☐ REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
Securities to be registered or to be registered pursuant to
Section 12(b) of the Act: None
Securities registered or to be registered
pursuant to Section 12(g) of the Act:
Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares
of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition
report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange
Act of 1934.
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant
has submitted every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding
12 months.
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions
of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2
of the Exchange Act.
†The term “new or revised
financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting
Standards Codification after April 5, 2012.
Indicate by check mark which basis of
accounting the registrant has used to prepare the financial statements included in this filing.
If “Other” has been checked
in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate
by check mark whether the registrant is a shell company.
We
are a specialty clinical-stage pharmaceutical company. Our focus is creating and enhancing a portfolio of technologies and assets
based on cannabinoid therapies. With this focus, the Company is currently engaged in the following development programs based
on Δ9-tetrahydrocannabinol, or THC, and/or non-psychoactive cannabidiol, or CBD and/or other cannabinoid receptors, or CBR,
agonists: SCI-110 (formerly THX-110) for the treatment of Tourette syndrome, or TS, for the treatment of obstructive sleep apnea,
or OSA, and for the treatment of Alzheimer’s disease and agitation; SCI-160 (formerly THX-160) for the treatment of pain;
and SCI-210 (formerly THX-210) for the treatment of Autism Spectrum Disorder, or ASD, and epilepsy.
SCI-110 is a combination
therapy candidate based on two components: (1) THC, which is the major cannabinoid molecule in the cannabis plant, and (2) CannAmide™,
a proprietary Palmitoylethanolamide, or PEA, formulation. PEA is an endogenous fatty acid amide that belongs to the class of nuclear
factor agonists, which are molecules that regulate the expression of genes. We believe that the combination of THC and PEA may
induce a reaction known as the “entourage effect,” which has strong potential to treat TS, OSA and Alzheimer’s disease and
agitation.
SCI-160 is a novel
pharmaceutical preparation containing a cannabinoid receptor type 2, or CB2 receptor, agonist for the treatment of pain. This
innovative CB2 receptor agonist was synthesized by Raphael Mechoulam, Ph.D., Professor of Medicinal Chemistry at the Hebrew University,
a member of the SciSparc Scientific Advisory Board.
We believe that modulating
CB2 receptor activity by selective CB2 receptor agonists holds unique therapeutic potential for addressing pain conditions.
Also based on the
“entourage effect,” we are developing SCI-210, a proprietary novel preparation candidate containing non-psychoactive
CBD and CannAmide™. SCI-210 is intended for the treatment of ASD and epilepsy. On February 9, 2021, we announced that we
have begun commercial production of our proprietary PEA oral tablets CannAmide™, which will be marketed to pharmacies and
other retail outlets across Canada following our entering into a distribution agreement.
Pursuant to the positive
results obtained in a phase IIa TS study conducted at Yale School of Medicine, we are developing a regulatory dossier to be submitted
to the German Federal Institute for Drugs and Medical Devices and the Israeli Ministry of Health for our SCI-110 program for TS.
In addition, we announced in November 2019 positive topline results from our Phase IIa clinical study in OSA, which we believe
suggests that SCI-110 positively affects symptoms in adult subjects with OSA. Following the recent successful completion of the
Phase IIa OSA clinical study, we are now assessing business and clinical strategies for further development of this program.
In February 2021,
we announced an agreement with The Israeli Medical Center for Alzheimer’s, to conduct a phase IIa clinical trial to evaluate the
safety, tolerability and efficacy of SCI-110 in patients with Alzheimer’s disease and agitation using our proprietary cannabinoid-based
technology. Sporadic observation in healthy or sick individuals indicated that cannabis products and in particular THC have calming
and anti-anxiety effects. Based on our pre-clinical and clinical experience using SCI-110 we believe that this treatment may potentially
be found to be more safe and efficacious than THC alone. Similarly, following positive results in a pre-clinical study that consisted
of in vitro tests which showed synergy between CBD and PEA, we announced in December 2019 progression of SCI-210 into a clinical
stage, and our plans to initiate a randomized, double blind placebo controlled study to evaluate the potential efficacy, safety
and tolerability of SCI-210 in treating patients with ASD. In addition, in March 2021, we announced an agreement with The Sheba
Fund for Health Services and Research at Chaim Sheba Medical Center, to examine the potential role of SCI-210 on status epilepticus.
For our
proprietary SCI-160, we are continuing the pre-clinical studies for mechanism of action evaluation and identifying pain
indication and formulation development.
In July 2019, we announced the issuance
of a product license for our proprietary formulation containing the active compound PEA oral tablet, CannAmide™ (TheraPEA),
by Canada’s Natural and Non-Prescription Health Products Directorate, or the NNHPD, for the recommended use as an anti-inflammatory
and to help relieve chronic pain. This license was issued by the NNHPD under the authority of the Natural Health Products Regulations.
Dosage form of the described natural health product is tablets composed of 400 milligrams of PEA with a recommended dose of one
tablet up to three times a day. Chronic pain is estimated to affect 38% of people worldwide, and according to an analysis by the
World Health Organization, half of the most prevalent conditions responsible for living with disability is characterized by the
presence of different kinds of pain. With the NNHPD license, we are able to offer safe and beneficial non-opiate pain management
products. CannAmide™’s active compound PEA is a cannabimimetic compound that regulates endocannabinoid levels by enhancing
receptor sensitivity and inhibiting their metabolism, and is particularly attractive therapeutically as it appears to have a very
high safety profile with low or to no possibility for abuse. Although numerous clinical trials have shown the favorable effect
of PEA, as a raw material agent it has low solubility. CannAmide™ formulation was designed to increase PEA solubility and
absorption.
We were incorporated under the laws of the State of Israel on
August 23, 2004. From March 2017 until July 2020, our American Depositary Shares, or ADSs, were listed on the Nasdaq Capital Market,
or Nasdaq. On July 2, 2020, our ADSs were suspended from Nasdaq due to our failure to meet the shareholders equity requirements
of Nasdaq. On September 21, 2020, our ADSs were officially delisted from Nasdaq. Since December 8, 2020, our ADSs have been quoted
on the OTCQB, under the symbol “SPRCY.” Each of our ADSs represents 140 of our Ordinary Shares.
Unless otherwise indicated,
all references to the “Company,” “we,” “us, “our” and “SciSparc” refer to
SciSparc Ltd. (formerly known as Therapix Biosciences Ltd.) and its subsidiaries.
References to “U.S. dollars”
and “$” are to currency of the United States of America, and references to “NIS” are to New Israeli Shekels.
References to “Ordinary Shares” are to our Ordinary Shares, no par value. We report financial information under International
Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board and none of the financial statements
were prepared in accordance with generally accepted accounting principles in the United States. Unless derived from our financial
statements or otherwise indicated, U.S. dollar translations of NIS amounts presented in this Annual Report on Form 20-F, or the
Annual Report, are translated using a rate of NIS 3.215 to USD 1.00, the last exchange rate published by the Bank of Israel by
December 31, 2020.
On September 17, 2020, our shareholders
approved a reverse split of our share capital by a ratio of up to 20:1, to be effective at the ratio and date to be determined
by our Board of Directors. On October 1, 2020, our Board of Directors resolved that the final ratio for the reverse split will
be 20:1, or the Reverse Split. The Reverse Split became effective after the close of business on October 16, 2020. Concurrently
with the Reverse Split, we changed the ratio of the ADSs to our Ordinary Shares from each ADS representing 40 Ordinary Shares
to each ADS representing 140 Ordinary Shares. This resulted in a reverse split on our American Depositary Receipt program, or
the ADS Split. All descriptions of our share capital, including share amounts and per share amounts, and descriptions of the ADSs
in this Annual Report are presented after giving effect to the Reverse Split and ADS Split, respectively.
Certain information
included or incorporated by reference in this Annual Report may be deemed to be “forward-looking statements” within
the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. Forward-looking statements are
often characterized by the use of forward-looking terminology such as “may,” “will,” “expect,”
“anticipate,” “estimate,” “continue,” “believe,” “should,” “intend,”
“project” or other similar words, but are not the only way these statements are identified.
Forward-looking statements
include, but are not limited to, statements about:
These statements are
only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our or our
industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated
by the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events.
Although we believe
that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements.
Readers are urged
to carefully review and consider the various disclosures made throughout this Annual Report which are designed to advise interested
parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
You should not put
undue reliance on any forward-looking statements. Any forward-looking statements in this Annual Report are made as of the date
hereof, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by law.
The risk factors described below
are a summary of the principal risk factors associated with an investment in us. These are not the only risks we
face. You should carefully consider these risk factors, together with the risk factors set forth in Item 3.D of
this Annual Report and the other reports and documents filed by us with the SEC.
PART I
ITEM 1.
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IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
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Not applicable.
ITEM 2.
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OFFER STATISTICS AND EXPECTED TIMETABLE
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Not applicable.
A.
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[Removed and reserved]
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B.
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Capitalization and Indebtedness
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Not
applicable.
C.
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Reasons for the Offer and Use of
Proceeds
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Not applicable.
You should carefully
consider the risks described below, together with all of the other information in this Annual Report. The risks described below
are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be
immaterial may also materially and adversely affect our business operations. If any of these risks actually occurs, our business
and financial condition could suffer and the price of our ADSs could decline.
Risks Related to Our Financial Condition
and Capital Requirements
We are a specialty clinical-stage
pharmaceutical company and have a limited operating history on which to assess the prospects for our business, have incurred significant
losses since the date of our inception, and anticipate that we will continue to incur significant losses until we are able to
successfully commercialize our product candidates.
Since our inception
in 2004, we have been operating as a specialty pharmaceutical company and have a limited operating history on which to assess
the prospects for our business, have incurred significant losses, and anticipate that we will continue to incur significant losses
for the foreseeable future. We have only focused our business on developing a portfolio of approved drugs based on cannabinoid
molecules since August 2015.
We have historically
incurred substantial net losses; including net losses of approximately $3.5 million for the year ended December 31, 2020 and net
losses of approximately $4.7 million in 2019. As of December 31, 2020, we had an accumulated deficit of approximately $55.2
million.
We have devoted substantially
all of our financial resources to develop our product candidates, and more recently, to a lesser degree, we have been searching
for strategic transactions. We have financed our operations primarily through the issuance of equity securities. The amount of
our future net losses will depend, in part, on completing the development of our product candidates, the demand for our product
candidates, the rate of our future expenditures and our ability to obtain funding through the issuance of our securities, strategic
collaborations or grants. Pharmaceutical product development is a highly speculative undertaking and involves a substantial degree
of risk and we have mainly focused our business on the development of cannabinoid molecules since August 2015. We are in the late
stages of preclinical and at the early stages of clinical development for our product candidates, we have not yet commenced pivotal
clinical studies for any product candidate. Although we have begun early commercialization efforts for our proprietary PEA oral
tablets formulation, CannAmide™, which we expect will be marketed to pharmacies and other retail outlets across Canada following
our entering into a distribution agreement(s), it may be several years, if ever, before we complete pivotal clinical studies and
have our lead product candidate approved for commercialization. Even if we obtain regulatory approval to market a product candidate,
our future revenue will depend upon the size of the markets for which our product candidates may receive approval and our ability
to achieve sufficient market acceptance, pricing, reimbursement from third-party payors and adequate market share for our product
candidates in those markets.
We expect to continue
to incur significant losses until we are able to commercialize our main product candidates, which we may not be successful in
achieving. We anticipate that our expenses will increase substantially if and as we:
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continue the research and development
of our product candidates;
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expand the scope of our current clinical
studies for our product candidates;
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seek regulatory and marketing approvals
for our product candidates that successfully complete clinical studies;
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establish a sales, marketing and distribution
infrastructure to commercialize our product candidates;
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seek to identify, assess, acquire,
license, and/or develop other product candidates and subsequent generations of our current product candidates;
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seek to maintain, protect, and expand
our intellectual property portfolio;
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seek to attract and retain skilled
personnel; and
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create additional infrastructure to
support our operations as a public company and our product candidate development and planned future commercialization efforts.
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We have
not generated any revenue from the sale of our current product candidates and may never be profitable.
We have not yet commercialized
any of our main product candidates and have not generated any revenue since the date of our inception. Although we have begun
early commercialization efforts for our proprietary PEA oral tablets formulation. CannAmide™, we do not currently expect
the sale of CannAmide to result in material revenues, nor is CannAmide™ our lead product candidate. We do not know whether
or when we will become profitable. Our ability to generate revenue and achieve profitability depends on our ability to successfully
complete the development of, and to commercialize, our product candidates and on the demand for our product candidates. Our ability
to generate revenue and achieve profitability depends on our ability, alone or with strategic collaboration partners, to successfully
complete the development of, and obtain the regulatory and marketing approvals necessary to commercialize, one or more of our
product candidates. Our ability to generate future revenue from product candidate sales depends heavily on our success in many
areas, including but not limited to:
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completing research and preclinical
and clinical development of our product candidates;
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obtaining regulatory and marketing
approvals for product candidates for which we complete clinical studies;
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establishing and maintaining supply
and manufacturing relationships with third parties that can provide adequate (in amount and quality) products to support market
demand for our product candidates, if approved;
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launching and commercializing product
candidates if and when we obtain regulatory and marketing approval, either directly or with a collaborator or distributor;
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obtaining market acceptance of our
product candidates as viable treatment options;
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addressing any competing pharmaceutical
or biotechnological and market developments;
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identifying, assessing, acquiring and/or
developing new product candidates;
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negotiating favorable terms in any
collaboration, licensing or other arrangements into which we may enter;
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maintaining, protecting and expanding
our portfolio of intellectual property rights, including patents, trade secrets and know-how; and
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attracting, hiring and retaining qualified
personnel.
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Even if one or more
of the product candidates that we develop is approved for commercial sale, we anticipate incurring significant costs associated
with commercializing any approved product candidate. Our expenses could increase beyond expectations if we are required by the
FDA, the European Medicines Agency, or the EMA, or other regulatory agencies, domestic or foreign, to perform clinical, nonclinical
or other types of studies in addition to those that we currently anticipate. In cases where we are successful in obtaining regulatory
approvals to market one or more of our product candidates, our revenue will be dependent, in part, upon the size of the markets
in the territories for which we gain regulatory approval, the accepted price for the product candidate, the ability to get reimbursement
at an acceptable price and whether we own the commercial rights for that territory. If the number of our addressable patients
is not as significant as we estimate, the indication approved by regulatory authorities is narrower than we expect, or the reasonably
expected population for treatment is narrowed by competition, physician choice or treatment guidelines, we may not generate significant
revenue from sales of such product candidates, even if approved. Additionally, if we are not able to generate revenue from the
sale of any approved product candidates, we may be forced to cease operations.
We expect that we will need to raise
substantial additional funding before we can expect to become profitable from sales of our product candidates. This additional
financing may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force
us to delay, limit or terminate our product candidate development efforts or other operations.
As of December 31,
2020, our cash was approximately $1.95 million, we had a working capital of approximately $1.42 million and an accumulated deficit
of approximately $55.2 million. Based upon our currently expected level of operating expenditures, we expect that our existing
cash will be sufficient to fund operations at least through March 31, 2022. We expect that we will require substantial additional
capital to commercialize our product candidates. In addition, our operating plans may change as a result of many factors that
may currently be unknown to us, and we may need to seek additional funds sooner than planned. Our future funding requirements
will depend on many factors, including but not limited to:
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the scope, rate of progress, results
and cost of product development, clinical studies, preclinical testing, and other related activities;
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the cost, timing and outcomes of regulatory
approvals;
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the cost and timing of establishing
sales, marketing, and distribution capabilities; and
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the terms and timing of any collaborative,
licensing, and other arrangements that we may establish.
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Any additional fundraising
efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize
our product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms
acceptable to us, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of holders of
our securities and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance,
may cause the market price of our Ordinary Shares or ADSs to decline. The incurrence of indebtedness could result in increased
fixed payment obligations, and we may be required to agree to certain restrictive covenants, such as limitations on our ability
to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating
restrictions that could adversely impact our ability to conduct our business. We could also be required to seek funds through
arrangements with collaborative partners or otherwise at an earlier stage than otherwise would be desirable, and we may be required
to relinquish rights to some of our technologies or product candidates or otherwise agree to terms unfavorable to us, any of which
may have a material adverse effect on our business, operating results and prospects. Even if we believe that we have sufficient
funds for our current or future operating plans, we may seek additional capital if market conditions are favorable or if we have
specific strategic considerations.
If we are unable to
obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research
or development programs or the commercialization of any product candidates or be unable to expand our operations or otherwise
capitalize on our business opportunities, as desired, which could materially affect our business, financial condition and results
of operations.
Risks Related to the Discovery and Development
of Our Product Candidates
We are
heavily dependent on the success of our product candidates, which are in the late stages of pre-clinical development or early
stages of clinical development. We cannot give any assurance that any of our product candidates will receive regulatory approval,
which is necessary before they can be commercialized.
To date, we have invested
substantially all of our efforts and financial resources to design and develop our product candidates, including conducting preclinical
studies and providing general and administrative support for these operations. Our future success is dependent on our ability
to successfully develop, obtain regulatory approval for, and then successfully commercialize one or more product candidates. We
currently generate no revenue from sales of any product candidate, and we may never be able to develop or commercialize a marketable
product candidate.
Each of our product
candidates is in the late stages of pre-clinical development or early stages of development and will require additional clinical
development (and in some cases additional preclinical development), management of nonclinical, clinical and manufacturing activities,
regulatory approval, obtaining adequate manufacturing supply, building of a commercial organization and significant marketing
efforts before we generate any revenue from product candidate sales. It may be years before a pivotal study is initiated, if at
all. Any clinical trials in the United States will require the approval of an Investigational New Drug, or IND, application by
the FDA, and we cannot assure that we will obtain such approval in a timely manner, or at all. We are not permitted to market
or promote any of our product candidates before we receive regulatory approval from the FDA or comparable foreign regulatory authorities,
and we may never receive such regulatory approval for any of our product candidates.
We as a company have
never submitted marketing applications to the FDA or comparable foreign regulatory authorities. We cannot be certain that any
of our product candidates will be successful in clinical studies or receive regulatory approval or what regulatory pathway the
regulatory authorities shall designate for our product candidates. Further, our product candidates may not receive regulatory
approval even if they are successful in clinical studies. If we do not receive regulatory approvals for our product candidates,
we may not be able to continue our operations.
We generally plan
to seek regulatory approval to commercialize our product candidates in the United States, the European Union and in additional
foreign countries. To obtain regulatory approvals we must comply with the numerous and varying regulatory requirements of such
countries regarding safety, efficacy, chemistry, manufacturing and controls, clinical studies, commercial sales, pricing and distribution
of our product candidates. Even if we are successful in obtaining approval in one jurisdiction, we cannot ensure that we will
obtain approval in any other jurisdictions. If we are unable to obtain approval for our product candidates in multiple jurisdictions,
our revenue and results of operations would be negatively affected.
The regulatory approval processes
of the FDA and comparable foreign authorities are lengthy, time consuming and inherently unpredictable. If we are ultimately unable
to obtain regulatory approval for our product candidates, our business will be substantially harmed.
The time required
to obtain approval by the FDA and comparable foreign authorities is unpredictable, typically takes many years following the commencement
of clinical studies and depends upon numerous factors. In addition, approval policies, regulations or the type and amount of clinical
data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary
among jurisdictions, which may cause delays in the approval or the decision not to approve an application. We have not obtained
regulatory approval for any product candidate, and it is possible that none of our existing product candidates or any product
candidates we may seek to develop in the future will ever obtain regulatory approval.
Applications for our
product candidates could fail to receive regulatory approval for many reasons, including but not limited to the following:
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the FDA or comparable foreign regulatory
authorities may disagree with the design or implementation of our clinical studies;
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we may be unable to demonstrate to
the FDA or comparable foreign regulatory authorities that a product candidate’s safety-benefit ratio for its proposed
indication is acceptable;
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the FDA or comparable foreign regulatory
authorities may disagree with our interpretation of data from preclinical studies or clinical studies;
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the data collected from clinical studies
of our product candidates may not be sufficient to support the submission of a New Drug Application, or NDA, in the United
States or elsewhere;
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the FDA or comparable foreign regulatory
authorities may fail to approve the manufacturing processes, test procedures and specifications or facilities of third-party
manufacturers with which we contract for clinical and commercial supplies; and
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the approval policies or regulations
of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient
for approval.
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This lengthy approval
process, as well as the unpredictability of the results of clinical studies, may result in our failing to obtain regulatory approval
to market any of our product candidates, which would significantly harm our business, results of operations and prospects.
Clinical drug development involves
a lengthy and expensive process with an uncertain outcome, and results of earlier studies may not be predictive of future study
results.
Clinical testing is
expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the
clinical study process. The results of preclinical studies and early clinical studies of our product candidates may not be predictive
of the results of later-stage clinical studies. Product candidates that have shown promising results in early-stage clinical studies
may still suffer significant setbacks in subsequent advanced clinical studies. There is a high failure rate for drugs proceeding
through clinical studies, and product candidates in later stages of clinical studies may fail to show the desired safety and efficacy
traits despite having progressed satisfactorily through preclinical studies and initial clinical studies. A number of companies
in the pharmaceutical industry have suffered significant setbacks in advanced clinical studies due to lack of efficacy or adverse
safety profiles, notwithstanding promising results in earlier studies. Moreover, preclinical and clinical data are often susceptible
to varying interpretations and analyses. We do not know whether any Phase I, Phase II, Phase III or other clinical studies
we may conduct will demonstrate consistent or adequate efficacy and safety sufficient to obtain regulatory approval to market
our product candidates.
We may find it difficult to enroll
patients in our clinical studies. Difficulty in enrolling patients could delay or prevent clinical studies of our product candidates.
Identifying and qualifying
patients to participate in clinical studies of our product candidates is critical to our success. The timing of our clinical studies
depends in part on the speed at which we can recruit patients to participate in testing our product candidates, and we may experience
delays in our clinical studies if we encounter difficulties in enrollment. The evolving COVID-19 pandemic may directly or indirectly
impact the pace of enrollment in our clinical studies as patients may avoid or may not be able to travel to healthcare facilities
and physicians’ offices unless due to a health emergency and clinical study staff can no longer get to the clinic. Additionally,
such facilities and offices have been and may continue to be required to focus limited resources on non-clinical trial matters,
including treatment of COVID-19 patients, thereby decreasing availability, in whole or in part, for clinical trial services. –Our
business and operations have been and are likely to continue to be adversely affected by the COVID-19 global pandemic. See “Risks
Related to Our Business Operations” for additional information.
Some of the conditions
for which we plan to evaluate our current product candidates are for rare diseases. Accordingly, there is a limited patient pool
from which to draw for clinical studies. Further, the eligibility criteria of our clinical studies will further limit the pool
of available study participants as we will require that patients have specific characteristics that we can measure or to assure
their disease is either severe enough or not too advanced to include them in a study.
Additionally, the
process of finding patients may prove costly. We also may not be able to identify, recruit and enroll a sufficient number of patients
to complete our clinical studies because of the perceived risks and benefits of the product candidate under study, the availability
and efficacy of competing therapies and clinical studies, the proximity and availability of clinical study sites for prospective
patients and the patient referral practices of physicians. If patients are unwilling to participate in our studies for any reason,
the timeline for recruiting patients, conducting studies and obtaining regulatory approval of potential product candidates will
be delayed.
If we experience delays
in the completion or termination of any clinical study of our product candidates, the commercial prospects of our product candidates
will be harmed, and our ability to generate product candidate revenue from any of these product candidates could be delayed or
prevented. In addition, any delays in completing our clinical studies will increase our costs, slow down our product candidate
development and approval process and jeopardize our ability to commence product candidate sales and generate revenue. Any of these
occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause,
or lead to, a delay in the commencement or completion of clinical studies may also ultimately lead to the denial of regulatory
approval of our product candidates.
If the
FDA does not conclude that our product candidates satisfy the requirements for the Section 505(b)(2) regulatory approval
pathway, or if the requirements for our product candidates under Section 505(b)(2) are not as we expect, the approval pathway
would likely take significantly longer, cost significantly more and entail significantly greater complications and risks than
anticipated and in either case may not be successful.
We intend to seek
FDA approval through the Section 505(b)(2) regulatory pathway for our product candidate- SCI-110 and potentially for our
drug candidate SCI-210. The Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Amendments,
added Section 505(b)(2) to the Federal Food, Drug, and Cosmetic Act of 1938, as amended, or the FDC Act, or Section 505(b)(2).
Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies
not conducted by or for the applicant and for which the applicant has not obtained a right of reference.
If the FDA does not
allow us to pursue the Section 505(b)(2) regulatory pathway as anticipated, we may need to conduct additional clinical trials,
provide additional data and information and meet additional standards for regulatory approval. If this were to occur, the time
and financial resources required to obtain FDA approval, and complications and risks associated with FDA approval, would substantially
increase. We may need to obtain additional funding, which could result in significant dilution to the ownership interests of our
then existing shareholders to the extent we issue equity securities or convertible debt. We cannot assure you that we would be
able to obtain such additional financing on terms acceptable to us, if at all. Moreover, inability to pursue the Section 505(b)(2)
regulatory pathway could result in new competitive product candidates reaching the market faster than our product candidates,
which could materially adversely impact our competitive position and prospects. Even if we are allowed to pursue the Section 505(b)(2)
regulatory pathway, we cannot assure you that our product candidates will receive the requisite approvals for commercialization.
In addition, notwithstanding
the approval of a number of product candidates by the FDA under Section 505(b)(2) over the last few years, some pharmaceutical
companies and others have objected to the FDA’s interpretation of Section 505(b)(2). For example, several companies
have previously petitioned the FDA regarding the constitutionality of allowing others to rely upon FDA findings that are based
on their proprietary data. If the FDA’s interpretation of Section 505(b)(2) is successfully challenged, the FDA may
be required to change its 505(b)(2) policies and practices, which could require that we generate full data regarding safety and
effectiveness for previously approved active ingredients and delay or even prevent the FDA from approving any NDA that we submit
under Section 505(b)(2). In addition, the pharmaceutical industry is highly competitive, and Section 505(b)(2) NDAs are subject
to special requirements designed to protect the patent rights of sponsors of previously approved drugs that are referenced in
a Section 505(b)(2) NDA. These requirements may give rise to patent litigation and mandatory delays in approval of our potential
future NDAs for up to 30 months depending on the outcome of any litigation. It is not uncommon for a manufacturer of an approved
product to file a citizen petition with the FDA seeking to delay approval of, or impose additional approval requirements for,
pending competing products. If successful, such petitions can significantly delay, or even prevent, the approval of the new product.
However, even if the FDA ultimately denies such a petition, the FDA may substantially delay approval while it considers and responds
to the petition. In addition, even if we are able to utilize the Section 505(b)(2) regulatory pathway for our product candidates,
there is no guarantee this would ultimately lead to faster product development or earlier approval. Moreover, even if these product
candidates are approved under the Section 505(b)(2) pathway, as the case may be, the approval may be subject to limitations on
the indicated uses for which the products may be marketed or to other conditions of approval or may contain requirements for costly
post-marketing testing and surveillance to monitor the safety or efficacy of the products. Our product candidates are at early
stages of development and are subject to uncertainty over what we must do on our development program in order to secure approval
under Section 505(b)(2).
We may
encounter substantial delays in our clinical studies, or we may fail to demonstrate safety and efficacy to the satisfaction of
applicable regulatory authorities.
Before obtaining marketing
approval from regulatory authorities for the sale of our product candidates, we must conduct extensive clinical studies to demonstrate
the safety and efficacy of the product candidates in humans. Clinical testing is expensive, time consuming and uncertain as to
outcome. We cannot guarantee that any clinical studies will be conducted as planned or completed on schedule, if at all. A failure
of one or more clinical studies can occur at any stage of testing, and our future clinical studies may not be successful. Events
that may prevent successful or timely completion of clinical development include but are not limited to:
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inability to generate sufficient preclinical,
toxicology or other in vivo or in vitro data to support the initiation of human clinical studies;
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the occurrence of a pandemic or the
spread of a virus that diverts the attention of regulatory agencies from reviewing our study design or results or which, as
a result of such pandemic or widespread, requires us to materially modify our planned clinical studies;
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delays in reaching a consensus with
regulatory agencies on study design;
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delays in reaching agreement on acceptable
terms with prospective contract research organizations, or CROs, and clinical study sites, the terms of which can be subject
to extensive negotiation and may vary significantly among different CROs and clinical study sites;
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delays in obtaining required Institutional
Review Board, or IRB, approval at each clinical study site;
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imposition of a clinical hold by regulatory
agencies, after review of an IND, application, or equivalent application, or an inspection of our clinical study operations
or study sites;
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delays in recruiting suitable patients
to participate in our clinical studies, which may be impacted by COVID-19 or government restrictions enacted as a result thereof;
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difficulty collaborating with patient
groups and investigators;
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failure by our CROs, other third parties
or us to adhere to clinical study requirements;
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failure to perform in accordance with
the FDA’s Good Clinical Practices, or GCP, requirements, or applicable regulatory guidelines in other countries;
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delays in having patients complete
participation in a study or return for post-treatment follow-up;
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patients dropping out of a study;
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occurrence of serious adverse events
associated with the product candidate that are viewed to outweigh its potential benefits;
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changes in regulatory requirements
and guidance that require amending or submitting new clinical protocols;
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the cost of clinical studies of our
product candidates being greater than we anticipate;
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clinical studies of our product candidates
producing negative or inconclusive results, which may result in us deciding, or regulators requiring us, to conduct additional
clinical studies or abandon product candidate development programs; and
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delays in manufacturing, testing, releasing,
validating or importing/exporting sufficient stable quantities of our product candidates for use in clinical studies or the
inability to do any of the foregoing.
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Any inability to successfully
complete preclinical and clinical development could result in additional costs to us or impair our ability to generate revenue.
We may also be required to conduct additional safety, efficacy and comparability studies before we will be allowed to start clinical
studies with our repurposed drugs. Clinical study delays could also shorten any periods during which our product candidates have
patent protection and may allow our competitors to bring product candidates to market before we do, which could impair our ability
to obtain orphan exclusivity and successfully commercialize our product candidates and may harm our business and results of operations.
In respect
of our product candidates targeting rare indications, orphan drug exclusivity may afford limited protection, and if another party
obtains orphan drug exclusivity for the drugs and indications we are targeting, we may be precluded from commercializing our product
candidates in those indications during that period of exclusivity.
We are seeking to
obtain an orphan designation for some of our product candidates in the United States. Under the Orphan Drug Act, the FDA
may designate a product as an orphan drug if it is a drug intended to treat a rare disease or condition, defined, in part, as
a patient population of fewer than 200,000 in the United States, or a patient population greater than 200,000 in the United States
where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the United States.
Additionally, designation is granted for products intended for the diagnosis, prevention or treatment of a life-threatening, seriously
debilitating or serious and chronic condition and when, without incentives, it is unlikely that sales of the drug in the European
Union would be sufficient to justify the necessary investment in developing the drug.
In the United States,
the first NDA applicant with an orphan drug designation for a particular active moiety to treat a specific disease or condition
that receives FDA approval is entitled to a seven-year exclusive marketing period in the United States for that product candidate,
for that indication. In the European Union, orphan drug designation also entitles a party to financial incentives such as reduction
of fees or fee waivers and 10 years of market exclusivity is granted following drug approval. This period may be reduced to six
years if the orphan drug designation criteria are no longer met, including where it is shown that the product is sufficiently
profitable not to justify maintenance of market exclusivity.
In June 2016, we submitted
a request for orphan drug designation to the FDA for SCI-110 for the treatment of TS. In a letter dated September 29, 2016, the
FDA informed us that our request could not be granted at such time, and is being held in abeyance until and subject to us providing
additional information pertaining to the overall prevalence of TS in both children and adults, and further clinical data to support
our scientific rationale for our request for orphan drug designation within 12 months. In September 2017, we responded to such
FDA letter within the designated time frame, and provided the FDA with our articulated and reasoned responses including documentation
and clinical data that supports it. On December 26, 2017, we received the FDA’s response to our response. The FDA accepted
that there is adequate scientific rationale for the treatment of TS with SCI-110 mainly through the preliminary results of ongoing
clinical trials, suggesting that SCI-110 may provide benefit in treating TS. However, the FDA stated that it was unable to grant
our request and indicated that we did not provide adequate prevalence estimates, and any evidence to support our statement that
only moderate to severe TS patients would require pharmacological treatment. We further responded in January 2018 by providing
additional information. On January 23, 2020, following additional correspondence with the FDA, the FDA still did not grant us
our request due to the fact that we have not yet provided adequate prevalence estimates. However, the FDA did agree with
our position that we could potentially qualify for orphan drug designation with respect to the moderate-to-severe TS sub-group
population only rather than the entire population. After we had provided additional prevalence estimates, the FDA raised a concern
in its letter, dated December 7, 2020, about our ability to limit the use of the product to the subset of patients we are pursuing.
Due to the fact that we disagree with this concern, we requested a clarification call. In the clarification call conducted on
February 2, 2021, we agreed with the FDA concern about our ability to limit the use of the product to the subset of patients in
addition to a safety concern associated with THC treatment in pediatrics population so we suggested to amend our preliminary request
and asked to include only adults in the treated population. An amendment letter was discussed and the FDA described what it would
want to see in such an amendment. In March we sent our response to the FDA.
There is no assurance
that we will successfully obtain orphan drug designation for TS, any future rare indications or orphan exclusivity upon approval
of any of our product candidates that have already obtained designation.
Even if we do obtain
orphan exclusivity for any product candidate, the exclusive marketing rights may be lost if the FDA later determines that the
request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug. Moreover,
a drug product candidate with an active moiety that is a different cannabinoid from that in our drug candidate or, under limited
circumstances, the same drug product candidate, may be approved by the FDA for the same indication during the period of marketing
exclusivity. The limited circumstances include a showing that the second drug is clinically superior to the drug with marketing
exclusivity through a demonstration of superior safety or efficacy or that it makes a major contribution to patient care. In addition,
if a competitor obtains approval and marketing exclusivity for a drug product candidate with an active moiety that is the same
as that in a product candidate we are pursuing for the same indication, approval of our product candidate would be blocked during
the period of marketing exclusivity unless we could demonstrate that our product candidate is clinically superior to the approved
product candidate. In addition, if a competitor obtains approval and marketing exclusivity for a drug product candidate with an
active moiety that is the same as that in a product candidate we are pursuing for a different orphan indication, this may negatively
impact the market opportunity for our product candidate.
There have been legal
challenges to aspects of the FDA’s regulations and policies concerning the exclusivity provisions of the Orphan Drug Act,
and future challenges could lead to changes that affect the protections afforded our product candidates in ways that are difficult
to predict. In a recent successful legal challenge, a court invalidated the FDA’s denial of orphan exclusivity to a drug
on the grounds that the drug was not proven to be clinically superior to a previously approved product candidate containing the
same ingredient for the same orphan use. In response to the decision, the FDA released a policy statement stating that the court’s
decision is limited just to the facts of that particular case and that the FDA will continue to require the sponsor of a designated
drug that is the “same” as a previously approved drug to demonstrate that its drug is clinically superior to that
drug upon approval in order to be eligible for orphan drug exclusivity, or in some cases, to even be eligible for marketing approval.
In the future, there is the potential for additional legal challenges to the FDA’s orphan drug regulations and policies,
and it is uncertain how such challenges might affect our business.
While orphan drug product candidates
are typically sold at a high price relative to other medications, the market may not be receptive to high pricing of our product
candidates.
We develop our product
candidates to treat rare diseases, a space where medications are usually sold at high prices compared with other medications.
However, our product candidates are repurposed drugs, which means, among other things, that they contain drug substances
available in pharmacies for the purpose of treating indications that are different from the indications for which we plan to use.
Accordingly, even if regulatory authorities approve our product candidates, the market may not be receptive to, and it may be
difficult for us to achieve, a per-patient per-year price high enough to allow us to realize a return on our investment.
Our product
candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval,
limit the commercial profile of an approved label or result in significant negative consequences following marketing approval,
if any.
The use of dronabinol
has been associated with seizures, paranoia, rapid heart rate and unusual thoughts and behaviors. Undesirable side effects caused
by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical studies and could result
in a more restrictive marketing label or the delay or denial of regulatory approval by the FDA or other comparable foreign authorities.
Potential side effects of our cannabinoid-based treatments may include: asthenia, palpitations, tachycardia, vasodilation/facial
flush, abdominal pain, nausea, vomiting, amnesia, anxiety/nervousness, ataxia, confusion, depersonalization, dizziness, euphoria,
hallucinations, paranoid reaction, somnolence and abnormal thinking. Results of our studies may identify unacceptable severity
and prevalence of these or other side effects. In such an event, our studies could be suspended or terminated, and the FDA or
comparable foreign regulatory authorities could order us to cease further development of or deny or withdraw approval of our product
candidates for any or all targeted indications.
Drug-related side
effects could affect patient recruitment, the ability of enrolled patients to complete the study or result in potential product
candidate liability claims.
Additionally,
if one or more of our product candidates receives marketing approval, and we or others later identify undesirable side effects
caused by such product candidates, a number of potentially significant negative consequences could result, including but not limited
to:
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regulatory authorities may withdraw
approvals of such product candidate;
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regulatory authorities may require
additional warnings on the label;
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we may be required to create a Risk
Evaluation and Mitigation Strategy, or REMS, plan, which could include a medication guide outlining the risks of such side
effects for distribution to patients, a communication plan for healthcare providers and/or other elements to assure safe use;
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we could be sued and held liable for
harm caused to patients; and
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our reputation may suffer.
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Any of these events
could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved, and could significantly
harm our business, results of operations and prospects.
Even if we obtain regulatory approval
for a product candidate, our product candidates will remain subject to regulatory scrutiny.
If our product candidates
are approved, they will be subject to ongoing regulatory requirements for manufacturing, labeling, packaging, storage, advertising,
promotion, sampling, record-keeping, conduct of post-marketing studies and submission of safety, efficacy and other post-market
information, including both federal and state requirements in the United States. In addition, manufacturers and manufacturers’
facilities are required to comply with extensive FDA requirements, including ensuring that quality control and manufacturing procedures
conform to current Good Manufacturing Practices, or cGMP, regulations and Quality System Regulation, or QSR. As such, we and our
contract manufacturers will be subject to continual review and inspections to assess compliance with cGMP, QSR and adherence to
commitments made in any NDA. Accordingly, we and others with whom we work must continue to expend time, money and effort in all
areas of regulatory compliance, including manufacturing, production and quality control.
Any regulatory approvals
that we receive for our product candidates may also be subject to limitations on the approved indicated uses for which the product
candidate may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing,
including Phase 4 clinical trials and surveillance to monitor the safety and efficacy of the product candidate. We will also
be required to report certain adverse reactions and production problems, if any, to the FDA, and to comply with requirements concerning
advertising and promotion for our product candidates. Promotional communications with respect to prescription drugs are subject
to a variety of legal and regulatory restrictions and must be consistent with the information in the product candidate’s
approved label. As such, we may not promote our product candidates for indications or uses for which they do not have FDA approval.
The holder of an approved NDA must also submit new or supplemental applications and obtain FDA approval for certain changes to
the approved product candidate, product candidate labeling or manufacturing process. We could also be asked to conduct post-marketing
clinical studies to verify the safety and efficacy of our product candidates in general or in specific patient subsets. If original
marketing approval were obtained via the accelerated approval pathway, we could be required to conduct a successful post-marketing
clinical study to confirm clinical benefit for our product candidates. An unsuccessful post-marketing study or failure to complete
such a study could result in the withdrawal of marketing approval. Furthermore, any new legislation addressing drug safety issues
could result in delays in product candidate development or commercialization or increased costs to assure compliance. Foreign
regulatory authorities impose similar requirements.
If a regulatory agency
discovers previously unknown problems with a product candidate, such as adverse events of unanticipated severity or frequency,
or problems with the facility where the product candidate is manufactured, or disagrees with the promotion, marketing or labeling
of a product candidate, such regulatory agency may impose restrictions on that product candidate or us, including requiring withdrawal
of the product candidate from the market. If we fail to comply with applicable regulatory requirements, a regulatory agency or
enforcement authority may, among other things:
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issue warning letters;
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impose civil or criminal penalties;
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suspend or withdraw regulatory approval;
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suspend any of our ongoing clinical
studies;
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refuse to approve pending applications
or supplements to approved applications submitted by us;
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impose restrictions on our operations,
including closing our contract manufacturers’ facilities; or
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seize or detain product candidates,
or require a product candidate recall.
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Any government investigation
of alleged violations of law could require us to expend significant time and resources in response and could generate negative
publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to commercialize
and generate revenue from our product candidates. If regulatory sanctions are applied or if regulatory approval is withdrawn,
the value of our company and our operating results will be adversely affected.
We are subject to numerous complex
regulations and failure to comply with these regulations, or the cost of compliance with these regulations, may harm our business.
The research, testing,
development, manufacturing, quality control, approval, labeling, packaging, storage, recordkeeping, promotion, advertising, marketing,
distribution, possession and use of our product candidates, among other things, are subject to regulation by numerous governmental
authorities in the United States and elsewhere. The FDA regulates drugs under the FDC Act, and implementing regulations. Noncompliance
with any applicable regulatory requirements can result in refusal to approve product candidates for marketing, warning letters,
product candidate recalls or seizure of product candidates, total or partial suspension of production, prohibitions or limitations
on the commercial sale of product candidates or refusal to allow the entering into of federal and state supply contracts, fines,
civil penalties and/or criminal prosecution. Additionally, the FDA and comparable governmental authorities have the authority
to withdraw product candidate approvals that have been previously granted. Moreover, the regulatory requirements relating to our
product candidates may change from time to time and it is impossible to predict what the impact of any such changes may be.
We are developing
product candidates that are controlled substances as defined in the Controlled Substances Act of 1970, or CSA, which establishes,
among other things, certain registration, production quotas, security, recordkeeping, reporting, import, export and other requirements
administered by the Drug Enforcement Administration, or the DEA. As a result, any product candidate that is a controlled substance
(or includes a controlled substance) cannot be marketed before such substance is rescheduled by the DEA as a Schedule II, III,
IV or V substance. The active ingredient in our product candidates is dronabinol, which is a Schedule III controlled substance.
See Item 4.B. “Business—Government Regulation—Controlled Substances” for additional information.
The manufacture, shipment,
storage, sale and use, among other things, of controlled substances that are pharmaceutical product candidates are subject to
a high degree of regulation. The DEA also conducts periodic inspections of registered establishments that handle controlled substances.
Facilities that conduct research, manufacture, distribute, import or export controlled substances must be registered to perform
these activities and have the security, control and inventory mechanisms required by the DEA to prevent drug loss and diversion.
Failure to maintain compliance, particularly non-compliance resulting in loss or diversion, can result in regulatory action that
could have a material adverse effect on our business, results of operations, financial condition and prospects. The DEA may seek
civil penalties, refuse to renew necessary registrations, or initiate proceedings to suspend or revoke those registrations. In
certain circumstances, violations could lead to criminal proceedings.
Individual states
also have controlled substances laws. Though state controlled substances laws often mirror federal law, because the states are
separate jurisdictions, they may separately schedule our product candidates as well. While some states automatically schedule
a drug when the DEA does so, other states schedule drugs through rulemaking or a legislative action. State scheduling may delay
commercial sale of any product candidate for which we obtain federal regulatory approval and adverse scheduling could have a material
adverse effect on the commercial attractiveness of such product candidate. We or our partners must also obtain separate state
registrations, permits or licenses in order to be able to obtain, handle, and distribute controlled substances for clinical trials
or commercial sale, and failure to meet applicable regulatory requirements could lead to enforcement and sanctions from the states
in addition to those from the DEA or otherwise arising under federal law.
Risks Related to Our Reliance on Third
Parties
We rely on third parties to conduct
our preclinical and clinical studies and perform other tasks for us. If these third parties do not successfully carry out their
contractual duties, meet expected deadlines or comply with regulatory requirements, we may not be able to obtain regulatory approval
for or commercialize our product candidates and our business could be substantially harmed.
We have relied upon
and plan to continue to rely upon third-party CROs to monitor and manage data for our ongoing preclinical and clinical programs.
(Target Health, Inc., FGK Clinical Research GmbH, or FGK, and others). We rely on these parties for execution of our preclinical
and clinical studies, and control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that
each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards and our
reliance on the CROs does not relieve us of our regulatory responsibilities. We and our CROs and other vendors are required to
comply with current cGMP, GCP, QSR and Good Laboratory Practices, or GLP, which are regulations and guidelines enforced by the
FDA, the Competent Authorities of the Member States of the European Economic Area, and comparable foreign regulatory authorities
for all of our product candidates in clinical development. Regulatory authorities enforce these regulations through periodic inspections
of study sponsors, principal investigators, study sites and other contractors. If we or any of our CROs or vendors fail to comply
with applicable regulations, the clinical data generated in our clinical studies may be deemed unreliable and the FDA, EMA or
comparable foreign regulatory authorities may require us to perform additional clinical studies before approving our marketing
applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine
that any of our clinical studies comply with GCP regulations. In addition, our clinical studies must be conducted with product
candidates which are produced under cGMP regulations. Our failure to comply with these regulations may require us to repeat clinical
studies, which would delay the regulatory approval process.
If any of our relationships
with these third-party CROs terminate, we may not be able to enter into arrangements with alternative CROs or do so on commercially
reasonable terms. In addition, our CROs are not our employees, and except for remedies available to us under our agreements with
such CROs, we cannot control whether or not they devote sufficient time and resources to our on-going clinical, nonclinical and
preclinical programs. These risks may be heightened as a result of the evolving COVID-19 pandemic. If CROs do not successfully
carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or
accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements
or for other reasons, our clinical studies may be extended, delayed or terminated and we may not be able to obtain regulatory
approval for or successfully commercialize our product candidates. CROs may also generate higher costs than anticipated. As a
result, our results of operations and the commercial prospects for our product candidates would be harmed, our costs could increase
and our ability to generate revenue could be delayed.
Switching or adding
additional CROs involves additional cost and requires management time and focus. In addition, there is a natural transition period
when a new CRO commences work. As a result, delays may occur, which could materially impact our ability to meet our desired clinical
development timelines. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not
encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact
on our business, financial condition and prospects.
We will rely on third parties to
manufacture our API and formulations. Our business could be harmed if those third parties fail to provide us with sufficient quantities
of our needed supplies, or fail to do so at acceptable quality levels or prices.
We do not have the
infrastructure or capability internally to manufacture the API formulations, and we lack the resources and the capability to manufacture
any of our product candidates on a clinical or commercial scale. We plan to rely on third parties for such supplies. There are
a limited number of manufacturers who have the ability to produce our API and there may be a need to identify alternate manufacturers
to prevent a possible disruption of our clinical studies. Any significant delay or discontinuity in the supply of these components,
which could be caused as a result of COVID-19, could considerably delay completion of our clinical studies, product candidate
testing and potential regulatory approval of our product candidates, which could harm our business and results of operations.
We and our collaborators and contract
manufacturers are subject to significant regulation with respect to manufacturing our product candidates. The manufacturing facilities
on which we rely may not continue to meet regulatory requirements and have limited capacity.
All entities involved
in the preparation of therapeutics for clinical studies or commercial sale, including our existing contract manufacturers for
our product candidates, are subject to extensive regulation. Components of a finished therapeutic product approved for commercial
sale or a product candidate used in late-stage clinical studies must be manufactured in accordance with cGMP. These regulations
govern manufacturing processes and procedures (including record keeping) and the implementation and operation of quality systems
to control and assure the quality of investigational product candidates and products approved for sale. Poor control of production
processes can lead to the introduction of contaminants or to inadvertent changes in the properties or stability of our product
candidates that may not be detectable in final product testing. We, our collaborators or our contract manufacturers must supply
all necessary documentation in support of an NDA, or Marketing Authorization Application, or MAA, on a timely basis and must adhere
to GLP and cGMP QSR regulations enforced by the FDA and other regulatory agencies through their facilities inspection program.
Some of our contract manufacturers have never produced a commercially approved pharmaceutical product and therefore have not obtained
the requisite regulatory authority approvals to do so. The facilities and quality systems of some or all of our collaborators
and third-party contractors must pass a pre-approval inspection for compliance with the applicable regulations as a condition
of regulatory approval of our product candidates or any of our other potential product candidates. In addition, the regulatory
authorities may, at any time, audit or inspect a manufacturing facility involved with the preparation of our product candidates
or our other potential product candidates or the associated quality systems for compliance with the regulations applicable to
the activities being conducted. We do not control the manufacturing process of, and are completely dependent on, our contract
manufacturing partners for compliance with the regulatory requirements. If these facilities do not pass a pre-approval plant inspection,
regulatory approval of the product candidates may not be granted or may be substantially delayed until any violations are corrected
to the satisfaction of the regulatory authority, if ever.
The regulatory authorities
also may, at any time following approval of a product candidate for sale, if ever, audit the manufacturing facilities of our collaborators
and third-party contractors. If any such inspection or audit identifies a failure to comply with applicable regulations or if
a violation of our product candidate specifications or applicable regulations occurs independent of such an inspection or audit,
we or the relevant regulatory authority may require remedial measures that may be costly and/or time consuming for us or a third
party to implement, and that may include the temporary or permanent suspension of a clinical study or commercial sales, or the
temporary or permanent closure of a facility. Any such remedial measures imposed upon us or third parties with whom we contract
could materially harm our business.
If we, our collaborators,
or any of our third-party manufacturers fail to maintain regulatory compliance, the FDA or other applicable regulatory authority
can impose regulatory sanctions including, among other things, refusal to approve a pending application for a new drug product,
withdrawal of an approval or suspension of production. As a result, our business, financial condition and results of operations
may be materially harmed.
Additionally, if supply
from one approved manufacturer is interrupted, an alternative manufacturer would need to be qualified through an NDA or MAA amendment,
or equivalent foreign regulatory filing, which could result in further delay. The regulatory agencies may also require additional
studies if a new manufacturer is relied upon for commercial production. Switching manufacturers may involve substantial costs
and is likely to result in a delay in our desired clinical and commercial timelines.
These factors could
cause us to incur higher costs and could cause the delay or termination of clinical studies, regulatory submissions, required
approvals or commercialization of our product candidates. Furthermore, if our suppliers fail to meet contractual requirements
and we are unable to secure one or more replacement suppliers capable of production at a substantially equivalent cost, our clinical
studies may be delayed or we could lose potential revenue.
Our reliance on third parties requires
us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secrets
will be misappropriated or disclosed.
Because we rely on
third parties to develop and manufacture our product candidates, we must, at times, share trade secrets with them. We seek to
protect our proprietary technology in part by entering into confidentiality agreements and, if applicable, material transfer agreements,
collaborative research agreements, consulting agreements or other similar agreements with our collaborators, advisors, employees
and consultants prior to beginning research or disclosing proprietary information. These agreements typically limit the rights
of the third parties to use or disclose our confidential information, such as trade secrets. Despite the contractual provisions
employed when working with third parties, the need to share trade secrets and other confidential information increases the risk
that such trade secrets become known by our competitors, are inadvertently incorporated into the technology of others, or are
disclosed or used in violation of these agreements. Given that our proprietary position is based, in part, on our know-how and
trade secrets, a competitor’s discovery of our trade secrets or other unauthorized use or disclosure would impair our competitive
position and may have a material adverse effect on our business.
Risks Related to Commercialization of
Our Product Candidates
If the market opportunities for
our product candidates are smaller than we believe they are, our revenue may be adversely affected, and our business may suffer.
Our projections of
both the number of people who have our target diseases, as well as the subset of people with these diseases who have the potential
to benefit from treatment with our product candidates, are based on our beliefs and estimates. These estimates have been derived
from a variety of sources, including the scientific literature, surveys of clinics, patient foundations or market research and
may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of these diseases. The number
of patients may turn out to be lower than expected. The effort to identify patients with diseases we seek to treat is in early
stages, and we cannot accurately predict the number of patients for whom treatment might be possible. Additionally, the potentially
addressable patient population for each of our product candidates may be limited or may not be amenable to treatment with our
product candidates, and new patients may become increasingly difficult to identify or gain access to, which would adversely affect
our results of operations and our business.
We face intense competition and
rapid technological change and the possibility that our competitors may discover, develop or commercialize therapies that are
similar, more advanced or more effective than ours, which may adversely affect our financial condition and our ability to successfully
commercialize our product candidates.
The biotechnology
and pharmaceutical industries are highly competitive. There are many pharmaceutical companies, biotechnology companies, public
and private universities and research organizations actively engaged in the research and development of products that may be similar
to our product candidates.
The first THC-based
pharmaceutical, a pill sold under the commercial name of Marinol (scientific name: dronabinol), was developed by a company called
Unimed Pharmaceuticals, with funding provided by the National Cancer Institute. In 1985, Marinol received FDA approval as a treatment
for chemotherapy-related nausea and vomiting. Today, Marinol is marketed by AbbVie, Inc. Since the introduction of Marinol into
the market, other pharmaceuticals containing THC have also been developed. These include generic oral capsules of dronabinol,
such as those marketed by SVC Pharma LP and Akorn Inc., Meda AB’s Cesamet (nabilone), a synthetic derivative of THC, and
Sativex (nabiximols), a whole cannabis extract administered as an oral spray. Furthermore, to the best of our knowledge, multiple
companies that are working in the cannabis therapeutic area and are pursuing regulatory approval for their product candidates.
For example, GW Pharmaceuticals PLC, or GW, which markets Sativex, a botanical cannabinoid oral mucosal for the treatment
of spasticity due to multiple sclerosis received FDA approval in the United States in June 2018 for Epidiolex, a liquid formulation
of highly purified cannabidiol extract, as a treatment for Dravet’s Syndrome, Lennox Gastaut Syndrome, and various childhood
epilepsy syndromes. In addition, GW is developing a cannabidivarin, or CBDV, based therapy for ASD and therapy for neonatal hypoxic-ischemic
encephalopathy and schizophrenia. Zynerba Pharmaceuticals, Inc., or Zynerba, is developing a transdermal formulation of cannabidiol
for Fragile X and certain refractory epilepsies and ASD. Skye Bioscience, Inc., or Skye is focused on developing proprietary,
synthetic cannabinoid-derived molecules to treat glaucoma and other diseases with significant unmet need. Corbus
Pharmaceuticals Holdings is seeking FDA approval for their synthetic cannabinoid for systemic sclerosis, cystic fibrosis, dermatomyositis
and systemic lupus erythematosus and non-alcoholic steatohepatitis, or NASH. RespireRx Pharmaceutical Inc., or RespireRx, developing
Dronabinol for OSA treatment.
More established companies
may have a competitive advantage over us due to their greater size, cash flows and institutional experience. Compared to us, many
of our competitors may have significantly greater financial, technical and human resources. As a result of these factors, our
competitors may have an advantage in marketing their approved products and may obtain regulatory approval of their product candidates
before we are able to, which may limit our ability to develop or commercialize our product candidates. Our competitors may also
develop drugs that are safer, more effective, more widely used and less expensive than ours, and may also be more successful than
us in manufacturing and marketing their products. These advantages could materially impact our ability to develop and commercialize
our product candidates successfully.
Our product candidates
may also compete with medical and recreational marijuana, in markets where the recreational and/or medical use of marijuana is
legal. There is support in the United States for further legalization of marijuana. In markets where recreational and/or
medical marijuana is not legal, our product candidates may compete with marijuana purchased in the illegal drug market. We cannot
assess the extent to which patients may utilize marijuana obtained illegally for the treatment of the indications for which we
are developing our product candidates.
Even if we successfully
develop our product candidates, and obtain marketing approval for them, other treatments or therapeutics may be preferred and
we may not be successful in commercializing our product candidates or in bringing them to market.
Many of our competitors
have substantially greater financial, technical and other resources, such as larger research and development staff and experienced
marketing and manufacturing organizations. Additional mergers and acquisitions in the biotechnology and pharmaceutical industries
may result in even more resources being concentrated in our competitors. As a result, these companies may obtain regulatory approval
more rapidly than we are able to and may be more effective in selling and marketing their products as well. Smaller or early-stage
companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established
companies. Competition may increase further as a result of advances in the commercial applicability of technologies and greater
availability of capital for investment in these industries. Our competitors may succeed in developing, acquiring or licensing
on an exclusive basis, products that are more effective or less costly than any product candidate that we may develop, or achieve
earlier patent protection, regulatory approval, product commercialization and market penetration than we do. Additionally, technologies
developed by our competitors may render our potential product candidates uneconomical or obsolete, and we may not be successful
in marketing our product candidates against competitors.
We currently have no marketing and
sales organization. If we are unable to establish sales and marketing capabilities or enter into agreements with third parties
to market and sell our product candidates, we may be unable to generate any revenue.
Although our employees
may have sold other similar products in the past while employed at other companies, we as a company have no experience selling
and marketing our product candidates and we currently have no marketing or sales organization. To successfully commercialize any
products that may result from our development programs, we will need to develop these capabilities, either on our own or with
others. If our product candidates receive regulatory approval, we intend to establish a sales and marketing organization with
technical expertise and supporting distribution capabilities to commercialize our product candidates in major markets, which will
be expensive, difficult and time consuming. Any failure or delay in the development of our internal sales, marketing and distribution
capabilities would adversely impact the commercialization of our products.
Further, given our
lack of prior experience in marketing and selling pharmaceutical products, our initial estimate of the size of the required sales
force may be materially more or less than the size of the sales force actually required to effectively commercialize our product
candidates. As such, we may be required to hire substantially more sales representatives to adequately support the commercialization
of our product candidates or we may incur excess costs as a result of hiring more sales representatives than necessary. With respect
to certain geographical markets, we may enter into collaborations with other entities to utilize their local marketing and distribution
capabilities, but we may be unable to enter into such agreements on favorable terms, if at all. If our future collaborators do
not commit sufficient resources to commercialize our future products, if any, and we are unable to develop the necessary marketing
capabilities on our own, we will be unable to generate sufficient product revenue to sustain our business. We may be competing
with companies that currently have extensive and well-funded marketing and sales operations. Without an internal team or the support
of a third party to perform marketing and sales functions, we may be unable to compete successfully against these more established
companies.
The commercial success of any current
or future product candidate will depend upon the degree of market acceptance by physicians, patients, third-party payors and others
in the medical community.
Even with the requisite
approvals from the FDA and comparable foreign regulatory authorities, the commercial success of our product candidates will depend
in part on the medical community, patients and third-party payors accepting our product candidates as medically useful, cost-effective
and safe. Any product that we bring to the market may not gain market acceptance by physicians, patients, third-party payors and
others in the medical community. The degree of market acceptance of any of our product candidates, if approved for commercial
sale, will depend on a number of factors, including:
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the safety and efficacy of the product
as demonstrated in clinical studies and potential advantages over competing treatments;
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the prevalence and severity of any
side effects, including any limitations or warnings contained in a product’s approved labeling;
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the clinical indications for which
approval is granted;
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relative convenience and ease of administration;
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the cost of treatment, particularly
in relation to competing treatments;
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the willingness of the target patient
population to try new therapies and of physicians to prescribe these therapies;
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the strength of marketing and distribution
support and timing of market introduction of competitive products;
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publicity concerning our products or
competing products and treatments; and
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sufficient third-party insurance coverage
and reimbursement.
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Even if a potential
product displays a favorable efficacy and safety profile in preclinical and clinical studies, market acceptance of the product
will not be fully known until after it is launched. Our efforts to educate the medical community and third-party payors on the
benefits of the product candidates may require significant resources and may never be successful. If our product candidates are
approved but fail to achieve an adequate level of acceptance by physicians, patients, third-party payors and others in the medical
community, we will not be able to generate sufficient revenue to become or remain profitable.
The insurance coverage and reimbursement
status of newly-approved products is uncertain. Failure to obtain or maintain adequate coverage and reimbursement for new or current
products could limit our ability to market those products and decrease our ability to generate revenue.
The pricing, coverage
and reimbursement of our product candidates, if approved, must be adequate to support our commercial infrastructure. Our per-patient
prices must be sufficient to recover our development and manufacturing costs and potentially achieve profitability. Accordingly,
the availability and adequacy of coverage and reimbursement by governmental and private payors are essential for most patients
to be able to afford expensive treatments such as ours, assuming approval. Sales of our product candidates will depend substantially,
both domestically and abroad, on the extent to which the costs of our product candidates will be paid for by health maintenance,
managed care, pharmacy benefit and similar healthcare management organizations, or reimbursed by government authorities, private
health insurers and other third-party payors. If coverage and reimbursement are not available, or are available only to limited
levels, we may not be able to successfully commercialize our product candidates. Even if coverage is provided, the approved reimbursement
amount may not be high enough to allow us to establish or maintain pricing sufficient to realize a return on our investment.
There is significant
uncertainty related to the insurance coverage and reimbursement of newly approved products. In the United States, the principal
decisions about coverage and reimbursement for new drugs are typically made by the Centers for Medicare & Medicaid Services
(formerly the Health Care Financing Administration), or CMS, an agency within the U.S. Department of Health and Human Services,
as CMS decides whether and to what extent a new drug will be covered and reimbursed under Medicare. Private payors tend to follow
the coverage reimbursement policies established by CMS to a substantial degree. It is difficult to predict what CMS will decide
with respect to reimbursement for products such as ours.
Outside the United
States, international operations are generally subject to extensive governmental price controls and other market regulations,
and we believe the increasing emphasis on cost-containment initiatives in Europe, Canada and other countries has and will continue
to put pressure on the pricing and usage of our product candidates. In many countries, the prices of medical products are subject
to varying price control mechanisms as part of national health systems. In general, the prices of medicines under such systems
are substantially lower than in the United States. Other countries allow companies to fix their own prices for medicinal products,
but monitor and control company profits. Additional foreign price controls or other changes in pricing regulation could restrict
the amount that we are able to charge for our product candidates. Accordingly, in markets outside the United States, the reimbursement
for our products may be reduced compared with the United States and may be insufficient to generate commercially reasonable revenue
and profits.
Moreover, increasing
efforts by governmental and third-party payors in the United States and abroad to cap or reduce healthcare costs may cause such
organizations to limit both coverage and the level of reimbursement for new products approved and, as a result, they may not cover
or provide adequate payment for our product candidates. We expect to experience pricing pressures in connection with the sale
of any of our product candidates due to the trend toward managed healthcare, the increasing influence of health maintenance organizations
and additional legislative changes. The downward pressure on healthcare costs in general, particularly prescription drugs and
surgical procedures and other treatments, has become very intense. As a result, increasingly high barriers are being erected to
the entry of new products.
Healthcare legislative reform measures may have a material
adverse effect on our business and results of operations.
In
the United States, there have been and continue to be a number of legislative initiatives to contain healthcare costs. For example,
in 2010, the Patient Protection and Affordable Care Act, or the ACA, was enacted, which substantially changed the way healthcare
is financed by both governmental and private insurers, and significantly impacted the U.S. pharmaceutical industry. The following
are among the provisions established by the ACA of greatest importance to the pharmaceutical and biotechnology industry:
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an annual, nondeductible fee on any
entity that manufactures or imports certain specified branded prescription drugs and biologic agents apportioned among these
entities according to their market share in some government healthcare programs;
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an increase in the statutory minimum
rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13% of the average manufacturer price
for most branded and generic drugs, respectively, and capped the total rebate amount for innovator drugs at 100% of the Average
Manufacturer Price, or AMP;
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extension of manufacturers’ Medicaid
rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;
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expansion of eligibility criteria for
Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding
new mandatory eligibility categories for individuals with income at or below 133% of the federal poverty level, thereby potentially
increasing manufacturers’ Medicaid rebate liability;
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a Medicare Part D coverage gap discount
program, in which manufacturers must agree to offer 50% (and 70% as of January 1, 2019) point-of-sale discounts off negotiated
prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s
outpatient drugs to be covered under Medicare Part D;
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expansion of the entities eligible for discounts under federal
340B;
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a Patient-Centered Outcomes Research Institute to oversee, identify
priorities in, and conduct comparative clinical effectiveness research, along with funding for such research;
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establishment
of a Center for Medicare Innovation at CMS to test innovative payment and service delivery models to lower Medicare and
Medicaid spending. This center is currently focused on the following priorities:
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testing new payment and service delivery models;
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evaluating results and advancing best practices; and
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engaging a broad range of stakeholders to develop additional
models for testing.
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implementation of the federal physician
payment transparency requirements, or the Sunshine Act. The Substance Use-Disorder Prevention that Promotes Opioid Recovery
and Treatment for Patients and Communities Act, or the SUPPORT Act, signed into law by President Trump on October 24, 2018,
expanded Sunshine Act reporting to include data for physician assistants, nurse practitioners, clinical nurse specialists,
certified registered nurse anesthetists and certified nurse midwifes. The amendment applies to reports submitted to CMS on
or after January 1, 2022.
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Some
of the provisions of the ACA have yet to be fully implemented, and there have been legal and political challenges to certain aspects
of the ACA. The ACA may be modified, amended or repealed at any time and may or may not be replaced with a different law or health
care payment system. The ACA is expected to continue to have a significant impact on the health care industry. With regard to
pharmaceutical product candidates, among other things, the ACA may expand and increase industry rebates for drugs covered under
Medicaid programs and make changes to the coverage requirements under the Medicare D program. Since the enactment of the
ACA, numerous regulations have been issued providing further guidance on its requirements. The ACA continues to be implemented
through regulation and government activity but is subject to possible amendment, additional implementing regulations and interpretive
guidelines. Several states have decided not to expand their Medicaid programs and are seeking alternative reimbursement models
to provide care to the uninsured. The manner in which these issues are resolved could materially affect the extent to which and
the amount at which pharmaceuticals are reimbursed by government programs such as Medicare, Medicaid and Tricare.
In 2016, CMS issued
a final rule regarding the Medicaid Drug Rebate Program that, among other things, revised the manner in which the AMP is calculated
by manufacturers participating in the program and implemented certain amendments to the Medicaid rebate statute created under
the ACA. In addition, on December 21, 2020, CMS issued a final rule that made changes to the Medicaid Drug Rebate Program regulations
in several areas, including some changes to the treatment of value-based purchasing arrangements and price reporting for patient
benefit programs sponsored by pharmaceutical manufacturers.
Two bills affecting
the implementation of certain taxes under the ACA have been signed into law. The Tax Cuts and Jobs Act of 2017, or the TCJA, includes
a provision that repealed, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain
individuals who fail to maintain qualifying health coverage for all or part of a year, that is commonly referred to as the “individual
mandate.’’ Additionally, on January 22, 2018, then President Trump signed a continuing resolution on appropriations
for fiscal year 2018 that delayed the implementation of certain ACA-mandated fees. Further, the Bipartisan Budget Act of 2018,
among other things, amended the ACA, effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly
referred to as the “donut hole.” In July 2018, CMS published a final rule permitting further collections and payments
to and from certain ACA qualified health plans and health insurance issuers under the ACA risk adjustment program in response to
the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment. On December 14,
2018, a U.S. District Court Judge in the Northern District of Texas ruled that the individual mandate is an inseverable feature
of the ACA, and therefore, because it was repealed as part of the TCJA, the remaining provisions of the ACA are invalid as well.
While the Texas U.S. District Court Judge, as well as the Trump administration and CMS have stated that the ruling will have no
immediate effect, it is unclear how this decision, subsequent appeals, and other efforts to modify, amend or repeal and replace
the ACA will impact the ACA and our business, although the Biden administration has indicated that it will support and expand upon
the ACA. There can be no assurances that the implementation of the ACA or any subsequent modifications or legal challenges will
not adversely impact our operations and financial condition.
In addition, other
legislative changes have been proposed and adopted in the United States since the ACA was enacted. In 2011, the Budget Control
Act of 2011 among other things, created measures for spending reductions by Congress. This includes aggregate reductions of Medicare
payments to providers of 2% per fiscal year. These reductions, known as Medicare sequestration adjustments, went into effect in
2013. However, under the Coronavirus Aid, Relief, and Economic Securities Act of 2020 and related legislation, Medicare sequestration
adjustments from May 1, 2020 through March 31, 2021 have been suspended, though sequestration has been extended through 2030. Additionally,
there has been heightened governmental scrutiny recently over the manner in which manufacturers set prices for their marketed products.
For example, there have been several recent Congressional inquiries and proposed and enacted federal and state legislation designed
to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient
programs, and reform government program reimbursement methodologies for drug products. At the federal level, including the former
Administration’s budget for fiscal year 2020, there were further drug price control measures to permit Medicare Part D plans
to negotiate the price of certain drugs under Medicare Part D, to continue to allow some states to negotiate drug prices under
Medicaid through supplemental rebate negotiations and other mechanisms, and legislation was introduced to eliminate cost sharing
for generic drugs for Part D low-income patients.
In addition, in November
2020, the U.S. Department of Health and Human Services, or DHHS, finalized a regulation aimed at lowering prescription drug prices
and out-of-pocket spending for prescription drugs by excluding rebates on prescription drugs paid by manufacturers to or purchased
by Medicare Part D plan sponsors or pharmacy benefit managers, or PBMs, acting under contract with Medicare Part D plan sponsors
from the existing discount safe harbor under the federal Anti-Kickback Statute, or the AKS Statute. The regulation reflects the
first change to the AKS Statute discount safe harbor since the Medicare Part D program was established. In addition to the rebate
exclusions, two new safe harbors were added. One of these new safe harbors protects point-of-sale reductions in price from a manufacturer
to a plan sponsor under Medicare Part D or a Medicaid Managed Care Organization, or MCO, for a prescription drug payable, in whole
or in part, by a plan sponsor under Medicare Part D or a MCO, provided certain conditions are met. The other protects certain
fixed-fee services arrangements between manufacturers and PBMs.
Congress and the executive
branch have each indicated that it will continue to seek new legislative or administrative measures to control drug costs. At
the state level, legislatures have been increasingly passing legislation and implementing regulations designed to control pharmaceutical
and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product
access and marketing cost disclosure and transparency measures, drug price increases, and, in some cases, designed to encourage
importation from other countries and bulk purchasing. On the federal level, the Trump administration issued a final rule in 2020
for the safe importation of drugs from Canada and other countries. We also expect the Biden administration to support drug importation.
During the 2020 presidential campaign, President Biden also supported a proposal to limit drug price increases to no more than
the inflation rate.
We expect that additional
state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal
and state governments will pay for healthcare products and services, which could result in reduced demand for our product candidates
or additional pricing pressures.
The COVID-19 pandemic may adversely affect any potential
future revenues, results of operations and financial condition.
COVID-19 and the various
precautionary measures taken by many governmental authorities around the world to limit its spread has had a severe effect on
global markets and the global economy. The extent to which the coronavirus impacts our business and operations will depend on
future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning
the severity of COVID-19 and the nature and extent of governmental actions taken to contain or treat its impact and the availability,
costs, effectiveness and public acceptance of any FDA-approved vaccines, among others. COVID-19 and official actions taken in
response to it have caused a major slowdown in overall economic activity in the U.S. and elsewhere, curtailed consumer spending
and made it more challenging to adequately staff and manage our business and operations. At this time, it is still difficult to
assess whether the COVID-19 pandemic and official responses could cause a material adverse effect on our results of operations
and financial condition. The COVID-19 pandemic and official responses could further divert the attention and efforts of the medical
community to coping with COVID-19 and disrupt the market place in which we operate. Any outbreak of COVID-19 among our executives
and key employees or their families and loved ones could disrupt our management and operations and adversely affect our results
of operations and financial condition.
Risks Related to Our Intellectual Property
If we are unable to obtain and maintain
effective patent rights for our product candidates, we may not be able to compete effectively in our markets. If we are unable
to protect the confidentiality of our trade secrets or know-how, such proprietary information may be used by others to compete
against us.
Historically, we have
relied on trade secret protection and confidentiality agreements to protect the intellectual property related to our technologies
and product candidates. Since 2015, we have also sought patent protection for certain of our product candidates. Our success depends
in large part on our ability to obtain and maintain patent and other intellectual property protection in the United States and
in other countries with respect to our proprietary technology and new product candidates.
We have sought to
protect our proprietary position by filing patent applications in the United States and in other countries, with respect to our
novel technologies and product candidates, which are important to our business. Patent prosecution is expensive and time consuming,
and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely
manner. It is also possible that we will fail to identify patentable aspects of our research and development output before it
is too late to obtain patent protection.
Not including patents
and applications which we are in the process of being assigned we have a portfolio of two provisional patent applications with
the U.S. Patent and Trademark Office, or USPTO, pending patent applications in six families, of which four families are currently
international Patent Cooperation Treaty of the World International Property Organization, or PCT, applications or PCT applications
that have entered the national phase in various national entities. We cannot offer any assurances about which, if any, patent
applications will issue, the breadth of any such patent or whether any issued patents will be found invalid and unenforceable
or will be threatened by third parties. Any successful opposition to our patents after issuance could deprive us of rights necessary
for the successful commercialization of any new product candidates that we may develop.
We have exclusively
licensed: (i) one U.S. patent from Dekel Pharmaceuticals Ltd., or Dekel, and (ii) one U.S. patent family from Yissum Research
Development Company of the Hebrew University of Jerusalem Ltd., or Yissum. We cannot assure you that we will ever enter into definitive
license agreements with any third party licensor. See Item 4.B. “Business Overview—Intellectual Property—In-Licensed
Patents and Patent Applications.” To the extent the licensed or future licensed patents are found to be invalid or unenforceable,
we may be limited in our ability to compete and market our product candidates. Moreover, the terms of our licenses affect our
ability to control the value of any of our product candidates. If we or any of the parties that control the enforcement of licensed
patents elect not to enforce any or all of the licensed patents it could significantly undercut the value of any of our product
candidates, which would materially adversely affect our future revenue, financial condition and results of operations. Moreover,
fluctuating currency rates may create inconsistencies in the royalty payments we are obligated to make under our licenses.
Also, there is no
guarantee that the patent registration applications that were submitted by us with regard to our technologies will result in patent
registration. In the event of failure to complete patent registration, our developments will not be proprietary, which might allow
other entities to manufacture our product candidates and compete with them.
Further, there is
no assurance that all potentially relevant prior art relating to our patent applications has been found, which can invalidate
a patent or prevent a patent from issuing from a pending patent application. Even if patents do successfully issue, and even if
such patents cover our product candidates, third parties may challenge their validity, enforceability, or scope, which may result
in such patents being narrowed, found unenforceable or invalidated. Furthermore, even if they are unchallenged, our patent applications
and any future patents may not adequately protect our intellectual property, provide exclusivity for our new product candidates,
or prevent others from designing around our claims. Any of these outcomes could impair our ability to prevent competition from
third parties, which may have an adverse impact on our business.
If we cannot obtain
and maintain effective patent rights for our product candidates, we may not be able to compete effectively, and our business and
results of operations would be harmed.
We may not be able to identify infringements
of our patents and accordingly the enforcement of our intellectual property rights may be difficult.
The drug substance
in some of our product candidates is repurposed, which means that it is available in other pharmaceutical products for the purpose
of treating indications that are different from the indications for our product candidates. It is possible that if we receive
regulatory approval to market and sell our drug candidates, some patients that receive a prescription could be sold the same drug
substance but not our product candidate. It would be difficult, if not impossible for us to identify such instances that may constitute
an infringement of our patents. In addition, because the drug substance of some of our product candidates is repurposed, such
substance may not be eligible for patent protection or data exclusivity.
If we are unable to maintain effective
proprietary rights for our product candidates, we may not be able to compete effectively in our markets.
In addition to the
protection afforded by any patents currently owned and that may be granted, historically, we have relied on trade secret protection
and confidentiality agreements to protect proprietary know-how that is not patentable or that we elect not to patent, processes
that are not easily known, knowable or easily ascertainable, and for which patent infringement is difficult to monitor and enforce
and any other elements of our product candidate discovery and development processes that involve proprietary know-how, information
or technology that is not covered by patents. However, trade secrets can be difficult to protect. We seek to protect our proprietary
technology and processes, in part, by entering into confidentiality agreements with our employees, consultants, scientific advisors,
and contractors. We also seek to preserve the integrity and confidentiality of our data, trade secrets and intellectual property
by maintaining physical security of our premises and physical and electronic security of our information technology systems. Agreements
or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets and
intellectual property may otherwise become known or be independently discovered by competitors.
We cannot provide
any assurances that our trade secrets and other confidential proprietary information will not be disclosed in violation of our
confidentiality agreements or that competitors will not otherwise gain access to our trade secrets or independently develop substantially
equivalent information and techniques. Also, misappropriation or unauthorized and unavoidable disclosure of our trade secrets
and intellectual property could impair our competitive position and may have a material adverse effect on our business. Additionally,
if the steps taken to maintain our trade secrets and intellectual property are deemed inadequate, we may have insufficient recourse
against third parties for misappropriating any trade secret.
Intellectual property rights of
third parties could adversely affect our ability to commercialize our product candidates, and we might be required to litigate
or obtain licenses from third parties in order to develop or market our product candidates. Such litigation or licenses could
be costly or not available on commercially reasonable terms.
It is inherently difficult
to conclusively assess our freedom to operate without infringing on third party rights. Our competitive position may be adversely
affected if existing patents or patents resulting from patent applications issued to third parties or other third party intellectual
property rights are held to cover our product candidates or elements thereof, or our manufacturing or uses relevant to our development
plans. In such cases, we may not be in a position to develop or commercialize product candidates or our product candidates unless
we successfully pursue litigation to nullify or invalidate the third party intellectual property right concerned, or enter into
a license agreement with the intellectual property right holder, if available on commercially reasonable terms. There may also
be pending patent applications that if they result in issued patents, could be alleged to be infringed by our new product candidates.
If such an infringement claim should be brought and be successful, we may be required to pay substantial damages, be forced to
abandon our new product candidates or seek a license from any patent holders. No assurances can be given that a license will be
available on commercially reasonable terms, if at all.
It is also possible
that we have failed to identify relevant third party patents or applications. For example, certain U.S. patent applications that
will not be filed outside the United States remain confidential until patents issue. Patent applications in the United States
and elsewhere are published approximately 18 months after the earliest filing for which priority is claimed, with such earliest
filing date being commonly referred to as the priority date. Therefore, patent applications covering our new product candidates
or platform technology could have been filed by others without our knowledge. Additionally, pending patent applications which
have been published can, subject to certain limitations, be later amended in a manner that could cover our platform technologies,
our new product candidates or the use of our new product candidates. Third party intellectual property right holders may also
actively bring infringement claims against us. We cannot guarantee that we will be able to successfully settle or otherwise resolve
such infringement claims. If we are unable to successfully settle future claims on terms acceptable to us, we may be required
to engage in or continue costly, unpredictable and time-consuming litigation and may be prevented from or experience substantial
delays in pursuing the development of and/or marketing our new product candidates. If we fail in any such dispute, in addition
to being forced to pay damages, we may be temporarily or permanently prohibited from commercializing our new product candidates
that are held to be infringing. We might, if possible, also be forced to redesign our new product candidates so that we no longer
infringe the third party intellectual property rights. Any of these events, even if we were ultimately to prevail, could require
us to divert substantial financial and management resources that we would otherwise be able to devote to our business.
Third-party claims of intellectual
property infringement may prevent or delay our development and commercialization efforts.
Our commercial success
depends in part on our avoiding infringement of the patents and proprietary rights of third parties. Numerous U.S. and foreign
issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing
new product candidates. As our industries expand and more patents are issued, the risk increases that our product candidates may
be subject to claims of infringement of the patent rights of third parties.
Third parties may
assert that we are employing their proprietary technology without authorization. There may be third-party patents or patent applications
with claims to materials, designs or methods of manufacture related to the use or manufacture of our product candidates. There
may be currently pending patent applications that may later result in issued patents that our product candidates may infringe.
In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents.
If any third-party
patents were held by a court of competent jurisdiction to cover aspects of our formulations, processes for designs, or methods
of use, the holders of any such patents may be able to block our ability to develop and commercialize the applicable product candidate
unless we obtain a license or until such patent expires or is finally determined to be invalid or unenforceable. In either case,
such a license may not be available on commercially reasonable terms or at all.
Parties making claims
against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize
one or more of our product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation
expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement
against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement,
pay royalties, redesign our infringing product candidates or obtain one or more licenses from third parties, which may be impossible
or require substantial time and monetary expenditure.
Patent policy and rule changes could
increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of
any issued patents.
Changes in either
the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of any patents
that may issue from our patent applications, or narrow the scope of our patent protection. The laws of foreign countries may not
protect our rights to the same extent as the laws of the United States. Publications of discoveries in the scientific literature
often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not
published until 18 months after filing, or in some cases not at all. We therefore cannot be certain that we were the first to
file the invention claimed in our owned and licensed patent or pending applications, or that we or our licensor were the first
to file for patent protection of such inventions. Assuming all other requirements for patentability are met, in the United States
prior to 2013, the first to make the claimed invention without undue delay in filing, is entitled to the patent, while outside
the United States, the first to file a patent application is entitled to the patent. After 2013, the United States moved to a
first to file system. Changes in patent litigation could increase the uncertainties and costs surrounding the prosecution of our
patent applications and the enforcement or defense of any issued patents, all of which could have a material adverse effect on
our business and financial condition.
We may be involved in lawsuits to
protect or enforce our intellectual property, which could be expensive, time consuming, and unsuccessful.
Competitors may infringe
our intellectual property. If we were to initiate legal proceedings against a third party to enforce a patent covering one of
our new product candidates, the defendant could counterclaim that the patent covering our product candidate is invalid and/or
unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability
are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including
lack of novelty, obviousness, or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone
connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during
prosecution. The validity of U.S. patents may also be challenged in post-grant proceedings before the USPTO. The outcome following
legal assertions of invalidity and unenforceability is unpredictable.
Derivation proceedings
initiated by third parties or brought by us may be necessary to determine the priority of inventions and/or their scope with respect
to our patent or patent applications or those of our licensors. An unfavorable outcome could require us to cease using the related
technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party
does not offer us a license on commercially reasonable terms. Our defense of litigation or interference proceedings may fail and,
even if successful, may result in substantial costs and distract our management and other employees. In addition, the uncertainties
associated with litigation could have a material adverse effect on our ability to raise the funds necessary to continue our clinical
trials, continue our research programs, license necessary technology from third parties, or enter into development partnerships
that would help us bring our new product candidates to market.
Furthermore, because
of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some
of our confidential information could be compromised by disclosure during this type of litigation. There could also be public
announcements of the results of hearings, motions, or other interim proceedings or developments. If securities analysts or investors
perceive these results to be negative, it could have a material adverse effect on the price of our Ordinary Shares.
We may be subject to claims challenging
the inventorship of our intellectual property.
We may be subject
to claims that former employees, collaborators or other third parties have an interest in, or right to compensation, with respect
to our current patent and patent applications, future patents or other intellectual property as an inventor or co-inventor. For
example, we may have inventorship disputes arise from conflicting obligations of consultants or others who are involved in developing
our product candidates. Litigation may be necessary to defend against these and other claims challenging inventorship or claiming
the right to compensation. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable
intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome
could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could
result in substantial costs and be a distraction to management and other employees.
We may not be able to protect our
intellectual property rights throughout the world.
Filing, prosecuting,
and defending patents on product candidates, as well as monitoring their infringement in all countries throughout the world would
be prohibitively expensive, and our intellectual property rights in some countries can be less extensive than those in the United
States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal
and state laws in the United States.
Competitors may use
our technologies in jurisdictions where we have not obtained patent protection to develop their own products and may also export
otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the
United States. These products may compete with our product candidates. Future patents or other intellectual property rights may
not be effective or sufficient to prevent them from competing.
Many companies have
encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal
systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets,
and other intellectual property protection, which could make it difficult for us to stop the marketing of competing products in
violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions, whether or not
successful, could result in substantial costs and divert our efforts and attention from other aspects of our business, could put
our future patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and
could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or
other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to monitor and enforce our intellectual
property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property
that we develop or license.
Our former chairman and chief executive
officer, Dr. Ascher Shmulewitz, may threaten to terminate an agreement with respect to intellectual property rights that we license
from an entity controlled by Dr. Shmulewitz.
In May 2015, we entered
into a license agreement, which, following an amendment thereto in August 2015, became effective, with Dekel, an Israeli private
company controlled by Dr. Ascher Shmulewitz, our former chairman and chief executive officer, under which we were granted an irrevocable,
worldwide, exclusive, royalty-bearing license to certain of Dekel’s technology. See Item 7.B. “Related Party Transactions—Dekel
License Agreement.”
We do not have any
agreement with Dr. Shmulewitz to present us with business opportunities he may wish to pursue, subject only to his duties under
Israeli law, and we do not have proprietary rights to Dr. Shmulewitz’ inventions that are not included under the consulting
and services agreement we previously had entered into with him (pertaining solely to the field of immunomodulators including cannabinoids
to treat chronic pain and inflammation).
On
September 17, 2017, we entered into an amendment to the license agreement, which, if certain conditions precedent were met by
June 30, 2018, would provide for an amendment to the compensation terms of such license agreement. We did not meet the conditions
precedent required under such amendment to the license agreement with Dekel by June 30, 2018, and as a result thereof, the amendment
never went into effect. On July 14, 2019, we entered into an amendment to the license agreement, which encompasses our and Dekel’s
original intention to exclude certain consumer packaged goods (including, inter alia, food, beverage, cosmetics, pet products
and hemp based products, which are sources of nutrients or other substances which may have a nutritional effect) from the scope
of the licensed products and the field of our activity, as described in the license agreement, which intention was not reflected
in the license agreement, and therefore, desired and agreed to amend the license agreement to reflect the foregoing clarification,
as well as certain additional less material matters as discussed in the amendment. The amendment also prescribes a specific development
plan under the license agreement requiring us to invest in the licensed technology (as defined under the license agreement) formulation
development and maintain a total annual investment cap of $350,000 and for a non-compete and non-solicitation obligation by Dekel
and Dr. Shmulewitz, towards our field of activity.
In August 2020, Dr.
Shmulewitz was replaced by Mr. Amity Weiss, who was appointed as our Chief Executive Officer. In February 2021, we received a
request from Dr. Shmulewitz to provide him with information in regards to our compliance with Dekel license agreement. While we
have no reason to believe that we are not complying with material terms of Dekel license agreement, we cannot provide assurances
that Dr. Shmulewitz will not threaten to terminate the agreement. If a dispute arises between us and Dekel under the license agreement,
we cannot assure you that our business will not impeded or materially harmed by such dispute.
Risks Related to Our Business Operations
From time to time, we may sign letters
of intent and/or enter into term sheets or other similar arrangements that are subject to negotiation of definitive agreements.
There can be no assurance that we will enter into any such definitive agreements. Similarly, we may strategically invest in transactions
from time to time, and there can be no assurance that the value of our investment will increase or that it will not fluctuate.
From time to time,
we may sign letters of intent and/or enter into term sheets or other similar arrangements that are subject to negotiation of definitive
agreements. We may never enter into definitive agreements after signing a letter of intent and/or entering into a term sheet or
other similar arrangement for a multitude of reasons, including, but not limited to, regulatory, operational, financial and other
considerations. There may also be forces outside of our control that have an effect on our ability or decision as to whether we
enter into such definitive agreements. As a result, there can be no assurance that upon signing a letter of intent and/or entering
into a term sheet or similar arrangement, that we will enter into definitive documents. This could have a material adverse effect
on our reputation and could cause us to incur expenses if any legal claims arise as a result thereof. For example, in November
2019, we entered into a memorandum of understanding with Heavenly Rx, Ltd., or Heavenly Rx, pursuant to which we and Heavenly
Rx agreed to pursue a business combination. In accordance with the memorandum of understanding between the parties, any transaction
between the parties remained subject to entry into definitive agreements, and to shareholder and regulatory approvals. We never
entered into definitive agreements and do not expect to do so.
Similarly, we may
strategically invest into various pharmaceutical companies. However, we can offer no assurance that the value of our investment
will increase or that it will not fluctuate because the value of our investments may be adversely affected by a number of factors,
such as negative changes in a company’s results of operations, cash flows, financial position and accounting impairment.
We will need to expand our organization
and we may experience difficulties in recruiting needed additional employees and consultants, which could disrupt our operations.
As our development
and commercialization plans and strategies develop and because we are so leanly staffed, we will need additional managerial, operational,
sales, marketing, financial, legal and other resources. The competition for qualified personnel in the pharmaceutical field is
intense. Due to this intense competition, we may be unable to attract and retain qualified personnel necessary for the development
of our business or to recruit suitable replacement personnel.
Our management may
need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount
of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations, which may
result in weaknesses in our infrastructure, operational mistakes, loss of business opportunities, loss of employees and reduced
productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial
resources from other projects, such as the development of additional product candidates. If our management is unable to effectively
manage our growth, our expenses may increase more than expected, our ability to generate and/or grow revenue could be reduced
and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize product
candidates and compete effectively will depend, in part, on our ability to effectively manage any future growth.
We may not be successful in our
efforts to identify, license or discover additional product candidates.
Although a substantial
amount of our effort will focus on the continued clinical testing, potential approval and commercialization of our existing product
candidates, the success of our business also depends in part upon our ability to identify, license or discover additional product
candidates. Our research programs or licensing efforts may fail to yield additional product candidates for clinical development
for a number of reasons, including but not limited to the following:
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our research or business development
methodology or search criteria and process may be unsuccessful in identifying potential product candidates;
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we may not be able or willing to assemble
sufficient resources to acquire or discover additional product candidates;
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our product candidates may not succeed
in preclinical or clinical testing;
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our potential product candidates may
be shown to have harmful side effects or may have other characteristics that may make the products unmarketable or unlikely
to receive marketing approval;
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competitors may develop alternatives
that render our product candidates obsolete or less attractive;
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product candidates we develop may be
covered by third parties’ patents or other exclusive rights;
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the market for a product candidate
may change during our program so that such a product may become unreasonable to continue to develop;
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a product candidate may not be capable
of being produced in commercial quantities at an acceptable cost, or at all; and
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a product candidate may not be accepted
as safe and effective by patients, the medical community or third-party payors.
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If any of these events
occur, we may be forced to abandon our development efforts for a program or programs, or we may not be able to identify, license
or discover additional product candidates, which would have a material adverse effect on our business and could potentially cause
us to cease operations. Research programs to identify new product candidates require substantial technical, financial and human
resources. We may focus our efforts and resources on potential programs or product candidates that ultimately prove to be unsuccessful.
We may be subject, directly or indirectly,
to federal and state healthcare fraud and abuse laws, false claims laws and health information privacy and security laws. If we
are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.
If we obtain FDA approval
for any of our product candidates and begin commercializing those products in the United States, our operations may be directly
or indirectly through our customers, subject to various federal and state fraud and abuse laws, including, without limitation,
the federal Anti-Kickback Statute, the federal False Claims Act and physician sunshine laws and regulations. These laws may impact,
among other things, our proposed sales, marketing and education programs. In addition, we may be subject to patient privacy regulation
by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate
include:
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the federal Anti-Kickback Statute,
which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration,
directly or indirectly, to induce, or in return for, the purchase or recommendation of an item or service reimbursable under
a federal healthcare program, such as the Medicare and Medicaid programs;
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federal civil and criminal false claims
laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting,
or causing to be presented, claims for payment from Medicare, Medicaid or other third-party payors that are false or fraudulent;
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the Health Insurance Portability and
Accountability Act of 1996, or HIPAA, which created new federal criminal statutes that prohibit executing a scheme to defraud
any healthcare benefit program and making false statements relating to healthcare matters;
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HIPAA, as amended by the Health Information
Technology and Clinical Health Act, and its implementing regulations, which imposes certain requirements relating to the privacy,
security and transmission of individually identifiable health information;
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the federal physician sunshine requirements
under the ACA requires manufacturers of drugs, devices and medical supplies to report annually to the U.S. Department
of Health and Human Services information related to payments and other transfers of value to physicians, other healthcare
providers and teaching hospitals and ownership and investment interests held by physicians and other healthcare providers
and their immediate family members and applicable group purchasing organizations; and
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state law equivalents of each of the
above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party
payor, including commercial insurers, state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s
voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, or otherwise restrict
payments that may be made to healthcare providers and other potential referral sources; state laws that require drug manufacturers
to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing
expenditures and state laws governing the privacy and security of health information in certain circumstances, many of which
differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.
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Because of the breadth
of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business
activities could be subject to challenge under one or more of such laws. In addition, recent health care reform legislation has
strengthened these laws. For example, the ACA, among other things, amends the intent requirement of the federal anti-kickback
and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific
intent to violate it. Moreover, the ACA provides that the government may assert that a claim including items or services resulting
from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the False Claims
Act.
If our operations
are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may
be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from participation in government health
care programs, such as Medicare and Medicaid, imprisonment and the curtailment or restructuring of our operations, any of which
could adversely affect our ability to operate our business and our results of operations.
Our business and operations have
been and are likely to continue to be adversely affected by the COVID-19 global pandemic.
Our operations and
business have been and are likely to continue to experience disruption due to the unprecedented conditions surrounding the COVID-19
pandemic spreading throughout Israel and the world. To date, we have taken action to reduce our operating expenses in the short
term. As part of the cut to our operating expenses, our Chief Technologies Officer has been on temporary unpaid leave between
May 2020 to September 2020, further enabling us to reduce our operating expenses during the COVID-19 pandemic. There can be no
assurance that the analysis that we have undertaken or remedial measures that have been enacted will enable us to avoid part or
all of any impact from the spread of COVID-19 or its consequences, including downturns in business sentiment generally or in our
sector in particular.
In addition, the impact
of COVID-19 may cause delays to all of our future research and development operations, including but not limited to our products
development, manufacturing, pre-clinical and clinical trials, and may make it difficult for us to recruit patients to all of our
clinical trials, and keep all of our research and development projects on time.
It
is not possible at this time to estimate the full impact that the COVID-19 pandemic could have on our business, the continued
spread of COVID-19, and any additional measures taken by governments, health officials or by us in response to such spread, could
have on our business, results of operations and financial condition. The COVID-19 pandemic and mitigation measures have also negatively
impacted global economic conditions, which, in turn, could adversely affect our business, results of operations and financial
condition. We continue to monitor our operations and government recommendations and may elect to temporarily close our office
to protect our employees. A significant reduction in our workforce and our compliance with instructions imposed by Israeli authorities
may harm our ability to continue operating our business and materially and adversely affect our operations and financial condition.
Moreover, we cannot foresee whether the Israeli authorities will impose further restrictive instructions, which if implemented
may lead to significant changes. The spread of COVID-19 may also result in the inability of our suppliers to deliver components
or raw materials on a timely basis. The extent to which COVID-19 impacts our business and financial condition will depend on future
developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity
of COVID-19 and the actions to contain COVID-19 or treat its impact, among others.
The use of any of our product candidates
and marketed products could result in product liability or similar claims that could be expensive, damage our reputation and harm
our business.
Our business exposes
us to an inherent risk of potential product liability or similar claims. The pharmaceutical and nutraceuticals industries have
historically been litigious, and we face financial exposure to product liability or similar claims if the use of any of our products
were to cause or contribute to injury or death. There is also the possibility that defects in the design or manufacture of any
of our products might necessitate a product recall. Although we plan to maintain product liability insurance, the coverage limits
of these policies may not be adequate to cover future claims. In the future, we may be unable to maintain product liability insurance
on acceptable terms or at reasonable costs and such insurance may not provide us with adequate coverage against potential liabilities.
A product liability claim, regardless of merit or ultimate outcome, or any product recall could result in substantial costs to
us, damage to our reputation, customer dissatisfaction and frustration and a substantial diversion of management attention. A
successful claim brought against us in excess of, or outside of, our insurance coverage could have a material adverse effect on
our business, financial condition and results of operations.
If we fail to comply with environmental,
health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material
adverse effect on the success of our business.
Our research and development
activities and our third-party manufacturers’ and suppliers’ activities involve the controlled storage, use and disposal
of hazardous materials, including the components of our product candidates and other hazardous compounds. We and our manufacturers
and suppliers are subject to laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous
materials. In some cases, these hazardous materials and various wastes resulting from their use are stored at our and our manufacturers’
facilities pending their use and disposal. We cannot eliminate the risk of contamination, which could cause an interruption of
our commercialization efforts, research and development efforts, business operations and environmental damage resulting in costly
clean-up and liabilities under applicable laws and regulations governing the use, storage, handling and disposal of these materials
and specified waste products. Although we believe that the safety procedures utilized by our third-party manufacturers for handling
and disposing of these materials generally comply with the standards prescribed by these laws and regulations, we cannot guarantee
that this is the case or eliminate the risk of accidental contamination or injury from these materials. In such an event, we may
be held liable for any resulting damages and such liability could exceed our resources and state or federal or other applicable
authorities may curtail our use of certain materials and/or interrupt our business operations. Furthermore, environmental laws
and regulations are complex, change frequently and have tended to become more stringent. We cannot predict the impact of such
changes and cannot be certain of our future compliance. We do not currently carry biological or hazardous waste insurance coverage.
Risks Related to the Ownership of Our
Securities
There currently is not, and we may not be able to establish,
a liquid market for the ADSs or attract the attention of research analysts at major brokerage firms.
The ADSs are quoted currently quoted on
the OTCQB. As a result of a lack of a liquid market, investment banks may be less likely to agree to underwrite or place secondary
offerings on behalf of us. If this occurs, it would have a material adverse effect on us.
We cannot predict whether an active market
for the ADSs will ever develop in the future. In the absence of an active trading market:
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investors may have difficulty buying and selling or obtaining market quotations for the ADSs;
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market visibility for the ADSs may be limited; and
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a lack of visibility for the ADSs may have a depressive effect on the market price for the ADSs.
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The ADSs were listed on Nasdaq from March
2017 through July 2020, and have been quoted on the OTCQB since December 2020 as a result of not meeting the shareholders equity
requirements of Nasdaq. Inter-dealer, over-the-counter markets provide significantly less liquidity than Nasdaq or the New York
Stock Exchange. No assurances can be given that the ADSs will ever actively trade on such markets, much less a senior market like
Nasdaq. In any of these events, there could remain a highly illiquid market for the ADSs and you may be unable to dispose of the
ADSs at desirable prices or at all.
Since our securities are quoted on the OTCQB, our securities
holders may face significant restrictions on the resale of our securities due to state “Blue Sky” laws.
Each state has its own securities laws,
often called “blue sky” laws, which (i) limit sales of securities to a state’s residents unless the securities
are registered in that state or qualify for an exemption from registration, and (ii) govern the reporting requirements for broker-dealers
doing business directly or indirectly in the state. Before a security is sold in a state, there must be a registration in place
to cover the transaction, or the transaction must be exempt from registration. The applicable broker must be registered in that
state. We do not know whether our securities will be registered or exempt from registration under the laws of any state. Since
our securities are quoted on the OTCQB, a determination regarding registration will be made by those broker-dealers, if any, who
agree to serve as the market-makers for our securities. There may be significant state blue sky law restrictions on the ability
of investors to sell, and on purchasers to buy, our securities. You should therefore consider the resale market for our securities
to be limited, as you may be unable to resell your securities without the significant expense of state registration or qualification.
If you are not an institutional investor,
you may not be able to purchase our units in an offering of securities by us. Institutional investors in every state may purchase
the units in an offering pursuant to exemptions provided to such entities under the Blue Sky laws of various states. The definition
of an “institutional investor” varies from state to state but generally includes financial institutions, broker-dealers,
banks, insurance companies and other qualified entities.
We file periodic and current reports under
the Securities Exchange Act of 1934, as amended, or the Exchange Act. Therefore, under Section 18 of the Securities Act of 1933,
as amended, or the Securities Act, the states and territories of the United States are preempted from regulating the resale by
shareholders of our ADSs because our securities will be covered securities. However, notwithstanding preemption, the states and
territories of the United States may require notice filings and collect fees with regard to these transactions and a state may
suspend the offer and sale of securities within such state if any such required filing is not made or fee is not paid. As of the
date of this prospectus, we have not determined in which of these states, if any, we will submit the required filings or pay the
required fee.
If our Ordinary Shares or ADSs are subject to the penny
stock rules, this may make it more difficult to sell our shares.
The SEC has adopted rules that regulate
broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price
of less than $5.00 (other than securities registered on certain national securities exchanges or authorized for quotation on certain
automated quotation systems, provided that current price and volume information with respect to transactions in such securities
is provided by the exchange or system). The OTCQB does not meet such requirements and if the price of our securities is less than
$5.00, our securities will be deemed penny stocks. The penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information.
In addition, the penny stock rules require that prior to effecting any transaction in a penny stock not otherwise exempt from those
rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser
and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement
to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure
requirements may have the effect of reducing the trading activity in the secondary market for our securities, and therefore shareholders,
or ADS holders, may have difficulty selling their shares or ADSs.
We will need additional capital in the future. Raising
additional capital by issuing securities may cause dilution to existing shareholders.
We have incurred losses
in each year since our inception. If we continue to use cash at our historical rates of use we will need significant additional
financing, which we may seek through a combination of private and public equity offerings, debt financings and collaborations and
strategic and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible
debt securities, an existing shareholder’s ownership interest will be diluted, and the terms of any such offerings may include
liquidation or other preferences that may adversely affect the then existing shareholders rights. Debt financing, if available,
would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our
ability to take specific actions such as incurring debt or making capital expenditures. If we raise additional funds through collaboration,
strategic alliance or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies,
future revenue streams or product candidates, or grant licenses on terms that are not favorable to us.
An active and visible public trading market for the ADSs
may not develop and the market for the ADSs is limited.
The ADSs are thinly traded and any recently
reported sales price may not be a true market-based valuation of the ADSs. In addition, the stock market in general has experienced
extreme price and volume fluctuations that have often been unrelated or disproportionate to operating performance. Consequently,
holders of shares of the ADSs may not be able to liquidate their investment in the ADSs at prices that they may deem appropriate.
The exercise of outstanding warrants will cause significant
dilution to holders of our equity securities.
As of March 22, 2021, holders of warrants
may exercise their warrants into up to 3,568,565 ADSs. In the event that such warrants are exercised in full, the ownership interest
of existing holders of our equity securities will be diluted.
The market price of our securities
may be highly volatile, and you may not be able to resell your ADSs at or above the price you paid.
The
market price of the ADSs is volatile. The ADS price is and will continue to be subject to wide fluctuations in response to a variety
of factors, including the following:
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adverse results or delays in preclinical studies or clinical trials;
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reports of adverse events in our product candidates or clinical trial failures of our product candidates;
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inability to obtain additional funding;
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any delay in filing a regulatory submission for any of our product or product candidates and any adverse development or perceived adverse development with respect to the review of that regulatory submission by the FDA or European or Asian authorities;
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failure to successfully develop and commercialize our products or product candidates;
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failure to enter into strategic collaborations;
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failure by us or strategic collaboration partners to prosecute, maintain or enforce our intellectual property rights;
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changes in laws or regulations applicable to future products;
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inability to scale up our manufacturing capabilities through third-party manufacturers, inability to obtain adequate product supply for our products or the inability to do so at acceptable prices;
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introduction of new products or technologies by our competitors;
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failure to meet or exceed financial projections we may provide to the public;
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failure to meet or exceed the financial expectations of the investment community;
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announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by our competitors;
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disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our platform technologies, technologies, products or product candidates;
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additions or departures of key scientific or management personnel;
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significant lawsuits, including patent or shareholder litigation;
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changes in the market valuations of similar companies;
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changes in general conditions in the economy and the financial markets, including as a result of COVID-19;
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sales of our securities by us or our shareholders in the future; and
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trading volumes of our securities.
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In addition, companies
trading in the stock market have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of the
ADSs, regardless of our actual operating performance.
Outstanding warrants and pre-funded
warrants to acquire our ADSs or Ordinary Shares are speculative in nature. Furthermore, holders of our warrants and pre-funded
warrants will have no rights as shareholders until such holders exercise their warrants and acquire our ADSs.
Until
holders of the warrants and pre-funded warrants acquire our ADSs upon exercise of the warrants and pre-funded warrants, holders
of the warrants and pre-funded warrants will have no rights with respect to our ADSs or Ordinary Shares underlying such warrants
and pre-funded warrants. Upon exercise of the warrants and pre-funded warrants, the holders thereof will be entitled to exercise
the rights of a holder of ADSs only as to matters for which the record date occurs after the exercise date.
Our
warrants and pre-funded warrants only represent the right to acquire ADSs at a fixed price, and in the case of the warrants, for
a limited period of time. Specifically, holders of the warrants and pre-funded warrants that we issued in private placements in
March 2020 and March 2021 and in our November 2020 public offering may exercise their right to acquire ADSs and pay an exercise
price per ADS(ranging from $5.02 to $24.50 per ADS), subject to adjustment upon certain events, and in the case of warrants only
prior to five years from their respective issuance dates, after which date any unexercised warrants will expire and have no further
value. In addition, we issued a warrant to Capital Point Ltd. to purchase $340,000 of ADSs, with an exercise price per ADS equal
to the closing price of our ADSs on the trading day on which the notice of exercise is actually received by us and will be exercisable
for 12 months starting from May 15, 2021 for a one-year period.
Failure to achieve and maintain effective
internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business,
results of operation or financial condition. In addition, current and potential shareholders could lose confidence in our financial
reporting, which could have a material adverse effect on the price of the ADSs.
Effective
internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We will be required
to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley
Act, which requires annual management assessments of the effectiveness of our internal control over financial reporting. In addition,
if we fail to maintain the adequacy of our internal control, as such standards are modified, supplemented or amended from time
to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial
reporting in accordance with Section 404. Disclosing deficiencies or weaknesses in our internal control, failing to remediate these
deficiencies or weaknesses in a timely fashion or failing to achieve and maintain an effective internal control environment may
cause investors to lose confidence in our reported financial information, which could have a material adverse effect on the price
of the ADSs. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed.
We may be a “passive foreign
investment company,” or PFIC, for U.S. federal income tax purposes in the current taxable year or may become one in any subsequent
taxable year. There generally would be negative tax consequences for U.S. taxpayers that are holders of the ADSs or Ordinary Shares
if we are or were to become a PFIC.
In
general, we will be treated as a PFIC for U.S. federal income tax purposes in any taxable year in which either (1) at least 75%
of our gross income is “passive income” or (2) on average at least 50% of our assets by value produce passive income
or are held for the production of passive income. Passive income for this purpose generally includes, among other things, certain
dividends, interest, royalties, rents and gains from commodities and securities transactions and from the sale or exchange of property
that gives rise to passive income. Passive income also includes amounts derived by reason of the temporary investment of funds,
including those raised in a public offering. In determining whether a non-U.S. corporation is a PFIC, a proportionate share of
the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest (by value) is taken
into account. We do not believe that we will be deemed a PFIC for 2020. If we are a PFIC in any taxable year during which a U.S.
taxpayer holds the ADSs or Ordinary Shares, such U.S. taxpayer would be subject to certain adverse U.S. federal income tax rules.
In particular, if the U.S. taxpayer did not make an election to treat us as a “qualified electing fund,” or QEF, or
make a “mark-to-market” election, then “excess distributions” to the U.S. taxpayer, and any gain realized
on the sale or other disposition of the ADSs or Ordinary Shares by the U.S. taxpayer: (1) would be allocated ratably over the U.S.
taxpayer’s holding period for the ADSs or Ordinary Shares; (2) the amount allocated to the current taxable year and any period
prior to the first day of the first taxable year in which we were a PFIC would be taxed as ordinary income; and (3) the amount
allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class
of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting
tax attributable to each such other taxable year. In addition, if the U.S. Internal Revenue Service, or the IRS, determines that
we are a PFIC for a year with respect to which we have determined that we were not a PFIC, it may be too late for a U.S. taxpayer
to make a timely QEF or mark-to-market election. U.S. taxpayers that have held the ADSs or Ordinary Shares during a period when
we were a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC in subsequent years, subject to exceptions
for U.S. taxpayer who made a timely QEF or mark-to-market election. A U.S. taxpayer can make a QEF election by completing the relevant
portions of and filing IRS Form 8621 in accordance with the instructions thereto. We intend to make available to U.S. taxpayers
upon request the information needed in order to complete IRS Form 8621 and to make and maintain a valid QEF election for any year
in which we or any of our subsidiaries are a PFIC. U.S. taxpayers that hold the ADSs or Ordinary Shares are strongly urged to consult
their tax advisors about the PFIC rules, including tax return filing requirements and the eligibility, manner, and consequences
to them of making a QEF or mark-to-market election with respect to the ADSs or Ordinary Shares in the event that we are a PFIC.
See Item 10.E. “Taxation—U.S. Federal Income Tax Considerations—Passive Foreign Investment Companies” for
additional information.
Holders of ADSs may not receive the
same distributions or dividends as those we make to the holders of our Ordinary Shares, and, in some limited circumstances, holders
of ADSs may not receive dividends or other distributions on our Ordinary Shares and they may not receive any value for them, if
it is illegal or impractical to make them available to them.
The
depositary for the ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on Ordinary
Shares or other deposited securities underlying the ADSs, after deducting its fees and expenses. You will receive these distributions
in proportion to the number of Ordinary Shares your ADSs represent. However, the depositary is not responsible if it decides that
it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make
a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act, but that are
not properly registered or distributed under an applicable exemption from registration. In addition, conversion into U.S. dollars
from foreign currency that was part of a dividend made in respect of deposited Ordinary Shares may require the approval or license
of, or a filing with, any government or agency thereof, which may be unobtainable. In these cases, the depositary may determine
not to distribute such property and hold it as “deposited securities” or may seek to effect a substitute dividend or
distribution, including net cash proceeds from the sale of the dividends that the depositary deems an equitable and practicable
substitute. We have no obligation to register under U.S. securities laws any ADSs, Ordinary Shares, rights or other securities
received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, Ordinary
Shares, rights or anything else to holders of ADSs. In addition, the depositary may withhold from such dividends or distributions
its fees and an amount on account of taxes or other governmental charges to the extent the depositary believes it is required to
make such withholding. This means that you may not receive the same distributions or dividends as those we make to the holders
of our Ordinary Shares, and, in some limited circumstances, you may not receive any value for such distributions or dividends if
it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value
of the ADSs.
Holders of ADSs must act through
the depositary to exercise their rights as our shareholders.
Holders
of the ADSs do not have the same rights of our shareholders and may only exercise the voting rights with respect to the underlying
Ordinary Shares in accordance with the provisions of the deposit agreement for the ADSs. Under Israeli law, the minimum notice
period required to convene a shareholders meeting is no less than 35 or 21 calendar days. When a shareholder meeting is convened,
holders of the ADSs may not receive sufficient notice of a shareholders’ meeting to permit them to withdraw their Ordinary
Shares to allow them to cast their vote with respect to any specific matter. In addition, the depositary and its agents may not
be able to send voting instructions to holders of the ADSs or carry out their voting instructions in a timely manner. We will make
all reasonable efforts to cause the depositary to extend voting rights to holders of the ADSs in a timely manner, but we cannot
assure holders that they will receive the voting materials in time to ensure that they can instruct the depositary to vote their
ADSs. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote,
for the manner in which any vote is cast or for the effect of any such vote. As a result, holders of the ADSs may not be able to
exercise their right to vote and they may lack recourse if their ADSs are not voted as they requested. In addition, in the capacity
as a holder of ADSs, they will not be able to call a shareholders’ meeting.
You may be subject to limitations
on transfer of your ADSs.
Your
ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from
time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to
deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time
if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body,
or under any provision of the deposit agreement, or for any other reason in accordance with the terms of the deposit agreement.
ADSs holders
may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable
results to the plaintiff(s) in any such action.
The
deposit agreement governing the ADSs representing our Ordinary Shares provides that owners and holders of ADSs irrevocably waive
the right to a trial by jury in any legal proceeding arising out of or relating to the deposit agreement or the ADSs, including
claims under federal securities laws, against us or the depositary to the fullest extent permitted by applicable law. If this jury
trial waiver provision is prohibited by applicable law, an action could nevertheless proceed under the terms of the deposit agreement
with a jury trial. To our knowledge, the enforceability of a jury trial waiver under the federal securities laws has not been finally
adjudicated by a federal court. However, we believe that a jury trial waiver provision is generally enforceable under the laws
of the State of New York, which govern the deposit agreement, by a court of the State of New York or a federal court, which have
non-exclusive jurisdiction over matters arising under the deposit agreement, applying such law. In determining whether to enforce
a jury trial waiver provision, New York courts and federal courts will consider whether the visibility of the jury trial waiver
provision within the agreement is sufficiently prominent such that a party has knowingly waived any right to trial by jury. We
believe that this is the case with respect to the deposit agreement and the ADSs. In addition, New York courts will not enforce
a jury trial waiver provision in order to bar a viable setoff or counterclaim sounding in fraud or one which is based upon a creditor’s
negligence in failing to liquidate collateral upon a guarantor’s demand, or in the case of an intentional tort claim (as
opposed to a contract dispute), none of which we believe are applicable in the case of the deposit agreement or the ADSs. No condition,
stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or owner of ADSs or by us or the depositary
of compliance with any provision of the federal securities laws. If you or any other holder or owner of ADSs brings a claim against
us or the depositary in connection with matters arising under the deposit agreement or the ADSs, you or such other holder or owner
may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits
against us and / or the depositary. If a lawsuit is brought against us and / or the depositary under the deposit agreement, it
may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures
and may result in different results than a trial by jury would have had, including results that could be less favorable to the
plaintiff(s) in any such action, depending on, among other things, the nature of the claims, the judge or justice hearing such
claims, and the venue of the hearing.
Risks Related to Israeli Law and Our
Operations in Israel
Provisions of Israeli law may make
it easy for our shareholders to demand that we convene a shareholders meeting, and/or allow shareholders to convene a shareholder
meeting without the consent of our management, which may disrupt our management’s ability to run our company.
Section 63(b) of the
Israeli Companies Law, or the Companies Law, may allow any one or more of our shareholders holding at least 5% of our voting rights
to demand that we convene an extraordinary shareholders meeting. Also, in the event that we choose not to convene an extraordinary
shareholders meeting pursuant to such a request, Sections 64-65 of the Companies Law provide, among others, that such shareholders
may independently convene an extraordinary shareholders meeting within three months (or under court’s ruling) and require
us to cover the costs, within reason, and as a result thereof, our directors might be required to repay us such costs. If our shareholders
decide to exercise these rights in a way inconsistent with our management’s strategic plans, our management’s ability
to run our company may be disrupted, and this process may entail significant costs to us.
Our operations are subject to currency
and interest rate fluctuations.
We
incur expenses in U.S. dollars and NIS, but our financial statements are denominated in U.S. dollars. U.S. dollars is our functional
currency and is the currency that represents the principal economic environment in which we operate. As a result, we are affected
by foreign currency exchange fluctuations through both translation risk and transaction risk. As a result, we are exposed to the
risk that the NIS may appreciate relative to the dollar, or, if the NIS instead devalues relative to the dollar, that the inflation
rate in Israel may exceed such rate of devaluation of the NIS, or that the timing of such devaluation may lag behind inflation
in Israel. In any such event, the dollar cost of our operations in Israel would increase and our dollar-denominated results of
operations would be adversely affected.
Provisions
of Israeli law and our articles of association may delay, prevent or otherwise impede a merger with, or an acquisition of, our
company, which could prevent a change of control, even when the terms of such a transaction are favorable to us and our shareholders.
Provisions of Israeli law and our amended
and restated articles of association could have the effect of delaying or preventing a change in control and may make it more difficult
for a third party to acquire us or our shareholders to elect different individuals to our board of directors, even if doing so
would be considered to be beneficial by some of our shareholders, and may limit the price that investors may be willing to pay
in the future for our ordinary shares. Among other things:
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Israeli corporate law regulates mergers and requires that a tender
offer be effected when more than a specified percentage of shares in a company are purchased;
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Israeli corporate law does not provide for shareholder action by written
consent, thereby requiring all shareholder actions to be taken at a general meeting of shareholders;
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our amended and restated articles of association divide our directors
into three classes, each of which is elected once every three years;
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our amended and restated articles of association require a vote of
the holders of a majority of our outstanding ordinary shares entitled to vote present and voting on the matter at a general meeting
of shareholders (referred to as simple majority), and the amendment of a limited number of provisions, such as the provision stating
that each year the term of office of only one class of directors will and dividing our directors into three classes, requires a
vote of the holders of 65% of the voting power represented at a general meeting of our shareholders and voting thereon has
been obtained, provided the majority constitutes more than 33.33% of the total issued and outstanding share capital as of the record
date of such meeting; and
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our amended and restated articles of association provide that director
vacancies may be filled by our board of directors.
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Further, Israeli tax
considerations may make potential transactions undesirable to us or to some of our shareholders whose country of residence does
not have a tax treaty with Israel granting tax relief to such shareholders from Israeli tax. With respect to mergers, Israeli tax
law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of numerous conditions,
including a holding period of two years from the date of the transaction during which certain sales and dispositions of shares
of the participating companies are restricted. See “Item 10.E. Taxation—Israeli Tax Considerations and Government Programs”
for additional information.
It may be difficult to enforce a
judgment of a United States court against us and our officers and directors and the Israeli experts named in this Annual Report
in Israel or the United States, to assert United States securities laws claims in Israel or to serve process on our officers and
directors and these experts.
We were incorporated
in Israel and our corporate headquarters are located in Israel. All of our executive officers and directors and the Israeli experts
named in this Annual Report are located in Israel. All of our assets and most of the assets of these persons are located in Israel.
Service of process upon us or our non-U.S. resident directors and officers and enforcement of judgments obtained in the United
States against us or our non-U.S. directors and executive officers may be difficult to obtain within the United States. We have
been informed by our legal counsel in Israel that it may be difficult to assert claims under U.S. securities laws in original actions
instituted in Israel, or obtain a judgment based on the civil liability provisions of U.S. federal securities laws. Israeli courts
may refuse to hear a claim based on a violation of U.S. securities laws against us or our non-U.S. officers and directors because
Israel may not be the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear a claim,
it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content
of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure
will also be governed by Israeli law. There is little binding case law in Israel addressing the matters described above. Israeli
courts might not enforce judgments rendered outside Israel, which may make it difficult to collect on judgments rendered against
us or our non-U.S. officers and directors.
Moreover, an Israeli
court will not enforce a non-Israeli judgment if it was given in a state whose laws do not provide for the enforcement of judgments
of Israeli courts (subject to exceptional cases), if its enforcement is likely to prejudice the sovereignty or security of the
State of Israel, if it was obtained by fraud or in the absence of due process, if it is at variance with another valid judgment
that was given in the same matter between the same parties, or if a suit in the same matter between the same parties was pending
before a court or tribunal in Israel at the time the foreign action was brought.
Our headquarters and other significant
operations are located in Israel, and, therefore, our results may be adversely affected by political, economic and military instability
in Israel.
Our
executive offices, corporate headquarters and principal research and development facilities are located in Israel. In addition,
all of our officers and directors are residents of Israel. Accordingly, political, economic and military conditions in Israel and
the surrounding region may directly affect our business. Any armed conflicts, political instability, terrorism, cyberattacks or
any other hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners
could adversely affect our operations. Ongoing and revived hostilities in the Middle East or other Israeli political or economic
factors, could harm our operations.
Our commercial
insurance does not cover losses that may occur as a result of events associated with war and terrorism. Although the Israeli government
currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure
you that this government coverage will be maintained or that it will sufficiently cover our potential damages. Any losses or damages
incurred by us could have a material adverse effect on our business. Any armed conflicts or political instability in the region
would likely negatively affect business conditions and could harm our results of operations.
Further,
in the past, the State of Israel and Israeli companies have been subjected to economic boycotts. Several countries still restrict
business with the State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse impact on
our operating results, financial condition or the expansion of our business. A campaign of boycotts, divestment and sanctions has
been undertaken against Israel, which could also adversely impact our business.
In
addition, Israel is experiencing a level of unprecedented political instability. The Israeli government has been in a transitionary
phase since December 2018, when the Israeli Parliament, or the Knesset, first resolved to dissolve itself and call for new general
elections. Since then, Israel held general elections three times – in April and September of 2019 and in March of 2020. A
fourth election is due to take place on March 23, 2021. The Knesset has not passed a budget for the year 2021, and certain government
ministries, which may be critical to the operation of our business, are without necessary resources and may not receive sufficient
funding moving forward. In the event that the current political stalemate is not resolved during 2021, our ability to conduct our
business effectively may be adversely affected.
Finally,
many Israeli citizens are obligated to perform several days, and in some cases more, of annual military reserve duty each year
until they reach the age of 40 (or older, for reservists who are military officers or who have certain occupations) and, in the
event of a military conflict, may be called to active duty. In response to increases in terrorist activity, there have been periods
of significant call-ups of military reservists. It is possible that there will be military reserve duty call-ups in the future.
Our operations could be disrupted by such call-ups, which may include the call-up of members of our management. Such disruption
could materially adversely affect our business, prospects, financial condition and results of operations.
Your rights and responsibilities
as a holder of our securities will be governed by Israeli law, which differs in some material respects from the rights and responsibilities
of shareholders of U.S. companies.
We
are incorporated under Israeli law. The rights and responsibilities of holders of our Ordinary Shares are governed by our articles
of association and the Companies Law. These rights and responsibilities differ in some respects from the rights and responsibilities
of shareholders in typical U.S. corporations. In particular, pursuant to the Companies Law, each shareholder of an Israeli company
has to act in good faith and in a customary manner in exercising his or her rights and fulfilling his or her obligations toward
the Company and other shareholders and to refrain from abusing his or her power in the Company, including, among other things,
in voting at the general meeting of shareholders, on amendments to a company’s articles of association, increases in a company’s
authorized share capital, mergers and certain transactions requiring shareholders’ approval under the Companies Law. In addition,
a controlling shareholder of an Israeli company or a shareholder who knows that it possesses the power to determine the outcome
of a shareholder vote or who has the power to appoint or prevent the appointment of a director or officer in the Company, or has
other powers toward the Company has a duty of fairness toward the Company. However, Israeli law does not define the substance of
this duty of fairness. There is little case law available to assist in understanding the implications of these provisions that
govern shareholder behavior.
We received Israeli government
grants for certain of our past research and development activities and programs, some of which we sold or are in the process
of selling. The terms of such grants may require us, in the future, to pay royalties and to satisfy specific conditions if and
to the extent we receive future royalties or in order to complete the sale of such grant based technologies and programs. We may
be required to pay penalties in addition to payment of the royalties.
Our research and
development efforts with respect to some of our past activities, which was focused on developing an immunotherapeutic
monoclonal antibody for the treatment of Alzheimer’s disease, which we sold in March 2015, and our Anti-CD3 technology
directed toward the treatment of inflammatory and autoimmune diseases, which in part was returned and re-assigned to Hadasit
Medical Research Services & Development Ltd., or Hadasit, and in part is still in the process of being sold, were
financed in part through royalty-bearing grants from the Israeli Innovation Authority, or the IIA. As of March 22, 2021, we
had received the aggregate amount of approximately $1.1 million from the IIA for the development of our abovementioned
technologies. As of December 31, 2020, our contingent liabilities regarding IIA grants received by us were in an aggregate
amount of $1.2 million including interest. With respect to such grants, we are committed to pay certain royalties up to $1.2
million relating only to technologies in our possession and excluding any royalties for technologies that we sold to third
parties. We are required to comply with the requirements of the Israeli Encouragement of Industrial Research, Development and
Technological Innovation Law, 5744-1984, as amended, or the Innovation Law, and related regulations, or the Research Law,
with respect to those past grants. When a company develops know-how, technology or products using IIA grants, the terms of
these grants and the Research Law restrict the transfer or license of such know-how, and the transfer of manufacturing or
manufacturing rights of such products, technologies or know-how outside of Israel, without the prior approval of the IIA.
Therefore, the discretionary approval of an IIA committee would be required for any transfer or license to third parties
inside or outside of Israel of know how or for the transfer outside of Israel of manufacturing or manufacturing rights
related to those aspects of such technologies. We may not receive those approvals. Furthermore, the IIA may impose certain
conditions on any arrangement under which it permits us to transfer technology or development.
Under the Innovation
Law and the regulations thereunder, a recipient of IIA grants is required to return the grants by the payment of royalties of 3%
to 6% on the revenues generated from the sale of products (and related services) developed (in whole or in part) under an IIA program
up to the total amount of the grants received from IIA, linked to the U.S. dollar and bearing interest at an annual rate of the
London Interbank Offered Rate, or LIBOR, applicable to U.S. dollar deposits, as published on the first business day of each calendar
year.
The United Kingdom’s
Financial Conduct Authority, which regulates LIBOR, announced in July 2017 that it will no longer persuade or require banks to
submit rates for LIBOR after 2021. The grants received from the IIA bear an annual interest rate based on the 12-month LIBOR. Accordingly,
there is considerable uncertainty regarding the publication of LIBOR beyond 2021. While it is not currently possible to determine
precisely whether, or to what extent, the withdrawal and replacement of LIBOR would affect us, the implementation of alternative
benchmark rates to LIBOR may increase our financial liabilities to the IIA. To date, the IIA has not published a decision regarding
an alternative benchmark to be used in the LIBOR’s stead.
The transfer or license of IIA-supported
technology or know-how outside of Israel and the transfer of manufacturing of IIA-supported products, technology or know-how outside
of Israel may involve the payment of significant amounts, depending upon the value of the transferred or licensed technology or
know-how, our research and development expenses, the amount of IIA support, the time of completion of the IIA-supported research
project and other factors. These restrictions and requirements for payment may impair our ability to sell, license or otherwise
transfer our technology assets outside of Israel or to outsource or transfer development or manufacturing activities with respect
to any product or technology outside of Israel. Furthermore, the consideration available to our shareholders in a transaction involving
the transfer outside of Israel of technology or know-how developed with IIA funding (such as a merger or similar transaction) may
be reduced by any amounts that we are required to pay to the IIA.
General Risk Factors
The Jumpstart Our Business Startups
Act of 2012, or the JOBS Act, will allow us to postpone the date by which we must comply with some of the laws and regulations
intended to protect investors and to reduce the amount of information we provide in our reports filed with the Securities and Exchange
Commission, or SEC, which could undermine investor confidence in our company and adversely affect the market price of the ADSs
or Ordinary Shares.
For
so long as we remain an “emerging growth company” as defined in the JOBS Act, we intend to take advantage of certain
exemptions from various requirements that are applicable to public companies that are not “emerging growth companies”
including:
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the provisions of the Sarbanes-Oxley Act requiring that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting;
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any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report on the financial statements;
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our ability to defer compliance with any new or revised financial accounting standards provided pursuant to Section 13(a) of Exchange Act; and
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our ability to furnish two rather than three years of income statements and statements of cash flows in various required filings.
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We
intend to take advantage of these exemptions until we are no longer an “emerging growth company.” We will remain an
emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the date
of our first sale of equity securities pursuant to an effective registration statement under the Securities Act, (b) in which we
have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which
means the market value of our Ordinary Shares that is held by non-affiliates exceeds $700 million as of the prior June 30, and
(2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
We cannot predict if
investors will find the ADSs or Ordinary Shares less attractive because we may rely on these exemptions. If some investors find
the ADSs or Ordinary Shares less attractive as a result, there may be a less active trading market for the ADSs or Ordinary Shares,
and our market prices may be more volatile and may decline.
Sales of a substantial number
of our ADSs or Ordinary Shares in the public market by our existing shareholders could cause our share price to
fall.
Sales
of a substantial number of the ADSs or Ordinary Shares in the public market, or the perception that these sales might occur, could
depress the market price of the ADSs or Ordinary Shares and could impair our ability to raise capital through the sale of additional
equity securities. We are unable to predict the effect that sales may have on the prevailing market price of the ADSs or Ordinary
Shares.
We have not paid, and do not intend
to pay, dividends on our Ordinary Shares and, therefore, unless our traded securities appreciate in value, our investors may not
benefit from holding our securities.
We
have not paid any cash dividends on our Ordinary Shares since inception. We do not anticipate paying any cash dividends our Ordinary
Shares in the foreseeable future. Moreover, the Companies Law imposes certain restrictions on our ability to declare and pay dividends.
As a result, investors in the ADSs or Ordinary Shares will not be able to benefit from owning these securities unless their market
price becomes greater than the price paid by such investors and they are able to sell such securities. We cannot assure you that
you will ever be able to resell our securities at a price in excess of the price paid.
As a “foreign private issuer”
we are permitted to and follow certain home country corporate governance practices instead of otherwise applicable SEC requirements,
which may result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.
Our status as a
foreign private issuer also exempts us from compliance with certain SEC laws and regulations, including the proxy rules and the
short-swing profits recapture rules. In addition, we will not be required under the Exchange Act to file current reports and financial
statements with the SEC as frequently or as promptly as U.S. domestic companies whose securities are registered under the Exchange
Act and we will generally be exempt from filing quarterly reports with the SEC. Also, although the Companies Law requires us to
disclose the annual compensation of our five most highly compensated senior officers on an individual basis, this disclosure is
not as extensive as that required of a U.S. domestic issuer. Furthermore, as a foreign private issuer, we are also not subject
to the requirements of Regulation FD (Fair Disclosure) promulgated under the Exchange Act. These exemptions and leniencies will
reduce the frequency and scope of information and protections to which you are entitled as an investor.
International expansion of our business
exposes us to business, regulatory, political, operational, financial and economic risks associated with doing business outside
of the United States or Israel.
Other than our headquarters
and other operations which are located in Israel (as further described below), we currently have limited international operations,
but our business strategy incorporates potentially significant international expansion, particularly in anticipation of approval
of our product candidates. We plan to maintain sales representatives and conduct physician and patient association outreach activities,
as well as clinical trials, outside of the United States and Israel. Doing business internationally involves a number of risks,
including but not limited to:
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multiple, conflicting and changing laws and regulations such as privacy regulations, tax laws, export and import restrictions, employment laws, regulatory requirements and other governmental approvals, permits and licenses;
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failure by us to obtain regulatory approvals for the use of our products in various countries;
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additional potentially relevant third-party patent rights;
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complexities and difficulties in obtaining protection and enforcing our intellectual property;
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difficulties in staffing and managing foreign operations;
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complexities associated with managing multiple payor reimbursement regimes, government payors or patient self-pay systems;
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limits in our ability to penetrate international markets;
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financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the impact of local and regional financial crises on demand and payment for our products and exposure to foreign currency exchange rate fluctuations;
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natural disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease, boycotts, curtailment of trade and other business restrictions;
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an outbreak of a contagious disease, such as coronavirus, which may cause us, third party vendors and manufacturers and/or customers to temporarily suspend our or their respective operations in the affected city or country;
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certain expenses including, among others, expenses for travel, translation and insurance; and
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regulatory and compliance risks that relate to maintaining accurate information and control over sales and activities that may fall within the purview of the U.S. Foreign Corrupt Practices Act, or FCPA, its books and records provisions or its anti-bribery provisions.
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Any of these factors
could significantly harm our future international expansion and operations and, consequently, our results of operations.
Failure
to comply with the FCPA could subject us to penalties and other adverse consequences.
We
are subject to the FCPA, which generally prohibits companies, such as us, whose securities are listed in the United States, from
paying, offering or authorizing payment or offering of anything of value, directly or indirectly, to any foreign government official,
political party or candidate for public office for the purpose of influencing any act or decision of such foreign person in order
to assist companies like us in obtaining or retaining business. The FCPA also obligates companies like us, whose securities are
listed in the United States, to comply with accounting provisions requiring the companies to maintain books and records that accurately
and fairly reflect all transactions of the companies, including international subsidiaries, and to devise and maintain an adequate
system of internal accounting controls for international operations. The U.S. Department of Justice and the SEC, which have responsibility
for enforcement of the FCPA, both consider employees of government-operated health care systems to be “foreign officials”
for FCPA purposes. In addition, the U.S. Department of Justice and the SEC are both engaged in a long-running FCPA compliance review
of pharmaceutical companies. If our employees or agents are found to have engaged in conduct that violates the FCPA, we would be
held responsible and could suffer severe penalties and other consequences, including adverse publicity and damage to our reputation.
Security
breaches and other disruptions could compromise our information, expose us to liability and harm our reputation and business.
In the ordinary course
of our business we collect and store sensitive data, including intellectual property, personal information and our proprietary
business information. The secure maintenance and transmission of this information is critical to our operations and business strategy.
We rely on commercially available systems, software, tools and domestically available monitoring to provide security for processing,
transmitting and storing this sensitive data.
Hackers may attempt
to penetrate our computer systems, and, if successful, misappropriate personal or confidential business information. In addition,
an associate, contractor or other third-party with whom we do business may attempt to circumvent our security measures in order
to obtain such information, and may purposefully or inadvertently cause a breach involving such information. While we continue
to implement additional protective measures to reduce the risk of and detect cyber incidents, cyber-attacks are becoming more sophisticated
and frequent, and the techniques used in such attacks change rapidly.
Also, our information
technology networks and infrastructure may still be vulnerable to damage, disruptions or shutdowns due to attack by hackers or
breaches, employee error or malfeasance, power outages, computer viruses, telecommunication or utility failures, systems failures,
natural disasters or other catastrophic events. Any such compromise could disrupt our operations, damage our reputation and subject
us to additional costs and liabilities, any of which could adversely affect our business.
We may be subject to securities litigation,
which is expensive and could divert management attention.
In
the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action
litigation. We may be the target of this type of litigation in the future. Litigation of this type could result in substantial
costs and diversion of management’s attention and resources, which could seriously hurt our business. Any adverse determination
in litigation could also subject us to significant liabilities.
If securities or industry analysts
do not publish or cease publishing research or reports about us, our business or our market, or if they adversely change their
recommendations or publish negative reports regarding our business or our shares, the share price and trading volume of our securities
could decline.
The
trading market for the ADSs or Ordinary Shares will be influenced by the research and reports that industry or securities analysts
may publish about us, our business, our market or our competitors. We do not have any control over these analysts and we cannot
provide any assurance that analysts will cover us or provide favorable coverage. If any of the analysts who may cover us adversely
change their recommendation regarding our securities, or provide more favorable relative recommendations about our competitors,
the price of our securities would likely decline. If any analyst who may cover us were to cease coverage of our company or fail
to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the price or trading
volume of our securities to decline.
ITEM 4.
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INFORMATION ON THE COMPANY
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A.
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History and Development of the Company
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Our
legal and commercial name is SciSparc Ltd. We were incorporated in the State of Israel on August 23, 2004, and are subject to the
Companies Law. From March 2017 until July 2020, our ADSs were traded on Nasdaq. On July 2, 2020, our ADSs were delisted from Nasdaq
due to our failure to meet the shareholders equity requirements of Nasdaq. Our ADSs representing our Ordinary Shares are currently
quoted on the United States on the OTCQB under the symbol “SPRCY.” From December 26, 2005 to August 9, 2018, our
Ordinary Shares were traded on the Tel Aviv Stock Exchange.
Our
registered office and principal place of business is located at 20 Raul Wallenberg St., Tower A, 2nd Floor, Tel Aviv
6971916, Israel. Our telephone number in Israel is: +972-3-6103100.
Our
website address is http://www.therapixbio.com (which we expect will soon be replaced by http://www.scisparc.com). The information
contained on our website or available through our website is not incorporated by reference into and should not be considered a
part of this Annual Report, and the reference to our website in this Annual Report is an inactive textual reference only. The SEC
also maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers
that file electronically with the SEC. Our filings with the SEC will also be available to the public through the SEC’s website
at www.sec.gov.
We
are an emerging growth company, as defined in Section 2(a) of the Securities Act, as implemented under the JOBS Act. As such, we
are eligible to, and intend to, take advantage of certain exemptions from various reporting requirements applicable to other public
companies that are not emerging growth companies including but not limited to not being required to comply with the auditor attestation
requirements of the SEC rules under Section 404 of the Sarbanes-Oxley Act. We could remain an emerging growth company until the
earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the date of our first sale of common equity
securities pursuant to an effective registration statement under the Securities Act, (b) in which we have total annual gross revenue
of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our Ordinary
Shares that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued
more than $1.0 billion in non-convertible debt during the prior three-year period.
We
are a foreign private issuer as defined by the rules under the Securities Act and the Exchange Act. Our status as a foreign private
issuer also exempts us from compliance with certain laws and regulations of the SEC, including the proxy rules and the short-swing
profits recapture rules. In addition, we will not be required to file annual, quarterly and current reports and financial statements
with the SEC as frequently or as promptly as U.S. domestic companies registered under the Exchange Act.
Our capital expenditures
for 2020, 2019 and 2018 amounted to $0, $1,000 and $17,000, respectively. These expenditures were primarily for purchases of fixed
assets. Our purchases of fixed assets primarily include, computers, and equipment used for the development of our products, and
we financed these expenditures primarily from cash on hand.
Overview
We are a specialty
clinical-stage pharmaceutical company. Our focus is creating and enhancing a portfolio of technologies and assets based on cannabinoid
therapies. With this focus, we are currently engaged in the following development programs based on THC, and/or CBD or other CBR
agonists: SCI-110 for the treatment of TS, OSA and patients with Alzheimer’s disease and agitation; SCI-160 for
the treatment of pain; and SCI-210 for the treatment of ASD and epilepsy.
SCI-110 is a combination
therapy candidate based on two components: (1) THC, which is the major cannabinoid molecule in the cannabis plant, and (2) CannAmide™,
a proprietary PEA formulation. PEA is an endogenous fatty acid amide that belongs to the class of nuclear factor agonists, which
are molecules that regulate the expression of genes. We believe that the combination of THC and PEA may induce a reaction known
as the “entourage effect,” which has strong potential to treat TS, OSA and Alzheimer’s disease and agitation.
SCI-160 is a novel
pharmaceutical preparation containing a CB2 receptor agonist for the treatment of pain. This innovative CB2 receptor agonist was
synthesized by Raphael Mechoulam, Ph.D., Professor of Medicinal Chemistry at the Hebrew University, a member of the SciSparc Scientific
Advisory Board.
Modulating CB2 receptor
activity by selective CB2 receptor agonists holds unique therapeutic potential for addressing pain conditions.
Also based on the “entourage
effect,” we are developing SCI-210, a proprietary novel preparation candidate containing non-psychoactive CBD and CannAmide.
SCI-210 is intended for the treatment of ASD and epilepsy.
Pursuant to the positive
results obtained in the phase IIa TS study conducted at Yale School of Medicine, we are developing a regulatory dossier to be submitted
to the German Federal Institute for Drugs and Medical Devices and the Israeli Ministry Of Health for our SCI-110 program for TS.
In addition, we announced in November 2019 positive topline results from our Phase IIa clinical study in OSA, suggesting that SCI-110
positively affects symptoms in adult subjects with OSA. Following the recent successful completion of the Phase IIa OSA clinical
study the Company is now assessing business and clinical strategies for further development of this program. In February 2021,
we announced an agreement with The Israeli Medical Center for Alzheimer’s, to conduct a phase IIa clinical trial to evaluate the
potential safety, tolerability and efficacy of SCI-110 in patients with Alzheimer’s disease and agitation using our proprietary
cannabinoid-based technology. Sporadic observation in healthy or sick individuals indicated that cannabis products and in particular
THC have calming and anti-anxiety effects. Based on our pre-clinical and clinical experience using SCI-110 we believe that this
treatment may potentially be found to be more safe and efficacious than THC alone. Similarly, following positive results in a pre-clinical
study that consisted of in vitro tests which showed synergy between CBD and PEA, we announced in December 2019 progression of SCI-210
into a clinical stage, and our plans to initiate a randomized, double blind placebo controlled study to evaluate the potential
efficacy, safety and tolerability of SCI-210 in treating patients with ASD. In addition, in March 2021, we announced an agreement
with The Sheba Fund for Health Services and Research at Chaim Sheba Medical Center, to examine the potential role of SCI-210 on
status epilepticus.
For our proprietary
SCI-160, we are continuing the pre-clinical studies by conducting multiple tests for mechanism of action evaluation and identifying
pain indication and formulation development.
The Medical Cannabis Industry
The medicinal cannabis market is an important
and evolving segment in global medical therapy. The growing awareness of the medicinal benefits of the active cannabinoids in the
plant and its use for improving the quality of life of patients with numerous and diverse indications (oncological patients, chronic
pain conditions etc.), as well as the global trends of regulatory changes relating to the use of the plant and of cannabinoids,
have all led to a rapid growth in this market. The recent changes in the perception of medicinal cannabis and the scientific and
medical acknowledgement of its benefits have created a growing need for more efficient drugs with an improved tolerance profile.
The global medical marijuana market was $6.33 billion in 2018 and is anticipated to exhibit a compound annual growth fate of 20.4%
through 2026, at which time the market is projected reach $26.92 billion. Geographically, North America had the largest medical
marijuana market share with a revenue of $5.99 billion earned in 2018, which is anticipated to reach $24.57 billion by the end
of 2026.
Our Drug Development
Programs
SCI-110
– TS, OSA and Alzheimer’s disease and agitation
We
believe that our product candidate, SCI-110, offers a safe and potentially effective solution for a variety of medical concerns.
Despite being in its early phases of clinical testing, the application of SCI-110 has extended into several treatments, including
TS, OSA and Alzheimer’s disease and agitation.
TS
TS is a neuropsychiatric
disorder, characterized by physical (motor) tics and vocal (phonic) tics. Motor tics generally precede the development of phonic
tics in TS, and the onset of simple tics usually predates that of complex tics. TS ranges from mild symptoms to loud noises and
forceful movements that can result in self-injury (e.g. punching oneself in the face, repeating other people’s words or involuntary
swearing). Many with TS experience additional neurobehavioral problems and comorbidities including inattention, hyperactivity and
impulsivity, anger control problems, sleep difficulties, and obsessive-compulsive symptoms. Pharmacotherapy is used when symptoms
are more severe and interfere with the ability to function. Furthermore, according to the CDC, in most cases, the prevalence of
tics decreases during adolescence and early adulthood, and sometimes disappears entirely; therefore, there are a limited number
of adults with TS and it is usually manifested mainly through moderate to severe symptoms.
Market
Size
The exact
number of people with TS is unknown. The prevalence of TS and TS symptoms is greater in children than in adults. The global TS
drugs market size (revenues of total drugs sold) was approximately $80 million in 2019 and is expected to reach $98.7 million by
2023. North America dominated the TS market in 2018 and is estimated to hold the largest market size today and in the future owing
to high incidences of TS, highly aware population, advanced healthcare infrastructure, and favorable government initiatives. One
out of 162 children in the U.S. have TS, and it affects three out of every 1,000 children between the ages of 6 and 17.
Current
Treatment
Pharmacological
intervention is considered the first line of therapy for TS, but is reserved for more severe symptoms that interfere with the individual’s
ability to function. Today, a full class of drugs that interact with dopamine and non-dopamine systems in the brain are used in
the treatment of TS symptoms. Many of the drugs used to treat TS are limited to the treatment of a narrow range of TS symptoms
(mainly tics), and are associated with severe side effects, both of which limit their utility. Furthermore, several of these drugs
have a black box warning on their label due to their potentially lethal effect. A black box warning is the strictest warning put
in the labeling of prescription drugs or drug products by the FDA when there is reasonable evidence of an association of a serious
hazard with the drug.
The
medications commonly used to treat symptoms of TS can be divided into the following groups:
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Antipsychotic medications: belong to a class of drugs primarily used to manage psychosis (including haloperidol, pimozide and fluphenazine), all of which are associated with severe side effects (including weight gain, sedation, akathisia (a state of agitation, distress, and restlessness), nausea and tardive dyskinesia (involuntary movements of the face and jaw), among others).
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Alpha2 Adrenergic Agonists: belong to a class of drugs primarily used to manage hypertension and migraine headaches prevention (including clonidine and guanfacine), which have limited utility despite common application to children with Attention Deficit Hyperactivity Disorder, or ADHD. Similar to antipsychotic medications, these also are associated with several side effects, and some of them, such as clonidine, might even be lethal.
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Benzodiazepines, an anticonvulsant or antiepileptic drug: belong to a class of drugs primarily used to manage seizures, panic disorder and movement disorders. Of these, Clonazepam is used off-label for the reduction of tics in TS patients, which also has associated negative side effects.
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As the currently used
medications are managing only a small number of disease symptoms with limited efficacy and questionable safety, there is a clear
unmet medical need for the management of TS.
Our SCI-110 Solution
for TS
Our
SCI-110 platform is a drug candidate for the treatment of TS.
On April 4, 2018, we
announced topline results of our Phase IIa investigator-initiated study at Yale University of SCI-110 for the treatment of TS.
The study was a single-arm, open-label trial, in which each subject both received one daily treatment of SCI-110 via oral administration
and was followed-up for a period of 12 weeks. 16 subjects participated in the study and received SCI-110 at the Yale University
Child Study Center at Yale University. The primary endpoint of the study was to assess the performance of SCI-110 in the treatment
of adult patients suffering from symptoms of TS, as measured by the Yale Global Tic Severity Scale Total Tic Score, or YGTSS-TTS,
the customary index for assessing symptom severity. Treatment was given in a dose titration regimen with a maximum dose of SCI-110
consisting of 10mg dronabinol and 800mg CannAmide™.
The topline results
of the study showed that each of these 16 subjects with medication-refractory TS sustained a significant reduction of tic symptoms
(paired t-test: YGTSS-TTS mean difference (mean +/- SD) =7.9+/-8.4, t= 3.7, df=15, p=0.002) from baseline (YGTSS-TTS: 38.4 +/-
8.3) to endpoint YGTSS-TTS: 30.5 +/- 10.9). This resulted in an average tic reduction of 21% across the entire sample of 16 TS
subjects. Six of the 16 medication-refractory TS subjects experienced a response to treatment as defined by a reduction in YGTSS-TTS
of greater than 25%. Improvement over time with treatment was also observed when generalized linear models were used to analyze
repeated measures data on the YGTSS-TTS. In the study, SCI-110 demonstrated no significant effects on comorbid ADHD, anxiety, depression
or obsessive-compulsive disorder, or OCD, symptoms. The medication was generally well-tolerated by the subjects with only two subjects
stopping treatment early (one due to sedation and another due to lack of improvement in tic symptoms). 12 of the 16 subjects elected
to proceed with a 24-week extension phase of the trial, which was also completed.
Following
the Phase IIa study, we plan to initiate a randomized, double-blind, placebo controlled study to evaluate the potential safety,
tolerability and efficacy of daily oral SCI-110 in treating adults with TS, with Hannover Medical School, Germany and Tel-Aviv
Sourasky Medical Center, Israel. The study is expected to include approximately 60 patients. Study patients are randomized
to either oral SCI-110 or placebo at a 1:1 ratio. The overall estimated study duration is 24 months. We plan to also conduct further
preclinical studies in parallel to our clinical plans as part of registration process with the FDA and EMA. Following these studies,
if successful, we intend to conduct a Phase III, multinational, multicenter, randomized, double-blind, parallel-group, placebo
controlled study to evaluate the potential safety, tolerability and efficacy of up to twice daily oral SCI-110 in treating TS.
In June 2016, we submitted a request
for orphan drug designation to the FDA for SCI-110 for the treatment of TS. The request is still pending and we are in communication
with FDA. Our last communication was in December 2020 when we received a letter from FDA. raising a concern that it will be hard
to limit the use of the product to the subset of patients we are pursuing. There is no assurance that we will successfully obtain
orphan drug designation for TS. However, in light of the fact that we disagree with this concern expressed by the FDA, we requested
a clarification call. In the clarification call conducted on February 2, 2021, we agreed with the FDA concern about our ability
to limit the use of the product to the subset of patients in addition to a safety concern associated with THC treatment in pediatrics
population so we suggested to amend our preliminary request and asked to include only adults in the treated population. An amendment
letter was discussed and the FDA described what it would want to see in such an amendment. In March we sent our response to the
FDA.
If the FDA does not
allow us to pursue the Section 505(b)(2) regulatory pathway as anticipated, we may need to conduct additional clinical trials,
provide additional data and information and meet additional standards for regulatory approval. If this were to occur, the time
and financial resources required to obtain FDA approval, and complications and risks associated with FDA approval, would substantially
increase. In a pre-IND meeting we had with FDA in February 2018, the FDA did not oppose our plans to submit an NDA via the 505(b)(2)
pathway relying, in part, on clinical and nonclinical information from literature related to dronabinol and the FDA’s previous
finding of safety and efficacy for the reference listed drug (Marinol).
Obstructive Sleep Apnea
OSA is characterized
by episodic sleep state–dependent collapse of the upper airway, resulting in periodic reductions or cessations in ventilation,
with consequent hypoxia, hypercapnia, or arousals from sleep. OSA severity is typically assessed with the apnea–hypopnea
index, or AHI, which is the number of apneas and hypopneas per hour of sleep.
On May 18, 2020, we
completed a joint venture transaction, or the Joint Venture Transaction, with Capital Point Ltd. and Coeruleus Ltd., pursuant to
which we transferred to Evero Health Ltd., or Evero, our SCI-110 sleep technology, to be fully owned by Evero, under the terms
and conditions of an asset purchase agreement.
Market Size and
Current Treatment
We are not aware of any FDA approved
pharmacological treatment for OSA, however, the global OSA devices market was $7.81 billion in 2019 and is projected to reach $13.24
billion by 2027. Around 3 million adults were suffering from OSA in the U.S. In 2019, the market for OSA devices was $3.77 billion.
North America dominates this market due to higher prevalence of OSA and the presence of favorable reimbursement policies which
has been pivotal in higher adoption of OSA devices in the region.
Our SCI-110 Solution
for OSA
In October 2017, we
signed an agreement with Assuta Medical Center, Israel to conduct a Phase IIa, sponsor-initiated trial for the treatment of OSA
SCI-110. The study was completed in November 2019.
Within the SCI-110
platform, we completed a proof of concept, single arm, open label, phase IIa trial for OSA titled “Examining the Efficacy
of a Therapeutic Combination of Dronabinol (synthetic ∆9-tetrahydracannabinol) and Palmitoylethanolamide for Obstructive
Sleep Apnea.” The study was conducted under the leadership of Prof. Yaron Dagan, head of the Sleep Medicine Institute at
Assuta. Patients with a confirmed OSA diagnosis received one daily treatment, each day for 30 days, of SCI-110 via oral administration,
which was followed-up for a period of 30 days, with the primary efficacy endpoint evaluating a significant change in the AHI, which
assesses the quality of sleep before and after treatment, as well as safety of the treatment. Secondary efficacy measurements include
a change in blood oxidation index before and after the treatment, improvement in quality assessment index, improvement in fatigue
and sleepiness based on the Epworth Sleepiness Scale index.
The top line results
for this study showed that of the 10 patients recruited into the study, nine patients completed the study and one dropped out of
the study due to a treatment associated adverse event (dizziness). Among the remaining nine patients, 55% demonstrated significant
improvement in AHI values (t-test; AHI mean difference 0.013, p<0.05), where average baseline (AHI: 24.2 +/- 5.0) dropped to
endpoint (AHI: 11.2 +/- 6.8), marking a reduction of around 54%. Two patients reported mild side effects which were resolved, when
the dosages of THC were reduced to 5mg/day. In general, SCI-110 therapy was well tolerated and exhibited no serious adverse events.
Pain (SCI-160)
Pain is the most common
reason for physician consultation in most developed countries. It is a major symptom in many medical conditions, and can interfere
with a person’s quality of life and general functioning. Opioid medications can provide short, intermediate or long acting
analgesia depending upon the specific properties of the medication and whether it is formulated as an extended release drug. Opioids
are efficacious analgesics in chronic malignant pain and modestly effective in nonmalignant pain management. However, there are
associated adverse effects, especially during the commencement or change in dose. Prolonged opioid use may cause drug tolerance,
chemical dependency, diversion and addiction. The potency and availability of these substances, despite their high risk of addiction
and overdose, have made them popular both as formal medical treatments and as recreational drugs. Due to their sedative effects
on the medulla oblongata, opioids in high doses present the potential for respiratory depression, and may cause respiratory failure
and death. In a 2013 review study published in Fundamental & Clinical Pharmacology, various studies were cited demonstrating
that cannabinoids exhibit comparable effectiveness to opioids in models of acute pain and even greater effectiveness in models
of chronic pain. Cannabis produces several compounds with various known activities known together as cannabinoids, such as THC
and cannabidiol (CBD). In general, cannabinoids bind and act through the two characterized cannabinoid receptors: CB1 and CB2.
However, activation of the CB1 receptor (as for example in the case of THC) leads to unwanted psychoactive “high” and
other adverse events, whereas activation of CB2 does not lead to any psychoactivity. In addition and unrelated to the above sentence,
the affinity of the cannabis derived cannabinoids to these receptors is limited and partial. Newly synthetic cannabinoid HU-433,
a specific CB2 agonist with high CB2 receptor affinity, was specifically synthesized by Prof. Raphael Mechoulam from Hebrew University
of Jerusalem, and is our proprietary new chemical entity.
Alzheimer’s disease and Agitation (SCI-110)
We recently signed
an agreement with The Israeli Medical Center for Alzheimer’s, to conduct a phase IIa clinical trial to evaluate the safety, tolerability
and efficacy of SCI-110 in patients with Alzheimer’s disease and agitation using our proprietary cannabinoid-based technology.
The study’s primary objective is the safety of SCI-110 and the secondary objective is the ability of the compound to ameliorate
agitation and other behavioral disturbances in patients with Alzheimer’s disease. The study will be initiated immediately
after receipt of all the required approvals from the (IRB and the Israeli Ministry of Health. The study, titled “Clinical
Study Protocol Phase II-a open label trial to evaluate the safety, tolerability and efficacy trend of SCI-110 in patients with
Alzheimer’s Disease and agitation,” is expected to be conducted under the leadership of Dr. Alona Raveh, MD, Principal
Investigator and board-certified geriatrician. The drug product, SCI-110, is a unique proprietary combination of Dronabinol (synthetic
delta-9-tetrahydrocannabinol (Δ⁹-THC), and Palmitoylethanolamide (PEA). Alzheimer’s disease is the most common
type of dementia, accounting for over two-thirds of cases of dementia. Alzheimer’s disease is a neurodegenerative disease
that causes progressive and disabling impairment of cognitive functions including memory, comprehension, language, attention, reasoning
and judgment. Symptoms of Alzheimer’s disease depend on the stage of the disease. Neuropsychiatric symptoms like apathy,
social withdrawal, disinhibition, agitation, psychosis, insomnia, poor appetite and wandering are also common in the mid to late
stages. The current pharmacological treatment of agitation in Alzheimer’s disease has an unsatisfactory benefit/risk ratio
and often involves using off-label drugs. Antipsychotic drugs, which are the most frequently used drugs for this purpose, are only
marginally better than placebo.
Market Size
It is estimated that the global Alzheimer’s therapeutics market is
projected to reach $13.57 billion by 2027 from $7.42 billion in 2019 with a substantial compounded annual growth rate of 9.2% through
2027, which is primarily attributed to the increasing pipeline drug development and increasing investments for drug development
biomarkers.
Our SCI-210 Solution for ASD
In
December 2019, we announced the progression of SCI-210 into clinical stage. In light of this, we plan to initiate a randomized,
double blind placebo controlled study to evaluate the efficacy, safety and tolerability of SCI-210 in treating patients with ASD.
This announcement
follows our previous release from October 2019 describing positive results obtained in its pre-clinical program. The medicinal
cannabis product (SCI-210) is a proprietary novel preparation containing non-psychoactive cannabinoid CBD and CannAmide™
(a proprietary PEA formulation).
Market
Size
It
is estimated that the global ASD therapeutics market was approximately $3.3 billion in 2018 and is expected to reach approximately
$4.6 billion by 2026 with a compounded annual growth rate of 4.3% during such time period.
Our SCI-210
Solution for SE
In
March 2021, we entered an agreement with The Sheba Fund for Health Services and Research, to perform a pre-clinical study for the
evaluation of our SCI-210 drug development program for the treatment of SE. The
pre-clinical study that we expect to conduct is expected to investigate the potential advantage of its proprietary combination
of SCI-210 by harnessing the “entourage effect” phenomenon, originally coined by Prof. Mechoulam. The effect of SCI-210
will be compared to CBD single treatment in animal model (mice) of SE.
SE
is a common life threatening medical emergency characterized by an acute, prolonged epileptic seizure. SE can represent either
the exacerbation of a pre-existing seizure or the initial manifestation of epilepsy. In order to avoid neurological sequelae, a
timely treatment should be started. When the continuous seizure does not respond to conventional drug treatment, SE can pose serious
life threatening risks.
In
2018, GW’s Epidiolex, a plant-based, pharmaceutical grade CBD extract was approved by the FDA for the treatment of seizures
associated with two rare and severe forms of epilepsy. Our study for SCI-210 previously demonstrated met its endpoint (efficacy)
when comparing its effect to the effect of CBD alone in an in-vitro hepatocytes model of fat accumulation; the effect of CBD was
enhanced by the addition of PEA, lowering the required effective concentration of CBD. In this study, we hope to demonstrate again
meet the study endpoint (efficacy) when comparing treatment using our product candidate compared to the effect of CBD alone on
SE and its neurological cognitive sequelae.
Market
Size
According to the World Health Organization
(WHO) report on epilepsy in 2019, around 50 million people have epilepsy. In addition, it has been estimated that the global epilepsy
market size would grow from $8.8 billion in 2018 to $9.5 billion towards the end of 2023, with a compounded annual growth rate
of 8.20% during this time frame.
In 2017, the Americas
held a 41% market share ($1.49 billion) and are projected to hold such position, estimated to be $1.6 billion in 2023.
Our SCI-160 Pain Solution
In July 2018, we executed
a license agreement with Yissum, the technology transfer company of the Hebrew University of Jerusalem, for SCI-160, a synthetic
cannabinoid synthesized by Prof. Mechoulam. We completed two preliminary preclinical studies evaluating analgesic and opioid-sparing
effects of this compound in a rat model of acute and chronic pain. In the preclinical studies, SCI-160 was well tolerated and did
not cause any significant adverse clinical effects. In addition, efficacy studies demonstrated the analgesic superiority of SCI-160
over control and were comparable to high-dose morphine analgesic effects and in some instances exerted greater potency. These preclinical
studies in SCI-160 were able to meet their endpoints - efficacy and safety - for both acute and chronic pain.
Market Size
The global chronic pain treatment market was valued at $77.8
billion in 2019. North America contributed the highest revenue to the chronic pain treatment market in the past, due to the high
prevalence of chronic diseases and increasing awareness on the issue, huge number of chronic pain treatment clinics, and high adoption
of non-opioid pain management options. Moreover, with age, people fall prey to chronic illnesses, due to their reduced power of
healing. In North America, 59.9 million people were aged 65 or above in 2019, with the number further expected to increase in the
coming years. The therapeutic market of acute pain in the seven major markets (United States, Germany, France, Italy, Spain, United
Kingdom and Japan) is estimated to have been $1.9 billion in 2017.
Of the population undergoing
surgery in the U.S., nearly 80% experienced acute postoperative pain, thereby contributing 41,766,061 patients to the acute pain
population in 2017. Furthermore, among the patients with trauma injury in the U.S., 34,068,366 patients were added to the acute
pain patient population. In contrast, the contribution of patients to the acute pain patient population by other acute medical
illnesses was observed to be lowest in 2017.
Our CannAmide™ Anti-Inflammatory
and Chronic Pain Solution
In July 2019, we announced
the issuance of a product license for our proprietary PEA oral tablet CannAmide™ by Health Canada’s Natural and Non-prescription
Health Products Directorate, or the NNHPD, for the recommended use as an anti-inflammatory and to help relieve chronic pain. This
license was issued by the NNHPD under the authority of the Natural Health Products Regulations. Dosage form of the described natural
health product is tablets composed of 400mg PEA with a recommended dose of one tablet three times a day. Additionally, on February
9, 2021, we announced that we have begun commercial production of our proprietary PEA oral tablets CannAmide™, which will
be marketed to pharmacies and other retail outlets across Canada following our entering into a distribution agreement. Furthermore,
on February 10, 2021, we announced that we had entered into an agreement with Procaps, a leader in contract development and manufacturing
services in softgel advanced technologies for the global pharmaceutical and nutraceutical industries, to develop and commercially
manufacture both of our drug candidates, SCI-110 and our proprietary PEA oral tablets CannAmide™, in softgel capsule form.
CannAmide™ is
a cannabimimetic compound that regulates endocannabinoid levels by enhancing receptor sensitivity and inhibiting their metabolism,
and is particularly attractive therapeutically as it appears to have a very high safety profile with low or no abuse liability.
Although numerous clinical trials have shown the favorable effect of PEA as an analgesic agent it has low solubility.
Other Programs
Cannabis and cannabinoids have
great therapeutic potential and have been used for years for medicinal purposes. For example, cannabis and cannabinoids are being
used to improve the quality of life of patients with numerous and diverse indications (oncological patients, chronic pain conditions,
etc.). We believe that the novel approaches and unique mechanism of action of our proprietary technology platforms, including our
drug delivery systems and unique combination and specific dosages, may be expanded to treat additional diseases and unmet medical
needs.
In the future, we may
consider expanding our pipeline to include these additional indications.
Intellectual
Property
Our intellectual property
portfolio comprises three granted U.S. patents, pending patent applications in seven families, of which five families are currently
international PCT applications or PCT applications that have entered the national phase and two families which are U.S. provisional
applications. Of this portfolio, we have exclusively licensed one granted U.S. patent from Dekel and one patent family from Yissum.
Internally Developed
Patent Applications
In April 2015, we filed
a provisional application with the USPTO for combinations of cannabinoids, n-acylethanolamines, and inhibitors of n-acylethanolamine
degradation, which, in April 2016 was converted into an international PCT application that subsequently entered national phase
in the following state entities: U.S., European Patent Office, or EPO, Israel, Australia, Canada, China and Japan. The technology
is directed to utilizing the potentiating effect of n-acylethanolamines on cannabinoids for any cannabinoid amenable indication,
including but not limited to analgesia and TS. The 20 year term of any patent issuing from this application would expire in April
2036.
In May 2015, we filed
a provisional application with the USPTO for combinations of opioids, n-acylethanolamines, and inhibitors of n-acylethanolamines
degradation, which, in May 2016 was converted into an international PCT application that subsequently entered national phase in
the following state entities: U.S., EPO, Israel, Australia, Canada, China and Japan. The technology is directed to potentiating
effect of N-acylethanolamines on opioids for opioid amenable indications. The 20 year term of any patent issuing from this application
would expire in May 2036.
In July 2016, we filed
a provisional application with the USPTO for the use of cannabinoids for potentiating the efficacy of antibiotics, which in July
2017 was converted into an international PCT application that subsequently entered national phase in the following state entities:
U.S., EPO, Canada and China. The 20 year term of any patent issuing from this application would expire in July 2037.
In
January 2018, we filed a provisional application with the USPTO directed to methods of treating OSA, which in January 2019 was
converted into an international PCT application that subsequently
entered national phase in the following state entities: U.S., EPO and Australia. The 20 year term of any patent issuing from this
application would expire in January 2039.
In April 2019, we filed
a provisional application with the USPTO directed to compositions and methods for potentiating derivatives of 4-aminophenols, which
in April 2020 was converted into an international PCT application. The 20 year term of any patent issuing from this application
would expire in April 2040.
In August 2020, we
filed a provisional application with the USPTO directed to methods for maintaining microvascular integrity.
In June 2020, we filed
a provisional application with the USPTO directed to flumazenil for the treatment of post-viral fatigue syndrome.
In
March 2013, we filed a provisional application with the USPTO for the technology of proprietary sequences of anti-CD3 antibody
and the utilization of the latter in various autoimmune diseases, as well as in hepato-pathologies. The provisional application
has been converted to a PCT and then entered a National Status in December 2014 in the U.S., EPO, China, Canada and Japan. In the
U.S. it has received a grant status in June 2018.
In-Licensed Patents and Patent Applications
In May 2015, we entered
into an exclusive, irrevocable, worldwide license agreement with Dekel for certain technology and one granted U.S. patent related
to compositions and methods for treating inflammatory disorders. The agreement became effective in August 2015 immediately after
we and Dekel entered into an amendment to the license agreement. Pursuant to the license agreement, we granted Dekel an option
to purchase 3,876,000 of our Ordinary Shares at an exercise price of NIS 0.5 per share, exercisable for 90 days. The option was
fully exercised as of November 2015. We also granted Dekel an additional option to purchase 11,926,154 of our Ordinary Shares at
an exercise price of NIS 0.65 per share, exercisable for 12 months. As of the date of this Annual Report, 65% of the second option
(representing options to purchase 7,760,256 Ordinary Shares) has been exercised, for aggregate consideration of NIS 5 million,
and the remainder of the option has expired. Pursuant to the license agreement, in May 2016 we issued Dekel 200,000 of our Ordinary
Shares at a price per share of NIS 0.5 on account of future royalty payments. This upfront payment of shares on account of future
royalty payments was originally a pre-condition for the closing of the agreement and was subject to the
TASE’s prior approval. This pre-condition was subsequently forfeited by Dekel under the first amendment of the license
agreement, to enable the agreement to enter into effect even prior to TASE approval, which was eventually obtained later on. Also,
pursuant to the license agreement, we are obligated to pay Dekel fees based on specific milestones and royalties upon commercialization.
The milestone payments include: (i) $25,000 upon the successful completion of preclinical trials (which milestone was met in November
2016, resulting in this payment becoming due, and which was paid in March 2017); (ii) $75,000 upon the successful completion of
a Phase I/IIa trial (which was paid in April 2018); and (iii) $75,000 upon the earlier of generating net revenues of at least $200,000
from the commercialization of the technology or the approval of the FDA / the EMA of a drug based on the licensed assets. In each
case, and subject to our discretion, the respective milestone payments are payable in cash or equity based on a price per Ordinary
Share of NIS 0.5. The royalty payments are 8% for commercialization and 35% pursuant to a sub-license of the licensed assets. The
patent expiration dates of any patents maturing from this application would likely be 2029.
On July 14, 2019, we
entered into an amendment to the license agreement, according to encompasses our and Dekel’s original intention to exclude
certain consumer packaged goods (including, inter alia, food, beverage, cosmetics, pet products and hemp based products, which
are sources of nutrients or other substances which may have a nutritional effect) from the scope of the licensed products and the
field of our activity, as described in the license agreement, which intention was not reflected in the license agreement, and therefore,
desired and agreed to amend the license agreement to reflect the foregoing clarification, as well as certain additional less material
matters as discussed in the amendment. The amendment also prescribes a specific development plan under the license agreement requiring
us to invest in the licensed technology (as defined under the license agreement) formulation development and maintenance a total
annual investment cap of $350,000 and for a non-compete and non-solicitation obligation by Dekel and Dr. Shmulewitz, our former
chairman and chief executive officer, towards our field of activity.
On July 29, 2018, we
entered into an exclusive, worldwide, sublicensable, royalty-bearing license agreement with Yissum for a license to make commercial
use of the licensed technology, in order to develop, obtain regulatory approvals, manufacture, market, distribute or sell products,
or the Yissum License Agreement. According to the Yissum License Agreement, we were required to pay Yissum an initial payment of
$133,000, and shall pay Yissum royalties at the rates of 3% of net sales, subject to the royalty reductions as described in the
Yissum License Agreement. All right, title and interest in and to the Yissum License Agreement shall vest solely in Yissum, and
we shall hold and make use of the rights granted. All rights in the development results shall be solely owned by us, except to
the extent that an employee of the Yissum, including the researcher, is considered an inventor of a patentable invention arising
from the development results, in which case such invention and all patent applications and/or patents claiming such invention shall
be owned jointly by us and Yissum, as appropriate, and Yissum’s share in such joint patents shall be automatically include
in the Yissum License Agreements.
Other Intellectual Property Protection
In
addition to patent protection, we intend to use other means to protect our proprietary rights, including pursuing marketing or
data exclusivity periods, orphan drug status, and similar rights that are available under regulatory provisions in certain countries,
including but not limited to the United States, Europe, Canada, Japan, and China.
We also rely on trade
secrets, know-how, and continuing innovation to develop and maintain our competitive position. We cannot be certain that patents
will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in
the future, nor can we be sure that any of our existing patents or any patents granted to us in the future will be commercially
useful in protecting our technology.
We also seek regulatory
approval for our products for indications with high unmet medical need, great market potential, and where we have a proprietary
position through patents covering various aspects of our products, including but not limited to: composition, dosage, formulation,
use, and manufacturing process. Our success depends, in part, on an intellectual property portfolio that supports future revenue
streams and erects barriers to our competitors. We are maintaining and building our patent portfolio through filing new patent
applications, prosecuting existing applications, and licensing and acquiring new patents and patent applications.
Despite these measures,
any of our intellectual property and proprietary rights could be challenged, invalidated, circumvented, infringed or misappropriated.
Intellectual property and proprietary rights may not be sufficient to permit us to take advantage of current market trends or otherwise
to provide competitive one. For more information, see Item 3D. “Risk Factors—Risks Related to our Intellectual Property.”
Sales and Transfer of Intellectual Property
Assets
Transaction with
Former Subsidiary
In June 2016, we entered
into a share transfer agreement with our former subsidiary, Orimmune Bio Ltd., or Orimmune, and Karma Link Ltd., or Karma Link.
According to the agreement, we agreed to sell our interests in Orimmune to Karma Link, and also use our best efforts to transfer
to and assign Orimmune our rights in the Anti-CD3 technology (which was in-licensed by us during 2010 from Hadasit, and certain
internally developed assets and technology relating thereto), and also assist in obtaining all the necessary approvals for such
technology transfer (including from Hadasit, but without undertaking a commitment for the technology transfer, which required Hadasit’s
pre-approval).
During May 2017, we
entered into an amendment with Karma Link and Orimmune, pursuant to which the parties acknowledged that our discussions with Hadasit
regarding the possibility of assigning the license to Orimmune, as contemplated in the transfer agreement, had yet to mature into
an agreement with Hadasit, due to Hadasit’s objection to the proposed assignment. We agreed to bear certain fees expenses
related to the license incurred prior to the date hereof in the amount of $60,000, which were paid to Orimmune. In addition, during
a period of six months commencing as of the date of the amendment, we agreed to bear certain additional fees and expenses related
to the license. It was determined that such additional amounts will not exceed $15,000, with such additional fees and expenses
to be coordinated with our approval in advance. In consideration for such participation by us, it was agreed to increase the percentages
of the predetermined rate. Although failure to complete the assignment will not constitute a breach of the agreement by us, such
failure may obligate us to decide whether to continue with the program (including continuing the search for other potential collaborators
for the assignment of the license) or to abandon the license pursuant to the provisions of the original license agreement with
Hadasit. In either of such events, we may bear certain payments and liabilities to third parties including the IIA.
The IIA previously
declined our request for a joint ownership registration with Hadasit of the patent underlying the assets, according to the license
agreement with Hadasit, due to the IIA’s claim that such registration was not in compliance with the IIA rules regarding
use of its grants. Following further discussions between Hadasit and us held during the second half of 2017, and through the first
quarter of 2018, after not succeeding in assigning the license to a buyer, we signed the Termination Agreement. According to the
Termination Agreement, Hadasit assigned to us a patent and we re-assigned to Hadasit all of its rights, title and interest in the
patents that developed by Hadasit prior to the Hadasit License.
On December 13, 2018,
an additional amendment to the transfer agreement was signed, or the Additional Amendment, between us, Karma Link and Orimmune,
under which the parties acknowledged that despite our efforts and assistance in the discussions with Hadasit regarding the possibility
of assigning the license to Orimmune, Orimmune chose not to enter into an agreement with Hadasit. Under that Additional Amendment,
it was agreed that Orimmune (and Karma Link) will be assigned certain rights in IP related to the licensed technology owned by
us, subject to certain conditions precedent which were still not met as of December 31, 2020. Recently, subsequent to the year
ended December 31, 2020, we received the approval of the IIA to complete the assignment and we are now seeking to complete the
transaction.
Joint Venture Transaction
On May 18, 2020, we
closed on the Joint Venture Transaction. As part of the Joint Venture Transaction, we transferred to Evero, our subsidiary, our
SCI-110 sleep technology, to be fully owned by Evero, under the terms and conditions of an asset purchase agreement.
Commercialization
Although
we started early commercialization of our proprietary PEA oral tablets CannAmide™, we intend to build a global commercial
infrastructure to effectively support the commercialization of our main product candidates, if and when we believe regulatory approval
of a product candidate in a particular geographic market appears imminent.
To
develop the appropriate commercial infrastructure, we will likely have to invest significant amounts of financial and management
resources, some of which we expect to commit prior to completing the regulatory process for our product candidates. Where appropriate,
we may elect in the future to utilize strategic partners, distributors, or contract sales forces to assist in the commercialization
of our products. In certain instances we may consider building our own commercial infrastructure.
Competition
The
biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong
emphasis on proprietary products. While we believe that our scientific knowledge, technology and development experience provide
us with competitive advantages, we face potential competition from many different sources, including major pharmaceutical, specialty
pharmaceutical and biotechnology companies, academic institutions, governmental agencies and public and private research institutions.
Any product candidates that we successfully develop and commercialize will compete with existing therapies and new therapies that
may become available in the future.
The
first THC-based pharmaceutical, a pill sold under the commercial name of Marinol (scientific name: dronabinol), was developed
by a company called Unimed Pharmaceuticals, with funding provided by the National Cancer Institute. In 1985, Marinol received
FDA approval as a treatment for chemotherapy-related nausea and vomiting. Today, Marinol is marketed by AbbVie, Inc. Since the
introduction of Marinol into the market, other pharmaceuticals containing THC have also been developed. These include generic
oral capsules of dronabinol, such as those marketed by SVC Pharma LP and Akorn Inc., Syndros, an orally administered liquid formulation
of dronabinol, Meda AB’s Cesamet (nabilone), a synthetic derivative of THC, and Sativex (nabiximols), a whole cannabis extract
administered as an oral spray. Furthermore, we are aware of multiple companies that are working in the cannabis therapeutic
area and are pursuing regulatory approval for their product candidates. For example, GW, which markets Sativex, a botanical cannabinoid
oral mucosal for the treatment of spasticity due to multiple sclerosis received FDA approval in the United States in June 2018
for Epidiolex, a liquid formulation of highly purified cannabidiol extract, as a treatment for Dravet’s Syndrome, Lennox
Gastaut Syndrome, and various childhood epilepsy syndromes and Prader-Willi syndrome. Zynerba is developing a transdermal formulation
of cannabidiol, and Emerald Bioscience is focused on the discovery, development and commercialization of cannabis therapeutics.
In addition, GW is developing a
CBDV based therapy for ASD and therapy for neonatal hypoxic-ischemic encephalopathy and schizophrenia. Zynerba is developing a
transdermal formulation of cannabidiol for Fragile X and certain refractory epilepsies and ASD. Skye is focused on ton developing proprietary,
synthetic cannabinoid-derived molecules to treat glaucoma and other diseases with significant unmet need, Corbus
Pharmaceuticals Holdings is seeking FDA approval for their synthetic cannabinoid for systemic sclerosis, cystic fibrosis, dermatomyositis
and systemic lupus erythematosus and NASH. RespireRx, is developing Dronabinol for OSA treatment.
Our
competitors, either alone or through their strategic partners, might have substantially greater name recognition and financial,
technical, manufacturing, marketing and human resources than we do and significantly greater experience and infrastructure in researching
and developing pharmaceutical products, obtaining FDA and other regulatory approvals of those products and commercializing those
products around the world. They may also have intellectual property portfolios that provide them with significant competitive advantages
or create substantial barriers in our target markets.
Manufacturing
We
currently expect to contract with third parties for the manufacturing and testing of our product candidates for preclinical trials
and clinical trials and intend to do so in the future. We do not own or operate manufacturing facilities for the production of
clinical quantities of our product candidates. The use of contracted manufacturing and reliance on collaboration partners is relatively
cost-efficient and has may eliminate the need to directly invest in manufacturing facilities and additional staff. Nevertheless,
we are looking into entering into transactions with a potential partner that owns or has clinical or commercial scale manufacturing
capabilities.
To
date, our third-party manufacturers have met our manufacturing requirements. We expect third-party manufacturers to be capable
of providing sufficient quantities of our product candidates to meet anticipated full scale commercial demands. To meet our projected
needs for commercial manufacturing, third parties with whom we currently work might need to increase their scale of production,
or we will need to secure alternate suppliers. We believe that there are alternate sources of supply that can satisfy our clinical
and commercial requirements, although we cannot be certain that identifying and establishing relationships with such sources, if
necessary, would not result in significant delay or material additional costs.
Government
Regulation
FDA Approval Process
In the United States,
pharmaceutical product candidates are subject to extensive regulation by the FDA. The FDC Act, and other federal and state statutes
and regulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval,
labeling, promotion, marketing, distribution, post-approval monitoring, reporting, sampling, and import and export of pharmaceutical
drug product candidates. Failure to comply with applicable U.S. rules and regulations may subject a company to a variety of administrative
or judicial sanctions, such as FDA refusal to approve pending NDAs, warning letters, product candidate recalls, product candidate
seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties and criminal prosecution.
Pharmaceutical drug
product candidate development in the United States typically involves pre-clinical laboratory and animal testing, the submission
to the FDA of an Investigational New Drug Application (IND), which must become effective before clinical testing may commence,
and adequate, well-controlled clinical trials to establish the safety and effectiveness of the drug for each indication for which
FDA approval is sought. Satisfaction of FDA pre-market approval requirements typically takes many years and the actual time required
may vary substantially based upon the type, complexity and novelty of the product candidate or disease.
Nonclinical
tests include laboratory evaluation of an API or drug substance and drug product’s candidate chemistry, formulation and toxicity,
as well as animal trials to assess the characteristics and potential safety and efficacy of the product candidate. The conduct
of the nonclinical toxicology studies must comply with federal regulations and requirements, including GLP. The results of nonclinical
testing are submitted to the FDA as part of an IND along with other information, including information about product candidate
chemistry, manufacturing and controls, and a proposed clinical trial protocol. Long term nonclinical tests, such as animal tests
of reproductive toxicity and carcinogenicity, may continue after the IND is submitted.
A 30-day waiting period
after the submission of an original IND is required prior to the commencement of clinical testing in humans. If the FDA has not
imposed a clinical hold on the IND or otherwise commented or questioned the IND within this 30-day period, the proposed clinical
trial proposed in the IND may begin.
Clinical
trials involve the administration of the investigational product to healthy volunteers or patients under the supervision of a qualified
investigator. Clinical trials must be conducted: (i) in compliance with federal regulations, (ii) in compliance with GCP, an international
standard meant to protect the rights and health of patients and to define the roles of clinical trial sponsors, administrators
and monitors. Clinical protocols and detail the objectives of the trial, the parameters to be used in monitoring safety, and the
effectiveness criteria to be evaluated. Each protocol and any amendment involving testing of U.S. patients study subjects within
the United States and subsequent protocol amendments must be submitted to the FDA as part of the IND.
The
FDA may order the temporary hold of a clinical trial at any time or impose other sanctions if the FDA believes that the clinical
trial either is not being conducted in accordance with FDA requirements regulations or presents a potentially unacceptable risk
to the clinical trial subjects. The trial protocol and informed consent information for subjects in clinical trials must also be
submitted to an IRB for approval. An IRB may impose other conditions for the protocol and may also require the clinical trial at
the site to be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements.
505(b)(2)
Regulatory Approval Process
Section
505(b)(2) of the FDC Act, or 505(b)(2), provides an alternate regulatory pathway to FDA approval for new or improved formulations
or new uses of previously approved drug products. Specifically, 505(b)(2) permits the filing of an NDA where at least some of the
information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not
obtained a right of reference, or use from the person by or for whom the investigations were conducted. The applicant may rely
upon the FDA’s prior findings of safety and efficacy for an approved product that acts as the reference listed drug for purposes
of a 505(b)(2) NDA. The FDA may also require 505(b)(2) applicants to perform additional studies or measurements to support any
changes from the reference listed drug. The FDA may then approve the new product candidate for all or some of the labeled indications
for which the referenced product has been approved, as well as for any new indication sought by the 505(b)(2) applicant.
Orange Book
Listing
Section
505 of the FDC Act describes three types of marketing applications that may be submitted to the FDA to request marketing authorization
for a new drug. A Section 505(b)(1) NDA is an application that contains full reports of investigations of safety and efficacy.
A Section 505(b)(2) NDA is an application that contains full reports of investigations of safety and efficacy, but where at least
some of the information required for approval comes from investigations that were not conducted by or for the applicant and for
which the applicant has not obtained a right of reference or use from the person by or for whom the investigations were conducted.
This regulatory pathway enables the applicant to rely, in part, on the FDA’s prior findings of safety and efficacy for an
existing product, or published literature, in support of its application. Section 505(j) establishes an abbreviated approval process
for a generic version of approved drug products through the submission of an abbreviated new drug application, or ANDA. An ANDA
provides for marketing of a generic drug product that has the same active ingredients, dosage form, strength, route of administration,
labeling, performance characteristics and intended use, among other things, to a previously approved product. ANDAs are termed
“abbreviated” because they are generally not required to include preclinical and clinical data to establish safety
and efficacy. Instead, generic applicants must scientifically demonstrate that their product is bioequivalent to, or performs in
the same manner as, the innovator drug through in vitro, in vivo or other testing. For systemic drugs, the generic version must
also deliver the same amount of active ingredients into a subject’s bloodstream in the same amount of time as the innovator
drug and can often be substituted by pharmacists under prescriptions written for the reference listed drug.
In
seeking approval for a drug through an NDA, including a 505(b)(2) NDA, applicants are required to list with the FDA patents whose
claims cover the applicant’s product. Upon approval of an NDA, each of the patents listed in the application for the drug
is then published in Approved Drug Products with Therapeutic Equivalence Evaluations, also known as the Orange Book. These products
may be cited by potential competitors in support of approval of an ANDA or 505(b)(2) NDA.
Any
applicant who submits an ANDA seeking approval of a generic equivalent version of a drug listed in the Orange Book or a 505(b)(2)
NDA referencing a drug listed in the Orange Book must certify to the FDA that (1) no patent information on the drug product that
is the subject of the application has been submitted to the FDA; (2) such patent has expired; (3) the date on which such patent
expires; or (4) such patent is invalid or will not be infringed upon by the manufacture, use or sale of the drug product for which
the application is submitted. This last certification is known as a Paragraph IV certification. Generally, the ANDA or 505(b)(2)
NDA cannot be approved until all listed patents have expired, except where the ANDA or 505(b)(2) NDA applicant challenges a listed
patent through a Paragraph IV certification. If the applicant does not challenge the listed patents or does not indicate that it
is not seeking approval of a patented method of use, the ANDA or 505(b)(2) NDA application will not be approved until all of the
listed patents claiming the referenced product have expired.
If
the competitor has provided a Paragraph IV certification to the FDA, the competitor must also send notice of the Paragraph IV certification
to the holder of the NDA for the reference listed drug and the patent owner once the application has been accepted for filing by
the FDA. The NDA holder or patent owner may then initiate a patent infringement lawsuit in response to the notice of the Paragraph
IV certification. The filing of a patent infringement lawsuit within 45 days of the receipt of a Paragraph IV certification prevents
the FDA from approving the application until the earlier of 30 months from the date of the lawsuit, expiration of the patent, settlement
of the lawsuit, a decision in the infringement case that is favorable to the applicant or such shorter or longer period as may
be ordered by a court. This prohibition is generally referred to as the 30-month stay. In instances where an ANDA or 505(b)(2)
NDA applicant files a Paragraph IV certification, the NDA holder or patent owner regularly take action to trigger the 30-month
stay, recognizing that the related patent litigation may take many months or years to resolve. Thus, approval of an ANDA or 505(b)(2)
NDA could be delayed for a significant period of time depending on the patent certification the applicant makes and the reference
drug sponsor’s decision to initiate patent litigation. The applicant may also elect to submit a statement certifying that
its proposed label does not contain, or carves out, any language regarding the patented method-of-use rather than certify to a
listed method-of-use patent.
Although
our product candidates are based on repurposed drugs, there are at present no patents or other exclusivities listed in the Orange
Book pertaining to a product containing the active ingredient dronabinol.
Exclusivity
The
FDA provides periods of regulatory exclusivity, which provides the holder of an approved NDA limited protection from new competition
in the marketplace for the innovation represented by its approved drug for a period of three or five years following the FDA’s
approval of the NDA. Five years of exclusivity are available to New Chemical Entities, or NCEs. An NCE is a drug that contains
no active moiety or drug substance that has been approved by the FDA in any other NDA. An active moiety is the molecule or ion,
excluding those appended portions of the molecule that cause the drug to be an ester, salt, including a salt with hydrogen or coordination
bonds, or other noncovalent, or not involving the sharing of electron pairs between atoms, derivatives, such as a complex (i.e.,
formed by the chemical interaction of two compounds), chelate (i.e., a chemical compound), or clathrate (i.e., a polymer framework
that traps molecules), of the molecule, responsible for the therapeutic activity of the drug substance. During the exclusivity
period, the FDA may not accept for review or approve an ANDA or a 505(b)(2) NDA submitted by another company that contains the
previously approved active moiety. An ANDA or 505(b)(2) application, however, may be submitted one year before NCE exclusivity
expires if a Paragraph IV certification is filed.
If
a product is not eligible for the NCE exclusivity, it may be eligible for three years of exclusivity. Three-year exclusivity is
available to the holder of an NDA, including a 505(b)(2) NDA, for a particular condition of approval, or change to a marketed product,
such as a new formulation for a previously approved product, if one or more new clinical trials, other than bioavailability or
bioequivalence trials, was essential to the approval of the application and was conducted or sponsored by the applicant. This three-year
exclusivity period protects against FDA approval of ANDAs and 505(b)(2) NDAs for the condition of the new drug’s approval.
As a general matter, three-year exclusivity does not prohibit the FDA from approving ANDAs or 505(b)(2) NDAs for generic versions
of the original, unmodified drug product. Five-year and three-year exclusivity will not delay the submission or approval of a full
NDA; however, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical
studies and adequate and well-controlled clinical trials necessary to demonstrate safety and efficacy.
NDA Submission
and Review by the FDA
Assuming
successful completion of the required clinical and nonclinical testing, among other items, the results of product development,
including chemistry, manufacture and controls, nonclinical studies and clinical trials are submitted to the FDA, along with proposed
labeling, as part of an NDA. The submission of an NDA requires payment of a substantial user fee to the FDA. These user fees must
be paid at the time of the first submission of the application, even if the application is being submitted on a rolling basis.
Fee waivers or reductions are available in some circumstances. One basis for a waiver of the application user fee is if the applicant
employs fewer than 500 employees, including employees of affiliates, the applicant does not have an approved marketing application
for a product that has been introduced or delivered for introduction into interstate commerce, and the applicant, including its
affiliates, is submitting its first marketing application.
The cost of preparing
and submitting an NDA is substantial. Under federal law, the submission of most NDAs is additionally subject to a substantial application
user fee; the fee in the fiscal year 2020 is $2,942,965.
The
FDA has 60 or 74 days from its receipt of an NDA to determine whether the application will be accepted for filing based on
the agency’s threshold determination that it is sufficiently complete to permit substantive review. Once the submission is
accepted for filing, the FDA begins an in-depth review. The FDA has agreed to certain performance goals in the review of NDAs.
Most such applications for standard review drug product candidates are reviewed within 10 to 12 months, while most applications
for priority review drugs are reviewed in six months. Priority review can be applied to drugs that the FDA determines offer major
advances in treatment, or provide a treatment where no adequate therapy exists. The review process for both standard and priority
review may be extended by FDA for three additional months to consider certain late-submitted information, or information intended
to clarify information already provided in the submission.
The
FDA may also refer applications for novel drug product candidates, or drug product candidates that present difficult questions
of safety or efficacy, to an advisory committee, which is typically a panel that includes clinicians and other experts, for review,
evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of
an advisory committee, but it generally follows such recommendations. Before approving an NDA, the FDA will typically inspect one
or more clinical sites to assure compliance with GCP. Additionally, the FDA will inspect the facility or the facilities at which
the drug substance and drug product is are manufactured. The FDA will not approve the drug product candidate unless compliance
with or current cGMP is satisfactory and the NDA contains data that provide substantial evidence that the drug is safe and effective
in the indication studied.
After
the FDA evaluates the NDA and the manufacturing facilities, it issues either an approval letter or a complete response letter.
A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing,
or information, in order for the FDA to reconsider the application. If, or when, those deficiencies have been addressed to the
FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. The FDA has committed to reviewing
such resubmissions in two or six months depending on the type of requested information.
An approval letter
authorizes commercial marketing of the drug with specific prescribing information for specific indications. As a condition of NDA
approval, the FDA may require a REMS plan to help ensure that the benefits of the drug outweigh the potential risks. REMS can include
medication guides, communication plans for health care professionals, and Elements to Assure Safe Use, or ETASU. An ETASU can include,
but are not limited to, special training or certification for prescribing or dispensing, dispensing only under certain circumstances,
special monitoring, and the use of patient registries. The requirement for a REMS can materially affect the potential market and
profitability of the drug. Moreover, product candidate approval may require substantial post-approval testing and surveillance
to monitor the drug’s safety or efficacy. Once granted, product candidate approvals may be withdrawn if compliance with regulatory
standards is not maintained or problems are identified following initial marketing.
Disclosure of Clinical Trial Information
Sponsors of clinical
trials of certain FDA-regulated product candidates, including prescription drugs, are required to register and disclose certain
clinical trial information on a public website (clinicaltrials.gov) which is maintained by the U.S. National Institutes of Health.
Information related to the product candidate, patient population, phase of investigation, study sites and investigator, and other
aspects of the clinical trial is made public as part of the registration. Sponsors are also obligated to disclose the results of
these trials after completion. Disclosure of the results of these trials can be delayed until the product candidate drug product
or new indication being studied has been approved. Competitors may use this publicly available information to gain knowledge regarding
the design and progress of our development programs.
Fast Track Designation and Accelerated
Approval
TS
may be considered as a serious condition with a potentially disabling nature. The FDA has programs to facilitate the development,
and thus expedite the review, of drugs that are intended for the treatment of a serious or life-threatening disease or condition
for which there is no effective treatment and which demonstrate the potential to address unmet medical needs for the condition.
These therapies for serious conditions are approved and available to patients as soon as it can be concluded that the therapies’
benefits outweigh their risk. Under the Fast Track Program, the sponsor of a new drug candidate may request that FDA designate
the drug candidate for a specific indication as a Fast Track drug concurrent with, or after, the filing of the IND for the drug
candidate. FDA must determine if the drug candidate qualifies for Fast Track designation within 60 days of receipt of the
sponsor’s request.
Under
the FDA’s accelerated approval regulations, FDA may approve a drug for a serious or life-threatening illness that provides
meaningful therapeutic benefit to patients over existing treatments based upon a surrogate endpoint that is reasonably likely to
predict clinical benefit. Accelerated approval may also be based on a clinical endpoint that can be measured earlier than irreversible
morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical
benefit, considering the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments.
In
clinical trials, a surrogate endpoint is a measurement of laboratory or clinical signs of a disease or condition that substitutes
for a direct measurement of how a patient feels, functions or survives. Surrogate endpoints can often be measured more easily or
more rapidly than clinical endpoints. A drug product that is approved on this basis is subject to
rigorous post-marketing compliance requirements, including the completion of confirmatory or post-approval clinical trial(s) to
confirm the effect on the clinical endpoint. Failure to conduct required post-approval studies, or confirm a clinical benefit during
post-marketing studies, will allow FDA to withdraw the drug from the market on an expedited basis. All promotional materials for
drug candidates approved under accelerated approval regulations are subject to prior review by FDA.
In
addition to other benefits such as the ability to use surrogate endpoints and engage in more frequent interactions with FDA, FDA
may initiate review of sections of a Fast Track drug’s NDA before the application is complete. This rolling review is available
if the applicant provides, and FDA approves, a schedule for the submission of the remaining information and the applicant pays
applicable user fees. However, FDA’s time period goal for reviewing an application does not begin until the last section
of the NDA is submitted. Additionally, the Fast Track designation may be withdrawn by FDA if FDA believes that the designation
is no longer supported by data emerging in the clinical trial process.
Patent Term Extension
After
NDA approval, owners of relevant drug patents may apply for up to a five-year patent extension. The allowable patent term extension
is calculated as half of the drug’s testing phase, the time between IND submission and NDA submission, and all of the review
phase—the time between NDA submission and approval up to a maximum of five years. The time can be shortened if FDA determines
that the applicant did not pursue approval with due diligence. The total patent term after the extension may not exceed 14 years.
For
patents that might expire during the application phase, the patent owner may request an interim patent extension. An interim patent
extension increases the patent term by one year and may be renewed up to four times. For each interim patent extension granted,
the post-approval patent extension is reduced by one year. The director of the USPTO must determine that approval of the drug covered
by the patent for which a patent extension is being sought is likely. Interim patent extensions are not available for a drug for
which an NDA has not been submitted.
Advertising and Promotion
Once
an NDA is approved, a drug product will be subject to certain post-approval requirements. Products manufactured or distributed
by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including manufacturing, periodic reporting, product
sampling and distribution, advertising, promotion, drug shortage reporting, compliance with any post-approval requirements imposed
as a conditional of approval such as Phase 4 clinical trials, REMS and surveillance, recordkeeping and reporting requirements,
including adverse experiences. For instance, FDA closely regulates the post-approval marketing and promotion of drugs, including
standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational
activities and promotional activities involving the internet.
Drugs
may be marketed only for the approved indications and in accordance with the provisions of the approved labeling. Changes to some
of the conditions established in an approved application, including changes in indications, labeling, or manufacturing processes
or facilities, require submission and FDA approval of a new NDA or NDA supplement before the change can be implemented. An NDA
supplement for a new indication typically requires clinical data similar to that in the original application. The FDA uses the
same procedures and actions in reviewing NDA supplements as it does in reviewing NDAs.
Adverse
Event Reporting and GMP Compliance
Adverse
event reporting and submission of periodic reports are required following FDA approval of an NDA. The FDA also may require post-marketing
testing, known as Phase 4 testing, REMS and surveillance to monitor the effects of an approved product candidate, or the FDA
may place conditions on an approval that could restrict the distribution or use of the drug product. In addition, quality-control,
drug manufacture, packaging, and labeling procedures must continue to conform with cGMPs after approval. Drug manufacturers and
certain of their subcontractors are required to register their establishments with the FDA and certain state agencies. Registration
with the FDA subjects entities to periodic unannounced inspections by the FDA, during which the FDA inspects manufacturing facilities
to assess compliance with cGMPs. Accordingly, manufacturers must continue to expend time, money and effort in the areas of production
and quality control to maintain compliance with cGMPs. Regulatory authorities may withdraw product candidate approvals or request
product candidate recalls if a company fails to comply with regulatory standards, if it encounters problems following initial marketing
or if previously unrecognized problems are subsequently discovered.
Pediatric
Exclusivity and Pediatric Use
The
Best Pharmaceuticals for Children Act, or BPCA, provides NDA holders a six-month extension of any exclusivity—patent or non-patent—for
a drug if certain conditions are met. Conditions for exclusivity include a determination by the FDA that information relating to
the use of a new drug in the pediatric population may produce health benefits in that population; a written request by the FDA
for pediatric studies; and agreement by the applicant to perform the requested studies and the submission to the FDA; and the acceptance
by the FDA, of the reports of the requested studies within the statutory timeframe. Applications under the BPCA are treated as
priority applications.
In
addition, under the Pediatric Research Equity Act, or PREA, NDAs or supplements to NDAs must contain data to assess the safety
and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration
for each pediatric subpopulation for which the drug is safe and effective, unless the sponsor has received a deferral or waiver
from the FDA. Unless otherwise required by regulation, PREA does not apply to any drug for an indication for which orphan designation
has been granted. The required pediatric assessment must assess the safety and effectiveness of the product candidate for the claimed
indications in all relevant pediatric subpopulations and support dosing and administration for each pediatric subpopulation for
which the product candidate is safe and effective. The sponsor or FDA may request a deferral of pediatric studies for some or all
of the pediatric subpopulations. A deferral may be granted for several reasons, including a finding that the drug is ready for
approval for use in adults before pediatric studies are complete or that additional safety or effectiveness data need to be collected
before the pediatric studies begin. Under PREA, the FDA must send a non-compliance letter requesting a response with 45 days
to any sponsor that fails to submit the required assessment, keep a deferral current or fails to submit a request for approval
of a pediatric formulation.
Orphan Drugs
Under
the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition—generally
a disease or condition with a prevalence of fewer than 200,000 individuals in the United States. Orphan drug designation must be
requested before submitting an NDA. After the FDA grants orphan drug designation, the generic identity of the drug and its potential
orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in, or shorten the duration
of, the regulatory review and approval process. The first NDA applicant to receive FDA approval for a particular active ingredient
to treat a particular disease with an FDA orphan drug designation is entitled to a seven-year exclusive marketing period in the
United States for that drug product candidate for that indication. During the seven-year exclusivity period, the FDA may not approve
any other applications to market the same drug for the same disease, except in limited circumstances, such as a showing of clinical
superiority to the product candidate with orphan drug exclusivity. Orphan drug exclusivity does not prevent the FDA from approving
a different drug for the same disease or condition, or the same drug for a different disease or condition. Among the other benefits
of orphan drug designation are tax credits for certain research and a waiver of the NDA application user fee.
In
June 2016, we submitted a request for orphan drug designation to the FDA for SCI-110 for the treatment of TS. In a letter dated
September 29, 2016, the FDA informed us that our request could not be granted at such time, and is being held in abeyance until
and subject to us providing additional information pertaining to the overall prevalence of TS in both children and adults, and
further clinical data to support our scientific rationale for our request for orphan drug designation within 12 months. In September
2017, we responded to such FDA letter within the designated time frame, and provided the FDA with our articulated and reasoned
responses including documentation and clinical data that supports it. On December 26, 2017, we received the FDA’s response
to our response. The FDA accepted that there is adequate scientific rationale for the treatment of TS with SCI-110 mainly through
the preliminary results of ongoing clinical trials, suggesting that SCI-110 may provide benefit in treating TS. However, the FDA
stated that it was unable to grant our request and indicated that we did not provide adequate prevalence estimates, and any evidence
to support our statement that only moderate to severe TS patients would require pharmacological treatment. We further responded
in January 2018 by providing the requested information. On January 23, 2020, following additional correspondence with the FDA,
the FDA still did not grant us our request due to fact that we have not yet provided adequate prevalence estimates. However, the
FDA did agree with our position that we could potentially qualify for orphan drug designation with respect to the moderate-to-severe
TS sub-group population only rather than the entire population. After we had provided additional prevalence estimates, the FDA
raised a concern in its letter, dated December 7, 2020, about our ability to limit the use of the product to the subset of patients
we are pursuing. Due to the fact that we disagree with this concern, we requested a clarification call. In the clarification call
conducted on February 2, 2021, we agreed with the FDA concern about our ability to limit the use of the product to the subset of
patients in addition to a safety concern associated with THC treatment in pediatrics population so we suggested to amend our preliminary
request and asked to include only adults in the treated population. An amendment letter was discussed and the FDA described what
it would want to see in such an amendment. We are now working on the amendment. There is no assurance that we will successfully
obtain orphan drug designation for TS.
Special Protocol Assessment
A
company may reach an agreement with the FDA under the Special Protocol Assessment, or SPA, process as to the required design and
size of clinical trials intended to form the primary basis of an efficacy claim. According to its performance goals, the FDA is
supposed to evaluate the protocol within 45 days of the request to assess whether the proposed trial is adequate, and that
evaluation may result in discussions and a request for additional information. An SPA request must be made, and all open issues
must be resolved before the clinical trial begins. If a written agreement is reached, it will be documented and made part of the
administrative record. Under the FDC Act and FDA guidance implementing the statutory requirement, an SPA is generally binding upon
the FDA except in limited circumstances, such as if the FDA identifies a substantial scientific issue essential to determining
safety or efficacy after the study begins, public health concerns emerge that were unrecognized at the time of the protocol assessment,
the sponsor and FDA agree to the change in writing, or if the study sponsor fails to follow the protocol that was agreed upon with
the FDA.
Controlled Substances
The
active ingredient in our product candidate SCI-110 is a Schedule I controlled substance. The CSA and its implementing regulations
establish a “closed system” of regulations for controlled substances. The CSA imposes registration, security, recordkeeping
and reporting, storage, manufacturing, distribution, importation and other requirements under the oversight of the DEA. The DEA
is the federal agency responsible for regulating controlled substances, and requires those individuals or entities that manufacture,
import, export, distribute, research, or dispense controlled substances to comply with the regulatory requirements in order to
prevent the diversion of controlled substances to illicit channels of commerce.
The DEA categorizes
controlled substances into one of five schedules—Schedule I, II, III, IV or V—with varying qualifications for
listing in each schedule. Schedule I substances by definition have a high potential for abuse, have no currently accepted
medical use in treatment in the United States and lack accepted safety for use under medical supervision. Schedule I substances
may be used only in federally approved research programs and may not be marketed or sold for dispensing to patients in the United
States. Pharmaceutical product candidates having a currently accepted medical use that are otherwise approved for marketing may
be listed as Schedule II, III, IV or V substances, with Schedule II substances presenting the highest potential for abuse
and physical or psychological dependence, and Schedule V substances presenting the lowest relative potential for abuse and
dependence. The regulatory requirements are more restrictive for Schedule II substances than Schedule III substances.
For example, all Schedule II drug prescriptions must be signed by a physician, physically presented to a pharmacist in most
situations and cannot be refilled.
Following
NDA approval of a drug containing a Schedule I controlled substance, that substance must be rescheduled as a Schedule II,
III, IV or V substance before it can be marketed. In 2015, the Improving Regulatory Transparency for New Medical Therapies Act,
removed uncertainty associated with timing of the DEA rescheduling process after NDA approval. Specifically, it requires DEA to
issue an “interim final rule,” pursuant to which a manufacturer may market its product candidate within 90 days of
FDA approval. The new law also preserves the period of orphan marketing exclusivity for the full seven years such that this period
only begins after DEA scheduling. This contrasts with the previous situation whereby the orphan “clock” began to tick
upon FDA approval, even though the product candidate could not be marketed until DEA scheduling was complete.
Facilities
that manufacture, distribute, import or export any controlled substance must register annually with the DEA. The DEA registration
is specific to the particular location, activity(ies) and controlled substance schedule(s). For example, separate registrations
are required for importation and manufacturing activities, and each registration authorizes which schedules of controlled substances
the registrant may handle. However, certain coincident activities are permitted without obtaining a separate DEA registration,
such as distribution of controlled substances by the manufacturer that produces them.
The
DEA inspects all manufacturing facilities to review security, recordkeeping, reporting and handling prior to issuing a controlled
substance registration. The specific security requirements vary by the type of business activity and the schedule and quantity
of controlled substances handled. The most stringent requirements apply to manufacturers of Schedule I and Schedule II
substances. Required security measures commonly include background checks on all employees and physical control of controlled substances
through storage in approved vaults, safes and cages, and through use of alarm systems and surveillance cameras. An application
for a manufacturing registration as a bulk manufacturer (not a dosage form manufacturer or a repacker/relabeler) for a Schedule I
or II substance must be published in the Federal Register, and the application is open for 30 days to permit interested persons
to submit comments, objections or requests for a hearing. A copy of the notice of the Federal Register publication is forwarded
by DEA to all those registered, or applicants for registration, as bulk manufacturers of that substance. Once registered, manufacturing
facilities must maintain records documenting the manufacture, receipt and distribution of all controlled substances. Manufacturers
must submit periodic reports to the DEA of the distribution of Schedule I and II controlled substances, Schedule III
narcotic substances, and other designated substances. Registrants must also report any controlled substance thefts or significant
losses, and must obtain authorization to destroy or dispose of controlled substances. As with applications for registration as
a bulk manufacturer, an application for an importer registration for a Schedule I or II substance must also be published in
the Federal Register, which remains open for 30 days for comments. Imports of Schedule I and II controlled substances
for commercial purposes are generally restricted to substances not already available from domestic supplier or where there is not
adequate competition among domestic suppliers. In addition to an importer or exporter registration, importers and exporters must
obtain a permit for every import or export of a Schedule I and II substance or Schedule III, IV and V narcotic, and submit
import or export declarations for Schedule III, IV and V non-narcotics. In some cases, Schedule III non-narcotic substances
may be subject to the import/export permit requirement, if it is necessary to ensure that the United States complies with its obligations
under international drug control treaties.
For
drugs manufactured in the United States, the DEA establishes annually an aggregate quota for the amount of substances within Schedules I
and II that may be manufactured or produced in the United States based on the DEA’s estimate of the quantity needed to meet
legitimate medical, scientific, research and industrial needs. This limited aggregate amount of cannabis that the DEA allows to
be produced in the United States each year is allocated among individual companies, which, in turn, must annually apply to the
DEA for individual manufacturing and procurement quotas. The quotas apply equally to the manufacturing of the API/drug substance
and production of dosage forms. The DEA may adjust aggregate production quotas a few times per year, and individual manufacturing
or procurement quotas from time to time during the year, although the DEA has substantial discretion in whether or not to make
such adjustments for individual companies.
Individual
states may also maintain separate controlled substance laws and regulations, including licensing, recordkeeping, security, distribution,
and dispensing requirements. State Authorities, including Boards of Pharmacy, regulate use of controlled substances in each state.
Failure to maintain compliance with applicable requirements, particularly as manifested in the loss or diversion of controlled
substances, can result in enforcement action that could have a material adverse effect on our business, operations and financial
condition. The DEA may seek civil penalties, refuse to renew necessary registrations, or initiate proceedings to revoke those registrations.
In certain circumstances, violations could lead to criminal prosecution.
Canada
NNHPD Approval
Pursuant to a non-traditional
class III Product License Application, CannAmide™ (TheraPEA) received Health Canada approval (NPN 80093504) from the NNHPD on July
23, 2019. In the approval letter, the NNHPD confirmed that the application was in compliance with section 7 of the Natural Health Products
Regulations, or NHPR. The dosage of 1 x 400 mg tablet 3 times daily was approved for the following use: “Studies show that PEA may
be used as an anti-inflammatory to help relieve chronic pain”.
Any labels used in the marketing
of TheraPEA must reflect the information outlined on the product license and must comply with the labelling requirements as per Part 5
of the NHPR. In addition, natural health products, such as TheraPEA, must be manufactured, packaged, labelled, imported, distributed or
stored in accordance with GMP as required by NHPR or in accordance with equivalent requirements if the natural health product is imported.
Pursuant to the NHPR, companies
are required to provide the NNHPD with the Canadian site information prior to commencing the importation and/or sale of the natural health
products in Canada.
Changes made in respect of a licensed
product require the submission of an amendment, notification or a new product license application as per sections 11, 12 and 13 of the
NHPR.
Europe/Rest of World Government Regulation
In
addition to regulations in the United States, we are and will be subject, either directly or through our distribution partners,
to a variety of regulations in other jurisdictions governing, among other things, clinical trials and any commercial sales and
distribution of our product candidates, if approved.
Whether
or not we obtain FDA approval for a product candidate, we must obtain the requisite approvals from regulatory authorities in non-U.S.
countries prior to the commencement of clinical trials or marketing of the product candidate in those countries. Certain countries
outside of the United States have a process that requires the submission of a clinical trial application, or CTA, much like an
IND prior to the commencement of human clinical trials. In Europe, for example, a CTA must be submitted to the competent national
health authority and to independent ethics committees in each country in which a company intends to conduct clinical trials. Once
the CTA is approved in accordance with a country’s requirements, clinical trial development may proceed in that country.
The
requirements and process governing the conduct of clinical trials, product candidate licensing, pricing and reimbursement vary
from country to country, even though there is already some degree of legal harmonization in the European Union member states resulting
from the national implementation of underlying European Union legislation. In all cases, the clinical trials are conducted in accordance
with GCP and other applicable regulatory requirements.
To
obtain regulatory approval of an investigational drug under the European Union. regulatory systems, we must submit a marketing
authorization application. This application is similar to the NDA in the United States, with the exception of, among other things,
country-specific document requirements. Drugs can be authorized in the European Union by using (i) the centralized authorization
procedure, (ii) the mutual recognition procedure, or MRP, (iii) the decentralized procedure or (iv) national authorization
procedures. The initial Sativex approvals were a consequence of an application under the De-Centralized Procedure, or DCP, to the
European Union member state of Spain.
The
EMA implemented the centralized procedure for the approval of human drugs to facilitate marketing authorizations that are valid
throughout the European Union. This procedure results in a single marketing authorization granted by the European Commission that
is valid across the European Union, as well as in Iceland, Liechtenstein and Norway. The centralized procedure is compulsory for
human drugs that are: (i) derived from biotechnology processes, such as genetic engineering, (ii) contain a new active
substance indicated for the treatment of certain diseases, such as HIV/AIDS, cancer, diabetes, neurodegenerative diseases, autoimmune
and other immune dysfunctions and viral diseases, (iii) officially designated “orphan drugs” (drugs used for rare
human diseases) and (iv) advanced-therapy medicines, such as gene- therapy, somatic cell-therapy or tissue-engineered medicines.
The centralized procedure may at the request of the applicant also be used for human drugs which do not fall within the above mentioned
categories if the human drug (a) contains a new active substance which, on the date of entry into force of this Regulation,
was not authorized in the Community; or (b) the applicant shows that the medicinal product candidate constitutes a significant
therapeutic, scientific or technical innovation or that the granting of authorization in the centralized procedure is in the interests
of patients or animal health at the European Community level.
Under
the centralized procedure in the European Union, the maximum timeframe for the evaluation of a MAA by the EMA is 210 days
(excluding clock stops, when additional written or oral information is to be provided by the applicant in response to questions
asked by the Committee for Medicinal Product candidates for Human Use, or CHMP, with adoption of the actual marketing authorization
by the European Commission thereafter. Accelerated evaluation might be granted by the CHMP in exceptional cases, when a medicinal
product candidate is expected to be of a major public health interest from the point of view of therapeutic innovation, defined
by three cumulative criteria: (1) the seriousness of the disease to be treated; (2) the absence of an appropriate alternative therapeutic
approach, and (3) anticipation of exceptional high therapeutic benefit. In this circumstance, EMA ensures that the evaluation for
the opinion of the CHMP is completed within 150 days and the opinion issued thereafter.
The
MRP, for the approval of human drugs is an alternative approach to facilitate individual national marketing authorizations within
the European Union. Basically, the MRP may be applied for all human drugs for which the centralized procedure is not obligatory.
The MRP is applicable to the majority of conventional medicinal product candidates, and is based on the principle of recognition
of an already existing national marketing authorization by one or more member states. Since the first approvals for Sativex were
national approvals in the United Kingdom and Spain (following a DCP), the only route open to us for additional marketing authorizations
in the European Union was the MRP.
The
characteristic of the MRP is that the procedure builds on an already-existing marketing authorization in a member state of the
European Union that is used as a reference in order to obtain marketing authorizations in other European Union member states. In
the MRP, a marketing authorization for a drug already exists in one or more member states of the European Union and subsequently
MAAs are made in other European Union member states by referring to the initial marketing authorization. The member state in which
the marketing authorization was first granted will then act as the reference member state. The member states where the marketing
authorization is subsequently applied for act as concerned member states.
The
MRP is based on the principle of the mutual recognition by European Union member states of their respective national marketing
authorizations. Based on a marketing authorization in the reference member state, the applicant may apply for marketing authorizations
in other member states. In such case, the reference member state shall update its existing assessment report about the drug in
90 days. After the assessment is completed, copies of the report are sent to all member states, together with the approved
summary of product candidate characteristics, labeling and package leaflet. The concerned member states then have 90 days
to recognize the decision of the reference member state and the summary of product candidate characteristics, labeling and package
leaflet. National marketing authorizations shall be granted within 30 days after acknowledgement of the agreement.
Should
any Member State refuse to recognize the marketing authorization by the reference member state, on the grounds of potential serious
risk to public health, the issue will be referred to a coordination group. Within a timeframe of 60 days, member states shall,
within the coordination group, make all efforts to reach a consensus. If this fails, the procedure is submitted to an EMA scientific
committee for arbitration. The opinion of this EMA Committee is then forwarded to the Commission, for the start of the decision
making process. As in the centralized procedure, this process entails consulting various European Commission Directorates General
and the Standing Committee on Human Medicinal Product candidates or Veterinary Medicinal Product candidates, as appropriate. Since
the initial approvals of Sativex in the United Kingdom and Spain, there have been three “waves” of additional approvals
under three separate MRPs. Each of these procedures have been completed without any referral, and therefore without any delay.
For
other countries outside of the European Union, such as countries in Eastern Europe, Latin America or Asia, the requirements governing
the conduct of clinical trials, product candidate licensing, pricing and reimbursement vary from country to country. In all cases,
again, the clinical trials are conducted in accordance with GCP and the other applicable regulatory requirements.
If
we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, fines, suspension
of clinical trials, suspension or withdrawal of regulatory approvals, product candidate recalls, seizure of product candidates,
operating restrictions and criminal prosecution.
In
addition, most countries are parties to the Single Convention on Narcotic Drugs 1961, which governs international trade and domestic
control of narcotic substances, including cannabis extracts. Countries may interpret and implement their treaty obligations in
a way that creates a legal obstacle to our obtaining marketing approval for Sativex and our other product candidates in those countries.
These countries may not be willing or able to amend or otherwise modify their laws and regulations to permit Sativex or our other
product candidates to be marketed, or achieving such amendments to the laws and regulations may take a prolonged period of time.
In that case, we would be unable to market our product candidates in those countries in the near future or perhaps at all.
Reimbursement
Sales
of pharmaceutical product candidates in the United States will depend, in part, on the extent to which the costs of the product
candidates will be covered by third-party payers, such as government health programs, commercial insurance and managed health care
organizations. These third-party payers are increasingly challenging the prices charged for medical product candidates and services.
Additionally, the containment of health care costs has become a priority of federal and state governments, and the prices of drugs
have been a focus in this effort. The United States government, state legislatures and foreign governments have shown significant
interest in implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for
substitution of generic product candidates. Adoption of price controls and cost-containment measures, and adoption of more restrictive
policies in jurisdictions with existing controls and measures, could further limit our net revenue and results. If these third-party
payers do not consider our product candidates to be cost-effective compared to other available therapies, they may not cover our
product candidates after approval as a benefit under their plans or, if they do, the level of payment may not be sufficient to
allow us to sell our product candidates on a profitable basis.
The Medicare Prescription
Drug, Improvement, and Modernization Act of 2003, or the MMA, imposed new requirements for the distribution and pricing of prescription
drugs for Medicare beneficiaries and included a major expansion of the prescription drug benefit under Medicare Part D. Under
Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private entities which will provide coverage
of outpatient prescription drugs. Part D plans include both stand-alone prescription drug benefit plans and prescription drug
coverage as a supplement to Medicare Advantage plans. Unlike Medicare Part A and B, Part D coverage is not standardized.
Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop
its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription drug
formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily
all the drugs in each category or class. Any formulary used by a Part D prescription drug plan must be developed and reviewed
by a pharmacy and therapeutic committee. Government payment for some of the costs of prescription drugs may increase demand for
product candidates for which we receive marketing approval. However, any negotiated prices for our product candidates covered by
a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain. Moreover, while the MMA applies
only to drug benefits for Medicare beneficiaries, private payers often follow Medicare coverage policy and payment limitations
in setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments
from non-governmental payers.
The ACA was enacted
in March 2010. Since its enactment, there have been judicial and Congressional challenges to certain aspects of the law. The ACA
may be modified, amended or reaped at any time and may or may not be replaced with a different law or health care payment system.
The ACA is expected to continue to have a significant impact on the health care industry. With regard to pharmaceutical product
candidates, among other things, the ACA may expand and increase industry rebates for drugs covered under Medicaid programs and
make changes to the coverage requirements under the Medicare D program. Since the enactment of the ACA, numerous regulations
have been issued providing further guidance on its requirements. The ACA continues to be implemented through regulation and government
activity but is subject to possible amendment, additional implementing regulations and interpretive guidelines. Several states
have decided not to expand their Medicaid programs and are seeking alternative reimbursement models to provide care to the uninsured.
The manner in which these issues are resolved could materially affect the extent to which and the amount at which pharmaceuticals
are reimbursed by government programs such as Medicare, Medicaid and Tricare. We are unable to predict the full impact of any potential
modification, amendment, or repeal of the ACA.
Our ability to
commercialize any products successfully also will depend in part on the extent to which coverage and adequate reimbursement for
our products, once approved, and related treatments will be available from third-party payors, such as government health administration
authorities, private health insurers and managed care organizations. Third-party payors determine which medications they will cover
and separately establish reimbursement levels. Even if we obtain coverage for a given product by a third-party payor, the third-party
payor’s reimbursement rates may not be adequate to make the product affordable to patients or profitable to us, or the third-party
payors may require co-payments that patients find unacceptably high. Patients who are prescribed medications for the treatment
of their conditions, and their prescribing physicians, generally rely on third-party payors to reimburse all or part of the costs
associated with their prescription drugs. Patients are unlikely to use our products unless coverage is provided, and reimbursement
is adequate to cover all or a significant portion of the cost of our products. Therefore, coverage and adequate reimbursement is
critical to new product acceptance. Coverage decisions may depend upon clinical and economic standards that disfavor new drug products
when more established or lower cost therapeutic alternatives are already available or subsequently become available.
Government authorities
and other third-party payors are developing increasingly sophisticated methods of controlling healthcare costs, such as by limiting
coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that drug companies
provide them with predetermined discounts from list prices as a condition of coverage, are using restrictive formularies and preferred
drug lists to leverage greater discounts in competitive classes and are challenging the prices charged for medical products. Further,
no uniform policy for determining coverage and reimbursement for drug products exists among third-party payors in the United States.
Therefore, coverage and reimbursement for drug products can differ significantly from payor to payor. As a result, the coverage
determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support
for the use of our products to each payor separately, with no assurance that coverage and adequate reimbursement will be applied
consistently or obtained in the first instance.
We cannot be sure
that coverage and reimbursement will be available for any product that we commercialize and, if reimbursement is available, that
the level of reimbursement will be adequate. Coverage and reimbursement may impact the demand for, or the price of, any product
candidate for which we obtain marketing approval. If coverage and reimbursement are not available, or if reimbursement is available
only to limited levels, we may not successfully commercialize any product candidate for which we obtain marketing approval.
As a condition
of receiving Medicaid coverage for prescription drugs, the Medicaid Drug Rebate Program requires manufacturers to calculate and
report to CMS their Average Manufacturer Price, or AMP, which is used to determine rebate payments shared between the states and
the federal government and, for some multiple source drugs, Medicaid payment rates for the drug, and for drugs paid under Medicare
Part B, to also calculate and report their average sales price, which is used to determine the Medicare Part B payment rate for
the drug. In January 2016, CMS issued a final rule regarding the Medicaid Drug Rebate Program, effective April 1, 2016, that, among
other things, revised the manner in which the AMP is calculated by manufacturers participating in the program and implemented certain
amendments to the Medicaid rebate statute created under the ACA. Drugs that are approved under a biologics license application,
or BLA, or an NDA, including a 505(b)(2) NDA, are subject to an additional requirement to calculate and report the manufacturer’s
best price for the drug and inflation penalties which can substantially increase rebate payments. On December 21, 2020, CMS issued
a final rule that made changes to the Medicaid Drug Rebate Program regulations in several areas, including some changes to the
treatment of value-based purchasing arrangements and price reporting for patient benefit programs sponsored by pharmaceutical manufacturers.
For BLA and NDA
drugs, the Veterans Health Care Act of 1992 requires manufacturers to calculate and report to the Department of Veterans Affairs
a different price called the Non-Federal AMP, offer the drugs for sale on the Federal Supply Schedule, and charge the government
no more than a statutory price referred to as the Federal Ceiling Price, which includes an inflation penalty. A separate law requires
manufacturers to pay rebates on these drugs when paid by the Department of Defense under its TRICARE Retail Pharmacy Program. Knowingly
submitting false pricing information to the government creates potential federal False Claims Act liability.
Further, there
has been increasing legislative and enforcement interest in the United States with respect to specialty drug pricing practices.
Specifically, there have been several recent U.S. Congressional inquiries and proposed and enacted legislation at the federal and
state levels designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing
and manufacturer patient programs, reduce the cost of drugs under Medicare, and reform government program reimbursement methodologies
for drugs. We expect that the pharmaceutical industry will continue to experience pricing pressures due to the trend toward managed
healthcare, particularly towards specialty pharmacy, the increasing influence of managed care organizations, and additional legislative
proposals. For example, CMS issued an interim final rule on November 27, 2020 designed to test whether a Most-Favored-Nation model
will help control growth in spending for Medicare Part B drugs without adversely affecting quality of care. This followed an Executive
Order issued in September 2020 that directed the Secretary of DHHS to implement new payment models under the Medicare Part B and
Part D programs to curb “unfair” and high drug prices in the United States. Implementation of this interim final rule
has been blocked by a temporary restraining order and preliminary injunctions through various court actions. The Most-Favored-Nation
model will not be implemented without further rulemaking, and the new Biden administration may choose to modify the model, move
forward with the model as is, or withdraw it. Nonetheless, we expect that there will continue to be a number of U.S. federal and
state proposals to implement governmental pricing controls and limit the growth of healthcare costs, including the cost of prescription
drugs.
At the state level, legislatures have been
increasingly passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing,
including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure
and transparency measures, drug price increases, and, in some cases, designed to encourage importation from other countries and
bulk purchasing. On the federal level, the Trump Administration issued a final rule in 2020 for the safe importation of drugs from
Canada and other countries. We also expect the Biden administration to support drug importation. During the 2020 presidential campaign,
President Biden also supported a proposal to limit drug price increases to no more than the inflation rate. Additional health reform
measures may continue and affect our business in unknown ways.
Foreign Regulation
In addition to
regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial
sales and distribution of our products to the extent we choose to develop or sell any products outside of the United States. The
approval process varies from country to country and the time may be longer or shorter than that required to obtain FDA approval.
The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country
to country.
In addition, in
some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing
drug pricing vary widely from country to country. For example, the European Union provides options for its member states to restrict
the range of medicinal product candidates for which their national health insurance systems provide reimbursement and to control
the prices of medicinal product candidates for human use. A member state may approve a specific price for the medicinal product
candidate or it may instead adopt a system of direct or indirect controls on the profitability of our Company placing the medicinal
product candidate on the market. There can be no assurance that any country that has price controls or reimbursement limitations
for pharmaceutical product candidates will allow favorable reimbursement and pricing arrangements for any of our product candidates.
Historically, product candidates launched in the European Union do not follow price structures of the United States and generally
tend to be significantly lower.
Other Health Care Laws and Compliance Requirements
In the United States,
our activities are potentially subject to regulation by various federal, state and local authorities in addition to the FDA, including
the CMS, other divisions of the DHHS (e.g., the Office of Inspector General), the U.S. Department of Justice and individual
U.S. Attorney offices within the Department of Justice, and state and local governments.
The federal Anti-Kickback Statute prohibits,
among other things, any person or entity, from knowingly and willfully offering, paying, soliciting or receiving any remuneration,
directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward, or in return for, the referral of an individual
for, or purchasing, leasing, ordering, or arranging for the purchase, lease or order of, any good, facility, item or service reimbursable,
in whole or in part, by Medicare, Medicaid or other federal healthcare programs. The term remuneration has been interpreted broadly
to include anything of value, including unlawful financial inducements paid to prescribers and beneficiaries, as well as impermissible
promotional practices. There are a number of statutory exceptions and regulatory safe harbors protecting some common activities
from prosecution, but the exceptions and safe harbors are drawn narrowly. Failure to meet all of the requirements of a particular
applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the federal Anti-Kickback
Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all
of its facts and circumstances. Additionally, the ACA amended the intent requirement of the federal Anti-Kickback Statute so that
a person or entity no longer needs to have actual knowledge of the federal Anti-Kickback Statute, or specific intent to violate
it, to have violated the statute. The ACA also provided that a violation of the federal Anti-Kickback Statute is grounds for the
government or whistleblower to assert that a claim for payment of items or services resulting from such violation constitutes a
false or fraudulent claim for purposes of the civil False Claims Act.
In
addition, in November 2020, DHHS finalized a regulation aimed at lowering prescription drug prices and out-of-pocket spending for
prescription drugs by excluding rebates on prescription drugs paid by manufacturers to or purchased by Medicare Part D plan sponsors
or pharmacy benefit managers (PBMs) acting under contract with Medicare Part D plan sponsors from the existing discount safe harbor
under the federal Anti-Kickback Statute (AKS Statute). The regulation reflects the first change to the AKS discount safe harbor
since the Medicare Part D program was established. In addition to the rebate exclusions, two new safe harbors were added. One of
these new safe harbors protects point-of-sale reductions in price from a manufacturer to a plan sponsor under Medicare Part D or
a Medicaid Managed Care Organization (MCO) for a prescription drug payable, in whole or in part, by a plan sponsor under Medicare
Part D or a MCO, provided certain conditions are met. The other protects
certain fixed-fee services arrangements between manufacturers and PBMs.
The federal civil and criminal false claims
laws, including the federal False Claims Act, prohibit, among other things, any person or entity from knowingly presenting, or
causing to be presented, a false claim for payment to, or for approval by, the federal government, including the Medicare and Medicaid
programs, or knowingly making, using, or causing to be made or used a false record or statement material to a false or fraudulent
claim to avoid, decrease or conceal an obligation to pay money to the federal government.
The civil monetary
penalties statute imposes penalties against any person or entity who, among other things, is determined to have presented or caused
to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not
provided as claimed or is false or fraudulent.
HIPAA created additional
federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare
benefit program, including public and private payors, or obtain, by means of false or fraudulent pretenses, representations or
promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless
of whether the payor is public or private, knowingly and willfully embezzling or stealing from a health care benefit program, willfully
obstructing a criminal investigation of a health care offense and knowingly and willfully falsifying, concealing or covering up
by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment
for, healthcare benefits, items or services relating to healthcare matters. The ACA amended the federal health care fraud criminal
statute implemented under HIPAA so that a person or entity no longer needs to have actual knowledge of the statute, or the specific
intent to violate it, to have violated the statute.
Additionally, the
federal Open Payments program pursuant to the Physician Payments Sunshine Act, created under Section 6002 of the ACA and its implementing
regulations, require some manufacturers of drugs, devices, biologicals and medical supplies for which payment is available under
Medicare, Medicaid or the Children’s Health Insurance Program (with specified exceptions) to report annually information
related to specified payments or other transfers of value provided to physicians and teaching hospitals, or to entities or individuals
at the request of, or designated on behalf of, the physicians and teaching hospitals and to report annually specified ownership
and investment interests held by physicians and their immediate family members. The SUPPORT Act, signed into law by President Trump
on October 24, 2018, expanded Sunshine Act reporting to include data for physician assistants, nurse practitioners, clinical nurse
specialists, certified registered nurse anesthetists and certified nurse midwifes. The amendment applies to reports submitted to
CMS on or after January 1, 2022.
In addition, we
may be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business.
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing
regulations, impose requirements relating to the privacy, security and transmission of individually identifiable health information
on HIPAA covered entities and their business associates, including mandatory contractual terms and the implementation of certain
safeguards of such information. Among other things, HITECH makes HIPAA’s security standards directly applicable to business
associates, independent contractors or agents of covered entities that receive or obtain protected health information in connection
with providing a service on behalf of a covered entity. HITECH also created four new tiers of civil monetary penalties, amended
HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority
to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’
fees and costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security of health
information in some circumstances, many of which differ from each other in significant ways, may not have the same effect and may
not be preempted by HIPAA, thus complicating compliance efforts.
Many states have
also adopted laws similar to each of the above federal laws, which may be broader in scope and apply to items or services reimbursed
by any payor, including commercial insurers. We may also be subject to state laws that require pharmaceutical companies to comply
with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the
federal government, and/or state laws that require drug manufacturers to report information related to marketing expenditures or
payments and other transfers of value to physicians and other healthcare providers.
Enforcement actions can be brought by federal
or state governments or, in some cases, as “qui tam” actions brought by individual whistleblowers in the name of the
government. Depending on the circumstances, failure to comply with these laws can result in penalties, including criminal, civil
and/or administrative criminal penalties, damages, fines, disgorgement, debarment from government contracts, individual imprisonment,
additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to
resolve allegations of non-compliance with these laws, exclusion from government programs, refusal to allow us to enter into supply
contracts, including government contracts, reputational harm, diminished profits and future earnings and the curtailment or restructuring
of our operations, any of which could adversely affect our business.
In order to distribute
product candidates commercially, we must comply with state laws that require the registration of manufacturers and wholesale distributors
of pharmaceutical product candidates in a state, including, in certain states, manufacturers and distributors who ship product
candidates into the state, even if such manufacturers or distributors have no place of business within the state. Some states also
impose requirements on manufacturers and distributors to establish the pedigree of product candidate in the chain of distribution,
including some states that require manufacturers and others to adopt new technology capable of tracking and tracing product candidate
as it moves through the distribution chain. Several states have enacted legislation requiring pharmaceutical companies to establish
marketing compliance programs, file periodic reports with the state, make periodic public disclosures on sales, marketing, pricing,
clinical trials and other activities or register their sales representatives. Other legislation has been enacted in certain states
prohibiting pharmacies and other health care entities from providing certain physician prescribing data to pharmaceutical companies
for use in sales and marketing, and prohibiting certain other sales and marketing practices. All of our activities are potentially
subject to federal and state consumer protection and unfair competition laws.
Expanded Access to Investigational Drugs
An investigational
drug may be eligible for clinical use outside the context of a manufacturer’s clinical trial of the drug. “Expanded
access” refers to the use of an investigational drug where the primary purpose is to diagnose, monitor, or treat a patient’s
disease or condition rather than to collect information about the safety or effectiveness of a drug. Expanded access INDs are typically
sponsored by individual physicians to treat patients who fall into one of three FDA-recognized categories of expanded access: expanded
access for individual patients, including for emergency use; expanded access for intermediate-size patient populations; and expanded
access for large patient populations under a treatment IND or treatment protocol. For all types of expanded access, FDA must determine
prior to authorizing expanded access that: (1) the patient or patients to be treated have a serious or life threatening disease
or condition and there is no comparable or satisfactory alternative therapy; (2) the potential patient benefit justifies the potential
risks of use and that the potential risks are not unreasonable in the context of the disease or condition to be treated; and (3)
granting the expanded access will not interfere with the initiation, conduct, or completion of clinical studies in support of the
drug’s approval. In addition, the sponsor of an expanded access IND must submit IND safety reports and, in the cases of protocols
continuing for one year or longer, annual reports to the FDA. Expanded access programs are not intended to yield information relevant
to evaluating a drug’s effectiveness for regulatory purposes. If a patient enrolled in one of our clinical trials is not
eligible or able to continue enrollment, we may be required to continue to provide our product candidate to such patient through
expanded access.
The Foreign Corrupt Practices
Act
The FCPA prohibits
any U.S. individual or business from paying, offering or authorizing payment or offering of anything of value, directly or indirectly,
to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity
in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities
are listed in the United States to comply with accounting provisions requiring the companies to maintain books and records that
accurately and fairly reflect all transactions of the companies, including international subsidiaries, and to devise and maintain
an adequate system of internal accounting controls for international operations.
Foreign Regulation
In addition to
regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial
sales and distribution of our products to the extent we choose to develop or sell any products outside of the United States. The
approval process varies from country to country and the time may be longer or shorter than that required to obtain FDA approval.
The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country
to country.
In addition, in
some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing
drug pricing vary widely from country to country. For example, the European Union provides options for its member states to restrict
the range of medicinal product candidates for which their national health insurance systems provide reimbursement and to control
the prices of medicinal product candidates for human use. A member state may approve a specific price for the medicinal product
candidate or it may instead adopt a system of direct or indirect controls on the profitability of our Company placing the medicinal
product candidate on the market. There can be no assurance that any country that has price controls or reimbursement limitations
for pharmaceutical product candidates will allow favorable reimbursement and pricing arrangements for any of our product candidates.
Historically, product candidates launched in the European Union do not follow price structures of the United States and generally
tend to be significantly lower.
Other Health Care Laws and Compliance Requirements
In the United States,
our activities are potentially subject to regulation by various federal, state and local authorities in addition to the FDA, including
the CMS, other divisions of the U.S. Department of Health and Human Services (e.g., the Office of Inspector General), the
U.S. Department of Justice and individual U.S. Attorney offices within the Department of Justice, and state and local governments.
The federal Anti-Kickback
Statute prohibits, among other things, any person or entity, from knowingly and willfully offering, paying, soliciting or receiving
any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward, or in return for, the referral
of an individual for, or purchasing, leasing, ordering, or arranging for the purchase, lease or order of, any good, facility, item
or service reimbursable, in whole or in part, by Medicare, Medicaid or other federal healthcare programs. The term remuneration
has been interpreted broadly to include anything of value, including unlawful financial inducements paid to prescribers and beneficiaries,
as well as impermissible promotional practices. There are a number of statutory exceptions and regulatory safe harbors protecting
some common activities from prosecution, but the exceptions and safe harbors are drawn narrowly. Failure to meet all of the requirements
of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the federal
Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative
review of all of its facts and circumstances. Additionally, the ACA amended the intent requirement of the federal Anti-Kickback
Statute so that a person or entity no longer needs to have actual knowledge of the federal Anti-Kickback Statute, or the specific
intent to violate it, to have violated the statute. The ACA also provided that a violation of the federal Anti-Kickback Statute
is grounds for the government or a whistleblower to assert that a claim for payment of items or services resulting from such violation
constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act.
The federal civil
and criminal false claims laws, including the federal False Claims Act, prohibit, among other things, any person or entity from
knowingly presenting, or causing to be presented, a false claim for payment to, or for approval by, the federal government, including
the Medicare and Medicaid programs, or knowingly making, using, or causing to be made or used a false record or statement material
to a false or fraudulent claim to avoid, decrease or conceal an obligation to pay money to the federal government.
The civil monetary
penalties statute imposes penalties against any person or entity who, among other things, is determined to have presented or caused
to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not
provided as claimed or is false or fraudulent.
HIPAA created additional
federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare
benefit program, including public and private payors, or obtain, by means of false or fraudulent pretenses, representations or
promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless
of whether the payor is public or private, knowingly and willfully embezzling or stealing from a health care benefit program, willfully
obstructing a criminal investigation of a health care offense and knowingly and willfully falsifying, concealing or covering up
by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment
for, healthcare benefits, items or services relating to healthcare matters. The ACA amended the federal health care fraud criminal
statute implemented under HIPAA so that a person or entity no longer needs to have actual knowledge of the statute, or the specific
intent to violate it, to have violated the statute.
Additionally, the
federal Open Payments program pursuant to the Physician Payments Sunshine Act, created under Section 6002 of the ACA and its implementing
regulations, require some manufacturers of drugs, devices, biologicals and medical supplies for which payment is available under
Medicare, Medicaid or the Children’s Health Insurance Program (with specified exceptions) to report annually information
related to specified payments or other transfers of value provided to physicians and teaching hospitals, or to entities or individuals
at the request of, or designated on behalf of, the physicians and teaching hospitals and to report annually specified ownership
and investment interests held by physicians and their immediate family members.
In addition, we
may be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business.
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing
regulations, impose requirements relating to the privacy, security and transmission of individually identifiable health information
on HIPAA covered entities and their business associates, including mandatory contractual terms and the implementation of certain
safeguards of such information. Among other things, HITECH makes HIPAA’s security standards directly applicable to business
associates, independent contractors or agents of covered entities that receive or obtain protected health information in connection
with providing a service on behalf of a covered entity. HITECH also created four new tiers of civil monetary penalties, amended
HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority
to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’
fees and costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security of health
information in some circumstances, many of which differ from each other in significant ways, may not have the same effect and may
not be preempted by HIPAA, thus complicating compliance efforts.
Many states have
also adopted laws similar to each of the above federal laws, which may be broader in scope and apply to items or services reimbursed
by any payor, including commercial insurers. We may also be subject to state laws that require pharmaceutical companies to comply
with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the
federal government, and/or state laws that require drug manufacturers to report information related to marketing expenditures or
payments and other transfers of value to physicians and other healthcare providers.
Enforcement actions
can be brought by federal or state governments or, in some cases, as “qui tam” actions brought by individual whistleblowers
in the name of the government. Depending on the circumstances, failure to comply with these laws can result in penalties, including
criminal, civil and/or administrative criminal penalties, damages, fines, disgorgement, debarment from government contracts, individual
imprisonment, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar
agreement to resolve allegations of non-compliance with these laws, exclusion from government programs, refusal to allow us to
enter into supply contracts, including government contracts, reputational harm, diminished profits and future earnings and the
curtailment or restructuring of our operations, any of which could adversely affect our business.
In order to distribute
product candidates commercially, we must comply with state laws that require the registration of manufacturers and wholesale distributors
of pharmaceutical product candidates in a state, including, in certain states, manufacturers and distributors who ship product
candidates into the state, even if such manufacturers or distributors have no place of business within the state. Some states also
impose requirements on manufacturers and distributors to establish the pedigree of product candidate in the chain of distribution,
including some states that require manufacturers and others to adopt new technology capable of tracking and tracing product candidate
as it moves through the distribution chain. Several states have enacted legislation requiring pharmaceutical companies to establish
marketing compliance programs, file periodic reports with the state, make periodic public disclosures on sales, marketing, pricing,
clinical trials and other activities or register their sales representatives. Other legislation has been enacted in certain states
prohibiting pharmacies and other health care entities from providing certain physician prescribing data to pharmaceutical companies
for use in sales and marketing, and prohibiting certain other sales and marketing practices. All of our activities are potentially
subject to federal and state consumer protection and unfair competition laws.
Expanded Access to Investigational Drugs
An investigational
drug may be eligible for clinical use outside the context of a manufacturer’s clinical trial of the drug. “Expanded
access” refers to the use of an investigational drug where the primary purpose is to diagnose, monitor, or treat a patient’s
disease or condition rather than to collect information about the safety or effectiveness of a drug. Expanded access INDs are typically
sponsored by individual physicians to treat patients who fall into one of three FDA-recognized categories of expanded access: expanded
access for individual patients, including for emergency use; expanded access for intermediate-size patient populations; and expanded
access for large patient populations under a treatment IND or treatment protocol. For all types of expanded access, FDA must determine
prior to authorizing expanded access that: (1) the patient or patients to be treated have a serious or life threatening disease
or condition and there is no comparable or satisfactory alternative therapy; (2) the potential patient benefit justifies the potential
risks of use and that the potential risks are not unreasonable in the context of the disease or condition to be treated; and (3)
granting the expanded access will not interfere with the initiation, conduct, or completion of clinical studies in support of the
drug’s approval. In addition, the sponsor of an expanded access IND must submit IND safety reports and, in the cases of protocols
continuing for one year or longer, annual reports to the FDA. Expanded access programs are not intended to yield information relevant
to evaluating a drug’s effectiveness for regulatory purposes. If a patient enrolled in one of our clinical trials is not
eligible or able to continue enrollment, we may be required to continue to provide our product candidate to such patient through
expanded access.
Grants from the IIA
Our
research and development efforts mainly with respect to our past activities (with respect to immunotherapy programs such as the
Anti-CD3) were financed in part through royalty-bearing grants from the IIA. As of December 31, 2020, we had received the aggregate
amount of approximately $1.1 million from the IIA for the development of these programs, which have since been sold. With respect
to such grants, we are committed to pay royalties of up to an aggregate amount of approximately $1.1 million relating only to technologies
in our possession and excluding any royalties for technologies that we sold to third parties. We are further required to comply
with the requirements of the Research Law, with respect to those past grants. In addition, any change of control and any change
of ownership of our Ordinary Shares that would make a non-Israel citizen or resident an “interested party” as defined
in the Research Law requires prior written notice from the IIA. When a company develops know-how, technology or products using
IIA grants, the terms of these grants and the Research Law restrict the transfer of such know-how inside or outside of Israel,
and the transfer outside of Israel of manufacturing or manufacturing rights of such products, technologies or know-how, without
the prior approval of the IIA. None of our current projects in the field of cannabinoid therapeutics are supported by the IIA,
yet if eligible, we might apply for such support in the future.
C.
|
Organizational Structure
|
Brain Bright Ltd. is an inactive wholly-owned
subsidiary. In addition, we also own 85% of its issued and outstanding share capital of Evero, a company focused on the development
and commercialization of SCI-110 sleep technology.
In addition, we own approximately 27% of Lara
Pharm Ltd., an inactive private company engaged in the field of medical cannabis and developing a formulation based on synthetic
cannabinoids, for the provision through an inhaler.
D.
|
Property, Plants and Equipment
|
Our offices are located at 20 Raul Wallenberg
Street, Tower A, 2nd Floor, Tel Aviv 6971916, Israel, where we currently occupy approximately 100 square meters.
We lease our facilities and our lease ends on September 1, 2021. Our current monthly rent payment is NIS 12,000 (approximately
$3,600).
We consider that our current office space
is sufficient to meet our anticipated needs for the foreseeable future and is suitable for the conduct of our business. However,
we are currently assessing our future needs and have not renewed our lease as of the date hereof.
ITEM 4A.
|
UNRESOLVED STAFF COMMENTS
|
None.
ITEM 5.
|
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|
The following discussion and analysis should be read in
conjunction with our financial statements and related notes included elsewhere in this Annual Report. This discussion and other
parts of this Annual Report contain forward-looking statements based upon current expectations that involve risks and uncertainties.
Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements
as a result of several factors, including those set forth under Item 3.D. “Risk Factors” and elsewhere in this Annual
Report. We report financial information under IFRS as issued by the International Accounting Standards Board and none of the financial
statements were prepared in accordance with generally accepted accounting principles in the United States. Our discussion and
analysis for the year ended December 31, 2018 can be found in our Annual Report for the fiscal year ended December 31, 2019, filed
with the SEC on June 15, 2020.
The following financial data in this narrative are expressed
in thousands, except for share and per share data or as otherwise noted.
We have not generated any revenues since our inception.
Operating Results
To date, we have not generated revenue from the sale of any product, and we do not
expect to generate significant revenue within the next year at least. As of December 31, 2020, we had an accumulated deficit of
approximately $55,200. Our operating activities are described below under “Operating Expenses.”
Operating Expenses
Our current operating expenses consist of two components — research
and development expenses and general and administrative expenses.
Research and Development Expenses,
net
Our research and development expenses consist primarily
of salaries and related personnel expenses, share-based compensation expenses, consulting and subcontractor expenses and other
related research and development expenses.
The following table discloses the breakdown
of research and development expenses:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Wages and related expenses
|
|
|
322
|
|
|
|
435
|
|
Share-based payments
|
|
|
69
|
|
|
|
165
|
|
Clinical studies
|
|
|
-
|
|
|
|
240
|
|
Research and preclinical studies
|
|
|
139
|
|
|
|
277
|
|
Chemistry and formulations
|
|
|
-
|
|
|
|
85
|
|
Regulatory, professional and other expenses
|
|
|
119
|
|
|
|
437
|
|
|
|
|
649
|
|
|
|
1,639
|
|
We expect that our research and development expenses will
materially increase as we plan to start new clinical trials and develop new products.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries, share-based compensation
expense, professional service fees for accounting, legal, bookkeeping, facilities and other general and administrative expenses.
The following table discloses the breakdown of general and administrative expenses:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Wages and related expenses
|
|
|
237
|
|
|
|
382
|
|
Share-based payment
|
|
|
22
|
|
|
|
388
|
|
Professional and directors’ fees
|
|
|
1,283
|
|
|
|
1,065
|
|
Investor relations and business expenses
|
|
|
22
|
|
|
|
63
|
|
Office maintenance, rent and other expenses
|
|
|
182
|
|
|
|
72
|
|
Regulatory expenses
|
|
|
98
|
|
|
|
112
|
|
Business development expenses
|
|
|
58
|
|
|
|
387
|
|
Total
|
|
|
1,902
|
|
|
|
2,469
|
|
Comparison of the year ended December 31, 2020 to the year ended December 31, 2019
Results of Operations
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Research and development expenses
|
|
|
649
|
|
|
|
1,639
|
|
General and administrative expenses
|
|
|
1,902
|
|
|
|
2,469
|
|
Other expense (income), net
|
|
|
742
|
|
|
|
-
|
|
Operating loss
|
|
|
3,293
|
|
|
|
4,108
|
|
Financial expense (income), net
|
|
|
242
|
|
|
|
371
|
|
Loss from discontinued operations, net
|
|
|
-
|
|
|
|
207
|
|
Net loss
|
|
|
3,535
|
|
|
|
4,686
|
|
Net loss attributable to holders of Ordinary Shares
|
|
|
3,482
|
|
|
|
4,479
|
|
Research and Development Expenses
Our research and development expenses for the year ended December 31, 2020 amounted
to $649, representing a decrease of $990, or 60%, compared to $1,639 for the year ended December 31, 2019. The decrease was primarily
attributable to a decrease of $781 in clinical, preclinical studies and regulatory and other expenses, reflecting the ending of
clinical and preclinical studies that were initiated in previous years and therefore a decrease in regulatory and other expenses.
In addition, we did not initiate new clinical studies during the year ended December 31, 2020, thereby limiting our research and
development expenses. During the second half of 2020, the company accelerated preparations for new clinical and pre-clinical
studies that have begun and are expected to begin during the year of 2021.
General and Administrative Expenses
Our general and administrative expenses totaled $1,902 for the year ended December
31, 2020, representing a decrease of $567, or 23%, compared to $2,469 for the year ended December 31, 2019 (net of loss from discontinued
operations). The decrease resulted primarily from a decrease of $329 in business development, a decrease of $145 in wages and
related expenses reflecting our efforts to reduce these expenses, a decrease of $41 in investor relations and business expenses
and a decrease of $366 in share-based payment expenses. We experienced an increase of $218 in professional and directors’
fees mainly due to an increase in directors and officers insurance during 2020.
Operating Loss
Our operating loss for the year ended December 31, 2020
was $3,293, representing a decrease of $815, or 20%, as compared to an operating loss of $4,108 for the year ended December 31,
2019.
Financial Expense and Income
Financial expense and income consist of revaluations of
instruments measured at fair value, exchange rate differences, bank fees, loans interest and other transactional costs.
We recognized financial income, for the year ended December
31, 2020 of $630, representing a change of $325, as compared to financial income net of $305 for the year ended December 31, 2019.
The change was primarily due to changes in the fair value of financial instruments.
We recognized financial expense, for the year ended December
31, 2020 of $872, representing a change of $196, as compared to financial expenses net of $676 for the year ended December 31,
2019. The increase was primarily due to finance expenses related to expenses related to issuance of warrants that we conducted
in March and April.
Discontinued Operations, Net
Our loss from discontinued operations, net totaled $0 for the year ended December
31, 2020. On March 26, 2019, due in part to significant losses incurred by THR, as well as its failure to maintain required licenses
to operate its facilities, our board of directors resolved that THR will commence a liquidation process of its assets, a process
which ended on June 27, 2019, with the confirmation of THR dissolution by submitting all documents required by law. Since April
2019, THR has had no employees and all business operations have been discontinued. Accordingly, we presented all profit or loss
results relevant to THR for the year ended on December 31, 2019, as loss from discontinued operations, net. Also, as of June 27,
2019, THR had no assets or liabilities and recorded an income in the amount of $616 (THR recorded a loss of $2,400 during the
period since consolidation on October 3, 2018, up until December 31, 2018).
Total Comprehensive Loss
Our total
comprehensive loss for the year ended December 31, 2020 was $3,535, representing a decrease of $1,151, or 24.6%, as compared to $4,686
for the year ended December 31, 2019.
Critical Accounting Policies and Estimates
We describe our significant accounting policies more fully
in Note 2 and the significant accounting judgments, estimates and assumptions used in the preparation of the financial statements
in Note 3 to our financial statements for the year ended December 31, 2020. We believe that the accounting policies below are
critical in order to fully understand and evaluate our financial condition and results of operations.
We prepare our financial statements in accordance with IFRS.
At the time of the preparation of the financial statements, our management is required to use estimates, evaluations, and assumptions
which affect the application of the accounting policy and the amounts reported for assets, obligations, income, and expenses.
Any estimates and assumptions are continually reviewed. The changes to the accounting estimates are credited during the period
in which the change to the estimate is made.
Contingent Liabilities
The evaluations of provisions and contingent liabilities
are based on best professional judgment, taking into consideration the stage of the proceedings, as well as cumulative legal experience
in the various topics. Whereas the results of the lawsuits shall be determined by the courts, these results may differ from these
evaluations.
Share-Based Compensation
Our employees and other service providers are entitled to
benefits by way of share-based compensation settled with company options to shares. The cost of transactions with employees settled
with capital instruments is measured based on the fair value of the capital instruments on the granting date. The fair value is
determined using an accepted options pricing model. The model is based on share price, grant date and on assumptions regarding
expected volatility, expected lifespan, expected dividend, and a no risk interest rate.
The cost of the transactions settled with capital instruments
is recognized in profit or loss together with a corresponding increase in the equity over the period in which the performance
and/or service takes place, and ending on the date on which the relevant employees are entitled to the benefits, or the Vesting
Period. The aggregate expense recognized for transactions settled with capital instruments at the end of each reporting date and
until the Vesting Period reflects the degree to which the Vesting Period has expired and our best estimate regarding the number
of options that have ultimately vested. The expense or income in profit or loss reflects the change of the aggregate expense recognized
as of the end of the reported period.
We selected the Black-Scholes option-pricing model as a fair value method for our
options awards. The option-pricing model requires a number of assumptions:
Expected dividend yield - The expected dividend
yield assumption is based on our historical experience and expectation of no future dividend payouts. We have historically not
paid cash dividends and have no foreseeable plans to pay cash dividends in the future.
Volatility - The expected volatility is based on
fluctuations in the price of our ADS prices on the OTCQB Marketplace.
Risk free interest rate - The risk free interest
rate is based on the U.S. Treasury yield curve, in accordance with the option’s contractual term.
Contractual term - An option’s contractual
term must at least include the Vesting Period and the employees’ historical exercise and post-vesting employment termination
behavior for similar grants. If the amount of past exercise data is limited, that data may not represent a sufficiently large
sample on which to base a robust conclusion on expected exercise behavior.
Share price - The share price is determined according
to the last known or above closing price of our ADSs at the grant date.
B.
|
Liquidity and Capital Resources
|
Overview
Since our inception in 2004, and through December 31, 2020,
we have funded our operations principally with $51,085 from the issuance of Ordinary Shares (including ADSs),warrants and pre-funded
warrants. As of December 31, 2020, we had $1,946 in cash, and an additional amount of $170 in short-term bank deposits.
The table below presents our cash flows
for the periods indicated:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Operating activities
|
|
|
(4,307
|
)
|
|
|
(4,696
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
24
|
|
|
|
1,268
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
5,359
|
|
|
|
2,804
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
-
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents(*)
|
|
|
1,076
|
|
|
|
(615
|
)
|
|
(*)
|
During the year ended December 31, 2020, we did not have
any cash equivalents.
|
Operating Activities
Net cash used in operating activities was $4,307 during 2020 in comparison
to $4,696 during 2019. The decrease of $389 was primarily attributable to a decrease in research and development and general and administrative
expenses.
Investing Activities
Net cash
provided by investing activities of $24 during the year ended December 31, 2020 primarily reflected the investment in restricted bank
deposits.
Net cash
provided by investing activities of $1,268 during the year ended December 31, 2019 primarily reflected the sale of property and equipment
and repayment of a convertible loan in the 2019 period.
Financing Activities
Net cash provided by financing activities of $5,359 in the
year ended December 31, 2020 primarily consisted $5,136 of net proceeds from the issuance of share capital, pre-funded warrants
and warrants.
Net cash provided by financing activities of $2,804 in the
year ended December 31, 2019 consisted mainly of $2,898 of net proceeds from the issuance of share capital and warrants.
On March 19, 2020, we entered into a securities purchase agreement with respect to
a private placement of convertible notes in the aggregate amount of $220,000, warrants to purchase up to 4,490 ADSs, and 571 ADSs.
The private placement closed on April 6, 2020. The offering resulted in gross proceeds to us of approximately $220. The convertible
notes were repaid during 2020.
On April 1, 2020 we entered into a securities purchase agreement, or the April 2020
Purchase Agreement, with institutional investors to purchase of 59,524 units, each consisting of (i) one pre-funded warrant to
purchase one ADS and (ii) one Series B warrant to purchase one ADS, at a purchase price of $20.993 per unit. The Series B warrants
have an exercise price of $30.10 per ADS, are exercisable upon issuance and expire five years from the date of issuance. The offering
resulted in gross proceeds to us of approximately $1.25 million. The closing of the sale of the securities took place on April
3, 2020. All of the pre-funded warrants were exercised. In addition, 59,524 of the Series B warrants were exercised pursuant to
a cashless exercise mechanism as described in the April 2020 Purchase Agreement for no further consideration to us.
On July 23,
2020, we submitted to the Tel Aviv-Jaffa District Court, or the Tel Aviv Court, a
petition pursuant to the Israeli Insolvency and Economic Rehabilitation Law, 2018, to
commence proceedings for our economic rehabilitation. On August 11, 2020,
Pure Capital Ltd., or Pure Capital, proposed to deposit $1.5 million with the Company’s temporary trustee nominated by the
Tel Aviv Court to cover and pay all of the Company’s debts, without derogating from any other creditor’s rights towards
the Company, or the Pure Capital Proposal. The Pure Capital Proposal was made subject to the replacement of the Company’s
Board of Directors with Pure Capital’s designated nominees that were voted upon at the adjourned annual general meeting
held on August 4, 2020. The Tel Aviv Court issued an order on August 14, 2020, or the Order, approving the Pure Capital Proposal
and settlement agreement submitted to the Tel Aviv Court by the parties thereto. In accordance with the terms of the Order and
following the deposit by Pure Capital, the members of our Board of Directors were replaced.
On November 19, 2020, we entered into definitive agreements with investors providing
for the issuance of an aggregate of 835,447 units of securities, with each unit consisting of (i) one ADS, and (ii) two warrants,
with each warrant entitling the holder thereof to purchase one ADS, at the public offering price of $5.02 per unit in a public
offering. Each warrant is exercisable upon issuance and expires five years from the date of issuance. The offering resulted in
gross proceeds to us of approximately $4.2 million. As of March 22, 2021, there were 69,920 warrants exercised and 1,600,974 warrants
outstanding. Aegis Capital Corp. served as sole placement agent in connection with the offering and received a cash
placement fee equal to 8.0% of the gross proceeds received for the units sold in the offering. The offering closed on November
23, 2020.
On March 1, 2021, we entered into a definitive agreement with several accredited
and institutional investors providing for the issuance of an aggregate of 1,152,628 units, as follows: (a) 916,316 units, at a
price of $7.07 per unit, consisting of (i) one ADS, each representing 140 Ordinary Shares, and (ii) a
Series A Warrant to purchase an equal number of units purchased and a Series B Warrant to purchase half the number of units,
and (b) 236,312 pre-funded units, at a price of $7.069 per unit, consisting of (i) one pre-funded warrant to purchase one ADS
and (ii) a Series A Warrant to purchase an equal number of units purchased
and a Series B Warrant to purchase half the number of units. The pre-funded warrants have an exercise price of $0.001 per
full ADS and will be exercisable at any time after the date of issuance upon payment of the exercise price. The Series A
Warrants have an exercise price of $7.07, subject to adjustments therein. The Series B Warrants have an exercise price equal to
$10.60, subject to adjustments therein. The Series A Warrants and the Series B Warrants are exercisable six months from the date
of issuance and have a term of exercise equal to five years from the initial exercise date. As of March 22, 2021, there were 1,152,628
Series A Warrants, 576,314 Series B Warrants and 236,312 pre-funded warrants outstanding. Aegis Capital Corp. acted as exclusive
placement agent in connection with this offering and received a transaction fee equal to $0.4949 per unit and $0.4949 per pre-funded
unit sold at the closing. The offering closed on March 4, 2021 and resulted in gross proceeds to us of approximately $8.15 million.
Current Outlook
We have financed our operations to
date primarily through proceeds from sales of our Ordinary Shares and ADSs as well as exercises of warrants and options to purchase
Ordinary Shares or ADSs, as the case may be. We have incurred losses and generated negative cash flows from operations since August
2004. Since August 2004, we have not generated any revenue from the sale of product candidates and we do not expect to generate
revenues from sale of our main product candidates in the next few years.
As of December 31, 2020, our cash,
including short-term bank deposits, was $1,956.
We
believe that our existing cash resources will be sufficient to finance our operating activities in the foreseeable future; however,
we expect that we will require substantial additional capital to complete the development of, and to commercialize, our product
candidates. If we do seek to raise additional capital, there can be no guarantee or assurance that we will be successful in raising
such additional capital or that the term of such capital raise will be on terms favorable to us. In addition, as we continue to
assess the effects of the COVID-19 pandemic and its impact on capital market transactions in the United States, although we were
able to raise financing in April 2020, November 2020 and March 2021 offerings, all of which were during the COVID-19 pandemic,
there can be no assurance that we will be able to raise financing again during the COVID-19 pandemic, or even after COVID-19 is
no longer a “pandemic” if, for example, there is downturn in the U.S. or global economy.
In addition, our operating plans may change as a result of many factors that may
currently be unknown to us, and we may need to seek additional financing sooner than planned. Following actions taken during fiscal
year 2020 to reduce our operating expenses in the short term as a result of the COVID-19 pandemic, we are currently looking to
expand our operations including planned clinical trials and early commercialization efforts for our proprietary PEA oral tablets
CannAmide™. There can be no assurance that the analysis that we have undertaken or remedial measures that have been enacted
will enable us to avoid part or all of any impact from the spread of COVID-19 or its consequences, including downturns in business
sentiment generally or in our sector in particular. In addition, our efforts to commercialize our proprietary PEA oral tablets
CannAmide™ may not lead to any revenue or revenue at the level at which we are expecting. In addition to the COVID-19 pandemic,
our future capital requirements will depend on many factors, including:
|
●
|
the progress and costs of our research and development activities;
|
|
|
|
|
●
|
the costs of manufacturing our product candidates;
|
|
|
|
|
●
|
the costs of filing, prosecuting, enforcing and defending patent claims and other intellectual
property rights;
|
|
|
|
|
●
|
the potential costs of contracting with third parties to provide marketing and distribution
services for us or for building such capacities internally; and
|
|
|
|
|
●
|
the magnitude of our general and administrative expenses.
|
Until we can generate significant recurring revenues, we expect
to satisfy our future cash needs through debt and/or equity financings (such as our March 2017, March 2019, December 2019, April
2020, November 2020 and March 2021 offerings of ADSs and/or warrants). We cannot be certain that additional funding will be available
to us on acceptable terms, if at all. If funds are not available, we may be required to delay, reduce the scope of, or eliminate
research or development plans for, or commercialization efforts with respect to our product candidates.
C.
|
Research and development, patents and licenses, etc.
|
For a description of our research and development programs and the amounts that we
have incurred over the last two years pursuant to those programs, please see “Item 5. Operating and Financial Review and
Prospects— A. Operating Results— Operating Expenses— Research and Development Expenses, net” and “Item
5. Operating and Financial Review and Prospects— A. Operating Results— Comparison of the year ended December 31, 2020
to the year ended December 31, 2019— Research and Development Expenses.”
The COVID-19
pandemic has impacted companies in Israel and around the world, and as its trajectory remains highly uncertain, and although
the impact of COVID-19 has lessened in Israel recently, we cannot predict the duration and severity of the outbreak and its
containment measures for our Company. Further, we cannot predict impacts, trends and uncertainties involving the
pandemic’s effects on economic activity, the size of our labor force, and the extent to which our income,
profitability, liquidity, or capital resources may be materially and adversely affected. See also “Item 3.D. –
Risk Factors– Risks Related to Our Business Operations – Our business and operations have been and are likely to
continue to be adversely affected by the COVID-19 global pandemic.”
E.
|
Off-Balance Sheet Arrangements
|
We currently do not have any off-balance sheet arrangements.
F.
|
Tabular Disclosure of Contractual Obligations
|
The following table summarizes our
contractual obligations at December 31, 2020:
|
|
Total
|
|
|
Less than 1
year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
More than
5 years
|
|
|
|
(in thousands of U.S. dollars)
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License and contractual agreements(1)
|
|
|
723
|
|
|
|
-
|
|
|
|
723
|
|
|
|
-
|
|
|
|
-
|
|
Facility(2)
|
|
|
22
|
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(1)
|
Represents contractual obligations with respect to a clinical investigation
and laboratory services contract with Hannover Medical School to conduct a phase IIb clinical trial.
|
|
|
(2)
|
Represents our lease agreement with a third party for an area of approximately
100 square meters.
|
ITEM 6.
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
A.
|
Directors and Senior Management
|
The
following table sets forth information regarding our executive officers, key employees and directors as of March 22, 2021:
Name
|
|
Age
|
|
|
Position
|
Itschak Shrem
|
|
73
|
|
|
Chairman of the Board of Directors
|
Oz Adler
|
|
34
|
|
|
Chief Financial Officer
|
Dr. Adi Zuloff-Shani
|
|
52
|
|
|
Chief Technologies Officer
|
Amnon Ben Shay(1)(2)(3)(4)
|
|
58
|
|
|
Director
|
Alon Dayan(1)(2)(3)(4)
|
|
45
|
|
|
Director
|
Moshe Revach
|
|
44
|
|
|
Director
|
Liat Sidi(3)
|
|
46
|
|
|
Director
|
Lior Vider(1)(2)(3)
|
|
44
|
|
|
Director
|
Amity Weiss
|
|
58
|
|
|
Director and Chief Executive Officer
|
(1)
|
Member of the Compensation Committee
|
|
|
(2)
|
Member of the Audit Committee
|
|
|
(3)
|
Independent Director (as determined by our Board of Directors, pursuant to the definition
prescribed to such term under Nasdaq Stock Market rules)
|
|
|
(4)
|
External director under the Companies Law
|
Mr. Itschak Shrem has served
as our Chairman since August 2020. Mr. Shrem has more than 40 years of experience in financial markets and venture capital.
In 1991, Mr. Shrem founded Dovrat Shrem Ltd., an investment banking, management and technology company. Prior to that, he spent
15 years at Clal Israel Ltd., where he served in various capacities, including chief operating officer, and was responsible for
capital markets and insurance businesses. In 1993, Mr. Shrem founded Pitango Venture Capital Fund (formerly, Polaris) and served
as a partner of Pitango Funds I, II and III. He has been the Managing Director of Yaad Consulting 1995 Ltd. since 1995. Mr. Shrem
currently serves on the board of directors of Rail Visions Ltd. Previously, Mr. Shrem served on the board of Tel-Aviv Sourasky
Medical Center, the Weizman Institute Eden Spring Ltd., Nano Dimension Ltd., Ormat Industries Ltd., Retalix Ltd. and as chairman
of Sphera Funds Management Ltd. Mr. Shrem holds a B.A. in Economics and Accounting from Bar-Ilan University and an M.B.A. from
Tel-Aviv University.
Mr. Oz Adler, CPA, has served as our Chief Financial
Officer since April 2018 and as our VP Finance from March 2018 until April 2018. He previously served as our Controller commencing
in September 2017. Mr. Adler has experience in a wide variety of managerial, financial, tax and accounting. From 2012 until 2017,
Mr. Adler was employed as a certified public accountant at Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global.
Mr. Adler holds a B.A. in Accounting and Business management from The College of Management, Israel.
Dr. Adi Zuloff-Shani has served as our Chief Technologies
Officer since February 2016. Dr. Zuloff-Shani has more than 20 years of experience as a research and development executive. Prior
to joining us, and from 2012 to 2016, Dr. Zuloff-Shani served as a vice president development at Macrocure Ltd. (Nasdaq: MCUR)
where besides leading all research and development activities, she interacted and was involved with the activities of all
departments including clinical, operations, quality assurance, quality control, finance, and regulatory affairs. Dr. Zuloff-Shani
holds a Ph.D. in human biology and immunology from Bar-Ilan University, Israel.
Mr. Amnon Ben Shay has
served as our external director under the Companies Law since January 2021. Mr. Ben Shay has been serving as the chief financial
officer of Hadar Hasharon Marketing and Distributions Ltd. since 2019. Additionally, Mr. Ben Shay currently serves on the board
of directors of Value Capital One Ltd. (TASE: VALU) and previously served on the board of directors of Azorim Investments and Building
Development Company Ltd. (TASE: AZRM) and B.G.I. Investments (1961) Ltd. (TASE: BGI). From 2017 to 2019, Mr. Ben Shay served as
the chief financial officer of Fridenson Air & Ocean Ltd. From 2014 to 2017, he served as the chief financial officer of Abetrans
Logistics Ltd. Prior to that, Mr. Ben Shay served as the chief financial officer of Isline Export and Import Services Ltd. from
2010 to 2013. Prior to the year 2009, Mr. Ben Shay served as the chief financial officer of several Israeli real estate investment
groups. Mr. Ben Shay holds a B.A. in economics and business and an M.B.A in business, both from The Hebrew University of Jerusalem,
Israel, and an accounting certificate from The College of Management Academic Studies, Israel.
Mr. Alon Dayan
has served as our external director under the Companies Law since January 2021. Mr. Dayan is the founder of L1-Systems Ltd. and
has been serving as its chief executive officer since 2015. Since 2018, Mr. Dayan has served as the chief executive officer of
Virtual Crypto Technologies Inc. (OTC: VBIX), which he founded as well. Prior to that, he served as a business development manager
at Elbit Systems Ltd. from 2006 to 2013. Mr. Dayan holds a B.A. in electronical engineering from Ariel University, Israel.
Mr. Moshe Revach has served as our Director since
August 2020. Mr. Revach serves as deputy mayor of the city of Ramat Gan, Israel, has held both the sports and government relations
portfolios in the Ramat Gan municipality since 2013, and has served in various other Ramat Gan municipality positions since 2008.
Mr. Revach serves as a director of L.L.N IT solutions, a wholly-owned subsidiary of the Jewish Agency for Israel and of Biomedico
Hadarim Ltd. Mr. Revach previously served as a director of the RPG Economic Society and Jewish Experience Company on behalf of
the Jewish Agency. Mr. Revach holds an LL.B from the Ono Academic College, Israel, and a B.A. in management and economics from
the University of Derby.
Ms. Liat Sidi has served as our Director since August
2020. Ms. Sidi serves as the manager of the accounting department for Foresight Autonomous Holdings Ltd. (Nasdaq and TASE: FRSX).
Ms. Sidi previously served as an accountant for Panaxia Labs Israel Ltd. (TASE: PNAK) from 2015 to 2020 and as an accountant for
Soho Real Estate Ltd. from 2015 to 2016. Ms. Sidi also served as an accountant for Feldman-Felco Ltd. from 2006 to 2010 and as
an accountant for Eli Abraham accounting firm from 2000 to 2006. Ms. Sidi completed tax, finance and accounting studies in Ramat
Gan College of Accounting.
Mr. Lior Vider has served as our Director since August
2020. Mr. Vider has served as a senior investment portfolio manager at Epsilon Investment House Ltd. since 2010. Mr. Vider previously
served as chief investment manager for Impact Investment Management Ltd., from the Union Bank group, from 2007 to 2010 and as
chairman of the board of directors and a member of the group’s investment committee of Rahkia Capital Markets Ltd. from
2006 to 2007. Mr. Vider also served as manager of the financial desk and as a trader in trust funds of Ilanot Discount from 2003
to 2006. Mr. Vider founded and managed sponser.co.il, a financial portal specializing in services for investors from 2005 to 2017.
Mr. Vider holds a B.A. in industry and management engineering from Shenkar College in Israel.
Mr. Amity Weiss has served
on our Board of Directors since August 2020 and was also appointed our Chief Executive Officer in August 2020. Mr. Weiss
currently serves as chairman of the board of directors of P.L.T Financial Services Ltd. (TASE: PLTP), as chairman of the board
of directors of Matomy Media Group Ltd. (LSE: MTMY, TASE: MTMY.TA) and as an external director of Cofix Group Ltd. (TASE: CFCS).
In 2016, Mr. Weiss founded Amity Weiss Management Ltd. and now serves as its chief executive officer. From 2001 until 2015, Mr.
Weiss served as vice president of business marketing & development and in various other positions at Bank Poalei Agudat Israel
Ltd. from the First International Bank of Israel group. Mr. Weiss holds a B.A. in economics from New England College, an M.B.A.
in business administration from Ono Academic College in Israel, an Israeli branch of University of Manchester and an
LL.B from the Ono Academic College.
Scientific Advisory Board
We have a Scientific Advisory Board of twelve award winning
and active physicians and scientists in the field(s) of: psychiatry and child psychiatry, TS, neurology, Alzheimer’s disease,
hospice and palliative medicine neurobiology, pharmacology and neuropsychopharmacology, organic and medicinal chemistry, cannabinoids
and drug discovery. We consult with the members of our Scientific Advisory Board on a regular basis.
Prof. Raphael Mechoulam is a Professor Emeritus
of the Department of Natural Products of the School of Pharmacy at the Faculty of Medicine of the Hebrew University of Jerusalem,
and a member of the Israel Academy of Sciences and Humanities. Prof. Mechoulam’s research in the field of cannabis has led
to his discovery of the endocannabinoid system. Additionally, Prof. Mechoulam was among the first to complete the total synthesis
of the major plant cannabinoids, THC, cannabidiol, cannabigerol, and others, and also played a key role in the isolation of the
first described endocannabinoid anandamide. Prof. Mechoulam’s research interests are in the chemical and biological activity
of natural products and medicinal agents, of which his primary contributions are in the field of the constituents of cannabis,
about which Prof. Mechoulam has published extensively. Prof. Mechoulam has received amongst others, the Israel Prize in 2000,
the European College of Neuropsychopharmacology Lifetime Achievement Award in 2006 and the Rothschild Prize in 2012.
Dr. Yossi Tam received his B.Med.Sc., M.Sc., Ph.D.
and D.M.D. from the Hebrew University of Jerusalem. Dr. Tam did his postdoctoral training at the National Institutes of Health
(NIH), and in 2011, became a staff scientist at the NIH. In June 2014, Dr. Tam moved to the Hebrew University of Jerusalem, where
he heads the Obesity and Metabolism Laboratory at the Institute for Drug Research, and focuses on targeting the endocannabinoid
(eCB) system for Obesity, Diabetes and the metabolic syndrome. Dr. Tam also serves as the Director of the Hebrew University’s
Multidisciplinary Center on Cannabinoid Research and a Scientific Advisory Board Member of several biotech companies, which develop
a portfolio of non-psychoactive cannabinoid and cannabinoid modulating medicines for unmet market needs. Dr. Tam won major national
and international grants, and authored over 40 peer-reviewed papers in leading journals, and two book chapters. Having a clinical
background with basic science training, Dr. Tam has always been interested in how science can directly improve people’s
everyday lives. Thus, he has strived unceasingly to integrate his clinical curiosity and experimental knowledge, in order to deepen
the understanding of clinically relevant research questions.
Prof. Elon Eisenberg, is the Dean of the Faculty
of Medicine at the Technion - Israel Institute of Technology. Prof. Eisenberg is a Professor of Neurology and Pain Medicine at
the Faculty of Medicine and holds the Otto Barth Family Academic Chair in Biomedical Science. Prof. Eisenberg graduated from Sackler
School of Medicine, Tel-Aviv University in Israel. Prof. Eisenberg completed a residency in Neurology, at Rambam Medical Center,
Haifa, Israel, and Neurology - Pain Fellowship at Massachusetts General Hospital, Harvard Medical School in Boston, USA. Prof.
Eisenberg has been the director of the Institute of Pain Medicine at Rambam Health Care Campus, Haifa, Israel, and the President
of the Israeli Pain Association. Prof. Eisenberg is currently the director of the Pain Research Unit at the Institute of Pain
Medicine, Rambam Health Care Campus. H Prof. Eisenberg’s main areas of research include mechanisms and treatment of pain
with special emphasis on neuropathic pain, CRPS, cancer pain, opioids and cannabinoids. Prof. Eisenberg has published about two-hundred
articles, book chapters and other manuscripts in various areas of pain.
Prof. James Leckman, M.D. is the Neison Harris
Professor of Child Psychiatry, Psychiatry, Psychology and Pediatrics at Yale University. Prof. Leckman has served as director
of Research for the Yale Child Study Center for more than twenty years. Prof. Leckman’s current research involves exploring
whether the strengthening of families and the enhancement of childhood development leads to peaceful results and the prevention
of violence. Additionally, Prof. Leckman has a longstanding interest in TS and OCD. Prof. Leckman is the author or co-author of
over 430 original articles published in peer-reviewed journals, twelve books, and 140 book chapters.
Prof. Michael Davidson currently serves, among
other things, as Chairman of the Stuckinski Centre for Alzheimer’s Disease Research in Ramat Gan. Prof. Davidson is also
the editor of European Neuropsychopharmacology. Prof. Davidson served as Chief Psychiatrist at the Department of Psychiatry
of the Sheba Medical Centre in Tel-Hashomer for six years. Prof. Davidson holds a professorship at the Sackler School of
Medicine of Tel Aviv University and a secondary appointment at the Mount Sinai School of Medicine in New York. Prof. Davidson
is considered an international expert on Alzheimer’s disease and is the author of approximately 300 publications in scientific
literature.
Prof. Daniele Piomelli serves as the Louise Turner
Arnold Chair in Neurosciences and Professor of Anatomy and Neurobiology, Pharmacology, and Biological Chemistry at University
of California, Irvine. Prof. Piomelli is also the founding director of the drug discovery and development unit (D3) at the Italian
Institute of Technology in Genoa, Italy, as well as the Editor in Chief of Cannabis and Cannabinoid Research of Cannabis and Cannabinoid
Research. Prof. Piomelli’s research has resulted in several contributions to the pharmacology of lipid based signaling molecules
including endocannabinoid substances and lipid amides. Prof. Piomelli is the author of more than 400 peer reviewed articles and
books and has received several awards and honors. Prof. Piomelli studied Pharmacology and Neuroscience at Columbia University,
and the Rockefeller University, and earned his degree of Doctor of Pharmacy from University of Naples.
Prof. Kirsten Müller-Vahl is a Professor of
Psychiatry at the Department of Psychiatry, Socialpsychiatry and Psychotherapy at the Hanover Medical School, Germany. Prof. Müller-Vahl
specialist in both neurology and adult psychiatry and has worked extensively at a specialized movement disorder clinic. For six
years, Prof. Müller-Vahl was a grant-holder for the German Government for scientific research related to TS. Over the past
eighteen years, Dr. Müller-Vahl has investigated more than 12000 patients with TS, both children and adults, and has served
as the head of the TS outpatient department for over twenty years. Additionally, Prof. Müller-Vahl served on the scientific
advisory board of the German Tourette Syndrome Association, and, in 2011, she became the president of the German Society for the
Study of Tourette Syndrome. Furthermore, Prof. Müller-Vahl is a German representative member of the management committee
and coordinator of the COST Action BM0905, which is involved the study of TS, and the leader of Working Group 4, which is involved
in outreach activities. Prof. Müller-Vahl is a full partner in the European Union funded FP7 program, the “European
Multicentre Tics in Children Studies.”
Prof. Avi Weizman is a Professor of Child and Adult
Psychiatry at the Sackler Faculty of Medicine of Tel Aviv University, a Director of the Felsentein Medical Research Center
and the head of a Laboratory for Biological Psychiatry and the head of a Research Unit at the Geha Mental Health Center. Prof.
Weizman’s research involves the investigation of brain mechanisms of mental disorders, and currently focuses on neurodevelopmental
disorders, development of new strategies for the treatment of psychotic disorders and the psychopharmacology of mental disorders.
Prof. Weizman is the author of more than 760 original papers, five full books, 28 book chapters and 60 review articles. After
completing his residency in Psychiatry, Prof. Weizman spent two years as a visiting scientist at the National Institute of Mental
Health in Bethesda, MD.
Dr. Michael H. Bloch, M.D., M.S. is the associate
training director of the Child Study Center’s Solnit Integrated Program, which provides psychiatrists-in-training with the
opportunity to integrate general, child and research psychiatry during many stages of their career. Dr. Bloch’s research
interests focus on studying TS, OCD, and trichotillomania. Dr. Bloch’s current research involves developing superior treatments
for children and adults diagnosed with the aforementioned indications and examining predictors of long-term outcomes with an emphasis
on neuroimaging. Dr. Bloch has over 100 peer-reviewed publications and has received the Keese Prize (Best Research Thesis by graduating
medical student at Yale University), the Lustman Award (Best Research performed by Psychiatry Resident at Yale University) and
the AACAP Norbert and Charlotte Rieger Award for Scientific Achievement (Best Manuscript Published in JAACAP by Child Psychiatrist).
Dr. Bloch graduated from Yale School of Medicine, where he completed training in both child and adult psychiatry.
Prof. Saoirse O’Sullivan, PhD received her doctorate
from Trinity College Dublin in 2001 and moved to the University of Nottingham in 2002 as a Research fellow where she began researching
cannabinoid pharmacology. She was made Lecturer in 2007 and Associate Professor in 2011. Prof. O’Sullivan has over 26 original
research articles, six reviews and three books chapters on the topic of cannabinoid pharmacology, with specific interests on the
cardiovascular and gastrointestinal effects of cannabinoids and therapeutic potential of cannabis-based medicines. Prof. O’Sullivan’s
research methodologies span from cellular and animal models to human healthy volunteer studies and early phase clinical trials.
In 2016, Prof. O’Sullivan was named the International Cannabinoid Research Society Young Investigator of the year. In 2017,
Prof. O’Sullivan started her own consulting company, CanPharma Consulting.
Dr. Mellar P. Davis, MD, FCCP FAAHPM is a member of the
Palliative Care Department, and Section Head, Geisinger Medical System Danville, PA. He has been a member of the Geisinger Medical
Staff since August 2016. In his role as Section Head, Dr. Davis is responsible for developing palliative care services throughout
the Geisinger Medical System including outpatient and inpatient services. In addition, Dr. Davis works with the Geisinger Hospice
Services to develop and coordinate care within the central region. Dr. Davis was a member of the Cleveland Clinic Palliative Care
section, Taussig Cancer Institute and fellowship director until joining the Geisinger Medical System. Dr. Davis was the co-chair
of the Palliative Care Study Group of the Multinational Association of Supportive Care (MASCC) and a past board member since 2010.
Dr. Davis has been a Professor of Medicine in The Cleveland Clinic Lerner College of Medicine, Case Western Reserve University,
since 2009 and was elected as a Fellow to the American Academy of Hospice and Palliative Medicine in 2010. Dr. Davis is Editor
in Chief of Progress on Palliative Care. Dr. Davis’ present duties are as the Associate Editor in Chief of PC Fast Article
Critical Summary for Clinicians in Palliative Care.
Prof. David John Nutt, DM, FRCP, FRCPsych, FMedSci,
DLaws is a psychiatrist and the Edmond J. Safra Professor of Neuropsychopharmacology in the Division of Brain Science, Imperial
College London. He was previously the president of the European Brain Council, British Association of Psychopharmacology, British
Neuroscience Association and the European College of Neuropsychopharmacology. He is currently founding Chair of DrugScience and
holds visiting professorships at the Open University and the University of Maastricht. In 2013, he won the John Maddox Prize,
an international prize administered by Sense about Science in partnership with Nature for standing up for science and in 2017
a Doctor of Laws (Honoris Causa) from the University of Bath.
Family Relationships
There are no family relationships between any members of our
executive management and our directors.
Arrangements for Election of Directors and Members of Management
We are not a party to, and there are no arrangements or voting
agreements that we are aware of for the election of our directors and members of management.
Compensation
The following table presents in the aggregate all compensation
we paid to all of our directors and senior management, as a group for the year ended December 31, 2020. The table does not include
any amounts we paid to reimburse any of such persons for costs incurred in providing us with services during this period.
All amounts reported in the tables
below reflect the cost to the Company, in thousands of U.S. Dollars, for the year ended December 31, 2020.
(in thousands of U.S. dollars)
|
|
Salary/Fee
|
|
|
Pension,
Retirement
and Other
Similar
Benefits(1)
|
|
|
Share
Based
Compensation(2)
|
|
All directors and senior management as a group, consisting of 19 persons (*)
|
|
$
|
670
|
|
|
|
77
|
|
|
$
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Includes our former Chairman and Chief Executive Officer Dr. Ascher Shmulewitz, former director and Chief Executive Officer, Gilad Bar-Lev, and former directors Prof. Ari Shamiss, Arie Webber, Tod Violette, Stephen Simes, Amit Berger, Eric So and Lior Amit, who resigned from their former positions as executive officers and/or members of our board during the year of 2020.
|
|
|
|
|
(1)
|
Represents the directors and senior management’s payment of mandatory social benefits made by the Company on behalf of such officer. Such benefits may include, to the extent applicable to the executive, payments, contributions and/or allocations for savings funds, education funds (referred to in Hebrew as “Keren Hishtalmut”), pension, severance, risk insurances (e.g., life or work disability insurance) and payments for social security.
|
|
|
|
|
(2)
|
Computed based on fair value for ADS options granted and estimated using the Black-Scholes option pricing model.
|
In accordance with the Companies Law, the table below reflects the compensation granted
to our five most highly compensated officers or directors during or with respect to the year ended December 31, 2020.
Annual Compensation (in thousands of U.S. dollars)
Executive Officer
|
|
Salary/Fee
|
|
|
Pension, Retirement and Other Similar
Benefits
|
|
|
Share
Based
Compensation (1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Ascher Shmulewitz*
|
|
$
|
201
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Adi Zuloff-Shani, Chief Technologies Officer
|
|
$
|
129
|
|
|
$
|
30
|
|
|
$
|
55
|
|
|
$
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oz Adler, Chief Financial Officer
|
|
$
|
188
|
|
|
$
|
43
|
|
|
$
|
70
|
|
|
$
|
301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gilad Bar Lev*
|
|
$
|
57
|
|
|
$
|
3
|
|
|
|
-
|
|
|
$
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen M. Simes *
|
|
$
|
22
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
(1)
|
Share based compensation includes the cost of our non-cash share-based compensation in 2020.
|
|
|
|
|
(*)
|
Dr. Ascher Shmulewitz, Gilad Bar-Lev and Stephen M. Simes are no longer members of our Board
of Directors or executive officers of the Company.
|
Employment and Services Agreements with Executive Officers
With the exception of our Chief Executive Officer, we have entered
into written employment agreements and/or consulting agreements with each of our executive officers. All of these agreements contain
customary provisions regarding noncompetition, confidentiality of information and assignment of inventions. However, the enforceability
of the noncompetition provisions may be limited under applicable law. Most of these agreements are terminable by either party
upon 30 days’ prior written notice. However, a longer 90 day notice period is required with respect to each of our executive
officers. In addition, we have entered into agreements with each executive officer and director pursuant to which we have agreed
to indemnify each of them up to a certain amount and to the extent that these liabilities are not covered by directors and officers
insurance. Members of our senior management are eligible for bonuses each year, subject to a pre-determined target-based bonus
plan, which is usually set during the first quarter of each calendar year following the recommendation of our compensation committee
and the approval of our Board of Directors. The annual bonuses are payable upon meeting objectives and targets that are set by
our Chief Executive Officer and compensation committee and approved annually by our Board of Directors.
For a description of the terms of our options and option plans,
see Item 6.E. “Share Ownership” below.
According
to the Companies Law, following the appointment of the External Directors and the recommendation of our compensation committee
and the Board of Directors, at the special general meeting, held on March 2, 2021, our shareholders approved the terms of compensation
of our Chief Executive Officer, Mr. Amity Weiss, and the Chairperson of the Board of Directors, as set forth below. Such terms
are in line with our Compensation Policy.
|
●
|
Chairperson of the Board of Directors - a monthly fee in the amount of NIS 10,000 (approximately $3,030) plus applicable value added tax (VAT).
|
|
●
|
Chief Executive Officer - a monthly fee in the amount of NIS 10,000 (approximately $3,030) plus applicable value added tax (VAT).
|
Directors’ Service Contracts
We do not have written agreements with any director (including
our Chief Executive Officer, who is also a director) providing for benefits upon the termination of his/her employment with us.
Our Board of Directors presently consists of seven members.
Although our securities are not listed on a national securities exchange or in an inter-dealer quotation system which has requirements
that directors be independent, while we are currently quoted on the OTCQB, we have nevertheless adopted the independence standards
of the Nasdaq Capital Market to determine the independence of our directors and those directors serving on any committee. These
standards provide, among other things, that a person will be considered an independent director if he or she is not an officer
of the company and is, in the view of the company’s board of directors, free of any relationship that would interfere with
the exercise of independent judgment. We believe that Mr. Vider, Ms. Sidi, Mr. Ben Shay and Mr. Dayan are all currently
considered “independent” for purposes of the Nasdaq Stock Market rules. Our articles of association provide that the
number of directors shall be set by the general meeting of the shareholders provided that it will consist of not less than three
and not more than 12 directors. Pursuant to the Companies Law, the overall planning and management of our business is vested in
our Board of Directors. Our Board of Directors may exercise all powers and may take all actions that are not specifically granted
to our shareholders or to management. Our executive officers are responsible for our day-to-day management and have individual
responsibilities established by our Board of Directors. Our Chief Executive Officer is appointed by, and serves at the discretion
of, our Board of Directors. All other executive officers are appointed by the Board of Directors or by our Chief Executive Officer,
provided that he was authorized by the Board of Directors to do so. Their terms of employment are subject to the approval of our
Board of Directors’ Compensation Committee (see “—Compensation Committee”)
and of the Board of Directors (and in case the terms are not compatible with the provisions of the compensation policy, to our
shareholders’ approval as well), and are subject to the terms of any applicable employment agreements that we may enter
into with them.
Other than our external directors,
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. 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 is for a term of office that expires on the third annual general meeting following such election or re-election,
such that from 2020 and after, at each annual general meeting the term of office only one class of directors will expire. Each
director, aside from any founder director, holds office until the annual general meeting of our shareholders for the year in which
his or her term expires and until his or her successor is duly appointed, unless the tenure of such director expires earlier pursuant
to the Companies Law upon the occurrence of certain events or unless removed from office by a vote of the holders of at least
65% of the total voting power of our shareholders at a general meeting of our shareholders in accordance with our amended and
restated articles of association.
Our directors who are not founder directors
are divided among the three classes as follows:
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the Class I director is Ms. Liat Sidi, and her term will expire at our annual general meeting of shareholders to be held in 2021;
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the Class II directors consist of Mr. Moshe Revach and Mr. Lior Vider and their terms will expire at our annual general meeting of shareholders to be held in 2022; and
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the Class III directors consist of Mr. Amity Weiss and Mr. Itschak Shrem and their terms will expire at our annual general meeting of shareholders to be held in 2023.
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Additionally, and as further set forth below, Mr. Amnon Ben
Shay and Mr. Alon Dayan are external directors of the Company and their three year terms commenced on January 7, 2021.
In addition, our articles of association allow our Board of
Directors to appoint directors to fill vacancies on our Board of Directors or in addition to the acting directors (subject to
the limitation on the number of directors and their qualifications), until the next general meeting in which directors may be
appointed or such appointment terminated.
Under the Companies Law, nominations for directors may be made
by any shareholder holding at least 1% of our outstanding voting power. However, any such shareholder may make such a nomination
only if a written notice of such shareholder’s intent to make such nomination has been given to our Board of Directors.
Any such notice must include certain information, a description of all arrangements between the nominating shareholder and the
proposed director nominee(s) and any other person pursuant to which the nomination(s) are to be made by the nominating shareholder,
the consent of the proposed director nominee(s) to serve as our director(s) if elected and a declaration signed by the nominee(s)
declaring that there is no limitation under the Companies Law preventing their election and that all of the information that is
required to be provided to us in connection with such election under the Companies Law has been provided.
Under the Companies Law, our Board of Directors must determine
the minimum number of directors who are required to have accounting and financial expertise. Under Israeli applicable regulations,
a director with accounting and financial expertise is a director who, by reason of his or her education, professional experience
and skill, has a high level of proficiency in and understanding of business accounting matters and financial statements. He or
she must be able to thoroughly comprehend the financial statements of the company and initiate debate regarding the manner in
which financial information is presented. In determining the number of directors required to have such expertise, our Board of
Directors must consider, among other things, the type and size of the company and the scope and complexity of its operations.
Our Board of Directors has determined that the minimum number of directors of our company who are required to have accounting
and financial expertise is one.
Our Board of Directors is required to elect one director to
serve as the Chairman of the Board of Directors to preside at the meetings of the Board of Directors, and may also remove that
director as Chairman. Pursuant to the Companies Law, neither the chief executive officer nor any of his or her relatives is permitted
to serve as the Chairman of the Board of Directors, and a company may not (subject to a certain time-limited exemption, as described
below) vest the Chairman or any of his or her relatives with the chief executive officer’s authorities. In addition, a person
who reports, directly or indirectly, to the chief executive officer may not serve as the Chairman of the Board of Directors; the
Chairman may not be vested with authorities of a person who reports, directly or indirectly, to the chief executive officer; and
the Chairman may not serve in any other position in the company or a controlled company, but he or she may serve as a director
or chairman of a controlled company. However, and notwithstanding the foregoing, the Companies Law permits the shareholders of
a company to determine, for periods not exceeding three years from each such determination, that the Chairman or his or her relative
may serve as chief executive officer or be vested with the chief executive officer’s authorities, and that the chief executive
officer or his or her relative may serve as Chairman or be vested with the Chairman’s authorities. Such determination of
a company’s shareholders requires either: (1) the approval of at least the majority of the shares of those shareholders
present and voting on the matter (other than controlling shareholders and those having a personal interest in the determination);
or (2) that the total number of shares opposing such determination does not exceed 2% of the total voting power in the company.
Our Executive Chairman was acting as our interim Chief Executive Officer for no additional compensation, until May 2020, which
appointment was approved by our shareholders at our 2017 annual general meeting, which took place on November 1, 2017).
The Board of Directors may, subject
to the provisions of the Companies Law, delegate any or all of its powers to committees of the Board of Directors, and it may,
from time to time, revoke such delegation or alter the composition of any such committees, subject to certain limitations. Unless
otherwise expressly provided by the Board of Directors, the committees shall not be empowered to further delegate such powers.
The composition and duties of our audit committee, compensation committee, the research and development and clinical trials committee
are described below. See “—Committees of the Board of Directors” below.
Role of Board of Directors in Risk Oversight Process
The Board of Directors oversees how management monitors compliance
with our risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the
risks faced by us. Our Board of Directors encourages management to promote a culture that incorporates risk management into our
corporate strategy and day-to-day business operations. Management discusses strategic and operational risks at regular management
meetings, and conducts specific strategic planning and review sessions that include a focused discussion and analysis of the risks
we face. Senior management reviews these risks with the Board of Directors focusing on particular business functions, operations
or strategies, and presents the steps taken by management to mitigate or eliminate such risks. The Board of Directors is assisted
in its oversight role by an internal auditor. The internal auditor undertakes both regular and ad hoc reviews of risk management
controls and procedures, the results of which are reported to our audit committee. See “—Committees of the Board of
Directors—Internal Auditor” below.
Leadership Structure of the Board of Directors
In accordance with the Companies Law and our articles of association,
our Board of Directors is required to appoint one of its members to serve as Chairman of the Board of Directors. Our Board of
Directors has appointed Mr. Itschak Shrem to serve as Chairman of the Board of Directors on August 4, 2020.
Alternate Directors
Our articles of association provide, consistent with the Companies
Law, that any director, and with respect to external directors (to the extent required under applicable law – see the description
of the External Directors Relief Resolution under “—External Directors” below) – only subject to certain
preconditions, may appoint another person to serve as his alternate director, provided such person has the qualifications prescribed
under the Companies Law to be appointed and to serve as a director and is not already serving as a director or an alternate director
of the company. The term of an alternate director may be terminated at any time by the appointing director and automatically terminates
upon the termination of the term of the appointing director. An alternate director has the same rights and responsibilities as
a director. To date there are no alternate director appointments in effect.
External Directors
Qualifications of external directors
Under the Companies Law, companies incorporated under the laws
of the State of Israel that are “public companies” are required to appoint at least two external directors who meet
the qualification requirements under the Companies Law. Such external directors are not required to be Israeli residents in case
the company is listed on a foreign stock exchange (such as ours). Appointment of external directors is made by a special majority
resolution of the general meeting of our shareholders. At a shareholders’ meeting held on January 7, 2021, each of Mr. Amnon
Ben Shay and Mr. Alon Dayan were elected to serve as external directors of the Company for a three-year term commencing on the
date of the meeting.
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 our 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
serve 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.
The term “affiliation” includes:
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an employment relationship;
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a business or professional relationship maintained on a regular basis;
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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.
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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, or any other person assuming the responsibilities
of any of the foregoing positions, without regard to such person’s title, and a director or manager directly subordinate
to the general manager.
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 such 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 Israel
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 either
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 Nasdaq requirements 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 as required under the Companies
Law and regulations promulgated thereunder.
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.
Under the Companies Law, until the lapse of a two-year period
from the date that an external director has ceased to act as an external director (and until the lapse of a one-year period, with
respect to such external director spouse or children) certain prohibitions apply to the ability of the company and its controlling
shareholders, including any corporations controlled by a controlling shareholder to grant such former external director or his
or her spouse or children any benefits (directly or indirectly).
Election and dismissal of external directors
Under Israeli law, external directors are elected by a majority
vote at a shareholders’ meeting, provided that either:
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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 or 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
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the total number of shares held by the shareholders mentioned in the paragraph above that are voted against the election
of the external director does not exceed two percent of the aggregate voting rights in the company.
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Under Israeli law, the initial term of an external director
of an Israeli public company is three years. The external director may be reelected, subject to certain circumstances and conditions,
to two additional terms of three years, each if:
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his/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, subject to additional restrictions set forth in the Companies Law with respect to the affiliation of the external
director nominee, as described above;
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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
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his/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).
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The term of office for external directors for Israeli companies
traded on certain foreign stock exchanges may be further extended, indefinitely, in increments of additional three-year terms,
in each case provided that: (i) both the audit committee and the board of directors confirm that, in light of the expertise and
contribution of the external director, the extension of such external director’s term would be in the interest of the company;
(ii) the appointment to the additional term is subject to the reelection provision described above; and (iii) the term during
which the nominee served as an external director and the board of directors’ and audit committee’s reasoning for the
extension of such term were presented before the general meeting of shareholders prior to the approval of the extension.
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.
Under the regulations
pursuant to the Companies Law, a public company with securities listed on certain foreign exchanges that satisfies the applicable
domestic country laws and regulations that apply to companies organized in that country relating to the appointment of independent
directors and composition of audit and compensation committees and have no controlling shareholder may adopt an exemption from
the requirement to appoint external directors or comply with the audit committee and compensation committee composition requirements
under the Companies Law. We may adopt this exemption in the future if we will no longer have a controlling shareholder.
Additional provisions
Under the Companies Law, each committee authorized to exercise
any of the powers of the board of directors must include only directors and is required to include at least one external director
and each of the 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 an external director except for certain exculpation, indemnification and
insurance provided by the company, as specifically allowed by the Companies Law.
With respect to the committees of the Board, see “Committees
of the Board of Directors” below.
Fiduciary Duties of Office Holders
The Companies Law imposes a duty of care and a duty of loyalty
on all office holders of a company. “Office holders” includes the chief executive officer, general manager, chief
business manager, deputy general manager, vice general manager, any other person assuming the responsibilities of any of the above
positions regardless of that person’s title, and a director, or a manager directly subordinate to the chief executive officer
or general manager.
The duty of care requires an office holder to act with the level
of care with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of
care of an office holder includes a duty to use reasonable means to obtain:
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information on the advisability of a given action brought for his approval or performed by
him by virtue of his position; and
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all other important information pertaining to these actions.
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The duty of loyalty of an office holder requires an office holder
to act in good faith and for the benefit of the company, and includes a duty to:
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refrain from any conflict of interest between the performance of his duties in the company
and his performance of his other duties or personal affairs;
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refrain from any action that constitutes competition with the company’s business;
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refrain from exploiting any business opportunity of the company to receive a personal gain
for himself or others; and
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disclose to the company any information or documents relating to the company’s affairs
which the office holder has received due to his position as an office holder.
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Approval of Related Party Transactions under Israeli Law
General
Under the Companies Law, we may approve an action by an office
holder from which the office holder would otherwise have to refrain, as described above, if:
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the office holder acts in good faith and the act or its approval does not cause harm to the
company; and
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the office holder disclosed the nature of his or her interest in the transaction (including
any significant fact or document) to the company at a reasonable time before the company’s approval of such matter.
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Disclosure of Personal Interests of an Office Holder
The Companies Law requires that an office holder disclose to
the company, promptly, and, in any event, not later than the board meeting at which the transaction is first discussed, any direct
or indirect personal interest that he or she may have and all related material information known to him or her relating to any
existing or proposed transaction by the company.
A “personal interest” includes the personal interest
of a person for whom the office holder holds a voting proxy or the personal interest of the office holder with respect to his
or her vote on behalf of a person for whom he or she holds a proxy even if such shareholder has no personal interest in the matter.
If the transaction is an extraordinary transaction, the office
holder must also disclose any personal interest held by:
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the office holder’s relatives; or
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any corporation in which the office holder or his or her relatives holds 5% or more of the
shares or voting rights, serves as a director or general manager or has the right to appoint at least one director or the
general manager.
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An office holder is not, however, obliged
to disclose a personal interest if it derives solely from the personal interest of his or her relative in a transaction that is
not considered an extraordinary transaction.
Under the Companies Law, an extraordinary
transaction is a transaction:
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not in the ordinary course of business;
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not on market terms; or
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that is likely to have a material effect on the company’s profitability, assets or liabilities.
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The Companies Law does not specify neither to who within us
nor the manner in which required disclosures are to be made. We require our office holders to make such disclosures to our Board
of Directors.
Under the Companies Law, once an office holder complies with
the above disclosure requirement, the board of directors may approve a transaction between the company and an office holder, or
a third party in which an office holder has a personal interest, unless the articles of association provide otherwise and provided
that the transaction is in the company’s interest and is performed by the office holder in good faith. If the transaction
is an extraordinary transaction, first the audit committee and then the board of directors, in that order, must approve the transaction.
Under specific circumstances, shareholder approval may also be required. Any director (and any person, in general) who has a personal
interest in an extraordinary transaction, which is considered at a meeting of the board of directors or the audit committee, may
not be present at this meeting or vote on this matter, unless the chairman of the relevant committee or board of directors determines
that he or she should be present in order to present the transaction that is subject to approval. If a majority of the board of
directors or the audit committee, as the case may be, has a personal interest in the approval of a transaction, then all directors
may participate in discussions of the audit committee or the board of directors (as applicable) on such transaction and the voting
on approval thereof, but shareholder approval is also required for such transaction.
Under the Companies Law, all arrangements
as to compensation and indemnification or insurance of office holders require approval of the compensation committee and board
of directors, and compensation of office holders who are directors must be also approved, subject to certain exceptions, by the
shareholders, in that order. If shareholders of a company do not approve the compensation terms of office holders, other than
directors, the compensation committee and board of directors may override the shareholders’ decision, subject to certain
conditions.
Disclosure of Personal Interests of a Controlling Shareholder
Under the Companies Law, the disclosure requirements that apply
to an office holder also apply to a “controlling shareholder” of a public company. Extraordinary transactions with
a controlling shareholder or in which a controlling shareholder has a personal interest, including a private placement in which
a controlling shareholder has a personal interest, as well as transactions for the provision of services whether directly or indirectly
by a controlling shareholder or his or her relative, or a company such controlling shareholder controls, and transactions concerning
the terms of engagement of a controlling shareholder or a controlling shareholder’s relative, whether as an office holder
or an employee, require the approval of the audit committee or the compensation committee, as the case may be, the board of directors
and a majority of the shares voted by the shareholders of the company participating and voting on the matter in a shareholders’
meeting. In addition, the shareholder approval must fulfill one of the following requirements:
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at least a majority of the shares held by shareholders who have no personal interest in the
transaction and are voting at the meeting must be voted in favor of approving the transaction, excluding abstentions; or
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the shares voted by shareholders who have no personal interest in the transaction who vote
against the transaction represent no more than 2% of the voting rights in the company.
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In addition, any extraordinary transaction with a controlling
shareholder or in which a controlling shareholder has a personal interest with a term of more than three years requires the abovementioned
approval every three years; however, such transactions not involving the receipt of services or compensation can be approved for
a longer term, provided that the audit committee determines that such longer term is reasonable under the circumstances.
Pursuant to regulations promulgated under the Companies Law,
certain transactions with a controlling shareholder or his or her relative, or with directors, that would otherwise require approval
of a company’s shareholders may be exempt from shareholder approval upon certain determinations of the audit or compensation
committee and board of directors.
The Companies Law requires that every shareholder that participates,
in person, by proxy or by voting instrument, in a vote regarding a transaction with a controlling shareholder, must indicate in
advance or in the ballot whether or not that shareholder has a personal interest in the vote in question. Failure to so indicate
will result in the invalidation of that shareholder’s vote.
The term “controlling shareholder” is defined in
the Companies Law as a shareholder with the ability to direct the activities of the company, other than by virtue of being an
office holder. A shareholder is presumed to be a controlling shareholder if the shareholder holds 50% or more of the voting rights
in a company or has the right to appoint the majority of the directors of the company or its general manager. The definition a
“controlling shareholder” is deemed to include any shareholder that holds 25% or more of the voting rights in a company
if no other shareholder holds more than 50% of the voting rights in the company. For the purpose of determining the holding percentage
stated above, two or more shareholders who have a personal interest in a transaction that is brought for the company’s approval
are deemed as joint holders. According to the foregoing, the Companies Law recognizes a situation where there exists a “controlling
shareholder” regarding a particular matter or in relation to a particular transaction, although such shareholder would not
be considered to have a controlling interest on an ongoing basis or in any other case.
Duties of Shareholders
Under the Companies Law, a shareholder has a duty to refrain
from abusing its power in the company and to act in good faith and in an acceptable manner in exercising its rights and performing
its obligations to the company and other shareholders, including, among other things, voting at general meetings of shareholders
on the following matters:
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amendment of the articles of association;
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increase in the company’s authorized share capital;
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merger; and
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the approval of “related party” transactions and acts of office holders that require
shareholder approval.
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A shareholder also has a general duty to refrain from oppressing
and discriminating against other shareholders.
The remedies generally available upon a breach of contract will
also apply to a breach of the above mentioned duties, and in the event of oppression of other shareholders, additional remedies
are available to the injured shareholder.
In addition, any controlling shareholder, any shareholder that
knows that its vote can determine the outcome of a shareholder vote and any shareholder that, under a company’s articles
of association, has the power to appoint or prevent the appointment of an office holder, or has another power with respect to
a company, is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this
duty except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach
of the duty to act with fairness, taking the shareholder’s position in the company into account.
Committees of the Board of Directors
Our Board of Directors has established two standing committees,
both of which (the audit committee and the compensation committee) are mandatory (and to date comprised of the same members and
combined into one functional committee which resides as a unified committee). In addition, occasionally our Board of Directors
may form sub-committees for certain matters on an ad hoc basis, such as a pricing committee or a nomination and corporate governance
committee, with advisory powers only, operating under a framework and guidelines as outlined and defined in advance by our Board
of Directors.
Audit Committee
Under the Companies Law, we are required to appoint an audit
committee.
Our audit committee, acting in compliance with and subject to
the provision of the Companies Law and pursuant to a written charter, is currently comprised of Mr. Vider, Ms. Sidi, Mr. Ben Shay
and Mr. Dayan.
Under the Companies Law, our audit
committee is responsible for:
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determining whether there are deficiencies in the business management practices of our company,
and making recommendations to the Board of Directors to improve such practices;
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determining whether to approve certain related party transactions (including transactions
in which an office holder has a personal interest and whether such transaction is extraordinary or material under Companies
Law) (see “—Approval of Related Party Transactions under Israeli Law”);
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examining our internal controls and internal auditor’s performance, including whether
the internal auditor has sufficient resources and tools to dispose of its responsibilities;
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examining the scope of our auditor’s work and compensation and submitting a recommendation
with respect thereto to our Board of Directors or shareholders, depending on which of them is considering the appointment
of our auditor;
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establishing procedures for the handling of employees’ complaints as to the management
of our business and the protection to be provided to such employees;
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determining whether certain acts of an office holder not in accordance with his or her fiduciary
duty owed to the company are extraordinary or material and to approve such acts and certain related party transactions (including
transactions in which an office holder has a personal interest) and whether such transaction is extraordinary or material
under the Companies Law (see “—Approval of Related Party Transactions Under Israeli Law”);
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deciding whether to approve and to establish the approval process (including by tender or
other competitive proceedings) for certain transactions with a controlling shareholder or in which a controlling shareholder
has a personal interest; and
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determining the process of approving of transactions that are not negligible, including determining
the types of transactions that will be subject to the approval of the audit committee.
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We have adopted an audit committee charter setting forth among
others, the responsibilities of the audit committee consistent with the rules of the SEC and Nasdaq Listing Rules (in addition
to the requirements for such committee under the Companies Law which may apply in connection with the External Directors Relief
Resolution), including, among others, the following:
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considering and making recommendations to the Board of Directors on our financial statements,
reviewing and discussing the financial statements and presenting its recommendations with respect to the financial statements
to the Board of Directors prior to the approval of the financial statements by our Board of Directors;
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oversight of our independent registered public accounting firm and recommending the engagement,
compensation or termination of engagement of our independent registered public accounting firm to the Board of Directors in
accordance with Israeli law;
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recommending the engagement or termination of the person filling the office of our internal
auditor, reviewing the services provided by our internal auditor and reviewing effectiveness of our system of internal control
over financial reporting;
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recommending the terms of audit and non-audit services provided by the independent registered
public accounting firm for pre-approval by our Board of Directors; and
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reviewing and monitoring, if applicable, legal matters with significant impact, reviewing
regulatory authorities’ findings, receiving reports regarding irregularities and legal compliance, acting according
to “whistleblower policy” and recommending to our Board of Directors if so required, and overseeing our policies
and procedures regarding compliance with applicable financial and accounting related standards, rules and regulations.
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Certain exemptions are available under the regulations of the
Companies Law which allows companies whose shares are traded on the Nasdaq not to follow the requirements of the Companies Law
with regard to the composition of the audit committee (with respect to membership of external directors) as provided for under
the Companies Law, and instead, if the company follows the Nasdaq rules applicable to U.S. domestic companies with respect to
the appointment and composition of the audit committee. This regulation is currently not available to us as we are quoted on the
OTCQB and not traded on the Nasdaq.
Companies traded on the Nasdaq Stock Market are required to
maintain an audit committee consisting of at least three members, all of whom are independent and are financially literate and
one of whom has accounting or related financial management expertise. The OTCQB does not have any similar requirements.
As noted above, currently
the members of our audit committee include Mr. Vider, Mr. Ben Shay and Mr. Dayan. All of the members of our audit committee are
“independent,” as such term is defined in under Nasdaq Stock Market rules. Mr. Ben Shay serves as the Chairman of our
audit committee. Although we are quoted on the OTCQB, all members of our audit committee meet the requirements for financial literacy
under the Nasdaq Stock Market rules. Our Board of Directors has determined that Amnon Ben Shay is an audit committee financial
expert as defined by the SEC rules and has the requisite financial experience that would be required by the Nasdaq Stock Market
rules.
Compensation Committee
Under the Companies Law, the board of directors of any public
company must establish a compensation committee. The compensation committee must be comprised of at least three directors, including
all of the external directors (if any), who must constitute a majority of the members of the compensation committee, and one of
whom must serve as chairman of the committee. Certain exemptions are available under the regulations of the Companies Law which
allows companies whose shares are traded on stock exchanges such as the Nasdaq Stock Market, and who do not have a shareholder
holding 25% or more of the company’s share capital, such as exemption from this majority requirement; provided, however,
that the compensation committee meets other Companies Law composition requirements, as well as the requirements of the jurisdiction
where the company’s securities are traded. This exemption is currently not available to us as we are quoted on the OTCQB
and not traded on the Nasdaq.
Certain exemptions are available under the regulations of the
Companies Law which allows companies whose shares are traded on Nasdaq not to follow the requirements of the Companies Law with
regard to the composition of the compensation committee (with respect to membership of external directors) as provided for under
the Companies Law, and instead, if the company follows the Nasdaq rules applicable to U.S. domestic companies with respect to
the appointment and composition of the compensation committee. This regulation is currently not available to us as we are quoted
on the OTCQB and not traded on the Nasdaq.
Our compensation committee is acting in compliance with and
subject to the provisions of the Companies Law and pursuant to a written charter, and consists of Mr. Vider, Ms. Sidi, Mr. Ben
Shay and Mr. Dayan, each of whom is “independent,” as such term is defined under the Nasdaq Stock Market rules. Our
compensation committee complies with the provisions of the Companies Law, the regulations promulgated thereunder, and our articles
of association (insofar as the provisions of our articles of association referring to the compensation committee according to
Israeli law should be referred to and read based on said exemption), on all aspects referring to its independence, authorities
and practice.
Our compensation committee reviews and recommends to our Board
of Directors: (1) the annual base compensation of our executive officers and directors; (2) annual incentive bonus, including
the specific goals and amount; (3) equity compensation; (4) employment agreements, severance arrangements, and change in control
agreements/provisions; (5) retirement grants and/or retirement bonuses; and (6) any other benefits, compensation, compensation
policies or arrangements.
The duties of the compensation
committee include the recommendation to the company’s board of directors of a policy regarding the terms of engagement of
office holders, to which we refer as a Compensation Policy. The Compensation Policy must be adopted by the company’s Board
of Directors, after considering the recommendations of the Compensation Committee. The Compensation Policy is then brought for
approval by our shareholders and is subject to special majority requirements. On January 15, 2020, our shareholders approved our
updated Compensation Policy, which unless amended or restated, shall remain in effect until January 15, 2023. Following our compensation
committee’s and Board of Directors’ review, and in light of the Israeli Securities Authority’s legal position
number 21-101, as amended in June 2020 and August 2020, regarding the necessity to refer to the annual premium and deductibles
in compensation policies, at our special general meeting of shareholders held on March 2, 2021, our shareholders approved the amendment
of the Compensation Policy such that the limitations on the annual premium and deductibles that may be paid by us under our directors’ and
officers’ liability insurance shall be removed.
Compensation Policy
The Compensation Policy must serve as the basis for decisions
concerning the financial terms of employment or engagement of executive officers and directors, including exculpation, insurance,
indemnification or any monetary payment or obligation of payment in respect of employment or engagement. The Compensation Policy
must be approved (or reapproved) not longer than every three years, and relate to certain factors, including advancement of the
company’s objectives, the company’s business and its long-term strategy, and creation of appropriate incentives for
executives. It must also consider, among other things, the company’s risk management, size and the nature of its operations.
The Compensation Policy must furthermore consider the following additional factors:
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the knowledge, skills, expertise and accomplishments of the relevant office holder (director
or executive);
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the director’s or executive’s roles and responsibilities and prior compensation
agreements with him or her;
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the relationship between the terms offered and the average and median compensation of the
other employees of the company, including those employed through manpower companies;
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the impact of disparities in salary upon work relationships in the company;
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the possibility of reducing variable compensation at the discretion of the board of directors;
and the possibility of setting a limit on the exercise value of non-cash variable compensation; and
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as to severance compensation, the period of service of the director or executive, the terms
of his or her compensation during such service period, the company’s performance during that period of service, the
person’s contribution towards the company’s achievement of its goals and the maximization of its profits, and
the circumstances under which the person is leaving the company.
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The Compensation Policy must also include the following principles:
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the link between variable compensation and long-term performance and measurable criteria;
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the relationship between variable and fixed compensation, and the ceiling for the value of
variable compensation;
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the conditions under which a director or executive would be required to repay compensation
paid to him or her if it was later shown that the data upon which such compensation was based was inaccurate and was required
to be restated in the company’s financial statements;
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the minimum holding or vesting period for variable, equity-based compensation; and
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maximum limits for severance compensation.
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The Compensation Policy must also consider appropriate incentives
from a long-term perspective and maximum limits for severance compensation.
The Compensation Committee is responsible for (1) recommending
the Compensation Policy to a company’s Board of Directors for its approval (and subsequent approval by our shareholders)
and (2) duties related to the compensation policy and to the compensation of a company’s office holders as well as functions
previously fulfilled by a Company’s Audit Committee with respect to matters related to approval of the terms of engagement
of office holders, including:
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recommending whether a compensation policy should continue in effect, if the then-current
policy has a term of greater than three years (approval of either a new compensation policy or the continuation of an existing
compensation policy must in any case occur every three years);
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recommending to the board of directors periodic updates to the compensation policy;
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assessing implementation of the compensation policy; and
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determining whether the compensation terms of the chief executive officer of the company need
not be brought to approval of the shareholders.
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Under the regulations promulgated under the Companies Law, certain
exemptions and reliefs with respect to the Compensation Committee are granted to companies whose securities are traded outside
of Israel. These exemptions and reliefs are currently not available to us as we are quoted on the OTCQB and not traded on the
Nasdaq.
Internal Auditor
Under the Companies Law, the Board of Directors of an Israeli
public company must also appoint an internal auditor nominated and supervised by the audit committee. Our internal auditor is
Mr. Daniel Shapira, who has been serving as our internal auditor since March 2006. Mr. Shapira is a Certified Public Accountant
and holds a B.A. degree in Economics and Accounting from Bar-Ilan University, Israel.
The role of the internal auditor is to examine whether a company’s
actions comply with the law and proper business procedure. Our Chairman acts as the internal auditor’s organizational supervisor.
The internal auditor will submit his internal auditor’s work plan for the approval of our audit committee. The internal
auditor may not be an “interested party” or office holder, or a relative of any interested party or office holder,
and may not be a member of the company’s independent accounting firm or its representative. The Companies Law defines an
interested party as a holder of 5% or more of the shares or voting rights of a company, any person or entity that has the right
to nominate or appoint at least one director or the general manager of the company or any person who serves as a director or as
the general manager of a company. Our internal auditor is not our employee, but the managing partner of a firm which specializes
in internal auditing.
Remuneration of Directors
Under the Companies Law, remuneration of directors is subject
to the approval of the compensation committee, thereafter by the board of directors and thereafter by the general meeting of the
shareholders. In case the remuneration of the directors is in accordance with regulation applicable to remuneration of the external
directors then such remuneration shall be exempt from the approval of the general meeting. See “—External Directors.”
Insurance
Under the Companies Law and our articles of association, a company
may obtain insurance for any of its office holders for:
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a breach of his or her duty of care to the company or to another person, including a breach
arising out of the negligent conduct of the office holder;
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a breach of his or her duty of loyalty to the company, provided that the office holder acted
in good faith and had reasonable cause to assume that his or her act would not prejudice the company’s interests;
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a financial liability imposed upon him or her in favor of another person concerning an act
performed by such office holder in his or her capacity as an officer holder;
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any other insurable action in accordance with the Companies Law;
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expenses incurred by an office holder relating to an administrative enforcement proceeding
conducted with respect to such office holder including reasonable litigation expenses and attorneys’ fees; and
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payments to the party injured by the violation, in accordance with the Securities Law.
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On January 15, 2020, we have approved a six-year framework,
where, among others, the yearly premium will not exceed the sum of $1,500,000 (allowing an annual increase of 15%), with a liability
limit of up to $40,000,000 per event per annum, and additional side A difference in conditions (DIC) liability limit of up to
$10,000,000, and including an 84 months run-off insurance under reasonable customary terms, and an annual increase of the foregoing
parameters of no more than 10%. In addition, we have a similar insurance framework included and in effect under our compensation
policy.
We currently have liability insurance providing total coverage
of $5,000,000 per claim and in the aggregate for the benefit of all of our directors and officers and company coverage for securities
claim.
Indemnification
The Companies Law and our articles of association provide that
we may indemnify an office holder against:
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a financial liability imposed on him or her in favor of another person by any judgment concerning
an act performed in his or her capacity as an office holder, including a settlement or arbitrator’s award approved by
a court; However, if an undertaking to indemnify an office holder with respect to such liability is provided in advance, then
such an undertaking must be limited to events which, in the opinion of the board of directors, can be foreseen based on a
company’s activities when the undertaking to indemnify is given, and to an amount or according to criteria determined
by the board of directors as reasonable under the circumstances, and such undertaking must detail the abovementioned foreseen
events and amount or criteria;
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reasonable litigation expenses, including attorneys’ fees, incurred by the office holder:
(i) as a result of an investigation or proceeding instituted against him or her by an authority authorized to conduct such
investigation or proceeding, provided that (a) no indictment (as defined in the Companies Law) was filed against such office
holder as a result of such investigation or proceeding; and (b) no financial liability as a substitute for the criminal proceeding
(as defined in the Companies Law) was imposed upon him or her as a result of such investigation or proceeding, or, if such
financial liability was imposed, it was imposed with respect to an offense that does not require proof of criminal intent;
and (ii) in connection with a monetary sanction;
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reasonable litigation expenses, including attorneys’ fees, expended by the office holder
or charged to him or her by a court relating to an act performed in his or her capacity as an office holder, in connection
with: (1) proceedings that the company institutes, or that another person institutes on the company’s behalf, against
him or her; (2) a criminal charge of which he or she was acquitted; or (3) a criminal charge for which he or she was convicted
for a criminal offense that does not require proof of criminal thought;
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expenses incurred by an office holder relating to an administrative enforcement proceeding
conducted with regard to such office holder, including reasonable litigation expenses and including attorneys’ fees;
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payment to the party injured by the violation; and
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liability or expense otherwise permitted as an indemnification by the Companies Law.
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Our articles of association allow us to indemnify our office
holders up to a certain amount. The Companies Law also permits a company to undertake in advance to indemnify an office holder,
provided that if such indemnification relates to financial liability imposed on him or her, as described above, then the undertaking
should be limited:
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to categories of events that the board of directors determines are likely to occur in light
of the operations of the company at the time that the undertaking to indemnify is made; and
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in amount or criterion determined by the board of directors, at the time of the giving of
such undertaking to indemnify, to be reasonable under the circumstances.
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We have entered into indemnification agreements, with each of
our directors and with certain members of our senior management. Each such indemnification agreement provides the office holder
with indemnification to the fullest extent permitted under applicable law and up to a certain amount, and including with respect
to liabilities resulting from our initial public offering in the United States and any other subsequent public offerings, and
to the extent that the directors and officers insurance do not cover these liabilities.
Exculpation
Under the Companies Law, an Israeli company may not exculpate
an office holder from liability for a breach of his or her duty of loyalty, but may exculpate in advance an office holder from
his or her liability to the company, in whole or in part, and for damages caused to the company as a result of a breach of his
or her duty of care (other than in relation to distributions), but only if a provision authorizing such exculpation is included
in its articles of association. A company may not exculpate a director from liability arising out of a prohibited dividend or
distribution to shareholders. Our articles of association provide that we may exculpate any office holder from liability to us
to the fullest extent permitted by law.
We have entered into exculpation agreements with each of our
current directors and executive officers undertaking to exculpate and release our office holders from any and all liability to
us related to any breach by them of their duty of care to us to the fullest extent permitted by law and including with respect
to liabilities resulting from our initial public offering in the United States and any other subsequent public offerings.
Limitations
The Companies Law provides that we may not exculpate or indemnify
an office holder nor enter into an insurance contract that would provide coverage for any liability incurred as a result of any
of the following: (1) a breach by the office holder of his or her duty of loyalty unless (in the case of indemnity or insurance
only, but not exculpation) the office holder acted in good faith and had a reasonable basis to believe that the act would not
prejudice us; (2) a breach by the office holder of his or her duty of care if the breach was carried out intentionally or recklessly
(as opposed to merely negligently); (3) any action taken or omission committed with the intent to derive an illegal personal benefit;
or (4) any fine or forfeit levied against the office holder.
On December 31, 2018,
we had three full-time employees. On December 31, 2019, we had seven full-time employees. On December 31, 2020, we had had three
members of senior management: our Chief Executive Officer, Chief Financial Officer and Chief Technologies Officer, of which our
Chief Executive Officer is engaged as a consultant.
None of our current employees and officeholders is represented by labor unions or
covered by collective bargaining agreements. We believe that we maintain good relations with all of our employees. However, in
Israel, we are subject to certain Israeli labor laws, regulations and national labor court precedent rulings, as well as certain
provisions of collective bargaining agreements applicable to us by virtue of extension orders issued in accordance with relevant
labor laws by the Israeli and Industry of Economy and which apply such agreement provisions to our employees even though they
are not part of a union that has signed a collective bargaining agreement.
All of our employment and services agreements include employees’ and service-providers’
undertakings with respect to non-competition and assignment to us of intellectual property rights developed in the course of employment
and confidentiality. The enforceability of such provisions is limited by Israeli law.
Unless
indicated otherwise, the following table lists as of March 22, 2021, the number of our shares beneficially owned by each of our
directors, our executive officers and our directors and executive officers as a group as of March 22, 2021:
Executive Officers and Directors
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Number of
Ordinary
Shares
Beneficially
Owned (1)
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Percent of
Class (2)
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Itschak Shrem
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539,280
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*
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%
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Amity Weiss
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89,880
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*
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Oz Adler
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94,996
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(3)
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*
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Dr. Adi Zuloff-Shani
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136,664
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(4)
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*
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Amnon Ben Shay
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-
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Alon Dayan
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-
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Moshe Revach
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-
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Liat Sidi
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-
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Lior Vider
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-
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Lior Amit**
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-
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Gilad Bar-Lev**
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-
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Amit Berger**
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-
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Prof. Ari Shamiss**
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Dr. Ascher Shmulewitz**
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8,000
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Stephen M. Simes**
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-
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Eric So**
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|
Todd Violette**
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Arie Weber**
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All directors and executive officers as a group (19 persons)**
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868,820
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*
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%
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*
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Less than 1%.
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**
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Messrs. Amit, Bar-Lev, Berger, Shamiss, Shmulewitz, Simes, So,
Violette and Weber resigned from their former positions as executive officers and/or members of our board during the year of 2020. Beneficial
ownership information for such persons is based on (i) our own internal records and (ii) the annual report on Form 20-F for the
year ended December 31, 2019 or the final prospectus dated November 19, 2020, as applicable.
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(1)
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Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Ordinary Shares relating to options currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them.
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(2)
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The percentages shown are based on 751,565,483 Ordinary Shares issued and outstanding as of March 22, 2021, plus Ordinary Shares relating to options and warrants currently exercisable or exercisable within 60 days of the date of this table, which are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person.
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(3)
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Includes options to purchase 20,000 Ordinary Shares at an exercise price of $2.80 per share, and options to purchase 74,996 Ordinary Shares at an exercise price $1.50 per share. In addition, Mr. Adler holds options to purchase 150,004 Ordinary Shares that are not exercisable within 60 days. Mr. Adler’s options have expiration dates ranging from August 31, 2023 to October 10,2029, and a weighted average exercise price of $1.61.
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(4)
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Includes options to purchase 25,000 Ordinary Shares at an exercise price of NIS 21.22 (approximately $6.43) per share, options to purchase 45,000 Ordinary Shares at an exercise price of $2.80 per share and options to purchase 66,664 Ordinary Shares at an exercise price of $1.50 per share. In addition, Dr. Zuloff-Shani holds options to purchase 133,336 Ordinary Shares that are not exercisable within 60 days. Dr. Zuloff-Shani’s options have expiration dates ranging from August 28, 2023 to October 10, 2029, and a weighted average exercise price of $2.17.
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Equity Incentive Plans
Israeli Share Option Plan (2015); Israeli Share Option Plan (2005)
In July 2005, we adopted the Israeli Share Option Plan (2005),
or the 2005 Plan, which was in force for a period of 10 years. Upon the expiration of the 2005 Plan, we adopted the Israeli Share
Option Plan (2015), or the 2015 Plan. There are no options outstanding under our 2005 Plan and all new options are granted under
the 2015 Plan.
Under the 2015 Plan, we grant options to purchase our Ordinary
Shares to our officers, employees, consultants and other service providers. As of March 22, 2021, 2,200,000 Ordinary Shares were
reserved for issuance under the 2015 Plan, of which options to purchase 790,000 Ordinary Shares were issued and outstanding thereunder.
Of such outstanding options, options to purchase 498,660 Ordinary Shares were vested as of March 22, 2021, with a weighted average
exercise price of $3.41 per share.
The 2015 Plan was designed to reflect the provisions of the
Israeli Income Tax Ordinance (New Version) 5721-1961, or the Ordinance, mainly Sections 102 and 3(i), which afford certain tax
advantages to Israeli employees, officers, and directors who are granted share options in accordance with its terms. Section 102
of the Ordinance allows employees, directors, and officers, who are not controlling shareholders and who are Israeli residents,
to receive favorable tax treatment for compensation in the form of shares or share options. Section 102 of the Ordinance includes
two alternatives for tax treatment involving the issuance of share options or shares to a trustee for the benefit of the grantees
and also includes an additional alternative for the issuance of share options or shares directly to the grantee. Sections 102(b)(2)
and 102(b)(3) of the Ordinance, which provide the most favorable tax treatment for grantees, permit the issuance to a trustee
under the “capital gain” tax regime. In order to comply with the terms of the “capital gain” tax regime,
all share options granted under a specific plan and subject to the provisions of Section 102 of the Ordinance, as well as the
shares issued upon exercise of such share options and other shares received following any realization of rights with respect to
such share options, such as share dividends and share splits, must be registered in the name of a trustee selected by the board
of directors and held in trust for the benefit of the relevant employee, director, officer or service provider. The trustee may
not release these share options or shares to the relevant grantee before the second anniversary of the registration of the share
options in the name of the trustee. However, under this regime, our ability to deduct an expense with respect to the issuance
of the share options or shares might be limited. Section 3(i), which permits the issuance of share options under the “income
from labor” tax regime, does not provide for similar tax benefits.
The 2015 Plan may be administered by our Board of Directors
either directly or upon the recommendation of a committee appointed by our Board of Directors. Our compensation committee recommends
to the Board of Directors, and the Board of Directors determines or approves the eligible individuals who receive share options
under the 2015 Plan, the number of Ordinary Shares covered by those share options, the terms under which such share options may
be exercised, and other terms and conditions of the share options, all in accordance with the provisions of the 2015 Plan. Share
option holders may not transfer their share options except in the event of death or transfer in accordance with law and the provisions
of the 2015 Plan. Our compensation committee or Board of Directors may at any time amend or terminate the 2015 Plan; however,
any amendment or termination may not adversely affect any share options or shares granted under such 2105 Plan prior to such action.
The share option exercise price is determined by the Board of Directors, following the recommendation of the compensation committee,
and specified in each option award agreement.
Awards under the 2015 Plan may be granted until December 2025,
10 years from December 2015. Share options granted under the 2015 Plan generally vest over three years commencing on the date
of grant such that the options shall vest on a quarterly basis in equal portions, unless otherwise provided in a specific share
option grant agreement and such option agreements may contain acceleration provisions upon certain merger, acquisition, or change
of control transactions. Share options, other than certain incentive share options, that are not exercised within the term set
forth under each award agreement shall expire, unless otherwise determined by our Board of Directors. Except as otherwise determined
by the Board of Directors or as set forth in an individual’s award agreement, in the event of termination of employment
or services for reasons of disability or death, the grantee, or in the case of death - his or her legal successor, may exercise
share options that have vested prior to termination within a period of twenty four months from the date of disability or death.
If we terminate a grantee’s employment or service for cause (as this term is defined under the Plan), all of the grantee’s
unvested share options will expire on the date of termination, yet share options which by that date the offeree’s eligibility
to exercise has already been formed shall remain exercisable. If a grantee’s employment or service is terminated for any
other reason other than for cause, the grantee may exercise his or her vested share options within 90 days of the date of termination,
unless otherwise provided in a specific share option grant agreement. In the event of (i) a sale of all or substantially all of
our assets or (ii) our consolidation or merger in which we are not the ongoing or surviving corporation, then, and unless otherwise
determined in the agreement or by the Board of Directors, we shall be entitled to determine that all of the outstanding unexercised
share options held by or for the benefit of any grantee shall be assumed or substituted for an appropriate number of share options
of the successor company, provided that the aggregate amount of the exercise price for such share options shall be equal to the
aggregate amount of the exercise price of our unexercised share options held by each grantee at such time. In addition, and unless
otherwise determined by our Board of Directors, upon the occurrence of certain events, as further described in the 2015 Plan (among
others, a merger transaction (or the like), liquidation and/or dissolution, recapitalization, rights offering, distribution of
bonus shares, dividends and capital reorganization), a grantee’s rights to purchase shares under the 2015 Plan shall be
adjusted as provided therein.
ITEM 7.
|
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
As
of March 22, 2021, two beneficial holders of our Ordinary Shares had beneficial ownership of 5% or more of our outstanding Ordinary
Shares. The following table lists as of the date indicated the number of our Ordinary Shares beneficially owned by such holders:
Name
|
|
Number of
Ordinary
Shares
Beneficially
Owned (1)
|
|
|
Percent of
Class (2)
|
|
Bigger Capital Fund, LP
|
|
|
14,199,117
|
(3)
|
|
|
4.99
|
%
|
Robert J Eide Pension Plan
|
|
|
14,199,117
|
(4)
|
|
|
4.99
|
%
|
(1)
|
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes
voting or investment power with respect to securities. Ordinary Shares relating to options currently exercisable or exercisable
within 60 days of the date of this table are deemed outstanding for computing the percentage of the person holding such securities
but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject
to community property laws where applicable, the persons named in the table above have sole voting and investment power with
respect to all shares shown as beneficially owned by them.
|
|
|
(2)
|
The percentages shown are based on 284,551,451 Ordinary Shares issued and outstanding as of
March 22, 2021.
|
|
|
(3)
|
Based solely on a Schedule 13G filed with the SEC on February 1, 2021. As of December 31, 2020, Bigger Capital Fund, LP
beneficially owned 13,210,400 Ordinary Shares and an aggregate of 200,000 ADSs currently issuable upon the exercise of warrants
with an exercise price of $5.02 per ADS. Bigger Capital Fund GP, LLC, as the general partner of Bigger Capital Fund, LP, may
be deemed to beneficially own the (i) 13,210,400 Ordinary Shares and (ii) 200,000 ADSs issuable upon exercise of warrants
beneficially owned by Bigger Capital Fund, LP. Mr. Michael Bigger, as the managing member of Bigger Capital Fund GP, LLC may
be deemed to beneficially own the (i) 13,210,400 Ordinary Shares and (ii) 200,000 ADSs issuable upon exercise of warrants
owned by Bigger Capital Fund, LP. The address of Bigger Capital Fund, LP is 2285 Spruce Goose Street, Suite A229, Las Vegas,
NV 89135. The amounts and percentages in the table give effect to the 4.99% beneficial ownership limitation set forth in the
warrant.
|
|
|
(4)
|
Based solely on a Schedule 13G filed with the SEC on November 23, 2020. As of December 9, 2020, Robert J Eide Pension
Plan owned 13,210,400 Ordinary Shares and an aggregate of 200,000 ADSs issuable upon the exercise of warrants. Robert Eide
is the trustee and sole beneficiary of Robert J Eide Pension Plan, and his address is 810 7th Avenue #18, New York, NY 10019.
Mr. Eide may be deemed to own the 13,210,400 Ordinary Shares and the warrants to purchase up to 200,000 ADSs. The amounts
and percentages in the table give effect to the 4.99% beneficial ownership limitation set forth in the warrant.
|
Changes in Percentage Ownership by Major Shareholders
Over the course of 2020, there were no increases in the percentage ownership of our
major shareholders, other than the addition of the new major shareholders listed above under “A. Major Shareholders”.
On the other hand, there was a decrease in the percentage ownership of entities affiliated with L.I.A. Pure Capital Ltd. (from
12.58% to 4.9%).
During the fiscal year ended December 31, 2019, two shareholders reached ownership
thresholds of our ADSs that reached at least 5% of our issued and outstanding ADSs, one of which was L.I.A. Pure Capital Ltd.
As of the filing date of our annual report on Form 20-F for the year ended December 31, 2019, and as of the date of the filing
of this Annual Report, we are not aware that such other 5% holder of our ADSs continues to be a major shareholder (holding at
least 5% of our issued and outstanding ADSs/Ordinary Shares).
Record Holders
As
of March 22, 2021, there were six holders of record of our Ordinary Shares, one of which has a registered address in the United
States. Based upon a review of the information provided to us by The Bank of New York Mellon, the depository of the ADSs, as of
March 22, 2021, there were 43 holders of record of our ADSs on record with the Depository Trust Company.
These numbers are not representative
of the number of beneficial holders of our shares nor is it representative of where such beneficial holders reside, since many
of these shares were held of record by brokers or other nominees.
We are not controlled by another corporation, by any foreign
government or by any natural or legal persons except as set forth herein, and there are no arrangements known to us which would
result in a change in control at a subsequent date.
B.
|
Related Party Transactions
|
Employment Agreements
We have entered into written employment
agreements with our Chief Financial Officer and Chief Technologies Officer. Each of these agreements contain customary provisions
regarding noncompetition, confidentiality of information and assignment of inventions. However, the enforceability of the noncompetition
provisions may be limited under applicable law. Most of these agreements are terminable by either party upon 30 days’ prior
written notice. In addition, we have entered into agreements with each executive officer and director pursuant to which we have
agreed to indemnify each of them up to a certain amount and to the extent that these liabilities are not covered by directors
and officers insurance. Members of our senior management are eligible for bonuses each year. The bonuses are payable upon meeting
objectives and targets that are set by our Chief Executive Officer and approved annually by our Board of Directors that also set
the bonus targets for our Chief Executive Officer. See Item 6.B. “Compensation—Employment and Service Agreements with
Executive Officers” and see the descriptions of exculpation and indemnification agreements and directors and officers insurance
arrangements in Item 6.A. “Directors and Senior Management” and Item 6.C. “Board Practices—Insurance,”
— “Indemnification” and “—Exculpation.”
Options
Since our inception, we have granted
options to purchase our Ordinary Shares to our employees, officers, service providers and certain of our directors. Such option
agreements may contain acceleration provisions upon certain merger, acquisition, or change of control transactions. We describe
our option plans under Item 6.E. “Share Ownership—Equity Incentive Plans.” If the relationship between us and
an executive officer or a director is terminated, except for cause (as defined in the various option plan agreements), options
that are vested will generally remain exercisable for 90 days after such termination.
Dekel License Agreement
In May 2015, we entered into a license
agreement, which, following an amendment thereto in August 2015, became effective, with Dekel, an Israeli private company controlled
by Dr. Ascher Shmulewitz, the former Chairman of our Board of Directors (and previously our interim Chief Executive Officer),
under which we were granted an irrevocable, worldwide, exclusive, royalty-bearing license to certain of Dekel’s technology.
We and Dekel have since entered into additional amendments to the license agreement, with the last such amendment entered into
on July 14, 2019. See Item 4.B. “Business Overview—Intellectual Property— Dekel License Agreement” for
additional information.
Convertible Loan with Dekel
On March 19, 2020,
we entered into a securities purchase agreement (“SPA”) with Dekel, pursuant to the SPA, Dekel received convertible
promissory notes (the “Notes”), with an aggregate original principal amount of approximately $350,000, at an aggregate
purchase price of $315,000 to be paid in several tranches spread across a twelve-month period. In addition, the Company issued
a warrant to purchase up to 4,490 ADSs of the Company (the “Private Placement Warrant”) and 571 ADSs. The initial tranche
of the Private Placement was for a principal amount of $220 at a purchase price of $198. The Notes are unsecured, have a maturity
date of March 23, 2021, bear interest at a rate of 12% per annum, and may be converted, at the election of the holder, into ADSs
at an initial conversion price of $24.50 per ADS (the “Fixed Conversion Price”), subject to adjustments. After the
six-month anniversary of the issuance of the Notes, the conversion price shall be equal to the lower of the Fixed Conversion Price
or 70% of the lowest trading price of the ADSs as reported on Nasdaq or any exchange upon which the ADSs or ordinary shares of
the Company are traded at such time, for the 20 prior trading days including the day upon which a notice of conversion is received
by the Company or its transfer agent. The Private Placement Warrant is exercisable at any time on or after the actual closing date
and on or prior to the close of business on the five-year anniversary of the date of issuance, at an initial exercise price of
$24.5 per ADS, subject to adjustment. On November 8, 2020, the Notes were terminated and the initial tranche was fully repaid by
the Company.
C.
|
Interests of Experts and Counsel
|
Not applicable.
ITEM 8.
|
FINANCIAL INFORMATION.
|
A.
|
Consolidated Statements and Other Financial Information.
|
See Item 18. “Financial Statements.”
Legal Proceedings
On July 23, 2020, we submitted to the Tel Aviv Court, or the
Court, a petition pursuant to the Israeli Insolvency and Economic Rehabilitation Law, 2018, to commence proceedings for the economic
rehabilitation of the Company, or the Petition. In the Petition submitted to the Court, we stated that it is insolvent (as determined
by the cash flow test) and unable to pay its debts to our creditors.
On August 6, 2020, L.I.A. Pure Capital Ltd., or Pure Capital,
filed with the Court, requesting an order to have the results of the Company’s annual general meeting held on August 4,
2020 declared invalid, mainly due to our reliance on discretionary voting of the depositary bank for our ADSs. The Court asked
for the Company and former directors’ response by no later than August 13, 2020, which was subsequently extended.
On August 11, 2020, Pure Capital proposed to deposit $1.5 million
with the Company’s temporary trustee nominated by the Court to cover and pay all of our debts, without derogating from any
other creditor’s rights towards us, or the Pure Capital Proposal. The Pure Capital Proposal was made subject to the replacement
of our board of the directors as of the date of the Pure Capital Proposal, or the Prior Board, with Pure Capital’s designated
nominees that were voted upon at the adjourned annual general meeting of the Company’s shareholders on August 4, 2020 (as
discussed below). The Court issued an order on August 14, 2020, or the Order, approving the Pure Capital Proposal and settlement
agreement submitted to the Court by the parties thereto.
In accordance with the terms of the Order and following the
deposit by Pure Capital, the Prior Board was replaced with: Itschak Shrem (chairman), Amity Weiss (also appointed to act as the
Company’s Chief Executive Officer), Moshe Revach, Lior Amit, Lior Vider and Liat Sidi. Following the issuance of the Order,
a related case that was filed by Pure Capital with the Court was withdrawn as well.
Dividends
We have never declared or paid any cash dividends on our Ordinary
Shares and do not anticipate paying any cash dividends in the foreseeable future. Payment of cash dividends, if any, in the future
will be at the discretion of our Board of Directors and will depend on then-existing conditions, including our financial condition,
operating results, contractual restrictions, capital requirements, business prospects and other factors our Board of Directors
may deem relevant.
The distribution of dividends may also be limited by the Companies
Law, which permits the distribution of dividends only out of retained earnings or earnings derived over the two most recent fiscal
years, whichever is higher, provided that there is no reasonable concern that payment of a dividend will prevent a company from
satisfying its existing and foreseeable obligations as they become due.
Payment of dividends may be subject to Israeli withholding taxes.
See Item 10.E. “Taxation” for additional information.
No significant change, other than as
otherwise described in this Annual Report, has occurred in our operations since the date of our consolidated financial statements
included in this Annual Report.
ITEM 9.
|
THE OFFER AND LISTING
|
A.
|
Offer and Listing Details
|
Our ADSs, each of which represents one hundred forty of our
Ordinary Shares, are quoted on the OTCQB under the symbol “SPRCY.” On July 2, 2020, our ADSs were suspended from Nasdaq
due to our failure to meet the shareholders equity requirements of Nasdaq. On September 21, 2020, our ADSs were officially delisted
from Nasdaq.
Not applicable.
Our ADSs are quoted on the OTCQB.
Not applicable.
Not applicable.
Not applicable.
ITEM 10.
|
ADDITIONAL INFORMATION
|
Not applicable.
B.
|
Memorandum and Articles of Association
|
A
copy of our articles of association is attached as Exhibit 1.1 to this Annual Report. The information called for by this Item is
set forth in Exhibit 2(d) to this annual report on Form 20-F and is incorporated by reference into this Annual Report.
We have not entered into any material
contract within the two years prior to the date of this Annual Report, other than contracts entered into in the ordinary course
of business, or as otherwise described herein in “Item 4.A. History and Development of the Company” above, “Item
4.B. Business Overview” above, or “Item 7.A. Major Shareholders” above.
There are currently no Israeli currency
control restrictions on remittances of dividends on our Ordinary Shares, proceeds from the sale of the shares or interest or other
payments to non-residents of Israel, except for shareholders who are subjects of countries that are, or have been, in a state
of war with Israel.
ISRAELI TAX CONSIDERATIONS AND GOVERNMENT PROGRAMS
The following is a description of the
material Israeli income tax consequences of the ownership of our Ordinary Shares or ADSs. The following also contains a description
of material relevant provisions of the current Israeli income tax structure applicable to companies in Israel, with reference
to its effect on us. To the extent that the discussion is based on new tax legislation which has not been subject to judicial
or administrative interpretation, there can be no assurance that the tax authorities will accept the views expressed in the discussion
in question. The discussion is not intended, and should not be taken, as legal or professional tax advice and is not exhaustive
of all possible tax considerations.
The following description is not intended
to constitute a complete analysis of all tax consequences relating to the ownership or disposition of our Ordinary Shares and
ADSs. Shareholders should consult their own tax advisors concerning the tax consequences of their particular situation, as well
as any tax consequences that may arise under the laws of any state, local, foreign or other taxing jurisdiction.
General Corporate Tax Structure in Israel
Israeli resident companies are generally
subject to corporate tax, currently at the rate of 23% of a company’s taxable income. Capital gains derived by an Israeli
resident company are subject to tax at the prevailing corporate tax rate. Under Israeli tax legislation, a corporation will be
considered as an “Israeli resident company” if it meets one of the following: (i) it was incorporated in Israel; or
(ii) the control and management of its business are exercised in Israel.
The Encouragement of Research, Development and Technological Innovations in
the Industry Law, 5744-1984
Under the Innovation
Law, research and development programs which meet specified criteria and are approved by a committee of the IIA are eligible for
grants of up to 50% of the project’s expenditure, as determined by the research committee, and subject to the benefit track
under which the grant was awarded. A company that receives a grant from the IIA, or a grant recipient, is typically required to
pay royalties from the revenues generated from the sale of products and related services developed, in whole or in part pursuant
to, or as a result of, a research and development program funded by the IIA. Under the regular benefits tracks, the royalties are
generally at a range of 3.0% to 5.0% of revenues until the entire IIA grant is repaid, together with an annual interest generally
equal to the 12 month LIBOR applicable to dollar deposits that is published on the first business
day of each calendar year. The obligation to pay royalties is contingent on actual income generated from such products and services.
In the absence of such income, no payment of such royalties is required.
The United Kingdom’s
Financial Conduct Authority, which regulates LIBOR, announced in July 2017 that it will no longer persuade or require banks to
submit rates for LIBOR after 2021. The grants received from the IIA bear an annual interest rate based on the 12-month LIBOR. Accordingly,
there is considerable uncertainty regarding the publication of LIBOR beyond 2021. While it is not currently possible to determine
precisely whether, or to what extent, the withdrawal and replacement of LIBOR would affect us, the implementation of alternative
benchmark rates to LIBOR may increase our financial liabilities to the IIA.
The terms of the Innovation Law also require that the manufacture
of products developed with government grants be performed in Israel. The transfer of manufacturing activity outside Israel may
not be transferred outside of Israel, unless the prior approval of the IIA is received (such approval is not required for the
transfer of a portion of the manufacturing capacity which does not exceed, in the aggregate, 10% of the portion declared to be
manufactured outside of Israel in the applications for funding, in which case only notification is required). It should be noted
that this does not restrict the export of products that incorporate the funded technology. Under the regulations of the Innovation
Law, assuming we receive approval from the IIA to manufacture our IIA-funded products outside Israel, we may be required to pay
increased royalties. The increase in royalties depends upon the manufacturing volume that is performed outside of Israel as follows:
Manufacturing Volume Outside of Israel
|
|
Royalties
to the IIA as
a Percentage
of Grant
|
|
Up to 50%
|
|
|
120
|
%
|
between 50% and 90%
|
|
|
150
|
%
|
90% and more
|
|
|
300
|
%
|
If the manufacturing is performed outside of Israel by us, the
rate of royalties payable by us on revenues from the sale of products manufactured outside of Israel will increase by 1% over
the regular rates. If the manufacturing is performed outside of Israel by a third party, the rate of royalties payable by us on
those revenues will be equal to the ratio obtained by dividing the amount of the grants received from IIA and our total investment
in the project that was funded by these grants. The transfer of no more than 10% of the manufacturing capacity in the aggregate
outside of Israel is exempt under the Innovation Law from obtaining the prior approval of the IIA. A company requesting funds
from the IIA also has the option of declaring in its IIA grant application an intention to perform part of its manufacturing outside
Israel, thus avoiding the need to obtain additional approval under the same manufacturing scope indicated at the application.
On January 6, 2011, the Innovation Law was amended to clarify that the potential increased royalties specified in the table above
will apply even in those cases where the IIA approval for transfer of manufacturing outside of Israel is not required, namely
when the volume of the transferred manufacturing capacity is less than 10% of total capacity.
The know-how developed
within the framework of the IIA plan may not be transferred to third parties outside Israel without the prior approval of a governmental
committee charted under the Innovation Law. The approval, however, is not required for the export of any products developed using
grants received from the IIA. The IIA approval to transfer know-how created, in whole or in part, in connection with an IIA-funded
project to a third party outside Israel is subject to payment of a redemption fee to the IIA calculated according to a formula
provided under the Innovation Law that is based, in general, on the ratio between the aggregate IIA grants to the company’s
aggregate investments in the project that was funded by these IIA grants, multiplied by the transaction consideration taking into
account a depreciation mechanism, and less royalties already paid to the IIA. According to regulations promulgated under the Innovation
Law, the maximum amount payable to the IIA in case of transfer of know how outside Israel shall not exceed six times the value
of the grants received plus interest, with a possibility to reduce such payment to up to three times the value of the grants received
plus interest if the grant recipient undertakes to continue the research and development activity in Israel for a period of three
years after payment to the IIA, and maintain at least 75% of the research and development employees the company had for the six
months before the know-how was transferred, while keeping the same scope of employment for such research and development staff,
subject to additional conditions specified in the regulations.
Transfer of know-how within Israel is subject to the IIA approval
and to an undertaking of the recipient Israeli entity to comply with the provisions of the Innovation Law and related regulations,
including the restrictions on the transfer of know-how and the obligation to pay royalties, as further described in the Innovation
Law and related regulations.
The restrictions under the Innovation Law will continue to apply
even after we will repay the full amount of royalties payable pursuant to the grants. In addition, the government of the State
of Israel may from time to time audit sales of product candidates which it claims incorporate technology funded via IIA programs
and this may lead to additional royalties being payable on additional product candidates.
These restrictions
may impair our ability to outsource manufacturing or otherwise transfer our know-how outside Israel and may require us to obtain
the approval of the IIA for certain actions and transactions and pay additional royalties or other payments to the IIA. If we fail
to comply with certain restrictions under the Innovation Law, we may be subject to mandatory repayment of grants received by us
(together with interest and penalties), as well as be exposed to criminal charges.
Our research and development
efforts have been financed, partially, through grants that we have received from the IIA. We therefore must comply with the requirements
of the Innovation Law and related regulations. Our total outstanding obligation to the IIA, respectively, including the interest
accrued through December 31, 2020, amounts to approximately $1.2 million.
Tax Benefits for Research and Development under the Innovation Law
Israeli tax law allows, under certain
conditions, a tax deduction for expenditures, including capital expenditures, in scientific research in the fields of industry,
agriculture, transportation or energy, for the year in which they are incurred. Expenditures are deemed related to scientific
research and development projects, if:
|
●
|
The expenditures are approved by the relevant Israeli government ministry, determined by the
field of research;
|
|
|
|
|
●
|
The research and development must be for the promotion of the company; and
|
|
|
|
|
●
|
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 finance of such scientific research and development
projects. No deduction under these research and development deduction rules is allowed if such deduction is related to an expense
invested in an asset depreciable under the general depreciation rules of the Ordinance. Expenditures not so approved are deductible
in equal amounts over three years.
From time to time we may apply the
IIA for approval to allow a tax deduction for all research and development expenses during the year incurred. There can be no
assurance that such application will be accepted.
Taxation of our Shareholders
Capital Gains
Capital
gain tax is imposed on the disposal of capital assets by an Israeli resident, and on the disposal of such assets by a non-Israeli
resident if those assets are either (i) located in Israel; (ii) are shares or a right to a share in an Israeli resident corporation,
or (iii) represent, directly or indirectly, rights to assets located in Israel, unless a tax treaty between Israel and the seller’s
country of residence provides otherwise. The Israel Income Tax Ordinance, or the Ordinance, distinguishes between “Real Gain”
and the “Inflationary Surplus.” Real Gain is the excess of the total capital gain over Inflationary Surplus. Inflationary
Surplus is computed generally on the basis of the increase in the Israeli Consumer Price Index or, in certain circumstances, according
to the change in the foreign currency exchange rate, between the date of purchase and the date of disposal. Inflationary Surplus
is not subject to tax in Israel.
Real Gain accrued by individuals on
the sale of our Ordinary Shares will be taxed at the rate of 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” including, among other rights, the right to company profits, voting
rights, the right to the company’s liquidation proceeds and the right to appoint a company director) at the time of sale
or at any time during the preceding 12 months period, such gain will be taxed at the rate of 30%.
Real Gain derived by corporations will
be generally subject to the regular corporate tax rate (23% in 2020).
Individual and corporate shareholder
dealing in securities in Israel are taxed at the tax rates applicable to business income– 23% for corporations in 2020 and
a marginal tax rate of up to 47% in 2020 for individuals, unless the benefiting provisions of an applicable tax treaty applies.
Capital Gains Taxes is Applicable
also to Non-Israeli Resident Shareholders. A non-Israeli resident (whether an individuals or a corporations) who derives capital
gains from the sale of shares in an Israeli resident company may be exempt from Israeli capital gain tax so long as the following
cumulative conditions are met: (i) the shares were purchased upon or after the registration of the securities on a recognized
stock exchange, outside of Israel (such as Nasdaq) (ii) the seller does not have a permanent establishment in Israel to which
the derived capital gain is attributed, and (iii) with respect to securities listed on a recognized stock exchange outside of
Israel, such shareholders are not subject to the Israeli Income Tax Law (Inflationary Adjustments) 5745-1985. However, non-Israeli
corporation will not be entitled to the foregoing exemptions if Israeli residents (a) have a controlling interest of more than
25% in such non-Israeli corporation, or (b) are the beneficiaries of or are entitled to 25% or more of the revenues or profits
of such non-Israeli corporation, whether directly and 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.
Additionally,
a sale of shares by a non-Israeli resident may be exempt from Israeli capital gains tax under the provisions of an applicable tax
treaty. For example, under Convention Between the Government of the United States of America and the Government of the State of
Israel with respect to Taxes on Income, as amended, or the United States-Israel Tax Treaty, the sale, exchange or other disposition
of shares by a shareholder who is a United States resident (for purposes of the United States-Israel Tax Treaty) holding the shares
as a capital asset and is entitled to claim the benefits afforded to such a resident by the United States.-Israel Tax Treaty, or
a Treaty U.S. Resident, is generally exempt from Israeli capital gains tax unless: (i) the capital gain arising from such sale,
exchange or disposition is attributed to real estate located in Israel; (ii) the capital gain arising from such sale, exchange
or disposition is attributed to royalties; (iii) the capital gain arising from the such sale, exchange or disposition is attributed
to a permanent establishment in Israel, under certain terms; (iv) such Treaty U.S. Resident holds, directly or indirectly, shares
representing 10% or more of the voting capital during any part of the 12-month period preceding the disposition, subject to certain
conditions; or (v) such Treaty U.S. Resident is an individual and was present in Israel for 183 days or more during the relevant
taxable year. In any such case, the sale, exchange or disposition of such shares would be subject to Israeli tax, to the extent
applicable; however, under the United States-Israel Treaty, a U.S. resident would be permitted to claim a credit for the Israeli
tax against the U.S. federal income tax imposed with respect to the sale, exchange or disposition, subject to the limitations in
U.S. laws applicable to foreign tax credits. The United States-Israel Treaty does not provide such credit against any U.S. state
or local taxes.
In some instances where our shareholders
may be liable for Israeli tax on the sale of their Ordinary Shares or ADSs, the payment of the consideration may be subject to
the withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their capital
gains in order to avoid withholding at source at the time of sale.
Either
the purchaser, the Israeli stockbrokers or financial institution through which the shares are held is obliged, subject to the above
mentioned exemptions, to withhold tax upon the sale of securities from the Real Gain at the rate of 25%.
At the sale of securities traded on
a stock exchange, a detailed return, including a computation of the tax due, must be filed and an advance payment must be made
on January 31 and July 31 of every tax year in respect of sales of securities made within the previous six months. However, if
all tax due was withheld at source according to applicable provisions of the Ordinance and regulations promulgated thereunder,
the aforementioned return need not be filed and no advance payment must be paid. Capital gain is also reportable on the annual
income tax return.
Dividends
A distribution of dividends from income, to an Israeli resident
individual, will generally be subject to income tax at a rate of 25%. However, a 30% tax rate will apply if the dividend recipient
is a Controlling Shareholder (as defined above in this section) at the time of distribution or at any time during the preceding
12 months period. If the recipient of the dividend is an Israeli resident corporation, generally, such dividend will be exempt
from income tax provided the income from which such dividend is distributed was derived or accrued within Israel.
Non-Israeli residents
(whether individuals or a corporations) are generally subject to Israeli income tax on the receipt of dividends paid on our Ordinary
Shares or ADSs at the rate of 25%, which tax will be withheld at source, unless relief is provided in a treaty between Israel and
the shareholder’s country of residence. With respect to a person who is a Controlling Shareholder at the time of receiving
the dividend or on any time during the preceding twelve months, the applicable tax rate is 30%, unless a reduced tax rate is provided
under an applicable tax treaty, subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing
for a reduced tax rate. Such 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 the recipient is a Controlling Shareholder or not). For example, under the United
States-Israel Tax Treaty, the maximum rate of tax withheld at source in Israel on dividends paid to a holder of our Ordinary Shares
or ADSs who is a Treaty U.S. Resident is 25%. However, generally, the maximum rate of withholding tax on dividends, not generated
by a Preferred Enterprise, that are paid to a United States corporation holding 10% or more of the outstanding voting capital throughout
the tax year in which the dividend is distributed as well as during the previous tax year, is 12.5%, provided that not more than
25% of the gross income for such preceding year consists of certain types of dividends and interest. The aforementioned rates will
not apply if the dividend income was generated through a permanent establishment of the U.S. resident which is maintained 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 business conducted in Israel by the taxpayer, (ii) the taxpayer has no other
taxable sources of income in Israel with respect to which a tax return is required to be filed, and (iii) the taxpayer is not
obligated to pay excess tax (as further explained below).
Excess Tax
Individuals who are
subject to tax in Israel (whether any such individual is an Israeli resident or non-Israeli resident) are also subject to an additional
tax at a rate of 3% on annual income exceeding a certain threshold (NIS 651,600 for 2020, which amount is linked to the annual
changes to 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.
Estate and Gift Tax
Israeli law presently does not impose estate or gift taxes.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION AND IS NOT INTENDED
TO BE, AND SHOULD NOT BE CONSIDERED TO BE, LEGAL OR TAX ADVICE. EACH U.S. HOLDER SHOULD CONSULT WITH HIS OR HER OWN TAX ADVISOR
AS TO THE PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND SALE OF ORDINARY SHARES AND AMERICAN
DEPOSITARY SHARES, INCLUDING THE EFFECTS OF APPLICABLE STATE, LOCAL, FOREIGN OR OTHER TAX LAWS AND POSSIBLE CHANGES IN THE TAX
LAWS.
Subject to the limitations described in the next paragraph,
the following discussion summarizes the material U.S. federal income tax consequences to a “U.S. Holder” arising from
the purchase, ownership and sale of the Ordinary Shares and ADSs. For this purpose, a “U.S. Holder” is a holder of
Ordinary Shares or ADSs that is: (1) an individual citizen or resident of the United States, including an alien individual who
is a lawful permanent resident of the United States or meets the substantial presence residency test under U.S. federal income
tax laws; (2) a corporation (or entity treated as a corporation for U.S. federal income tax purposes) or a partnership (other
than a partnership that is not treated as a U.S. person under any applicable U.S. Treasury regulations) created or organized under
the laws of the United States or the District of Columbia or any political subdivision thereof; (3) an estate, the income of which
is includable in gross income for U.S. federal income tax purposes regardless of source; (4) a trust if a court within the United
States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have authority
to control all substantial decisions of the trust; or (5) a trust that has a valid election in effect to be treated as a U.S.
person to the extent provided in U.S. Treasury regulations.
This summary is for general information purposes only and does
not purport to be a comprehensive description of all of the U.S. federal income tax considerations that may be relevant to a decision
to purchase our Ordinary Shares or ADSs. This summary generally considers only U.S. Holders that will own our Ordinary Shares
or ADSs as capital assets. Except to the limited extent discussed below, this summary does not consider the U.S. federal tax consequences
to a person that is not a U.S. Holder, nor does it describe the rules applicable to determine a taxpayer’s status as a U.S.
Holder. This summary is based on the provisions of the Internal Revenue Code of 1986, as amended, or the Code, final, temporary
and proposed U.S. Treasury regulations promulgated thereunder, administrative and judicial interpretations thereof, (including
with respect to the Tax Cuts and Jobs Act of 2017), and the U.S./Israel Income Tax Treaty, all as in effect as of the date hereof
and all of which are subject to change, possibly on a retroactive basis, and all of which are open to differing interpretations.
We will not seek a ruling from the IRS with regard to the U.S. federal income tax treatment of an investment in our Ordinary Shares
or ADSs by U.S. Holders and, therefore, can provide no assurances that the IRS will agree with the conclusions set forth below.
This discussion does not address all of the aspects of U.S.
federal income taxation that may be relevant to a particular U.S. holder based on such holder’s particular circumstances
and in particular does not discuss any estate, gift, generation-skipping, transfer, state, local, excise or foreign tax considerations.
In addition, this discussion does not address the U.S. federal income tax treatment of a U.S. Holder who is: (1) a bank, life
insurance company, regulated investment company, or other financial institution or “financial services entity;” (2)
a broker or dealer in securities or foreign currency; (3) a person who acquired our Ordinary Shares or ADSs in connection with
employment or other performance of services; (4) a U.S. Holder that is subject to the U.S. alternative minimum tax; (5) a U.S.
Holder that holds our Ordinary Shares or ADSs as a hedge or as part of a hedging, straddle, conversion or constructive sale transaction
or other risk-reduction transaction for U.S. federal income tax purposes; (6) a tax-exempt entity; (7) real estate investment
trusts or grantor trusts; (8) a U.S. Holder that expatriates out of the United States or a former long-term resident of the United
States; or (9) a person having a functional currency other than the U.S. dollar. This discussion does not address the U.S. federal
income tax treatment of a U.S. Holder that owns, directly or constructively, at any time, Ordinary Shares or ADSs representing
10% or more of our voting power. Additionally, the U.S. federal income tax treatment of partnerships (or other pass-through entities)
or persons who hold Ordinary Shares or ADSs through a partnership or other pass-through entity are not addressed.
In general, for U.S. federal income tax purposes, U.S. Holders of our ADSs will be
treated as owning the underlying Ordinary Shares represented by those ADSs. Accordingly, exchanges of Ordinary Shares for ADSs,
and ADSs for Ordinary Shares will not be subject to U.S. federal income tax.
Each prospective investor is advised to consult his or her own
tax adviser for the specific tax consequences to that investor of purchasing, holding or disposing of our Ordinary Shares or ADSs,
including the effects of applicable state, local, foreign or other tax laws and possible changes in the tax laws.
Taxation of Dividends Paid on Ordinary Shares or ADSs
We do not intend to pay dividends in the foreseeable future.
In the event that we do pay dividends, and subject to the discussion under the heading “Passive Foreign Investment Companies”
below and the discussion of “qualified dividend income” below, a U.S. Holder will be required to include in gross
income as ordinary income the amount of any distribution paid on Ordinary Shares or ADSs (including the amount of any Israeli
tax withheld on the date of the distribution), to the extent that such distribution does not exceed our current and accumulated
earnings and profits, as determined for U.S. federal income tax purposes. The amount of a distribution which exceeds our earnings
and profits will be treated first as a non-taxable return of capital, reducing the U.S. Holder’s tax basis for the Ordinary
Shares to the extent thereof, and then capital gain. We do not expect to maintain calculations of our earnings and profits under
U.S. federal income tax principles and, therefore, U.S. Holders should expect that the entire amount of any distribution generally
will be reported as dividend income.
In general, preferential tax rates for “qualified dividend
income” and long-term capital gains are applicable for U.S. Holders that are individuals, estates or trusts. For this purpose,
“qualified dividend income” means, inter alia, dividends received from a “qualified foreign corporation.”
A “qualified foreign corporation” is a corporation that is entitled to the benefits of a comprehensive tax treaty
with the United States which includes an exchange of information program. The IRS has stated that the Israel/U.S. Tax Treaty satisfies
this requirement and we believe we are eligible for the benefits of that treaty.
Dividends will not qualify for the preferential rate if we are
treated, in the year the dividend is paid or in the prior year, as a PFIC, as described below under “Passive Foreign Investment
Companies.” A U.S. Holder will not be entitled to the preferential rate: (1) if the U.S. Holder has not held our Ordinary
Shares or ADSs for at least 61 days of the 121 day period beginning on the date which is 60 days before the ex-dividend date,
or (2) to the extent the U.S. Holder is under an obligation to make related payments on substantially similar property. Any days
during which the U.S. Holder has diminished its risk of loss on our Ordinary Shares or ADSs are not counted towards meeting the
61-day holding period. Finally, U.S. Holders who elect to treat the dividend income as “investment income” pursuant
to Code section 163(d)(4) will not be eligible for the preferential rate of taxation.
The amount of a distribution with respect to our Ordinary Shares
or ADSs will be measured by the amount of the fair market value of any property distributed, and for U.S. federal income tax purposes,
the amount of any Israeli taxes withheld therefrom. Cash distributions paid by us in NIS will be included in the income of U.S.
Holders at a U.S. dollar amount based upon the spot rate of exchange in effect on the date the dividend is includible in the income
of the U.S. Holder, and U.S. Holders will have a tax basis in such NIS for U.S. federal income tax purposes equal to such U.S.
dollar value. If the U.S. Holder subsequently converts the NIS into U.S. dollars or otherwise disposes of it, any subsequent gain
or loss in respect of such NIS arising from exchange rate fluctuations will be U.S. source ordinary exchange gain or loss.
Taxation of the Disposition of Ordinary Shares or ADSs
Except as provided under the PFIC rules described below under
“Passive Foreign Investment Companies,” upon the sale, exchange or other disposition of our Ordinary Shares or ADSs,
a U.S. Holder will recognize capital gain or loss in an amount equal to the difference between such U.S. Holder’s tax basis
for the Ordinary Shares or ADSs in U.S. dollars and the amount realized on the disposition in U.S. dollar (or its U.S. dollar
equivalent determined by reference to the spot rate of exchange on the date of disposition, if the amount realized is denominated
in a foreign currency). The gain or loss realized on the sale, exchange or other disposition of Ordinary Shares or ADSs will be
long-term capital gain or loss if the U.S. Holder has a holding period of more than one year at the time of the disposition. Individuals
who recognize long-term capital gains may be taxed on such gains at reduced rates of tax. The deduction of capital losses is subject
to various limitations.
Gain realized by a U.S. Holder on a sale, exchange or other
disposition of Ordinary Shares or ADSs will generally be treated as U.S. source income for U.S. foreign tax credit purposes. A
loss realized by a U.S. Holder on the sale, exchange or other disposition of Ordinary Shares or ADSs is generally allocated to
U.S. source income. The deductibility of a loss realized on the sale, exchange or other disposition of Ordinary Shares or ADSs
is subject to limitations. An additional 3.8% net investment income tax (described below) may apply to gains recognized upon the
sale, exchange or other taxable disposition of our Ordinary Shares or ADS by certain U.S. Holders who meet certain income thresholds.
Passive Foreign Investment Companies
Special U.S. federal income tax laws apply to U.S. taxpayers
who own shares of a corporation that is a PFIC. We will be treated as a PFIC for U.S. federal income tax purposes for any taxable
year that either:
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75% or more of our gross income (including our pro rata share of gross income for any company,
in which we are considered to own 25% or more of the shares by value), in a taxable year is passive; or
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At least 50% of our assets, averaged over the year and generally determined based upon fair
market value (including our pro rata share of the assets of any company in which we are considered to own 25% or more of the
shares by value) are held for the production of, or produce, passive income.
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For this purpose, passive income generally consists of dividends,
interest, rents, royalties, annuities and income from certain commodities transactions and from notional principal contracts.
Cash is treated as generating passive income.
We do not expect that we will be treated as a PFIC for the current
taxable year. The tests for determining PFIC status are applied annually, and it is difficult to make accurate projections of
future income and assets which are relevant to this determination. In addition, our PFIC status may depend in part on the market
value of our Ordinary Shares or ADSs. Accordingly, there can be no assurance that we currently are not or will not become a PFIC.
If we currently are or become a PFIC, each U.S. Holder who has
not elected to mark the shares to market (as discussed below), would, upon receipt of certain distributions by us and upon disposition
of our Ordinary Shares or ADSs at a gain: (1) have such distribution or gain allocated ratably over the U.S. Holder’s
holding period for the Ordinary Shares or ADSs, as the case may be; (2) the amount allocated to the current taxable year and any
period prior to the first day of the first taxable year in which we were a PFIC would be taxed as ordinary income; and (3) the
amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable
class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting
tax attributable to each such other taxable year. In addition, when shares of a PFIC are acquired by reason of death from a decedent
that was a U.S. Holder, the tax basis of such shares would not receive a step-up to fair market value as of the date of the decedent’s
death, but instead would be equal to the decedent’s basis if lower, unless all gain were recognized by the decedent. Indirect
investments in a PFIC may also be subject to these special U.S. federal income tax rules.
The PFIC rules described above would not apply to a U.S. Holder
who makes a QEF election for all taxable years that such U.S. Holder has held the Ordinary Shares or ADSs while we are a PFIC,
provided that we comply with specified reporting requirements. Instead, each U.S. Holder who has made such a QEF election is required
for each taxable year that we are a PFIC to include in income such U.S. Holder’s pro rata share of our ordinary earnings
as ordinary income and such U.S. Holder’s pro rata share of our net capital gains as long-term capital gain, regardless
of whether we make any distributions of such earnings or gain. In general, a QEF election is effective only if we make available
certain required information. The QEF election is made on a shareholder-by-shareholder basis and generally may be revoked only
with the consent of the IRS. We do not intend to furnish U.S. Holders annually with information needed in order to complete IRS
Form 8621 and to make and maintain a valid QEF election for any year in which we or any of our subsidiaries are a PFIC. Therefore,
the QEF election will not be available with respect to our Ordinary Shares or ADSs.
U.S. Holders who hold our Ordinary Shares or ADSs during a period
when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC. U.S. Holders are strongly urged to consult
their tax advisors about the PFIC rules.
Tax on Net Investment Income
Subject to certain adjustments under the PFIC rules, U.S. Holders
who are individuals, estates or trusts will generally be required to pay a 3.8% Medicare tax on their net investment income (including
dividends on and gains from the sale or other disposition of our Ordinary Shares or ADSs), or in the case of estates and trusts
on their net investment income that is not distributed. In each case, the 3.8% Medicare tax applies only to the extent the U.S.
Holder’s total adjusted income exceeds applicable thresholds.
Tax Consequences for Non-U.S. Holders of Ordinary Shares
or ADSs
Except as provided below, an individual, corporation, estate
or trust that is not a U.S. Holder referred to below as a non-U.S. Holder, generally will not be subject to U.S. federal income
or withholding tax on the payment of dividends on, and the proceeds from the disposition of, our Ordinary Shares or ADSs.
A non-U.S. Holder may be subject to U.S. federal income tax
on a dividend paid on our Ordinary Shares or ADSs or gain from the disposition of our Ordinary Shares or ADSs if: (1) such item
is effectively connected with the conduct by the non-U.S. Holder of a trade or business in the United States and, if required
by an applicable income tax treaty is attributable to a permanent establishment or fixed place of business in the United States;
or (2) in the case of a disposition of our Ordinary Shares or ADSs, the individual non-U.S. Holder is present in the United States
for 183 days or more in the taxable year of the disposition and other specified conditions are met. Any dividend income or gain
described in clause (1) above will be subject to U.S. federal income tax on a net income tax basis in the same manner as a U.S.
Holder and, with respect to corporate holders, a branch profits tax imposed at a rate of 30% (or such lower rate as may be specified
by an applicable income tax treaty) may also apply to its effectively connected earnings and profits (subject to adjustments).
Any dividend income or gain described in clause (2) above that is not effectively connected with the conduct by a Non-U.S. Holder
of a trade or business within the U.S. generally will be subject to 30% withholding tax (or such lower rate as may be specified
by an applicable income tax treaty) net of certain U.S. source capital losses.
In general, non-U.S. Holders will not be subject to backup withholding
with respect to the payment of dividends on our Ordinary Shares or ADSs if payment is made through a paying agent, or office of
a foreign broker outside the United States. However, if payment is made in the United States or by a U.S. related person, non-U.S.
Holders may be subject to backup withholding, unless the non-U.S. Holder provides an applicable IRS Form W-8 (or a substantially
similar form) certifying its foreign status, or otherwise establishes an exemption.
The amount of any backup withholding from a payment to a non-U.S.
Holder will be allowed as a credit against such holder’s U.S. federal income tax liability and may entitle such holder to
a refund, provided that the required information is timely furnished to the IRS.
Information Reporting and Withholding
A U.S. Holder may be subject to backup withholding at a rate
of 24% with respect to cash dividends and proceeds from a disposition of Ordinary Shares or ADSs. In general, backup withholding
will apply only if a U.S. Holder fails to comply with specified identification procedures. Backup withholding will not apply with
respect to payments made to designated exempt recipients, such as corporations and tax-exempt organizations. Backup withholding
is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a U.S. Holder, provided
that the required information is timely furnished to the IRS.
F.
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Dividends and Paying Agents
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Not applicable.
Not applicable.
We are subject to certain information reporting requirements
of the Exchange Act, applicable to foreign private issuers and under those requirements will file reports with the SEC. The SEC
maintains an Internet website that contains reports and other information regarding issuers that file electronically with the
SEC. Our filings with the SEC will also available to the public through the SEC’s website at www.sec.gov.
As a foreign private issuer, we are exempt from the rules under
the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders
are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition,
we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC
as frequently or as promptly as U.S. domestic companies whose securities are registered under the Exchange Act. However, we file
with the SEC, within 120 days after the end of each fiscal year, or such applicable time as required by the SEC, an annual report
on Form 20-F containing financial statements audited by an independent registered public accounting firm, and may submit to the
SEC, on a Form 6-K, unaudited quarterly financial information.
We maintain a corporate website at http://www.therapixbio.com
(which we expect will soon be replaced by http://www.scisparc.com). Information contained on, or that can be accessed through,
our website and the other websites referenced above do not constitute a part of this Annual Report. We have included these website
addresses in this Annual Report solely as inactive textual references.
I.
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Subsidiary Information.
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Not applicable.
ITEM 11.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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In the ordinary course of our operations, we are exposed to
certain market risks, primarily changes in foreign currency exchange rates and interest rates.
Quantitative and Qualitative Disclosure About Market Risk
We are exposed to market risks in the
ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse
changes in financial market prices and rates. Our current investment policy is to invest available cash in bank deposits with
banks that have a credit rating of at least A-minus. However, a substantial majority of our cash is held in current bank accounts
that do not bear interest. In the future, we intend to hold most of our cash in deposits that bear interest. Given the current
low rates of interest we receive, once we begin to hold most of our cash in deposits that bear interest, we do not expect to be
adversely affected if such rates are reduced. Our market risk exposure is primarily a result of NIS/U.S. dollar exchange rates,
which is discussed in detail in the following paragraph.
Foreign Currency Exchange Risk
Our results of operations
and cash flow are subject to fluctuations due to changes mainly in NIS/U.S. dollar currency exchange rates. As of December 31,
2020, the vast majority of our liquid assets are held in U.S. dollars, and the majority of our expenses is denominated in U.S.
dollars. Changes of both 5% and 10% in the U.S. Dollar/NIS exchange rate would decrease/increase our loss for 2020 by less than
1%, respectively. However, these historical figures may not be indicative of future exposure, as we expect that the percentage
of our NIS denominated expenses will materially decrease in the near future, therefore reducing our exposure to exchange rate fluctuations.
Beginning October 1, 2018, our functional currency is the U.S. dollar.
We do not hedge our foreign currency
exchange risk. In the future, we may enter into formal currency hedging transactions to decrease the risk of financial exposure
from fluctuations in the exchange rates of our principal operating currencies. These measures, however, may not adequately protect
us from the material adverse effects of such fluctuations.
ITEM 12.
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DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
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Not applicable.
Not applicable.
Not applicable.
D.
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American Depositary Shares
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Fees and Expenses
Persons depositing or withdrawing shares or ADS holders must pay:
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For:
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$5.00 (or less) per 100 ADSs (or portion of 100 ADSs).
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Issuance of ADSs, including issuances resulting from a distribution of shares
or rights or other property.
Cancellation of ADSs for the purpose of withdrawal, including if the deposit
agreement terminates.
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$.05 (or less) per ADS.
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Any cash distribution to ADS holders.
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A fee equivalent to the fee that would be payable if securities distributed to you had been
shares and the shares had been deposited for issuance of ADSs.
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Distribution of securities distributed to holders of deposited securities (including rights)
that are distributed by the depositary to ADS holders.
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$.05 (or less) per ADS per calendar year.
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Depositary services.
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Registration or transfer fees.
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Transfer and registration of shares on our share register to or from the name of the depositary
or its agent when you deposit or withdraw shares.
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Expenses of the depositary.
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Cable and facsimile transmissions (when expressly provided in the deposit
agreement).
Converting foreign currency to U.S. dollars.
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Taxes and other governmental charges the depositary or the custodian has to pay on any ADSs
or shares underlying ADSs, such as stock transfer taxes, stamp duty or withholding taxes.
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As necessary.
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Any charges incurred by the depositary or its agents for servicing the deposited securities.
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As necessary.
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The depositary collects its fees for
delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or
from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those
fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect
its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the
book-entry system accounts of participants acting for them. The depositary may collect any of its fees by deduction from
any cash distribution payable (or by selling a portion of securities or other property distributable) to ADS holders that are
obligated to pay those fees. The depositary may generally refuse to provide fee-attracting services until its fees for those services
are paid.
From time to time, the depositary may
make payments to us to reimburse us for costs and expenses generally arising out of establishment and maintenance of the ADS program,
waive fees and expenses for services provided to us by the depositary or share revenue from the fees collected from ADS holders.
In performing its duties under the deposit agreement, the depositary may use brokers, dealers, foreign currency dealers or other
service providers that are owned by or affiliated with the depositary and that may earn or share fees, spreads or commissions.
Liquidity and Capital Resources
Description of the Matter
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As
discussed in Note 1 to the consolidated financial statements, the Company has incurred losses, and has not yet started recognizing
revenues from sales and its operations are dependent on its ability to raise additional funds from existing and/or new investors.
This dependency will continue until the Group will be able to completely finance its operations by generating revenue from its
products. In addition, as of the Approval Date, the Group has raised the necessary funding in order to continue its activity in
the foreseeable future.
We
identified Liquidity and Capital Resources as a critical audit matter due to the subjective judgments required of management to
conclude the Company would have sufficient liquidity to sustain itself for at least a year beyond the date of the issuance of the
consolidated financial statements. This in turn led to a high degree of auditor subjectivity and judgment to evaluate the audit
evidence supporting the liquidity conclusions. Additionally, the relevance of management’s liquidity conclusions to the users
of the consolidated financial statements also impacted our assessment of these circumstances as a critical audit matter.
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How We Addressed the Matter in Our Audit
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Addressing the matter involved performing procedures and evaluating audit evidence in connection with our overall opinion on the consolidated financial statements. Our audit procedures to evaluate the significant judgments made by management included, among others, testing the reasonableness of the total liquid assets at December 31, 2020, evaluating the amount and timing of forecasted clinical trial expenses and related payments, including negotiated vendor payment terms, evaluating the fluctuations in forecasted clinical trial expenses and payments thereof as compared to historic amounts and the underlying management assumptions, evaluating the reasonableness of the amounts and timing of payments of forecasted general and administrative expenses and other income, net, reconsidering certain prior management forecasted amounts to evaluate whether those forecasted amounts approximated the ultimate actual results. This was performed in consideration of management’s ability to put forth reasonable estimates and evaluating the adequacy of the Company’s disclosure of these circumstances in the consolidated financial statements.
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/s/
KOST FORER GABBAY & KASIERER
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Tel Aviv, Israel
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KOST
FORER GABBAY & KASIERER
A Member of Ernst & Young Global
We
have served as the Company’s auditor since 2009.
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March 29,
2021
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SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
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December 31,
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2020
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2019
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Note
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USD in thousands
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ASSETS
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|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
5
|
|
|
$
|
1,946
|
|
|
$
|
870
|
|
Restricted deposit
|
|
|
|
|
|
10
|
|
|
|
10
|
|
Other accounts receivable
|
|
6
|
|
|
|
594
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,550
|
|
|
|
955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
Restricted deposit
|
|
9
|
|
|
|
-
|
|
|
|
24
|
|
Property and equipment, net
|
|
10
|
|
|
|
11
|
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,561
|
|
|
$
|
1,154
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Note
|
|
|
USD in thousands
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
Credit from others
|
|
|
|
|
$
|
-
|
|
|
$
|
67
|
|
Trade payables
|
|
11, 22
|
|
|
|
556
|
|
|
|
864
|
|
Other accounts payable
|
|
12, 22
|
|
|
|
34
|
|
|
|
108
|
|
Short-term loan
|
|
|
|
|
|
188
|
|
|
|
-
|
|
Warrants
|
|
17e
|
|
|
|
353
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,131
|
|
|
|
1,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
Lease liability
|
|
|
|
|
|
-
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY:
|
|
17
|
|
|
|
|
|
|
|
|
|
Share capital and premium
|
|
|
|
|
|
49,040
|
|
|
|
45,636
|
|
Reserve from share-based payment transactions
|
|
18
|
|
|
|
4,315
|
|
|
|
4,862
|
|
Warrants
|
|
17e
|
|
|
|
2,207
|
|
|
|
464
|
|
Foreign currency translation reserve
|
|
2e
|
|
|
|
497
|
|
|
|
497
|
|
Transactions with non-controlling interests
|
|
|
|
|
|
559
|
|
|
|
261
|
|
Accumulated deficit
|
|
|
|
|
|
(55,188
|
)
|
|
|
(51,706
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
|
|
|
1,430
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
|
|
|
$
|
2,561
|
|
|
$
|
1,154
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
CONSOLIDATED STATEMENTS OF PROFIT OR LOSS
|
|
|
|
Year ended
December 31,
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
Note
|
|
USD in thousands (except per share data)
|
|
Research and development expenses
|
|
19a
|
|
$
|
649
|
|
|
$
|
1,639
|
|
|
$
|
2,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
19b
|
|
|
1,902
|
|
|
|
2,469
|
|
|
|
4,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
19c
|
|
|
742
|
|
|
|
-
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
|
|
3,293
|
|
|
|
4,108
|
|
|
|
7,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income
|
|
19d
|
|
|
(630
|
)
|
|
|
(305
|
)
|
|
|
(828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance expenses
|
|
19e
|
|
|
872
|
|
|
|
676
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss continuing operations
|
|
|
|
|
3,535
|
|
|
|
4,479
|
|
|
|
6,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net
|
|
4
|
|
|
-
|
|
|
|
207
|
|
|
|
2,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
|
|
|
3,535
|
|
|
|
4,686
|
|
|
|
8,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity holders of the Company (continuing operations)
|
|
|
|
|
3,482
|
|
|
|
4,479
|
|
|
|
6,534
|
|
Equity holders of the Company (discontinued operations)
|
|
|
|
|
-
|
|
|
|
315
|
|
|
|
1,989
|
|
Non-controlling interests
|
|
|
|
|
53
|
|
|
|
(108
|
)
|
|
|
426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,535
|
|
|
|
4,686
|
|
|
|
8,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per ordinary share attributable to equity holders of the Company:
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
|
|
0.10
|
|
|
|
0.60
|
|
|
|
1.00
|
|
Loss from discontinued operations
|
|
|
|
|
-
|
|
|
|
0.04
|
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.10
|
|
|
|
0.64
|
|
|
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per ordinary share attributable to equity holders of the Company:
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
|
|
0.11
|
|
|
|
0.60
|
|
|
|
1.00
|
|
Loss from discontinued operations
|
|
|
|
|
-
|
|
|
|
0.04
|
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.11
|
|
|
|
0.64
|
|
|
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per ADS attributable to equity holders of the
Company:
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
|
|
13.49
|
|
|
|
84.00
|
|
|
|
140.00
|
|
Loss from discontinued operations
|
|
|
|
|
-
|
|
|
|
5.60
|
|
|
|
28.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13.49
|
|
|
$
|
89.60
|
|
|
$
|
168.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per ADS attributable to equity holders of the Company:
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
|
|
14.90
|
|
|
|
84.00
|
|
|
|
140.00
|
|
Loss from discontinued operations
|
|
|
|
|
-
|
|
|
|
5.60
|
|
|
|
28.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14.90
|
|
|
$
|
89.60
|
|
|
$
|
168.00
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
CONSOLIDATED STATEMENTS COMPREHENSIVE LOSS
|
|
Year ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
USD in thousands
|
|
Loss
|
|
$
|
3,535
|
|
|
$
|
4,686
|
|
|
$
|
8,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts that will not be reclassified subsequently to profit or loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments arising from translating financial statements from functional currency to presentation currency
|
|
|
-
|
|
|
|
-
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total components that will not be reclassified subsequently to profit or loss
|
|
|
-
|
|
|
|
-
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
3,535
|
|
|
|
4,686
|
|
|
|
9,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity holders of the Company (continuing operations)
|
|
|
3,482
|
|
|
|
4,479
|
|
|
|
6,819
|
|
Equity holders of the Company (discontinued operations)
|
|
|
-
|
|
|
|
315
|
|
|
|
1,989
|
|
Non-controlling interests
|
|
|
53
|
|
|
|
(108
|
)
|
|
|
426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,535
|
|
|
$
|
4,686
|
|
|
$
|
9,234
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
|
|
Attributable
to equity holders of the Company
|
|
|
|
|
|
|
|
|
|
Share
capital
and premium
|
|
Reserve
from share-based payment transactions
|
|
|
Warrants
|
|
|
Transactions
with non-controlling interests
|
|
|
Foreign
currency translation reserve
|
|
|
Accumulated
deficit
|
|
|
Total
|
|
|
Non-controlling
interests
|
|
|
Total
equity
|
|
|
|
USD
in thousands
|
|
Balance
at January 1, 2018
|
|
|
40,424
|
|
|
5,311
|
|
|
|
-
|
|
|
|
261
|
|
|
|
782
|
|
|
|
(38,389
|
)
|
|
|
8,389
|
|
|
|
-
|
|
|
|
8,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,523
|
)
|
|
|
(8,523
|
)
|
|
|
(426
|
)
|
|
|
(8,949
|
)
|
Total
other comprehensive loss
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(285
|
)
|
|
|
-
|
|
|
|
(285
|
)
|
|
|
-
|
|
|
|
(285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive loss
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(285
|
)
|
|
|
(8,523
|
)
|
|
|
(8,808
|
)
|
|
|
(426
|
)
|
|
|
(9,234
|
)
|
Non-controlling
interests arising from initially consolidated company
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
318
|
|
|
|
318
|
|
Issue
of share capital, net of issue expenses
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expiration
of share options
|
|
|
1,506
|
|
|
(1,506
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cost
of share-based payment
|
|
|
-
|
|
|
604
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
604
|
|
|
|
-
|
|
|
|
604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2018
|
|
|
41,930
|
|
|
4,409
|
|
|
|
-
|
|
|
|
261
|
|
|
|
497
|
|
|
|
(46,912
|
)
|
|
|
185
|
|
|
|
(108
|
)
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss)
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,794
|
)
|
|
|
(4,794
|
)
|
|
|
108
|
|
|
|
(4,686
|
)
|
Issue
of share capital, net of issue expenses (1)
|
|
|
2,099
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,099
|
|
|
|
-
|
|
|
|
2,099
|
|
Conversion
of convertible debentures (Note 13b)
|
|
|
1,507
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,507
|
|
|
|
-
|
|
|
|
1,507
|
|
Registration
of the resale of warrants (Note 17e)
|
|
|
-
|
|
|
-
|
|
|
|
464
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
464
|
|
|
|
-
|
|
|
|
464
|
|
Expiration
of share options
|
|
|
100
|
|
|
(100
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cost
of share-based payment
|
|
|
-
|
|
|
553
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
553
|
|
|
|
-
|
|
|
|
553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2019
|
|
$
|
45,636
|
|
$
|
4,862
|
|
|
$
|
464
|
|
|
$
|
261
|
|
|
$
|
497
|
|
|
$
|
(51,706
|
)
|
|
$
|
14
|
|
|
$
|
-
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss)
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,482
|
)
|
|
|
(3,482
|
)
|
|
|
(53
|
)
|
|
|
(3,535
|
)
|
Warrants
reclassification
|
|
|
|
|
|
|
|
|
|
(464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(464
|
)
|
|
|
|
|
|
|
(464
|
)
|
Issue
of share capital, net of issue expenses (2)
|
|
|
2,763
|
|
|
-
|
|
|
|
2,207
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,970
|
|
|
|
-
|
|
|
|
4,970
|
|
Conversion
of convertible debentures (Note 13b)
|
|
|
3
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
Non-controlling
interests
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
298
|
|
|
|
-
|
|
|
|
-
|
|
|
|
298
|
|
|
|
53
|
|
|
|
351
|
|
Expiration
of share options
|
|
|
638
|
|
|
(638
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cost
of share-based payment
|
|
|
-
|
|
|
91
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
91
|
|
|
|
-
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2020
|
|
$
|
49,040
|
|
|
4,315
|
|
|
|
2,207
|
|
|
|
559
|
|
|
|
497
|
|
|
|
(55,188
|
)
|
|
|
1,430
|
|
|
|
-
|
|
|
|
1,430
|
|
(1)
|
Net of issue expenses
of $469.
|
(2)
|
Net of issue expenses
of $784
|
The
accompanying notes are an integral part of the consolidated financial statements.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Year
ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
USD in thousands
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
$
|
(3,535
|
)
|
|
$
|
(4,686
|
)
|
|
$
|
(8,949
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to the profit or loss items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
164
|
|
|
|
179
|
|
|
|
147
|
|
Loss (gain) from sale of equipment
|
|
|
-
|
|
|
|
1,223
|
|
|
|
(7
|
)
|
Cost of share-based payment
|
|
|
91
|
|
|
|
553
|
|
|
|
604
|
|
Finance expenses (income), net
|
|
|
(476
|
)
|
|
|
156
|
|
|
|
(748
|
)
|
Impairment loss of intangible assets
|
|
|
-
|
|
|
|
-
|
|
|
|
273
|
|
Impairment loss of goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
160
|
|
Impairment of investment in associate
|
|
|
795
|
|
|
|
-
|
|
|
|
-
|
|
Aborted public offering costs
|
|
|
-
|
|
|
|
-
|
|
|
|
53
|
|
Tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
574
|
|
|
|
2,111
|
|
|
|
422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in other accounts receivable
|
|
|
(519
|
)
|
|
|
329
|
|
|
|
(99
|
)
|
Increase (decrease) in trade payables
|
|
|
(752
|
)
|
|
|
(840
|
)
|
|
|
177
|
|
Increase (decrease) in other accounts payable
|
|
|
(75
|
)
|
|
|
(736
|
)
|
|
|
649
|
|
Increase(decrease) in related parties
|
|
|
-
|
|
|
|
(874
|
)
|
|
|
668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,346
|
)
|
|
|
(2,121
|
)
|
|
|
1,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(4,307
|
)
|
|
$
|
(4,696
|
)
|
|
$
|
(7,132
|
)
|
The
accompanying notes are an integral part of the consolidated financial statements.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Year ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
USD in thousands
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in restricted bank deposits
|
|
$
|
24
|
|
|
$
|
(1
|
)
|
|
$
|
(10
|
)
|
Purchase of property and equipment
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(17
|
)
|
Proceeds from sale of property and equipment
|
|
|
-
|
|
|
|
724
|
|
|
|
44
|
|
Proceeds from (investment in) convertible loans
|
|
|
-
|
|
|
|
546
|
|
|
|
(2,125
|
)
|
Acquisition of initially consolidated subsidiary (a)
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
24
|
|
|
|
1,268
|
|
|
|
(2,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issue of share capital (net of issuance expenses) (b)
|
|
|
2,650
|
|
|
|
2,216
|
|
|
|
-
|
|
Issue of warrants (b)
|
|
|
2,376
|
|
|
|
682
|
|
|
|
-
|
|
Payment of issuance expenses related to previous period (b)
|
|
|
116
|
|
|
|
(30
|
)
|
|
|
-
|
|
Interest paid on lease liability
|
|
|
(7
|
)
|
|
|
(17
|
)
|
|
|
-
|
|
Repayment of lease liability
|
|
|
(26
|
)
|
|
|
(47
|
)
|
|
|
-
|
|
Issue of convertible debentures (net of issuance expenses) (b)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,481
|
|
Prepaid public offering costs
|
|
|
-
|
|
|
|
-
|
|
|
|
(36
|
)
|
Repayment of short-term credit
|
|
|
(1,410
|
)
|
|
|
-
|
|
|
|
-
|
|
Receipt of short-term credit from others, net
|
|
|
1,660
|
|
|
|
-
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
5,359
|
|
|
|
2,804
|
|
|
|
1,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange rate differences on cash in foreign currency
|
|
|
-
|
|
|
|
9
|
|
|
|
301
|
|
Exchange rate differences on translation differences on cash
|
|
|
|
|
|
|
-
|
|
|
|
(321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
|
1,076
|
|
|
|
(615
|
)
|
|
|
(7,710
|
)
|
Cash at the beginning of the period
|
|
|
870
|
|
|
|
1,485
|
|
|
|
9,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at the end of the period
|
|
$
|
1,946
|
|
|
$
|
870
|
|
|
$
|
1,485
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Year ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
USD in thousands
|
|
(a) Acquisition of initially consolidated subsidiary:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The subsidiaries’ assets and liabilities at date of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (excluding cash)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
648
|
|
Property and equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,192
|
)
|
Customer relationships
|
|
|
-
|
|
|
|
-
|
|
|
|
(307
|
)
|
Deferred taxes liability
|
|
|
-
|
|
|
|
-
|
|
|
|
60
|
|
Goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
(160
|
)
|
Non-controlling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(1,633
|
)
|
Conversion of convertible loans
|
|
|
-
|
|
|
|
-
|
|
|
|
1,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) Significant non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of debentures into share capital
|
|
|
-
|
|
|
|
1,507
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue of share capital
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registration of warrants
|
|
|
-
|
|
|
|
464
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid issue expenses
|
|
$
|
-
|
|
|
$
|
116
|
|
|
$
|
30
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
|
a.
|
SciSparc
Ltd. (formerly known as Therapix Biosciences Ltd.) (“SciSparc” or the “Company”), a pharmaceutical company,
was incorporated in Israel and commenced its operations on August 23, 2004. Until March 2014, SciSparc and its subsidiaries at
the time (the “Group”) were mainly engaged in developing several innovative immunotherapy products and SciSparc’s
own patents in the immunotherapy field. In August 2015, the Company decided to adopt a different business strategy and began focusing
on developing a portfolio of approved drugs based on cannabinoid molecules. With this focus, the Company is currently engaged
in the following development programs based on Δ9-tetrahydrocannabinol (“THC”) and/or non-psychoactive cannabidiol
for the treatment of Tourette syndrome and for the treatment of obstructive sleep apnea, pain, Autism Spectrum Disorder and epilepsy.
The headquarters of the Company are located in the Tel Aviv, Israel.
|
The
Company changed its name from Therapix Biosciences Ltd. to SciSparc Ltd. on January 24, 2021.
The
Company was previously a dual-listed company, whereby it listed (a) its ordinary shares, no par value each (“ordinary
shares”), on the Tel-Aviv Stock Exchange (“TASE”) from December 26, 2005 until its delisting on August 7,
2018, and (b) its American Depository Shares (“ADSs”) on the Nasdaq Capital Market (“Nasdaq”)
following its initial public offering (“IPO”) on March 27, 2017, at which time it raised $13,700, until its
suspension from listing, and subsequent delisting, from Nasdaq on July 2, 2020 and September 21, 2020, respectively.
Following the delisting of the ADSs from Nasdaq, the Company’s ADSs were listed on the Pink Sheets and then
subsequently upgraded to the OTCQB on December 8, 2020. The ADSs are currently quoted on the OTCQB under the symbol
“SPRCY”. Since the IPO, the Company has had its ADSs registered with the U.S. Securities and Exchange Commission
(“SEC”). All information in these financial statements regarding the ADSs presumes that all of the
Company’s ordinary shares have been converted into ADSs. Each ADS represents one hundred and forty (140) ordinary
shares.
As
of December 31, 2020, the Company had two subsidiaries, both of which are companies incorporated under the laws of Israel: (1)
Brain Bright Ltd. (“Brain Bright”); and (2) Evero Health Ltd. (“Evero” and together with Brain Bright,
the “Subsidiaries”).
Both
of the Subsidiaries are private companies, and as of the date of these financial statements, Brain Bright is an inactive company
with no assets or liabilities. The Company also owns approximately 27% of the share capital of Lara Pharm Ltd. (“Lara”).
Lara is a private company incorporated under the laws of Israel which, to the Company’s knowledge, does not engage in any
business, and in any event, the Company does not have significant influence over Lara since it has no representation on Lara’s
board of directors. The Company wrote-off the entire investment in Lara in 2015 (see Note 8a).
On
October 3, 2018 (the “Acquisition Date”), the Company obtained control over Therapix Healthcare Resources Inc. (“THR”),
a Delaware corporation, which was established on July 31, 2018, by acquiring 82.36% of THR’s equity through the conversion
of a convertible loan.
On
June 27, 2019, following the finalization of THR’s dissolution, completed by submitting all documents required by law (“THR’s
Dissolution”), the Company deconsolidated THR (see Note 4).
The consolidated financial statements
of the Company for the year ended December 31, 2020, were approved on March 25, 2021 and signed on March 29, 2021 (the “Approval
Date”).
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
|
b.
|
Functional currency
and presentation currency:
|
The
functional currency of the Company, which is the currency that best reflects the economic environment in which the Company operates
and conducts its transactions is the U.S. Dollar (“USD” or “$”), since it’s the primary currency
of the economic environment in which the Company operates (see Note 2e). The consolidated financial statements are also presented
in USD since the Company believes that preparing the consolidated financial statements in USD provides more relevant information
to the users of the consolidated financial statements.
|
c.
|
The Group incurred
operating losses since its incorporation, and expects
to continue to incur operating losses for the foreseeable future. As of December 31, 2020, the Group had an accumulated deficit of approximately $55,188 as a result
of recurring operating losses.
|
As
of the Approval Date, the Group has not yet started recognizing revenues from sales and its operations are dependent on its ability
to raise additional funds from existing and/or new investors. This dependency will continue until the Group will be able to completely
finance its operations by generating revenue from its products. In addition, as of the Approval Date, the Group has raised the
necessary funding in order to continue its activity in the foreseeable future.
As of the Approval Date, the Company
had $7.78 million in cash. The Company anticipates that its cash as of December 31, 2020 will provide sufficient liquidity for more than
a twelve-month period from March 29, 2021. The actual amount of cash that the Company will need to operate is subject to many factors,
including, but not limited to, the timing, design and conduct of clinical trials for its drug candidates. The Company is dependent upon
significant future financing to provide the cash necessary to execute its current operations, including the commercialization of any
of its drug candidates.
|
d.
|
Public health epidemics or outbreaks could adversely impact the Company’s
business. In late 2019, a novel strain of COVID-19, also known as coronavirus, was reported in Wuhan, China. While initially the outbreak
was largely concentrated in China, it has now spread to several other countries, including in Israel, and infections have been reported
globally. The extent to which the coronavirus impacts the Company’s operations will depend on future developments, which are highly
uncertain and cannot be predicted with confidence, including the duration and severity of the outbreak, and the actions that may be required
to contain the coronavirus or treat its impact. In particular, the continued spread of the coronavirus globally, could adversely impact
the Company’s operations and workforce, including other Company’s research and clinical trials and its ability to raise capital,
which in turn could have an adverse impact on the Company’s business, financial condition and results of operation.
|
|
e.
|
Definitions and
Meanings:
|
|
The Company
|
-
|
SciSparc
Ltd. (formerly known as Therapix Biosciences Ltd.)
|
|
|
|
|
|
The Group
|
-
|
SciSparc Ltd. (formerly Therapix Biosciences
Ltd.) and its Subsidiaries, as detailed in Note 1a.
|
|
|
|
|
|
Subsidiaries
|
-
|
Companies that are
controlled by the Company, as defined in IFRS 10, “Consolidated Financial Statements”, and whose accounts
are consolidated with those of the Company (if active).
|
|
|
|
|
|
Associates
|
-
|
An entity over which
the Company has significant influence, as defined in IAS 28, “Investment in Associates and Joint Ventures”
and is not a Subsidiary.
|
|
|
|
|
|
Related Parties
|
-
|
As defined in IAS
24, “Related Party Disclosures”.
|
|
|
|
|
|
IAS
|
-
|
International Accounting
Standards issued by the International Accounting Standards Board (“IASB”).
|
|
|
|
|
|
IFRS
|
-
|
International Financial
Reporting Standards issued by the IASB.
|
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE 2:-
|
SIGNIFICANT
ACCOUNTING POLICIES
|
The
following accounting policies have been applied consistently in the financial statements for all periods presented, unless otherwise
stated.
|
a.
|
Basis of presentation
of the financial statements:
|
These
financial statements have been prepared in accordance with IFRS, as issued by the IASB.
The
Company’s financial statements have been prepared on a cost basis, unless otherwise indicated.
The
Company has elected to present the profit or loss items using the function of expense method.
The
financial statements are presented in USD and all values are rounded to the nearest thousand (‘000), except when otherwise
indicated.
The
operating cycle of the Company is one year.
|
c.
|
Consolidated financial
statements:
|
The
consolidated financial statements comprise the financial statements of companies that are controlled by the Company (Subsidiaries).
Control of a company is achieved when the Company is exposed, or has rights, to variable returns from its involvement with the
investee and has the ability to affect those returns through its power over the investee. Potential voting rights are considered
when assessing whether an entity has control over the other entity. The consolidation of the financial statements commences on
the date on which control is obtained and ends when such control ceases.
The
financial statements of the Company and of the Subsidiaries are prepared as of the same dates and periods. The consolidated financial
statements are prepared using uniform accounting policies by all companies in the Group. Significant intra-Group balances and
transactions and gains or losses resulting from intra-Group transactions are eliminated in full in the consolidated financial
statements.
Non-controlling
interests in subsidiaries represent the equity in subsidiaries not attributable, directly or indirectly, to a parent. Non-controlling
interests are presented in equity separately from the equity attributable to the equity holders of the Company. Profit or loss
and components of other comprehensive income are attributed to the Company and to non-controlling interests. Losses are attributed
to non-controlling interests even if they result in a negative balance of non-controlling interests in the consolidated statement
of financial position.
|
d.
|
Discontinued operations:
|
A
discontinued operation is a component of the Company that either has been disposed of or is classified as held for sale. The operating
results relating to the discontinued operation are presented separately in profit or loss, net of the tax effect.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (CONT.)
|
|
e.
|
Functional currency
and foreign currency:
|
|
1.
|
Functional currency
and presentation currency:
|
Effective
on October 1, 2018, due to changes in certain economic facts and circumstances, the functional currency of the Company was changed
from the New Israeli Shekel (“NIS”) to USD. Thus, the functional and reporting currency of the Company is the USD.
In determining the appropriate functional currency that should be used, the Company followed the guidance in IAS 21, “The
Effects of Changes in Foreign Exchange Rates”. The Company accounted for the change in its functional currency prospectively.
All
resulting translation differences until October 1, 2018, following the fact that the reporting currency was different than the
functional currency, were recognized as a separate component of other comprehensive income (loss) in equity “foreign currency
translation reserve.”
The
functional currency of THR up until THR’s Dissolution, was also USD.
|
2.
|
Transactions, assets
and liabilities in foreign currency:
|
Transactions
denominated in foreign currency (other than the functional currency) are recorded on initial recognition at the exchange rate
at the date of the transaction. After initial recognition, monetary assets and liabilities denominated in foreign currency are
translated at each reporting date into the functional currency at the exchange rate at that date. Non-monetary assets and liabilities
denominated in foreign currency and measured at fair value are retranslated into the functional currency using the exchange rate
prevailing at the date when the fair value was determined. Non-monetary assets and liabilities measured at cost are translated
at the exchange rate at the date of the transaction.
|
f.
|
Business combinations
and goodwill:
|
Business
combinations are accounted for by applying the acquisition method. The cost of the acquisition is measured at the fair value of
the consideration transferred on the acquisition date with the addition of non-controlling interests in the acquiree. In each
business combination, the Company chooses whether to measure the non-controlling interests in the acquiree based on their fair
value on the acquisition date or at their proportionate share in the fair value of the acquiree’s net identifiable assets.
Direct
acquisition costs are carried to the statement of profit or loss as incurred.
Goodwill
is initially measured at cost which represents the excess of the acquisition consideration and the amount of non-controlling interests
over the net identifiable assets acquired and liabilities assumed. If the resulting amount is negative, the acquirer recognizes
the resulting gain on the acquisition date.
A
restricted deposit is cash invested in a short-term deposit (between three months and one year) or in a long-term deposit (with
a maturity of more than one year from the date of investment). Restricted deposits are designated to secure the Company’s
office facilities lease agreements and its credit cards.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (CONT.)
|
|
h.
|
Property and equipment,
net:
|
Property
and equipment are measured at cost, including directly attributable costs, less accumulated depreciation, accumulated impairment
losses and any related investment grants and excluding day-to-day servicing expenses.
Depreciation
is calculated on a straight-line basis over the useful life of the assets at annual rates as follows:
|
|
%
|
|
|
Mainly %
|
|
Lab equipment
|
|
6-50
|
|
|
33
|
|
Computers
|
|
33-50
|
|
|
33
|
|
Office furniture and equipment
|
|
20-33
|
|
|
25
|
|
Motor vehicles
|
|
55
|
|
|
-
|
|
Leasehold improvements
|
|
see below
|
|
|
-
|
|
Leasehold
improvements are depreciated on a straight-line basis over the shorter of the lease term (including the extension option held
by a company and intended to be exercised) and the expected life of the improvement.
The
useful life, depreciation method and residual value of an asset are reviewed at least each year-end and any changes are accounted
for prospectively as a change in accounting estimate. Depreciation of an asset ceases at the earlier of the date that the asset
is classified as held for sale and the date that the asset is derecognized.
Separately
acquired intangible assets are measured on initial recognition at cost including directly attributable costs. Intangible assets
acquired in a business combination are measured at fair value at the acquisition date. Expenditures relating to internally generated
intangible assets, excluding capitalized development costs, are recognized in profit or loss when incurred.
Intangible
assets with a finite useful life are amortized over their useful life and reviewed for impairment whenever there is an indication
that the asset may be impaired. The amortization period and the amortization method for an intangible asset are reviewed at least
at each year end.
|
j.
|
Impairment of non-financial
assets:
|
The
Company evaluates the need to record an impairment of non-financial assets whenever events or changes in circumstances indicate
that the carrying amount is not recoverable. If the carrying amount of non-financial assets exceeds their recoverable amount,
the assets are reduced to their recoverable amount. The recoverable amount is the higher of fair value less costs of sale and
value in use. In measuring value in use, the expected future cash flows are discounted using a pre-tax discount rate that reflects
the risks specific to the asset. The recoverable amount of an asset that does not generate independent cash flows is determined
for the cash-generating unit to which the asset belongs. Impairment losses are recognized in profit or loss.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (CONT.)
|
|
k.
|
Financial instruments:
|
Financial
assets are measured upon initial recognition at fair value plus transaction costs that are directly attributable to the acquisition
of the financial assets, except for financial assets measured at fair value through profit or loss in respect of which transaction
costs are recorded in profit or loss.
The
Company classifies and measures debt instruments in the financial statements based on the following criteria:
|
-
|
The Company’s
business model for managing financial assets; and
|
|
-
|
The contractual
cash flow terms of the financial asset.
|
|
a)
|
Debt instruments
are measured at amortized cost when:
|
The
Company’s business model is to hold the financial assets in order to collect their contractual cash flows, and the contractual
terms of the financial assets give rise on specified dates to cash flows that are solely payments of principal and interest on
the principal amount outstanding. After initial recognition, the instruments in this category are measured according to their
terms at amortized cost using the effective interest rate method, less any provision for impairment.
On
the date of initial recognition, the Company may irrevocably designate a debt instrument as measured at fair value through profit
or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency, such as when a related financial
liability is also measured at fair value through profit or loss.
|
b)
|
Debt instruments
are measured at fair value through profit or loss when:
|
A
financial asset which is a debt instrument does not meet the criteria for measurement at amortized cost or at fair value through
other comprehensive income. After initial recognition, the financial asset is measured at fair value and gains or losses from
fair value adjustments are recognized in profit or loss.
|
c)
|
Equity instruments
and other financial assets held for trading:
|
Investments
in equity instruments do not meet the above criteria and accordingly are measured at fair value through profit or loss.
Other
financial assets held for trading such as derivatives, including embedded derivatives separated from the host contract, are measured
at fair value through profit or loss unless they are designated as effective hedging instruments.
Dividends
from investments in equity instruments are recognized in profit or loss when the right to receive the dividends is established.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE 2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (CONT.)
|
|
k.
|
Financial instruments:
(Cont.)
|
|
2.
|
Derecognition of
financial assets:
|
A
financial asset is derecognized only when:
|
-
|
The contractual
rights to the cash flows from the financial asset have expired;
|
|
-
|
The Company has
transferred substantially all the risks and rewards deriving from the contractual rights to receive cash flows from the financial
asset or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control
of the asset; or
|
|
-
|
The Company has
retained its contractual rights to receive cash flows from the financial asset but has assumed a contractual obligation to
pay the cash flows in full without material delay to a third party.
|
|
3.
|
Financial liabilities:
|
|
a)
|
Financial liabilities
measured at amortized cost:
|
Financial
liabilities are initially recognized at fair value less transaction costs that are directly attributable to the issue of the financial
liability.
After
initial recognition, the Company measures all financial liabilities at amortized cost using the effective interest rate method,
except for financial liabilities at fair value through profit or loss such as derivatives.
|
b)
|
Financial liabilities
measured at fair value through profit or loss:
|
At
initial recognition, the Company measures financial liabilities that are not measured at amortized cost at fair value. Transaction
costs are recognized in profit or loss.
After
initial recognition, changes in fair value are recognized in profit or loss.
|
4.
|
Derecognition of
financial liabilities:
|
A
financial liability is derecognized only when it is extinguished, that is when the obligation specified in the contract is discharged
or cancelled or expires. A financial liability is extinguished when the debtor discharges the liability by paying in cash, other
financial assets, goods or services, or is legally released from the liability.
|
5.
|
Offsetting financial
instruments:
|
Financial
assets and financial liabilities are offset and the net amount is presented in the statement of financial position if there is
a legally enforceable right to set off the recognized amounts and there is an intention either to settle on a net basis or to
realize the asset and settle the liability simultaneously. The right of set-off must be legally enforceable not only during the
ordinary course of business of the parties to the contract but also in the event of bankruptcy or insolvency of one of the parties.
In order for the right of set-off to be currently available, it must not be contingent on a future event, there may not be periods
during which the right is not available, or there may not be any events that will cause the right to expire.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE 2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (CONT.)
|
|
k.
|
Financial instruments:
(Cont.)
|
|
6.
|
Compound financial
instruments:
|
Convertible
debentures which contain both an equity/derivative component and a liability component are separated into two components. This
separation is performed by first determining the liability component based on the fair value of an equivalent non-convertible
liability. The value of the conversion component is determined to be the residual amount. Directly attributable transaction costs
are apportioned between the equity component and the liability component based on the allocation of proceeds to the equity and
liability components.
|
7.
|
Issue of a unit
of securities:
|
The
issue of a unit of securities involves the allocation of the proceeds received (before issue expenses) to the securities issued
in the unit based on the following order: financial derivatives and other financial instruments measured at fair value in each
period. Then fair value is determined for financial liabilities that are measured at amortized cost. The proceeds allocated to
equity instruments are determined to be the residual amount. Issue costs are allocated to each component pro rata to the amounts
determined for each component in the unit.
|
l.
|
Research and development
expenditures:
|
Research
expenditures are recognized in profit or loss when incurred.
The
conditions enabling capitalization of development costs as an asset have not yet been met and, therefore, all development expenditures
are recognized in profit or loss when incurred.
|
m.
|
Finance income and
expenses:
|
Finance
income and expenses comprise interest income on amounts invested and exchange rate gains and losses. Interest income is recognized
as it accrues using the effective interest method. Finance income and expenses derive also from changes in the fair value of financial
liabilities measured at fair value through profit or loss. Borrowing costs are recognized in profit or loss using the effective
interest method.
|
n.
|
Fair value measurement:
|
Fair
value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Fair value measurement is based on the assumption that the transaction will take place in
the asset’s or the liability’s principal market, or in the absence of a principal market, in the most advantageous
market.
The
fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset
or liability, assuming that market participants act in their economic best interest.
Fair
value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits
by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its
highest and best use.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (CONT.)
|
|
n.
|
Fair
value measurement: (Cont.)
|
The
Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure
fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
All
assets and liabilities measured at fair value or for which fair value is disclosed are categorized into levels within the fair
value hierarchy based on the lowest level input that is significant to the entire fair value measurement:
|
Level 1
|
-
|
Quoted prices (unadjusted)
in active markets for identical assets or liabilities.
|
|
|
|
|
|
Level 2
|
-
|
Inputs other than quoted prices included within
Level 1 that are observable directly or indirectly.
|
|
|
|
|
|
Level 3
|
-
|
Inputs that are not based on observable market
data (valuation techniques which use inputs that are not based on observable market data).
|
Current
or deferred taxes are recognized in profit or loss, except to the extent that they relate to items which are recognized in other
comprehensive income or equity.
A
current tax liability is measured using the tax rates and tax laws that have been enacted or substantively enacted by the reporting
date as well as adjustments required in connection with the tax liability in respect of previous years.
Deferred
taxes are computed in respect of temporary differences between the carrying amounts in the financial statements and the amounts
attributed for tax purposes.
Deferred
taxes are measured at the tax rate that is expected to apply when the asset is realized, or the liability is settled, based on
tax laws that have been enacted or substantively enacted by the reporting date.
Deferred
tax assets are reviewed at each reporting date and reduced to the extent that it is not probable that they will be utilized. Deductible
carryforward losses and temporary differences for which deferred tax assets had not been recognized are reviewed at each reporting
date and a respective deferred tax asset is recognized to the extent that their utilization is probable.
Taxes
that would apply in the event of the disposal of investments in investees have not been taken into account in computing deferred
taxes, as long as the disposal of the investments in investees is not probable in the foreseeable future. Also, deferred taxes
that would apply in the event of distribution of earnings by investees as dividends have not been taken into account in computing
deferred taxes, since the distribution of dividends does not involve an additional tax liability or since it is the Company’s
policy not to initiate distribution of dividends from a subsidiary that would trigger an additional tax liability.
Taxes
on income that relate to distributions of an equity instrument and to transaction costs of an equity transaction are accounted
for pursuant to IAS 12, “Income Taxes”.
Deferred
taxes are offset if there is a legally enforceable right to offset a current tax asset against a current tax liability and the
deferred taxes relate to the same taxpayer and the same taxation authority.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (CONT.)
|
|
p.
|
Share/ADS-based
payment transactions:
|
The
Company’s employees and other service providers may receive remuneration in the form of share/ADS-based payments (“Equity-settled
transactions”).
Equity-settled
transactions:
The
cost of equity-settled transactions with employees is measured at the fair value of the equity instruments granted at grant date.
The fair value is determined using an acceptable option pricing model (“OPM”). As for service providers, the cost
of the transactions is measured at the fair value of the goods or services received as consideration for equity instruments granted.
The
cost of equity-settled transactions is recognized in profit or loss together with a corresponding increase in equity during the
period in which the performance and/or service conditions are to be satisfied ending on the date on which the relevant employees
become entitled to the award (the “Vesting Period”). The cumulative expense recognized for equity-settled transactions
at the end of each reporting period until the vesting date reflects the extent to which the Vesting Period has expired and the
Company’s best estimate of the number of equity instruments that will ultimately vest.
No
expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition,
which are treated as vesting irrespective of whether the market condition is satisfied, provided that all other vesting conditions
(service and/or performance) are satisfied.
If
the Company modifies the conditions on which equity-instruments were granted, an additional expense is recognized for any modification
that increases the total fair value of the share-based payment arrangement or is otherwise beneficial to the employee/other service
provider at the modification date.
If
a grant of an equity instrument is cancelled, it is accounted for as if it had vested on the cancellation date and any expense
not yet recognized for the grant is recognized immediately. However, if a new grant replaces the cancelled grant and is identified
as a replacement grant on the grant date, the cancelled and new grants are accounted for as a modification of the original grant,
as described above.
|
q.
|
Earnings (loss)
per share/ADS:
|
Earnings
(loss) per share or per ADS are calculated by dividing the income (loss) attributable to equity holders of the Company by the
weighted number of ordinary shares or ADSs outstanding during the period.
Basic
loss per ordinary share or ADS includes only ordinary shares or ADSs that were outstanding during the period.
Potential
ordinary shares or ADSs are included in the computation of diluted loss per ordinary share or per ADS when their conversion increases
loss per ordinary share or ADS from continuing operations.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (CONT.)
|
|
r.
|
Employee benefit
liabilities:
|
The
Company has several employee-benefit plans:
|
1.
|
Short-term employee
benefits:
|
Short-term
employee benefits are benefits that are expected to be settled wholly before twelve months after the end of the annual reporting
period in which the employees render the related services. These benefits include salaries, paid annual leave, paid sick leave,
recreation and social security contributions and are recognized as expenses as the services are rendered. A liability in respect
of a cash bonus or a profit-sharing plan is recognized when the Company has a legal or constructive obligation to make such payment
as a result of past service rendered by an employee and a reliable estimate of the amount can be made.
|
2.
|
Post-employment
benefits:
|
The
plans are normally financed by contributions to insurance companies and classified as defined contribution plans or as defined
benefit plans.
The
Company has defined contribution plans to its employees according to the specific laws per country.
A
provision in accordance with IAS 37, “Provisions, Contingent Liabilities and Contingent Assets”, is recognized
when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow
of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the
amount of the obligation. When the Company expects part or all of the expense to be reimbursed, for example under an insurance
contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense
is recognized in the statement of profit or loss net of any reimbursement.
Following
are the types of provisions included in the financial statements:
Legal
claims:
A
provision for claims is recognized when the Company has a present legal or constructive obligation as a result of a past event,
it is more likely than not that an outflow of resources embodying economic benefits will be required by the Company to settle
the obligation and a reliable estimate can be made of the amount of the obligation.
The
Company elected to apply the provisions of IFRS 16, “Leases” (“IFRS 16”) using the modified retrospective
method (without restatement of comparative data).
The
accounting policy for leases applied effective from January 1, 2019, is as follows:
The
Company accounts for a contract as a lease when the contract terms convey the right to control the use of an identified asset
for a period of time in exchange for consideration.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (CONT.)
|
|
1.
|
The Company as a
lessee:
|
For
leases in which the Company is the lessee, the Company recognizes on the commencement date of the lease a right-of-use asset and
a lease liability, excluding leases whose term is up to 12 months and leases for which the underlying asset is of low value. For
these excluded leases, the Company has elected to recognize lease payments as an expense in profit or loss on a straight-line
basis over the lease term (see Note 9). In measuring the lease liability, the Company
has elected to apply the practical expedient in IFRS 16 and separates the lease components from the non-lease components (such
as management and maintenance services, etc.) included in a single contract.
On
the commencement date, the lease liability includes all unpaid lease payments discounted at the interest rate implicit in the
lease, if that rate can be readily determined, or otherwise using the Company’s incremental borrowing rate. After the commencement
date, the Company measures the lease liability using the effective interest rate method.
On
the commencement date, the right-of-use asset is recognized in an amount equal to the lease liability plus lease payments already
made on or before the commencement date and initial direct costs incurred. The right-of-use asset is measured applying the cost
model and depreciated over the shorter of its useful life and the lease term.
The
Company tests for impairment of the right-of-use asset whenever there are indications of impairment pursuant to the provisions
of IAS 36, “Impairment of Assets”.
|
2.
|
Lease extension
and termination options:
|
A
non-cancelable lease term includes both the periods covered by an option to extend the lease when it is reasonably certain that
the extension option will be exercised, and the periods covered by a lease termination option when it is reasonably certain that
the termination option will not be exercised.
In
the event of any change in the expected exercise of the lease extension option or in the expected non-exercise of the lease termination
option, the Company remeasures the lease liability based on the revised lease term using a revised discount rate as of the date
of the change in expectations. The total change is recognized in the carrying amount of the right-of-use asset until it is reduced
to zero, and any further reductions are recognized in profit or loss.
If
a lease modification does not reduce the scope of the lease and does not result in a separate lease, the Company remeasures the
lease liability based on the modified lease terms using a revised discount rate as of the modification date and records the change
in the lease liability as an adjustment to the right-of-use asset.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (CONT.)
|
|
3.
|
Lease
modifications: (Cont.)
|
If
a lease modification reduces the scope of the lease, the Company recognizes a gain or loss arising from the partial or full reduction
of the carrying amount of the right-of-use asset and the lease liability. The Company subsequently remeasures the carrying amount
of the lease liability according to the revised lease terms, at the revised discount rate as of the modification date and records
the change in the lease liability as an adjustment to the right-of-use asset.
The
accounting policy for leases applied until December 31, 2018, is as follows:
The
criteria for classifying leases as finance or operating leases depend on the substance of the agreements and are made at the inception
of the lease in accordance with the following principles as set out in IAS 17, “Leases”.
The
Company as lessee:
Operating
leases:
Leases
in which substantially all the risks and rewards of ownership of the leased asset are not transferred to the Company are classified
as operating leases. Lease payments are recognized as an expense in profit or loss on a straight-line basis over the lease term.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE 3:-
|
SIGNIFICANT ACCOUNTING
JUDGMENTS, ESTIMATES AND ASSUMPTIONS USED IN THE PREPARATION OF THE FINANCIAL STATEMENTS
|
In
the process of applying the significant accounting policies, the Company has made the following judgments which have the most
significant effect on the amounts recognized in the financial statements:
|
-
|
Discount rate for
a lease liability:
|
When
a company in the Group is unable to readily determine the discount rate implicit in a lease in order to measure the lease liability,
such company uses an incremental borrowing rate. That rate represents the rate of interest that the Company would have to pay
to borrow over a similar term and with similar security, the funds necessary to obtain an asset of similar value to the right-of-use
asset in a similar economic environment. When there are no financing transactions that can serve as a basis, said company determines
the incremental borrowing rate based on its credit risk, the lease term and other economic variables deriving from the lease contract’s
conditions and restrictions.
The
Company assesses whether it controls a company in which it holds less than the majority of the voting rights by, among others,
reference to the size of its holding of voting rights relative to the size and dispersion of holdings of the other vote holders
including voting patterns at previous shareholders’ meetings.
|
-
|
Determining the
fair value of share-based payment transactions:
|
The
fair value of share-based payment transactions is determined upon initial recognition by an acceptable OPM. The inputs to the
model include share price, exercise price and assumptions regarding expected volatility, expected life of share option, risk-free
interest and expected dividend yield.
|
b.
|
Estimates and assumptions:
|
The
preparation of the financial statements requires management to make estimates and assumptions that have an effect on the application
of the accounting policies and on the reported amounts of assets, liabilities, revenues and expenses. Changes in accounting estimates
are reported in the period of the change in estimate.
The
key assumptions made in the financial statements concerning uncertainties at the reporting date and the critical estimates computed
by the Company that may result in a material adjustment to the carrying amounts of assets and liabilities within the next financial
year are discussed below.
In
estimating the likelihood of outcome of legal claims filed or threatened to commence against the Company and/or its Subsidiaries
and/or affiliates, the Company relies on its management’s best knowledge and estimations and where applicable, on the opinion
of their legal counsels. These estimates are based, among others, on management’s familiarity of and proximity to the circumstances,
and also on the legal counsels’ best professional judgment, taking into account the stage of proceedings and legal precedents
in respect of the different issues. Since the outcome of the claims might be determined in courts and/or other quasi-judicial
tribunals, the results could differ from these estimates.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE 3:-
|
SIGNIFICANT ACCOUNTING
JUDGMENTS, ESTIMATES AND ASSUMPTIONS USED IN THE PREPARATION OF THE FINANCIAL STATEMENTS (CONT.)
|
|
b.
|
Estimates and assumptions:
(Cont.)
|
|
-
|
Lease extension
and/or termination options:
|
In
evaluating whether it is reasonably certain that a company of the Group will exercise an option to extend a lease or not exercise
an option to terminate a lease, the Company considers all relevant facts and circumstances that create an economic incentive
for the Company to exercise the option to extend or not exercise the option to terminate such as: significant amounts invested
in leasehold improvements, the significance of the underlying asset to the Company’s operation and whether it is a specialized
asset, the company’s past experience with similar leases, etc.
After
the commencement date, the Company reassesses the term of the lease upon the occurrence of a significant event or a significant
change in circumstances that affects whether the company is reasonably certain to exercise an option or not exercise an option
previously included in the determination of the lease term, such as significant leasehold improvements that had not been anticipated
on the lease commencement date, sublease of the underlying asset for a period that exceeds the end of the previously determined
lease period, etc.
|
-
|
Fair value of financial
instruments:
|
When
the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be derived
from active markets, their fair value is determined using a variety of valuation techniques that include the use of valuation
models. The inputs to these models are taken from observable markets where possible, but where this is not feasible, estimation
is required in establishing fair values. The models are tested for validity by calibrating to prices from any observable current
market transactions in the same instrument when available.
NOTE 4:-
|
DISCONTINUED
OPERATIONS:
|
Deconsolidation
of THR:
On
July 31, 2018, the Company entered into an agreement for convertible equity (the “Convertible Equity Agreement”) with
THR, then an unaffiliated third party. Since July 31, 2018, THR was engaged in operating pain treatment clinics, mainly in Tennessee,
to treat an assortment of different pains, including, acute pain, spine pain, chronic headaches, cancer pain, oral/maxillofacial
pain, neuropathic pain and rheumatologic/myofascial pain. Under the Convertible Equity Agreement, the Company loaned an aggregate
amount of $1,625 (the “THR Loan”) to THR. The maturity date of the THR Loan, which accrued interest at a rate of 9%
per annum, was to occur upon demand of the Company and under certain conditions.
On
October 3, 2018, following the occurrence of the conditions required under the Convertible Equity Agreement for conversion of
the THR Loan, the Company converted the entire THR Loan and as a result held 82.36% of THR’s equity, and accordingly obtained
control over THR. Until December 31, 2018, no further changes were made to THR’s equity. On December 31, 2018, due to significant
losses incurred by THR, as well as its failure to maintain required licenses to operate its facilities, the Company decided to
fully impair the goodwill and additional intangible assets which have arisen from THR’s acquisition in the amount of $160
and $273, respectively.
On
March 26, 2019, following the financial deterioration of THR, THR’s board of directors resolved that THR will commence a
liquidation process of its assets, a process which ended on June 27, 2019, with the confirmation of THR’s Dissolution by
submitting all documents required by law. As of April 2019, THR had no employees and all business operations were discontinued.
Accordingly, the Company presented all profit or loss results relevant to THR as loss from discontinued operations, net. Also,
as of June 27, 2019, THR had no assets or liabilities and recorded an income in the amount of $616 (THR recorded a loss of $2,400
during the period since consolidation on October 3, 2018, up until December 31, 2018).
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE 4:-
|
DISCONTINUED
OPERATIONS: (CONT.)
|
Deconsolidation
of THR: (Cont.)
In
addition, the Company concluded that following THR’s Dissolution on June 27, 2019, and given that THR had no operations
since April 2019 and there was no longer a board of directors, that it lost its control over THR and accordingly deconsolidated
THR on June 27, 2019 from the Group’s consolidated financial statements.
Since
the Acquisition Date and until April 8, 2019, the Company loaned to THR an additional total amount of $822, which loans included
an interest rate of 9% per annum, in order to allow THR to maintain its ongoing operations. The loss, following the fact that
the above-mentioned loans will not be repaid, was attributed to the equity holders of the Company (discontinued operations).
The
loss following the fact that the above-mentioned loans will not be repaid was attributed to the equity holders of the Company
(discontinued operations).
Below
is data of the net cash flows provided by (used in) the discontinued operations:
|
|
Year ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Operating activities
|
|
$
|
-
|
|
|
$
|
(1,024
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
-
|
|
|
|
724
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cash for immediate withdrawal - in USD
|
|
$
|
1,878
|
|
|
$
|
760
|
|
Cash for immediate withdrawal - in NIS
|
|
|
68
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,946
|
|
|
$
|
870
|
|
NOTE 6:-
|
OTHER ACCOUNTS
RECEIVABLE
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Government authorities
|
|
$
|
103
|
|
|
$
|
41
|
|
Other receivables
|
|
|
183
|
|
|
|
23
|
|
Prepaid expenses
|
|
|
308
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
594
|
|
|
$
|
75
|
|
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE 7:-
|
CONVERTIBLE LOAN
|
On
April 17, 2018, the Company entered into a convertible loan agreement with Cure Pharmaceutical Holding Corp. (the “Convertible
Loan Agreement” and “Cure”, respectively), a U.S.-based company. Under the Convertible Loan Agreement, the Company
lent Cure an amount of $500 (the “Cure Loan”). The maturity date of the Cure Loan, together with an interest at a
rate of 9% per annum, was set as April 30, 2019 (the “Maturity Date”). In addition, according to the Convertible Loan
Agreement, the Company had the option to instruct Cure, prior to the Maturity Date, to repay the Cure Loan amount together with
all interest accrued thereon, in lieu of the conversion (described below), in which case Cure will effect such repayment on the
Maturity Date. Furthermore, the Convertible Loan Agreement set forth several options by which the Cure Loan could be converted.
On
December 31, 2018, the Company instructed Cure to repay the Cure Loan (with the 9% accrued interest) on the Maturity Date and
as a result the Cure Loan was fully repaid by Cure, including interest in the amount of $46, on April 30, 2019. Accordingly, the
Convertible Loan Agreement was terminated with no further effect.
NOTE 8:-
|
INVESTMENT IN
ASSOCIATES AND INVESTMENTS IN INVESTEES
|
On
June 15, 2014, a definitive investment agreement was signed between the Company and Lara, an Israeli company that operates
in the field of medical cannabis, which determined, among others, that the Company will invest in Lara up to a total of $1,500,
subject to the fulfillment of several prerequisites (the “Investment Agreement”). Under the Investment Agreement,
the Company undertook to transfer to Lara an initial investment amount of $800 in exchange for the issuance of 48% of Lara’s
issued and outstanding share capital (approximately 27% on a fully diluted basis). In May 2016, following various claims that
the parties held against each other, the Company and Lara signed a settlement and termination agreement (the “Settlement
Agreement”). Under the Settlement Agreement, the parties agreed that the Company will continue to hold approximately 27%
of Lara’s share capital, and that it will be released from making the remaining payments under the Investment Agreement
and all other terms of the Investment Agreement will have no further binding effect.
Pursuant
to the Settlement Agreement, the Company’s representative on Lara’s board of directors resigned. The Company also
forfeited its right to appoint a director. Accordingly, the Company no longer has significant influence over Lara. As of December
31, 2019, the balance of the investment in Lara was $0.
|
b.
|
Sale of Orimmune
Bio Ltd. and the Termination of the Hadasit License Agreement:
|
On
June 22, 2016, the Company entered into a share transfer agreement (the “Transfer Agreement”) with its then wholly
owned subsidiary, Orimmune Bio Ltd. (“Orimmune”) and Karma Link Ltd. (the “Buyer”), whereby the Company
would sell its interests in Orimmune to the Buyer, and also use its best efforts to transfer to and assign Orimmune its rights
in the Anti-CD3 technology (which was in-licensed by the Company during 2010 from Hadasit Medical Research Services & Development
Ltd. (“Hadasit”), and certain internally developed assets and technology relating thereto) (the “License”),
and also assist in obtaining all the necessary approvals for such technology transfer (including from Hadasit, but without undertaking
a commitment for the technology transfer, which required Hadasit’s pre-approval). In consideration of the forgoing, it was
agreed that the Company would be entitled to a predetermined rate (which is a low double-digit number) of all receipts which the
Buyer will receive from Orimmune or from third parties in connection with the sale of shares and/or assets of Orimmune, up to
an aggregate of approximately $10. For each receipt in excess of said aggregate amount, the Company will be entitled to a lower
rate determined therefrom (also a low double-digit number) (such rates shall be regarded herein after as the “Predetermined
Rates”).
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE 8:-
|
INVESTMENT IN
ASSOCIATES AND INVESTMENTS IN INVESTEES (CONT.)
|
|
b.
|
Sale of Orimmune
Bio Ltd. and the Termination of the Hadasit License Agreement: (Cont.)
|
In
August 2016, the Transfer Agreement was closed; and the Company sold and transferred its holding in Orimmune to the Buyer and
as a result of the loss of control, the Company recorded a capital gain in the amount of $34.
During
May 2017, the parties agreed to amend the Transfer Agreement (the “First Amendment”), under which the parties acknowledged
that the process of assigning the License and transferring the License, as contemplated in the Transfer Agreement, had yet to
mature into an agreement with Hadasit (by no fault of the Company). As a result, the Company agreed to bear certain expenses related
to the License incurred by the Buyer prior to the date of the First Amendment and additional such expenses expected during the
six-month period thereafter (and which otherwise would have had supposedly been borne by the Buyer), and which aggregated in the
total to approximately $75. The parties to the Transfer Agreement further agreed that in the event that the parties were unable
to successfully assign the License within said six-month period, the Company would be deemed to have satisfied its obligation
to use reasonable commercial efforts, in accordance with the Transfer Agreement. In consideration of the foregoing, the parties
agreed to increase the percentages of the Predetermined Rate of all receipts that the Buyer may receive from Orimmune or from
third parties in connection with the sale by the Buyer of Orimmune’s shares and/or assets.
After
not succeeding in assigning the License to the Buyer, on March 29, 2018, the Company and Hadasit signed a mutual termination agreement
of the License (the “Termination Agreement”), according to which, among others, the License (including the consulting
agreements associated with said License) was terminated as of that date, except for certain matters as prescribed thereunder.
In connection with the Termination Agreement, the Company paid Hadasit the outstanding amount owed and/or to be owed to Hadasit
under the License until terminated (which was later set as an amount of $104), and certain intellectual property (“IP”)
rights were assigned back to Hadasit and other IP rights had to be jointly registered, all pending the Israeli Innovation Authority’s
(“IIA”) approval, which was obtained in June 2018.
On
December 13, 2018, an additional amendment to the Transfer Agreement was signed (the “Second Amendment”) between the
parties, under which it was acknowledged that the Company’s termination of the License agreement with Hadasit was due to
Orimmune’s (and the Buyer’s) decision not to enter into a subsequent license agreement with Hadasit. Under that Second
Amendment, it was agreed that Orimmune (and the Buyer) will be assigned certain rights in IP related to the licensed technology
owned by the Company subject to certain conditions precedent which were still not met as of December 31, 2020. As of the Approval
Date, the Company received the approval of the IIA to complete the assignment and the Company is acting to complete the transaction.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE 8:-
|
INVESTMENT IN
ASSOCIATES AND INVESTMENTS IN INVESTEES (CONT.)
|
|
c.
|
Coeruleus - Joint
Venture Transaction
|
|
|
On
May 15, 2020, the Company entered into a series of transactions (together, the “Joint Venture Transaction”), including
a definitive share transfer agreement with Capital Point Ltd. (“Capital Point”), an Israeli holding company traded
on the TASE, and Evero, pursuant to which Capital Point sold to Evero 5,952,469 ordinary shares, NIS 0.01 par value each, of Coeruleus
Ltd. (the “Purchased Coeruleus Shares” and “Coeruleus,” respectively), an Israeli company and a subsidiary
of Capital Point (owns approximately 46%), engaged in, among others, developing innovative medications based on the active generic
substance flumazenil, including a sublingual spray to reduce the side effects of hypnotic sleep medication, and a sublingual spray
to improve function and quality of life in patients with hepatic encephalopathy. The Purchased Coeruleus Shares represented approximately
35% of the issued and outstanding share capital of Coeruleus. In consideration thereof, Evero issued and sold to Capital Point
176,470 ordinary shares, NIS 1.00 par value each, constituting 15% of the issued and outstanding share capital of Evero, which
was valued at $351, based on apportionment of the fair market value of the Company as reflected on Nasdaq as of May 15, 2020.
Following the transaction, Capital Point held approximately 11% of Coeruleus’ issued and outstanding share capital. The
transaction costs of $51 were also capitalized as part of the investment in associate.
|
As
part of the Joint Venture Transaction, the Company transferred to Evero its SCI-110 sleep technology, to be fully owned by Evero,
under the terms and conditions of an asset purchase agreement. In addition, the Company issued to Capital Point a warrant (the
“Capital Point Warrant”) to purchase $340 of ADSs of the Company. Pursuant to the terms of the Capital Point Warrant,
the exercise price per ADS is equal to the closing price of the Company’s ADSs on the trading day on which the notice of
exercise was actually received by the Company, and shall be paid by transferring to the Company a duly executed share transfer
deed for 9,577 ordinary shares of Evero. The Capital Point Warrant is exercisable for twelve months starting from the twelve-month
anniversary of the issuance date, which was May 15, 2020.
On
November 29, 2020, the shareholders of Coeruleus approved an investment from its shareholders of approximately $30. The
Company did not participate in this investment in Coeruleus and therefore, as of the completion of such financing, the
Company held less than 1% of the issued and outstanding shares of Coeruleus.
On July 10, 2017, effective
August 1, 2017, the Company entered into a three-year lease agreement with a third party (the “Period”) for an area
of approximately 205 square meters for the Company’s offices in the district of Tel Aviv (the City of Givatayim), Israel.
The yearly lease fee according was set at approximately $65, linked to the NIS. The lease expired on July 31, 2020. The Company
did not exercise its option to extend the Period until July 31, 2023.
On
September 1, 2020, the Company entered into a one-year lease agreement (“the 2020 Lease”) with a third party for an
area of approximately 100 square meters for the Company’s offices in the district of Tel Aviv, Israel. The Company has an option to extend for an additional five-year
term. The Company deemed this option as not-reasonably certain to be renewed. The yearly lease
fee was set at approximately $44, linked to the NIS.
Since the 2020 Lease has a duration of
no more than 12 months, the 2020 Lease was not recognized on the statement of financial position.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE 10:-
|
PROPERTY AND
EQUIPMENT, NET
|
|
|
Assets owned and used by the Company
|
|
|
Right-of-
use assets
|
|
|
|
|
|
|
Computers
|
|
|
Lab equipment
|
|
|
Office furniture and equipment
|
|
|
Leasehold
improvements
|
|
|
Motor vehicles
|
|
|
Leasehold office
|
|
|
Total
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2020
|
|
$
|
20
|
|
|
$
|
12
|
|
|
$
|
23
|
|
|
$
|
29
|
|
|
$
|
-
|
|
|
$
|
193
|
|
|
$
|
277
|
|
Effect of non-application of IFRS 16
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(193
|
)
|
|
|
(193
|
)
|
Purchases
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Disposals
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(29
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020
|
|
|
20
|
|
|
|
12
|
|
|
|
23
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2020
|
|
|
15
|
|
|
|
12
|
|
|
|
11
|
|
|
|
7
|
|
|
|
|
|
|
|
57
|
|
|
|
102
|
|
Effect of non-application of IFRS 16
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(57
|
)
|
|
|
(57
|
)
|
Depreciation
|
|
|
4
|
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
-
|
|
|
|
7
|
|
Disposals
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020
|
|
|
19
|
|
|
|
12
|
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciated cost at December 31, 2020
|
|
|
1
|
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2019
|
|
|
66
|
|
|
|
2,004
|
|
|
|
134
|
|
|
|
29
|
|
|
|
8
|
|
|
|
-
|
|
|
|
2,241
|
|
Effect of non-application of IFRS 16
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
193
|
|
|
|
193
|
|
Purchases
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
Disposals
|
|
|
(47
|
)
|
|
|
(1,992
|
)
|
|
|
(111
|
)
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
(2,158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
|
20
|
|
|
|
12
|
|
|
|
23
|
|
|
|
29
|
|
|
|
-
|
|
|
|
193
|
|
|
|
227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2019
|
|
|
16
|
|
|
|
97
|
|
|
|
16
|
|
|
|
4
|
|
|
|
1
|
|
|
|
-
|
|
|
|
134
|
|
Effect of non-application of IFRS 16
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
57
|
|
|
|
57
|
|
Depreciation
|
|
|
10
|
|
|
|
102
|
|
|
|
53
|
|
|
|
3
|
|
|
|
2
|
|
|
|
-
|
|
|
|
122
|
|
Disposals
|
|
|
(11
|
)
|
|
|
(187
|
)
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(211
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
|
15
|
|
|
|
12
|
|
|
|
11
|
|
|
|
7
|
|
|
|
-
|
|
|
|
57
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciated cost at December 31, 2019
|
|
$
|
5
|
|
|
$
|
-
|
|
|
$
|
12
|
|
|
$
|
22
|
|
|
$
|
-
|
|
|
$
|
136
|
|
|
$
|
175
|
|
Depreciation
expenses for the years ended December 31, 2020 and 2019, amounted to $7 and $67, respectively.
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accrued expenses
|
|
$
|
279
|
|
|
$
|
525
|
|
Open debts
|
|
|
277
|
|
|
|
339
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
556
|
|
|
$
|
864
|
|
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE 12:-
|
OTHER ACCOUNTS
PAYABLE
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Employees and payroll accruals
|
|
$
|
20
|
|
|
$
|
68
|
|
Accrued vacation
|
|
|
14
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34
|
|
|
$
|
108
|
|
NOTE 13:-
|
FINANCIAL INSTRUMENTS
|
|
a.
|
Classification of
financial assets and financial liabilities:
|
The
financial assets and financial liabilities in the consolidated statements of financial position are classified by groups of financial
instruments pursuant to IFRS 9, “Financial Instruments” (“IFRS 9”):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and restricted deposits
|
|
$
|
1,956
|
|
|
$
|
904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,956
|
|
|
|
904
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current financial liabilities carried at amortized cost
|
|
|
188
|
|
|
|
972
|
|
Credit from others, including short-term lease liability
|
|
|
-
|
|
|
|
67
|
|
Warrants liability
|
|
|
353
|
|
|
|
7
|
|
Lease liability
|
|
|
-
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
541
|
|
|
$
|
1,140
|
|
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE 13:-
|
FINANCIAL INSTRUMENTS
(CONT.)
|
|
b.
|
Convertible Debentures:
|
On
November 23, 2018 (the “Issuance Date”), the Company entered into a securities purchase agreement (the “Securities
Purchase Agreement”) and a registration rights agreement with YA II PN Ltd. (“Yorkville”), a fund
managed by Yorkville Advisors Global L.P., for the sale in a private placement of up to $2,500 in principal amount of unsecured
convertible debentures (the “Convertible Debentures”). Interest on the Convertible Debentures will accrue at a rate
of 5% per annum and can be repaid in cash with an addition of an 10% redemption premium upon the maturity date of the Convertible
Debentures, being 12 months from the issuance of each Convertible Debenture.
The
first tranche of $1,500 of the Convertible Debentures was issued on November 26, 2018. In addition, $78 was deducted due to issue
expenses, and Yorkville received 131 ADSs of the Company in return to additional commitment fees (valued at $75). Also, an additional
fee of $10 was deducted from the $1,500 due to payments to Yorkville’s legal counsels. Two additional tranches of $500 each
of the Convertible Debentures shall be purchased by Yorkville conditional on the passage of time and/or certain triggering events
as disclosed in the Securities Purchase Agreement. If the Company will not comply with the triggering events mentioned, the Company
will be deemed to be in default pursuant to the terms, and inter alia, the interest on the Convertible Debentures will accrue
up to a rate of 15% per annum. The Company shall pay Yorkville additional commitment fees upon issuance of each such tranche,
to be paid at the Company’s option in cash or ADSs of the Company. From and after the date of issuance of the Convertible
Debentures, the outstanding principal, together with accrued and unpaid interest, will be convertible, at the option of Yorkville,
into the Company’s ADSs at the lower of $7.00 or 95% of the lowest daily volume-weighted average price (“VWAP”)
during the five consecutive trading days immediately preceding the conversion date.
On
March 28, 2019, as part of a financing round (see Note 17e.1), Yorkville agreed to invest $250 by converting $250 of the principal
outstanding amount ($1,500) under the Convertible Debentures. As a result of the conversion, the Company issued to Yorkville 1,020
ADSs. In addition, as part of the financing round above-mentioned, the Company issued to Yorkville a warrant to purchase up to
765 ADSs.
Since
July 8, 2019, up until September 13, 2019, Yorkville converted the rest of the principal outstanding amount under the Convertible
Debentures, by converting $100 on July 8, 2019; $450 on July 23, 2019; $375 on August 30, 2019; and $325 on September 13, 2019
- refer to Note 17f for more information.
Valuation
process and techniques:
The
Company’s management considers the appropriateness of the valuation methods and inputs and may request that alternative
valuation methods are applied to support the valuation arising from the method chosen.
The
valuation of the Convertible Debentures was set in accordance with IFRS 9 and IAS 32, “Financial Instruments: Presentation”
(“IAS 32”). IFRS 9 and IAS 32 determine the accepted method in allocating the consideration received from a bundle
of securities. According to the guidelines of IFRS 9 and IAS 32, the allocation is based on the method of the remainder of consideration,
when there is a hierarchy regarding the financial instruments measured at fair value and the financial instruments recognized
as the remainder of consideration.
According
to IFRS 9 and IAS 32, the allocation is based on the following hierarchy:
|
-
|
Derivative and other
financial instrument measured at fair value through its contractual life.
|
|
-
|
Financial liabilities
and other complex instruments which are not recognized at fair value.
|
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE 13:-
|
FINANCIAL INSTRUMENTS
(CONT.)
|
|
b.
|
Convertible Debentures:
(Cont.)
|
IFRS
9 and IAS 32 also determine that a derivative which may be settled other than by the exchange of a fixed amount of cash or another
financial asset for a fixed number of the entity’s own equity instruments, will be defined as a financial liability, measured
and presented at fair value each period. Accordingly, and as mentioned in the Securities Purchase Agreement, in the event of conversion,
the number of shares to be issued is unknown (not fixed). Therefore, according to the definition mentioned above, the conversion
component is classified as a financial liability that will be measured at fair value, through profit or loss, as of the Issuance
Date and on any following financial reporting date (accordingly, issue expenses related to the derivative will be recorded through
profit or loss). The remainder of the consideration will be attributed to the debt component and no consideration will be left
to attribute to the equity instrument (issuance of 131 ADSs mentioned above).
The
valuation of the conversion component of Convertible Debentures was set at fair value, as required in IFRS 9, and in accordance
with IFRS 13, “Fair value measurement” (“IFRS 13”) and was categorized as Level 3 by the Company.
General
Overview of Valuation Approaches used in the Valuation:
Fair
value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
Economic
methodology:
The
convertible component was calculated using the Monte Carlo Simulation Model, an OPM which takes into account the parameters as
disclosed below for each period valuated, in which a valuation was performed at (i) the Issuance Date, (ii) each reporting date
and (iii) prior to each conversion.
Hereinafter
are the ranges of the parameters used:
The price of the ADS as of the valuation date ($)
|
|
164.5-238
|
|
The exercise price of the option (*) ($)
|
|
490
|
|
The expected volatility of the price of the ADS (%)
|
|
79.2-116.1
|
|
The risk-free interest rate for the option contractual term (%)
|
|
1.97-2.52
|
|
The expected dividends over the option’s expected term (%)
|
|
0
|
|
Maturity date
|
|
November 23,
2019
|
|
|
(*)
|
The
lower of $490.00 or 95% of the lowest daily VWAP during the five consecutive trading days immediately preceding the conversion
date.
|
Hereinafter
is the reconciliation of the fair value measurements (the conversion component of the Convertible Debentures) that are categorized
within Level 3 of the fair value hierarchy in financial instruments:
Balance at January 1, 2018
|
|
$
|
-
|
|
Issuance at November 23, 2018
|
|
|
745
|
|
Net change in fair value of the conversion component designated at fair value through profit or loss
|
|
|
(468
|
)
|
|
|
|
|
|
Balance at December 31, 2018
|
|
|
277
|
|
Net change in fair value of
the conversion component designated at fair value through profit or loss
|
|
|
(82
|
)
|
Conversion of the proportional part out of the conversion component
|
|
|
(195
|
)
|
|
|
|
|
|
Balance at December 31, 2019
|
|
$
|
-
|
|
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE 13:-
|
FINANCIAL INSTRUMENTS
(CONT.)
|
On
January 15, 2020, the Company entered into a bridge loan agreement (the “Bridge Loan”) with a third party, in which
the third party lent to the Company $50 (the “Bridge Loan Amount”). On April 17, 2020, the Bridge Loan Amount was
fully repaid by the Company, including interest in the amount of $2. Accordingly, the Bridge Loan was terminated with no further
effect.
On
September 8, 2020, the Company entered into a certain credit agreement (the “Credit Facility”), with M.R.M. Merchavit
Holdings and Management Ltd. (the “Lender”), whereby the Lender agreed to extend a line of credit to the Company in
the aggregate amount of $200, or the Credit Amount. According to the terms of the Credit Facility, $100 of the Credit Amount (the
“Loan Amount”), was immediately drawn on the date of the Credit Facility, and the remaining $100 was available be
drawn on an as-needed basis. The Loan Amount was due upon the earlier of one year from September 8, 2020 or at such time that
the Company raised $1,500. The Lender was entitled to a transaction and interest fee of $5 (plus VAT) that was offset from the
Credit Facility for the immediately drawn $100 and 5% from any additional withdrawal amount from the Credit Facility. On November
24, 2020, the Loan Amount was fully repaid by the Company.
On
March 19, 2020, the Company entered into a securities purchase agreement with Dekel Pharmaceutical Ltd. (“Dekel”)
pursuant to which Dekel agreed to invest in the Company through a private placement transaction (the “Private Placement”).
At the time of the Private Placement, Dekel was considered as a related party to the Company; however, it is no longer a related
party to the Company. In connection with the Private Placement, Dekel received convertible promissory notes (the “Notes”),
with an aggregate original principal amount of approximately $350, at an aggregate purchase price of $315 to be paid in several
tranches spread across a twelve-month period. In addition, the Company issued a warrant to purchase up to 4,490 ADSs of the Company
(the “Private Placement Warrant”) and 571 ADSs. The initial tranche of the Private Placement was for a principal amount
of $220 at a purchase price of $198. The Notes are unsecured, have a maturity date of March 23, 2021, bear interest at a rate
of 12% per annum, and may be converted, at the election of the holder, into ADSs at an initial conversion price of $24.50 per
ADS (the “Fixed Conversion Price”), subject to adjustments. After the six-month anniversary of the issuance of the
Notes, the conversion price shall be equal to the lower of the Fixed Conversion Price or 70% of the lowest trading price of the
ADSs as reported on Nasdaq or any exchange upon which the ADSs or ordinary shares of the Company are traded at such time, for
the 20 prior trading days including the day upon which a notice of conversion is received by the Company or its transfer agent.
The Private Placement Warrant is exercisable at any time on or after the actual closing date and on or prior to the close of business
on the five-year anniversary of the date of issuance, at an initial exercise price of $24.5 per ADS, subject to adjustment. On
November 8, 2020, the Notes was terminated and the initial tranche was fully repaid by the Company.
General
Overview of Valuation Approaches used in the Valuation:
Fair
value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE 13:-
|
FINANCIAL INSTRUMENTS
(CONT.)
|
Economic
methodology:
The
warrants’ fair value was calculated using the Black–Scholes OPM, which takes into account the parameters as
disclosed below for each period valuated, in which a valuation was performed at (i) the issuance date, and (ii) each reporting
date with the following assumptions:
|
|
December 31,
2020
|
|
|
March 23,
2020
|
|
Dividend yield (%)
|
|
|
0
|
|
|
|
0
|
|
Expected volatility (%)
|
|
|
132
|
|
|
|
122.01
|
|
Risk-free interest rate (%)
|
|
|
0.38
|
|
|
|
0.38
|
|
Underlying Share Price ($)
|
|
|
3.625
|
|
|
|
30.1
|
|
Exercise price ($)
|
|
|
24.5
|
|
|
|
24.5
|
|
Warrants fair value ($)
|
|
|
2.22
|
|
|
|
25.2
|
|
|
f.
|
Financial risk factors:
|
The
Company’s activities expose it to various financial risks such as market risks (foreign currency risk and interest risk),
credit risk and liquidity risk. The Company’s comprehensive risk management plan focuses on activities that reduce to a
minimum any possible adverse effects on the Company’s financial performance.
Risk
management is performed by management in accordance with the policies approved by the Company’s board of directors (the
“Board”). The Board establishes written principles for the overall risk management activities as well as specific
policies with respect to certain exposures to risks such as exchange rate risk, credit risk and the investments of surplus funds.
Foreign
currency risk:
The
Company is exposed to exchange rate risk resulting from the exposure to different currencies, mainly from transactions in NIS.
Exchange rate risk arises from recognized liabilities that are denominated in a foreign currency other than the functional currency.
All
cash and restricted deposits related to the Company are held in two banks in Israel which are considered financially solid.
The
Company monitors the risk of a shortage of funds on a regular basis and acts to raise funds to satisfy its liabilities. As of
December 31, 2020, the Company expects to settle all of its financial liabilities in less than one year.
The
carrying amounts of cash and restricted deposits, and all other financial assets and liabilities approximate their fair value.
Refer
to Note 1c for more information.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE 14:-
|
EMPLOYEE BENEFIT
LIABILITIES
|
Employee
benefits consist of short-term benefits and post-employment benefits.
Post-employment
benefits:
According
to the labor laws and the Israeli Severance Pay Law, 1963 (the “Severance Pay Law”), the Company is required to pay
compensation to an employee upon dismissal or retirement or to make current contributions in defined contribution plans pursuant
to Section 14 of the Severance Pay Law, as specified below. The Company’s liability is accounted for as a post-employment
benefit. The computation of the Company’s employee benefit liability is made in accordance with a valid employment contract
based on the employee’s salary and employment term which establish the entitlement to receive the compensation.
The
post-employment benefits are normally financed by contributions classified as defined benefit plans or as defined contribution
plans as detailed below.
Defined
contribution plans:
Section
14 of the Severance Pay Law applies to a substantial part of the compensation payments, pursuant to which the fixed contributions
paid by the Company into pension funds and/or policies of insurance companies release the Company from any additional liability
to employees for whom said contributions were made. These contributions and contributions for compensation represent defined contribution
plans.
|
|
Year ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Expenses in respect of defined contribution plans
|
|
$
|
52
|
|
|
$
|
50
|
|
|
$
|
65
|
|
NOTE 15:-
|
TAXES ON INCOME
|
|
a.
|
Tax rates applicable
to the Company:
|
The
Israeli statutory corporate tax rate and real capital gains tax rate were 23% in 2020, 2019, and 2018.
The
assessments of the Company are deemed final through the 2014 tax year.
In
addition, as of December 31, 2020, through the date of THR’s Dissolution, it met all reporting obligations.
|
c.
|
Carryforward tax
losses and other temporary differences:
|
The
Company has accumulated tax losses since its inception.
As
of December 31, 2020, the Company’s net carryforward tax losses are estimated to grow to approximately $43,000 ($39,000
as of December 31, 2019).
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE 16:-
|
CONTINGENT LIABILITIES,
COMMITMENTS, CLAIMS AND LIENS
|
|
a.
|
New License Agreement
with Ramot at Tel Aviv University Ltd.:
|
In
February 2016, the Company entered into an exclusive, irrevocable, worldwide research and license agreement with Ramot for a patent
application relating to methods for treatment of cognitive decline with low doses of THC (the “Ramot License Agreement”).
The Company undertook to pay certain expenses in relation to certain IP covered under the Ramot License Agreement, and to fund
further research in an amount of approximately $62. In addition, certain milestones fees and payments were set under the Ramot
License Agreement.
On
March 13, 2019, further to discussions between the Company and Ramot, the Company notified Ramot of its intent to terminate the
Ramot License Agreement, and it was effectively terminated on May 13, 2019, without any additional costs borne by the Company.
At the date of termination of the Ramot License Agreement and as of the Approval Date, the Company does not believe that said
termination will have a material effect on the Company’s operations and business.
|
b.
|
License Agreement
with Dekel Pharmaceuticals Ltd.:
|
In
May 2015, the Company entered into an exclusive, irrevocable, worldwide license agreement with Dekel for certain technology and
one granted U.S. patent related to compositions and methods for treating inflammatory disorders (the “Dekel License Agreement”).
The Dekel License Agreement became effective in August 2015.
Pursuant
to the Dekel License Agreement, the Company is obligated to pay Dekel fees based on specific milestones and royalties upon commercialization.
The milestone payments include: (i) $25 upon the successful completion of preclinical trials (which milestone was met in November
2016; this milestone was paid in cash in March 2017); (ii) $75 upon the successful completion of a Phase I/IIa trial; and (iii)
$75 upon the earlier of generating net revenues of at least $200 from the commercialization of the technology or the approval
of the U.S. Food and Drug Administration or the European Medicines Agency, of a drug based on the licensed assets. In each case,
and subject to the Company’s discretion, the respective milestone payments are payable in cash or equity based on a price
per ordinary share of NIS 0.5. The royalty payments are 8% for commercialization and 35% pursuant to a sub-license of the licensed
assets. The patent expiration dates of any patents maturing from this application would likely be 2029.
On
July 14, 2019, an amendment to the Dekel License Agreement was signed (the “Amendment”), which encompasses the
Company and Dekel’s original intention to exclude certain consumer packaged goods (meaning, inter alia, food, beverage,
cosmetics, pet products and hemp based products, which are sources of nutrients or other substances which may have a
nutritional effect) from the scope of the licensed products and the field of activity of the Company described in the Dekel
License Agreement. The parties agreed to amend the Dekel License Agreement to reflect the foregoing clarification, as well
as certain additional less material matters as discussed in the Amendment.
The
Amendment also prescribes for a specific development plan under the Dekel License Agreement requiring the Company to invest in
the licensed technology (as defined under the License Agreement) formulation development and maintenance a total annual investment
to be capped at $350. The Amendment also included a non-compete and non-solicitation obligation by Dekel and Dr. Ascher Shmulewitz,
the Company’s former Executive Chairman of the Board and former interim Chief Executive Officer, towards the Company’s
field of activity.
On
November 13, 2019, an additional milestone under the Dekel License Agreement, in the amount of $75, was reached upon the successful
completion of a Phase IIa clinical trial. The Company paid the milestone amount on April 13, 2020.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE 16:-
|
CONTINGENT LIABILITIES,
COMMITMENTS, CLAIMS AND LIENS (CONT.)
|
|
c.
|
License Agreement
with Yissum Research Development Company of the Hebrew University of Jerusalem Ltd. (“Yissum”):
|
On
July 29, 2018, the Company entered into an exclusive, worldwide, sublicensable, royalty-bearing license with Yissum for a license
to make commercial use of the licensed technology, in order to develop, obtain regulatory approvals, manufacture, market, distribute
or sell products, all within the field and the territory only, as determined in the agreement (the “Yissum License Agreement”).
According to the Yissum License Agreement, the Company shall pay Yissum royalties at the rates of future net sales, subject to
the royalty reductions as described in the Yissum License Agreement. The Company is also obligated to pay sublicense fees out
of the sublicense consideration. All right, title and interest in and to the Yissum License Agreement shall vest solely in Yissum,
and the Company shall hold and make use of the rights granted. All rights in the development results shall be solely owned by
the Company, except to the extent that an employee of Yissum, including the researcher, is considered an inventor of a patentable
invention arising from the development results, in which case such invention and all patent applications and/or patents claiming
such invention shall be owned jointly by the Company and Yissum, as appropriate, and Yissum’s share in such joint patents
shall be automatically included in the Yissum License Agreement.
|
d.
|
Investigator-initiated
study contract with Hannover Medical School:
|
On
April 11, 2017, the Company entered into an investigator-initiated study contract with Hannover Medical School (“MHH”)
to conduct during 2018 a phase IIb clinical trial titled “A Randomized, Double-Blind, Placebo controlled study to Evaluate
the Safety, Tolerability and Efficacy of Up to Twice Daily Oral SCI-110 in Treating Adults with Tourette Syndrome” in treating
approximately 20 Tourette syndrome subjects aged 18 to 65. Upon the execution of the agreement the Company paid the first installment
in the amount of $122 out of a total estimated amount of approximately $776. Due to regulatory and strategic reasons, the Company
decided to change the study design from investigator-initiated to an industry sponsored trial. During October 2017, a discussion
was carried out between the Company and MHH and the latter was informed about this change and a termination letter stating the
above was sent to MHH on November 19, 2017. MHH has acknowledged that part of the first instalment that was paid by the Company,
in accordance with the initial agreement, will be used to set-off amounts owed under a new agreement or will be paid back to the
Company.
On
August 13, 2018, the Company entered into an agreement with MHH to conduct a clinical investigation and laboratory services for
a randomized, double-blind, placebo-controlled proof of concept study to evaluate the safety, tolerability and efficacy of daily
oral SCI-110 in treating adults with Tourette syndrome in an estimated amount of $835.
|
e.
|
All
litigations and claims that were attributed to THR were settled or terminated prior to or following THR’s Dissolution (see
Note 4). As of December 31, 2020, there are no pending litigations or claims against the Company, which according to the best
knowledge and estimations of the Company’s management, require a provision as such.
|
|
f.
|
During October 2019,
the Company received a letter of demand from a former service provider (the “Service Provider”) outlining an alleged
debt of approximately $85. The Company rejects all such claims which are not supported by the facts and denies any outstanding
debt owed to the service provider by the Company and under the circumstances, the Company’s management estimates that
no provision is required as of December 31, 2020. In addition, as of the Approval Date, no formal claim was filed by the Service
Provider on this matter.
|
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
NOTE 16:-
|
CONTINGENT LIABILITIES,
COMMITMENTS, CLAIMS AND LIENS (CONT.)
|
|
g.
|
On July 23, 2020, the Company submitted to the Tel Aviv-Jaffa District Court (the “Court”) a petition pursuant to the Israeli Insolvency and Economic Rehabilitation Law, 2018, to commence proceedings for the economic rehabilitation of the Company (the “Petition”). In the Petition submitted to the Court, the Company stated that it is insolvent (as determined by the cash flow test) and unable to pay its debts to the Company’s creditors.
On August 6, 2020, L.I.A. Pure Capital Ltd. (“Pure Capital”) filed with the Court a demand, requesting an order to have the results of the Company’s annual general meeting held on August 4, 2020 declared invalid, mainly due to the Company’s reliance on discretionary voting of the depositary bank for the Company’s ADSs. The Court asked for the Company and directors’ response by no later than August 13, 2020, which was subsequently extended.
On August 11, 2020, Pure
Capital proposed to deposit $1,500 with the Company’s temporary trustee nominated by the Court to cover and pay all of
the Company’s debts, without derogating from any other creditor’s rights towards the Company (the “Pure
Capital Proposal”). The Pure Capital Proposal was made subject to the replacement of the Company’s Board as of
the date of the Pure Capital Proposal (the “Prior Board”) with Pure Capital’s designated nominees that were
voted upon at the adjourned annual general meeting of the Company’s shareholders on August 4, 2020 (as discussed
below). The Court issued an order on August 14, 2020 (the “Order”), approving the Pure Capital Proposal and
settlement agreement submitted to the Court by the parties thereto.
In accordance with the terms of the Order and following the deposit by Pure Capital, the Prior Board was replaced with: Itschak Shrem (chairman), Amity Weiss (also appointed to act as the Company’s Chief Executive Officer), Moshe Revach, Lior Amit, Lior Vider and Liat Sidi. Following the issuance of the Order, a related case that was filed by Pure Capital with the Court was withdrawn as well.
On December 15, 2020, Mr. Lior Amit tendered his resignation from the Board.
|
|
a.
|
Composition of share
capital:
|
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
Authorized
|
|
|
Issued and outstanding
|
|
|
Authorized
|
|
|
Issued and outstanding
|
|
|
|
Number of shares
|
|
Ordinary shares
|
|
|
1,800,000,000
|
|
|
|
145,148,593
|
|
|
|
15,000,000
|
|
|
|
11,439,401
|
|
Description
of ADSs:
The Bank of New York Mellon,
as depositary, registers and delivers the Company’s ADSs. Each ADS represents one hundred and forty (140) ordinary shares.
Each ADS will also represent any other securities, cash or other property which may be held by the depositary.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
|
a.
|
Composition of share
capital: (Cont.)
|
Reverse
Share Split
On
September 17, 2020, the Company convened a special general meeting of its shareholders, whereby the shareholders approved, inter
alia, (i) an increase to the Company’s share capital from 500,000,000 ordinary shares to 750,000,000 ordinary shares; and
(ii) a reverse split of the Company’s share capital up to a ratio of 20:1 (the “Reverse Split”).
On
October 16, 2020, the Company convened a special general meeting of its shareholders, whereby the shareholders approved an increase
to the Company’s share capital from 750,000,000 ordinary shares to 1,800,000,000 ordinary shares.
On
October 1, 2020, the Company’s Board resolved that the final ratio for the Reverse Split will be 20:1, which went effective
on October 16, 2020. Concurrently with the Reverse Split, a change to the ratio of its ADSs to its ordinary shares was effective
pursuant to which each ADS representing 40 ordinary shares changed to each ADS representing 140 ordinary shares. This resulted
in a reverse split on the Company’s American Depositary Receipt program. Consequently, all share numbers, share prices,
and exercise prices have been retroactively adjusted in these consolidated financial statements for all periods presented.
|
b.
|
Changes in share
capital:
|
Issued
and outstanding share capital:
|
|
Number of
ordinary shares
|
|
Balance at January 1, 2020
|
|
|
11,439,401
|
|
|
|
|
|
|
Issue of share capital - 2020 Financing Rounds (Note 17e)
|
|
|
125,375,916
|
|
|
|
|
|
|
Conversion of Warrants (Note 17e)
|
|
|
8,333,276
|
|
|
|
|
|
|
Balance at December 31, 2020
|
|
|
145,148,593
|
|
|
c.
|
Rights attached
to shares:
|
Voting
rights at the shareholders meeting, right to dividends, rights upon liquidation of the Company and right to nominate the directors
in the Company.
|
d.
|
Capital management
in the Company:
|
The
Company’s capital management objectives are to preserve the Company’s ability to ensure business continuity thereby
creating a return for the shareholders, investors and other interested parties. The Company is not under any minimal equity requirements
nor is it required to attain a certain level of capital return.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
|
1.
|
March 2019 Financing
Round:
|
On
March 28, 2019, the Company entered into a definitive securities purchase agreement (the “Purchase Agreement”) with
institutional investors to purchase (i) 9,184 of the Company’s ADSs, representing 1,285,760 ordinary shares, at a purchase
price of $245 per ADS, in a registered direct offering (the “Registered Direct Offering”); and (ii) warrants to purchase
up to 6,888 ADSs, representing 964,320 ordinary shares, with an initial exercise price of $245 per ADS (the “Warrants”),
in a concurrent private placement (the “March 2019 Financing Round” and, together with the Registered Direct Offering,
the “Offerings”). The March 2019 Financing Round included an investment from Yorkville that was made by converting
$250 of the principal outstanding amount under the Convertible Debentures (see Note 13b).
The
total gross proceeds to the Company from the Offerings was $2,000, not including the conversion above mentioned by Yorkville and
net of issue expenses in the total amount of $356, out of which $248 were attributed to the Registered Direct Offering and the
additional $108 were attributed to the Warrants. The closing of the sale of the ADSs and Warrants occurred on April 1, 2019.
The
ADSs issued under the Registered Direct Offering were issued pursuant to a prospectus supplement dated as of March 28, 2019, which
was filed with the SEC in connection with a takedown from the Company’s shelf registration statement on Form F-3, which
became effective on July 20, 2018.
The
Warrants which were issued in the March 2019 Financing Round, along with the ADSs issuable upon their exercise, were offered pursuant
to Section 4(a)(2) under the Securities Act of 1933, as amended, and Regulation D promulgated thereunder and may not be offered
or sold in the United States absent registration with the SEC or an applicable exemption from such registration requirements.
The
Warrants were immediately exercisable upon issuance for a period of three years, at an exercise price of $245 per share. In addition,
the Warrants have a cashless exercise mechanism (the “Cashless Mechanism”), which provides that if at any time after
the six months anniversary of their issuance there is no effective registration statement, or no current prospectus
available for the resale of the ADSs underlying the Warrants by the holder, then these Warrants may also be exercised, in whole
or in part, at such time by means of a “cashless exercise”.
On
August 22, 2019, the Company registered the resale of 6,566 ADSs underlying the Warrants. As of the Approval Date, none of the
Warrants were exercised.
Valuation
process and techniques:
The
Company’s management considers the appropriateness of the valuation methods and inputs and may request that alternative
valuation methods are applied to support the valuation arising from the method chosen.
The
allocation of the consideration received from the bundle of securities is based on the method of the remainder of consideration,
when there is a hierarchy regarding the financial instruments measured at fair value and the financial instruments recognized
as the remainder of consideration.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
|
e.
|
Financing Rounds:
(Cont.)
|
|
1.
|
March 2019 Financing
Round: (Cont.)
|
Valuation
of Warrants:
Since
the Warrants have a Cashless Mechanism, there is no certainty, at the time of signing the Purchase Agreement, regarding the number
of ADSs that will be issued, meaning the Warrants are defined as a financial liability, and therefore, will be calculated and
presented in fair value, upon the Issuance Date and at each reporting date that follows, unless the ADSs underlying the Warrants
will be registered for resale and as a result the Cashless Mechanism will be cancelled and accordingly the Company will have to
classify the Warrants as equity.
Valuation
of ADSs:
The
Company’s ADSs are an equity instrument which will set as the residual value of the proceeds, less the fair value of the
Warrants.
General
Overview of Valuation Approaches used in the Valuation:
Fair
value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
Economic
methodology:
The
Warrants fair value was calculated using the Black-Scholes OPM with the following assumptions:
|
|
March 28,
2019
|
|
|
August 22,
2019
|
|
|
December 31,
2020
|
|
Dividend yield (%)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Expected volatility (%)
|
|
|
70.12
|
|
|
|
84.97
|
|
|
|
189
|
|
Risk-free interest rate (%)
|
|
|
2.18
|
|
|
|
1.48
|
|
|
|
0.17
|
|
Expected life of Warrants (years)
|
|
|
3
|
|
|
|
2.58
|
|
|
|
1.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants fair value ($)
|
|
|
1.41
|
|
|
|
1.01
|
|
|
|
0.37
|
|
As
above-mentioned, on August 22, 2019 (the “Registration Date”), the Company registered for resale 459,640 ADSs underlying
the Warrants, and as a result of the registration, the Warrants were classified as equity at the fair value as of the Registration
Date which was $464.
Reconciliation
of the fair value measurements that are categorized within Level 3 of the fair value hierarchy in financial instruments:
Balance of liability due to Warrants at January 1, 2020
|
|
$
|
7
|
|
Reclassification of warrants to liability
|
|
|
464
|
|
Net change in fair value of the Warrant designated at fair value through profit or loss
|
|
|
(468
|
)
|
|
|
|
|
|
Balance of liability due to Warrants at December 31, 2020
|
|
$
|
3
|
|
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
|
e.
|
Financing Rounds:
(Cont.)
|
|
2.
|
December 2019 Financing
Round:
|
On
December 3, 2019, the Company entered into definitive securities purchase agreements with institutional investors to purchase
an aggregate 14,286 of the Company’s ADSs, representing 2,000,040 ordinary shares, at a purchase price of $87.5 per ADS
in a registered direct offering (the “December Registered Direct Offering”). The proceeds to the Company from the
December Registered Direct Offering were $1,029, net of issue expenses in the total amount of $221.
|
3.
|
April 2020 Financing
Round
|
On
April 1, 2020, the Company entered into a definitive securities purchase agreement (the “April 2020 Purchase Agreement”)
with institutional investors to purchase of 59,524 units, each consisting of (i) one pre-funded warrant to purchase one ADS and
(ii) one Series B warrant to purchase one ADS, at a purchase price of $20.993 per unit. The Series B warrants have an exercise
price of $30.10 per ADS, are exercisable upon issuance and expire five years from the date of issuance. The offering resulted
in gross proceeds to the Company of approximately $1,250. The closing of the sale of the securities took place on April 3, 2020.
After the closing of the April 2020 Purchase Agreement and until the Approval Date, all pre-funded warrants were exercised. In
addition, 59,524 of the Series B warrants were exercised pursuant to a cashless exercise mechanism as described in the April 2020
Purchase Agreement for no further consideration to the Company. As of the Approval Date, all Series B warrants were exercised.
The
Series B warrants are classified as a financial liability that will be measured at fair value, through profit or loss, as of the
issuance date and on any following financial reporting date (accordingly, issue expenses related to the Series B warrants will
be recorded through profit or loss). No consideration will be left to attribute to the pre-funded warrants, which is an equity
instrument.
The
valuation of the conversion component of the Series B warrants was set at fair value, as required in IFRS 9, and in accordance
with IFRS 13, and was categorized as Level 3 by the Company.
Hereinafter
is the reconciliation of the fair value measurements that are categorized within Level 3 of the fair value hierarchy in financial
instruments:
Balance at January 1, 2020
|
|
$
|
-
|
|
|
|
|
|
|
Issuance at April 3, 2020
|
|
$
|
1,250
|
|
Net change in fair value of the Series B warrants designated at fair value through profit or loss
|
|
|
172
|
|
Conversion part of Series B warrants
|
|
|
(1,422
|
)
|
|
|
|
|
|
Balance at December 31, 2020
|
|
$
|
-
|
|
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
|
e.
|
Financing Rounds:
(Cont.)
|
|
4.
|
November 2020 Financing
Round
|
On
November 20, 2020, the Company completed an offering for gross proceeds of $4,200 by way of the issuance of an aggregate of 835,447
units, each consisting of (i) one ADS and (ii) two warrants to purchase one ADS each, at a purchase price of $5.02 per
unit (“November 2020 Warrants”). The November 2020 Warrants have an exercise price of $5.02 per ADS, will
be exercisable upon issuance and will expire five years from the date of issuance.
The
November 2020 Warrants are classified as issued warrants in the Company’s equity.
|
f.
|
Additional issuance
of ordinary shares/ADSs:
|
Further
to the matter discussed in Note 13b, since July 8, 2019, up until September 13, 2019, Yorkville converted the rest of the
principal outstanding amount under the Convertible Debentures, by converting $100 on July 8, 2019; $450 on July 23, 2019; $375
on August 30, 2019; and $325 on September 13, 2019, in which following the conversions, the Company issued to Yorkville 8,151
ADSs, representing 1,141,140 ordinary shares. The total consideration, including the conversion of $250 as part of the 2019 March
Financing Round, was $1,507.
|
NOTE 18:-
|
SHARE-BASED PAYMENT
TRANSACTIONS
|
|
a.
|
The cost of share-based
payment recognized in the financial statements:
|
The
expenses due to share-based compensation for the years ended December 31, 2020, 2019 and 2018, recognized in the financial statements
in respect of the share option plan of the Company is shown in the following table, detailed by departments:
|
|
Year ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Research and development expenses
|
|
$
|
69
|
|
|
$
|
165
|
|
|
$
|
109
|
|
General and administrative expenses
|
|
|
22
|
|
|
|
388
|
|
|
|
495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
91
|
|
|
$
|
553
|
|
|
$
|
604
|
|
|
1.
|
The 2005 and 2015
ESOP of the Company:
|
During
2005, the Board adopted the 2005 Employees Share Option Plan (the “2005 ESOP”). Ten years later the Board adopted
a new plan - the 2015 Employees Share Option Plan (the “2015 ESOP”). Under both the 2005 ESOP and 2015 ESOP, the Company
may grant its employees and other service providers options to purchase the Company’s ordinary shares (“Share Options”).
On
November 13, 2019, the Board reserved an additional number of 950,000 Share Options for the purposes of the 2015 ESOP, bringing
the amount of Share Options reserved under the 2015 ESOP to 2,200,000, out of which a total of 1,410,000 were still available for
grant as of December 31, 2020.
Each
ADS option (“ADS Options”) granted under the 2015 ESOP represents one hundred and forty (140) Share Options and vice
versa.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
|
NOTE 18:-
|
SHARE-BASED PAYMENT
TRANSACTIONS (CONT.)
|
|
a.
|
The cost of share-based
payment recognized in the financial statements: (Cont.)
|
|
2.
|
On March 12, 2019,
the Board approved and granted 1,171 ADS Options (equal to 164,000 Share Options) under the 2015 ESOP to a new consultant
of the Company. The exercise price was set at $420.00 per ADS Option.
|
The
fair value for ADS Options granted to the consultant was estimated using the Black-Scholes OPM with the following parameters:
Dividend yield (%)
|
|
|
0
|
|
Expected volatility (%)
|
|
|
76
|
|
Risk-free interest rate (%)
|
|
|
2.61
|
|
Expected life of share options (years)
|
|
|
10
|
|
The
fair value of the ADSs options was set at $224 per ADS Option.
|
3.
|
On October 10, 2019
(the “Grant Date”), the Board approved the grant of 10,129 ADS Options (equal to 1,418,060 Share Options) under
the 2015 ESOP to directors, officers and employees, some of which required the approval of the general meeting of the Company’s
shareholders (the “General Meeting”), which occurred on January 15, 2020. Following the resignation of some directors
and employees on December 31, 2019, 2,143 ADS Options (equal to 300,020 Share Options) were not granted. Out of the 7,986
ADS Options that were granted, 1,395 ADS Options didn’t require the General Meeting’s approval. The date of commencement
for all ADS Options granted, the date on which the vesting started, was the Grant Date. The exercise price was set at $210.00
per ADS Option.
|
According
to IFRS 2, “Share-based Payment”, the fair value of the ADS Options was estimated using the Black-Scholes OPM,
in which the fair value estimation for the ADS Options which required the General Meeting’s approval was calculated based
on parameters as of December 31, 2019.
Based
on the above-mentioned, hereinafter are the parameters used in order to estimate the fair value of the ADS Options using the Black-Scholes
OPM:
|
|
October 10,
2019
|
|
|
December 31,
2019
|
|
Underlying ADS price
|
|
|
154
|
|
|
|
78.12
|
|
Dividend yield (%)
|
|
|
0
|
|
|
|
0
|
|
Expected volatility (%)
|
|
|
70
|
|
|
|
73
|
|
Risk-free interest rate (%)
|
|
|
1.67
|
|
|
|
1.91
|
|
Expected life of share options (years)
|
|
|
10
|
|
|
|
9.78
|
|
The
fair value of the ADSs options approved on October 10, 2019 by the Board, and on January 15, 2020 at the General Meeting (valuated
as of December 31, 2019) was set at $114.1 and $51.1, per ADS Option, respectively.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
|
NOTE 18:-
|
SHARE-BASED PAYMENT
TRANSACTIONS (CONT.)
|
|
b.
|
Movement during
the year:
|
|
1.
|
The following table
lists the number of Share Options or ADS Options, the weighted average exercise prices of Share Options or ADS Options and
changes in directors (and former directors), officers, employees and consultants Share Options or ADS Options during the years
ended on December 31, 2020 and 2019:
|
|
|
Number of
Share Options
|
|
|
Weighted
average
exercise
price
|
|
|
Number of
ADS Options
|
|
|
Weighted
average
exercise
price
|
|
2020
|
|
|
|
|
USD
|
|
|
|
|
|
USD
|
|
Share/ADS Options outstanding at the beginning of the year
|
|
|
2,101,402
|
|
|
$
|
2.41
|
|
|
|
15,010
|
|
|
$
|
337.40
|
|
Share/ADS Options granted during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Share/ADS Options forfeited during the year
|
|
|
(1,311,402
|
)
|
|
|
2.50
|
|
|
|
(18,734
|
)
|
|
|
175.00
|
|
Share/ADS Options expired during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share/ADS Options outstanding at the end of the year
|
|
|
790,000
|
|
|
|
2.41
|
|
|
|
11,285
|
|
|
|
168.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share/ADS Options exercisable at the end of the year
|
|
|
498,660
|
|
|
|
3.41
|
|
|
|
7,120
|
|
|
|
168.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share/ADS Options outstanding at the beginning of the year
|
|
|
890,652
|
|
|
$
|
3.00
|
|
|
|
6,361
|
|
|
$
|
432.60
|
|
Share/ADS Options granted during the year
|
|
|
1,282,000
|
|
|
|
1.60
|
|
|
|
9,157
|
|
|
|
236.60
|
|
Share/ADS Options forfeited during the year
|
|
|
(18,750
|
)
|
|
|
2.80
|
|
|
|
(134
|
)
|
|
|
392.00
|
|
Share/ADS Options expired during the year
|
|
|
(52,500
|
)
|
|
|
3.80
|
|
|
|
(375
|
)
|
|
|
532.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share/ADS Options outstanding at the end of the year
|
|
|
2,101,402
|
|
|
|
2.41
|
|
|
|
15,010
|
|
|
|
337.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share/ADS Options exercisable at the end of the year
|
|
|
828,484
|
|
|
|
3.41
|
|
|
|
5,918
|
|
|
|
467.60
|
|
|
2.
|
The
weighted average fair value of Share Options and ADS Options granted during 2019 was 0.6 and 84, respectively. No Share/ADS Options
were granted during 2020.
|
|
3.
|
The
weighted average remaining contractual life of the Share/ADS Options outstanding was 5 years and 7.47 years as of December 31,
2020 and 2019, respectively.
|
|
4.
|
The
range of exercise prices of Share Options outstanding at the end of the year was $1.50 - $6.43 (inclusive)_as of December 31,
2020, and $1.50 - $6.20 (inclusive) as of December 31, 2019.
|
The
range of exercise prices of ADS Options outstanding at the end of the year was $210 - $900.20 (inclusive) as of December 31, 2020,
and $210 - $868 (inclusive) as of December 31, 2019.
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
|
NOTE 19:-
|
ADDITIONAL INFORMATION
TO THE ITEMS OF PROFIT OR LOSS
|
|
|
|
Year ended
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
a.
|
Research and development expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages and related expenses
|
|
$
|
322
|
|
|
$
|
435
|
|
|
$
|
667
|
|
|
Share-based payment
|
|
|
69
|
|
|
|
165
|
|
|
|
109
|
|
|
Regulatory, professional and other expenses
|
|
|
119
|
|
|
|
437
|
|
|
|
595
|
|
|
Research and preclinical studies
|
|
|
139
|
|
|
|
277
|
|
|
|
593
|
|
|
Clinical studies
|
|
|
-
|
|
|
|
240
|
|
|
|
692
|
|
|
Chemistry and formulations
|
|
|
-
|
|
|
|
85
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
649
|
|
|
|
1,639
|
|
|
|
2,710
|
|
b.
|
General and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages and related expenses
|
|
|
237
|
|
|
|
382
|
|
|
|
761
|
|
|
Share-based payment
|
|
|
22
|
|
|
|
388
|
|
|
|
495
|
|
|
Professional and directors’ fees
|
|
|
1,283
|
|
|
|
1,065
|
|
|
|
1,154
|
|
|
Business development expenses
|
|
|
58
|
|
|
|
387
|
|
|
|
1,323
|
|
|
Regulatory expenses
|
|
|
98
|
|
|
|
112
|
|
|
|
72
|
|
|
Office maintenance, rent and other expenses
|
|
|
182
|
|
|
|
72
|
|
|
|
198
|
|
|
Investor relations and business expenses
|
|
|
22
|
|
|
|
63
|
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,902
|
|
|
|
2,469
|
|
|
|
4,371
|
|
c.
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
160
|
|
|
Impairment of investment in associate
|
|
|
742
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
742
|
|
|
|
-
|
|
|
|
160
|
|
d.
|
Finance income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in fair value of financial liabilities designated at fair value through profit or loss
|
|
|
(630
|
)
|
|
|
(292
|
)
|
|
|
(468
|
)
|
|
Exchange rate differences, net
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
(303
|
)
|
|
Finance income from the convertible loan
|
|
|
-
|
|
|
|
(11
|
)
|
|
|
(35
|
)
|
|
Intercompany finance income
|
|
|
-
|
|
|
|
-
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(630
|
)
|
|
|
(305
|
)
|
|
|
(828
|
)
|
e.
|
Finance expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance expenses due to the convertible debentures
|
|
|
-
|
|
|
|
536
|
|
|
|
112
|
|
|
Issue expenses related to convertible component and warrants
|
|
|
835
|
|
|
|
108
|
|
|
|
-
|
|
|
Exchange rate differences, net
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
Interest expense in respect of leases
|
|
|
7
|
|
|
|
19
|
|
|
|
-
|
|
|
Finance expenses from interest and commissions
|
|
|
18
|
|
|
|
13
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
872
|
|
|
$
|
676
|
|
|
$
|
121
|
|
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
|
NOTE
20:-
|
LOSS
PER SHARE/ADS
|
|
a.
|
Details of the number
of shares and loss used in the computation of loss per share:
|
|
|
Year ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Amounts used in the computation of basic and diluted loss
|
|
Weighted
number of
shares (*)
|
|
|
Loss
|
|
|
Weighted
number of
shares (*)
|
|
|
Loss
|
|
|
Weighted
number of
shares (*)
|
|
|
Loss
|
|
|
|
In
thousands
|
|
|
USD
|
|
|
In
thousands
|
|
|
USD
|
|
|
In
thousands
|
|
|
USD
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
|
36,143
|
|
|
|
(3,482
|
)
|
|
|
8,580
|
|
|
$
|
(4,479
|
)
|
|
|
6,996
|
|
|
$
|
(6,534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of potential dilutive ordinary shares
|
|
|
964
|
|
|
|
(468
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
972
|
|
|
|
(395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
|
37,107
|
|
|
|
(3,950
|
)
|
|
|
8,580
|
|
|
|
(4,479
|
)
|
|
|
7,968
|
|
|
|
(6,929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted loss per share
|
|
|
-
|
|
|
|
-
|
|
|
|
8,580
|
|
|
|
(315
|
)
|
|
|
6,996
|
|
|
|
(1,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of potential dilutive ordinary shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
972
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
|
-
|
|
|
$
|
-
|
|
|
|
8,580
|
|
|
$
|
(315
|
)
|
|
|
7,968
|
|
|
$
|
(1,989
|
)
|
|
b.
|
The computation
of diluted loss per share or ADS did not include the following convertible securities since their inclusion would decrease
the loss per share (anti-dilutive effect):
|
|
1.
|
Ordinary share or
ADS Options to employees, officers, directors and consultants; and
|
|
2.
|
Non-marketable warrants
to investors.
|
|
NOTE 21:-
|
OPERATING SEGMENTS
|
The
Company applies the principles of IFRS 8, “Operating Segments” (“IFRS 8”), regarding
operating segments. The segment reporting is based on internal management reports of the Company’s management, which are
regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated and assess performance.
According to the principles of IFRS 8, the Company’s management determined that as of December 31, 2020, the Company has
one reportable segment - development of drugs based on cannabinoid molecules to be approved by an official regulatory authority
(the Company’s operation). The pain clinic services segment, including lab services (THR’s operation), was terminated
on March 26, 2019 (see Note 4).
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
|
NOTE 22:-
|
TRANSACTIONS
AND BALANCES WITH RELATED PARTIES
|
|
a.
|
Balances with related
parties:
|
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
Key
management
personnel
|
|
|
Other
related
parties
|
|
|
Key
management
personnel
|
|
|
Other
related
parties
|
|
Current liabilities
|
|
$
|
59
|
|
|
$
|
-
|
|
|
$
|
208
|
|
|
$
|
-
|
|
|
b.
|
Transactions with
related parties (not including amounts described in Note 22c):
|
|
|
Year ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Research and development expenses
|
|
$
|
-
|
|
|
$
|
75
|
|
|
$
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
769
|
|
|
c.
|
Benefits to key
management personnel (including directors):
|
|
|
Year ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Short-term benefits
|
|
$
|
746
|
|
|
$
|
948
|
|
|
$
|
1,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of share-based payment
|
|
$
|
91
|
|
|
$
|
275
|
|
|
$
|
520
|
|
SCISPARC
LTD. (FORMERLY THERAPIX BIOSCIENCES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USD in thousands (except share data)
|
NOTE 23:-
|
EVENTS AFTER
THE REPORTING DATE
|
|
a.
|
On
January 7, 2021, the general meeting of the Company’s shareholders approved the election of Mr. Amnon Ben Shay and Mr.
Alon Dayan to serve as external directors of the Company, for a three-year term commencing as of the date of such
meeting.
|
|
b.
|
On March 2, 2021,
the general meeting of the Company’s shareholders approved amendments to the Company’s Amended and Restated Articles
of Association to eliminate the par value of the Company’s ordinary shares and to increase the Company’s share
capital to 3,600,000,000 ordinary shares.
|
|
c.
|
On
March 4, 2021, the Company completed a private offering with several accredited and institutional investors for gross
proceeds of $8,150, providing for the issuance of an aggregate of 1,152,628 units, as follows: (a) 916,316 units at a
price of $7.07 per unit, consisting of (i) one ADS of the Company, and (ii) a Series A Warrant to purchase an equal number
of units purchased (the “2021 Series A Warrant”) and a Series B Warrant (the “2021 Series B Warrant”)
to purchase half the number of units (the “Ordinary Warrants”), and (b) 236,312 pre-funded units at a price
of $7.069 per unit, consisting of (i) one pre-funded warrant to purchase one ADS and (ii) one 2021 Series A Warrant and
one 2021 Series B Warrant.
The
Series A Warrant have an exercise price of $7.07 per ADS and the Series B Warrants have an exercise price
of $10.60 per ADS. Both the Series A Warrants and the Series B Warrants are exercisable six months from the date of
issuance and will expire five years from the date of issuance.
The
offering resulted in gross proceeds to the Company of approximately $8,150.
|
-
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F-51
Therapix Biosciences (NASDAQ:TRPX)
Gráfico Histórico do Ativo
De Mai 2024 até Jun 2024
Therapix Biosciences (NASDAQ:TRPX)
Gráfico Histórico do Ativo
De Jun 2023 até Jun 2024