economic or legal substance
of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such a determination,
the parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely
as possible in an acceptable manner so that the transactions contemplated hereby be consummated as originally contemplated to the
fullest extent possible.
Section 5.10. Other
Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent
of holders of a majority of the Registrable Securities, enter into any agreement with any holder or prospective holder of any securities
of the Company giving such holder or prospective holder any registration rights the terms of which would reduce the amount of Registrable
Securities the Shareholders can include in any registration statement, unless such rights are subordinate to those of the Shareholders
hereunder.
Section 5.11. Confidentiality. Each
Shareholder agrees that any notice received pursuant to this Agreement, including any notice of a proposed underwritten public
offering or postponement of an offering or effecting of a registration, is confidential information and that any trading in securities
of the Company following receipt of such information may only be done in compliance with all applicable securities laws.
Section 5.12. Independent
Nature of Shareholders’ Obligations and Rights. The obligations of each Shareholder hereunder are several and not
joint with the obligations of any other Shareholder hereunder, and no Shareholder shall be responsible in any way for the performance
of the obligations of any other Shareholder hereunder. Nothing contained herein or in any other agreement or document delivered
at any closing, and no action taken by any Shareholder pursuant hereto or thereto, shall be deemed to constitute the Shareholders
as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Shareholders are
in any way acting in concert with respect to such obligations or the transactions contemplated by this Agreement. Each Shareholder
shall be entitled to protect and enforce its rights, including the rights arising out of this Agreement, and it shall not be necessary
for any other Shareholder to be joined as an additional party in any proceeding for such purpose.
[Signature pages follow.]
IN WITNESS WHEREOF, the parties
hereto have duly executed this Agreement or have caused this Agreement to be duly executed by their respective authorized officers
as of the day and year first above written.
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SOL-GEL TECHNOLOGY LTD. |
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M. ARKIN DERMATOLOGY LTD. |
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Email: ______________ |
[Signature page to the Registration
Rights Agreement]
EXHIBIT A
JOINDER TO REGISTRATION
RIGHTS AGREEMENT
This Joinder Agreement (this
“Joinder Agreement”) is made as of the date written below by the undersigned (the “Joining Party”)
in accordance with the Registration Rights Agreement dated as of [ ],
2017 (as the same may be amended from time to time, the “Registration Rights Agreement”), among Sol-Gel Technologies
Ltd. and the Shareholders party thereto. Capitalized terms used, but not defined, herein shall have the meaning ascribed to such
terms in the Registration Rights Agreement.
The Joining Party hereby acknowledges,
agrees and confirms that, by its execution of this Joinder Agreement, the Joining Party shall be deemed to be a party to the Registration
Rights Agreement as of the date hereof as a “Permitted Transferee” of a Shareholder thereto, and shall have
all of the rights and obligations of a “Shareholder” thereunder as if it had executed the Registration Rights
Agreement. The Joining Party hereby ratifies, as of the date hereof, and agrees to be bound by, all of the terms, provisions and
conditions contained in the Registration Rights Agreement (including, without limitation, Section 5.01 thereof).
IN WITNESS WHEREOF, the undersigned
has executed this Joinder Agreement as of the date written below.
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Exhibit 10.6
COMPENSATION POLICY
SOL-GEL TECHNOLOGIES LTD.
Compensation Policy for Executive Officers
and Directors
ADOPTED: October 2, 2017
Table of Contents
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Page |
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| A. |
Overview and Objectives |
A- 3 |
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| B. |
Base Salary and Benefits |
A- 5 |
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| C. |
Cash Bonuses (Excluding Directors) |
A-6 |
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| D. |
Equity-Based Compensation |
A- 8 |
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| E. |
Retirement and Termination of Service Arrangements (Excluding Directors) |
A- 9 |
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| F. |
Exemption, Indemnification and Insurance |
A- 10 |
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| G. |
Arrangements upon Change of Control |
A-11 |
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| H. |
Board of Directors Compensation |
A- 11 |
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| I. |
Miscellaneous |
A-12 |
A. Overview and Objectives
This
document sets forth the compensation policy for executive officers (this “Compensation
Policy” or “Policy”)
of Sol-Gel Technologies Ltd. (“Sol-Gel” or the “Company”
and “Executive Officers”, accordingly), in accordance with the
requirements of the Companies Law 5759-1999 (the “Companies
Law”).
Compensation is a key component
of Sol-Gel’s overall human capital strategy to attract, retain, reward, and motivate highly skilled individuals that will enhance
Sol-Gel’s value and otherwise assist Sol-Gel to reach its business and financial short and long term goals. Accordingly, the structure
of this Policy was established to tie the compensation of each Executive Officer to Sol-Gel’s goals and performance.
For purposes of this Policy, “Executive
Officers” shall mean “Office Holders” as such term is defined in Section 1 of the Companies Law.
This Compensation Policy shall
apply to compensation agreements and arrangements which will be approved after the date on which this Compensation Policy is approved
by the general meeting of Sol-Gel’s shareholders and shall serve as Sol-Gel’s Compensation Policy for the maximum period
of time permitted by any applicable law.
The Compensation Committee (upon
its appointment in accordance with the applicable law) and the Board of Directors of Sol-Gel (the “Compensation Committee”
and “Board”, respectively) shall review and reassess the adequacy of this Policy from time to time, as required
by the Companies Law.
It should be
clarified, that wherever reference is made to the required approvals in this Compensation Policy, such reference relates to the
applicable law as of the date of approval of this Compensation Policy and in any case is subject to the provisions of sections
32 and 34 below.
Sol-Gel’s objectives and goals
in setting this Compensation Policy are to attract, motivate and retain highly experienced personnel who will provide leadership
for Sol-Gel’s success and enhance the Company’s shareholders’ value, while supporting a performance culture that is based on merit,
and rewards excellent performance in the short and long term, while recognizing Sol-Gel’s core values. To that end, this Policy
is designed, among others:
| 2.1. | To closely align the interests of the Executive Officers with those of Sol-Gel’s shareholders in
order to enhance shareholder value; |
| 2.2. | To provide the Executive Officers with a structured compensation package, while creating a balance
between the fixed components, i.e., the base salaries and benefits, and the variable compensation, such as bonuses and equity-based
compensation in order to minimize potential conflicts between the interests of Executive Officers and those of Sol-Gel; |
| 2.3. | To strengthen the retention and the motivation of Executive Officers in the short and long term. |
| 2.4. | This Compensation Policy was prepared taking into account the Company’s nature, size and business
and financial characteristics. |
| 3. | Compensation structure and instruments |
Compensation instruments under
this Compensation Policy may include the following:
| · | Benefits and perquisites; |
| · | Cash bonuses (short-to-medium term incentive); |
| · | Equity based compensation (medium-to-long
term incentive); and |
| · | Retirement and termination of service
arrangements payments. |
For the purpose
of this Compensation Policy:
“Base Salary”
shall mean: gross salary, before contributions to social benefits (“Base Salary”);
“Employment
Cost” shall mean: any payment for the employment, including contributions to social benefits, car and expenses of the
use thereof, bonuses and any other benefit or payment (“Employment
Cost”).
| 4. | Overall Compensation - Ratio Between Fixed and Variable Compensation |
This
Policy aims to balance the mix of “fixed compensation”, comprised of base salary and benefits
(“Fixed Compensation”) and “variable compensation”, comprised of cash bonuses and equity
based compensation1 (excluding adjustment period/retirement bonuses, granted in accordance with section 21 below)
(“Variable Compensation”) in order to, among other things, appropriately incentivize Executive Officers to
meet Sol-Gel’s short and long term goals while taking into consideration the Company’s need to manage a variety
of business risks.
The total Variable Compensation
of each Executive Officer shall not exceed 85% of the total compensation package of such an Executive Officer on an annual basis.
The Board believes that such range expresses the appropriate compensation mix in the event that all performance objectives are
achieved and assumes that all compensation elements are granted with respect to a given year.
It should be clarified, that the
Fixed Compensation may constitute 100% of the total compensation package for an Executive Officer in any year (under circumstances
in which a variable component will not be approved for that year and/or in the event of a failure to meet the set goals, if and
when determined).
| 5. | Intra-Company Compensation Ratio |
In
the process of drafting this Policy, Sol-Gel’s Board has examined the ratio
between employer cost, as such term is defined in the Companies Law, associated with the engagement of the Executive Officers (the
“Executive Officers Cost”) and the average and median employer cost associated with the engagement of the other
employees of Sol-Gel (the “Other Employees Cost” and the “Ratio”, respectively). The Board believes
that the current Ratio does not adversely impact the work environment in Sol-Gel. The following are the ratios as of the date of
the approval of this Compensation Policy:
| Position | |
Ratio
between the
Executive Officers Cost
and the average Other
Employees Cost | | |
Ratio
between the
Executive Officers Cost
and the median Other
Employees Cost | |
| CEO | |
| 8.12 | | |
| 10.64 | |
| Other Executive Officers | |
| 3.12 | | |
| 4.16 | |
1 Based on the fair value on the
date of grant, calculated annually, on a linear basis.
B.
Base Salary and Benefits
| 6.1. | The Base Salary varies between Executive Officers, is individually determined by the Company (subject
to the approvals of the Compensation Committee and the Board, and with respect to the CEO, also the Company’s general meeting of
shareholders) and may be considered and adjusted by the Company (subject to the approvals of the abovementioned organs) on a periodically
basis, according to, among others, the educational background, prior vocational experience,
expertise and qualifications, role, business authorities and responsibilities, past performance and previous compensation arrangements
of such Executive Officer, as well as the Company’s financial state and cash position and any requirements or restrictions prescribed
by any applicable legislation, from time to time. When determining the Base Salary, the Company may also decide to consider, at
the sole discretion of the Compensation Committee and the Board and as required, the prevailing pay levels in the relevant market,
Base Salary and the total compensation package of comparable Executive Officers in the Company, the proportion between the Executive
Officer’s compensation package and the salaries of other employees in the Company and specifically the median and average salaries
and the effect of such proportions on the work relations in the Company. |
| 7.1. | In addition to the Base Salary, the following benefits may be granted to the Executive Officers
(subject to the approvals of the Compensation Committee and the Board, and with respect to the CEO- also the Company’s general
meeting pf shareholders), in order, among other things, to comply with legal requirements. It shall be clarified, that the list
below is an open list and Sol-Gel (subject to the abovementioned required approvals) may grant to its Executive Officers other
similar, comparable or customary benefits, subject to the applicable law. In addition, Executive Officers employed outside of Israel
may receive other similar, comparable or customary benefits as applicable in the relevant jurisdiction in which they are employed. |
| · | Vacation days in accordance with market
practice and the applicable law, up to a cap of 30 days per annum; |
| · | Sick days in accordance with market practice
and the applicable law; However, the Company may decide to cover sick days from the first day; |
| · | Convalescence pay according to the applicable
law; |
| · | Medical Insurance in accordance with market
practice and the applicable law; |
| · | With respect to Executive Officers employed
in Israel: monthly remuneration for a study fund (“Keren Hishtalmut”), as allowed by applicable tax law and with reference
to Sol-Gel’s practice and common market practice; |
| · | Pension and savings – according to local market practices and legislation; |
| · | Disability insurance – the Company may purchase disability insurance, according to applicable
legislation. |
| 7.2. | Sol-Gel may offer additional benefits to its Executive Officers, including but not limited to:
communication, company car and travel benefits, insurances and other benefits (such as newspaper subscriptions, academic and professional
studies), etc., including their gross up. |
| 7.3. | Sol-Gel may reimburse its Executive Officers for reasonable work-related expenses incurred as part
of their activities, including without limitations, meeting participation expenses, reimbursement of business travel, including
a daily stipend when traveling and accommodation expenses. Sol-Gel may provide advance payments to its Executive Officers in connection
with work-related expenses. |
At the discretion of the Compensation
Committee and the Board (and with respect to the CEO- also the Company’s general meeting of shareholders), Sol-Gel may grant a
newly recruited Executive Officer a signing bonus. Such bonus may be granted in cash, equity or a combination of both. The signing
bonus will not exceed: (1) 50% of such Executive Officer’s annual Base Salary, if the signing bonus is granted in cash; (2) 100%
of such Executive Officer’s annual Base Salary, if the signing bonus is granted by equity; (3) In case the signing bonus is a combination
of cash and equity, its ceiling shall be proportional to the cash and equity components, calculated in accordance with the ratios
mentioned in sections (1) and (2) above.
C. Cash Bonuses (Excluding Directors)
The Company
(subject to the approvals of the Compensation Committee and the Board, and with respect to the CEO- also the Company’s general
meeting of shareholders) may grant cash bonuses to its Executive Officers (excluding directors) on a quarterly or annually basis,
or on a shorter or longer period basis, in accordance with the principles detailed below.
| 9.1. | The annual bonus that may be paid to the Executive Officers for any fiscal year shall not exceed
twelve (12) monthly Base Salaries to the CEO, and six (6) monthly Base Salaries to any other Executive Officer. |
The annual bonus
to the CEO will be based mainly on measurable criteria, and with respect to its less significant part shall be determined at the
discretion of the Compensation Committee and the Board, in accordance with the following:
| Position | |
Company/Individual
Performance Measures | |
Company’s
Discretion |
| | |
| |
|
| CEO | |
75%-100%
| |
0%-25% |
The measurable
criteria and their relative weight shall be determined by the Compensation Committee and the Board in respect of each calendar
year. These measurable criteria will include, inter alia, objectives relating to compliance with the Company’s work plans
and with various budget objectives, including, inter alia, compliance with objectives relating to revenues, expenses, investments,
etc., meeting various financial objectives, such as objectives relating to the annual profit (net profit, pre-tax profit, etc.)
and the Company’s EBITDA, objectives relating to the recruitment and development of professional personnel, objectives relating
to raising investments, debt, etc., objectives relating to the Company’s business operations and the Company’s operations as a
company traded on NASDAQ, objectives relating to the realization of the Company’s assets, the acquisition of new activities and/or
companies and objectives relating to an increase of the return on the Company’s assets.
| 9.3. | Other Executive Officers (Excluding CEO and Directors) |
The Company may also award (subject
to the approvals of the Compensation Committee and the Board) an annual bonus to its Executive Officers, due to their unique contribution
to the Company. Such grant will be based, inter alia, on measurable criteria, based on the Company’s financial results,
the scope of the Company’s business activity, the CEO’s opinion on the contribution of the Executive Officer to the Company, the
distribution of the annual bonus over the year, etc. It should be clarified, that the annual bonus may be based in whole or in
part on discretion, provided that it does not exceed the ceiling specified in section 9.1 above. The CEO of the Company shall be
entitled to determine the abovementioned targets for each such an Executive Officer. Notwithstanding the foregoing, it is hereby
clarified, that the grant of annual bonus to an Executive Officer, of up to three Base Salaries, shall be approved by the CEO of
the Company.
In
addition to the annual bonus, Sol-Gel may grant Executive Officers a special bonus as an award for special achievements (outstanding
personal achievement, outstanding personal effort or outstanding Company’s performance, such as in connection with mergers and
acquisitions, offerings, achieving target budget or business plan under exceptional circumstances and
special recognition in case of retirement), at the discretion of the Compensation Committee and the Board (and with respect to
the CEO- also the Company’s general meeting of shareholders) which shall not exceed six (6) monthly Base Salaries.
| 11. | Additional Provisions Relating to Cash Bonuses |
Should the employment or service
of the Executive Officer terminate prior to the end of a fiscal year, Sol-Gel may pay the Executive Officer his/her pro-rata share
of that fiscal year’s bonus, based on the period such Executive Officer was employed by the Company or has served in the
Company.
| 11.2. | Compensation Recovery (“Clawback”) |
| 11.2.2. | In the event of an accounting restatement, Sol-Gel shall be entitled to recover from its Executive
Officers the bonus compensation in the amount in which such bonus exceeded what would have been paid under the financial statements,
as restated (“Compensation Recovery”), provided that a claim is made by Sol-Gel prior to the third anniversary
of fiscal year end of the restated financial statements. |
| 11.2.3. | Notwithstanding the aforesaid, the Compensation Recovery will not be triggered in the following
events: |
| · | The financial restatement is required
due to changes in the applicable financial reporting standards; or |
| · | The Company (subject to any required approval
by the applicable law) has determined that clawback proceedings in the specific case would be impossible, impractical or not commercially
or legally efficient; or |
| · | The amount to be paid under the clawback
proceedings is less than 10% of the relevant bonus received by the Executive Officer. |
| 11.2.4. | It shall be clarified, that Sol-Gel shall not be entitled to Compensation Recovery with respect
to equity-based compensation granted to its Executive Officers. |
| 11.3. | Reduction or Postponement |
In the event of
the termination of office of an Executive Officer under circumstances in which he/she will not be entitled to severance pay, the
Company (subject to the approvals of the Compensation Committee and the Board) may revoke the entitlement of such an Executive
Officer to an annual bonus and to all parts of the annual bonus which have not yet been paid to him.
D. Equity-Based Compensation
| 12. | General and Objectives |
| 12.1. | The Company (subject to the approvals of the Compensation Committee and the Board, and with respect
to the Company’s directors and CEO- also the Company’s general meeting of shareholders) may grant from time to time equity-based
compensation which will be individually determined and awarded according to, inter alia, the performance, educational background,
prior business experience, qualifications, role and the personal responsibilities of the Executive Officer. Equity-based compensation
may also be awarded to the Company’s directors, including, for the avoidance of doubt, the Executive Chairman, provided that such
directors do not also serve as officers in the Company. |
12.2. The
main objectives of the equity-based compensation is to enhance the alignment between the Executive Officers’ and directors’ interests
with the long term interests of Sol-Gel and its shareholders, and to strengthen the retention and the motivation of Executive Officers
in the medium-to-long term. In addition, since equity-based awards are structured to vest over several years, their incentive value
to recipients is aligned with longer-term strategic plans.
| 12.3. | The equity based compensation
offered by Sol-Gel is intended to be in a form of options exercisable into shares, restricted
shares and/or other equity based awards, such as restricted share units (RSUs), in accordance
with the Company’s incentive plan in place as may be updated from time to time.2 |
The fair market value of the equity-based
compensation for each Executive Officer during a fiscal year, shall not exceed 200% of his/her annual Base Salary, as shall be
determined according to acceptable valuation practices at the time of grant.3
Subject to any applicable law,
Sol-Gel may determine, at the discretion of the Compensation Committee and the Board (and with respect to the Company’s directors
and CEO- also the Company’s general meeting of shareholders), the tax regime under which equity-based compensation may be granted,
including a tax regime which will maximize the benefit to the Executive Officers.
The exercise
price for each option shall not be less than the average closing Company’s share price on NASDAQ over the 30 trading days preceding
the Board’s decision on the grant of the relevant option.
It is hereby
clarified, that unless otherwise determined by the Company (subject to the approvals of the Compensation Committee and the Board,
and with respect to the Company’s directors and CEO- also the Company’s general meeting of shareholders), and subject to the provisions
of any applicable law, the exercise price of restricted shares and restricted share units (RSUs) is zero. In addition, it shall
be clarified, that the exercise of restricted shares and RSUs may be subject to the achievement of goals set in advance and approved
in accordance with the applicable law.
2
The equity based compensation is based on the fair value on the date of grant, calculated annually, on a linear basis.
3 Calculated
annually, on a linear basis.
Options, restricted
shares and restricted share units (RSUs) may also be exercised by a method of “Cashless” exercise.
The Board considered
the possibility of determining a ceiling for the exercise value of the variable equity components and decided, taking into account
the purpose of the equity-based compensation, not to set such a ceiling in this Policy.
All equity-based
incentives granted to Executive Officers and directors shall be subject to vesting periods in order to promote long-term retention
of such recipients. Grants to Executive Officers (excluding directors) shall vest gradually over a period of at least two years,
while grants to directors shall vest over a period of at least one year. Such grants may be vested on a quarterly, semi-annual
or an annual basis, or based on other time periods (which may not be necessarily equal), as determined by the Company (subject
to the approvals of the Compensation Committee and the Board, and with respect to the Company’s directors and CEO- also the Company’s
general meeting of shareholders). The Company (subject to the abovementioned required approvals) may condition the vesting of part
or all of the equity-based incentives, for some or all of its Executive Officers, upon the achievement of predetermined performance
goals. The Company (subject to the abovementioned required approvals) may also set terms relating to vesting in connection with
an Executive Officer leaving the Company (due to a dismissal, resignation, death or disability).
| 17. | For details regarding ceilings with respect to director’s equity-based compensation see section
29 below. |
All other terms
of the equity awards shall be in accordance with Sol-Gel’s incentive plans and other related practices and policies. Accordingly,
the Company may (subject to the approvals of the Compensation Committee and the Board, and with respect to the Company’s directors
and CEO- also the Company’s general meeting of shareholders) extend the period of time for which an award is to remain exercisable
and make provisions with respect to the acceleration of the vesting period of any Executive Officer’s awards, including, without
limitation, in connection with a corporate transaction involving a change of control, subject to any additional approval as may
be required by the Companies Law.
E. Retirement and Termination of Service
Arrangements (Excluding Directors)
| 19. | Advanced Notice Period |
| 19.1. | Sol-Gel (subject to the approvals of the Compensation Committee and the Board, and with respect
to the CEO- also the Company’s general meeting of shareholders) may provide each Executive Officer (excluding directors), pursuant
to an Executive Officer’s employment agreement and according to the Company’s decision per each case, a prior notice of termination
of up to six (6) months, except for the CEO whose prior notice may be of up to twelve (12) months (the “Advance Notice
Period”). During the Advance Notice Period, the Executive Officer may be entitled to all of the compensation elements,
and to the continuation of vesting of his/her options, restricted shares, RSUs and/or any other equity based awards. |
| 19.2. | During the Advance Notice Period, an Executive Officer will be required to keep performing his/her
duties pursuant to his/her agreement with the Company, unless the Company (subject to the approvals of the Compensation Committee
and the Board, and with respect to the CEO- also the Company’s general meeting of shareholders) has waived the Executive Officer’s
services to the Company during the Advance Notice Period and pay the amount payable in lieu of notice, plus the value of benefits. |
| 19.3. | In the event of a change of control in the Company, the Company (subject to the approvals of the
Compensation Committee and the Board, and with respect to the CEO- also the Company’s general meeting of shareholders) may decide
to extend the Advance Notice Period as provided in section 19.1 above (and the compensation paid for such Advance Notice Period,
accordingly) to up to two times the original Advance Notice Period
of the Executive Officer, in accordance with the applicable law as of that time. |
| 20. | Adjustment Period/Retirement Bonus |
In
addition to the Advance Notice Period, the Company (subject to the approvals of the Compensation Committee and the Board, and with
respect to the CEO- also the Company’s general meeting of shareholders) may provide an additional adjustment period/retirement
payment that will be determined, among other things, taking into consideration the Executive Officer’s seniority in the
Company, performance during employment, contribution to Sol-Gel achieving its goals and the circumstances of retirement or termination.
The maximum adjustment period/retirement bonus that may be paid to each Executive Officer shall be up to six (6) month Base Salaries
and may only be granted to Executive Officers who have served in the Company for at least one year.
| 21. | Additional Retirement and Termination Benefits |
Sol-Gel may provide additional
retirement and terminations benefits and payments as may be required by applicable law (e.g., mandatory severance pay under Israeli
labor laws- unless employment/term of service was terminated for cause), or which will be comparable to customary market practices.
F. Exemption, Indemnification and Insurance
Sol-Gel (subject to the approvals
of the Compensation Committee and the Board, and with respect to the Company’s directors and CEO- also the Company’s general meeting
of shareholders) may exempt in advance and retroactively its Executive Officers, from any liability to the Company, in whole or
in part, for damages in consequence of his or her duty of care vis-a-vis the Company, to the fullest extent permitted by law and
subject to the provisions of the Company’s Articles of Association.
Sol-Gel (subject to the approvals
of the Compensation Committee and the Board, and with respect to the Company’s directors and CEO- also the Company’s general meeting
of shareholders) may indemnify its Executive Officers to the fullest extent permitted by applicable law and the Company’s Articles
of Association, for any liability and expense that may be imposed on the Executive Officer, as provided in the Indemnity Agreement
between such individuals and Sol-Gel, all subject to applicable law and the Company’s Articles of Association.
| 24.1. | Sol-Gel (subject to the approvals of the Compensation Committee and the Board, and with respect
to the Company’s directors and CEO- also the Company’s general meeting of shareholders) will provide “Directors’ and
Officers’ Liability Insurance” (the “Insurance Policy”),
as well as a “run off” insurance policy for its Executive Officers as follows: |
| · | The annual premium to
be paid by Sol-Gel shall not exceed $750,000 of the aggregate coverage
of the Insurance Policy; |
| · | The limit of liability of the insurer
shall be up to $75 million per event and in the aggregate in the
insurance period. |
| · | The deductible amount per each claim shall
not exceed $1 million. |
| · | The Insurance Policy, as well as the limit of liability and the premium for each extension or renewal
shall be approved by the Company, which shall determine (subject to the
approvals of the Compensation Committee and the Board, and with respect to the Company’s directors and CEO- also the Company’s
general meeting of shareholders) that the sums are reasonable considering Sol-Gel’s exposures, the scope of coverage and
the market conditions and that the Insurance Policy reflects the current market conditions, and it shall not materially affect
the Company’s profitability, assets or liabilities. |
| · | The policy will also cover the liability
of the controlling shareholders due to their positions as Executive Officers in the Company, from time to time, provided that the
coverage terms in this respect do not exceed those of the other Executive Officers in the Company. |
G. Arrangements upon Change of Control
| 25. | The following benefits may be granted
to the Executive Officers in addition to the benefits applicable in the case of any retirement or termination of service upon a
“Change of Control” following
of which the employment of the Executive Officer is terminated or adversely adjusted in a material way: |
| 25.1. | Vesting acceleration of outstanding options, restricted shares, restricted share units (RSUs) and/or
other equity based awards. |
| 25.2. | Extension of the exercising period of options, restricted shares, restricted share units (RSUs)
and/or other equity based awards for Sol-Gel’s Executive Officers for a period of up to five (5) years, following the date
of termination of employment. |
| 25.3. | An Advance Notice Period, in accordance with section 19.3 above. |
| 25.4. | An Adjustment period/retirement bonus
in accordance with section 20 above, of up to twelve (12) months of Employment Cost.
|
H. Board of Directors Compensation
| 26. | The compensation of the Company’s directors shall be in accordance with the amounts provided in
the Companies Regulations (Rules Regarding the Compensation and Expenses of an External Director) of 2000, as amended by the Companies
Regulations (Relief for Public Companies Traded in Stock Exchange Outside of Israel) of 2000, as such regulations may be amended
from time to time, or in accordance with section 27 below, subject to any required approvals by the applicable law. |
| 27. | The compensation of the Company’s directors (including external directors and independent directors)
shall not exceed the following: |
| 27.1. | Base payment of $45,000 per year (the “Base Payment”); |
| 27.2. | Chairman of the Board- an additional amount of $25,000 per year to the Base Payment; |
| 27.3. | Committee Chairman- an additional amount of $10,000 per year to the Base Payment; |
| 27.4. | Committee member- an additional amount of $5,000 per year to the Base Payment; |
| 28. | In addition, the Company may engage with its directors (excluding external and independent directors)
for the receipt of consulting services and/or other special services, for a consideration of up to $1,000 per day, plus reasonable
expense reimbursement. Such compensation shall be paid for a maximum of 6 days per year for each director. |
| 29. | Directors may be granted equity-based
compensation in accordance with the applicable principles detailed in section D of this
Policy, and subject to the provisions of the Companies Law and the regulations thereunder.4 |
Equity based-compensation
granted to the Company’s directors, shall not exceed the following amounts (subject to any applicable law):5
| 29.1. | Director: $55,000 per year (the “Equity Compensation”); |
| 29.2. | Chairman of the Board- an additional amount of $55,000 per year to the Equity Compensation; |
| 29.3. | Committee Chairman- an additional amount of $10,000 per year per year to the Equity Compensation; |
| 29.4. | Committee member- an additional amount of $5,000 per year to the Equity Compensation; |
| 30. | Sol-Gel’s external and independent directors may be entitled to reimbursement of expenses in accordance
with the Companies Law and the regulations thereunder. |
I. Miscellaneous
| 31. | This Policy is designed solely for the benefit of Sol-Gel. Nothing in this Compensation Policy
shall be deemed to grant any of Sol-Gel’s Executive Officers or employees or any third party any right or privilege in connection
with their employment by the Company and their compensation thereof. Such rights and privileges, to which Executive Officers or
employees serving in the Company or that will serve in the Company in the future, are entitled for, shall be governed by the respective
personal employment agreements. |
| 32. | This Policy is subject to applicable law and is not intended, and should not be interpreted as
limiting or derogating from, provisions of applicable law to the extent not permitted, nor should it be interpreted as limiting
or derogating from the Company’s Articles of Association. |
| 33. | This Policy is not intended to affect current agreements nor affect obligating customs (if applicable)
between the Company and its Executive Officers as such may exist prior to the approval of this Compensation Policy, subject to
any applicable law. |
| 34. | In the event of amendments made to the Companies Law or any regulations promulgated thereunder
providing relief in connection with Sol-Gel’s compensation to its Executive Officers, Sol-Gel may elect to act pursuant to
such relief without regard to any contradiction with this Policy. |
| 35. | The Company (subject to any required approvals by the applicable law) may determine that none or
only part of the payments, benefits and perquisites shall be granted, and is authorized to cancel or suspend a compensation package
or part of it. |
| 4 | The equity based compensation is based on the fair value on the date of grant, calculated annually,
on a linear basis. |
| 5 | Based
on the fair value on the date of grant, calculated annually, on a linear basis.
|
| 36. | An immaterial change in the terms of office of Executive Officers (excluding directors, a controlling
shareholder or a controlling shareholder’s relative) during the term of this Compensation Policy, will be subject to the approval
of the Company’s CEO only (changes in the terms of office of the CEO shall be approved in accordance with the Companies Law). An
immaterial change in this matter shall be deemed to be a change that does not exceed 5% of the annual Employment Cost with respect
to the employment of such an Executive Officer in the Company, subject to the conditions prescribed in this Compensation Policy. |
| 37. | It should be clarified, that the compensation components detailed in this Policy do not relate
to various components that the Company may provide to all or part of its employees and/or its Executive Officers, such as: parking
spaces, entry permits for its assets, reimbursement for meals and accommodation expenses, vacations, company events, etc. |
*********************
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
We hereby consent to the use in this Amendment No.4 to the
Registration Statement on Form F-1 of Sol-Gel Technologies Ltd. of our report dated March 30, 2017, except for the effects of the stock split discussed in Note 10(b) to the financial statements, as to which the date is January
19, 2018 relating to the financial statements, which appears in such Registration Statement. We also consent to the reference to us under the
heading “Experts" in such Registration Statement.
Tel-Aviv, Israel
January 23, 2018 |
/s/ Kesselman & Kesselman
Certified Public Accountants (Isr.)
A member firm of PricewaterhouseCoopers International
Limited |
Kesselman & Kesselman, Trade Tower, 25 Hamered Street, Tel-Aviv
6812508, Israel,
P.O Box 50005 Tel-Aviv 6150001 Telephone: +972 -3- 7954555, Fax:+972
-3- 7954556, www.pwc.com/il
Exhibit 99.7
January 18, 2018
Securities and Exchange Commission
Division of Corporation Finance
Office of the Chief Accountant
100 F Street NE
Washington, DC 20549
| |
Re: |
Sol-Gel Technologies Ltd. Registration Statement on Form F-1 |
| |
|
(CIK No. 0001684693; File No. 333-220234) |
| |
|
Application for Waiver of Requirements of Form 20-F, Item 8.A.4 |
Ladies and Gentlemen:
I am the Chief Executive Officer of Sol-Gel
Technologies Ltd., a company organized under the laws of the State of Israel (the “Company”). In connection with a
proposed initial public offering of the Company’s ordinary shares (the “Offering”), we hereby respectfully request
that the Securities and Exchange Commission (the “Commission”) waive the requirement of Item 8.A.4 of Form 20-F, which
states that in the case of a company’s initial public offering (“IPO”) the Registration Statement on Form F-1
(the “Registration Statement”) must contain audited financial statements of a date not older than 12 months from the
date of the offering unless a waiver is obtained. See also Division of Corporation Finance, Financial Reporting Manual, Section
6220.3.
At the time of the Company’s initial
public filing on August 29, 2017, the Company’s Registration Statement satisfied Item 8.A.4 of Form 20-F, which is applicable
to the Registration Statement pursuant to Item 4(a) of Form F-1, because it contained audited financial statements for the year
ended December 31, 2016 prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). However,
because the Company’s audited financial statements for the year ended December 31, 2017 will not be available until approximately
March 15, 2018, by the time we intend to file the Fourth Amendment to the Company’s Registration Statement, on or around
January 22, 2018, such amendment to the Registration Statement will contain only audited financial statements for the year ended
December 31, 2016, prepared in accordance with U.S. GAAP. Additionally, the Company may need to make at least one amendment after
the date hereof and prior to the availability of the audited financial statements for the year ended December 31, 2017 containing
the same financial statements as those that are contained in its most recent filing.
The Company is submitting this waiver request
pursuant to Instruction 2 to Item 8.A.4 of Form 20-F, which provides that the Commission will waive the 12-month age of financial
statements requirement “in cases where the company is able to represent adequately to us that it is not required to comply
with this requirement in any other jurisdiction outside the United States and that complying with this requirement is impracticable
or involves undue hardship.”
See also the Commission’s November 1,
2004 release entitled International Reporting and Disclosure Issues in the Division of Corporation Finance (available on the Commission’s
website at http://www.sec.gov/divisions/corpfin/internatl/cfirdissues1104.htm) at Section III.B.c, in which the Commission notes:
“the instruction indicates that the
staff will waive the 12-month requirement where it is not applicable in the registrant’s other filing jurisdictions and is
impracticable or involves undue hardship. As a result, we expect that the vast majority of IPOs will be subject only to the 15-month
rule. The only times that we anticipate audited financial statements will be filed under the 12-month rule are when the registrant
must comply with the rule in another jurisdiction, or when those audited financial statements are otherwise readily available.”
In connection with this request, on behalf
of the Company, I represent to the Commission that:
1. The Company
is not required by the Israeli Companies Law or any jurisdiction outside the United States to prepare, and has not prepared, financial
statements audited under any generally accepted auditing standards for any interim period.
2. Compliance
with Item 8.A.4 is impracticable and involves undue hardship for the Company.
3. The Company
does not anticipate that its audited financial statements for the year ended December 31, 2017 will be available until approximately
mid-March 2018.
4. In no event
will the Company seek effectiveness of the Registration Statement if its audited financial statements are older than 15 months
at the time of the Offering.
We will file this letter as an exhibit to
the Registration Statement pursuant to Instruction 2 to Item 8.A.4 of Form 20-F.
Please do not hesitate to contact our Chief
Financial Officer, Gilad Mamlok, at [email protected] if you have any questions regarding the foregoing or if we can provide
any additional information.
| |
Very truly yours, |
| |
|
|
|
| |
By: |
/s/ Alon Seri-Levy |
| |
|
Name: |
Alon Seri-Levy |
| |
|
Title: |
Chief Executive Officer |
| cc: |
Joshua Kiernan, Latham & Watkins LLP |
| |
Nathan Ajiashvili, Latham & Watkins LLP |
| |
Gene Kleinhendler, Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co. |
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