B.   LIQUIDITY AND CAPITAL RESOURCES

 

Since our inception, we have generated significant losses and expect to continue to generate losses for the foreseeable future. As of December 31, 2008, we had an accumulated deficit of $45 million. We have funded our operations primarily through the proceeds from the sales of our equity securities. Through December 31, 2008, we had received aggregate gross proceeds of approximately $60.7 million from the sales of our equity securities. As of December 31, 2008, we had cash, cash equivalents, short-term bank deposit and marketable securities of $15.7 million, compared to $24.3 million as of December 31, 2007.

 

D.   TREND INFORMATION

 

See “Item 5. Operating and Financial Review and Prospects.”

 

E.   OFF-BALANCE SHEET ARRANGEMENTS

 

We are not party to any material off-balance-sheet arrangements.

 

F.   TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

 

Set forth below is a description of our contractual cash obligations as of December 31, 2008. Operating and capital lease obligations consist of rent payable under our existing facility leases and lease payments for company automobiles and equipment. Other long-term obligations consist of cash obligations under various license agreements.

 

		Total				2009				2010				2011				2012				2013				Thereafter
		(In thousands)
Operating and capital lease obligations		$	2,756			$	985			$	750			$	403			$	372			$	246			$	-
Other long-term liabilities		$	4,977			$	150			$	189			$	228			$	253			$	253			$	3,904

ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A.  DIRECTORS AND SENIOR MANAGEMENT

 

The following table sets forth information regarding our executive officers and directors:

 

Name		Age		Position
Amir Avniel		36		Chief Executive Officer and President
Ronen Tamir		42		Chief Commercialization Officer
Dalia Cohen, Ph.D.		57		Chief Scientific Officer
Ranit Aharonov, Ph.D.		39		Executive Vice President, R&D, Head of Computational Biology
Ayelet Chajut, Ph.D.		46		Executive Vice President, R&D, Head of Molecular Biology
Limor Zur-Stoller		40		Vice President Finance
Tami Fishman Jutkowitz		33		General Counsel
Yoav Chelouche(2)(3)		55		Chairman of the Board
Isaac Bentwich, M.D.		47		Director
Prof. Moshe Many, M.D.(1)		80		Director
Simcha Sadan, Ph.D.		68		Director
Joshua Rosensweig, Ph.D.		56		Director
Gerald Dogon(1)(2)(3)		69		External Director
Tali Yaron-Eldar(1)		45		External Director

 

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(1)           Member of our Audit Committee

 

(2)           Member of our Compensation Committee

 

(3)           Member of our Nominating and Corporate Governance Committee

 

Amir Avniel has served as our Chief Executive Officer since April 2006 and as President since May 2005. Mr. Avniel joined us in May 2001 and previously held other senior management positions, including Chief Technology Officer and Chief Operating Officer. Mr. Avniel is responsible for the overall planning and execution of our operations, business development, technology and research and development efforts. He also coordinates the development of agreements and collaborations between us and other industry leaders. He has been named co-author of 20 patent applications. Mr. Avniel studied computer science at the Academic College of Tel Aviv - Jaffa, Israel. Prior to his academic studies, he served as an officer in the Israel Defense Force, where he was awarded four commendations for excellence.

 

Ronen Tamir has served as our Chief Commercialization Officer since September 2008. Mr. Tamir joined us in December 2007 and held the position of Vice President, Marketing and Communication until September 2008. Prior to joining us, he was Vice President, Investor Relations for North America at Novartis AG. While Mr. Tamir was at Novartis, Novartis significantly increased its North American shareholder base and his team won numerous awards, including the “Best European IR Team in North America for 2005” by IR magazine, the “Silver Anvil” award by the Public Relations Society of America, and the “Big Apple - Best of the Best” award by the Institution of Public Relations, for an investor relations campaign in 2006. Prior to joining Novartis in 2004, Mr. Tamir held several key positions at Serono, including Director of Business Intelligence for North America and Global Product Manager, Neurology, in Geneva, Switzerland, where he oversaw the global launch of Rebif, the leading therapy for Multiple Sclerosis. In addition, Mr. Tamir was the Regional Product Manager for Neurology and Metabolism for Serono’s Intercontinental Business Operations. Ronen holds a degree in Biology from Bar-Ilan University in Israel and an MBA from Warwick Business School in the UK.

 

Dalia Cohen, Ph.D. has served as our Chief Scientific Officer since February 2008. Dr. Cohen joined us in August 2006 and held the position of Executive Vice President, Global Head of Research and Development until February 2008. Prior to joining us, Dr. Cohen served in several executive positions at Novartis AG. From May 2005 to June 2006, Dr. Cohen served as Vice President and Global Head for Strategic and Enabling Technologies and Molecular Medicine, at the Novartis Institute for Biomedical Research. From October 1998 to April 2005, Dr. Cohen established and served as Vice President and Global Head of the Functional Genomics Department at the Novartis Institute for Biomedical Research. From 1997 to 1998, Dr. Cohen served as Executive Director and Senior Expert of Molecular and Cellular Biology at Novartis Pharma Research. From 1992 to 1996, Dr. Cohen was a Research Fellow in the Oncology Department at Sandoz Pharmaceutical Corporation, and from 1986 to 1992, Dr. Cohen was a Research Associate in the Department of Molecular Pharmacology at the Albert Einstein College of Medicine. In addition, Dr. Cohen is an Adjunct Professor at the University of Medicine and Dentistry of New Jersey-Robert Wood Johnson Medical School. Dr. Cohen received her Ph.D. in Cell Biology from the Faculty of Medicine at Technion, Israel Institution of Technology and has published more than 70 scientific articles.

 

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Ranit Aharonov, Ph.D. has served as our Executive Vice President, R&D, Head of Computational Biology since February 2008. Dr. Aharonov joined us in March 2003 and previously held other positions, including Executive Vice President of IP and Computational Biology, Vice President of Research and Product Strategy, Vice President, Research and Director, Algorithms. Prior to joining us, from October 1998 until September 2002, Dr. Aharonov taught Neural Computation-related courses at the Hebrew University of Jerusalem. She is the author of nine papers published in peer reviewed journals and the co-author of 31 patent applications, and was an adjunct lecturer in Neural Network Theory and Applications at the Brain Science Institute of Bar-Ilan University. Dr. Aharonov earned her Ph.D. in Neural Computation from the Hebrew University in Jerusalem.

 

Ayelet Chajut, Ph.D. has served as our Executive Vice President, R&D, Head of Molecular Biology since February 2008. Dr. Chajut joined us on June 2006 and previously held several positions including Vice President of Genomics and Vice President of Diagnostics . Prior to joining us, from February 1999 until May 2005, Dr. Chajut held different positions at Quark Biotech, Inc., including Vice President of Research from March 2003 until May 2005. Dr. Chajut continued to serve as a general consultant to Quark Biotech, Inc. from May 2005 until December 2005. From May 2005 until April 2006, Dr. Chajut was the Director of Research and Development at Quantomix. She is the author of ten papers published in peer reviewed journals and the co-author of 4 patent applications. Dr. Chajut earned her Ph.D. in Molecular Biology of Lenti-viruses from the Department of Human Microbiology, Tel-Aviv University and did her Post Doctoral studies from 1994 through 1997 in the Department of Cell Research and Immunology, Faculty of Life Sciences, Tel-Aviv University.

 

Limor Zur-Stoller has served as our Vice President of Finance since November 2008. Prior to joining us, Ms. Zur-Stoller  served as GammaCan International Inc.'s Chief Financial Officer from March 2008 until November 2008. From November 2001 until March 2008, Ms. Zur-Stoller worked at RadView Software Ltd., including as Vice President of Finance (August 2006 - March 2008). Director of Finance (July 2004 - August 2006) and Controller (November 2001 -July 2004).  From December 1997 until June 2001, Ms. Zur-Stoller served as the International Controller at Check Point Software Technologies Ltd.  From June 1994 until December 1997, Ms. Zur-Stoller was an auditor with the accounting firm of Deloitte Brightman Almagor, a member of Deloitte Touche Tohmatsu.  Ms. Zur-Stoller received a B.A. in accounting and economics from Tel Aviv University and an M.B.A. in finance and accounting from The College of Management in Israel and is a Certified Public Accountant.

 

Tami Fishman Jutkowitz has served as our General Counsel since February 2006. Previous to joining us, she served as legal counsel to Applied Materials Inc, the Israeli subsidiary of Applied Materials Inc. from December 2004 until February 2006. From August 2000 until December 2004, Ms. Jutkowitz was an associate in the law firm Tulchinski Stern and Co.  Ms. Jutkowitz has an LLB in law studies from the Bar Ilan University and an M.B.A. in finance from the Bar Ilan University.

 

Yoav Chelouche has served as Chairman of our board of directors since April 2006, and as a member of our board of directors since 2003. Mr. Chelouche has over 20 years of experience in leadership and management within the high technology sector. Since 2001, Mr. Chelouche has been a managing partner of Aviv Venture, an Israel-based technology venture capital fund. From 1995 to 2001, he served as President and Chief Executive Officer of Scitex Corp., a leader in digital imaging and printing systems. From 1980 to 1995, he held several management positions at Scitex, including Vice President, Strategy and Business Development, Vice President Marketing and Vice President, Finance - Europe. Mr. Chelouche holds an MBA from INSEAD, Fontainebleau, France and a B.A. in Economics and Statistics from Tel Aviv University, Israel.

 

Isaac Bentwich, M.D. , our founder, has been a member of our board of directors since our inception in 2000. He also served as our Chief Executive Officer from inception to May 2005, as the Chairman of our board of directors from inception to April 2006 and as our Chief Architect from May 2005 to May 2009 . Dr. Bentwich is a physician by training and an entrepreneur. Prior to founding Rosetta Genomics, Dr. Bentwich was Executive Vice President of Physician’s Solutions at HBOC, now a part of McKesson Corporation, a healthcare services company. Dr. Bentwich joined HBOC in 1995, when it acquired Pegasus Medical Ltd., an Israeli medical-informatics company he founded and led. He is the co-author of 45 patent applications. Dr. Bentwich holds an M.D. from Ben-Gurion University of the Negev.

 

Prof. Moshe Many, M.D., Ph.D . has served as a member of our board of directors since December 2003. A surgeon by training, Prof. Many has served as Chairman of the Research and Development Committee of Teva Pharmaceutical’s board of directors since 1991. He formerly served as Chairman of Surgery and Chief of Urology at the Sheba Medical Center, after which he was appointed to serve as President of Tel Aviv University from 1983 through 1991. He now serves as President of Ashkelon Academic College. Prof. Many holds an M.D. from the Geneva University, and a Ph.D. from Tufts University.

 

Simcha Sadan, Ph.D. has served as a member of our board of directors since December 2006. Dr. Sadan has been serving as the Chairman of the Board of Club Hotel Europe Ltd. and of Premier Club Ltd. Dr. Sadan has also served as an alternate director at several public companies, such as, Shaniv Household Paper Industry Limited, Haribua Hakachol, Telkoor Telecom Ltd. and others. Dr. Sadan also held different executive and consultancy positions and was also a member of governmental and professional committees. Dr. Sadan had been a member of the Faculty of Management at Tel Aviv University. Dr. Sadan holds a Ph.D. in Business Administration from the University of California, Berkeley, M.B.A. majoring in accounting and finance and B.A in Economics and Statistics from the Hebrew University and an L.L.B. from the Faculty of Law at Tel-Aviv University.

 

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Joshua Rosensweig has served as a member of our board of directors since May 2004. From September 2003 to September 2006, Dr. Rosensweig served as the Chairman of the board of directors of the First International Bank of Israel. Since 2003, he has also served as member of the board of directors of Plastro Irrigation Systems Ltd. From 1998 to July 2005, Dr. Rosensweig was a senior partner at Gornitzky and Co., a law firm where he specialized in international transactions and taxation, and where he now serves as of counsel. Dr. Rosensweig lectured at Bar-Ilan University, Law School from 1980 to 1995 and at Tel Aviv University, School of Business from 1983 to 1995. Dr. Rosensweig received his J.S.D. (International Taxation), and LL.M. (Taxation) from New York University Law School.

 

Gerald Dogon has served as a member of our board of directors since February 2007. Since December 2007, Mr. Dogon has served as a member of the board of directors of Fundtech Ltd. and also serves as member of its Audit and Nominating Committees. From December 2004 to December 2006, Mr. Dogon served as a director and a member of the audit, investment and nomination committees of Scailex Corporation (previously Scitex Corporation). From October 2005 until it was acquired by PMC-Sierra, Inc. in May 2006, he served as member of the board of directors of Passave, Inc., a semiconductor company. From 1999 to 2000, he served as a director and as chairman of the audit committee of Nogatech, Inc. From 1994 to 1998, Mr. Dogon served as Executive Vice President and Chief Financial Officer of DSPC Inc., and from November 1997 until December 1999, he served as a director of DSPC Inc. Mr. Gerald holds a B.A. in Economics from the University of Cape Town.

 

Tali Yaron-Eldar has served as a member of our board of directors since February 2007. Since January 2004, Ms. Yaron-Eldar has served as the Chief Executive Officer of Arazim Investment Company. In addition, since March 2007, she has been a partner with the law firm of Tadmor & Co. From January 2004 to March 2007, Ms. Yaron-Eldar was a partner with the law firm Cohen, Yaron-Eldar & Co. Ms. Yaron-Eldar, has also served in a variety of public positions, including as the Chief Legal Advisor of the Customs and V.A.T department of the Finance Ministry of the State of Israel from 1998 to 2001 and as the Commissioner of Income Tax and Real Property Tax Authority of the State of Israel from 2002 to 2004. Ms. Yaron-Eldar holds an MBA specializing in finance and an LL.M. from Tel Aviv University and is a member of the Israeli Bar Association

 

B.  COMPENSATION

 

The aggregate direct compensation we paid to our executive officers as a group (nine persons) for the year ended December 31, 2008 was approximately $1,422,000 of which approximately $105,000 was set aside or accrued to provide for pension, retirement, severance or similar benefits. These amounts do not include expenses we incurred for other payments, including dues for professional and business associations, business travel and other expenses, and other benefits commonly reimbursed or paid by companies in Israel. We also paid one-time bonuses to five of our executive officers in the aggregate amount of $209,000 upon performance during 2008. During 2008 we paid $221,000 direct compensation to Dr. Isaac Bentwich, our founder and a member of our board of directors, of which approximately $24,080 was set aside or accrued to provide for pension, retirement, severance or similar benefits.

 

We paid an aggregate of $109,300 in direct compensation to our directors other than our Chairman, Yoav Chelouche, for their services as directors for the year ended December 31, 2008. We paid $84,000 to Mr. Chelouche in 2008 for services rendered in 2008 as the Chairman of our board of directors. We have entered into an agreement with Yoav Chelouche to serve as Chairman of our board of directors. Under this agreement, Mr. Chelouche receives a monthly retainer fee of $7,000, as well as options to purchase our ordinary shares. Each of our non-executive directors, other than Mr. Chelouche and Dr. Bentwich, receives an annual fee of $10,000. An additional annual fee of $10,000 is paid to each non-executive director for serving on one of our committees.

 

As of June 1, 2009, there were outstanding options to purchase 879,182 ordinary shares that were granted to 14 of our directors and officers, at a weighted average exercise price of $3.92 per share.

 

C.  BOARD PRACTICES

 

We are incorporated in Israel, and, therefore, subject to various corporate governance practices under Israeli law relating to such matters as independent directors, the audit committee and the internal auditor. These matters are in addition to the requirements of The NASDAQ Global Market and other relevant provisions of U.S. securities laws. Under The NASDAQ Global Market rules, a foreign private issuer may generally follow its home country rules of corporate governance in lieu of the comparable NASDAQ Global Market requirements, except for certain matters such as composition and responsibilities of the audit committee and the independence of its members. For U.S. domestic companies, NASDAQ Global Market rules specify that the board of directors must contain a majority of independent directors within 12 months of its initial public offering. We currently comply with this requirement as well as the committee composition and responsibility requirements with respect to our audit committee and our other committees. In addition, under the Israeli Companies Law, 5759-1999, as amended (the “Companies Law”), we are required to appoint at least two external directors, and this appointment must be confirmed by our shareholders no later than three months after the closing of an initial public offering. We have appointed Gerald Gogon and Tali Yaron-Eldar as our external directors, each of whom is also independent under the rules of The NASDAQ Global Market. The appointment of Mr. Dogon and Ms. Yaron-Eldar was confirmed by our shareholders at an extraordinary general meeting held on May 30, 2007.

 

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Board of Directors

 

Our board of directors currently consists of eight directors, including two external directors. Certain of our current directors were appointed by certain of our shareholders or by our founding shareholders pursuant to board appointment rights granted to such shareholders in connection with their purchase of our shares. These rights terminated after the initial public offering, and from now on, our directors, apart from the external directors, will be elected by a vote of the holders of a majority of the voting power represented at a meeting of our shareholders and voting on the election of directors. Our articles of association provide that we may have no less than two and up to 11 directors.

 

Each director will hold office until the annual general meeting of our shareholders for the year in which his or her term expires or until his or her successor shall be elected and qualified. The approval of at least 75% of the voting rights represented at a general meeting is generally required to remove any of our directors from office. A simple majority of our shareholders at a general meeting may elect directors in their stead or fill any vacancy, however created, in our board of directors. In addition, vacancies on the board of directors, other than vacancies created by an external director, may be filled by a vote of a majority of the directors then in office. Our board of directors may also appoint additional directors up to the maximum number permitted under our articles of association. A director so chosen or appointed will hold office until the next general meeting of our shareholders. See “— External Directors” below for a description of the procedure for election of external directors.

 

In accordance with our amended and restated articles of association, our board of directors, apart from our external directors, are divided into three classes with staggered three-year terms. At each annual general meeting of shareholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. Our directors are divided among the three classes as follows:

 

·

the Class I director is Yoav Chelouche, and his term expires at the annual general meeting of shareholders to be held in 2011;

 

·

the Class II directors are Dr. Simcha Sadan, and Dr. Joshua Rosensweig, and their terms expire at the annual general meeting of shareholders to be held in 2009; and

 

·

the Class III directors are Prof. Moshe Many and Dr. Isaac Bentwich, and their terms expire at the annual general meeting of shareholders to be held in 2010.

 

In addition, our two external directors, Gerald Dogon and Tali Yaron-Eldar, were appointed by our shareholders on May 30, 2007 for three-year terms. See “External Directors” below.

 

Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors.

 

Our articles of association provide, as allowed by Israeli law, that any director may, by written notice to us, appoint another person to serve as an alternate director (subject to the approval of a majority of the other directors in a written resolution or at the next meeting of the board of directors) and may cancel such appointment. The term of appointment of an alternate director may be for one meeting of the Board of Directors, or for a specified period, or until notice is given of the termination of the appointment. To our knowledge, no director currently intends to appoint any other person as an alternate director. The Companies Law stipulates that a person not qualified to be appointed as a director, shall not be appointed and shall not serve as alternate director. In addition, a person who serves as a director shall not be appointed and shall not serve as an alternate director except under very limited circumstances. An alternate director has the same responsibilities as a director.

 

External Directors

 

Qualifications of External Directors

 

Companies incorporated under the laws of the State of Israel whose shares are listed on a stock exchange, including The NASDAQ Global Market, are required to appoint at least two external directors. We have appointed Gerald Dogon and Tali Yaron-Eldar, who qualify as external directors under the Companies Law. The appointment of our external directors was  confirmed by our shareholders at an extraordinary general meeting held on May 30, 2007. The Companies Law provides that a person may not be appointed as an external director if the person, or the person’s relative, partner, employer or any entity under the person’s control, has or had during the two years preceding the date of appointment any affiliation with the company or any entity controlling, controlled by or under common control with the company.

 

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The term affiliation includes:

 

·

an employment relationship;

 

·

a business or professional relationship maintained on a regular basis;

 

·

control; and

 

·

service as an office holder, excluding service as a director in a private company prior to the first offering of its shares to the public if such director was appointed as a director of the private company in order to serve as an external director following the public offering.

 

The term “office holder” is defined in the Companies Law as a director, general manager, chief business manager, deputy general manager, vice general manager, executive vice president, vice president, any other manager directly subordinate to the general manager or any other person assuming the responsibilities of any of the foregoing positions, without regard to such person’s title.

 

No person can serve as an external director if the person’s position or other business creates, or may create, a conflict of interest with the person’s responsibilities as an external director or may otherwise interfere with the person’s ability to serve as an external director. If at the time an external director is appointed all current members of the board of directors are of the same gender, then that external director must be of the other gender.

 

An amendment to the Companies Law in January 2006 provides that a person may be appointed as an external director if he or she has professional qualifications or if he or she has accounting and financial expertise. In addition, at least one of the external directors must have accounting and financial expertise. In determining the number directors required to have such expertise, the members of the board of directors must consider, among other things, the type and size of the company and the scope and complexity of its operations. The board of directors has determined that our company requires at least one director with the requisite accounting and financial expertise, who is Mr. Dogon, and that both of our external directors possess the requisite professional qualifications.

 

Until the lapse of two years from termination of office, a company may not appoint an external director as an office holder and cannot employ or receive services from that person for pay, either directly or indirectly, including through a corporation controlled by that person.

 

Election of External Directors

 

External directors are elected by a majority vote at a shareholders’ meeting, provided that either:

 

·

at least one-third of the shares of non-controlling shareholders that voted at the meeting, vote in favor of the election of the external director (disregarding abstentions); or

 

·

the total number of shares of non-controlling shareholders that voted against the election of the external director does not exceed one percent of the aggregate voting rights in the company.

 

The initial term of an external director is three years and he or she may be reelected to one additional term of three years. Thereafter, he or she may be reelected by our shareholders for additional periods of up to three years each, in each case provided that the audit committee and the board of directors confirm that, in light of the external director’s expertise and special contribution to the work of the board of directors and its committees, the reelection for such additional period(s) is beneficial to the company. An external director may only be removed by the same percentage of shareholders as is required for his or her election, or by a court, and then only if the external director ceases to meet the statutory requirements for his or her appointment or if the external director violates his or her duty of loyalty to the company. If an external directorship becomes vacant, a company’s board of directors is required under the Companies Law to call a shareholders’ meeting immediately to appoint a new external director.

 

Each committee of a company’s board of directors that has the right to exercise a power delegated by the board of directors is required to include at least one external director and our audit committee is required to include all of the external directors. An external director is entitled to compensation only as provided in regulations adopted under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with services provided as an external director.

 

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Board Committees

 

Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee.

 

Audit Committee

 

Under the listing requirements of The NASDAQ Global Market, a foreign private issuer is required to maintain an audit committee that operates under a formal written charter and has certain responsibilities and authority, including being directly responsible for the appointment, compensation, retention and oversight of the work of the issuer’s independent auditors. The members of the audit committee are required to meet the independence requirements established by the SEC in accordance with the requirements of the Sarbanes-Oxley Act. The rules of The NASDAQ Global Market also require that at least one member of the audit committee be a financial expert. Our audit committee is comprised of three members and meets the listing requirements of The NASDAQ Global Market and the SEC.

 

Under the Companies Law, the board of directors of a public company must establish an audit committee. The audit committee must consist of at least three directors and must include all of the company’s external directors. The audit committee may not include the chairman of the board, any director employed by the company or providing services to the company on an ongoing basis, a controlling shareholder or any of a controlling shareholder’s relatives.

 

Our audit committee provides assistance to the board of directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal compliance functions by pre-approving the services performed by our independent accountants and reviewing their reports regarding our accounting practices and systems of internal control over financial reporting. The audit committee also oversees the audit efforts of our independent accountants and takes those actions as it deems necessary to satisfy itself that the accountants are independent of management. Under the Companies Law, the audit committee is also required to identify deficiencies in the administration of the company, including by consulting with the internal auditor, and recommending remedial actions with respect to such deficiencies, and is responsible for reviewing and approving related party transactions.

 

The approval of the audit committee is required to effect certain specified actions and transactions with office holders and controlling shareholders. A controlling shareholder is a shareholder who has the ability to direct the activities of a company, including a shareholder that owns 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights, but excluding a shareholder whose power derives solely from his or her position on the board of directors or any other position with the company. The audit committee may not approve an action or a transaction with a controlling shareholder or with an office holder unless at the time of approval the two external directors were serving as members of the audit committee and at least one of them was present at the meeting at which the approval was granted.

 

Our written audit committee charter, a copy of which is available on the “Corporate Governance” section of our website, states that in fulfilling this role, the committee is entitled to rely on interviews and consultations with our management, our internal auditor and our independent public accountant. However, it is not obligated to conduct any independent investigation or verification.

 

Our audit committee consists of Gerald Dogon (Chairman), Prof. Moshe Many and Tali Yaron-Eldar. Our board of directors has determined that Mr. Dogon qualifies as an “audit committee financial expert” as defined under the rules and regulations of the SEC, applicable NASDAQ Global Market rules and the Companies Regulations (Conditions and Criteria for Directors with Accounting and Financial Expertise and with Professional Qualifications) - 2005.

 

Compensation Committee

 

Our compensation committee reviews and recommends policies relating to compensation and benefits of our officers and employees. The compensation committee reviews corporate goals and objectives set by our board that are relevant to compensation of the Chief Executive Officer and other executive officers, evaluates the performance of these officers in light of those goals and objectives, and sets the compensation of these officers based on such evaluations. The compensation committee also administers the issuance of options and other awards under our stock plans. The compensation committee reviews and evaluates, at least annually, the goals and objectives of our incentive compensation plans and monitors the results against the approved goals and objectives. The compensation committee operates under a written compensation committee charter, a copy of which is available on the “Corporate Governance” section of our website. The members of our compensation committee are Yoav Chelouche (Chairman) Tali Yaron Eldar and Gerald Dogon. Our board of directors has determined that both members of our compensation committee are independent under the applicable NASDAQ Global Market rules.

 

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Nominating and Corporate Governance Committee

 

The nominating and corporate governance committee is responsible for making recommendations to the board of directors regarding candidates for directorships and the size and composition of our board. In addition, the nominating and corporate governance committee is responsible for overseeing our corporate governance guidelines and reporting and making recommendations to the board concerning governance matters. The nominating and corporate governance committee operates under a written charter, a copy of which is available on the “Corporate Governance” section of our website. The members of our nominating and corporate governance committee are Yoav Chelouche (Chairman) and Gerald Dogon. Our board of directors has determined that both members of our nominating and corporate governance committee are independent under the applicable NASDAQ Global Market rules.

 

Under the Companies Law, the nominations for director are generally made by our directors but may be made by one or more of our shareholders. However, any shareholder or shareholders holding at least 5% of the voting rights in our issued share capital may nominate one or more persons for election as directors at a general meeting only if a written notice of such shareholder’s intent to make such nomination or nominations has been given to our secretary and each such notice sets forth all the details and information as required to be provided under our articles of association.

Internal Auditor

 

Under the Companies Law, the board of directors must appoint an internal auditor nominated by the audit committee. On May, 7, 2007, we appointed Yardeni Gelfend as our internal auditor.  The role of the internal auditor is to examine whether a company’s actions comply with applicable law and orderly business procedure. Under the Companies Law, the internal auditor may not be an interested party or an office holder, or affiliate, or a relative of an interested party or an office holder, nor may the internal auditor be the company’s independent accountant or its representative. An interested party is defined in the Companies Law as a 5% or greater shareholder, any person or entity who has the right to designate one director or more or the chief executive officer of the company or any person who serves as a director or as a chief executive officer. The internal auditor also can not be terminated without his or her consent, nor can he or she be suspended from such position unless the board of directors has so resolved after hearing the opinion of the audit committee and after giving him or her opportunity to present his or her case to the board and to the audit committee.

Approval of Specified Related Party Transactions Under Israeli Law

See Item 10.B – "Memorandum and Articles of Association — Fiduciary Duties of Office Holders", "– Disclosure of Personal Interests of an Office Holder" and "—Transactions Requiring Special Approval" for a discussion of the requirements of Israeli law regarding the fiduciary duties of the office holders of the Company, including directors and executive officers, and their duties to disclose any personal interest that such person may have and all related material information known to him or her relating to any existing or proposed transaction by the company, as well as transactions that require special approval.

D.  EMPLOYEES

 

As of December 31, 2008, 2007 and 2006, we had 111, 70 and 41 full-time employees, respectively. Of the 111 full-time employees as of December 31, 2008, 57 were engaged in research and development and 54 were engaged in management, administration, business development, marketing and finance. Of the 111 full-time employees as of December 31, 2008, 42 were located in the United States and 69 were located in Israel.

 

The Israeli labor law governs the length of the workday, minimum daily wages for workers, procedures for hiring and dismissing employees, determination of severance pay, annual leave, sick days and other conditions of employment. Israeli law generally requires severance pay upon the retirement or death of an employee or termination of employment without cause (as defined in the law). Severance pay may be funded by Managers’ Insurance described below. The payments to Managers’ Insurance on account of severance pay amount to approximately 8.33% of the employee’s wages. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the U.S. Social Security Administration. Such amounts also include payments by the employee for national health insurance. The total payments to the National Insurance Institute are equal to approximately 17.4% of the wages (up to a specified amount), of which the employee contributes approximately 12% and the employer contributes approximately 5.4%.

 

We contribute funds on behalf of all our employees (typically following a trial period of three months) to a fund known as “Managers’ Insurance.” This fund provides a combination of savings plan, insurance and severance pay benefits to the employee, giving the employee payments upon retirement or death and securing the payment of severance pay, if legally required, upon termination of employment. We decide whether each employee is entitled to participate in the plan and each employee who agrees to participate contributes an amount equal to 5% of his or her salary and we, the employer, contribute between 13.3% and 15.8% of his or her salary.

 

We have never experienced labor-related work stoppages and believe that our relations with our employees are good.

 

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E.  SHARE OWNERSHIP

 

The following table sets forth, as of June 1, 2009, the number of our ordinary shares beneficially owned by (i) each of our directors and executive officers and (ii) our directors and executive officers as a group. The information in this table is based on 14,174,443 ordinary shares outstanding as of June 1, 2009. Beneficial ownership of shares is determined in accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. Ordinary shares that are subject to convertible securities, warrants or options that are currently convertible or exercisable or convertible or exercisable within 60 days of June 1, 2009 are deemed to be outstanding and beneficially owned by the person holding the convertible securities, warrants or options for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage of any other person.

 

Name of Beneficial Owner		Number of Shares Beneficially Owned				Percentage of Outstanding Ordinary Shares
Amir Avniel (1)			143,812				1.0	%
Ronen Tamir (2)			44,540				*
Dalia Cohen, Ph.D.(3)			18,730				*
Ranit Aharonov, Ph.D. (4)			34,645				*
Ayelet Chajut, Ph.D.(5)			18,781				*
Limor Zur-Stoller			-				*
Tami Fishman Jutkowitz (6)			10,498				*
Yoav Chelouche (7)			199,360				1.4	%
Isaac Bentwich, M.D. (8)			1,655,401				11.7	%
Prof. Moshe Many, M.D. (9)			46,522				*
Simcha Sadan, Ph.D. (10)			59,195				*
Joshua Rosensweig.(11)			157,849				1.1	%
Gerald Dogon (12)			9,510				*
Tali Yaron-Eldar (13)			9,510				*
Directors and executive officers as a group (14 persons) (14)			2,408,253				16.4	%

 

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*	Represents beneficial ownership of less than 1% of ordinary shares.

 

(1)

Consists of options currently exercisable or exercisable within 60 days of June 1, 2009 to purchase 75,336 ordinary shares (which have an exercise price of $0.00 per share and expire in May 2013), 1,429 ordinary shares (which have an exercise price of $0.00 per share and expire in May 2014), 37,668 ordinary shares (which have an exercise price of $0.00 per share and expire in December 2014),  829 ordinary shares (which have an exercise price of $0.00 per share and expire in June 2015) and 28,550 ordinary shares (which have an exercise price of $5.68  per share and expire in September 2016).

 

(2)	Consists of options currently exercisable or exercisable within 60 days of June 1, 2009 to purchase 44,540  ordinary shares (which have an exercise price of $5.45 per share and expire in December 2017),

 

(3)	Consists of options currently exercisable or exercisable within 60 days of June 1, 2008 to purchase 18,730 ordinary shares (which have an exercise price of $6.59 per share and expire in August 2016).

 

(4)

Consists of options currently exercisable or exercisable within 60 days of June 1, 2009 to purchase 3,516 ordinary shares (which have an exercise price of $0.00 per share and expire in June 2013), 251 ordinary shares (which have an exercise price of $0.00 per share and expire in January 2014), 1,308 ordinary shares (which have an exercise price of $0.00 per share and expire in May 2014), 4,771 ordinary shares (which have an exercise price of $0.00 per share and expire in December 2014), 659 ordinary shares (which have an exercise price of $0.00 per share and expire in June 2015), 16,265 ordinary shares (which have an exercise price of $3.50 per share and expire in January 2016) and 7,875 ordinary shares (which have an exercise price of $4.16 per share and expire in June 2018).

 

(5)

Consists of options currently exercisable or exercisable within 60 days of June 1, 2009 to purchase 5,650 ordinary shares (which have an exercise price of $4.37 per share and expire in June 2016), 1,256 ordinary shares (which have an exercise price of $4.37 per share and expire in January 2017), 11,875 ordinary shares (which have an exercise price of $4.16 per share and expire in June 2018),

 

 

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(6)	Consists of options currently exercisable or exercisable within 60 days of June 1, 2009 to purchase 6,123 ordinary shares (which have an exercise price of $3.50 per share and expire in April 2016) and 4,375 ordinary shares (which have an exercise price of $4.7 per share and expire in July 2018).

 

(7)

Consists of (i) 17,137 ordinary shares held by Yunsan Ltd., a company controlled by Mr. Chelouche, the chairman of our board of directors, (ii) 14,228 ordinary shares and (iii) options currently exercisable or exercisable within 60 days of June 1, 2009 to purchase 10,288 ordinary shares (which have an exercise price of $0.00 per share and expire in April 2012) and 157,707 ordinary shares (which have an exercise price of $3.50 per share and expire in July 2016).

 

(8)

Consists of (i) 1,105,870 ordinary shares directly owned by Dr. Bentwich, (ii) 549,531 ordinary shares held by Harmonia 2000. Harmonia 2000 is an Israeli non-profit association, of which Dr. Bentwich is one of seven members, and one of three members of its managing board. The members of Harmonia 2000’s managing board control the securities held by Harmonia 2000, and Dr. Bentwich may therefore be deemed to beneficially own the securities owned by Harmonia 2000. Dr. Bentwich disclaims any beneficial ownership of the securities owned by Harmonia 2000.

 

(9)

Consists of (i) 26,932 ordinary shares held by Prof. Many and (ii) options currently exercisable or exercisable within 60 days of June 1, 2009 to purchase 6,908 ordinary shares (which have an exercise price of $3.50 per share and expire in July 2016) and 12,682 ordinary shares (which have an exercise price of $6.15 per share and expire in July 2016).

 

(10)

Consists of (i) 4,923 ordinary shares held by Dr. Sadan, (ii) 43,705 ordinary shares held by SMB Ltd., a company controlled by Dr. Sadan and (iii) options currently exercisable or exercisable within 60 days of June 1, 2009 to purchase 10,567 ordinary shares (which have an exercise price of $6.03 per share and expire in January 2017).

 

(11)

Consists of (i) 138,259 ordinary shares held by Dr. Rosensweig, (ii) options currently exercisable or exercisable within 60 days of June 1, 2009 to purchase 6,908 ordinary shares (which have an exercise price of $3.50 per share and expire in July 2016) and 12,682 ordinary shares (which have an exercise price of $6.15 per share and expire in July 2016).

 

(12)	Consists of options currently exercisable or exercisable within 60 days of June 1, 2009 to purchase 9,510 ordinary shares (which have an exercise price of $8.8 per share and expire in March 2017).

 

(13)	Consists of options currently exercisable or exercisable within 60 days of June 1, 2009 to purchase 9,510 ordinary shares (which have an exercise price of $8.8 per share and expire in March 2017).

 

(14)	See notes 1 through 13 above.

 

Employee Benefit Plans

 

2003 Israeli Share Option Plan

 

In March 2003, we adopted the Rosetta Genomics Ltd. 2003 Israeli Share Option Plan, or the 2003 Plan. The 2003 Plan provided for the grant of options to our directors, employees, consultants and service providers, and to the directors, employees, consultants and service providers of our subsidiaries and affiliates. Upon shareholder approval of the 2006 Global Share Incentive Plan, or 2006 Plan, in July 2006, the 2003 Plan was terminated and the 321,773 ordinary shares that were available for issuance under the 2003 Plan were transferred to the 2006 Plan. However, all outstanding options granted under the 2003 Plan remain outstanding and subject to the terms of the 2003 Plan. Any options that were granted under the 2003 plan and that are canceled are transferred to the 2006 Plan. As of June 1, 2009, options to purchase 321,375 ordinary shares have been granted and are still outstanding under the 2003 Plan and 241,450 shares have been issued pursuant to the exercise of options granted under the 2003 Plan.

 

2006 Global Share Incentive Plan

 

The 2006 Global Share Incentive Plan, or the 2006 Plan, was approved in July 2006. In November 2007, our board of directors approved an additional 500,000 shares under the 2006 Plan.  As of June 1, 2009, there were 199,075 shares available for grant under the 2006 Plan, 8,164 shares have been issued pursuant to the exercise of options granted under the 2006 Plan and options to purchase 1,148,761 ordinary shares have been granted and are outstanding under the 2006 Plan. The 2006 Plan, and its corresponding sub-plans for grantees subject to U.S. taxation and grantees subject to Israeli taxation, provides for the grant of options to our directors, employees, consultants and service providers, and to the directors, employees, consultants and service providers of our subsidiaries and affiliates.

 

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Administration of Our Employee Benefit Plans

 

Our employee benefit plans are administered by our compensation committee, which makes recommendations to our board of directors regarding the grant of options and the terms of the grant, including, exercise price, method of payment, vesting schedule, acceleration of vesting and the other matters necessary in the administration of these plans. Options granted under the 2003 Plan and the 2006 Plan to eligible employees and office holders who are Israeli residents may be granted under Section 102(b)(2) of the Israel Income Tax Ordinance pursuant to which the options or the ordinary shares issued upon their exercise must be allocated or issued to a trustee and be held in trust for the lesser of (a) 30 months, or (b) two years following the end of the tax year in which the options are granted, provided that options granted after January 1, 2006 are only subject to being held in trust for two years. Under Section 102, any tax payable by an employee from the grant or exercise of the options is deferred until the transfer of the options or ordinary shares by the trustee to the employee or upon the sale of the options or ordinary shares and gains are subject to a capital gains tax of 25%.

 

Options to be granted under the 2006 Plan to U.S. residents may qualify as incentive stock options within the meaning of Section 422 of the Code. The exercise price for incentive stock options must not be less than the fair market value on the date the option is granted, unless otherwise approved by our board of directors and shareholders, or 110% of the fair market value if the optionholder holds more than 10% of our share capital.

 

Options granted under our employee benefit plans generally vest over three or four years, and they expire ten years from the date of grant. If we terminate an employee for cause, all of the employee’s vested and unvested options expire no later than five days from the time of delivery of the notice of discharge, unless determined otherwise by the compensation committee. Upon termination of employment for any other reason, including due to death or disability of the employee, vested options may be exercised within three months of the date of termination, unless otherwise determined by the compensation committee. Vested options not exercised within the prescribed period and unvested options return to the 2006 plan for reissuance.

 

In the event of a merger, consolidation, reorganization or similar transaction in which our ordinary shares are exchanged for shares of another corporation, each optionholder will be entitled to purchase the number of shares of the other corporation as it would have received if he or she had exercised its option immediately prior to such transaction. In the event of a change of control, or merger, consolidation, reorganization or similar transaction resulting in the acquisition of at least 50% of our voting power, or the sale of all or substantially all of our assets, each optionholder is required to participate in the transaction and sell or exchange their shares received pursuant to the exercise of an option.

 

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ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A.  MAJOR SHAREHOLDERS

 

The following table sets forth, as of June 1, 2009, the number of ordinary shares beneficially owned by each person or entity known by us to be the beneficial owner of more than 5% of our outstanding ordinary shares. The information in this table is based on 14,174,443 ordinary shares outstanding as of June 1, 2009. Beneficial ownership of shares is determined in accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. Ordinary shares that are subject to convertible securities, warrants or options that are presently convertible or exercisable or convertible or exercisable within 60 days of June 1, 2009 are deemed to be outstanding and beneficially owned by the person holding the convertible securities, warrants or options for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage of any other person. None of the persons or entities that we know beneficially owns more than 5% of our outstanding ordinary shares, has different voting rights. Except as indicated in the footnotes to this table, each shareholder in the table has sole voting and investment power for the shares shown as beneficially owned by them.

 

Name and Address of Beneficial Owner (1)		Number of Shares Beneficially Owned(5)				Percentage of Outstanding Ordinary Shares
Prometheus Laboratories Inc. (2)			2,000,000				14.1	%
Isaac Bentwich, M.D. (3)			1,655,401				11.7	%
Far West Capital Management (4)			855,650				6.0	%

 

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(1)	Unless otherwise noted, the address for each of the individuals noted above is c/o Rosetta Genomics Ltd., 10 Plaut Street, Science Park, Rehovot 76706 Israel.

(2)	Based solely on a Schedule 13G filed by Prometheus with the SEC on May 4, 2009. Prometheus’ address is 9410 Carroll Park Drive, San Diego, California 92121.

(3)

Consists of (i) 1,105,870 ordinary shares directly owned by Dr. Bentwich, (ii) 549,531 ordinary shares held by Harmonia 2000. Harmonia 2000 is an Israeli non-profit association, of which Dr. Bentwich is one of seven members, and one of three members of its managing board. The members of Harmonia 2000’s managing board control the securities held by Harmonia 2000, and Dr. Bentwich may therefore be deemed to beneficially own the securities owned by Harmonia 2000. Dr. Bentwich disclaims any beneficial ownership of the securities owned by Harmonia 2000.

(4)	Based solely on a Schedule 13G filed by Far West Capital Management with the SEC on May 18, 2009. Far West capital Management’s address is 4749 Nicasio Valley Road, Nicasio, California 94946.

(5)	Our ordinary shares are traded on the NASDAQ Global Market in the United State. A significant portion of our shares are held in street name, therefore we generally have no way of determining who our shareholders are, their geographical location or how many shares a particular shareholder owns.

Significant Changes in Share Ownership

The following table shows changes over the last three years in the percentage ownership by major shareholders:

Name of Beneficial Owner		Percentage of Outstanding Ordinary Shares Owned as of March 31, 2007				Percentage of Outstanding Ordinary Shares Owned as of June 1, 2008				Percentage of Outstanding Ordinary Shares Owned as of  June 1, 2009
Amir Avniel			5.5	%			5.6	%			1.0	%
Isaac Bentwich, M.D.			16.0	%			15.9	%			11.7	%
Highbridge International LLC (1)			6.5	%			6.7	%			-
Entities and Persons affiliated with Davidson Kempner Partners (2)			-				5.3	%			-
Prometheus Laboratories Inc. (3)			-				-				14.1	%
Far West Capital Management (4)			-				-				6.0	%

 

 

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(1)	Based solely on (i) a Schedule 13G filed with the SEC on March 5, 2007 and (ii) a Schedule 13G/A filed with the SEC on January 30, 2008.

(2)	Based solely on (i) a Schedule 13G filed with the SEC on January 17, 2008 and (ii) a Schedule 13G/A filed with the SEC on February 17, 2009.

(3)	Based solely on a Schedule 13G filed with the SEC on May 4, 2009.

(4)	Based solely on a Schedule 13G filed with the SEC on May 18, 2009.

Control of Registrant

 

To our knowledge, we are not directly or indirectly owned or controlled by another corporation, by any foreign government, or by any other natural or legal person. As of June 1, 2009, our officers and directors as a group beneficially owned 2,408,253 ordinary shares, or 16.4% of the then outstanding ordinary shares.

 

B.  RELATED PARTY TRANSACTIONS

 

We have, from time to time, entered into agreements with our shareholders and affiliates. We describe these related party transactions entered into since January 1, 2008 below:

 

Exclusive Testing and Administrative Services Agreement with Teva Pharmaceutical Industries Ltd.

 

On December 24, 2008, we entered into an Exclusive Testing and Administrative Services Agreement with Teva Pharmaceutical Industries Ltd. Prof. Moshe Many, M.D., Ph.D., one of our directors has served as Chairman of the Research and Development Committee of Teva’s board of directors since 1991.  Please see “Item 4. Information on the Company — B. Business Overview — Collaborations and Partnerships” for a description of this agreement.

 

Consulting Agreement with a Related Party

 

In April 2007, we entered into a consulting agreement with Prof. Moshe Hod, the brother of Nathan Hod, a member of our board of directors until December 18, 2008 , for a monthly fee of $10,000. In 2008, we paid Prof. Hod $ 140,000 under this agreement.

 

Exculpation, Indemnification and Insurance

 

Our articles of association permit us to exculpate, indemnify and insure our directors and officers to the fullest extent permitted by the Companies Law. We have entered into agreements with each of our office holders undertaking to indemnify them to the fullest extent permitted by law, including with respect to liabilities resulting from our initial public offering to the extent that these liabilities are not covered by insurance. We have obtained director and officer insurance for each of our officers and directors.

 

C.  INTERESTS OF EXPERTS AND COUNSEL

 

Not applicable.

ITEM 8.  FINANCIAL INFORMATION

 

A.  CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

 

Consolidated Financial Statements

 

Our consolidated financial statements and related notes are included in this Annual Report beginning on page F-1. See also Item 18.

 

Legal Proceedings

 

We are currently not a party to any legal proceedings.

 

Dividend Policy

 

To date, we have not declared or paid cash dividends on any of our shares, and we have no current intention of paying any cash dividends in the near future.

 

The Companies Law also restricts our ability to declare dividends. We can only distribute dividends from profits (as defined in the Companies Law), or, if we do not meet the profits test, with court approval provided in each case that there is no reasonable concern that the dividend distribution will prevent the company from meeting its existing and foreseeable obligations as they come due. The payment of dividends may be subject to Israeli withholding taxes.

 

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B.  SIGNIFICANT CHANGES

 

See “Note 18.  Subsequent Events” to our consolidated financial statements included in this Annual Report beginning on page F-1 for a discussion of significant events that have occurred since December 31, 2008.

ITEM 9. THE OFFER AND LISTING

 

A.  OFFER AND LISTING DETAILS

 

Our ordinary shares began trading on The NASDAQ Global Market on February 27, 2007 under the symbol “ROSG.” Prior to that time, there was no established public trading market for our ordinary shares. The high and low sales prices per share of our ordinary shares on The NASDAQ Global Market for the periods indicated are set forth below:

 

		High				Low
Year Ended
December 31, 2007		$	10.33			$	4.75
December 31, 2008		$	6.25			$	1.08
Quarter Ended
March 31, 2007		$	10.33			$	6.20
June 30, 2007		$	8.94			$	6.30
September 30, 2007		$	7.90			$	4.95
December 31, 2007		$	7.00			$	4.75
March 31, 2008		$	6.25			$	3.41
June 30, 2008		$	5.44			$	4.00
September 30, 2008		$	5.07			$	2.46
December 31, 2008		$	3.00			$	1.08
March 31, 2009		$	3.80			$	1.18
Month Ended
December 31, 2008		$	2.51			$	1.08
January 31, 2009		$	3.11			$	1.18
February 28, 2009		$	3.80			$	2.47
March 31, 2009		$	3.07			$	2.04
April 30, 2009		$	3.80			$	2.69
May 31, 2009		$	3.60			$	2.91

 

B.  PLAN OF DISTRIBUTION

 

Not applicable.

 

C.  MARKETS

 

Our ordinary shares are traded only in the United States on The NASDAQ Global Market.

 

D.  SELLING SHAREHOLDERS

 

Not applicable.

 

E.  DILUTION

 

Not applicable.

 

F.  EXPENSES OF THE ISSUE

 

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

 

A.  SHARE CAPITAL

 

Not applicable.

 

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B.  MEMORANDUM AND ARTICLES OF ASSOCIATION

 

Objects and Purposes

 

We were first registered under Israeli law on March 9, 2000. Our registration number with the Israel Registrar of Companies is 51-292138-8. The objective stated in Section 3 of our articles of association is to engage in any lawful activity.

 

Fiduciary Duties of Office Holders

 

An “office holder” is defined in the Companies Law as a director, general manager, chief business manager, deputy general manager, vice general manager, executive vice president, vice president, any other manager directly subordinate to the general manager or any other person assuming the responsibilities of any of the foregoing positions, without regard to such person’s title.

 

The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company. The duty of care requires an office holder to act with the level of care which a reasonable office holder in the same position would have acted under the same circumstances. The breach of such duty is governed by Israeli contract laws. The duty of care includes a duty to use reasonable means to obtain:

 

·

information on the appropriateness of a given action brought for his approval or performed by him by virtue of his position; and

 

·

all other important information pertaining to the previous actions.

 

The duty of loyalty requires an office holder to act in good faith for the interests of the company and includes a duty to:

 

·

refrain from any conflict of interest between the performance of his duties in the company and his personal affairs;

 

·

refrain from any activity that is competitive with the company;

 

·

refrain from exploiting any business opportunity of the company to receive a personal gain for himself or others; and

 

·

disclose to the company any information or documents relating to a company’s affairs which the office holder has received due to his position as an office holder.

 

Each person listed in the table under “Item 6 - Directors, Senior Management and Employees - A. Directors and Senior Management” is an office holder.

Disclosure of Personal Interests of an Officer Holder

 

The Companies Law requires that an office holder disclose to the company any personal interest that he or she may have, and all related material information known to him or her, in connection with any existing or proposed transaction by the company. The disclosure is required to be made promptly and in any event, no later than the board of directors meeting in which the transaction is first discussed. “Personal interest”, as defined by the Companies Law, includes a personal interest of any person in an act or transaction of the company, including a personal interest of his relative or of a corporate body in which that person or a relative of that person is a 5% or greater shareholder, a holder of 5% or more of a company’s outstanding shares or voting rights, a director or general manager, or in which he or she has the right to appoint at least one director or the general manager. “Personal interest” does not apply to a personal interest stemming merely from the fact that the office holder is also a shareholder in the company.  The Companies Law defines a relative as a spouse, sibling, parent, grandparent, descendent, spouse’s descendant and the spouse of any of the foregoing.

If the transaction is an extraordinary transaction, the office holder must also disclose any personal interest held by his or her relative.

Transactions Requiring Special Approval

Under the Companies Law, an extraordinary transaction is a transaction:

 

·

not in the ordinary course of business;

 

·

not on market terms; or

 

·

likely to have a material impact on the company’s profitability, assets or liabilities.

 

 

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Under the Companies Law, once an office holder complies with the above disclosure requirement, the board of directors may approve the transaction, between the company and that office holder, or a third party in which the office holder has a personal interest, unless the company’s articles of association provide otherwise. A transaction that is adverse to the company’s interest may not be approved. If the transaction is an extraordinary transaction, then it also must be approved by the audit committee, before the board approval, and under certain circumstances, by the shareholders of the company. Exculpation, indemnification, insurance or compensation of a director would generally require shareholder approval. A director who has a personal interest in a matter which is considered at a meeting of the board of directors or the audit committee may not be present at this meeting or vote on this matter, unless a majority of the board of directors or the audit committee also has a personal interest in the transaction. If a majority of the directors has a personal interest in a transaction, shareholder approval is also required.

 

Under the Companies Law, the disclosure requirements which apply to an office holder also apply to a controlling shareholder of a public company. For these purposes, a controlling shareholder is any shareholder that has the ability to direct the company’s actions, including any shareholder holding 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company. Two or more shareholders with a personal interest in the approval of the same transaction are deemed to be one shareholder.   Extraordinary transactions of a public company with a controlling shareholder or in which a controlling shareholder has a personal interest, and the terms of compensation of a controlling shareholder who is an office holder, require the approval of the audit committee, the board of directors and the shareholders of the company. The shareholder approval must satisfy either of the following criteria:

 

·

the majority of the votes for the approval includes the votes of at least one-third of the total votes of shareholders who are present at the meeting and who have no personal interest in the transaction; the votes of abstaining shareholders shall not be included in the number of the said total votes; or

 

·

the total number of votes against the approval, among the shareholders who are present at the meeting and who have no personal interest in the transaction shall not exceed 1% of the aggregate voting rights in the company.

 

For information concerning the direct and indirect personal interests of certain of our office holders and principal shareholders in certain transactions with us, see “Item 7 - Major Shareholders and Related Party Transactions - B. Related Party Transactions.”

 

Directors’ Compensation

 

Under the Companies Law, all arrangements as to compensation of office holders who are not directors require approval of the board of directors, unless the articles of association provide otherwise. Arrangements as to compensation of directors, as well as indemnification and insurance of directors, also generally require audit committee approval, before board approval, and shareholder approval.  Our compensation committee generally is required to approve the compensation of office holders.

Directors Borrowing Powers

 

Our board of directors may from time to time, in its discretion, cause the Company to borrow or secure the payment of any sum or sums of money for the purposes of the Company. Such borrowing powers may be exercised by a majority of the board in accordance with our articles of association.

Rights Attached to Our Shares

 

Dividend Rights. Our articles of association provide that our board of directors may, subject to the applicable provisions of the Companies Law, from time to time, declare such dividend as may appear to the board of directors to be justified by the profits of the Company. Subject to the rights of the holders of shares with preferential or other special rights that may be authorized in the future, holders of ordinary shares are entitled to receive dividends according to their rights and interest in our profits. Under the Companies Law, a company may distribute a dividend only if the distribution does not create a reasonable risk that the company will be unable to meet its existing and anticipated obligations as they become due. A company may only distribute a dividend out of the company’s profits, as defined under the Companies Law. If the company does not meet the profit requirement, a court may allow it to distribute a dividend, as long as the court is convinced that there is no reasonable risk that such distribution might prevent the company from being able to meet its existing and anticipated obligations as they become due.

Voting Rights. Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. These voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future. The ordinary shares do not have cumulative voting rights in the election of directors. As a result, holders of ordinary shares that represent more than 50% of the voting power at the general meeting of shareholders, in person or by proxy, have the power to elect all the directors whose positions are being filled at that meeting to the exclusion of the remaining shareholders. However, external directors are elected by a majority vote at a shareholders’ meeting, on the condition that either:

 

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·

the majority of shares voted for the election includes at least one-third of the shares of non-controlling shareholders voted at the meeting (excluding abstaining votes); or

 

·

the total number of shares of non-controlling shareholders voted against the election of the external director does not exceed one percent of the aggregate voting rights in the company.

 

Liquidation Rights. In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion to their respective holdings. This liquidation right may be affected by the grant of preferential dividends or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future.

 

Redemption Provisions. We may, subject to applicable law, issue redeemable preference shares and redeem the same.

 

Capital Calls. Under our articles of association and the Companies Law, the liability of our shareholders is limited to the par value of the shares held by them.

 

Transfer of Shares. Fully paid ordinary shares are issued in registered form and may be transferred pursuant to our articles of association, unless such transfer is restricted or prohibited by another instrument and subject to applicable securities laws.

 

Modification of Rights

 

Unless otherwise provided by our articles of association, rights attached to any class may be modified or abrogated by a resolution adopted in a general meeting approved by a majority of 75% of the voting power represented at the meeting in person or by proxy and voting thereon, subject to the sanction of a resolution passed by majority of the holders of 75% a majority of the shares of such class present and voting as a separate general meeting of the holders of such class.

 

Shareholders’ Meetings and Resolutions

 

The quorum required for an ordinary meeting of shareholders consists of at least two shareholders present in person or by proxy, who hold or represent between them at least 25% of the outstanding voting shares, unless otherwise required by applicable rules. A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time and place or any time and place as the chairman of the board may designate. At such reconvened meeting, the required quorum consists of any two shareholders present in person or by proxy.

 

Under the Companies Law, each shareholder of record will be provided at least 21 calendar days’ prior notice of any general shareholders meeting.

 

Under the Companies Law and our articles of association, all resolutions of our shareholders require a simple majority of the shares present, in person or by proxy, and voting on the matter, subject to certain exceptions provided for under the Companies Law, which require a majority of at least 75% of the shares present.

 

Under the Companies Law, each and every shareholder has a duty to act in good faith in exercising his rights and fulfilling his obligations towards us and other shareholders, such as in voting in the general meeting of shareholders on the following matters:

 

·

any amendment to the articles of association;

 

·

an increase of our authorized share capital;

 

·

a merger; or

 

·

approval of certain actions and transactions that require shareholder approval.

 

In addition, each and every shareholder has the general duty to refrain from depriving other shareholders of their rights as a shareholder. In addition, any controlling shareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder or class vote and any shareholder who, pursuant to the company’s articles of association has the power to appoint or prevent the appointment of an office holder in the company is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this duty of fairness.

Our annual general meetings are held once in every calendar year at such time (within a period of not more than fifteen months after the last preceding annual general meeting) and at such place determined by our board. All general meetings other than annual general meetings shall be called extraordinary general meetings.

 

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Our board of directors may, in its discretion, convene additional meetings as “special general meetings.” In addition, the board must convene a special general meeting upon the demand of two of the directors, one fourth of the nominated directors, one or more shareholders having at least 5% of outstanding share capital and at least 1% of the voting power in the company, or one or more shareholders having at least 5% of the voting power in the company. The chairperson of the board of directors presides at each of our general meetings. The chairperson of the board of directors is not entitled to a vote at a general meeting in his capacity as chairperson.

Limitation on Owning Securities

The ownership of our ordinary shares by nonresidents of Israel is not restricted in any way by our memorandum of association and articles of association or the laws of the State of Israel, except for citizens of countries, which are in a state of war with Israel, who may not be recognized as owners of our ordinary shares.

Mergers and Acquisitions and Tender Offers under Israeli Law

 

The Companies Law includes provisions that allow a merger transaction and requires that each company that is a party to a merger have the transaction approved by its board of directors and the majority of each party’s shares voted on the proposed merger at a shareholders’ meeting called on at least 21 days’ prior notice. Under the Companies Law, merger transactions may be approved by holders of a simple majority of our shares present, in person or by proxy, at a general meeting and voting on the transaction. In determining whether the required majority has approved the merger, if shares of a company are held by the other party to the merger, or by any person holding at least 25% of the outstanding voting shares or 25% of the means of appointing directors of the other party to the merger, then a vote against the merger by holders of the majority of the shares present and voting, excluding shares held by the other party or by such person, or anyone acting on behalf of either of them, is sufficient to reject the merger transaction. If the transaction would have been approved but for the exclusion of the votes of certain shareholders as provided above, a court may still approve the merger upon the request of holders of at least 25% of the voting rights of a company, if the court holds that the merger is fair and reasonable, taking into account the value of the parties to the merger and the consideration offered to the shareholders. Upon the request of a creditor of either party of the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be completed unless at least 50 days have passed from the time that a proposal for the approval of the merger has been filed with the Israel Registrar of Companies and 30 days have passed from the time that the approval of the merging parties’ shareholders has been received.

 

The Companies Law also provides that an acquisition of shares of a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% shareholder of the company and there is no existing 25% or greater shareholder in the company. If there is no existing 45% or greater shareholder in the company, the Companies Law provides that an acquisition of shares of a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% shareholder of the company.

 

If following any acquisition of shares, the acquirer will hold 90% or more of the company’s shares or of a class of shares, the acquisition may not be made other than through a tender offer to acquire all of the shares of such class. If the shareholders who declined or do not respond to the tender offer hold 5% or less of the company’s outstanding share capital or class of shares, all the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law. However, the tendered shareholders may seek to alter the consideration by court order.

 

C.  MATERIAL CONTRACTS

 

Please see “Item 4. Information on the Company — B. Business Overview — Collaborations and Partnerships” and “Item 4. Information on the Company — B. Business Overview — Our Intellectual Property Strategy and Position — In-Licensed Intellectual Property” for a discussion of our material strategic alliances and research and license agreements. Please see “Item 7. Major Shareholders and Related Party Transactions— B. Related Party Transactions” for a discussion of other material contracts entered into other than in the ordinary course of business.

 

D.  EXCHANGE CONTROLS

 

Under Israeli Law, Israeli non-residents who purchase ordinary shares with certain non-Israeli currencies (including U.S. dollars) may freely repatriate in such non-Israeli currencies all amounts received in Israeli currency in respect of the ordinary shares, whether as a dividend, as a liquidating distribution, or as proceeds from any sale in Israel of the ordinary shares, provided in each case that any applicable Israeli income tax is paid or withheld on such amounts. The conversion into the non-Israeli currency must be made at the rate of exchange prevailing at the time of conversion. Under Israeli law, both residents and non-residents of Israel may freely hold, vote and trade ordinary shares.

 

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E.  TAXATION

 

ISRAELI TAX CONSIDERATIONS AND GOVERNMENT PROGRAMS

 

The following also contains a description of material relevant provisions of the current Israeli income tax structure applicable to companies in Israel, with special 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, we cannot assure you that the views expressed in the discussion will be accepted by the appropriate tax authorities or the courts.

 

This discussion does not address all of the tax consequences that may be relevant to purchasers of our ordinary shares in light of their particular circumstances or certain types of purchasers of our ordinary shares subject to special tax treatment. Examples of this kind of investor include residents of Israel and traders in securities who are subject to special tax regimes not covered in this discussion. Because individual circumstances may differ, you should consult your tax advisor to determine the applicability of the rules discussed below to you and the particular tax effects of the offer, including the application of Israeli or other tax laws. The discussion below is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations.

 

Taxation of Companies

 

General Corporate Tax Structure

 

Generally, Israeli companies are subject to “Corporate Tax” on their taxable income at the rate of 27% for the 2008 tax year and 26% for the 2009 year tax . Following an amendment to the Tax Ordinance, which came into effect on January 1, 2006, the Corporate Tax rate is scheduled to decrease to 25% for the 2010 tax year and thereafter.  Israeli companies are generally subject to Capital Gains Tax at a rate of 25% for capital gains (other than gains deriving from the sale of listed securities) derived after January 1, 2003. However, the effective tax rate payable by a company which derives income from an approved enterprise (as further discussed below) may be considerably less.

Tax Benefits for Research and Development

 

Israeli tax law allows, under specified conditions, a tax deduction for R&D expenditures, including capital expenditures, for the year in which they are incurred. These expenses must relate to scientific research and development projects and must be approved by the relevant Israeli government ministry, determined by the field of research. Furthermore, the research and development must be for the promotion of the company and carried out by or on behalf of the company seeking such tax deduction. However, 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. Expenditures not so approved are deductible over a three-year period.

 

Tax Benefits Under the Law for the Encouragement of Industry (Taxes), 1969

 

Under the Law for the Encouragement of Industry (Taxes), 1969, industrial companies, as defined under the law, are entitled to the following tax benefits, among others:

 

·

Deduction of purchases of know-how and patents over an eight-year period for tax purposes;

 

·

Right to elect, under specified conditions, to file a consolidated tax return with additional related Israeli Industrial Companies;

 

·

Accelerated depreciation rates on equipment and buildings; and

 

·

Deductions over a three-year period of expenses involved with the issuance and listing of shares on a stock market.

 

Eligibility for benefits under the Law for the Encouragement of Industry is not subject to receipt of prior approval from any governmental authority. Under the law, an “industrial company” is defined as a company resident in Israel, at least 90.0% of the income of which, in any tax year, determined in Israeli currency, exclusive of income from government loans, capital gains, interest and dividends, is derived from an “industrial enterprise” owned by it. An “industrial enterprise” is defined as an enterprise whose major activity in a given tax year is industrial production activity.

 

We believe that we currently qualify as an industrial company within the definition under the Law for the Encouragement of Industry. No assurance can be given that we will continue to qualify as an industrial company or that the benefits described above will be available in the future.

 

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Special Provisions Relating to Taxation under Inflationary Conditions

According to the law, until 2007, the results for tax purposes were measured based on the changes in the Israeli CPI.

In February 2008, the "Knesset" (Israeli parliament) passed an amendment to the Income Tax (Inflationary Adjustments) Law, 1985, which limits the scope of the law starting 2008 and thereafter. Starting 2008, the results for tax purposes are measured in nominal values, excluding certain adjustments for changes in the Israeli CPI carried out in the period up to December 31, 2007. The amendment to the law includes, inter alia, the elimination of the inflationary additions and deductions and the additional deduction for depreciation starting 2008.

Tax Benefits under the Law for the Encouragement of Capital Investments, 1959

 

The Law for the Encouragement of Capital Investment, 1959 (the “Investment Law”) provides that a proposed capital investment in production facilities or other eligible facilities may be designated as an “Approved Enterprise.” To obtain “Approved Enterprise” status, an application to the Investment Center of the Ministry of Industry and Trade (the “Investment Center”) needs to be submitted. Each instrument of approval for an Approved Enterprise relates to a specific investment program that is defined both by the financial scope of the investment, including sources of funds, and by the physical characteristics of the facility or other assets.

 

The tax benefits available under any instrument of approval relate only to taxable profits attributable to the specific program and are contingent upon meeting the criteria set out in the instrument of approval. If a company has more than one approval or only a portion of its capital investments are approved, its effective tax rate is the weighted average of the applicable rates. Subject to certain qualifications, however, if a company with one or more approvals distributes dividends, the dividends are deemed attributable to the entire enterprise. As explained below, following the amendment of the Investment Law which became effective on April, 1, 2005, companies may receive tax benefits under the law without applying for an Approved Enterprise status.

 

Tax Benefits for Income from Approved Enterprises Approved Before April 1, 2005

 

Before April 1, 2005 an Approved Enterprise was entitled to either receive a grant from the Government of Israel or an alternative package of tax benefits (“Alternative Benefits”). We have elected to forego the entitlement to grants and have applied for the Alternative Benefits, under which undistributed income that we generate from our Approved Enterprises will be completely tax exempt (a “tax exemption”) for two years commencing from the year that we first produce taxable income and will be subject to a reduced tax rate of 10%-25% for an additional five to eight years, depending on the extent of foreign investment in the Company.

 

Alternative Benefits are available until the earlier of (i) seven consecutive years, commencing in the year in which the specific Approved Enterprise first generates taxable income, (ii) 12 years from commencement of production and (iii) 14 years from the date of approval of the Approved Enterprise status. This limitation does not apply to the exemption period.

 

Dividends paid out of income generated by an Approved Enterprise (or out of dividends received from a company whose income is generated by an Approved Enterprise) are generally subject to withholding tax at the rate of 15%. This withholding tax is deductible at source by the Approved Enterprise. The 15% tax rate is limited to dividends and distributions out of income derived during the benefits period and actually paid at any time up to 12 years thereafter. Since we elected the Alternative Benefits track, we will be subject to pay corporate tax at the rate of 10% - 25% in respect of the gross amount of the dividend that we may distribute out of profits which were exempt from corporate tax in accordance with the provisions of the Alternative Benefits track.

 

Since we have elected the Alternative Benefits package, we are not obliged to attribute any part of dividends that we may distribute to exempt profits, and we may decide from which year’s profits to declare dividends. We currently intend to reinvest any income that we may in the future derive from our Approved Enterprise programs and not to distribute the income as a dividend.

 

If we qualify as a “Foreign Investors’ Company” or “FIC”, our Approved Enterprises will be entitled to additional tax benefits. Subject to certain conditions, a FIC is a company with a level of foreign investment of more than 25%. The level of foreign investment is measured as the percentage of rights in the company (in terms of shares, rights to profits, voting and appointment of directors), and of combined share and loan capital, that are owned, directly or indirectly, by persons who are not residents of Israel. Such a company will be eligible for an extension of the period during which it is entitled to tax benefits under its Approved Enterprise status (so that the benefit periods may be up to ten years) and for further tax benefits if the level of foreign investment exceeds 49%. The tax rate for the remainder of the benefits period will be 25%, unless the level of foreign investment exceeds 49%, in which case the tax rate will be 20% if the foreign investment is more than 49% and less than 74%; 15% if more than 74% and less than 90%; and 10% if 90% or more. The benefits available to an Approved Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations and the criteria in the specific certificate of approval, as described above. If a company does not meet these conditions, it would be required to refund the amount of tax benefits, together with consumer price index linkage adjustment and interest.

 

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Tax Benefits under an Amendment that became effective on April 1, 2005

 

On April 1, 2005, a significant amendment to the Investment Law became effective (the “Amendment”). The Investment Law provides that terms and benefits included in any certificate of approval that was granted before the Amendment came into effect will remain subject to the provisions of the Investment Law as they were on the date of such approval.

 

The amendment to the Investments Law, which was published on April 1, 2005 (the “Amendment”), has changed certain provisions of the Law. As a result of the Amendment, a company is no longer obliged to acquire Approved Enterprise status in order to receive the tax benefits previously available under the Alternative Benefits provisions, and therefore generally there is no need to apply to the Investment Center for this purpose (Approved Enterprise status remains mandatory for companies seeking grants). Rather, the Company may claim the tax benefits offered by the Investments Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set out by the Amendment. A company is also granted a right to approach the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the Amendment.

Tax benefits are available under the Amendment to production facilities (or other eligible facilities), which are generally required to derive more than 25% of their business income from export (referred to as a “Benefited Enterprise”). In order to receive the tax benefits, the Amendment states that the company must make an investment which meets all the conditions set out in the Amendment for tax benefits and exceeds a minimum amount specified in the Law. Such investment allows the company to receive a “Benefited Enterprise” status, and may be made over a period of no more than three years ending at the end of the year in which the company requested to have the tax benefits apply to the Benefited Enterprise (the “Year of Election”). Where the company requests to have the tax benefits apply to an expansion of existing facilities, only the expansion will be considered to be a Benefited Enterprise and the company’s effective tax rate will be the weighted average of the applicable rates. In this case, the minimum investment required in order to qualify as a Benefited Enterprise is required to exceed a certain amount or certain percentage of the value of the company’s production assets before the expansion.

 

The duration of tax benefits is subject to a limitation of the earlier of 7 to 10 years from the commencement year, or 12 years from the first day of the Year of Election. The tax benefits granted to a Benefited Enterprise are determined, as applicable to its geographic location within Israel, according to one of the following new tax routes, which may be applicable to us:

 

·

Similar to the currently available alternative route, exemption from corporate tax on undistributed income for a period of two to ten years, depending on the geographic location of the Benefited Enterprise within Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in each year.  Benefits may be granted for a term of seven to ten years, depending on the level of foreign investment in the company.  If the company pays a dividend out of income derived from the Benefited Enterprise during the tax exemption period, such income will be subject to corporate tax at the applicable rate (10%-25%). The company is required to withhold tax at the source at a rate of 15% from any dividends distributed from income derived from the Benefited Enterprise; and

 

·

A special tax route, which enables companies owning facilities in certain geographical locations in Israel to pay corporate tax at the rate of 11.5% on income of the Benefited Enterprise. The benefits period is ten years. Upon payment of dividends, the company is required to withhold tax at source at a rate of 15% for Israeli residents and at a rate of 4% for foreign residents.

 

Generally, a company that is Abundant in Foreign Investment (as defined in the Investments Law) is entitled to an extension of the benefits period by an additional five years, depending on the rate of its income that is derived in foreign currency.

 

Dividends paid out of income derived by a Benefited Enterprise will be treated similarly to payment of dividends by an Approved Enterprise under the Alternative Benefits track. Therefore, dividends paid out of income derived by a Benefited Enterprise (or out of dividends received from a company whose income is derived from a Benefited Enterprise) are generally subject to withholding tax at the reduced rate of 15% (deductible at source). The reduced rate of 15% is limited to dividends and distributions out of income derived from a Benefited Enterprise during the benefits period and actually paid at any time up to 12 years thereafter. A company qualifying for tax benefits under the Amendment which pays a dividend out of income derived by its Benefited Enterprise during the tax exemption period will be subject to tax in respect of the gross amount of the dividend at the otherwise applicable rate of 10%-25%.

 

The Amendment changes the definition of “foreign investment” in the Investments Law so that the definition now requires a minimal investment of NIS 5 million by foreign investors. Furthermore, such definition now also includes the purchase of shares of a company from another shareholder, provided that the company’s outstanding and paid-up share capital exceeds NIS 5 million. Such changes to the aforementioned definition are retroactive from 2003.

 

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As a result of the Amendment, tax-exempt income generated under the provisions of the new law will subject us to taxes upon distribution of the tax-exempt income to shareholders or liquidation of the company, and we may be required to record a deferred tax liability with respect to such tax-exempt income.

 

As of December 31, 2008 the Company did not generate income under any of the above mentioned laws.

 

Israeli Transfer Pricing Regulations

 

On November 29, 2006, Income Tax Regulations (Determination of Market Terms), 2006, promulgated under Section 85A of the Tax Ordinance, came into effect (the “TP Regs”). Section 85A of the Tax Ordinance and the TP Regs generally requires that all cross-border transactions carried out between related parties be conducted on an arm’s length principle basis and will be taxed accordingly.  The TP Regs are not expected to have a material effect on the Company.

 

Taxation of our Shareholders

 

Israeli law generally imposes a capital gains tax on the sale of capital assets located in Israel, including shares in Israeli resident companies, unless a specific exemption is available or unless a treaty between Israel and the country of the non-resident provides otherwise.

 

On January 1, 2006, an amendment to the Israeli tax regime became effective (the “2006 Tax Reform”). The 2006 Tax Reform significantly changed the tax rates applicable to income derived from shares. According to the 2006 Tax Reform, an individual is subject to a 20% tax rate on real capital gains derived from the sale of shares, unless such shareholder claims a deduction for financing expenses in connection with such shares in which case the gain will generally be taxed at a rate of 25%. Additionally, if such shareholder is considered a “substantial shareholder” (generally a shareholder who holds directly or indirectly 10% or more of the right to profits, right to nominate a director and voting rights) of the company issuing the shares, the tax rate is 25%.

 

The determination of whether the individual is a substantial shareholder will be made on the date that the securities are sold. In addition, the individual will be deemed to be a substantial shareholder if at any time during the 12 months preceding this date he had been a substantial shareholder. However, the foregoing tax rates will not apply to dealers in securities.

 

Corporations are subject to corporate tax rates in respect of capital gains from the sale of shares in Israeli companies. The 2006 Tax Reform provides that the corporate tax rate will be reduced gradually from 29% in 2007 to 27% in 2008, 26% in 2009 and 25% in 2010. However, between 2006 and 2009, corporations whose taxable income was not determined immediately before the 2006 Tax Reform was published, pursuant to part B of the Israeli Income Tax Law (Inflationary Adjustments), 1985 or pursuant to the Income Tax Regulations (Rules on Bookkeeping by Foreign Invested Companies and Certain Partnership and Determination of their Chargeable Income), 1984 (“Dollar Regulations”) will generally be taxed at a rate of 25% on their capital gains from the sale of their shares.

 

Non-residents of Israel, including corporations, will generally be exempt from any capital gains tax from the sale of shares traded on a recognized stock exchange outside of Israel (including NASDAQ), provided that such shareholders did not acquire their shares prior to an initial public offering, that the gains are not derived through a permanent establishment that the non-resident maintains in Israel, and that such shareholders are not subject to the Inflationary Adjustment Law. However, non-Israeli corporations will not be entitled to such exemption if an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. In any case, these tax rates are subject to the provisions of any applicable tax treaty.

 

In addition, pursuant to the Convention Between the U.S. Government and the Government of Israel with Respect to Taxes on Income, as amended (the “United States-Israel Tax Treaty”), the sale, exchange or disposition of ordinary shares by a person who qualifies as a resident of the United States within the meaning of the United States-Israel Tax Treaty and who is entitled to claim the benefits afforded to such person by the United States-Israel Tax Treaty (a “Treaty United States Resident”) generally will not be subject to the Israeli capital gains tax unless such “Treaty United States Resident” holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding such sale, exchange or disposition, subject to certain conditions. However, under the United States-Israel Tax Treaty, such “Treaty United States Resident” would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The United States-Israel Tax Treaty does not relate to U.S. state or local taxes.

 

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Non-residents of Israel are subject to income tax on income accrued or derived from sources in Israel. These sources of income include passive income, including dividends, royalties and interest, as well as non-passive income from services rendered in Israel. On distribution of dividends other than bonus shares or stock dividends by a publicly traded company, income tax is withheld at source, at the rate of 20% for dividends paid to an individual or foreign corporation, and 15% for dividends generated by an Approved Enterprise, unless in each case a different rate is provided in a treaty between Israel and shareholder’s country of residence. Under the U.S.-Israel tax treaty, the maximum tax on dividends paid to a holder of ordinary shares who is a U.S. resident will be 25%. However, the maximum tax rate on dividends not generated by an approved enterprise paid to a U.S. corporation holding at least 10% of our voting power is 12.5%.

 

A non-resident of Israel who receives dividends from which tax was withheld is generally exempt from the duty to file returns in Israel in respect of such income, provided such income was not derived from a business conducted in Israel by the taxpayer, and the taxpayer has no other taxable sources of income in Israel.

 

CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

 

General

 

The following is a summary of certain material U.S. federal income tax consequences to U.S. persons holding our ordinary shares (referred to herein as U.S. holders) of purchasing, owning, and disposing of such shares. For this purpose, a U.S. person is, in each case as defined for U.S. federal income tax purposes: (a) an individual who is a citizen or resident of the United States; (b) a corporation or other entity taxable as a corporation under federal income tax laws created or organized in or under the laws of the United States, any state of the United States or the District of Columbia; (c) an estate the income of which is subject to U.S. federal income tax regardless of its source; or (d) a trust that is subject to the primary supervision of a court over its administration and one or more U.S. persons control all substantial decisions, or a trust that has validly elected to be treated as a domestic trust under applicable Treasury Regulations. This summary does not address any tax consequences to persons other than U.S. persons.

 

This discussion is a general summary and does not address all aspects of U.S. federal income taxation that may be relevant to particular U.S. holders based on their particular investment or tax circumstances. It does not address any tax consequences to certain types of U.S. holders that are subject to special treatment under the U.S. federal income tax laws, such as insurance companies, tax-exempt organizations, financial institutions, or broker-dealers, dealers in securities or currencies, traders in securities that elect to use the mark-to-market method of accounting for their securities, partnerships or other pass-through entities for U.S. federal tax purposes, regulated investment companies, real estate investment trusts, expatriates, persons liable for alternative minimum tax, persons owning, directly or by attribution, 10% or more, by voting power or value, of our ordinary shares, persons whose “functional currency” is not the U.S. dollar, persons holding ordinary shares as part of a hedging, constructive sale or conversion, straddle, or other risk-reducing transaction, or persons acquiring an interest in our shares in exchange for services.

 

This summary addresses only ordinary shares that (a) are held as capital assets, and (b) were acquired upon original issuance at their initial offering price.

 

This summary relates only to U.S. federal income taxes. It does not address any other tax, including but not limited to state, local, or foreign taxes, or any other U.S. federal taxes other than income taxes.

 

The statements in this summary are based on the current U.S. federal income tax laws as contained in the Internal Revenue Code, Treasury Regulations, and relevant judicial decisions and administrative guidance. The U.S. federal tax laws are subject to change, and any such change may materially affect the U.S. federal income tax consequences of purchasing, owning, or disposing of our ordinary shares. We cannot assure you that new laws, interpretations of law or court decisions, any of which may take effect retroactively, will not cause any statement in this summary to be inaccurate. No ruling or opinions of counsel will be sought in connection with the matters discussed herein. There can be no assurance that the positions we take on our tax returns will be accepted by the Internal Revenue Service.

 

This section is not a substitute for careful tax planning. Prospective investors are urged to consult their own tax advisors regarding the specific U.S. federal, state, foreign and other tax consequences to them, in light of their own particular circumstances, of the purchase, ownership and disposition of our ordinary shares and the effect of potential changes in applicable tax laws.

 

Dividends

 

A U.S. holder will be required to take into account as dividends any distributions with respect to our ordinary shares made out of our current or accumulated earnings and profits. The dividends received deduction will not be available to a U.S. holder that is taxed as a corporation. With certain exceptions (including but not limited to dividends treated as investment income for purposes of investment interest deduction limitations), qualified dividends received by a non-corporate U.S. holder generally will be subject to tax at the maximum tax rate accorded to capital gains, if certain holding period and other conditions are satisfied, through December 31, 2010, after which the rate applicable to dividends is scheduled to return to the tax rate generally applicable to ordinary income. Dividends will generally be from a non-U.S. source and treated as “passive income” for U.S. foreign tax credit purposes.

 

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Although, to the extent we pay dividends in the future, we intend to pay dividends to U.S. holders in U.S. dollars, the amount of any dividend paid in Israeli currency will equal its U.S. dollar value for U.S. federal income tax purposes, calculated by reference to the exchange rate in effect on the date the dividend is received by the U.S. holder, regardless of whether the Israeli currency is converted into U.S. dollars. If the Israeli currency is not converted into U.S. dollars on the date of receipt, the U.S. holder will have a basis in the Israeli currency equal to its U.S. dollar value on the date of receipt. Any subsequent gain or loss upon the conversion or other disposition of the Israeli currency will be treated as ordinary income or loss, and generally will be income or loss from U.S. sources.

 

A U.S. holder will not incur tax on a distribution with respect to our ordinary shares in excess of our current and accumulated earnings and profits if the distribution does not exceed the adjusted basis of the U.S. holder’s ordinary shares. Instead, the distribution will reduce the adjusted basis of the shares. Any such distribution in excess of both our current and accumulated earnings and profits and the U.S. holder’s adjusted basis will be treated as capital gain, long-term if the U.S. holder has held the shares for more than one year, and generally will be gain or loss from U.S. sources. See “Disposition of Ordinary Shares” below for a discussion of capital gains tax rates and limitations on deductions for losses.

 

Disposition of Ordinary Shares

 

In general, a U.S. holder must treat any gain or loss recognized upon a taxable disposition of our ordinary shares as capital gain or loss, long-term if the U.S. holder has held the shares for more than one year. In general, a U.S. holder will recognize gain or loss in an amount equal to the difference between the sum of the fair market value of any property and the amount of cash received in such disposition and the U.S. holder’s adjusted tax basis. A U.S. holder’s adjusted tax basis generally will equal the U.S. holder’s acquisition cost less any return of capital. Long-term capital gain realized by a non-corporate U.S. holder generally will be subject to a reduced maximum rate of 15% through December 31, 2010, after which the maximum capital gains rate is scheduled to return to 20%. The deduction of capital losses is subject to limitations, as are losses upon a taxable disposition of our ordinary shares if the U.S. holder purchases, or enters into a contract or option to purchase, substantially identical stock or securities within 30 days before or after any disposition. Gain or loss from the disposition of our ordinary shares will generally be from U.S. sources, but such gain or loss may be from a non-U.S. source under some circumstances under the U.S.-Israel Tax Treaty. U.S. holders should consult their own independent tax advisors regarding the sourcing of any gain or loss on the disposition of our ordinary shares, as well as regarding any foreign currency gain or loss in connection with such a disposition.

 

Credit for Foreign Taxes Paid or Withheld

 

Payments to U.S. holders as dividends or consideration for ordinary shares may in some circumstances be subject to Israeli withholding taxes. See “Israeli Tax Considerations and Government Programs” above. Generally, such withholding taxes in lieu of Israeli income taxes imposed on such transactions are creditable against the U.S. holder’s U.S. tax liability, subject to numerous U.S. foreign tax credit limitations, including additional limitations in the case of qualified dividends eligible for the maximum rate accorded to capital gains. A corporate U.S. holder may also be eligible for an “indirect” foreign tax credit on dividends to take account of certain Israeli taxes we previously paid to Israel.  A U.S. holder should consult its own independent tax advisor regarding use of the U.S. foreign tax credit and its limitations. A U.S. holder (except an individual who does not itemize deductions) may elect to take a deduction rather than a credit for foreign taxes paid.

 

Controlled Foreign Corporation

 

For U.S. federal income tax purposes, a “controlled foreign corporation” is a foreign corporation in which U.S. holders who own at least 10% of the voting power (directly or by constructive ownership through certain related persons) collectively own more than 50% of the voting power or value. If we are or become a controlled foreign corporation, such 10% U.S. holders must include in their current U.S. taxable income their share of the corporation’s undistributed “Subpart F income” (i.e., certain passive income, sales or service income, insurance, shipping, ocean activity, or oil-related income, and income from specified disfavored activities or from ostracized foreign countries) and the amount of the corporation’s investments in U.S. property. These income inclusions are not eligible for the maximum capital gains tax rate on qualified dividends to non-corporate tax payers. We believe that the corporation is not and has not been, and we expect that the corporation will not become, a controlled foreign corporation. There can be no assurance, however, that the corporation will not become a controlled foreign corporation in the future.

 

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Passive Foreign Investment Company

 

We were a passive foreign investment company, or PFIC for the years ended December 31, 2006 and 2007. We believe that we should not be treated as a PFIC for 2008. We nevertheless recognize that there are significant areas of uncertainty in the PFIC rules, and the IRS may not agree with our belief. We are a passive foreign investment company, or PFIC, if 75% or more of our gross income in a taxable year, including the pro rata share of the gross income of any company in which we are considered to own 25% or more of the shares by value, is passive income. Alternatively, we are a PFIC if at least 50% of our assets in a taxable year, averaged over the year and ordinarily determined based on fair market value, including the 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.

 

PFIC status is determined annually and cannot be definitively determined until the close of the year in question. If we qualify as a PFIC at any time during a U.S. holder’s holding period of our ordinary shares, any subsequent distributions to, or disposition of the shares by, the U.S. holder will be subject to the excess distribution rules (described below), regardless of whether we are a PFIC in the year of distribution or disposition, unless the U.S. holder: (1) made the qualified electing fund (“QEF”) election (described below); (2) made the mark-to-market election (described below); or (3) during a year in which the corporation is no longer a PFIC, elected to recognize all gain inherent in the shares of the last day of the last taxable year in which the corporation was a PFIC. Therefore, for example, if a U.S. holder acquired our ordinary shares in 2007, such ordinary shares will henceforth be considered shares in a PFIC, regardless of whether we meet the PFIC tests in future years, unless the U.S. holder makes a timely QEF or mark-to-market election, or makes the deemed gain election in a year in which the corporation is no longer a PFIC.

 

If we are a PFIC, each U.S. holder, upon certain excess distributions by us and upon disposition of our ordinary shares at a gain, would be liable to pay tax at the highest then-prevailing income tax rate on ordinary income plus interest on the tax, as if the distribution or gain had been recognized ratably over the holder’s holding period for the ordinary shares. Additionally, if we are a PFIC, a U.S. holder who acquires ordinary shares from a deceased person who was a U.S. holder would not receive the step-up of the income tax basis to fair market value for such ordinary shares. Instead, such U.S. holder would have a tax basis equal to the deceased’s tax basis, if lower.

 

If a U.S. holder has made a QEF election covering all taxable years during which the holder holds ordinary shares and in which we are a PFIC, distributions and gains will not be taxed as described above, nor will denial of a basis step-up at death described above apply. Instead, a U.S. holder that makes a QEF election is required for each taxable year to include in income the holder’s pro rata share of the ordinary earnings of the QEF as ordinary income and a pro rata share of the net capital gain of the QEF as capital gain, regardless of whether such earnings or gain have in fact been distributed. Undistributed income is subject to a separate election to defer payment of taxes. If deferred, the taxes will be subject to an interest charge. Where earnings and profits that were included in income under this rule are later distributed, the distribution is not a dividend. The basis of a U.S. shareholder’s shares in a QEF is increased by amounts that are included in income, and decreased by amounts distributed but not taxed as dividends. In addition, if a U.S. holder makes a timely QEF election, our ordinary shares will not be considered shares in a PFIC in years in which we are not a PFIC, even if the U.S. holder had held ordinary shares in prior years in which we were a PFIC.

 

In order to comply with the requirements of a QEF election, a U.S. holder must receive certain information from us. The QEF election is made on a shareholder-by-shareholder basis and can be revoked only with the consent of the IRS. A shareholder makes a QEF election by attaching a completed IRS Form 8621, including the information provided in the PFIC annual information statement, to a timely filed U.S. federal income tax return and by filing a copy of the form with the IRS. There is no assurance that we will provide such information as the IRS may require in order to enable U.S. holders to make the QEF election. Moreover, there is no assurance that we will have timely knowledge of our status as a PFIC in the future. Even if a shareholder in a PFIC does not make a QEF election, if such shareholder is a U.S. holder, such shareholder must annually file with the shareholder’s tax return and with the IRS a completed Form 8621.

 

If our ordinary shares are “regularly traded” on a “qualified exchange or other market,” as provided in applicable Treasury Regulations, a U.S. holder of our shares may elect to mark the shares to market annually, recognizing as ordinary income or loss each year an amount equal to the difference between the shareholder’s adjusted tax basis in such shares and their fair market value. Losses would be allowed only to the extent of net mark-to-market gain previously included by the U.S. holder under the election in previous taxable years. As with the QEF election, a U.S. holder who makes a mark-to-market election would not be subject to the general PFIC regime and the denial of basis step-up at death described above.

 

If we are a PFIC and, at any time, have a non-U.S. subsidiary that is classified as a PFIC, U.S. holders of our ordinary shares generally would be deemed to own, and also would be subject to the PFIC rules with respect to, their indirect ownership interests in that lower-tier PFIC. If we are a PFIC and a U.S. holder of our ordinary shares does not make a QEF election in respect of a lower-tier PFIC, the U.S. holder could incur liability for the deferred tax and interest charge described above if either (1) we receive a distribution from, or dispose of all or part of our interest in, the lower-tier PFIC or (2) the U.S. holder disposes of all or part of its ordinary shares. There is no assurance that any lower-tier PFIC will provide to a U.S. holder the information that may be required to make a QEF election with respect to the lower-tier PFIC. A mark-to-market election under the PFIC rules with respect to our ordinary shares would not apply to a lower-tier PFIC, and a U.S. holder would not be able to make such a mark-to-market election in respect of its indirect ownership interest in that lower-tier PFIC. Consequently, U.S. holders of our ordinary shares could be subject to the PFIC rules with respect to income of the lower-tier PFIC the value of which already had been taken into account indirectly via mark-to-market adjustments. Similarly, if a U.S. holder made a mark-to-market election under the PFIC rules in respect of our ordinary shares and made a QEF election in respect of a lower-tier PFIC, that U.S. holder could be subject to current taxation in respect of income from the lower-tier PFIC the value of which already had been taken into account indirectly via mark-to-market adjustments. U.S. holders are urged to consult their own tax advisers regarding the issues raised by lower-tier PFICs.

 

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THE RULES DEALING WITH PFICS AND WITH THE QEF AND MARK-TO-MARKET ELECTIONS ARE VERY COMPLEX AND ARE AFFECTED BY VARIOUS FACTORS IN ADDITION TO THOSE DESCRIBED ABOVE, INCLUDING OUR OWNERSHIP OF ANY NON-U.S. SUBSIDIARIES. AS A RESULT, U.S. HOLDERS OF ORDINARY SHARES ARE STRONGLY ENCOURAGED TO CONSULT THEIR TAX ADVISERS ABOUT THE PFIC RULES IN CONNECTION WITH THEIR PURCHASING, HOLDING OR DISPOSING OF ORDINARY SHARES.

 

Backup Withholding and Information Reporting

 

A U.S. holder (excepting most corporations) may, under certain circumstances, be subject to information reporting requirements and backup withholding at a rate of 28% on payments of dividends, interest, and other reportable payments. A non-corporate U.S. holder should consult its own independent tax advisor regarding the possibility of information reporting and backup withholding on payments in connection with the purchase, ownership, or disposition of our ordinary shares.

 

F.  DIVIDENDS AND PAYING AGENTS

 

Not applicable.

 

G.  STATEMENT BY EXPERTS

 

Not applicable.

 

H.  DOCUMENTS ON DISPLAY

 

We file annual and special reports and other information with the SEC. You may inspect and copy such material at the public reference facilities maintained by the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may also obtain copies of such material from the SEC at prescribed rates by writing to the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our SEC filings also are available to the public from the SEC’s website at www.sec.gov. In addition, our annual and special reports and other information filed with the SEC is available free of charge through the Investors section of our website as soon as reasonably practicable after such materials have been electronically filed with, or furnished to, the SEC.

 

I.  SUBSIDIARY INFORMATION

 

Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Risk

 

We are exposed to market risk related to changes in interest rates primarily from our investments in certain short-term investments. We maintain an investment portfolio consisting mainly of U.S. money markets and government grade securities, directly or through managed funds. We do not utilize derivative financial instruments, derivative commodity instruments or other market risk-sensitive instruments to manage exposure to interest rate changes. Accordingly, we believe that, while the securities we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments.

 

Exchange Rate Risk

 

We hold most of our cash, cash equivalents and marketable securities in U.S. dollars but incur a significant portion of our expenses, principally salaries and related personal expenses, in NIS. As a result, we are exposed to the risk that the U.S. dollar will be devalued against the NIS.  The following table illustrates the effect of the changes in exchange rates on our operation loss for the periods indicated: 

		Year ended December 31,
		2006								2007								2008
		Actual				At 2005 Exchange rates (1)				Actual				At 2006 Exchange rates (1)				Actual				At 2007 Exchange rates (1)
		(In thousands)
Operating loss		$	8,125			$	8,058			$	11,042			$	9,673			$	14,889			$	13,633

 

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(1) Based on average exchange rates during the period

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

Not applicable.

 

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PART II

 

ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

 

None.

 

ITEM 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

Material Modifications to the Rights of Security Holders

 

Upon completion of our initial public offering in March 2007, all of our outstanding preferred shares and ordinary A shares were converted into ordinary shares. Our second amended articles of association also became effective upon the completion of our initial public offering. The material provisions of our second amended articles of association are described under “Item 10. Additional Information — B. Memorandum and Articles of Association.” Since our initial public offering, no instruments defining the rights of holders of our ordinary shares have been modified.

 

Use of Proceeds

 

The Registration Statement on Form F-1 (Reg. No. 333-137095) in connection with our initial public offering was declared effective by the SEC on February 26, 2007. In the initial public offering, we sold 4,312,500 ordinary shares at an initial public offering price per share of $7.00. The net offering proceeds to us after deducting total expenses were $26,008,011. As of December 31, 2008, approximately $15.5 million of the net proceeds of the offering had been used to fund operations and capital expenditures. The remaining net proceeds have been invested in bank deposits and marketable securities. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus dated February 26, 2007 filed with the SEC pursuant to Rule 424(b)(4).

 

ITEM 15T.  CONTROLS AND PROCEDURES

 

A.  DISCLOSURE CONTROLS AND PROCEDURES

 

Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Annual Report on Form 20-F. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their desired control objectives. Based on the evaluation of our disclosure controls and procedures as of December 31, 2008, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

B.  MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment we believe that, as of December 31, 2008, our internal control over financial reporting is effective at a reasonable assurance level based on those criteria.

 

This Annual Report on Form 20-F does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in the Annual Report.

 

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C.  CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during the period covered by this Annual Report, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 16. RESERVED

 

ITEM 16A.  AUDIT COMMITTEE FINANCIAL EXPERT

 

Our audit committee consists of Gerald Dogon (Chairman), Prof. Moshe Many and Tali Yaron-Eldar, all of whom are independent under the rules and regulations of NASDAQ. Our board of directors has determined that Mr. Dogon qualifies as an “audit committee financial expert” as defined in the instructions to Item 16A of Form 20-F.

 

ITEM 16B.  CODE OF ETHICS

 

We have adopted a code of conduct and ethics that applies to all of our employees, including our principal executive officer and principal accounting and financial officer, and our directors. The text of the code of conduct and ethics is posted on the “Corporate Governance” section of our website at www.rosettagenomics.com . Disclosure regarding any amendments to, or waivers from, provisions of the code of conduct and ethics that apply to our directors, principal executive and financial and accounting officers will be included in a Form 6-K within four business days following the date of the amendment or waiver, unless website posting of such amendments or waivers is then permitted by the rules of The NASDAQ Stock Market, LLC.

 

ITEM 16C.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Accounting Fees and Services

 

The following table presents fees for professional audit services rendered by Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, independent registered public accountants, for the audit of our consolidated financial statements and services  normally provided by the independent auditor in connection with statutory and regulatory filings or engagements for the years ended December 31, 2008 and December 31, 2007 and fees billed for other services rendered by Kost Forer Gabbay & Kasierer during those periods.

 

		2008				2007
Audit fees (1)		$	105,000			$	75,000
Audit-related fees			18,560				-
Tax fees (2)			10,000				15,600
All other fees (3)			-				750
Total		$	133,560			$	91,350

 

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(1)           Audit services were comprised of services associated with the audit of our consolidated financial statements and services normally provided by the independent auditor in connection with statutory and regulatory filings or engagements and registration statements.

(2)           Tax services were comprised of tax compliance, tax advice and tax planning services.

(3)           All other services were comprised of business related consultation.

 

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-audit Services of Independent Auditors

 

Our audit committee was established effective upon the completion of our initial public offering in March 2007. Consistent with policies of the Securities and Exchange Commission regarding auditor independence, the audit committee has responsibility for appointing, setting compensation and overseeing the work of the independent auditor. The audit committee operates under a written charter which provides that the committee must approve in advance all audit services and all permitted non-audit services, except where such services are determined to be de minimis under the Exchange Act. The audit committee may delegate, to one or more designated members of the audit committee, the authority to grant such pre-approvals. The decision of any member to whom such authority is delegated is to be presented to the full audit committee at each of its scheduled meetings.

 

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

 

Not applicable.

 

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

 

Not applicable.

 

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ITEM 16F.  CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

 

Not applicable.

 

ITEM 16G.  CORPORATE GOVERNANCE

 

There are no significant differences between our corporate governance practices and those required of a U.S. domestic issuer under the rules of The NASDAQ Stock Market. However, pursuant to the rules and regulations of The NASDAQ Stock Market, a foreign private issuer may follow its home country practice in lieu of certain NASDAQ listing requirements. We have in the past elected to follow home country practice in lieu of certain NASDAQ requirements as follows:

 

·

NASDAQ rules require that the quorum for meetings of a company’s shareholders be not less than 33 1/3% of the outstanding voting stock of the company.  We have, however, chosen to follow home country practice with respect to shareholder meeting quorum and our articles of association provide that the quorum required for any meeting of our shareholders shall consist of at least two shareholders present, in person or by proxy, who hold or represent between them at least 25% of the voting power of our issued share capital.

 

·

In November 2007, our Board of Directors authorized an increase of 500,000 ordinary shares for issuance under our Global Share Incentive Plan (2006), or 2006 Plan.  Generally, under NASDAQ’s requirements, such an increase would require shareholder approval.  However, we chose to follow our home country practice, which does not require shareholder approval, and did not seek or receive shareholder approval for the increase in shares under the 2006 Plan.

 

 

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PART III

 

ITEM 17. FINANCIAL STATEMENTS

 

See Item 18.

 

ITEM 18. FINANCIAL STATEMENTS

 

Our consolidated financial statements and related notes are included in this Annual Report beginning on page F-1.

 

ITEM 19. EXHIBITS

 

The following is a list of exhibits filed as part of this Annual Report.

 

Exhibit Number		Description of Exhibit
1.1(5)		Second Amended and Restated Articles of Association, as amended on May 30, 2007.
2.1(1)		Form of Share Certificate for Ordinary Shares.
2.2(1)		Investor Rights Agreement dated April 4, 2006.
2.3*		Convertible Note Agreement, dated as of September 24, 2008, by and among Rosetta Genomics Ltd. and the entities identified in the Schedule of Investors thereto and form of Convertible Promissory Notes.
4.1(1)@		Research Collaboration Agreement, dated as of January 31, 2006, by and between Rosetta Genomics Ltd., and Isis Pharmaceuticals, Inc.
4.2(1)@		License Agreement, dated as of May 4, 2006, by and between Rosetta Genomics Ltd. and The Rockefeller University.
4.3(3)@		License Agreement, dated effective as of May 1, 2007, by and between Rosetta Genomics Ltd. and The Rockefeller University.
4.4(1)		License Agreement, dated as of June 23, 2003, by and between Rosetta Genomics Ltd. and Maimonides Innovative Technologies Ltd.
4.5(1)		Lease Agreement, dated August 4, 2003, by and between Rosetta Genomics Ltd., as tenant, and Rorberg Contracting and Investments (1963) Ltd. and Tazor Development Ltd., as landlords, as amended in April 2004 and as extended on April 9, 2006 (as translated from Hebrew).
4.6(5)		Lease, dated December 2, 2007, between 15 Exchange Place Corp. and Rosetta Genomics Inc.
4.7*		Lease Agreement from Wexford-UCSC II, L.P. to Rosetta Genomics Inc., dated July 7, 2008, and First Amendment thereto, dated August 11, 2008.
4.8(1)		2003 Israeli Share Option Plan.
4.9(4)		2006 Employee Incentive Plan (Global Share Incentive Plan).
4.10(1)		Form of Director and Officer Indemnification Agreement.
4.11(1)@		License Agreement, dated as of June 28, 2006, by and between Rosetta Genomics Ltd. and Max Planck Innovation GmbH.
4.12(1)@		License Agreement, dated August 2, 2006, by and between The Johns Hopkins University and Rosetta Genomics Ltd.
4.13(1)@		License Agreement, dated as of December 22, 2006, by and between Rosetta Genomics Ltd. and Max Planck Innovation GmbH.
4.14(1)@		Cooperation and Project Funding Agreement, dated effective as of May 1, 2006, by and among Rosetta Genomics Ltd., the Israel-United States Binational Industrial Research and Development Foundation and Isis Pharmaceuticals, Inc.

 

 

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4.15(5)@		License Agreement, dated effective as of January 8, 2008, by and between Rosetta Genomics Ltd. and The Rockefeller University.
4.16*@		Exclusive Testing and Administrative Services Agreement between Rosetta Genomics Ltd. And Teva Pharmaceutical Industries Ltd., dated December 24, 2008
4.17*@		License Agreement by and between Prometheus Laboratories Inc. and Rosetta Genomics Ltd., dated April 10, 2009.
4.18*@		Laboratory Services Agreement, effective as of April 10, 2009, by and between Prometheus Laboratories Inc. and Rosetta Genomics Ltd.
4.19(6)		Stock Purchase Agreement by and between Prometheus Laboratories Inc. and Rosetta Genomics Ltd., dated April 10, 2009.
4.20*		Stock Purchase Agreement by and among Rosetta Genomics Ltd., Rosetta Genomics Inc., Parkway Clinical Laboratories, Inc. and Dr. Raza Bokhari, dated July 22, 2008.
4.21*		Stock Purchase Agreement by and among Sanra Laboratories, LLC, Parkway Clinical Laboratories, Inc. and Rosetta Genomics Inc., dated May 15, 2009.
8.1(1)		Subsidiaries.
12.1*		Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).
12.2*		Certification of Principal Accounting and Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b).
13.1*		Certification of the Principal Executive Officer and the Principal Accounting and Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
15.1*		Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global.

 

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(1)	Incorporated by reference from the Registrant’s Registration Statement on Form F-1 (Reg. No. 333-137095), initially filed with the SEC on September 1, 2006.

 

(2)	Incorporated by reference from the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2006 (Reg. No. 001-33042), filed with the SEC on May 21, 2007.

 

(3)	Incorporated by reference from the Registrant’s Form 6-K dated August 2, 2007 (Reg. No. 001-33042), filed with the SEC on August 3, 2007.

 

(4)	Incorporated by reference from the Registrant’s Registration Statement on Form S-8 (Reg. No. 333-147805), filed with the SEC on December 3, 2007.

 

(5)	Incorporated by reference from the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2007 (Reg. No. 001-33042), filed with the SEC on June 26, 2008.

 

(6)	Incorporated by reference from the Registrant’s Form 6-K dated April 2009 (Reg. No. 001-33042), filed with the SEC on April 14, 2009.

 

*	Filed herewith.

 

@	Confidential portions of these documents have been filed separately with the SEC pursuant to a request for confidential treatment.

 

 

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SIGNATURE

 

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

	ROSETTA GENOMICS LTD.
Dated: June 30, 2009	By:	/s/ Amir Avniel
		Amir Avniel, Chief Executive Officer and
		President

 

 

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ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008

 

U.S. DOLLARS IN THOUSANDS

 

 

 

INDEX

 

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets	F-3 - F-4
Consolidated Statements of Operations	F-5
Statements of Changes in Shareholders' Equity (Deficiency)	F-6 - F-9
Consolidated Statements of Cash Flows	F-10 - F-11
Notes to Consolidated Financial Statements	F-12 - F-44

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F-1

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

ROSETTA GENOMICS LTD.

(A development stage company)

 

We have audited the accompanying consolidated balance sheets of Rosetta Genomics Ltd. (a development stage company) ("the Company") and its subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in shareholders' equity (deficiency) and cash flows for each of the three years in the period ended December 31, 2008 and for the period from March 9, 2000 (date of inception) through December 31, 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. We were not engaged to perform an audit of the Company's and its subsidiaries internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's and its subsidiaries internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audits, the consolidated financial statements referred to above, present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2008 and 2007, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 2008 and for the period from March 9, 2000 (date of inception) through December 31, 2008 in conformity with accounting principles generally accepted in the United States.

 

	/s/ KOST FORER GABBAY & KASIERER
Tel-Aviv, Israel	KOST FORER GABBAY & KASIERER
June 11, 2009	A Member of Ernst & Young Global

 

F-2

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ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

CONSOLIDATED BALANCE SHEETS

---

U.S. dollars in thousands

 

					December 31,
		Note			2008				2007
ASSETS
CURRENT ASSETS:
Cash and cash equivalents					$	14,454			$	13,590
Short-term bank deposit		4				840				112
Marketable securities		5				426				8,251
Trade receivables, net						502				-
Other accounts receivable and prepaid expenses						335				297
Total current assets						16,557				22,250
LONG-TERM INVESTMENT		6				-				2,391
SEVERANCE PAY FUND						131				144
PROPERTY AND EQUIPMENT, NET		7				1,301				1,253
OTHER INTANGIBLE ASSETS		8				251				-
GOODWILL		9				1,905				-
						3,588				3,788
Total assets					$	20,145			$	26,038

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

CONSOLIDATED BALANCE SHEETS

---

U.S. dollars in thousands (except share and per share data)

 

					December 31,
		Note			2008				2007
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank loan, current maturities of capital lease and long-term bank loan		12a			$	81			$	247
Trade payables						1,030				516
Other accounts payable and accruals		10				1,387				1,102
Total current liabilities						2,498				1,865
LONG-TERM LIABILITIES:
Long-term bank loan and capital lease		12a				49				16
Convertible loan		11				750				-
Deferred revenue						228				228
Accrued severance pay						520				324
Total long-term liabilities						1,547				568
COMMITMENTS AND CONTINGENT LIABILITIES		12
SHAREHOLDERS' EQUITY :
Share capital:		13
Ordinary shares of NIS 0.01 par value: 17,578,370 shares authorized at December 31, 2008 and 2007; 12,367,303 and 12,106,115 shares issued at December 31, 2008 and 2007, respectively, and 12,171,932 and 11,910,744 shares outstanding at December 31, 2008 and 2007, respectively						34				27
Additional paid-in capital						61,018				58,984
Other comprehensive income						3				86
Deficit accumulated during the development stage						(44,955	)			(35,492	)
Total shareholders' equity						16,100				23,605
Total liabilities and shareholders' equity					$	20,145			$	26,038

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

CONSOLIDATED STATEMENTS OF OPERATIONS

---

U.S. dollars in thousands (except share and per share data)

 

					Year ended December 31,												Period from March 9, 2000 (date of inception) through December 31,
		Note			2008				2007				2006				2008
Revenues					$	1,511			$	-			$	-			$	1,511
Cost of revenues						774				-				-				774
Gross profit						737				-				-				737
Operating expenses:
Research and development, net						8,705				6,400				4,781				28,204
Marketing and business development						2,368				1,742				1,504				6,909
General and administrative						3,703				2,903				1,860				11,040
Goodwill impairment						850				-				-				850
Total operating expenses						15,626				11,045				8,145				47,003
Operating loss						14,889				11,045				8,145				46,266
Financial expenses (income), net		15				(5,449	)			3,616				(538	)			(1,334	)
Loss before taxes on income						9,440				14,661				7,607				44,932
Taxes on income		14				23				-				-				23
Net loss					$	9,463			$	14,661			$	7,607			$	44,955
Basic and diluted net loss per Ordinary share					$	0.79			$	1.32			$	2.98
Weighted average number of Ordinary shares used to compute basic and diluted net loss per Ordinary share						12,038,295				11,142,149				2,551,860

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)

---

U.S. dollars in thousands (except share data)

 

		Number of Ordinary shares				Number of Preferred shares				Number of Ordinary A shares				Share capital				Additional paid-in capital				Receipts on account of shares				Accumulated other comprehensive income				Deferred stock compensation				Deficit accumulated during the development stage				Total
Balance as of March 9, 2000 (date of inception)			-				-				-			$	-			$	-			$	-			$	-			$	-			$	-			$	-
Issuance of shares, net			2,522,496				-				-				6				34				-				-				-				-				40
Net loss			-				-				-				-				-				-				-				-				(145	)			(145	)
Balance as of December 31, 2000			2,522,496				-				-				6				34				-				-				-				(145	)			(105	)
Issuance of shares, net in July-December 2001			38,421				-				-				*) -				153				-				-				-				-				153
Treasury shares			(195,371	)			-				-				*) -				-				-				-				-				-				-
Net loss			-				-				-				-				-				-				-				-				(367	)			(367	)
Balance as of December 31, 2001			2,365,546				-				-				6				187				-				-				-				(512	)			(319	)
Exercise of stock options			10,184				-				-				*) -				-				-				-				-				-				-
Deferred stock compensation			-				-				-				-				196				-				-				(196	)			-				-
Amortization of deferred stock compensation			-				-				-				-				-				-				-				72				-				72
Forfeiture of options granted to employees			-				-				-				-				(6	)			-				-				6				-				-
Net loss			-				-				-				-				-				-				-				-				(1,582	)			(1,582	)
Balance as of December 31, 2002			2,375,730				-				-				6				377				-				-				(118	)			(2,094	)			(1,829	)
Issuance of series A Preferred shares, net in July 2003			-				535,084				-				1				2,652				-				-				-				-				2,653
Conversion of convertible loan to series A Preferred shares in October 2003			-				621,835				-				2				2,689				-				-				-				-				2,691
Exercise of warrants to series A Preferred shares			-				180,850				-				*) -				660				-				-				-				-				660
Exercise of stock options			37,816				-				-				-				-				-				-				-				-				-
Deferred stock compensation			-				-				-				-				174				-				-				(174	)			-				-
Amortization of deferred stock compensation			-				-				-				-				-				-				-				177				-				177
Forfeiture of options granted to employees			-				-				-				-				(22	)			-				-				22				-				-
Expenses related to warrants granted to non-employees			-				-				-				-				194				-				-				-				-				194
Net loss			-				-				-				-				-				-				-				-				(2,305	)			(2,305	)
Balance as of December 31, 2003			2,413,546				1,337,769				-				9				6,724				-				-				(93	)			(4,399	)			2,241

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)

---

U.S. dollars in thousands (except share data)

 

		Number of Ordinary shares				Number of Preferred shares				Number of Ordinary A shares				Share capital				Additional paid-in capital				Receipts on account of shares				Accumulated other comprehensive income				Deferred stock compensation				Deficit accumulated during the development stage				Total
Balance as of December 31, 2003			2,413,546				1,337,769				-				9				6,724				-				-				(93	)			(4,399	)			2,241
Issuance of series B Preferred shares, net in September 2004			-				265,747				-				1				1,394				-				-				-				-				1,395
Issuance of Ordinary shares in May 2004			56,914				-				-				*) -				-				-				-				-				-				-
Exercise of stock options			17,033				-				-				-				-				-				-				-				-				-
Deferred stock compensation			-				-				-				-				239				-				-				(239	)			-				-
Amortization of deferred stock compensation			-				-				-				-				-				-				-				92				-				92
Forfeiture of options granted to employees			-				-				-				-				(25	)			-				-				25				-				-
Receipts on account of shares			-				-				-				-				-				493				-				-				-				493
Expenses related to shares and warrants granted to non-employees			-				-				-				-				52				-				-				-				-				52
Net loss			-				-				-				-				-				-				-				-				(2,982	)			(2,982	)
Balance as of December 31, 2004			2,487,493				1,603,516				-				10				8,384				493				-				(215	)			(7,381	)			1,291
Issuance of series B Preferred shares, net in February 2005			-				392,087				-				1				2,164				(493	)			-				-				-				1,672
Conversion of shareholders loan to series B Preferred shares			-				20,802				-				*) -				122				-				-				-				-				122
Exercise of stock options			55,394				-				-				-				-				-				-				-				-				-
Deferred stock compensation			-				-				-				-				32				-				-				(32	)			-				-
Amortization of deferred stock compensation			-				-				-				-				-				-				-				124				-				124
Forfeiture of options granted to employees			-				-				-				-				(16	)			-				-				16				-				-
Cost related to shares and warrants granted to non-employees			-				-				-				-				161				-				-				-				-				161
Cost related to warrants granted as finders' fee			-				-				-				-				138				-				-				-				-				138
Expenses related to accelerations of vesting of stock options			-				-				-				-				12				-				-				-				-				12
Net loss			-				-				-				-				-				-				-				-				(5,843	)			(5,843	)
Balance as of December 31, 2005			2,542,887				2,016,405				-				11				10,997				-				-				(107	)			(13,224	)			(2,323	)

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)

---

U.S. dollars in thousands (except share data)

		Number of Ordinary shares				Number of Preferred shares				Number of Ordinary A shares				Share capital				Additional paid-in capital				Accumulated other comprehensive income				Deferred stock compensation				Deficit accumulated during the development stage				Total
Balance as of December 31, 2005			2,542,887				2,016,405				-				11				10,997				-				(107	)			(13,224	)			(2,323	)
Conversion of convertible loan into series B Preferred shares			-				1,033,382				-				2				6,228				-				-				-				6,230
Issuance of series C Preferred shares, net			-				1,822,422				-				4				13,292				-				-				-				13,296
Exercise of warrants to purchase series B Preferred shares in April 2006			-				76,395				-				*) -				447				-				-				-				447
Exercise of stock options			11,148				-				-				*) -				-				-				-				-				-
Amortization of deferred stock compensation			-				-				-				-				-				-				59				-				59
Issuance of shares to non-employee			9,240				-				-				*) -				61				-				-				-				61
Unrealized gain from marketable securities			-				-				-				-				-				3				-				-				3
Cancellation of restricted Ordinary shares			(1,581	)			-				-				*) -				-				-				-				-				-
Compensation related to shares and warrants granted to non-employees			-				-				-				-				177				-				-				-				177
Stock based compensation to employees			-				-				-				-				756				-				-				-				756
Net loss			-				-				-				-				-				-				-				(7,607	)			(7,607	)
Balance as of December 31, 2006			2,561,694				4,948,604				-				17				31,958				3				(48	)			(20,831	)			11,099
Conversion of Ordinary shares   into Ordinary A shares			(2,159,126	)			-				2,159,126				-				-				-				-				-				-
Adjustment from conversion into Ordinary shares			-				306,962				(306,962	)			-				-				-				-				-				-
Conversion into Ordinary shares in March 2007			7,107,730				(5,255,566	)			(1,852,164	)											-				-				-				-
Issuance of Ordinary shares, net of $4,180 issuance cost in March 2007			4,312,500				-				-				10				25,998				-				-				-				26,008
Exercise of stock options			83,999				-				-				-				41				-				-				-				41
Exercise of warrants			3,947				-				-				-				-				-				-				-				-
Amortization of deferred stock compensation			-				-				-				-				-				-				33				-				33
Forfeiture of options granted to employees			-				-				-				-				(15	)			-				15				-				-
Stock based compensation to non-employees			-				-				-				-				155				-				-				-				155
Stock based compensation to employees			-				-				-				-				847				-				-				-				847
Unrealized gain from hedging activities			-				-				-				-				-				83				-				-				83
Net loss			-				-				-				-				-				-				-				(14,661	)			(14,661	)
Balance as of December 31, 2007			11,910,744				-				-				27				58,984				86				-				(35,492	)			23,605

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)

---

U.S. dollars in thousands (except share data)

		Number of Ordinary shares				Number of Preferred shares				Number of Ordinary A shares				Share capital				Additional paid-in capital				Accumulated other comprehensive income				Deficit accumulated during the development stage				Total
Balance as of December 31, 2007			11,910,744				-				-				27				58,984				86				(35,492	)			23,605
Exercise of stock options			31,527				-				-				*) -				33				-				-				33
Issuance of shares in July 2008			229,661				-				-				7				993				-				-				1,000
Stock based compensation to non-employees			-				-				-				-				70				-				-				70
Stock based compensation to employees			-				-				-				-				938				-				-				938
Realized loss from hedging activities			-				-				-				-				-				(83	)			-				(83	)
Net loss			-				-				-				-				-				-				(9,463	)			(9,463	)
Balance as of December 31, 2008			12,171,932				-				-			$	34			$	61,018			$	3			$	(44,955	)		$	16,100

 

Accumulated other comprehensive income

		Year ended December 31,
		2008				2007
Accumulated unrealized gains from available-for-sale- marketable securities, net of taxes		$	3			$	3
Accumulated unrealized gains from hedging activity			-				83
		$	3			$	86

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

---

U.S. dollars in thousands

 

		Year ended December 31,												Period from March 9, 2000 (date of inception) through December 31,
		2008				2007				2006				2008
Cash flows from operating activities:
Net loss		$	(9,463	)		$	(14,661	)		$	(7,607	)		$	(44,955	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			334				179				161				1,119
Amortization of other  intangible assets and impairment of goodwill			936				-				-				936
Foreign currency adjustments			(39	)			12				4				(49	)
Amortization of discount on convertible loan			-				-				-				405
Income related to embedded derivative			-				-				-				(236	)
Interest on short-term bank deposit			(5	)			-				(149	)			(154	)
Modification of convertible loan			-				-				-				360
Capital loss from sale of property and equipment			2				4				20				55
Accrued interest on marketable securities			(36	)			(98	)			(14	)			(193	)
Accrued severance pay, net			209				(66	)			165				389
Amortization of deferred stock compensation			-				33				59				557
Stock-based compensation to employees			938				847				756				2,541
Compensation related to shares and warrants granted to non-employees			70				155				177				947
Cost related to acceleration of stock options' vesting			-				-				-				12
Decrease in marketable securities			-				-				-				42
Gain from sale of marketable securities			(5,640	)			-				-				(5,640	)
Impairments of investments in marketable securities			631				5,009				-				5,640
Increase in trade receivables			(233	)			-				-				(233	)
Increase in other accounts receivable and prepaid expenses			(62	)			(80	)			(66	)			(276	)
Increase in trade payables			221				248				61				925
Increase in deferred revenue			-				-				-				228
Increase in other accounts payable and accruals			176				352				19				1,081
Net cash used in operating activities			(11,961	)			(8,066	)			(6,414	)			(36,499	)
Cash flows from investing activities:
Purchase of property and equipment			(298	)			(975	)			(301	)			(2,451	)
Proceeds from sale of property and equipment			-				-				2				62
Decrease (increase) in bank deposits			(723	)			5,037				(5,000	)			(686	)
Purchase of marketable securities			(8,491	)			(68,430	)			(750	)			(77,671	)
Proceeds from sale of marketable securities			23,755				53,263				381				77,399
Acquisition of Parkway (b)			(2,107	)			-				-				(2,107	)
Net cash provided by (used in) investing activities			12,136				(11,105	)			(5,668	)			(5,454	)
Cash flows from financing activities:
Repayment of capital lease			(239	)			(70	)			(37	)			(346	)
Proceeds from (repayment of) short-term bank loan			25				-				(72	)			28
Receipt of long-term bank loan and capital lease			134				261				114				583
Repayment of long-term bank loan			(14	)			(17	)			(6	)			(109	)
Proceeds from convertible loans			750				-				-				9,142
Shareholders loans, net			-				-				(109	)			148
Issuance of shares, net			-				27,318				13,326				47,050
Exercise of warrants and options			33				41				447				1,181
Increase in deferred issuance costs			-				-				(1,270	)			(1,270	)
Net cash provided by financing activities			689				27,533				12,393				56,407
Increase in cash and cash equivalents			864				8,362				311				14,454
Cash and cash equivalents at beginning of period			13,590				5,228				4,917				-
Cash and cash equivalents at end of period		$	14,454			$	13,590			$	5,228			$	14,454

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

---

U.S. dollars in thousands

 

			Year ended December 31,												Period from March 9, 2000 (date of inception) through December 31,
			2008				2007				2006				2008
Supplemental disclosure:
(a)	Non-cash transactions:
	Conversion of convertible loan		$	-			$	-			$	6,230			$	6,230
	Issuance of shares in return for Parkway's shares		$	1,000			$	-			$	61			$	1,061
	Issuance expenses - initial public offering		$	-			$	40			$	517			$	-
(b)	Parkway acquisition:
	Working capital (excluding cash)		$	71			$	-			$	-			$	71
	Property & equipment			(86	)			-				-				(86	)
	Backlog			(193	)			-				-				(193	)
	CLIA certification			(144	)			-				-				(144	)
	Goodwill			(2,755	)			-				-				(2,755	)
				(3,107	)			-				-				(3,107	)
	Issuance of shares			1,000				-				-				1,000
			$	(2,107	)		$	-			$	-			$	(2,107	)
(c)	Cash paid during the year:
	Income taxes		$	72			$	36			$	20			$	183
	Interest		$	3			$	4			$	7			$	20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 1:-

GENERAL

a.

Rosetta Genomics Ltd. (the "Company") commenced operations on March 9, 2000. The Company develops microRNA-based diagnostic and therapeutic products. The Company is focused on developing and commercializing these products, establishing strategic alliances with leading biotechnology and pharmaceutical companies, and establishing and maintaining a strong intellectual property position in the microRNA field.

b.

The Company holds a wholly-owned subsidiary in the U.S., Rosetta Genomics Inc. The principal business activity of the subsidiary is to expand the research, development and the business development of the Company in the U.S.

c.

On March 2, 2007, the Company consummated an initial public offering (the "IPO") on The NASDAQ Global Market and issued an aggregate of 4,312,500 Ordinary shares for net proceeds of $ 26 million (see Note 13a for further information).

d.

Acquisition of Parkway Clinical Laboratories, Inc. (“Parkway”)   On July 22, 2008 ("the closing date"), the Company, through its subsidiary Rosetta Genomics Inc., acquired all of the issued and outstanding capital stock of a company in the U.S., Parkway Clinical Laboratories Inc. ("the Parkway transaction"). Parkway is a national, full-service Clinical Laboratories Improvement Amendments ("CLIA") certified clinical laboratory service company, which specializes in oral drug screening in the workplace environment and genetics testing services. Parkway provides services to correctional facilities, health systems, rehabilitation centers, corporations and individuals. Parkway operates a laboratory, for which it bills facilities, third party payers and individuals on a fee-for-service basis. The consideration included (i) $ 1,900 in cash (ii) issuing 229,661 Ordinary shares of the Company equal in value to $ 1,000 (iii) issuing expenses of $ 207. In addition the Company will pay $ 200 and issue a number of Ordinary shares of the Company equal in value to $ 100 if either of the following milestones is achieved within 12 months following the closing date: The Company reaches and holds for a period of 30 consecutive days a market cap of at least $ 100,000, or the consolidated revenues of the Company and Parkway equal $ 8,000. As of the date of the financial statements, the Company did not achieve the milestones. Parkway became a wholly-owned subsidiary of the Company, and accordingly, its results of operations have been included in the consolidated financial statements since the closing date. This acquisition was accounted for under the purchase method of accounting, in accordance with SFAS 141, and accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their relative fair values as of the acquisition date, as follows:

 

Working capital		$	(71	)
Property & equipment, net			86
Intangible assets
Backlog			193
CLIA certification			144
Goodwill			2,755
Net assets acquired		$	3,107

 

F-12

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 1:-

GENERAL (Cont.)

The value assigned to the tangible assets, intangible assets and liabilities has been determined as follows:

1.

Tangible assets:

The acquired working capital consisted of Parkway's non cash components of current assets less other current liabilities as of the acquisition date.

Parkway's current assets and liabilities were recorded at their carrying amounts. The carrying amounts of the current assets and liabilities were reasonable proxies for their market values due to their short-term maturity.

 

Property and equipment were presented at current replacement cost.

 

2.

Backlog:

The fair value of the backlog was determined using the income approach.

3.

CLIA certification:

The fair value of the license was determined using the cost approach, which is the cost that a non-CLIA certified laboratory would have to pay in order to become CLIA certified.

 

Unaudited pro forma results:

The following table for the year ended December 31, 2008 presents certain combined unaudited statements of income data as if the acquisitions of the Parkway transaction occurred on January 1, 2008, after giving effect to purchase accounting adjustments, including amortization of identifiable intangible assets:

		Year ended December 31,
		2008
		Unaudited
Net revenues		$	3,161
Net loss		$	9,760
Basic and diluted net loss per share		$	0.8

The pro forma financial information is not necessarily indicative of the combined results that would have been attained had the acquisitions taken place at the beginning of 2008, nor is it necessarily indicative of future results.

During the fourth quarter of 2008, the Company recorded goodwill impairment in the amount of $ 850 (see also Note 2j). On May 18, 2009, the Company sold Parkway (see also Note 18b).

 

F-13

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 1:-

GENERAL (Cont.)

e.

The Company's accumulated deficit during the development stage totaled $ 44,955 for the period from March 9, 2000 (date of inception) to December 31, 2008.   The Company is in the development stage and, as such, its ability to continue to operate is dependent on the completion of the development of its products, the ability to market and sell its products and additional financing until profitability is achieved.

 

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP").

a.

Use of estimates:   The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

b.

Financial statements in U.S. dollars:   The Company's financing activities are incurred in U.S. dollars. A portion of the Company's costs is incurred in U.S. dollars. The Company's management believes that the U.S. dollar is the primary currency of the economic environment in which the Company operates. Thus, the functional and reporting currency of the Company is the U.S. dollar. Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S. dollars in accordance with Statement No. 52 of the Financial Accounting Standards Board ("FASB"), "Foreign Currency Translation". All transaction gains and losses from the remeasurement of monetary balance sheet items are reflected in the statements of operations as financial income or expenses, as appropriate.

 

c.

Principles of consolidation:   The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. Intercompany transactions and balances have been eliminated upon consolidation.

 

d.

Cash equivalents:   Cash equivalents include short-term highly liquid investments that are readily convertible to cash with original maturities of three months or less from time of deposit.

 

e.

Short-term bank deposits:   Short-term bank deposits are deposits with maturities of more than three months but less than one year. The short-term deposits are presented at their cost. The accrued interest is included in other receivables and prepaid expenses.

 

F-14

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

f.

Marketable securities:   The Company accounts for investments in debt and equity securities in accordance with Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). Management determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determination at each balance sheet date. At December 31, 2008 and 2007, all marketable securities are designated as available-for-sale. Accordingly, these securities are stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), a separate component of shareholders' equity, realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the consolidated statement of operations. FASB Staff Position ("FSP") No. 115-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investment" ("FSP 115-1") provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and for measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. If, after consideration of all available evidence to evaluate the realizable value of its investment, impairment is determined to be other-than-temporary, then an impairment loss should be recognized equal to the difference between the investment's cost and its fair value. As of December 31, 2007, the Company had $7,400 of principal invested in Auction Rate Securities (ARS) ranked AAA/Aaa at the time of purchase. All of these securities retained at least AAA or Aaa rating as of December 31, 2007. All securities continue to pay interest in accordance with their stated terms as of December 31, 2007. However, since these ARS have experienced multiple failed auctions due to a lack of liquidity in the market for these securities, the Company has revalued its ARS portfolio. As a result, it has recorded an impairment charge of $ 5,009 in its statement of operation to reflect other than temporary decline in the value of its investment in ARS. During 2008 the Company recorded an additional impairment of $ 631 related to the ARS. During the fourth quarter of 2008, the Company received $ 7,400 from the repurchase of the ARS following an unexpected offer to settle the ARS and recorded gain in the amount of $ 5,640 upon receiving the funds (See Note 6).

 

g.

Trade receivables:   Trade receivables are reported, net of allowance for doubtful accounts, which is estimated and recorded in the period the related revenues recorded. Management provides for probable uncollectible amounts through a provision for bad debt expense and an adjustment to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written-off through a charge to the valuation allowance and a credit to accounts receivable. As of December 31, 2008 the allowance for doubtful accounts is $ 5.

 

F-15

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

h.

Property and equipment:   Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets.   The annual depreciation rates are as follows:

 

	%
Computer equipment	33
Office furniture and laboratory equipment	7 - 15 (mainly 15)
Leasehold improvement	Over the shorter of the lease term or useful economic life

i.

Intangible assets:   Intangible assets acquired in a business combination are recorded at fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortized over their useful economic life using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up and are assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each financial year-end. The Company's intangible assets consist of CLIA certification and backlog. The backlog's estimated useful life is one year; the CLIA certification has indefinite useful life and therefore, is not subject to amortization, but rather reviewed for impairment at least annually in accordance with the provision of SFAS 142. In accordance with SFAS 144, The Company's management has assessed whether there has been an impairment of the Company's intangible assets during 2008. This was undertaken due to certain indicators of impairment such as a decline in fair value of publicly traded competitive companies the Company's recent operating results and the determination in 2008 that intangible assets have been impaired. Impairment is considered to exist if total estimated future cash flows on an undiscounted basis are less than the carrying value of the asset or asset group tested for impairment. In performing that test, the Company's management estimated the sum of the undiscounted future cash-flows, expected to be derived from its asset group. The Company's management used significant assumptions and estimates, including but not limited to projected future revenues and cash flows, growth rates, future gross margins and operating results, future working capital needs and future capital expenditures, as well as appropriate discount rates. The assumptions developed by the Company's management were based upon historical trends and estimates of future economic conditions. The management assisted by a third party valuator in applying the customary valuation techniques and required economic models. These assumptions may differ from actual results due to, among other things, technological change, economic conditions, changes to its business models or changes in operating performance and an impairment charge may be required in the future.

 

F-16

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

		The analysis showed that the sum of the undiscounted cash-flow derived from the asset group exceeded its carrying amount and accordingly, the Company's management concluded that impairment of the intangible assets with finite useful lives is not required.
	j.	Goodwill:   Goodwill is measured as the excess of the cost of an acquired company over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. Goodwill is not amortized, but rather reviewed for impairment at least annually in accordance with the provisions of SFAS No. 142. The goodwill impairment test under SFAS No. 142 involves a two-step approach. Under the first step, the Company determines the fair value of each reporting unit to which goodwill has been assigned. The reporting units of the Company for purposes of the impairment test are the Company's two operating segments, the core technology, and laboratory services, as these are the components of the business for which discrete financial information is available and segment management regularly reviews the operating results of those components. The Company then compares the fair value of each reporting unit to its carrying value, including goodwill. The Company estimates the fair value of each reporting unit by estimating the present value of the reporting unit's future cash flows. If the fair value exceeds the carrying value, no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is considered potentially impaired and the second step is completed in order to measure the impairment loss. Under the second step goodwill is reduced to its implied fair value through an adjustment to the goodwill balance, resulting in an impairment charge. In accordance with SFAS No. 142, the Company performed an annual assessment of goodwill impairment as of December 31, 2008 for the laboratory services segment. This was undertaken due to certain indicators of impairment such as a decline in fair value of publicly traded competitive companies the Company's recent operating results and the determination in 2008 that goodwill have been impaired. The Company performed the impairment analysis based on estimated discounted future cash flow. As a result of this analysis, the Company determined that goodwill impairment related to the laboratory services had occurred and recognized a non-cash impairment charge of $ 850.

 

k.

Impairment of long-lived assets:   The long-lived assets of the Company and its subsidiaries and all identifiable intangible assets that are subject to amortization are reviewed for impairment in accordance with Statement of Financial Accounting Standard No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets"("SFAS No. 144"), whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. As of December 31, 2008 and 2007, no impairment losses have been identified.

 

F-17

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

l.

Convertible notes:   Convertible notes are accounted for in accordance with the provisions of Emerging Issues Task Force ("EITF") Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock" ("EITF 00-19"). The Company has also considered Statements of Financial Accounting Standard No.133, "Accounting for Derivatives, Instruments and Hedging Activities" ("SFAS 133"), APB 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants" and EITF 05-2 "The Meaning of "Conventional Convertible Debt Instrument" in Issue No. 00-19", the Company, where applicable, recorded an embedded derivative instrument classified as a liability.

 

m.

Revenue recognition:   Revenues from sales of Rosetta core products are recognized in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements" ("SAB No. 104"), when delivery has occurred, persuasive evidence of an agreement exists, the vendor's fee is fixed or determinable, no further obligation exists and collectability is probable. To the extent future obligations are included in a multi-element arrangement; revenue is recognized upon delivery, provided fair value for the elements exists. In multi-element arrangements that include future obligations, if fair value does not exist for all undelivered elements, revenue for the entire arrangement is deferred until all elements are delivered or when fair value can be established according to EITF Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). Royalties from licensing the right to use the Company's products will be recognized when earned and when written sales confirmation from the licensee is received and no future obligation exists. Non-refundable, up front advancements of royalties from licensing the right to use the Company's products which are fully chargeable against royalties, are recorded as deferred revenue until the above mentioned criteria for recognizing revenue are met. Deferred revenues represent payments received in advance, where not all revenue recognition criteria are met. As of December 31, 2008, the Company has deferred revenue in an amount of $ 228. Revenues from laboratory services are recognized, when persuasive evidence of an arrangement exists, services have been rendered, the fee is determinable and collectability is reasonably assured. The Company primarily recognizes revenue for services rendered upon completion of the testing process. Billing for services reimbursed by third-party payers are recorded as revenues net of allowance for differences between amounts billed and the estimated receipts from such payers. Adjustments to the estimated receipts, based on final settlement with the third party payers, are recorded upon settlement. Unbilled receivables are recorded for services rendered during, but billed subsequent to, the reporting period.

 

F-18

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

n.

Research and development expenses, net:   Research and development expenses include costs of salaries and related expenses, activities related to intellectual property, research materials and supplies and equipment depreciation. All research and development costs are expensed as incurred. The Company has entered into several license agreements for rights to utilize certain technologies. The terms of the licenses may provide for upfront payments, annual maintenance payments and royalties on product sales. Costs to acquire and maintain licensed technology that has not reached technological feasibility and does not have alternative future use are charged to research and development expense as incurred. During the years ended December 31, 2008, 2007 and 2006, the Company charged to research and development expense $ 162, $ 253 and $ 453 of costs associated with license fees, respectively. (Note 12e-12j). Royalty bearing grants from the Bi-national Industrial Research and Development Foundation ("BIRD") for funding approved research and development projects, are presented as a reduction from the research and development expenses (Note 12k). The Company received grants in an amount of $ 143, $ 143 and $ 71, in the years 2008, 2007 and 2006, respectively.

 

o.

Accounting for stock-based compensation:   The Company accounts for stock-based compensation in accordance with SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123(R)"). SFAS No. 123(R) requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's consolidated income statements. The Company recognizes compensation expenses for the value of its awards granted based on the straight line method over the requisite service period of each of the awards, net of estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on actual historical pre-vesting forfeitures. The Company selected the Black-Scholes-Merton option pricing model as the most appropriate fair value method for its stock-options awards and values restricted stock based on the market value of the underlying shares at the date of grant. The option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term. The weighted-average estimated fair value of employee stock options granted during the 12 months ended December 31, 2008, 2007 and 2006 was $ 3.14, $ 5.12 and $ 5.01, respectively per share using the Black-Scholes option pricing model with the following weighted-average assumptions (annualized percentages):

 

		Year ended December 31,
		2008		2007		2006
Dividend yield		0%		0%		0%
Expected volatility		75%-85%		85%-90%		90%
Risk-free interest		3.53%		4.17%		4.8%
Expected life		6.25 years		6.25 years		6-6.25 years

 

F-19

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

The Company is required to assume a dividend yield as an input in the Black-Scholes model. The dividend yield assumption is based on the Company's historical experience and expectation of future dividend payouts. The Company has historically not paid dividends and has no foreseeable plans to pay dividends. The dividend yield used for the twelve months ended December 31, 2008 and 2007 was 0%. The computation of expected volatility is based on realized historical stock price volatility of peer data as well as historical volatility of the Company's stock starting from the IPO date. As a result of the above-mentioned calculations, the volatility used for the twelve months ended December 31, 2008 and 2007 was between 75%-85% and between 85%-90%, respectively. The risk-free interest rate assumption is the implied yield currently available on United States treasury zero-coupon issues with a remaining term equal to the expected life term of the Company's options. The Company determined the expected life of the options according to the simplified method, average of vesting and the contractual term of the Company's stock options. The Company applies SFAS No. 123(R) and EITF No. 96-18 "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services", with respect to options and warrants issued to non-employees. SFAS No. 123(R) requires the use of option valuation models to measure the fair value of the options and warrants at the measurement date.

 

p.

Net loss per share:   Basic earnings per share are computed based on the weighted average number of Ordinary shares outstanding during each year. Diluted earnings per share are computed based on the weighted average number of Ordinary shares outstanding during each year, plus dilutive potential Ordinary shares considered outstanding during the year, in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). Basic and diluted net loss per share is computed using the weighted average number of Ordinary shares outstanding during the period. For the years ended December 31, 2008, 2007 and 2006, all outstanding options, warrants and Preferred shares, if any, have been excluded from the calculation of the diluted net loss per share since their effect was anti-dilutive.

 

q.

Income taxes:   The Company and its subsidiaries account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). This Statement prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company and its subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets to the amounts that are more likely-than-not to be realized.

F-20

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

On January 1, 2007, the Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109" (FIN 48). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.

 

r.

Severance pay:   A majority of the employees are included under section 14 of the Israeli Severance Compensation Law ("Section 14"). Under Section 14, the Israeli employees are entitled only to monthly deposits, at a rate of 8.33% of their monthly salary, made on their behalf with insurance companies. Payments in accordance with Section 14 release the Israeli subsidiary from any future severance payments in respect of those employees. Deposits under Section 14 are not recorded as an asset in the Company's balance sheet. For those Israeli employees who are not included under Section 14, the liability for severance pay is calculated pursuant to Israel's Severance Pay Law based on the most recent salary of the employees multiplied by the number of years of employment, as of the balance sheet date. Employees are entitled to one month's salary for each year of employment or a portion thereof. The Israeli subsidiary's liability for all of its employees, is fully provided by monthly deposits with insurance policies and by an accrual. The value of these policies is recorded as an asset in the Company's balance sheet. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israel's Severance Pay Law or labor agreements. The value of the deposited funds is based on the cash surrendered value of these policies, and includes immaterial profits. The Subsidiary’s and Parkway’s employees have a 401(K) defined contribution plan covering certain employees in the U.S. Severance expenses for the years ended December 31, 2008, 2007 and 2006 were $ 478, $ 171 and $ 333, respectively, and $ 1,292 from March 9, 2000 (date of inception) through December 31, 2008.

 

s.

Concentrations of credit risk:   Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short term bank deposits, marketable securities and trade receivables. As a result of the recent turmoil in capital markets, the Company has tightened its control and monitoring over its marketable securities portfolio in order to minimize potential risks stemming from current capital markets environment. Such measures included among others: reducing credit exposure to financial sector securities and increasing the overall credit quality of the portfolio.

 

F-21

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

As of December 31, 2008, the Company's marketable securities include an investment in a U.S. Agency security. Management believes that minimal credit risk exists with respect to these marketable securities. The Company has no off-balance-sheet concentration of credit risk other than foreign exchange contracts or other foreign hedging arrangements to hedge is operating activities.

 

t.

Fair value of financial instruments:   The carrying amounts of our financial instruments, including cash and cash equivalents, short-term bank deposits, marketable securities, accounts receivable, accounts payable and accrued liabilities, approximate fair value because of their generally short maturities. Effective January 1, 2008, the Company adopted SFAS 157, "Fair Value Measurements" and, effective October 10, 2008, adopted FSP No. SFAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active", except as it applies to the nonfinancial assets and nonfinancial liabilities subject to FSP 157-2. SFAS 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, SFAS 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:   Level 1 -    Observable input that reflects quoted prices (unadjusted) for identical assets or liabilities in active markets.   Level 2 -     Include other inputs that are directly or indirectly observable in the marketplace.   Level 3 -     Unobservable inputs which are supported by little or no market activity.   The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following methods were used by the Company and its subsidiaries in estimating their fair value disclosures for financial instruments:   1.    The fair value of short-term marketable securities is based on quoted market prices.   2.    The fair value of derivative instruments is estimated by obtaining quotes from brokers.

 

F-22

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

u.

Derivative instruments:   The Company sometimes uses derivative financial instruments to manage its exposure to fluctuations in foreign exchange rates. The Company accounts for derivative financial instruments in accordance with SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). Under SFAS No. 133, all derivatives are recorded as either assets or liabilities in the consolidated balance sheet, and periodically adjusted to fair value. The classification of gains and losses resulting from changes in the fair value of derivatives is dependent on the intended use of the derivative and its resulting designation. Adjustments to reflect changes in fair of values of derivatives not designated as hedging instruments are reflected in earnings. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction in the same period during which the hedge transaction affects earnings. During 2008, the Company recognized income from derivative instruments of $ 182, which was offset against the payroll expenses in the statement of income and recorded financial expenses from derivative instruments of $ 87. As of December 31, 2008 the Company has no unrecognized income from derivative instruments.

 

v.

Reclassification:   Certain comparative figures have been reclassified to conform to the current year presentation.

 

w.

Impact of recently issued Accounting Standards:

1.

In February 2008, the FASB issued FSP No. FAS 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13", and FSP No. FAS 157-2, "Effective Date of FASB Statement No. 157". Collectively, the Staff Positions defer the effective date of Statement 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities except for items that are recognized or disclosed at fair value on a recurring basis at least annually, and amend the scope of Statement 157. As described in Note 2(r), the Company adopted Statement 157 and the related FASB staff positions except for those items specifically deferred under FSP No. FAS 157-2.

2.

In March 2008, the FASB issued Statement 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161") an amendment to FASB No. 133.  This statement changes the disclosure requirements for derivative instruments and hedging activities.  Entities are required to provide enhanced disclosures about (a) how and why and entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows.  This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.   The Company does not expect the adoption of SFAS 161 to have a material impact on its financial position, results of operations or cash flows.

 

F-23

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

3.

In November 2007, the EITF issued EITF Issue No. 07-1, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property.   Companies may enter into arrangements with other companies to jointly develop, manufacture, distribute, and market a product. Often the activities associated with these arrangements are conducted by the collaborators without the creation of a separate legal entity (that is, the arrangement is operated as a "virtual joint venture"). The arrangements generally provide that the collaborators will share, based on contractually defined calculations, the profits or losses from the associated activities. Periodically, the collaborators share financial information related to product revenues generated (if any) and costs incurred that may trigger a sharing payment for the combined profits or losses. The consensus requires collaborators in such an arrangement to present the result of activities for which they act as the principal on a gross basis and report any payments received from (made to) other collaborators based on other applicable GAAP or, in the absence of other applicable GAAP, based on analogy to authoritative accounting literature or a reasonable, rational, and consistently applied accounting policy election. EITF 07-1 is effective for collaborative arrangements in place at the beginning of the annual period beginning after December 15, 2008. The Company is currently evaluating the impact that the adoption of EITF 07-1 could have on the Company's financial statement.

 

4.

In December 2007, the FASB issued SFAS 141(R), ''Business Combinations'' (''SFAS 141(R)''). This Statement replaces SFAS No. 141, ''Business Combinations'', and requires an acquirer to recognize the assets acquired, the liabilities assumed, including those arising from contractual contingencies, any contingent consideration and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. SFAS 141(R) also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS 141(R)). In addition, SFAS 141(R)'s requirement to measure the noncontrolling interest in the acquiree at fair value will result in recognizing the goodwill attributable to the noncontrolling interest in addition to that attributable to the acquirer.   SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. As such, the adoption of SFAS 141(R) is not expected to have a material effect on accounting for our current subsidiaries.

 

F-24

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

5.

In December 2007, the FASB issued SFAS 160, ''Non-controlling Interests in Consolidated Financial Statements'' (''SFAS 160''). SFAS 160 amends ARB 51, ''Consolidated Financial Statements'', to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 also changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. SFAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent owners and the interests of the non-controlling owners of a subsidiary.   SFAS 160 is effective for fiscal periods, and interim periods within those fiscal years, beginning on or after December 15, 2008. The adoption of SFAS 160 is not expected to have a material effect on accounting for current subsidiaries.

 

NOTE 3: -

FAIR VALUE MEASURMENTS

In accordance with SFAS 157, the Company measures its marketable securities and foreign currency derivative contracts at fair value. Marketable securities are classified within Level 2. This is because these assets are valued using quoted market prices for similar assets or alternative pricing sources and models utilizing market observable inputs. Foreign currency derivative contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.

The Company's financial assets (liabilities) measured at fair value on a recurring basis, excluding accrued interest components, consisted of the following types of instruments as of December 31, 2008:

		Fair value measurements using input type
		Level 1				Level 2				Level 3				Total
Assets:
Marketable securities		$	-			$	426			$	-			$	426
Total Assets			-				426				-				426
Liabilities:
Convertible loan			-				-				750				750
Foreign currency derivative contracts			-				65				-				65
Total liabilities		$	-			$	65			$	750			$	815

The Company values the Level 3 convertible loan based on the fair value (see Note 11).

 

F-25

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 4:-

SHORT-TERM BANK DEPOSIT

As of December 31, 2008 the Company holds two deposits as follows:

Amount		Maturity date		Interest
$ 723		March 2, 2009		2%
$ 117		December 3, 2009		2.25%

NOTE 5:-

MARKETABLE SECURITIES

As of December 2008 and 2007, the Company holds $ 426 and $ 8,251 in marketable securities, respectively, designated as available-for-sale.

Accordingly, the balance of these available-for-sale securities as of December 31, 2008 and 2007 is stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss).

		Cost				Unrealized gains				Market value
Available-for-sale:
December 31, 2008:
U.S. Government Securities		$	423			$	3			$	426
December 31, 2007:
U.S. Government and Agencies Securities		$	8,248			$	3			$	8,251

Proceeds from maturity and sales of available-for-sale securities during 2008 were $ 23,755. Net realized gains from the sales of available-for-sale securities in the year 2008 are $ 62.

NOTE 6:-

LONG-TERM INVESTMENT

At December 31, 2007, the Company had $ 7,400 of principal invested in ARS. The ARS held by the Company are private placement securities with long-term nominal maturities for which the interest rates are reset through an auction each one or three month. The monthly auctions historically have provided a liquid market for these securities. Some of the underlying collateral for the ARS held by the Company consists of sub-prime mortgages.

Consistent with the Company's investment policy guidelines, the ARS investments held by the Company all had AAA/Aaa credit ratings at the time of purchase. With the liquidity issues experienced in global credit and capital markets, the ARS held by the Company at December 31, 2007 have experienced multiple failed auctions as the amount of securities submitted for sale has exceeded the amount of purchase orders. All of these securities retained at least AAA or Aaa rating as of December 31, 2007.

 

F-26

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 6:-

LONG-TERM INVESTMENT (Cont.)

The estimated market value of the Company's ARS holdings at December 31, 2007 was $ 2,391, which reflects a $ 5,009 adjustment to the principal value of $ 7,400. Although the ARS continue to pay interest according to their stated terms, based on valuation models and an analysis of other-than-temporary impairment factors, the Company has recorded a pre-tax impairment charge of $ 5,009 and $ 631 in 2007 and in the first median of 2008, respectively, reflecting the ARS holdings that the Company has concluded have other-than-temporary decline in value.

During the fourth quarter of 2008, the Company received $ 7,400 from the repurchase of the ARS following an unexpected offer to settle the above mentioned ARS. The impairment charge that was recorded in 2007 and 2008 was reversed in the fourth quarter of 2008, and the Company recorded a financial income of $ 5,640 on these Securities.

		Cost				Other than temporary impairment				Market value
December 31, 2008:
Total available-for-sale marketable securities		$	-			$	-			$	-
December 31, 2007:
Total available-for-sale marketable securities		$	7,400			$	5,009			$	2,391

 

NOTE 7:-

PROPERTY AND EQUIPMENT

		December 31,
		2008				2007
Cost:
Computer equipment		$	459			$	383
Office furniture and laboratory equipment			1,384				1,144
Leasehold improvements			288				230
			2,131				1,757
Accumulated depreciation:
Computer equipment			333				273
Office furniture and laboratory equipment			407				197
Leasehold improvements			90				34
			830				504
Depreciated cost		$	1,301			$	1,253

Depreciation expenses for the years ended December 31, 2008, 2007 and 2006 were $ 334, $ 179 and $ 161, respectively, and $ 1,119 from March 9, 2000 (date of inception) through December 31, 2008. Those expenses include depreciation expenses of capital lease equipment for the years ended December 31, 2008, 2007 and 2006 were $ 29, $ 17 and $ 10, respectively.

 

F-27

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 8:-

INTANGIBLE ASSETS

a.

Comprised as follows:

		December 31,
		2008				2007
Cost:
CLIA certification		$	144			$	-
Backlog			193				-
			337				-
Accumulated amortization:
CLIA certification			-				-
Backlog			86				-
			86				-
Amortized cost		$	251			$	-

b.

Amortization expense amounted to $ 86 for the year ended December 31, 2008.

c.

Estimated amortization expenses for the year 2009 are $ 107, (see also Note 18b).

NOTE 9:-

GOODWILL

		December 31,
		2008
Balance as of December 31, 2007			-
Acquisition of Parkway			2,755
Goodwill impairment			(850	)
Balance as of December 31, 2008		$	1,905

 

NOTE 10:-

OTHER ACCOUNTS PAYABLE AND ACCRUALS

		December 31,
		2008				2007
Employees salary and payroll accruals		$	739			$	942
Accrued expenses and other			485				118
Deferred revenues and advances from customers			163				42
		$	1,387			$	1,102

 

F-28

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 11:-

CONVERTIBLE LOANS

On September 24, 2008, the Company signed a convertible note agreement with private investors ("Purchasers") in an initiative for development of microRNA-based algae feedstocks for biofeuls. The Company intends to establish a separately operated business unit by forming a wholly owned Israeli subsidiary to be named Rosetta Green Ltd. ("RG"). Under the agreement the Purchasers may purchase convertible notes in an amount up to $ 2,500. The notes will convert to RG Ordinary shares nominal value NIS 0.01, once RG is established as is obtained by dividing the principal amount of the note by a price per RG share reflecting a fully-diluted pre-money valuation of RG equal to $ 5,000. If RG is not established the Notes shall convert into Ordinary shares of the Company at a price per share reflecting the average of the closing prices over the fine consecutive trading days ending on the last trading day prior to the date of conversion, such purchase price shall not be lower than $ 2.00 per share. Up to $ 1,250 were to be paid at the closing and up to $ 1,250 were to be paid upon satisfaction of the first of two milestones. The Company plans to establish the green energy project during 2010. (See also Note 18c).

In September 2008, the Company issued a convertible loan in a principal amount of $ 750.

The convertible loan is a hybrid instrument that contains an embedded conversion option to the Company's common shares or RG's common shares, depending on the formation of RG, as detailed above. The embedded conversion option was separated from the host contract and accounted for a derivative under FAS 133. According to EITF 00-19 the derivative was classified as a liability and was measured at fair value. Due to the limitation of the conversion share price as mentioned above, the fair value of the note is equal to the invested amount.

 

NOTE 12: -

COMMITMENTS AND CONTINGENT LIABILITIES

a.

Capital lease and operating lease:   During 2008 and 2007, the Company leased laboratory equipment and computer equipment under several capital and operating lease agreements in a total amount of $ 351, $ 400 respectively, to be paid in 10 to 60 monthly payments.   The commitments under the lease and loan agreements are as follows:

 

		December 31, 2008
Due until December 31, 2009		$	157
Due until December 31, 2010			63
Due until December 31, 2011			9
		$	229

 

F-29

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 12: -

COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

b.

The facilities and motor vehicles of the Company are rented under operating leases. Aggregate minimum rental commitments under the non-cancelable rent and lease agreements as of December 31, 2008 are as follows:

 

2009		$	828
2010			687
2011			394
2012			372
2013			246
Total		$	2,527

Total rent and lease expenses for the years ended December 31, 2008, 2007 and 2006, were $ 641, $ 333 and $ 287, respectively, and $ 1,486 for the period from March 9, 2000, (date of inception) through December 31, 2008.

 

c.

As of December 31, 2008 and 2007, the Company provided a bank guarantee for the fulfillment of its lease commitments in the amount of approximately $ 137 and $ 112, respectively.   As of December 31, 2008, the bank restricted $ 45 of the Company's deposit, against a loan the Company received from the bank.

 

d.

In June 2003, the Company entered into a license agreement with a related party to use its intellectual property for a period of 20 years in consideration of up to $ 100. According to the agreement, the Company is obligated to pay an aggregate consideration of up to $ 100, of which $ 20 was paid in cash and $ 80 shall be paid as quarterly royalties equal to 5% of the net income of the Company resulting from this agreement.

e.

In May 2006, the Company signed a royalty-bearing, co-exclusive, worldwide license agreement with a third party. Under this agreement, the Company was granted the right to make, use and sell the third party's proprietary microRNAs for diagnostic purposes including a limited right to sublicense. In consideration for this license the Company paid an initiation fee and will pay a fixed annual license maintenance fee, royalties based on net sales and a percentage of the Company's revenues from any sublicense. The Company estimates that the minimum aggregate license maintenance fees over the term of this agreement will be approximately $ 840 until 2029. During the years ended December, 31, 2008, 2007 and 2006, the Company paid fees in the amount of $ 40, $ 72 and $ 83, respectively, to the third party. The Company recorded the payments as research and development expenses since the licensed technology has not reached technological feasibility and does not have alternative future use.

 

f.

In June 2006, the Company signed a royalty-bearing, co-exclusive, worldwide license agreement with a third party. Under this agreement, the Company licensed from this third party the rights to its proprietary microRNAs for diagnostic purposes. In consideration for this license the Company paid an initiation fee and will pay a fixed annual license maintenance fee, royalties based on net sales and a percentage of the Company's revenue from any sublicense.   The Company estimates that the minimum aggregate license maintenance fees over the term of this agreement will be approximately $ 543 until 2022. During the year ended December 31, 2006, the Company paid fees in the amount of $ 219, to the third party.   No payments in respect to this agreement were made during the years 2007 and 2008. The Company recorded the payments as research and development expenses since the licensed technology has not reached technological feasibility and does not have alternative future use.

 

F-30

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 12:-

COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

g.

In August 2006, the Company signed a royalty-bearing, exclusive, worldwide license agreement with a third party. Under this agreement, the Company has exclusively licensed from this third party the rights to its proprietary microRNAs for all fields and applications including a limited right to sublicense. In consideration for this license the Company paid an initiation fee and will pay minimum annual royalties, royalties based on net sales and a percentage of the Company's revenues from any sublicense. The Company estimates that the aggregate minimum royalties over the term of this agreement will be approximately $ 2,250 until 2032. During the years ended December 31, 2008, 2007 and 2006, the Company paid fees in the amount of $ 15, $ 43 and $ 125, respectively to the third party. The Company recorded the payments as research and development expenses since the licensed technology has not reached technological feasibility and does not have alternative future use.

h.

In December 2006, the Company signed a royalty-bearing, non-exclusive, worldwide license agreement with a third party. Under this agreement the Company licensed from the third party its proprietary microRNAs for research purposes. In consideration for this license the Company will pay an initiation fee and will be required to pay a fixed annual license maintenance fee, royalties based on net sales and a percentage of the Company's revenues from any sublicenses. The Company estimates that the minimum aggregate license maintenance fees over the term of this agreement will be approximately $ 293 until 2022. During the years ended December 31, 2008, 2007 and 2006, the Company paid the third party an aggregate of $ 22, $ 20 and $ 26, respectively under this agreement. The Company recorded the payments as research and development expenses since the licensed technology has not reached technological feasibility and does not have alternative future use.

i.

In May 2007, the Company signed a royalty-bearing, co-exclusive, worldwide license agreement with a third party. Under this agreement, the Company has licensed from this third party the rights to its proprietary microRNAs for therapeutic purposes including a limited right to sublicense. In consideration for this license the Company paid an initiation fee and will pay a fixed annual license maintenance fee, payments based on milestones and royalties based on net sales and a percentage of the Company's revenues from any sublicense. The Company estimates that the minimum aggregate maintenance fees over the term of this agreement will be approximately $ 630 until 2029. During the years ended December 31, 2008 and 2007, the Company paid fees in the amount of $ 51 and $ 118, respectively, to the third party. The Company recorded the payments as research and development expenses since the licensed technology has not reached technological feasibility and does not have alternative future use.

j.

In January 2008, the Company signed a royalty-bearing, co-exclusive, worldwide license agreement with a third party. Under this agreement, the Company was granted the right to make, use and sell the third party's proprietary microRNAs for research purposes including a limited right to sublicense. In consideration for this license the Company paid an initiation fee and will pay a fixed annual license maintenance fee, royalties based on net sales and a percentage of the Company's revenues from any sublicense. The Company estimates that the minimum aggregate license maintenance fees over the term of this agreement will be approximately $ 420 until 2029. During the year ended December, 31, 2008, the Company paid initiation fees in the amount of $ 40, to the third party. The Company recorded the payments as research and development expenses since the licensed technology has not reached technological feasibility and does not have alternative future use.

 

F-31

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 12:-

COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

k.

Under the BIRD royalty-bearing program, the Company is not obligated to repay any amounts received from BIRD if the development work being carried out by the Company does not continue beyond the investigational new drug ("IND") stage. If the development works which is being carried out by the Company continues beyond the IND stage, the Company is required to repay BIRD 100% of the grant that the Company received provided that the repayment to BIRD is made within the first year following project completion. For every year that the Company does not make these repayments, the amount to be repaid incrementally increases up to 150% in the fifth year following project completion. All amounts to be repaid to BIRD are linked to the U.S. consumer price Index.   As of December 31, 2008, the Company had received $ 357 from BIRD, which was offset against research and development expenses. As of December, 31 2008 no liability was recorded since the Company did not reach technological feasibility for this project.

 

NOTE 13:-

SHARE CAPITAL

a.

Initial public offering:   On March 2, 2007, the Company completed the initial public offering (the "IPO") of its Ordinary shares. The IPO consisted of the sale of 4,312,500 Ordinary shares at a price of $ 7.00 per share, including 562,500 shares pursuant to the exercise of the over-allotment option granted by the Company to the underwriters. Net proceeds from the initial public offering were $ 26 million. In addition, upon completion of the IPO, all outstanding Preferred shares were converted into 7,107,730 Ordinary shares.

 

b.

Reverse stock split:   On August 31, 2006, the Company's Board of Directors approved, subject to shareholder approval which occurred on September 3, 2006, a 1-for-3.9822 reverse stock split and, accordingly, all shares, options, warrants and earnings (losses) per share amounts have been retroactively adjusted for all periods presented to reflect this reverse stock split. On September 3, 2006, the shareholders also approved a recapitalization of the Company's authorized share capital so that each share has a par value of NIS 0.01. The reverse stock split and the recapitalization became effective on October 4, 2006.

 

c.

Ordinary shares:   Ordinary shares confer upon the holders the right to receive notice to participate and vote in the general meetings of the Company, the right to receive dividends, if declared. In March 2007 all the Preferred shares were converted into Ordinary shares by dividing the applicable original issue price of such Preferred share by the applicable conversion price of such Preferred share, as defined in the Amended and Restated Articles of Association of the Company. The original issue prices of series A Preferred shares are $ 3.65, $ 4.08 and $ 5.29, of series B Preferred shares is $ 5.86 and of series C Preferred shares is $ 7.68. The initial conversion price of each of the series A, B and C Preferred shares is identical to the original issue price of such series, and is subject to adjustment for stock splits and other reclassifications and will also be adjusted in accordance with the standard weighted-average anti-dilution provisions contained in the Company's Amended and Restated Articles of Association in the event of a subsequent issuance of securities, subject to certain exceptions, at a price per share less than the applicable original issue price. The conversion ratio for each Preferred share was 1:1.

 

F-32

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 13:-

SHARE CAPITAL (Cont.)

d.

Investment agreements:

1.

During 2000, the Company signed investment agreements and issued 2,522,496 Ordinary shares to investors and founders, in consideration of $ 40. The Company repurchased 195,371 of those shares and holds it as treasury shares.

2.

During 2001, the Company signed investment agreements and issued 38,421 Ordinary shares in consideration of $ 153.

3.

In July 2003, the Company signed an investment agreement with existing and new investors, pursuant to which the Company issued 535,084 Preferred A shares, at a price per share of $ 5.29, for consideration of $ 2,653, net of issuance expenses of $ 177.

4.

In October 2003, the Company issued 457,952 Preferred A shares at a price per share of $ 3.65 upon conversion of a convertible loan made available in 2002, and an additional 180,850 Preferred A shares were issued to the lenders of the loan upon exercise of warrants.   In addition, 163,883 Preferred A shares were issued upon conversion of a convertible loan received by the Company in March 2003 at a price per share of $ 4.08.

 

5.

In May 2004, the Company issued 56,914 restricted Ordinary shares to four of its board members at no consideration, to be held by a trustee. Each director is entitled to 1/36 of the shares for each month starting September 2003, in which he serves as a board member. In the event that a board member ceases to serve as a board member prior to the end of three years, the shares will remain with the trustee. As of December 31, 2007, two of those board members still serve as directors. Compensation expenses related to this grant amounted to $ 49 for the year ended December 31, 2006. No compensation expenses related to this grant were recorded during 2008 and 2007.   In May 2006, 1,581 restricted Ordinary shares were canceled.

 

6.

In September 2004, the Company signed an investment agreement with existing and new investors, pursuant to which the Company issued 265,747 Preferred B shares, at a price per share of $ 5.86, for total consideration of $ 1,395, net of issuance expenses of $ 162.   In addition, the Company granted the investors warrants to purchase 80,492 Preferred B shares at an exercise price of $ 5.86 per share, exercisable upon the earlier of June 30, 2006 or the closing of a financing of at least $ 5,000 at a pre-money valuation of at least $ 40,000. 76,395 warrants were exercised into Preferred B shares in 2006. The remaining warrants were cancelled on April 23, 2006.

 

7.

Pursuant to the investment agreement signed in September 2004, in February 2005, the Company issued 392,087 Preferred B shares, for total consideration of $ 2,165, net of issuance expenses of $ 132. In addition, $ 122 of the shareholder's loan was converted into 20,802 Preferred B shares.

8.

On January 15, 2006 the Company issued 1,033,382 series B Preferred shares at a price of $ 5.86 from the conversion of 2005 convertible loan.

 

F-33

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 13:-

SHARE CAPITAL (Cont.)

9.

In January 2006, the Company paid a finder's fee of $ 31 by issuing to a non-employee 5,335 Ordinary shares at a price of $ 5.86 per share, for services rendered to the Company.

10.

In March 2006, the board of directors and the shareholders of the Company approved an increase of 9,668,104 shares to the authorized share capital and a recapitalization of the authorized share capital of the Company as follows: The authorized share capital of the Company shall be 17,578,370 shares divided into: (i) 12,304,859 Ordinary shares; (ii) 1,381,158 Preferred A shares; (iii) 1,883,397 Preferred B shares and (iv) 2,008,957 Preferred C shares.

11.

In April 2006, the Company issued 1,822,422 Preferred C shares at a price per share of $ 7.68 for gross proceeds of $ 14,000 (the "Series C Financing").

12.

In connection with the Series C Financing, the Company paid $30 by issuing 3,905 Ordinary shares at a price of $ 7.68 per share.

13.

On March 2, 2007, the Company consummated an initial public offering (the "IPO") on The NASDAQ Global Market and issued an aggregate of 4,312,500 Ordinary shares at price per share of $ 7 for net proceeds of $ 26 million. (Refer to Note 13a for further information).

	14.	In July 2008, as a part of the consideration of Parkway's acquisition (see also Note 1d), the Company issued to Parkway's former sole owner 229,661 Ordinary shares which are equal in value to $ 1,000 based on the weighted- average closing price of the Company's Ordinary shares during the 10 trading days immediately preceding the date of issuance.
		All of the shares have NIS 0.01 par value as of December 31, 2008 and 2007.

 

e.

Finders' fee warrants:   Under finders' fee agreements, the following warrants are outstanding as of December 31, 2008:

 

Issuance date		Number of warrants			Exercisable into shares		Exercise price			Exercisable through
April 2006			33,585		Ordinary		$	7.68		April 23, 2009

 

The fair value of the warrants granted was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions; risk-free interest rates of 4.4%, dividend yields of 0%, volatility factors of the expected market price of the Company's shares of 90%, and a weighted-average expected life of the warrants of three years. During 2007, 8,432 warrants with expiration date of January 31, 2008, were exercised using a cashless method, into 3,947 of Ordinary shares. Additional 25,683 and 39,660 warrants with January 31, 2008 and July 15, 2008, respectively, expiration date, expired on those dates. 33,585 warrants with April 23, 2009 expiration date, were expired on that date.

 

F-34

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 13:-

SHARE CAPITAL (Cont.)

f.

Stock option plans:

1.

During 2001 the Company adopted the 2001 Israeli Share Option Plan (the "2001 Plan"), pursuant to which options may be granted to the Company's officers, directors, employees and consultants.   Pursuant to the plan, the Company has reserved a total of 376,679 shares for this plan and for any other option plans, which may be adopted by the Company in the future. In March 2003, the Company adopted the 2003 Israeli Share Option Plan (the "2003 Plan"), pursuant to which options may be granted to the Company's officers, directors, employees and consultants. Pursuant to the plan, the Company has reserved an additional 188,340 shares for the 2003 Plan and for any other share option plans that have previously been, or in the future may be, adopted by the Company. In March 2005, the Company's board of directors approved an increase in the shares available under the 2003 Plan of 401,791 shares to a total of 966,810 shares (including the 376,679 shares reserved under the 2001 Plan). In July 2006, the Company adopted the 2006 Israeli Share Option Plan (the "2006 Plan"), pursuant to which options may be granted to the Company's officers, directors, employees and consultants. Pursuant to the 2006 Plan, the Company has reserved an additional 452,024 shares for the 2006 Plan and for any other share option plans that have previously been, or in the future may be, adopted by the Company. In November, 2007 the Board of Directors of the Company approved an additional 500,000 shares for the 2006 plan. The total number of options authorized for grant under the plans amounted to 1,918,825. As of December 31, 2008, an aggregate of 199,627 options of the Company are available for future grants. Options granted under the 2001 and 2003 Plans typically vest, as set forth in each optionee's option agreement, over three years. Options granted under the 2006 Plan typically vest, as set forth in each optionee's option agreement, over 4 years. All Options are exercisable until ten years from the grant of the option. Any options which are forfeited or unexercised become available for future grants. The exercise price equals the share price on the grant date.

 

2.

In September 2005, the Company's Board of Directors approved the acceleration of vesting of 5,274 unvested options, held by a former employee. As a result, the Company recorded additional compensation costs of $ 12.

 

F-35

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ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 13:-

SHARE CAPITAL (Cont.)

3.

A summary of the Company's stock option activity and related information for the year ended December 31, 2008, is as follows:

 

		Number of options				Weighted-average exercise price				Weighted- average remaining contractual term (in years)				Aggregate intrinsic value
Outstanding at January 1, 2008			881,107			$	4.19
Granted			372,104			$	4.22
Exercised			(10,365	)		$	3.15
Forfeited			(31,111	)		$	4.93
Outstanding at December 31, 2008			1,211,735			$	4.19				7.78			$	162
Vested or expected to vest			1,088,785			$	4.16				7.94			$	162
Exercisable at December 31, 2008			524,163			$	3.55				6.94			$	162

 

The weighted-average grant-date fair value of options granted during the twelve months ended December 31, 2008, 2007 and 2006 was $ 3.14, $ 5.12 and $ 5.01, respectively. The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the fair market value of the Company Ordinary shares on December 31, 2008 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2008. This amount changes based on the fair market value of the Company's shares. Total intrinsic value of options exercised for the twelve months ended December 31, 2008 was $ 22. As of December 31, 2008, there was $ 1,949 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company's stock option plans. The cost is expected to be recognized over a weighted average period of 2.82 years.   The following table summarizes information about options to employees outstanding at December 31, 2008 under the plans:

 

Exercise price				Options outstanding at December 31, 2008				Weighted average remaining contractual life (years)				Weighted average exercise price				Options exercisable at December 31, 2008				Average exercise price of options exercisable
$	0				137,372				4.97			$	0				137,372			$	0
$	2.31-$4.70				682,448				8.22			$	3.92				209,361			$	3.55
$	5.45-$6.59				342,851				7.98			$	5.87				152,277			$	6.00
$	7.098-$8.8				49,064				8.20			$	7.98				25,153			$	8.10
					1,211,735												524,163

 

F-36

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ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 13:-

SHARE CAPITAL (Cont.)

 

The following table sets forth the total stock-based compensation expense resulting from stock options granted to employees and directors included in the Company's consolidated statement of operations:

		Year ended December 31
		2008				2007
Research and development cost		$	218			$	135
Marketing and business development expenses			239				225
General and administrative expenses			481				520
Total stock-based compensation expense		$	938			$	880

g.

Options issued to non-employees:

1.

The Company's outstanding options to non-employees as of December 31, 2008, are as follows:

 

Issuance date		Options for Ordinary shares				Exercise price				Options exercisable			Exercisable through
April 2002			30,864			$	-				30,864		April 2012
May 2002			10,288			$	-				10,288		May 2012
July 2002			10,288			$	-				10,288		July 2012
September 2002			11,651			$	3.65				11,651		September 2012
September 2002			7,534			$	-				7,323		September 2012
January 2004			5,022			$	-				5,233		January 2014
November 2004			14,228			$	-				14,228		November 2014
December 2004			2,511			$	-				2,511		December 2014
August 2006			3,767			$	6.59				3,767		August 2016
July 2007			38,940			$	7.30				12,168		July 2017
July 2007			10,000			$	6.84				3,124		July 2017
November 2007			25,000			$	5.96				6,250		November 2017
January 2008			15,000			$	5.70				-		January 2018
August 2008			25,000			$	3.80				-		August 2018
			210,093								117,695

2.

The Company had accounted for its options to non-employees under the fair value method of SFAS No. 123(R) and EITF 96-18. The fair value of options granted with an exercise price of $0, was equal to the share price at the date of grant. The fair value of options granted during 2008 with an exercise price other than $0 was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions: risk-free interest rates of 2.42%, dividend yields of 0%, volatility factors of the expected market price of the Company's Ordinary shares of 85%, and a weighted-average expected life of the options of 10 years.

 

F-37

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 13:-

SHARE CAPITAL (Cont.)

3.

The following table sets forth the total stock-based compensation expense resulting from stock options granted to non-employees included in the Company's consolidated statement of operations:

		Year ended December 31,
		2008				2007
Research and development cost		$	70			$	125
General and administrative expenses			-				30
Total stock-based compensation expense		$	70			$	155

 

NOTE 14:-

INCOME TAXES

a.

Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985:   Results for tax purposes in Israel are measured and reflected in real terms in accordance with the change in the Consumer Price Index (CPI). As explained in Note 2b, the consolidated financial statements are presented in dollars. The differences between the change in the Israeli CPI and in the NIS/dollar exchange rate causes a difference between taxable income or loss and the income or loss before taxes reflected in the consolidated financial statements. In accordance with paragraph 9(f) of SFAS No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), the Company has not provided deferred income taxes on this difference between the reporting currency and the tax bases of assets and liabilities. According to the law, until 2007, the results for tax purposes were measured based on the changes in the Israeli CPI. In February 2008, the "Knesset" (Israeli parliament) passed an amendment to the Income Tax (Inflationary Adjustments) Law, 1985, which limits the scope of the law starting 2008 and thereafter. Starting 2008, the results for tax purposes are measured in nominal values, excluding certain adjustments for changes in the Israeli CPI carried out in the period up to December 31, 2007. The amendment to the law includes, inter alia, the elimination of the inflationary additions and deductions and the additional deduction for depreciation starting 2008.

 

b.

Tax benefits under Israel's Law for the Encouragement of Industry (Taxes), 1969 (the "Tax Law"):   The Company is currently qualified as an "industrial company", as defined by the Tax Law, and as such, is entitled to certain tax benefits, mainly amortization of costs relating to know-how and patents over eight years, the right to claim public issuance expenses over three years, and accelerated depreciation.

 

F-38

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 14:-

INCOME TAXES (Cont.)

c.

Tax benefits under the Law for the Encouragement of Capital Investments, 1959 ("the Law"):   The Company's facilities in Israel have been granted "Approved Enterprise" status under the Law, and elected the "Alternative Benefits Track". The main benefit arising from such status is the reduction in tax rates on income derived from "Approved Enterprises". Consequently, the Company is entitled to a two-year tax exemption and five years of tax at a reduced rate (25%). Additionally, if the Company becomes a "foreign investors company", as defined by the Law, as such it will be entitled to a reduced tax rate of 10%-25% (based on the percentage of foreign ownership in each tax year) and an extension of three years for the benefit period. Since the Company has had no taxable income, the benefits have not yet commenced for any of the programs. The period of tax benefits, detailed above, is subject to a limit of 12 years from the commencement of production, or 14 years from the approval date, whichever is earlier. The year's limitation does not apply to the exemption period. The entitlement to the above benefits is conditional upon the Company's fulfilling the conditions stipulated by the Law, regulations published thereunder and the letters of approval for the specific investments in "Approved Enterprises". In the event of failure to comply with these conditions, the benefits may be canceled and the Company would be required to refund the amount of tax benefits, plus a consumer price index linkage adjustment and interest. As of December 31, 2008, management believes that the Company will be able to meet all of the aforementioned conditions. If these retained tax-exempt profits attributable to the "Approved Enterprise" are distributed in a manner other than in the complete liquidation of the Company, they would be taxed at the corporate tax rate applicable to such profits as if the Company had not elected the "Alternative Benefits Track", currently between 10%-25% for an "Approved Enterprise". The Company did not generate income under the provision of the law. Income from sources other than the "Approved Enterprise" during the benefit period will be subject to tax at the regular corporate tax rate. On April 1, 2005, an amendment to the Investment Law came into effect ("the Amendment") and has significantly changed the provisions of the Investment Law. The Amendment limits the scope of enterprises, which may be approved by the Investment Center by setting criteria for the approval of a facility as a Beneficiary Enterprise such as provision generally requiring that at least 25% of the Beneficiary Enterprise's income will be derived from export. Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded under the Investment Law so that companies no longer require Investment Center approval in order to qualify for tax benefits. If the Company pays a dividend out of income derived from the Benefited Enterprise during the tax exemption period, such income will be subject to corporate tax at the applicable rate (10%-25%) in respect of the gross amount of the dividend that the Company may be distributed. The Company is required to withhold tax at the source at a rate of 15% from any dividends distributed from income derived from the Benefited Enterprise. Under the amendment the benefit period for the Company will extend until the earlier of (1) seven years from the commencement year or (2) twelve years from the first day of the year of election. This period may be extended for Benefited Enterprise owned by a "foreign investor's company" during all or part of the benefit period.

 

F-39

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 14:-

INCOME TAXES (Cont.)

 

However, the Amendment provides that terms and benefits included in any letter of approval already granted will remain subject to the provisions of the law as they were on the date of such approval.   As of December 31, 2008, the Company did not generate income under any of the above-mentioned laws.

 

d.

Tax rates applicable to the income of the Company:   Corporate tax in Israel: Taxable income of Israeli companies is subject to tax at the rate of: 31% in 2006, 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter. Following an additional amendment to the tax ordinance, which came into effect on January 1, 2009, an Israeli corporation, may elect a 5% rate of corporate tax (instead of 25%) for dividends distributions received from a foreign subsidiary which is used in Israel in 2009, or within one year after actual receipt of the dividend, whichever is later. The 5% tax rate is subject to various conditions, which include conditions with regard to the identity of the corporation that distributes the dividends, the source of the dividend, the nature of the use of the dividend income, and the period which the dividend income will be used in Israel.

 

e.

Deferred income taxes:   Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows:

 

		December 31,
		2008				2007
Operating loss carryforward and deductions		$	12,551			$	9,022
Reserves, allowances and other			85				212
Net deferred tax asset before valuation allowance			12,636				9,234
Valuation allowance			(12,636	)			(9,234	)
Net deferred tax asset		$	-			$	-

 

As of December 31, 2008 and 2007, the Company has provided valuation allowances of $ 12,551 and $ 9,022, respectively, in respect of deferred tax assets resulting from tax loss carryforward, other temporary differences and tax withholding. Management currently believes that since the Company has a history of losses it is more likely than not that the deferred tax regarding the loss carryforward and the other temporary differences will not be realized in the foreseeable future.

 

f.

The main reconciling item between the statutory tax rate of the Company and the effective tax rate is the recognition of valuation allowances in respect of deferred taxes relating to accumulated net operating losses carried forward among the various subsidiaries worldwide due to the uncertainty of the realization of such deferred taxes and the effect of the "Approved Enterprise".

 

F-40

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 14:-

INCOME TAXES (Cont.)

g.

Net operating losses carryforward:   The Company has estimated accumulated losses for tax purposes as of December 31, 2008, in the amount of approximately $ 38,743 which may be carried forward and offset against taxable income in the future for an indefinite period. The Company's subsidiary in the United States have estimated total available carry-forward tax losses as of December 31, 2008 of approximately $ 2,447 to offset against future tax profits for periods of 20 years.

 

h.

Income taxes for the twelve months ended December 31, 2008 and 2007:   The Company and its subsidiary in the United States have not recorded any tax expenses during the twelve months ended December 31, 2008 and 2007, as the Company has losses. Parkway recorded tax expenses starting on the closing date until December 31, 2008 in the amount of $ 23.

 

i.

The Company adopted the provisions of FIN 48 as of January 1, 2007, and there was no effect on the financial statements. As a result, the Company did not record any cumulative effect related to adopting FIN 48. The Company did not record a liability deriving from the implementation of FIN 48.

NOTE 15:-

FINANCIAL EXPENSES (INCOME)

		Year ended December 31,
		2008				2007				2006
Financial income:
Interest income on short-term deposits		$	185			$	380			$	486
Foreign currency adjustments gains			-				-				45
Interest and realized gain on marketable securities			*) 6,115				1,230				14
			6,300				1,610				545
Financial expenses:
Bank and Interest expenses			(109	)			(24	)			(7	)
Foreign currency adjustments losses			(11	)			(50	)			-
realized loss on marketable securities			(13	)			-				-
Impairment of investment in marketable securities			(631	)			(5,009	)			-
Loss related to derivative instruments			(87	)			(143	)			-
			(851	)			(5,226	)			(7	)
		$	5,449			$	(3,616	)		$	538

*)             Including gain from the sale of ARS in the amount of $ 5,640 (see also note 6).

NOTE 16:-

RELATED PARTY TRANSACTIONS

a.

In June 2003, the Company entered into a license agreement with a shareholder of the Company to use its intellectual property for a period of 20 years for consideration of up to $ 100 (see Note 12d). During the years 2008 and 2007, no expenses were recorded.

b.

In April 2007, the Company entered into a consulting agreement with a related party for a monthly fee of $ 10. In Addition the Company granted the consultant 38,940 options at an exercise price of $ 7.3. During 2008 and 2007 the Company paid $ 140 and $ 78, respectively, to this related party.

 

F-41

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 17:-

SEGMENTS OF THE COMPANY AND RELATED INFORMATION

The Company has two reportable segments related to continuing operations. The core technology division develops and commercializes molecular diagnostic products.

The drug screening laboratory services division provides drugs of abuse and pre-employment drug testing services.

The segments are managed separately because each segment provides different laboratory services.

a.

The table below presents financial information for the Company's two reportable segments:

		Year ended December 31, 2008
Revenues from external customers:
Core technology		$	-
Laboratory services			1,511
Consolidated revenues		$	1,511
Gross profit:
Core technology		$	-
Laboratory services			737
Consolidated gross profit		$	737
Operating loss:
Core technology		$	14,070
Laboratory services			819
Consolidated operating loss		$	14,889
Depreciation and amortization:
Core technology		$	291
Laboratory services			979
Consolidated depreciation and amortization		$	1,270
Expenditure for segments assets:
Core technology		$	63
Laboratory services			101
Consolidated expenditure		$	164
Segment goodwill:
Core technology		$	-
Laboratory services			1,905
Consolidated goodwill		$	1,905
Segment assets:
Core technology		$	17,300
Laboratory services			2,845
Consolidated assets		$	20,145

 

F-42

---

 

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 17:-

SEGMENTS OF THE COMPANY AND RELATED INFORMATION (Cont.)

In 2008 two customers from the drug screening laboratory services division accounted for 28% and 24% of the Company's revenues.

 

Long-lived assets:

		December 31
		2008
Israel		$	1,163
U.S.A			2,294
		$	3,457

 

NOTE 18:-

SUBSEQUENT EVENTS

a.

1.

License and collaboration agreement with Prometheus:   On April 10, 2009 the Company entered into a license and collaboration agreement (the "License Agreement") with Prometheus Laboratories Inc. ("PL") under which the Company agreed to exclusively license and sublicense to PL certain rights related to the Company's microRNA-based cancer diagnostic tests: miRview™  mets, miRview™ squamous and miRview™ meso ("Cancer Diagnostics Products"), including the rights to certain software developed by the Company and related to the miRview ™ mets product. The Company also agreed to collaborate with Prometheus in order to further develop the Cancer Diagnostics Products and to develop two new microRNA-based gastroenterology tests ("GI Products"). Under the License Agreement, PL has the exclusive right to develop and commercialize the Cancer Diagnostics Products and the GI Products in the U.S. The License Agreement also gives PL a right of first negotiation to take a license for certain diagnostic tests or products that are under development by the Company. PL will contribute to a development fund that will be used to further develop the Cancer Diagnostic Products and to develop the GI Products. In addition, PL will pay the Company additional amounts upon reaching certain publication requirements for the Cancer Diagnostic Products and achieving certain product profiles for the GI Products. The Company is also entitled to receive certain payments upon the achievement of commercial milestones. The total amount potentially payable to the Company under these provisions is $ 17,000. The Company is also entitled to royalties on the sale of the Cancer Diagnostic Products and the GI Products, subject to reductions in certain instances.

F-43

---

 

ROSETTA GENOMICS LTD. AND ITS SUBSIDIARIES

(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)

 

 

NOTE 18:-

SUBSEQUENT EVENTS (Cont.)

 

The agreement will terminate upon the later of the expiration or abandonment of the last licensed patent to expire or become abandoned, or, if a licensed product involves certain sublicensed technical information, until the end of such additional period as is required under the applicable upstream license. PL can terminate the agreement (either entirely or as to one or more licensed products) by providing six months' written notice to the Company.

 

2.

Prometheus stock purchase agreement:   On April 10, 2009 the Company entered into a stock purchase agreement with PL (the "Purchase Agreement"). Under the Purchase Agreement, on April 27, 2009 ("the closing date"), PL purchased 2,000,000 Ordinary shares of the Company (the "Shares") at a price of $ 4.00 per share in a private placement transaction. Under the terms of the Purchase Agreement, so long as PL or its affiliates continue to hold at least 50% of these Shares, PL is entitled to information rights, pre-emptive rights and board observer rights. Pursuant to the pre-emptive rights, PL has the right to participate in future offerings of the Company's securities to purchase up to its pro rata share in any such offering on the same terms and conditions as other investors.  Under the terms of the Purchase Agreement, the Company is also required to prepare and file with the SEC a Registration Statement on Form F-3 (the "Registration Statement") covering the resale of the Shares. The Registration Statement should be filed within 45 days from the closing date and should be declared effective within 90 days of the closing date if it is not reviewed by the SEC or within 180 days of the closing date if it is reviewed by the SEC.  If the Registration Statement is not declared effective within the required timeframe, the Company will be required to pay liquidated damages equal to 1% of the aggregate purchase of the Shares for each month that effectiveness is delayed, up to a maximum of 8% of the aggregate purchase price.

 

b.

Sale of Parkway:   On May 18, 2009, the Company sold Parkway in a management buy-out for up to maximum amount of $ 2,500 to be paid as a fixed percentage of revenues (15%) over six years. As a result of the transaction, the Company recorded a loss in the second quarter of 2009, in the amount of approximately $ 2,250, since future proceeds are contingent upon parkway's revenues.

 

c.

Green Energy Initiative:   On March 11, 2009, the Company received the second milestone payment from the private investors who invested up to $ 1,500 in the green energy initiative. The project leverages the Company's proprietary microRNA technologies and strong IP position to develop a wide range of plant-based applications (see Note 11).

 

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F-44

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