As filed with the Securities and Exchange Commission on December 23, 2014.
Registration No. 333-
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM F-1
 
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
CHECK-CAP LTD.
(Exact name of Registrant as specified in its charter)
 
Israel
(State or other jurisdiction of
incorporation or organization)
3844
(Primary Standard Industrial
Classification Code Number)
Not Applicable
(I.R.S. Employer
Identification Number)
 
Check-Cap Building
Abba Hushi Avenue
P.O. Box 1271
Isfiya, 30090
Mount Carmel, Israel
+972-4-8303400
 
(Address, including zip code, and telephone number,
including area code, of Registrant’s principal executive offices)
 
Puglisi & Associates
850 Library Avenue, Suite 204
Newark, Delaware 19711
302-738-6680
 
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
Copies to:
Mitchell S. Nussbaum, Esq.
Angela M. Dowd, Esq.
Loeb & Loeb LLP
345 Park Avenue
New York, New York 10154
(212) 407-4000 - Telephone
(212) 407-4990 - Facsimile
Eran Yaniv, Adv.
Sharon Rosen, Adv.
Fischer Behar Chen Well
Orion & Co.
3 Daniel Frisch Street
Tel Aviv, 6473104, Israel
+972 3 6944111 - Telephone
+972 3 6091116 - Facsimile
Yvan-Claude Pierre, Esq.
Daniel I. Goldberg, Esq.
Reed Smith LLP
599 Lexington Avenue
New York, New York 10022
(212) 521-5400 - Telephone
(212) 521-5450 - Facsimile
Shlomo Landress, Adv.
Amit, Pollak, Matalon & Co.
Nitsba Tower,
17 Yitzhak Sadeh St.,
Tel Aviv 67775, Israel
+972 3 568 9000
Telephone
+972 3 568 9001
Facsimile
 
 
 

 
 
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, or the Securities Act, check the following box.   T
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   £
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   £
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   £
__________________________
 
Calculation of Registration Fee
 
Title of Each Class of Securities to be Registered
 
Proposed Maximum Aggregate Offering
Price (1)
   
Amount of
Registration Fee (1)
 
Ordinary shares, par value NIS 0.01 (2)(3)
  $ 15,000,000     $ 1,743  
Underwriter warrants (4)(6)
    -        -  
Ordinary shares, par value NIS 0.01 underlying the underwriter warrants (3)(5)
  $  750,000     $ 87.15  
TOTAL
  $
15,750,000
    $
1,830.15
 
 
 
(1)
Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act.
 
 
(2)
Includes ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the ordinary shares are first bona fide offered to the public, and also includes ordinary shares that may be purchased by the underwriters pursuant to an option to purchase additional ordinary shares to cover over-allotments, if any. The ordinary shares are not being registered for the purpose of sales outside the United States.
 
 
(3)
Pursuant to Rule 416 of the Securities Act, the securities being registered hereunder include such additional securities as may be issued after the date hereof as a result of share splits, share dividends or similar transactions.
 
 
(4)
We have agreed to issue, upon closing of this offering, warrants exercisable for a period of four years following the effective date of this registration statement representing 5% of the aggregate number of ordinary shares issued in the offering, but not including the over-allotment option, or the “underwriter warrants,” to Chardan Capital Markets, LLC. Resales of the underwriter warrants on a delayed or continuous basis pursuant to Rule 415 under the Securities Act are registered hereby. Resales of ordinary shares issuable upon exercise of the underwriter warrants are also being similarly registered on a delayed or continuous basis hereby. See “Underwriting.”
 
 
(5)
No fee required pursuant to Rule 457(g) under the Securities Act.
 
 
(6)
Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(g) under the Securities Act.  We have calculated the proposed maximum aggregate offering price of the ordinary shares underlying the underwriters’ warrants by assuming that such warrants are exercisable to purchase ordinary shares at a price per ordinary share equal to 100% of the price per ordinary share sold in this offering.
 
 
 
 

 
 
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall hereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission acting pursuant to said section 8(a), may determine.
 
 
 

 
 
The information contained herein is subject to completion or amendment.  A registration statement relating to these securities has been filed with the U.S. Securities and Exchange Commission. These securities may not be sold until the registration statement becomes effective. This prospectus is not an offer to sell and is not a solicitation of an offer to buy in any jurisdiction in which an offer, solicitation, or sale is not permitted.
 
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION, DATED DECEMBER 23, 2014
 
 
Check-Cap Ltd.
         Ordinary Shares
 
Check-Cap Ltd. is offering     ordinary shares in its initial public offering.  We currently expect the initial public offering price to be between $         and $        per ordinary share.
 
Prior to this offering, there has been no public market for our ordinary shares. We have applied for the listing of our ordinary shares on the NASDAQ Capital Market under the symbol “CHEK.”  There is no assurance that this application will be approved.
 
Concurrently with this offering, we expect to complete a private placement of                      ordinary shares, or the Private Placement, at a purchase price per ordinary share equal to the public offering price in accordance with Regulation S under the Securities Act of 1933, as amended, or the “Securities Act” or Regulation D under the Securities Act, to certain investors including certain of our affiliates.  The sale of such ordinary shares will not be registered under the Securities Act.  We expect to receive $                     in aggregate net proceeds from the Private Placement.  See “Summary-Recent Developments—Credit Line Agreement; Private Placement.” The closing of the Private Placement is conditioned upon the completion of the offering to which this prospectus relates. However, the completion of the offering to which this prospectus relates is not conditioned upon the closing of the Private Placement.
 
We are an “emerging growth company” under applicable U.S. federal securities laws and may elect to comply with reduced public company reporting requirements.  See “Implications of Being an Emerging Growth Company” on page 6 of this pros pectus .
 
Investing in our ordinary shares involves a high degree of risk.  You should read carefully the “Risk Factors” beginning on page 14 of this prospectus before investing in our ordinary shares that are the subject of this offering.
 
Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of the disclosures in this prospectus. Any representation to the contrary is a criminal offense.
 
   
Per Ordinary Share
   
Total
 
Public offering price
  $       $    
Underwriting discount and commissions (1)
  $       $    
Proceeds, before expenses, to us
  $       $    
 
 
(1)
We have also agreed to issue, upon closing of this offering, compensation warrants to Chardan Capital Markets, LLC as representative of the underwriters, entitling it to purchase up to     ordinary shares.  For a description of other terms of the compensation warrants and a description of the additional compensation to be received by the underwriters see “Underwriting.”
 
 
 

 
 
The underwriters have an option exercisable within 45 days from the date of this prospectus to purchase up to          of additional ordinary shares from us at the public offering price, less the underwriting discount, solely to cover over-allotments. The ordinary shares issuable upon exercise of the underwriters’ over-allotment option have been registered under the registration statement of which this prospectus forms a part. In addition to the underwriting discount, we have agreed to pay certain of the expenses of underwriters incurred in connection with this offering, see “Underwriting” beginning on page 156 of this prospectus. 
 
The underwriters expect to deliver the ordinary shares to purchasers on or about                , 2015.
 
 
Chardan Capital Markets, LLC
Maxim Group LLC
 
                  , 2015
 
 
 

 
 
TABLE OF CONTENTS
 
Page
 
1
14
47
48
49
50
52
55
56
58
73
101
110
130
132
136
144
146
156
163
163
163
164
F-1
 
 
i

 
 
 
You should rely only on the information contained in this prospectus, any amendment or supplement to this prospectus or any free writing prospectus prepared by us or on our behalf. We have not, and the underwriters have not, authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer of these securities, or soliciting any offers to buy these securities, in any jurisdiction where the offer or solicitation is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our ordinary shares.
 
Neither we nor any of the underwriters has done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required other than the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of our ordinary shares set forth in, and the possession and distribution of, this prospectus outside of the United States.
 
We obtained statistical data, market data and other industry data and forecasts used throughout this prospectus from market research, publicly available information and industry publications. While we believe that the statistical data, industry data and forecasts and market research are reliable, we have not independently verified the data.
 
 
ii

 
 
 
 
PROSPECTUS SUMMARY
 
The following summary does not contain all of the information you should consider before investing in our ordinary shares.  You should read the following summary together with the entire prospectus carefully, including the “Risk Factors” section beginning on page 14 and the financial statements and the accompanying notes to those financial statements beginning on page F-1 before making an investment decision.  Unless otherwise indicated, all information in this prospectus assumes no exercise of the underwriters’ over-allotment option and no exercise of the underwriter warrants. Unless the context otherwise requires, references to “we,” “our,” “us,” “our company,” and “Check-Cap” refer to Check-Cap Ltd., an Israeli company. The terms “dollar,” “US$” or “$” refer to U.S. dollars, the lawful currency of the United States, and the term “NIS” refers to New Israeli Shekels, the lawful currency of the State of Israel. Unless otherwise indicated, U.S. dollar translation of NIS amounts presented in this prospectus are translated using the rate of $1.00 = NIS 3.4380, the exchange rate published by the Bank of Israel on June 30, 2014, and U.S. dollar translation of Euro amounts presented in this prospectus are translated using the rate of $1.00 = Euro 1.3693, the exchange rates published by the Wall Street Journal on June 30, 2014.
 
Our Company
 
We are a clinical stage medical diagnostics company engaged in the development of an ingestible imaging capsule that utilizes low-dose X-rays for the screening for colorectal cancer, or CRC.  While CRC is the second leading cause of death from cancer in the United States and is largely preventable with early detection, about one-half of Americans over the age of 50 do not undergo any form of CRC screening due in large part to the pain, discomfort and embarrassment related to current screening methods.  Unlike other structural screening methods that are designed to generate structural information of the colon for the detection of pre-cancerous polyps, such as optical colonoscopy, computed tomographic colonography, or CTC, and other capsule-based technology, our imaging capsule is designed to be ingested without any cleansing of the colon and to travel through the gastrointestinal tract naturally while the patient continues his or her normal daily routine.  Furthermore, unlike the procedures for CRC imaging devices currently on the market, all of which require the patient to fast for several hours prior to administration, the procedure for the Check-Cap device is designed to enable patients to continue eating normally.  We believe that this solution will be attractive to both physicians and patients, thereby increasing the number of people willing to undergo screening for CRC.
 
Our imaging capsule is being designed to create a reconstructed three-dimensional image of the colon and to enable detection of clinically significant polyps with a high degree of sensitivity. Colon polyps are fleshy growths that occur on the lining of the colon. Polyps in the colon are extremely common, and when certain types of polyps grow large enough they can become cancerous.
 
Our imaging capsule will be swallowed by the patient and propelled by natural motility through the gastrointestinal tract and excreted naturally with no need for retrieval for data collection. Unlike other CRC screening methods, this process should not disrupt a patient’s normal activities or require fasting. Our imaging capsule employs X-rays which are considered low dose by the Radiation Safety Division of the Radiological Protection Branch of the Soreq Nuclear Research Center, which allows it to image the lining of the colon even when surrounded by intestinal content.  As such, we believe that patients using our imaging capsule will not be required to undergo any prior bowel cleansing.
 
Our imaging capsule is being designed to transmit the data it collects to an external data recorder that will be worn by the patient. The external data recorder is being designed to enable the transfer of the data to physicians, who will then utilize our data viewer software application to analyze the data collected by our imaging capsule. We intend for physicians to be able to review the colon’s inner images at any location at any time, in less time than is required to perform an optical colonoscopy
 
In order to enable a complete view of capsule positioning and motility, we have designed a Capsule Positioning System, or CPS, which is mounted on the patient’s back throughout the entire procedure. The CPS is being designed to provide the physician with accurate localization data aligned with a reconstructed image.
 
In the event that polyps are identified through our imaging capsule, the patient would be required to undergo a subsequent traditional colonoscopy procedure to examine, remove and biopsy the polyps. For those patients who require a subsequent polypectomy, concerns regarding pain, discomfort and embarrassment may still remain with respect to the subsequent polypectomy. We do not, however, believe that these concerns will make the use of our imaging capsule any less attractive to doctors and patients. Although patients who are initially screened utilizing a traditional colonoscopy could avoid the need for a second procedure if polyps are discovered because they could undergo a polypectomy during the initial screening, if necessary, we believe that our imaging capsule will still be attractive to doctors and patients since a large majority of patients who are screened will not require a subsequent polypectomy. According to a review published by the Agency for Healthcare Research and Quality in October 2008, out of 100 adults aged 50-75, only 25-30 persons have one or more polyps and only 15 persons have significant (10+mm) polyps.
 
 
 
1

 
 
 
A clinical proof-of-concept study, which was based on a 10-case study conducted at Tel Aviv Medical Center in Israel and used a prior version of our imaging capsule, did not identify any material safety or feasibility issues. The study demonstrated the applicability of our imaging technology to the human colon, generating images taken in the colon without any prior bowel-cleansing. All subjects ingested the capsule easily with smooth passage within the designated transit time, on average, within two to three days. There were no reported device-related adverse events. Mild effects on bowel movements were noted, which were determined to be related to the contrast agent and passed within one to two days after the capsule was excreted.
 
Another objective of the 10-case study was to estimate total radiation exposure for each case study. This was calculated using standard established factors for calculating effective radiation exposure, such as the duration of the capsule inside the body, and was based on the activity of the radiation source inside the imaging capsule and radiation energy, both of which were measured for each case study. The average calculated exposure for the entire procedure in the 10-case study, from ingestion of the capsule to excretion, was 0.03 mSv (STD 0.007 mSv). This level of radiation exposure is similar to a single chest X-ray (approximately 0.06mSv) and two orders of magnitude less than a CTC.
 
The 10-case clinical proof-of-concept study focused on assessing the safety and feasibility of the Check-Cap imaging system.  The 10-case study is the first part of a multi-center, prospective clinical feasibility study to establish the safety, functionality and preliminary efficacy of the Check-Cap imaging system in patients eligible for CRC screening, by comparing results from the clinical feasibility study with those from non-invasive, low-sensitivity fecal occult blood tests, or FOBTs, and fecal immunochemical tests, or FITs, as well as from optical colonoscopies.  The feasibility study is designed to include approximately 60 subjects.  The study is being conducted in Israel at the Tel Aviv Medical Center and Laniado Hospital and is planned to also be conducted at the Erasmus University Medical Center in the Netherlands. The clinical feasibility study will evaluate the image resolution generated by the capsule in an unprepped human colon, will assess polyp imaging in various shapes and in different segments of the colon and will evaluate the safety of the device in terms of total and segmental transit time and analyze the effects of the presence of polyps and variable colon dimensions on these parameters.  The study will seek to create a clinical atlas of images that will enable comparisons between images acquired by different CRC screening modalities.  During the feasibility study we will collect data about the overall imaging of the colon’s internal surfaces during the passage of the capsule to support the development of a correlation map of polyps identified through our imaging system with polyps imaged by optical colonoscopy and CTC.  Additionally, the feasibility study will measure total radiation exposure and the distribution of contrast material within the colon.
 
Following the successful completion of the broader multi-center, prospective clinical feasibility study, we plan to submit during 2015 a request for CE marking for the marketing and sale of our capsule in the European Union. We expect to perform post-marketing studies in Europe following CE marking for the purpose of collecting additional clinical data to support market adoption. Subject to regulatory approval and available capital, we anticipate launching our product commercially in Europe during 2016.
 
We plan to conduct a second pre-IDE meeting, now referred to as a pre-submission meeting, with the U.S. Food and Drug Administration, or FDA , in late 2015, and subsequently to submit a request for the approval of an investigational device exemption, or IDE, for a pivotal study in the United States to (i) demonstrate device safety as evidenced by a lack of device-related serious adverse events; and (ii) provide efficacy data concerning our imaging capsule’s sensitivity and specificity.  We anticipate that FDA approval for the pivotal study will be subject to our providing sufficient clinical data from the multi-center, prospective clinical feasibility study. We also intend to pursue clinical trials for regulatory approvals in Japan and China in parallel to the U.S. pivotal study.  Pivotal studies are expected, among other things, to compare the images of polyps identified by our imaging system with the same polyps detected by traditional optical colonoscopy and CTC in instances where patients were referred after positive exam results.  These clinical findings will be analyzed in comparison with results obtained from FOBTs and FITs. Subject to the successful completion of our clinical trials and the receipt of initial FDA approval for the marketing of our imaging capsule in the United States, we anticipate launching our product commercially in the United States during 2017.
 
We have submitted patent applications covering our technology in the United States, member states of the European Patent Organisation, Australia, Brazil, Canada, China, Hong Kong, India, Israel, Japan and South Korea. We have been granted patents for our core patent by the U.S. Patent and Trademark Office as well as from the European Patent Office, Australia, China, Hong Kong, Israel, India and Japan.  We also filed patent applications describing the use of our imaging technology in several other medical applications.
 
 
 
2

 
 
 
Since our formation, we have not generated any revenue. We do not anticipate generating any revenue for the foreseeable future and we do not yet have any specific launch dates for our product. For the six months ended June 30, 2014, we had a total comprehensive loss of $2.2 million.  For the year ended December 31, 2013, we had a total comprehensive loss of $4.0 million.  As of June 30, 2014, we had an accumulated deficit of $24.7 million and a total shareholders’ deficit of $998,000.
 
Industry Background
 
According to the American Cancer Society, or the ACS, CRC is the third most common cancer diagnosed and the second leading cause of death from cancer in the United States.  The ACS estimates that in 2014, in the United States approximately 136,830 people are expected to be diagnosed with CRC and approximately 50,310 people will die from CRC. According to the World Health Organization, or the WHO, in 2012, in Europe there were an estimated 471,000 cases of CRC and approximately 228,000 died from the disease, and in Japan there were an estimated 112,675 cases of CRC and approximately 49,345 died from the disease. According to the WHO, in 2020 the expected numbers of cases of CRC are estimated to be 159,972 in the United States, 528,481 in Europe, 128,346 in Japan and 1,678,127 worldwide.
 
CRC screening can reduce death rates from CRC by detecting polyps at an earlier, more treatable stage. CRC is one of the few cancers that can be prevented through screening because pre-cancerous polyps, from which colon cancers often develop, can be identified and removed. Moreover, the five-year survival rate is greater than 90% for CRC patients diagnosed at an early, localized stage. However, less than 40% of cases are currently diagnosed at that stage. According to the Centers for Disease Control and Prevention, or the CDC, at least 6 out of every 10 deaths from CRC could be prevented if every adult age 50 years or older was screened regularly and approximately 30,000 lives could be saved each year in the United States if the screening recommendations were followed. The ACS’ goal is to have 80% of those 50 years and older who are covered by the program screened by 2018.
 
Today, there is a range of options for CRC screening in the average risk population, with current technology falling into two general categories: (i) structural exams, such as optical colonoscopy, sigmoidoscopy, CTC and optical capsules (all of which require aggressive bowel preparation), which are invasive exams that enable physicians to visualize the colon for abnormalities; and (ii) stool tests, such as FOBTs, FITs and stool DNA tests, which test for blood and irregularities in DNA. Notwithstanding the many CRC screening alternatives, the fact that the tests are encouraged by clinicians and insurers and the clinical value of screening for CRC, a large portion of the population are still reticent to undergo CRC screening and are not satisfied with the currently available alternatives.
 
The ACS recommends that men and women over the age of 50 undergo an optical colonoscopy every 10 years or other structural tests, such as sigmoidoscopy or virtual colonoscopy, every five years or alternatively, a FOBT should be performed every year. According to the U.S. Census Bureau, as of mid-2014, there were projected to be approximately 91 million Americans aged 50-75 years. Assuming the longest screening interval of 10 years, the addressable annual U.S. patient population is at least 9.1 million.
 
Optical colonoscopy is currently considered the most reliable method for detecting disorders of the colon and is the standard screening tool for early detection of colon cancer. Optical colonoscopy demonstrates a high degree (approximately 95%) of sensitivity ( i.e. , detection of individuals with cancer) and specificity ( i.e. , avoiding false negative results). Optical colonoscopy involves the insertion of a flexible colonoscope, which is an approximately160 centimeters long endoscope, by a physician into a patient’s colon through the anus in order to visually inspect the interior of the colon. Air must be pumped in through the rectum in a process called “insufflation.”  Sigmoidoscopy, or FSIG, is an endoscopic procedure that examines the lower part of the colon lumen.  The exam may be performed with a variety of endoscopic instruments, including a standard 60 centimeter sigmoidoscope.  FSIG is typically performed without sedation and with a more limited bowel preparation than a standard optical colonoscopy.  An optical colonoscopy and sigmoidoscopy can perform both diagnostic and limited treatment functions, by allowing for the removal of polyps and adenomas during the course of the procedure.  However, both of these procedures carry some risks of bowel perforations and bleeding and related limitations as they require prior cleansing of the bowel, insufflation and sedation, involve potential complications and may cause patient anxiety, discomfort and, in some cases, pain. In addition, a patient’s normal daily routine is disrupted for one or two days.
 
 
 
3

 
 
 
CTC, or virtual colonoscopy, is an imaging procedure that results in cross-sectional, two- or three-dimensional views of the entire colon with the use of a special X-ray machine linked to a computer. Here, as well, a flexible tube is inserted into the rectum in order to allow air or carbon dioxide to open the colon. The patient then passes through the CT scanner, which creates multiple images of the colon interior. This method does not allow for treatment and the subject is exposed to a high dose of radiation. A full bowel cleansing is currently necessary for a successful examination by CTC.
 
FOBT is based on an analysis of stool samples and is currently the most widely used non-invasive screening test. It has a lower sensitivity in detecting polyps (measured by the percentage of polyps being found). According to the CDC, in 2012, only approximately 10.6% of men and 10.2% of women in the United States underwent the procedure due to its inconvenience and unreliable performance. FOBT is being replaced by a more sensitive blood stool technology FIT, but it is also not designed to detect the majority of non-bleeding polyps.
 
In 2009, optical capsule endoscopy became commercially available in Europe for CRC screening. In early 2014, the FDA granted approval for optical capsule endoscopy procedure to be used for CRC screening for use in patients who have had an incomplete optical colonoscopy.  However, this technology requires bowel cleansing to a greater degree than is required for a regular optical colonoscopy, which can result in dehydration and in turn can lead to cancellation of the procedure in certain cases. Moreover, because this procedure must be completed within several hours in order to maintain a clean colon and to accommodate the capsule’s limited battery life, patients are required to drink large amounts of liquid so that the capsule can flow through the gastrointestinal tract during the time allotted. Furthermore, camera-based optical capsule endoscopy procedures generate a large number of images, often requiring more physician time to analyze the images than to conduct an optical colonoscopy.
 
Several companies are developing technologies based on molecular diagnostics (from blood and other bodily fluids), or MDx, tests that investigate the link between genes and the function of metabolic pathways, drug metabolism and disease development with a primary focus on the study of DNA, RNA and proteins. Genetic markers can be traced within stool samples in minute quantities. For example, a special collecting kit for stool samples and an analyzer to diagnose CRC based on these stool-based markers has been developed and recently approved by the FDA. While the method of screening for CRC using stool DNA testing has been endorsed by several societies, this test does not generate structural information on the colon and therefore, does not detect most pre-cancerous polyps.
 
Our Solution
 
We believe that our imaging capsule could represent a potential breakthrough in CRC screening by providing a structural exam without the pain, discomfort and embarrassment experienced by some patients undergoing a traditional optical colonoscopy and other currently available screening methods by offering the following benefits:
 
 
·
eliminating the need for fasting and prior bowel cleansing, which would differentiate our imaging capsule from every other currently available structural screening exam;
 
·
providing patients with a procedure that requires them to swallow our capsule and small amounts of a contrast agent, thereby minimizing any disruption to their normal activities;
 
·
eliminating the need to sedate patients;
 
·
obviating the requirement for the insufflation (the forcing of air into the gastrointestinal tract) of patients;
 
·
administering our technology on an outpatient basis;
 
·
providing digital reporting, storage and remote consulting capabilities; and
 
·
enabling a physician to analyze the results in approximately 10 minutes, which would be less time than is required to conduct an optical colonoscopy.
   
 
 
4

 
 
 
Although our imaging capsule utilizes radiation that is considered low dose, we believe that the risks associated with such radiation exposure are low compared to risks associated with other procedures such as perforation, bleeding or sedation related effects (optical colonoscopy and sigmoidoscopy) and dehydration and damage to kidneys (optical capsules).  Unlike FOBTs, FITs and stool DNA tests, our capsule-based imaging modality generates structural information on the colon, which could assist in the detection of pre-cancerous polyps. We therefore do not believe that the low dose radiation in our imaging capsule will make our imaging capsule less attractive to physicians and patients than other less effective products that do not employ any radiation.
 
We believe that gastroenterologists will embrace our technology and encourage the use of our imaging capsule. This may increase the number of people undergoing CRC screening and may cause more people with polyps to obtain polypectomy – a therapeutic procedure during which polyps are removed and which currently receives different reimbursement coverage.
 
Our imaging capsule and CPS are intended to be prescribed to patients by physicians. Just prior to swallowing our capsule, a patient will begin drinking small amounts of a radio opaque contrast agent (such as barium sulfate or iodine) with his or her meals, which enhances the contrast of the colon surface. The capsule is propelled by natural motility through the gastrointestinal tract. As it makes its way through the gastrointestinal tract, information is transmitted to a receiving device worn by the patient that stores the information for offline analysis. After our imaging capsule is expelled from a patient’s body, the CPS data will be transferred to physicians, who will then utilize our data viewer software application to analyze the data collected by our imaging capsule. Our proprietary software is being designed to process the data and produce a two- and three-dimensional visualization of the colon. A physician will then analyze the visualization to determine whether any anatomical anomalies are present on the surface of the colon.
 
Our imaging capsule consists of an X-ray source and several X-ray detectors. The X-ray source is contained in a rotating radiation shield, enabling the generation of 360-degree angular scans. The collection of successive angular scans enables the virtual reconstruction of a portion of the colon.  During movement of our imaging capsule longitudinally through the colon, successive images of portions of the colon are collected to enable the three-dimensional reconstruction of the colon. Our imaging capsule is also intended to enable identification of polyps, which protrude inward into the colon, through the detection of irregularities in the topography of the colon.
 
 
 
Image for illustration purpose only
 
 
 
 
5

 
 
 
 
Our Strategy
 
Our goal is to become a leading supplier of CRC screening technology and, subject to the successful completion of the development of our technology and the receipt of the requisite regulatory approvals, to establish our technology as a leading CRC screening method. Key elements of our strategy include:
 
 
·
obtaining CE marking for the marketing and sale of our imaging capsule in the European Union, followed by obtaining regulatory approvals for the use of our imaging capsule initially in the United States and Japan.  In Europe and Japan, we intend to offer our imaging capsule as an imaging and screening tool for the general population.  In the United States, we may first seek to obtain regulatory approvals for our imaging capsule as an adjunct tool to FOBTs and FITs, and after we have conducted more extensive clinical studies, we anticipate applying to the FDA for the use of our imaging capsule as an initial screening tool;
 
·
obtaining third-party reimbursement for our technology;
 
·
enhancing our existing technology portfolio and developing new technologies; and
 
·
successfully marketing our product to establish a large customer base.
 
Our Challenges
 
Because we are still in the clinical and development stage, we are subject to certain challenges, including, among others, that:
 
 
·
our technology has been tested on a limited basis and therefore we cannot assure the product’s clinical value;
 
·
we need to CE mark the devices in the European Union and obtain the requisite regulatory approvals in the United States, Japan and other markets where we plan to focus our commercialization efforts;
 
·
we need to raise an amount of capital sufficient to complete the development of our technology, obtain the requisite regulatory approvals and commercialize our current and future products;
 
·
we need to obtain reimbursement coverage from third-party payors for procedures using our imaging capsule;
 
·
we need to increase our manufacturing capabilities; and
 
·
we need to establish and expand our customer base while competing against other sellers of capsule endoscopes as well as other current and future CRC screening technologies and methods.
 
Our ability to operate our business and achieve our goals and strategies is subject to numerous risks as described more fully in “Risk Factors.”
 
Implications of Being an Emerging Growth Company
 
As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of certain exemptions from specified disclosure and other requirements that are otherwise generally applicable to public companies. These exemptions include:
 
 
·
being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;
 
·
not being required to comply with the auditor attestation requirements for the assessment of our internal control over financial reporting provided by Section 404 of the Sarbanes-Oxley Act of 2002;
 
·
not being required to comply with any requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and our financial statements;
 
·
reduced disclosure obligations regarding executive compensation; and
 
·
not being required to hold a nonbinding advisory vote on executive compensation or seek shareholder approval of any golden parachute payments not previously approved.
 
 
 
6

 
 
 
In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards.  However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
 
We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which our total annual gross revenues exceed $1.0 billion; (ii) the last day of the fiscal year in which the fifth anniversary of the date of the first sale of ordinary shares under this registration statement occurs; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act. When we are no longer deemed to be an emerging growth company, we will not be entitled to rely on the exemptions provided in the JOBS Act discussed above. We may choose to take advantage of some, but not all, of the exemptions available to emerging growth companies.  We have taken advantage of some of the reduced reporting exemptions in this prospectus.  Accordingly, the information contained herein and in future filings with the U.S. Securities and Exchange Commission may be different from the information provided by other public companies in similar filings.
 
Concurrent Private Placement
 
Concurrently with this offering, we expect to complete a Private Placement of                      ordinary shares at a purchase price per ordinary share equal to the public offering price in accordance with Regulation S under the Securities Act or Regulation D under the Securities Act, to certain investors including certain of our affiliates.  The sale of such ordinary shares will not be registered under the Securities Act.  We expect to receive $                     in aggregate net proceeds from the Private Placement.  The closing of the Private Placement is conditioned upon the completion of the offering to which this prospectus relates. However, the completion of the offering to which this prospectus relates is not conditioned upon the closing of the Private Placement.
 
Corporate Information
 
We were incorporated as a limited liability private company under the laws of the State of Israel on April 5, 2009, and on May 31, 2009, we acquired all of the business operations and substantially all of the assets of Check-Cap LLC, a Delaware limited liability company formed in December 2004. Our principal executive offices are located at Check-Cap Building, Abba Hushi Avenue, P.O. Box 1271, Isfiya, 30090, Mount Carmel, Israel. Our telephone number is +972-4-8303400. Our website address is www.check-cap.com . Information contained on, or accessible through, our website does not constitute part of this prospectus and is not incorporated by reference herein.
 
Throughout this prospectus we refer to the trademark “CHECK-CAP” that we use in our business. Furthermore, we received a notice of allowance for the “CHECK-CAP” mark and design logo in the United States and hold a registered trademark for the “CHECK-CAP” design logo in Europe. Other trademarks and service marks appearing in this prospectus are the property of their respective holders.
 
Recent Developments
 
Credit Line Agreement ; Private Placement
 
On August 20, 2014, we entered into a certain credit line agreement, pursuant to which we obtained a credit line in an aggregate principal amount of $12 million from certain lenders and existing shareholders, or the Lenders.  The credit line amount was deposited in an escrow account at the closing, which was consummated on October 14, 2014.
 
 
 
7

 
 
 
We issued to each Lender at closing a warrant, collectively referred to as the Credit Line Warrants, to purchase a number of our ordinary shares constituting 2% of our share capital on a fully diluted basis (assuming conversion of all of our convertible securities into ordinary shares at a 1:1 conversion rate) as of the closing for each $1 million (or portion thereof) extended by such Lender.  We issued Credit Line Warrants to purchase in the aggregate 53,169,092 of our ordinary shares. The Credit Line Warrants are exercisable for a period of ten years at an exercise price of NIS 0.01 per share, and may be exercised on a net issuance basis.
 
Under the terms of the agreement, if we intend to consummate (as defined in the credit line agreement) an initial public offering of our securities, or an IPO, and such IPO is expected to be consummated on or prior to February 18, 2015, or if we consummate (as defined in the credit line agreement) an IPO on or prior to February 18, 2015, we will be entitled to direct that all or any portion of the credit loan amount be invested in ordinary shares in a private placement transaction that is exempt from the registration requirements of the Securities Act at a price per ordinary share equal to the public offering price per share in the IPO. In the event that we direct that less than the full credit line amount be invested in the private placement, the amount to be invested by each lender in the private placement will be equal to their pro rata share of the total credit line amount.  If we consummate (as defined in the credit line agreement) an IPO on or prior to February 18, 2015, any part of the credit line amount not so invested in the private placement will be released to the Lenders. The consummation of any of the transactions contemplated by the credit line agreement, including, without limitation, the Private Placement, is not a condition to our obligation or the obligation of the underwriters to consummate the transactions contemplated by the underwriting agreement.
 
If we do not consummate (as defined in the credit line agreement) an IPO on or prior to February 18, 2015, we may “call” the credit line amount ( i.e., direct that such funds be released from the escrow account to us) at any time thereafter until April 14, 2016, subject to certain conditions.  Any part of the credit line amount not so called by us on or prior to such date will be released to the Lenders.  If we call the credit line amount from the escrow account on or prior to April 14, 2016, the amount called will bear interest at the annual rate of 7%; provided that the aggregate interest rate will not be less than 5%.  The called credit line amount (and, at our option, the interest accrued thereon) will automatically convert into shares of our company upon the earlier of a qualified financing round (which includes a public offering, including an IPO), an M&A Event ( i.e. , as defined in the credit line agreement as an acquisition with or into another entity, the sale or license of all or substantially all of our assets or intellectual property or all or substantially all of our issued and outstanding share capital, or any other transaction having the same effect of any of the foregoing) and April 14, 2016, and the Lenders may elect to convert the entire called credit line amount (and, at our option, the interest accrued thereon) upon a non-qualified financing round, all under the terms and conditions set forth in the credit line agreement.  In the event that the qualified financing round is an IPO, in lieu of automatic conversion, we are entitled, to the extent permitted by law, to deposit in trust an amount equal to 125% of the called credit line amount (and, at our option, the interest accrued thereon) and irrevocably instruct the trustee to submit an offer, on behalf of each Lender, for the purchase of the IPO shares at the IPO price determined by the lead underwriters.
 
Israel-United States Binational Industrial Research and Development Foundation Grant
 
On July 13, 2014, we entered into a Cooperation and Project Funding Agreement with the Israel-United States Binational Industrial Research and Development Foundation, or the BIRD Foundation, and Synergy Research Inc., or Synergy, pursuant to which the BIRD Foundation has agreed to award a grant in the maximum amount of the lesser of (i) $900,000; and (ii) 50% of the actual expenditures for the funding of a project entitled “Collection & Analysis of Gastrointestinal Images for Diagnostic Adenomatic Polyps and Colorectal Cancer.”  The development work is expected to be performed over a 24 month period by Synergy (or a subcontractor on its behalf) and us.  Of the total grant amount, we are expected to receive an aggregate of $567,000 to fund our expenditures for the project, in five installments. We received our first advance payment from the BIRD Foundation of $68,000 in July 2014.  Our research and development expenses, net is presented net of the differences between the fair value of the liability and the grant amount received from the BIRD Foundation.
 
We are required to repay the total sum granted to us and Synergy by the BIRD Foundation, linked to the U.S. Consumer Price Index from date of receipt of each payment, up to 100%, 113%, 125%, 138% and 150% of the linked sum granted by the BIRD Foundation if repaid within one year, two years, three years, four years and five or more years, respectively, of the original project completion date in accordance with the project proposal.  Repayments are made at the rate of 5% of gross revenues derived from the product funded by the project. Under the terms of the agreement, if any portion of the product funded by the project is sold outright to a third party prior to full repayment of the grant to the BIRD Foundation, one-half of the sale proceeds will be applied to the repayment of the grant.  If the funded product is licensed to a third party, 30% of all payments received under the respective license agreement must be paid to the BIRD Foundation in repayment of the grant.
 
 
 
8

 
 
 
 
The Offering
   
Issuer
Check-Cap Ltd.
 
Ordinary shares offered by us in this offering
                ordinary shares
 
Over-allotment option
The underwriters have an option for a period of 45 days to purchase up to    additional ordinary shares to cover over-allotments, if any.
 
Ordinary shares outstanding immediately prior to the offering
                ordinary shares
 
Ordinary shares to be issued in the concurrent Private Placement
 
                ordinary shares
Ordinary shares to be outstanding immediately after the offering and the concurrent Private Placement (1)
                ordinary shares (or            ordinary shares if the underwriters exercise in full their option to purchase additional shares).
 
Use of Proceeds
We estimate that the net proceeds from our issuance and sale of    ordinary shares in this offering will be approximately $     million, based on the offering price of $     per share, and after deducting underwriting discounts and commissions and offering expenses payable by us. If the representative of the underwriters exercises the over-allotment option in full, we estimate that the net proceeds from this offering will be approximately $     million, based on the offering price of $     per share, and after deducting underwriting discounts and commissions and offering expenses payable by us.  We will also expect to receive net proceeds of approximately $         million from the sale of                              ordinary shares in the concurrent Private Placement after deducting commissions payable by us. We currently expect to use the net proceeds from this offering and the concurrent Private Placement as follows:
 
·     approximately $     million on research and development;
 
·     approximately $     million on regulatory submissions for approvals of our product, including
             approximately  $     million on clinical trials in Europe and the United States;
 
·     approximately $     million to build our manufacturing capabilities for the clinical phase; and
 
·     the balance, if any, for other general corporate purposes.
 
See “Use of Proceeds” beginning on page 48 of this prospectus.
 
Private Placement
Concurrent with this offering, we expect to complete a Private Placement of                      ordinary shares at a purchase price per ordinary share equal to the public offering price in accordance with Regulation S under the Securities Act or Regulation D under the Securities Act, to certain investors including certain of our affiliates.  The sale of such ordinary shares will not be registered under the Securities Act.  We expect to receive $                     in aggregate net proceeds from the Private Placement.  The closing of the Private Placement is conditioned upon the completion of the offering to which this prospectus relates. However, the completion of the offering to which this prospectus relates is not conditioned upon the closing of the Private Placement. See “Summary—Recent Developments Credit Line Agreement; Private Placement”
 
 
 
9

 
 
 
Underwriter Warrants
 
We will issue to Chardan Capital Markets, LLC as representative of the underwriters, upon closing of this offering, warrants entitling the underwriter to purchase 5% of the aggregate number of ordinary shares issued in this offering, but not including the over-allotment option. The underwriter warrants may be exercised for a period of four years following the date of effectiveness of the Registration Statement on Form F-1 of which this prospectus forms a part. 
 
Dividend Policy
We do not anticipate declaring or paying any cash dividends on our ordinary shares following this offering.
 
Transfer Agent and the Registrar
 
American Stock Transfer & Trust Company LLC
Risk Factors
Investing in our securities involves a high degree of risk.  See “Risk Factors” beginning on page 14 of this prospectus.  See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our ordinary shares. 
 
Proposed Symbol and Listing
We have applied for the listing our ordinary shares on the NASDAQ Capital Market under the symbol “CHEK.”
 
 
(1)    The number of ordinary shares to be outstanding after our initial public offering and the concurrent Private Placement is based on              ordinary shares issued and outstanding as of          , 2015, and excludes:
 
 
·
19,126,687 ordinary shares issuable upon the exercise of outstanding warrants to purchase preferred shares (comprised of (i) warrants to purchase 836,412 Series C-1 preferred shares; (ii) warrants to purchase 1,175,257 Series C-2 preferred shares; (iii) warrants to purchase 503,872 Series D-1 preferred shares; and (iv) warrants to purchase 16,611,146 Series D-2 preferred shares, following their conversion into warrants to purchase ordinary shares immediately prior to the closing of this offering) with a weighted average exercise price of $0.45 per ordinary share;
 
 
·
230,920 ordinary shares issuable upon the exercise of outstanding warrants, which will be automatically exercised, without consideration, if and when Guy Neev exercises any part of his options to purchase 1,995,475 ordinary shares, or the Neev Options, in proportion to (i) the portion of the Neev Options exercised by Guy Neev; and (ii) the number of warrants held by the optionee with respect to which such warrants were granted that were exercised prior to the exercise of the Neev Options;
 
 
·
57,599,850 ordinary shares issuable upon the exercise of outstanding warrants , of which (i) warrants to purchase 53,169,092 ordinary shares have an exercise price of NIS 0.01 per ordinary share and are fully vested; (ii) warrants to purchase 2,215,379 ordinary shares have an exercise price of NIS 0.01 per ordinary share and will become fully vested upon the closing of this offering; and (iii) warrants to purchase 2,215,379 ordinary shares with an exercise price per share equal to the price per share at which our ordinary shares are sold to the public in this offering which will become fully vested upon the closing of this offering;
 
 
·
12,366,188 ordinary shares issuable upon the exercise of outstanding options with a weighted average exercise price of $0.17 per ordinary share, granted under our 2006 Unit Option Plan;
 
 
 
10

 
 
 
 
·
 
11,630,739 ordinary shares issuable upon the exercise of outstanding options granted under our 2006 Unit Option Plan, which will become fully vested upon the closing of this offering; (i) fifty-percent of which have an exercise price of NIS 0.01 per ordinary share; and (ii) fifty-percent of which will be exercisable at the price per share at which our ordinary shares are sold to the public in this offering;
 
  · 769,453 ordinary shares issuable upon the exercise of options with an exercise price of $0.2478 per ordinary share, under our 2006 Unit Option Plan, which we have agreed that certain executive officers will be entitled to upon completion of an equity financing, which includes this offering;
 
  ·
the ordinary shares issuable upon the exercise of warrants to be issued to certain finders in connection with the credit line agreement if either (i) the credit line amount extended to us is invested in ordinary shares in a private placement on or prior to February 18, 2015; or (ii) if we do not consummate an IPO on or prior to February 18, 2015 and we call the credit line amount, upon conversion of the credit line amount into ordinary shares in accordance with the terms of the credit line agreement;
 
 
·
 
150,000 ordinary shares issuable upon the exercise of warrants with an exercise price per ordinary shares equal to the initial public offering price to be issued to our U.S. legal counsel as partial compensation for services rendered in connection with the offering; and
     
 
·
the ordinary shares issuable upon exercise of the underwriter warrants to be issued in connection with this offering.
 
 
Except as otherwise indicated, information in this prospectus reflects or assumes:
 
 
·
the adoption of our amended and restated articles of association prior to the closing of this offering, which will replace our articles of association currently in effect;.
 
 
·
a one-for-       reverse split of our ordinary shares, which will occur prior to the pricing of this offering;
 
 
·
the conversion of all outstanding preferred shares into an aggregate of              ordinary shares immediately prior to the closing of this offering;
 
 
·
the issuance of 1,995,475 ordinary shares to Mr. Guy Neev upon the exercise prior to the closing of this offering of the Neev Options;
 
 
·
the issuance of 7,503,521 ordinary shares issuable under warrants that will be automatically exercised, without consideration, upon the exercise by Mr. Guy Neev of the Neev Options;
 
  ·
the issuance of            ordinary shares in the Private Placement at the initial public offering price per ordinary share;
 
 
·
an initial public offering price of $          , which is the mid-point of the range set forth of the front cover of this prospectus; and
 
 
·
that the underwriters do not exercise their over-allotment option.
 
 
 
11

 
 
 
Summary Financial Data
 
You should read the following summary financial information in conjunction with our financial statements and related notes, “Selected Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.
 
The following tables set forth our summary financial data. You should read the following summary financial data in conjunction with, and it is qualified in its entirety by reference to, our historical financial information and other information provided in this prospectus, including “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes appearing elsewhere in this prospectus.
 
The summary statements of comprehensive loss data for the years ended December 31, 2012 and 2013, and the statements of financial position data as of December 31, 2013 are derived from our audited financial statements appearing elsewhere in this prospectus. The summary statements of comprehensive loss data for the six-month periods ended June 30, 2013 and 2014, and the statements of financial position data as of June 30, 2014 are derived from our unaudited financial statements appearing elsewhere in this prospectus. The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all adjustments necessary to present fairly our financial position as of June 30, 2014 and our results of operations for the six months ended June 30, 2013 and 2014. The historical results set forth below are not necessarily indicative of the results to be expected in future periods. Our financial statements have been prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board.
 
Statements of Comprehensive Loss Data
 
   
Year Ended December 31,
   
Six Months Ended June 30,
 
   
2013
   
2012
   
2014
   
2013
 
   
(US$ in thousands, except per share data)
 
               
(Unaudited)
 
Research and development expenses, net (1)  
    2,662       2,692       1,640       1,364  
General and administrative expenses
    1,090       1,203       564       520  
Other expenses (income)
    (10 )     13       --       --  
Operating loss
    3,742       3,908       2,204       1,884  
Finance income
    (63 )     (416 )     (60 )     (45 )
Finance expenses
    316       229       85       230  
Finance expenses (income), net
    253       (187 )     25       185  
Loss and total comprehensive loss for the period
    3,995       3,721       2,229       2,069  
Loss per ordinary share of NIS 0.01 par value, basic and diluted (2)
    0.18       0.17       0.10       0.09  
Weighted average number of ordinary shares outstanding – basic and diluted (in thousands) (2)
    32,542       32,530       32,542       32,542  
Pro forma loss per ordinary share of NIS 0.01 par value (3)
                               
Basic and diluted (unaudited) (2)  
                               
Pro forma weighted average number of ordinary shares outstanding - basic and diluted (in thousands) (unaudited) (2)
                               
                                 
 
 
 
 
12

 
 
Statements of Financial Position Data
 
As of December 31, 2013
 
As of June 30, 2014
 
     
Actual
 
Pro forma (3)
Pro forma as
adjusted (4)
 
     
(US$ in thousands)
Unaudited
 
Cash and cash equivalents                                             
  $ 4,975     $ 2,794   $        
Working capital (5)                                              
    4,131       1,990            
Total assets                                             
    5,375       3,276            
Capital stock                                             
    23,676       23,716            
Total shareholders’ equity (deficit)
  $ 1,191     $ (998 )          
 
 
 
( 1)
 
Research and development expenses, net is presented net of the differences between the amount of grants received from the OCS and the fair value of their financial liability. The effect of the participation by the OCS totaled $0.4 million and $0.2 million for the years ended December 31, 2013 and 2012, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Operations Overview—Research and Development, Expenses, Net” for more information.
 
 
(2)
Basic and diluted loss per ordinary share is computed based on the basic and diluted weighted average number of ordinary shares outstanding during each period.  For purposes of these calculations, the following ordinary shares are deemed to be outstanding: (i) the 1,995,475 ordinary shares issuable to Mr. Guy Neev upon exercise of the Neev Options; and (ii) the 7,503,521 ordinary shares issuable under warrants that will be automatically exercised without consideration upon the exercise by Mr. Guy Neev of the Neev Options.  For additional information, see Note 17 to our financial statements for the year ended December 31, 2013 included elsewhere in this prospectus.
 
 
(3)
On a pro forma basis to give effect to the conversion immediately prior to the completion of this offering of all of our outstanding preferred shares into            ordinary shares.
 
 
(4)
On a pro forma as adjusted basis to give further effect to (i)  the issuance and sale of ordinary shares by us in this offering at an assumed initial public offering price of $           per share, the midpoint of the estimated initial public offering price range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us; and (ii) the issuance and sale of ordinary shares by us in the concurrent Private Placement at an assumed price of $                  per ordinary share, the estimated public offering price, after deducting commissions and estimated expenses payable by us in connection with the concurrent Private Placement.
 
 
(5)
Working capital is defined as total current assets minus total current liabilities.
 
 
 
13

 
 
RISK FAC T ORS
 
 Investing in our securities involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus, including the financial statements and the related notes appearing at the end of this prospectus, before purchasing our securities. If any of the following risks actually occur, they may materially harm our business and our financial condition and results of operations. In any such event, the market price of our securities could decline and you could lose all or part of your investment
 
Risks Related to Our Business
 
We have a history of losses, may incur future losses and may not achieve profitability.
 
We are a clinical and development-stage medical diagnostics company with a limited operating history.  We have incurred net losses in each fiscal year since we commenced operations in 2009.  We incurred net losses of $3.7 million in 2012, $4.0 million in 2013 and $2.2 million in the six months ended June 30, 2014.  As of June 30, 2014, our accumulated deficit was $24.7 million.  Our losses could continue for the foreseeable future as we continue our investment in research and development and clinical trials to complete the development of our technology and to attain regulatory approvals, begin the commercialization efforts for our imaging capsule, increase our marketing and selling expenses, and incur additional costs as a result of being a public company in the United States. The extent of our future operating losses and the timing of becoming profitable are highly uncertain, and we may never achieve or sustain profitability.
 
We may not succeed in completing the development of our product, commercializing our product and generating significant revenues.
 
Since commencing our operations, we have focused on the research and development and limited clinical trials of our imaging capsule.  Our product is not approved for commercialization and has never generated any revenues. Our ability to generate revenues and achieve profitability depends on our ability to successfully complete the development of our product, obtain market approval and generate significant revenues. The future success of our business cannot be determined at this time, and we do not anticipate generating revenues from product sales for the foreseeable future. In addition, we have no experience in commercializing our imaging capsule and face a number of challenges with respect to our commercialization efforts, including, among others, that:
 
 
·
we may not have adequate financial or other resources to complete the development of our product;
 
 
·
we may not be able to manufacture our products in commercial quantities, at an adequate quality or at an acceptable cost;
 
 
·
we may not be able to establish adequate sales, marketing and distribution channels;
 
 
·
healthcare professionals and patients may not accept our imaging capsule;
 
 
·
we may not be aware of possible complications from the continued use of our imaging capsule since we have limited clinical experience with respect to the actual use of our imaging capsule;
 
 
·
technological breakthroughs in CRC screening, treatment and prevention may reduce the demand for our imaging capsule;
 
 
·
changes in the market for CRC screening, new alliances between existing market participants and the entrance of new market participants may interfere with our market penetration efforts;
 
 
·
third-party payors may not agree to reimburse patients for any or all of the purchase price of our imaging capsule, which may adversely affect patients’ willingness to purchase our imaging capsule;
 
 
·
uncertainty as to market demand may result in inefficient pricing of our imaging capsule;
 
 
·
we may face third-party claims of intellectual property infringement;
 
 
14

 
 
 
·
we may fail to obtain or maintain regulatory approvals for our imaging capsule in our target markets or may face adverse regulatory or legal actions relating to our imaging capsule even if regulatory approval is obtained; and
 
 
·
we are dependent upon the results of ongoing clinical studies relating to our imaging capsule and the products of our competitors.
 
If we are unable to meet any one or more of these challenges successfully, our ability to effectively commercialize our imaging capsule could be limited, which in turn could have a material adverse effect on our business, financial condition and results of operations.
 
Our early clinical experience to date may not have revealed certain potential limitations of the technology and potential complications from our imaging capsule.
 
To date, we have performed clinical studies with a prior version of our imaging capsule and with several versions of non-imaging capsules. The clinical trial that was conducted using the prior version of our imaging capsule was conducted under a different protocol and used a different group of patients. Therefore, we will have a limited ability to identify potential problems and/or inefficiencies concerning our imaging capsule in advance of its use in patients and we cannot assure you that its actual clinical performances will be satisfactory, or that its use will not result in unanticipated complications. Furthermore, the results from our first clinical studies and the previous pre-clinical studies may not be indicative of the clinical results obtained when we examine our final imaging capsule on real screening population. If our imaging capsule does not function as expected over time, we could be subject to liability claims, our reputation may be harmed and our imaging capsule would not be widely adopted.
 
We expect to derive most of our revenues from sales of one product or product line. Our inability to successfully commercialize this product, or any subsequent decline in demand for this product, could severely harm our ability to generate revenues.
 
We are currently dependent on the successful commercialization of our imaging capsule to generate revenues. As a result, factors adversely affecting our ability to successfully commercialize, or the pricing of or demand for, this product could have a material adverse effect on our financial condition and results of operations. If we are unable to successfully commercialize or create market demand for our imaging capsule, we will have limited ability to generate revenues.
 
Furthermore, and consequently, we are vulnerable to fluctuations in demand for our imaging capsule. Such fluctuations in demand may be due to many factors, including, among others:
 
 
·
market acceptance of a new product, including healthcare professionals’ and patients’ preferences;
 
 
·
development of similarly cost-effective products by our competitors;
 
 
·
development delays of our imaging capsule;
 
 
·
technological innovations in CRC screening, treatment and prevention;
 
 
·
adverse medical side effects suffered by patients using our imaging capsule, whether actually resulting from the use of our imaging capsule or not;
 
 
·
changes in regulatory policies toward CRC screening or imaging technologies;
 
 
·
changes in regulatory approval or clearance requirements for our product;
 
 
·
third-party claims of intellectual property infringement;
 
 
·
budget constraints and the availability of reimbursement or insurance coverage from third-party payors for our imaging capsule;
 
 
·
increases in market acceptance of other technologies; and
 
 
·
adverse responses from certain of our competitors to the offering of our imaging capsule.
 
 
15

 
 
If healthcare professionals do not recommend our product to their patients, our imaging capsule may not achieve market acceptance and we may not become profitable.
 
CRC screening candidates are generally referred by their healthcare professional to a specified device and screening technologies are purchased by prescription. If healthcare professionals, including physicians, do not recommend or prescribe our product to their patients, our imaging capsule may not achieve market acceptance and we may not become profitable. In addition, physicians have historically been slow to change their medical diagnostic and treatment practices because of perceived liability risks arising from the use of new products. Delayed adoption of our imaging capsule by healthcare professionals could lead to a delayed adoption by patients and third-party payors. Healthcare professionals may not recommend or prescribe our imaging capsule until certain conditions have been satisfied including, among others:
 
 
·
there is sufficient long-term clinical evidence to convince them to alter their existing screening methods and device recommendations;
 
 
·
there are recommendations from other prominent physicians, educators and/or associations that our imaging capsule is safe and effective;
 
 
·
we obtain favorable data from clinical studies for our imaging capsule;
 
 
·
reimbursement or insurance coverage from third-party payors is available; and
 
 
·
they become familiar with the complexities of our imaging capsule.
 
We cannot predict when, if ever, healthcare professionals and patients may adopt the use of our imaging capsule. Even if favorable data is obtained from clinical studies for our imaging capsule, there can be no assurance that prominent physicians would endorse it or that future clinical studies will continue to produce favorable data regarding our imaging capsule. In addition, prolonged market exposure may also be a pre-requisite to reimbursement or insurance coverage from third-party payors. If our imaging capsule does not achieve an adequate level of acceptance by patients, healthcare professionals and third-party payors, we may not generate significant product revenues and we may not become profitable.
 
If we are unable to market and sell our imaging capsule, we may not become profitable.
 
We have not had any sales of our imaging capsule to date. There can be no assurance that we will be able to receive regulatory clearance for our imaging capsule in the foreseeable future or ever or that our imaging capsule will be accepted as comparable or superior to existing technologies for the visualization, imaging or screening of the colon. Our ability to market and sell our imaging capsule successfully depends on one or more of the following:
 
 
·
the existence of clinical data sufficient to support the use of our imaging capsule for the visualization, imaging, or screening of the colon as compared to other colon visualization, imaging or screening methods (if clinical trials indicate that our imaging capsule is not as clinically effective as other current methods, or if our technology causes unexpected complications or other unforeseen negative effects, we may not obtain regulatory clearance or approval to market and sell our imaging capsule or physicians may be reluctant to use it);
 
 
·
the availability of sufficient clinical data for physicians to use our imaging capsule in their practice and for private third-party payors to make an adequate reimbursement decision to provide coverage for our imaging capsule; and
 
 
·
the availability of a reliable contrast agent for our imaging capsule that is accepted by physicians and patients.
 
If one or more of the above conditions is not satisfied, we may not be able to market and sell our imaging capsule or the demand for our imaging capsule may be lower than expected and sales of our imaging capsule may not contribute to our growth at the rate we expect or at all.
 
 
16

 
 
We expect to face competition from large, well-established manufacturers of traditional technologies for detecting gastrointestinal disorders, as well as from other manufacturers of optical capsule endoscopy systems.
 
Competition for our imaging capsule comes from traditional well-entrenched manufacturers of equipment for detecting gastrointestinal disorders and diseases, such as colonoscopy, sigmoidoscopy, optical capsule endoscopy and CTC. The principal manufacturers of equipment for optical colonoscopy, sigmoidoscopy and optical capsule endoscopy are Olympus, Richo Company Ltd., Hoya, Covidien plc and Fuji Film. The principal manufacturers of equipment for CTC are General Electric Healthcare Systems, Siemens Medical Solutions, Philips Medical Systems Ltd. and Toshiba Corporation. All of these companies have substantially greater financial resources than we do, and they have established reputations as well as worldwide distribution channels for providing medical instruments to physicians.
 
In addition, several companies are developing technologies based on molecular diagnostics (from blood and other bodily fluids), or MDx, tests that investigate the link between genes and the function of metabolic pathways, drug metabolism and disease development with a primary focus on the study of DNA, RNA and proteins.  Genetic markers can be traced within stool samples in minute quantities.  A U.S. based company, Exact Sciences, is developing a special collecting kit for stool samples and an analyzer to diagnose CRC based on these stool-based markers.  The method of screening for colon cancer using stool DNA testing has been endorsed by the ACS, the U.S. Multi-Society Task Force on Colorectal Cancer and the American College of Radiology, but not by the U.S. Preventive Services Task Force.
 
Certain companies are developing or commercializing optics-based optical capsule endoscopy systems.  The existing capsule technology requires intense bowel cleansing, even more so than is required for colonoscopy. Given Imaging, an Israeli-based company that was acquired by Covidien plc (NYSE: COV) in February 2014, has developed visualization capsules for the detection of disorders of the esophagus, small bowel and colon.  It launched its PillCamColon capsule in Europe in 2007 and has limited sales. In early 2014, the FDA granted approval for optical capsule endoscopy for colon cancer screening only for patients after incomplete colonoscopy. However, this technology requires bowel cleansing to an even greater degree than that required for regular optical colonoscopy, which can result in dehydration and, in turn, can lead to cancellation of the procedure in certain cases. Other companies, including Olympus, Intromedic and RF System, are developing similar approaches for optical capsule endoscopy.
 
Procedures for bowel cleansing that are less onerous are constantly being developed, which could make our entry into the market more difficult.  For instance, bowel cleansing initiated by the ingestion of pills rather than through drinking large amounts of distasteful liquids may be viewed as an improvement to the cleansing process, but other screening methods may be even more palatable to patients.
 
If we are unable to convince physicians to adopt our imaging capsule over the current technologies marketed by our competitors, our results of operations may suffer.
 
We are planning to rely on local distributors to market and distribute our imaging capsule.
 
We are planning to rely on distributors for the marketing and distribution of our imaging capsule.  Our success in generating sales in countries or regions where we will engage local distributors will depend in part on the efforts of third parties over whom we have limited control. If we are unable to identify suitable local distributors in the countries where we intend to market and distribute our imaging capsule, our business, financial condition and results of operations could be negatively affected.
 
We have limited manufacturing capabilities and if we are unable to scale our manufacturing operations to meet anticipated market demand, our growth could be limited and our business, financial condition and results of operations could be materially adversely affected.
 
We currently have limited resources, facilities and experience in commercially manufacturing sufficient quantities of our imaging capsule, external receiver and software application to meet the demand we expect from our expanded commercialization efforts. We expect to face certain technical challenges as we increase manufacturing capacity, including, among others, logistics associated with the handling of radioactive materials, equipment design and automation, material procurement, lower than expected yields and increased scrap costs, as well as challenges related to maintaining quality control and assurance standards. Furthermore, we may encounter similar or unforeseen challenges initiating and later expanding production of any new products. If we are unable to scale our manufacturing capabilities to meet market demand, our growth could be limited and our business, financial condition and results of operations could be materially adversely affected.
 
In addition, we have received grants from Government of the State of Israel through the OCS (see “Risk Factors – Risks Related to Our Operations in Israel”), the terms of which require that products developed with OCS grants be manufactured in Israel and that the technology developed thereunder may not be transferred outside of Israel, unless prior approval is received from the OCS, which we may not receive. We are currently considering whether it would be possible to assemble the capsule without the X-ray source in Israel, and have the X-ray source subsequently inserted into our imaging capsule at a reactor or cyclotron site or at a distribution center outside Israel. Even following the full repayment of any OCS grants, we must nevertheless continue to comply with the requirements of the Encouragement of Industrial Research and Development Law 5744-1984, or the Research Law. The foregoing restrictions may impair our ability to outsource or transfer development or manufacturing activities with respect to any product or technology outside of Israel.
 
 
17

 
 
Our reliance on limited source suppliers could harm our ability to meet demand for our product in a timely manner or within budget.
 
We currently depend on limited source suppliers for some of the components necessary for the production of our product. For example, for the current version of the imaging capsule used in clinical trials, we currently have one leading supplier for the motor that we are using to rotate the collimated X-ray source in our imaging capsule and we currently have one leading supplier for the X-ray detectors used in our imaging capsule. There are a limited number of manufacturers worldwide who are capable of manufacturing the motor and the specially designed X-ray detectors that we currently use in our imaging capsule.  In addition, the application-specific integrated circuit, or ASIC, residing in our imaging capsule is currently manufactured for us by a single semiconductor fabrication plant, or FAB. There are many alternative FABs worldwide and the design of our current ASIC could be adapted in the event it became necessary to use an alternative FAB.  Our current suppliers have been able to supply the required quantities of such components to date.  However, if the supply of these components is disrupted or terminated or if our current suppliers are unable to supply required quantities of components, we may not be able to find alternative sources for these key components in a timely manner. Although we are planning to maintain strategic inventory of key components, the inventory may not be sufficient to satisfy the demand for our imaging system if such supply is interrupted or otherwise affected by catastrophic events such as a fire at our storage facility. As a result, we may be unable to meet the demand for our imaging system, which could harm our ability to generate revenues, lead to customer dissatisfaction and damage our reputation. If we are required to change the manufacturer of any of these key components, there may be a significant delay in locating a suitable alternative manufacturer. In addition, we may be required to verify that the new manufacturer maintains facilities and procedures that comply with FDA and other applicable quality standards and with all applicable regulations and guidelines. The delays associated with the identification of a new manufacturer could delay our ability to manufacture our imaging system in a timely manner or within budget. Furthermore, in the event that the manufacturer of a key component of our imaging system ceases operations or otherwise ceases to do business with us, we may not have access to the information necessary to enable another supplier to manufacture the component. The occurrence of any of these events could harm our ability to meet demand for our imaging system in a timely manner or within budget.
 
The use of any of our imaging capsule, external receiver or software application could result in product liability or similar claims that could be expensive damage our reputation and harm our business.
 
Our business exposes us to an inherent risk of potential product liability or similar claims related to the manufacturing, marketing and sale of medical devices. The medical device industry has historically been litigious, and we face financial exposure to product liability or similar claims if the use of any of our imaging capsule, external receiver or software application were to cause or contribute to injury or death, including, without limitation, harm to the body caused by the procedure or inaccurate diagnoses from the procedure that could affect treatment options. There is also the possibility that defects in the design or manufacture of any of these products might necessitate a product recall. Although we plan to maintain product liability insurance, the coverage limits of these policies may not be adequate to cover future claims. In the future, we may be unable to maintain product liability insurance on acceptable terms or at reasonable costs and such insurance may not provide us with adequate coverage against potential liabilities. A product liability claim, regardless of merit or ultimate outcome, or any product recall could result in substantial costs to us, damage to our reputation, customer dissatisfaction and frustration, and a substantial diversion of management attention. A successful claim brought against us in excess of, or outside of, our insurance coverage could have a material adverse effect on our business, financial condition and results of operations.
 
Our imaging capsule is a complex medical device that requires intensive training and care for data analysis.
 
Our imaging capsule is a complex medical device that requires intensive training and care for data analysis. Although our distributors will be required to ensure that our imaging capsule is only prescribed by trained clinicians, the potential for misuse of our imaging capsule still exists due to its complexity. Such misuse could result in adverse medical consequences for patients that could damage our reputation, subject us to costly product liability litigation and otherwise have a material adverse effect on our business, financial condition and results of operations.
 
 
18

 
 
We depend on third parties to manage our clinical studies and trials and to perform related data collection and analysis and, as a result, we may face costs and delays that are beyond our control.
 
We rely on third parties, including clinical investigators and clinical sites, to manage our clinical trials and to perform data collection and analysis. Although we have and expect to continue to have contractual arrangements with these third parties, we may not be able to control the amount and timing of resources that these parties devote to our studies and trials or the quality of these resources. If these third parties fail to properly manage our studies and trials, we will be unable to complete them at all or in a satisfactory manner, which could prevent us from obtaining regulatory approvals for, or achieving market acceptance of, our product.
 
In addition, termination of relationships with third parties may result in delays, inability to enter into arrangements with alternative third parties or do so on commercially reasonable terms. Switching or adding additional clinical sites involves additional cost and requires management time and focus. In addition, there is a natural transition period when a new clinical site commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines.
 
We intend to sell our products in the United States, Europe and Japan and, if we are unable to manage our operations in these territories, our business, financial condition and results of operations could be materially adversely affected.
 
Our headquarters and all of our operations and employees are presently located in Israel, but we intend to market our products in the United States, Europe and Japan. Accordingly, we are subject to risks associated with international operations, and our international sales and operations will require significant management attention and financial resources. In addition, our international sales and operations will subject us to risks inherent in international business activities, many of which are beyond our control and include, among others:
 
 
foreign certification, registration and other regulatory requirements;
 
 
customs clearance and shipping delays;
 
 
import and export controls;
 
 
trade restrictions;
 
 
multiple and possibly overlapping tax structures;
 
 
difficulty forecasting the results of our international operations and managing our inventory due to our reliance on third-party distributors;
 
 
differing laws and regulations, business and clinical practices, third-party payor reimbursement policies and patient preferences;
 
 
differing standards of intellectual property protection among countries;
 
 
difficulties in staffing and managing our international operations;
 
 
difficulties in penetrating markets in which our competitors’ products are more established;
 
 
currency exchange rate fluctuations; and
 
 
political and economic instability, war or acts of terrorism.
 
If we are unable to manage our international operations effectively, our business, financial condition and results of operations could be materially adversely affected.
 
 
19

 
 
We will require additional funding in order to complete the commercialization of our imaging capsule and the development and commercialization of any future products.
 
Our operations have consumed substantial amounts of cash. We expect that we will need to continue to spend substantial amounts in order to complete the development, clinical development, regulation and commercialization of our imaging capsule. Although we intend to use the proceeds of this offering and the concurrent Private Placement to finance these efforts, we will need to raise additional funds prior to commercialization of our product. Additional financing may not be available to us on a timely basis on terms acceptable to us, or at all. In addition, any additional financing may be dilutive to our shareholders or may require us to grant a lender a security interest in our assets.
 
Furthermore, if adequate additional financing on acceptable terms is not available, we may not be able to develop our imaging capsule at the rate or to the stage we desire and we may have to delay or abandon the commercialization of our imaging capsule. Alternatively, we may be required to prematurely license to third parties the rights to further develop or to commercialize our imaging capsule on terms that are not favorable to us. Any of these factors could materially adversely affect our business, financial condition and results of operations.
 
If we lose our key personnel or are unable to attract and retain additional personnel, our business and ability to compete will be harmed.
 
We are dependent on the principal members of our management, research and development team and scientific staff. In order to implement our business strategy, we will need to retain our key personnel with expertise in the areas of research and development, clinical testing, government regulation, manufacturing, finance, marketing and sales. Our product development plans depend in part on our ability to retain engineers with expertise in a variety of technical fields. The loss of a number of these persons or our inability to attract and retain qualified personnel could harm our business and our ability to compete.
 
Substantially all of our operations are currently conducted at a single location near Haifa, Israel, and any disruption at our facility could materially adversely affect our business, financial condition and results of operations.
 
Substantially all of our operations are conducted at a single location near Haifa, Israel. We take precautions to safeguard our facility, including obtaining insurance coverage and implementing health and safety protocols and off-site storage of computer data. However, a natural or other disaster, such as a fire, flood or an armed conflict involving Israel, as detailed further below, could damage or destroy our facility and our manufacturing equipment or inventory, cause substantial delays in our operations and otherwise cause us to incur additional unanticipated expenses. In addition, the insurance we maintain against fires, floods and other natural disasters may not be adequate to cover our losses in any particular case and it does not cover losses resulting from armed conflicts or terrorist attacks in Israel. Damage to our facility, our other property or to any of our suppliers, whether located in Israel or elsewhere, due to fire, a natural disaster or casualty event or an armed conflict, could materially adversely affect our business, financial condition and results of operations, with or without insurance.
 
We will incur significant increased costs as a result of operating as a public company in the United States, and our management will be required to devote substantial time to new compliance initiatives.
 
As a public company in the United States, we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules and regulations implemented by the U.S. Securities and Exchange Commission and the NASDAQ Stock Market, impose various requirements on public companies, including requiring the establishment and maintenance of effective disclosure and financial controls. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time consuming and costly. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs. These rules and regulations could make it more difficult and more expensive for us to obtain certain types of insurance including director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantial costs to maintain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We cannot predict or estimate the amount or timing of additional costs we may incur in order to comply with such requirements.
 
 
20

 
 
We will be required to develop and maintain proper and effective internal controls over financial reporting. We may not complete our analysis of our internal controls over financial reporting in a timely manner, or these internal controls may have one or more material weaknesses, which may adversely affect investor confidence in our company and, as a result, the value of our ordinary shares.
 
Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis will be a costly and time-consuming effort that will need to be evaluated frequently. Section 404 of the Sarbanes-Oxley Act requires the management of public companies to conduct an annual review and evaluation of their internal controls and to obtain an attestation report from their registered public accounting firm regarding the effectiveness of internal controls. We would be required to perform the annual review and evaluation of our internal controls no later than in connection with the second annual report on Form 20-F filed after the offering to which this prospectus relates. However, if we qualify as a smaller reporting company and/or emerging growth company, which we expect to, we will be exempt from the auditors’ attestation requirement until such time as we no longer qualify as a smaller reporting company and/or emerging growth company. We would no longer qualify as a smaller reporting company if the market value of our public float exceeded $75 million as of the last day of our second fiscal quarter in any fiscal year following this offering. We would no longer qualify as an emerging growth company at such time as described in the risk factor immediately below.
 
We are in the early stages of the costly and challenging process of compiling the system and processing documentation necessary to evaluate and correct a material weakness in internal controls needed to comply with Section 404. The material weakness relates to our being a small company with a limited number of employees which limits our ability to assert the controls related to the segregation of duties. During the evaluation and testing process, if we identify one or more additional material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our ordinary shares to decline.
 
While we currently qualify as an “emerging growth company” under the JOBS Act, we will cease to be an emerging growth company on or before the end of 2019, and at such time our costs and the demands placed upon our management will increase.
 
We will continue to be deemed an emerging growth company until the earliest of (i) the last day of the fiscal year in which our annual gross revenues exceed $1 billion (as indexed for inflation); (ii) the last day of the fiscal year in which the fifth anniversary of the date of the first sale of ordinary shares under this registration statement; (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; or (iv) the date on which we are deemed to be a ‘large accelerated filer,’ as defined by the U.S. Securities and Exchange Commission, which would generally occur upon our attaining a public float of at least $700 million. Once we lose emerging growth company status, we expect the costs and demands placed upon our management to increase, as we will be required to comply with additional disclosure and accounting requirements, particularly if we also no longer qualify as a smaller reporting company.
 
Risks Related to Regulations
 
If we are unable to obtain, or experience significant delays in obtaining, FDA clearances or approvals, CE Certificates of Conformity, or equivalent third country approvals for our imaging capsule or future products or product enhancements, our ability to commercially distribute and market our products could suffer.
 
Our products are subject to rigorous regulation by FDA and numerous other federal, state and foreign governmental authorities and notified bodies. The process of obtaining regulatory clearances or approvals, CE Certificates of Conformity, or equivalent third country approvals to market a medical device can be costly and time consuming, and we may not be able to obtain these clearances or approvals, CE Certificates of Conformity, or equivalent third country approvals on a timely basis, if at all. In particular, we expect to eventually generate a portion of our revenues from sales of our imaging capsule and future products in the United States, the European Union, or third countries. Before a new medical device, or a new use of, or claim for, an existing product can be marketed in the United States, it must first receive clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or FDA approval of a premarket approval application, or PMA, unless an exemption applies. FDA will clear marketing of a low to moderate risk medical device through the 510(k) process if sufficiently similar predicate devices have previously been cleared via this pathway. In the 510(k) clearance process, FDA must only determine that the proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device, with respect to intended use/indications for use, technological characteristics and principles of operation in order to clear the proposed device for marketing. Clinical data is sometimes required to support substantial equivalence.
 
 
21

 
 
High risk devices deemed to pose the greatest risk, such as life-sustaining, life-supporting, or implantable devices, or devices not deemed substantially equivalent to a previously cleared device, require approval of a PMA. The PMA process is more costly, lengthy and uncertain than the 510(k) clearance process. The PMA pathway requires an applicant to demonstrate the safety and effectiveness of the device based, in part, on the data obtained in clinical trials. A PMA application must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to FDA’s satisfaction the safety and efficacy of the device for its intended use.
 
In instances where a device is novel and there is no suitable predicate device, but that device is deemed to be of low to moderate risk, FDA can reclassify the device to class I or class II via de novo reclassification. This process involves the submission of a reclassification petition, and FDA accepting that “special controls” are adequate to ensure the product’s performance and safety. FDA now allows “direct” de novo reclassification petitions, a mechanism by which a sponsor can directly submit a detailed de novo reclassification petition as the device’s initial submission without having to first receive a not substantially equivalent, or NSE, decision on a 510(k) submission.
 
These processes can be expensive and lengthy. FDA’s 510(k) clearance process usually takes from 6 to 9 months, but it can last longer. Direct de novo reclassification typically takes at least 9 to 12 months from filing to clearance. The PMA pathway is much more costly and uncertain than the 510(k) clearance process or de novo reclassification, and generally takes at least 12 to 18 months, or even longer, from the time the application is filed with FDA to ultimate approval.
 
We are not aware of any legally marketed predicate device upon which FDA could base a determination of substantial equivalence under a 510(k) clearance process. Our strategy therefore is to submit a direct de novo reclassification petition for our imaging capsule. To support this petition, our objective is to demonstrate that the device poses a low to moderate risk to patients. We cannot assure you that FDA will not demand that we obtain PMA approval of our imaging capsule.
 
FDA can delay, limit or deny clearance or approval of an application for many reasons, including, among others:
 
 
we may not be able to demonstrate to FDA’s satisfaction that our products are safe and effective for their intended use;
 
 
the data from our pre-clinical studies and clinical trials may be insufficient to support clearance or approval;
 
 
in the case of a PMA submission, that the manufacturing process or facilities we use may not meet applicable requirements; and
 
 
changes in FDA’s 510(k) clearance, de novo reclassification, or PMA approval processes and policies, or the adoption of new regulations may require additional data.
 
We may not obtain the necessary regulatory clearances, approvals, CE Certificates of Conformity or equivalent third country approvals to market our imaging capsule or future products in the United States or elsewhere. Any delay in, or failure to receive or maintain, clearance, approval or CE Certificates of Conformity for our imaging capsule or other products under development could prevent us from generating revenue from these products or achieving profitability.
 
 
22

 
 
There is no guarantee that the FDA will grant de novo reclassification or PMA approval of our imaging capsule and failure to obtain necessary 510(k) clearances or approvals for our future products would adversely affect our ability to grow our business.
 
Our imaging capsule and some of our future products will require FDA clearance of a 510(k), de novo reclassification, or may require FDA approval of a PMA. The FDA may not approve or clear our imaging capsule or our future products for the indications that are necessary or desirable for successful commercialization. Indeed, the FDA may refuse our requests for 510(k) clearance, de novo reclassification or premarket approval for our imaging capsule or any other future product, new intended uses or modifications to these products once they are cleared or approved for marketing.
 
Our strategy is to submit a direct de novo reclassification petition for our imaging capsule. A de novo reclassification generally applies where there is no predicate device and the FDA believes the device poses a low to moderate risk. De novo reclassifications can either be submitted in lieu of a 510(k) notice, such as in our case, or after a 510(k) notice has been filed and found NSE. If a 510(k) notice is found NSE, a de novo petition must be submitted within 30 days from the receipt of the NSE determination.
 
To support our direct de novo reclassification petition, our objective is to demonstrate that the device poses a low to moderate risk to patients. If the FDA determines that our imaging capsule is not a candidate for de novo reclassification, it will require approval of the device for market through the PMA process. A PMA application must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use. By statute, the FDA has 180 days to review the “accepted application,” although, generally, review of the application can take between one and three years. During this review period, the FDA may request additional information or clarification of information already provided or even request new data that may require us to conduct additional tests. Also during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with quality system regulations. The FDA’s review of a PMA could significantly delay our plans to get to market. There is also no guarantee that the FDA would approve a PMA. Failure to receive clearance or approval for our imaging capsule or future products would have an adverse effect on our ability to expand our business.
 
If we or our future distributors do not obtain and maintain the necessary regulatory clearances or approvals, or CE Certificates of Conformity, or equivalent third country approvals in a specific country or region, we will not be able to market and sell our imaging capsule or future products in that country or region.
 
We intend to market our imaging capsule in a number of international markets. To be able to market and sell our imaging capsule in a specific country or region, we or our distributors must comply with the regulations of that country or region. While the regulations of some countries do not impose barriers to marketing and selling part or all of our products or only require notification, others require that we or our distributors obtain the approval of a specified regulatory authorities or that we obtain CE Certificates of Conformity from a Notified Body. These regulations, including the requirements for approvals or CE Certificates of Conformity, and the time required for regulatory review, vary from country to country. Obtaining regulatory approvals or CE Certificates of Conformity is expensive and time-consuming, and we cannot be certain that we or our distributors will receive regulatory approvals or CE Certificates of Conformity for our imaging capsule or any future products in each country or region in which we plan to market such products. If we modify our imaging capsule or any future products, we or our distributors may need to apply for new regulatory approvals or our Notify Body may need to review the planned changes before we are permitted to sell them. We may not meet the quality and safety standards required to maintain the authorizations or CE Certificates of Conformity that we or our distributors have received. If we or our distributors are unable to maintain our authorizations or CE Certificates of Conformity in a particular country or region, we will no longer be able to sell our imaging capsule or any future products in that country or region, and our ability to generate revenues will be materially and adversely affected.
 
 
23

 
 
Our imaging capsule may be considered a drug-device combination product because of the preparatory use of Iodine or barium sulfate to provide a coating for colonic imaging. We cannot be sure how the FDA or the competent regulatory authorities of foreign countries will regulate this product. The review of combination products is often more complex and more time consuming than the review of products under the jurisdiction of only one center within the FDA.
 
Our imaging capsule may be considered a combination product because of the preparatory use of barium sulfate or Iodine to provide a coating for colonic imaging. A combination product is the combination of two or more regulated components, i.e. , drug/device, biologic/device, drug/biologic, or drug/device/biologic, that are combined or mixed and produced as a single entity; packaged together in a single package or as a unit; or a drug, device, or biological product packaged separately that according to its investigational plan or proposed labeling is intended for use only with an approved individually specified drug, device, or biological product where both are required to achieve the intended use, indication or effect. For a combination product, the FDA must determine which center or centers within the FDA will review the product and under what legal authority the product candidate will be reviewed. The combination product’s primary mode of action is used to determine which center within the FDA has primary regulatory jurisdiction over the product. The other centers within the agency also may provide consulting or collaborative reviews of the product as necessary. We believe that we have put forth a reasonable argument to the FDA that our imaging capsule should be regulated as a device and or a combination product with a device primary mode of action. However, we cannot be sure as to whether the FDA will treat our imaging capsule as a device or a combination product. The review of combination products is often more complex and more time consuming than the review of a product under the jurisdiction of only one center within the FDA. In the case of the imaging capsule, should the FDA determine that the barium sulfate is not being used in accordance with its approved labeling, the Center for Drug Evaluation and Research may take a prominent role it its regulation. If the FDA does not approve or clear our imaging capsule, or any future products, in a timely fashion, or at all, our business and financial condition will be adversely affected.
 
Similar obstacles may be encountered in foreign countries should our imaging capsule be considered as a combination product.
 
If the indications for use or instructions for use for which the Iodine-based contrast agent or the barium sulfate- based contrast agent is approved are not sufficiently broad to support its use prior to the ingestion of our imaging capsules, the FDA or the competent regulatory authorities in the EU Member States and other foreign countries may consider that contrast agent is being used off-label.
 
Ingestion of our imaging capsule requires the preparatory use of Iodine or barium sulfate to provide a coating for colonic imaging. We cannot be sure that the indications for which Iodine-based contrast agent   or the barium sulfate-based contrast agent are approved in the United States, the EU Member States or in other countries is sufficiently broad to cover such use. If the FDA or the competent regulatory authorities in the EU Member States and in other countries consider that Iodine and/or barium sulfate is not approved for the purpose for which it is used with the imaging capsules, we may be considered to promote the off-label use of the Iodine and/or barium sulfate. Because the off-label use of drugs or medicinal products is generally prohibited in the United States, the EU Member States and in other countries, we could face both related issues with the FDA and/or the competent authorities of the EU Member States and/or other countries. In these circumstances, the FDA and/or the competent regulatory authorities in the EU Member States and/or other countries may require us to obtain appropriate regulatory approvals for the Iodine-based contrast agent   or the barium sulfate-based contrast agent prior to marketing our imaging capsules with such substances. Under such circumstances, should we fail to obtain approval of the contrast agent for use with our imaging capsule, in a timely fashion, or at all, our business and financial condition will be adversely affected.
 
If we are unable to successfully complete clinical trials with respect to our imaging capsule, we may be unable to receive regulatory approvals or clearances, CE Certificates of Conformity or equivalent third country approvals for our imaging capsule and/or our ability to achieve market acceptance of our imaging capsule will be harmed.
 
The development of medical devices typically includes pre-clinical studies. Certain other devices require the submission of data generated from clinical trials, which can be long, expensive and uncertain processes, subject to delays and failure at any stage. The data obtained from the studies and trials may be inadequate to support regulatory clearances or approvals, or to obtain CE Certificates of Conformity or equivalent third country approval, or to allow market acceptance of the products being studied. Our imaging capsule technology is currently undergoing clinical development and clinical trials. To date, we have performed clinical studies with a prior version of our imaging capsule and with several versions of non-imaging capsules.
 
 
24

 
 
The development of sufficient and appropriate clinical protocols to demonstrate safety and efficacy are required, and we may not adequately develop such protocols to support clearance, approval, or to obtain CE Certificates of Conformity or equivalent third country approval. The clinical trial that was conducted using the prior version of our imaging capsule, was conducted under a different protocol and used a group of patients different from those we intend to study in future clinical trials. Further, FDA, the competent regulatory authorities of other countries, or our Notified Body in the EU may require us to submit data on a greater number of patients than we originally anticipated and/or for a longer follow-up period or they may change the data collection requirements or data analysis applicable to our clinical trials.
 
The commencement or completion of any of our clinical studies or trials may be delayed or halted, or be inadequate to support regulatory clearance, approval or product acceptance, or to obtain CE Certificates of Conformity or equivalent third country approval, for numerous reasons, including, among others:
 
 
patients do not enroll in the clinical trial at the rate we expect;
 
 
patients do not comply with trial protocols;
 
 
patient follow-up is not at the rate we expect;
 
 
patients experience adverse side effects;
 
 
patients die during a clinical trial, even though their death may be unrelated to our product;
 
 
FDA or other regulatory authorities do not approve a clinical trial protocol or a clinical trial, or place a clinical trial on hold;
 
 
institutional review boards, or IRBs, Ethics Committees and third-party clinical investigators may delay or reject our trial protocol and Informed Consent Form;
 
 
third-party clinical investigators decline to participate in a study or trial or do not perform a study or trial on our anticipated schedule or consistent with the investigator agreements, study or trial protocol, good clinical practices or other FDA or IRBs, Ethics Committees, or any other applicable requirements;
 
 
third-party organizations do not perform data collection, monitoring and analysis in a timely or accurate manner or consistent with the study or trial protocol or investigational or statistical plans;
 
 
regulatory inspections of our studies, trials or manufacturing facilities may require us to, among other things, undertake corrective action or suspend or terminate our studies or clinical trials;
 
 
changes in governmental regulations or administrative actions;
 
 
the interim or final results of the study or clinical trial are inconclusive or unfavorable as to safety or efficacy; and
 
 
a regulatory agency or our Notified Body concludes that our trial design is or was inadequate to demonstrate safety and efficacy.
 
The results of pre-clinical and clinical studies do not necessarily predict future clinical trial results, and predecessor clinical trial results may not be repeated in subsequent clinical trials. Additionally, FDA, the competent regulatory authorities of EEU Member States, other third country regulatory entities, or our Notified Body may disagree with our interpretation of the data from our pre-clinical studies and clinical trials, or may find the clinical trial design, conduct or results inadequate to demonstrate safety or efficacy, and may require us to pursue additional pre-clinical studies or clinical trials, which could further delay the clearance, approval, or CE marking of our products. The data we collect from our non-clinical testing, our pre-clinical studies and other clinical trials may not be sufficient to support regulatory clearance, approval or to obtain CE Certificates of Conformity.
 
 
25

 
 
If the third parties on which we rely to conduct our clinical trials and clinical development do not perform as contractually required or expected, we may not be able to obtain regulatory clearance or approval, CE Certificates of Conformity, or equivalent third country approval for, or commercialize, our imaging capsule or future products.
 
We do not have the ability to independently conduct our clinical trials for our imaging capsule and we must rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories to conduct such trials. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain CE Certificates of Conformity, regulatory clearance, approval for, or successfully commercialize, our imaging capsule or future products on a timely basis, if at all, and our business, operating results and prospects may be adversely affected. Furthermore, our third-party clinical trial investigators may be delayed in conducting our clinical trials for reasons outside of their control.
 
The results of our clinical trials may not support our product candidate claims or may result in the discovery of adverse side effects.
 
Even if our clinical trials are completed as planned, we cannot be certain that their results will support our product claims or that the FDA, foreign authorities or our Notified Body will agree with our conclusions regarding them. Success in pre-clinical studies and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that clinical trials will replicate the results of prior trials and pre-clinical studies. The clinical trial process may fail to demonstrate that our imaging capsule, or any future products, are safe and effective for the proposed indicated uses, which could cause us to abandon a product and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, our ability to commercialize our imaging capsule, or any future products, and generate revenues. It is also possible that patients enrolled in clinical trials will experience adverse side effects that are not currently part of the product candidate’s profile.
 
Even if our imaging capsule or future products are cleared or approved by regulatory authorities or if we obtain CE Certificates of Conformity from our Notified Body, modifications to our imaging capsule or future products may require new regulatory clearances or approvals, new CE Certificates of Conformity, or may require us to recall or cease marketing it until the necessary clearances, approvals or CE Certificates of Conformity are obtained.
 
Once marketed, modifications to our imaging capsule or future products may require new regulatory approvals, clearances, including 510(k) clearances or premarket approvals, or require us to recall or cease marketing the modified devices until these clearances or approvals are obtained. Any modification to a 510(k)-cleared device that could significantly affect its safety or efficacy, or that would constitute a major change in its intended use, requires a new 510(k) clearance or, possibly, a PMA. The FDA requires device manufacturers to initially make and document a determination of whether or not a modification requires a new approval, supplement or clearance. A manufacturer may determine that a modification could not significantly affect safety or efficacy and does not represent a major change in its intended use, so that no new 510(k) clearance is necessary. However, the FDA can review a manufacturer’s decision and may disagree. The FDA may also on its own initiative determine that a new clearance or approval is required. We may make modifications to our imaging capsule in the future that we believe do not or will not require additional clearances or approvals. Further, our products could be subject to recall if the FDA determines, for any reason, that our products are not safe or effective. Any recall or FDA requirement that we seek additional approvals or clearances could result in significant delays, fines, increased costs associated with modification of a product, loss of revenue and potential operating restrictions imposed by the FDA.
 
If a manufacturer determines that a modification to an FDA-cleared device could significantly affect its safety or efficacy, or would constitute a major change in its intended use, then the manufacturer must file for a new 510(k) clearance or possibly a premarket approval application. Where we determine that modifications to our products require a new 510(k) clearance or premarket approval application, we may not be able to obtain those additional clearances or approvals for the modifications or additional indications in a timely manner, or at all.
 
 
26

 
 
Any modification to a PMA-approved device must either be approved in a PMA Supplement, or if the modification does not impact the device’s safety or effectiveness, described in a 30-Day Notice or in the device’s Annual Report.  The FDA may not approve a modification described in a PMA Supplement, in which case the modified device cannot be marketed.  The FDA can also disagree that a change described in a 30-Day Notice or Annual Report is appropriately described in either filing, and request that the company file a PMA Supplement and/or request that the company cease marketing the modified device until the PMA Supplement is approved.
 
Similar rules also apply in foreign jurisdictions. In the European Union, or EU, we must inform the Notified Body that carried out the conformity assessment of the medical devices we market or sell in the EU of any planned substantial changes to our quality system or changes to our devices which could affect compliance with the Essential Requirements laid down in Annex I to the Council Directive 93/42/EEC concerning medical devices (“Medical Devices Directive”) or the devices’ intended purpose. The Notified Body will then assess the changes and verify whether they affect the products’ conformity with the Essential Requirements laid down in Annex I to the Medical Devices Directive or the conditions for the use of the device. If the assessment is favorable, the Notified Body will issue a new CE Certificate of Conformity or an addendum to the existing CE Certificate of Conformity attesting compliance with the Essential Requirements laid down in Annex I to the Medical Devices Directive.
 
If the Notified Body or relevant regulatory authorities disagree with our assessments and require modifications to an existing CE Certificate of Conformity, the preparation of a new CE Certificates of Conformity or new regulatory clearances or approvals for modifications, we may be required to recall and to stop marketing the modified devices.
 
Obtaining clearances and approvals, or new or amended CE Certificates of Conformity for device modifications can be a time consuming process, and delays in obtaining required future clearances, approvals, or CE Certificates of Conformity would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth.
 
Even if our imaging capsule and future products are cleared or approved by regulatory authorities or if we obtain CE Certificates of Conformity from our Notified Body, if we or our suppliers fail to comply with ongoing FDA or other foreign regulatory authority requirements, or if we experience unanticipated problems with our products, our products could be subject to restrictions or withdrawal from the market.
 
The manufacturing processes, reporting requirements, post-approval clinical data and promotional activities associated with any product for which we obtain clearance or approval CE Certificates of Conformity, or equivalent third country approval will be subject to continuous regulatory review, oversight and periodic inspections by FDA other domestic and foreign regulatory authorities and our Notified Body. In particular, we and certain of our suppliers are required to comply with FDA’s Quality System Regulations, or QSR. In the EU, we will also be subject to the quality system requirements laid down in the Annexes to the Medical Devices Directive. Such compliance can be facilitated by, among other things, a certificate of compliance with ISO 13485:2003. Through compliance with the ISO 13485:2003 standard, we will benefit from a presumption of conformity with the relevant quality system requirements laid down in the Annexes to Medical Devices Directive. These regulations and standards govern the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of any product for which we obtain clearance or approval, CE Certificates of Conformity, or equivalent third country approval. Regulatory authorities, such as FDA, and our Notified Body enforce the QSR and other regulations through periodic inspections. The failure by us or one of our suppliers to comply with applicable statutes and regulations falling within the competence of FDA and other regulatory authorities or our Notified Body, or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues, could result in, among other things, any of the following enforcement actions:
 
 
untitled letters, warning letters, fines, injunctions, corporate integrity agreements, consent decrees and civil penalties;
 
 
unanticipated expenditures to address or defend such actions;
 
 
custom er notifications for repair, replacement or refunds;
 
 
27

 
 
 
recall, detention or seizure of our products;
 
 
operating restrictions or partial suspension or total shutdown of production;
 
 
refusing or delaying our requests for 510(k) clearance or premarket approval of new products or modified products;
 
 
operating restrictions;
 
 
withdrawing 510(k) clearances on PMA approvals that have already been granted;
 
 
suspension or withdrawal of our CE Certificates of Conformity;
 
 
refusal to grant export approval for our products; or
 
 
criminal prosecution.
 
If any of these actions were to occur, it would harm our reputation and cause our product sales and profitability to suffer and may prevent us from generating revenue. Furthermore, our key suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements which could result in our failure to produce our products on a timely basis and in the required quantities, if at all.
 
Even if regulatory clearance or approval of a product is granted, or if we obtain CE Certificates of Conformity, such clearance or approval, or CE Certificates of Conformity may be subject to limitations on the intended uses for which the product may be marketed and reduce our potential to successfully commercialize the product and generate revenue from the product. If FDA or the competent regulatory authorities of foreign countries determines that our promotional materials, labeling, training or other marketing or educational activities constitute the promotion of an unapproved use or the promotion of an intended purpose not covered by our CE mark, they could request that we cease or modify our training or promotional materials or subject us to regulatory enforcement actions. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our training or other promotional materials to constitute promotion of an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement.
 
In addition, we may be required to conduct costly post-market testing and surveillance to monitor the safety or effectiveness of our products, and we must comply with medical device reporting requirements, including the reporting of adverse events and malfunctions related to our products. Later discovery of previously unknown problems with our products, including unanticipated adverse side effects or adverse side effects of unanticipated severity or frequency, manufacturing problems, or failure to comply with regulatory requirements such as QSR, may result in changes to labeling, restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recalls, a requirement to repair, replace or refund the cost of any medical device we manufacture or distribute, fines, suspension or withdrawal of regulatory approvals or CE Certificates of Conformity, product seizures, injunctions or the imposition of civil or criminal penalties, all of which would adversely affect our business, financial condition and operating results and prospects.
 
If we fail to maintain necessary regulatory clearances or CE Certificates of Conformity for our imaging capsule and indications in our target foreign markets, if clearances or approvals, or CE Certificates of Conformity for future products and indications are delayed or not issued, or if there are regulatory changes in our existing or future target markets, our commercial operations could be harmed.
 
Our imaging capsule is a medical device that is subject to extensive regulations that are intended to assure its safety, effectiveness and compliance with applicable consumer laws. If we fail to obtain and maintain these regulatory approvals or clearances, or CE Certificates of Conformity, our ability to sell our imaging capsule and generate revenues will be materially harmed.
 
 
28

 
 
These laws and regulations relate to the design, development, testing, manufacturing, storage, labeling, packaging, content and language of the instructions for use of the device, sale, promotion, distribution, importing and exporting, shipping, post-sale surveillance and recall from our imaging capsule’s markets, and all countries in which we intend to sell our imaging capsule apply some form of regulations of this kind. Most notably, we must comply with the Medical Devices Directive and are subject to extensive regulation in the United States by FDA and other federal, state and local authorities. In the EU, compliance with the requirements laid down in the Medical Devices Directive, including the Essential Requirements laid down its Annex I thereto, is a prerequisite to be able to affix the CE mark of conformity to our medical devices. Without such CE mark, our products cannot be marketed or sold in the EU. To demonstrate compliance with the Essential Requirements laid down in Annex I to the Medical Devices Directive we must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Apart from low risk medical devices (Class I with no measuring function and which are not sterile), in relation to which the manufacturer can make an EC Declaration of Conformity based on self-assessment of the conformity of its products with the Essential Requirements laid down in Annex I to the Medical Devices Directive, a conformity assessment procedure requires the intervention a Notified Body. The Notified Body would typically audit and examine products’ Technical File, which we must create, and the quality system for manufacture, design and final inspection of our devices before issuing a CE Certificate of Conformity demonstrating compliance with the relevant Essential Requirements laid down in Annex I to the Medical Devices Directive or the quality system requirements laid down in the other Annexes to the Directive. Following the issuance of this CE Certificate of Conformity, we can draw up an EC Declaration of Conformity and affix the CE mark to the products covered by this CE Certificate of Conformity and by the EC Declaration of Conformity Other countries outside the EU also accept the CE mark as a certification of quality, efficacy and safety of medical devices and an element of related authorization of the products in their territory.
 
We will be subject to annual audits by a Notified Body under the Medical Devices Directive. During this audit, the third-party assessor or Notified Body will examine the maintenance and implementation of our quality control system, device post-marketing vigilance system and any changes or modifications made to our products.
 
On September 26, 2012, the European Commission adopted a package of legislative proposals designed to replace the existing regulatory framework for medical devices in the EU. These proposals are intended to strengthen the medical devices rules in the EU. On October 22, 2013, the European Parliament voted in favor of an amended draft of the Regulation. The proposed text is currently being discussed by the Council of the European Union. These adopted or expected regulatory changes may adversely affect our business, financial condition and results of operations or restrict our operations.
 
Our imaging capsule may in the future be subject to product recalls that could harm our reputation, business and financial results.
 
FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture. In the case of FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious injury or death. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Once marketed, recalls of any of our products, including our imaging capsule, would divert managerial and financial resources and have an adverse effect on our business, financial condition and results of operations. FDA requires that certain classifications of recalls be reported to FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to FDA. We may initiate voluntary recalls involving our products in the future that we determine do not require us to notify FDA. If FDA disagrees with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, FDA could take enforcement action against us based on our failure to report the recalls when they were conducted.
 
If our imaging capsule or future products cause or contribute to a death or a serious injury, or malfunction in such a way that causes or contributes to a death or serious injury, we will be subject to medical device reporting regulations, which can result in corrective actions or enforcement actions from regulatory authorities.
 
Under FDA medical device reporting regulations, medical device manufacturers are required to report to FDA information that a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of our device (or any similar future product) were to recur. If we fail to investigate and report these events to FDA within the required timeframes, or at all, FDA could take enforcement action against us. Any such adverse event involving our products also could result in future corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, including any legal action taken against us, will require us to devote sufficient time and capital to the matter, distract management from operating our business, and may harm our reputation and financial results.
 
 
29

 
 
In addition, we must also comply with the EU Medical Device Vigilance System (MEDDEV 2.12/1 rev.8), which is intended to protect the health and safety of patients, users and others by establishing reporting procedures and reducing the likelihood of reoccurrence of incidents related to the use of a medical device. Under this system, incidents (which are defined as any malfunction or deterioration in the characteristics and/or performance of a device, as well as any inadequacy in the labeling or the instructions for use which, directly or indirectly, may lead to or may have led to the death of a patient, or user or other persons or to a serious deterioration in such person’s state of health) must be reported by manufacturers through a Manufacturer’s Incident Reports to competent authorities within periods of time specified in the MEDDEV 2.12/1 rev. 8. Such incidents are evaluated and, where appropriate, information is disseminated between the competent authorities of the EU Member States. The MEDDEV 2.12/1 rev. 8 is also intended to facilitate a direct, early and harmonized establishment of Field Safety Corrective Actions, or FSCAs, across the EU Member States in which the device is being marketed. An FSCA is an action taken by a manufacturer to reduce a risk of death or serious deterioration in the state of health associated with the use of a medical device that is already placed on the market. An FSCA may include device recall, modification, exchange, or destruction. FSCAs must be reported by the manufacturer or the manufacturer’s European Authorized Representative, to its customers and/or the end users of the device through a Field Safety Notice. FSCAs must also be reported to the competent authorities of the EU Member States.
 
Our failure to comply with radiation safety or radio frequency regulations in a specific country or region could impair our ability to commercially distribute and market our imaging capsule in that country or region.
 
Our imaging capsule includes a tiny X-ray source and wireless radio frequency transmitter and receiver, and is therefore subject to equipment authorization requirements in a number of countries and regions. In the United States, the EU and Japan, authorities often require advance clearance of all radiation and radio frequency devices before they can be sold or marketed in these jurisdictions, subject to limited exceptions. Modifications to the approved system design and specifications may require new or further regulatory clearances or approvals before we are permitted to market and sell a modified system. If we are unable to obtain any required clearances or approvals from the authorities responsible for the radiation as well as the radio frequency regulations in these and other jurisdictions, the sale or use of our imaging capsule could be prevented in these countries. Any such action could negatively affect our business, financial condition and results of operations.
 
Our business is subject to complex environmental legislation that may increase our costs and our risk of noncompliance.
 
Our research and development and manufacturing processes involve the handling of potentially harmful radioactive and other hazardous materials. We are subject to local laws and regulations governing the use, shipping, handling, storage and disposal of these materials, and we incur expenses related to compliance with these laws and regulations. If we are found to have violated environmental, health and safety laws, whether as a result of human error, equipment failure or other causes, we could be held liable for damages, penalties and costs of remedial actions which could materially adversely affect our business, financial condition and results of operations. In the future, we could be subject to additional environmental requirements or existing environmental laws could become more stringent, which could lead to greater compliance costs and increasing risks and penalties associated with violations. For example, changes to, or restrictions on, permitting requirements or processes, hazardous or radioactive material storage or handling might require an unplanned capital investment or relocation. If we fail to comply with existing or new environmental laws or regulations, our business, financial condition and results of operations could be materially adversely affected.
 
If we are unable to achieve reimbursement and coverage from third-party payors for procedures using our imaging capsule, or if reimbursement is insufficient to create an economic benefit for purchasing or using our imaging capsule when compared to alternative procedures, demand for our products may not grow at the rate we expect.
 
The demand for our imaging capsule will depend significantly on the eligibility of the procedures performed using our imaging capsule for reimbursement through government-sponsored healthcare payment systems and private third-party payors. Reimbursement practices vary significantly from country to country and within some countries, by region, and we must obtain reimbursement approvals on a country-by-country and/or region-by-region basis. In general, the process of obtaining reimbursement and coverage approvals has been longer outside of the United States. We may not be able to obtain reimbursement approvals in a timely manner or at all and existing reimbursement and coverage policies may be revised from time to time by third-party payors. If physicians, hospitals and other healthcare providers are unable to obtain sufficient coverage and reimbursement from third-party payors for procedures using our imaging capsule, if reimbursement is, or is perceived by our customers to be, insufficient to create an economic incentive for purchasing or using our imaging capsule, or if such reimbursement does not adequately compensate physicians and health care providers compared to the other procedures they offer, demand for our products may not grow at the rate we expect.
 
 
30

 
 
Federal and state privacy laws, and equivalent laws of third countries, may increase our costs of operation and expose us to civil and criminal sanctions.
 
The Health Insurance Portability and Accountability Act of 1996, as amended, and the regulations that have been issued under it, to which we refer collectively as HIPAA, and similar laws outside the United States, contain substantial restrictions and requirements with respect to the use and disclosure of individuals’ protected health information. The HIPAA privacy rules prohibit “covered entities,” such as healthcare providers and health plans, from using or disclosing an individual’s protected health information, unless the use or disclosure is authorized by the individual or is specifically required or permitted under the privacy rules. Under the HIPAA security rules, covered entities must establish administrative, physical and technical safeguards to protect the confidentiality, integrity and availability of electronic protected health information maintained or transmitted by them or by others on their behalf. While we do not believe that we are a covered entity under HIPAA, many of our customers are covered entities subject to HIPAA. Such customers may require us to enter into business associate agreements, which will obligate us to safeguard certain health information we obtain in the course of our relationship with them, restrict the manner in which we use and disclose such information and impose liability on us for failure to meet our contractual obligations.
 
In addition, under The Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, which was signed into law as part of the U.S. stimulus package in February 2009, certain of HIPAA’s privacy and security requirements are now also directly applicable to “business associates” of covered entities and subject them to direct governmental enforcement for failure to comply with these requirements. We may be deemed as a “business associate” of some of our customers. As a result, we may be subject as a “business associate” to civil and criminal penalties for failure to comply with applicable privacy and security rule requirements. Moreover, HITECH created a new requirement obligating “business associates” to report any breach of unsecured, individually identifiable health information to their covered entity customers and imposes penalties for failing to do so.
 
In addition to HIPAA, most U.S. states have enacted patient confidentiality laws that protect against the disclosure of confidential medical information, and many U.S. states have adopted or are considering adopting further legislation in this area, including privacy safeguards, security standards, and data security breach notification requirements. These U.S. state laws, which may be even more stringent than the HIPAA requirements, are not preempted by the federal requirements, and we are therefore required to comply with them to the extent they are applicable to our operations.
 
These and other possible changes to HIPAA or other U.S. federal or state laws or regulations, or comparable laws and regulations in countries where we conduct business, could affect our business and the costs of compliance could be significant. Failure by us to comply with any of the standards regarding patient privacy, identity theft prevention and detection, and data security may subject us to penalties, including civil monetary penalties and in some circumstances, criminal penalties. In addition, such failure may damage our reputation and adversely affect our ability to retain customers and attract new customers.
 
The protection of personal data, particularly patient data, is subject to strict laws and regulations in many countries. The collection and use of personal health data in the EU is governed by the provisions of Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data, commonly known as the Data Protection Directive. The Directive imposes a number of requirements including an obligation to seek the consent of individuals to whom the personal data relates, the information that must be provided to the individuals, notification of data processing obligations to the competent national data protection authorities of individual EU Member States and the security and confidentiality of the personal data. The Data Protection Directive also imposes strict rules on the transfer of personal data out of the EU to the US. Failure to comply with the requirements of the Data Protection Directive and the related national data protection laws of the EU Member States may result in fines and other administrative penalties and harm our business. We may incur extensive costs in ensuring compliance with these laws and regulations, particularly if we are considered to be a data controller within the meaning of the Data Protection Directive.
 
 
31

 
 
The adoption of healthcare reform and deficit reduction measures in the United States may adversely affect our business and financial results.
 
On March 23, 2010, President Obama signed into law major healthcare reform legislation under the Patient Protection and Affordable Care Act of 2010, or the PPACA, which was modified on March 30, 2010 by the enactment of the Health Care and Education Reconciliation Act of 2010. This law substantially changes the way healthcare is financed by both governmental and private insurers, and significantly impacts the device industry. The PPACA is intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medical device manufacturers, and impose additional health policy reforms. Under the PPACA, it is expected that expanded healthcare coverage will be made available to millions of Americans. The increased costs to the U.S. government from the PPACA are expected to be funded through a combination of payment reductions for providers over time and several new taxes. The PPACA imposes, among other things, an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United States beginning in 2013, resulting in an anticipated cost to the medical device industry of up to $20 billion over the next decade. We likely will be subject to the excise tax with respect to our imaging capsule if it is approved for sale in the United States. The PPACA also limits the rate of growth in Medicare payments to providers and authorizes certain voluntary demonstration projects beginning no later than 2013 around development of bundling payments for acute, inpatient hospital services, physician services, and post acute services for episodes of hospital care. In addition, the PPACA provides for the establishment of an Independent Payment Advisory Board, or IPAB, that, beginning in 2014, could recommend changes in Medicare payments to physicians and other providers that would take effect unless Congress passes an alternative measure to achieve the same amount of savings. The IPAB has not yet been created. The PPACA also increases fraud and abuse penalties and expands the scope and reach of the Federal Civil False Claims Act and government enforcement tools, which may adversely impact healthcare companies.
 
The U.S. Supreme Court heard a constitutional challenge to the PPACA and in June 2012 held that the PPACA is constitutional. However, states are allowed to opt out of the expansion of eligibility criteria for Medicaid under the PPACA and many states have chosen to do so, causing many uninsured patients to remain without coverage. In addition to the PPACA, the effect of which cannot presently be quantified given its recent enactment, various healthcare reform proposals have also emerged at the state level. We cannot predict whether future healthcare initiatives will be implemented at the federal or state level or the effect any future legislation or regulation will have on us. However, we anticipate that the PPACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and an additional downward pressure on the price that we receive for any approved product, and could adversely affect our business. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. Insurers may also refuse to provide any coverage of uses of approved products for medical indications other than those for which the FDA has granted market approvals, all of which may adversely affect our business, financial condition and results of operations, possibly materially.
 
In addition to health reform, other deficit reduction measures could affect reimbursement for our device and related procedures. For example, beginning April 1, 2013, Medicare payments for all items and services have been reduced by 2% under the sequestration ( i.e. , automatic spending reductions) required by the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012. These cuts will remain in effect until 2024 unless Congress enacts legislation to cancel or delay the cuts. These payment reductions, or similar efforts to reduce Medicare spending to control the federal deficit, could adversely affect our business by reducing reimbursement to the providers who purchase and use our devices and perform related procedures.
 
 
32

 
 
If we fail to comply with the U.S. federal Anti-Kickback Statute and similar state and third country laws, we could be subject to criminal and civil penalties and exclusion from federally funded healthcare programs including the Medicare and Medicaid programs and equivalent third country programs, which would have a material adverse effect on our business and results of operations.
 
A provision of the Social Security Act, commonly referred to as the federal Anti-Kickback Statute, prohibits the knowing and willful offer, payment, solicitation or receipt of any form of remuneration, directly or indirectly, in cash or in kind, to induce or reward the referring, ordering, leasing, purchasing or arranging for, or recommending the ordering, purchasing or leasing of, items or services payable, in whole or in part, by Medicare, Medicaid or any other federal healthcare program. PPACA, among other things, clarified that a person or entity needs not to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it. Although there are a number of statutory exemptions and regulatory safe harbors to the federal Anti-Kickback Statute protecting certain common business arrangements and activities from prosecution or regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that do not fit squarely within an exemption or safe harbor may be subject to scrutiny. The federal Anti-Kickback Statute is very broad in scope and many of its provisions have not been uniformly or definitively interpreted by existing case law or regulations. In addition, most of the states have adopted laws similar to the federal Anti-Kickback Statute, and some of these laws are even broader than the federal Anti-Kickback Statute in that their prohibitions may apply to items or services reimbursed under Medicaid and other state programs or, in several states, apply regardless of the source of payment. Violations of the federal Anti-Kickback Statute may result in substantial criminal, civil or administrative penalties, damages, fines and exclusion from participation in federal healthcare programs.
 
All of our financial relationships with healthcare providers, purchasers, formulary managers, and others who provide products or services to federal healthcare program beneficiaries are potentially governed by the federal Anti-Kickback Statute and similar state laws. We believe our operations are in compliance with the federal Anti-Kickback Statute and similar state laws. However, we cannot be certain that we will not be subject to investigations or litigation alleging violations of these laws, which could be time-consuming and costly to us and could divert management’s attention from operating our business, which in turn could have a material adverse effect on our business. In addition, if our arrangements were found to violate the federal Anti-Kickback Statute or similar state laws, the consequences of such violations would likely have a material adverse effect on our business, results of operations and financial condition.
 
There are other federal and state laws that may affect our ability to operate, including the federal civil False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment of government funds or knowingly making, using or causing to be made or used, a false record or statement material to an obligation to pay money to the government or knowingly concealing or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. PPACA amended the Social Security Act to provide that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Moreover, we may be subject to other federal false claim laws, including, among others, federal criminal healthcare fraud and false statement statutes that extend to non-government health benefit programs. Moreover, there are analogous state laws. Violations of these laws can result in substantial criminal, civil or administrative penalties, damages, fines and exclusion from participation in federal healthcare programs.
 
Similar restrictions are imposed by the national legislation of many third countries in which our medical devices will be marketed. Moreover, the provisions of the Foreign Corrupt Practices Act of 1997 and other similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from providing money or anything of value to officials of foreign governments, foreign political parties, or international organizations with the intent to obtain or retain business or seek a business advantage. Recently, there has been a substantial increase in anti-bribery law enforcement activity by U.S. regulators, with more aggressive and frequent investigations and enforcement by both the U.S. Securities and Exchange Commission and the Department of Justice. A determination that our operations or activities violated United States or foreign laws or regulations could result in imposition of substantial fines, interruption of business, loss of supplier, vendor or other third-party relationships, termination of necessary licenses and permits, and other legal or equitable sanctions. In addition, lawsuits brought by private litigants may also follow as a consequence.
 
 
33

 
 
If the U.S. Nuclear Regulatory Commission, or NRC, or other nuclear regulatory commissions around the world, would take the position that an imaging capsule containing radioactive material cannot be passed in excreta into the sanitary sewer system without limitation, we may be subject to further regulations and patients may be required to retrieve our imaging capsule after use.
 
As our imaging capsule includes an ingestible capsule with a radioactive source, we must address NRC regulations in addition to FDA requirements as well as regulations of other nuclear regulatory commissions in jurisdictions in which we intend to commercialize our imaging capsule. Our imaging capsule is loaded with the X-ray source, sealed and then ingested by the patient. Although the NRC places conditions and limitations on the disposal of radioactive material in the sanitary sewer, such conditions and limitations do not apply to radioactive material contained in the excreta of individuals that are undergoing medical diagnosis or therapy with radioactive material. However, there is no assurance that the NRC or other regulatory commissions worldwide will take a similar position in relation to our imaging capsule and we may face limitations by the NRC or other nuclear regulatory commissions in jurisdictions in which we intend to commercialize our imaging capsule in relation to the disposal of our imaging capsule in the sanitary system, such as requiring patients to retrieve our imaging capsule after use, which could make our imaging capsule less attractive.
 
Our failure to comply with the necessary regulatory approval regarding the use of radioactive materials could significantly impair our ability to develop, manufacture and/or sell our imaging capsule.
 
The manufacture of our imaging capsule requires the use and storage of radioactive materials. In order to use such materials in the development and manufacture of our imaging capsule in Israel, we are required to obtain a permit from the Israeli Commissioner for Environmental Radiation, or the Commissioner, pursuant to the Israeli Pharmaceutical Regulations (Radioactive Elements and By-Products) – 1980. Should we fail to comply with the conditions of our currently existing permit, the Commissioner would have authority to cancel our permit. Should the Commissioner determine that our activities or facilities constitute a danger to the health and well-being of a person, the public or the environment, the cancellation of our permit could be immediate and without prior notice. Furthermore, we cannot guarantee the annual renewal of our permit and/or annual renewal subject to identical conditions, as the approval of an annual application and the conditions thereof are at the discretion of the Commissioner. Similar requirements and regulations may apply to the manufacture of our imaging capsule in other countries. Cancellation of or failure to renew our permit could have materially adverse consequences on our ability to manufacture and sell our products and therefore on our ability to continue our business and operations.
 
Risks Related to Our Intellectual Property
 
If we are unable to protect our intellectual property rights, our competitive position could be harmed.
 
Our success and ability to compete depends in large part upon our ability to protect our intellectual property. Although we have patents issued in Israel, Europe, United States, Japan, China, India, Hong Kong, and Australia, we continue to file and prosecute in many of the same countries and additional countries such as Canada and Korea. We face several risks and uncertainties in connection with our intellectual property rights, including, among others:
 
 
pending and future patent applications may not result in the issuance of patents or, if issued, may not be issued in a form that will be advantageous to us;
 
 
our issued patents may be challenged, invalidated or legally circumvented by third parties;
 
 
our patents may not be upheld as valid and enforceable or prevent the development of competitive products;
 
 
the eligibility of certain inventions related to diagnostic medicine, more specifically diagnostic methods and processes, for patent protection in the United States has been limited recently which may affect our ability to enforce our issued patents in the United States or may make it difficult to obtain broad patent protection going forward in the United States;
 
 
for a variety of reasons, we may decide not to file for patent protection on various improvements or additional features; and
 
 
intellectual property protection and/or enforcement may be unavailable or limited in some countries where laws or law enforcement practices may not protect our proprietary rights to the same extent as the laws of the United States, the European Union, Canada or Israel.
 
 
34

 
 
Consequently, our competitors could develop, manufacture and sell products that directly compete with our products, which could decrease our sales and diminish our ability to compete. In addition, competitors could attempt to develop their own competitive technologies that fall outside of our intellectual property rights. If our intellectual property does not adequately protect us from our competitors’ products and methods, our competitive position could be materially adversely affected.
 
Because the medical device industry is litigious, we are susceptible to intellectual property suits that could cause us to incur substantial costs or pay substantial damages or prohibit us from selling our imaging capsule.
 
There is a substantial amount of litigation over patent and other intellectual property rights in the medical device industry. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. We are presently unaware of any other parties’ valid patents and proprietary rights which our evolving product designs would infringe. Searches typically performed to identify potentially infringed patents of third parties are often not conclusive and, because patent applications can take many years to issue, there may be applications now pending, which may later result in issued patents which our current or future products may infringe. In addition, our competitors or other parties may assert that our imaging capsule and the methods it employs may be covered by patents held by them. If our imaging capsule infringes a valid patent, we could be prevented from manufacturing or selling it unless we can obtain a license or redesign the product to avoid infringement. A license may not always be available or may require us to pay substantial royalties. We also may not be successful in any attempt to redesign our product to avoid infringement. Infringement and other intellectual property claims, with or without merit, can be expensive and time-consuming to litigate and could divert our management’s attention from operating our business.
 
The steps we have taken to protect our intellectual property may not be adequate, which could have a material adverse effect on our ability to compete in the market.
 
In addition to patents, we rely on confidentiality, non-compete, non-disclosure and assignment of inventions provisions, as appropriate, with our employees, consultants and, to some extent, our distributors, to protect and otherwise seek to control access to, and distribution of, our proprietary information. These measures may not be adequate to protect our intellectual property from unauthorized disclosure, third-party infringement or misappropriation, for the following reasons:
 
 
the agreements may be breached, may not provide the scope of protection we believe they provide or may be determined to be unenforceable;
 
 
we may have inadequate remedies for any breach;
 
 
proprietary information could be disclosed to our competitors; or
 
 
others may independently develop substantially equivalent or superior proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technologies.
 
Specifically with respect to non-compete agreements, under current U.S. and Israeli law, we may be unable to enforce these agreements, in whole or in part, and it may be difficult for us to restrict our competitors from gaining the expertise that our former employees gained while working for us. For example, Israeli courts have recently required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or its intellectual property. If we cannot demonstrate that harm would be caused to us, we may be unable to prevent our competitors from benefiting from the expertise of our former employees. In addition, some states in the United States, such as California, have laws which severely restrict the use of non-compete undertakings.
 
If, for any of the above reasons, our intellectual property is disclosed or misappropriated, it could harm our ability to protect our rights and could have a material adverse effect on our business, financial condition and results of operations.
 
 
35

 
 
Third-party claims of infringement or other claims against us could require us to redesign our imaging capsule, seek licenses, or engage in future costly intellectual property litigation, which could negatively affect our future business and financial performance.
 
Substantial litigation over intellectual property rights exists in the medical device industry in general and in the medical imaging sector in particular. We expect that we may be subject to third-party infringement claims as our revenues increase, the number of competitors grows and the functionality of products and technology in different industry segments converges. Third parties may currently have, or may eventually be issued, patents on which our current or future products or technologies may infringe.
 
In addition, litigation in which we are accused of infringement may cause negative publicity, adversely impact prospective customers, cause product shipment delays, prohibit us from manufacturing, marketing or selling our current or future products, require us to develop non-infringing technology, make substantial payments to third parties or enter into royalty or license agreements, which may not be available on acceptable terms, or at all. If a successful claim of infringement were made against us and we could not develop non-infringing technology or license the infringed or similar technology in a timely and cost-effective manner, our ability to generate significant revenues may be substantially harmed and we could be exposed to significant liability. A court could enter orders that temporarily, preliminarily or permanently enjoin us or our customers from making, using, selling, offering to sell or importing our current or future products, or could enter an order mandating that we undertake certain remedial activities. Claims that we have misappropriated the confidential information or trade secrets of third parties can have a similar negative impact on our reputation, business, financial condition or results of operations.
 
We may also become involved in litigation in connection with our brand name rights. We do not know whether others will assert that our brand name infringes their trademark rights. In addition, names we choose for our products may be claimed to infringe names held by others. If we have to change the names we use, we may experience a loss in goodwill associated with our brand name, customer confusion and a loss of sales.
 
Third parties may challenge the validity of our issued patents or challenge patent applications in administrative proceedings before various patent offices which, if successful, could negatively affect our future business and financial performance.
 
Various patent offices, including in the United States and Europe, provide administrative proceedings by which a third party can challenge the validity of an issued patent or challenge an application that is being examined absent any threat of litigation. In some instances, including in the United States, the administrative proceedings provide a more efficient and favorable forum to challenge our patents which may lead to more opportunities for competitors to do so, particularly smaller competitors with limited resources. Moreover, the standards utilized in these administrative proceedings, at least in the United States, provide certain legal advantages versus challenging the validity of a patent in a district court. If a third party is successful in one of these administrative proceedings, the patent will no longer be enforceable in the corresponding jurisdiction. With this loss in patent rights, we will not be able to prevent third parties from offering identical or similar competing products which may result in lower profits and a less substantial market share.
 
We may need to initiate lawsuits to protect or enforce our patents and other intellectual property rights, which could be expensive and, if we lose, could cause us to lose some of our intellectual property rights, which would harm our ability to compete in the market.
 
We rely on patents to protect a portion of our intellectual property and our competitive position. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and, consequently, patent positions in the medical device industry are generally uncertain. In order to protect or enforce our patent rights, we may initiate patent and related litigation against third parties, such as infringement suits or interference proceedings. Any lawsuits that we initiate could be expensive, take significant time and divert our management’s attention from other business concerns and the outcome of litigation to enforce our intellectual property rights in patents, copyrights, trade secrets or trademarks is highly unpredictable. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. In addition, we may provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, including attorney fees, if any, may not be commercially valuable. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.
 
 
36

 
 
We may not be able to enforce covenants not to compete at all or, we may be unable to enforce them for the duration contemplated in our employment contracts and may, therefore, be unable to prevent competitors from benefiting from the expertise of some of our former employees involved in research and development activities.
 
We currently have non-competition agreements with substantially all of our employees who are involved in research and development, all of whom are located in Israel. These agreements prohibit our employees, if they cease working for us, from directly competing with us or working for our competitors for a limited period of time following termination of employment. In many jurisdictions, courts are increasingly refusing to enforce restrictions on competition by former employees or have interpreted them narrowly. For example, in Israel, where all of our employees reside, courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or its intellectual property. If we cannot demonstrate that harm would be caused to us, an Israeli court may refuse to enforce our non-compete restrictions or reduce the contemplated period of non-competition such that we may be unable to prevent our competitors from benefiting from the expertise of our former employees.
 
Risks Related to Our Operations in Israel
 
Our principal offices, research and development facilities and some of our suppliers are located in Israel and, therefore, our business, financial condition and results of operation may be adversely affected by political, economic and military instability in Israel.
 
Our principal offices, research and development facilities   are located in northern Israel. In addition, all of our employees and officers, and most of our directors, are residents of Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affect our operations and results of operations. In addition, our operations may be adversely affected by the call-up of certain of our employees, including members of our senior management, to active military services in the case of such hostilities.
 
During the Second Lebanon War of 2006, between Israel and Hezbollah, a militant Islamic movement, rockets were fired from Lebanon into Israel, including into the Haifa area, where our facility is located, causing casualties and major disruption of economic activities in northern Israel. An escalation in tension and violence between Israel and the militant Hamas movement (which controls the Gaza Strip) and other Palestinian Arab groups, culminated with Israel’s military campaign in Gaza in December 2008, in November 2012 and again in July and August 2014 in an endeavor to prevent continued rocket attacks against Israel’s southern towns. It is unclear whether any negotiations that may occur between Israel and the Palestinian Authority will result in an agreement. In addition, Israel faces threats from more distant neighbors, in particular, Iran, an ally of Hezbollah and Hamas.
 
Popular uprisings in various countries in the Middle East and North Africa are affecting the political stability of those countries. Such instability may lead to deterioration in the political and trade relationships that exist between the State of Israel and these countries. Furthermore, several countries, principally in the Middle East, restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in the region continue or intensify. Such restrictions may seriously limit our ability to sell our products to customers in those countries. Parties with whom we may do business could decline to travel to Israel during periods of heightened unrest or tension. In addition, the political and security situation in Israel may result in parties with whom we may have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements. In addition, any hostilities involving Israel could have a material adverse effect on our facilities including our corporate office or on the facilities of our local suppliers, in which event all or a portion of our inventory may be damaged, and our ability to deliver products to customers could be materially adversely affected. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or significant downturns in the economic or financial condition of Israel, could adversely affect our operations and product development, cause our revenues to decrease and adversely affect our share price following this offering. Similarly, Israeli corporations are limited in conducting business with entities from several countries.
 
 
37

 
 
Our commercial insurance policy does not cover losses associated with terrorist attacks. Although the Israeli government in the past covered the reinstatement value of certain damages that were caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained, or if maintained, will be sufficient to compensate us fully for damages incurred. Any losses or damages incurred by us could have a material adverse effect on our business. Any armed conflicts, terrorist activities or political instability in the region would likely negatively affect business conditions generally and could harm our results of operations.
 
Our operations could also be disrupted by the obligations of personnel to perform military service. As of December 22, 2014, we had 36 employees and independent contractors, all of whom were based in Israel. Some of these employees may be called upon to perform up to 54 days in each three year period (and in the case of officers, up to 84 days in each three year period) of military reserve duty until they reach the age of 40 (and in some cases, depending on their specific military profession up to 45 or even 49 years of age) and, in certain emergency circumstances, may be called to immediate and unlimited active duty. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists and it is possible that there will be similar large-scale military reserve duty call-ups in the future. Our operations could be disrupted by the absence of a significant number of employees related to military service, which could materially adversely affect our business and results of operations.
 
Pursuant to the terms of the Israeli government grants we received for research and development expenditures, we are obligated to pay certain royalties on our revenues to the Israeli government. The terms of the grants require us to satisfy specified conditions and to make additional payments in addition to repayment of the grants upon certain events.
 
We have received grants from the Government of the State of Israel through the OCS for the financing of a portion of our research and development expenditures pursuant to the Research Law and related regulations.  As of June 30, 2014, we had received funding from the OCS in the aggregate amount of $3.1 million.  Since June 30, 2014, we have received additional funding from the OCS in the aggregate amount of $566,551 under an approved OCS grant in the total amount of $702,000 for a research and development program for the 12 month period commencing March 1, 2014.  As of June 30, 2014, we had not paid any royalties to the OCS and had a contingent obligation to the OCS in the amount of $1.6 million.   We may apply for additional OCS grants in the future. However, as the funds available for OCS grants out of the annual budget of the State of Israel have been reduced in the past and may be further reduced in the future, we cannot predict whether we will be entitled to any future grants, or the amounts of any such grants.
 
The terms of the Israeli government participation require that products developed with OCS grants be manufactured in Israel and that the technology developed thereunder may not be transferred outside of Israel, unless prior approval is received from the OCS, which we may not receive. In addition, payment of additional amounts would be required if manufacturing is moved outside of Israel, in which case the royalty repayment rate is increased and the royalty ceiling can reach up to three times the amount of the grants received, and if OCS developed know-how is transferred outside of Israel, the royalty ceiling can reach up to six times the amount of grants received (plus interest). We are currently considering whether it would be possible to assemble the capsule without the X-ray source in Israel, and have the X-ray source subsequently inserted into our imaging capsule at a reactor or cyclotron site or at a distribution center outside Israel. Even following the full repayment of any OCS grants, we must nevertheless continue to comply with the requirements of the Research Law. The foregoing restrictions and requirements for payment may impair our ability to sell our technology assets outside of Israel or to outsource or transfer development or manufacturing activities with respect to any product or technology outside of Israel. Furthermore, the consideration available to our shareholders in a transaction involving the transfer outside of Israel of technology or know-how developed with OCS funding (such as a merger or similar transaction) may be reduced by any amounts that we are required to pay to the OCS.
 
If we fail to comply with any of the conditions and restrictions imposed by the Research Law, or by the specific terms under which we received the grants, we may be required to refund any grants previously received together with interest and penalties, and, in certain circumstances, may be subject to criminal charges.
 
 
38

 
 
Your rights and responsibilities as a shareholder will be governed by Israeli law which differs in some material respects from the rights and responsibilities of shareholders of U.S. companies.
 
The rights and responsibilities of the holders of our ordinary shares are governed by our amended articles of association and by Israeli law. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders in U.S.-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders, and to refrain from abusing its power in the company, including, among other things, in voting at a general meeting of shareholders on matters such as amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and acquisitions and related party transactions requiring shareholder approval. In addition, a shareholder who is aware that it possesses the power to determine the outcome of a shareholder vote or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company. There is limited case law available to assist us in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations.
 
It may be difficult to enforce a judgment of a U.S. court against us, our officers and directors or the Israeli experts named in this prospectus in Israel or the United States, to assert U.S. securities laws claims in Israel or to serve process on our officers and directors and these experts.
 
We are incorporated in Israel. All of our executive officers and the Israeli experts and all but two of our directors listed in this prospectus reside in Israel, and substantially all of our assets and most of the assets of these persons are located in Israel. Therefore, a judgment obtained against us, or any of these persons, including a judgment based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by an Israeli court. It also may be difficult for you to effect service of process on these persons in the United States or to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws on the grounds that Israel is not the most appropriate forum in which to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proven as a fact by expert witnesses, which can be a time consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel that addresses the matters described above. As a result of the difficulty associated with enforcing a judgment against us in Israel, you may not be able to collect any damages awarded by either a U.S. or foreign court. See “Enforceability of Civil Liabilities” for additional information on your ability to enforce a civil claim against us and our executive officers or directors, or some of the experts named in this prospectus.
 
Provisions of Israeli law and our amended articles of association may delay, prevent or otherwise impede a merger with, or an acquisition of, us, even when the terms of such a transaction are favorable to us and our shareholders.
 
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. For example, a tender offer for all of a company’s issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital and the approval of a majority of the offerees that do not have a personal interest in the tender offer, unless at least 98% of the company’s outstanding shares are tendered. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer (unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek appraisal rights), may, at any time within six months following the completion of the tender offer, petition an Israeli court to alter the consideration for the acquisition. In addition, a merger may not be consummated unless at least 50 days have passed from the date on which a proposal for approval of the merger was filed by each party with the Israeli Registrar of Companies and at least 30 days have passed from the date on which the merger was approved by the shareholders of each party. See “Description of Share Capital—Acquisitions under Israeli Law” for additional information.
 
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of a number of conditions, including, in some cases, a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are subject to certain restrictions. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no disposition of the shares has occurred.
 
 
39

 
 
We may become subject to claims for payment of compensation for assigned service inventions by our current or former employees, which could result in litigation and adversely affect our business.
 
Under the Israeli Patents Law, 5727-1967, or the Patents Law, inventions conceived by an employee during the scope of his or her employment are regarded as “service inventions” and are owned by the employer, absent a specific agreement between the employee and employer giving the employee service invention rights. The Patents Law also provides that if no such agreement between an employer and an employee exists, which prescribes whether, to what extent, and on what conditions the employee is entitled to remuneration for his or her service inventions, then such matters may, upon application by the employee, be decided by a government-appointed compensation and royalties committee established under the Patents Law, or the Committee.  Recent conflicting decisions of the Committee and the Israeli Supreme Court have created uncertainty with respect to an employee’s right to receive remuneration for service inventions. In an August 2012 decision, the Israeli Supreme Court held that an employee’s contractual waiver of rights to compensation for service inventions does not necessarily preclude the employee’s claim to such compensation, and as a result an employee who executed a waiver may still bring a claim for compensation for service inventions before the Committee. However, in a decision issued in May 2014, the Committee held that employees may waive their right to remuneration for service inventions.  We understand that a petition was recently filed and is currently pending with the Israeli High Court of Justice claiming that the Committee did not have authority to render such decision. A significant portion of our intellectual property has been developed by our employees in the course of their employment. Although our employees have agreed to assign to us all rights to any intellectual property created in the scope of their employment and most of our current employees, including all those involved in the development of our intellectual property, have agreed to waive their economic rights with respect to service inventions, we cannot assure you that claims will not be brought against us by current or former employees demanding remuneration in consideration for assigned service inventions. If any such claims were filed, we could be required to pay remuneration to our current or former employees for such assigned service inventions, or be forced to litigate such claims, which could negatively affect our business.
 
Risks Related to the Company
 
For as long as we are an “emerging growth company,” we will not be required to comply with certain reporting requirements that apply to other public companies. We cannot predict whether the reduced disclosure requirements applicable to emerging growth companies will make our ordinary shares less attractive to investors.
 
We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may choose to take advantage of certain exemptions from reporting requirements applicable to other public companies that are not emerging growth companies. These include: (i) not being required to comply with the auditor attestation requirements for the assessment of our internal controls over financial reporting provided by Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act; (ii) not being required to comply with any requirements adopted by the Public Company Accounting Oversight Board, or PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer; (iii) not being required to comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the U.S. Securities and Exchange Commission determines otherwise, (iv) not being required to provide certain disclosure regarding executive compensation required of larger public companies; and (v) not being required to hold a non-binding advisory vote on executive compensation or seek shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years from the end of our current fiscal year, although, if the market value of our ordinary shares that is held by non-affiliates exceeds $700 million as of any June 30 before the end of that five-year period, we would cease to be an emerging growth company as of the following December 31. We cannot predict if investors will find our ordinary shares less attractive if we choose to rely on these exemptions. If some investors find our ordinary shares less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our ordinary shares and our share price may be more volatile. Further, as a result of these scaled regulatory requirements, our disclosure may be more limited than that of other public companies and you may not have the same protections afforded to shareholders of such companies.
 
 
40

 
 
We will be a foreign private issuer and, as a result, we will not be subject to U.S. proxy rules and will be subject to the Exchange Act reporting obligations that, to some extent, are more lenient and less frequent than those applicable to a U.S. issuer.
 
Upon the completion of this offering, we will report under the Exchange Act as a foreign private issuer. Because we qualify as a foreign private issuer under the Exchange Act, we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. public companies, including (i) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; (ii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and (iii) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events. We intend to furnish quarterly reports to the SEC on Form 6-K for so long as we are subject to the reporting requirements of Section 13(g) or 15(d) of the Exchange Act, although the information we furnish may not be the same as the information that is required in quarterly reports on Form 10-Q for U.S. domestic issuers. In addition, while U.S. domestic issuers that are not large accelerated filers or accelerated filers are required to file their annual reports on Form 10-K within 90 days after the end of each fiscal year, in the fiscal years ending on or after December 15, 2011, foreign private issuers will not be required to file their annual report on Form 20-F until 120 days after the end of each fiscal year. Foreign private issuers are also exempt from the Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information. Although we intend to make interim reports available to our shareholders in a timely manner, you may not have the same protections afforded to shareholders of companies that are not foreign private issuers.
 
As a foreign private issuer, we are permitted, and intend, to follow certain home country corporate governance practices instead of otherwise applicable NASDAQ requirements, which may result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.
 
As a foreign private issuer, we are permitted, and intend, to follow certain home country corporate governance practices instead of those otherwise required under the Listing Rules of the NASDAQ Stock Market for domestic U.S. issuers. For instance, we intend to follow home country practice in Israel with regard to, among other things, director nomination procedures, the approval of compensation of officers, and quorum requirements at general meetings of our shareholders. In addition, we intend to follow our home country law instead of the Listing Rules of the NASDAQ Stock Market that require us to obtain shareholder approval for certain dilutive events, such as the establishment or amendment of certain equity based compensation plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or greater interest in the company, and certain acquisitions of the stock or assets of another company. Following our home country governance practices as opposed to the requirements that would otherwise apply to a United States company listed on NASDAQ may provide less protection to you than what is accorded to investors under the Listing Rules of the NASDAQ Stock Market applicable to domestic U.S. issuers.
 
Exchange rate fluctuations between the U.S. dollar and the NIS and the Euro and inflation may negatively affect our earnings and we may not be able to hedge our currency exchange risks successfully.
 
The dollar is our functional and reporting currency. However, a significant portion of our operating expenses, including personnel and facilities related expenses, are incurred in NIS. As a result, we are exposed to the risks that the NIS may appreciate relative to the U.S. dollar, or, if the NIS instead devalues relative to the U.S. dollar, that the inflation rate in Israel may exceed such rate of devaluation of the NIS, or that the timing of such devaluation may lag behind inflation in Israel. In any such event, the dollar cost of our operations in Israel would increase and our dollar-denominated results of operations would be adversely affected. The Israeli rate of inflation has not had a material adverse effect on our financial condition during 2012 and 2013 and during the six months ended June 30, 2014. In addition, we expect to incur operating expenses denominated in Euros, and therefore, our operating results are also subject to fluctuations due to changes in the U.S. dollar/Euro exchange rate. Given our general lack of currency hedging arrangements to protect us from fluctuations in the exchange rates of the NIS, the Euro and other foreign currencies in relation to the U.S. dollar (and/or from inflation of such foreign currencies), we may be exposed to material adverse effects from such movements. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation (if any) of the NIS against the U.S. dollar.
 
 
41

 
 
Our management team’s lack of experience as officers of publicly-traded companies may hinder our ability to comply with the Sarbanes-Oxley Act.
 
It may be time-consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance staff or consultants in order to develop and implement appropriate internal controls and reporting procedures. If we are unable to comply with the Sarbanes-Oxley Act’s internal controls requirements, we may not be able to obtain the independent auditor certifications that the Sarbanes-Oxley Act requires publicly-traded companies to obtain.
 
Risks Related to this Offering and Our Ordinary Shares
 
The price of our ordinary shares may be volatile, and the market price of our ordinary shares after this offering and the concurrent Private Placement may drop below the price you pay.
 
The initial public offering price per share may vary from the market price of our ordinary shares that prevails after the offering. If an active market for our ordinary shares develops and continues, the price of our ordinary shares nevertheless may be volatile. Market prices for securities of early-stage medical device companies have historically been particularly volatile. As a result of this volatility, you may not be able to sell your ordinary shares at or above the initial public offering price paid per ordinary share. The factors that may cause the market price of our ordinary shares to fluctuate include, but are not limited to:
 
 
progress, or lack of progress, in developing and commercializing our products;
 
 
favorable or unfavorable decisions about our products or intellectual property from government regulators, insurance companies or other third-party payors;
 
 
our ability to recruit and retain qualified regulatory and research and development personnel;
 
 
changes in investors’ and securities analysts’ perception of the business risks and conditions of our business;
 
 
changes in our relationship with key collaborators;
 
 
changes in the market valuation or earnings of our competitors or companies viewed as similar to us;
 
 
changes in key personnel;
 
 
depth of the trading market in our ordinary shares;
 
 
termination of the lock-up agreement or other restrictions on the ability of us or any of our existing shareholders to sell ordinary shares after this offering and the concurrent Private Placement;
 
 
changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;
 
 
the granting or exercise of employee stock options or other equity awards;
 
 
realization of any of the risks described under this section entitled “Risk Factors;” and
 
 
general market and economic conditions.
 
In addition, the equity markets have experienced significant price and volume fluctuations that have affected the market prices for the securities of newly public companies for a number of reasons, including reasons that may be unrelated to our business or operating performance. These broad market fluctuations may result in a material decline in the market price of our ordinary shares and you may not be able to sell your ordinary shares at prices you deem acceptable. In the past, following periods of volatility in the equity markets, securities class action lawsuits have been instituted against public companies. Such litigation, if instituted against us, could result in substantial cost and the diversion of management attention.
 
 
42

 
 
Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.
 
If you purchase ordinary shares in this offering, the public offering price that you pay per ordinary share will be substantially higher than the net tangible book value per ordinary share immediately after this offering. Therefore, you will incur an immediate dilution of $     (or %) in net tangible book value per ordinary share from the price you paid, based on the public offering price of $     per ordinary share. The exercise of outstanding warrants and options may result in further dilution of your investment, but only if the public offering price is greater than $     per ordinary share. In addition, if we raise funds by issuing additional shares or convertible securities in the future, the newly issued shares may further dilute your ownership interest.
 
Future sales of our ordinary shares, or the perception that future sales may occur, may cause the market price of our ordinary shares to decline, even if our business is doing well.
 
Sales of substantial amounts of our ordinary shares in the public market after this offering and the concurrent Private Placement, or the perception that these sales may occur, could materially and adversely affect the price of our ordinary shares and could impair our ability to raise capital in the future, particularly through the sale of additional equity securities. The ordinary shares sold in this offering will be freely tradable, without restriction, in the public market, except for any ordinary shares sold to our affiliates.
 
In connection with this offering, we, our officers and directors and the holders of 1% or more of our ordinary shares have agreed prior to the commencement of this offering, subject to limited exceptions, not to sell or transfer any of our ordinary shares for 180 days after the date of this prospectus without the consent of Chardan Capital Markets, LLC. However, Chardan Capital Markets, LLC may release these shares from any restrictions at any time. We cannot predict what effect, if any, market sales of shares held by any shareholder or the availability of shares for future sale will have on the market price of our ordinary shares.
 
Approximately            ordinary shares may be sold in the public market by existing shareholders after the date of this prospectus and an additional            ordinary shares may be sold in the public market by existing shareholders on or about 181 days after the date of this prospectus, subject to volume and other limitations imposed under the federal securities laws. See “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our ordinary shares after this offering.
 
In addition, we are issuing a warrant to Chardan Capital Markets, LLC in this offering to purchase an additional            ordinary shares. As of December 22, 2014, we had outstanding options to purchase 26,041,650 ordinary shares (including the Neev Options, which will be exercised prior to the closing of this offering), outstanding warrants to purchase 19,498,426 preferred shares (all of which will convert into warrants to purchase ordinary shares immediately prior to the closing of this offering) and outstanding warrants to purchase an aggregate of 65,376,963 ordinary shares. We plan to register for offer and sale the ordinary shares that are reserved for issuance pursuant to outstanding options. Shares covered by such registration statements upon the exercise of stock options generally will be eligible for sale in the public market, except that affiliates will continue to be subject to volume limitations and other requirements of Rule 144 under the Securities Act of 1933, as amended, or the Securities Act. After this offering and the concurrent Private Placement, the holders of approximately            ordinary shares will be entitled to registration rights.
 
The market price of our ordinary shares may drop significantly when the restrictions on resale by our existing shareholders lapse and these shareholders are able to sell our ordinary shares into the market. In addition, a sale by the company of additional ordinary shares or similar securities in order to raise capital might have a similar negative impact on the share price of our ordinary shares. A decline in the price of our ordinary shares might impede our ability to raise capital through the issuance of additional ordinary shares or other equity securities, and may cause you to lose part or all of your investment in our ordinary shares.
 
An active trading market may not develop for our ordinary shares, and you may not be able to sell your ordinary shares at or above the initial public offering price per share.
 
There is no established trading market for our ordinary shares, and the market for our ordinary shares may be highly volatile or may decline regardless of our operating performance. Prior to this offering, you could not buy or sell our ordinary shares publicly. An active public market for our ordinary shares may not develop or be sustained after this offering. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market in our ordinary shares or how liquid that market might become. If a market does not develop or is not sustained, it may be difficult for you to sell your ordinary shares at the time you wish to sell them, at a price that is attractive to you, or at all.
 
 
43

 
 
The initial public offering price per ordinary share has been determined through negotiation between us and representatives of the underwriter, and may not be indicative of the market prices that prevail after this offering. You may not be able to sell your ordinary shares at or above the initial public offering price per share.
 
Our management will have broad discretion over the use of proceeds from this offering and the concurrent Private Placement and may not obtain a favorable return on the use of these proceeds.
 
Our management will have broad discretion in determining how to apply the net proceeds from this offering and the concurrent Private Placement and may spend the proceeds in a manner that our shareholders may not deem desirable. We currently intend to use the net proceeds that we will receive from this offering and the concurrent Private Placement to finance the continuation of our product development and clinical studies in Europe and in the United States. We cannot assure you that these uses or any other use of the net proceeds of this offering and the concurrent Private Placement will yield favorable returns or results.
 
Additional financing may result in dilution to our shareholders.
 
We may need to raise additional funds in the future to finance internal growth, to make acquisitions or for other reasons. Any required additional financing may not be available on terms acceptable to us, or at all. If we raise additional funds by issuing equity securities, you may experience significant dilution of your ownership interest and the newly issued securities may have rights senior to those of the holders of our ordinary shares. Alternatively, if we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility, and would also require us to fund additional interest expense. If additional financing is not available when required or is not available on acceptable terms, we may be unable to successfully commercialize our product or continue our research and development.
 
We have never declared or paid a dividend and currently do not intend to pay cash dividends in the foreseeable future. Any return on investment may be limited to the value of our ordinary shares.
 
We have never declared and do not anticipate paying cash dividends on our ordinary shares in the foreseeable future. Our board of directors has discretion to declare and pay dividends on our ordinary shares and will make any determination to do so based on a number of factors, such as our operating results, financial condition, current and anticipated cash needs and other business and economic factors that our board of directors may deem relevant. In addition, we are only permitted to pay dividends out of “profits” (as defined by the Israeli Companies Law, 5759-1999, or the Israeli Companies Law), provided that there is no reasonable concern that the dividend distribution will prevent us from meeting our existing and foreseeable obligations, as they become due. If we do not pay dividends, our ordinary shares may be less valuable because a return on your investment will only occur if the trading price of our ordinary shares appreciates. Further, you should not rely on an investment in us if you require dividend income from your investments.
 
If securities or industry analysts do not publish research or reports about us or our business or publish unfavorable research about us or our business, the price of our ordinary shares and their trading volume could decline.
 
The trading market for our ordinary shares will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of us the trading price for our securities would be negatively affected. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our securities, the price of our securities would likely decline. If one or more of these analysts ceases to cover us or fails to publish regular reports on us, interest in the purchase of our securities could decrease, which could cause the price of our securities and their trading volume to decline.
 
 
44

 
 
Risks Related to Taxation
 
There is a risk that we could be treated as a domestic (U.S.) corporation for U.S. federal income tax purposes by reason of the transactions related to our acquisition of all of the business operations and substantially all of the assets of Check-Cap LLC on May 31, 2009 (hereinafter sometimes referred to as the “reorganization”).
 
Section 7874(b) of the Internal Revenue Code of 1986, as amended, or the Code, generally provides that a foreign corporation ( i.e. , a corporation created or organization under the laws of a jurisdiction outside of the United States) would be treated as a domestic (U.S.) corporation for U.S. federal income tax purposes if, pursuant to a plan or a series of related transactions, (1) the foreign corporation acquires, directly or indirectly, substantially all of the assets of a domestic corporation (or substantially all of the properties constituting a trade or business of a domestic partnership), (2) after the acquisition, the former shareholders of the acquired corporation by reason of holding shares of the acquired corporation (or, in the case of an acquisition with respect to a domestic partnership, the former partners of the domestic partnership by reason of holding a capital or profits interest in the domestic partnership) own at least 80% of the stock (by vote or value) of the acquiring corporation, and (3) after the acquisition, the expanded affiliated group that includes the acquiring corporation does not have substantial business activities in the foreign country in which, or under the laws of which, the acquiring corporation is created or organized when compared to the total business activities of such expanded affiliated group. On the basis of an analysis by Deloitte Touche Tohmatsu, or Deloitte, of the relevant facts and circumstances and the relevant law (including the temporary regulations under Section 7874 applicable at the time of the reorganization), it was determined that the third condition described in the preceding sentence was not met with respect to the reorganization and, therefore, that the inversion tax rules of Section 7874(b) would not apply to treat us as a domestic corporation for U.S. federal income tax purposes. However, since this determination was made on the basis of all of the relevant facts and circumstances, and it is not clear which facts and circumstances the Internal Revenue Service, or the IRS, may consider more important than others, this conclusion is not free from doubt.
 
If Section 7874(b) were to apply to the reorganization (and we were to be treated as a domestic corporation for U.S. federal income tax purposes), then, among other things, (i) we would be subject to U.S. federal income tax on our worldwide taxable income (if and when we have taxable income); (ii) certain payments ( e.g. , interest and dividends) that we make (or have made) to our foreign investors may be (or may have been) subject to U.S. withholding taxes; (iii) we may be subject to significant penalties for the failure to file certain tax returns and reports, including reports with respect to our foreign bank accounts; and (iv) the U.S. unitholders of Check-Cap LLC would not have been subject to U.S. federal income tax on royalties that are deemed to be paid to them under Section 367(d) of the Code as a result of the reorganization. (As discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Contractual Obligations” and “– Application of Critical Accounting Policies and Estimates – Royalties provision – Reimbursement liability to Check-Cap LLC unitholders,” as part of the reorganization, we committed to reimburse the unitholders of Check-Cap LLC for any tax burdens that may be imposed on them due to the reorganization, including royalties that are deemed to be paid to the U.S. unitholders under Section 367(d) of the Code.)
 
Prospective investors are urged to consult their own advisors on these issues. The balance of this discussion, including the discussion under “Taxation – U.S. Federal Income Taxation,” assumes that we will be and have been treated as a foreign corporation for U.S. federal income tax purposes.
 
We may be eligible for tax benefits from government programs, which require us to meet certain conditions, including regarding the location of our property, plant and equipment and manufacturing in Israel. We can provide no assurance that we would continue to be eligible for such benefits and/or that any such benefits will not be terminated in the future.
 
Our manufacturing facilities in Israel may qualify as a “Benefited Enterprise” under the Israeli Law for Encouragement of Capital Investments, 1959, or the Investment Law, which would entitle us to receive certain tax benefits. In order to be eligible for such benefits, we would be required to meet certain conditions, including the making of a minimum capital investment in our productive assets and the carrying on of a required portion of our manufacturing in Israel. The amount of the benefit will be determined in accordance with various conditions, including the location of our property, plant and equipment and the location of certain of our sub-contractors. If we cease to meet the required conditions for eligibility, the tax benefits could be cancelled and we could be required to pay increased taxes or to refund the amounts of the benefits received with interest and penalties. We can provide no assurance as to the amount of future capital investment in our productive assets, our future manufacturing location and the future location of our property, plant and equipment and certain of our sub-contractors, and therefore, we cannot provide assurance that we will be eligible for such tax benefits or assurance as to the amount of such tax benefits. Even if we continue to meet the relevant requirements, the tax benefits that Benefited Enterprises receive may not be continued in the future at their current levels or at all. If these tax benefits were reduced or eliminated, the amount of taxes that we would be required to pay would likely increase, as all of our operations would consequently be subject to corporate tax at the standard rate, which could adversely affect our results of operations. See “Taxation— Israeli Tax Considerations and Government Programs —Law for the Encouragement of Capital Investments, 5719-1959” for additional information concerning these tax benefits.
 
 
45

 
 
There is a risk that we may be classified as a passive foreign investment company, or PFIC, which could result in adverse U.S. federal income tax consequences to U.S. investors.
 
In general, we will be treated as a PFIC for any taxable year in which either (1) at least 75% of our gross income (including our pro rata share of the gross income of our 25% or more-owned corporate subsidiaries) is passive income or (2) at least 50% of the average value of our assets (including our pro rata share of the assets of our 25% or more-owned corporate subsidiaries) is attributable to assets that produce, or are held for the production of, passive income. Passive income generally includes dividends, interest, rents, royalties, and gains from the disposition of passive assets. If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. Holder (as defined in the section titled “Taxation—U.S. Federal Income Taxation—General”) of the ordinary shares, the U.S. Holder may be subject to increased U.S. federal income tax liability upon a sale or other disposition of the ordinary shares or the receipt of certain excess distributions from us and may be subject to additional reporting requirements.
 
Our actual PFIC status for our current taxable year or any subsequent taxable year is uncertain and will not be determinable until after the end of such taxable year. Accordingly, there can be no assurance with respect to our status as a PFIC for our current taxable year or any subsequent taxable year.
 
U.S. investors are urged to consult their own tax advisors regarding the possible application of the PFIC rules. For more information, see “Taxation—U.S. Federal Income Taxation—U.S. Holders—Passive Foreign Investment Company Rules.”
 
 
46

 
 
SPECIAL NOTE ON  FORWARD -LOOKING STATEMENTS
 
This prospectus contains statements that may be deemed to be “forward-looking statements” within the meaning of the federal securities laws. These statements relate to anticipated future events, future results of operations and/or future financial performance. In some cases, you can identify forward-looking statements by their use of terminology such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “ought to,” “plan,” “possible,” “potentially,” “predicts,” “project,” “should,” “will,” “would,” negatives of such terms or other similar terms. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The forward-looking statements in this prospectus include, without limitation, statements relating to:
 
 
our goals and strategies;
 
 
the timing and conduct of the clinical trials for our ingestible imaging capsule, including statements regarding the timing, progress and results of current and future preclinical studies and clinical trials, and our research and development programs;
 
 
the clinical utility, potential advantages and timing or likelihood of regulatory filings and approvals of our ingestible imaging capsule;
 
 
our future business development, results of operations and financial condition;
 
 
our ability to protect our intellectual property rights;
 
 
our plans to develop, launch and commercialize our imaging capsule and any future products;
 
 
the timing, cost or other aspects of the commercial launch of our imaging capsule;
 
 
market acceptance of our product;
 
 
our estimates regarding expenses, future revenues, capital requirements and our need for additional financing;
 
 
our estimates regarding the market opportunity for our imaging capsule;
 
 
the impact of government laws and regulations;
 
 
our ability to recruit and retain qualified regulatory and research and development personnel;
 
 
unforeseen changes in healthcare reimbursement for any of our approved product;
 
 
difficulties in maintaining commercial scale manufacturing capacity and capability; our ability to generate growth;
 
 
our failure to comply with regulatory guidelines;
 
 
uncertainty in industry demand and patient wellness behavior;
 
 
general economic conditions and market conditions in the medical device industry;
 
 
future sales of large blocks or our ordinary shares, which may adversely impact our share price;
 
 
depth of the trading market in our ordinary shares; and
 
 
our intended use of proceeds of this offering and the concurrent Private Placement.
 
The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties, including those described in “Risk Factors.”
 
You should not unduly rely on any forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus, to conform these statements to actual results or to changes in our expectations.
 
 
47

 
 
 
We estimate that we will receive net proceeds from this offering of approximately $      million, or $      million if the underwriters exercise in full their option to purchase additional ordinary shares, based on an assumed initial public offering price of $      , the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses. We will also expect to receive net proceeds of approximately $          million from the sale of                              ordinary shares in the concurrent Private Placement after deducting commissions payable by us. The information set forth below assumes concurrent consummation of the Private Placement and our receipt of net proceeds of approximately $           million from the Private Placement.
 
A $1.00 increase (decrease) in the assumed initial public offering price of $      would increase (decrease) the net proceeds that we receive from the offering by approximately $      million, assuming that the number of ordinary shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting and other discounts and commissions and estimated offering expenses. Similarly, each increase (decrease) of 100,000 shares in the number of ordinary shares offered by us would increase (decrease) the net proceeds to us from this offering by approximately $      million, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting and other discounts and commissions and estimated offering expenses.
 
We currently intend to use the net proceeds we receive from this offering and the concurrent Private Placement as follows:
 
 
approximately $      million on research and development;
 
 
approximately $      million on regulatory submissions for approvals of our product, including approximately $     million on clinical trials in Europe and the United States;
 
 
approximately $      million to build our manufacturing capabilities for the clinical phase; and
 
 
the balance, if any, for working capital and other general corporate purposes.
 
The expected use of net proceeds of this offering and the concurrent Private Placement represents our current intentions based upon our present plans and business conditions. Investors are cautioned, however, that expenditures may vary substantially from these estimates. Investors will be relying on the judgment of our management, who will have broad discretion regarding the application of the proceeds of this offering and the concurrent Private Placement. The amounts and timing of our actual expenditures will depend upon numerous factors, including the amount of cash generated by our operations, the amount of competition and other operational factors. From time to time, we will evaluate these and other factors to determine if our allocation of resources, including the proceeds of this offering and the concurrent Private Placement, is being optimized.
 
Circumstances that may give rise to changes in our use of net proceeds from this offering and the concurrent Private Placement include:
 
 
the timing of clinical studies and eventual FDA or other regulatory approvals of our imaging capsule;
 
 
the need or desire on our part to accelerate, increase or eliminate existing initiatives due to, among other things, changing market conditions and competitive developments; and
 
 
the availability of other sources of cash including cash flow from operations and new bank debt financing arrangements, if any.
 
Pending any use as described above, we intend to invest the net proceeds to us from this offering and the concurrent Private Placement in bank deposits, U.S. government securities and Israeli government securities. We cannot predict whether the net proceeds from such investments will produce a favorable return.
 
 
48

 
DIVI DEND  POLICY
 
We have never declared or paid dividends on our ordinary shares and currently do not intend to pay cash dividends on our ordinary shares in the foreseeable future. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business.
 
Our ability to distribute dividends also may be limited by future contractual obligations and by Israeli law. The Israeli Companies Law restricts our ability to declare dividends. Unless otherwise approved by a court, we can distribute dividends only from “profits” (as defined by the Israeli Companies Law), and only if there is no reasonable concern that the dividend distribution will prevent us from meeting our existing and foreseeable obligations as they become due. Subject to the foregoing, payment of future dividends, if any, will be at the discretion of our board of directors and will depend on various factors, such as our financial condition, operating results, current and anticipated cash needs and other business and economic factors that our board of directors may deem relevant. See “Description of Share Capital—Dividend and Liquidation Rights.” In addition, the payment of dividends may be subject to Israeli withholding taxes. See “Taxation—Israeli Tax Considerations and Government Programs—Taxation of Our Shareholders—Taxation of Non-Israeli Shareholders on Receipt of Dividends.” Furthermore, if we pay a dividend out of income attributed to our Benefited Enterprise that was generated during the tax exemption period, we may be subject to tax on the grossed-up amount of such distributed income at the corporate tax rate which would have been applied to our Benefited Enterprise’s income had we not enjoyed the exemption. See “Taxation – Israeli Tax Considerations and Government Programs — Law for the Encouragement of Capital Investments, 5719-1959 — Tax Benefits Subsequent to the 2005 Amendment.”
 
 
49

 
CAPIT AL IZATION
 
The following table sets forth our capitalization as of June 30, 2014:
 
 
on an actual basis;
 
 
on a pro forma basis to give effect to: (i) the conversion of all of our outstanding preferred shares into an aggregate of          ordinary shares immediately prior to the completion of this offering; (ii) the issuance of 1,995,475 ordinary shares to Mr. Guy Neev upon the exercise of the Neev Options, which will occur, prior to the closing of this offering; and (iii) the issuance of 7,503,521 ordinary shares issuable under warrants that will be automatically exercised without consideration upon the exercise of the Neev Options; and
 
 
on a pro forma as adjusted basis to give further effect to (i) the issuance and sale of ordinary shares by us in this offering at an assumed initial public offering price of $           per ordinary share, the midpoint of the estimated initial public offering price range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us; and (ii) the issuance and sale of ordinary shares by us in the Private Placement at an assumed price of $                  per  ordinary share, the midpoint of the estimated public offering price range, after deducting commissions and estimated expenses payable by us in connection with the Private Placement.
 
You should read this table in conjunction with our audited financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

   
As of June 30, 2014
 
   
Actual
   
Pro forma
   
Pro forma as adjusted
 
   
(in thousands of US$)
(Unaudited)
 
Liabilities:
                 
Other financial liabilities
  $ 657     $       $    
                         
Shareholders’ equity:
                       
Preferred share capital, 242,845,819 shares authorized, 86,778,910 shares issued, actual, no shares issued, pro forma, no shares issued, pro forma, as adjusted
    226       -       -  
Ordinary share capital, 907,154,181 shares authorized,              shares issued, actual,          shares issued, pro forma,          shares issued, pro forma, as adjusted
    53                  
Premium on preferred shares
    21,167       -       -  
Share options
    1,793                  
Premium on ordinary shares
    6                  
Capital reserve for ordinary share-based payment
    471                  
Accumulated deficit
    (24,714 )                
Total shareholders’ deficit  
  $ (998 )   $       $    
 
The number of issued and outstanding shares as of June 30, 2014 on a pro forma as adjusted basis in the table excludes:
 
 
19,126,687 ordinary shares issuable upon the exercise of outstanding warrants to purchase preferred shares (comprised of (i) warrants to purchase 836,412 Series C-1 preferred shares; (ii) warrants to purchase 1,175,257 Series C-2 preferred shares; (iii) warrants to purchase 503,872 Series D-1 preferred shares; and (iv) warrants to purchase 16,611,146 Series D-2 preferred shares, following their conversion into warrants to purchase ordinary shares immediately prior to the closing of this offering) with a weighted average exercise price of $0.45 per ordinary share;
 
 
50

 
 
 
230,920 ordinary shares issuable upon the exercise of outstanding warrants, which will be automatically exercised, without consideration, if and when Mr. Guy Neev exercises any part of the Neev Options, in proportion to (i) the portion of the Neev Options exercised by Mr. Guy Neev; and (ii) the number of warrants held by the optionee with respect to which such warrants were granted that were exercised prior to the exercise of the Neev Options;
 
 
57,599,850 ordinary shares issuable upon the exercise of outstanding warrants, of which (i) warrants to purchase 53,169,092 ordinary shares have an exercise price of NIS 0.01 per ordinary share and are fully vested; (ii) warrants to purchase 2,215,379 ordinary shares have an exercise price of NIS 0.01 per ordinary share and will become fully vested upon the closing of this offering; and (iii) warrants to purchase 2,215,379 ordinary shares with an exercise price per share equal to the price per share at which our ordinary shares are sold to the public in this offering which will become fully vested upon the closing of this offering;
 
 
12,366,188 ordinary shares issuable upon the exercise of outstanding options with a weighted average exercise price of $0.17 per ordinary share, granted under our 2006 Unit Option Plan;
 
 
11,630,739 ordinary shares issuable upon the exercise of outstanding options granted under our 2006 Unit Option Plan, which will become fully vested upon the closing of this offering; (i) fifty-percent of which have an exercise price of NIS 0.01 per ordinary share; and (ii) fifty-percent of which will be exercisable at the price per share at which our ordinary shares are sold to the public in this offering;
 
 
769,453 ordinary shares issuable upon the exercise of options with an exercise price of $0.2478 per ordinary share, under our 2006 Unit Option Plan, which we have agreed that certain executive officers will be entitled to upon completion of an equity financing, which includes this offering;
 
 
the ordinary shares issuable upon the exercise of warrants to be issued to certain finders in connection with the credit line agreement if either (i) the credit line amount extended to us is invested in ordinary shares in a private placement on or prior to February 18, 2015; or (ii) if we do not consummate an IPO on or prior to February 18, 2015 and we call the credit line amount, upon conversion of the credit line amount into ordinary shares;
 
 
150,000 ordinary shares issuable upon the exercise of warrants with an exercise price per ordinary shares equal to the initial public offering price to be issued to our U.S. legal counsel as partial compensation for services rendered in connection with the offering; and
 
 
the ordinary shares issuable upon exercise of the underwriter warrants to be issued in connection with this offering.
 
 
51

 
DI LU TION
 
If you invest in our ordinary shares, your ownership interest will be diluted to the extent of the difference between the initial public offering price per ordinary share and the pro forma as adjusted net tangible book value per ordinary share immediately after this offering. Dilution results from the fact that the initial public offering price per share is substantially in excess of the book value per share attributable to the existing shareholders for the presently outstanding ordinary shares.
 
As of June 30, 2014, our historical net tangible book value (deficit) was $(1.0) million, or $(0.031) per ordinary share. Net tangible book value (deficit) per ordinary share represents the amount of our total tangible assets less total liabilities, divided by 32,541,630, the number of ordinary shares outstanding on June 30, 2014, which number includes: (i) the 23,042,634 ordinary shares that were actually issued and outstanding on June 30, 2014; (ii) the 1,995,475 ordinary shares issuable to Mr. Guy Neev upon exercise of the Neev Options, which shares were deemed to be outstanding on June 30, 2014; and (iii) the 7,503,521 ordinary shares issuable under warrants that will be automatically exercised, without consideration, upon the exercise by Mr. Guy Neev of the Neev Options, which were also deemed to be outstanding on June 30, 2014.
 
Our pro forma net tangible book value (deficit) as of June 30, 2014 was $           , or $           per ordinary share. Pro forma net tangible book value (deficit) per ordinary share represents the amount of our total tangible assets less our total liabilities, divided by           , the number of our ordinary shares outstanding and deemed to be outstanding as described above, as of June 30, 2014, after giving effect to the conversion of all of our outstanding preferred shares into           ordinary shares immediately prior to the completion of this offering.
 
Our pro forma as adjusted net tangible book value as of June 30, 2014, was $           , or $     per ordinary share. The pro forma as adjusted net tangible book value gives further effect to (i) the sale of           ordinary shares in this offering at the initial public offering price of $     per share (the midpoint of the range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us; and (ii) the sale of           ordinary shares in the Private Placement at the initial public offering price of $     per share , after deducting commissions and estimated expenses payable by us in connection with the Private Placement. The difference between the initial public offering price and the pro forma as adjusted net tangible book value per share represents an immediate dilution of $     per share to new investors purchasing ordinary shares in this offering.
 
The following table illustrates this dilution on a per share basis to new investors:
 
               
Assumed initial public offering price per share
       
$
   
Pro forma net tangible book value (deficit) per share before this offering, as of June 30, 2014
 
$
         
Increase in pro forma net tangible book value per share attributable to new investors in this offering and new investors in the Private Placement
             
Pro forma net tangible book value per share after the offering and the Private Placement
             
Dilution in pro forma tangible book value per share to new investors in this offering
       
$
   
 
If the underwriters exercise their option to purchase additional ordinary shares in full, the pro forma as adjusted net tangible book value per share after giving effect to the offering and the Private Placement would be $     per ordinary share. This represents an increase in pro forma as adjusted net tangible book value of $     per share to existing shareholders and dilution in pro forma as adjusted net tangible book value of $     per ordinary share to new investors.
 
A $1.00 increase (decrease) in the assumed initial public offering price of $     , the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value after this offering and the Private Placement by $     and the pro forma as adjusted net tangible book value per ordinary share after this offering  and the Private Placement by $     per share and would increase (decrease) the dilution per share to new investors in this offering by $     per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. The information discussed above is illustrative only and may change based on the actual initial public offering price and other terms of the offering determined at pricing.
 
 
52

 
 
The following table summarizes, on a pro forma as adjusted basis as of June 30, 2014, the total number of ordinary shares purchased from us, the total consideration paid, or to be paid, and the average price per ordinary share paid, or to be paid, by existing shareholders and by new investors in this offering and the concurrent Private Placement at an assumed initial public offering price of $     per ordinary share, which is the midpoint of the price range listed on the cover page of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us. As the table shows, new investors purchasing shares in this offering will pay an average price per share substantially higher than our existing shareholders paid.
 
         
Average Price
Per
Ordinary
Share
         
 
Shares Purchased
 
Total Consideration
 
 
Number
 
Percentage
 
Amount
 
Percentage
 
Existing shareholders                                           
                 
New Investors                                           
                 
Total
                 
 
The table above is based on     ordinary shares outstanding on June 30, 2014 and includes:
 
 
the 1,995,475 ordinary shares issuable to Mr. Guy Neev upon exercise of the Neev Options, which shares were deemed to be outstanding on June 30, 2014;
 
 
the 7,503,521 ordinary shares issuable under warrants that will be automatically exercised without consideration upon the exercise by Mr. Guy Neev of the Neev Options, which shares were deemed to be outstanding on June 30, 2014;
 
 
the issuance of            ordinary shares in the Private Placement at the initial public offering price per ordinary share; and
 
 
the conversion of all of our outstanding preferred shares into an aggregate of          ordinary shares immediately prior to the completion of this offering.
 
The table above does not include:
 
 
19,126,687 ordinary shares issuable upon the exercise of outstanding warrants to purchase preferred shares (comprised of (i) warrants to purchase 836,412 Series C-1 preferred shares; (ii) warrants to purchase 1,175,257 Series C-2 preferred shares; (iii) warrants to purchase 503,872 Series D-1 preferred shares; and (iv) warrants to purchase 16,611,146 Series D-2 preferred shares, following their conversion into warrants to purchase ordinary shares immediately prior to the closing of this offering) with a weighted average exercise price of $0.45 per ordinary share;
 
 
230,920 ordinary shares issuable upon the exercise of outstanding warrants, which will be automatically exercised, without consideration, if and when Mr. Guy Neev exercises any part of the Neev Options, in proportion to (i) the portion of the Neev Options exercised by Mr. Guy Neev; and (ii) the number of warrants held by the optionee with respect to which such warrants were granted that were exercised prior to the exercise of the Neev Options;
 
 
57,599,850 ordinary shares issuable upon the exercise of outstanding warrants, of which (i) warrants to purchase 53,169,092 ordinary shares have an exercise price of NIS 0.01 per ordinary share and are fully vested; (ii) warrants to purchase 2,215,379 ordinary shares have an exercise price of NIS 0.01 per ordinary share and will become fully vested upon the closing of this offering; and (iii) warrants to purchase 2,215,379 ordinary shares with an exercise price per share equal to the price per share at which our ordinary shares are sold to the public in this offering which will become fully vested upon the closing of this offering;
 
 
12,366,188 ordinary shares issuable upon the exercise of outstanding options with a weighted average exercise price of $0.17 per ordinary share, granted under our 2006 Unit Option Plan;
 
 
11,630,739 ordinary shares issuable upon the exercise of outstanding options granted under our 2006 Unit Option Plan, which will become fully vested upon the closing of this offering; (i) fifty-percent of which have an exercise price of NIS 0.01 per ordinary share; and (ii) fifty-percent of which will be exercisable at the price per share at which our ordinary shares are sold to the public in this offering;
 
 
53

 
 
 
769,453 ordinary shares issuable upon the exercise of options with an exercise price of $0.2478 per ordinary share, under our 2006 Unit Option Plan, which we have agreed that certain executive officers will be entitled to upon completion of an equity financing, which includes this offering;
 
 
the ordinary shares issuable upon the exercise of warrants to be issued to certain finders in connection with the credit line agreement if either (i) the credit line amount extended to us is invested in ordinary shares in a private placement on or prior to February 18, 2015; or (ii) if we do not consummate an IPO on or prior to February 18, 2015 and we call the credit line amount, upon conversion of the credit line amount into ordinary shares;
 
 
150,000 ordinary shares issuable upon the exercise of warrants with an exercise price per ordinary shares equal to the initial public offering price to be issued to our U.S. legal counsel as partial compensation for services rendered in connection with the offering; and
 
 
ordinary shares issuable upon exercise of the underwriter warrants to be issued in connection with this offering.
 
If the underwriters exercise their over-allotment option to purchase additional shares in full, the following will occur:
 
 
the percentage of ordinary shares held by existing shareholders will decrease to approximately     % of the total number of ordinary shares outstanding after this offering; and
 
 
the number of ordinary shares held by new investors will increase to     , or approximately     % of the total number of ordinary shares outstanding after this offering.
 
To the extent that outstanding options and warrants are exercised, you will experience further dilution. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities may result in further dilution to our shareholders.
 
 
54

 
 
EN F ORCEABILITY OF CIVIL LIABILITIES
 
We are incorporated under the laws of the State of Israel. Service of process upon us and upon our directors and officers and the Israeli experts named in this prospectus, substantially all of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, because substantially all of our assets, and those of our directors and officers and the Israeli experts named herein, are located outside the United States, any judgment obtained in the United States against us or any of these persons may not be collectible within the United States.
 
We have irrevocably appointed Puglisi & Associates as our agent to receive service of process in any action against us in any United States federal or state court arising out of this offering or any purchase or sale of securities in connection with this offering. The address of Puglisi & Associates is 850 Library Avenue, Suite 204, Newark, Delaware 19711.
 
We have been informed by our legal counsel in Israel, Fischer Behar Chen Well Orion & Co., that there is doubt as to the enforceability of civil liabilities under U.S. securities laws pursuant to original actions instituted in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws on the grounds that Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact by expert witnesses, which can be a time-consuming and costly process. Certain matters of procedure may also be governed by Israeli law.
 
Subject to certain time limitations and legal procedures, Israeli courts may enforce a U.S. judgment in a civil matter, including a judgment based upon the civil liability provisions of the Securities Act and the Exchange Act and including a monetary or compensatory judgment in a non-civil matter, provided that, among other things:
 
 
the judgment was rendered by a court which was, according to the laws of the state of the court, competent to render the judgment;
 
 
the judgment may no longer be appealed;
 
 
the obligation imposed by the judgment is enforceable according to the rules relating to the enforceability of judgments in Israel and the substance of the judgment is not contrary to public policy; and
 
 
the judgment is executory in the state in which it was given.
 
Even if such conditions are met, an Israeli court may not declare a foreign civil judgment enforceable if:
 
 
the judgment was given in a state whose laws do not provide for the enforcement of judgments of Israeli courts (subject to exceptional cases);
 
 
the enforcement of the judgment is likely to prejudice the sovereignty or security of the State of Israel;
 
 
the judgment was obtained by fraud;
 
 
the opportunity given to the defendant to bring its arguments and evidence before the court was not reasonable in the opinion of the Israeli court;
 
 
the judgment was rendered by a court not competent to render it according to the laws of private international law as they apply in Israel;
 
 
the judgment is contradictory to another judgment that was given in the same matter between the same parties and that is still valid; or
 
 
at the time the action was brought in the foreign court, a lawsuit in the same matter and between the same parties was pending before a court or tribunal in Israel.
 
Foreign judgments enforced by Israeli courts generally will be payable in Israeli currency, which can then be converted into non-Israeli currency and transferred out of Israel. The usual practice in an action before an Israeli court to recover an amount in a non-Israeli currency is for the Israeli court to render judgment for the equivalent amount in Israeli currency at the rate of exchange in force on the date of the judgment, but the judgment debtor may make payment in foreign currency. Pending collection, the amount of the judgment of an Israeli court stated in Israeli currency ordinarily will be linked to the Israeli consumer price index plus interest at the annual statutory rate set by Israeli regulations prevailing at that time. Judgment creditors must bear the risk of unfavorable exchange rates.
 
 
55

 
 
SELECTED FIN AN CIAL DATA
 
You should read the following selected financial information in conjunction with our audited financial statements and related notes beginning on page F-1 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 58 in this prospectus.
 
The following tables set forth our selected financial data. You should read the following selected financial data in conjunction with, and it is qualified in its entirety by reference to, our historical financial information and other information provided in this prospectus, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes appearing elsewhere in this prospectus.
 
The selected statements of comprehensive loss data for the years ended December 31, 2012 and 2013 and the statements of financial position data as of December 31, 2012 and 2013 are derived from our audited financial statements appearing elsewhere in this prospectus. The selected statements of comprehensive loss data for the six months ended June 30, 2014 and the statements of financial position data as of June 30, 2014, are derived from our unaudited financial statements appearing elsewhere in this prospectus. The historical results set forth below are not necessarily indicative of the results to be expected in future periods. Our financial statements have been prepared in accordance with IFRS, as issued by the International Accounting Standards Board, or IASB.
 
Statements of Comprehensive Loss Data
 
   
Year Ended December 31,
   
Six Months Ended June 30 ,
 
   
2013
   
2012
   
2014
   
2013
 
   
(US$ in thousands, except per share data)
 
               
(Unaudited)
 
Research and development expenses, net (1)  
    2,662       2,692       1,640       1,364  
General and administrative expenses
    1,090       1,203       564       520  
Other expenses (income)
    (10 )     13       --       --  
Operating loss
    3,742       3,908       2,204       1,884  
Finance income
    (63 )     (416 )     (60 )     (45 )
Finance expenses
    316       229       85       230  
Finance expenses (income), net
    253       (187 )     25       185  
Loss and total comprehensive loss for the period  
    3,995       3,721       2,229       2,069  
Loss per ordinary share of NIS 0.01 par value , basic and diluted (2)  
    0.18       0.17       0.10       0.09  
Weighted average number of ordinary shares outstanding – basic and diluted (in thousands) ( 2)
    32,542       32,530       32,542       32,542  
Pro forma loss per ordinary share of NIS 0.01 par value (3)
                               
Basic and diluted (unaudited) (2)  
                               
Pro forma weighted average number of ordinary shares outstanding - basic and diluted (in thousands) (unaudited) (2)
                               
 
 
56

 
 
Statements of Financial Position Data
 
 
As of December 31, 2013
 
As of June 30, 2014
 
     
Actual
 
Pro forma (3)
Pro forma as
adjusted (4)
 
     
(US$ in thousands)
Unaudited
 
Cash and cash equivalents                                             
  $ 4,975     $ 2,794       $    
Working capital (5)                                              
    4,131       1,990            
Total assets                                             
    5,375       3,276            
Capital stock                                             
    23,676       23,716            
Total shareholders’ equity (deficit)
  $ 1,191     $ (998 )     $    
 
 
(1)
Research and development expenses, net is presented net of the differences between the amount of grants received from the OCS and the fair value of their financial liability. The effect of the participation by the OCS totaled $0.4 million, and $0.2 million for the years ended December 31, 2013, and 2012, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Operations Overview—Research and development, net” for more information.
 
 
(2)
Basic and diluted loss per ordinary share is computed based on the basic and diluted weighted average number of ordinary shares outstanding during each period. For purposes of these calculations, the following ordinary shares are deemed to be outstanding: (i) the 1,995,475 ordinary shares issuable to Mr. Guy Neev upon exercise of the Neev Options; and (ii) the 7,503,521 ordinary shares issuable under warrants that will be automatically exercised without consideration upon the exercise by Mr. Guy Neev of the Neev Options. For additional information, see Note 17 to our financial statements for the year ended December 31, 2013 included elsewhere in this prospectus.
 
 
(3)
On a pro forma basis to give effect to the conversion immediately prior to the completion of this offering of all of our outstanding preferred shares into          ordinary shares.
 
 
(4)
On a pro forma as adjusted basis to give further effect to (i) the issuance and sale of ordinary shares by us in this offering at an assumed initial public offering price of $          per share, the midpoint of the estimated initial public offering price range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and (ii) the issuance and sale of  ordinary shares by us in the Private Placement at an assumed price of $             per share, the estimated public offering price, after deducting commissions and estimated expenses payable by us in connection with the Private Placement.
 
 
(5)
Working capital is defined as total current assets minus total current liabilities.
 
57

 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial statements and related notes included in this prospectus beginning on page F-1. The following discussion and analysis contain forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.
 
Overview
 
We are a clinical stage medical diagnostics company engaged in the development of an ingestible imaging capsule that utilizes low-dose X-rays for CRC screening. While CRC is the second leading cause of death from cancer in the United States and is largely preventable with early detection, about one-half of Americans over the age of 50 do not undergo any form of CRC screening due in large part to the pain, discomfort and embarrassment related to current screening methods. Unlike other structural screening methods that are designed to generate structural information of the colon for the detection of pre-cancerous polyps, such as optical colonoscopy, CTC and other capsule-based technology, our imaging capsule is designed to be ingested without any cleansing of the colon and to travel through the gastrointestinal tract naturally while the patient continues his or her normal daily routine. Furthermore, unlike the procedures for CRC imaging devices currently on the market, all of which require the patient to fast for several hours prior to administration, the procedure for the Check-Cap device is designed to enable patients to continue eating normally. We believe that this solution will be attractive to both physicians and patients, thereby increasing the number of people willing to undergo screening for CRC.
 
Check-Cap LLC was formed in 2004 as a Delaware limited liability company to develop a novel and superior solution to colon cancer screening. In 2009, all of the business operations and substantially all of the assets of Check-Cap LLC were transferred to Check Cap Ltd., a newly-incorporated Israeli company. Our offices are located near Haifa, in the northern part of Israel. Our management team includes an experienced group of executives in the business, research, clinical and regulatory fields. As of June 30, 2014, our research and development team consists of 32 experienced professionals (including employees and independent contractors) in the fields of physics, electronics, software and mechanical engineering.
 
For the past several years, we have focused on the research and development of our imaging technology. We have successfully imaged sections of the colon and detected polyps of various sizes in pigs without any prior bowel cleansing through the insertion of a larger version of our imaging capsule in their colons. We also conducted a clinical study in Europe with a passive (non-imaging) version of our capsule that has similar dimensions to our first prototype imaging capsule, in order to collect pressure and motility data from humans. This information assisted in the development of the initial operational algorithm utilized by our capsule software used for the version of our imaging capsule used in humans.
 
A clinical proof-of-concept study, which was based on a 10-case study conducted at Tel Aviv Medical Center in Israel and used a prior version of our imaging capsule, did not identify any material safety or feasibility issues. The study demonstrated the applicability of our imaging technology to the human colon, generating images taken in the colon without any prior bowel-cleansing. All subjects ingested the capsule easily with smooth passage within the designated transit time, on average, within two to three days. There were no reported device-related adverse events. Mild effects on bowel movements were noted, which were determined to be related to the contrast agent and passed within one to two days after the capsule was excreted. See “Risk Factors – Risks Related to our Business.”
 
Another objective of the 10-case study was to estimate total radiation exposure for each case study. This was calculated using standard established factors for calculating effective radiation exposure, such as the duration of the capsule inside the body, and was based on the activity of the radiation source inside the imaging capsule and radiation energy, both of which were measured for each case study. The average calculated exposure for the entire procedure in the 10-case study, from ingestion of the capsule to excretion, was 0.03 mSv (STD 0.007 mSv). This level of radiation exposure is similar to a single chest X-ray (approximately 0.06mSv) and two orders of magnitude less than CTC.
 
 
58

 
 
The 10-case clinical proof-of-concept study focused on assessing the safety and feasibility of the Check-Cap imaging system.  The 10-case study is the first part of a multi-center prospective clinical feasibility study to establish the safety, functionality and preliminary efficacy of the Check-Cap imaging system in patients eligible for CRC screening, by comparing results from the clinical feasibility study with those from non-invasive, low-sensitivity FOBTs and FITs, as well as from optical colonoscopies. The feasibility study is designed to include approximately 60 subjects. The study is being conducted in Israel at the Tel Aviv Medical Center and Laniado Hospital and is planned to also be conducted at the Erasmus University Medical Center in the Netherlands.  The clinical feasibility study will evaluate the image resolution generated by the capsule in an unprepped human colon, will assess polyp imaging in various shapes and in different segments of the colon and will evaluate the safety of the device in terms of total and segmental transit time and analyze the effects of the presence of polyps and variable colon dimensions on these parameters. The study will seek to create a clinical atlas of images that will enable comparisons between images acquired by different CRC screening modalities. During the feasibility study we will collect data about the overall imaging of the colon’s internal surfaces during the passage of the capsule to support the development of a correlation map of polyps identified through our imaging system with polyps imaged by optical colonoscopy and CTC. Additionally, the feasibility study will measure total radiation exposure and the distribution of contrast material within the colon.
 
Following the successful completion of the broader multi-center, prospective clinical feasibility study, we plan to submit during 2015 a request for CE marking for the marketing and sale of our capsule in the European Union. We expect to perform post-marketing studies in Europe following CE marking for the purpose of collecting additional clinical data to support market adoption. Subject to regulatory approvals and available capital, we anticipate launching our product commercially in Europe during 2016.
 
We plan to conduct a second pre-IDE meeting, now referred to as a pre-submission meeting, with the FDA in late 2015, and subsequently to submit a request for the approval of an IDE for a pivotal study in the United States to (i) demonstrate device safety as evidenced by a lack of device-related serious adverse events; and (ii) provide efficacy data concerning our imaging capsule’s sensitivity and specificity.  We anticipate that the FDA approval for the pivotal study will be subject to our providing sufficient clinical data from the multi-center, prospective clinical feasibility study. We also intend to pursue clinical trials for regulatory approvals in Japan and China in parallel to the U.S. pivotal study. Pivotal studies are expected, among other things, to compare the images of polyps identified by our imaging system with the same polyps detected by traditional optical colonoscopy and CTC in instances where patients were referred after positive exam results. These clinical findings will be analyzed in comparison with results obtained from FOBTs and FITs. Subject to the successful completion of our clinical trials and the receipt of initial FDA approval for the marketing of our imaging capsule in the United States, we anticipate launching our product commercially in the United States during 2017.
 
Our imaging capsule is being designed to create a two- and three-dimensional reconstructed image of the colon and to detect clinically significant polyps with a high degree of sensitivity. Colon polyps are fleshy growths that occur on the lining of the colon. Polyps in the colon are extremely common, and when certain types of polyps grow large enough they can become cancerous.
 
Our imaging capsule will be swallowed by the patient and propelled by natural motility through the gastrointestinal tract and excreted naturally with no need for retrieval for data collection. Unlike other CRC screening methods, this process should not disrupt a patient’s normal activities or require fasting. Our imaging capsule employs X-rays which are considered low dose by the Radiation Safety Division of the Radiological Protection Branch of the Soreq Nuclear Research Center, which allows it to image the lining of the colon even when surrounded by intestinal content.  As such, we believe that patients using our imaging capsule will not be required to undergo any prior bowel cleansing.
 
Our imaging capsule is being designed to transmit the data it collects to an external data recorder that will be worn by the patient. The external data recorder is being designed to enable the transfer of the data to a physician, who will then utilize our data viewer software application to analyze the data collected by our imaging capsule. We intend for physicians to be able to review the colon’s inner images at any location at any time, in less time than is required to perform an optical colonoscopy.
 
In order to enable a complete view of capsule positioning and motility, we have designed the CPS, which is mounted on the patient’s back throughout the entire procedure. The CPS is being designed to provide the physician with accurate localization data aligned with a reconstructed image.
 
In the event that polyps are identified through our imaging capsule, the patient would be required to undergo a subsequent traditional colonoscopy procedure to examine, remove and biopsy the polyps. For those patients who require a subsequent polypectomy, concerns regarding pain, discomfort and embarrassment may still remain with respect to the subsequent polypectomy. We do not, however, believe that these concerns will make the use of our imaging capsule any less attractive to doctors and patients. Although patients who are initially screened utilizing a traditional colonoscopy could avoid the need for a second procedure if polyps are discovered because they could undergo a polypectomy during the initial screening, if necessary, we believe that our imaging capsule will still be attractive to doctors and patients since a large majority of patients who are screened will not require a subsequent polypectomy. According to a review published by the Agency for Healthcare Research and Quality in October 2008, out of 100 adults aged 50-75, only 25-30 persons have one or more polyps and only 15 persons have significant (10+mm) polyps.
 
 
59

 
 
We have submitted patent applications covering our technology in the United States, member states of the European Patent Organisation, Australia, Brazil, Canada, China, Hong Kong, India, Israel, Japan and South Korea. We have been granted patents for our core patent by the U.S. Patent and Trademark Office as well as from the European Patent Office, Australia, China, Hong Kong, Israel, India and Japan. We also filed patent applications describing the use of our imaging technology in several other medical applications.
 
We have generated significant losses to date, and we expect to continue to generate losses for at least the next several years as we continue our investment in research and development and clinical trials in order to complete the development of our imaging capsule and to attain regulatory approvals, begin the commercialization efforts for our products, increase our marketing and selling expenses, and incur additional costs as a result of becoming a public company in the United States. The extent of our future operating losses and the timing of becoming profitable are highly uncertain, and we may never achieve or sustain profitability. As of June 30, 2014, we had accumulated losses of approximately $24.7 million.
 
We believe that the net proceeds from this offering, together with our existing cash, will be sufficient to fund our projected operating requirements until the end of 2016. Until such time as we can generate a sufficient amount of product revenue, if ever, we expect to finance our future cash needs through public or private equity offerings, debt financings and/or corporate collaboration.
 
For a more detailed description of our business and plans, see “Business.”

Financial Operations Overview
 
Revenue
 
We have not generated any revenue since our inception. To date, we have funded our operations primarily through equity financings, as well as from grants that we received from the OCS. If our product development efforts result in clinical success, regulatory approval and the successful commercialization of our imaging capsule, we expect to generate revenue from sales of our imaging capsule.
 
Operating Cost and Expenses
 
Our operating costs and expenses are classified into two categories: research and development expenses and general and administrative expenses. For each category, the largest component is personnel costs, which consists of salaries, employee benefits and share-based compensation. Operating costs and expenses also include allocated overhead costs for depreciation of equipment. Operating costs and expenses are generally recognized as incurred. We expect personnel costs to continue to increase as we hire new employees to continue to grow our business. 
 
Research and Development Expenses, Net
 
Research and development activities are central to our business model. We intend to increase our research and development operations in order to complete the development of our imaging capsule and to attain regulatory approvals.
 
Since 2012, we have spent approximately $7.6 million on research and development expenses as of June 30, 2014, of which $0.6 million was funded by government grants. Our total research and development expenses, net of participations in the year ended December 31, 2013 and the six months ended June 30, 2014 were approximately $2.7 million and $1.6 million, respectively.  All research and development expenses are expensed as incurred. We expect research and development expenses to increase in absolute terms in the near term.
 
Research and development expenses primarily consist of:
 
 
personnel-related expenses, including salaries, benefits and related expenses;
 
 
60

 
 
 
payments made to third-party contract research organizations, contract manufacturers, investigative sites and consultants;
 
 
manufacturing development costs;
 
 
costs associated with preclinical studies and clinical trials;
 
 
facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities; and
 
 
costs associated with obtaining patents and maintaining.
 
Our research and development expenses, net are net of grants we have received from the Government of Israel through the OCS. In exchange for these grants, we are required to pay the OCS royalties from our revenues up to an aggregate of 100% (which may be increased under certain circumstances) of the U.S. dollar-linked value of the grant, plus interest at the rate of 12-month LIBOR. Pursuant to regulations under the Research Law, the rate of repayment ranges between 3% to 5% of revenues (or 6% with respect to certain limited programs and at an increased rate under certain circumstances). As of June 30, 2014, we had received funding from the OCS in the aggregate amount of $3.1 million.  Since June 30, 2014, we have received additional funding from the OCS in the aggregate amount of $566,551 under an approved OCS grant in the total amount of $702,000 for a research and development program for the 12 month period commencing March 1, 2014.  As of June 30, 2014, we had not paid any royalties to the OCS and had a contingent obligation to the OCS in the amount of $1.6 million. For additional information regarding the OCS grants, see below under “Royalties provisions - Government grants from the Office of the Chief Scientist” and “Taxation - Israeli Tax Considerations and Government Programs - The Encouragement of Industrial Research and Development Law, 5744-1984.” There can be no assurance that we will continue to receive grants from the OCS in amounts sufficient for our operations, if at all.
 
In July 2014, we received our first advance payment from the BIRD Foundation of $68,000 as part of a grant for the funding of a project entitled “Collection & Analysis of Gastrointestinal Images for Diagnostic Adenomatic Polyps and Colorectal Cancer.” We expect to receive an aggregate of $567,000 to fund our expenditures for the project, in five installments. See “Liquidity and Capital Resources  Sources of Liquidity” for a description of the Cooperation and Project Funding Agreement with the BIRD Foundation and Synergy.
 
General and Administrative Expenses
 
Our general and administrative expenses consist primarily of salaries and other related costs, including share-based compensation expense, for persons serving as our executive, finance, legal, human resources and administrative personnel, professional service fees and other general corporate expenses, such as communication, office and travel expenses. We expect that our general and administrative expenses will increase in the future as we incur additional general and administrative costs associated with being a public company in the United States, including compliance under the Sarbanes-Oxley Act of 2002 and rules promulgated by the U.S. Securities and Exchange Commission. These public company-related expense increases will likely include costs of additional legal fees, accounting and audit fees, directors’ and officers’ liability insurance premiums and costs related to investor relations.
 
Financial Income and Finance Expenses
 
Our finance income and finance expenses consist primarily of fair value changes with respect to the warrants to purchase Series C-1 preferred shares and warrants to purchase Series C-2 preferred shares issued to Pontifax (investing through three affiliated funds: Pontifax (Cayman) II, L.P., Pontifax (Israel) II L.P., Pontifax (Israel) II- Individual Investors L.P. which we collectively refer to as “Pontifax”), interest earned on our cash, cash equivalents and short-term investments and changes in provision for royalties to the OCS.
 
Foreign currency transactions are translated into U.S. dollars using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of comprehensive loss to “finance expenses”/“finance income.”
 
 
61

 
 
Taxes on Income
 
The standard corporate tax rate in Israel for the 2014 tax year and thereafter is 26.5%, increased from 25% for the 2012 and 2013 tax years.
 
We do not generate taxable income in Israel, as we have historically incurred operating losses resulting in carry forward tax losses totaling approximately $18.9 million as of June 30, 2014. We anticipate that we will be able to carry forward these tax losses indefinitely to future tax years. However, a tax loss that can be utilized in a certain tax year, cannot be carried forward to future tax years. Accordingly, we do not expect to pay taxes in Israel until we have taxable income after the full utilization of our carry forward tax losses.
 
Under the Law for the Encouragement of Capital Investments, 5719-1959 and other Israeli legislation, we may be entitled to certain additional tax benefits, including reduced tax rates, accelerated depreciation and amortization rates for tax purposes on certain assets, deduction of public offering expenses in three equal annual installments and amortization of other intangible property rights for tax purposes. See “Taxation— Israeli Tax Considerations and Government Programs” for additional information concerning these tax benefits.
 
Results of Operations
 
Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013
 

   
Six months ended June 30,
 
   
2014
   
2013
 
   
(Unaudited)
(US$ in thousands )
 
       
Research and development expenses, net  
  $ 1,640     $ 1,364  
General and administrative expenses                                                                                 
    564       520  
Operating loss                                                                                 
    2,204       1,884  
Finance income                                                                                 
    (60 )     (45 )
Finance expenses                                                                                 
    85       230  
Finance expenses, net                                                                                 
    25       185  
Loss for the period
    2,229       2,069  
Total comprehensive loss for the period                                                                                 
  $ 2,229     $ 2,069  
 
Research and Development Expenses, net . Our research and development expenses, net for the six months ended June 30, 2014 were $1.64 million, as compared with $1.36 million for the six months ended June 30, 2013, an increase of $276,000, or 20%.  The increase in research and development expenses, net was primarily due to an increase in amounts payable to subcontractors (an increase of $157,000), as well as an increase in materials (an increase of $69,000) and cost of salaries and related expenses (an increase of $66,000). This increase was partially offset by a decrease in cost for registration of patents (a decrease of $46,000).
 
   
Six months ended June 30,
 
   
2014
   
2013
   
Change
 
   
(Unaudited)
 
   
(US$ in thousands)
 
Salaries and related expenses   
  $ 1,105     $ 1,039     $ 66  
Share-based payment 
    32       9       23  
Materials 
    177       108       69  
Subcontractors                                                                             
    215       58       157  
Depreciation                                                                             
    36       35       1  
Cost for registration of patents                                                                             
    28       74       (46 )
Other research and development                                                                             
    47       41       6  
      1,640       1,364       276  
Less participation of the OCS                                                                             
    -       -       -  
Total research and development expenses, net                                                                             
  $ 1,640     $ 1,364     $ 276  
 
 
62

 
 
General and Administrative Expenses . Our general and administrative expenses for the six months ended June 30, 2014 were $564,000, as compared to $520,000 for the six months ended June 30, 2013, an increase of $44,000, or 8.5%. The increase in general and administrative expenses was due to increases in cost of salaries and related expenses, share-based payment, professional fees and other general and administrative expenses, primarily business travel (all of which amounted to an increase of $55,000).  This increase was partially offset by an $11,000 decrease in facility cost.
 
 
Six months ended June 30,
 
 
2014
 
2013
   
Change
 
 
(Unaudited)
 
 
(US$ in thousands)
 
           
Salaries and related expenses                                                                             
  $ 342     $ 334     $ 8  
Share-based payment                                                                             
    8       1       7  
Professional fees                                                                             
    43       39       4  
Facility cost                                                                             
    45       56       (11 )
Depreciation                                                                             
    3       3       -  
Other general and administrative                                                                             
    123       87       36  
Total general and administrative expenses, net                                                                             
  $ 564     $ 520     $ 44  
 
Operating Loss . As a result of a $276,000 increase in research and development expenses, net for the six months ended June 30, 2014 compared to the corresponding period in 2013, and a $44,000 increase in general and administrative expenses in the same period, our operating loss for the six months ended June 30, 2014 was $2.2 million, as compared to $1.9 million for the six months ended June 30, 2013, an increase of $320,000, or 17.0%.
 
Finance Income . Our finance income for the six months ended June 30, 2014 was $60,000, as compared to $45,000 for the corresponding period in 2013, an increase of $15,000. Finance income for the six months ended June 30, 2014 consists primarily of changes in provision for royalties ($42,000) and interest income on short-term deposits ($9,000). Finance income for the six months ended June 30, 2013 consists primarily of interest income on short term deposits ($40,000).
 
Finance Expenses . Our finance expenses for the six months ended June 30, 2014 were $85,000, as compared to $230,000 for the corresponding period in 2013, a decrease of $145,000. Finance expenses for the six months ended June 30, 2014 consist primarily of fair value changes on the warrants to purchase Series C-1 and C-2 preferred shares issued to Pontifax ($70,000) and losses on exchange rate fluctuations ($12,000). Finance expenses for the six months ended June 30, 2013 consist primarily of fair value changes on the warrants to purchase Series C-1 and C-2 preferred shares issued to Pontifax ($122,000), and changes in provision for royalties ($99,000).
 
Net Loss. Our net loss for the six months ended June 30, 2014 was $2.2 million, as compared to $2.1 million for the corresponding period in 2013, an increase of $160,000, or 7.7%.
 
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
 
   
Year ended December 31,
 
   
2013
   
2012
 
   
(US$ in thousands, except per
share data)
 
Research and development expenses, net                                                                                 
  $ 2,662     $ 2,692  
General and administrative expenses                                                                                 
    1,090       1,203  
Other expenses (income)                                                                                 
    (10 )     13  
Operating loss                                                                                 
    3,742       3,908  
Finance income                                                                                 
    (63 )     (416 )
Finance expenses                                                                                 
    316       229  
Finance expenses (income), net                                                                                 
    253       (187 )
Loss for the year                                                                                 
    3,995       3,721  
Total comprehensive loss for the year                                                                                 
  $ 3,995     $ 3,721  
 
 
63

 
 
Research and Development Expenses, net . Our total research and development expenses for the year ended December 31, 2013 were $3.03 million, as compared with $2. 92 million for the year ended December 31, 2012, an increase of $111,000 or 3.8%. The increase in research and development expenses between 2013 and 2012 was primarily due to increases in cost of salaries and related expenses, registration of patents and other research and development expenses, mainly clinical trial-related expenses (all of which amounted to an increase of $226,000), which was partially offset by a decrease in amounts payable to subcontractors (a decrease of $112,000).  Our research and development expenses, net for the year ended December 31, 2013 were $2.66 million, as compared with $2.69 million for the year ended December 31, 2012, a decrease of $30,000, or 1.1%.  The decrease in research and development expenses, net was primarily due to an increase in OCS grants (an increase of $141,000).
 
   
2013
   
2012
   
Change
 
   
(US$ in thousands)
 
Salaries and related expenses                                                                             
  $ 2,170     $ 2,091     $ 79  
Share-based payment                                                                             
    41       25       16  
Materials                                                                             
    307       329       (22 )
Subcontractors                                                                             
    218       330       (112 )
Depreciation                                                                             
    70       67       3  
Cost for registration of patents                                                                             
    118       52       66  
Other research and development                                                                             
    110       29       81  
      3,034       2,923       111  
Less participation of the OCS                                                                             
    (372 )     (231 )     (141 )
Total research and development expenses, net                                                                             
  $ 2,662     $ 2,692     $ (30 )
 
General and Administrative Expenses . Our general and administrative expenses for the year ended December 31, 2013 were $1.1 million, as compared to $1.2 million for the year ended December 31, 2012, a decrease of $113,000, or 9.4%. The decrease in general and administrative expenses was primarily due to decreases in facility cost and other general and administrative expenses, primarily business travel, communication and insurance (all of which amounted to a decrease of $178,000). This decrease was partially offset by a $25,000 increase in professional fees and a $30,000 increase in salaries and related expenses.
 
   
2013
   
2012
   
Change
 
   
(US$ in thousands)
 
Salaries and related expenses                                                                             
  $ 683     $ 653     $ 30  
Share-based payment                                                                             
    16       6       10  
Professional fees                                                                             
    95       70       25  
Facility cost                                                                             
    104       142       (38 )
Depreciation                                                                             
    7       7       -  
Other general and administrative                                                                             
    185       325       (140 )
Total general and administrative expenses                                                                             
  $ 1,090     $ 1,203     $ (113 )
 
Operating Loss . As a result of a $30,000 decrease in research and development expenses, net for the year ended December 31, 2012 compared to the year ended December 31, 2013, and a $113,000 decrease in general and administrative expenses in the same period, our operating loss for the year ended December 31, 2013 was $3.7 million, as compared to $3.9 million for the year ended December 31, 2012, a decrease of $166,000, or 4.2%.
 
Finance Income . Our finance income for the year ended December 31, 2013 was $63,000, as compared to $416,000 for the year ended December 31, 2012, a decrease of $353,000. Finance income for the year ended December 31, 2013 consists primarily of interest income on short-term deposits. Finance income for the year ended December 31, 2012 consists primarily of interest income on short term deposits ($183,000), and changes in provision for royalties ($233,000).
 
Finance Expenses . Our finance expenses for the year ended December 31, 2013 were $316,000, as compared to $229,000 for the year ended December 31, 2012, an increase of $87,000. Finance expenses for the year ended December 31, 2013 consist primarily of changes in a provision for royalties ($256,000) and fair value changes on the warrants to purchase Series C-1 and C-2 preferred shares issued to Pontifax ($55,000). Finance expenses for the year ended December 31, 2012 primarily consist of fair value changes on the warrants to purchase Series C-1 and C-2 preferred shares issued to Pontifax ($116,000) and changes in provision for royalties ($85,000) and losses on exchange rate fluctuations ($22,000).
 
 
64

 
 
Net Loss. Our net loss for the year ended December 31, 2013 was $4.0 million, as compared to $3.7 million for the year ended December 31, 2012, an increase of $274,000, or 7.4%.
 
Liquidity and Capital Resources
 
Sources of Liquidity
 
To date, we have funded our operations primarily with the approximately $24.5 million raised through equity financings, $12.0 million through a credit line transaction, and$3.5 million through grants that we received from the OCS. 
 
In 2012, we completed a private placement of 2,510,783 of our Series D-3 preferred shares for an aggregate consideration of $1.1 million, pursuant to a Share Purchase Agreement dated January 10, 2012.
 
On July 13, 2014, we entered into a Cooperation and Project Funding Agreement with the BIRD Foundation and Synergy, pursuant to which the BIRD Foundation has agreed to award a grant in the maximum amount of the lesser of (i) $900,000; and (ii) 50% of the actual expenditures for the funding of a project entitled “Collection & Analysis of Gastrointestinal Images for Diagnostic Adenomatic Polyps and Colorectal Cancer.”  The development work is expected to be performed over a 24 month period by Synergy (or a subcontractor on its behalf) and us.  Of the total grant amount, we are expected to receive an aggregate of $567,000 to fund our expenditures for the project, in five installments.  We received our first advance payment from the BIRD Foundation of $68,000 in July 2014.  Our research and development expenses, net is presented net of the differences between the fair value of the liability and the grant amount received from the BIRD Foundation.
 
We are required to repay the total sum granted to us and Synergy by the BIRD Foundation, linked to the U.S. Consumer Price Index from date of receipt of each payment, up to 100%, 113%, 125%, 138% and 150% of the linked sum granted by the BIRD Foundation if repaid within one year, two years, three years, four years and five or more years, respectively, of the original project completion date in accordance with the project proposal.  Repayments are made at the rate of 5% of gross revenues derived from the product funded by the project.  Under the terms of the agreement, if any portion of the product funded by the project is sold outright to a third party prior to full repayment of the grant to the BIRD Foundation, one-half of the sale proceeds will be applied to the repayment of the grant.  If the funded product is licensed to a third party, 30% of all payments received under the respective license agreement must be paid to the BIRD Foundation in repayment of the grant.
 
On August 20, 2014, we entered into a certain credit line agreement, pursuant to which we obtained a credit line in an aggregate principal amount of $12 million from certain lenders and existing shareholders, or the Lenders.  The credit line amount was deposited in an escrow account at the closing, which was consummated on October 14, 2014.
 
We issued to each Lender at closing a warrant, collectively referred to as the Credit Line Warrants, to purchase a number of our ordinary shares constituting 2% of our share capital on a fully diluted basis (assuming conversion of all of our convertible securities into ordinary shares at a 1:1 conversion rate) as of the closing for each $1 million (or portion thereof) extended by such Lender.  We issued Credit Line Warrants to purchase in the aggregate 53,169,092 of our ordinary shares.  The Credit Line Warrants are exercisable for a period of ten years at an exercise price of NIS 0.01 per share, and may be exercised on a net issuance basis.
 
Under the terms of the agreement, if we intend to consummate (as defined in the credit line agreement) an IPO and such IPO is expected to be consummated on or prior to February 18, 2015, or if we consummate (as defined in the credit line agreement) an IPO on or prior to February 18, 2015, we will be entitled to direct that all or any portion of the credit loan amount be invested in ordinary shares in a private placement transaction that is exempt from the registration requirements of the Securities Act at a price per ordinary share equal to the public offering price per share in the IPO. In the event that we direct that less than the full credit line amount be invested in the private placement, the amount to be invested by each lender in the private placement will be equal to their pro rata share of the total credit line amount.  If we consummate (as defined in the credit line agreement) an IPO on or prior to February 18, 2015, any part of the credit line amount not so invested in the private placement will be released to the Lenders.  The consummation of any of the transactions contemplated by the credit line agreement, including, without limitation, the Private Placement, is not a condition to our obligation or the obligation of the underwriters to consummate the transactions contemplated by the underwriting agreement.
 
If we do not consummate (as defined in the credit line agreement) an IPO on or prior to February 18, 2015, we may “call” the credit line amount ( i.e., direct that such funds be released from the escrow account to us) at any time thereafter until April 14, 2016, subject to certain conditions.  Any part of the credit line amount not so called by us on or prior to such date will be released to the Lenders.  If we call the credit line amount from the escrow account on or prior to April 14, 2016, the amount called will bear interest at the annual rate of 7%; provided that the aggregate interest rate will not be less than 5%.  The called credit line amount (and, at our option, the interest accrued thereon) will automatically convert into shares of our company upon the earlier of a qualified financing round (which includes a public offering, including an IPO), an M&A Event ( i.e ., an acquisition with or into another entity, the sale or license of all or substantially all of our assets or intellectual property or all or substantially all of our issued and outstanding share capital, or any other transaction having the same effect of any of the foregoing) and April 14, 2016, and the Lenders may elect to convert the entire called credit line amount (and, at our option, the interest accrued thereon) upon a non-qualified financing round, all under the terms and conditions set forth in the credit line agreement.  In the event that the qualified financing round is an IPO, in lieu of automatic conversion, we are entitled, to the extent permitted by law, to deposit in trust an amount equal to 125% of the called credit line amount (and, at our option, the interest accrued thereon) and irrevocably instruct the trustee to submit an offer, on behalf of each Lender, for the purchase of the IPO shares at the IPO price determined by the lead underwriters.
 
 
65

 
 
For the years ended December 31, 2013 and 2012, we received $647,000 and $541,000, respectively, in grants from the OCS for the financing of a portion of our research and development expenditure.  In July 2014, September 2014 and December 2014, we received additional funding from the OCS in the aggregate amount of $566,551 for the financing of a portion of our research and development expenditure.
 
We believe that based on our current business plan, our existing cash resources and the net proceeds from this offering will be sufficient to fund our currently anticipated cash requirements through 2016. Nevertheless, we will require significant additional financing in the future to fund our operations if and when we progress with our clinical trials in Europe and the United States.
 
Historical Cash Flows
 
The following table summarizes our statement of cash flows for the years ended December 31, 2012 and 2013 and the six months ended June 30, 2014.
 
   
Year ended December 31,
   
Six Months Ended June 30,
 
   
2013
   
2012
   
2014
 
2013
 
   
(US$ in thousands)
 
      (Unaudited)
Net cash used in operating activities
    (3,657 )     (4,160 )     (2,159 )     (1,843 )
Net cash generated from (used in) investing activities
    3,402       (3,543 )     (22 )     3,420  
Net cash generated from financing activities
    647       1,573       --       --  
 
Operating Activities
 
Net cash used in operating activities for the six months ended June 30, 2014 was $2.2 million, as compared to $1.8 million for the six months ended June 30, 2013. The increase in net cash used in operating activities in 2014 was attributable primarily to an increase in operating loss.
 
Net cash used in operating activities for the year ended December 31, 2013 was $3.7 million, as compared to $4.2 million for the year ended December 31, 2012. The decrease in net cash used in operating activities in 2013 was primarily due to an increase in the total comprehensive loss for the year.
 
Investing Activities
 
Net cash used in investing activities for the six months ended June 30, 2014 consists of purchase of property and equipment in the amount of $22,000.  Net cash generated from investing activities for the six months ended June 30, 2013 consists primarily of proceeds from short-term bank deposits of $3.4 million, which were partially offset by purchase of property and equipment in the amount of $27,000.
 
Net cash provided by investing activities for the year ended December 31, 2013 consists primarily of proceeds from short-term bank deposits of $3.4 million , which were partially offset by purchase of property and equipment in the amount of $45,000.  Net cash used in investing activities for the year ended December 31, 2012 consists primarily of investment in short-term bank deposits of $3.4 million, which were partially offset by purchase of property and equipment in the amount of $105,000.
 
 
66

 
 
Financing Activities
 
We did not generate cash from, or use cash in, financing activities for the six months ended June 30, 2014 and June 30, 2013.
 
Net cash generated from financing activities for the year ended December 31, 2013 was $647,000, comprised of an OCS grant. Net cash generated from financing activities in 2012 was $1.6 million comprised primarily of net proceeds from the issuance of Series D-3 preferred shares ($1.0 million) and an OCS grant ($541,000).
 
Contractual Obligations
 
The following table summarizes our contractual obligations as of June 30, 2014:
 
   
Payments due by period
 
   
(US$ in thousands)
 
   
Total
   
Less than 1
year
   
1-3 years
   
4-5 years
   
More than 5
years
 
Operating lease obligations(1):
    653       193       168       119       173  
                                         
Other long term liabilities reflected on the Statements of Financial Position:
                                       
Royalties to ASIC designer(2)
    170       -       74       96       -  
Office of the Chief Scientist(3)
    1,618       -       318       1,300       -  
Reimbursement liability to
                                       
Check-Cap LLC unitholders(4)
    749       -       19       137       593  
Total
    2,537       -       411       1,533       593  
 

 
 
(1)
Operating lease obligations consist of payments pursuant to a lease agreement for office facilities as well as lease agreements for vehicles, which generally run for a period of three years.
 
 
(2)
See “Provision for royalties to an ASIC designer.”
 
(3)    See “Research and Development Expenses, Net.”
 
 
(4)
On May 31, 2009, we entered into an asset transfer agreement with Check-Cap LLC pursuant to which Check-Cap LLC transferred all of its business operations and substantially all of its assets to us, in connection with which we undertook to reimburse the unitholders of Check-Cap LLC for any tax burdens that may be imposed on them due to the reorganization. The reimbursement liability is calculated assuming deemed royalties are paid to the U.S. unitholders of Check-Cap LLC under Section 367(d) of the Code and is based in part on our forecasted sales. The liability is calculated using the provisions of IAS 39, under which expected cash outflows were discounted using a 17.6% discount factor commensurate with our company’s risk at the date of initial recognition of the liability. Any updates in the expected cash outflows and the liability will be recorded to profit and loss each period. As of June 30, 2014, it was probable that we will be required to reimburse the U.S. unitholders of Check-Cap LLC, and accordingly, a liability for this reimbursement has been accounted for in our financial statements for such period in the amount of $749,000. See “Related Party Transactions—Transactions with Check-Cap LLC and the Members and Manager of Check-Cap LLC.”
 
Funding Requirements
 
We expect to incur losses from operations for the foreseeable future. We expect to incur increasing research and development expenses, including expenses related to the hiring of personnel and additional clinical trials. We expect that our general and administrative expenses will also increase as we expand our finance and administrative staff, add infrastructure, and incur additional costs related to being a public company in the United States, including directors’ and officers’ insurance, investor relations programs, and increased professional fees. Our future capital requirements will depend on a number of factors, including the timing and outcome of clinical trials and regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing patent claims and other intellectual property rights, the availability of financing, and our success in developing markets for our products.
 
 
67

 
 
Our expected future expenditures related to product, clinical and regulatory clearances are as follows:
 
 
completion of the clinical development of the final product;
 
 
conducting clinical trials in Europe, the United States and other territories;
 
 
development of future generations of our imaging capsule and future products;

 
FDA and additional regulatory filing costs; and
 
 
patent maintenance fees.
 
We believe that the net proceeds from this offering, together with our existing cash, will be sufficient to fund our operating expenses and capital expenditure requirements at least until the end of 2016. We have based this estimate on assumptions that may prove to be wrong, and we may use our available capital resources more quickly than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our imaging capsule, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials.
 
In the absence of additional funding, we expect our continuing operating losses to result in increases in our cash used in operations over the next several quarters and years.
 
Off-balance Sheet Arrangements
 
We do not have any material off-balance sheet arrangements.
 
Quantitative and Qualitative Disclosure of Market Risks
 
Exchange Rate Risk
 
Some of our assets and liabilities are affected by fluctuations in the exchange rate between the U.S. dollar and the NIS and between the U.S. dollar and the Euro. For example, salaries and related expenses for Israeli employees are paid in NIS and some of our suppliers are located in Europe and require payment in Euros.
 
As of June 30, 2014, our total assets and liabilities linked to the NIS amounted to $433,000 and $900,000, respectively. A 10% depreciation of the dollar in relation to the NIS would cause an exchange rate loss of $52,000.
 
As of June 30, 2014, we had no assets linked to the Euro and our total liabilities linked to the Euro amounted to 170,000.  A 10% depreciation of the dollar in relation to the Euro would cause an exchange rate loss of $17,000.
 
During 2013, the exchange rate between the NIS and the U.S. dollar decreased by 2.3% and the exchange rate between the Euro and the U.S. dollar increased by 2.0%.  During the nine months ended September 30, 2014, the exchange rate between the NIS and the U.S. dollar increased by 6.5% and the exchange rate between the Euro and the U.S. dollar decreased by 8.1%.  To date, we have not hedged the risks associated with fluctuations in currency exchange rates.
 
Interest Rate Risk
 
Our obligation to pay royalties to the OCS is linked to LIBOR and we are therefore exposed to changes in LIBOR.
 
As of June 30, 2014, we reported a total liability of $1.6 million with respect to our obligation to pay royalties to the OCS. A 25% increase in LIBOR would cause a financing loss of $3,000, based on the LIBOR as of June 30, 2014, which was 0.53%.
 
In addition, we intend to invest our cash balances, including certain of the net proceeds from this offering pending their ultimate use, primarily in bank deposits and securities issued by the U.S. and Israeli governments. We are exposed to market risks resulting from changes in interest rates relating primarily to our financial investments in cash and deposits. We do not use derivative financial instruments to limit exposure to interest rate risk. Our interest income may decline in the future as a result of changes in the financial markets; however, we believe any such potential loss would be immaterial to us.
 
 
68

 
 
Application of Critical Accounting Policies and Estimates
 
We prepare our financial statements in accordance with IFRS as issued by the IASB.
 
The preparation of our financial statements in conformity with IFRS requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as reported expenses during the reporting periods. On an ongoing basis, management evaluates such estimates and judgments, including those described in greater detail below. Our management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made and on various assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
 
While our significant accounting policies are more fully described in Note 2 to our financial statements appearing elsewhere in this prospectus, we believe that the accounting policies discussed below are critical to fully understand and evaluate our financial condition and results of operations.
 
Share-based compensation
 
We account for our share-based compensation for employees in accordance with the provisions of IFRS 2 “Share-based Payment,” which requires us to measure the cost of share-based compensation based on the fair value of the award on the grant date. The cost is recognized as compensation expense over the requisite service period which is usually the vesting period, based upon the grant date fair value of the equity or liability instruments issued. We recognize the compensation expenses over the vesting period using the accelerated method pursuant to which each vesting tranche is treated as a separate amortization period from the grant date to the vest date, and classify these amounts in the financial statements based on the department to which the related employee reports.
 
We selected the Black-Scholes option pricing model as the most appropriate method for computing the fair value of our share-based awards, using the standard parameters established in that model including estimates relating to the fair value of our ordinary shares, volatility, estimated life of the instruments, risk-free interest rates and dividends yield as described below.
 
Option Valuations
 
The determination of the grant date fair value of options using an option pricing model is affected by estimates and assumptions with respect to a number of complex and subjective variables. These variables include the expected volatility of our share price over the expected term of the options, share option exercise and cancellation behaviors, risk-free interest rates and expected dividends, which are estimated as follows:
 
 
Fair Value of our Ordinary Shares. Because our shares were not publicly traded prior to this offering, we estimate the fair value of our ordinary shares, as discussed below in “—Valuation of our ordinary shares.”
 
 
Volatility. The expected share price volatility is based on the historical equity volatility of the ordinary shares of comparable companies that are publicly traded.
 
 
Expected Term. The expected term of options granted represents the estimated period of time that options granted are expected to be outstanding. Since adequate historical experience is not available to provide a reasonable estimate, the expected term is determined based on the midpoint between the available exercise dates (the end of the vesting periods) and the last available exercise date (the contracted expiration date).
 
 
Risk-Free Rate. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with a term equivalent to the contractual life of the options.
 
 
69

 
 
 
Expected Dividend Yield. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.
 
If any of the estimates and assumptions used in the Black-Scholes model will change significantly, our share-based compensation for future awards may differ materially from those projected and recorded previously.

 
The following table presents the weighted-average assumptions used in estimating the fair value of options granted to employees during the years 2013 and 2012.
 
Parameters
 
June 2013 Grant
   
April-August 2012
Grants
 
             
Expected volatility (in %)                                              
    40-60       64-68  
Option term (in years)                                              
    5-10       5-10  
Risk free interest rate (in %)                                              
    0.75-2.25       0.75-2.25  
Anticipated rate of dividends (in %)
    0       0  
 
The following table presents the grant dates, number of underlying shares and related exercise prices of awards granted to employees and non-employees since January 1, 2012 as well as the estimated fair value of the underlying ordinary shares on the grant date.
 
Grant date
 
Number of shares
subject to awards
granted
 
Exercise price per
share
 
Estimated fair value
per ordinary share at
grant date
 
04/04/2012
    1,160,000   $ 0.25   $ 0.07  
28/08/2012
    350,000   $ 0.25   $ 0.07  
12/06/2013
    2,355,000   $ 0.25   $ 0.152  
 
Based on the assumed initial public offering price of $     per share, the midpoint of the range set forth on the cover page of this prospectus, the intrinsic value of the awards outstanding as of June 30, 2014 was $     million, of which $     related to vested options and $     related to unvested options.
 
Valuation of our ordinary shares
 
Due to the absence of an active public market for our ordinary shares prior to completion of this offering, the fair value of our ordinary shares for purposes of determining the exercise price for award grants has been determined in good faith by our management and approved by our board of directors. In connection with preparing our financial statements, our management considered the fair value of our ordinary shares based on a number of objective and subjective factors consistent with the methodologies outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, referred to as the AICPA Practice Aid.
 
Royalties provision
 
Government grants from the Office of the Chief Scientist
 
We have received research and development funding from the Government of the State of Israel through the OCS in the form of grants, which we are required to return with interest under certain conditions. For additional information regarding the OCS grants, see “— Research and Development Expenses, Net” and “Taxation — Israeli Tax Considerations and Government Programs — The Encouragement of Industrial Research and Development Law, 5744-1984.” Such grants qualify as “forgivable loans” in accordance with IAS 20, “Accounting for Government Grants and Disclosure of Government Assistance,” since they are repayable only if we generate revenues related to the underlying project.
 
In accordance with IAS 20, the grant is accounted for as a liability unless it is more likely than not that we will meet the terms of forgiveness of the loan, in which case the forgivable loan is accounted for as a government grant and recognized as a reduction of the research and development expenses.
 
 
70

 
 
We consider it more likely than not that the project underlying our OCS grants will reach the revenue generating stage and therefore, we record a liability in respect of the OCS grants. No minimum royalties are required to be paid in connection with the OCS grants. On the date of initial recognition, the grant is presented as a financial liability at the fair value of the expected cash flows to be repaid, discounted at a discount rate commensurate with the risk level of the research and development project. The difference between the amount of the grant and its fair value is treated as a government grant. In subsequent periods, the financial liability is measured at the present value of the expected cash flows to be paid in the future, discounted each period at the original interest rate used in computing the initial liability. Changes in fair value are recorded to profit and loss each period.
 
In calculating the present value of future payments to the OCS, we used a discount rate of 21.8% for grants received during the years 2012 and 2013.
 
Provision for royalties to an ASIC designer
 
In December 2007, we entered into an agreement for the development of an application specific integrated circuit, or ASIC, component to be used as an amplifier for the capture of signals at low frequencies from X-ray detectors contained in our product. The ASIC developer is entitled to receive royalties from us in the amount of 0.5 (approximately $0.68) for every ASIC component that we will sell, up to 200,000 (approximately $273,000).  The net present value of the royalty liability to the ASIC designer is dependent upon our management estimates and assumption as to future product shipments and interest rates used to calculate the present value of the cash payments required to repay the royalties to the ASIC designer. In calculating the present value of future royalty payments to the ASIC designer, we used a discount factor of 17.6%, commensurate with our risk at the date of initial recognition of the liability.
 
Reimbursement liability to Check-Cap LLC unitholders
 
On May 31, 2009, we entered into an asset transfer agreement with Check-Cap LLC pursuant to which Check-Cap LLC transferred all of its business operations and substantially all of its assets to us. In connection with the transaction we undertook to reimburse the unitholders of Check-Cap LLC for any tax burdens that may be imposed on them due to the reorganization. The reimbursement liability is calculated assuming deemed royalties are paid to the U.S. unitholders of Check-Cap LLC under Section 367(d) of the Code, and is based in part on our forecasted sales. The liability is calculated using the provisions of IAS 39, under which expected cash outflows were discounted using a 17.6% discount factor commensurate with our company’s risk at the date of initial recognition of the liability. Any updates in the expected cash outflows and the liability will be recorded to profit and loss each period. As of June 30, 2014, it was probable that we will be required to reimburse the U.S. unitholders of Check-Cap LLC, and accordingly, a liability for this reimbursement has been accounted for in our financial statements in the amount of $749,000. Due to the fact that we are still in the development stage and have not generated revenues, the sales forecast is highly subjective and may vary significantly in the future. As more information is gathered to assist our management in making forecasts, the liability will be updated.
 
Fair value of financial instruments
 
On June 1, 2009, in connection with that certain Series C Preferred Share Purchase Agreement, we issued to Pontifax, as the lead investor, warrants for the purchase of 836,412 Series C-1 preferred shares and warrants for the purchase of 1,007,975 Series C-2 preferred shares. These warrants are exercisable on a cashless basis and therefore, are classified as a liability in the statements of financial position. The fair value of this financial instrument is determined based on an option pricing model using similar assumptions to those used for our share-based compensation awards to employees.
 
Recent Accounting Pronouncements
 
IFRS 13 “Fair Value Measurement”
 
IFRS 13 establishes a single source of guidance for fair value measurement and disclosures about fair value measurement. The standard defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurement. The scope of IFRS 13 is broad: it applies to both financial instruments items and non-financial instruments items for which other IFRSs require or permit fair value measurement and disclosure about fair value measurement, except in specified circumstances. In general, the disclosure requirements in IFRS 13 are more extensive than those required in the current standards.
 
 
71

 
 
IFRS 13 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted. The application of the standard has had no effect on our financial results.
 
JOBS Act Exemption
 
The JOBS Act permits an “emerging growth company,” such as us, to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
 
 
72

 
 
BUSIN ES S
 
Our Company
 
We are a clinical stage medical diagnostics company engaged in the development of an ingestible imaging capsule that utilizes low-dose X-rays for CRC screening. While CRC is the second leading cause of death from cancer in the United States and is largely preventable with early detection, about one-half of Americans over the age of 50 do not undergo any form of CRC screening due in large part to the pain, discomfort and embarrassment related to current screening methods. Unlike other structural screening methods that are designed to generate structural information of the colon for the detection of pre-cancerous polyps, such as optical colonoscopy, CTC and other capsule-based technology, our imaging capsule is designed to be ingested without any cleansing of the colon and to travel through the gastrointestinal tract naturally while the patient continues his or her normal daily routine. Furthermore, unlike the procedures for CRC imaging devices currently on the market, all of which require the patient to fast for several hours prior to administration, the procedure for the Check-Cap device is designed to enable patients to continue eating normally. We believe that this solution will be attractive to both physicians and patients, thereby increasing the number of people willing to undergo screening for CRC.
 
Our imaging capsule is being designed to create a reconstructed two and three-dimensional image of the colon and to enable detection of clinically significant polyps with a high degree of sensitivity. Colon polyps are fleshy growths that occur on the lining of the colon. Polyps in the colon are extremely common, and when certain types of polyps grow large enough they can become cancerous.
 
Our imaging capsule will be swallowed by the patient, and propelled by natural motility through the gastrointestinal tract and excreted naturally with no need for retrieval for data collection. Unlike other CRC screening methods, this process should not disrupt a patient’s normal activities or require fasting. Our imaging capsule employs X-rays which are considered low dose according to the Radiation Safety Division of the Radiological Protection Branch of the Soreq Nuclear Research Center, which allows it to image the lining of the colon even when surrounded by intestinal content.  As such, we believe that patients using our imaging capsule will not be required to undergo any prior bowel cleansing.
 
Our imaging capsule is being designed to transmit the data it collects to an external data recorder that will be worn by the patient. The external data recorder is being designed to enable the transfer of the data to physicians, who will then utilize our data viewer software application to analyze the data collected by our imaging capsule. We intend for physicians to be able to review the colon’s inner images at any location at any time, in less time than is required to perform an optical colonoscopy.
 
In order to enable a complete view of capsule positioning and motility, we have designed the CPS, which is mounted on the patient’s back throughout the entire procedure. The CPS is being designed to provide the physician with accurate localization data aligned with a reconstructed image.
 
In the event that polyps are identified through our imaging capsule, the patient would be required to undergo a subsequent traditional colonoscopy procedure to examine, remove and biopsy the polyps. For those patients who require a subsequent polypectomy, concerns regarding pain, discomfort and embarrassment may still remain with respect to the subsequent polypectomy. We do not, however, believe that these concerns will make the use of our imaging capsule any less attractive to doctors and patients. Although patients who are initially screened utilizing a traditional colonoscopy could avoid the need for a second procedure if polyps are discovered because they could undergo a polypectomy during the initial screening, if necessary, we believe that our imaging capsule will still be attractive to doctors and patients since a large majority of patients who are screened will not require a subsequent polypectomy. According to a review published by the Agency for Healthcare Research and Quality in October 2008, out of 100 adults aged 50-75, only 25-30 persons have one or more polyps and only 15 persons have significant (10+mm) polyps.
 
A clinical proof-of-concept study, which was based on a 10-case study conducted at Tel Aviv Medical Center in Israel and used a prior version of our imaging capsule, did not identify any material safety or feasibility issues. The study demonstrated the applicability of our imaging technology to the human colon, generating images taken in the colon without any prior bowel-cleansing. All subjects ingested the capsule easily with smooth passage within the designated transit time, on average, within two to three days. There were no reported device-related adverse events. Mild effects on bowel movements were noted, which were determined to be related to the contrast agent and passed within one to two days after the capsule was excreted.
 
 
73

 

 
Another objective of the 10-case study was to estimate total radiation exposure for each case study. This was calculated using standard established factors for calculating effective radiation exposure, such as the duration of the capsule inside the body, and was based on the activity of the radiation source inside the imaging capsule and radiation energy, both of which were measured for each case study. The average calculated exposure for the entire procedure in the 10-case study, from ingestion of the capsule to excretion, was 0.03 mSv (STD 0.007 mSv). This level of radiation exposure is similar to a single chest X-ray (approximately 0.06mSv) and two orders of magnitude less than CTC.
 
The 10-case clinical proof-of-concept study focused on assessing the safety and feasibility of the Check-Cap imaging system.  The 10-case clinical proof-of-concept study is the first part of a multi-center, prospective clinical feasibility study to establish the safety, functionality and p reliminary efficacy  of the Check-Cap imaging system in patients eligible for CRC screening, by comparing results from the clinical feasibility study with those from non-invasive, low-sensitivity FOBTs and FITs, as well as from optical colonoscopies. The feasibility study is designed to include approximately 60 subjects. The study is being conducted in Israel at the Tel Aviv Medical Center and Laniado Hospital and is planned to also be conducted at the Erasmus University Medical Center in the Netherlands.  The clinical feasibility study will evaluate the image resolution generated by the capsule in an unprepped human colon, will assess polyp imaging in various shapes and in different segments of the colon and will evaluate the safety of the device in terms of total and segmental transit time and analyze the effects of the presence of polyps and variable colon dimensions on these parameters. The study will seek to create a clinical atlas of images that will enable comparisons between images acquired by different CRC screening modalities. During the feasibility study we will collect data about the overall imaging of the colon’s internal surfaces during the passage of the capsule to support the development of a correlation map of polyps identified through our imaging system with polyps imaged by optical colonoscopy and CTC. Additionally, the feasibility study will measure total radiation exposure and the distribution of contrast material within the colon.
 
Following the successful completion of the broader multi-center, prospective clinical feasibility study, we plan to submit during 2015 a request for CE marking for the marketing and sale of our capsule in the European Union. We expect to perform post-marketing studies in Europe following CE marking for the purpose of collecting additional clinical data. Subject to regulatory approval and available capital, we anticipate launching our product commercially in Europe during 2016.
 
We plan to conduct in late 2015 a second pre-IDE meeting, now referred to as a pre-submission meeting, with the FDA in late 2015, and subsequently to submit a request for the approval of an IDE for a pivotal study in the United States. We anticipate that the FDA approval for the pivotal study will be subject to our providing sufficient clinical data from the multi-center, prospective clinical feasibility study. We also intend to pursue clinical trials for regulatory approvals in Japan and China in parallel to the U.S. pivotal study. Pivotal studies are expected, among other things, to compare the images of polyps identified by our imaging system with the same polyps detected by traditional optical colonoscopy and CTC in instances where patients were referred after positive exam results. These clinical findings will be analyzed in comparison with results obtained from FOBTs and FITs. Subject to the successful completion of our clinical trials and the receipt of initial FDA approval for the marketing of our imaging capsule in the United States, we anticipate launching our product commercially in the United States during 2017.
 
We have submitted patent applications covering our technology in the United States, member states of the European Patent Organisation, Australia, Brazil, Canada, China, Hong Kong, India, Israel, Japan and South Korea. We have been granted patents for our core patent by the U.S. Patent and Trademark Office as well as from the European Patent Office, Australia, China, Hong Kong, Israel, India and Japan. We also filed patent applications describing the use of our imaging technology in several other medical applications.
 
Since our formation, we have not generated any revenue. We do not anticipate generating any revenue for the foreseeable future and we do not yet have any specific launch dates for our product. For the six months ended June 30, 2014, we had a total comprehensive loss of $2.2 million.  For the year ended December 31, 2013, we had a total comprehensive loss of $4.0 million.  As of June 30, 2014, we had an accumulated deficit of $24.7 million and a total shareholders’ deficit of $998,000.
 
Our Solution
 
CRC screening can reduce death rates from CRC by detecting polyps at an earlier, more treatable stage. CRC is one of the few cancers that can be prevented through screening because pre-cancerous polyps, from which colon cancers often develop, can be identified and removed. Today, there is a range of options for CRC screening in the average-risk population, with current technology falling into two general categories: (i) structural exams, such as optical colonoscopy (which is currently regarded as the “gold standard” for CRC screening), sigmoidoscopy, CTC and optical capsules (all of which require aggressive bowel preparation), which are invasive exams that enable physicians to visualize the colon for abnormalities; and (ii) stool tests, such as FOBTs, FITs and stool DNA tests, which test for blood and irregularities in DNA. Notwithstanding the many CRC screening alternatives, the fact that the tests are encouraged by clinicians and insurers and the clinical value of screening for CRC, a large portion of the population are still reticent to go for CRC screening and are not satisfied with the currently available alternatives.
 
 
74

 
 
We believe that our imaging capsule could represent a potential breakthrough in CRC screening by providing a structural exam without the pain, discomfort and embarrassment experienced by some patients undergoing a traditional optical colonoscopy and other currently available screening methods by offering the following benefits:
 
 
eliminating the need for fasting and prior bowel cleansing, which would differentiate our imaging capsule from every other currently available structural screening exam;
 
 
providing patients with a procedure that requires them to swallow our capsule and small amounts of a contrast agent, thereby minimizing any disruption to their normal activities;
 
 
eliminating the need to sedate patients;
 
 
obviating the requirement for the insufflation (the forcing of air into the gastrointestinal tract) of patients;
 
 
administering our technology on an outpatient basis;
 
 
providing digital reporting, storage and remote consulting capabilities; and
 
 
enabling a physician to analyze the results in approximately 10 minutes, which would be less time than is required to conduct an optical colonoscopy.
 
Although our imaging capsule utilizes radiation that is considered low dose, we believe that the risks associated with such radiation exposure are low compared to risks associated with other procedures such as perforation, bleeding or sedation related effects (optical colonoscopy and sigmoidoscopy) and dehydration and damage to kidneys (optical capsules).  Unlike FOBTs, FITs and stool DNA tests, our capsule-based imaging modality generates structural information on the colon, which could assist in the detection of pre-cancerous polyps. We therefore do not believe that the low dose radiation in our imaging capsule will make our imaging capsule less attractive to physicians and patients than other less effective products that do not employ any radiation.
 
We believe that gastroenterologists will embrace our technology and encourage the use of our imaging capsule. This may increase the number of people undergoing CRC screening and may cause more people with polyps to obtain a polypectomy – a therapeutic procedure during which polyps are removed and which currently receives higher reimbursement coverage than both screening and diagnostic colonoscopies.
 
Our goal is to become a leading supplier of CRC screening technology and to establish our technology as a leading CRC screening method. Key elements of our strategy include:
 
 
obtaining CE marking for the marketing and sale of our imaging capsule in the European Union, followed by obtaining regulatory approvals for the sale of our imaging capsule initially in the United States and Japan.
 
 
In Europe and Japan, we intend to offer our imaging capsule as an imaging and screening tool for the general population. In the United States, we may choose to first obtain regulatory approvals for our imaging capsule as an adjunct tool to FOBTs and FITs, and after we have conducted more extensive clinical studies in the United States, we anticipate applying to the FDA for the use of our imaging capsule as an initial screening tool;
 
 
obtaining third-party reimbursement for our technology;
 
 
enhancing our existing technology portfolio and developing new technologies; and
 
 
successfully marketing our product to establish a large customer base.
 
 
75

 
 
Our Technology
 
Our technology is based on an ingestible imaging capsule, which is swallowed by the patient and propelled by natural motility through the gastrointestinal tract. Our imaging capsule transmits information to a receiving device worn on the patient’s body that stores the information for off-line analysis. Our imaging capsule consists of an X-ray source and several X-ray detectors. The X-ray source is contained in a rotating radiation shield, enabling the generation of 360-degree angular scans. The collection of successive angular scans is intended to enable the virtual reconstruction of a portion of the colon. During movement of our imaging capsule longitudinally through the colon, successive images of portions of the colon enable the three-dimensional reconstruction of the colon. Our imaging capsule is also intended to enable identification of polyps, which protrude inward into the colon, through the detection of irregularities in the topography of the colon.
 
Our imaging system and CPS are intended to be prescribed to patients by physicians. Just prior to swallowing our capsule, a patient will begin drinking small amounts of a radio opaque contrast agent (such as barium sulfate or iodine) with his or her meals, which enhances the contrast of the colon surface. The capsule is propelled by natural motility through the gastrointestinal tract. As it makes its way through the gastrointestinal tract, information is transmitted to a receiving device worn by the patient that stores the information for offline analysis. After our imaging capsule is expelled from a patient’s body, the CPS data will be transferred to physicians, who will then utilize our data viewer software application to analyze the data collected by our imaging capsule. Our proprietary software is being designed to process the data and produce a two and three-dimensional visualization of the colon. A physician will then analyze the visualization to determine whether any anatomical anomalies are present on the surface of the colon. In Europe and Japan, we intend to offer our imaging capsule as an imaging and screening tool for the general population. In the United States, we currently plan for the technology to initially be an adjunct to FOBT or FIT to help detect polyps, masses, cancers and other lesions, and after we have conducted more extensive clinical studies in the United States, we anticipate applying to the FDA for the use of our imaging capsule as an initial screening tool.
 
Our imaging capsule consists of the following three main subsystems that together enable the generation of high resolution 3D imaging of the colon, further described below: (i) X-ray radar-based colon imaging capsule; (ii) CPS; and (iii) PC-based 3D imaging workstation.
 
Imaging Capsule
 
The imaging capsule, which is designed to measure, collect and transmit the clinical data, is comprised of the following components:
 
 
X-ray Source – including radioactive material sealed in a cylindrical housing.
 
 
Collimator – Radiation shield around the source, which absorbs most of the radiation. Several radial holes enable distribution of radiation in defined directions.
 
 
X-ray Sensor – Comprised of several solid state X-ray detectors for measuring the scattered radiation intensity.
 
 
Activation Circuit – Activates and/or deactivates the capsule. The circuit shall operate either by illumination of light or magnetic induction. The activation shall be coded to avoid false activation.
 
 
Tilt Sensor – Indication of capsule motion (3D acceleration).
 
 
Rotation Motor – For rotating the collimator and X-ray Source.
 
 
Source Concealment Mechanism – Conceals the source inside the radiation shield.
 
 
R-T – Radio frequency transceiver device to communicate with the receiver.
 
 
Batteries – Electrical power supply for the capsule.
 
 
Memory – Data storage. The imaging capsule should be able to store up to an hour of measured data.
 
 
CPS coil – Transmits a continuous electromagnetic wave utilized by an external localization system to track 3D position.
 
 
76

 
 
         
 
Image for illustration purpose only
 
Capsule Positioning System
 
The CPS is a small, disposable and biocompatible sticker which is being designed to automatically track the imaging capsule’s positioning and orientation throughout the gastrointestinal tract transition, control the capsule scan mechanism through an embedded activation algorithm, capture imaging data from the capsule through radio frequency communication to a non-volatile memory device and enable data retrieval through either wired or wireless communication to an external processor.
 
The CPS is comprised of the following components:
 
 
Sticker Housing – Biocompatible and water-resistant sticker and housing integrating all functional components, attached to the patient’s back, enabling five days of continuous operation.
 
 
Recorder–Consists of receiver electronics embedded software and nonvolatile memory.
 
 
Antennas – radio frequency antennas are embedded into the sticker housing and used to communicate with the capsule.
 
 
Activation/Deactivation Circuit – Used to activate/deactivate the CPS through a specialized protocol.
 
 
UI Indicators - Provides user with vocal, light or vibration indication as required.
 
 
PCB – Electronics’ printed circuit board.
 
 
Microcontroller – Runs embedded software and logic that manages the CPS.
 
 
RF Transceivers – Several transceivers used to communicate with the imaging capsule.
 
 
TILT/Compass Sensors – To determinate patient’s body movements.
 
 
77

 
 
 
Batteries – Electrical power supply for the CPS.
 
 
Memory – Non-volatile data storage to store data acquired by the imaging capsule.
 
 
Image for illustration purpose only
 
Workstation
 
The workstation is a specialized, user friendly, personal computer-based software package designed to retrieve and process clinical data from the CPS and to reconstruct and produce 3D visualization of the colon surface. The workstation is comprised of the following software components:
 
 
Communication Driver Software – to communicate with the CPS and retrieve collected data following procedure completion.
 
 
Data Processing Software – to process and reconstruct clinical data into a 3D structure.
 
 
Data Display and Management Software – includes the following functions:
 
 
3D visualization of the reconstructed colon surface.
 
 
Measurement and annotation tools.
 
 
Registration of patient and capsule data and management of the patient database.
 
 
78

 
 
 
 
Image for illustration purpose only
 
Our Imaging Capsule – Non-Clinical, Pre-Clinical and Clinical History
 
For the past nine years, we have developed and validated our new capsule-based imaging modality for CRC screening. Below is a summary of the validation tests carried out by us in the laboratory, in phantoms, animals and humans, which were designed to evaluate this new imaging modality’s performance and potential clinical value.
 
Non-Clinical and Pre-Clinical Testing
 
Imaging Performance Testing
 
The Check-Cap ingestible capsule transmits colon surface data as the capsule progresses through the colon. This data consists of imaged slices perpendicular to the capsule’s longitudinal axis; slices are then reconstructed by the workstation to produce 2D and 3D images of the colon. Following are performance measurements of the capsule imaging.
 
•            Modulation Transfer Function, or MTF . The existing design of our imaging capsule was moved along a longitudinal-edge phantom setup in 3mm steps. The figure below shows a typical raw signal after filtering for peak detection. The same test was carried out using an angular-edge phantom setup, which demonstrated similar results to those shown below. These tests do not take into account noise characteristics.
 
 
 
Image for illustration purpose only
 
 
79

 

For each position of the capsule in the phantom, the mean signal intensity (peak) was measured, the result of which is shown in the left figure below. Resulting line spread function, or LSF, which is the differential of the curve in the left figure below, is shown in the right figure below.
 
 
Image for illustration purpose only
 
The graphs above demonstrate that the existing design of our imaging capsule can detect objects of approximately 2-3mm when noise is not taken into account.
 
            Resolution Limit: Estimation of the Smallest Visible Object Size. In order to estimate the size of the smallest visible object, both spatial resolution and noise characteristics must be taken into account. The graph below presents the estimated MTF of our imaging capsule. Noise analysis indicates MTF 1/3 for minimum visibility, which demonstrates that the smallest visible object that can be detected with the existing design of our imaging capsule (in the conditions used, which included a colon diameter of 30mm) is of approximately 5-6 mm (see graph below).
 
 
Image for illustration purpose only
 
 
80

 
 
Image Reconstruction
 
Two main characteristics of our imaging capsule contribute to the image reconstruction performance:
 
 
The number of photons hitting the detector per time frame.
 
 
The angular spread of the photon beam coming out of the capsule collimator.
 
Based on the laboratory tests performed with the current version of our imaging capsule, polyps of 6 mm and larger should be visible and 10 mm polyps and larger are expected to be detected at high sensitivity. To further enhance the visibility of 6 mm - 9 mm polyps, a new design of the collimator was successfully tested in a future version of our imaging capsule, which enables 2.5 times the number of photons to be detected on the detectors, allowing the implementation of image enhancement algorithm, which is expected to improve the imaging performance.
 
Animal Testing and Tissue Equivalent Phantom Image Reconstruction
 
The physics of the Check-Cap imaging modality was tested in the laboratory on phantoms with tissue equivalent material and in animals to ensure that laboratory conditions mimic real life clinical scenarios.
 
Following the initial proof of concept, we performed a series of studies in order to evaluate the feasibility and preliminary safety of our technology. All of the studies were performed in pigs ranging from 60 to 90 kg. Pigs, which are commonly used in gastrointestinal studies, were selected as the animal model for preliminary evaluation of our imaging capsule based on the resemblance of the porcine colon size and morphology to the human colon. However, there are marked differences between the colon of pigs and that of humans. The pig colon is much longer, has a larger diameter in addition to other anatomical differences. In the pig model, the pressure waves of peristalsis are believed to be more frequent and shorter than in humans. As a result, we believe that colon content movement is substantially slower and more frequent in pigs than in humans. In these studies, we did not intend to collect statistically significant data; hence, the tests were repeated a limited number of times until adequate data was collected.
 
The first test was performed to demonstrate imaging proof-of-concept using a wired imaging capsule. This technology included all the basic features intended to be included in the clinical system, but on a larger scale due to the use of off-the-shelf components. The subsequent studies used versions of the imaging capsule that integrated most of the imaging components, software and electronics of the imaging capsule that we used with humans. Since off-the-shelf components were used, the animal capsules were larger and heavier than the version of our imaging capsule that are used clinically.
 
Raw data from an animal colon showing a decrease in X-ray florescence, or XRF, photon signals and an increase in Compton backscattering, or CMT, signals corresponding to the position of a polyp that was detected when our imaging capsule passed over the polyp is shown in the image below. These two signals are combined in order to form a three dimensional image below.
 
 
81

 
 
 
Image for illustration purpose only
 
The animal studies conducted to date demonstrate that our technology provides sufficient resolution for the detection of 10 mm polyps, which is the size of clinically significant polyps. The animal studies also demonstrated that 5 mm polyps can be detected, though with lower resolution than 10 mm polyps in the first animal capsule. Animal health was maintained throughout the studies. No adverse effects related to passage of our imaging capsule were noted.
 
The imaging capsules evaluated in the animal studies were significantly larger than the imaging capsules that we are using with humans. The differences in anatomy, physiology, and imaging capsules may have several effects on the data compared to use in the human population. Motility of the imaging capsules through the digestive system was slow due to the specific shape of the porcine gastrointestinal tract. In addition, because of the size of the imaging capsule, it was retained in the stomach for many hours and even days. Accordingly, the animal model required that normal ingestion be replaced by direct insertion of the imaging capsule into the small bowel. In order to simplify the development and animal testing, we used Tungsten radiation source with long half-life (120 days).
 
Following the success of the animal testing, a series of in-vitro tests were conducted to simulate different clinical scenarios in the laboratory using a miniaturized human imaging capsule. Polyps were created and reconstruction of the laboratory phantoms with a human-imaging capsule was generated to assess the ability to detect polyps as the capsule advances in the colon. The in-vitro tests demonstrated the imaging capabilities of our imaging technology. Below is the reconstruction of a laboratory phantom image.
 
 
Image for illustration purpose only
 
 
82

 
 
Polyp Detection Analysis
 
Laboratory tests were carried out to estimate the capsule’s ability to detect polyps in phantoms and demonstrate sensitivity and specificity of such detection. Below is an example of the reconstruction of a scan composed of three slices: XRF, CMT and a fused (combined) image.
 

 
Receiver Operating Characteristics
 
Standard receiver operating characteristics, or ROC, curves were generated from phantom data with 8 mm polyp in a 30 mm barrel phantom with 3% iodine concentration mimicking the colon contents. CMT, XRF and fused (combined) data were analyzed based on 2D slices that were generated and standard deviation indicator. There were a few cases where the noise in the phantoms was high enough to generate polyp false positive condition separately for each data type, especially in CMT. However, fusion of CMT and XRF data contributed to noise reduction and enabled to demonstrate 100% true positive and 0% false positive.
 
 
83

 
 

 
Clinical Trials
 
We initiated our first human clinical study in Germany in January 2010. The purpose of the study was to collect pressure and motility information from the digestive system of human volunteers. This study was conducted with a passive capsule that contained no X-ray source or detectors. It included several electronic components of the imaging capsule and had similar dimensions to the current imaging capsule.
 
The information we obtained from the first clinical study was used to develop the initial operational algorithm for the imaging capsule that was used in our next clinical study, which was a clinical proof-of-concept study conducted at the Tel-Aviv Medical Center in Israel.  The study was designed to assess the safety and feasibility of our imaging capsule with respect to total and segmental transit time, and the effect of variable colon dimensions on these parameters. The clinical proof-of-concept study, which was based on a 10-case study and used a prior version of our imaging capsule, did not identify any material safety or feasibility issues. The study demonstrated the applicability of our imaging technology to the human colon, generating images taken in the colon without any prior bowel-cleansing. All subjects ingested the capsule easily with smooth passage within the designated transit time, on average, within two to three days. There were no reported device-related adverse events. Mild effects on bowel movements were noted, which were determined to be related to the contrast agent and passed within one to two days after the capsule was excreted.
 
The 10-case clinical proof-of-concept study focused on assessing the safety and feasibility of the Check-Cap imaging system.  The 10-case study is the first part of a multi-center, prospective clinical feasibility study to establish the safety, functionality and preliminary efficacy of the Check-Cap imaging system in patients eligible for CRC screening, by comparing results from the clinical feasibility study with those from non-invasive, low-sensitivity FOBTs and FITs, as well as from optical colonoscopies. The feasibility study is designed to include approximately 60 subjects. The study is being conducted in Israel at the Tel Aviv Medical Center and Laniado Hospital and is planned to also be conducted at the Erasmus University Medical Center in the Netherlands.  The clinical feasibility study will evaluate the image resolution generated by the capsule in an unprepped human colon, will assess polyp imaging in various shapes and in different segments of the colon and will evaluate the safety of the device in terms of total and segmental transit time and analyze the effects of the presence of polyps and variable colon dimensions on these parameters. The study will seek to create a clinical atlas of images that will enable comparisons between images acquired by different CRC screening modalities. During the feasibility study we will collect data about the overall imaging of the colon’s internal surfaces during the passage of the capsule to support the development of a correlation map of polyps identified through our imaging system with polyps imaged by optical colonoscopy and CTC. Additionally, the feasibility study will measure total radiation exposure and the distribution of contrast material within the colon.
 
 
84

 
 
Following the successful completion of the broader multi-center, prospective clinical feasibility study, we plan to submit during 2015 a request for CE marking for the marketing and sale of our capsule in the European Union. We expect to perform post-marketing studies in Europe following CE marking for the purpose of collecting additional clinical data. Subject to regulatory approval and available capital, we anticipate launching our product commercially in Europe during 2016.
 
We plan to conduct a second pre-IDE meeting, now referred to as a pre-submission meeting, with the FDA in late 2015, and subsequently submit a request for the approval of an IDE for a pivotal study in the United States to: (i) demonstrate device safety as evidenced by a lack of device-related serious adverse events; and (ii) provide efficacy data concerning our imaging capsule’s sensitivity and specificity. We anticipate that the FDA approval for the pivotal study will be subject to our providing sufficient clinical data from the multi-center, prospective clinical feasibility study. Subject to the FDA’s approval, we intend to conduct a multi-center, prospective screening study in the United States to assess the performance of our imaging capsule in selected groups of patients. We may first seek to obtain regulatory approvals for the use of our imaging capsule in the United States for screening of the colon as an adjunct to negative FOBTs or FITs to detect polyps, masses, cancers and other lesions. The proposed pivotal study will be designed to establish that our imaging capsule is a tool to detect significant polyps that are not detected via the current FIT or FOBT screening paradigm. We have been in discussions with the FDA regarding the design of the proposed pivotal study and end points, as well as the sample size. After we have conducted more extensive clinical studies in the United States, we anticipate applying to the FDA for the use of our imaging capsule as an initial screening tool for the general population. Subject to the successful completion of our clinical trials and the receipt of initial FDA approval for the marketing of our imaging capsule in the United States, we anticipate launching our product commercially in the United States during 2017.
 
We also intend to pursue clinical trials for regulatory approvals in Japan and China in parallel to the U.S. pivotal study.
 
We recently concluded a limited, single-center, feasibility study at Rambam Medical Center in Haifa to assess the motility of our capsule in healthy subjects, with the objective of optimizing the daily routine of the subjects in order to shorten the transit time of our imaging capsule.  The study, in which 15 healthy subjects participated and used a dummy capsule with the same weight and dimensions as our current imaging capsule, did not identify any safety issues and all capsules were retrieved.  A structured daily routine determined the timing of the following: capsule ingestion, the subjects’ daily meals, the contrast agent ingestion and one daily dose of 10 mg of Bisacodyl, and all subjects continued their regular active lifestyles (such as work and sports). The average transit time of the dummy capsule in the 15 subjects was approximately 24 hours less than the average transit time of our imaging capsule in subjects participating in the multi-center feasibility study in which the participants do not ingest a daily dose of Bisacodyl, are less active and are continuously monitored in a designated apartment until the capsule is excreted.
 
Research and Development
 
Our research and development strategy is centered on developing our imaging system. Our research and development team is located at our facilities in Isfiya, Israel, and consists of 32 employees and independent contractors as of June 30, 2014 and is supported by highly experienced consultants.
 
We have received government grants as part of our research and development programs approved by the OCS. The total gross amount of grants actually received by us from the OCS, including accrued LIBOR interest, as of June 30, 2014, totaled approximately $3.1 million. Since June 30, 2014, we have received additional funding from the OCS in the aggregate amount of $566,551 under an approved OCS grant in the total amount of $702,000 for a research and development program for the 12 month period commencing March 1, 2014.  The financial liability recorded by us with respect to such OCS grants totaled approximately $1.2 million as of December 31, 2012 and $1.6 million as of December 31, 2013 and June 30, 2014. Because the repayment of the OCS grants will be in the form of future royalties, commitments to the OCS are presented on our balance sheet as a financial liability at the fair value of the expected cash flows to be repaid, discounted at a discount rate commensurate with the risk level of the research and development project.  As of June 30, 2014, we had not paid any royalties to the OCS.
 
We incurred approximately $1.6 million in research and development expenses, net (after deducting participation by others and government grants) for the six months ended June 30, 2014 and $2.7 million in research and development expenses, net (after deducting participation by others and government grants) for each of the years ended December 31, 2013 and 2012. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Operations Overview— Research and Development Expenses, Net.”
 
 
85

 
 
Intellectual Property
 
An important part of our competitive strategy is to seek, when appropriate, protection for our products and proprietary technology through a combination of U.S. and foreign patents, trademarks, trade secrets and contractual arrangements with our employees, consultants and suppliers. These measures, however, may not be adequate to protect our technology from unauthorized disclosure, third-party infringement or misappropriation as these parties may breach these agreements, and we may not have adequate remedies for any such breach. We intend to prosecute and defend our proprietary technology. The primary test for patent protection eligibility includes novelty, non-obviousness and usefulness.
 
We submit applications under the Patent Cooperation Treaty, or PCT, which is an international patent law treaty that provides a unified procedure for filing a single initial patent application to seek patent protection for an invention simultaneously in each of the member states. Although a PCT application is not itself examined and cannot issue as a patent, it allows the applicant to seek protection in any of the member states through national-phase applications.
 
As of October 5, 2014, we had 16 granted patents (not including separate validations in Europe), 1 “allowed” patent application and 22 pending patent applications (not including “allowed”) worldwide relating to various elements and functions of our products and related enhancements. We have submitted patent applications covering our technology in the United States, member states of the European Patent Organisation, Australia, Brazil, Canada, China, Hong Kong, India, Israel, Japan and South Korea. We have received patent grants for our core patent by the United States Patent and Trademark Office as well as from the European Patent Office, Australia, China, Hong Kong, Israel, India and Japan.
 
Our registered U.S. Patent Number 7,787,926 discloses an ingestible capsule with a radiation source and radiation detectors that, when used in conjunction with a radio opaque contrast agent, is adapted to detect clinically relevant findings in the colon. Utilizing X-ray fluorescence and Compton back scatterings, the capsule is able to measure the distance between the capsule and the colon wall and to distinguish between gas, intestinal contents, and clinically significant findings in the gastrointestinal tract.
 
A second PCT patent application (PCT/IL2008/000163), which is pending in several countries in the national-phase and granted in Europe and Hong Kong, discloses additional features such as a rotating collimator and improved scanning mechanisms, the capability to determine tissue density to differentiate between different types of polyps, as well as the capability to determine capsule movement in the colon. Another PCT application (PCT/IL2011/000462), which is pending in several countries in the PCT national-phase, discloses a number of alternate fail safe concealment mechanisms that can be utilized in the capsule to ensure that the X-ray source is blocked when the capsule is not scanning and is open when it is scanning, allowing the capsule to image the colon. The fail safe feature ensures that in the event of power failure, the radiation source is blocked and X-rays do not escape.
 
In another PCT patent application (PCT/IL2008/000765), which was granted in the United States, Europe, Israel and Japan, we disclose an imaging catheter that utilizes X-ray fluorescence, Compton back scattering and electron back scattering. The imaging catheter is designed for use in cardiac applications as well as intra-operative imaging applications such as imaging inside blood vessels where optical imaging cannot be performed because of obscuring circumstances.
 
While our policy is to obtain patents by application, to maintain trade secrets and to seek to operate without infringing on the intellectual property rights of third parties, technologies related to our business have been rapidly developing in recent years.  Additionally, patent applications that we may file may not result in the issuance of patents, and our issued patents and any issued patents that we may receive in the future may be challenged, invalidated or circumvented. For example, we cannot predict the extent of claims that may be allowed or enforced in our patents nor be certain of the priority of inventions covered by pending third-party patent applications. If third parties prepare and file patent applications that also claim technology or therapeutics to which we have rights, we may have to partake in proceedings to determine priority of invention, which could result in substantial costs to us, even if the eventual outcome is favorable to us. Moreover, because of the extensive time required for clinical development and regulatory review of a product we may develop, it is possible that, before our imaging capsule can be commercialized, related patents will have expired or will expire a short period following commercialization, thereby reducing the advantage of such patent. Loss or invalidation of certain of our patents, or a finding of unenforceability or limited scope of certain of our intellectual property, could have a material adverse effect on us. See “Risk Factors— Risks Related to Our Intellectual Property.”
 
 
86

 
 
In addition to patent protection, we rely on trade secrets, including unpatented know-how, technology innovation, drawings, technical specifications and other proprietary.  We also rely on protection available under trademark laws, and received a notice of allowance for the “CHECK-CAP” mark and design logo in the United States and hold a registered trademark for the “CHECK-CAP” design logo in Europe.
 
Competition
 
Competition for our imaging capsule comes primarily from traditional well-entrenched technologies for detecting gastrointestinal disorders and diseases, such as optical colonoscopy, sigmoidoscopy and CTC. The principal manufacturers of equipment for optical colonoscopy and sigmoidoscopy are Olympus, Richo Company Ltd., Hoya and Fuji Film. The principal manufacturers of equipment for CTC are General Electric Healthcare Systems, Siemens Medical Solutions, Philips Medical Systems Ltd. and Toshiba Corporation. All of these companies have substantially greater financial resources than we do, and they have established reputations as well as worldwide channels for distribution medical instruments to physicians.
 
In addition, several companies are developing technologies based on molecular diagnostics (MDx) (from blood and other bodily fluids), tests that investigate the link between genes and the function of metabolic pathways, drug metabolism and disease development with a primary focus on the study of DNA, RNA and proteins. Genetic markers can be traced within stool samples in minute quantities. A U.S.-based company, Exact Sciences, is developing a special collecting kit and associated analyzer to diagnose CRC using stool-based markers. The method of screening for colon cancer using stool DNA testing has been endorsed by the ADS, the U.S. Multi-Society Task Force on Colorectal Cancer and the American College of Radiology, but not by the U.S. Preventive Services Task Force.
 
In addition, we have competitors who offer or are developing optics-based optical capsule endoscopy systems. Given Imaging, an Israeli-based company that was acquired by Covidein plc (NYSE: COV) in February 2014, has developed visualization capsules for the detection of disorders of the esophagus, small bowel and colon. It launched the PillCam Colon Capsule in Europe in 2007 and has limited sales. In early 2014, the FDA granted approval for optical capsule endoscopy for CRC screening for use in patients after incomplete colonoscopy. However, this technology requires bowel cleansing to a greater degree than is required for a regular optical colonoscopy, which can result in dehydration and in turn can lead to cancellation of the procedure in certain cases. Moreover, because this procedure must be completed within several hours in order to maintain a clean colon and to accommodate the capsule’s limited battery life, patients are required to drink large amounts of liquid so that the capsule can flow through the gastrointestinal tract during the time allotted. Furthermore, camera-based optical capsule endoscopy procedures generate a large number of images, often requiring more physician time to analyze the images than to conduct a colonoscopy.
 
Olympus is a Japanese company that manufactures optics and imaging products in China. Olympus’ medical division of develops and sells products in the endoscopy, endosurgery and endotherapy fields. The FDA approved Olympus’ Endo-Capsule product for the visualization of the small bowel in late 2007 and the company is currently developing a capsule-based technology for CRC screening.
 
IntroMedic is a private Korean medical device manufacturer specializing in the development of technologies in the field of optical capsule endoscopy. IntroMedic’s MiroCam product, which is currently undergoing FDA trials in the United States, uses an oxide silicone chip for imaging and human body communication technology for the transmission of images. The company is developing a capsule-based technology for CRC screening.
 
RF System is a Japanese manufacturer of medical device equipment and cameras for industrial use. Its Sayaka product is a new, “battery free” capsule endoscope that uses induction charging to draw power. The company is developing a capsule technology for CRC screening.
 
All of the abovementioned CRC optical capsule endoscopy products under development rely on similar optics (camera) and complementary metal oxide semiconductor or CMOS, based technology, thus requiring a significant bowel cleansing prior to performing the procedure.
 
 
87

 
 
Sales and Marketing
 
Our goal is to establish our position as a leading player in the CRC screening market. Although we do not currently generate revenues, we expect to generate revenues after we obtain regulatory clearance or approval through sales of our imaging capsule system.
 
Because we are still in the clinical and development stage, we are subject to certain challenges, including, among others, that:
 
 
our technology has been tested on a limited basis and therefore we cannot assure the product’s clinical value;
 
 
we need to CE mark the devices in the European Union and obtain the requisite regulatory approvals in the United States, Japan and other markets where we plan to focus our commercialization efforts;
 
 
we need to raise an amount of capital sufficient to complete the development of our technology, obtain the requisite regulatory approvals and commercialize our current and future products;
 
 
we need to obtain reimbursement coverage from third-party payors for procedures using our imaging capsule;
 
 
we need to increase our manufacturing capabilities; and
 
 
we need to establish and expand our customer base while competing against other sellers of capsule endoscopes as well as other current and future CRC screening technologies and methods.
 
Our ability to operate our business and achieve our goals and strategies is subject to numerous risks as described more fully in “Risk Factors.”
 
Subject to our receipt of regulatory approval and available capital, we expect to initially launch our imaging capsule in 2016 in selected markets in Europe, where regulatory hurdles are generally lower and in which current penetration of optical colonoscopy as a screening tool is low relative to the U.S. market. We intend to target major markets in Europe. In these markets, we are planning to work with local distributors who are active in the gastroenterology field and who have already demonstrated excellent performance in introducing new and innovative technologies.
 
In the European Union and Japan, we intend to offer our imaging capsule as a primary screening tool for the general population. In the United States, we may target the population in a two-staged approach: first, we plan to obtain the requisite regulatory approvals to offer our imaging capsule as an adjunct tool to FOBTs and FITs, and after we have generated additional clinical data to support general screening indication, we plan to seek FDA approval for the use of our imaging capsule as a primary screening tool for the general population.
 
Subject to the successful completion of our clinical trials and the receipt of our initial FDA approval, we expect to launch the product in 2017 in the U.S. market, where we will consider setting up our own sales force or joining forces with a strategic partner. Initially, we are planning to sell our imaging capsule to the private sector. Simultaneously, we will work intensively to obtain reimbursement by Medicare and private insurers within the shortest possible time frame.
 
Subject to local regulatory approval, we also intend to market our imaging capsule in key markets in Asia. Initial efforts will focus in Japan in view of its well-developed CRC screening market.
 
Manufacturing and Suppliers
 
Our manufacturing operations are conducted at a facility located in Isfiya, Mount Carmel, Israel. We lease approximately 610 square meters at this facility under a lease agreement providing for a term of 10 years, commencing on June 1, 2012 and ending on May 31, 2022. We have the right to terminate the agreement at any time. We currently have sufficient space to manufacture our imaging capsule for the clinical studies but have limited resources, facilities and experience in commercially manufacturing large quantities of our imaging capsule, external receiver and software application to meet the demand we expect from our expanded commercialization efforts.  We expect to face certain technical challenges as we increase manufacturing capacity, including, among others, logistics associated with the handling of radioactive materials, equipment design and automation, material procurement, lower than expected yields and increased scrap costs, as well as challenges related to maintaining quality control and assurance standards. Our production objective is to establish a scalable capacity in order to meet such expanded demand for our imaging capsule and market expansion. If we are unable to scale our manufacturing capabilities to meet market demand, our growth could be limited and our business, financial condition and results of operations could be materially adversely affected.
 
 
88

 
 
We are currently building our production capacity and developing supply chain systems to support production for clinical trials. Our current capacity was built to accommodate our clinical phase. We have integrated a product life management system to enable overall life cycle tracking and documentation including full configuration management control and manufacturing documentation.
 
During the clinical testing phase in Europe, we are planning to conduct both the assembling of our imaging capsule and the insertion of the X-ray source at our facilities. As we proceed to the commercial phase in Europe and the U.S. clinical trial, we expect to collaborate with a third-party in the manufacturing and integration of the X-ray source into our imaging capsule, in order to increase the time and cost efficiency of the process. We are currently in discussions with several potential partners.
 
We do not currently have any sales. We are planning to develop a scale-up plan to meet our expected commercial supply needs. We are also working on a plan to expand our manufacturing capacity to support the expected larger clinical volume and subsequent higher volumes expected in the early commercialization stage. We are considering, among other options, the expansion of our assembly line in Israel, the buildup of new assembly lines in the United States and Europe, and alternative sources for the key capsule components (such as the motor, X-ray detectors, electrical components and PCBs). All of the facilities in which manufacturing and assembly of our products will be conducted will need to comply with applicable regulations and standards for medical devices.
 
We have received grants from Government of the State of Israel through the OCS, the terms of which require that products developed with OCS grants be manufactured in Israel and that the technology developed thereunder may not be transferred outside of Israel, unless prior approval is received from the OCS, which we may not receive. We are currently considering whether it would be possible to assemble the capsule without the X-ray source in Israel, and have the X-ray source subsequently inserted into our imaging capsule at a reactor or cyclotron site or at a distribution center outside Israel. Even following the full repayment of any OCS grants, we must nevertheless continue to comply with the requirements of the Research Law. The foregoing restrictions may impair our ability to outsource or transfer development or manufacturing activities with respect to any product or technology outside of Israel.  See “Risk Factors – Risks Related to Our Operations in Israel.”
 
We currently depend on limited source suppliers for some of the components necessary for the production of our imaging capsule. For example, for the current version of the imaging capsule used in clinical trials, we currently have one leading supplier for the motor that we are using to rotate the collimated X-ray source in our imaging capsule and we currently have one leading supplier for the X-ray detectors used in our imaging capsule. There are a limited number of manufacturers worldwide who are capable of manufacturing the motor and the specially designed X-ray detectors that we currently use in our imaging capsule.  In addition, the ASIC residing in our imaging capsule is currently manufactured for us by a single FAB.  There are many alternative FABs worldwide and the design of our current ASIC could be adapted in the event it became necessary to use an alternative FAB.  Our current suppliers have been able to supply the required quantities of such components to date.  However, if the supply of these components is disrupted or terminated or if our current suppliers are unable to supply required quantities of components, we may not be able to find alternative sources for these key components in a timely manner. Although we are planning to maintain strategic inventory of key components, the inventory may not be sufficient to satisfy the demand for our imaging system if such supply is interrupted, or subject to risk of loss due to catastrophic events such as a fire at our storage facility. As a result, we may be unable to meet the demand for our imaging system, which could harm our ability to generate revenues, lead to customer dissatisfaction and damage our reputation. If we are required to change the manufacturer of any of these key components, there may be a significant delay in locating a suitable alternative manufacturer. In addition, we may be required to verify that the new manufacturer maintains facilities and procedures that comply with FDA and other applicable quality standards and with all applicable regulations and guidelines. The delays associated with the identification of a new manufacturer could delay our ability to manufacture our imaging system in a timely manner or within budget. Furthermore, in the event that the manufacturer of a key component of our imaging system ceases operations or otherwise ceases to do business with us, we may not have access to the information necessary to enable another supplier to manufacture the component. The occurrence of any of these events could harm our ability to meet demand for our imaging system in a timely manner or within budget.
 
 
89

 
 
Employees
 
As of December 22, 2014, we had 36 employees and independent contractors, of whom 6 persons were in administrative, accounting and human resources and 30 persons were in research and development. As of December 31, 2013, we had 34 employees and independent contractors, of whom 6 persons were in administrative, accounting and human resources and 28 persons were in research and development. As of December 31, 2012, we had 36 employees and independent contractors, of whom 6 persons were in administrative, accounting and human resources and 30 persons were in research and development. As of December 31, 2011, we had 30 employees and independent contractors, of whom 5 persons were in administrative, accounting and human resources and 25 persons were in research and development. All of our employees are based in Israel.
 
Under Israeli law, we and our employees are subject to protective labor provisions, including the length of the workday, minimum wages for employees, annual leave, sick pay, determination of severance pay and advance notice of termination of employment, as well as procedures for hiring and dismissing employees and equal opportunity and anti-discrimination laws. While none of our employees is party to any collective bargaining agreements, orders issued by the Israeli Ministry of Economy (formerly named the Ministry of Industry, Trade and Labor) may make certain industry-wide collective bargaining agreements applicable to us. These agreements affect matters such as the length of the workday and week, recuperation pay, travel expenses and pension rights. We have never experienced labor-related work stoppages and believe that our relationships with our employees are good.
 
Israeli law generally requires the payment of severance compensation by employers upon the retirement, death or dismissal of an employee. We fund our ongoing severance obligations by making monthly payments to insurance policies. All of our current employees have agreed that upon termination of their employment, they will be entitled to receive only the amounts accrued in the insurance policies with respect to severance pay. For information regarding the severance pay to which our chief executive officer would be entitled upon termination of his employment, see “—Employment Agreements with Executive Officers.” 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. These amounts also include payments for national health insurance.
 
In addition, we have various consulting arrangements with experts in regulatory, research and clinical matters.
 
Scientific Advisors
 
Certain of our officers and employees including our Chief Executive Officer, our Chief Technology Officer, our Vice President, Research & Development and our clinical director have consulted on an individual, as needed basis with the individuals listed below with respect to matters of scientific relevance. We refer to these individuals as our Scientific Advisors. The amount of consulting services provided by our Scientific Advisors ranges from several hours a month to several hours a year. We intend to establish a routine of group meetings of these individuals as additional clinical data is generated.  The names and biographies of the individuals who act as our Scientific Advisors are set forth below:
 
Dr. Douglas K. Rex is the Chancellor’s Professor and Professor of Medicine at Indiana University School of Medicine and Director of Endoscopy at Indiana University Hospital. His major research interests have been in colorectal disease and, in particular, CRC screening and the technical performance of optical colonoscopy. He co-authored the CRC screening recommendations of the American College of Gastroenterology and those of the Gastroenterology Consortium. He has authored more than 110 original research papers, 50 book chapters, 100 invited papers and editorials, and 15 guideline papers. He is an Associate Editor of Journal Watch Gastroenterology and Reviews on Gastroenterological Disorders , and is a member of the Editorial Boards of Clinical Gastroenterology and Hepatology , Journal of Clinical Gastroenterology , World Journal of Gastroenterology and Gastroenterology and Hepatology . He has served as the ACG representative to the National Colorectal Cancer Round Table, and from 2000-2006 was the chairman of the U.S. Multi-Society (ACG, ASGE, AGA, ACP-ASIM) Task Force on Colorectal Cancer. He has also served in the American College of Gastroenterology as Chairman of the Board of Governors, Secretary, and Treasurer and is a Past President of the ACG. He was awarded Distinguished Professor in 2009. He graduated from Harvard College, summa cum laude, in 1976, and with highest distinction from Indiana University School of Medicine in 1980. Mr. Rex has served as a Scientific Advisor to the Company since July 2009.
 
 
90

 
 
Dr. Walter L. Robb is a mentor, director and angel investor to many Tech Valley start-ups. Dr. Robb joined General Electric in 1951 and served in various capacities at GE in management, research and development, retiring in 1992 as Senior Vice President for Corporate Research and Development and a member of the company’s Corporate Executive Council. For a time he directed GE’s Schenectady R&D Center, one of the world’s largest and most diversified industrial laboratories, with about 1,650 scientists, engineers and technicians concentrating on the company’s longer-range research and development needs. Dr. Robb headed GE Medical Systems (headquartered in Milwaukee) from 1973 to 1986, building it into the world’s leading producer of medical diagnostic imaging equipment. He holds 12 patents and authored more than a score of articles in professional journals. He is a member of the National Academy of Engineering. In 1993, he received the National Medal of Technology from then President Clinton for his leadership in the CT and MR imaging industry. Dr. Robb serves on the board of directors of Celgene Corporation and Mechanical Technology, Inc., which are publicly traded. Dr. Robb received a BS degree in chemical engineering from Penn State University in 1948 and an MS degree and PhD in chemical engineering both from the University of Illinois in 1951. Dr. Robb has served as a Scientific Advisor to the Company since May 2009.
 
Dr. Perry J .   Pickhardt is a professor in the University of Wisconsin Medical School. He served in the U.S. Navy, spending one year as the Department Head of Radiology, U.S. Naval Hospital Guantanamo Bay, Cuba and three years as the head of GI-GU Imaging at the National Naval Medical Center in Bethesda, MD. He also served as an Assistant Professor of Radiology at the Uniformed Services University of the Health Sciences in Bethesda. Among other projects at NNMC, Dr. Pickhardt organized a large multi-center screening trial evaluating CTC and served as the PI. Among other awards and honors, Dr. Pickhardt completed a Figley Fellowship at the AJR Editorial Office in Winston- Salem, NC in 2002. CTC and CRC screening continue to be Dr. Pickhardt’s primary clinical and research interests. His work has resulted in over 250 scientific publications and book chapters, and 3 textbooks including a textbook on body CT. He graduated first in his class from the University of Wisconsin with a B.S. in Physics in 1991 and from the University of Michigan Medical School in 1995. Dr. Pickhardt  has served as a Scientific Advisor to the Company since August 2009.
 
Steve Hanley is currently the Chief Executive Officer of MediBeacon LLC. Mr. Hanley is an experienced global business leader who has managed highly complex pharmaceutical and medical device operations with annual global revenue exceeding $1 billion. As the President of Covidien plc’s Imaging Solutions business unit, he led a multifunctional organization that included sales, marketing, logistics, manufacturing, as well as research and development. Internationally, his track record includes numerous new drug and device product introductions and sales force expansion in Eastern Europe, China and Latin America. Mr. Hanley is experienced working in different cultures and successfully navigating dynamic regulatory environments. Over his nearly 18 years with the Covidien family of companies, Steve developed a large network of business leaders and clinicians to help determine market needs, commercial potential and product positioning. As a sales leader, Mr. Hanley called on radiologists, nuclear medicine physicians, cardiologists, as well as surgeons in specialties including general, orthopedic, and OB/GYN. Mr. Hanley is Principal and Founder of Neem LLC, which was founded in 2009 to focus on startup and entrepreneurial medical device and other life science companies with whom the firm works to bridge the gap between breakthrough technology and commercialization. Mr. Hanley is the Chairman of the Board of Managers for Daya CNS LLC based in St Louis Missouri. In addition, Mr. Hanley currently is on the Advisory Board for Kogent Surgical LLC based in St Louis Missouri. Mr. Hanley received his bachelor’s and master’s degrees in business administration from Marquette University in 1989 and 1995, respectively. Mr. Hanley has served as a Scientific Advisor to the Company since June 2011.
 
Prof. Nadir Arber is a full Professor of Medicine and Gastroenterology. He is a holder of the Yechiel and Helen Lieber chair for Cancer Research at Tel Aviv Sourasky Medical Center and Tel Aviv University, Sackler School of Medicine. Prof. Arber serves as the Director of the Integrated Cancer Prevention Center (ICPC) at Tel Aviv Sourasky Medical Center in Tel Aviv. He also chairs the grants committee of the Sackler School of Medicine at Tel Aviv University. Prof. Arber is the Head of Cancer Research Center, Head of Djerassi Oncology Center, and President of the Israeli Association of Gastroenterology. Prof. Arber, a noted expert in the field of early detection and prevention, has been serving as the principal investigator (PI) of several international, multicenter clinical trials in the field of early detection, prevention and therapy of gastrointestinal malignancies using NSAIDs and in particular, CRC. Prof. Arber has published more than 330 publications. Prof. Arber received a MD from the Hadassah School of Medicine of the Hebrew University of Jerusalem in 1987, an MSc degree from Sackler School of Medicine, Tel Aviv University in 1991 and a MHA degree from Rekanaty School of Management, Tel Aviv University in 1991. Prof. Arber has served as a Scientific Advisor to the Company since January 2012.
 
 
91

 
 
Dr. Jonathan A. Leighton is Professor of Medicine and Chair of the Division of Gastroenterology and Vice Chair of the Department of Medicine at the Mayo Clinic in Arizona. In addition, Dr. Leighton is a member of the Board of Trustees of the American College of Gastroenterology. Dr. Leighton is an active member of, the American Gastroenterology Association, the American Society of Gastrointestinal Endoscopy, and the American College of Gastroenterology. His research interests include inflammatory bowel disease, biomarker discovery, as well as small bowel imaging including optical capsule endoscopy and deep enteroscopy. Dr. Leighton received an MD degree from the University of Arizona in 1981 and completed his internship and residency at the University of Texas Health Science Center in San Antonio, Texas in 1984. Dr. Leighton has served as a Scientific Advisor to the Company since July 2014.
 
Property
 
Our principal executive offices and operations are conducted at a facility located in Isfiya, Mount Carmel, Israel since June 1, 2009. We currently lease approximately 610 square meters at this facility under a lease agreement providing for a term of 10 years, commencing on June 1, 2012 and ending on May 31, 2022, unless earlier terminated by us upon at least 60 days prior written notice. We believe that our current facilities are adequate to meet our needs for the clinical phase of our development.
 
Environmental Health and Safety Matters
 
We are subject to environmental health and safety laws and regulations in Israel, governing, among other things, the use of radioactive materials, including the Israeli Work Safety Regulations (Occupational Safety and Health of Ionizing Radiation Practitioners) 1992-5753 and Women Employment Regulations (Work with Ionizing Radiation), 1979-5739. Our current research and development activities require, and our currently contemplated commercial activities will require, permits from various governmental authorities including, Israel’s Ministry of Environmental Protection, Israel’s Ministry of Health and local municipal authorities. Failure to obtain or maintain any such permits could have a material adverse effect on our business, financial condition and results of operations. The Ministry of Environmental Protection and the Ministry of Health conduct periodic inspections in order to review and ensure our compliance with the various regulations.
 
These laws, regulations and permits could potentially require expenditure by us for compliance or remediation. If we fail to comply with such laws, regulations or permits, we may be subject to fines and other civil, administrative or criminal sanctions, including the revocation of permits and licenses necessary to continue our business activities. In addition, we may be required to pay damages or civil judgments in respect of third-party claims, including those relating to personal injury (including exposure to radioactive materials) or contribution claims. Some environmental, health and safety laws allow for strict, joint and several liability for remediation costs, regardless of comparative fault. We may be identified as a responsible party under such laws. Such developments could have a material adverse effect on our business, financial condition and results of operations.
 
In addition, laws and regulations relating to environmental, health and safety matters are often subject to change. In the event of any changes or new laws or regulations, we could be subject to new compliance measures or to penalties for activities which were previously permitted.
 
Legal Proceedings
 
From time to time, we may be involved in litigation that arises through the normal course of business. As of the date of this filing, we are not a party to any material litigation nor are we aware of any such threatened or pending litigation.
 
There are no material proceedings in which any of our directors, officers or affiliates or any registered or beneficial shareholder of more than 5% of our ordinary shares, or any associate of any of the foregoing is an adverse party or has a material interest adverse to our interest.
 
 
92

 
 
U.S. Government Regulation
 
Our imaging system is a medical device subject to extensive regulation by FDA and other U.S. federal and state regulatory bodies. To ensure that medical products distributed in the United States are safe and effective for their intended use, FDA has imposed regulations that govern, among other things, the following activities that we or our partners perform and will continue to perform:
 
 
product design and development;
 
 
product testing;
 
 
validation and verifications;
 
 
product manufacturing;
 
 
product labeling;
 
 
product storage, shipping and handling;
 
 
premarket clearance or approval;
 
 
advertising and promotion;
 
 
product marketing, sales and distribution; and
 
 
post-market surveillance reporting death or serious injuries and medical device reporting.
 
FDA’s Premarket Clearance and Approval Requirements
 
Unless an exemption applies, before we can commercially distribute medical devices in the United States, we must obtain, depending on the type of device, either prior 510(k) clearance or PMA approval from FDA. FDA classifies medical devices into one of three classes:
 
 
Class I devices, which are subject to only general controls ( e.g. , labeling, medical devices reporting, and prohibitions against adulteration and misbranding) and, in some cases, to the 510(k) premarket clearance requirements;
 
 
Class II devices, generally requiring 510(k) premarket clearance before they may be commercially marketed in the United States; and
 
 
Class III devices, consisting of devices deemed by FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a predicate device, generally requiring submission of a PMA supported by clinical trial data.
 
510(k) Clearance Pathway
 
To obtain 510(k) clearance, we must submit a premarket notification, or 510(k) notice, demonstrating that the proposed device is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976 for which FDA has not yet called for the submission of premarket approval applications. FDA’s 510(k) clearance pathway takes approximately from 6 to 9 months, but it can take significantly longer. FDA may require additional information, including clinical data, to make a determination regarding substantial equivalence.
 
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a new or major change in its intended use, will require a new 510(k) clearance or, depending on the modification, require premarket approval. FDA requires each manufacturer to determine whether the proposed change requires submission of a 510(k), or a premarket approval, but FDA can review any such decision and can disagree with a manufacturer’s determination. If FDA disagrees with a manufacturer’s determination, FDA can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or premarket approval is obtained. If FDA requires us to seek 510(k) clearance or premarket approval for any modifications to a previously cleared product, we may be required to cease marketing or recall the modified device until we obtain this clearance or approval. Also, in these circumstances, we may be subject to significant regulatory fines or penalties.
 
 
93

 
 
De Novo Reclassification
 
If FDA finds that there is no suitable predicate device for our imaging capsule, it will automatically be considered a class III device. However, in instances where a device is novel and there is no suitable predicate device, but that device is deemed to be of low to moderate risk, FDA can reclassify the device to class I or class II via de novo reclassification. This process involves the submission of a reclassification petition, and FDA accepting that “special controls” are adequate to ensure the product’s performance and safety.
 
FDA now allows “direct” de novo reclassification petitions, a mechanism by which a sponsor can directly submit a detailed de novo reclassification petition as the device’s initial submission without having to first receive a not substantially equivalent, or NSE, decision on a 510(k) submission. The direct de novo pathway takes at least 9 to 12 months from submission of the petition to device clearance.
 
Our current strategy is to submit a direct de novo reclassification petition for our imaging capsule. To support a direct de novo reclassification petition, our objective is to demonstrate that the device poses a low to moderate risk to patients. If FDA determines that our imaging capsule is not a candidate for de novo reclassification, it will require approval of the device for market through the PMA process.
 
Alternatively, if we seek 510(k) clearance and our device is found not substantially equivalent, or NSE, a de novo petition must be filed within 30 days from the receipt of the NSE determination. The request should include a description of the device, labeling for the device, reasons for the recommended classification and information to support the recommendation. The de novo process following an NSE determination has a 60-day review period, although it is typical for the review to take far longer. If FDA classifies the device into class II, the company will then receive an approval order to market the device. This device type can then be used as a predicate device for future 510(k) submissions. However, if FDA subsequently determines that the device will remain in the class III category, then the device may not be marketed until the company has obtained an approved PMA.
 
Premarket Approval Pathway
 
A premarket approval application must be submitted if the device cannot be cleared through the 510(k) process or is found ineligible for de novo reclassification. The premarket approval application process is generally more costly and time consuming than the 510(k) process. A premarket approval application must be supported by extensive data including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to FDA’s satisfaction the safety and effectiveness of the device for its intended use.
 
After a premarket approval application is sufficiently complete, FDA will accept the application and begin an in-depth review of the submitted information. By statute, FDA has 180 days to review the “accepted application,” although, generally, review of the application can take at least 12 to 18 months, but it may take significantly longer. During this review period, FDA may request additional information or clarification of information already provided. Also during the review period, an advisory panel of experts from outside FDA may be convened to review and evaluate the application and provide recommendations to FDA as to the approvability of the device. In addition, FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with quality system regulations. New premarket approval applications or premarket approval application supplements are required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device’s indication for use, manufacturing process, labeling and design. Premarket approval supplements often require submission of the same type of information as a premarket approval application, except that the supplement is limited to information needed to support any changes from the device covered by the original premarket approval application, and may not require as extensive clinical data or the convening of an advisory panel.
 
Clinical Trials
 
Clinical trials are almost always required to support a premarket approval application or de novo reclassification petition and are sometimes required for a 510(k) premarket notification. If the device presents a “significant risk,” as defined by FDA, to human health, FDA requires the device sponsor to file an IDE application with FDA and obtain IDE approval prior to commencing the human clinical trials. The investigational device exemption application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The investigational device exemption application must be approved in advance by FDA for a specified number of patients, unless the product is deemed a “non-significant risk” device and eligible for more abbreviated investigational device exemption requirements. Clinical trials for a significant risk device may begin once the investigational device exemption application is approved by FDA and the appropriate institutional review boards at the clinical trial sites. Future clinical trials of our motion preservation designs will require that we obtain an investigational device exemption from FDA prior to commencing clinical trials and that the trial be conducted under the oversight of an institutional review board at the clinical trial site. Our clinical trials must be conducted in accordance with FDA regulations and federal and state regulations concerning human subject protection, including informed consent and healthcare privacy. A clinical trial may be suspended by FDA or the investigational review board at any time for various reasons, including a belief that the risks to the study participants outweigh the benefits of participation in the study. Even if a study is completed, the results of our clinical testing may not demonstrate the safety and efficacy of the device, or may be equivocal or otherwise not be sufficient to obtain approval of our product. Similarly, in Europe the clinical study must be approved by the local ethics committee and in some cases, including studies of high-risk devices, by the Ministry of Health in the applicable country.
 
 
94

 
 
Pervasive and Continuing FDA Regulation
 
After a device is placed on the market, numerous regulatory requirements continue to apply. These include:
 
 
product listing and establishment registration, which helps facilitate FDA inspections and other regulatory action;
 
 
Quality System Regulation, or QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;
 
 
labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label use or indication;
 
 
clearance of product modifications that could significantly affect safety or efficacy or that would constitute a major change in intended use of one of our cleared devices;
 
 
approval of product modifications that affect the safety or effectiveness of one of our approved devices;
 
 
medical device reporting regulations, which require that manufacturers comply with FDA requirements to report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur;
 
 
post-approval restrictions or conditions, including post-approval study commitments;
 
 
post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device;
 
 
FDA’s recall authority, whereby it can ask, or under certain conditions order, device manufacturers to recall from the market a product that is in violation of governing laws and regulations;
 
 
regulations pertaining to voluntary recalls; and
 
 
notices of corrections or removals.
 
We and our third-party manufacturers must register with FDA as medical device manufacturers and must obtain all necessary state permits or licenses to operate our business. As manufacturers, we and our third-party manufacturers are subject to announced and unannounced inspections by FDA to determine our compliance with quality system regulation and other regulations. We have not yet been inspected by the FDA.
 
Failure to comply with applicable regulatory requirements can result in enforcement action by FDA, which may include any of the following sanctions:
 
 
untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
 
 
unanticipated expenditures to address or defend such actions;
 
 
95

 
 
 
customer notifications for repair, replacement, refunds;
 
 
recall, detention or seizure of our products;
 
 
operating restrictions or partial suspension or total shutdown of production;
 
 
refusing or delaying our requests for 510(k) clearance or premarket approval of new products or modified products;
 
 
operating restrictions;
 
 
withdrawing 510(k) clearances on PMA approvals that have already been granted;
 
 
refusal to grant export approval for our products; or
 
 
criminal prosecution.
 
Regulatory Pathway for our Imaging System
 
We have established a clinical and regulatory strategy with our advisors and have conducted a pre-IDE meeting, now referred to as a pre-submission meeting, with FDA (an informal interaction to facilitate a clearer understanding of FDA’s expectations). During this process, we received FDA’s feedback on our submission and our questions and we are planning to continue the dialogue with FDA before the submission of a formal request for the IDE that is necessary for us to conduct the U.S. pivotal clinical trial.
 
Our current strategy is to submit a direct de novo reclassification petition for our imaging capsule. Although FDA could require us to submit a PMA, we believe that the device could be considered for evaluation under FDA’s de novo reclassification provisions, which allow a novel device to be reclassified into class I or class II. To support this, our objective is to demonstrate that device poses a low to moderate risk to patients.
 
We believe that important potential benefits of our system for CRC screening are the elimination of the need for bowel cleansing, the elimination of the need for conscious sedation, the minimally invasive, painless nature of the examination, and the ability to pursue normal daily activities immediately following the procedure. Furthermore, the system is being designed to generate information from segments of the colon ( e.g. , cecum and ascending colon) that are difficult to access by conventional optical colonoscopy ( i.e. , incomplete colonoscopies) without the risks and discomforts of operative examination or other invasive methods. We believe these benefits will be attractive to a large number of patients from the target populations that so far refrained from any screening tests. Thus, we anticipate that our capsule will increase the public compliance to screening recommendation.
 
If FDA determines that our imaging capsule is not a candidate for de novo reclassification, it will require approval of the device for market through the PMA process. Because of the technological characteristics of this device, the non-clinical tests (including lab and animals) and clinical data required may not be significantly different between a de novo and PMA regulatory processes. We believe that under both scenarios, we will be required to conduct a multi-center clinical study to establish the safety and efficacy and to demonstrate sensitivity and specificity of our imaging capsule in several hundreds of patients.
 
FCC Clearance and Regulation
 
Because our imaging capsule includes a wireless radio frequency transmitter and receiver, it is subject to equipment authorization requirements in the United States. The U.S. Federal Communications Commission, or FCC, requires authorization of radio frequency devices before they can be sold or marketed in the United States, subject to limited exceptions. The authorization requirements are intended to confirm that the proposed products comply with FCC radio frequency emission, power level standards, and other technical requirements and will not cause interference. Our capsule is using the same frequency band as other approved capsules, and we expect that it will comply with the FCC’s technical requirements, so it is expected that it will be authorized by the FCC as well.
 
Third-Party Coverage and Reimbursement
 
Coverage of and reimbursement for our imaging capsule and related procedures, after approval, will be subject to the requirements of various third-party payors, including government-sponsored healthcare payment systems and private third-party payors. Coverage policies and reimbursement methodologies vary significantly from program-to-program, and may be subject to federal and state regulations. For example, the Medicare statute requires all items and services to be “reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member” in order to be covered. Medicare currently does not provide separate reimbursement for many devices, but may include payment for the device in the payment for the related procedure. Third-party payors’ coverage and reimbursement policies, including their interpretations of whether an item or service is “reasonable and necessary” or experimental and their payment methodologies, are subject to change pursuant to legislation, regulation, or, in the case of private payors, negotiations with providers.
 
 
96

 
 
Fraud and Abuse Laws
 
In the United States, the healthcare industry is subject to extensive federal, state, and local regulation. Both federal and state governmental agencies subject the healthcare industry to intense regulatory scrutiny, including heightened civil and criminal enforcement efforts. These laws constrain the sales, marketing and other promotional activities of manufacturers of medical devices, by limiting the kinds of financial arrangements (including sales programs) we may have with hospitals, physicians and other potential purchasers of the medical devices. The laws and regulations that may affect our ability to operate include, but are not limited to:
 
 
The federal Anti-Kickback Statute, which prohibits, among other things, knowingly or willingly offering, paying, soliciting or receiving remuneration, directly or indirectly, in cash or in kind, to induce or reward the purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any health care items or service for which payment may be made, in whole or in part, by federal healthcare programs such as Medicare and Medicaid. This statute has been interpreted to apply to arrangements between medical device manufacturers on one hand and prescribers, purchasers and formulary managers on the other. Further, PPACA, among other things, clarified that a person or entity needs not to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it. Although there are a number of statutory exemptions and regulatory safe harbors to the federal Anti-Kickback Statute protecting certain common business arrangements and activities from prosecution or regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that do not fit squarely within an exemption or safe harbor may be subject to scrutiny;
 
 
The federal civil False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment of government funds or knowingly making, using or causing to be made or used, a false record or statement material to an obligation to pay money to the government or knowingly concealing or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. In addition, PPACA amended the Social Security Act to provide that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Many medical device manufacturers and other healthcare companies have been investigated and have reached substantial financial settlements with the federal government under the civil False Claims Act for a variety of alleged improper marketing activities, including providing free product to customers with the expectation that the customers would bill federal programs for the product; providing consulting fees, grants, free travel, and other benefits to physicians to induce them to use the company’s products. In addition, in recent years the government has pursued civil False Claims Act cases against a number of manufacturers for causing false claims to be submitted as a result of the marketing of their products for unapproved, and thus non-reimbursable, uses. Device manufacturers also are subject to other federal false claim laws, including, among others, federal criminal healthcare fraud and false statement statutes that extend to non-government health benefit programs;
 
 
Analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to items or services reimbursed under Medicaid and other state programs or, in several states, apply regardless of the payor. Several states now require medical device manufacturers to report expenses relating to the marketing and promotion or require them to implement compliance programs or marketing codes. For example, California, Connecticut and Nevada mandate implementation of corporate compliance programs, while Massachusetts and Vermont impose more detailed restrictions on device manufacturer marketing practices and tracking and reporting of gifts, compensation and other remuneration to health care providers;
 
 
97

 
 
 
The federal Foreign Corrupt Practices Act of 1997 and other similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from providing money or anything of value to officials of foreign governments, foreign political parties, or international organizations with the intent to obtain or retain business or seek a business advantage. Recently, there has been a substantial increase in anti-bribery law enforcement activity by U.S. regulators, with more frequent and aggressive investigations and enforcement proceedings by both the Department of Justice and the U.S. Securities and Exchange Commission. Violations of these laws can result in the imposition of substantial fines, interruptions of business, loss of supplier, vendor or other third-party relationships, termination of necessary licenses and permits, and other legal or equitable sanctions. Other internal or government investigations or legal or regulatory proceedings, including lawsuits brought by private litigants, may also follow as a consequence; and
 
 
The federal Physician Payment Sunshine Act, being implemented as the Open Payments Program, requires certain medical device manufacturers to engage in extensive tracking of payments or transfers of value to physicians and teaching hospitals, maintenance of a payments database, and public reporting of the payment data. Device manufacturers with products for which payment is available under Medicare, Medicaid or the State Children’s Health Insurance Program are required to track and report such payments. Applicable manufacturers should have begun tracking on August 1, 2013 and must report payment data to the Centers for Medicare & Medicaid Services, or CMS , by June 30, 2014.
 
Violations of any of the laws described above or any other governmental regulations that apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government-funded healthcare programs, like Medicare and Medicaid, and the curtailment or restructuring of our operations.
 
Privacy Laws
 
HIPAA/HITECH and related U.S. federal and state laws protect the confidentiality of certain patient health information, including patient records, and restrict the use and disclosure of that protected information. In particular, the U.S. Department of Health and Human Services promulgated patient privacy rules under the HIPAA.
 
These privacy rules protect medical records and other personal health information by limiting their use and disclosure, giving individuals the right to access, amend and seek accounting of their protected health information and limiting most use and disclosures of health information to the minimum degree reasonably necessary to accomplish the intended purpose. Because we intend to sell products, once approved, to persons and entities subject to HIPAA and are exposed to personally-identifiable health information in the course of our operations, we also may be subject to certain elements of HIPAA, particularly as a business associate to covered entities, as well as similar state laws. HIPAA imposes civil and criminal penalties for violations of its provisions, which could be substantial. State privacy laws have their own penalty provisions which may be applicable.
 
NRC Regulatory Issues
 
As our imaging capsule includes an ingestible capsule with a radioactive source, the company must address NRC regulations, or relevant Agreement State regulations, in addition to FDA requirements. An Agreement State is a state that has signed an agreement with the NRC authorizing the state to regulate certain uses of radioactive materials within the state. Agreement State regulations are substantially similar to the NRC’s regulations.
 
The capsule is loaded with the X-ray source, sealed and then ingested by the patient. The capsule is excreted naturally through the patient’s system and is not recovered and therefore is disposed of in the sanitary sewer system. Although the NRC regulations in 10 CFR Part 20 place certain conditions and limitations on the disposal of radioactive material in the sanitary sewer, such conditions and limitations do not apply to radioactive material contained in excreta of individuals that are undergoing medical diagnosis or therapy with radioactive material. Our regulatory advisors have advised us that the NRC staff likely would take the position that a capsule containing radioactive material can be passed in excreta into the sanitary sewer system without limitation. If, however, the NRC were to find that our capsule system could not be passed in excreta into the sanitary sewer system without limitation pursuant to 10 CFR 20.2003(b) the NRC may place restrictions on the disposal of the capsule system in the sanitary sewer system.
 
 
98

 
 
An entity which manufactures, prepares, or transfers a medical capsule containing radioactive byproduct material needs to be licensed or covered by a license issued by the NRC or an Agreement State. An NRC or Agreement State licensee authorized to possess and/or distribute byproduct material can transfer the byproduct material only to another NRC, or Agreement State, approved entity or licensee. The NRC’s regulations permit only individuals who are authorized users ( e.g. , individuals who meet certain training and experience criteria regarding the safe use of radioactive drugs) or persons working under the supervision of an authorized user to administer radioactive drugs for medical use.
 
The NRC regulations do exempt certain products from the NRC’s regulations. Existing exemptions from licensing requirements for the use of byproduct material include exemptions for specific products ( e.g. , time pieces), exemptions for classes of products ( e.g. , gas or aerosol detectors), and broader materials exemptions for “exempt concentrations” and “exempt quantities” of radioactive material. These two broad materials exemptions specifically exclude the transfer of byproduct material contained in any food, drug, or product designed for ingestion by a human being. Capsules containing our X-ray source would not qualify as an “exempt quantity” because of their intended use ( i.e. , for ingestion) even though they may contain a smaller quantity of the source than the exempt quantities set forth in the regulations.
 
Accordingly, we will need to obtain the appropriate licenses from the NRC or an Agreement State prior to the clinical investigation and/or marketing of the device. We intend to engage a radiopharmaceutical company to manufacture our imaging capsule. The fact that another company will be manufacturing the capsule, however, does not exempt us from also obtaining radioactive materials licenses from the NRC or an Agreement State. Distribution activities are generally classified by the NRC as either “distribution” or “redistribution”, and both types of activities require a specific license. “Distribution” refers to the initial transfer from the manufacturing radiopharmacy, while “redistribution” refers to a subsequent transfer of the drug by an NRC licensee to an authorized user. In order to distribute the capsule commercially, we will need to obtain an NRC or Agreement State “medical distribution” radioactive materials license and may also need to obtain a radioactive materials license authorizing the possession of the radioactive material. Both types of licenses may be obtained by submitting a license application request to the NRC or an Agreement State. In the event that we develop the capsule outside the United States, we would be required to have one of our U.S. offices apply for and receive both the possession and medical distribution radioactive materials licenses. If we do not have an office in the United States, then we can contract with a company with a U.S. office to apply for and obtain these licenses, and that company would be the licensed U.S. distributor of the capsule.
 
We may be able to petition the NRC to carve out an exemption for the distribution licensing requirement to permit distribution to all health care professionals and not just those licensed by the NRC. This has been done successfully by other medical device companies. For example, Tri-Med, Inc. manufactures an ingestible capsule containing radioactive material for testing of H. Pylori. The company petitioned the NRC in 1994 for an exemption from the distribution licensing regulation. The NRC evaluated the petition and issued a proposed ruling for comments. After receiving comments on the proposed ruling, the NRC issued a final ruling, in 1997, providing for the exemption. This exemption is narrowly drawn, and specific to the distribution of a “radioactive drug containing one microcurie of carbon-14 urea to any person for ‘in vivo’ diagnostic use.” In creating the exemption, the NRC noted the importance of bringing an inexpensive and effective diagnostic tool to a large number of people, along with the minimum radiation contained in the capsule.
 
We may consider petitioning the NRC in a similar manner to make the device more widely available. As our imaging capsule imparts comparable radiation exposure to the Tri-Med device described above, and has the potential to be used widely for diagnosis, our imaging capsule may be a candidate for such an exemption.
 
Regulation in Europe, Japan and Other Countries
 
In the EU, a company that wishes to bring a medical device to market must CE mark the device following demonstration of conformity with the Essential Requirements laid down in Annex I to the Medical Devices Directive.
 
 
99

 
 
Compliance with these requirements entitles manufacturers to affix the CE mark of conformity to their medical devices, without which the medical devices cannot be commercialized in the EU. To demonstrate compliance with the Essential Requirements laid down in Annex I to the Medical Devices Directive and obtain the right to affix the CE mark of conformity to our medical devices, we and our products must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Apart from low risk medical devices (Class I with no measuring function and which are not sterile), in relation to which the manufacturer can issue an EC Declaration of Conformity based on self-assessment of the conformity of its products with the Essential Requirements laid down in the Medical Devices Directive, a conformity assessment procedure requires the intervention of a Notified Body, which is an organization designated by the competent authorities of a EU Member States to conduct conformity assessments. The Notified Body will typically audit and examine the Technical File that the manufacturer has created for the medical devices and the quality system for the manufacture, design and final inspection of the devices before issuing a CE Certificate of Conformity demonstrating compliance with the relevant Essential Requirements laid down in Annex I to the Medical Devices Directive or the quality system requirements laid down in the other Annexes to the Directive. Following the issuance of this CE Certificate of Conformity, the manufacturer is required to draw up an EC Declaration of Conformity and to affix the CE mark to the products covered by this CE Certificate of Conformity and the EC Declaration of Conformity.
 
We will be required to demonstrate that our products comply with the Essential Requirements laid down in Annex I to the Medical Devices Directive through a conformity assessment procedure. We cannot be certain that we will be able to fulfill the quality and performance requirements laid down in Annex I to the Medical Devices Directive and to obtain or maintain CE Certificates of Conformity for our products. If we are unable to obtain or maintain these CE Certificates of Conformity for our products, we will not be able to sell our products in any EU Member States nor in various other third countries where CE marking is accepted as evidence of compliance with relevant national laws.
 
In Japan, manufacturing and marketing medical devices are regulated by the Pharmaceutical Affairs Law, or PAL. In accordance with the PAL, manufacturers must obtain a license for manufacturing medical devices from the Ministry of Health, Labour and Welfare, or MHLW. A license is required for each manufacturing plant specified by an MHLW Ministerial Ordinance.
 
A licensed manufacturer is responsible only for manufacturing medical devices. In regard to the marketing of medical devices, the PAL specifies that a Marketing Authorization Holder, or MAH, licensed by MHLW is responsible for putting medical devices into marketplace. Licenses for marketing medical devices are divided into the following 3 types, which correspond to the classifications below:
 
 
No. 1 type license for marketing – Specially controlled medical devices (Class III, IV)
 
 
No. 2 type license for marketing – Controlled medical devices (Class II)
 
 
No. 3 type license for marketing – General medical devices (Class I)
 
Generally, the process for obtaining marketing clearance for medical devices in Japan ranges from twelve months for products with only very minor modifications from previously cleared product versions, to a few years in the case of a completely new device.
 
In order for us to market our products in countries other than the United States, the EU and Japan (which were described above), we must obtain regulatory approvals and comply with extensive safety and quality regulations in these countries. These regulations, including the requirements for approvals or clearance and the time required for regulatory review varies from country to country. It is customary that once a product has been cleared for sales in the US and is CE marked in the EU, many other countries will follow. Failure to obtain regulatory approval or clearance in any foreign country in which we plan to market our product may harm our ability to generate revenue and harm our business.
 
 
100

 
INDU ST R Y
 
Colorectal Cancer
 
CRC is a cancer that develops in the colon or the rectum. The colon and rectum are parts of the digestive system, which is also called the gastrointestinal tract. The digestive system processes food for energy and rids the body of solid waste in the form of fecal matter or stool. After food is chewed and swallowed, it travels through the esophagus to the stomach. There, it is partially broken down and sent to the small intestine, where digestion continues and most of the nutrients are absorbed. The small intestine joins the large intestine in the lower right abdomen. The first and longest part of the large intestine is the colon, a muscular tube approximately five feet long. Water and mineral nutrients are absorbed from the food matter in the colon. Waste (feces) left from this process passes into the rectum, the final six inches of the large intestine, and is then expelled from the anus.
 
CRC usually develops slowly over a period of many years, generally beginning with a noncancerous polyp, which eventually becomes cancerous. A polyp is a growth of tissue that develops in the lining of the colon or rectum. Certain kinds of polyps, called adenomatous polyps or adenomas, are most likely to become cancerous. More than half of all individuals will eventually develop one or more adenomas.
 
Once cancer forms in the large intestine, it can grow through the lining and into the wall of the colon or rectum. Cancers that have invaded the wall can also penetrate blood vessels or lymph vessels, which are thin channels that carry away cellular waste and fluid. Cancer cells typically spread first into nearby lymph nodes, which are bean-shaped structures that help fight infections. Cancerous cells can also be carried in blood vessels to the liver or lungs, or can spread in the abdominal cavity to other areas, such as the ovary. The process through which cancer cells travel to distant parts of the body through blood or lymphatic vessels is called metastasis.
 
According to the ACS, CRC is the third most common cancer diagnosed and the second leading cause of death from cancer in the United States. The ACS estimates that in 2014, in the United States approximately 136,830 people are expected to be diagnosed with CRC and approximately 50,310 people will die from CRC. According to the WHO, in 2012, in Europe there were an estimated 471,000 cases of CRC and approximately 228,000 died from the disease and in Japan there were an estimated 112,675 cases of CRC and approximately 49,345 died from the disease. According to the WHO, in 2020 the expected numbers of cases of CRC are estimated to be 159,972 in the United States, 528,481 in Europe, 128,346 in Japan and 1,678,127 worldwide.
 
Costs associated with CRC treatment are very high and are usually assigned to three post-diagnostic time periods:
 
 
initial treatment – during the first three months following diagnosis;
 
 
maintenance care – between initial and terminal treatment; and
 
 
terminal treatment – during the final six months prior to death.
 
A recent study published by the Journal of the National Cancer Institute found that investing in some CRC screening programs could cut future, more expensive treatment costs in half.
 
CRC Screening
 
CRC screening can reduce death rates from CRC both by preventing the disease and by detecting it at earlier more treatable stages. CRC is one of the few cancers that can be prevented through screening because pre-cancerous polyps, from which colon cancers usually develop, can be identified and removed. The five-year survival rate is greater than 90% for CRC patients diagnosed at an early, localized stage. However, less than 40% of cases are currently diagnosed at that stage. According to the CDC, at least 6 out of every 10 deaths from CRC could be prevented if every adult age 50 years or older was screened regularly and that approximately 30,000 lives could be saved each year in the United States if the screening recommendations were followed. The ACS’s goal is to have 80% of those 50 years and older who are covered by the program screened by 2018.
 
The ACS recommends that men and women over the age of 50 receive an optical colonoscopy every 10 years or other structural test, such as sigmoidoscopy or virtual colonoscopy, every five years or alternatively, FOBT should be performed every year. According to the U.S. Census Bureau, as of mid-2014, there were projected to be approximately 91 million Americans aged 50-75 years. Assuming the longest screening interval of 10 years, the addressable annual U.S. patient population is at least 9.1 million.
 
 
101

 
 
Despite evidence supporting the effectiveness of CRC screening and the availability of various screening tests, in 2010, approximately 58.6% of Americans 50 years and older had been screened for CRC, according to the CDC. This compares unfavorably to 72% to 83% for screening of other types of cancers, such as breast and cervical cancer. The CRC screening rates are even lower among people aged 50 to 64 according to the CDC.
 
In the 2008 ACS guidelines for CRC screening in average risk-adults, titled “A Joint Guideline from the American Cancer Society, the U.S. Multi-Society Task Force on CRC, and the American College of Radiology”, screening tests were grouped into those that primarily detect cancer early and those that can detect both early cancer and adenomatous polyps. The latter provide greater potential for prevention through removal of polyps, or polypectomy. The panel recommended that, when possible, clinicians should make patients aware of the full range of screening options, but at a minimum they should be prepared to offer patients a choice between a screening test that is effective at both early cancer detection and cancer prevention through the detection and removal of polyps and a screening test that is primarily effective at early cancer detection. It was the opinion of the panel that colon cancer prevention should be the primary goal of CRC screening. Tests that are designed to detect both early cancer and adenomatous polyps should be encouraged if resources are available and patients are willing to undergo an invasive test. These tests include the partial or full structural exams mentioned above. These tests require bowel preparation and an office or hospital visit and have various levels of risk to patients. These tests also have other limitations, including greater patient requirements for successful completion, and potential harm to the patients.
 
Structural Methods – Tests that Detect both Polyps and Cancer Tumors
 
Optical Colonoscopy
 
Optical colonoscopy, one of the most commonly performed medical procedures in the United States, allows direct photographic inspection of the entire length of the colon, as well as same-session biopsy sampling or definitive treatment by polypectomy in the case of pre-cancerous polyps and some early-stage cancers. Optical colonoscopy is capable of examining the entire colon and rectum. At present, a colonoscopy once every 10 years is an acceptable option for CRC screening in average-risk adults beginning at age 50 years, as recommended by the U.S. Preventive Services Task Force.
 
Patients are generally required to adopt a liquid diet one or two days before the examination, followed by ingestion of oral lavage solutions, saline laxatives, or pills to stimulate bowel movements until the bowel is clean. Proper bowel preparation is a critical element in the accuracy and cost-effectiveness of screening with optical colonoscopy. It is common, but not necessary, for a patient to receive a mild sedative prior to the procedure.
 
A principal benefit of optical colonoscopy is that it allows for a full structural examination of the colon and rectum in a single session and for the detection of colorectal polyps and cancers accompanied by biopsy or polypectomy. All other forms of screening, such as FOBT, FIT, CTC and stool DNA, require optical colonoscopy as a follow-on procedure to conduct a biopsy or polypectomy if a positive result is obtained. Patient surveys indicate that those willing to undergo invasive testing tend to choose optical colonoscopy as their preferred test. In addition to the dietary preparation and bowel cleansing, optical colonoscopy usually requires a day dedicated to the examination, and because of sedation, a chaperone for transportation. Surveys indicate that a significant percentage of adults prefer non-invasive options for CRC screening.
 
Optical colonoscopy is not an infallible procedure. Controlled studies have shown the optical colonoscopy miss rate for large adenomas (=10 mm) to be 6% to 12%, which is operator dependent. The reported optical colonoscopy miss rate for cancer is about 5%. Optical colonoscopy can result in significant side effects, most often associated with polypectomy. The most common serious complication is post-polypectomy bleeding. Another significant risk associated with optical colonoscopy is perforation of the bowel wall.
 
Formal quality-assurance programs do not exist, and the current reimbursement system for optical colonoscopy does not reward careful examination. Instead, it tends to reward rapidly performed examinations and examinations sometimes repeated at unnecessarily short intervals.
 
 
102

 
 
CTC – CT Colonography
 
Computed tomography colonography (CTC), also referred to as virtual colonoscopy, is an imaging examination of the entire colon and rectum. CTC uses computed tomography (CT) to acquire images and advanced two-dimensional and three-dimensional image display techniques for interpretation. Since its introduction in the mid-1990s, there have been rapid advancements in CTC technology.
 
Computer imaging graphics allow for the visualization of three-dimensional endoscopic flight paths through the inside of the colon, which are simultaneously viewed with interactive two-dimensional images. The integrated use of the three-dimensional and two-dimensional techniques allows for ease of polyp detection, as well as the characterization of lesion density and location. CTC provides a time-efficient procedure with good accuracy and minimal invasiveness. However, the required colon preparation is similar to the cleansing required prior to optical colonoscopy. No sedation or recovery time is required and a chaperone is not needed to provide transportation after the procedure.
 
At this time, reimbursement for screening CTC is limited, although 47 U.S. states now offer Medicare reimbursement for diagnostic CTC. However, because reimbursement for screening is still uncommon, the current professional capacity to deliver CTC is also limited. Capacity is expected to increase when third-party payers expand reimbursement for screening.
 
There is controversy surrounding the long-term potential harms associated with radiation dose effects from repeated CT examinations at shorter intervals, usually less than three years. One aspect of this controversy relates to risk-estimation models, and the other pertains to the long-term risk of cancer from single and repeated medical imaging exposures. While current estimates of the potential cancer risk related to low-dose radiation exposures during medical procedures derive from models based on long-term outcomes in survivors of acute radiation doses from atomic weapons, there is disagreement over whether this model truly is applicable to periodic exposures from medical imaging. Since CTC is a minimally invasive test, the risk for colonic perforation during screening is extremely low.
 
In addition to radiation risks, CTC requires the same full bowel preparation and restricted diet as an optical colonoscopy, which may decrease patient adherence. CTC also has the burdensome effect of requiring insufflation of the colon, which causes discomfort to patients.
 
CTC is similar to endoscopy and double contrast barium enema (DCBE) where effectiveness of the procedure is operator-dependent, and thus initiatives towards training and certification are important.
 
Sigmoidoscopy
 
Sigmoidoscopy, also known as flexible sigmoidoscopy or FSIG, is an endoscopic procedure that examines the lower part of the colon lumen. The exam may be performed with a variety of endoscopic instruments, including a standard 60 cm sigmoidoscope. FSIG is typically performed without sedation and with a more limited bowel preparation than standard optical colonoscopy. Since sedation is not required, it can be performed in office-based settings and by non-physicians, including properly trained nurses or physician assistants. Since FSIG examines only the distal third of the colon, not all of the polyps or tumors can be detected at the time of screening. The examination reaches the splenic flexure, which is about 40 cm from the anus. If one polyp is detected in that distal segment, the patient is referred to full optical colonoscopy since the probability for additional polyps in the rest of the colon is high.
 
The primary limitation of FSIG is that it does not examine the entire colon but only the rectum, sigmoid, and descending colon. Another limitation of FSIG is that there may be considerable variation both in the depth of insertion of the sigmoidoscope. Adenoma detection by FSIG depends on the skill of the examiner, which may reduce the effectiveness of FSIG for CRC screening. FSIG is sometimes performed by primary care physicians who are generally less trained and experienced than a gastrointestinal specialist who performs hundreds or thousands of examination per year. The complications of FSIG include colonic perforation, even if no biopsy or polypectomy is performed, though this rarely occurs.
 
Patients who had also undergone unsedated FSIG screening were more than twice as likely to say that they would not return for additional screening compared with those who had undergone optical colonoscopy with sedation.
 
 
103

 
 
Stool Test Methods – Tests that Primarily Detect Cancer
 
Stool tests of various types do not generate structural information of the colon but provide an indication on the presence of blood or DNA changes in the colon. As such, they are designed to detect early stage cancer rather than pre-cancerous polyps. Although early stage detection of cancer is important, there is a clear advantage for technologies that generate structural information of the colon, which enable detection of pre-cancerous polyps.
 
FOBT- Fecal Occult Blood Test
 
Fecal occult blood test (FOBT) is the most common stool blood test in use for CRC screening and the only CRC screening test for which there is evidence of efficacy from prospective, randomized controlled trials. This test involves the collection of two samples from each of three consecutive bowel movements. Collection of all six samples is important because test sensitivity improves with each additional stool sample. FOBT is generally regarded as having a high specificity for bleeding polyps but low specificity for polyps that do not bleed. The sensitivity and specificity of a FOBT has been shown to be highly variable and varies based on a number of factors. These include: the brand or variant of the test, specimen collection technique, number of samples collected per test, whether or not the stool specimen is rehydrated ( i.e. , adding a drop of water to the slide window before processing), and variations in interpretation, screening interval and other factors.
 
Annual screening with high-sensitivity FOBT has been shown in published, peer-reviewed literature to detect a majority of prevalent CRC in an asymptomatic population and is an acceptable option for colorectal screening in average-risk adults aged 50 years and older. Any positive test result should be followed up with optical colonoscopy.
 
FIT - Fecal Immunochemical Test
 
The concept of applying an immunochemical method to testing stool for occult blood was first proposed in the 1970s, and commercialization of the technology began in the 1980s. However, it is more expensive than FOBT.
 
Fecal immunochemical test (FIT) has several technological advantages when compared with FOBT. FIT detects human globin, a protein that along with heme constitutes human hemoglobin. Thus, FIT is more specific for human blood than standard FOBT tests. Further, unlike FOBT, FIT is not subject to false-negative results in the presence of high-dose vitamin C supplements. In addition, because globin is degraded by digestive enzymes in the upper gastrointestinal tract, FIT has higher specificity for lower gastrointestinal bleeding. Finally, the sample collection for some variants of FIT are less demanding of patients than FOBT, requiring fewer samples and less direct handling of stool.
 
The spectrum of benefits, limitations, and harms is similar to a FOBT. An additional advantage of FIT over FOBT appears to be fewer demands on patients undergoing FIT compared with FOBT. FIT does not require a restricted diet, and the sampling procedures for some forms of FIT are less demanding. Thus, patients’ compliance is much higher leading to improved cancer detection rate.
 
Stool DNA
 
Stool DNA, or sDNA, allows for the testing of altered DNA that may predict the presence of CRC. Adenoma and carcinoma cells that contain altered DNA are continuously shed into the large bowel lumen and passed in the feces. Because DNA is stable in stool, it can be differentiated and isolated from bacterial DNA found in the feces. No single gene mutation is present in cells shed by every adenoma or cancer.
 
A multi-target DNA stool assay is required to achieve adequate sensitivity. Several studies on the sensitivity and specificity of sDNA testing for CRC detection have been published utilizing a panel of DNA markers. Test sensitivity for CRC in these studies ranged from 52% to 92%.
 
The primary benefit of sDNA is that this methodology has acceptable sensitivity for CRC and is built upon the concept of detecting molecular markers associated with advanced colorectal neoplasia. It is not dependent on the detection of occult bleeding, which is intermittent and nonspecific, and it requires only a single stool collection. Further, newer versions may have better sensitivity as more is learned about markers that are common across all prevalent CRC, as well as advanced adenomas. sDNA sampling is noninvasive and does not cause the patient physical harm.
 
 
104

 
 
Patient and provider acceptance of this technique appears to be high, with available data indicating that sDNA is preferred over other tests by some individuals, and among others testing with sDNA, it is at least as acceptable to patients as testing with FOBT.
 
A limitation of sDNA testing for the detection of CRC and large adenomas is that test sensitivity is based on a panel of markers that appears to identify the majority of CRC cases, but not all. Further, it is not known what proportion of advanced adenomas is identified with the current commercial version of the sDNA test. Other potential limitations that have considerable implications for cost effectiveness are the unit cost of the current test, which is much higher than the other stool tests, and the frequency with which the test should be performed, which is uncertain. On August 11, 2014, the FDA  approved a new sDNA screening test called Cologuard for colorectal cancer. The test, which was developed by Exact Sciences, identifies 11 molecular features including blood and tumor-associated DNA in the stool of patients. In a major clinical trial supporting its approval, Cologuard demonstrated greater sensitivity than FIT. The overall sensitivity for CRC of any stage was 92% for Cologuard compared to 73.8% for FIT. Sensitivity of the Cologuard for the detection of pre-cancerous polyps that are greater than 10 mm was 42%. Cologuard may be a strong alternative to older technologies due to the higher sensitivity. One potential limitation of Cologuard is the specificity, which is lower than FIT. The specificity rate determined in the clinical trial supporting its approval was 86.6% for Cologuard versus 94.9% for FIT. If used alone, Cologuard might lead to unnecessary colonoscopies as patients are referred for more extensive imaging when no cancer is present. Increasing the specificity by also performing a FIT would increase patient costs and minimize the impact of the new test.
 
Optics-Based Capsule Endoscopy
 
Certain companies are developing or commercializing optics-based capsule endoscopy systems. Given Imaging, an Israeli-based company that was acquired by Covidien plc (NYSE: COV) in February 2014, has developed visualization capsules for the detection of disorders of the esophagus, small bowel and colon. It launched the PillCam Colon capsule in Europe in 2007 and has limited sales. In early 2014, the FDA granted approval for optical capsule endoscopy for colon cancer screening only for patients after incomplete colonoscopy. However, this technology requires bowel cleansing even to a greater degree than for regular colonoscopy, which can result in dehydration and can, in turn, lead to cancellation of the procedure in certain cases. Other companies, including Olympus and Intromedic, are developing similar approaches for optical capsule endoscopy.
 
The following table outlines some of the benefits and limitations of the currently available CRC screening tests.
 
Test
Benefits
Performance and Complexity*
Limitations
Test Time Interval*
Cost Range*
Flexible Sigmoidoscopy
* Fairly quick and safe
* Few complications
* Minimal bowel preparation
* Minimal discomfort
* Does not require sedation or a specialist
Performance High for lower one-third of the colon
 
Complexity Intermediate
* Views only lower one-third of colon
* Cannot remove large polyps
* Small risk of infection or bowel tear
* Slightly more effective when combined with annual FOB testing
* Optical colonoscopy needed if abnormalities are detected
5 years
Intermediate
Optical Colonoscopy
* Examines entire colon
* Can biopsy and remove polyps
* Can diagnose other diseases
* Required for abnormal results from all other tests
 
 
Performance
Highest
 
Complexity
High
* Can miss some polyps and cancers
* Full bowel preparation needed
* Can be expensive
* Sedation of some kind usually needed, necessitating chaperone
* Patient may miss a day of work
* Highest risk of bowel tears or infection, compared to other tests
10 years
High
Double Contrast Barium Enema
* Can usually view entire colon
* Few complications
* No sedation needed
Performance
High
 
Complexity
High
* Can miss some small polyps and cancers
* Full bowel preparation needed
* Some false positive test results
* Cannot remove polyps
* Exposure to low dose radiation
* Optical colonoscopy necessary if abnormalities are detected
5 years
Intermediate
 
 
 
105

 
 
Computed Tomographic Colonography
* Full bowel preparation
* Fairly quick
* Few complications
* No sedation needed
* Noninvasive
Performance
High
 
Complexity
Intermediate
* Can miss some polyps and cancers
* Full bowel preparation needed
* Cannot remove polyps
* Exposure to low dose radiation
* Optical colonoscopy necessary if abnormalities are detected
5 years
High
Fecal Occult Blood Test
* No bowel preparation
* Sampling is done at home
* Low cost
* Noninvasive
Performance
Intermediate for cancer
 
Complexity
Lowest
* Requires multiple stool samples
* Will most polyps and some cancers
* May produce false-positive test results
* Pre-test dietary limitations
* Slightly more effective when combined with a flexible sigmiodoscopy every 5 years
*  Optical colonoscopy necessary if abnormalities are detected
Annual
Low
Stool DNA Test
* No bowel preparation
* Sampling is done at home
* Requires a single stool sample
* Noninvasive
Performance
Intermediate for cancer
 
Complexity
Low
* Will miss most polyps and some cancers
* High cost compared to other stool tests
* New Technology with uncertain interval between testing
* Optical colonoscopy necessary if abnormalities are detected
CMS proposes to cover Colo-Guard Test once every 3 years for beneficiaries who meet certain criteria
Intermediate
 
 
106

 
 
Fecal Immunochemical Test (FIT)
* No direct risk to the colon
* No bowel preparation
* No pre-test dietary restrictions
* Sampling done at home
Performance
Intermediate for cancer
 
Complexity
Low
* Will miss most polyps and some cancers
* May produce false-positive test results
* Optical colonoscopy necessary if abnormalities are detected
Annual
Low
Capsule Endoscopy
* Noninvasive
* No hospitalization
* No sedation
* No pain
Performance Good for medium and large size polyps
 
Complexity
High
* Rigorous bowel preparation needed
* Additional drugs and fluids during the 10 hours passage time
* Uncontrolled propulsion in the colon
* Cannot remove large polyps
* Intense preparation and additional drugs may affect kidneys and mineral balance
* Optical colonoscopy needed if abnormalities are detected
Uncertain
High
 
* Complexity involves patient preparation, inconvenience, facilities and equipment needed, and patient discomfort
 
New Technologies
 
Biomarkers
 
Biomarkers to detect CRC are currently under development and in clinical testing by several companies. A biomarker is a substance, usually in the blood, used as an indicator of a biologic state. It is a characteristic that is objectively measured and evaluated as an indicator of normal biologic processes, pathogenic processes, or pharmacologic responses to a therapeutic intervention. There has been increasing interest in the medical community to the entrance of biomarkers to detect cancer and other diseases.
 
Blood-Based Epigenetic Biomarker
 
Epigenetics provides an additional layer of regulation in addition to DNA sequence information, and some epigenetic changes can be inherited from one generation to the next. DNA methylation is a core epigenetic mechanism where cytosine residues on DNA are tagged with a methyl group. Clusters of cytosines sometimes occur in the upstream regulatory sequences of genes, creating ‘CpG islands’ that are hypo- or hypermethylated. Methyl-binding proteins can interact with the methylated DNA to facilitate gene repression or silencing. There are many hypermethylated genes associated with CRC that influence key signaling pathways. Adenomatous polyposis coli (APC) is the most commonly mutated gene in CRC, and is known to be silenced via hypermethylation. APC normally facilitates the destruction of transcription factor responsible for cell proliferation and migration, and the loss of APC can upregulate those and other processes.
 
A molecular diagnostics company, Epigenomics, is utilizing an epigenetic marker to create a blood-based test for the early detection of CRC in patients who are not compliant to existing tools such as optical colonoscopy or stool tests. The test is called Epi proColon® and detects the methylated form of Septin9 (SEPT9), a gene that is typically unmethylated in normal colorectal cells. The blood-based test eliminates the need for upfront invasive procedures or handling of stool samples. In a large clinical study, Epi proColon® demonstrated sensitivity of approximately 68%, which mean that 68 out of every 100 patients with CRC were correctly identified using Epi proColon®. Positive results from the test are followed up by traditional methods such as a optical colonoscopy to confirm the findings and remove any precancerous polyps. Epi proColon® is currently marketed in Europe and is under regulatory review in the United States.
 
 
107

 
 
On March 27, 2014, an FDA Advisory Committee provided recommendations for the approval of Epigenomics’ premarket approval (PMA) application for Epi proColon®. The committee voted 9 to 0 with one abstention in favor of the safety profile. This is consistent with the minimal requirements of the test, which include a routine blood draw to collect a sample for analysis. The panel chairperson voted unfavorably to break a 5-5 split with regard to the effectiveness of the product, citing concerns that long-term data supporting the benefits of the test are unavailable. Epigenomics has plans to conduct a post-approval study to address this issue. Finally, the Advisory Committee voted 5-4 in support of a positive risk/benefit profile for the test. The FDA will continue to evaluate Epi proColon®.
 
On June 2, 2014, the FDA issued a response letter to Epigenomics related to its PMA for its blood-based CRC test indicating that the PMA application does not contain sufficient evidence to support approval of its test.
 
Third-Party Reimbursement
 
Reimbursement in the United States
 
In the United States, healthcare providers that purchase medical devices generally rely on third-party payors, such as Medicare, Medicaid, private health insurance plans and health maintenance organizations, to reimburse all or a portion of the cost of the devices, as well as any related healthcare services utilizing the devices.
 
Coverage is not guaranteed simply because a product has received FDA clearance or approval. Medicare’s general definition of a medically necessary service is one that is reasonable and necessary for the diagnosis or treatment of an illness or injury, or that improves the functioning of a malformed body member. In order to be eligible for reimbursement, a device must be proven to be cost-effective, demonstrating potential decrease in spending to the U.S. health economy.
 
According to various studies and publications, a key criterion for to reimbursement for colon cancer screening is patient adherence (for instance, “Cost-Effectiveness of Colonoscopy in Screening for CRC,” Annals of Internal Medicine, October 17, 2000 vol. 133 no. 8 573-584). Adherence is strongly affected by patients’ willingness to use the device as a screening tool for CRC. Several models have been designed to demonstrate the cost effectiveness of optical colonoscopy, CTC, fecal testing and optical capsule endoscopy. Today, several technologies achieved Medicare coverage for CRC Screening, including: FOBT / FIT, Flexible Sigmoidoscopy, Optical Colonoscopy and Barium Enema. In August 2014, the Centers for Medicare and Medicaid Services issued a proposed decision memorandum for CRC screening using Cologuard, a multitargeted stool DNA test. CTC (virtual colonoscopy) is not yet eligible for coverage.
 
In 2009, the Centers for Medicare and Medicaid Services issued a decision memorandum rejecting federal reimbursement for CTC screening for CRC. Their main argument for the decision was that based on available evidence, screening with CTC would not necessarily result in cost saving, at least at current screening compliance rates. CTC was not seen as a tool which could potentially increase patients’ adherence. This procedure involves bowel preparation, as well as insufflations of the colon and the exposure of patients to very significant amount of radiation.
 
An important European study (C. Hassan et al, “Cost Effectiveness of Optical capsule endoscopy,” Endoscopy 2008, 40, 414-421) assessed the potential cost effectiveness of screening with optical capsule endoscopy and compared the cost-effectiveness with that of optical colonoscopy. Effectiveness of screening was measured in terms of life-years saved through prevention or down staging of CRC. The conclusion was that adherence to optical capsule endoscopy may be presumed to be substantially higher than that of optical colonoscopy.
 
Third-party payors in the United States began issuing coverage policies for optical capsule endoscopy in early 2002. Initially, all reimbursement policies provided coverage for optical capsule endoscopy of the small bowel only for the diagnosis of obscure gastrointestinal bleeding. Subsequently, reimbursement coverage has been expanded to include other diagnoses and as of December 31, 2012, approximately 220 million people in the United States are covered with most reimbursement policies providing coverage for a number of small bowel indications, including obscure gastrointestinal bleeding, suspected Crohn’s disease, suspected small bowel tumors and other small bowel pathologies.
 
In 2013, for procedures performed in a physician’s office, the national average global fee paid by Medicare under the CPT code for optical capsule endoscopy of the small bowel was $971. For procedures performed in an outpatient hospital setting, the national average physician fee paid by Medicare was $197 and the national average payment rate to the hospital for the technical component was $751. For optical capsule endoscopy of the esophagus, in 2013, the national average global fee paid by Medicare for a procedure in a physician’s office was $812. The national average physician fee paid by Medicare in an outpatient hospital setting was $54 and the national average payment rate to the hospital for the technical component was $927.
 
 
108

 
 
Below are the fees paid by Medicare in 2014 under the CPT code for screening optical colonoscopy:
 
Payment for Physician’s Services:
 
Code
 
Description
 
Payment (1)
G0105
 
Colorectal cancer screening; colonoscopy on individual at high risk
 
$
208.83
G0121
 
Colorectal cancer screening; colonoscopy on individual not meeting criteria for high risk
 
$
208.83
 
Payment for the Hospital:
               
Code
 
Short Description
 
APC
 
Payment (2)
G0105
 
Colorectal scrn; high risk ind
 
0158 (Colorectal cancer
 
$
646.73
G0121
 
Colon ca scrn not high risk ind
 
screening; Colonoscopy)
     
 
On November 25, 2014 Exact Sciences Corp. announced that the CMS had issued its final payment decision regarding Cologuard and will reimburse it at $502 per test.
 
Private Payers
 
The national average cost of an optical colonoscopy may range from $2,000 to $3,000. The cost also depends on the state or city in which the procedure takes place. Currently, there is no optical capsule endoscopy available for the colon in the United States, nor is there a CPT code for such capsule or related method of screening. There can be no assurance that coverage will be obtained in the near future or at all. Third-party payors may deny coverage if they determine that a procedure was not reasonable or necessary as determined by the payor, was experimental or was used for an unapproved indication. During the past several years, the major third-party payors have substantially revised their reimbursement methodologies in an attempt to contain or reduce their healthcare reimbursement costs.
 
Reimbursement rates vary depending on the third-party payor and individual insurance plan involved, the procedure performed and other factors. Medicare reimbursement for in-patient hospital services is based on a fixed amount per admission based on the patient’s specific diagnosis and the procedure performed during the hospital stay. As a result, any illness to be treated or procedure to be performed in an in-patient setting will be reimbursed only at a prescribed rate set by the government.
 
In countries outside the United States, coverage for CRC screening is obtained from various sources, including governmental authorities, private health insurance plans, and labor unions. Although not as prevalent as in the United States, health maintenance organizations are emerging in certain European countries. Coverage systems in international markets vary significantly by country and, within some countries, by region. Coverage approvals must be obtained on a country-by-country or region-by-region basis. In general, the process of obtaining coverage approvals has been slower outside of the United States.
 
Coverage Outside the United States
 
In countries outside the United States, coverage is obtained from various sources, including governmental authorities, private health insurance plans, and labor unions. In some countries, private insurance systems may also offer payments for some therapies. Although not as prevalent as in the United States, health maintenance organizations are emerging in certain European countries. Coverage systems in international markets vary significantly by country and, within some countries, by region. Coverage approvals must be obtained on a country-by-country or region-by-region basis.
 
 
109

 
 
MANA GEMENT
 
Executive Officers and Directors
 
The following table sets forth information for our executive officers and directors as of the date of this prospectus. Unless otherwise stated, the address for our directors and executive officers is c/o Check-Cap Ltd., Abba Hushi Avenue, P.O. Box 1271, Isfiya, 30090, Mount Carmel, Israel.
         
Name
 
Age
 
Position(s)
Guy Neev
 
47
 
Chief Executive Officer and Director
Lior Torem
 
45
 
Chief Financial Officer
Yoav Kimchy
 
53
 
Chief Technology Officer and Director
Alex Ovadia
 
53
 
Vice President, Research and Development
Tomer Kariv
 
54
 
Chairman of the Board of Directors
Walter L. Robb
 
86
 
Director
Richard Stone
 
72
 
Director
Alon Dumanis
 
64
 
Director
 
Prior to the closing of this offering we will establish an Audit Committee and a Compensation Committee, each in compliance with the requirements of the Israeli Companies Law, the NASDAQ Listing Rules and the rules of the U.S. Securities and Exchange Commission. Prior to the closing of this offering we will also make a determination as to which of our directors are “independent directors” under the rules of the NASDAQ Stock Market and the U.S. Securities and Exchange Commission.
 
Executive Officers and Directors
 
Guy Neev has served as our chief executive officer since our inception in April 2009 and has served as a member of our board of directors since April 2009. Since March 2008, Mr. Neev has served as the chief executive officer of Check-Cap LLC and as a member of the board of directors of Check Cap Ltd. (Delaware), the manager of Check-Cap LLC. Prior to assuming his position as Check-Cap LLC’s chief executive officer, Mr. Neev served as an executive consultant to Check-Cap LLC and as a part-time chief executive officer for several early stage medical devices companies in Israel. Between 2004 and 2007, Mr. Neev served as chief executive officer and vice president of business development of Cappella Inc., a medical devices company developing stents for cardiovascular applications, after serving as a cardiovascular business unit manager at Boston Scientific Corporation from 2003 to 2004. Prior to that, from 1997 to 2003, Mr. Neev served as business unit manager at Azimuth Technologies Ltd. and as chief executive officer of its subsidiary, Waycomm Wireless Solutions Ltd. Mr. Neev also served as a major in the Israeli Air Force. Mr. Neev holds a B.A. degree in economics from Bar Ilan University, Israel and a M.I.B. (Masters in International Business) degree from Norges Handelshoyskole, Bergen, Norway. Mr. Neev was appointed as a director pursuant to our articles of association in effect prior to the closing of this offering.
 
Lior Torem has served as our chief financial officer, on a part-time basis, since May 2010. Beginning in January 2010, Mr. Torem served as an executive consultant to our company. Since November 2008, Mr. Torem has also served as the chief financial officer, on a part-time basis, of Superfish, Inc., a developer of visual search technology for searching images. From 2003 to 2009, Mr. Torem served as vice president of finance at Actelis Networks Inc., a provider of high performance, scalable broadband over copper solutions, and from 2001 to 2003, served as vice president of finance at its subsidiary Actelis Networks Ltd. Prior to that, from 1997 to 2000, Mr. Torem served as corporate controller at Mentergy Ltd., a publicly-traded company that provides e-learning solutions and satellite communications services. Mr. Torem holds a B.A. degree in accounting and economics from Bar Ilan University, an MBA degree from Haifa University and he is a Certified Public Accountant in Israel.
 
Yoav Kimchy has served as our chief technology officer since our inception in April 2009 and a member of our board of directors since April 2009. Dr. Kimchy founded Check-Cap LLC in December 2004, serving as its president and chief executive officer until March 2008, and as its president and chief technical officer since March 2008. Dr. Kimchy has also served as a member of the board of directors of Check-Cap Ltd. (Delaware), the manager of Check-Cap LLC, since December 2004. Between 2005 and 2012, Dr. Kimchy also served as our vice president of research and development. Between 2000 and 2003, Dr. Kimchy served as the vice president of research and development of V-Target Ltd. (Israel), a medical device company developing gamma imaging applications. Prior to that, from 1998 to 2000, Dr. Kimchy served as director of cardiovascular research at Impulse Dynamics Ltd. (Israel), a medical device company developing a unique therapeutic pulsing technology for chronic heart failure. From 1994 to 1998, Dr. Kimchy served as a systems engineer and algorithm specialist for an Israeli government contract project with the Israeli Navy. Dr. Kimchy also served as a lieutenant in the Israeli Navy. Dr. Kimchy holds a B.Sc. degree in physics and mathematics from the Hebrew University of Jerusalem, an M.Sc. degree in biomedical engineering from Tel Aviv University and a PhD from the Technion-Israel Institute of Technology. Dr. Kimchy was appointed as a director pursuant to the appointment rights of the holders of our ordinary shares under our articles of association in effect prior to the closing of this offering.
 
 
110

 
 
Alex Ovadia has served as our vice president of research and development since January 2013. Prior to that, between 2001 and 2012, Mr. Ovadia served in various positions as global director and senior manager for CT research and development at Philips Healthcare. In these capacities he led global organizations including systems engineering, physics, system verification and hardware development. Mr. Ovadia was also appointed as a member of Global CT R&D staff and member of management of Philips Medical System Technologies Ltd. Prior to that, from 1990 to 2001, Mr. Ovadia served as project/systems engineering manager for large scale military projects, mainly aircraft upgrades for U.S. and European governments performed by Elbit Systems Ltd. Mr. Ovadia holds a BSc degree in electrical engineering from the Technion-Israel Institute of Technology.
 
Tomer Kariv has served as a member of our board of directors since June 2009 and as the chairman of our board of directors since July 2010. Mr. Kariv has served as a member of the board of directors of Check Cap Ltd. (Delaware) and a manager of Check-Cap LLC since March 2008. Mr. Kariv is the co-founder and since December 2004, has served as Chief Executive Officer of Pontifax, a group of Israeli-based life sciences venture funds focusing on investments in bio-pharmaceutical and med-tech technologies. Mr. Kariv has also served as an active board member of many of the funds’ portfolio companies, assuming a special responsibility for strategic planning. Among others, since March 2008, Mr. Kariv has served as a board member of Macrocure Ltd, Arno Therapeutics Inc. and Medical Compression Systems Ltd. During the 10 years prior to establishing Pontifax, Mr. Kariv played a key role in investing, managing and nurturing technology driven companies and startups and has held senior management positions at top Israeli financial institutions. Mr. Kariv practiced law with Sullivan & Cromwell, a leading corporate law firm in New York, and holds a B.A. degree in Economics from Harvard University and a J.D. from Harvard Law School. Mr. Kariv was appointed as a director pursuant to the appointment rights of Pontifax under our articles of association in effect prior to the closing of this offering.
 
Walter L. Robb has served as a member of our board of directors since May 2009. Dr. Robb has served as a member of the board of directors of Check Cap Ltd. (Delaware) and a manager of Check-Cap LLC since February 2005. Dr. Robb is the general partner of Counter Point Ventures a venture capital firm established in 2007, and served as the interim chief executive officer of Cyclics Corporation, which manufactures and supplies resins and thermoplastic tooling products, in 2009. Since 1993, Dr. Robb has served as a management consultant and president of Vantage Management, Inc. a private investment and consulting firm, and has been a member of the boards of directors of Celgene Corporation since 1992 and Mechanical Technology, Inc. since 2000. Dr. Robb has also served as a director in several start-up companies over the last 20 years. Until 1993, Dr. Robb served as senior vice president and director for corporate research and development for General Electric, and served on General Electric’s Corporate Executive Council from 1986 to 1993. Dr. Robb was the director of GE Medical Systems from 1973 to 1986. In September 1994, Dr. Robb received the National Medal of Technology from President Clinton for leadership in the CT and MR Imaging Industry. Dr. Robb holds a BS degree in chemical engineering from Penn State University and an MS degree and PhD in chemical engineering, both from the University of Illinois. Dr. Robb was appointed as a director pursuant to the appointment rights of the holders of our former Series A preferred shares under our articles of association in effect prior to the closing of this offering.
 
Richard Stone has served as a member of our board of directors since May 2009. Professor Stone has served as a member of the board of directors of Check Cap LLC since August 2005. Professor Stone began his legal career in private practice and in 1969, was appointed to the position of Assistant Solicitor General of the United States, an office which he held until 1973. In 1974, Professor Stone was appointed to the faculty of Columbia Law School, where he still teaches today primarily in the area of taxation. Professor Stone holds an A.B. from Harvard College and an LL.B. degree from Harvard Law School. Professor Stone was appointed as a director pursuant to the appointment rights of the holders of our former Series B preferred shares under our articles of association in effect prior to the closing of this offering.
 
 
111

 
 
Alon Dumanis has served as a member of our board of directors since 2010. Dr. Dumanis has over 30 years of experience in international business development, entrepreneurial, and technological management of high-technology companies, the domains of which, include information, aviation, electronics, life science and emerging technology. Dr. Dumanis has managed multibillion dollar research and development programs and many large scale projects in engineering, security and information. Since 2001, Dr. Dumanis has served as the chief executive officer of Docor International Management Ltd., a Dutch investment company and since 2010, has served as the chief executive officer of its parent company, Crecor B.V. Dr. Dumanis is currently the chairman of the boards of directors of Xsight Systems Ltd., Softlib Ltd. and DNR Imaging Systems Ltd. and is a member of the board of directors of Spectronix Ltd. (TASE-SPCT), Nova Measuring Instruments Ltd. (NASDAQ-NVMI), Aposense Ltd. (TASE –APOS), Collplant Holdings Ltd. (TASE-CLPT) and other hi-technology companies of Docor’s investment portfolio. Dr. Dumanis is a former member of the board of directors of El Al Israel Airlines Ltd. (TASE –ELAL), Tadiran Communications Ltd. (TASE-TDCM) and Inventech Investments Co. Ltd. (TASE-IVTC). From 1996 to 2000, Dr. Dumanis was Head of Material Command for the Israel Air Force, where he held the rank of Brigadier General. Dr. Dumanis holds a BS degree and MS degree in Aeronautical Engineering both from the Technion-Israel Institute of Technology, and a PhD in Aeronautical Engineering from Purdue University in Indiana USA. Dr. Dumanis was appointed as a director pursuant to the appointment rights of Docor International B.V. under our articles of association in effect prior to the closing of this offering.
 
Arrangements Concerning Election of Directors; Family Relationships
 
Our current board of directors consists of six directors. Pursuant to our articles of association in effect prior to this offering, certain of our shareholders had rights to appoint members of our board of directors. See “Management — Executive Officers and Directors.” All rights to appoint directors and observers will terminate upon the closing of this offering, although currently-serving directors that were appointed prior to this offering will continue to serve pursuant to their appointment until the next annual meeting of shareholders.
 
We are not a party to, and are not aware of, any voting agreements among our shareholders. In addition, there are no family relationships among our executive officers and directors.
 
Corporate Governance Practices
 
Under the Israeli Companies Law, companies incorporated under the laws of the State of Israel whose shares are publicly traded, including companies with shares listed on the NASDAQ Capital Market, are considered public companies under Israeli law and are required to comply with various corporate governance requirements relating to such matters as external directors, the audit committee, the compensation committee and an internal auditor. This is the case even if our shares are not listed on the Tel Aviv Stock Exchange. These requirements are in addition to the corporate governance requirements imposed by the Listing Rules of the NASDAQ Stock Market and other applicable provisions of U.S. securities laws to which we will become subject (as a foreign private issuer) upon the closing of this offering and the listing of our ordinary shares on the NASDAQ Capital Market. Under the Listing Rules of the NASDAQ Stock Market, a foreign private issuer, such as us, may generally follow its home country rules of corporate governance in lieu of the comparable requirements of the Listing Rules of the NASDAQ Stock Market, except for certain matters including (among others) the composition and responsibilities of the audit committee and the independence of its members within the meaning of the rules and regulations of the U.S. Securities and Exchange Commission. We intend to rely on this “home country practice exemption” solely with respect to the following items:
 
 
Nomination of our directors. Israeli law and our amended and restated articles of association do not require director nominations to be made by a nominating committee of our board of directors consisting solely of independent directors, as required under the Listing Rules of the NASDAQ Stock Market. In accordance with Israeli law and practice, directors are recommended by our board of directors for election by our shareholders (other than directors elected by our board of directors to fill a vacancy).
 
 
112

 
 
 
Compensation of officers . Israeli law and our amended and restated articles of association do not require that the independent members of our board of directors (or a compensation committee composed solely of independent members of our board of directors) determine an executive officer’s compensation, as is generally required under the Listing Rules of the NASDAQ Stock Market with respect to the chief executive officer and all other executive officers. For details regarding the approvals required under the Israeli Companies Law for the approval of compensation of the chief executive officer, all other executive officers and directors, see below under “Approval of Related Party Transactions under Israeli Law — Disclosure of Personal Interests of an Office Holder and Approval of Certain Transactions— Compensation of Chief Executive Officer,” “Approval of Related Party Transactions under Israeli Law — Disclosure of Personal Interests of an Office Holder and Approval of Certain Transactions— Compensation of Officers Other than the Chief Executive Officer” and “Approval of Related Party Transactions under Israeli Law — Disclosure of Personal Interests of an Office Holder and Approval of Certain Transactions— Compensation of Directors,” respectively.
 
 
Shareholder approval. We will seek shareholder approval for all corporate actions requiring such approval under the requirements of the Israeli Companies Law, rather than seeking approval for corporate actions in accordance with NASDAQ Listing Rule 5635. In particular, under the NASDAQ Listing Rule, shareholder approval is generally required for: (i) an acquisition of shares/assets of another company that involves the issuance of 20% or more of the acquirer’s shares or voting rights or if a director, officer or 5% shareholder has greater than a 5% interest (or such persons collectively have a 10% or greater interest) in the target company or the assets to be acquired or the consideration to be received and the present or potential issuance of ordinary shares, or securities convertible into or exercisable for ordinary shares, could result in an increase in outstanding common shares or voting power of 5% or more; (ii) the issuance of shares leading to a change of control; (iii) adoption/amendment of a stock option or purchase plan or other equity compensation arrangements, pursuant to which stock may be acquired by officers, directors, employees or consultants (with certain limited exception); and (iv) issuances of 20% or more of the shares or voting rights (including securities convertible into, or exercisable for, equity) of a listed company via a private placement (and/or via sales by directors/officers/5% shareholders) if such equity is issued (or sold) at below the greater of the book or market value of shares. By contrast, under the Israeli Companies Law, the adoption of, and material changes to, equity-based compensation plans generally require the approval of the board of directors (for details regarding the approvals required under the Israeli Companies Law for the approval of compensation of the chief executive officer, all other executive officers and directors, see below under “Approval of Related Party Transactions under Israeli Law — Disclosure of Personal Interests of an Office Holder and Approval of Certain Transactions— Compensation of Chief Executive Officer,” “Approval of Related Party Transactions under Israeli Law — Disclosure of Personal Interests of an Office Holder and Approval of Certain Transactions— Compensation of Officers Other than the Chief Executive Officer” and “Approval of Related Party Transactions under Israeli Law — Disclosure of Personal Interests of an Office Holder and Approval of Certain Transactions— Compensation of Directors,” respectively).
 
 
Quorum requirement. Under our amended and restated articles of association and as permitted under the Israeli Companies Law, a quorum for any meeting of shareholders shall be the presence of at least two shareholders present in person, by proxy or by a voting instrument, who hold at least 25% of the voting power of our shares instead of 33 1/3% of the issued share capital required under the NASDAQ Listing Rules. At an adjourned meeting, any number of shareholders shall constitute a quorum, unless the meeting of shareholders was convened at the demand of shareholders, in which case, the quorum shall be the presence of one or more shareholders holding at least 5% of our issued share capital and at least one percent of the voting power of our shares, or one or more shareholders with at least 5% of the voting power of our shares.
 
 
113

 
 
Except as stated above, we intend to comply with the rules generally applicable to U.S. domestic companies listed on NASDAQ. We may in the future decide to use the foreign private issuer exemption with respect to some or all of the other NASDAQ corporate governance rules. Following our home country governance practices, as opposed to the requirements that would otherwise apply to a company listed on NASDAQ, may provide less protection than is accorded to investors under NASDAQ listing requirements applicable to domestic issuers. For more information, see “Risk Factors —As a foreign private issuer, we are permitted, and intend, to follow certain home country corporate governance practices instead of otherwise applicable NASDAQ requirements, which may result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.”
 
Board Practices
 
Board of Directors
 
Under the Israeli Companies Law, the management of our business, including strategy and policies, is vested in our board of directors. Our board of directors may exercise all powers and may take all actions that are not specifically granted to our shareholders or to management. Our executive officers are responsible for our day-to-day management and have individual responsibilities established by our board of directors. Our chief executive officer is appointed by, and serves at the discretion of, our board of directors, subject to the employment agreement that we have entered into with him. All other executive officers are appointed by our chief executive officer, and are subject to the terms of any applicable employment agreements that we may enter into with them.
 
Under our amended articles of association, which will be effective upon the closing of this offering, our board of directors must consist of at least          and not more than          directors, including at least two external directors required to be appointed under the Israeli Companies Law. Our board of directors will consist of            directors upon the closing of this offering, including two new directors, who are our external directors whose service will commence upon the completion of this offering. The appointment of the external directors is subject to ratification at a meeting of our shareholders to be held no later than three months following the closing of this offering.
 
We intend to comply with the NASDAQ Listing Rule that requires that a majority of our board of directors be comprised of independent directors. The definition of independent director under the NASDAQ Listing Rules and external director under the Israeli Companies Law overlap to a significant degree, such that we would generally expect our two directors serving as external directors under the Israeli Companies Law to satisfy the requirement to be independent under NASDAQ Listing Rules. The definition of external director under the Israeli Companies Law includes a set of statutory criteria that must be satisfied, including criteria whose aim is to ensure that there is no factor which would impair the ability of the external director to exercise independent judgment. The definition of independent director under NASDAQ Listing Rules specifies similar, if slightly less stringent, requirements in addition to the requirement that the board consider any factor which would impair the ability of the independent director to exercise independent judgment. However, external directors must be elected by a special majority of shareholders while independent directors may be elected by an ordinary majority. See “— External Directors” for a description of the requirements under the Israeli Companies Law for a director to serve as an external director.
 
Other than external directors, who are subject to special election requirements under the Israeli Companies Law (as detailed below), our amended and restated articles of association require that our directors be elected by the general meeting of our shareholders by the vote of a majority of the ordinary shares present, in person or by proxy, and voting at that meeting. Each director (other than the external directors) will hold office until the first annual general meeting of shareholders following his or her appointment, unless the tenure of such director expires earlier pursuant to the Israeli Companies Law or unless he or she is removed from office as described below. In addition, our amended articles of association allow our board of directors to appoint directors (other than the external directors) to fill vacancies on our board of directors, for a term of office equal to the remaining period of the term of office of the director(s) whose office(s) have been vacated. See “— External Directors” for a description of the procedure for the election of external directors.
 
In accordance with the exemption available to foreign private issuers under the NASDAQ Listing Rules, we do not intend to follow the requirements of the NASDAQ Listing Rules with regard to the process of nominating directors, and instead, will follow Israeli law and practice, in accordance with which our board of directors (or a committee thereof) is authorized to recommend to our shareholders director nominees for election.
 
 
114

 
 
Under the Israeli Companies Law and our amended and restated articles of association, nominations for directors may also be added to the agenda of a future general meeting of shareholders, at the request of any one or more shareholders holding at least 1% of our outstanding voting power. Any director nominated by a shareholder is required to certify to us, as required by all director nominees, that he or she meets all the requirements of the Israeli Companies Law for election as a director of a public company, and possesses the necessary qualifications and is able to dedicate sufficient time, to fulfill his or her duties as a director of our company, taking into consideration our company’s size and special needs.
 
Under the Israeli Companies Law, our board of directors must determine the minimum number of directors who are required to have accounting and financial expertise. See “— External directors.” In determining the number of directors required to have such expertise, our board of directors must consider, among other things, the type and size of the company and the scope and complexity of its operations. Our board of directors has determined that the minimum number of directors of our company who are required to have accounting and financial expertise is one.
 
External Directors
 
Under the Israeli Companies Law, our board of directors is required to include at least two members who qualify, and were elected as, external directors (within the meaning of the Israeli Companies Law).          and          have agreed to serve as our external directors following the closing of this offering, subject to ratification at a meeting of our shareholders to be held no later than three months following the closing of this offering.
 
The provisions of the Israeli Companies Law set forth special approval requirements for the election of external directors. External directors must be elected by a majority vote of the shares present and voting on the matter at a shareholders meeting, provided that either:
 
 
such majority includes at least a majority of the shares held by all shareholders who are non-controlling shareholders and shareholders who do not have a personal interest in the election of the external director (other than a personal interest not deriving from a relationship with a controlling shareholder) that are voted at the meeting, excluding abstentions, which we refer to as a disinterested majority; or
 
 
the total number of shares held by shareholders who are non-controlling shareholders and shareholders who do not have a personal interest in the election of the external director (other than a personal interest not derived from a relationship with a controlling shareholder) voted against the election of the external director does not exceed 2% of the aggregate voting rights in the company.
 
The term “controlling shareholder” is defined in the Israeli Companies Law as a shareholder with the ability to direct the activities of a company, other than by virtue of being an office holder. A shareholder is deemed to be a controlling shareholder if the shareholder holds 50% or more of the voting rights in the company or has the right to appoint 50% or more of the directors of a company or its general manager. For purposes of shareholder approval of certain extraordinary and interested party transactions, as well as corporate approval of executive compensation, a controlling shareholder is deemed to include any shareholder (or two or more shareholders having a personal interest in the same matter being brought for approval) who hold(s) in the aggregate 25% or more of the voting rights in a public company if no other shareholder holds more than 50% of the voting rights in the company.
 
The term “personal interest” is defined in the Israeli Companies Law as a person’s or entity’s personal interest in an act or a transaction of a company, (i) including the personal interest of (a) any spouse, sibling, parent, grandparent or descendant of the persons, any descendant, sibling or parent of a spouse of the person and the spouse of any of the foregoing; and (b) an entity in which the person or entity or any of the foregoing relatives of the person serves as a director or the chief executive officer, owns at least 5% of its issued share capital or voting rights or has the right to appoint one or more directors or the chief executive officer; but (ii) excluding a personal interest arising solely from the ownership of shares. In the case of a person voting by proxy, “personal interest” includes the personal interest of the proxy holder or the shareholder granting the proxy (even if the proxy holder has no personal interest in the matter), whether or not the proxy holder has discretion how to vote.
 
 
115

 
 
The initial term of an external director is three years. Thereafter, an external director may be reelected by shareholders to serve in that capacity for up to two additional three-year terms, provided that either:
 
 
his or her service for each such additional term is recommended by one or more shareholders holding at least 1% of the company’s voting rights and is approved at a shareholders meeting by a disinterested majority, where the total number of shares held by non-controlling, disinterested shareholders voting for such reelection exceeds 2% of the aggregate voting rights in the company, and provided further that the external director is not an affiliated or competing shareholder, as defined in the Israeli Companies Law, or a relative of such a shareholder at the time of the appointment, and is not affiliated with such a shareholder at the time of appointment or within the two years preceding the date of appointment; or
 
 
his or her service for each such additional term is recommended by the board of directors and is approved at a shareholders meeting by the same majority required for the initial election of an external director (as described above).
 
However, the term of office for external directors for Israeli companies traded on certain foreign stock exchanges, including the NASDAQ Capital Market, may be extended indefinitely in increments of additional three-year terms, in each case provided that the audit committee and the board of directors of the company confirm that, in light of the external director’s expertise and special contribution to the work of the board of directors and its committees, the reelection for such additional period(s) is beneficial to the company, and provided that the external director is reelected subject to the same shareholder vote requirements as if elected for an additional term (as described above). Prior to the approval of the reelection of the external director at a general shareholders meeting, the company’s shareholders must be informed of the term previously served by him or her and of the reasons why the board of directors and audit committee recommended the extension of his or her term.
 
If the board of directors has determined that an external director ceases to meet the statutory qualifications for appointment or if he or she violates his or her duty of loyalty to the company, the board of directors is required to call a special general meeting of shareholders for the removal of the external director. In such circumstances, the removal of the external director by the shareholders requires the same special shareholder majority that is required for the election of an external director, as described above. An external director may also be removed by order of an Israeli court, at the request of a director or shareholder, if the court finds that the external director has ceased to meet the statutory qualifications for his or her appointment or has violated his or her duty of loyalty to the company. If an external directorship becomes vacant and there are fewer than two external directors on the board of directors at the time, then the board of directors is required under the Israeli Companies Law to call a shareholders’ meeting as soon as practicable to appoint a replacement external director.
 
Each committee of the board of directors that exercises the powers of the board of directors must include at least one external director, except that the audit committee and the compensation committee must include all external directors then serving on the board of directors. Under the Israeli Companies Law, external directors of a company are prohibited from receiving, directly or indirectly, any compensation for their services as external directors other than pursuant to the Israeli Companies Law and the regulations promulgated thereunder. Compensation of an external director is determined prior to his or her appointment and may not be changed during any three-year term subject to certain exceptions.
 
The Israeli Companies Law provides that a person is not qualified to serve as an external director if (i) the person is a relative of a controlling shareholder of the company; or (ii) if that person or his or her relative, partner, employer, another person to whom he or she was directly or indirectly subordinate, or any entity under the person’s control, has or had, during the two years preceding the date of appointment as an external director: (a) any affiliation with the company, with any person or entity controlling the company or a relative of such person at the time of appointment, or with any entity controlled by or under common control with the company at the time of appointment or during the two years preceding the appointment; or (b) in the case of a company with no controlling shareholder or a shareholder holding 25% or more of its voting rights, had at the date of appointment as an external director, any affiliation with a person then serving as chairman of the board or chief executive officer, a holder of 5% or more of the issued share capital or voting power in the company or the most senior financial officer.
 
The term “relative” is defined as a spouse, sibling, parent, grandparent or descendant; spouse’s sibling, parent or descendant; and the spouse of each of the foregoing persons.
 
 
116

 
 
The term “affiliation” includes (subject to certain exceptions): an employment relationship; a business or professional relationship even if not maintained on a regular basis (excluding insignificant relationships); control; and service as an office holder, excluding service as a director in a private company prior to the initial public offering of its shares if such director was appointed as a director of the private company in order to serve as an external director following the initial public offering.
 
The term “office holder” is defined under the Israeli Companies Law as a general manager, chief business manager, deputy general manager, vice general manager, any other person assuming the responsibilities of any of these positions regardless of that person’s title, a director and any other manager directly subordinate to the general manager.
 
In addition, no person may serve as an external director if that person’s positions or professional or other activities create, or may create, a conflict of interest with that person’s responsibilities as a director or otherwise interfere with that person’s ability to serve as a director or if the person is an employee of the Israel Securities Authority or of an Israeli stock exchange. A person may furthermore not continue to serve as an external director if he or she received direct or indirect compensation other than as permitted by the Israeli Companies Law and the regulations promulgated thereunder.
 
Following the termination of an external director’s service on a board of directors, such former external director and his or her spouse and children and other relatives may not be provided a direct or indirect benefit by the company, its controlling shareholder or any entity under its controlling shareholder’s control. This includes engagement as an officer or director of the company or a company controlled by its controlling shareholder or employment by, or provision of services to, any such company for consideration, either directly or indirectly, including through a corporation controlled by such person. This restriction extends for a period of two years with regard to the former external director and his or her spouse or child and for one year with respect to other relatives of the former external director.
 
If at the time at which an external director is appointed all members of the board of directors who are not controlling shareholders or relatives of controlling shareholders of the company are of the same gender, the external director to be appointed must be of the other gender. A director of one company may not be appointed as an external director of another company if a director of the other company is acting as an external director of the first company at such time.
 
According to the Israeli Companies Law and regulations promulgated under the Israeli Companies Law, a person may be appointed as an external director only if he or she has professional qualifications or if he or she has accounting and financial expertise (each, as defined below). At least one of the external directors must be determined by our board of directors to have accounting and financial expertise. However, as a company listed on the NASDAQ Capital Market, neither of our external directors is required to possess accounting and financial expertise as long as each possesses the requisite professional qualifications, and at least one of our other directors (i) meets the independence requirements under the Exchange Act and the NASDAQ Listing Rules for membership on the audit committee; and (ii) has accounting and financial expertise as defined under Israeli Companies Law.
 
A director with accounting and financial expertise is a director who, due to his or her education, experience and skills, possesses an expertise in, and an understanding of, financial and accounting matters and financial statements, such that he or she is able to understand the financial statements of the company and initiate a discussion about the presentation of financial data. A director is deemed to have professional qualifications if he or she has any of (i) an academic degree in economics, business management, accounting, law or public administration; (ii) an academic degree or has completed another form of higher education in the primary field of business of the company or in a field which is relevant to his/her position in the company; or (iii) at least five years of experience serving in one of the following capacities, or at least five years of cumulative experience serving in two or more of the following capacities: (a) a senior business management position in a company with a significant volume of business; (b) a senior position in the company’s primary field of business; or (c) a senior position in public administration or service. The board of directors is charged with determining whether a director possesses financial and accounting expertise or professional qualifications.
 
Our board of directors has determined that          has accounting and financial expertise and          possesses professional qualifications, as required under the Israeli Companies Law.
 
 
117

 
 
Audit Committee
 
Following the listing of our ordinary shares on the NASDAQ Capital Market, our audit committee will consist of          , along with our two external director nominees,          and          .          will serve as the Chairman of the audit committee.
 
Israeli Companies Law Requirements
 
Under the Israeli Companies Law, we are required to appoint an audit committee. The audit committee must be comprised of at least three directors, including all of the external directors, one of whom must serve as chairman of the committee. The audit committee may not include the chairman of the board, a controlling shareholder of the company or a relative of a controlling shareholder, a director employed by or providing services on a regular basis to the company, to a controlling shareholder or to an entity controlled by a controlling shareholder or a director who derives most of his or her income from a controlling shareholder.
 
In addition, under the Israeli Companies Law, the audit committee of a publicly traded company must consist of a majority of unaffiliated directors, within the meaning of the Israeli Companies Law. In general, an “unaffiliated director” under the Israeli Companies Law is defined as either an external director or a director who meets the following criteria:
 
 
the audit committee has determined that he or she meets the qualifications for being appointed as an external director, except for (i) the requirement that the director be an Israeli resident (which does not apply to companies such as ours whose securities have been offered outside of Israel or are listed outside of Israel); and (ii) the requirement for accounting and financial expertise or professional qualifications; and
 
 
he or she has not served as a director of the company for a period exceeding nine consecutive years. For this purpose, a break of less than two years in the service shall not be deemed to interrupt the continuation of the service.
 
NASDAQ Listing Requirements
 
Under the NASDAQ corporate governance rules, we are required to maintain an audit committee consisting of at least three independent directors, within the meaning of the Exchange Act and NASDAQ Listing Rules, each of whom must be able to read and understand fundamental financial statements, including the company’s balance sheet, income statement and cash flow statement (and one of whom has past employment experience in finance or accounting, requisite professional certification in accounting or other comparable experience or background that leads to financial sophistication) and none of whom has participated in the preparation of our or any of our subsidiary’s financial statements at any time during the prior three years.
 
All members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the U.S. Securities and Exchange Commission and the NASDAQ Listing Rules. Our board of directors has determined that          is an audit committee financial expert as defined by the U.S. Securities and Exchange Commission rules and has the requisite financial sophistication required by the NASDAQ Listing Rules.
 
Each of the members of the audit committee is “independent” as such term is defined in Rule 10A-3(b)(1) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which is different from the general NASDAQ test for independence of board and committee members.
 
Audit Committee Role
 
Our board of directors has adopted an audit committee charter to be effective upon the listing of our shares on the NASDAQ Capital Market that will set forth the responsibilities of the audit committee consistent with the rules of the U.S. Securities and Exchange Commission and the NASDAQ Listing Rules, as well as the requirements for audit committees under the Israeli Companies Law, including the following:
 
 
oversight of our independent registered public accounting firm and recommending the engagement, compensation or termination of engagement of our independent registered public accounting firm to the board of directors or shareholders for their approval, as applicable, in accordance with the requirements of the Israeli Companies Law;
 
 
118

 
 
 
recommending the engagement or termination of the person filling the office of our internal auditor; and
 
 
recommending the terms of audit and non-audit services provided by the independent registered public accounting firm for pre-approval by our board of directors or shareholders for their approval, as applicable, in accordance with the requirements of the Israeli Companies Law.
 
Our audit committee provides assistance to our board of directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal compliance functions by pre-approving the services performed by our independent accountants and reviewing their reports regarding our accounting practices and systems of internal control over financial reporting. Our audit committee also oversees the audit efforts of our independent accountants and takes those actions that it deems necessary to satisfy itself that the accountants are independent of management.
 
Under the Israeli Companies Law, our audit committee is responsible for:
 
 
determining whether there are deficiencies in the business management practices of our company, including in consultation with our internal auditor or the independent auditor, and making recommendations to the board of directors to improve such practices;
 
 
determining whether to approve certain related party transactions (including transactions in which an office holder has a personal interest) and whether such transaction is extraordinary or material under Israeli Companies Law (see “— Approval of Related Party Transactions under Israeli Law”);
 
 
determining whether a competitive process must be implemented for the approval of certain transactions with controlling shareholders or its relative or in which a controlling shareholder has a personal interest (whether or not the transaction is an extraordinary transaction), under the supervision of the audit committee or other party determined by the audit committee and in accordance with standards determined by the audit committee, or whether a different process determined by the audit committee should be implemented for the approval of such transactions;
 
 
determining the process for the approval of certain transactions with controlling shareholders or in which a controlling shareholder has a personal interest that the audit committee has determined are not extraordinary transactions but are not immaterial transactions;
 
 
where the board of directors approves the working plan of the internal auditor, to examine such working plan before its submission to the board of directors and proposing amendments thereto;
 
 
examining our internal controls and internal auditor’s performance, including whether the internal auditor has sufficient resources and tools to dispose of its responsibilities;
 
 
examining the scope of our auditor’s work and compensation and submitting a recommendation with respect thereto to our board of directors or shareholders, depending on which of them is considering the compensation of our auditor; and
 
 
establishing procedures for the handling of employees’ complaints as to the management of our business and the protection to be provided to such employees.
 
Our audit committee may not approve any actions requiring its approval (see “— Approval of Related Party Transactions under Israeli Law”), unless at the time of the approval a majority of the committee’s members are present, which majority consists of unaffiliated directors including at least one external director.
 
Compensation Committee and Compensation Policy
 
Following the listing of our ordinary shares on the NASDAQ Capital Market, our compensation committee will consist of          ,           and          .          will serve as the Chairman of the compensation committee.
 
 
119

 
 
Israeli Companies Law Requirements
 
Under the Israeli Companies Law, the board of directors of a public company must appoint a compensation committee. The compensation committee must be comprised of at least three directors, including all of the external directors, who must constitute a majority of the members of the compensation committee. However, subject to certain exceptions, Israeli companies whose securities are traded on certain U.S. stock exchanges, such as the NASDAQ Capital Market, that do not have a controlling shareholder, do not have to meet such majority requirement, provided that the compensation committee meets other Israeli Companies Law composition requirements and the requirements of the jurisdiction where the company’s securities are traded. Each compensation committee member that is not an external director must be a director whose compensation does not exceed an amount that may be paid to an external director under regulations promulgated under the Israeli Companies Law. The compensation committee is subject to the same Israeli Companies Law restrictions as the audit committee as to who may not be a member of the committee. See “— Audit Committee — Companies Law Requirements.”
 
NASDAQ Listing Requirements
 
Under the NASDAQ corporate governance rules, we are required to maintain a compensation committee consisting of at least two directors, each of whom is an independent director within the meaning of the NASDAQ Listing Rules.
 
Compensation Committee Role
 
Our board of directors has adopted a compensation committee charter to be effective upon the listing of our shares on the NASDAQ Capital Market that will set forth the responsibilities of the compensation committee consistent with the NASDAQ Listing Rules and the requirements for compensation committees under the Israeli Companies Law, including the following:
 
 
recommending to the board of directors for its approval (i) a compensation policy; (ii) whether a compensation policy should continue in effect, if the then-current policy has a term of greater than three years (approval of either a new compensation policy or the continuation of an existing compensation policy must in any case occur every three years); and (iii) periodic updates to the compensation policy. See “— Compensation Policy.” In addition, the compensation committee is required to periodically examine the implementation of the compensation policy;
 
 
the approval of the terms of employment and service of office holders (including determining whether the compensation terms of a candidate for chief executive officer of the company need not be brought to approval of the shareholders); and
 
 
reviewing and approving grants of options and other incentive awards to persons other than office holders to the extent such authority is delegated by our board of directors, subject to the limitations on such delegation as provided in the Israeli Companies Law.
 
Compensation Policy
 
Under the Israeli Companies Law, the duties of the compensation committee include the recommendation to the company’s board of directors of a policy regarding the terms of engagement of office holders, as such term is defined in the Israeli Companies Law, to which we refer to as a compensation policy, and any extensions and updates thereto. The compensation policy must be adopted by the company’s board of directors, after considering the recommendations of the compensation committee, and will need to be brought for approval by the company’s shareholders, which approval requires a Special Approval for Compensation (as defined below under “— Approval of Related Party Transactions under Israeli Law — Disclosure of Personal Interests of an Office Holder and Approval of Certain Transactions”).
 
We will be required to adopt a compensation policy within nine months following the listing of our ordinary shares on the NASDAQ Capital Market.
 
 
120

 
 
The compensation policy must serve as the basis for decisions concerning the financial terms of employment or engagement of office holders, including exculpation, insurance, indemnification or any monetary payment or obligation of payment in respect of employment or engagement. The compensation policy must relate to certain factors, including advancement of the company’s objectives, the company’s business plan and its long-term strategy, and creation of appropriate incentives for office holders, and must consider (among other things) the company’s risk management, size and the nature of its operations. The compensation policy must also consider the following additional factors:
 
 
the knowledge, skills, expertise and accomplishments of the relevant office holder;
 
 
the office holder’s roles and responsibilities and prior compensation agreements with him or her;
 
 
the relationship between the terms offered and the average compensation of the other employees of the company (including any employees employed through manpower companies);
 
 
the impact of disparities in salary upon work relationships in the company;
 
 
the possibility of reducing variable compensation at the discretion of the board of directors, and the possibility of setting a limit on the exercise value of non-cash variable equity-based compensation; and
 
 
as to severance compensation, the period of employment or service of the office holder, the terms of his or her compensation during such period, the company’s performance during such period, the person’s contribution towards the company’s achievement of its goals and the maximization of its profits, and the circumstances under which the person is leaving the company.
 
The compensation policy must also include the following principles:
 
 
the link between variable compensation and long-term performance and measurable criteria;
 
 
the relationship between variable and fixed compensation, and the ceiling for the value of variable compensation;
 
 
the conditions under which an office holder would be required to repay compensation paid to him or her if it was later shown that the data upon which such compensation was based was inaccurate and was required to be restated in the company’s financial statements;
 
 
the minimum holding or vesting period for variable, equity-based compensation; and
 
 
maximum limits for severance compensation.
 
Internal Auditor
 
Under the Israeli Companies Law, the board of directors of an Israeli public company must appoint an internal auditor recommended by the audit committee. An internal auditor may not be:
 
 
a person (or a relative of a person) who holds more than 5% of the company’s outstanding shares or voting rights;
 
 
a person (or a relative of a person) who has the power to appoint a director or the general manager of the company;
 
 
an office holder, within the meaning of the Israeli Companies Law (including a director and the general manager) of the company (or a relative thereof); or
 
 
a member of the company’s independent accounting firm, or anyone on his or her behalf.
 
The role of the internal auditor is to examine, among other things, our compliance with applicable law and orderly business procedures. The audit committee is required to oversee the activities and to assess the performance of the internal auditor as well as to review the internal auditor’s work plan. We intend to appoint an internal auditor following the closing of this offering.
 
Approval of Related Party Transactions under Israeli Law
 
Fiduciary Duties of Directors and Executive Officers
 
The Israeli Companies Law codifies the fiduciary duties that office holders owe to a company. Each person listed in the table under “Management — Executive Officers and Directors” is an office holder under the Israeli Companies Law.
 
 
121

 
 
An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires an office holder to act with the level of care with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of care includes a duty to use reasonable means to obtain:
 
 
information on the advisability of a given action brought for his or her approval or performed by virtue of his or her position; and
 
 
all other important information pertaining to any such action.
 
The duty of loyalty requires an office holder to act in good faith and in the best interests of the company, and includes, among other things, the duty to:
 
 
refrain from any conflict of interest between the performance of his or her duties to the company and his or her other duties or personal affairs;
 
 
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 herself or others; and
 
 
disclose to the company any information or documents relating to the company’s affairs which the office holder received as a result of his or her position as an office holder.
 
We may approve an act specified above which would otherwise constitute a breach of the office holder’s duty of loyalty, provided that the office holder acted in good faith, the act or its approval does not harm the company and the office holder discloses his or her personal interest a sufficient amount of time before the date for discussion of approval of such act.
 
Disclosure of Personal Interests of an Office Holder and Approval of Certain Transactions
 
Disclosure of Personal Interests of an Office Holder
 
The Israeli Companies Law requires that an office holder promptly disclose to the company any “personal interest” that he or she may be aware of and all related material information or documents concerning any existing or proposed transaction with the company. An interested office holder’s disclosure must be made promptly and in any event no later than the first meeting of the board of directors at which the transaction is considered. A personal interest includes an interest of any person in an act or transaction of a company, including a personal interest of such person’s relative or of a corporate entity in which such person or a relative of such person holds 5% or more of the outstanding shares or voting rights, is a director or general manager or in which he or she has the right to appoint at least one director or the general manager, but excluding a personal interest arising from one’s ownership of shares in the company. A personal interest includes the personal interest of a person for whom the office holder holds a voting proxy or the personal interest of the office holder with respect to his or her vote on behalf of a person for whom he or she holds a proxy even if such shareholder has no personal interest in the matter. An office holder is not, however, obliged to disclose a personal interest if it derives solely from the personal interest of his or her relative in a transaction that is not considered an extraordinary transaction. Under the Israeli Companies Law, an extraordinary transaction is defined as any of the following: a transaction other than in the ordinary course of business; a transaction that is not on market terms; or a transaction that may have a material impact on a company’s profitability, assets or liabilities.
 
Generally, a person who has a personal interest in a matter which is considered at a meeting of the board of directors or the audit committee may not be present at such a meeting or vote on that matter unless, with respect to an office holder, the chairman of the audit committee or board of directors (as applicable) determines that the office holder should be present in order to present the transaction that is subject to approval. If a majority of the members of the audit committee or the board of directors (as applicable) has a personal interest in the approval of a transaction, then all directors may participate in discussions of the audit committee or the board of directors (as applicable) on such transaction and the voting on approval thereof. If a majority of the members of the board of directors has a personal interest in the approval of a transaction, shareholder approval is also required for such transaction.
 
 
122

 
 
Approval of Transactions with Officer Holders
 
If it is determined that an office holder has a personal interest in a transaction that is not an extraordinary transaction, approval by the board of directors is required for the transaction, unless the company’s articles of association provide for a different method of approval. Further, so long as an office holder has disclosed his or her personal interest in a transaction, the board of directors may approve an act by the office holder that would otherwise be deemed a breach of his or her duty of loyalty, provided that the transaction is in the company’s best interest and the office holder acted in good faith. An extraordinary transaction in which an office holder has a personal interest requires approval first by the company’s audit committee and subsequently by the board of directors.
 
Compensation of Officers Other than the Chief Executive Officer
 
The compensation of an office holder (other than the chief executive officer) who is not a director requires approval first by the company’s compensation committee, then by the company’s board of directors, according to the company’s compensation policy. In special circumstances the compensation committee and board of directors may approve a compensation arrangement that is inconsistent with the company’s compensation policy, provided that they have considered the same considerations and matters required for the approval of a compensation policy in accordance with the Israeli Companies Law and such arrangement must be approved by a majority vote of the shares present and voting at a shareholders meeting on the matter, provided that either: (i) such majority includes at least a majority of the shares held by all shareholders who are not controlling shareholders and shareholders who do not have a personal interest in such compensation arrangement present and voting on the matter, excluding abstentions; or (ii) the total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in the matter and who vote against the matter does not exceed 2% of the company’s aggregate voting rights. We refer to this as the Special Approval for Compensation. However, if the shareholders of the company do not approve a compensation arrangement with an executive officer that is inconsistent with the company’s compensation policy, the compensation committee and board of directors may, in special circumstances, override the shareholders’ decision if each of the compensation committee and the board of directors discuss the arrangement again, analyze the shareholders’ objection and provide detailed reasons for their decision.
 
Compensation of Chief Executive Officer
 
The compensation of a public company’s chief executive officer requires the approval of first, the company’s compensation committee; second, the company’s board of directors and third (except for a number of exceptions), the company’s shareholders by the Special Approval for Compensation. However, if the shareholders of the company do not approve a compensation arrangement with a chief executive officer, the compensation committee and board of directors may, in special circumstances, override the shareholders’ decision if each of the compensation committee and the board of directors discuss the arrangement again, analyze the shareholders’ objection and provide detailed reasons for their decision. The compensation committee and board of directors approval should be in accordance with the company’s compensation policy; however, in special circumstances, they may approve compensation terms of a chief executive officer that are inconsistent with such policy provided that they have considered the same considerations and matters required for the approval of a compensation policy in accordance with the Israeli Companies Law and that shareholder approval was obtained by the Special Approval for Compensation.
 
Compensation of Directors
 
Arrangements regarding the compensation of a director require the approval of the compensation committee, board of directors and (except for a number of exceptions) shareholders by ordinary majority, in that order. The approval of the compensation committee and board of directors must be in accordance with the compensation policy. In special circumstances the compensation committee and board of directors may approve a compensation arrangement that is inconsistent with the company’s compensation policy, provided that they have considered the same considerations and matters required for the approval of a compensation policy in accordance with the Israeli Companies Law and that shareholder approval was obtained by the Special Approval for Compensation.
 
 
123

 
 
With respect to compensation of an officer (including chief executive officer) or director who is also a controlling shareholder, see “— Disclosure of Personal Interests of Controlling Shareholders and Approval of Certain Transactions.”
 
Disclosure of Personal Interests of Controlling Shareholders and Approval of Certain Transactions
 
Pursuant to Israeli law, the disclosure requirements regarding personal interests that apply to directors and executive officers also apply to a controlling shareholder of a public company. In the context of a transaction involving a shareholder of the company, a controlling shareholder also includes a shareholder who holds 25% or more of the voting rights in the company if no other shareholder holds more than 50% of the voting rights in the company. For this purpose, the holdings of all shareholders who have a personal interest in the same transaction will be aggregated. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, including a private placement in which a controlling shareholder has a personal interest, and the terms of engagement with a controlling shareholder or a relative thereof, directly or indirectly (including through a corporation controlled by a controlling shareholder), for the provision of services to the company and his or her terms of employment or service as an office holder or employment as other than an office holder, require the approval of each of (i) the audit committee or the compensation committee with respect to the terms of service or employment by the company as an office holder, an employee or service provider; (ii) the board of directors; and (iii) the shareholders, in that order. The shareholder approval requires one of the following, which we refer to as a Special Majority:
 
 
at least a majority of the shares held by all shareholders who do not have a personal interest in the transaction and who are present and voting on the matter approves the transaction, excluding abstentions; or
 
 
the shares voted against the transaction by shareholders who have no personal interest in the transaction and who are present and voting at the meeting do not exceed 2% of the voting rights in the company.
 
Each shareholder voting on the approval of an extraordinary transaction with a controlling shareholder must inform the company prior to voting whether or not he or she has a personal interest in the approval of the transaction, otherwise, the shareholder is not eligible to vote on the proposal and his or her vote will not be counted for purposes of the proposal.
 
To the extent that any such transaction with a controlling shareholder is for a period of more than three years, approval is required once every three years, unless, with respect to any such extraordinary transactions, the audit committee determines that the duration of the transaction is reasonable given the related circumstances.
 
The compensation committee and board approval for arrangements regarding the terms of service or employment of a controlling shareholder must be in accordance with the company’s compensation policy. In special circumstances the compensation committee and board of directors may approve a compensation arrangement that is inconsistent with the company’s compensation policy, provided that they have considered the same considerations and matters required for the approval of a compensation policy in accordance with the Israeli Companies Law and that shareholder approval was obtained by the Special Majority.
 
Pursuant to regulations promulgated under the Israeli Companies Law, certain transactions with a controlling shareholder or his or her relative, or with directors, relating to terms of service or employment that would otherwise require approval of a company’s shareholders may be exempt from shareholder approval upon certain determinations of the audit committee and board of directors. Under these regulations, a shareholder holding at least 1% of the issued share capital or voting power of the company may require, within 14 days of the publication or announcement of such determinations, that despite such determinations by the audit committee and the board of directors, such transaction will require shareholder approval under the same majority requirements that would otherwise apply to such transactions.
 
In addition, disclosure of a personal interest in a private placement of a public company (including disclosure of any material fact or document) is required by (i) a shareholder holding 5% or more of the company’s issued and outstanding capital or its voting rights whose holdings will increase as result of the private placement and a shareholder who will hold 5% or more of the company’s issued and outstanding capital or its voting rights as a result of the private placement, if 20% or more of the company’s outstanding share capital prior to the private placement is issued in the private placement and the payment for which is not only in cash or listed securities or the transaction is not on market terms; and (ii) a person or entity that will become a controlling shareholder as a result of the private placement.
 
 
124

 
 
Shareholder Duties
 
Pursuant to the Israeli Companies Law, a shareholder has a duty to act in good faith and in a customary manner toward the company and other shareholders and to refrain from abusing his or her power in the company, including, among other things, in voting at a meeting of shareholder with respect to the following matters:
 
 
an amendment to the company’s articles of association;
 
 
an increase of the company’s authorized share capital;
 
 
a merger; and
 
 
the approval of related party transactions and acts of office holders that require shareholder approval.
 
In addition, a shareholder has a general duty to refrain from discriminating against other shareholders.
 
Certain shareholders have a duty of fairness toward the company. These shareholders include any controlling shareholder, any shareholder who knows that he or she has the power to determine the outcome of a shareholder vote and any shareholder who has the power to appoint or to prevent the appointment of an office holder of the company or other power towards the company. The Israeli Companies Law does not define the substance of the duty of fairness, except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty to act with fairness.
 
Exculpation, Insurance and Indemnification of Directors and Officers
 
Under the Israeli Companies Law, a company may not exculpate an office holder from liability for a breach of the duty of loyalty. An Israeli company may exculpate an office holder in advance from liability to the company, in whole or in part, for damages caused to the company as a result of a breach of duty of care, but only if a provision authorizing such exculpation is included in its articles of association. Our amended articles of association to be effective upon the closing of this offering include such a provision, to the fullest extent permitted by law. The company may not exculpate in advance a director from liability arising out of a prohibited dividend or other distribution to shareholders.
 
Under the Israeli Companies Law and the Israeli Securities Law, 5728-1968, or the Israeli Securities Law, a company may indemnify an office holder in respect of the following liabilities and expenses incurred for acts performed by him or her as an office holder, either pursuant to an undertaking made in advance of any such event or following an event, provided its articles of association include a provision authorizing such indemnification:
 
 
a financial liability imposed on him or her in favor of another person pursuant to a judgment, including a settlement or arbitrator’s award approved by a court. However, if an undertaking to indemnify an office holder with respect to such liability is provided in advance, then such an undertaking must be limited to events which, in the opinion of the board of directors, can be foreseen based on the company’s activities when the undertaking to indemnify is given, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and such undertaking shall detail the abovementioned foreseen events and amount or criteria;
 
 
reasonable litigation expenses, including attorneys’ fees, incurred by the office holder (1) as a result of an investigation or proceeding instituted against him or her by an authority authorized to conduct such investigation or proceeding, provided that (i) no indictment was filed against such office holder as a result of such investigation or proceeding; and (ii) no financial liability was imposed upon him or her as a substitute for the criminal proceeding as a result of such investigation or proceeding or, if such financial liability was imposed, it was imposed with respect to an offense that does not require proof of criminal intent; and (2) in connection with a monetary sanction;
 
 
reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or imposed by a court in proceedings instituted against him or her by the company, on its behalf, or by a third party, or in connection with criminal proceedings in which the office holder was acquitted, or as a result of a conviction for an offense that does not require proof of criminal intent; and
 
 
125

 
 
 
expenses, including reasonable litigation expenses and legal fees, incurred by an office holder in relation to an administrative proceeding instituted against such office holder, or certain compensation payments made to an injured party imposed on an office holder by an administrative proceeding, pursuant to certain provisions of the Israeli Securities Law.
 
Under the Israeli Companies Law and the Israeli Securities Law, a company may insure an office holder against the following liabilities incurred for acts performed by him or her as an office holder if and to the extent provided in the company’s articles of association:
 
 
a breach of the duty of loyalty to the company, provided that the office holder acted in good faith and had a reasonable basis to believe that the act would not harm the company;
 
 
a breach of the duty of care to the company or to a third party, to the extent such a breach does not arise out of the negligent conduct of the office holder;
 
 
a financial liability imposed on the office holder in favor of a third party; and
 
 
expenses, including reasonable litigation expenses and legal fees, incurred by an office holder in relation to an administrative proceeding instituted against such office holder or certain compensation payments to an injured party imposed on an office holder by an administrative proceeding, pursuant to certain provisions of the Securities Law.
 
Under the Israeli Companies Law, a company may not indemnify, exculpate or enter into an insurance contract for office holder liability, for any of the following:
 
 
a breach of the duty of loyalty, except for indemnification and insurance for a breach of the duty of loyalty to the company to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
 
 
a breach of the duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder;
 
 
an act or omission committed with intent to derive illegal personal benefit; or
 
 
a fine, monetary sanction or forfeit levied against the office holder.
 
Under the Israeli Companies Law, exculpation, indemnification and insurance of office holders in a public company must be approved by the compensation committee and the board of directors and, with respect to the chief executive officer or a director or under certain circumstances, also by the shareholders. See “— Approval of Related Party Transactions under Israeli Law.”
 
Our amended articles of association, which will be effective upon the closing of this offering, permit us to exculpate, indemnify and insure our office holders to the fullest extent permitted under the Israeli Companies Law and the Israeli Securities Law. We have obtained directors’ and officers’ liability insurance for the benefit of our office holders and intend to continue to maintain such coverage and pay all premiums thereunder to the fullest extent permitted by the Israeli Companies Law.  In accordance with our articles of association, in the event that our insurance also covers our liability, our office holders shall have precedence over us in collecting insurance payments.
 
We have entered into indemnification and exculpation agreements with each of our current officers and directors exculpating them from a breach of their duty of care to us to the fullest extent permitted by the Israeli Companies Law and undertaking to indemnify them to the fullest extent permitted by the Israeli Companies Law and the Israeli Securities Law, to the extent that these liabilities are not covered by insurance.  This indemnification is limited to events determined as foreseeable by our board of directors based on our activities, as set forth in the indemnification agreements.   Under such indemnification agreements, the maximum aggregate amount of indemnification that we may pay to any and all of our currently serving or future officers and directors together may not exceed the higher of $5 million and 25% of our shareholders equity according to our most recent financial statements at the time of payment.
 
 
126

 
 
Code of Business Conduct and Ethics
 
We intend to adopt a Code of Business Conduct and Ethics applicable to all of our directors and employees, including our chief executive officer, chief financial officer, controller or principal accounting officer, or other persons performing similar functions, which complies with the “code of ethics” contemplated by Item 16B of Form 20-F promulgated by the U.S. Securities and Exchange Commission. Upon the effectiveness of the registration statement of which this prospectus forms a part, the full text of the Code of Business Conduct and Ethics will be posted on our website at www.check-cap.com . Information contained on, or that can be accessed through, our website does not constitute a part of this prospectus and is not incorporated by reference herein. If we make any amendment to the Code of Business Conduct and Ethics or grant any waivers, including any implicit waiver, from a provision of the code of ethics, we will disclose the nature of such amendment or waiver on our website to the extent required by the rules and regulations of the U.S. Securities and Exchange Commission. Under Item 16B of the U.S. Securities and Exchange Commission’s Form 20-F, if a waiver or amendment of the Code of Business Conduct and Ethics applies to our principal executive officer, principal financial officer, principal accounting officer or controller and relates to standards promoting any of the values described in Item 16B(b) of Form 20-F, we are required to disclose such waiver or amendment on our website in accordance with the requirements of Instruction 4 to such Item 16B.
 
Compensation of Executive Officers and Directors
 
The aggregate compensation paid and share-based compensation and other payments expensed by us to our directors and executive officers with respect to the year ended December 31, 2013 was $1 million.  This amount includes approximately $93,000 set aside or accrued to provide pension, severance, retirement or similar benefits or expenses, but does not include business travel, professional and business association dues and expenses reimbursed to office holders, and other benefits commonly reimbursed or paid by companies in our industry. As of December 31, 2013, options to purchase 8,733,816 ordinary shares granted to our directors and executive officers were outstanding under our 2006 Unit Option Plan at a weighted average exercise price of approximately $0.13 per share.
 
Effective as of January 1, 2013, our chief executive officer, chief financial officer and chief technology officer agreed to a temporary 20% reduction in their salaries, as part of cost cutting measures. To compensate such executives for the salary reduction, we agreed that upon completion of an equity financing, which includes this offering, each such executive will be entitled to the following: (i) a cash payment equal to the cost of such executive’s salary reduction plus 8% annual interest; (ii) options to purchase a number of ordinary shares equal to such executive’s cash payment divided by $0.2748 with an exercise price per share equal to $0.2748.  We anticipate that in total we will grant options to purchase 769,453 ordinary shares.  Such options will be granted under our 2006 Unit Option Plan and will be fully vested upon grant; and (iii) a one-time bonus equal to one and a half monthly salaries of such executive, provided that the aggregate bonuses for all such executives may not exceed $60,000 and the aggregate compensation for all such executives may not exceed $250,000.
 
Effective as of the closing of the credit line agreement that we entered into on August 20, 2014 (See “Prospectus Summary—Recent Developments— Credit Line Agreement”), the employment terms of each of our executive officers were amended as follows: (i) the respective base salaries of each of our executive officers increased effective as of November 1, 2014 by an aggregate annual amount of $348,000 for all executive officers (based on pre-reduced salaries); (ii) each of our chief executive officer and chief financial officer is entitled to a one-time bonus of specified amounts in the aggregate amount of $200,000 for both executive officers; (iii) each of our executive officers shall be entitled to an annual bonus up to certain specified amounts, at the discretion of our board of directors and subject to milestones determined by the board of directors; and (iv) we granted our executive officers options to purchase, in the aggregate, 11,630,739 of our ordinary shares, constituting, in the aggregate, 5.25% of our fully diluted share capital as of the closing, with an exercise price of NIS 0.01 per share.  Each of the executive officers subsequently agreed that the exercise price of fifty-percent of their respective options will increase to equal the price per share at which our ordinary shares are sold to the public in the initial public offering of our securities.  The executive officers also agreed that such portion of their options will vest and become exercisable only upon the consummation of the initial public offering of our securities prior to their expiration date.  The remaining options with an NIS 0.01 exercise price will vest on a quarterly basis in eight equal installments during a period of 24 months from grant. In addition, the executive officers agreed to reduce the term of their respective options such that these options will now expire after eight years (instead of ten years) following their issuance, i.e. , on October 14, 2022.  Upon the closing of this offering or a reverse merger, private placement, PIPE (private investment in public equity) transaction or any other form of equity financing in our company, any unvested portion of the options shall become fully vested and exercisable.
 
 
127

 
 
We do not have any written agreements with any director providing for benefits upon the termination of such director’s relationship with us.
 
Employment Agreements with Executive Officers
 
We have entered into written employment agreements with each of our executive officers. These agreements contain provisions standard for a company in our industry regarding non-competition, confidentiality of information and assignment of inventions. The enforceability of covenants not to compete in Israel and the United States is subject to limitations. For example, Israeli courts have recently required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or its intellectual property.
 
In the event our chief executive officer’s employment is terminated other than for cause, he will be entitled to a one-time severance fee in an amount equal to 50% of his annual salary prior to the voluntary 20% reduction in his salary effective as of January 1, 2013.  If his employment is terminated prior to the consummation of an initial public offering of our shares, we may elect, at our discretion, in lieu of payment of the foregoing severance fee, to grant to him fully vested options to purchase 4,000,000 of our ordinary shares, at an exercise price of NIS 0.01, exercisable for a period of ten years from the issuance thereof.  If his employment is terminated after the consummation of an initial public offering of our shares, the severance fee will be amended to 50% of his amended annual salary following the initial public offering (and we will not be entitled to grant options in lieu of payment of the severance fee).  Other than the foregoing, our agreements with our executive officers do not provide for benefits upon the termination of their respective employment with us, other than payment of salary and benefits during the required notice period for termination of these agreements, which varies under these individual agreements.
 
2006 Unit Option Plan
 
In connection with the transfer of all of the business operations and substantially all of the assets of Check-Cap LLC to us in 2009, we assumed the Check-Cap LLC 2006 Unit Option Plan, or the 2006 Unit Option Plan. The 2006 Unit Option Plan is our sole equity incentive plan. Under the 2006 Unit Option Plan, we are permitted to grant options to purchase our ordinary shares to our employees, consultants and service providers. For the purpose of the 2006 Unit Option Plan: (i) an “employee” means any person, including officers, directors or affiliates who are employed by us or by our affiliates; (ii) a “consultant” means any person who is engaged by us to render consulting or advisory services to us or to any of our entities provided that such services are provided in good faith and are (a) not in connection with the offer or sale of our securities in a capital raising transaction and (b) not directly or indirectly promoting or maintaining a market for our securities; (iii) a “service provider” means an employee, director, supplier or officer holder as defined in the Israeli Companies Law; and (iv) an “affiliate” means any entity which is directly or indirectly our parent or subsidiary.
 
Our board of directors has the authority to administer the 2006 Unit Option Plan and to grant options under the 2006 Unit Option Plan, including, without limitation, the authority to determine the persons to whom options shall be granted, the number of shares subject to each option, the time or times at which the options will be granted, restrictions on the transferability of the options, and the schedule and conditions on which such options may be exercised.
 
The 2006 Unit Option Plan provides for the grant of options pursuant to Sections 102 and 3(i) of the Israeli Income Tax Ordinance [New Version], 5721-1961, which we refer to as the Tax Ordinance. The 2006 Unit Option Plan provides that Section 102 options may be granted only to employees who are Israeli residents and who do not own interests possessing more than 10% of the total combined voting power of all classes of our equity or the equity of our affiliates immediately before such option is granted. Options granted to optionees who are Israeli residents that are not intended to qualify as Section 102 Options are granted under Section 3(i) of the Ordinance, which does not provide for similar tax benefits, and are referred to as Section 3(i) options. The 2006 Unit Option Plan was submitted for the approval of the Israeli Tax Authority, which we refer to as the ITA, as required by applicable law.
 
Section 102 of the Tax Ordinance allows employees, directors and officers, who are not controlling shareholders and who are Israeli residents, to receive favorable tax treatment for compensation granted in the form of shares or options. Section 102 of the Ordinance includes two alternatives for tax treatment involving the issuance of options or shares to a trustee for the benefit of the grantees, which are referred to as the capital gains track and the ordinary income track, and also includes an additional alternative for the issuance of options or shares issued directly to the grantee. Under the 2006 Unit Option Plan, Section 102 options may be designated as options granted under any one of the foregoing alternatives and such designation shall be included in the option agreement for the option award.
 
 
128

 
 
Options granted to date to employees under the 2006 Unit Option Plan were granted under Section 102(b)(2) of the Tax Ordinance, which permits the issuance to a trustee under the “capital gains track.” In order to comply with the terms of the capital gains track, all options granted under a specific plan and subject to the provisions of Section 102 of the Tax Ordinance, as well as the shares issued upon exercise of such options and other shares received subsequently following any realization of rights with respect to such options, such as share dividends and share splits, must be registered in the name of a trustee selected by the board of directors and held in trust for the benefit of the relevant employee, director or officer for a period of two years from the date of the grant. However, under this track, we are not allowed to deduct an expense with respect to the issuance of the options or shares.
 
The exercise price of an option granted under the 2006 Unit Option Plan is determined by the board of directors or a committee appointed by it. The first option grant to an employee generally vests over a period of three years and nine months commencing on the date of grant, such that 8.33% vest on the first anniversary of the date of grant and an additional 8.33% vest on each subsequent three-month period thereafter, for 33 months. Additional option grants to an employee generally vest over a period of two years and nine months commencing on the date of grant, such that 8.33% is fully vested on the date of grant and an additional 8.33% vest on each subsequent three-month period thereafter, for 33 months. Options granted under the 2006 Unit Option Plan generally expire within ten years of the grant date or upon the earlier termination of employment of, or services provided by, the optionee, as applicable, subject to the extended period of exercisability upon termination of employment or services, as applicable. Our board of directors may determine a shorter exercisability period for an option at the time of grant of such option. Upon termination of the employment of or services rendered by an optionee, as applicable (other than for cause, disability or death), generally vested options may be exercised within three months after the date of such termination or within such shorter time period (not to be less than 30 days) or such longer time period (not to exceed five years) as our board of directors or a committee appointed by it shall determine, but in any event no later than the expiration date of the options. If the employment or services of the optionee are terminated because of death or disability (or if the optionee dies within three months after termination of employment or services other than for cause), the optionee’s options may be exercised by the optionee or the optionee’s legal representative or authorized assignee to the extent exercisable on the date of such termination or within 12 months thereafter or as otherwise determined by the board of directors or a committee appointed by it. If the employment or services of the optionee are terminated for cause, all outstanding options will, to the extent not previously exercised, be of no force and effect as of the date of termination, unless otherwise determined by the board of directors or a committee appointed by it.
 
In the event of a merger or consolidation of our company in which our company is not the surviving entity, an acquisition of all or substantially all of the outstanding capital of our company or the sale of all or substantially all of our assets, the optionee shall be provided the opportunity to (i) exercise his or her options in connection with the transaction and to receive in the transaction such consideration as the holder of ordinary shares shall receive in the transaction; or (ii) retain his or her options or receive a substitute option from the surviving company, if any.
 
As of June 30, 2014, we had granted options to purchase an aggregate 16,990,075 ordinary shares under the 2006 Unit Option Plan, of which options to purchase an aggregate 34,882 ordinary shares had been exercised into our ordinary shares, options to purchase an aggregate 2,514,434 ordinary shares had been forfeited without having been exercised and options to purchase an aggregate 14,430,911 ordinary shares were outstanding at a weighted average exercise price of approximately $0.14 per share. As of such date, 1,790,091 ordinary shares were available for future grants under the 2006 Unit Option Plan.
 
 
129

 
 
RELATED PAR TY T RA NSACTIONS
 
Other than the executive and director compensation and indemnification and exculpation arrangements discussed in “Management,” and the transaction described below, we have not entered into any transactions since January 1, 2011 to which we have been or are a party to and in which any of our directors, executive officers or holders of more than 5% of our share capital, or any immediate family member of, or person sharing the household with, any of these individuals or entities, had or will have a direct or indirect material interest.
 
Credit Line Agreement; Private Placement
 
On August 20, 2014, we entered into a certain credit line agreement, pursuant to which we obtained a credit line in an aggregate principal amount of $12 million from certain lenders and existing shareholders, including Pontifax, Docor International B.V. and Counterpoint Ventures Fund II LP.  The credit line amount was deposited in an escrow account at the closing, which was consummated on October 14, 2014, and may be released or called by us under certain terms and conditions.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Sources of Liquidity.” Assuming that we call the full credit line amount for investment in our ordinary shares in the Private Placement and assuming that the purchase price per ordinary share sold in the Private Placement is $                         , the midpoint of the range set forth on the cover page of this prospectus, we anticipate that Pontifax, Docor International, B.V and Counterpoint Ventures Fund II LP will acquire                            ,                          and                        ordinary shares in the Private Placement for an aggregate purchase price of $                         , $                          and $                         respectively.
 
Pontifax Warrants
 
On October 14, 2014, we issued warrants to purchase an aggregate of 4,430,758 of our ordinary shares at an exercise price of NIS 0.01 per share, or the Pontifax Warrants, to the Pontifax entities in consideration of their commitment to provide to us, for no consideration, the following services, if and to the extent requested by us: (i) business development services, in such scope and substance as shall be agreed between us and Pontifax; and (ii) a representative designated by Pontifax to serve as the chairman of our board of directors.  On December 16, 2014, the Pontifax entities agreed that the exercise price of fifty-percent of their warrants will increase to equal the price per share at which our ordinary shares are sold to the public in the initial public offering of our securities.  The Pontifax entities also agreed that such portion of their warrants will vest and become exercisable only upon the consummation of the initial public offering of our securities prior to their expiration date.  The remaining warrants with an NIS 0.01 exercise price will vest on a quarterly basis in eight equal installments during a period of 24 months from issuance.  In addition, the Pontifax entities agreed to reduce the term of their respective warrants such that these warrants will now expire after eight years (instead of ten years) following their issuance, i.e ., on October 14, 2022.  Upon the closing of this offering or a reverse merger, private placement, PIPE (private investment in public equity) transaction or any other form of equity financing in our company, any unvested portion of the warrants will become fully vested and exercisable.
 
Share Purchase Agreement
 
We entered into a Share Purchase Agreement, dated as of March 4, 2011, with Pontifax (Cayman) II, L.P., Pontifax (Israel) II L.P., Pontifax (Israel) II- Individual Investors L.P., BXR Portfolio Limited (formerly named Eastern Petroleum Investment Company Limited), Docor International B.V., Jacobs Investment Company LLC and certain additional investors for the private placement of 24,545,195 of our Series D-1 preferred shares and warrants for the purchase of 16,199,826 of our Series D-2 preferred shares, for an aggregate consideration of $9.3 million. All such warrants are exercisable no later than March 16, 2015. All of such Series D-1 preferred shares will convert into ordinary shares immediately prior to the closing of this offering.
 
Shareholders Agreement
 
Contemporaneously with the closing of the Share Purchase Agreement described above, we entered into a shareholders agreement, dated as of March 17, 2011, to which each of the holders of our preferred shares, including Pontifax (Cayman) II, L.P., Pontifax (Israel) II L.P., Pontifax (Israel) II- Individual Investors L.P., BXR Portfolio Limited (formerly named Eastern Petroleum Investment Company Limited), Docor International B.V., Spearhead Investments (Bio) Ltd., Jacobs Investment Company LLC and Emigrant Alternative Portfolios LLC, is a party, either as an original signatory or by virtue of a joinder thereto, and certain of the holders of our ordinary shares, including Yoav Kimchy and Sigalit Kimchy are parties.  On October 14, 2014, the parties to such shareholders agreement and the lenders under the credit line agreement, dated August 20, 2014, entered into an Amended and Restated Shareholders Agreement, or the Shareholders Agreement.  Prior to the closing of this offering, we will amend the Shareholders Agreement to eliminate the provisions related to i nformation rights and matters related to the board of directors , such that the amended Shareholder Agreement will consist primarily of the provisions regarding registration rights described below, and the undertaking discussed below under “—Transactions with Check-Cap LLC and the Members and Manager of Check-Cap LLC.”
 
 
130

 
 
Demand Registration Rights
 
At any time after the closing of this offering, but subject to the terms of the 180-day lock-up agreements entered into between certain of the parties to the Shareholders Agreement and the underwriters of this offering, at the request of, either (i) holders of a majority of our former Series D preferred shares (all of which will convert into ordinary shares immediately prior to the closing of this offering); or (ii) holders of a majority of our former Series C preferred shares (all of which will convert into ordinary shares immediately prior to the closing of this offering); or (iii) persons holding at least 20% of the ordinary shares issued upon conversion of the former preferred shares or in respect thereof, we must register any or all of such shareholders’ ordinary shares. We are required to effect up to two such registrations for each former holder of our preferred shares, with respect to all of such person’s or entities’ shares. We will be required to give notice of a demand registration to the other holders of registrable securities that will be entitled to registration rights and include their shares in such registration if they so timely request.
 
Piggyback Registration Rights
 
Following our initial public offering, all of the former holders of our preferred shares that are a party to the Shareholders Agreement will have the right to request that we include their registrable securities in certain registration statements that we file in connection with the public offering of our shares. We will be required to give notice of our intention to effect such a registration to all holders of our registrable securities that will be entitled to registration rights and include their shares in such registration if they so timely request.
 
Registration Priority
 
To the extent it is not in our best interest for all of the former holders of our preferred shares to participate in any demand or piggyback registration, the shares to be included in the registration statement on behalf of the former preferred shareholders shall be allocated as follows: first, shares sought to be registered by the former holders of our Series D preferred shares; second, shares sought to be registered by the former holders of Series C preferred shares; third, shares sought to be registered by the former holders of our Series A preferred shares; and fourth, shares sought to be registered by the former holders of our Series B preferred shares.
 
Expenses
 
We have agreed to pay all expenses incurred in carrying out the above registrations, including the fees of one counsel chosen by the selling shareholders that are a party to the Shareholders Agreement. However, we shall not be required to pay any registration expenses in connection with any initiated registration that is subsequently withdrawn, other than a withdrawal due to a material adverse change not known to the holder of registrable securities at the time of such demand or request by us or the underwriters to reduce the size of the offering as a result of which the holders of at least a majority of the registrable securities elect to withdraw. A registration shall not count as a permitted registration until it has remained effective for a period of at least 120 days.
 
Transactions with Check-Cap LLC and the Members and Manager of Check-Cap LLC
 
On May 31, 2009, we entered into an asset transfer agreement with Check-Cap LLC pursuant to which Check-Cap LLC transferred all of its business operations and substantially all of its assets to us. Our shareholders’ holdings on the date of the asset transfer transaction reflected their interests as members of Check-Cap LLC. In the framework of the asset transfer agreement and under the Shareholders Agreement, we undertook to use commercially reasonable efforts to procure that distributions or advance funds are made to our shareholders holding (at the date of the transaction) ordinary shares, Series A preferred shares and/or Series B preferred shares ( i.e. , the shareholders who are also members of Check-Cap LLC), as would be necessary to eliminate the tax impact on such shareholders of the reorganization and the transfer of all of the business operations and substantially all of the assets from Check-Cap LLC to us. Notwithstanding the foregoing, we will not advance payments to such shareholders to address the fact that they will no longer receive a “pass through” of losses generated by us as they previously received while owning units of Check-Cap LLC. These advances, if and to the extent made, will be deducted from any distributions such shareholders are entitled to receive from us. We have reserved $749,000 in our financial statements for the six months ended June 30, 2014 on account of such advances.
 
In connection with the asset transfer agreement, we assumed the former obligation of Check-Cap LLC to distribute any proceeds it collects on the $1 million key man life insurance policy with respect to Yoav Kimchy to the former holders of the Series A preferred units in an amount equal to their respective capital contributed to Check-Cap LLC, less any amounts previously distributed to them, plus any accrued and unpaid dividends due to them as of the date of distribution.
 
Check-Cap Ltd. (Delaware), which is the manager of Check-Cap LLC and is wholly-owned by Mr. Kimchy, our chief technology officer and a director, handles from time to time certain logistical, administrative and investor relations matters for us with our U.S. suppliers and investors under a Services Agreement dated October 1, 2010, which expires on December 31, 2014. Under the agreement, we agreed to pay Check-Cap Ltd. (Delaware) in consideration of its services a quarterly payment of $20,000, which amount essentially covers its costs of performing such functions. We last utilized such services as of December 31, 2012; however, we may utilize such services again in the future. For the year ended December 31, 2012, we paid Check-Cap Ltd. (Delaware) an aggregate of $80,000 for such services.
 
 
131

 
 
PRINCIPAL   SHAREHOLDERS
 
The following table sets forth information regarding beneficial ownership of our ordinary shares as of (i) immediately prior to this offering, (ii) as adjusted to give effect to this offering, and (iii) as adjusted to give effect to this offering and the concurrent Private Placement, by:
 
 
each person, or group of affiliated persons, known to us to be the beneficial owner of 5% or more of our outstanding shares;
 
 
each of our directors and executive officers; and
 
 
all of our directors and executive officers as a group.
 
Beneficial ownership is determined in accordance with the rules of the U.S. Securities and Exchange Commission. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting or investment power with respect to those securities, and include shares subject to options and warrants that are exercisable within 60 days following December 22, 2014. Such shares are also deemed outstanding for purposes of computing the percentage ownership of the person holding the option or warrant, but not the percentage ownership of any other person. The percentage of beneficial ownership of our ordinary shares before the offering is, as set forth in the table below, based on 109,821,544 ordinary shares issued and outstanding as of December 22, 2014. The percentage of beneficial ownership of our ordinary shares after the offering is, as set forth in the table below, based on          ordinary shares outstanding after the offering, which includes the ordinary shares isssuable upon the conversion of our preferred shares into ordinary shares immediately prior to the consummation of this offering plus the ordinary shares to be sold by us in the offering, assuming both no exercise and the exercise in full of the over-allotment option by the underwriter. The percentage of beneficial ownership of our ordinary shares after both the offering and the concurrent Private Placement, as set forth in the table below, is based on          ordinary shares outstanding after the offering and the concurrent Private Placement, assuming both no exercise and the exercise in full of the over-allotment option by the underwriter.
 
As of December 22, 2014, to our knowledge there were 98 record holders of our ordinary shares. To our knowledge, as of December 22, 2014, 46 of the record holders of our ordinary shares were in the United States, which held, in the aggregate 30.6% of our outstanding ordinary shares as of such date. Following the adoption of our amended and restated articles of association, none of our shareholders will have voting rights different from the voting rights of other shareholders. To the best of our knowledge, we are not owned or controlled, directly or indirectly, by another corporation or by any government. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
 
Except as indicated in the footnotes below, we believe that the persons named in the table below have sole voting and investment power with respect to the ordinary shares indicated in the table as being beneficially owned by them. Unless otherwise noted below, each shareholder’s address is c/o Check-Cap Ltd., Check-Cap Building, Abba Hushi Ave., P.O. Box 1271, Isfiya, 30090, Mount Carmel, Israel.
 
   
Ordinary Shares Beneficially Owned Prior to this Offering
   
Ordinary Shares Beneficially Owned After this Offering (Assuming No Exercise of the Over-Allotment Option)
   
Ordinary Shares Beneficially Owned After this Offering (Assuming Full Exercise of the Over-Allotment Option)
   
Ordinary Shares Beneficially Owned After this Offering and the Private Placement (Assuming No Exercise of the Over-Allotment Option)
   
Ordinary Shares Beneficially Owned After this Offering and the Private Placement (Assuming Full Exercise of the Over-Allotment Option)
 
Name and Address of Beneficial Owner
 
Number
   
Percent
   
Number
   
Percent
   
Number
   
Percent
   
Number
   
Percent
   
Number
   
Percent
 
Pontifax (1)(11)  
    28,216,569       25.33 %                                                                
Shanghai Fosun Pharmaceutical Group Co. Ltd. (2)
    17,723,031       13.90 %                                                                
Yoav and Sigalit Kimchy (3)  
    13,105,930       11.93 %                                                                
BXR Portfolio Limited (4)  
    11,135,453       9.75 %                                                                
Docor International B.V. (5)(11)
    9,420,292       8.50 %                                                                
Spearhead Investments (Bio) Ltd. (6)(11)
    6,740,191       6.14 %                                                                
Jacobs Investment Company LLC (7)(11)
    5,954,704       5.40 %                                                                
Emigrant Alternative Investments LLC (8)(11)
    5,800,389       5.28 %                                                                
Counterpoint Ventures Fund L.P. (9)(11)
    5,742,015       5.22 %                                                                
                                                                                 
Directors and Executive Officers:
                                                                               
Guy Neev (10)  
    6,781,820       5.86 %                                                                
Lior Torem
    *       *                                                                  
Yoav Kimchy (3)  
    13,105,930       11.93 %                                                                
Alex Ovadia
    *       *                                                                  
Tomer Kariv (1)(11)  
    28,216,569       25.33 %                                                                
Walter L. Robb (9)(11)  
    5,884,498       5.35 %                                                                
Richard Stone
    *       *                                                                  
Alon Dumanis
    --       --                                                                  
Directors and executive officers as a group (8 persons) (11)
    55,618,074       49.95 %                                                                
 
 
132

 
 
___________________
 
*
Less than 1% of our outstanding ordinary shares.
 
(1)
Includes (i) 8,865,752 preferred shares directly held by Pontifax (Cayman) II L.P. that are convertible (at an assumed 1 for 1 conversion rate) into 8,865,752 ordinary shares within 60 days of December 22, 2014, warrants to purchase 1,543,311 preferred shares (which are convertible into 1,543,311 ordinary shares at an assumed 1 for 1 conversion rate) directly held by Pontifax (Cayman) II L.P. that are exercisable within 60 days of December 22, 2014, the warrants to purchase 3,248,880 ordinary shares directly held by Pontifax (Cayman) II L.P. that are exercisable within 60 days of December 22, 2014 and the Pontifax Warrants to purchase 135,370 ordinary shares directly held by Pontifax (Cayman) II L.P. that are exercisable within 60 days of December 22, 2014; (ii) 6,678,235 preferred shares directly held by Pontifax (Israel) II L.P. that are convertible (at an assumed 1 for 1 conversion rate) into 6,678,235 ordinary shares within 60 days of July 3, 2014, warrants to purchase 1,162,518 preferred shares (which are convertible into 1,162, 518 ordinary shares at an assumed 1 for 1 conversion rate) directly held by Pontifax (Israel) II L.P. that are exercisable within 60 days of December 22, 2014, warrants to purchase 2,447,258 ordinary shares directly held by Pontifax (Israel) II L.P. that are exercisable within 60 days of December 22, 2014 and the Pontifax Warrants to purchase 101,969 ordinary shares directly held by Pontifax (Israel) II L.P. that are exercisable within 60 days of December 22, 2014; and (iii) 2,592,417 preferred shares directly held by Pontifax (Israel) II – Individual Investors LLP that are convertible (at an assumed 1 for 1 conversion rate) into 2,592,417 ordinary shares within 60 days of December 22, 2014, warrants to purchase 451,277 preferred shares (which are convertible into 451,277 ordinary shares at an assumed 1 for 1 conversion rate) directly held by Pontifax (Israel) II – Individual Investors LLP that are exercisable within 60 days of December 22, 2014, warrants to purchase 949,999 ordinary shares directly held by Pontifax (Israel) II – Individual Investors LLP that are exercisable within 60 days of December 22, 2014 and the Pontifax Warrants to purchase 39,583 ordinary shares directly held by Pontifax (Israel) II – Individual Investors LLP that are exercisable within 60 days of December 22, 2014.  Does not include (i) warrants held by the foregoing entities to purchase an aggregate of 2,065,289 preferred shares that are not exercisable within 60 days of December 22, 2014; and (ii) the Pontifax Warrants held by the foregoing entities to purchase an aggregate of 4,153,835 ordinary shares that are not exercisable within 60 days of December 22, 2014, which will become fully vested (to the extent not previously vested) upon completion of this offering. Pontifax Management II L.P., or Pontifax Management, is the general partner of Pontifax (Cayman) II, L.P., Pontifax (Israel) II, L.P. and Pontifax (Israel) II – Individual Investors, L.P., and Pontifax Management 2 G.P. (2007) Ltd., or Pontifax Management GP, is the general partner of Pontifax Management.  Pontifax has further advised us that Mr. Tomer Kariv, the chairman of our board of directors, and Mr. Ran Nussbaum are directors of Pontifax Management GP and, as such, hold voting and dispositive power over the shares held by the Pontifax entities.
 
 
133

 
 
(2)
Includes warrants to purchase 17,723,031 ordinary shares held by Shanghai Fosun Pharmaceutical Group Co. Ltd. that are exercisable within 60 days of December 22, 2014.
 
(3)
Includes (i) 6,391,042 ordinary shares held directly by Yoav Kimchy; (ii) options to purchase 323,846 ordinary shares held by Yoav Kimchy that are exercisable within 60 days of December 22, 2014; and (iii) 6,391,042 ordinary shares held directly by Sigalit Kimchy.  Does not include (i) options to purchase 266,124 ordinary shares held by Yoav Kimchy that will become exercisable upon completion of this offering; and (ii) options to purchase 1,557,688 ordinary shares held by Yoav Kimchy that are not exercisable within 60 days of December 22, 2014, which will become fully vested (to the extent not previously vested) upon completion of this offering. Yoav Kimchy, our chief technology officer and a director, and Sigalit Kimchy are husband and wife.
 
(4)
Includes (i) 6,759,724 preferred shares that are convertible (at an assumed 1 for 1 conversion rate) into 6,759,724 ordinary shares within 60 days of December 22, 2014; and (ii) warrants to purchase 4,375,729 preferred shares (which are convertible into 4,375,729 ordinary shares at an assumed 1 for 1 conversion rate) that are exercisable within 60 days of December 22, 2014. BXR Portfolio Limited (formerly named Eastern Petroleum Investment Company Limited) has advised us that it is a wholly-owned subsidiary of BXR Group Limited.  BXR Group Limited has advised us that the board of directors of BXR Group Limited possesses the ultimate voting and investment power over the shares held by BXR Portfolio Limited.
 
(5)
Includes (i) 6,557,305 preferred shares that are convertible (at an assumed 1 for 1 conversion rate) into 6,557,305 ordinary shares within 60 days of December 22, 2014; (ii) warrants to purchase 647,608 preferred shares (which are convertible into 647,608 ordinary shares at an assumed 1 for 1 conversion rate) that are exercisable within 60 days of December 22, 2014; and (iii) warrants to purchase 2,215,379 ordinary shares that are exercisable within 60 days of December 22, 2014. Does not include warrants to purchase 640,081 ordinary shares that are not exercisable within 60 days of December 22, 2014. Docor International B.V. has advised us that it is a wholly-owned subsidiary of Crecor B.V., which is a wholly-owned subsidiary of the Van Leer Group Foundation. Docor International B.V. has advised us that the supervisory board and managing board of Crecor B.V. are responsible for the investments of Crecor B.V. and as such, possess the ultimate voting and investment power over the shares held by Docor International B.V.
 
(6)
Includes 6,740,191 preferred shares that are convertible (at an assumed 1 for 1 conversion rate) into 6,740,191 ordinary shares within 60 days of December 22, 2014.  Does not include warrants to purchase 773,709 ordinary shares that are not exercisable within 60 days of December 22, 2014.  Spearhead Investments (Bio) Ltd. has advised us that it is wholly-owned by Biomedix Incubator Ltd., an Israeli company whose shares are publicly traded on the Tel Aviv Stock Exchange.
 
(7)
Includes (i) 5,517,131 preferred shares that are convertible (at an assumed 1 for 1 conversion rate) into 5,517,131 ordinary shares within 60 days of December 22, 2014; and (ii) warrants to purchase 437,573 preferred shares (which are convertible into 437,573 ordinary shares at an assumed 1 for 1 conversion rate) that are exercisable within 60 days of December 22, 2014.  Does not include warrants to purchase 557,209 ordinary shares that are not exercisable within 60 days of December 22, 2014.  Mr. Gary Jacobs has advised us that he serves as the Managing Director of Jacobs Investment Company, LLC, and as such, possesses the ultimate voting and investment power over the shares held by Jacobs Investment Company LLC.
 
 
134

 
 
(8)
Includes 5,800,389 preferred shares that are convertible (at an assumed 1 for 1 conversion rate) into 5,800,389 ordinary shares within 60 days of December 22, 2014. Does not include warrants to purchase 665,829 ordinary shares that are not exercisable within 60 days of December 22, 2014.  Emigrant Alternative Investments LLC has advised us that it is a wholly-owned subsidiary of Emigrant Bank, which is a wholly-owned subsidiary of Emigrant Bancorp, Inc., which is a wholly-owned subsidiary of New York Private Bank & Trust Corporation (“NYPBTC”), which is wholly owned by trusts benefitting the family of Paul Milstein (the “Trusts”) and by some members of that family.  Each of the foregoing may be deemed to be a beneficial owner of the shares held by Emigrant Alternative Investments LLC.  Emigrant Alternative Investments LLC has advised us that Howard Milstein, through control of the Trusts, which own 100% of the voting stock of NYPBTC, and in his capacity as an officer of NYPBTC, may be deemed to have sole power to vote and dispose of the shares held by Emigrant Alternative Investments LLC.
 
(9)
Includes: (i) 4,612,172 preferred shares that are convertible (at an assumed 1 for 1 conversion rate) into 4,612,172 ordinary shares within 60 days, held by Counterpoint Ventures Fund LP and Counterpoint Ventures Fund II LP; and (ii) warrants to purchase 1,129,843 ordinary shares that are exercisable within 60 days of December 22, 2014 held by Counterpoint Ventures Fund II LP. Mr. Robb has advised us that the general partner of each of Counterpoint Ventures Fund LP and Counterpoint Ventures Fund II LP is Lion Development LLC, which is 99% controlled by Mr. Walter Robb, and as such, Walter Robb possesses the ultimate voting and investment power over the shares held by the Counterpoint Ventures entities.  Does not include warrants to purchase 529,434 ordinary shares held in the aggregate by the Counterpoint entities that are not exercisable within 60 days of December 22, 2014.  In addition, Mr. Walter Robb directly holds options to purchase 142,483 ordinary shares that are exercisable within 60 days of December 22, 2014 and options to purchase 16,356 ordinary shares that are not exercisable within 60 days of December 22, 2014.
 
(10)
Includes options to purchase 6,781,820 ordinary shares exercisable within 60 days of December 22, 2014.  Does not include (i) options to purchase 266,100 ordinary shares that will become exercisable upon completion of this offering; and (ii) options to purchase 6,230,753 ordinary shares that are not exercisable within 60 days of December 22, 2014, which will become fully vested (to the extent not previously vested) upon completion of this offering.
 
(11)
Does not include warrants to purchase 2,065,289 ordinary shares held by the Pontifax entities, warrants to purchase 640,081 ordinary shares held by Docor International B.V., warrants to purchase 773,709 ordinary shares held by Spearhead Investments (Bio) Ltd., warrants to purchase 557,209 ordinary shares held by Jacobs Investment Company LLC, warrants to purchase 665,829 ordinary shares held by Emigrant Alternative Investments LLC and warrants to purchase 529,434 ordinary shares held by the Counterpoint Ventures entities (collectively referred to as the “Anti-Dilution Warrants”). The Anti-Dilution Warrants were issued as anti-dilution protection in connection with the grant to Mr. Guy Neev of the Neev Options. The Anti-Dilution Warrants will be automatically exercised, without consideration, if and when Mr. Guy Neev exercises any part of the Neev Options, in proportion to the portion of the Neev Options exercised by Mr. Guy Neev (and with respect to Anti-Dilution Warrants to purchase 211,718 ordinary shares held by the Pontifax entities, in proportion to the number of warrants held by the Pontifax entities with respect to which such Anti-Dilution Warrants were granted that were exercised prior to the exercise of the Neev Options).
 
 
135

 
 
DESCRIPTION OF  SHA RE CAPITAL
 
The following description of our share capital and provisions of our amended articles of association is a summary. This summary is subject to the Israeli Companies Law and to the complete text of our amended and restated articles of association (which we will adopt substantially in the form attached as Exhibit 3.2 to the registration statement, of which this prospectus is a part, prior to the completion of this offering).
 
General
 
Immediately prior and subject to the consummation of this offering and the concurrent Private Placement, our authorized share capital will consist solely of ordinary shares, par value NIS 0.01 per share, of which          shares will be issued and outstanding (assuming that the underwriters do not exercise their option to purchase additional ordinary shares).
 
All of our outstanding ordinary shares will be validly issued, fully paid and non-assessable. Our ordinary shares are not redeemable and do not have any preemptive rights.
 
Warrants
 
As of December 22, 2014, the following warrants were outstanding:
 
 
the Anti-Dilution Warrants to purchase 7,734,441 ordinary shares, which will be automatically exercised, without consideration, unless the holder thereof objects to such exercise, if and when Mr. Guy Neev exercises any part of the Neev Options, in proportion to the portion of the Neev Options exercised by Mr. Guy Neev (and with respect to 230,920 of such warrants, in proportion to the number of warrants with respect to which such 230,920 warrants were granted that were exercised prior to the exercise of the Neev Options);
 
 
warrants to purchase 836,412 Series C-1 preferred shares with an exercise price of $0.2495 per share. The warrants are exercisable on a cashless basis;
 
 
warrants to purchase 1,175,257 Series C-2 preferred shares with an exercise price of $0.269 per share. Of such warrants, warrants to purchase 1,007,975 Series C-2 preferred shares are exercisable on a cashless basis; 1,007,975 C-2 warrants (with cashless exercise) were issued to Pontifax and 167,282 C2 warrants (without cashless exercise) were issued to placement agents;
 
 
warrants to purchase 503,872 Series D-1 preferred shares with an exercise price of $0.37708 per share;
 
 
warrants to purchase 16,611,146 Series D-2 preferred shares with an exercise price of $0.47135 per share; and
 
 
warrants to purchase 57,599,850 ordinary shares, of which (i) warrants to purchase 53,169,092 ordinary shares have an exercise price of NIS 0.01 per ordinary share and are fully vested; (ii) the Pontifax Warrants to purchase 2,215,379 ordinary shares have an exercise price of NIS 0.01 per ordinary share and will become fully vested upon the closing of this offering; and (iii) the Pontifax Warrants to purchase 2,215,379 ordinary shares with an exercise price per share equal to the price per share at which our ordinary shares are sold to the public in this offering which will become fully vested upon the closing of this offering.
 
All of the warrants to purchase preferred shares will convert into warrants to purchase ordinary shares immediately prior to and subject to the consummation of this offering.
 
Options
 
As of December 22, 2014, the following options were outstanding:
 
 
options to purchase 12,366,188 of our ordinary shares (which include options to purchase 936,936 ordinary shares issued as anti-dilution protection in connection with the grant to Mr. Guy Neev of the Neev Options), with a weighted average exercise price of $0.17 per share, were outstanding under our 2006 Unit Option Plan. Of such outstanding options, options to purchase 10,376,684 of our ordinary shares, with a weighted average exercise price of $0.17 per share, were vested as of such date;
 
 
options to purchase 11,630,739 of our ordinary shares were outstanding under our 2006 Unit Option Plan, which will become fully vested upon the closing of this offering, (i) fifty-percent of which have an exercise price of NIS 0.01 per ordinary share; and (ii) fifty-percent of which will be exercisable at the price per share at which our ordinary shares are sold to the public in this offering;
 
 
136

 
 
 
the Neev Options for 1,995,475 shares; and
 
 
769,453 ordinary shares issuable upon the exercise of options with an exercise price of $0.2478 per ordinary share, under our 2006 Unit Option Plan, which we have agreed that certain executive officers will be entitled to upon completion of an equity financing, which includes this offering.
 
Share History
 
The following is a summary of our security issuances since January 1, 2011:
 
 
Since January 1, 2011, we granted options to purchase an aggregate of 16,613,441 ordinary shares, in each case having an exercise price per share ranging from NIS 0.01 (approximately $0.00270) to $0.24780, to certain of our employees, officers and consultants under our 2006 Unit Option Plan. Of such options, options to purchase an aggregate of 1,675,810 ordinary shares have been forfeited and cancelled without being exercised as of the date of this prospectus.
 
 
In October 2012, we issued and sold 14,780 ordinary shares pursuant to the exercise of options held by an employee, having an exercise price per share of $0.22270.
 
 
Pursuant to a Share Purchase Agreement dated March 4, 2011 between us and the investors identified therein, we issued an aggregate 24,545,195 of our Series D-1 preferred shares and warrants for the purchase of 16,199,826 of our Series D-2 preferred shares, for aggregate consideration of $9.3 million. In addition, as partial consideration for brokerage services in connection with such financing, we issued warrants to purchase 503,872 Series D-1 preferred shares and warrants to purchase 411,320 Series D-2 preferred shares.
 
 
Pursuant to a Share Purchase Agreement dated January 10, 2012 between us and the investors identified therein, we issued a total of 2,510,783 Series D-3 preferred shares, for aggregate consideration of $1.1 million.
 
 
Pursuant to a Credit Line Agreement dated August 20, 2014 between us and the lenders identified therein, we issued warrants for the purchase of an aggregate 53,169,092 ordinary shares.
 
 
On October 14, 2014, we issued a warrant for the purchase of 4,430,758 ordinary shares to an existing shareholder as consideration for certain services it may provide at our request.
 
Registration Number and Purposes of the Company
 
Our registration number with the Israeli Registrar of Companies is 51-425981-1. Our purpose as set forth in our amended articles of association is to engage in any lawful activity. Our amended and restated articles of association state that the liability of our shareholders is limited, subject to the provisions of the Israeli Companies Law.
 
Voting Rights and Conversion
 
All ordinary shares have identical voting and other rights in all respects.
 
Transfer of Shares
 
Our fully paid ordinary shares are issued in registered form and may be freely transferred under our amended articles of association, unless the transfer is restricted or prohibited by another instrument, applicable law or the rules of a stock exchange on which the shares are listed for trade. The ownership or voting of our ordinary shares by non-residents of Israel is not restricted in any way by our amended articles of association or the laws of the State of Israel, except for ownership by nationals of some countries that are, or have been, in a state of war with Israel.
 
Election of Directors
 
Our ordinary shares do not have cumulative voting rights for the election of directors. As a result, the holders of a majority of the voting power represented at a shareholders meeting have the power to elect all of our directors, subject to the special approval requirements for external directors described under “Management — External Directors.”
 
 
137

 
 
Under our amended articles of association to be effective upon the closing of this offering, our board of directors must consist of not less than          but no more than          directors, including at least two external directors as required by the Israeli Companies Law. Pursuant to our amended articles of association, other than the external directors, for whom special election requirements apply under the Israeli Companies Law, each of our directors will be appointed by a simple majority vote of holders of our voting shares, participating and voting at an annual general meeting of our shareholders. Each director (other than external directors) will hold office until the next annual general meeting following the annual general meeting at which they were elected and until his or her successor is elected and qualified, or until his or her earlier resignation, death or removal by a vote of the majority of the voting power of our shareholders at a general meeting of until his or her office expires by operation of law, in accordance with the Israeli Companies Law. In addition, our amended articles of association allow our board of directors to appoint directors (other than external directors) to fill vacancies on the board of directors to serve for a term of office equal to the remaining period of the term of office of the directors(s) whose office(s) have been vacated. External directors are elected for an initial term of three years, may be elected for additional terms of three years each under certain circumstances, and may be removed from office pursuant to the terms of the Israeli Companies Law. See “Management — Board Practices — External Directors.”
 
Dividend and Liquidation Rights
 
We may declare a dividend to be paid to the holders of our ordinary shares in proportion to their respective shareholdings. Under the Israeli Companies Law, dividend distributions are determined by the board of directors and do not require the approval of the shareholders of a company unless the company’s articles of association provide otherwise. Our amended articles of association do not require shareholder approval of a dividend distribution and provide that dividend distributions may be determined by our board of directors.
 
Pursuant to the Israeli Companies Law, we may declare and pay dividends only if, upon the determination of our board of directors, there is no reasonable concern that the distribution will prevent us from being able to meet the terms of our existing and foreseeable obligations as they become due. Under the Israeli Companies Law, the distribution amount is further limited to the greater of retained earnings or earnings generated over the two most recent years legally available for distribution according to our then last reviewed or audited financial statements, provided that the date of the financial statements is not more than six months prior to the date of distribution. In the event that we do not have retained earnings or earnings generated over the two most recent years legally available for distribution, we must seek the approval of the court in order to distribute a dividend. The court may approve our request if it is convinced that there is no reasonable concern that the payment of a dividend will prevent us from satisfying our existing and foreseeable obligations as they become due.
 
In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of our ordinary shares in proportion to their shareholdings. This right, as well as the right to receive dividends, may be affected by the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future.
 
Exchange Controls
 
There are currently no Israeli currency control restrictions on remittances of dividends on our ordinary shares, proceeds from the sale of the shares or interest or other payments to non-residents of Israel, except for shareholders who are subjects of countries that are, or have been, in a state of war with Israel.
 
 
138

 
 
Shareholder Meetings
 
Under Israeli law, we are required to hold an annual general meeting of our shareholders once every calendar year that must be held no later than 15 months after the date of the previous annual general meeting. All meetings other than the annual general meeting of shareholders are referred to in our amended articles of association as extraordinary general meetings. Our board of directors may call extraordinary general meetings whenever it sees fit, at such time and place, within or outside of Israel, as it may determine. In addition, the Israeli Companies Law provides that our board of directors is required to convene an extraordinary general meeting upon the written request of (i) any two of our directors or one-quarter of the serving members of our board of directors; or (ii) one or more shareholders holding, in the aggregate, either (a) 5% or more of our outstanding shares and 1% of our outstanding voting power or (b) 5% or more of our outstanding voting power.
 
Furthermore, the Israeli Companies Law requires that resolutions regarding the following matters be approved by our shareholders at a general meeting:
 
 
amendments to our articles of association;
 
 
appointment, terms of service and termination of service of our auditors;
 
 
appointment of external directors;
 
 
approval of certain related party transactions;
 
 
increases or reductions of our authorized share capital;
 
 
mergers; and
 
 
the exercise of our board of director’s powers by a general meeting, if our board of directors is unable to exercise its powers and the exercise of any of its powers is essential for our proper management.
 
Subject to the provisions of the Israeli Companies Law and regulations promulgated thereunder, shareholders entitled to participate and vote at general meetings are the shareholders of record on a date to be decided by the board of directors, which, as a company listed on an exchange outside Israel, may be between four and 40 days prior to the date of the meeting.
 
The Israeli Companies Law and our amended articles of association require that a notice of any annual general meeting or extraordinary general meeting be provided to shareholders at least 21 days prior to the meeting and if the agenda of the meeting includes, among other things, the appointment or removal of directors, the approval of transactions with office holders or interested or related parties, an approval of a merger or the approval of the compensation policy, notice must be provided at least 35 days prior to the meeting.
 
Under the Israeli Companies Law and under our amended articles of association, our shareholders are not permitted to take action via written consent in lieu of a meeting.
 
Voting rights
 
Quorum Requirements
 
Pursuant to our amended articles of association, holders of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote before the shareholders at a general meeting. The quorum required for general meetings of our shareholders is at least two shareholders present in person, by proxy or written ballot, who hold or represent between them at least 25% of the total outstanding voting rights, within half an hour of the time fixed for the commencement of the meeting. A meeting adjourned for lack of a quorum is generally adjourned to the same day in the following week at the same time and place or to a later time or date if so specified in the notice of the meeting. At the reconvened meeting, any number of shareholders present in person or by proxy shall constitute a lawful quorum.
 
 
139

 
 
Vote Requirements
 
Our amended articles of association provide that all resolutions of our shareholders require a simple majority vote, unless otherwise required by the Israeli Companies Law or by our amended articles of association. Under the Israeli Companies Law, certain actions require a special majority, including: (i) appointment of external directors, requiring the approval described above under “Management—Board Practices—External Directors”; (ii) approval of an extraordinary transaction with a controlling shareholder or in which the controlling shareholder has a personal interest and the terms of employment or other engagement of the controlling shareholder or a relative of the controlling shareholder (even if not extraordinary), requiring the approval described above under “Management —Approval of Related Party Transactions under Israeli Law— Disclosure of Personal Interests of Controlling Shareholders and Approval of Certain Transactions”; (iii) approval of a compensation policy, requiring the approval described under Management—Board Practices——Compensation Committee and Compensation Policy”; and (iv) approval of executive officer compensation inconsistent with our office holder compensation policy or the compensation of our chief executive officer (subject to limited exceptions), requiring the approval described above under “Management— Approval of Related Party Transactions under Israeli Law— Disclosure of Personal Interests of an Office Holder and Approval of Certain Transactions.
 
In addition, under the Israeli Companies Law the authorization of the chairman of the board to assume the role or responsibilities of the chief executive officer, or the authorization of the chief executive officer or his or her relative thereof to assume the role or responsibilities of the chairman of the board, for periods of no longer than three years each, is subject to receipt of the approval of a majority of the shares voting on the matter, provided that either (i) included in such majority are at least two-thirds of the shares of shareholders who are non-controlling shareholders and shareholders who do not have a personal interest in the resolution that are voted at the meeting on the matter (excluding any abstentions); or (ii) the total number of shares of shareholders specified in clause (i) who voted against the resolution does not 2% of the voting rights in the company.
 
Another exception to the simple majority vote requirement is a resolution for the voluntary winding up, or an approval of a scheme of arrangement or reorganization, of the company pursuant to Section 350 of the Israeli Companies Law, which requires the approval of holders of 75% of the voting rights represented at the meeting, in person, by proxy or by voting deed and voting on the resolution. Under our amended articles of association, the alteration of the rights, privileges, preferences or obligations of any class of our shares requires a simple majority of the class so affected (or such other percentage of the relevant class that may be set forth in the governing documents relevant to such class), in addition to the ordinary majority vote of all classes of shares voting together as a single class at a shareholder meeting.
 
Access to Corporate Records
 
Under the Israeli Companies Law, shareholders are provided access to: minutes of the general meetings of our shareholders; our shareholders register and principal shareholders register, articles of association and financial statements; and any document that we are required by law to file publicly with the Israeli Companies Registrar or the Israel Securities Authority. In addition, shareholders may request to be provided with any document in the company’s possession related to an action or transaction requiring shareholder approval under the related party transaction provisions of the Israeli Companies Law. We may deny this request if we believe it has not been made in good faith or if such denial is necessary to protect our interest or protect a trade secret or patent.
 
Modification of Class Rights
 
Under the Israeli Companies Law and our amended articles of association, the rights attached to any class of share, such as voting, liquidation and dividend rights, may be amended by adoption of a resolution by the holders of a majority of the shares of that class present at a separate class meeting, or otherwise in accordance with the rights attached to such class of shares, as set forth in our amended articles of association.
 
Registration Rights
 
For a discussion of registration rights we have granted to our existing shareholders prior to this offering, please see “Certain Relationships and Related Party Transactions — Shareholders Agreement.”
 
 
140

 
 
Acquisitions under Israeli Law
 
Full Tender Offer
 
A person wishing to acquire shares of an Israeli public company, and who would as a result hold over 90% of the target company’s issued and outstanding share capital, is required by the Israeli Companies Law to make a tender offer to all of the company’s shareholders for the purchase of all of the issued and outstanding shares of the company. A person wishing to acquire shares of a Israeli public company, and who would as a result hold over 90% of the issued and outstanding share capital of a certain class of shares of the company, is required to make a tender offer to all of the shareholders who hold shares of the relevant class for the purchase of all of the issued and outstanding shares of that class. If the shareholders who do not accept the offer hold less than 5% of the issued and outstanding share capital of the company or of the applicable class, and more than half of the shareholders who do not have a personal interest in the offer accept the offer, all of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law. However, a tender offer will also be accepted if the shareholders who do not accept the offer hold less than 2% of the issued and outstanding share capital of the company or of the applicable class of shares.
 
Upon a successful completion of such a full tender offer, any shareholder that was an offeree in such tender offer, whether such shareholder accepted the tender offer or not, may, within six months from the date of acceptance of the tender offer, petition an Israeli court to determine whether the tender offer was for less than fair value and that the fair value should be paid as determined by the court. However, under certain conditions, the offeror may include in the terms of the tender offer that an offeree who accepted the offer will not be entitled to petition the Israeli court as described above.
 
If (a) the shareholders who did not respond or accept the tender offer hold at least 5% of the issued and outstanding share capital of the company, or of the applicable class, or the shareholders who accept the offer constitute less than a majority of the offerees that do not have a personal interest in the acceptance of the tender offer, or (b) the shareholders who did not accept the tender offer hold 2% or more of the issued and outstanding share capital of the company (or of the applicable class), the acquirer may not acquire shares of the company that will increase its holdings to more than 90% of the company’s issued and outstanding share capital or of the applicable class from shareholders who accepted the tender offer.
 
Special Tender Offer
 
The Israeli Companies Law provides that an acquisition of shares of an Israeli public company must be made by means of a special tender offer if as a result of the acquisition the purchaser would become a holder of 25% or more of the voting rights in the company, if there is no other shareholder that holds 25% or more of the voting rights in the company, subject to exceptions. Similarly, the Israeli Companies Law provides that an acquisition of shares in an Israeli public company must be made by means of a special tender offer if as a result of the acquisition the purchaser would become a holder of more than 45% of the voting rights in the company, if there is no other shareholder of the company who holds more than 45% of the voting rights in the company, subject to certain exceptions. No tender offer is required if the acquisition of shares: (i) occurs in the context of a private placement, that was approved by the company’s shareholders and whose purpose is to give the acquirer at least 25% of the voting rights in the company if there is no person who holds 25% or more of the voting rights in the company, or as a private placement whose purpose is to give the acquirer 45% of the voting rights in the company, if there is no person who holds 45% of the voting rights in the company; (ii) was from a holder of 25% or more of the voting rights in the company following which the purchaser will hold 25% or more of the voting rights in the company; or (iii) was from a holder of more than 45% of the voting rights in the company following which the purchaser will hold more than 45% of the voting rights in the company.
 
A special tender offer must be extended to all shareholders of a company but the offeror is not required to purchase shares representing more than 5% of the voting power attached to the company’s outstanding shares, regardless of how many shares are tendered by shareholders. A special tender offer may be consummated only if (i) at least 5% of the voting power attached to the company’s outstanding shares will be acquired by the offeror; and (ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer (excluding the purchaser, its controlling shareholders, holders of 25% or more of the voting rights in the company or any person having a personal interest in the acceptance of the tender offer, or anyone on their behalf, including any such person’s relatives and entities under their control). If a special tender offer is accepted, then the purchaser or any person or entity controlling it, at the time of the offer, and any person or entity under common control with the purchaser or such controlling person or entity may not make a subsequent tender offer for the purchase of shares of the target company and may not enter into a merger with the target company for a period of one year from the date of the offer, unless the purchaser or such person or entity undertook to effect such an offer or merger in the initial special tender offer.
 
 
141

 
 
Merger
 
The Israeli Companies Law permits merger transactions if approved by each party’s board of directors and, unless certain requirements described under the Israeli Companies Law are met, by a majority vote of each party’s shares, and, in the case of the target company, a majority vote of each class of its shares, voted on the proposed merger at a shareholders meeting. The board of directors of a merging company may not approve the merger if it determines that there exists a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of the merging entities.
 
For purposes of the shareholder vote of a merging company whose shares are held by the other merging company or a person or entity holding 25% or more of any of the means of control of the other merging entity, unless a court rules otherwise, the merger will not be deemed approved if a majority of the votes of shares voting on the matter at the shareholders meeting (excluding abstentions) that are held by parties other than the other party to the merger, or by any other person or entity who holds 25% or more of the voting rights or the right to appoint 25% or more of the directors of the other party, or any one on their behalf including their relatives or corporations controlled by any of them, vote against the merger. If, however, the merger involves a merger with a company’s own controlling shareholder or if the controlling shareholder has a personal interest in the merger, then the merger is instead subject to the same Special Majority approval that governs all extraordinary transactions with controlling shareholders (as described under “Management — Approval of Related Party Transactions under Israeli Law — Disclosure of Personal Interests of Controlling Shareholders and Approval of Certain Transactions”).
 
If the transaction would have been approved by the shareholders of a merging company but for the separate approval of each class or the exclusion of the votes of certain shareholders as provided above, a court may still approve the merger upon the request of holders of at least 25% of the voting rights of a company, if the court holds that the merger is fair and reasonable, taking into account the valuation of the merging companies and the consideration offered to the shareholders.
 
Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of the merging entities, and may further give instructions to secure the rights of creditors.
 
In addition, a merger may not be consummated unless at least 50 days have passed from the date on which a proposal for approval of the merger was filed by each party with the Israeli Registrar of Companies and at least 30 days have passed from the date on which the merger was approved by the shareholders of each party.
 
Anti-Takeover Measures under Israeli Law
 
The Israeli Companies Law allow us to create and issue shares having rights different from those attached to our ordinary shares, including shares providing certain preferred rights with respect to voting, distributions or other matters and shares having preemptive rights. As of the closing of this offering, no preferred shares will be authorized under our amended articles of association. In the future, if we do authorize, create and issue a specific class of preferred shares, such class of shares, depending on the specific rights that may be attached to it, may have the ability to frustrate or prevent a takeover or otherwise prevent our shareholders from realizing a potential premium over the market value of their ordinary shares. The authorization and designation of a class of preferred shares will require an amendment to our amended articles of association, which requires the prior approval of the holders of a majority of the voting power attached to our issued and outstanding shares at a general meeting. The convening of the meeting, the shareholders entitled to participate and the majority vote required to be obtained at such a meeting will be subject to the requirements set forth in the Israeli Companies Law as described above in “— Voting Rights.”
 
Borrowing Powers
 
Pursuant to the Israeli Companies Law and our amended articles of association, our board of directors may exercise all powers and take all actions that are not required under law or under our amended articles of association to be exercised or taken by our shareholders, including the power to borrow money for company purposes.
 
 
142

 
 
Changes in Capital
 
Our amended articles of association enable us to increase or reduce our share capital. Any such changes are subject to the provisions of the Israeli Companies Law and must be approved by a resolution duly passed by our shareholders at a general meeting by voting on such change in the capital. In addition, transactions that have the effect of reducing capital, such as the declaration and payment of dividends in the absence of sufficient retained earnings or profits, require the approval of both our board of directors and an Israeli court.
 
Transfer Agent and Registrar
 
The transfer agent and registrar for our ordinary shares is American Stock Transfer & Trust Company.  Its address is 6201 15 th Avenue, Brooklyn, NY 11219, and its telephone number is (718) 921-8200.
 
Listing
 
We have applied for the listing of our ordinary shares on the NASDAQ Capital Market under the symbol “CHEK.”
 
 
143

 
 
SHARES ELIGI BLE FOR FUTURE SALE
 
Prior to this offering, no public market existed for our ordinary shares. Sales of substantial amounts of our ordinary shares following this offering, or the perception that these sales could occur, could adversely affect prevailing market prices of our ordinary shares and could impair our future ability to obtain capital, especially through an offering of equity securities. Assuming that the underwriters do not exercise their over-allotment option with respect to this offering, assuming the consummation of the concurrent Private Placement of   ordinary shares and assuming no exercise of options or warrants outstanding following the offering, we will have an aggregate of          ordinary shares outstanding upon completion of this offering and the concurrent Private Placement. Of these shares, the ordinary shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless purchased by “affiliates” (as that term is defined under Rule 144 of the Securities Act), who may sell only the volume of shares described below and whose sales would be subject to additional restrictions as described below.
 
The remaining outstanding ordinary shares will be deemed “restricted securities” as defined in Rule 144. Restricted securities may be sold in the public market only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rule 144 or Rule 701 promulgated under the Securities Act of 1933, as amended, which rules are summarized below. In addition, our executive officers, directors and greater than 1% shareholders will enter into lock-up agreements with the representative of the underwriters under which they will agree, subject to specific exceptions, not to sell any of our shares for at least 180 days following the date of this prospectus, as described below under “Underwriting.” As a result of these agreements, subject to the provisions of Rule 144 or Rule 701, based on an assumed offering date of          , 2015, ordinary shares will be available for sale in the public market as follows:
 
 
Beginning on the date of this prospectus, all of the ordinary shares sold in this offering will be immediately available for sale in the public market;
 
 
Beginning 181 days after the date of this prospectus, subject to possible extension as described in “Underwriting” below,          additional ordinary shares will become eligible for sale in the public market, all of which will be held by affiliates and subject to the volume and other restrictions of Rule 144, as described below; and
 
 
The remainder of the ordinary shares will be eligible for sale in the public market from time to time beginning on the date of this prospectus, as described below.
 
Rule 144
 
In general, under Rule 144 as currently in effect, once we have been subject to public company reporting requirements for at least 90 days, a person who is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates, is entitled to sell those shares without complying with the manner of sale, volume limitation or notice provisions of Rule 144, subject to compliance with the public information requirements of Rule 144. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then that person would be entitled to sell those shares upon expiration of the lock-up agreements described below, without complying with any of the requirements of Rule 144.
 
In general, under Rule 144, as currently in effect, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell upon expiration of the lock-up agreements described below, within any three-month period, a number of shares that does not exceed the greater of:
 
 
1% of the number of ordinary shares then outstanding, which will equal approximately          shares immediately after this offering and the concurrent Private Placement; or
 
 
the average weekly trading volume of our ordinary shares on the NASDAQ Capital Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale.
 
 
144

 
 
Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.
 
Rule 701
 
Rule 701 generally allows a shareholder who purchased ordinary shares pursuant to a written compensatory plan or contract and who is not deemed to have been an affiliate of our company during the immediately preceding 90 days to sell these shares in reliance upon Rule 144, but without being required to comply with the public information, holding period, volume limitation or notice provisions of Rule 144. Rule 701 also permits affiliates of our company to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. All holders of Rule 701 shares, however, are required by that rule to wait until 90 days after the date of this prospectus before selling those shares pursuant to Rule 701, subject to the lock-up agreements described below.
 
Form S-8 Registration Statements
 
Following the completion of this offering, we may file one or more registration statements on Form S-8 under the Securities Act to register the ordinary shares issued or reserved for issuance under our 2006 Unit Option Plan. The registration statement on Form S-8 will become effective automatically upon filing. Ordinary shares issued upon exercise of a share option and registered under the Form S-8 registration statement will, subject to vesting and Rule 144 volume limitations applicable to our affiliates, be available for sale in the open market immediately unless they are otherwise subject to the lock-up restrictions described under “Underwriting” below, in which case, they will be available for sale after the expiration of such lock-up.
 
Registration Rights
 
Upon the closing of this offering, but subject to the terms of any lock-up agreement, holders of a total of           of our ordinary shares will have the right to require us to register these shares under the Securities Act under specified circumstances and will have incidental registration rights. After registration pursuant to these rights, these shares will become freely tradable without restriction under the Securities Act. For more information on these registration rights, see “Related Party Transactions—Shareholders Agreement.”
 
Lock-up Agreements
 
For a description of the lock-up agreements with the representative of the underwriters that restrict sales of shares by us and our executive officers and directors, see the information under the heading “Underwriting.”
 
 
145

 
 
TAXAT I ON
 
The following description is not intended to constitute a complete analysis of all tax consequences relating to the ownership and disposition of our ordinary shares. You should consult your own tax advisor concerning the tax consequences of your particular situation, as well as any tax consequences that may arise under the laws of any state, local, foreign or other taxing jurisdiction.
 
Israeli Tax Considerations and Government Programs
 
The following is a brief summary of the material Israeli tax laws applicable to us, and certain Israeli Government programs that benefit us. This section also contains a discussion of material Israeli tax consequences concerning the ownership and disposition of our ordinary shares purchased by investors in this offering. This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law. Examples of such investors include residents of Israel or traders in securities who are subject to special tax regimes not covered in this discussion. Because parts of this discussion are based on new tax legislation that has not yet been subject to judicial or administrative interpretation, we cannot assure you that the appropriate tax authorities or the courts will accept the views expressed in this discussion. The discussion below is subject to change, including due to amendments under Israeli law or changes to the applicable judicial or administrative interpretations of Israeli law, which change could affect the tax consequences described below.
 
General Corporate Tax Structure in Israel
 
Israeli resident companies are generally subject to corporate tax, currently at the rate of 26.5% of a company’s taxable income. However, the effective tax rate payable by a company that derives income from an Approved Enterprise, a Benefited Enterprise or a Preferred Enterprise (as discussed below) may be considerably less. Capital gains derived by an Israeli resident company are subject to tax at the prevailing corporate tax rate.
 
Law for the Encouragement of Industry (Taxes), 5729-1969
 
The Law for the Encouragement of Industry (Taxes), 5729-1969, generally referred to as the Industry Encouragement Law, provides several tax benefits for “Industrial Companies.” The Industry Encouragement Law defines an “Industrial Company” as a company resident in Israel, of which 90% or more of its income in any tax year, other than income from defense loans, is derived from an “Industrial Enterprise” owned by it. An “Industrial Enterprise” is defined as an enterprise whose principal activity in a given tax year is industrial production.
 
The following corporate tax benefits, among others, are available to Industrial Companies:
 
 
amortization over an eight-year period of the cost of purchased know-how and patents and rights to use a patent and know-how which are used for the development or advancement of the Industrial Enterprise;
 
 
under limited conditions, an election to file consolidated tax returns with related Israeli Industrial Companies; and
 
 
expenses related to a public offering are deductible in equal amounts over three years.
 
Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. We believe that we may qualify as an “Industrial Company” within the meaning of the Industry Encouragement Law; however, there can be no assurance that we will qualify as an Industrial Company or that the benefits described above will be available in the future.
 
Law for the Encouragement of Capital Investments, 5719-1959
 
The Law for the Encouragement of Capital Investments, 5719-1959, generally referred to as the Investment Law, provides certain incentives for capital investments in production facilities (or other eligible assets) by “Industrial Enterprises” (as defined under the Investment Law).
 
The Investment Law was significantly amended effective April 1, 2005, referred to as the 2005 Amendment, and further amended as of January 1, 2011, referred to as the 2011 Amendment. Pursuant to the foregoing amendments, generally tax benefits that were granted in accordance with the provisions of the Investment Law prior to each such amendment remain in force; however, any benefits granted subsequent to the respective amendment are subject to the provisions of the Investment Law as amended.
 
 
146

 
 
Tax Benefits Prior to the 2005 Amendment
 
Prior to the 2005 Amendment, a capital investment in eligible production facilities (or other eligible assets) could, upon application to the Investment Center of the Israeli Ministry of Economy (formerly named the Ministry of Industry, Trade and Labor), or the Investment Center, be designated as an “Approved Enterprise” and accordingly, entitled to certain tax benefits under the Investment Law. Each certificate of approval for an Approved Enterprise relates to a specific investment program in the Approved Enterprise, delineated both by the financial scope of the investment and by the physical characteristics of the facility or the asset. We do not have any Approved Enterprises.
 
Tax Benefits Subsequent to the 2005 Amendment
 
Pursuant to the 2005 Amendment, a company whose facilities meet certain criteria set forth in the 2005 Amendment, may claim certain tax benefits offered by the Investment Law (as further described below) directly in its tax returns, without the need to obtain prior approval. In order to receive the tax benefits, a company must make an investment which meets all of the conditions, including exceeding a minimum entitling investment amount, set forth in the Investment Law. Such investment allows a company to receive “Benefited Enterprise” status, and may be made over a period of no more than three years ending at the end of the year in which the company chose to have the tax benefits apply to its Benefited Enterprise, referred to as the “Year of Election.”
 
The extent of the tax benefits available under the 2005 Amendment to qualifying income of a Benefited Enterprise depends on, among other things, the geographic location in Israel of the Benefited Enterprise. The location will also determine the period for which tax benefits are available. Under the “Exemption Track” the tax benefits include an exemption from corporate tax on undistributed income generated by the Benefited Enterprise for a period of two to ten years, depending on the geographic location of the Benefited Enterprise in 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 the company in each year. . The benefits period is for a duration of seven or ten years, depending on the location of the Benefited Enterprise, from the later of the first year in which the company generated taxable income from its Benefited Enterprise and the Year of Election, but in any event not more than 12 or 14 years from the Year of Election, depending on the location of the company. A company qualifying for tax benefits under the Exemption Track which pays a dividend out of income derived by its Benefited Enterprise during the tax exemption period will be subject to corporate tax in respect of the amount of the dividend (grossed-up to reflect the pre-tax income that it would have had to earn in order to distribute the dividend) at the corporate tax rate which would have otherwise been applicable. Dividends paid out of income attributed to a Benefited Enterprise are generally subject to withholding tax at source at the rate of 15%-20% or such lower rate as may be provided in an applicable tax treaty.
 
The benefits available to a Benefited Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations. If a company does not meet these conditions, it may be required to refund the amount of tax benefits, as adjusted by the Israeli consumer price index, and interest, or other monetary penalties.
 
We currently have one Benefited Enterprise program under the Investments Law, which, we believe, entitle us to certain tax benefits with respect to income to be derived from our Benefited Enterprise. During the benefits period, taxable income from our Benefited Enterprise program (once generated) will be tax exempt for a period of ten years commencing with the year we will first earn taxable income relating to such enterprise. We chose 2010 as the Year of Election. Due to the location of our company, we believe we are entitled to a 10 year benefit period, subject to a 14 year limitation from the Year of Election, and therefore, the tax benefit period will in any event end in 2023.
 
Tax Benefits under the 2011 Amendment
 
The 2011 Amendment canceled the availability of the benefits granted to companies under the Investment Law prior to 2011 and, instead, introduced new benefits for income generated by a “Preferred Company” through its “Preferred Enterprise” (as such terms are defined in the Investment Law) as of January 1, 2011. The definition of a Preferred Company includes a company incorporated in Israel that is not wholly-owned by a governmental entity, and that has, among other things, Preferred Enterprise status and is controlled and managed from Israel. Effective January 1, 2014, a Preferred Company is entitled to a reduced corporate tax rate of 16% with respect to its income derived by its Preferred Enterprise in 2014 and thereafter, unless the Preferred Enterprise is located in a specified development zone, in which case the rate will be 9%. Our facilities are located in a specified development zone.
 
 
147

 
 
Dividends paid out of income attributed to a Preferred Enterprise are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty. However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply).
 
The 2011 Amendment also provides transitional provisions to address companies already enjoying existing tax benefits under the Investment Law. These transitional provisions provide, among other things, that unless an irrevocable request is made to apply the provisions of the Investment Law as amended in 2011 with respect to income to be derived as of January 1, 2011, a Benefited Enterprise can elect to continue to benefit from the benefits provided to it before the 2011 Amendment came into effect, provided that certain conditions are met.
 
We have examined the possible effect, if any, of the provisions of the 2011 Amendment on our financial statements and have decided not to apply the new benefits under the 2011 Amendment.
 
The termination or substantial reduction of any of the benefits available under the Investment Law could materially increase our future tax liabilities.
 
The Encouragement of Industrial Research and Development Law, 5744-1984
 
Under the Encouragement of Industrial Research and Development Law, 5744-1984, generally referred to as the Research Law, research and development programs which meet specified criteria and are approved by a committee of the OCS are eligible for grants. The grants awarded are typically up to 50% of the project’s expenditures, as determined by the research committee. The grantee is required to pay royalties to the State of Israel from the sale of products developed under the program. Regulations under the Research Law generally provide for the payment of royalties of 3% to 5% (or 6% with respect to certain limited programs and at an increased rate under certain circumstances) on sales of products and services based on technology developed using grants, until 100% of the grant, linked to the dollar and bearing interest at the LIBOR rate, is repaid. The terms of the Israeli government participation also require that products developed with OCS grants be manufactured in Israel and that the technology developed thereunder may not be transferred outside of Israel, unless approval is received from the OCS. However, this does not restrict the export of products that incorporate the funded technology. In addition, payment of additional amounts is required if manufacturing is moved outside of Israel, in which case the royalty repayment rate is increased and the royalty ceiling can reach up to three times the amount of the grants received, and if OCS developed know-how is transferred outside of Israel, the royalty ceiling can reach up to six times the amount of grants (plus interest).
 
As of June 30, 2014, we have received funding from the OCS for the financing of a portion of our research and development expenditures in an aggregate amount of $3.1 million.  Since June 30, 2014, we have received additional funding from the OCS in the aggregate amount of $566,551 under an approved OCS grant in the total amount of $702,000 for a research and development program for the 12 month period commencing March 1, 2014.  As of June 30, 2014, we had a contingent obligation to the OCS in the amount of $1.6 million.
 
Taxation of our Shareholders
 
Capital Gains Taxes Applicable to Non-Israeli Resident Shareholders . A non-Israeli resident who derives capital gains from the sale of shares in an Israeli resident company that were purchased after the company was listed for trading on a stock exchange outside of Israel will be exempt from Israeli tax so long as the shares were not held through a permanent establishment that the non-resident maintains in Israel. However, non-Israeli corporations will not be entitled to the foregoing exemption if Israeli residents: (i) have a controlling interest of 25% or more in such non-Israeli corporation; or (ii) are the beneficiaries of, or are entitled to, 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. In addition, such exemption is not applicable to a person whose gains from selling or otherwise disposing of the shares are deemed to be business income.
 
 
148

 
 
Additionally, a sale of securities by a non-Israeli resident may be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty. For example, under the Convention Between the Government of the United States of America and the Government of the State of Israel with respect to Taxes on Income, as amended, or the United States-Israel Tax Treaty, the sale, exchange or other disposition of shares by a shareholder who (i) is a U.S. resident (for purposes of the treaty); (ii) holds the shares as a capital asset; and (iii) is entitled to claim the benefits afforded to such person by the treaty, is generally exempt from Israeli capital gains tax. Such exemption will not apply if, among other things: (i) the capital gain arising from such sale, exchange or other disposition is treated as industrial or commercial profits attributed to a permanent establishment in Israel, subject to certain conditions; (ii) the shareholder holds, directly or indirectly, shares representing 10% or more of the voting capital of the corporation during any part of the 12-month period preceding the disposition, subject to certain conditions; (iii) the capital gain arising from such sale, exchange or disposition is treated as royalties; or (iv) such U.S. resident is an individual and was present in Israel for 183 days or more during the relevant taxable year. In such case, the sale, exchange or disposition of our ordinary shares would be subject to Israeli tax, to the extent applicable; however, under the United States-Israel Tax Treaty, the taxpayer 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 under U.S. law applicable to foreign tax credits. The United States-Israel Tax Treaty does not relate to U.S. state or local taxes.
 
In some instances where our shareholders may be liable for Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at source at the time of sale.
 
Taxation of Non-Israeli Shareholders on Receipt of Dividends . Non-Israeli residents are generally subject to Israeli withholding tax on the receipt of dividends paid on our ordinary shares at the rate of 25%, unless relief is provided in a treaty between Israel and the shareholder’s country of residence (subject to the receipt of a valid certificate from the Israeli Tax Authority allowing for a reduced tax rate). With respect to a person who is a “substantial shareholder” at the time of receiving the dividend or at any time during the preceding 12 months, the applicable withholding tax rate is 30%, unless such “substantial shareholder” holds such shares through a nominee company, in which case the rate is 25%. A “substantial shareholder” is generally a person who alone or together with such person’s relative or another person who collaborates with such person on a permanent basis, holds, directly or indirectly, at least 10% of any of the “means of control” of the corporation. “Means of control” generally include the right to vote, receive profits, nominate a director or an executive officer, receive assets upon liquidation, or order someone who holds any of the aforesaid rights how to act, regardless of the source of such right.
 
However, a distribution of dividends to non-Israeli residents is subject to withholding tax at source at a rate of 15-20% if the dividend is distributed from income attributed to an Approved Enterprise, Benefited Enterprise or a Preferred Enterprise, unless a reduced tax rate is provided under an applicable tax treaty. With respect to a Benefited Enterprise whose Year of Election is before 2014, such as ours, distribution of dividends attributed to income of such Benefited Enterprise is subject to 15% tax rate. We cannot assure you that in the event we declare a dividend we will designate the income out of which the dividend is paid in a manner that will reduce shareholders’ tax liability.
 
Under the United States-Israel Tax Treaty, the maximum rate of tax withheld at source in Israel on dividends paid to a holder of our ordinary shares who is a U.S. resident (for purposes of the United States-Israel Tax Treaty) is 25%. With respect to dividends paid to a U.S. corporation that held 10% or more of our outstanding voting capital throughout the tax year in which the dividend is distributed and the preceding tax year and provided that not more than 25% of the gross income of the paying corporation for such prior taxable year (if any) consists of certain interest or dividends, the maximum rate of tax withheld at source is 12.5%; provided, however, that if the paying corporation is an Approved Enterprise, the applicable withholding tax rate under such circumstances is reduced to 15%. We believe that the reference in the United States-Israel Tax Treaty to an Approved Enterprise under the Investment Law is deemed to include also a Benefitted Enterprise and Preferred Enterprise under the Investment Law.
 
U.S. residents who are subject to Israeli withholding tax on a dividend may be entitled to a credit or deduction for U.S. federal income tax purposes in the amount of the taxes withheld, subject to detailed rules contained in U.S. tax legislation.
 
 
149

 
 
Surtax
 
Subject to the provisions of an applicable tax treaty, individuals who are subject to tax in Israel are also subject to an additional tax at a rate of 2% on annual income (including, but not limited to, dividends, interest and capital gain) exceeding NIS 811,560 for 2014, which amount is linked to the annual change in the Israeli consumer price index.
 
Estate and Gift Tax
 
Israeli law presently does not impose estate or gift taxes.
 
U.S. Federal Income Taxation
 
General
 
The following are the material U.S. federal income tax consequences of the acquisition, ownership and disposition of our ordinary shares covered by this prospectus.
 
The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to a beneficial owner of our ordinary shares that is for U.S. federal income tax purposes:
 
 
an individual citizen or resident of the United States;
 
 
a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized) in or under the laws of the United States, any state thereof or the District of Columbia;
 
 
an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or
 
 
a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust; or (ii) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
 
A beneficial owner of our ordinary shares that is described above is referred to herein as a “U.S. Holder.” If a beneficial owner of our ordinary shares is not described as a U.S. Holder and is not an entity treated as a partnership or other pass-through entity for U.S. federal income tax purposes, such owner will be considered a “Non-U.S. Holder.” The material U.S. federal income tax consequences applicable specifically to Non-U.S. Holders are described below under the heading “Non-U.S. Holders.”
 
This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, Treasury regulations promulgated thereunder, published rulings and court decisions, all as currently in effect. These authorities are subject to change or differing interpretations, possibly on a retroactive basis.
 
This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular holder based on such holder’s individual circumstances. In particular, this discussion considers only holders that purchase our ordinary shares pursuant to this offering and own and hold the ordinary shares as capital assets within the meaning of Section 1221 of the Code, and does not address the potential application of the alternative minimum tax or the U.S. federal income tax consequences to holders that are subject to special rules, including:
 
 
financial institutions or financial services entities;
 
 
broker-dealers;
 
 
persons that are subject to the mark-to-market accounting rules under Section 475 of the Code;
 
 
tax-exempt entities;
 
 
governments or agencies or instrumentalities thereof;
 
 
insurance companies;
 
 
150

 
 
 
regulated investment companies;
 
 
real estate investment trusts;
 
 
certain expatriates or former long term residents of the United States;
 
 
persons that actually or constructively own 5% or more of our voting shares;
 
 
persons that acquired the ordinary shares pursuant to an exercise of employee options, in connection with employee incentive plans or otherwise as compensation;
 
 
persons that hold the ordinary shares as part of a straddle, constructive sale, hedging, conversion or other integrated transaction;
 
 
persons whose functional currency is not the U.S. dollar;
 
 
passive foreign investment companies; or
 
 
controlled foreign corporations.
 
This discussion does not address any aspect of U.S. federal non-income tax laws, such as gift or estate tax laws, or state, local or non-U.S. tax laws or, except as discussed herein, any tax reporting obligations applicable to a holder of our ordinary shares. Additionally, this discussion does not consider the tax treatment of partnerships or other pass-through entities or persons who hold our ordinary shares through such entities. If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of our ordinary shares, the U.S. federal income tax treatment of a partner in the partnership generally will depend on the status of the partner and the activities of the partnership. This discussion also assumes that any distribution made (or deemed made) to a holder in respect of our ordinary shares and any consideration received (or deemed received) by a holder in connection with the sale or other disposition of our ordinary shares will be in U.S. dollars. In addition, as described in “Risk Factors – Risks Related to Taxation – There is a risk that we could be treated as a domestic (U.S.) corporation for U.S. federal income tax purposes by reason of the transactions related to our acquisition of all of the business operations and substantially all of the assets of Check-Cap LLC on May 31, 2009 (hereinafter sometimes referred to as the “reorganization”),” this discussion also assumes that we will be and have been treated as a foreign corporation for U.S. federal income tax purposes.
 
We have not sought, and will not seek, a ruling from the Internal Revenue Service (the “IRS”) or an opinion of counsel as to any U.S. federal income tax consequence described herein. The IRS may disagree with the description herein, and its determination may be upheld by a court. Moreover, there can be no assurance that future legislation, regulations, administrative rulings or court decisions will not adversely affect the accuracy of the statements in this discussion.
 
EACH PROSPECTIVE INVESTOR IN OUR ORDINARY SHARES IS URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO SUCH INVESTOR OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND ANY APPLICABLE TAX TREATIES.
 
U.S. Holders
 
Taxation of Cash Distributions
 
Subject to the passive foreign investment company, or PFIC, rules discussed below, a U.S. Holder generally will be required to include in gross income as ordinary income the amount of any cash dividend paid in respect of our ordinary shares. A cash distribution on our ordinary shares generally will be treated as a dividend for U.S. federal income tax purposes to the extent the distribution is paid out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes). Such dividend generally will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations. The portion of such cash distribution, if any, in excess of such earnings and profits will be applied against and reduce (but not below zero) the U.S. Holder’s adjusted tax basis in the ordinary shares. Any remaining excess generally will be treated as gain from the sale or other taxable disposition of such ordinary shares.
 
 
151

 
 
With respect to non-corporate U.S. Holders, any such cash dividends may be subject to U.S. federal income tax at the lower applicable regular long term capital gains tax rate (see “— Taxation on the Disposition of Ordinary Shares ” below) provided that (a) our ordinary shares are readily tradable on an established securities market in the United States or we are eligible for the benefits of the United States-Israel Tax Treaty, (b) we are not a PFIC, as discussed below, for either the taxable year in which the dividend was paid or the preceding taxable year, and (c) certain holding period requirements are met. Therefore, if our ordinary shares are not readily tradable on an established securities market, and we are not eligible for the benefits of the United States-Israel Tax Treaty, then cash dividends paid by us to non-corporate U.S. Holders will not be subject to U.S. federal income tax at the lower regular long term capital gains tax rate. Under published IRS authority, shares are considered for purposes of clause (a) above to be readily tradable on an established securities market in the United States only if they are listed on certain exchanges, which presently include the NASDAQ Capital Market. Although we have applied to have our ordinary shares listed and traded on the NASDAQ Capital Market, we cannot guarantee that our application will be approved or, if approved, that our ordinary shares will continue to be listed and traded on the NASDAQ Capital Market. U.S. Holders should consult their own tax advisors regarding the availability of the lower rate for any cash dividends paid with respect to our ordinary shares.
 
Dividends paid to a U.S. Holder with respect to our ordinary shares generally will be foreign source income, which may be relevant in calculating such U.S. Holder’s foreign tax credit limitations. Subject to certain conditions and limitations, Israeli tax withheld on dividends may be deducted from such U.S. Holder’s taxable income or credited against such U.S. Holder’s U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends that we distribute generally should constitute “passive category income,” or, in the case of certain U.S. Holders, “general category income.” A foreign tax credit for foreign taxes imposed on distributions may be denied if a U.S. Holder does not satisfy certain minimum holding period requirements. The rules relating to the determination of the foreign tax credit are complex, and U.S. Holders should consult their tax advisors to determine whether and to what extent they will be entitled to this credit.
 
Taxation on the Disposition of Ordinary Shares
 
Upon a sale or other taxable disposition of our ordinary shares, and subject to the PFIC rules discussed below, a U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized and the U.S. Holder’s adjusted tax basis in the ordinary shares.
 
The regular U.S. federal income tax rate on capital gains recognized by U.S. Holders generally is the same as the regular U.S. federal income tax rate on ordinary income, except that long term capital gains recognized by non-corporate U.S. Holders generally are subject to U.S. federal income tax at a maximum regular rate of 20%. Capital gain or loss will constitute long term capital gain or loss if the U.S. Holder’s holding period for the ordinary shares exceeds one year. The deductibility of capital losses is subject to various limitations. Any such gain or loss that a U.S. Holder recognizes generally will be treated as U.S. source income or loss for foreign tax credit limitation purposes.
 
If an Israeli capital gains tax applies to any gains from the disposition of our ordinary shares by a U.S. Holder, as discussed in “Israeli Tax Considerations and Government Programs – Taxation of our Shareholders” above, such tax may be treated as a foreign tax eligible for a deduction from such holder’s U.S. federal taxable income or a foreign tax credit against such holder’s U.S. federal income tax liability (subject to certain conditions and limitations). In addition, if such Israeli tax applies to any such gain, a U.S. Holder may be entitled to certain benefits under the United States-Israel Tax Treaty, if such holder is considered a resident of the United States for purposes of, and otherwise meets the requirements of, the United States-Israel Tax Treaty. U.S. Holders should consult their own tax advisors regarding the deduction or credit for any such Israeli tax and their eligibility for the benefits of the United States-Israel Tax Treaty.
 
Additional Taxes
 
U.S. Holders that are individuals, estates or trusts and whose income exceeds certain thresholds generally will be subject to a 3.8% Medicare contribution tax on unearned income, including, without limitation, dividends on, and gains from the sale or other taxable disposition of, our ordinary shares, subject to certain limitations and exceptions. U.S. Holders should consult their own tax advisors regarding the effect, if any, of such tax on their ownership and disposition of our ordinary shares.
 
 
152

 
 
Passive Foreign Investment Company Rules
 
A foreign ( i.e. , non-U.S.) corporation will be a PFIC if either (a) at least 75% of its gross income in a taxable year of the foreign corporation, including its pro rata share of the gross income of any corporation in which it is considered to own at least 25% of the shares by value, is passive income, or (b) at least 50% of its assets in a taxable year of the foreign corporation, ordinarily determined based on fair market value and averaged quarterly over the year, including its pro rata share of the assets of any corporation in which it is considered to own at least 25% of the shares by value, are held for the production of, or produce, passive income. Passive income generally includes dividends, interest, rents and royalties (other than certain rents or royalties derived from the active conduct of a trade or business), and gains from the disposition of passive assets.
 
Our actual PFIC status for our current taxable year or any subsequent taxable year is uncertain and will not be determinable until after the end of such taxable year. Accordingly, there can be no assurance with respect to our status as a PFIC for our current taxable year or any subsequent taxable year.
 
If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. Holder of the ordinary shares, and the U.S. Holder did not make either a timely QEF election for our first taxable year as a PFIC in which the U.S. Holder held (or was deemed to hold) the ordinary shares, a QEF election along with a purging election, or a mark-to-market election, each as described below, such holder generally will be subject to special rules for regular U.S. federal income tax purposes with respect to:
 
 
any gain recognized by the U.S. Holder on the sale or other disposition of its ordinary shares; and
 
 
any “excess distribution” made to the U.S. Holder (generally, any distributions to such U.S. Holder during a taxable year of the U.S. Holder that are greater than 125% of the average annual distributions received by such U.S. Holder in respect of the ordinary shares during the three preceding taxable years of such U.S. Holder or, if shorter, such U.S. Holder’s holding period for the ordinary shares).
 
Under these rules,
 
 
the U.S. Holder’s gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for the ordinary shares;
 
 
the amount allocated to the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain or received the excess distribution or to the period in the U.S. Holder’s holding period before the first day of our first taxable year in which we qualified as a PFIC will be taxed as ordinary income;
 
 
the amount allocated to other taxable years (or portions thereof) of the U.S. Holder and included in its holding period will be taxed at the highest ordinary tax rate in effect for that year and applicable to the U.S. Holder; and
 
 
the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such other taxable year of the U.S. Holder.
 
In general, if we are determined to be a PFIC, a U.S. Holder may avoid the PFIC tax consequences described above with respect to the ordinary shares by making a timely QEF election (or a QEF election along with a purging election). Pursuant to the QEF election, a U.S. Holder will be required to include in income its pro rata share of our net capital gains (as long term capital gain) and other earnings and profits (as ordinary income), on a current basis, in each case whether or not distributed, in the taxable year of the U.S. Holder in which or with which our taxable year ends. However, a U.S. Holder may make a QEF election only if we agree to provide certain tax information to such holder annually. At this time, we do not intend to provide U.S. Holders with such information as may be required to make a QEF election effective.
 
Alternatively, if a U.S. Holder, at the close of its taxable year, owns ordinary shares in a PFIC that are treated as marketable stock, the U.S. Holder may make a mark-to-market election with respect to such ordinary shares for such taxable year. If the U.S. Holder makes a valid mark-to-market election for the first taxable year of the U.S. Holder in which the U.S. Holder holds (or is deemed to hold) the ordinary shares and for which we are determined to be a PFIC, such holder generally will not be subject to the PFIC rules described above with respect to its ordinary shares. Instead, in general, the U.S. Holder will include as ordinary income for each year that we are treated as a PFIC the excess, if any, of the fair market value of its ordinary shares at the end of its taxable year over the adjusted tax basis in its ordinary shares. The U.S. Holder also will be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted tax basis of its ordinary shares over the fair market value of its ordinary shares at the end of its taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). The U.S. Holder’s adjusted tax basis in its ordinary shares will be adjusted to reflect any such income or loss amounts, and any further gain recognized on a sale or other taxable disposition of the ordinary shares will be treated as ordinary income. In the case of a U.S. Holder that has held our ordinary shares during any taxable year in respect of which we were classified as a PFIC and continues to hold such ordinary shares (or any portion thereof) and has not previously determined to make a mark-to-market election, and that is now considering making a mark-to-market election, special tax rules may apply relating to purging the PFIC taint of such ordinary shares.
 
 
153

 
 
The mark-to-market election is available only for stock that is regularly traded on a national securities exchange that is registered with the U.S. Securities and Exchange Commission, including the NASDAQ Capital Market, or on a foreign exchange or market that the IRS determines has rules sufficient to ensure that the market price represents a legitimate and sound fair market value. Although we have applied to have our ordinary shares listed and traded on the NASDAQ Capital Market, we cannot guarantee that our application will be approved or, if approved, that the ordinary shares will continue to be listed and traded on the NASDAQ Capital Market. U.S. Holders should consult their own tax advisors regarding the availability and tax consequences of a mark-to-market election with respect to our ordinary shares under their particular circumstances.
 
If we are a PFIC and, at any time, have a foreign subsidiary that is classified as a PFIC, a U.S. Holder of our ordinary shares generally should be deemed to own a portion of the shares of such lower-tier PFIC, and generally could incur liability for the deferred tax and interest charge described above if we receive a distribution from, or dispose of all or part of our interest in, or the U.S. Holder were otherwise deemed to have disposed of an interest in, the lower-tier PFIC. A mark-to-market election generally would not be available with respect to such a lower-tier PFIC. U.S. Holders are urged to consult their own tax advisors regarding the tax issues raised by lower-tier PFICs.
 
A U.S. Holder that owns (or is deemed to own) ordinary shares in a PFIC during any taxable year of the U.S. Holder may have to file an IRS Form 8621 (whether or not a mark-to-market election is or has been made) with such U.S. Holder’s U.S. federal income tax return and provide such other information as may be required by the U.S. Treasury Department.
 
The rules dealing with PFICs and mark-to-market elections are very complex and are affected by various factors in addition to those described above. Accordingly, U.S. Holders of our ordinary shares should consult their own tax advisors concerning the application of the PFIC rules to our ordinary shares under their particular circumstances.
 
Non-U.S. Holders
 
Cash dividends paid or deemed paid to a Non-U.S. Holder with respect to our ordinary shares generally will not be subject to U.S. federal income tax unless such dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains or maintained in the United States).
 
In addition, a Non-U.S. Holder generally will not be subject to U.S. federal income tax on any gain attributable to a sale or other taxable disposition of the ordinary shares unless such gain is effectively connected with its conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment or fixed base that such holder maintains or maintained in the United States) or the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of such sale or other disposition and certain other conditions are met (in which case, such gain from U.S. sources generally is subject to U.S. federal income tax at a 30% rate or a lower applicable tax treaty rate).
 
Cash dividends and gains that are effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains or maintained in the United States) generally will be subject to regular U.S. federal income tax at the same regular U.S. federal income tax rates as applicable to a comparable U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes, may also be subject to an additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.
 
 
154

 
 
Backup Withholding and Information Reporting
 
In general, information reporting for U.S. federal income tax purposes should apply to cash distributions made on our ordinary shares within the United States to a U.S. Holder (other than an exempt recipient) and to the proceeds from sales and other dispositions of the ordinary shares by a U.S. Holder (other than an exempt recipient) to or through a U.S. office of a broker. Payments made (and sales and other dispositions effected at an office) outside the United States will be subject to information reporting in limited circumstances. In addition, certain information concerning a U.S. Holder’s adjusted tax basis in its ordinary shares and adjustments to that tax basis and whether any gain or loss with respect to such ordinary shares is long term or short term also may be required to be reported to the IRS, and certain holders may be required to file an IRS Form 8938 (Statement of Specified Foreign Financial Assets) to report their interest in our ordinary shares.
 
Moreover, backup withholding of U.S. federal income tax at a rate of 28% generally will apply to cash dividends paid on the ordinary shares to a U.S. Holder (other than an exempt recipient) and the proceeds from sales and other dispositions of the ordinary shares by a U.S. Holder (other than an exempt recipient), in each case who:
 
 
fails to provide an accurate taxpayer identification number;
 
 
is notified by the IRS that backup withholding is required; or
 
 
in certain circumstances, fails to comply with applicable certification requirements.
 
A Non-U.S. Holder generally may eliminate the requirement for information reporting and backup withholding by providing certification of its foreign status, under penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.
 
Backup withholding is not an additional tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S. Holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely furnished to the IRS.
 
Holders are urged to consult their own tax advisors regarding the application of backup withholding and the availability of and procedures for obtaining an exemption from backup withholding in their particular circumstances.
 
 
155

 
 
UN D ERWRITING
 
Under the terms and subject to the conditions contained in an underwriting agreement, we have agreed to sell to the underwriters named below, for which Chardan Capital Markets, LLC, or “Chardan,” is acting as representative, and the underwriters named below have agreed to purchase from us, the number of ordinary shares set forth opposite their respective names below.
 
Underwriter
 
Number of Ordinary
 Shares
Chardan Capital Markets, LLC
   
Maxim Group LLC
   
     
Total
   
 
The underwriting agreement provides that the obligation of the underwriters to purchase the shares offered hereby is subject to certain conditions and that the underwriters are obligated to purchase all of the shares offered hereby if any of the shares are purchased.
 
If the underwriters sell more shares than the above number, the underwriters have an option for 45 days to buy up to an aggregate of          additional shares from us at the public offering price less the underwriting commissions and discounts to cover these sales.
 
Commissions, Discounts and Other Compensation
 
The underwriters have advised us that they propose to offer the shares to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $          per share. After this offering, the public offering price and concession may be changed by the underwriters. No such change shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The shares are offered by the underwriters as stated herein, subject to receipt and acceptance by the underwriters and subject to their right to reject any order in whole or in part.
 
We have agreed to pay to the underwriters a fee equal to 7% of the aggregate gross proceeds of the shares sold in this offering. This fee is to be paid by means of a discount from the offering price to purchasers in the offering. We have also agreed to pay the underwriter a structuring fee of $100,000 if the aggregate gross proceeds of this offering are less than or equal to $15 million, or $250,000 if the aggregate gross proceeds of this offering are in excess of $15 million. In addition, we have agreed to reimburse the underwriter for its reasonable out-of-pocket expenses incurred in connection with this offering in an aggregate amount not to exceed $250,000 for all such expenses. We estimate that expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $          .
 
The following table summarizes the public offering price, underwriting discounts and commissions and proceeds before expenses to us assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares:
 
       
Total
   
Per
Share
 
Without
Over-
Allotment
 
With
Over-
Allotment
             
Public offering price                                                                               
           
Underwriting discounts and commissions                                                                               
           
Proceeds, before expenses, to us                                                                               
           
 
Determination of Offering Price
 
Prior to this offering, there has not been a public market for our ordinary shares in the United States. The public offering price for our ordinary shares will be determined through negotiations between us and the representative. Among the factors to be considered in these negotiations will be prevailing market conditions, our financial information, market valuations of other companies that we and the underwriters believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant.
 
 
156

 
 
We offer no assurances that the initial public offering price will correspond to the price at which our ordinary shares will trade in the public market subsequent to this offering or that an active trading market for our ordinary shares will develop and continue after this offering.
 
Underwriter Warrants
 
We shall issue to Chardan as representative of the underwriters, upon the closing of the offering, underwriter warrants entitling the underwriter to purchase 5% of the aggregate number of ordinary shares sold in the offering. The underwriter warrants may be exercised for a period of four years following the date of effectiveness of the Registration Statement on Form F-1 of which this prospectus forms a part. The underwriter warrants will have an exercise price equal to 100% of the per share price of the shares sold in this offering but not including the over-allotment option. The underwriter warrants are not redeemable by us. We can demand that Chardan exercise the underwriter warrants if our ordinary shares trade at a price of more than 100% above the exercise price of the warrants for more than 90 consecutive days.
 
The underwriter warrants and the securities underlying such warrants are deemed to be underwriting compensation by FINRA and are therefore subject to a 180-day lock-up pursuant to FINRA Rule 5110(g)(1). The representative (or permitted assignee under the rule) may not sell, transfer, assign, pledge or hypothecate the underwriter warrants or the securities underlying the underwriter warrants, nor will it engage in any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the underwriter warrants or the underlying securities for a period of 180 days from the date on which the Registration Statement on Form F-1 of which this prospectus forms a part is declared effective by the U.S. Securities and Exchange Commission, except to any FINRA member participating in the offering and their bona fide officers or partners.
 
Lock-up Agreements
 
We have agreed not to offer, sell, contract to sell, pledge, grant options to purchase, or otherwise dispose of any of our ordinary shares or securities exchangeable for or convertible into our ordinary shares for a period of 180 days after the date of this prospectus without the prior written consent of Chardan. This agreement does not apply to the issuance of shares upon the exercise of rights to acquire ordinary shares pursuant to any existing stock option or similar equity incentive or compensation plan. Our directors, executive officers and greater than 1% shareholders have agreed, subject to certain exceptions, not to, directly or indirectly, sell, hedge, or otherwise dispose of any ordinary shares, options to acquire ordinary shares or securities exchangeable for or convertible into ordinary shares, for a period of 180 days from the date on which the Registration Statement on Form F-1 of which this prospectus forms a part is declared effective by the U.S. Securities and Exchange Commission without the prior written consent of Chardan.
 
Right of First Refusal
 
Subject to certain terms and exceptions, for a period of twenty-four (24) months after the date of effectiveness of the registration statement of which this prospectus is a part, Chardan as representative of the underwriters has a right of first refusal to act as lead underwriter or book-running manager or placement agent for each and every future public and private equity and debt offerings we do, or any successor to or any subsidiary of us, on any U.S. stock exchange during such twenty-four (24) month period.
 
Indemnification and Contribution
 
The underwriting agreement provides for indemnification between us and the underwriters against specified liabilities, including liabilities under the Securities Act, and for contribution by us and the underwriters to payments that may be required to be made with respect to those liabilities. We have been advised that, in the opinion of the U.S. Securities and Exchange Commission, indemnification of liabilities under the Securities Act is against public policy as expressed in the Securities Act, and is therefore, unenforceable.
 
 
157

 

Short Sales, Stabilizing Transactions and Penalty Bids
 
In order to facilitate this offering, persons participating in this offering may engage in transactions that stabilize, maintain, or otherwise affect the price of ordinary shares during and after this offering. Specifically, the underwriters may engage in the following activities in accordance with the rules of the U.S. Securities and Exchange Commission.
 
Short sales. Short sales involve the sales by the underwriters of a greater number of shares than they are required to purchase in the offering. Covered short sales are short sales made in an amount not greater than the underwriters’ over-allotment option to purchase additional shares from us in this offering. The underwriters may close out any covered short position by either exercising their over-allotment option to purchase shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. Naked short sales are any short sales in excess of such over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the ordinary shares in the open market after pricing that could adversely affect investors who purchase in this offering.
 
Stabilizing transactions. The underwriters may make bids for or purchases of the shares for the purpose of pegging, fixing, or maintaining the price of the shares, so long as stabilizing bids do not exceed a specified maximum.
 
Penalty bids. If the underwriters purchase shares in the open market in a stabilizing transaction or syndicate covering transaction, they may reclaim a selling concession from the underwriters and selling group members who sold those shares as part of this offering. Stabilization and syndicate covering transactions may cause the price of the shares to be higher than it would be in the absence of these transactions. The imposition of a penalty bid might also have an effect on the price of the shares if it discourages re-sales of the shares.
 
The transactions above may occur on The NASDAQ Capital Market or otherwise. Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of the shares. If these transactions are commenced, they may be discontinued without notice at any time.
 
Discretionary Sales
 
The underwriters have informed us that they do not expect to confirm sales of ordinary shares offered by this prospectus to accounts over which they exercise discretionary authority without obtaining the specific approval of the account holder.
 
Electronic Distribution
 
A prospectus in electronic format may be made available on the internet sites or through other online services maintained by one or more of the underwriters participating in this offering, or by their affiliates. Other than the prospectus in electronic format, the information on any underwriters’ web site and any information contained in any other web site maintained by an underwriter is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or any underwriter in its capacity as underwriter and should not be relied upon by investors.
 
Affiliations
 
In addition to the compensation and expenses described above, for advisory services provided by Chardan to us in connection with the Private Placement, we will pay to Chardan a fee of 2.5% of the gross proceeds from the Private Placement (or a maximum of $300,000) if the gross proceeds of this offering is less than or equal to $20,000,000 and a fee of 5.0% of the gross proceeds from the Private Placement (or a maximum of $600,000) if the gross proceeds of this offering exceed $20,000,000. The underwriters and their affiliates may in the future provide various investment banking and other financial services for us for which services they may in the future receive, customary fees. Except for services provided in connection with this offering and the concurrent Private Placement, none of the underwriters has provided any investment banking or other financial services to us during the past 180 days and we do not expect to retain any of the underwriters to perform any investment banking or other financial services to us for at least 90 days after the date of this prospectus.
 
 
158

 
 
Offer Restrictions Outside the United States
 
Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
 
Australia
 
This prospectus is not a disclosure document under Chapter 6D of the Australian Corporations Act, has not been lodged with the Australian Securities and Investments Commission and does not purport to include the information required of a disclosure document under Chapter 6D of the Australian Corporations Act. Accordingly, (i) the offer of the securities under this prospectus is only made to persons to whom it is lawful to offer the securities without disclosure under Chapter 6D of the Australian Corporations Act under one or more exemptions set out in section 708 of the Australian Corporations Act; (ii) this prospectus is made available in Australia only to those persons as set forth in clause (i) above; and (iii) the offeree must be sent a notice stating in substance that by accepting this offer, the offeree represents that the offeree is such a person as set forth in clause (i) above, and, unless permitted under the Australian Corporations Act, agrees not to sell or offer for sale within Australia any of the securities sold to the offeree within 12 months after its transfer for the offeree under this prospectus.
 
China
 
The information in this document does not constitute a public offer of the securities, whether by way of sale or subscription, in the People’s Republic of China (excluding, for purposes of this paragraph, Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan). The securities may not be offered or sold directly or indirectly in the PRC to legal or natural persons other than directly to “qualified domestic institutional investors.”
 
European Economic Area — Belgium, Germany, Luxembourg and the Netherlands
 
The information in this document has been prepared on the basis that all offers of ordinary shares will be made pursuant to an exemption under the Directive 2003/71/EC (“Prospectus Directive”), as implemented in Member States of the European Economic Area (each, a “Relevant Member State”), from the requirement to produce a prospectus for offers of securities.
 
An offer to the public of ordinary shares has not been made, and may not be made, in a Relevant Member State except pursuant to one of the following exemptions under the Prospectus Directive as implemented in that Relevant Member State:
 
 
to legal entities that are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;
 
 
to any legal entity that has two or more of (i) an average of at least 250 employees during its last fiscal year; (ii) a total balance sheet of more than €43 million (as shown on its last annual unconsolidated or consolidated financial statements); and (iii) an annual net turnover of more than €50 million (as shown on its last annual unconsolidated or consolidated financial statement);
 
 
to fewer than 100 natural or legal persons (other than qualified investors within the meaning of Article 2(1)I of the Prospectus Directive) subject to obtaining the prior consent of the company or any underwriter for any such offer; or
 
 
in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of ordinary shares shall result in a requirement for the publication by the company of a prospectus pursuant to Article 3 of the Prospectus Directive.
 
 
159

 
 
France
 
This document is not being distributed in the context of a public offering of financial securities (offre au public de titres financiers) in France within the meaning of Article L.411-1 of the French Monetary and Financial Code (Code monétaire et financier) and Articles 211-1 et seq. of the General Regulation of the French Autorité des marchés financiers (“AMF”). The ordinary shares have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in France.
 
This document and any other offering material relating to the ordinary shares have not been, and will not be, submitted to the AMF for approval in France and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in France.
 
Such offers, sales and distributions have been and shall only be made in France to (i) qualified investors (investisseurs qualifiés) acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-1 to D.411-3, D. 744-1, D.754-1 and D.764-1 of the French Monetary and Financial Code and any implementing regulation; and/or (ii) a restricted number of non-qualified investors (cercle restreint d’investisseurs non-qualifiés) acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-4, D.744-1, D.754-1 and D.764-1 of the French Monetary and Financial Code and any implementing regulation.
 
Pursuant to Article 211-3 of the General Regulation of the AMF, investors in France are informed that the ordinary shares cannot be distributed (directly or indirectly) to the public by the investors otherwise than in accordance with Articles L.411-1, L.411-2, L.412-1 and L.621-8 to L.621-8-3 of the French Monetary and Financial Code.
 
Ireland
 
The information in this document does not constitute a prospectus under any Irish laws or regulations and this document has not been filed with or approved by any Irish regulatory authority as the information has not been prepared in the context of a public offering of securities in Ireland within the meaning of the Irish Prospectus (Directive 2003/71/EC) Regulations 2005 (the “Prospectus Regulations”). The ordinary shares have not been offered or sold, and will not be offered, sold or delivered directly or indirectly in Ireland by way of a public offering, except to (i) qualified investors as defined in Regulation 2(l) of the Prospectus Regulations; and (ii) fewer than 100 natural or legal persons who are not qualified investors.
 
Israel
 
The ordinary shares offered by this prospectus may not be offered or sold to any person resident in Israel or entity organized or formed in Israel, unless it is an “institutional investor,” as set forth in Section 15A(b)(1) of the Israeli Securities Law 5728-1968, or the Israeli Securities Law, and has provided the requisite certification under the First Addendum of the Israeli Securities Law, or pursuant to other exemptions available under the Israeli Securities Law.
 
Italy
 
The offering of the ordinary shares in the Republic of Italy has not been authorized by the Italian Securities and Exchange Commission (Commissione Nazionale per le Società e la Borsa, “CONSOB” pursuant to the Italian securities legislation and, accordingly, no offering material relating to the ordinary shares may be distributed in Italy and such securities may not be offered or sold in Italy in a public offer within the meaning of Article 1.1(t) of Legislative Decree No. 58 of 24 February 1998 (“Decree No. 58”), other than:
 
 
to Italian qualified investors, as defined in Article 100 of Decree no. 58 by reference to Article 34-ter of CONSOB Regulation no. 11971 of 14 May 1999 (“Regulation no. 1197l”) as amended (“Qualified Investors”); and
 
 
in other circumstances that are exempt from the rules on public offer pursuant to Article 100 of Decree No. 58 and Article 34-ter of Regulation No. 11971 as amended. Any offer, sale or delivery of the ordinary shares or distribution of any offer document relating to the ordinary shares in Italy (excluding placements where a Qualified Investor solicits an offer from the issuer) under the paragraphs above must be:
 
 
160

 
 
 
made by investment firms, banks or financial intermediaries permitted to conduct such activities in Italy in accordance with Legislative Decree No. 385 of 1 September 1993 (as amended), Decree No. 58, CONSOB Regulation No. 16190 of 29 October 2007 and any other applicable laws; and
 
 
in compliance with all relevant Italian securities, tax and exchange controls and any other applicable laws.
 
Any subsequent distribution of the ordinary shares in Italy must be made in compliance with the public offer and prospectus requirement rules provided under Decree No. 58 and the Regulation No. 11971 as amended, unless an exception from those rules applies. Failure to comply with such rules may result in the sale of such ordinary shares being declared null and void and in the liability of the entity transferring the ordinary shares for any damages suffered by the investors.
 
Japan
 
The ordinary shares have not been and will not be registered under Article 4, paragraph 1 of the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948), as amended (the “FIEL”) pursuant to an exemption from the registration requirements applicable to a private placement of securities to Qualified Institutional Investors (as defined in and in accordance with Article 2, paragraph 3 of the FIEL and the regulations promulgated thereunder). Accordingly, the ordinary shares may not be offered or sold, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan other than Qualified Institutional Investors. Any Qualified Institutional Investor who acquires ordinary shares may not resell them to any person in Japan that is not a Qualified Institutional Investor, and acquisition by any such person of ordinary shares is conditional upon the execution of an agreement to that effect.
 
Portugal
 
This document is not being distributed in the context of a public offer of financial securities (oferta pública de valores mobiliários) in Portugal, within the meaning of Article 109 of the Portuguese Securities Code (Código dos Valores Mobiliários). The ordinary shares have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in Portugal. This document and any other offering material relating to the ordinary shares has not been, and will not be, submitted to the Portuguese Securities Market Commission (Comissão do Mercado de Valores Mobiliários) for approval in Portugal and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in Portugal, other than under circumstances that are deemed not to qualify as a public offer under the Portuguese Securities Code. Such offers, sales and distributions of ordinary shares in Portugal are limited to persons who are “qualified investors” (as defined in the Portuguese Securities Code). Only such investors may receive this document and they may not distribute it or the information contained in it to any other person.
 
Sweden
 
This document has not been, and will not be, registered with or approved by Finansinspektionen (the Swedish Financial Supervisory Authority). Accordingly, this document may not be made available, nor may the ordinary shares be offered for sale in Sweden, other than under circumstances that are deemed not to require a prospectus under the Swedish Financial Instruments Trading Act (1991:980) (Sw. lag (1991:980) om handel med finansiella instrument). Any offering of ordinary shares in Sweden is limited to persons who are “qualified investors” (as defined in the Financial Instruments Trading Act). Only such investors may receive this document and they may not distribute it or the information contained in it to any other person.
 
Switzerland
 
The ordinary shares may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (“SIX”) or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering material relating to the ordinary shares may be publicly distributed or otherwise made publicly available in Switzerland.
 
 
161

 
 
Neither this document nor any other offering material relating to the ordinary shares has been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of ordinary shares will not be supervised by, the Swiss Financial Market Supervisory Authority (FINMA).
 
         This document is personal to the recipient only and not for general circulation in Switzerland.
 
United Arab Emirates
 
Neither this document nor the ordinary shares have been approved, disapproved or passed on in any way by the Central Bank of the United Arab Emirates or any other governmental authority in the United Arab Emirates, nor have we received authorization or licensing from the Central Bank of the United Arab Emirates or any other governmental authority in the United Arab Emirates to market or sell the ordinary shares within the United Arab Emirates. This document does not constitute and may not be used for the purpose of an offer or invitation. No services relating to the ordinary shares, including the receipt of applications and/or the allotment or redemption of such shares, may be rendered within the United Arab Emirates by us.
 
         No offer or invitation to subscribe for ordinary shares is valid or permitted in the Dubai International Financial Centre.
 
United Kingdom
 
Neither the information in this document nor any other document relating to the offer has been delivered for approval to the Financial Services Authority in the United Kingdom and no prospectus (within the meaning of section 85 of the Financial Services and Markets Act 2000, as amended (“FSMA”)) has been published or is intended to be published in respect of the ordinary shares. This document is issued on a confidential basis to “qualified investors” (within the meaning of section 86(7) of FSMA) in the United Kingdom, and the ordinary shares may not be offered or sold in the United Kingdom by means of this document, any accompanying letter or any other document, except in circumstances that do not require the publication of a prospectus pursuant to section 86(1) FSMA. This document should not be distributed, published or reproduced, in whole or in part, nor may its contents be disclosed by recipients to any other person in the United Kingdom.
 
        Any invitation or inducement to engage in investment activity (within the meaning of section 21 of FSMA) received in connection with the issue or sale of the ordinary shares has only been communicated or caused to be communicated and will only be communicated or caused to be communicated in the United Kingdom in circumstances in which section 21(1) of FSMA does not apply to us.
 
In the United Kingdom, this document is being distributed only to, and is directed at, persons (i) who have professional experience in matters relating to investments falling within Article 19(5) (investment professionals) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (“FPO”); (ii) who fall within the categories of persons referred to in Article 49(2)(a) to (d) (high net worth companies, unincorporated associations, etc.) of the FPO; or (iii) to whom it may otherwise be lawfully communicated (together “relevant persons”). The investments to which this document relates are available only to, and any invitation, offer or agreement to purchase will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents.
 
 
162

 
 
LEGAL MA TTE RS
 
Certain legal matters concerning this offering will be passed upon for us by Loeb & Loeb LLP, New York, New York. Certain legal matters with respect to matters of Israeli law including the validity of the ordinary shares offered by this prospectus will be passed upon for us by Fischer Behar Chen Well Orion & Co., Tel Aviv, Israel. Certain legal matters related to the offering will be passed upon for the underwriters by Reed Smith LLP, New York, New York and Amit, Pollak, Matalon & Co., Tel Aviv, Israel.
 
EXPERTS
 
The financial statements included in this prospectus, have been audited by Brightman Almagor Zohar & Co., a member firm of Deloitte Touche Tohmatsu, or Deloitte, an independent registered public accounting firm, as stated in their report appearing herein, which report express an unqualified opinion and includes an explanatory paragraph referring to the fact that we are in a development stage. Such financial statements have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The address of Brightman Almagor Zohar & Co., a member firm of Deloitte, is 1 Azrieli Center, Tel Aviv, 67021, Israel.
 
WHERE YOU CAN FIND ADDITIONAL INFORMATION
 
We have filed with the SEC a registration statement on Form F-1 under the Securities Act with respect to the ordinary shares offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules that are part of the registration statement. For further information about us and about the ordinary shares, you should refer to our registration statement and its exhibits. Statements made in this prospectus concerning the contents of any contract, agreement or other document are summaries of all material information about the documents summarized, but are not complete descriptions of all terms of these documents. If we filed any of these documents as an exhibit to the registration statement, you may read the document itself for a complete description of its terms.
 
Upon the completion of this offering, we will become subject to periodic reporting and other information requirements of the Exchange Act as applicable to foreign private issuers and will file reports, including annual reports on Form 20-F, and other information with the SEC. As we are a for eign private issuer, we are exempt from some of the Exchange Act reporting requirements, namely, the rules prescribing the furnishing and content of proxy statements to shareholders and Section 16 short swing profit reporting for our officers and directors and for holders of more than 10% of our shares. In addition, we will not be required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. You may read and copy any document we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more information on the public reference rooms and their copy charges. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding issuers, such as us, who file electronically with the SEC. The address of that website is http://www.sec.gov .
 
163

 
 
EXPENSES RELA T ING TO THIS OFFERING
 
The following table sets forth all expenses to be paid by the registrant, other than estimated underwriting discounts and commissions, in connection with this initial public offering. All amounts shown are estimates except for the SEC registration fee, the FINRA filing fee and the NASDAQ listing fee:
 
SEC registration fee
  $ 1,830.15  
FINRA filing fee
  $ 2,862.50  
NASDAQ listing fee
  $ 50,000  
Legal fees and expenses*
       
Accounting fees and expenses*
       
Transfer agent and registrar’s fees and expenses*
       
Printing expenses*
       
Miscellaneous fees and expenses*
       
Total*
       
 
* To be filed by amendment
 
 
164

 
 
 
FINANCIAL STATEMENTS A S  OF DECEMBER 31, 2013
 

 
F - 1

 
 

To the Shareholders of
Check-Cap Ltd.
Isfiya, Israel
 
We have audited the accompanying statements of financial position of Check-Cap Ltd. (hereafter- "the Company") as of December 31, 2013 and 2012, and the statements of profit or loss and other comprehensive income, statements of changes in equity, and statements of cash flows for each of the two years in the period ended December 31, 2013. 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 misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its 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 internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by 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, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2013 and 2012, and the results of operations, and cash flows for each of the two years in the period ended December 31, 2013, in conformity with International Financial Reporting Standards as issued by International Accounting Standards Board (IFRS).

The Company is in the development stage as of December 31, 2013. As discussed in Note 1B to the financial statements, successful completion of the Company's development program and, ultimately, the attainment of profitable operations is dependent upon future events, including obtaining adequate financing to fulfill its development activities and achieving a level of sales adequate to support the Company's cost structure.

/s/ Brightman Almagor Zohar & Co.
Certified Public Accountants
A Member Firm of Deloitte Touche Tohmatsu
Tel Aviv, Israel
July 3, 2014
 
 
 
F - 2

 
 
STATEMENTS OF FINANCIAL POSITION

         
December 31,
 
         
2013
   
2012
 
   
Note
   
in USD thousands
 
Assets
                 
Current assets
                 
Cash and cash equivalents
  5       4,975       4,583  
Restricted deposit
          46       43  
Short-term investment
  5       -       3,450  
Other current assets
  6       130       164  
Total current assets
          5,151       8,240  
                       
Property and equipment, net
  7       224       256  
Total assets
          5,375       8,496  
                       
Liabilities and shareholders’ equity
                     
Current liabilities
                     
Trade accounts payable
          221       140  
Other current liabilities
          141       140  
Employee benefits
  8A       658       509  
Total current liabilities
          1,020       789  
                       
Non-current liabilities
                     
Royalties provision
  10A       2,577       2,046  
Other financial liabilities
  11D1       587       532  
Total non-current liabilities
          3,164       2,578  
                       
Shareholders’ equity
  1D                  
Preferred share capital
          226       226  
Ordinary share capital
          53       53  
Premium on preferred shares
          21,167       21,167  
Share options
          1,793       1,793  
Premium on ordinary shares
          6       6  
Capital reserve for ordinary share-based payment
          431       374  
Accumulated deficit
          (22,485 )     (18,490 )
Total shareholders’ equity
          1,191       5,129  
Total liabilities and shareholders’ equity
          5,375       8,496  
 
July 3, 2014
           
Date of approval of
financial statements
 
Tomer Kariv- Chairman of the Board of Directors
 
Guy Neev-CEO
 
Lior Torem-CFO

The accompanying notes to the financial statements are an integral part of them.

 
F - 3

 
 
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
 
         
Year ended December 31,
 
   
Note
   
2013
   
2012
 
         
in USD thousands
 
                   
Research and development expenses, net
  13       2,662       2,692  
General and administrative expenses
  14       1,090       1,203  
Other expenses (income)
          (10 )     13  
Operating loss
          3,742       3,908  
                       
Finance income
  15       (63 )     (416 )
Finance expenses
  16       316       229  
Finance expenses (income), net
          253       (187 )
                       
Loss for the year
          3,995       3,721  
                       
Total comprehensive loss for year
          3,995       3,721  
                       
Loss per ordinary share (in USD)  Basic and diluted
          0.18       0.17  
                       
Weighted average number of ordinary shares outstanding - basic and diluted
(in thousands)
  17       32,542       32,530  
                       
Pro forma loss per ordinary share (in USD) Basic and diluted (unaudited)
  1D    
X.XX
   
X.XX
 
                       
Pro forma weighted average number of ordinary shares outstanding  - basic and diluted (in thousands) (unaudited)
       
XXX
   
XXX
 

The accompanying notes to the financial statements are an integral part of them.
 
F - 4

 
 
CHECK-CAP LTD.
 
   
Preferred share capital
   
Ordinary share capital
   
Premium on preferred shares
   
Share options
   
Premium on ordinary shares
   
Capital reserve for ordinary share based payment
   
Accumulated deficit
   
Total
 
   
In USD thousands
 
For the year ended
  December 31, 2013
                                               
Balance - January 1, 2013
    226       53       21,167       1,793       6       374       (18,490 )     5,129  
Ordinary share based payment
    -       -       -       -       -       57       -       57  
Comprehensive loss for the year
    -       -       -       -       -       -       (3,995 )     (3,995 )
Total shareholders’ equity as of December 31, 2013
    226       53       21,167       1,793       6       431       (22,485 )     1,191  
                                                                 
For the year ended
  December 31, 2012
                                                               
Balance - January 1, 2012
    219       53       20,145       1,793       3       343       (14,769 )     7,787  
Issue of preferred D3 shares, net
    7       -       1,022       -       -       -       -       1,029  
Issue of ordinary share under
  employee share option plan
    -       (* )     -       -       3       -       -       3  
Recognition of share based payment
    -       -       -       -               31       -       31  
Comprehensive loss for the year
    -       -       -       -       -       -       (3,721 )     (3,721 )
Total shareholders’ equity as of December 31, 2012
    226       53       21,167       1,793       6       374       (18,490 )     5,129  
                                                                 
(*)
Less than NIS 1 thousands

The accompanying notes to the financial statements are an integral part of them.

 
F - 5

 
 
CHECK-CAP LTD.
 
   
Year ended December 31,
 
   
2013
   
2012
 
   
in USD thousands
 
CASH FLOWS  FROM OPERATING ACTIVITIES
           
Loss for the year
    (3,995 )     (3,721 )
Net gain arising on financial assets and liabilities designated as at fair value
through profit or loss
    55       116  
Depreciation and amortization
    77       73  
Ordinary share-based compensation
    57       31  
Royalties provision
    (116 )     (464 )
                 
Changes in assets and liabilities items:
               
Decrease in other current assets
    34       25  
Increase (decrease) in trade accounts payable and other current liabilities
    82       (385 )
Increase in employees benefits
    149       165  
Net cash used in operating activities
    (3,657 )     (4,160 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchase of property and equipment
    (45 )     (105 )
Proceeds from disposal of property and equipment
    -       16  
Increase in restricted deposit
    (3 )     (4 )
Decrease (increase) short-term investment
    3,450       (3,450 )
Net cash generated from (used in) investing activities
    3,402       (3,543 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from issuance of preferred shares, net
    -       1,029  
Receipt of loan from the Office of Chief Scientist
    647       541  
Proceeds from issue of ordinary shares
    -       3  
Net cash generated from financing activities
    647       1,573  
                 
Effect of exchange rate changes on cash and cash equivalents
    -       (7 )
                 
Net increase (decrease) in cash and cash equivalents
    392       (6,137 )
                 
Cash and cash equivalents at the beginning of the year
    4,583       10,720  
                 
Cash and cash equivalents at the end of the year
    4,975       4,583  

The accompanying notes to the financial statements are an integral part of them.
 
 
F - 6

 
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 1
-
GENERAL INFORMATION

 
A.
General

Check-Cap Ltd. (hereafter-"the Company") is a limited liability private company incorporated in Israel. The registered address of its offices is Abba Hushi Blvd., Isfiya.

The Company is engaged in the development of an ingestible imaging capsule that utilizes low-dose X-rays for the screening for  precancerous polyps and colorectal cancer. The capsule is designed to enable an early detection of the disease without the need for a prior burdensome and uncomfortable bowel cleansing, in a patient-friendly and non-invasive screening procedure.

 
B.
Financial Position

Since its inception, the Company has devoted substantially all of its efforts to research and development, clinical trials, recruiting management and technical staff, acquiring assets and raising capital. The Company is still in its development and clinical stage and has not yet generated revenues. The extent of the Company's future operating losses and the timing of becoming profitable are uncertain. The Company has incurred losses of $22,485 and $18,490 thousands for the years ended December 31, 2013 and 2012, respectively. The Company funds its operations primarily through equity financings.

Management expects that the Company will continue to generate losses from its development and clinical activities which will result in a negative cash flow from operating activity. Management expects that the Company's existing cash along with its plans to raise additional funds in the future will be sufficient to fund the Company's projected operating requirements for at least another 18 months following December 31, 2013. The Company's ability to continue its projected plans beyond such date through profitability is dependent upon its ability to secure additional funds.

 
C.
Agreement for transfer of assets

On May 31, 2009, the Company entered into an asset transfer agreement with Check-Cap LLC (hereafter-”the Predecessor Entity”), a company with the same shareholders as the Company at the time of transfer. According to the agreement, the Predecessor Entity transferred all of its business operations and substantially all of its assets to the Company, including development and consulting agreements, cash, property and equipment and intangible ownership rights, free of any debt. The above agreement did not have any effect on the Company's operations and was accounted for using historical amounts.

In addition, losses for tax purposes accumulated by the Predecessor Entity were not transferred to the Company.

 
D.
Pro Forma Information (unaudited)
 
The pro forma information gives effect to the conversion of all of the Company’s Preferred shares into XX,XXX,XXX ordinary shares.  Because the Company is considering an IPO, the financial statements include the effect of the conversion of all of the preferred shares into ordinary shares in a pro forma shareholders’ equity presentation, and retroactively reflect the effect of the conversion in a pro forma loss per share presentation. As discussed in Note 17, the CEO Options and the Anti-dilution Warrants (as such terms are defined in Note 11D(3)) are considered outstanding for the purpose of calculating basic loss per share, so although it was agreed with the CEO that the exercise of the CEO Options and hence, the automatic exercise of the Anti-dilution Warrants, will occur prior to the consummation of the IPO, no further pro forma effect was necessary.
 
 
F - 7

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 2
-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 
A.
Declaration regarding the implementation of International Financial Reporting Standards as issued by the International Accounting Standard Board (IFRS)

The financial statements of the Company have been prepared in conformity with the IFRS.

The significant accounting policies detailed below were applied consistently for all of the reporting periods presented in these financial statements, except for the changes in accounting policies that were due to the application of standards, amendments to standards and interpretations that took effect on the date of the financial statements, as specified in Note 3.

 
B.
Presentation of statements of financial position

The Company presents assets and liabilities in the statement of financial position by allocating items to current and non-current.

 
C.
Format for analysis of expenses in the statement of comprehensive Income

The format for analysis of expenses recognized in the statement of profit or loss and comprehensive income is a classification method based on the operating characteristic of the expense. The Company believes that such way of allocation provides more reliable and relevant information.

 
D.
Foreign currency:

 
 1.
Functional currency and presentation currency
 
The Company has not yet generated revenues, and the majority of its expenses is in U.S. Dollar (Dollar or USD) or NIS, while none of these currencies is significantly material compared to the other. After considering the factors to determine the functional currency in IAS 21, "the Effects of Changes in Foreign Exchange Rates", management determined that the Dollar is the Company's functional currency.

Management judgment, in setting the Dollar as the Company's functional currency, is based mainly on the following criteria: The Company's budget and other Company internal reports, including reports to the Company's Board of Directors and investors, are presented in Dollars. Management is using these reports in order to make decisions for the Company. All of the Company's equity and debt financings were in Dollars; and it is expected that a significant portion of the Company's future revenue will be in Dollars. The financial statements are presented in Dollars, which is the functional currency of the Company. See Note 2Q regarding the rates of exchange and changes in them during the presented periods.
 
 
 2.
Translation of transactions that are not in the functional currency
 
In preparing the financial statements of the Company, transactions in currencies other than the functional currency of the Company (hereafter – “foreign currency”) are recorded at the rates of exchange prevailing at the date of the transactions. At each statement of financial position date, monetary items denominated in foreign currencies are remeasured at the rates prevailing at the statement of financial position date. (Non-monetary items carried at fair value that are denominated in foreign currencies are remeasured at the rates prevailing at the date when the fair value was determined). Non-monetary items that are measured in terms of historical cost are translated at the historical exchange rates that were in effect on the date of the execution of the transactions related to them.
 
 
F - 8

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 2
-          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

 
D. 
Foreign currency (Cont.)

 
 3.
Recognition of exchange differences
 
Exchange differences are recognized in profit and loss in the period in which they arise.
 
 
E.
Cash and cash equivalents

Cash and cash equivalents includes cash in hand and term deposits in banks with an original maturity of up to three months, with a high level of liquidity that may be easily converted to known amounts of cash, and that are exposed to insignificant risk of change in value.

 
F.
Property and equipment

 
(1)
General

Property and equipment are tangible items, which are held for use in the production or supply of goods or services, expected to be used for more than one period.

The Company presents its property and equipment items under the cost method.

Under the cost method, property and equipment are presented in the statement of financial position at cost less accumulated depreciation and accumulated impairment losses. The cost includes the cost of the asset acquisition, as well as the costs that can be directly attributed to bring the asset to the location and condition that are necessary for it to be capable to operate in the manner intended by management.

 
(2)
Depreciation of property and equipment

Depreciation of property and equipment is calculated using the straight-line method at rates considered adequate to depreciate the assets over their estimated useful lives as follows:

   
Length of useful life
   
Depreciation rate
 
   
Years
   
%
 
             
Office furniture and equipment
  10-14     7-10  
Laboratory equipment
  3-7     15-33  
Computers and auxiliary equipment
  3     33  

Gain or loss arising on disposal or retirement of an item of property and equipment is determined as the difference between the disposal proceeds and the net carrying amount of the asset and are recognized in the statement of profit or loss and other comprehensive income.

 
G.
Research and development costs

Expenditures related to research activities, for the purpose of acquiring new scientific or technical know-how, are expensed when incurred.

Development activities are related to a plan to produce new products or processes, or to significantly improve existing products or processes. Expenditures for development activities are capitalized as an intangible asset only if: the development costs may be reliably measured;
 
F - 9

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 2
-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

 
G.
Research and development costs (Cont.)

 
the product or process is technically and commercially feasible; future economic benefit is expected from the product and the Company intends and has adequate resources to complete the development and use or sell the asset.

None of the Company's development costs meet the above conditions. Therefore, costs were expensed as incurred.

See Note 2K below regarding the offset of grants received for participation in research and development expenses.

 
H.
Financial assets

 
(1)
General

All financial assets are recognized and derecognized in the statement of financial position on the date where the purchase or sale of the financial asset is under a contract whose terms require the transfer of the financial asset within the timeframe established by the relevant market.

The financial assets are initially recognized at their fair value, with the addition of transaction costs, except for those financial assets classified as at fair value through profit and loss, which are initially recognized at their fair values.

Financial assets are classified into loans and receivables as specified below. The classification depends on the nature and purpose of the financial asset, and is determined at the time of initial recognition.

 
(2)
Loans and receivables

Loans and other current assets are non-derivative financial assets, with fixed or determinate payments, that are not traded in an active market. Subsequent to initial recognition, the loans and other current assets are measured at net book value, which is amortized using the effective interest method, while considering transaction costs and after deducting impairment provisions.

(3)               Impairment of financial assets

Financial assets, other than those classified as financial assets at fair value through profit and loss, are assessed for indications of impairment at the end of each reporting period.  Objective evidence of impairment exists when one or more events that have occurred after the initial recognition of the financial asset, having negative impact on the estimated future cash flows.

Indications of impairment may include:
 
 
§
Significant financial difficulties of the issuer or debtor;
 
§
Probability that the debtor will enter bankruptcy or financial reorganization.

The Company examines indications of impairment on a group basis for specific financial assets, for which no impairment indications have been assessed, based on past experience with groups of receivables with similar characteristics and changes in the level of delinquent payments and also economic changes related to the sector and the economic environment in which they operate.
 
F - 10

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 2
-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

 
H.
Financial assets (Cont.)

(3)           Impairment of financial assets (Cont.)

For financial assets carried at amortized cost, impairment loss recognized is the difference between the carrying amount of the  financial asset and the present value of estimated future cash flows, discounted at the financial assets original effective interest rate.

Other than the exception of equity investments classified as available for sale, if the amount of loss due to impairment of a financial asset decreased in the following period and that decrease is objectively related to an event that occurred after the impairment was recognized, then in this case, the loss from impairment recognized in the past is fully or partially reversed through profit and loss. Such reversal is limited in amount so that the reversed financial asset value does not exceed what the amortized cost would have been at that date had no impairment have been recognized in the past.

The book value of a financial asset is directly reduced by the loss from impairment, with the exception of trade receivables, where the book value is reduced through the use of a bad debt provision.  When trade receivables are considered uncollectible, they are written off against the provision account. Collections in subsequent periods of amounts previously written off are credited to the provision account. Changes in the book value of the provision are recognized in profit and loss.

 
I.
IFRS 13 "Fair Value Measurement"

IFRS 13 establishes a single source of guidance for fair value measurement and disclosures about fair value measurement. The standard defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurement. The scope of IFRS 13 is broad: It applies to both financial instruments items and non-financial instruments items for which other IFRSs require or permit fair value measurement and disclosure about fair value measurement, except in specified circumstances. In general, the disclosure requirements in IFRS 13 are more extensive than those required in the current standards.

IFRS 13 is effective for annual periods beginning on or after 1 January 2013, with earlier application permitted.

 
J.
Financial liabilities and equity instruments issued by the Company

(1)           Classification as a financial liability or an equity instrument

Debt and equity instruments are classified as a financial liability or as an equity instrument, in accordance with the substance of the contractual arrangements.

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its' liabilities. Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.

Financial liabilities are classified as:
 
§            Financial liabilities at fair value through profit and loss; or,
§            Other financial liabilities.
 
F - 11

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 2
-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

 
J.
Financial liabilities and equity instruments issued by the Company (Cont.)

 
(2)
Warrants for the acquisition of the Company's preferred and ordinary shares

 
 a.
Warrants to acquire shares of the Company which provide the holder with the right to acquire a fixed number of preferred shares in consideration of a fixed amount of cash are presented in equity as “receipts on account of issued preferred shares” section. For this purpose, an exercise amount varying according to the exercise date, where at the date of the issuance, the exercise price at any possible exercise date can already be determined, is treated as a fixed amount.

 
 b.
Warrants to acquire shares of the Company shares which provide the holder with the right to acquire a fixed number of ordinary or preferred shares in consideration of a variable amount of cash or cashless right are presented in current liabilities, measured at fair value through profit and loss.

 
(3)
Derecognition of financial liabilities

A financial liability is derecognized if, and only if, it is settled. Meaning that the obligation that is specified in the contract is paid, cancelled or expired.

 
K.
Grants from the Office of the Chief Scientist of the Ministry of Economy (formerly named the Ministry of Industry, Trade and Labor) (hereafter-"OCS")

Grants received from the OCS, which the Company is required to return with interest under certain conditions, represent loans that may be forgiven and are treated as follows:

On the date of initial recognition, the grant is presented as a financial liability at the fair value of the expected cash flows to be repaid, discounted at a discount rate commensurate with the risk level of the research and development project. The difference between the amount of the grant and its fair value at initial recognition, is treated as a government grant (see also Note 10A and 4B2)).

In subsequent periods, the financial liability is measured at the present value of the expected cash flows to be paid in the future, discounted each period at the original interest rate of the liability, with the changes in the liability being recorded in profit and loss for each period.

 
L.
Provisions

Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, as to which it is probable that the Company will be required to settle the obligation , and such obligation can be reliably estimated.

The amount recognized as a provision reflects the best estimate of the Company's management as to the amount required to settle the present obligation as of the statement of financial position date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured by using the cash flows estimated to settle the obligation, its carrying amount is the present value of those anticipated cash flows.

When all or part of the present amount to settle an obligation is expected to be recovered from a third-party, the Company recognizes an asset with respect to the recovery, to the extent of the provision that was recognized, only if it is virtually certain that the reimbursement will be received and the amount can be reliably estimated. (See Note 10).
 
F - 12

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 2
-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

 
M.
Share-based payments

Share-based payments to employees and to others who provide similar services, which are settled by equity instruments of the Company, are measured at their fair value on the grant date.  The Company measures the fair value of the equity instruments granted using the Black Scholes Merton formula. (See Note 12 with regard to inputs used in measurement of fair value of the share-based payments). When the equity instruments granted do not vest until such employees complete a defined period of service, comply with the conditions for exercise or defined market conditions are present, the Company recognizes the share-based payment arrangements in the financial statements over the vesting period against an increase in shareholders’ equity. As of the date of the financial statements, the Company approximates the number of equity instruments expected to vest. Any change in estimate with relation to previous periods is recognized in profit and loss over the term of the vesting period.

 
N.
Taxes on income

In view of the Company’s losses for tax purposes, and due to the lack of expectation of taxable income in the foreseeable future, the Company does not record deferred taxes for losses carried forward and for temporary differences between financial reporting and tax purposes.

 
O.
Employee benefits

Post-employment benefits

The Company has a defined contribution plan in accordance with Section 14 of the Severance Pay Law. See Note 8.

Short-term employee benefits

Short-term employee benefits are benefits which are anticipated to be utilized or paid during a period that does not exceed 12 months from the end of the period in which the service that creates the entitlement to the benefit was rendered.

Short-term employee benefits include the Company’s liabilities for salaries, vacation, recreation pay, and deposits for National Insurance. These benefits are recorded to profit and loss, when incurred. The benefits are measured on a non-capitalized basis, which the Company anticipates paying. The difference between the amount of short-term benefits to which the employee is entitled and the amount paid is therefore recognized as an asset or liability.

 
P.
Loss per share

The Company presents basic and fully diluted loss per share for its ordinary shares. The basic loss per share, which is the same as the fully diluted loss, is calculated by dividing the loss attributable to holders of ordinary shares of the Company, by the weighted average number of ordinary shares outstanding during the reporting period .

In calculating the loss attributable to the ordinary shareholders, the Company deducted the 8% annual preference dividends amounts for the preferred shareholders even though dividends have never been declared.
 
F - 13

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 2
-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

 
Q.
Exchange rates and linkage bases

Balances in foreign currency or linked thereto are included in the financial statements at the representative exchange rates, as  published by the Bank of Israel, that were prevailing  as of the statement of financial position date.

Data on exchange rates are as follows:

   
Representative
   
Representative
 
   
exchange rate of $
   
exchange rate of
 
   
(NIS/$ 1)
    $ (/ 1)  
Date of financial statements:
             
December 31, 2013
    3.471       0.7259  
December 31, 2012
    3.733       0.7586  

   
%
   
%
 
Changes in exchange rates for the period:
           
Year ended:
           
December 31, 2013
    (7.02 )     4.31  
December 31, 2012
    (2.30 )     1.96  
 
NOTE 3
-
NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED

IFRS 9 Financial Instruments

IFRS 9, issued in November 2009, introduced new requirements for the classification and measurement of financial assets. IFRS 9 was amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition.

Key requirements of IFRS 9:

All recognized financial assets that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement are required to be subsequently measured at amortized cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortized cost at the end of subsequent accounting periods. All other debt investments and equity investments are measured at their fair value at the end of subsequent accounting periods. In addition, under IFRS 9, entities may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognized in profit or loss.
 
F - 14

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 3
-
NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED (CONT.)

IFRS 9 Financial Instruments (Cont.)

With regard to the measurement of financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the recognition of the effects of changes in the liability's credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability's credit risk are not subsequently reclassified to profit or loss. Under IAS 39, the entire amount of the change in the fair value of the financial liability designated as fair value through profit or loss is presented in profit or loss.

The Company believes that the effects of adoption of IFRS 9 would not be material based on the current financial position of the Company; however, it is not practicable to provide an estimate of such effects until a detailed review has been completed.
 
NOTE 4
-
SIGNIFICANT ACCOUNTING JUDGMENT AND KEY SOURCE OF ESTIMATIONS

In the application of the Company's accounting policies, which are described in Note 2, management is required to make judgments, estimations and assumptions about the carrying amounts of assets and liabilities. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis and revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

 
A.
Share-based compensation

The Company accounts for its share-based compensation to employees in accordance with the provisions of IFRS 2 "Share-based Payment," which requires measuring the cost of share-based compensation based on the fair value of the award on the grant date. The cost is recognized as compensation expense over the requisite service period which is usually the vesting period, based upon the grant date fair value of the equity or liability instruments issued. The Company recognizes the compensation expenses over the vesting period using the accelerated method pursuant to which each vesting tranche is treated as a separate amortization period from the grant date to the vesting date, and classifies these amounts in the financial statements based on the department to which the related employee reports.

The Company selected the Black-Scholes Merton option pricing model as the most appropriate method for computing the fair value of its share-based awards, using the standard parameters established in that model including estimates relating to the fair value of its ordinary shares, volatility, estimated life of the instruments, risk-free interest rates and dividends yield as described below.

 
F - 15

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 4
-
SIGNIFICANT ACCOUNTING JUDGMENT AND KEY SOURCE OF ESTIMATIONS (CONT.)

 
A.
Share-based compensation (Cont.)

 
1.
Option Valuations

The determination of the grant date fair value of options using an option pricing model is affected by estimates and assumptions with respect to a number of complex and subjective variables. These variables include the expected volatility of the Company’s share price over the expected term of the options, share option exercise and cancellation behaviors, risk-free interest rates and expected dividends, which are estimated as follows:

Fair Value of the Ordinary Shares . Since the Company's shares are not publicly traded, the Company must estimate the fair value of its ordinary shares, as discussed below in "—Valuation of the Company's ordinary shares."

Volatility . The expected share price volatility was based on the historical equity volatility of the ordinary shares of comparable companies that are publicly traded.

Expected Term . The expected term of options granted represents the estimated period of time that options granted are expected to be outstanding. Since adequate historical experience is not available to provide a reasonable estimate, the expected term is determined based on the midpoint between the available exercise dates (the end of the vesting periods) and the last available exercise date (the contracted expiration date).

Risk-Free Rate . The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with a term equivalent to the expected term of the options.

Expected Dividend Yield . The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future. Consequently, the Company used an expected dividend yield of zero.

If any of the estimates and assumptions used in the Black-Scholes Merton model change significantly, the Company’s share-based compensation for future awards may differ materially from those projected and recorded previously

 
2.
Valuation of the Company's ordinary shares

Due to the absence of an active market for the Company's ordinary shares, the fair value of its ordinary shares for purposes of determining the exercise price for award grants was determined in good faith by the Company's management, with the assistance of a third party valuation expert, and approved by the Company's board of directors. In connection with preparing its financial statements, the Company's management considered the fair value of the Company's ordinary shares based on a number of objective and subjective factors consistent with the methodologies outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, referred to as the AICPA Practice Aid.
 
F - 16

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 4
-
SIGNIFICANT ACCOUNTING JUDGMENT AND KEY SOURCE OF ESTIMATIONS (CONT.)

 
B.
Royalties provision

 
1.
Government grants from the Office of the Chief Scientist

The Company received research and development funding from the State of Israel through the OCS in the form of grants which the Company is required to return with interest under certain conditions. Pursuant to regulations under the Encouragement of Industrial Research and Development Law 5744- 1984 (the "Research Law"), royalties on the Company's revenues will be payable to the Israeli government, at rates ranging from 3% to 5% (or at an increased rate under certain circumstances), up to an aggregate of 100% (which may be increased under certain circumstances) of the dollar-linked value of the total grants received in respect of the approved plans, plus interest at the rate of 12-month London Interbank Offered Rate, or LIBOR. Such grants qualify as "forgivable loans" in accordance with IAS 20, "Accounting for Government Grants and Disclosure of Government Assistance", since they are repayable only if the Company generates revenues related to the underlying project.

In accordance with IAS 20, the grant is accounted for as a liability unless it is more likely than not that the Company will meet the terms of forgiveness of the loan, in which case the forgivable loan is accounted for as a government grant and recognized as a reduction of the research and development expenses. The Company considers it more likely than not that the project underlying its OCS grants will reach the revenue generating stage and therefore, it records a liability in respect of the OCS grants.

On the date of initial recognition, the grant is presented as a financial liability at the fair value of the expected cash flows to be repaid, discounted at a discount rate commensurate with the risk level of the research and development project. The difference between the amount of the grant and its fair value is treated as a government grant. In subsequent periods, the financial liability is measured at the present value of the expected cash flows to be paid in the future, discounted each period at the original interest rate used in computing the initial liability. Changes in the liability are recorded to profit and loss each period.
In calculating the present value of future payments to the OCS, the Company used a discount rate of 21.8% for grants received during 2012 and 2013.

Due to the fact that the Company is still in its development and clinical stage and has not generated revenues, the sales forecast is highly subjective and may vary significantly in the future. As more information is gathered to assist the Company’s management in making forecasts, the liability would be updated. Any updates in the expected cash outflows and the liability will be recorded to profit and loss each period.

 
2.
Provision for royalties to an ASIC designer

In December 2007, the Company entered into an agreement for the development of an Application Specific Integrated Circuit (hereafter –"ASIC") component to be used as an amplifier for the capture of signals at low frequencies from X-ray detectors contained in the Company's product. The ASIC developer is entitled to receive royalties from the Company in the amount of 0.5 (approximately $0.69) for every ASIC component that the Company will sell, up to 200 thousand (approximately $276 thousand) (hereafter-"Royalties Rights"). The net present value of the royalty liability to the ASIC designer is dependent upon the Company's management estimates and assumption as to future product shipments and interest rates used to calculate the present value of the cash payments required to repay the royalties to the ASIC designer. The liability was calculated as the present value of expected cash outflows discounted at a 17.6% discount factor, commensurate with the risk of the Company at the date of initial recognition of the liability.
 
 
F - 17

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 4
-
SIGNIFICANT ACCOUNTING JUDGMENT AND KEY SOURCE OF ESTIMATIONS (CONT.)

 
B.
Royalties provision (Cont.)

 
3.
Reimbursement liability to Predecessor Entity unit holders

On May 31, 2009, the Company entered into an agreement with the Predecessor Entity pursuant to which the Predecessor Entity transferred all of its business operations and substantially all of its assets to the Company. In connection with the reorganization, the Company undertook to reimburse the unit holders of the Predecessor Entity for any tax burdens that may be imposed on them due to the reorganization. The reimbursement liability is calculated assuming deemed royalties are paid to the U.S. unit holders of the Predecessor Entity under Section 367(d) of the U.S. Internal Revenue Code of 1986, as amended (the “Code”) and is based in part on the Company’s forecasted revenues. The liability was calculated using the provisions of IAS 39 under which expected cash outflows were discounted using a 17.6% discount factor commensurate with the risk of the Company at the date of initial recognition of the liability. Due to the fact that the Company is still in its development stage and has not generated revenues, the sales forecast is highly subjective and may vary significantly in the future. As more information gathered to assist the Company's management in making forecasts, the liability would be updated. Any updates in the expected cash outflows and the liability will be recorded to profit and loss each period.

 
C. 
Fair value of financial instruments

On June 1, 2009, in connection with the certain Series C preferred share purchase agreement, the Company issued the following warrants to the lead investor: 836,712 warrants for the purchase of C1 preferred shares and 1,007,975 warrants for the purchase of C2 preferred shares. These warrants are exercisable on a cashless basis and therefore, are classified as a liability in the statement of financial position. The fair value of this financial instrument is determined based on an option pricing model using similar assumptions to those used for the Company's share-based compensation awards to employees. Changes in the inputs used in valuation of the warrants may change the fair value of liability and affect the Company's profit or loss.

NOTE 5
-
CASH AND CASH EQUIVALENTS AND SHORT TERM INVESTMENT

Composition:
 
 
 
 
Annual interest rate as
   
December 31,
 
   
of December 31, 2013
   
2013
   
2012
 
   
%
   
in USD thousands
 
                   
Cash on hand and bank balances
          270       78  
Short-term deposits
  0-1.64       4,705       4,505  
Cash and cash equivalents
          4,975       4,583  
                       
Cash and short-term deposits in Dollar
          4,589       3,476  
                       
Short-term deposits in GBP
          4       -  
                       
Cash and short-term deposits in NIS
          382       1,107  
                       
Short-term investments
          -       3,450  

 
F - 18

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS

NOTE 6
-
OTHER RECEIVABLES

Composition:
 
   
December 31,
 
   
2013
   
2012
 
   
in USD thousands
 
             
Government institutions
    45       37  
Other
    64       68  
Prepaid expenses
    21       59  
      130       164  
 
NOTE 7
-
PROPERTY AND EQUIPMENT, NET
 
   
Office
         
Computers
       
   
Furniture
         
and
       
   
And
   
Laboratory
   
auxiliary
       
   
equipment
   
equipment
   
equipment
   
Total
 
   
in USD thousands
 
Cost
                       
                         
Cost as of January 1, 2012
    75       244       106       425  
Additions
    14       35       56       105  
Disposals
    -       (16 )     -       (16 )
Cost as of December 31, 2012
    89       263       162       514  
Additions
    1       8       36       45  
Cost as of December 31, 2013
    90       271       198       559  
                                 
Accumulated depreciation
                               
                                 
Accumulated depreciation as of January 1, 2012
    18       114       53       185  
Depreciation
    6       32       37       75  
Disposals
    -       (2 )     -       (2 )
Accumulated depreciation as of December 31, 2012
    24       144       90       258  
Depreciation
    7       29       41       77  
Accumulated depreciation as of December 31, 2013
    31       173       131       335  
                                 
Net book value:
                               
December 31, 2013
    59       98       67       224  
                                 
December 31, 2012
    65       119       72       256  
 
 
F - 19

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 8
-
EMPLOYEE BENEFITS

 
A.
Composition
 
   
December 31,
 
   
2013
   
2012
 
   
(Audited)
 
   
in USD thousands
 
Short term employee benefits:
           
Benefits for vacation pay
    222       230  
Liability for salary, bonuses  and wages
    436       279  
      658       509  
 
 
B.
Post-employment Benefits

Defined contribution plans

Severance pay plans

According to Israeli law the Company is generally required to pay severance compensation to an employee at the time of dismissal, death or retirement (including employees who leave the place of employment under other specified circumstances). The calculation of the obligation related to the termination of the employee-employer relationship is based on the employee's salary and the years of service.

Commencing June 1, 2009, the Company has defined contribution plans, in accordance with Section 14 of the Israeli Severance Pay Law, according to which the Company makes monthly payments to insurance policies for its employees. Upon termination of employment, employees will be entitled to receive only the amounts accrued in the insurance policies with respect to severance pay. Deposits to a defined contribution plan for severance pay or for pensions are recognized as an expense at the time of the deposit to the plan concurrent with obtaining the labor services from the employee, and no additional provision in the financial statements is required.

 
C.
Short-term employee benefits

 
(1)
Paid vacation days

In accordance with the Yearly Vacation Law-1951, Company employees are entitled to a number of paid vacation days for each year of employment. In accordance with the law and its appendix, and as determined in the agreement between the Company and the employees, the number of vacation days per year to which each employee is establish based on the  seniority of that employee.

The employee may use vacation days based on his needs and with the Company's consent, and to accrue the remainder of unused vacation days. The vacation days utilized first are those credited for the current year and subsequently from any balance transferred from the prior year (on a LIFO basis). An employee who ceased working before utilizing the balance of vacation days accrued is entitled to payment for the balance of unutilized vacation days.

 
(2)
Related parties

For information regarding short term employee liabilities given to related parties see Note 20.
 
F - 20

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS

NOTE 9
-
TAXES ON INCOME

 
(1)
The Company received final tax assessments for the year ended December 31, 2009

 
(2)
Losses and deductions for tax purposes carried forward amount to approximately $16.7 thousand as of December 31, 2013. Due to the lack of expectation of taxable income in the foreseeable future, no deferred taxes were recorded for these carry forward losses and deductions.

 
(3)
Corporate tax rates in Israel:

The Israeli corporate tax rate was, 25% in 2012 and 2013.

In August 2013, the Economic Plan to change the national priorities in 2013 and 2014 (“Amended Budget Law”) was officially published. The Amended Budget Law consists of fiscal changes whose main aim is to enhance the collection of taxes in those years. These changes include: (i) raising the Israeli corporate tax rate from 25% to 26.5%; (ii) cancelling the reduction of the tax rates applicable to preferred enterprises (9% in development area A and 16% in other areas); and (iii) in certain cases increasing the tax rates on dividends within the scope of the Law for the Encouragement of Capital Investments to 20% effective from January 1, 2014. Other changes introduced by the Amended Budget Law include taxing revaluation gains effective from August 1, 2013. The changes regarding the taxation of revaluation gains, however, will only become effective once regulations that define “non-corporate taxable retained earnings” are issued as well as regulations that set forth provisions for avoiding double taxation of assets outside of Israel. As of the date of publication of these financial statements, no such regulations have been issued. The change in tax rates did not have an effect on the Company’s financial statements.

The Company did not record current taxes for the years ended December 31, 2012 and 2013 since it had no taxable income.

NOTE 10
-
COMMITMENTS AND CONTINGENT LIABILITIES

 
A.
Provisions

Royalties to the OCS

The Company has a liability to pay royalties to the Israeli government as a result of grants received from the Israeli OCS. The liability is calculated based on future sales generated by products which were developed using the OCS grants. As of December 31, 2013, it is probable that the Company will be required to pay the above mentioned royalties, and accordingly, the Company recorded, as of December 31, 2013, a provision in a total amount of $1,618 thousand, including interest  (see also Note 4B1). According to the terms of the grants, the OCS is entitled to royalties equal to 3-5% (or at an increased rate under certain circumstances) of the sales of the product funded, up to the full principal amount (which may be increased under certain circumstances) of the U.S. dollar-linked value of the grants, plus interest at the rate of 12-month LIBOR.

The total amount of grants received until December 31, 2013 amounted $3,050 thousand, excluding interest.

 
F - 21

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS

NOTE 10
-
COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)

 
A.
Provisions (Cont.)
 
Royalties to the OCS (Cont.)

The movement in the provision is as follows:
 
   
December 31,
 
   
2013
   
2012
 
   
in USD thousands
 
             
Balance at the beginning of the year:
    1,190       990  
                 
Changes during the year:
               
Amounts charged to the statement of profit and loss and other comprehensive loss
    (219 )     (341 )
Amounts received during the year
    647       541  
Balance at year end
    1,618       1,190  

Royalties to an ASIC designer:

The Company has a liability to pay royalties for the development of an ASIC  component which is used as an amplifier for the capture of signals at low frequencies from X-ray detectors contained in the capsule. The institution that developed the ASIC is entitled to a receive royalties from the Company in the amount of 0.5 ($0.69) for every ASIC component that the Company will sell, capped at  200 thousand ($276 thousand). This Royalty Right is considered a liability of the Company for the development of the ASIC component.

The royalties liability is calculated based on estimated future sales generated by products which includes the ASIC component. As of December 31, 2013 the Company believe it will be required to pay the above mentioned royalties, and accordingly, recorded, as of December 31, 2013, a provision in a total amount of $171 thousands.

Reimbursement liability to Predecessor Entity’s unit holders:

As part of the reorganization discussed in Note 1C, the Company committed to reimburse the unit holders of the Predecessor Entity for any tax burdens that may be imposed on them due to the reorganization. The reimbursement liability is calculated assuming deemed royalties are paid to the U.S. unit holders of the Predecessor Entity under Section 367(d) of the Code and is based in part on the forecasted sales of the Company. The liability was calculated using the provisions of IAS 39 under which expected cash outflows were discounted using a discount factor commensurate with the risk of the Company. Any updates in the expected cash outflows and the liability will be charged to earnings. As of December 31, 2013, the balance of the reimbursement liability totaled $788 thousands.

   
December 31,
 
   
2013
   
2012
 
   
in USD thousands
 
             
Royalties to the OCS
    1,618       1,190  
Royalties to an ASIC designer
    171       157  
Reimbursement liability to Predecessor Entity’s unit holders
    788       699  
      2,577       2,046  
 
 
F - 22

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 10
-
COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)

 
B.
Commitments

 
1.
Rental agreement

In April 2009, the Company entered into a rental agreement according to which the Company rented space of approximately 550 sq. meters in a building located in Isfiya for a period of 10 years, commencing June 1, 2009. In June 2012, the Company extended the rental agreement and rented additional space of 60 sq. meters in the building's second floor. The rental period is 10 years commencing June 1, 2012, and the Company has the right to terminate the agreement at any time upon at least 60 days prior written notice. The monthly rental fee is NIS17 thousand (approximately $4.9 thousand). The rental expenses recorded by the Company for the years ended December 31, 2013 and 2012 were $56 thousands and 51 thousands respectively.

 
2.
Agreements for financial brokerage service

See Note 11Dc2.

 
3.
Detector development agreement

See Note 11Dc4.

 
C.
Liens

In July 2013, the Company pledged a deposit of NIS 150 thousand, respectively ($43 thousand) with a bank as a security for credit cards issued to the Company.

 
D.
Legal

As of the date of the financial statements, the Company has not been and is not a party to any legal proceedings.
 
NOTE 11
-
SHARE CAPITAL

 
A.
Authorized capital:
 
   
December 31,
 
   
2013
   
2012
 
   
Thousands of shares
 
             
Ordinary shares with par value of  NIS 0.01
    907,154       907,154  
Preferred A shares with par value of  NIS 0.01
    6,750       6,750  
Preferred B shares with par value of  NIS 0.01
    6,769       6,769  
Preferred C1 shares with par value of  NIS 0.01
    17,494       17,494  
Preferred C2 shares with par value of  NIS 0.01
    31,833       31,833  
Preferred C3 shares with par value of  NIS 0.01
    30,000       30,000  
Preferred D1 shares with par value of  NIS 0.01
    80,000       80,000  
Preferred D2 shares with par value of  NIS 0.01
    60,000       60,000  
Preferred D3 shares with par value of  NIS 0.01
    5,000       5,000  
Preferred D4 shares with par value of  NIS 0.01
    5,000       5,000  
 
 
F - 23

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 11
-
SHARE CAPITAL (CONT.)
 
 
B.
Issued capital
 
   
Number of shares
   
Share capital
   
Premium on shares
 
   
December 31,
   
December 31,
   
December 31,
 
   
2013
   
2012
   
2013
   
2012
   
2013
   
2012
 
   
Thousands of shares
   
in USD thousands
   
in USD thousands
 
                                     
Ordinary shares with par value of  NIS 0.01 fully paid up
    23,043       23,043       53       53       6       6  
                                                 
Preferred A shares with par value of  NIS 0.01, participating and convertible, fully paid up
    6,750       6,750       15       15       660       660  
                                                 
Preferred B shares with par value of  NIS 0.01, participating and convertible, fully paid up
    6,769       6,769       15       15       1,367       1,367  
                                                 
Preferred C1 shares with par value of  NIS 0.01, participating and convertible, fully paid up
    16,415       16,415       42       42       3,584       3,584  
                                                 
Preferred C2 shares with par value of  NIS 0.01, participating and convertible, fully paid up
    29,789       29,789       79       79       7,606       7,606  
                                                 
Preferred D1 shares with par value of  NIS 0.01, participating and convertible, fully paid up
    24,545       24,545       68       68       (*)8,721       (*)8,721  
                                                 
Preferred D3 shares with par value of  NIS 0.01, participating and convertible, fully paid up
    2,511       2,511       7       7       1,022       1,022  
                                                 
                      279       279       22,966       22,966  
                                                 
(*) Include proceeds allocated to D1 and D2 warrants in a total amount of $1,793
 
F - 24

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS

NOTE 11
-
SHARE CAPITAL (CONT.)

 
C.
Rights attached to shares

 
(1)
Ordinary shares

The ordinary shares provide their owners with rights to receive dividends in cash and shares, and rights to participate at the time of distributing liquidation dividends, subject to the preferential rights of the preferred shareholders, as described below. Additionally, the ordinary shareholders have the right to vote in shareholders’ assemblies in a manner that each share provides one voting right to its holder.

 
(2)
Liquidation preferences on Preferred shares

The Preferred shares provide their owners with similar rights to the ordinary shares with a liquidation preference. In the occurrence of a Liquidation Event (as such term is defined in the Company's Articles of Association), the Preferred shares confer upon their holders preference rights, such that each Preferred share entitles its holder to be paid out of the assets of the Company available for distribution to its shareholders, an amount per preferred share equal to its original issue price, plus a yield of 8% per annum, in accordance with the following order of preference:

First to the holders of Preferred D shares, second to the holders of Preferred C shares, third to the holders of preferred A shares, and forth to the holders of Preferred B shares.

After the payment in full of the above preference amount, the remaining assets of the Company available for distribution to its shareholders, if any, shall be distributed among the holders of preferred shares as a single class, pro rata in accordance with each holder's original issue price.

After the payment in full of the above preference amount, the remaining assets of the Company available for distribution to its shareholders, if any, shall be distributed among the holders of Preferred shares and Ordinary shares, pro rata based on the number of shares held by each such holder on an "as-converted" basis ( i.e ., treating all Preferred shares as if they had been converted to Ordinary shares).

 
(3)
Conversion
 
Each Preferred share is convertible into such number of Ordinary shares at the then applicable conversion rate of such Preferred shares. In addition, each Preferred share shall automatically be converted into such number of Ordinary shares at the then applicable conversion rate of such Preferred shares upon a an initial public offering by the Company or a corporate successor of its equity interests in which at least $50 million is raised at a pre-money Company valuation of at least $200 million or a Liquidation Event (as such term is defined in the Company’s Articles of Association). The conversion rate of each Preferred share is equal to an amount sufficient to give each Preferred shareholder an 8% annual compounded return on the purchase price paid (or deemed paid) for each such Preferred share through the conversion date (less any distributions made by the Company prior to such date with respect to such Preferred share and less any payments made to the shareholder in connection with the reorganization discussed in Note 1C) divided by the conversion price of such Preferred share in effect at the time of adjustment.  The conversion price of each Preferred share is initially the purchase price paid (or deemed paid) for each such Preferred share, which is adjusted for certain shares split and combinations, distributions, mergers and reorganizations, and, with respect to the Preferred C and Preferred D shares, upon certain dilutive issuances, all as further detailed in the Company’s Articles of Association. 
 
F - 25

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS

NOTE 11
-
SHARE CAPITAL (CONT.)

 
D.
Changes in share capital

Description
Amount raised, gross
in USD thousands
Shares issued
Price per share
Warrants issued
Series A Investment Round, February 2005
$675
6,750,000 Preferred A Shares
$0.10
None
Series B Investment Round, August 2005
$1,382
6,769,359 Preferred B Shares
$0.20
None
Conversion of April 2007 Bridge Loan, June 2009
$403
1,614,490
Preferred C1 Shares
$0.25
Expired
 
Series C Investment Round, June 2009
$7,384
14,800,416
Preferred C1 Shares
13,725,012
Preferred C2 Shares
$0.25
 
$0.27
The lead investor received 836,412 preferred C1 warrants and 1,007,975 preferred C2 warrants (1)
 
Joinder to Series C Investment, November 2009 to February 2010
$4,321
16,063,656
Preferred C2 Shares
$0.27
Expired
In addition, finder's received 539,021 preferred C2 warrants (2)
Anti-Dilution Warrants
-
-
-
7,804,912 ordinary share warrants (3)
Series D1 Investment Round, March 2011 (4)
$9,255
24,545,195
Preferred D1 Shares
$0.38
16,199, 826 preferred D2 warrants issued to all investors (4)
In addition, finder's received 411,320 preferred D2 warrants and 503,872 preferred D1 warrants (5)
Series D3 Investment Round, January 2012 (6)
$1,055
2,510,783 Preferred D3 Shares
$0.42
None
Subtotal
$24,475
     
Less: Issuance expenses
($850)
     
Less: D1 and D2 warrants classified as financial liability
($439)
     
Ordinary shares
$59
     
Total
$23,245
     
 
 
F - 26

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 11
-
SHARE CAPITAL (CONT.)

 
D.
Changes in share capital (Cont.)

 
(1)
Of the warrants issued to the lead investor, the 836,412 preferred C1warrants are exercisable at $0.2495 per share and the 1,007,975 preferred C2 warrants are exercisable at $0.2269 per share.  These warrants expire on June 1, 2019 and are exercisable on a cashless basis. According to IAS 32, ‘Financial Instruments:  Presentation’ (hereinafter—IAS 32), the preferred C1 and C2 warrants issued to the lead investor are classified as a financial liability, as their respective terms do not provide for fixed monetary payment in exchange for fixed number of shares. Accordingly, such warrants are presented in the statement of financial position as financial liabilities carried at fair value through profit and loss. As of December 31, 2013 and 2012, the fair value of such warrants was $587 thousand and $532 thousand, respectively. The increase in the fair value of such warrants for the year ended December 31, 2013 was $55 and was charged to the statement of profit or loss and other comprehensive income within “Changes in fair value of financial assets and liabilities designated at fair value through profit and loss.”

 
(2)
In consideration for brokerage services in connection with the Series C preferred share investment: (i) on December 15, 2009, the Company issued warrants to purchase 371,739 preferred C2 shares, with an exercise price of $0.2690 per share, exercisable until November 22, 2014; and (ii) on April 27, 2010, the Company issued warrants to purchase 167,282 preferred C2 shares, with an exercise price of $0.2690 per share, exercisable until January 21, 2015. These grants were accounted for as a deduction of equity.
 
 
(3)
On May 11, 2010, the Company issued, free of charge, to all of its shareholders (except for certain ordinary shareholders) and warrant holders, warrants to purchase an aggregate of 7,804,912 ordinary shares (hereafter- “Anti-dilution Warrants”), as anti-dilution protection due to certain options granted to the Company’s CEO (hereafter- “CEO Options”).  The Anti-dilution Warrants will be automatically exercised, without consideration, upon the exercise by the Company’s CEO of the CEO Options (and with respect to Anti-dilution warrants granted to warrant holders, in proportion to the number of warrants with respect to which such Anti-dilution warrants were granted that were exercised prior to the exercise of the CEO Options). The fair value of the Anti-dilution Warrants on the grant date is immaterial.  See Note 17.
 
 
(4)
In connection with brokerage services in connection with the Series D-1 investment, the Company issued warrants to purchase 411,320 preferred D2 shares, with an exercise price of $0.47135 per share and exercisable until March 17, 2015, and warrants to purchase 503,872 preferred D1 shares, with an exercise price of $0.37708 per share and exercisable until March 17, 2015.These grants were accounted for as a deduction of equity. In addition, the brokerage services providers received $449 thousand in cash.
 
 
(5)
On January 10, 2012, the Company entered into a share purchase agreement pursuant to which the Company issued 2,510,783 preferred D3 shares in consideration of an investment of $1,055 thousand, reflecting a per share price of $0.42 per preferred D3 share.
 
Following the issuance of the preferred D3 shares described above, the Company increased its preferred share capital by $7 thousands and recorded a premium on preferred D3 shares of $1,022 thousands, net of issuance costs.
 
 
F - 27

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 12
-
SHARE BASED PAYMENT

A.            Details of share-based grants made by the Company
 
Month of option grant
 
No. of options
 
Grant date
Expiration date
 
Exercise price
   
Fair value on grant date
 
             
USD
 
April 2012
    1,160,000  
04/04/2012
04/04/2022
    0.25       0.07  
August 2012
    350,000  
28/08/2012
28/08/2022
    0.25       0.07  
June 2013
    2,355,000  
12/06/2013
12/06/2023
    0.25       0.152  

 
1)
In connection with the transfer of all of the business operations and substantially all of the assets of Check-Cap LLC to the Company in 2009, the Company assumed the Check-Cap LLC 2006 Unit Option Plan (hereafter: “the Plan”). According to the Plan, the Company is authorized to grant options to purchase ordinary shares of the Company to employees, directors and consultants of the Company. The options granted according to the Plan are generally exercisable for 10 years from the grant date unless otherwise determined by the Company’s Board of Directors, vest over a period to be determined by the Company’s Board of Directors, and have an exercise price to be determined by the Company’s Board of Directors.

 
2)
In April 2012, the Company’s Board of Directors approved the grant of 1,160,000 options to purchase ordinary shares NIS 0.01 par value of the Company at an exercise price of $0.2478 to employees and consultants of the Company. 25,012 of these options were vested on the grant date. 551,670 of the options will vest over two years, 357,494 of the options will vest over three years and the remaining, and 188,330 options will vest over four years.
 
The compensation expense was based on the fair value on the grant date, and was estimated at approximately $24 thousand.
 
 
3)
In August 2012 the Company’s Board of Directors approved the grant of 350,000 options to purchase ordinary shares NIS 0.01 par value of the Company at an exercise price of $0.2478 to employees and consultants of the Company. 29,174 of these options were vested on the grant date. 233,328 of the options will vest over two years, 87,498 of the options will vest over three years.
 
The compensation expense was based on the fair value on the grant date, and was estimated at approximately $4 thousand. This amount is charged to profit and loss over the vesting periods.
 
 
4)
In June 2013 the Company’s Board of Directors approved the grant of 2,355,000 options to purchase ordinary shares NIS 0.01 par value of the Company at an exercise price of $0.2478 to employees and consultants of the Company. 322,928 of these options were vested on the grant date. 1,351,660 of the options will vest over two years, 513,746 of the options will vest over three years, and 166,666 options will vest over four years. The compensation expense was based on the fair value on the grant date, and was estimated at approximately $84 thousand. This amount is charged to profit and loss over the vesting periods.
 
 
F - 28

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 12
-
SHARE-BASED PAYMENT (CONT.)

B.            Options Fair Value

The fair value of the options granted was estimated by applying the Black Scholes Merton model. While calculating the share based payments expenses, the Company took into account the estimated forfeiture rate of the options, based on the employees’ class.

The parameters which were used in applying the model are as follows:

Element
 
June 2013
   
April-August 2012
 
             
Share price (in $)
  0.152     0.07(**)  
Exercise price (in $)
  0.25     0.25  
Expected volatility (in %) (*)
  40-60     64-67  
Option term (in years)
  5-10     5-10  
Risk free interest rate (in %)
  0.75-2.25     0.75-2.25  
Anticipated rate of dividends (in %)
  0     0  

 
(*)
Since the shares of the Company are not marketable, the expected volatility was determined on the basis of the historic volatility of the share price of peer companies whose shares are traded on the stock exchange.

 
(**)
Based on funds raising close to the date of vesting.

In the absence of historic data as to the expected term of the options, management determine the expected term of the options based on the midpoint between the available exercise dates (the end of the vesting periods) and the last available exercise date (the contracted expiration date).

 
C.
Effect of share based payment transactions on the Company's profit or loss and on the financial position

   
For the year ended December 31,
 
   
2013
   
2012
 
   
in USD thousands
 
             
The part of the expense settled by equity instruments of the Company
    53       31  
 
F - 29

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS

NOTE 12
-
SHARE-BASED PAYMENT (CONT.)

 
D.
Additional details of options granted to employees

   
Number of options
   
Weighted average of exercise price
 
         
USD
 
             
Balance as of January 1, 2012
    13,020,977       0.124  
                 
Granted
    1,510,000       0.248  
Exercised
    (14,780 )     0.223  
Forfeited
    (508,453 )     0.166  
Balance as of December 31, 2012
    14,007,744       0.136  
                 
Granted
    2,355,000       0.248  
Forfeited
    (934,485 )     0.171  
Balance as of December 31, 2013
    15,428,259       0.151  
 
   
Options granted to employees and are exercisable
   
'Weighted average remaining term of the options
 
   
Number of options
   
Years
 
             
Balance as of December 31, 2012
    10,652,275       6.686  
                 
Balance as of December 31, 2013
    11,897,828       6.010  
 
NOTE 13
-
RESEARCH AND DEVELOPMENT EXPENSES, NET

Composition:
 
   
For the year ended December 31,
 
   
2013
   
2012
 
   
in USD thousands
 
             
Salaries and related expenses
    2,170       2,091  
Share-based payment
    41       25  
Materials
    307       329  
Subcontractors
    218       330  
Depreciation and amortization
    70       67  
Cost for registration of patents
    118       52  
Others
    110       29  
      3,034       2,923  
Less participation of the OCS
    (372 )     (231 )
Total research and development, net
    2,662       2,692  
 
 
F - 30

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 14
-
GENERAL AND ADMINISTRATIVE EXPENSES

Composition:
 
   
For the year ended December 31,
 
   
2013
   
2012
 
   
in USD thousands
 
             
Expenses for employee benefits
    683       653  
Share-based payment
    16       6  
Professional services
    95       70  
Office rent and maintenance
    104       142  
Depreciation and amortization
    7       7  
Others
    185       325  
Total general and administrative
    1,090       1,203  

NOTE 15
-
FINANCING INCOME

Composition:
 
   
For the year ended December 31,
 
   
2013
   
2012
 
   
in USD thousands
 
             
Interest income on short term deposits
    59       183  
Changes in provision for royalties
    -       233  
Exchange rate differences
    4       -  
Total financing income
    63       416  

NOTE 16
-
FINANCING EXPENSES

Composition:
 
   
For the year ended December 31,
 
   
2013
   
2012
 
   
in USD thousands
 
             
Bank fees
    5       6  
Current changes in provision for royalties
    256       85  
Changes in fair value of financial assets and liabilities designated at fair value through profit and loss
    55       116  
Exchange rate differences
    -       22  
Total financing expenses
    316       229  
 
 
F - 31

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS

NOTE 17
-
LOSS PER SHARE

Basic loss per share
 
Instruments that may potentially dilute the basic loss per share in the future, but were not included in the calculation of diluted loss per share, since their effect is anti-dilutive.
 
   
For the year ended December 31,
 
   
2013
   
2012
 
   
Thousands of shares
 
             
Weighted average number of ordinary shares used in calculating loss per share (1)
    32,542       32,530  
Adjustments:
               
Warrants and share options
    12,780       12,019  
Preferred shares
    86,779       86,779  
      132,101       131,328  
 
(1)   Includes (i) the CEO Options to purchase 1,995,475 ordinary shares, NIS 0.01 par value, of the Company, with an exercise price of NIS 0.01, granted to the Company's CEO on May 11, 2010. The CEO Options were fully vested on the grant date. The compensation expense was based on the fair value on the grant date and was estimated at approximately $96 thousand. This amount was charged to profit and loss on grant date; and (ii) Anti-dilution Warrants to purchase an aggregate of 7,503,521 ordinary shares, which were issued by the Company, free of charge, to all of its shareholders (except for certain ordinary shareholders) as anti-dilution protection due to the grant of the CEO Options.  These Anti-dilution Warrants will be automatically exercised, without further discretion on the part of the warrant holders and for no consideration, upon the exercise of the CEO Options by the Company’s CEO.
 
The Company accounted for the CEO Options and the foregoing Anti-dilution Warrants issued to shareholders as outstanding for the purpose of calculating basic loss per share as the CEO Options and such Anti-dilution Warrants are considered contingently issuable shares for little or no cash or other consideration. Under IAS 33, upon vesting, the CEO Options are not contingent and since the underlying shares are issued for little or no consideration, they were considered outstanding for purpose of the calculation of basic loss per share. Since the CEO Options are considered outstanding, such Anti-dilution Warrants are deemed automatically exercised, without further discretion on the part of the warrant holders and for no consideration, and therefore, the Anti-Dilution warrants were also considered outstanding for purpose of calculation basic loss per share.
 
NOTE 18
-
FINANCIAL INSTRUMENTS

 
A.
Financial instruments fair value

The carrying amount of the Company's financial instruments equals or approximates their fair value other than the reimbursement liability to the Predecessor Entity’s unit holders (See Note 4B3 and 10A), which its fair value as of December 31, 2013 is lower by approximately $150 thousands then its carrying amount. As of December 31, 2012, the fair value of such liability was lower by approximately $138 thousands than its carrying amount.
 
 
B.
Financial instruments according to category
 
   
December 31,
 
   
2013
   
2012
 
   
in USD thousands
 
Financial assets:
           
Cash and cash equivalents
    4,975       4,583  
Restricted deposit
    46       43  
Short-term investment
    -       3,450  
Other current assets
    130       164  
      5,151       8,240  
                 
Financial liabilities:
               
Current liabilities:
               
Trade accounts payable
    221       140  
Other current liabilities
    141       140  
Employee benefits liabilities
    658       509  
                 
Non-current liabilities:
               
Royalties provision
    2,577       2,046  
Other financial liabilities
    587       532  
      4,184       3,367  
 
 
F - 32

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 18
-
FINANCIAL INSTRUMENTS (CONT.)

 
C.
Purposes of financial risk management

The Company's finance department renders services for business operations, permits access to local and international financial markets, supervises and administers the financial risks related with the activities of the Company by means of internal reports which analyze the extent of exposure to risks according to their level and intensity. These risks include market risks (including foreign currency risk) and liquidity risk.

 
D.
Market risk

Foreign currency risk

The Company's functional currency is the U.S. dollar. The Company's exposures to the fluctuations occurring in the rates of exchange between the U.S. dollar and the New Israeli Shekel result mainly from salaries and related expenses that are stated in NIS.

The Company acts to reduce the currency risk by means of holding its liquid resources in short-term deposits (NIS and dollars).

During the year ended December 31, 2013, no change took place in the exposure to currency risk or in the manner in which the Company manages and measures the risk.

The book values of the financial assets and liabilities of the Company denominated in foreign currency are as follows:

   
Liabilities
   
Assets
 
   
December 31,
   
December 31,
 
   
2013
   
2012
   
2013
   
2012
 
   
in USD thousands
   
in USD thousands
 
                         
NIS
    940       605       490       1,220  
Euro
    171       156       -       -  

Sensitivity analysis of foreign currency

As stated above, the Company is exposed mainly to the NIS currency since salaries and related expenses are stated in N.I.S.

The following table itemizes the sensitivity to an increase or a decrease of 10% in the relevant exchange rate. 10% is the rate of sensitivity representing the assessments of management with respect to the reasonable possible change in exchange rates. The sensitivity analysis includes current balances of monetary items denominated in foreign currency and conforms their translation at the end of the period to a change of 10% in foreign currency rates.
 
 
F - 33

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 18
-
FINANCIAL INSTRUMENTS (CONT.)

 
D.
Market risk (Cont.)

Sensitivity analysis of foreign currency (Cont.)

   
Effect of NIS currency
 
   
December 31,
 
   
2013
   
2012
 
   
in USD thousands
 
Pre tax effect of increase of 10% in the $ currency vis-à-vis the NIS:
           
Effect on profit or loss and other comprehensive income for the year
    41       (56 )
Effect on equity (deficiency)
    41       (56 )
                 
Pre tax effect of decrease of 10% in the $ currency vis-à-vis the NIS:
               
Effect on profit or loss and other comprehensive income for the year
    (45 )     62  
Effect on equity (deficiency)
    (45 )     62  
                 
Pre tax effect of increase of 10% in the $ currency vis-à-vis the Euro:
               
Effect on profit or loss and other comprehensive income for the year
    16       14  
Effect on equity (deficiency)
    16       14  
                 
Pre tax effect of decrease of 10% in the $ currency vis-à-vis the Euro:
               
Effect on profit or loss and other comprehensive income for the year
    (17 )     (16 )
Effect on equity (deficiency)
    (17 )     (16 )
 
 
E.
Management of credit risk

Most of the Company’s receivables are from government institutions that have little to no credit risk exposure.

Moreover, the Company holds cash and cash equivalents in various financial institutions. These financial institutions are located in Israel and the United States. Pursuant to the Company’s policies, evaluations of the relative financial stability of the different financial institutions are performed on a current basis.

 
F. 
Liquidity risk

Carful management of liquidity risk requires a sufficient cash balance to support operating activities. Management constantly analyzes cash balances forecasts which comprised of cash and cash equivalents and assets at fair value through profit and loss. This analysis is based on forecasted cash flows, in accordance with policies and restrictions set by the Company.

The Company keeps a sufficient level of cash and cash equivalents, by taking into account the cash required for its operating activities, in order to reduce the liquidity risk which the Company is exposed to.
 
 
F - 34

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 19
-
FAIR VALUE

Fair value hierarchy

The table below presents an analysis of the financial instruments measured at fair value, using a valuation method:

The different levels were defined as follows:

1)           Level 1: Quoted prices (unadjusted) in an active market for identical instruments.
2)           Level 2: Data observed directly or indirectly that are not included in Level 1 above.
3)           Level 3: Data not based on observable market data.

   
For the year ended December 31, 2013
 
   
Level 3
   
in USD thousands
 
     
Other financial liabilities
    587  
Total
    587  

   
For the year ended December 31, 2012
 
   
Level 3
   
in USD thousands
 
     
Other financial liabilities
    532  
Total
    532  
         
 
The fair value of the financial liability included in the level 3 categories above has been determined in accordance with generally accepted pricing models based on a Black Scholes Merton formula, with the most significant inputs being share price, exercise price, volatility, risk free rate and contractual term. 

NOTE 20
-
TRANSACTIONS WITH INTERESTED PARTIES AND RELATED PARTIES

 
A.
Compensation to key management personnel and interested parties
 
   
For the year ended December 31,
 
   
2013
   
2012
 
   
in USD thousands
 
Salary and related expenses to interested parties employed by the Company
    403       436  
Number of personnel to which benefit applies
    2       2  
Salary and related expenses to key management personnel
    381       195  
Number of personnel to which benefit applies
    2       1  
Share based payment to interested parties and key management personnel
    46       31  
Number of personnel to which benefit applies
    5       5  
 
 
F - 35

 
CHECK-CAP LTD.
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 20
-
TRANSACTIONS WITH INTERESTED PARTIES AND RELATED PARTIES (CONT.)
 
 
B.
Transactions with interested and related parties


   
For the year ended December 31,
 
   
2013
   
2012
 
   
in USD thousands
 
Consultation (1)
    40       37  
Key man life insurance premium (2)
    9       8  
Management fees (3)
    -       80  
      49       125  
 
 
(1)
On July 1, 2005, the Company entered into an agreement with Hadar Kimchy according to which Hadar Kimchy provides marketing communication and graphical design services to the Company in consideration for a monthly retainer of 10,260 NIS ($3 thousand). The above services are provided to the Company by Sigalit Kimchy, who is employed by Hadar Kimchy. Sigalit Kimchy is a shareholder and is the spouse of Yoav Kimchy, the Company's chief technology officer and a director.

 
(2)
In connection with the asset transfer agreement entered into with the Predecessor Entity in May 2009, the Company assumed the former obligation of the Predecessor Entity to distribute any proceeds it collects on the $1,000,000 key man life insurance policy with respect to Yoav Kimchy, the Company's chief technology officer and a director, to the former holders of the Series A preferred units in an amount equal to their respective capital contributed to the Predecessor Entity, less any amounts previously distributed to them, plus any accrued and unpaid dividends due to them as of the date of distribution.
 
 
(3)
Check-Cap Ltd. (Delaware), which is the manager of the Predecessor Entity and is wholly-owned by Mr. Kimchy, the Company's chief technology officer and a director, handles from time to time certain logistical, administrative and investor relations matters for us with the Company’s U.S. suppliers and investors, in consideration of a quarterly payment of $20,000, which amount essentially covers Check-Cap Ltd. (Delaware)’s costs of performing these functions.  The Company last utilized such services as of December 31, 2012.
 
 
C.
Liabilities to interested parties and other related parties
 
   
December 31,
 
   
2013
   
2012
 
   
in USD thousands
 
Current liabilities-
           
Trade accounts payable
    34       22  
Employee benefits liabilities
    108       98  
                 
Non-current liabilities -
               
Reimbursement liability to Predecessor Entity's unit holders
    788       699  
 
 
F - 36

 
 
CHECK CAP LTD.

FINANCIAL STATEMENTS AS OF JUNE 30, 2014
 

 
F - 37

 
 
CHECK CAP LTD
STATEMENTS OF FINANCIAL POSITION

           
June 30,
   
December 31,
 
           
2014
   
2013
 
           
unaudited
   
audited
 
 
Note
       
In USD thousands
 
Assets
                   
Current assets
                   
Cash and cash equivalents
            2,794       4,975  
Restricted deposit
            46       46  
Other current assets
            230       130  
Total current assets
            3,070       5,151  
                         
Property and equipment, net
            206       224  
Total assets
            3,276       5,375  
                         
Liabilities and shareholders’ equity (deficit)
                       
Current liabilities
                       
Trade accounts payable
            278       221  
Other current liabilities
            116       141  
Employee benefits
            686       658  
Total current liabilities
            1,080       1,020  
                         
Non-current liabilities
                       
Royalties provision
            2,537       2,577  
Other financial liabilities
            657       587  
Total non-current liabilities
            3,194       3,164  
                         
Shareholders’ equity
1D
 
Pro Forma
as of
June 30, 2014
(unaudited)
                 
Preferred share capital
      -       226       226  
Ordinary share capital
   
XXX
      53       53  
Premium on preferred shares
      -       21,167       21,167  
Share options
   
XXX
      1,793       1,793  
Premium on ordinary shares
   
XXX
      6       6  
Capital reserve for ordinary share-based payment
      471       471       431  
Accumulated deficit
      (24,714 )     (24,714 )     (22,485 )
Total shareholders’ equity (deficit)
      (998 )     (998 )     1,191  
Total liabilities and shareholders’ equity (deficit)
      -       3,276       5,375  
 
The accompanying notes to the financial statements are an integral part of them.
 
 
F - 38

 

 
CHECK CAP LTD
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

   
Six months ended
June 30,
   
Three months ended June 30,
 
   
2014
   
2013
   
2014
   
2013
 
   
unaudited
 
   
In USD thousands
 
                         
                         
Research and development expenses, net
    1,640       1,364       843       704  
General and administrative expenses
    564       520       269       249  
Operating loss
    2,204       1,884       1,112       953  
                                 
Finance income
    (60 )     (45 )     (20 )     (27 )
Finance expenses
    85       230       50       149  
Finance expenses, net
    25       185       30       122  
                                 
Loss for the period
    2,229       2,069       1,142       1,075  
                                 
Total comprehensive loss for the period
    2,229       2,069       1,142       1,075  
                                 
Loss per ordinary share (in USD) basic and diluted
    0.10       0.09       0.05       0.05  
                                 
Weighted average number of ordinary shares outstanding - basic and diluted
(in thousands)
    32,542       32,542       32,542       32,542  
                                 
Pro forma loss per ordinary share (in USD) basic and diluted
 
X.XX
   
X.XX
   
X.XX
   
X.XX
 
                                 
Pro forma weighted average number of ordinary shares outstanding  - basic and diluted (in thousands)
 
XXX
   
X.XX
   
X.XX
   
X.XX
 
 
The accompanying notes to the financial statements are an integral part of them.

 
F - 39

 

CHECK CAP LTD
STATEMENTS OF CHANGES IN EQUITY (DEFICIT)

   
Preferred share capital
   
Ordinary share capital
   
Premium on preferred shares
   
Share options
   
Premium on ordinary shares
   
Capital reserve for ordinary share based payment
   
Accumulated deficit
   
Total
 
   
unaudited
 
   
In USD thousands
 
For the six months ended June 30, 2014
                                               
Balance - January 1, 2014
    226       53       21,167       1,793       6       431       (22,485 )     1,191  
Ordinary share-based payment
    -       -       -       -       -       40       -       40  
Comprehensive loss for the year
    -       -       -       -       -       -       (2,229 )     (2,229 )
Total shareholders’ deficit as of June 30, 2014
    226       53       21,167       1,793       6       471       (24,714 )     (998 )
                                                                 
For the six months ended June 30, 2013
                                                               
Balance - January 1, 2013
    226       53       21,167       1,793       6       374       (18,490 )     5,129  
Ordinary share-based payment
    -       -       -       -       -       10       -       10  
Comprehensive loss for the year
    -       -       -       -       -       -       (2,069 )     (2,069 )
Total shareholders’ equity as of June 30, 2013
    226       53       21,167       1,793       6       384       (20,559 )     3,070  
 
The accompanying notes to the financial statements are an integral part of them.

 
F - 40

 
 
CHECK CAP LTD
STATEMENTS OF CASH FLOWS

   
Six months ended
June 30,
 
   
2014
   
2013
 
   
unaudited
 
   
in USD thousands
 
CASH FLOWS  FROM OPERATING ACTIVITIES
           
Loss for the period
    (2,229 )     (2,069 )
Net gain arising on financial assets and liabilities designated as at fair value through profit or loss
    70       123  
Depreciation and amortization
    40       39  
Ordinary share-based compensation
    40       10  
                 
Changes in assets and liabilities items:
               
Increase in other current assets
    (100 )     (4 )
Increase in trade accounts payable and other current liabilities
    32       67  
Increase (decrease) in employees benefits
    28       (108 )
Increase (decrease) in royalties provision
    (40 )     99  
Net cash used in operating activities
    (2,159 )     (1,843 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchase of property and equipment
    (22 )     (27 )
Increase in restricted deposit
    -       (3 )
Decrease in short-term investment
    -       3,450  
Net cash generated from (used in) investing activities
    (22 )     3,420  
                 
Net increase (decrease) in cash and cash equivalents
    (2,181 )     1,577  
                 
Cash and cash equivalents at the beginning of the period
    4,975       4,583  
                 
Cash and cash equivalents at the end of the period
    2,794       6,160  
 
The accompanying notes to the financial statements are an integral part of them.
 
 
F - 41

 
CHECK CAP LTD
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 1
-
GENERAL INFORMATION

 
A.
General

Check Cap Ltd. (hereafter-"the Company") is a limited liability private company organized under the laws of the State of Israel. The registered address of its offices is Abba Hushi Blvd., Isfiya.
 
The Company is engaged in the development of an ingestible imaging capsule that utilizes low-dose X-rays for the screening for precancerous polyps and colorectal cancer. The capsule is designed to enable an early detection of the disease without the need for a prior burdensome and uncomfortable bowel cleansing, in a patient-friendly and non-invasive screening procedure.

 
B.
Financial Position

Since its inception, the Company has devoted substantially all of its efforts to research and development, clinical trials, recruiting management and technical staff, acquiring assets and raising capital. The Company is still in its development and clinical stage and has not yet generated revenues. The extent of the Company's future operating losses and the timing of becoming profitable are uncertain. The Company has incurred losses of $24,920, $22,485, and $20,268 thousands as of June 30, 2014 December 31, 2013 and June 30, 2013, respectively. The Company funds its operations primarily through equity financings.

 
C.
Agreement for transfer of assets

On May 31, 2009, the Company entered into an asset transfer agreement with Check Cap LLC (hereafter-"the Predecessor Entity"), a company with the same shareholders as the Company at the time of transfer. According to the agreement, the Predecessor Entity transferred all of its business operations and substantially all of its assets to the Company, including development and consulting agreements, cash, property and equipment and intangible ownership rights, free of any debt. The agreement did not have any effect on the Company's operations and was accounted for using historical amounts.

In addition, losses for tax purposes accumulated by the Predecessor Entity were not transferred to the Company.

 
D.
Pro Forma Information (unaudited)

The pro forma information gives effect to the capital restructuring concurrent with an event of an initial public offering by the Company to give effect to the conversion of all of the Company's Preferred shares into XX,XXX,XXX ordinary shares.  Because the Company is considering an IPO, the financial statements include the effect of the conversion of all of the preferred shares into ordinary shares in a pro forma shareholders' equity presentation, and retroactively reflects the effect of the conversion in a pro forma loss per share presentation.
 
The pro forma balance sheet information also gives effect to the exercise of options to purchase 1,995,475 ordinary shares granted to the Company’s CEO and warrants to purchase 7,503,521 ordinary shares granted to certain shareholders of the Company as anti-dilution protection upon the grant of the foregoing options to the Company’s CEO.

 
F - 42

 
CHECK CAP LTD
NOTES TO THE FINANCIAL STATEMENTS

NOTE 2
-
SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies applied in the annual financial statements of the Company as of December 31, 2013 are applied consistently in these financial statements.

NOTE 3
-
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited interim financial statements have been prepared in a condensed format and include the consolidated financial operations of the Company as of June 30, 2014 and for the six months then ended, in accordance with International Financial Reporting Standards, as issued by International Accounting Standards Board (IFRS), relating to the preparation of financial statements for interim periods. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2014, are not necessarily indicative of the results that may be expected for the year ended December 31, 2014.

NOTE 4
-
SUBSEQUENT EVENTS
 
On August 20, 2014, the Company entered into a certain credit line agreement, pursuant to which it obtained a credit line in an aggregate principal amount of $12 million from certain lenders and existing shareholders (the “Lenders”).  The credit line amount was deposited in an escrow account at the closing, which was consummated on October 14, 2014.
 
The Company issued to each Lender at closing a warrant (collectively, the “Credit Line Warrants”), to purchase a number of the Company’s ordinary shares constituting 2% of its share capital on a fully diluted basis (assuming conversion of all of the Company’s convertible securities into ordinary shares at a 1:1 conversion rate) as of the closing for each $1 million (or portion thereof) extended by such Lender.  The Company issued Credit Line Warrants to purchase in the aggregate 53,169,092 of its ordinary shares.  The Credit Line Warrants are exercisable for a period of ten years at an exercise price of NIS 0.01 per share, and may be exercised on a net issuance basis.

Under the terms of the agreement, if the Company intends to consummate (as defined in the credit line agreement) an initial public offering (an “IPO”), and such IPO is expected to be consummated on or prior to February 18, 2015, or if the Company consummates (as defined in the credit line agreement) an IPO on or prior to February 18, 2015, the Company will be entitled to direct that all or any portion of the credit line amount be invested in ordinary shares of the Company in a private placement transaction that is exempt from the registration requirements of the U.S. Securities Act of 1933, as amended, at a price per ordinary share equal to the public offering price per share in the IPO. In the event that the Company directs that less than the full credit line amount be invested in the private placement, the amount to be invested by each lender in the private placement will be equal to their pro rata share of the total credit line amount.  If the Company consummates (as defined in the credit line agreement) an IPO on or prior to February 18, 2015, any part of the credit line amount not so invested in the private placement will be released to the Lenders.
 
If the Company does not consummate (as defined in the credit line agreement) an IPO on or prior to February 18, 2015, the Company may call the credit line amount ( i.e., direct that such funds be released from the escrow account to the Company) at any time thereafter until April 14, 2016, subject to certain conditions.  Any part of the credit line amount not so called by the Company on or prior to such date will be released to the Lenders.  If the Company calls the credit line amount from the escrow account on or prior to April 14, 2016, the amount called will bear interest at the annual rate of 7%; provided that the aggregate interest rate will not be less than 5%.  The called credit line amount (and, at the Company’s option, the interest accrued thereon) will automatically convert into shares of the Company upon the earlier of a qualified financing round (which includes a public offering, including an IPO), an M&A. Event ( i.e ., an acquisition with or into another entity, the sale or license of all or substantially all of our assets or intellectual property or all or substantially all of our issued and outstanding share capital, or any other transaction having the same effect of any of the foregoing) and April 14, 2016, and the Lenders may elect to convert the entire called credit line amount (and, at the Company’s option, the interest accrued thereon) upon a non-qualified financing round, all under the terms and conditions set forth in the credit line agreement.  In the event that the qualified financing round is an IPO, in lieu of automatic conversion, the Company is entitled to, the extent permitted by law, to deposit in trust an amount equal to 125% of the called credit line amount (and, at the Company’s option, the interest accrued thereon) and irrevocably instruct the trustee to submit an offer, on behalf of each Lender, for the purchase of the IPO shares at the IPO price determined by the lead underwriters.
 
 
F - 43

 
 
Check-Cap Ltd.
         Ordinary Shares
 
 
____________________________
 
PROSPECTUS
____________________________
 

Chardan Capital Markets, LLC
Maxim Group LLC
 
                  , 2015
 
Through and including           , 2015 (the 25th day after the commencement of this offering), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealers’ obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
 
 
 

 
 
PART II
 
INFORMATION NOT REQUIRED IN PROSPECTUS
 
Item 6.    Indemnification of Directors and Officers
 
Under the Israeli Companies Law, a company may not exculpate an office holder from liability for a breach of the duty of loyalty. An Israeli company may exculpate an office holder in advance from liability to the company, in whole or in part, for damages caused to the company as a result of a breach of duty of care, but only if a provision authorizing such exculpation is included in its articles of association.  Our amended articles of association to be effective upon the closing of this offering include such a provision to the fullest extent permitted by law.  The company may not exculpate in advance a director from liability arising out of a prohibited dividend or other distribution to shareholders.
 
Under the Israeli Companies Law and the Israeli Securities Law, a company may indemnify an office holder in respect of the following liabilities and expenses incurred for acts performed by him or her as an office holder, either pursuant to an undertaking made in advance of any such event or following an event, provided its articles of association include a provision authorizing such indemnification:
 
 
·
a financial liability imposed on him or her in favor of another person pursuant to a judgment, including a settlement or arbitrator’s award approved by a court.  However, if an undertaking to indemnify an office holder with respect to such liability is provided in advance, then such an undertaking must be limited to events which, in the opinion of the board of directors, can be foreseen based on the company’s activities when the undertaking to indemnify is given, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and such undertaking shall detail the abovementioned foreseen events and amount or criteria;
 
 
·
reasonable litigation expenses, including attorneys’ fees, incurred by the office holder (1) as a result of an investigation or proceeding instituted against him or her by an authority authorized to conduct such investigation or proceeding, provided that (i) no indictment was filed against such office holder as a result of such investigation or proceeding; and (ii) no financial liability was imposed upon him or her as a substitute for the criminal proceeding as a result of such investigation or proceeding or, if such financial liability was imposed, it was imposed with respect to an offense that does not require proof of criminal intent; and (2) in connection with a monetary sanction;
 
 
·
reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or imposed by a court in proceedings instituted against him or her by the company, on its behalf, or by a third party, or in connection with criminal proceedings in which the office holder was acquitted, or as a result of a conviction for an offense that does not require proof of criminal intent; and
 
 
·
expenses, including reasonable litigation expenses and legal fees, incurred by an office holder in relation to an administrative proceeding instituted against such office holder, or certain compensation payments made to an injured party imposed on an office holder by an administrative proceeding, pursuant to certain provisions of the Israeli Securities Law.
 
Under the Israeli Companies Law and the Israeli Securities Law, a company may insure an office holder against the following liabilities incurred for acts performed by him or her as an office holder if and to the extent provided in the company’s articles of association:
 
 
·
a breach of the duty of loyalty to the company, provided that the office holder acted in good faith and had a reasonable basis to believe that the act would not harm the company;
 
 
·
a breach of the duty of care to the company or to a third party, to the extent such a breach arises out of the negligent conduct of the office holder;
 
 
·
a financial liability imposed on the office holder in favor of a third party; and
 
 
·
expenses, including reasonable litigation expenses and legal fees, incurred by an office holder in relation to an administrative proceeding instituted against such office holder or certain compensation payments to an injured party imposed on an office holder by an administrative proceeding, pursuant to certain provisions of the Securities Law.
 
 
II - 1

 
 
Under the Israeli Companies Law, a company may not indemnify, exculpate or enter into an insurance contract which would provide coverage for any monetary liability incurred as a result of any of the following:
 
 
·
a breach of the duty of loyalty, except for indemnification and insurance for a breach of the duty of loyalty to the company to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
 
 
·
a breach of the duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder;
 
 
·
an act or omission committed with intent to derive illegal personal benefit; or
 
 
·
a fine, monetary sanction or forfeit levied against the office holder.
 
Under the Israeli Companies Law, exculpation, indemnification and insurance of office holders in a public company must be approved by the compensation committee and the board of directors and, with respect to the chief executive officer or a director or under certain circumstances, also by the shareholders.  See “— Approval of Related Party Transactions under Israeli Law.”
 
Our amended articles of association, which will be effective upon the closing of this offering, permit us to exculpate, indemnify and insure our office holders to the fullest extent permitted under the Israeli Companies Law and Israeli Securities Law. We have obtained directors’ and officers’ liability insurance for the benefit of our office holders and intend to continue to maintain such coverage and pay all premiums thereunder to the fullest extent permitted by the Israeli Companies Law.  In accordance with our articles of association, in the event that our insurance also covers our liability, our office holders shall have precedence over us in collecting insurance payments.
 
We have entered into indemnification and exculpation agreements with each of our current officers and directors exculpating them from a breach of their duty of care to us to the fullest extent permitted by the Israeli Companies Law and undertaking to indemnify them to the fullest extent permitted by the Israeli Companies Law and the Israeli Securities Law, to the extent that these liabilities are not covered by insurance.  This indemnification is limited to events determined as foreseeable by our board of directors based on our activities, as set forth in the indemnification agreements.  Under such indemnification agreements, the maximum aggregate amount of indemnification that we may pay to any and all of our currently serving or future officers and directors together may not exceed the higher of $5 million and 25% of our shareholders equity according to our most recent financial statements at the time of payment.
 
The proposed form of Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement provides for indemnification of our office holders by the underwriters against certain liabilities.
 
Item 7.    Recent Sales of Unregistered Securities
 
Set forth below are the sales of all securities by us since January 1, 2011.
 
 
·
Since January 1, 2011, we granted options to purchase an aggregate of 4,982,702 ordinary shares to certain of our employees, officers and consultants under our 2006 Unit Option Plan, of which (i) options to purchase 1,117,702 ordinary shares having an exercise price of $0.22270 were granted in June 2011; (ii) options to purchase 1,160,000 ordinary shares having an exercise price of $0.24780 were granted in April 2012; (iii) options to purchase 350,000 ordinary shares having an exercise price of $0.24780 were granted in August 2012; (iv) options to purchase 2,355,000 ordinary shares having an exercise price of $0.24780 were granted in June 2013; and (v) options to purchase 11,630,739  ordinary shares having an exercise price of NIS 0.01 were granted on August 20, 2014.  Of such options, options to purchase an aggregate of 1,606,562 ordinary shares have been forfeited and cancelled without being exercised as of the date of this prospectus. We claimed exemption from registration under the Securities Act for such transactions under Section 4(a)(2) and/or Regulation S of the Securities Act.
 
 
II - 2

 
 
·
In October 2012, we issued and sold 14,780 ordinary shares pursuant to the exercise of options held by an employee, having an exercise price per share of $0.22270.  We claimed exemption from registration under the Securities Act for this transaction under Section 4(a)(2) and/or Regulation S of the Securities Act.
 
 
·
Pursuant to a Share Purchase Agreement dated March 4, 2011 between us and the investors identified therein, we issued an aggregate 24,545,195 of our Series D-1 preferred shares and warrants for the purchase of 16,199,826 of our Series D-2 preferred shares, for aggregate consideration of $9.3 million.  In addition, as partial consideration for brokerage services in connection with such financing, we issued warrants to purchase 503,872 Series D-1 preferred shares and warrants to purchase 411,320 Series D-2 preferred shares. We claimed exemption from registration under the Securities Act for this transaction under Section 4(a)(2) and/or Regulation S of the Securities Act.
 
 
·
Pursuant to a Share Purchase Agreement dated January 10, 2012 between us and the investors identified therein, we issued a total of 2,510,783 Series D-3 preferred shares, for aggregate consideration of $1.1 million. We claimed exemption from registration under the Securities Act for this transaction under Section 4(a)(2) and/or Regulation S of the Securities Act.
 
 
·
Pursuant to a Credit Line Agreement dated August 20, 2014 between us and the lenders identified therein, we issued warrants for the purchase of an aggregate 53,169,092 ordinary shares.  We claimed exemption from registration under the Securities Act for this transaction under Section 4(a)(2) and/or Regulation S of the Securities Act.
 
 
·
On October 14, 2014, we issued a warrant for the purchase of 4,430,758 ordinary shares to an existing shareholder as consideration for certain services it may provide at our request.   We claimed exemption from registration under the Securities Act for this transaction under Section 4(a)(2) and/or Regulation S of the Securities Act.
 
No underwriters were employed in connection with the transactions set forth in this Item 7.
 
Item 8.    Exhibits and Financial Statement Schedules
 
(a)           Exhibits
 
The exhibits listed in the accompanying Exhibit Index are incorporated herein by reference.
 
(b)           Financial Statement Schedules
 
All schedules have been omitted since they are not required or are not applicable or the required information is shown in the financial statements or related notes.
 
Item 9.    Undertakings
 
The registrant hereby undertakes:
 
(1)           for purposes of any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
 
(2)           for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
 
(3)           to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
 
(i)           to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
 
 
II - 3

 
 
(4)           that, for the purpose of determining any liability under the Securities Act of 1933, as amended, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
 
(5)           to remove from registration by means of a post-effective amendment any of the securities being registered that remain unsold at the termination of the offering.
 
(6)           to file a post-effective amendment to the registration statement to include any financial statements required by Item 8.A. of Form 20-F at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required by Section 10(a)(3) of the Act need not be furnished, provided that the registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements. Notwithstanding the foregoing, with respect to registration statements on Form F-3, a post-effective amendment need not be filed to include financial statements and information required by Section 10(a)(3) of the Act or Rule 3-19 of this chapter if such financial statements and information are contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Form F-3.
 
(7)           for the purposes of determining liability to any purchaser:
 
(i)            If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
 
(8)           for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
 
(i)            any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
 
(ii)           any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
 
(iii)          the portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
 
(iv)          any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
 
The registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
 
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the U.S. Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 
II - 4

 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in Mount Carmel, Israel, on December 23, 2014.

 
Check-Cap Ltd.
 
       
 
By:
/s/ Guy Neev
 
 
Name:
Guy Neev
 
 
Title:
Chief Executive Officer
 
 
 
 

 
 
POWER OF ATTORNEY
 
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Guy Neev and Lior Torem, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, and to sign any registration statement for the same offering covered by the registration statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
 
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated:

Dated: December 23, 2014
By:
/s/ Guy Neev  
 
Name:
Guy Neev
 
 
Title:
Chief Executive Officer and Director
(Principal Executive Officer)
 
     
Dated: December 23, 2014
By:
/s/ Lior Torem  
 
Name:
Lior Torem
 
 
Title:
Chief Financial Officer (Principal Financial Officer
and Principal Accounting Officer)
 
     
Dated: December 23, 2014
By:
/s/ Tomer Kariv  
 
Name:
Tomer Kariv
 
 
Title:
Chairman of the Board of Directors
 
       
Dated: December 23, 2014
By:
/s/ Walter L. Robb  
 
Name:
Walter L. Robb
 
 
Title:
Director
 
     
Dated: December 23, 2014
By:
/s/ Yoav Kimchy  
 
Title:
Yoav Kimchy
 
 
Title:
Director
 
     
Dated: December 23, 2014
By:
/s/ Alon Dumanis  
 
Name:
Alon Dumanis
 
 
Title:
Director
 
       
Dated: December 23, 2014
By:
/s/ Richard Stone  
 
Name:
Richard Stone
 
 
Title:
Director
 

 
 

 
 
SIGNATURE OF AUTHORIZED REPRESENTATIVE IN THE UNITED STATES
 
Pursuant to the Securities Act of 1933, as amended, the undersigned, the duly authorized representative in the United States of Check-Cap Ltd., has signed this registration statement or amendment thereto in Newark, Delaware, United States of America on December 23, 2014.

 
Authorized U.S. Representative
 
     
 
/s/ Donald J. Puglisi
 
 
Managing Director
Puglisi & Associates
 
 
 
 

 
 
Exhibit Index
 
Exhibit
No.
 
Description
1.1**
 
Form of Underwriting Agreement
3.1*
 
Sixth Amended and Restated Articles of Association of the Registrant
3.2**
 
Form of Amended and Restated Articles of Association of the Registrant to be effective prior to completion of this offering
4.1**
 
Form of Registrant’s Ordinary Share Certificate
4.2**
 
Form of Underwriter Warrants
5.1**
 
Form of opinion of Fischer Behar Chen Well Orion & Co.
10.1*
 
2006 Unit Option Plan, and Amendments thereto
10.2*
 
Amended and Restated Shareholders Agreement dated as of October 14, 2014 by and among Check-Cap Ltd. and the shareholders parties thereto
10.3**
 
Amendment to Amended and Restated Shareholders Agreement to be dated as of          , 2015 by and among Check-Cap Ltd. and the shareholders parties thereto
10.4*
 
Form of Series C-1 preferred shares purchase warrant
10.5*
 
Forms of Series C-2 preferred shares purchase warrant
10.6*
 
Form of Series D-1 preferred shares purchase warrant
10.7*
 
Form of Series D-2 preferred shares purchase warrant
10.8*
 
Share Purchase Agreement dated as of March 4, 2011 by and among Check-Cap Ltd. and the investors parties thereto
10.9*
 
Forms of Anti-Dilution Warrants
10.10*
 
Asset Transfer Agreement, dated as of May 31, 2009 by and between Check-Cap Ltd. and Check-Cap LLC.
10.11*
 
The Agreement for ASIC Design and Development dated November 26, 2009 by and between Check-Cap Ltd. and Politechnico di Milano
10.12*
 
Form of Indemnification Agreement
10.13*
 
Credit Line Agreement, dated as of August 20, 2014 by and among Check-Cap Ltd. and certain Lenders named therein
10.14*
 
Form of Ordinary Shares Warrant Certificate issued pursuant to a certain Credit Line Agreement dated as of August 20, 2014
10.15*
 
Forms of Ordinary Shares Warrant Certificate issued to the Pontifax entities
10.16*
 
Addendum to Credit Line Agreement dated as of October 14, 2014 by and among Check-Cap Ltd. and certain Lenders named therein
10.17*
 
Second Addendum to Credit Line Agreement dated as of December 22, 2014 by and among Check-Cap Ltd. and certain Lenders named therein
23.1*
 
Consent of Brightman Almagor Zohar & Co
23.2**
 
Consent of Fischer Behar Chen Well Orion & Co. (included in Exhibit 5.1)
24*
 
Power of Attorney (included on the signature page of this registration statement)
 
* Filed herewith
 
** To be filed by amendment
 


 
 


Exhibit 3.1
 
THE COMPANIES LAW, 5759-1999
 
A PRIVATE COMPANY LIMITED BY SHARES
 
SIXTH AMENDED AND RESTATED ARTICLES OF ASSOCIATION
 
OF
 
CHECK-CAP LTD
 
* * * *
 
 

 
 
GENERAL
 
1.             Definitions; Interpretation
 
1.1        Definitions
 
In these Sixth Amended and Restated Articles of Association, the following terms shall have the meaning appearing opposite them, unless another interpretation is expressly stated herein:
 
"Administrative Proceeding" -
 
A proceeding instituted pursuant to (a) Chapter H3 of the Securities Law, "Imposition of Monetary Sanctions by the Securities Authority"; (b) Chapter H4 of the Securities Law, "Imposition of Administrative Enforcement Sanctions by the Enforcement Committee"; (c) Chapter I1 of the Securities Law, "Arrangement for the Avoidance of Proceedings or Termination of Proceedings, which is Subject to Conditions" or (d) pursuant to Chapter I4(d) of the Companies Law;
" Affiliate " -
with respect to any Shareholder shall mean:  (i) any Person controlling, controlled by or under common control with said Shareholder (including any partnership in which such Shareholder serves as a general partner or any entity in which such Shareholder, its Affiliates and any of their respective Immediate Family Shareholders own greater than 10% in the aggregate of the issued and outstanding voting equity); (ii) any officer, director, trustee limited or general partner of any Shareholder or of any Person so controlling, controlled by or under common control with said Shareholder; provided that the Company shall not be deemed an Affiliate of any Shareholder; and (iii) any Person which a Shareholder has the power to direct or cause the direction of the policies or management whether by voting power or otherwise;
" Articles " -
means these Sixth Amended and Restated Articles of Association, as amended from time to time;
" Board of Directors " or " Board " -
means the Board of Directors of the Company;
" Business Day " -
means any day on which business is ordinarily conducted in the State of Israel (excluding Fridays).  If any notice or other communication is required to be delivered or action be taken pursuant to the terms of these Articles on a day which is not a Business Day, such notice shall not be required to be delivered or action taken until the next Business Day after the original required date ;
 
 
2

 
 
" Company " -
means Check-Cap Ltd.;
" Companies Law " -
means the Israel Companies Law, 5759-1999, as the same shall be amended from time to time;
" Director" -
means a member of the Board of Directors of the Company;
" Deemed Liquidation Event " -
means: (i) the liquidation or dissolution of the Company; (ii) the sale of the Company, whether through a merger or consolidation or change in control or in any other way (other than one in which the Shareholders prior to such merger or consolidation continue to own a majority of the stock of the surviving or acquiring corporation); (iii) the sale of a majority of the then outstanding Shares in the Company on an "as converted" basis; (iv) the sale or disposal of all or a majority of the Company's assets or rights over assets, including, without limitation, licensing or sub-licensing; (v) a voluntary liquidation of the Company by the Shareholders; or (vi) a merger ;
" Deemed Preferred A Purchase Price " -
means $0.10 per each Preferred A Share ;
" Deemed Preferred B Purchase Price " -
means $0.20 per each Preferred B Share;
" Deemed Preferred C1 Purchase Price " -
means $0.2495 per each Preferred C1 Share;
" Deemed Preferred C2 Purchase Price " -
means $0.2690 per each Preferred C2 Share;
" Deemed Preferred C3 Purchase Price " -
means the price per share actually paid for each Preferred C3 Share upon the exercise of the warrants (" C3  Warrants ") issued to (i) Pontifax and other investors according to that certain Convertible Loan Agreement dated February 12, 2008, (ii) Spearhead and such other Additional Joining Investors according to that certain Joinder Agreement dated November 22, 2009 and such other Additional Joining Investors Agreements, (iii) Docor according to that certain Joinder Agreement dated January 21, 2010, and (iv) any other Person, under substantially the same terms and conditions as the aforementioned warrants (which price shall reflect a Company's pre money valuation of $75M prior to the exercise of the C3 Warrants on a fully diluted basis (without taking into account the C3 Warrants );
 
 
3

 
 
 
" Deemed Preferred D1 Purchase Price " -
means $0.37708 per each Preferred D1 Share ;
" Deemed Preferred D2 Purchase Price " -
means the price per share actually paid for each Preferred D2 Share upon the exercise of those certain Warrants issued to the Investors (as such term is defined in that certain Share Purchase Agreement between the Company and the Investors dated March 4, 2011) and any other person under substantially the same terms and conditions as the aforesaid warrants;
" Deemed Preferred D3 Purchase Price " -
means $0.42 per each Preferred D3 Share;
" Deemed Preferred D4 Purchase Price " -
means the price per share actually paid for each Preferred D4 Share upon the exercise of those certain Warrants issued to GE Capital Equity Holdings Inc. (as such term is defined in that certain Development and Supply Agreement by and between the Company and GE Capital Equity Holdings Inc. dated January 10, 2012) and any other person under substantially the same terms and conditions as the aforesaid warrants;
" Dispose ," " Disposing " or " Disposition " -
means with respect to any asset (including shares or any portion thereof or interest therein), a sale, assignment, transfer, conveyance, gift, exchange or other disposition of such asset, whether such disposition be voluntary, involuntary or by operation of applicable law, including (but not limited to) the following:  (a) in the case of an asset owned by a natural person, a transfer of such asset upon the death of its owner, whether by will, intestate succession or otherwise; (b) in the case of an asset owned by an entity, (i) a merger or consolidation of such entity (other than the case in which such entity is the survivor thereof), (ii) a conversion of such entity into another type of entity, or (iii) a distribution of such asset, including in connection with the dissolution, liquidation, winding-up or termination of such entity (unless, in the case of dissolution, such entity’s business is continued without the commencement of liquidation or winding-up); and (c) a disposition in connection with, or in lieu of, a foreclosure of an encumbrance; but such terms shall not include the creation of an encumbrance;
" Docor " -
means Docor International B.V.;
 
 
4

 
 
" Effective Date " -
means February 9, 2005;
" Emigrant " -
means Emigrant Alternative Portfolios LLC, a Delaware limited liability company;
" Entitled Holder " -
as defined in Article 11(b);
" ESOP " -
has the meaning given such term in Article 11(b)(i) hereof;
" Fiscal Year " -
means the Company's taxable year ending December 31
" Founder " -
means Mr. Yoav Kimchy;
" GE Shareholders " -
GE Medical Systems Israel Ltd., GE Capital Equity Holdings Inc., and any Affiliate to which they transfer any of their Shares;
" Immediate Family Shareholder " -
means with respect to any Shareholder who is a natural person, such Shareholder’s parents (including step-parents), siblings (including step-siblings), spouse and children (including step-children);
" Liquidation Event " -
means, the Company's merger into a public company in which the merger consideration is shares which are publicly traded on a stock exchange;
" Major Decisions " -
shall have the meaning ascribed to such term in Article 73 below.
" Office holder ” -
means every Director and every officer of the Company, including without limitation, each of the persons defined as “ Nosei Misra ” in the Companies Law;
" Ordinary Majority " - More than fifty percent (50%) of the voting power represented by the shares held by all of the Shareholders present at a General Meeting, who are entitled to vote and who voted at such meeting in person or by means of a proxy (excluding abstentions);
" Ordinary Shares " -
means the Company’s Ordinary Shares, nominal value NIS 0.01 each;
" Permitted Transferee " -
with respect to a Shareholder means such Shareholder, such Shareholder's spouse or a descendant of such Shareholder, or a trust for the benefit of any of the foregoing,   (i) an Affiliate of a Shareholder, (ii) another Shareholder, (iii) the Company, (iv) the partners or Shareholders of a Shareholder that is a partnership or limited liability company, respectively, or (v) a transferee approved by the Board of Directors.  Notwithstanding the foregoing, no competitor of the Company or Affiliate of a competitor can be a Permitted Transferee;
 
 
5

 
 
" Person "  -
means an individual, corporation, partnership, joint venture, trust, and any other body corporate or unincorporated organization;
" Preferred A Shares "  -
means the Company's Series A Convertible Preferred Shares, nominal value NIS 0.01 each;
" Preferred B Shares "  -
means the Company's Series B Convertible Preferred Shares, nominal value NIS 0.01 each;
" Preferred C Shares "  -
means the Company's Preferred C1 Shares, Preferred C2 Shares and Preferred C3 Shares together;
" Preferred C1 Shares "  -
means the Company's Series C1 Convertible Preferred Shares, nominal value NIS 0.01 each;
" Preferred C2 Shares "  -
means the Company's Series C2 Convertible Preferred Shares, nominal value NIS 0.01 each;
" Preferred C3 Shares "  -
means the Company's Series C3 Convertible Preferred Shares, nominal value NIS 0.01 each;
" Preferred D Shares "  -
means the Company's Preferred D1 Shares, the Preferred D2 Shares the Preferred D3 Shares and the Preferred D4 Shares, together;
" Preferred D1 Shares " -
means the Company's Preferred D1 Shares, nominal value NIS 0.01 each;
" Preferred D2 Shares " –
means the Company's Preferred D2 Shares, nominal value NIS 0.01 each;
" Preferred D3 Shares " –
means the Company's Preferred D3 Shares, nominal value NIS 0.01 each;
" Preferred D4 Shares " –
means the Company's Preferred D4 Shares, nominal value NIS 0.01 each;
 
 
6

 
 
" Preferred Shares " -
means the Preferred A Shares, the Preferred B Shares, the Preferred C Shares and the Preferred D Shares;
" Preferred A Shares Conversion Price " -
has the meaning given such term in Article 5.3 (a) hereof;
" Preferred A Shares Preferred Amount " -
means, at any date, an amount sufficient to give each Preferred A Shareholder an 8% annual compounded return on the amount of (a) its Deemed Preferred A Purchase Price from the date of the purchase through such date less (b) the aggregate distributions made by the Company with respect to such Preferred A Shares as of the respective dates of such distributions and less (c) any payments made to such shareholders by the Company in connection with the Reorganization.  Preferred A Shares Preferred Amount will continue to accrue after any payment of all or portion of each Preferred A Shares Preferred Amount taking into account the amount of such payment until the Preferred A Shareholder has received aggregate distributions equal to the Deemed Preferred A Purchase Price;
" Preferred B Shares Conversion Price " -
has the meaning given such term in Article 5.4 (a) hereof;
" Preferred B Shares Preferred Amount " -
means, at any date, an amount sufficient to give each Preferred B Shareholder an 8% annual compounded return on the amount of (a) its Deemed Preferred B Purchase Price from the date of the purchase through such date less (b) the aggregate distributions made by the Company with respect to such Preferred B Shares as of the respective dates of such distributions and less (c) any payments made to such shareholders by the Company in connection with the Reorganization.  Preferred B Shares Preferred Amount will continue to accrue after any payment of all or portion of each Preferred B Shares Preferred Amount taking into account the amount of such payment until the Preferred B Shareholder has received aggregate distributions equal to the Deemed Preferred B Purchase Price;
" Preferred C Shares Conversion Price " -
has the meaning given such term in Article 5.5(a) hereof;
" Preferred C Shares Preferred Amount " -
means, at any date, an amount sufficient to give each Preferred C Shareholder an 8% annual compounded return on the amount of (a) its Deemed Preferred C Purchase Price from the date of the purchase through such date less (b) the aggregate distributions made by the Company with respect to such Preferred C Shares as of the respective dates of such distributions. Preferred C Shares Preferred Amount will continue to accrue after any payment of all or portion of each Preferred C Shares Preferred Amount taking into account the amount of such payment until the Preferred C Shareholder has received aggregate distributions equal to the Deemed Preferred C Purchase Price;
 
 
7

 
 
" Preferred D Shares Conversion Price " -
has the meaning given such term in Article 5.5A(a) hereof;
" Preferred D Shares Preferred Amount " -
means, at any date, an amount sufficient to give each Preferred D Shareholder an 8% annual compounded return on the amount of (a) its Deemed Preferred D Purchase Price from the date of the purchase through such date less (b) the aggregate distributions made by the Company with respect to such Preferred D Shares as of the respective dates of such distributions. Preferred D Shares Preferred Amount will continue to accrue after any payment of all or portion of each Preferred D Shares Preferred Amount taking into account the amount of such payment until the Preferred D Shareholder has received aggregate distributions equal to the Deemed Preferred D Purchase Price;
" Pontifax " -
means Pontifax (Cayman) II L.P., Pontifax (Israel) II L.P., and Pontifax (Israel) II - Individual Investors L.P.;
" Pontifax Director " -
means the Director appointed by Pontifax;
" Price Per Share " -
means, with respect to a share, the price actually paid for such share upon the issuance thereof;
" Proposed Issuance " -
means any proposal by the Company to issue shares other than equity or options or other rights to acquire equity pursuant to the ESOP;
" Qualifying IPO " -
means an initial public offering by the Company or a corporate successor of its equity interests in which at least $50 million is raised at a pre money Company valuation of at least $200 million ;
 
 
8

 
 
" Requisite Majority " -
means the holders of more than fifty percent (50%) of the voting power represented by the Preferred Shares held by all of the Preferred Shareholders (treated as a single class) present at a General Meeting, who are entitled to vote and who voted at such meeting in person or by means of a proxy (excluding abstentions);
" Register of Shareholders " -
 means the register of shareholders that must be maintained pursuant to Section 127 of the Companies Law;
" Reorganization "
means the reorganization and the transfer of certain assets or licensing of certain Company assets from Check-Cap LLC;
" Securities Law " - means the Securities Law, 5728-1968, as amended from time to time;
" Shareholder " –
means any person or entity registered in the Register of Shareholders as the owner of shares of the Company;
" Spearhead "
means Spearhead Investments (Bio) Ltd.;
" Year” and " Month " -
a Gregorian month or year;
 
1.2        Interpretation
 
(a)           Any capitalized term used but not otherwise defined in these Articles shall have the meaning ascribed to it in the Companies Law.
 
(b)           Words and expressions importing the singular shall include the plural and vice versa; words and expressions importing the masculine gender shall include the feminine gender; and words and expressions importing persons shall include bodies corporate.
 
(c)           The captions used in these Articles are for convenience only and shall not be deemed a part hereof or affect the construction of any portion hereof.
 
2.            Private Company; Objects of the Company
 
2.1      The Company is a private company, and accordingly:
 
(a)            The Company may not offer its securities to the public.
 
(b)            The right to transfer shares of the Company is restricted as provided in these Articles.
 
 
 2.2
The objects of the Company shall be to engage in any lawful activity.
 
3.             Limitation of Liability
 
The liability of the Shareholders is limited to the payment of the nominal value of the shares in the Company held thereby, and which remains unpaid, and only to that amount.  If the Company’s share capital shall at any time include shares without a nominal value, the liability of the holders of such shares shall be limited to the payment of up to NIS 1.00 for each such share held thereby, and which remains unpaid, and only to that amount.
 
 
9

 
 
SHARE CAPITAL
 
4.               Share Capital
 
4.1       The share capital of the Company is Eleven Million Four Hundred Thousand New Israeli Shekels (NIS 11,500,000) divided into 867,154,180 Ordinary Shares, of nominal value NIS 0.01 each, 6,750,000 Preferred A Shares, of nominal value NIS 0.01 each, 6,769,359 Preferred B Shares, of nominal value NIS 0.01 each, 17,493,491 Preferred C1 Shares, of nominal value NIS 0.01 each, 31,832,970 Preferred C2 Shares, of nominal value NIS 0.01 each, and 30,000,000 Preferred C3 Shares, of nominal value NIS 0.01 each, 80,000,000 Preferred D1 Shares, of nominal value NIS 0.01 each, 60,000,000 Preferred D2 Shares, of nominal value NIS 0.01 each, 45,000,000 Preferred D3 Shares, of nominal Value NIS 0.01 each and 5,000,000 Preferred D4 Shares, of nominal Value NIS 0.01 each.
 
4.2       The Preferred Shares shall have the rights, preference, privileges and restrictions granted to and imposed on the Preferred Shares as may be specifically indicated in these Articles and/or as the context may reasonably require.  The Ordinary Shares shall have all residual rights not specifically associated with the Preferred Shares.
 
5.               The Preferred Shares
 
    5.1        The Preferred Shares shall have the same terms, rights and preferences, except as detailed in these Articles.
 
    5.2        The Preferred Shares confer on the holders thereof all rights accruing to holders of Ordinary Shares in the Company, and in addition, subject to any provisions hereof conferring special rights as to voting, or restricting the right to vote, every Preferred Shareholder shall have one vote for each Ordinary Share into which the Preferred Shares held by the Shareholder of record could be converted (as provided in these Articles), on every resolution, without regard to whether the vote thereon is conducted by a show of hands, by written ballot or by any other means.
 
    5.3          The Preferred A Shares
 
(a)           Subject to the terms herein, any Preferred A Share may, at any time at the option of the holder thereof, be converted at any time into a number of fully paid and non-assessable Ordinary Shares (rounded down as to each conversion to the nearest whole number of shares) equal to (i) the sum of the then effective Preferred A Shares Preferred Amount divided by (ii) the conversion price in effect at the time of conversion (the " Preferred A Shares Conversion Price "). The Preferred A Shares Conversion Price shall initially be the Deemed Preferred A Purchase Price per Ordinary Share. The Preferred A Shares Conversion Price shall be adjusted in certain instances as provided in Article 5.3(c) and Article 5.3(e) below.
 
 
10

 
 
(b)           In order to exercise the conversion privilege, the holder of any Preferred A Shares to be converted shall surrender the certificate for such Share, duly endorsed or assigned to the Company or in blank, at any office or agency of the Company maintained for that purpose, accompanied by written notice to the Company at such office or agency that the holder elects to convert such Shares or, if fewer than all the Preferred A Shares represented by a single Share certificate are to be converted, the number of Preferred A Shares represented thereby to be converted.
 
Preferred A Shares shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such share certificates for conversion in accordance with the foregoing provisions, and at such time the rights of the holders of such shares as holders shall cease, and the Person or Persons entitled to receive Ordinary Shares issuable upon conversion shall be treated for all purposes as the record holder or holders of such Ordinary Shares at such time.  As promptly as practicable on or after the conversion date, the Company shall issue and shall deliver at such office or agency a certificate or certificates for the number of Ordinary Shares issuable upon conversion.
 
In the case of any conversion of fewer than all of the Preferred A Shares evidenced by a certificate, upon such conversion the Company shall execute and deliver to the holder thereof, at the expense of the Company, a new certificate or certificates representing the number of unconverted Preferred A Shares.
 
(c)           The Preferred A Shares Conversion Price shall be adjusted from time to time by the Company as follows:
 
(i)           If the Company shall hereafter pay a dividend or make a distribution to all holders of the outstanding Ordinary Shares in Ordinary Shares, the Preferred A Shares Conversion Price in effect at the opening of business on the date following the date fixed for the determination of holders of Shares entitled to receive such dividend or other distribution shall be reduced by multiplying such Preferred A Shares Conversion Price by a fraction, the numerator of which shall be the number of Ordinary Shares outstanding at the close of business on the Ordinary Share Record Date (as defined in Article 5.3(c)(v)) fixed for such determination and the denominator of which shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the Ordinary Share Record Date.  If any dividend or distribution of the type described in this Article 5.3(c)(i) is declared but not so paid or made, the Preferred A Shares Conversion Price shall again be adjusted to the Preferred A Shares Conversion Price which would then be in effect if such dividend or distribution had not been declared.
 
(ii)           If, on or prior to the fifth anniversary of the Effective Date, in case the Company shall issue or sell any Ordinary Shares, or securities convertible into or exercisable or exchangeable for Ordinary Shares (other than New Securities, as defined in Article 11(b)(ii)), for a consideration per share (or, in the case of convertible or exchangeable securities having a conversion or exchange price per Ordinary Share) less than the Preferred A Shares Current Market Price (as defined in Article 5.3(c)(v)) of the Ordinary Shares on the date of such issuance, the Preferred A Shares Conversion Price in effect immediately prior to such issuance or sale shall be reduced effective as of immediately following such issuance or sale by multiplying such Preferred A Shares Conversion Price by a fraction, (1) the numerator of which shall be the sum of (x) the number of Ordinary Shares immediately prior to such issuance or sale and (y) the number of Ordinary Shares which the aggregate consideration receivable by the Company for the total number of additional Ordinary Shares so issued or sold (or issuable on conversion, exercise or exchange) would purchase at the Preferred A Shares Current Market Price in effect immediately prior to such issuance or sale and (2) the denominator of which shall be the sum of (x) the number of Ordinary Shares outstanding immediately prior to such issuance or sale and (y) the number of additional Ordinary Shares to be issued or sold (or, in the case of convertible or exchangeable securities, issuable on conversion, exercise or exchange);
 
 
11

 
 
(iii)           If the outstanding Ordinary Shares shall be subdivided into a greater number of Ordinary Shares, the Preferred A Shares Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, if the outstanding Ordinary Shares shall be combined into a smaller number of Ordinary Shares, the Preferred A Shares Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective.
 
(iv)           If the Company shall, by dividend or otherwise, distribute to all holders of its Ordinary Shares any class of shares (other than any dividends or distributions to which Article 5.3(c)(i) applies) or evidences of its indebtedness, cash or other assets (the foregoing hereinafter in this Article 5.3(c)(iv) called the " Distributed Securities "), then, in each such case, the Preferred A Shares Conversion Price shall be reduced so that the same shall be equal to the price determined by multiplying the Preferred A Shares Conversion Price in effect immediately prior to the close of business on the Ordinary Share Record Date with respect to such distribution by a fraction, the numerator of which shall be the Preferred A Shares Current Market Price on such date less the fair market value (as determined by the Board, whose good faith determination shall be conclusive and described in a resolution of the Board) on such date of the portion of the Distributed Securities so distributed applicable to one Ordinary Share and the denominator of which shall be such Preferred A Shares Current Market Price, such reduction to become effective immediately prior to the opening of business on the day following the Ordinary Share Record Date; provided, however, that, in the event the then fair market value (as so determined) of the portion of the Distributed Securities so distributed applicable to one Ordinary Share is equal to or greater than the Preferred A Shares Current Market Price on the Ordinary Share Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each holder of Preferred A Shares shall have the right to receive upon conversion of a Preferred A Share the amount of Distributed Securities such holder would have received had such holder converted such Preferred A Share  immediately prior to such Ordinary Share Record Date.  If such dividend or distribution is not so paid or made, the Preferred A Shares Conversion Price shall again be adjusted to be the Preferred A Shares Conversion Price which would then be in effect if such dividend or distribution had not been declared.  If the Board determines the fair market value of any distribution for purposes of this Article 5.3(c)(iv) by reference to the actual or when issued trading market for any securities constituting all or part of such distribution, it must in doing so consider the prices in such market over the same period used in computing the Preferred A Shares Current Market Price pursuant to Article 5.3(c)(v) to the extent possible.
 
 
12

 
 
Rights or warrants distributed by the Company to all holders of Ordinary Shares entitling the holders thereof to subscribe for or purchase Ordinary Shares (either initially or under certain circumstances), which rights or warrants, until the occurrence of a specified event or events (" Dilution Trigger Event "): (A) are deemed to be transferred with such Ordinary Shares; (B) are not exercisable; and (C) are also issued in respect of future issuances of Ordinary Shares, shall be deemed not to have been distributed for purposes of this Article 5.3(c)(iv) (and no adjustment to the Preferred A Shares Conversion Price under this Article 5.3(c)(iv) shall be required) until the occurrence of the earliest Dilution Trigger Event, whereupon such rights or warrants shall be deemed to have been distributed and an appropriate adjustment to the Preferred A Shares Conversion Price under this Article 5.3(c)(iv) shall be made.  If any such rights or warrants, including any such existing rights or warrants distributed prior to the first issuance of Preferred A Shares, are subject to subsequent events, upon the occurrence of each of which such rights or warrants shall become exercisable to purchase securities, evidences of indebtedness or other assets, then the occurrence of each such event shall be deemed to be such date of issuance and record date with respect to new rights or warrants (and a termination or expiration of the existing rights or warrants, without exercise by the holder thereof).  In addition, in the event of any distribution (or deemed distribution) of rights or warrants, or any Dilution Trigger Event with respect thereto, that was counted for purposes of calculating a distribution amount for which an adjustment to the Preferred A Shares Conversion Price under this Article 5.3(c)(iv) was made, (1) in the case of any such rights or warrants which shall all have been redeemed or repurchased without exercise by any holders thereof, the Preferred A Shares Conversion Price shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Dilution Trigger Event, as the case may be, as though it were a cash distribution to which this Article 5.3(c)(iv) were applicable, equal to the per Share redemption or repurchase price received by a holder or holders of Ordinary Shares with respect to such rights or warrants (assuming such holder had retained such rights or warrants), made to all holders of Ordinary Shares as of the date of such redemption or repurchase, and (2) in the case of such rights or warrants which shall have expired or been terminated without exercise by any holders thereof, the Preferred A Shares Conversion Price shall be readjusted as if such rights and warrants had not been issued.
 
Notwithstanding any other provision of this Article 5.3(c)(iv) to the contrary, rights, warrants, evidences of indebtedness, other securities, cash or other assets (including, without limitation, any rights distributed pursuant to any holder rights plan) shall be deemed not to have been distributed for purposes of this Article 5.3(c)(iv) if the Company makes proper provision so that each holder of Preferred A Shares on the date fixed for determination of holders entitled to receive such distribution shall receive upon such distribution, the amount and kind of such distributions that such holder would have been entitled to receive if such holder had, immediately prior to such determination date, converted such Preferred A Shares into  Ordinary Shares.
 
 
13

 
 
For purposes of this Article 5.3(c)(iv) and Article 5.3(c)(i), any dividend or distribution to which this Article 5.3(c)(iv) is applicable that also includes Ordinary Shares, or rights or warrants to subscribe for or purchase Ordinary Shares to which Article 5.3(c)(i) applies (or both), shall be deemed instead to be (A) a dividend or distribution of the evidences of indebtedness, assets, shares, rights or warrants other than such Ordinary Shares or rights or warrants to which Article 5.3(c)(i) applies (and any Preferred A Shares Conversion Price reduction required by this Article 5.3(c)(iv) with respect to such dividend or distribution shall then be made) immediately followed by (B) a dividend or distribution of such Ordinary Shares or such rights or warrants (and any further Preferred A Shares Conversion Price reduction required by Article 5.3(c)(i) with respect to such dividend or distribution shall then be made), except that (1) the Ordinary Share Record Date of such dividend or distribution shall be substituted as "the date fixed for the determination of Shareholders entitled to receive such dividend or other distribution", "the Ordinary Share Record Date fixed for such determination" and "the Ordinary Share Record Date" within the meaning of Article 5.3(c)(i), and (2) any Ordinary Share included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" for the purposes of Article 5.3(c)(i).
 
(v)           For purposes of this Article 5.3(c) and Article 5.4(c), the following terms shall have the meaning indicated:
 
" Ordinary Share Record Date" means, with respect to any dividend, distribution or other transaction or event in which the holders of Ordinary Shares have the right to receive any cash, securities or other property or in which the Ordinary Shares (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of holders  of Shares entitled to receive such cash, securities or other property (whether such date is fixed by the Board or by statute, contract or otherwise).
 
" fair market value" means the amount which a willing buyer would pay a willing seller in an arm’s-length transaction.
 
For purposes of this Article 5.3(c), the following terms shall have the meaning indicated:
 
"Preferred A Shares Current Market Price" means the price of an Ordinary Share, as determined in good faith by the Board; provided, that for purposes of this Preferred A Shares Share designation, in no event shall the Preferred A Shares Current Market Price be less than $0.10 per Share, provided, further, that notwithstanding the foregoing, whenever successive adjustments to the Preferred A Shares Conversion Price are called for pursuant to this Article 5.3, such adjustments shall be made to the Preferred A Shares Current Market Price as may be necessary or appropriate to effectuate the intent of this Article 5.3 and to avoid unjust or inequitable results, as determined in good faith by the Board.
 
 
14

 
 
(vi)           No adjustment in the Preferred A Shares Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price, provided that any adjustment not made as a result of the foregoing shall be carried forward and given effect with any subsequent adjustment.  All calculations under this Article 5.3 shall be made by the Company and shall be made to the nearest cent.
 
(vii)           Whenever the Preferred A Shares Conversion Price is adjusted as herein provided, the Company shall promptly prepare an officer's certificate setting forth the Preferred A Shares Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.  Promptly thereafter, the Company shall prepare a notice of such adjustment of the Preferred A Shares Conversion Price setting forth the adjusted Preferred A Shares Conversion Price and the date on which each adjustment becomes effective and shall mail such notice of such adjustment of the Preferred A Shares Conversion Price to each holder of Preferred A Shares at such holder’s last address appearing on the Register of Shareholders  maintained for that purpose within 20 days of the effective date of such adjustment.  Failure to deliver such notice shall not affect the legality or validity of any such adjustment.
 
(viii)           In any case in which this Article 5.3(c) provides that an adjustment shall become effective immediately after an Ordinary Share Record Date for an event, the Company may defer until the occurrence of such event issuing to the holder of any Preferred A Shares converted after such Ordinary Share Record Date and before the occurrence of such event the additional Ordinary Shares issuable upon such conversion by reason of the adjustment required by such event over and above the Ordinary Shares issuable upon such conversion before giving effect to such adjustment.
 
(d)           In case of any consolidation of the Company with, or merger of the Company into, any other Person, or in case of any merger of another Person into the Company (other than a merger that does not result in any reclassification, conversion, exchange or cancellation of Ordinary Shares then outstanding), or in case of any sale, conveyance or transfer of all or substantially all the assets of the Company, the holder of Preferred A Shares shall have the right thereafter, during the period such Preferred A Shares shall be convertible as specified in Article 5.3(a), to convert such Preferred A Shares into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer by a holder of the number of Ordinary Shares of the Company into which such Preferred A Shares might have been converted immediately prior to such consolidation, merger, conveyance or transfer, assuming such holder of Ordinary Shares of the Company failed to exercise his rights of election, if any, as to the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer; provided that, if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer is not the same for each Ordinary Share of the Company in respect of which such rights of election shall not have been exercised (in this Section, " Nonelecting Share "), then for the purpose of this Article 5.3 the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer by each Nonelecting Share shall be deemed to be the kind and amount so receivable per share by a plurality of the Nonelecting Shares.  Such securities shall provide for adjustments which, for events subsequent to the effective date of the triggering event, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 5.3.  The above provisions of this Article 5.3 shall similarly apply to successive consolidations, mergers, conveyances or transfers.
 
 
15

 
 
(e)           In case:
 
(i)           the Company shall declare a distribution on its Ordinary Shares payable otherwise than in cash out of its earned surplus; or
 
(ii)           the Company shall authorize the granting to all holders of its Ordinary Shares of rights or warrants to subscribe for or purchase any shareholdership interest of any class or of any other rights; or
 
(iii)           of any reclassification of the Ordinary Shares (other than a subdivision or combination of the Company’s outstanding Ordinary Shares), or of any consolidation or merger to which the Company is a party and for which approval of any holders of shares of the Company is required, or the sale, conveyance or transfer of all or substantially all the assets of the Company; or
 
(iv)           of the voluntary or involuntary dissolution, liquidation or winding-up of the Company; or
 
(v)           the Company shall take any other action referred to in this Article 5.3;
 
then the Company shall mail to all holders of Preferred A Shares at their last addresses as they shall appear in the Register of Shareholders, at least 20 Business Days (or 10 Business Days in any case specified in clause (i) or (ii) above) prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the date as of which the holders of Ordinary Shares of record to be entitled to such dividend, distribution, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up is expected to become effective, and the date as of which it is expected that holders of Ordinary Shares of record shall be entitled to exchange their Ordinary Shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. Failure to give the notice required by this Article 5.3(e) or any defect therein shall not affect the legality or validity of any dividend, distribution, right, warrant, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up, or the vote upon any such action.
 
 
16

 
 
(f)           The Company shall at all times keep authorized and free from preemptive rights, for the purpose of effecting the conversion of Preferred A Shares, the full number of Ordinary Shares then issuable upon the conversion of all outstanding Preferred A Shares.
 
(g)           The Company will pay any and all taxes that may be payable in respect of the issue or delivery of Ordinary Shares on conversion of Preferred A Shares pursuant hereto.  The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of Ordinary Shares in a name other than that of the holder of the Preferred A Shares to be converted, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax, or has established to the satisfaction of the Company that such tax has been paid or is not payable.
 
5.4           The Preferred B Shares
 
(a)           Subject to the terms herein, any Preferred B Shares Share may, at any time at the option of the holder thereof, be converted at any time into a number of fully paid and nonassessable Ordinary Shares (rounded down as to each conversion to the nearest whole number of shares) equal to (i) the sum of the then effective Preferred B Shares Preferred Amount divided by (ii) the conversion price in effect at the time of conversion (the " Preferred B Shares Conversion Price ").  The Preferred B Shares Conversion Price shall initially be the Deemed Preferred B Purchase Price per Ordinary Share.  The Preferred B Shares Conversion Price shall be adjusted in certain instances as provided in Article 5.4 (c) and Article 5.4 (e).
 
(b)           In order to exercise the conversion privilege, the holder of any Preferred B Shares to be converted shall surrender the certificate for such share, duly endorsed or assigned to the Company or in blank, at any office or agency of the Company maintained for that purpose, accompanied by written notice to the Company at such office or agency that the holder elects to convert such shares or, if fewer than all the Preferred B Shares represented by a single share certificate are to be converted, the number of Preferred B Shares represented thereby to be converted.
 
Preferred B Shares shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such share certificates for conversion in accordance with the foregoing provisions, and at such time the rights of the holders of such shares as holders shall cease, and the Person or Persons entitled to receive Ordinary Shares issuable upon conversion shall be treated for all purposes as the record holder or holders of such Ordinary Shares at such time.  As promptly as practicable on or after the conversion date, the Company shall issue and shall deliver at such office or agency a certificate or certificates for the number of Ordinary Shares issuable upon conversion.
 
In the case of any conversion of fewer than all of the Preferred B Shares evidenced by a certificate, upon such conversion the Company shall execute and deliver to the holder thereof, at the expense of the Company, a new certificate or certificates representing the number of unconverted Preferred B Shares.
 
 
17

 
 
(c)           The Preferred B Shares Conversion Price shall be adjusted from time to time by the Company as follows:
 
(i)           If the Company shall hereafter pay a dividend or make a distribution to all holders of the outstanding Ordinary Shares in Ordinary Shares, the Preferred B Shares Conversion Price in effect at the opening of business on the date following the date fixed for the determination of holders of shares entitled to receive such dividend or other distribution shall be reduced by multiplying such Preferred B Shares Conversion Price by a fraction, the numerator of which shall be the number of Ordinary Shares outstanding at the close of business on the Ordinary Share Record Date (as defined in Article 5.4(c)(v)) fixed for such determination and the denominator of which shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the Ordinary Share Record Date. If any dividend or distribution of the type described in this Article 5.4 (c)(i) is declared but not so paid or made, the Preferred B Shares Conversion Price shall again be adjusted to the Preferred B Shares Conversion Price which would then be in effect if such dividend or distribution had not been declared.
 
(ii)           If, on or prior to February 9, 2010, in case the Company shall issue or sell any Ordinary Shares, or securities convertible into or exercisable or exchangeable for Ordinary Shares (other than New Securities, as defined in Article 11(b)(ii)), for a consideration per share (or, in the case of convertible or exchangeable securities having a conversion or exchange price per Ordinary Share) less than the Preferred B Shares Current Market Price (as defined in Article 5.3(c)(v)) of the Ordinary Shares on the date of such issuance, the Preferred B Shares Conversion Price in effect immediately prior to such issuance or sale shall be reduced effective as of immediately following such issuance or sale by multiplying such Preferred B Shares Conversion Price by a fraction, (1) the numerator of which shall be the sum of (x) the number of Ordinary Shares immediately prior to such issuance or sale and (y) the number of Ordinary Shares which the aggregate consideration receivable by the Company for the total number of additional Ordinary Shares so issued or sold (or issuable on conversion, exercise or exchange) would purchase at the Preferred B Shares Current Market Price in effect immediately prior to such issuance or sale and (2) the denominator of which shall be the sum of (x) the number of Ordinary Shares outstanding immediately prior to such issuance or sale and (y) the number of additional Ordinary Shares to be issued or sold (or, in the case of convertible or exchangeable securities, issuable on conversion, exercise or exchange);
 
(iii)           If the outstanding Ordinary Shares shall be subdivided into a greater number of Ordinary Shares, the Preferred B Shares Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, if the outstanding Ordinary Shares shall be combined into a smaller number of Ordinary Shares, the Preferred B Shares Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective.
 
 
18

 
 
(iv)           If the Company shall, by dividend or otherwise, distribute to all holders of its Ordinary Shares any class of shares (other than any dividends or distributions to which Article 5.4 (c)(i) applies) or evidences of its indebtedness, cash or other assets (the foregoing hereinafter in this Article 5.4(c)(iv) called the " Distributed Securities "), then, in each such case, the Preferred B Shares Conversion Price shall be reduced so that the same shall be equal to the price determined by multiplying the Preferred B Shares Conversion Price in effect immediately prior to the close of business on the Ordinary Share Record Date with respect to such distribution by a fraction, the numerator of which shall be the Preferred B Shares Current Market Price on such date less the fair market value (as determined by the Board, whose good faith determination shall be conclusive and described in a resolution of the Board) on such date of the portion of the Distributed Securities so distributed applicable to one Ordinary Share and the denominator of which shall be such Preferred B Shares Current Market Price, such reduction to become effective immediately prior to the opening of business on the day following the Ordinary Share Record Date; provided, however, that, in the event the then fair market value (as so determined) of the portion of the Distributed Securities so distributed applicable to one Ordinary Share is equal to or greater than the Preferred B Shares Current Market Price on the Ordinary Share Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each holder of Preferred B Shares shall have the right to receive upon conversion of a Preferred B Share  the amount of Distributed Securities such holder would have received had such holder converted such Preferred B Shares immediately prior to such Ordinary Share Record Date.  If such dividend or distribution is not so paid or made, the Preferred B Shares Conversion Price shall again be adjusted to be the Preferred B Shares Conversion Price which would then be in effect if such dividend or distribution had not been declared.  If the Board determines the fair market value of any distribution for purposes of this Article 5.4 (c)(iv) by reference to the actual or when issued trading market for any securities constituting all or part of such distribution, it must in doing so consider the prices in such market over the same period used in computing the Preferred B Shares Current Market Price pursuant to Article 5.4(c)(v) to the extent possible.
 
Rights or warrants distributed by the Company to all holders of Ordinary Shares entitling the holders thereof to subscribe for or purchase Ordinary Shares (either initially or under certain circumstances), which rights or warrants, until the occurrence of a Dilution Trigger Event: (A) are deemed to be transferred with such Ordinary Shares; (B) are not exercisable; and (C) are also issued in respect of future issuances of Ordinary Shares, shall be deemed not to have been distributed for purposes of this Article 5.4 (c)(iv) (and no adjustment to the Preferred B Shares Conversion Price under this Article 5.4 (c)(iv) shall be required) until the occurrence of the earliest Dilution Trigger Event, whereupon such rights or warrants shall be deemed to have been distributed and an appropriate adjustment to the Preferred B Shares Conversion Price under this Article 5.4 (c)(iv) shall be made.  If any such rights or warrants, including any such existing rights or warrants distributed prior to the first issuance of Preferred B Shares, are subject to subsequent events, upon the occurrence of each of which such rights or warrants shall become exercisable to purchase securities, evidences of indebtedness or other assets, then the occurrence of each such event shall be deemed to be such date of issuance and record date with respect to new rights or warrants (and a termination or expiration of the existing rights or warrants, without exercise by the holder thereof).  In addition, in the event of any distribution (or deemed distribution) of rights or warrants, or any Dilution Trigger Event with respect thereto, that was counted for purposes of calculating a distribution amount for which an adjustment to the Preferred B Shares Conversion Price under this Article 5.4 (c)(iv) was made, (1) in the case of any such rights or warrants which shall all have been redeemed or repurchased without exercise by any holders thereof, the Preferred B Shares Conversion Price shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Dilution Trigger Event, as the case may be, as though it were a cash distribution to which this Article 5.4 (c)(iv) were applicable, equal to the per share redemption or repurchase price received by a holder or holders of Ordinary Shares with respect to such rights or warrants (assuming such holder had retained such rights or warrants), made to all holders of Ordinary Shares as of the date of such redemption or repurchase, and (2) in the case of such rights or warrants which shall have expired or been terminated without exercise by any holders thereof, the Preferred B Shares Conversion Price shall be readjusted as if such rights and warrants had not been issued.
 
 
19

 
 
Notwithstanding any other provision of this Article 5.4 (c)(iv) to the contrary, rights, warrants, evidences of indebtedness, other securities, cash or other assets (including, without limitation, any rights distributed pursuant to any holder rights plan) shall be deemed not to have been distributed for purposes of this Article 5.4 (c)(iv) if the Company makes proper provision so that each holder of Preferred B Shares on the date fixed for determination of holders entitled to receive such distribution shall receive upon such distribution, the amount and kind of such distributions that such holder would have been entitled to receive if such holder had, immediately prior to such determination date, converted such Preferred B Shares into Ordinary Shares.
 
For purposes of this Article 5.4 (c)(iv) and Article 5.4 (c)(i), any dividend or distribution to which this Article 5.4 (c)(iv) is applicable that also includes Ordinary Shares, or rights or warrants to subscribe for or purchase Ordinary Shares to which Article 5.4 (c)(i) applies (or both), shall be deemed instead to be (A) a dividend or distribution of the evidences of indebtedness, assets, shares, rights or warrants other than such Ordinary Shares or rights or warrants to which Article 5.4 (c)(i) applies (and any Preferred B Shares Conversion Price reduction required by this Article 5.4 (c)(iv) with respect to such dividend or distribution shall then be made) immediately followed by (B) a dividend or distribution of such Ordinary Shares or such rights or warrants (and any further Preferred B Shares Conversion Price reduction required by Article 5.4 (c)(i) with respect to such dividend or distribution shall then be made), except that (1) the Ordinary Share Record Date of such dividend or distribution shall be substituted as "the date fixed for the determination of Shareholders entitled to receive such dividend or other distribution", "the Ordinary Share Record Date fixed for such determination" and "the Ordinary Share Record Date" within the meaning of Article 5.4 (c)(i), and (2) any Ordinary Share included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" for the purposes of Article 5.4 (c)(i).
 
 
20

 
 
(v)           For purposes of this Article 5.4 (c), the following terms shall have the meaning indicated:
 
"Preferred B Shares Current Market Price" means the price of a Ordinary Share, as determined in good faith by the Board; provided, that for purposes of this Preferred B Shares Share designation, in no event shall the Preferred B Shares Current Market Price be less than $0.20 per share, provided, further, that notwithstanding the foregoing, whenever successive adjustments to the Preferred B Shares Conversion Price are called for pursuant to this Article 5.4, such adjustments shall be made to the Preferred B Shares Current Market Price as may be necessary or appropriate to effectuate the intent of this Article 5.4  and to avoid unjust or inequitable results, as determined in good faith by the Board.
 
(vi)           No adjustment in the Preferred B Shares Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price, provided that any adjustment not made as a result of the foregoing shall be carried forward and given effect with any subsequent adjustment.  All calculations under this Article 5.4  shall be made by the Company and shall be made to the nearest cent.
 
(vii)           Whenever the Preferred B Shares Conversion Price is adjusted as herein provided, the Company shall prepare a notice of such adjustment of the Preferred B Shares Conversion Price setting forth the adjusted Preferred B Shares Conversion Price and the date on which each adjustment becomes effective and shall mail such notice of such adjustment of the Preferred B Shares Conversion Price to each holder of Preferred B Shares at such holder’s last address appearing on the Register of Shareholders  maintained for that purpose within 20 days of the effective date of such adjustment.  Failure to deliver such notice shall not affect the legality or validity of any such adjustment.
 
(viii)           In any case in which this Article 5.4 (c) provides that an adjustment shall become effective immediately after a Ordinary Share Record Date for an event, the Company may defer until the occurrence of such event issuing to the holder of any Preferred B Shares converted after such Ordinary Share Record Date and before the occurrence of such event the additional Ordinary Shares issuable upon such conversion by reason of the adjustment required by such event over and above the Ordinary Shares issuable upon such conversion before giving effect to such adjustment.
 
 
21

 
 
(d)           In case of any consolidation of the Company with, or merger of the Company into, any other Person, or in case of any merger of another Person into the Company (other than a merger that does not result in any reclassification, conversion, exchange or cancellation of Ordinary Shares then outstanding), or in case of any sale, conveyance or transfer of all or substantially all the assets of the Company, the holder of Preferred B Shares shall have the right thereafter, during the period such Preferred B Shares shall be convertible as specified in Article 5.4 (a), to convert such Preferred B Shares into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer by a holder of the number of Ordinary Shares of the Company into which such Preferred B Shares might have been converted immediately prior to such consolidation, merger, conveyance or transfer, assuming such holder of Ordinary Shares of the Company failed to exercise his rights of election, if any, as to the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer; provided that, if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer is not the same for each Ordinary Share of the Company in respect of which such rights of election shall not have been exercised (in this Section, "N onelecting Share "), then for the purpose of this Article 5.4  the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer by each Nonelecting Share shall be deemed to be the kind and amount so receivable per share by a plurality of the Nonelecting Shares. Such securities shall provide for adjustments which, for events subsequent to the effective date of the triggering event, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 5.4.  The above provisions of this Article 5.4 shall similarly apply to successive consolidations, mergers, conveyances or transfers.
 
(e)           In case:
 
(i)           the Company shall declare a distribution on its Ordinary Shares payable otherwise than in cash out of its earned surplus; or
 
(ii)           the Company shall authorize the granting to all holders of its Ordinary Shares of rights or warrants to subscribe for or purchase any shareholdership interest of any class or of any other rights; or
 
(iii)           of any reclassification of the Ordinary Shares (other than a subdivision or combination of the Company’s outstanding Ordinary Shares), or of any consolidation or merger to which the Company is a party and for which approval of any holders of shares of the Company is required, or the sale, conveyance or transfer of all or substantially all the assets of the Company; or
 
(iv)           of the voluntary or involuntary dissolution, liquidation or winding-up of the Company; or
 
(v)           the Company shall take any other action referred to in this Article 5.4;
 
then the Company shall mail to all holders of Preferred B Shares at their last addresses as they shall appear in the Register of Shareholders, at least 20 Business Days (or 10 Business Days in any case specified in clause (i) or (ii) above) prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the date as of which the holders of Ordinary Shares of record to be entitled to such dividend, distribution, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up is expected to become effective, and the date as of which it is expected that holders of Ordinary Shares of record shall be entitled to exchange their Ordinary Shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up.  Failure to give the notice required by this Article 5.4 (e) or any defect therein shall not affect the legality or validity of any dividend, distribution, right, warrant, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up, or the vote upon any such action.
 
 
22

 
 
(f)           The Company shall at all times keep authorized and free from preemptive rights, for the purpose of effecting the conversion of Preferred B Shares, the full number of Ordinary Shares then issuable upon the conversion of all outstanding Preferred B Shares.
 
(g)           The Company will pay any and all taxes that may be payable in respect of the issue or delivery of Ordinary Shares on conversion of Preferred B Shares pursuant hereto. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of Ordinary Shares in a name other than that of the holder of the Preferred B Shares to be converted, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax, or has established to the satisfaction of the Company that such tax has been paid or is not payable.
 
(h)           The Preferred B Shares shall be converted into Ordinary Shares upon the occurrence of a Qualifying IPO on the same basis as if they had been converted on such date by the holders thereof pursuant to Article 5.4 (a).
 
5.5            The Preferred C Shares
 
 (a)           Subject to the terms herein, any Preferred C Shares Share may, at any time at the option of the holder thereof, be converted at any time into a number of fully paid and nonassessable Ordinary Shares (rounded down as to each conversion to the nearest whole number of shares) equal to (i) the sum of the then effective Preferred C Shares Preferred Amount divided by (ii) the applicable conversion price in effect at the time of conversion (the " Preferred C Shares Conversion Price ").  The Preferred C1 Shares Conversion Price shall initially be the Deemed Preferred C1 Purchase Price per Ordinary Share, the Preferred C2 Shares Conversion Price shall initially be the Deemed Preferred C2 Purchase Price per Ordinary Share, and the Preferred C3 Shares Conversion Price shall initially be the Deemed Preferred C3 Purchase Price per Ordinary Share.  The Preferred C1 Shares Conversion Price, the Preferred C2 Shares Conversion Price and the Preferred C3 Shares Conversion Price shall be adjusted in certain instances as provided in Article 5.5 (c) and Article 5.5 (e).
 
(b)           In order to exercise the conversion privilege, the holder of any Preferred C Shares to be converted shall surrender the certificate for such share, duly endorsed or assigned to the Company or in blank, at any office or agency of the Company maintained for that purpose, accompanied by written notice to the Company at such office or agency that the holder elects to convert such shares or, if fewer than all the Preferred C Shares represented by a single Share certificate are to be converted, the number of Preferred C Shares represented thereby to be converted.
 
 
23

 
 
Preferred C Shares shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such share certificates for conversion in accordance with the foregoing provisions, and at such time the rights of the holders of such shares as holders shall cease, and the Person or Persons entitled to receive Ordinary Shares issuable upon conversion shall be treated for all purposes as the record holder or holders of such Ordinary Shares at such time.  As promptly as practicable on or after the conversion date, the Company shall issue and shall deliver at such office or agency a certificate or certificates for the number of Ordinary Shares issuable upon conversion.
 
In the case of any conversion of fewer than all of the Preferred C Shares evidenced by a certificate, upon such conversion the Company shall execute and deliver to the holder thereof, at the expense of the Company, a new certificate or certificates representing the number of unconverted Preferred C Shares.
 
(c)           The Preferred C Shares Conversion Price shall be adjusted from time to time by the Company as follows:
 
(i)           If the Company shall hereafter make a distribution to all holders of outstanding Ordinary Shares in Ordinary Shares, the applicable Preferred C Shares Conversion Price in effect at the opening of business on the date following the date fixed for the determination of holders of shares entitled to receive such dividend or other distribution shall be reduced by multiplying such applicable Preferred C Shares Conversion Price by a fraction, the numerator of which shall be the number of Ordinary Shares outstanding at the close of business on the Share Record Date (as defined in Article 5.5 (c)(v)) fixed for such determination and the denominator of which shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the Share Record Date. If any dividend or distribution of the type described in this Article 5.5 (c)(i) is declared but not so paid or made, the applicable Preferred C Shares Conversion Price shall again be adjusted to the applicable Preferred C Shares Conversion Price which would then be in effect if such dividend or distribution had not been declared.
 
(ii)           If, at any time, in case the Company shall issue or sell any Ordinary Shares or securities convertible into or exercisable or exchangeable for Ordinary Shares (other than Excluded Issuances, as defined in Article 11(b)(ii)), for a consideration per share (or, in the case of convertible or exchangeable securities having a conversion or exchange price per Ordinary Share) less than the Preferred C1 Shares Conversion Price and/or the Preferred C2 Shares Conversion Price, and/or the Preferred C3 Shares Conversion Price on the date of such issuance (after adjustments in accordance with the provisions hereof or for any recapitalization, stock splits, dividends and the like) (the " Reduced Price "), then the Preferred C1 Shares Conversion Price, and/or Preferred C2 Shares Conversion Price, and/or Preferred C3 Shares Conversion Price, as applicable, in effect immediately prior to such issuance or sale shall be reduced, for no additional consideration, to be equal to the Reduced Price, so that upon the conversion thereof such holders of Preferred C Shares, shall be entitled to additional Ordinary Shares, calculated according to a full ratchet anti-dilution mechanism as detailed below:
 
 
24

 
 
AO  = (N*P)   -  N
 
 NP
 
Where:
 
AO = the additional number of Ordinary Shares to be issued to the Preferred C Shares holder upon conversion of the Preferred C Shares;
 
N = the number of Preferred C Shares, on an as-converted basis, held by the Preferred C Shares holder, immediately prior to the issuance;
 
P = the applicable Preferred C Shares Conversion Price (as adjusted) in effect immediately prior to such issuance;
 
NP = the Reduced Price, which will be the new Preferred C Shares Conversion Price, in effect immediately after such issuance.
 
(iii)           If the outstanding Ordinary Shares shall be subdivided into a greater number of Ordinary Shares, the applicable Preferred C Shares Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, if any outstanding shares shall be combined into a smaller number of Ordinary Shares, the applicable Preferred C Shares Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective.
 
 
25

 
 
(iv)           If the Company shall, by dividend or otherwise, distribute to all holders of its Ordinary Shares any class of shares (other than any dividends or distributions to which Article 5.5 (c)(i) applies) or evidences of its indebtedness, cash or other assets (the foregoing hereinafter in this Article 5.5 (c)(iv) called the " Distributed Securities "), then, in each such case, the applicable Preferred C Shares Conversion Price shall be reduced so that the same shall be equal to the price determined by multiplying the applicable Preferred C Shares Conversion Price in effect immediately prior to the close of business on the Ordinary Share Record Date with respect to such distribution by a fraction, the numerator of which shall be the applicable Preferred C Shares Conversion Price on such date less the fair market value (as determined by the Board, whose good faith determination shall be conclusive and described in a resolution of the Board) on such date of the portion of the Distributed Securities so distributed applicable to one Ordinary Share and the denominator of which shall be such applicable Preferred C Shares Conversion Price, such reduction to become effective immediately prior to the opening of business on the day following the Ordinary Share Record Date; provided, however, that, in the event the then fair market value (as so determined) of the portion of the Distributed Securities so distributed applicable to one Ordinary Share is equal to or greater than the applicable Preferred C Shares Conversion Price on the Ordinary Share Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each holder of Preferred C Shares shall have the right to receive upon conversion of a Preferred C Share the amount of Distributed Securities such holder would have received had such holder converted such Preferred C Shares immediately prior to such Ordinary Share Record Date.  If such dividend or distribution is not so paid or made, the applicable Preferred C Shares Conversion Price shall again be adjusted to be the applicable Preferred C Shares Conversion Price which would then be in effect if such dividend or distribution had not been declared.  If the Board determines the fair market value of any distribution for purposes of this Article 5.5 (c)(iv) by reference to the actual or when issued trading market for any securities constituting all or part of such distribution, it must in doing so consider the prices in such market over the same period used in computing the Preferred C Shares Conversion Price pursuant to this Article 5.5 (c) to the extent possible.
 
Rights or warrants distributed by the Company to all holders of Ordinary Shares entitling the holders thereof to subscribe for or purchase Ordinary Shares (either initially or under certain circumstances), which rights or warrants, until the occurrence of a Dilution Trigger Event: (A) are deemed to be transferred with such Ordinary Shares; (B) are not exercisable; and (C) are also issued in respect of future issuances of Ordinary Shares, shall be deemed not to have been distributed for purposes of this Article 5.5 (c)(iv) (and no adjustment to the Preferred C Shares Conversion Price under this Article 5.5 (c)(iv) shall be required) until the occurrence of the earliest Dilution Trigger Event, whereupon such rights or warrants shall be deemed to have been distributed and an appropriate adjustment to the Preferred C Shares Conversion Price under this Article 5.5 (c)(iv) shall be made.  If any such rights or warrants, including any such existing rights or warrants distributed prior to the first issuance of Preferred C Shares, are subject to subsequent events, upon the occurrence of each of which such rights or warrants shall become exercisable to purchase securities, evidences of indebtedness or other assets, then the occurrence of each such event shall be deemed to be such date of issuance and record date with respect to new rights or warrants (and a termination or expiration of the existing rights or warrants, without exercise by the holder thereof).  In addition, in the event of any distribution (or deemed distribution) of rights or warrants, or any Dilution Trigger Event with respect thereto, that was counted for purposes of calculating a distribution amount for which an adjustment to the Preferred C Shares Conversion Price under this Article 5.5 (c)(iv) was made, (1) in the case of any such rights or warrants which shall all have been redeemed or repurchased without exercise by any holders thereof, the Preferred C Shares Conversion Price shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Dilution Trigger Event, as the case may be, as though it were a cash distribution to which this Article 5.5 (c)(iv) were applicable, equal to the per Share redemption or repurchase price received by a holder or holders of Shares with respect to such rights or warrants (assuming such holder had retained such rights or warrants), made to all holders of Ordinary Shares as of the date of such redemption or repurchase, and (2) in the case of such rights or warrants which shall have expired or been terminated without exercise by any holders thereof, the Preferred C Shares Conversion Price shall be readjusted as if such rights and warrants had not been issued.
 
 
26

 
 
Notwithstanding any other provision of this Article 5.5 (c)(iv) to the contrary, rights, warrants, evidences of indebtedness, other securities, cash or other assets (including, without limitation, any rights distributed pursuant to any holder rights plan) shall be deemed not to have been distributed for purposes of this Article 5.5 (c)(iv) if the Company, makes proper provision so that each holder of Preferred C Shares on the date fixed for determination of holders entitled to receive such distribution shall receive upon such distribution, the amount and kind of such distributions that such holder would have been entitled to receive if such holder had, immediately prior to such determination date, converted such Preferred C Shares into Ordinary Shares.
 
For purposes of this Article 5.5 (c)(iv) and Article 5.5 (c)(i), any dividend or distribution to which this Article 5.5 (c)(iv) is applicable that also includes Ordinary Shares, or rights or warrants to subscribe for or purchase Ordinary Shares to which Article 5.5 (c)(i) applies (or both), shall be deemed instead to be (A) a dividend or distribution of the evidences of indebtedness, assets, shares, rights or warrants other than such Ordinary Shares or rights or warrants to which Article 5.5 (c)(i) applies (and any Preferred C Shares Conversion Price reduction required by this Article 5.5 (c)(iv) with respect to such dividend or distribution shall then be made) immediately followed by (B) a dividend or distribution of such Ordinary Shares or such rights or warrants (and any further Preferred C Shares Conversion Price reduction required by Article 5.5 (c)(i) with respect to such dividend or distribution shall then be made), except that (1) the Ordinary Share Record Date of such dividend or distribution shall be substituted as "the date fixed for the determination of Shareholders entitled to receive such dividend or other distribution", "the Share Record Date fixed for such determination" and "the Ordinary Share Record Date" within the meaning of Article 5.5 (c)(i), and (2) any Ordinary Share included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" for the purposes of Article 5.5 (c)(i).
 
(v)           For purposes of this Article 5.5 (c), the following terms shall have the meaning indicated:
 
" Ordinary Share Record Date" means, with respect to any dividend, distribution or other transaction or event in which the holders of Ordinary Shares have the right to receive any cash, securities or other property or in which the Ordinary Shares (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of holders of shares entitled to receive such cash, securities or other property (whether such date is fixed by the Board or by statute, contract or otherwise).
 
 
27

 
 
" fair market value" means the amount which a willing buyer would pay a willing seller in an arm’s-length transaction.
 
(vi)           No adjustment in the Preferred C Shares Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price, provided that any adjustment not made as a result of the foregoing shall be carried forward and given effect with any subsequent adjustment.  All calculations under this Article 5.5  shall be made by the Company and shall be made to the nearest cent.
 
(vii)           Whenever the Preferred C1 Shares Conversion Price, and/or the Preferred C2 Shares Conversion Price, and/or the Preferred C3 Shares Conversion Price is adjusted as herein provided, the Company shall prepare a notice of such adjustment of the applicable Preferred C Shares Conversion Price setting forth the adjusted Preferred C Shares Conversion Price and the date on which each adjustment becomes effective and shall mail such notice of such adjustment of the applicable Preferred C Shares Conversion Price to each holder of Preferred C Shares, according to the class of Preferred C Shares held thereby, at such holder’s last address appearing on the Register of Shareholders maintained for that purpose within 20 days of the effective date of such adjustment. Failure to deliver such notice shall not affect the legality or validity of any such adjustment.
 
(viii)           In any case in which this Article 5.5 (c) provides that an adjustment shall become effective immediately after an Ordinary Share Record Date for an event, the Company may defer until the occurrence of such event issuing to the holder of any Preferred C Shares converted after such Ordinary Share Record Date and before the occurrence of such event the additional Ordinary Shares issuable upon such conversion by reason of the adjustment required by such event over and above the Ordinary Shares issuable upon such conversion before giving effect to such adjustment.
 
(d)           In case of any consolidation of the Company with, or merger of the Company into, any other Person, or in case of any merger of another Person into the Company (other than a merger that does not result in any reclassification, conversion, exchange or cancellation of Ordinary Shares then outstanding), or in case of any sale, conveyance or transfer of all or substantially all the assets of the Company, the holder of Preferred C Shares shall have the right thereafter, during the period such Preferred C Shares shall be convertible as specified in Article 5.5 (a), to convert such Preferred C Shares into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer by a holder of the number of Ordinary Shares of the Company into which such Preferred C Shares might have been converted immediately prior to such consolidation, merger, conveyance or transfer, assuming such holder of Ordinary Shares of the Company failed to exercise his rights of election, if any, as to the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer; provided that, if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer is not the same for each Ordinary Share of the Company in respect of which such rights of election shall not have been exercised (in this Section, " Nonelecting Share "), then for the purpose of this Article 5.5  the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer by each Nonelecting Share shall be deemed to be the kind and amount so receivable per Share by a plurality of the Nonelecting Shares. Such securities shall provide for adjustments which, for events subsequent to the effective date of the triggering event, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 5.5. The above provisions of this Article 5.5 shall similarly apply to successive consolidations, mergers, conveyances or transfers.
 
 
28

 
 
(e)           In case:
 
(i)           the Company shall declare a distribution on its Ordinary Shares payable otherwise than in cash out of its earned surplus; or
 
(ii)           the Company shall authorize the granting to any holders of its Ordinary Shares of rights or warrants to subscribe for or purchase any shareholdership interest of any class or of any other rights; or
 
(iii)          of any reclassification of the Ordinary Shares (other than a subdivision or combination of the Company’s outstanding Ordinary Shares), or of any consolidation or merger to which the Company is a party and for which approval of any holders of shares of the Company is required, or the sale, conveyance or transfer of all or substantially all the assets of the Company; or
 
(iv)          of the voluntary or involuntary dissolution, liquidation or winding-up of the Company; or
 
(v)           the Company shall take any other action referred to in this Article 5.5;
 
then the Company shall mail to all holders of Preferred C Shares at their last addresses as they shall appear in the Register of Shareholders, at least 20 Business Days (or 10 Business Days in any case specified in clause (i) or (ii) above) prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the date as of which the holders of  Ordinary Shares of record to be entitled to such dividend, distribution, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up is expected to become effective, and the date as of which it is expected that holders of Ordinary Shares of record shall be entitled to exchange their Ordinary Shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up.
 
(f)           The Company shall at all times keep authorized and free from preemptive rights, for the purpose of effecting the conversion of Preferred C Shares, the full number of Ordinary Shares then issuable upon the conversion of all outstanding Preferred C Shares.
 
(g)           The Company will pay any and all taxes that may be payable in respect of the issue or delivery of Ordinary Shares on conversion of Preferred C Shares pursuant hereto.  The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of Ordinary Shares in a name other than that of the holder of the Preferred C Shares to be converted, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax, or has established to the satisfaction of the Company that such tax has been paid or is not payable.
 
 
29

 
 
5.5A         The Preferred D Shares
 
 (a)           Subject to the terms herein, any Preferred D Shares may, at any time at the option of the holder thereof, be converted at any time into a number of fully paid and nonassessable Ordinary Shares (rounded down as to each conversion to the nearest whole number of shares) equal to (i) the sum of the then effective Preferred D Shares Preferred Amount divided by (ii) the applicable conversion price in effect at the time of conversion (the " Preferred D Shares Conversion Price ").  The Preferred D1 Shares Conversion Price shall initially be the Deemed Preferred D1 Purchase Price, the Preferred D2 Shares Conversion Price shall initially be the Deemed Preferred D2 Purchase Price, the Preferred D3 Shares Conversion Price shall initially be the Deemed Preferred D3 Purchase Price and the Preferred D4 Shares Conversion Price shall initially be the Deemed Preferred D4 Purchase Price.  The Preferred D1 Shares Conversion Price, the Preferred D2 Shares Conversion Price, the Preferred D3 Shares Conversion Price and the Preferred D4 Shares Conversion Price shall be adjusted in certain instances as provided in Article 5.5 A(c) and Article 5.5A (e).
 
(b)           In order to exercise the conversion privilege, the holder of any Preferred D Shares to be converted shall surrender the certificate for such share, duly endorsed or assigned to the Company or in blank, at any office or agency of the Company maintained for that purpose, accompanied by written notice to the Company at such office or agency that the holder elects to convert such shares or, if fewer than all the Preferred D Shares represented by a single share certificate are to be converted, the number of Preferred D Shares represented thereby to be converted.
 
Preferred D Shares shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such share certificates for conversion in accordance with the foregoing provisions, and at such time the rights of the holders of such shares as holders shall cease, and the Person or Persons entitled to receive Ordinary Shares issuable upon conversion shall be treated for all purposes as the record holder or holders of such Ordinary Shares at such time.  As promptly as practicable on or after the conversion date, the Company shall issue and shall deliver at such office or agency a certificate or certificates for the number of Ordinary Shares issuable upon conversion.
 
In the case of any conversion of fewer than all of the Preferred D Shares evidenced by a certificate, upon such conversion the Company shall execute and deliver to the holder thereof, at the expense of the Company, a new certificate or certificates representing the number of unconverted Preferred D Shares.
 
 
30

 
 
(c)           The Preferred D Shares Conversion Price shall be adjusted from time to time by the Company as follows:
 
(i)           If the Company shall hereafter make a distribution to all holders of outstanding Ordinary Shares in Ordinary Shares, the applicable Preferred D Shares Conversion Price in effect at the opening of business on the date following the date fixed for the determination of holders of shares entitled to receive such dividend or other distribution shall be reduced by multiplying such applicable Preferred D Shares Conversion Price by a fraction, the numerator of which shall be the number of Ordinary Shares outstanding at the close of business on the Share Record Date (as defined in Article 5.5A(c)(v)) fixed for such determination and the denominator of which shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the Share Record Date. If any dividend or distribution of the type described in this Article 5.5A(c)(i) is declared but not so paid or made, the applicable Preferred D Shares Conversion Price shall again be adjusted to the applicable Preferred D Shares Conversion Price which would then be in effect if such dividend or distribution had not been declared.
 
(ii)           If, until such time as (a) there shall be a public offering of the shares of the Company, or (b) the shares of the Company are otherwise publically traded or (c) the Company shall become a wholly owned subsidiary of a publically traded company, the Company shall issue or sell any Ordinary Shares or securities convertible into or exercisable or exchangeable for Ordinary Shares (other than Excluded Issuances, as defined in Article 11(b)(ii)), for a consideration per share (or, in the case of convertible or exchangeable securities having a conversion or exchange price per Ordinary Share) less than the Preferred D1 Shares Conversion Price and/or the Preferred D2 Shares Conversion Price  and/or the Preferred D3 Share Conversion Price and/or the Preferred D4 Share Conversion Price on the date of such issuance (after adjustments in accordance with the provisions hereof or for any recapitalization, stock splits, dividends and the like) (the " Reduced Price "), then the Preferred D1 Shares Conversion Price, and/or Preferred D2 Shares Conversion Price, and/or Preferred D3 Shares Conversion Price, and/or Preferred D4 Shares Conversion Price, as applicable, in effect immediately prior to such issuance or sale shall be reduced, for no additional consideration, to be equal to the Reduced Price, so that upon the conversion thereof such holders of Preferred D Shares, shall be entitled to additional Ordinary Shares, calculated according to a full ratchet anti-dilution mechanism as detailed below:
 
AO  = (N*P)   -  N
 
 NP
 
Where:
 
AO = the additional number of Ordinary Shares to be issued to the Preferred D Shares holder upon conversion of the Preferred D Shares;
 
N = the number of Preferred D Shares, on an as-converted basis, held by the Preferred D Shares holder, immediately prior to the issuance;
 
 
31

 
 
P = the applicable Preferred D Shares Conversion Price (as adjusted) in effect immediately prior to such issuance;
 
NP = the Reduced Price, which will be the new Preferred D Shares Conversion Price, in effect immediately after such issuance.
 
(iii)           If the outstanding Ordinary Shares shall be subdivided into a greater number of Ordinary Shares, the applicable Preferred D Shares Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, if any outstanding Shares shall be combined into a smaller number of Ordinary Shares, the applicable Preferred D Shares Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective.
 
(iv)           If the Company shall, by dividend or otherwise, distribute to all holders of its Ordinary Shares any class of Shares (other than any dividends or distributions to which Article 5.5A (c)(i) applies) or evidences of its indebtedness, cash or other assets (the foregoing hereinafter in this Article 5.5A (c)(iv) called the " Distributed Securities "), then, in each such case, the applicable Preferred D Shares Conversion Price shall be reduced so that the same shall be equal to the price determined by multiplying the applicable Preferred D Shares Conversion Price in effect immediately prior to the close of business on the Ordinary Share Record Date with respect to such distribution by a fraction, the numerator of which shall be the applicable Preferred D Shares Conversion Price on such date less the fair market value (as determined by the Board, whose good faith determination shall be conclusive and described in a resolution of the Board) on such date of the portion of the Distributed Securities so distributed applicable to one Ordinary Share and the denominator of which shall be such applicable Preferred D Shares Conversion Price, such reduction to become effective immediately prior to the opening of business on the day following the Ordinary Share Record Date; provided, however, that, in the event the then fair market value (as so determined) of the portion of the Distributed Securities so distributed applicable to one Ordinary Share is equal to or greater than the applicable Preferred D Shares Conversion Price on the Share Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each holder of Preferred D Shares shall have the right to receive upon conversion of a Preferred D Share the amount of Distributed Securities such holder would have received had such holder converted such Preferred D Shares immediately prior to such Ordinary Share Record Date.  If such dividend or distribution is not so paid or made, the applicable Preferred D Shares Conversion Price shall again be adjusted to be the applicable Preferred D Shares Conversion Price which would then be in effect if such dividend or distribution had not been declared.  If the Board determines the fair market value of any distribution for purposes of this Article 5.5A (c)(iv) by reference to the actual or when issued trading market for any securities constituting all or part of such distribution, it must in doing so consider the prices in such market over the same period used in computing the Preferred D Shares Conversion Price pursuant to this Article 5.5A (c) to the extent possible.
 
 
32

 
 
Rights or warrants distributed by the Company to all holders of Ordinary Shares entitling the holders thereof to subscribe for or purchase Ordinary Shares (either initially or under certain circumstances), which rights or warrants, until the occurrence of a Dilution Trigger Event: (A) are deemed to be transferred with such Ordinary Shares; (B) are not exercisable; and (C) are also issued in respect of future issuances of Ordinary Shares, shall be deemed not to have been distributed for purposes of this Article 5.5A (c)(iv) (and no adjustment to the Preferred D Shares Conversion Price under this Article 5.5A (c)(iv) shall be required) until the occurrence of the earliest Dilution Trigger Event, whereupon such rights or warrants shall be deemed to have been distributed and an appropriate adjustment to the Preferred D Shares Conversion Price under this Article 5.5A (c)(iv) shall be made.  If any such rights or warrants, including any such existing rights or warrants distributed prior to the first issuance of Preferred D Shares, are subject to subsequent events, upon the occurrence of each of which such rights or warrants shall become exercisable to purchase securities, evidences of indebtedness or other assets, then the occurrence of each such event shall be deemed to be such date of issuance and record date with respect to new rights or warrants (and a termination or expiration of the existing rights or warrants, without exercise by the holder thereof).  In addition, in the event of any distribution (or deemed distribution) of rights or warrants, or any Dilution Trigger Event with respect thereto, that was counted for purposes of calculating a distribution amount for which an adjustment to the Preferred D Shares Conversion Price under this Article 5.5A (c)(iv) was made, (1) in the case of any such rights or warrants which shall all have been redeemed or repurchased without exercise by any holders thereof, the Preferred D Shares Conversion Price shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Dilution Trigger Event, as the case may be, as though it were a cash distribution to which this Article 5.5A (c)(iv) were applicable, equal to the per Share redemption or repurchase price received by a holder or holders of Shares with respect to such rights or warrants (assuming such holder had retained such rights or warrants), made to all holders of Ordinary Shares as of the date of such redemption or repurchase, and (2) in the case of such rights or warrants which shall have expired or been terminated without exercise by any holders thereof, the Preferred D Shares Conversion Price shall be readjusted as if such rights and warrants had not been issued.
 
Notwithstanding any other provision of this Article 5.5A (c)(iv) to the contrary, rights, warrants, evidences of indebtedness, other securities, cash or other assets (including, without limitation, any rights distributed pursuant to any holder rights plan) shall be deemed not to have been distributed for purposes of this Article 5.5A (c)(iv) if the Company, makes proper provision so that each holder of Preferred D Shares on the date fixed for determination of holders entitled to receive such distribution shall receive upon such distribution, the amount and kind of such distributions that such holder would have been entitled to receive if such holder had, immediately prior to such determination date, converted such Preferred D Shares into Ordinary Shares.
 
 
33

 
 
For purposes of this Article 5.5A (c)(iv) and Article 5.5A (c)(i), any dividend or distribution to which this Article 5.5A (c)(iv) is applicable that also includes Ordinary Shares, or rights or warrants to subscribe for or purchase Ordinary Shares to which Article 5.5A (c)(i) applies (or both), shall be deemed instead to be (A) a dividend or distribution of the evidences of indebtedness, assets, shares, rights or warrants other than such Ordinary Shares or rights or warrants to which Article 5.5A (c)(i) applies (and any Preferred D Shares Conversion Price reduction required by this Article 5.5A (c)(iv) with respect to such dividend or distribution shall then be made) immediately followed by (B) a dividend or distribution of such Ordinary Shares or such rights or warrants (and any further Preferred D Shares Conversion Price reduction required by Article 5.5A (c)(i) with respect to such dividend or distribution shall then be made), except that (1) the Share Record Date of such dividend or distribution shall be substituted as "the date fixed for the determination of Shareholders entitled to receive such dividend or other distribution", "the Ordinary Share Record Date fixed for such determination" and "the Ordinary Share Record Date" within the meaning of Article 5.5A (c)(i), and (2) any Ordinary Share included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" for the purposes of Article 5.5A (c)(i).
 
(v)           For purposes of this Article 5.5A (c), the following terms shall have the meaning indicated:
 
"Ordinary Share Record Date" means, with respect to any dividend, distribution or other transaction or event in which the holders of Ordinary Shares have the right to receive any cash, securities or other property or in which the Ordinary Shares (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of holders of Shares entitled to receive such cash, securities or other property (whether such date is fixed by the Board or by statute, contract or otherwise).
 
" fair market value" means the amount which a willing buyer would pay a willing seller in an arm’s-length transaction.
 
(vi)           No adjustment in the Preferred D Shares Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price, provided that any adjustment not made as a result of the foregoing shall be carried forward and given effect with any subsequent adjustment.  All calculations under this Article 5.5A  shall be made by the Company and shall be made to the nearest cent.
 
(vii)           Whenever the Preferred D1 Shares Conversion Price and/or the Preferred D2 and/or the Preferred D3 and/or the Preferred D4 Shares Conversion Price is adjusted as herein provided, the Company shall prepare a notice of such adjustment of the applicable Preferred D Shares Conversion Price setting forth the adjusted Preferred D Shares Conversion Price and the date on which each adjustment becomes effective and shall mail such notice of such adjustment of the applicable Preferred D Shares Conversion Price to each holder of Preferred D Shares, according to the class of Preferred D Shares held thereby, at such holder’s last address appearing on the Register of Shareholders maintained for that purpose within 20 days of the effective date of such adjustment. Failure to deliver such notice shall not affect the legality or validity of any such adjustment.
 
(viii)           In any case in which this Article 5.5A (c) provides that an adjustment shall become effective immediately after an Ordinary Share Record Date for an event, the Company may defer until the occurrence of such event issuing to the holder of any Preferred D Shares converted after such Ordinary Share Record Date and before the occurrence of such event the additional Ordinary Shares issuable upon such conversion by reason of the adjustment required by such event over and above the Ordinary Shares issuable upon such conversion before giving effect to such adjustment.
 
 
34

 
 
(d)           In case of any consolidation of the Company with, or merger of the Company into, any other Person, or in case of any merger of another Person into the Company (other than a merger that does not result in any reclassification, conversion, exchange or cancellation of Ordinary Shares then outstanding), or in case of any sale, conveyance or transfer of all or substantially all the assets of the Company, the holder of Preferred D Shares shall have the right thereafter, during the period such Preferred D Shares shall be convertible as specified in Article 5.5A (a), to convert such Preferred D Shares into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer by a holder of the number of Ordinary Shares of the Company into which such Preferred D Shares might have been converted immediately prior to such consolidation, merger, conveyance or transfer, assuming such holder of Ordinary Shares of the Company failed to exercise his rights of election, if any, as to the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer; provided that, if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer is not the same for each Ordinary Share of the Company in respect of which such rights of election shall not have been exercised (in this Section, " Nonelecting Share "), then for the purpose of this Article 5.5A  the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer by each Nonelecting Share shall be deemed to be the kind and amount so receivable per share by a plurality of the Nonelecting Shares. Such securities shall provide for adjustments which, for events subsequent to the effective date of the triggering event, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 5.5A.  The above provisions of this Article 5.5A shall similarly apply to successive consolidations, mergers, conveyances or transfers.
 
(e)           In case:
 
(i)           the Company shall declare a distribution on its Ordinary Shares payable otherwise than in cash out of its earned surplus; or
 
(ii)          the Company shall authorize the granting to any holders of its Ordinary Shares of rights or warrants to subscribe for or purchase any shareholdership interest of any class or of any other rights; or
 
 
35

 
 
(iii)          of any reclassification of the Ordinary Shares (other than a subdivision or combination of the Company’s outstanding Ordinary Shares), or of any consolidation or merger to which the Company is a party and for which approval of any holders of shares of the Company is required, or the sale, conveyance or transfer of all or substantially all the assets of the Company; or
 
(iv)          of the voluntary or involuntary dissolution, liquidation or winding-up of the Company; or
 
(v)           the Company shall take any other action referred to in this Article 5.5A ;
 
then the Company shall mail to all holders of Preferred D Shares at their last addresses as they shall appear in the Register of Shareholders, at least 20 Business Days (or 10 Business Days in any case specified in clause (i) or (ii) above) prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the date as of which the holders of Ordinary Shares of record to be entitled to such dividend, distribution, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up is expected to become effective, and the date as of which it is expected that holders of Ordinary Shares of record shall be entitled to exchange their Ordinary Shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up.
 
(f)           The Company shall at all times keep authorized and free from preemptive rights, for the purpose of effecting the conversion of Preferred D Shares, the full number of Ordinary Shares then issuable upon the conversion of all outstanding Preferred D Shares.
 
(g)           The Company will pay any and all taxes that may be payable in respect of the issue or delivery of Ordinary Shares on conversion of Preferred D Shares pursuant hereto. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of Ordinary Shares in a name other than that of the holder of the Preferred D Shares to be converted, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax, or has established to the satisfaction of the Company that such tax has been paid or is not payable.
 
5.6            Mandatory Conversion
 
The Preferred A Shares, Preferred B Shares the Preferred C Shares and the Preferred D Shares shall be converted into Ordinary Shares immediately prior to the occurrence of a Qualifying IPO or a Liquidation Event, on the same basis as if they had been converted on such date by the holders thereof pursuant to Articles 5.3(a), 5.4(a) 5.5(a) or 5.5A(a) as applicable.
 
6.              Increase of Share Capital
 
(a)            Subject to Article 73, the Company may, from time to time, by resolution of the General Meeting adopted by an Ordinary Majority, whether or not all the shares then authorized have been issued, and whether or not all the shares issued have been called up for payment, increase its authorized share capital. Any such increase shall be in such amount and shall be divided into shares of such nominal amounts, with such rights and preferences and subject to such restrictions, as such resolution shall provide.
 
 
36

 
 
(b)            Except to the extent otherwise provided in such resolution, any new shares included in the authorized share capital increased as aforesaid shall be subject to all the provisions of these Articles which are applicable to shares included in the existing share capital, without regard to class (and, if such new shares are of the same class as a class of shares included in the existing share capital, to all of the provisions that are applicable to shares of such class included in the existing share capital).
 
7.             Special Rights; Modification of Rights
 
(a)            Subject to Article 73, the Company may from time to time, by resolution of the General Meeting adopted by an Ordinary Majority, provide for shares with such preferred or deferred rights or rights of redemption or other special rights or restrictions, whether in regard to dividends, voting, repayment of share capital or otherwise, as may be stipulated in such resolution.
 
 (b)            Subject to Article 73 and unless otherwise provided by these Articles, if at any time the share capital is divided into different classes of shares, the rights attached to any one or more class or classes may be modified, abrogated or waived (in all cases whether in whole or in part, temporary or permanently or only with respect to a specific action, transaction or event) by a resolution of the General Meeting adopted by an Ordinary Majority; provided however, that any direct adverse change to the rights attached to a certain class of shares under these Articles shall require an approval of the holders of more than fifty percent (50%) of the issued shares of such class, unless such change is applied to all other classes of shares to which such change is or may be applicable, regardless of whether such change affects (economically or otherwise) such classes of shares differently.
 
 
37

 
 
(c)           Without derogating from generality of the forgoing and notwithstanding anything to the contrary set forth herein, but in addition to Article 73, it is hereby clarified and agreed that any of the following shall not be deemed to be a direct adverse change to the rights attached to any one class of shares and shall not be subject to the approval of a separate class vote of the holders of shares of any particular class of shares: (i) an increase of the authorized share capital of the Company or the authorization and creation of additional shares of an existing class of shares or a new class of shares or other securities of the Company, having rights, preferences and privileges which are similar, senior or subordinate relative to other shares or securities of the Company; (ii) the issuance of additional shares of an existing class of shares or of a new class of shares or other securities of the Company having rights, preferences and privileges which are similar, senior or subordinate relative to other shares or securities of the Company; (iii) increase in the size of board of directors; (iv) a reclassification, reorganization or recapitalization of the Company's share capital, including the conversion of the Preferred Shares into Ordinary Shares, and determining the conversion ratio for such purpose (which need not to be identical for all Preferred Shares); provided however that: (1) a resolution of the General Meeting adopted by an Ordinary Majority, to convert any specific class of Preferred Shares into Ordinary Shares, that is effected without a simultaneous conversion into Ordinary Shares of all other classes of Preferred Shares then outstanding, shall be deemed a direct adverse change to the rights attached to that certain class of Preferred Shares and shall require an approval of the holders of more than fifty percent (50%) of the issued shares of such class of Preferred Shares; and (2) a resolution of the General Meeting adopted by an Ordinary Majority, to convert any specific class of Preferred Shares into Ordinary Shares at a conversion ratio that is lower than the conversion ratio that was applied to another class of Preferred Shares pursuant to such resolution of the General Meeting that was adopted by an Ordinary Majority, shall require an approval of the holders of more than fifty percent (50%) of the issued shares of the class of Preferred Shares that is being converted into Ordinary Shares at the lower conversion ratio, unless the higher conversion ratio results from the implementing or applying anti-dilution rights afforded to the other class of Preferred Shares. For greater certainty, a resolution of the General Meeting adopted by an Ordinary Majority, to convert all classes of Preferred Shares into Ordinary Shares at the same conversion ratio (for example: one Ordinary Share for each one Preferred Share), shall not be subject to the approval of a separate class vote of the holders of shares of any particular class of shares; and (v) an amendment, modification or waiver of any rights attached to existing class of shares, including without limitation, anti-dilution rights, preemptive rights and liquidation preferences; in all cases, provided that such change is applied to all such classes of shares to which such change is or may be applicable, regardless of whether such change affects (economically or otherwise) such classes of shares differently. Furthermore, any waiver or change to the rights attached to a class of shares shall not be deemed to be a direct adverse change to the rights attached to another class of shares if such other class of shares was not entitled to the relevant rights prior to such waiver or change.
 
                (d)         Any resolution required to be adopted pursuant to these Articles by the consent of a separate class of shares, whether by way of a separate General Meeting of such class or by way of written consent, shall be made by the holders of shares of such class entitled to vote or give consent thereon and no holder of shares of a certain class shall be banned from voting or consenting by virtue of being a holder of more than one class of shares of the Company, irrespective of any conflicting interests that may exist between such different classes of shares. For illustration purposes, in the event that a certain Shareholder is the holder of Preferred C Shares and Ordinary Shares whilst another Shareholder is the holder of Preferred C Shares only, the Shareholder holding two classes of shares shall not be prohibited from participating or voting on a resolution which requires the consent of the Ordinary Shares as a separate class irrespective of the effect that such change may have on the Preferred C Shares. Anything contained herein to the contrary notwithstanding, a Shareholder shall not be required to refrain from participating in the discussion or voting on any resolution concerning the modification or abrogation of the rights attached to any class of shares held by such Shareholder, even if such Shareholder may benefit in one way or another from the outcome of such resolution or if such resolution affects his rights in a different manner when compared to other Shareholders; e.g. a Shareholder shall be entitled to vote on the modification of rights attached to shares held by such Shareholder even if such change or modification may benefit such holder either directly or indirectly in a manner that is different from other holders of such class of shares (e.g. in the case of an increased financial value gained by virtue of such change, for example change or modification of rights in connection with a future financing round in which such Shareholder participates).
 
 
38

 
 
                (e)           It is clarified that for the purpose of any resolution required to be adopted pursuant to these Articles by the consent of a separate class of shares: (i) all the Preferred C Shares shall be considered as a single class for all matters, such that any change that is applied to all such classes of Preferred C Shares to which such change is or may be applicable (regardless of whether such change affects (economically or otherwise) such classes of Preferred C Shares differently), shall require the written consent of the holders of more than, or the approval at a separate General Meeting of at least the majority of the outstanding Preferred C1 Shares, Preferred C2 Shares and Preferred C3 Shares (treated as a single class); and (ii) all the Preferred D Shares shall be considered as a single class for all matters, such that any such that any change that is applied to all such classes of Preferred D Shares to which such change is or may be applicable (regardless of whether such change affects (economically or otherwise) such classes of Preferred D Shares differently), shall require the written consent of the holders of more than, or the approval at a separate General Meeting of, at least the majority of the outstanding Preferred D1 Shares, Preferred D2 Shares, Preferred D3 Shares and Preferred D4 Shares (treated as a single class).
 
(e)           Without derogating from the provisions of this Article 7 , any waiver or change to a right of any of the Preferred A Shares, or the Preferred B Shares or the Preferred C Shares or the Preferred D Shares, that was approved by the holders of the majority of the Preferred A Share or of the Preferred B Shares or of the Preferred C Shares or of the Preferred D Shares, as applicable (voting as a single separate class and on an as converted basis) shall apply to all of the Preferred A Shares or of the Preferred B Shares or of the Preferred C Shares or of the Preferred D Shares, as applicable. Unless otherwise provided in these Articles, any right or limitation expressly provided for the benefit or protection of a specifically named shareholder may not be modified, abrogated or waived without the prior written consent of such shareholder.
 
(f)           Notwithstanding the provisions of Section 20(c) of the Companies Law, except as otherwise specifically set forth in these Articles, to the maximum extent permitted under applicable law, in no event shall the Preferred Shares or any sub-class thereof, confer upon their holders the right to any separate class meeting or the right to any class vote.
 
(g)           The provisions of these Articles relating to General Meetings shall, mutatis mutandis, apply to any separate General Meeting of the holders of the shares of a particular class; provided, however, that the requisite quorum at any such separate General Meeting shall be one or more Shareholders present in person or by proxy and holding not less than the majority of the issued shares of such class.
 
8.             Consolidation, Subdivision, Cancellation and Reduction of Share Capital
 
(a)            The Company may, from time to time, by a resolution of the General Meeting adopted by an Ordinary Majority (subject, however, to the provisions of Articles 5, 7 and 73 of these Articles and to applicable law (other than Section 20(c) of the Companies Law with respect to which the provisions of these Articles shall prevail)):
 
 
39

 
 
(i)       consolidate and divide all or any part of its issued or unissued authorized share capital into shares of a per share nominal value that is greater than the per share nominal value of its existing shares;
 
(ii)       subdivide its shares (issued or unissued) or any of them into shares of lesser nominal value than is fixed by these Articles;
 
(iii)       cancel any shares that, at the date of the adoption of such resolution, have not been purchased or subscribed for; or
 
(iv)       reduce its share capital in any manner, and with and subject to any incident authorized, and consent required, by law.
 
(b)            With respect to any consolidation of issued shares into shares of a greater nominal value per share, and with respect to any other action that may result in fractional shares, the Board of Directors may settle any dispute that may arise with regard thereto as it deems fit, and in connection with any such consolidation or other action that may result in fractional shares may, without limitation:
 
(i)       determine, as to any holder of shares so consolidated, which issued shares shall be consolidated into a share of a greater nominal value per share;
 
(ii)       allot, in contemplation of or subsequent to such consolidation or other action, shares or fractional shares sufficient to preclude or remove fractional share holdings; or
 
(iii)       redeem, in the case of redeemable preference shares and subject to applicable law, such shares or fractional shares sufficient to preclude or remove fractional share holdings.
 
SHARES
 
9.             Issuance of Share Certificates: Replacement Certificates; Replacement of Lost Certificates
 
(a)            Share certificates shall be issued under the corporate seal of the Company (or facsimile thereof) and shall bear the signature (or facsimile thereof) of one Director or of any other person or persons authorized by the Board of Directors.
 
(b)            Each Shareholder shall be entitled to one numbered certificate for all the shares of any class registered in his name, and if the Board of Directors so approves, to several certificates, each for one or more of such shares.  Each certificate shall specify the serial numbers of the shares represented thereby and may also specify the amount paid up thereon.
 
(c)            A share certificate registered in the names of two or more persons shall be delivered to the person first named in the Register of Shareholders in respect of such co-ownership.
 
 
40

 
 
(d)            A share certificate that has been defaced, lost or destroyed may be replaced, and the Company shall issue a new certificate to replace such defaced, lost or destroyed certificate upon payment of such fee, and upon the furnishing of such evidence of ownership and such indemnity, as the Board of Directors in its discretion deems fit.
 
10.            Registered holder
 
Except as otherwise provided in these Articles, the Company shall be entitled to treat the registered holder of each share as the absolute owner thereof, and accordingly shall not, except as ordered by a court of competent jurisdiction or as required by law, be obligated to recognize any equitable or other claim to, or interest in, such share on the part of any other person.
 
11.            Allotment of Shares; Preemptive Rights
 
(a)            Subject to the provisions of Articles 11(b) and 73, the shares shall be under the control of the Board of Directors, who shall have the power to allot, issue or otherwise dispose of shares to such persons, at such times, on such terms and conditions (including inter alia terms relating to calls as set forth in Article 13 hereof), and either at par, at a premium or, subject to the provisions of the Companies Law, at a discount or with payment of commission, all as the Board of Directors deems fit; and, subject to the provisions of Articles 11(b) and 73, the Board of Directors shall also have the power to give any person the option to acquire from the Company any shares, either at nominal value, at a premium or, subject to the provisions of the Companies Law, at a discount or with payment of commission, for such period and for such consideration as the Board of Directors deems fit.
 
(b)            Subject to the provisions of Section 11(c) below, until immediately prior to a Qualifying IPO or a Liquidation Event, each Preferred Shareholder holding no less than 2% of the Ordinary Shares of the Company (on a fully diluted and as-converted basis) (an " Entitled Holder " and the " Minimum Holdings ", respectively) will have the right to purchase a pro-rata portion (on an as-converted basis) of any New Securities (as defined below) that the Company may, from time to time, propose to sell and issue and which are available for issuance following the exercise (or expiry, as applicable) of the rights of the GE Shareholders pursuant to Section 11(c) below. The Entitled Holder's pro rata share shall be the ratio of the number of issued and outstanding Ordinary Shares (on an as-converted basis) then held by the Entitled Shareholder as of the date of the Rights Notice (as defined in Article 11(b)(ii) below), to the sum of the total number of Ordinary Shares (on an as-converted basis) held by all Entitled Holders issued and outstanding as of such date. This pre-emptive right shall be subject to the following provisions:
 
 
41

 
 
(i)           " New Securities " shall mean any Ordinary Shares, Preferred Shares or other shares of any kind of the Company, whether now or hereafter authorized, and rights, options, or warrants to purchase said Ordinary Shares, Preferred Shares or other shares and securities of any type whatsoever that are or may become, convertible into or exchangeable for said Ordinary Shares, Preferred Shares or other share capital; provided, however, that "New Securities" shall not include (i) issuance under employee equity based plans approved by the Board of Directors(the " Employee Share Incentive Plan " or “ ESOP ”), (ii) issuance upon stock splits, stock dividend, reclassification and similar recapitalization events, (iii) issuances in connection with a bona fide business acquisition by the Company whether by merger, consolidation, purchase of assets, purchase or exchange of shares or otherwise, (iv) issuance in connection with the exercise of options or warrants that were granted subject to preemptive rights according to this Section 11 or exempt from such rights as an Excluded Issuance; (v) Ordinary Shares issued upon conversion of  Preferred Shares; (vi) issuance of securities to investment bankers and/or finders in connection with the provision of services pursuant to investment bankers agreements, finders agreements, introduction agreements or the like, approved by the Board; (vii) for the purpose of this Article 11 only - any issuance (or portion thereof) with respect to which the holders of more than seventy-five percent (75%) of the voting power represented by the Preferred Shares held by all of the Preferred Shareholders (treated as a single class) present at a General Meeting, who are entitled to vote and who voted at such meeting in person or by means of a proxy (excluding abstentions), agree in writing to waive the preemptive rights which would have been otherwise afforded thereto; and (viii) for the purpose of Articles 5.5(c)(ii) and 5.5A(c)(ii) only - any issuance with respect of which the holders of more than 50% of the Preferred C Shares and Preferred D Shares (treated as a single class on an as converted basis) agree in writing to waive part of or all anti-dilution rights; it is hereby clarified that for the purpose of subsections (vii) and (viii) no holder of shares of a certain class shall be banned from consenting to a waiver on any of the aforementioned rights by virtue of being a holder of more than one class of shares of the Company, irrespective of any conflicting interests that may exist between such different classes of shares and no holder of shares of certain class shall be required to refrain from consenting to any such waiver even if the holder may benefit from such waiver either directly or indirectly in a manner that is different from other holders of such class of shares (e.g. waiver of such rights in connection with a future financing round in which such shareholder participates) (the " Excluded Issuances ").
 
(ii)           If the Company proposes to issue New Securities, it shall give the Entitled Holders written notice (the " Rights Notice ") of its intention, describing the New Securities, the price, the general terms upon which the Company proposes to issue them, and the number of shares that the Entitled Holders have the right to purchase under this Article 11(b).  Each Entitled Holder shall have fifteen (15) days from delivery of the Rights Notice to agree to purchase (a) all or any part of its pro-rata share of such New Securities and (b) all or any part of the pro-rata share of any other Entitled Holder to the extent that such other Entitled Holder does not elect to purchase its full pro-rata share, in each case for the price and upon the general terms specified in the Rights Notice, by giving written notice to the Company setting forth the quantity of New Securities to be purchased.  If the Entitled Holders who elect to purchase their full pro-rata shares also elect to purchase in the aggregate more than 100% of the New Securities, such New Securities shall be sold to such Entitled Holders in accordance with their respective pro-rata share.
 
  (iii)           If the Entitled Holders fail to exercise in full their preemptive rights within the period or periods specified in Article 11(b)(ii), the Company shall have one hundred and eighty (180) days after delivery of the Rights Notice to sell the unsold portion of the New Securities at a price and upon general terms no more favorable to the purchasers thereof than specified in the Company's Rights Notice.  If the Company has not sold the New Securities within said one hundred and eighty (180) day period the Company shall not thereafter issue or sell any New Securities without first offering such securities to the Entitled Holders in the manner provided above.
 
 
42

 
 
  (iv)           Notwithstanding any of the aforesaid, in the event that the implementation of the provisions of this Article 11 may require, in the opinion of the Board of Directors, the publication of a prospectus under the Israeli Securities Law, as a result of the number of Preferred Shareholders who are entitled to receive a Rights Notice, then the pre-emptive right pursuant to this Article 11 shall be in effect only in respect of such number of Preferred Shareholders which shall not require the preparation of a prospectus (in accordance with the Israeli Securities Law), and the Entitled Holders for such purpose shall be such Preferred Shareholders holding no less than the Minimum Holdings as satisfy the investor criteria under Section 15 of the Israeli Securities Law and such Preferred Shareholders holding no less than the Minimum Holdings who are entitled to purchase the largest pro rata portion of the New Securities (as determined pursuant to Article 11(b) above) among all those Preferred Shareholders that are entitled to the pre-emptive right hereunder.
 
(c)            In the event that the Company proposes to issue New Securities in the framework of a Qualified Financing Round (as such term is defined below), it shall give the GE Shareholders written notice of its intention, describing the price, the general terms and conditions upon which the Company proposes to issue them. The GE Shareholders shall have the right, exercisable within twenty one (21) days from delivery of the Company's notice to participate in such Qualified Financing Round to invest (directly or through any of their Affiliates) up to US$1,000,000 in the framework thereof and to acquire equity stock of the Company of the same class that shall be issued to the investors in the Qualified Financing Round, under the same terms and conditions of the Qualified Financing Round, including the price per share.
 
The rights of the GE Shareholders pursuant to this Section 11(c) shall automatically expire on the earliest to occur of: (i) immediately prior to the closing of a Qualifying IPO; (ii) immediately prior to the occurrence of a Liquidation Event, or (iii) the closing of the Qualified Financing Round.
 
The rights of the GE Shareholders pursuant to this Section 11(c) shall not apply with respect to any financing round which is not a Qualified Financing Round.
 
For the purpose of this Subsection 11(c), the term Qualified Financing Round shall mean the first round of equity financing in the Company after the effective date of these Articles, in which the Company raises an aggregate gross amount of US$4,000,000 in one or a series of related transactions.
 
The rights of the GE Shareholders pursuant to this Section 11(c) may not be amended or modified without the express written consent of the GE Shareholders.
 
12.            Payment in Installments
 
If, pursuant to the terms of allotment or issuance of any share, all or any portion of the price thereof shall be payable in installments, every such installment shall be paid to the Company on the due date thereof by the then registered holder(s) of the share or the person(s) then entitled thereto.
 
 
43

 
 
13.            Calls on Shares
 
(a)           The Board of Directors may, from time to time, as it in its discretion deems fit, make calls for payment upon Shareholders in respect of any sum that has not been paid up in respect of shares held by such Shareholders and which is not, pursuant to the terms of allotment or issuance of such shares or otherwise, payable at a fixed time. Each Shareholder shall pay the amount of every call so made upon him (and of each installment thereof if the same is payable in installments), to the person(s) and at the time(s) and place(s) designated by the Board of Directors, as any such time(s) may subsequently be extended or such person(s) or place(s) changed. Unless otherwise stipulated in the resolution of the Board of Directors (and in the notice referred to below), each payment in response to a call shall be deemed to constitute a pro rata payment on account of all the shares of the Shareholder making payment in respect of which such call was made.
 
(b)           Notice of any call for payment by a Shareholder shall be given in writing to such Shareholder not less than fourteen (14) days prior to the time of payment fixed in such notice, and shall specify the time and place of payment, and the person to whom such payment is to be made.  Prior to the time for any such payment fixed in a notice of a call given to a Shareholder, the Board of Directors may in its absolute discretion, by notice in writing to such Shareholder, revoke such call in whole or in part, extend the time fixed for payment of such call or designate a different place of payment or person to whom payment is to be made. In the event of a call payable in installments, only one notice thereof need be given.
 
(c)           If pursuant to the terms of allotment or issuance of a share, or otherwise, an amount is made payable at a fixed time (whether on account of such share or by way of premium), such amount shall be payable at such time as if it were payable by virtue of a call made by the Board of Directors and for which notice was given in accordance with subarticles (a) and (b) of this Article 13, and the provisions of these Articles with regard to calls (and the non­payment thereof) shall be applicable to such amount (and the non-payment thereof).
 
(d)           Joint holders of a share shall be jointly and severally liable to pay all calls for payment in respect of such share and all interest payable thereon.
 
(e)           Any amount called for payment that is not paid when due shall bear interest from the date fixed for payment until actual payment, at such rate (not exceeding the then prevailing debitory rate charged by leading commercial banks in Israel) and payable at such time(s) as the Board of Directors may prescribe.
 
(f)           Upon the allotment of shares, the Board of Directors may provide for differences among the allottees of such shares as to the amounts and times for payment and of calls for payment in respect of such shares.
 
 
44

 
 
14.            Prepayment
 
With the consent of the Board of Directors any Shareholder may pay to the Company any amount not yet payable in respect of his shares, and the Board of Directors may approve the payment by the Company of interest on any such amount until the same would be payable if it had not been paid in advance, at such rate and time(s) as may be approved by the Board of Directors. The Board of Directors may at any time cause the Company to repay all or any part of the money so advanced, without premium or penalty.  Nothing in this Article 14 shall derogate from the right of the Board of Directors to make any call for payment before or after receipt by the Company of any such advance.
 
15.            Forfeiture and Surrender
 
(a)           If any Shareholder fails to pay an amount payable by virtue of a call, or interest thereon as provided for in accordance with these Articles, on or before the day fixed for payment of the same, the Board of Directors may at any time after the day fixed for such payment, so long as such amount or any portion thereof remains unpaid, forfeit all or any of the shares in respect of which such payment was called for.  All expenses incurred by the Company in attempting to collect any such amount or interest thereon, including without limitation attorneys' fees and costs of legal proceedings, shall be added to, and shall for all purposes (including the accrual of interest thereon) constitute a part of the amount payable to the Company in respect of such call.
 
(b)           Upon the adoption of a resolution as to the forfeiture of a Shareholder’s share, the Board of Directors shall cause notice thereof to be given to such Shareholder, which notice shall state that, in the event of the failure to pay the entire amount so payable by a date specified in the notice (which date shall be not less than fourteen (14) days after the date such notice is given and which may be extended by the Board of Directors), such shares shall ipso facto be forfeited; provided, however, that prior to such date the Board of Directors may nullify such resolution of forfeiture, but no such nullification shall estop the Board of Directors from adopting a further resolution of forfeiture in respect of the non-payment of the same amount.
 
(c)           Without derogating from Articles 55 and 60 of these Articles, whenever shares are forfeited as herein provided, all dividends, if any, theretofore declared in respect thereof and not actually paid shall be deemed to have been forfeited at the same time.
 
(d)           The Company, by resolution of the Board of Directors, may accept the voluntary surrender of any share.
 
(e)           Any share forfeited or surrendered as provided herein shall become the property of the Company, and the same, subject to the provisions of these Articles, may be sold, re-allotted or otherwise disposed of as the Board of Directors deems fit.
 
(f)           Any Shareholder whose shares have been forfeited or surrendered shall cease to be a Shareholder in respect of the forfeited or surrendered shares, but shall nonetheless be liable to pay and shall promptly pay, to the Company all calls, interest and expenses owing upon or in respect of such shares at the time of forfeiture or surrender, together with interest thereon from the time of forfeiture or surrender until actual payment at the rate prescribed in Article 13(e) above, and the Board of Directors, in its discretion, may enforce the payment of such moneys or any part thereof.  In the event of such forfeiture or surrender, the Company, by resolution of the Board of Directors, may accelerate the date(s) of payment of any or all amounts then owing to the Company by the Shareholder in question (but not yet due) in respect of all shares owned by such Shareholder, solely or jointly with another.
 
 
45

 
 
(g)           The Board of Directors may at any time, before any share so forfeited or surrendered shall have been sold, re-allotted or otherwise disposed of, nullify the forfeiture or surrender on such conditions as it deems fit, but no such nullification shall estop the Board of Directors from re-exercising its powers of forfeiture pursuant to this Article 15.
 
16.            Lien
 
(a)           Except to the extent that the same may be waived or subordinated in writing, the Company shall have a first and paramount lien upon all the shares registered in the name of each Shareholder (without regard to any equitable or other claim or interest in such shares on the part of any other person), and upon the proceeds of the sale thereof, for his debts, liabilities and obligations to the Company arising from any amount payable by such Shareholder in respect of any unpaid or partly paid share, whether or not such debt, liability or obligation has matured. Such lien shall extend to all dividends from time to time declared or paid in respect of such share. Unless otherwise provided, the registration by the Company of a transfer of shares shall be deemed to be a waiver on the part of the Company of any lien existing on such shares immediately prior to such transfer.
 
(b)           The Board of Directors may cause the Company to sell a share subject to such a lien when the debt, liability or obligation giving rise to such lien has matured, in such manner as the Board of Directors deems fit, but no such sale shall be made unless such debt, liability or obligation has not been satisfied within fourteen (14) days after written notice of the intention to sell shall have been served on such Shareholder, his executors or administrators.
 
(c)           The net proceeds of any such sale, after payment of the costs thereof, shall be applied in or toward satisfaction of the debts, liabilities or obligations of such Shareholder in respect of such share (whether or not the same have matured), and any residue shall be paid to the Shareholder, his executors, administrators or assigns.
 
17.            Sale After Forfeiture or Surrender or in Enforcement of Lien
 
Upon any sale of a share after forfeiture or surrender or for enforcing a lien, the Board of Directors may appoint any person to execute an instrument of transfer of the share so sold and cause the purchaser's name to be entered in the Register of Shareholders in respect of such share. The purchaser shall be registered as the Shareholder and shall not be bound to see to the regularity of the sale proceedings or to the application of the proceeds of such sale, and after his name has been entered in the Register of Shareholders in respect of such share, the validity of the sale shall not be impeached by any person, and the remedy of any person aggrieved by the sale shall be in damages only and against the Company exclusively.
 
 
46

 
 
18.            Redeemable Shares
 
The Company may, subject to applicable law, issue redeemable shares and redeem the same.
 
TRANSFER OF SHARES
 
19.            Restriction on Disposition by the Founder
 
If the Founder, or any of his Affiliates or Immediate Family Shareholders, receives an offer to enter into any transaction to Dispose of any of their shares, he will notify the Board, and the Board shall notify the Preferred C Shareholders, in writing of the terms of such offer within seven (7) Business Days of the receipt of such offer.  Save with a written waiver from the Preferred C Shareholders holding at least a majority of the Preferred C Shares, the Founder, or any of his Affiliates or family Shareholders, will not be entitled to Dispose of any of their shares, until the sooner of (a) March 5, 2011, or (b) the Preferred C Shareholders have disposed of all of their Preferred C Shares.  The limitations on disposition of Ordinary Shares set forth herein shall not apply to the Bring Along Rights set forth in Article 21.
 
20.             Right of First Refusal

 (a)           Except for Dispositions to Permitted Transferees, until immediately prior to the consummation of a Qualifying IPO or Liquidation Event, any Shareholder wishing to transfer its shares, or any number thereof (the " Offered Shares ") pursuant to the terms of a bona fide offer received from any person or entity (the " Third Party "), must first offer the Offered Shares to the Entitled Holders (the " Offerees "), on terms and conditions not less favorable than those proposed by the Third Party, by a written notice to the Offerees, with a copy to the Company (the " Notice of Sale ").
 
(b)           For the purposes of this Article 20, a Shareholder wishing to Dispose of any shares shall be referred to as the " Selling Shareholder ".
 
(c)           The Notice of Sale shall state the number and kind of Offered Shares, whether the Offered Shares will, upon the Disposition, be free of all liens, charges and encumbrances, that a bona fide offer has been received from the Third Party and the terms of the offer, the identity of the Third Party and the price and terms of payment for the Offered Shares.
 
(d)           Each Offeree shall be entitled to purchase its Proportional Part (as defined below) of the Offered Shares, or any portion thereof, at the price and under the conditions stated in the Notice of Sale, within fourteen days (14) of its receipt (the " Notice Period "), by giving written notice of his wish to do so to the Selling Shareholder, with copies to the Company (the " Response Notice ").
 
(e)           Each Offeree shall also be entitled to purchase Offered Shares that are not purchased by the other Offerees, by so indicating in the Response Notice. If the Response Notices, in the aggregate, are in respect of more than the Offered Shares, then the accepting Offerees shall be cut back with respect to their oversubscriptions, on a pro-rata basis between them in proportion to their respective Proportional Parts.
 
 
47

 
 
(f)           The " Proportional Part " of each Offeree for the purposes hereof shall equal the number of aggregate Offered Shares multiplied by a fraction, the numerator of which is the number of Ordinary Shares (on an as-converted basis) then held by such Offeree and the denominator of which is the aggregate number of Ordinary Shares (on an as-converted basis) then held by all Offerees.
 
(g)           The Response Notice shall, when taken in conjunction with the offer as set forth in the Notice of Sale, be deemed to constitute a valid, legally binding and enforceable agreement for the sale and purchase of such Offered Shares.
 
(h)           If a Response Notice has not been given by an Offeree within the Notice Period, then such Offeree shall be deemed to have waived its right of first refusal pursuant to this Article 20.
 
(i)           Upon expiration of the Notice Period:
 
 
(i)
If the Response Notices, in the aggregate, are in respect of all of, or more than, the Offered Shares, then the Offerees who sent such Response Notices shall acquire the Offered Shares, on the terms aforementioned, at a closing that shall take place (i) within seven (7) days following the expiration of the Response Period (or any such other date as shall be agreed upon between the parties); or (ii) upon the closing of the Third Party transaction, as applicable.
 
 
(ii)
in the event that the Offerees have not realized their first refusal rights hereunder in their entirety, then, subject to provisions herein, the Selling Shareholder shall be entitled to transfer such Offered Shares not purchased pursuant to this Article 20 to the Third Party, within forty-five (45) days thereafter, except that the Offered Shares may not be sold at a price and under conditions more favourable to the transferee than the price and conditions under which they were offered to the Offerees.
 
(j)           If the Offered Shares have not been sold within the aforesaid forty-five (45) days, their Disposition shall once again be subject to the provisions of this Article 20.
 
(k)           No transfer of shares shall be registered in the Company’s registry unless there has been compliance with the procedure set forth in this Article 20 and a proper writing or instrument of transfer (in any customary form or any other form satisfactory to the Board of Directors) has been submitted to the Company or its transfer agent, together with share certificate(s) and such other evidence of title as the Board of Directors may reasonably require. Until the transferee has been registered in the Register of Shareholders in respect of the shares so transferred, the Company may continue to regard the transferor as the owner thereof.
 
 
48

 

 
21.            Co Sale Rights and Compulsory Sale (Tag Along and Bring Along).
 
 (a)           Until immediately prior to the consummation of a Qualifying IPO or Liquidation Event, and subject to Article 20 above, in the event that any of the Shareholders (each, a " Co-Sale Selling Shareholder ") desires to sell or otherwise Dispose of any of its shares other than to such person's Permitted Transferee(s), then the provisions of this Article 21 shall apply with respect to such shares.
 
(b)           Within 14 days following the expiration of the Notice Period under Article 20 above, each Entitled Holder (the " Co-Sellers ") shall have the option, exercisable by written notice to the Co-Sale Selling Shareholder, to require the Co-Sale Selling Shareholder to provide as part of its proposed sale that such Co-Sellers be given the right to participate, on the same terms and conditions as the Co-Sale Selling Shareholder, in the sale pro-rata in proportion to the respective number of Ordinary Shares (on an "as-converted" basis) owned at such time by the Co-Sale Selling Shareholder and all other Co-Sellers who participate in the proposed sale. To the extent the Entitled Holders exercise such right, the number of shares that the Co-Sale Selling Shareholder may sell shall be correspondingly reduced.
 
 (c)           Until immediately prior to the consummation of a Qualifying IPO or Liquidation Event, if Shareholders holding a majority of the shares outstanding which majority must include Shareholders holding at least 75% of the Preferred Shares, all on an as converted basis, accept a detailed offer to sell all their shares to a third party (the " Purchase Offer ") and such Purchase Offer is conditional upon the sale of all of the shares, then the remaining holders shall be obligated to sell their shares pursuant to the terms specified in the Purchase Offer, and the proceeds from such sale shall be divided in accordance with the liquidation preferences set forth herein.
 
The closing of the sale under the Purchase Offer shall take place at such closing or at another time as agreed upon between the parties, provided however , that should any holder fail to comply with any of its obligations specified in this Article 21, the Company shall register the Disposition of such holder’s shares in the Company's books and hold any payment due to such holder under the Purchase Offer in escrow until such time that such holder shall fulfill its obligations hereunder. For avoidance of doubt, from the closing date of the Purchase Offer, such purchaser shall be regarded as the sole legal owner of the shares of such holder.
 
TRANSMISSION OF SHARES
 
22.            Decedent's Shares .
 
(a)           In case of a share registered in the names of two or more holders, the Company may recognize the survivor(s) as the sole owner(s) thereof unless and until the provisions of Article 22(b) of these Articles have been effectively invoked.
 
 
49

 
 
(b)           Any person becoming entitled to a share in consequence of the death of any person, upon producing evidence of the grant of probate or letters of administration or declaration of succession (or such other evidence as the Board of Directors may reasonably deem sufficient), shall be registered as a Shareholder in respect of such share, or may, subject to the regulations as to transfer herein contained, transfer such share.
 
23.            Receivers and Liquidators .
 
(a)           The Company may recognize any receiver, liquidator or similar official appointed to wind up, dissolve or otherwise liquidate a corporate Shareholder, and a trustee, manager, receiver, liquidator or similar official appointed in bankruptcy or in connection with the reorganization of, or similar proceeding with respect to a Shareholder or its properties, as being entitled to the shares registered in the name of such Shareholder.
 
(b)           Such receiver, liquidator or similar official appointed to wind up, dissolve or otherwise liquidate a corporate Shareholder, and such trustee, manager, receiver, liquidator or similar official appointed in bankruptcy or in connection with the reorganization of, or similar proceeding with respect to a Shareholder or its properties, upon producing such evidence as the Board of Directors may deem sufficient as to his authority to act in such capacity or under this Article, shall with the consent of the Board of Directors (which the Board of Directors may grant or refuse in its absolute discretion), be registered as a Shareholder in respect of such shares, or may, subject to the regulations as to transfer contained in these Articles, transfer such shares.
 
GENERAL MEETINGS
 
24.            Annual General Meeting .
 
(a)           An Annual General Meeting shall be held once in every calendar year at such time (within a period of not more than 15 months after the last preceding Annual General Meeting) and at such place, either within or without the State of Israel, as may be determined by the Board of Directors.
 
(b)           The Annual General Meeting may consider and vote upon the following matters:
 
(i)           Report by the Board of Directors of the Company;
 
(ii)           Report by the independent auditors of the Company;
 
(iii)           Approval of the Company's financial statements;
 
(iv)           Appointment of the Company's independent auditors and approval of their fees;
 
(v)           Approval of interested-party transactions in accordance with the requirements of the Companies Law; and
 
(vi)           Approval of changes to these Articles.
 
 
50

 
 
25.            Extraordinary General Meeting .
 
All General Meetings other than Annual General Meetings shall be called "Extraordinary General Meetings."  The Board of Directors may, whenever it deems fit, convene an Extraordinary General Meeting, at such time and place, as may be determined by the Board of Directors, and shall be obligated to do so upon a request in writing in accordance with Sections 63 or 64 of the Companies Law, or upon a request in writing of the Shareholders holding a majority of the Preferred C Shares.
 
26.            Notice of General Meetings; Omission to Give Notice .
 
(a)           Notice of a General Meeting shall be delivered at least seven (7) days prior to the date for convening of the meeting (but not more than forty-five (45) days before such date) to each of the Shareholders listed in the Register of Shareholders in the manner specified in these Articles.  Each such notice shall specify the place and the date and hour of the meeting, the agenda, reasonable detail of the matters to be discussed at the meeting, and arrangements for voting by proxy if the matters on the agenda for the meeting include matters in respect of which Shareholders may vote by proxy under any law or in accordance with these Articles.  If the agenda of the meeting includes a proposal to amend these Articles, the text of the proposed amendment shall be specified.
 
(b)           A resolution may be proposed and adopted at a meeting even though the notice prescribed in this Article has not been given, subject to the consent of all of the Shareholders entitled to vote thereon.
 
(c)           The non-receipt of notice sent to a Shareholder, shall not invalidate the proceedings at such meeting.
 
(d)           The Board of Directors may fix a date, not exceeding sixty (60) days prior to the date of any General Meeting, as the date as of which Shareholders entitled to notice of and to vote at such meeting shall be determined, and only those persons who were holders of record of voting shares on such date shall be entitled to notice of and to vote at such meeting.
 
PROCEEDINGS AT GENERAL MEETINGS
 
27.            Quorum .
 
(a)           No business shall be transacted at a General Meeting, or at any adjournment thereof, unless the quorum required under these Articles for such General Meeting or such adjourned meeting, as the case may be, is present when the meeting proceeds to business.
 
 
51

 
 
(b)           In the absence of contrary provisions in these Articles, two or more Shareholders, present in person or by proxy and holding in the aggregate at least a majority of the outstanding voting power in the Company (on an as converted basis), shall constitute a quorum of General Meetings.
 
(c)           If within half an hour from the time appointed for the meeting a quorum is not present, the meeting, if convened upon request under Sections 63 or 64 of the Companies Law, shall be dissolved, but in any other case it shall be adjourned to the same day in the next week, at the same time and place, or to such day and at such time and place as the Chairman may determine with the consent of the holders of more than 50% of the voting power represented at the meeting in person or by proxy and voting on the question of adjournment. No business shall be transacted at any adjourned meeting except business that might lawfully have been transacted at the meeting as originally called. At such adjourned meeting (other than an adjourned separate meeting of a particular class of shares as referred to in Article 7 of these Articles), any two shareholders present in person or by proxy shall constitute a quorum.
 
28.            Chairman .
 
The Chairman, if any, of the Board of Directors shall preside at every General Meeting of the Company.  If at any meeting the Chairman is not present within 15 minutes after the time fixed for holding the meeting or is unwilling to take the chair, the Shareholders present shall choose someone of their number to be the chairman of such meeting.  The office of Chairman shall not, by itself, entitle the holder thereof to vote at any General Meeting nor shall it entitle such holder to a second or casting vote (without derogating, however, from the right of such Chairman to vote as a Shareholder or proxy of a Shareholder if, in fact, he is also a Shareholder or such proxy).
 
29.            Adoption of Resolutions at General Meetings .
 
(a)           Subject to the provisions of Article 73, a resolution shall be deemed adopted if approved by the holders of more than 50% of the voting power represented at the meeting in person or by proxy and voting thereon.
 
(b)           Every question submitted to a General Meeting shall be decided by a show of hands, but if a written ballot is demanded by a Shareholder, present in person or by proxy and entitled to vote at the meeting, then the same shall be decided by a written ballot.  A written ballot may be demanded before the proposed resolution is voted upon or immediately after the declaration by the Chairman of the results of the vote by a show of hands.  If a written ballot is demanded after such declaration, then the results of the vote by a show of hands shall be of no effect, and the proposed resolution shall be decided by a written ballot.
 
(c)           A declaration by the Chairman of the meeting that a resolution has been carried unanimously, or carried by a particular majority, or defeated, and an entry to that effect in the minute book of the Company, shall be prima facie evidence of the fact without proof of the number or proportion of the votes recorded in favor of or against such resolution.
 
 
52

 
 
(d)           Shareholders may participate in a General Meeting by means of a conference telephone call or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Article shall constitute presence in person at such meeting.
 
(e)            The Preferred Shares shall vote together with the Ordinary Shares of the Company as one class, and not as a separate class, in all Shareholders meetings, except as required herein or by any applicable law (other than Section 20(c) of the Companies Law with respect to which the provisions of these Articles shall prevail), with each Preferred Share having votes in such number as if then converted into Ordinary Shares.
 
30.            Resolutions in Writing .
 
A resolution in writing signed by all Shareholders of the Company then entitled to attend and vote at General Meetings or to which all such Shareholders have given their written consent (by letter, telegram, telex, facsimile or otherwise) shall be deemed to have been unanimously adopted by a General Meeting duly convened and held.
 
31.            Power to Adjourn .
 
The Chairman of a General Meeting at which a quorum is present may, with the consent of the holders of more than 50% of the voting power represented in person or by proxy and voting on the question of adjournment, and shall if so directed by the meeting, adjourn the meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting except business that might lawfully have been transacted at the meeting as originally called. If a meeting is adjourned for twenty one (21) days or more, then notice thereof shall be given in the manner required for the meeting as originally called. If the adjourned meeting is adjourned for less than (21) days, then notice thereof shall be given in accordance with the provisions of the Companies Law, if any.
 
32.            Voting Power .
 
Subject to the provisions of Articles 5 and 33(a) and subject to any provisions of these Articles conferring special rights as to voting, or restricting the right to vote, every Shareholder shall have one vote for each Ordinary Share held by him of record, on an as converted basis, on every resolution, without regard to whether the vote thereon is conducted by a show of hands, by written ballot or by any other means.
 
33.            Voting Rights .
 
(a)           No Shareholders shall be entitled to vote at any General Meeting (or be counted as part of the quorum) unless all calls then payable by him in respect of his shares in the Company have been paid.
 
(b)           A company or other corporate body being a Shareholder of the Company may duly authorize any person to be its representative at any meeting of the Company or to authorize or deliver a proxy on its behalf.  Any person so authorized shall be entitled to exercise on behalf of such Shareholder all the power that the latter could have exercised if it were a natural person.  Upon the request of the Chairman of the meeting, written evidence of such authorization (in form acceptable to the Chairman) shall be delivered to him.
 
 
53

 
 
(c)           Any Shareholder entitled to vote may vote either in person or by proxy (who need not be a Shareholder of the Company), or if the Shareholder is a company or other corporate body by a representative authorized pursuant to Article 33(b).
 
(d)           If two or more persons are registered as joint holders of any share, the vote of the senior who tenders a vote, in person or by proxy, shall be accepted to the exclusion of the vote(s) of the other joint holder(s).  For the purposes of this Article 33(d), seniority shall be determined by the order of registration of the joint holders in the Register of Shareholders.
 
PROXIES
 
34.            Instrument of Appointment .
 
(a)           An instrument appointing a proxy shall be in writing and shall be substantially in the following form:
 
“I [Name of Shareholder] of [Address of Shareholder] being a Shareholder of Check-Cap Ltd. hereby appoint [Name of Proxy] of [Address of Proxy] as my proxy to vote for me and on my behalf at the General Meeting of the Company to be held on the _____ day of _____________ and at any adjournment(s) thereof.
 
Signed this ____ day of ______________, [signature of appointer].”
 
or in any usual or common form or in such other form as may be approved by the Board of Directors.  Such proxy shall be duly signed by the appointor or such person's duly authorized attorney or, if such appointor is a company or other corporate body, under its common seal or stamp or the hand of its duly authorized agent(s) or attorney(s).
 
(b)           The instrument appointing a proxy (and the power of attorney or other authority, if any, under which such instrument has been signed) shall either be delivered to the Company (at its principal place of business or at the offices of its registrar or transfer agent, or at such place as the Board of Directors may specify) not less than 24 hours before the time fixed for the meeting at which the person named in the instrument proposes to vote, or presented to the Chairman at such meeting.
 
35.            Effect of Death of Appointor or Transfer of Share or Revocation of Appointment .
 
(a)           A vote cast in accordance with an instrument appointing a proxy shall be valid despite the prior death or bankruptcy of the appointing Shareholder (or of his attorney-in-fact, if any, who signed such instrument), or the transfer of the share in respect of which the vote is cast, unless written notice of such matters shall have been received by the Company or by the Chairman of such meeting prior to such vote being cast.
 
 
54

 
 
(b)           Except if otherwise set forth in the instrument, an instrument appointing a proxy shall be deemed revoked (i) upon receipt by the Company or the Chairman, subsequent to receipt by the Company of such instrument, of written notice signed by the person who signed such instrument or by the Shareholder appointing such proxy canceling the appointment thereunder (or the authority pursuant to which such instrument was signed) or of an instrument appointing a different proxy (and such other documents, if any, required under Article 34(b) for such new appointment), provided such notice of cancellation or instrument appointing a different proxy were so received at the place and within the time for delivery of the instrument revoked thereby as referred to in Article 34(b) of these Articles, or (ii) if the appointing Shareholder is present in person at the meeting for which such instrument of proxy was delivered, upon receipt by the Chairman of such meeting of written notice from such Shareholder of the revocation of such appointment, or if and when such Shareholder votes at such meeting.  A vote cast in accordance with an instrument appointing a proxy shall be valid despite the revocation or purported cancellation of the appointment, or the presence in person or vote of the appointing Shareholder at a meeting for which it was rendered, unless such instrument of appointment was deemed revoked in accordance with the foregoing provisions of this Article 35(b) at or prior to the time such vote was cast.
 
BOARD OF DIRECTORS
 
36.            Powers of Board of Directors .
 
(a)            General .
 
The management of the business of the Company shall be vested in the Board of Directors, which may exercise all such powers and do all such acts and things as the Company is authorized to exercise and do, and are not required by law or these Articles to be done by the Company by action of its Shareholders at a General Meeting.  The authority conferred on the Board of Directors by this Article 36 shall be subject to the provisions of the Companies Law, these Articles and any regulation or resolution consistent with these Articles adopted from time to time by the Company by action of its Shareholders at a General Meeting; provided, however, that no such regulation or resolution shall invalidate any prior act done by or pursuant to a decision of the Board of Directors that would have been valid if such regulation or resolution had not been adopted.
 
(b)            Borrowing Power .
 
The Board of Directors may from time to time, at its discretion, cause the Company to borrow or guaranty the payment of any sum or sums of money for the purposes of the Company, and may secure or provide for the repayment of such sum or sums in such manner, at such times and upon such terms and conditions as it deems fit, and in particular by the issuance of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages, charges or other security interest on the whole or any part of the property of the Company, both present and future, including its uncalled or called but unpaid capital for the time being.
 
 
55

 
 
(c)            Reserves .
 
The Board of Directors may, from time to time, set aside any amount(s) out of the profits of the Company as a reserve or reserves for any purpose(s) that the Board of Directors, in its absolute discretion, shall deem fit, and may invest any sum so set aside in any manner and from time to time deal with and vary such investments and dispose of all or any part thereof, and employ any such reserve or any part thereof in the business of the Company without being bound to keep the same separate from other assets of the Company, and may subdivide or redesignate any reserve or cancel the same or apply the funds therein for another purpose, all as the Board of Directors may from time to time think fit.
 
37.            Exercise of Powers of Board of Directors .
 
(a)           A meeting of the Board of Directors at which a quorum is present shall be competent to exercise all the authorities, powers and discretion vested in or exercisable by the Board of Directors.
 
(b)           Subject to the provisions of Article 73, a resolution proposed at any meeting of the Board of Directors shall be deemed adopted if approved by the majority of the Directors lawfully entitled to vote thereon and present when such resolution is put to a vote and voted thereon.
 
(c)           Subject to the provisions of Article 73, a resolution in writing signed by all of the Directors then in office and lawfully entitled to vote thereon or to which all of the Directors have given their written consent (by letter, telegram, telex, facsimile or otherwise) shall be deemed to have been unanimously adopted by a meeting of the Board of Directors duly convened and held.
 
38.            Delegation of Powers .
 
(a)           Subject to Article 73 and to Section 112 of the Companies Law, the Board of Directors may delegate any or all of its powers to committees, each consisting of any Director who has indicated his/her interest to serve in such committee (each an " Interested Director "), and it may from time to time revoke such delegation or alter the composition of any such committee (provided that any Interested Director shall continue to be a member of any such committee).  Any Committee so formed (in these Articles referred to as a “ Committee of the Board of Directors ”), shall, in the exercise of the powers so delegated, conform to any regulations imposed on it by the Board of Directors.  The meetings and proceedings of any such Committee of the Board of Directors shall, mutatis mutandis , be governed by the provisions herein contained for regulating the meetings of the Board of Directors, so far as not superseded by any regulations adopted by the Board of Directors under this Article.  Unless otherwise expressly provided by the Board of Directors in delegating powers to a Committee of the Board of Directors, such Committee shall not be empowered to further delegate such powers.
 
(b)           Without derogating from the provisions of Article 51, the Board of Directors may, subject to the provisions of the Companies Law, from time to time appoint a Secretary to the Company, as well as officers, agents, employees and independent contractors, as the Board of Directors may think appropriate, and may terminate the service of any such person.  The Board of Directors may, subject to the provisions of the Companies Law, determine the powers and duties, as well as the terms and conditions of employment, of all such persons, and may require security in such cases and in such amounts as it thinks appropriate.
 
 
56

 
 
(c)           The Board of Directors may from time to time appoint, in the name of the Company, (an) advisor(s), counsel, (an) attorney(s), (a) consultant(s) or other third party to provide strategic advice, scientific assessments, legal advice, general business development advice or other specialist advice.  The fees for such advice will be paid by the Company.
 
(d)           Without derogating from the provisions of Article 38(a), the Board of Directors may form an HR Committee. To the extent that such a committee is formed, it shall be comprised of the Pontifax Director, the director representing the Preferred A Shareholders, and the director representing the Preferred B Shareholders. To the extent formed, the HR Committee will review and approve the terms of employment of all VP level management of the Company.
 
  (e)           Without derogating from the provisions of Article 38(a), the Board of Directors may form a Business Development and Management Committee. To the extent that such committee is formed, it shall include the Pontifax Director. In addition, to the extent such committee is formed, representatives of Pontifax will serve as external members of the Business Development and Management Committee.
 
(g)           The Pontifax Director shall have the right to determine the location of one "in person" Board meeting each year. The Company will reimburse the Pontifax Director and observer for reasonable out-of-pocket expenses incurred by them in connection with their attendance at Board meetings.
 
39.            Number of Directors .
 
(a)           The Board of Directors shall consist of up to eight (8) Directors of whom:
 
(i)            The holders of a majority of the Ordinary Shares shall be entitled to appoint one (1) Director;
 
(ii)           The holders of a majority of the Preferred A Shares shall be entitled to appoint one (1) Director;
 
(iii)          The holders of a majority of the Preferred B Shares shall be entitled to appoint one (1) Director;
 
(iv)          Pontifax shall be entitled to appoint one (1) Director;
 
(v)            one (1) director shall be the Company's CEO, ex officio ;
 
 
57

 
 
               (vi)           Spearhead shall be entitled to appoint one (1) Director;
 
 
(vii)
Docor shall be entitled to appoint one (1) Director; and
 
 
(viii)
The majority of the Directors shall be entitled to appoint one (1) Director.
 
(b)           Without derogating from Article 39(a), each of Pontifax and the Founder will be entitled to appoint one observer to the Board of Directors who may attend the meetings of the Board of Directors but shall not have the right to vote.
 
(c)           The right to appoint a director to the Board of Directors of the Company granted to a specifically named Shareholder in Article 39(a) may not be waived or terminated without the prior written consent of such Shareholder. To the extent that an amendment of this Article 39(c) adversely affects the rights and privileges of a specifically named Shareholder, such amendment shall require the prior written consent of such Shareholder.
 
40.            Appointment and Removal of Directors .
 
(a)           Except as otherwise provided in these Articles, Directors shall not be elected but shall be appointed. In addition, subject to Article 42, vacancies, however created, on the Board of Directors may only be filled by the Person who designated the previous incumbent of such vacancy.
 
(b)           The appointment (including fill of vacancy) or removal of a Director shall be effected by the delivery of a written notice to the Company at its principal office, signed by the Person entitled to effect such appointment or removal.  Any appointment or removal shall become effective on the date fixed in the notice or upon delivery of the notice to the Company, whichever is later.
 
41.            Qualification of Directors .
 
No person shall be disqualified to serve as a Director by reason of his not holding shares in the Company or by reason of his having served as a Director in the past.
 
42.            Continuing Directors in the Event of Vacancies .
 
Subject to Articles 39 and 48, in the event of one or more vacancies in the Board of Directors, the remaining Directors may continue to act in every matter and, pending the filling of any vacancy pursuant to the provisions of Article 40, may appoint Director(s) to fill any such vacancy temporarily (such temporarily appointed Director being automatically deemed to be removed from the Board upon the appointment of a Director to fill the previous vacancy in accordance with Article 40); provided, however, that if they number less than a majority of the number provided for pursuant to Article 39 of these Articles, they may act only in an emergency or to fill the office of Director that has become vacant up to the minimum number or in order to call a General Meeting of the Company for the purpose of electing Directors to fill any or all vacancies, so that at least a majority of the number of Directors provided for pursuant to Article 39 are in office as a result of such meeting.
 
 
58

 
 
43.            Vacation of Office .
 
(a)           The office of a Director shall be vacated, ipso facto , upon his death, or if he be found lunatic or become of unsound mind, or if he becomes bankrupt (or if the Director is a company, upon its winding-up).
 
(b)           The office of a Director shall be vacated by his written resignation.  Such resignation shall become effective on the date fixed therein or upon the delivery to the Company, whichever is later.
 
44.            Remuneration of Directors; Reimbursement of Expenses
 
A Director shall be paid remuneration by the Company for his services as a Director, to the extent such remuneration shall have been approved by a General Meeting of the Company.  The Company shall reimburse Directors and observers, for reasonable expenses incurred in connection with their service on the Board of Directors and their attendance at Board meetings, in accordance with the Company’ policy.
 
45.            Conflict of Interests .
 
Subject to the provisions of the Companies Law, no Director shall be disqualified by virtue of his office from holding any office or relationship of profit with the Company or with any company in which the Company shall be a shareholder or have another interest, or from contracting with the Company as vendor, purchaser or otherwise, nor shall any such contract, or any contract or arrangement entered into by or on behalf of the Company in which any Director shall in any way be interested, be avoided, nor, other than as required under the Companies Law, shall any Director be liable to account to the Company for any profit arising from any such office or relationship of profit or realized from such contract or arrangement by reason only of such Director's holding that office or of the fiduciary relations thereby established, but the nature of his interest, as well as any material fact or document, must be disclosed by him at the meeting of the Board of Directors at which the contract or arrangement is first considered, if his interest then exists, or in any other case no later than the first meeting of the Board of Directors after the acquisition of his interest.
 
46.            Alternate Directors .
 
(a)           A Director may, by written notice to the Company, appoint an alternate for himself (in these Articles referred to as an “ Alternate Director ”), remove such Alternate Director and appoint another Alternate Director in place of any Alternate Director appointed by him whose office has been vacated for any reason whatsoever. Unless the appointing Director, by the instrument appointing an Alternate Director or by written notice to the Company, limits such appointment to a specified period of time or restricts it to a specified meeting or action of the Board of Directors, or otherwise restricts its scope, the appointment shall be for an indefinite period, and for all purposes.
 
 
59

 
 
(b)           Any notice to the Company pursuant to Article 46(a) shall be given in person to, or by sending the same by mail to the attention of, the General Manager of the Company at the principal office of the Company or to such other person or place as the Board of Directors shall have determined for such purpose, and shall become effective on the date fixed therein, or upon the receipt thereof by the Company at the place specified above, whichever is later.
 
(c)           An Alternate Director shall have all the rights and obligations of the Director for whom the substitute is appointed; provided, however, that (i) he may not in turn appoint an alternate for himself (unless the instrument appointing him expressly provides otherwise), (ii) an Alternate Director shall have no standing at any meeting of the Board of Directors or any Committee of the Board of Directors while the Director for whom the substitute is appointed him is present, and (iii) the Alternate Director is not entitled to remuneration.
 
(d)           Any natural person that does not act as a Director but that is so qualified may act as an Alternate Director.  One person may not act as Alternate Director for more than one Director.
 
(e)           An Alternate Director shall alone be responsible for his own acts and defaults, and he shall not be deemed the agent of the Director who appointed him.
 
(f)           The office of an Alternate Director shall be vacated under the circumstances, mutatis mutandis, set forth in Article 43, and such office shall ipso facto be vacated if the Director who appointed such Alternate Director ceases to be a Director.
 
PROCEEDINGS OF THE BOARD OF DIRECTORS
 
47.            Meetings .
 
(a)           The Board of Directors may meet and adjourn its meetings and otherwise regulate such meetings and proceedings as the Directors deem fit.
 
(b)           Any one (1) Director may at any time, and the Chairman of the Board of Directors upon the request of any Director shall, convene a meeting of the Board of Directors, but not less than two (2) days notice shall be given of any meeting so convened.  Notice of any such meeting may be given in writing or by email, mail, telegram or facsimile.  Despite anything to the contrary in these Articles, failure to deliver notice to a Director of any such meeting in the manner required hereby may be waived by such Director, and a meeting shall be deemed to have been duly convened despite such defective notice if such failure or defect is waived prior to action being taken at such meeting by all Directors entitled to participate in such meeting to whom notice was not duly given.
 
 
60

 
 
(c)           Directors may attend any meeting via telephone so long as all may hear and be heard.
 
48.            Quorum .
 
Until otherwise unanimously decided by the Board of Directors, a quorum at a meeting of the Board of Directors shall be constituted by the presence in person or by telephone conference of a majority of the Directors appointed pursuant to Article 39 and lawfully entitled to vote on the subject matter of the relevant meeting,  provided, that, all members of the Board of Directors received due notice of such meeting or telephone conference.  No business shall be transacted at a meeting of the Board of Directors unless the requisite quorum is present (in person or by telephone conference) when the meeting proceeds to business.  If within half an hour from the time appointed for the meeting a quorum is not present it shall be adjourned to the next business day, at the same time and place, unless a majority of the Directors decide otherwise.  No business shall be transacted at any adjourned meeting except business that might lawfully have been transacted at the meeting as originally called.  At such adjourned meeting those Directors (appointed pursuant to Article 39) present, and lawfully entitled to vote on the subject matter of the relevant meeting shall constitute a quorum.
 
49.            Chairman of the Board of Directors .
 
The Board of Directors may from to time to time elect one of its members to be the Chairman of the Board of Directors, remove such Chairman from office and appoint another in his place.  The Chairman of the Board of Directors shall preside at every meeting of the Board of Directors, but if there is no such Chairman, or if at any meeting he is not present within fifteen (15) minutes of the time fixed for the meeting, or if he is unwilling to take the chairmanship, the Directors present shall choose one of their number to be the chairman of such meeting.  The Chairman of the Board of Directors shall not have a casting or deciding vote.
 
50.            Validity of Acts Despite Defects .
 
All acts done bona fide at any meeting of the Board of Directors, or of a committee of the Board of Directors, or by any person(s) acting as Director(s), shall, even if it is subsequently discovered that there was some defect in the appointment of the participants in such meeting or any of them or any person(s) acting as aforesaid, or that they or any of them were disqualified, be as valid as if there were no such defect or disqualification.
 
GENERAL MANAGER
 
51.            General Manager, Chief Executive Officer, Managers .
 
Subject to Article 73, the Board of Directors may from time to time appoint one or more persons, whether or not Directors, as General Manager as Chief Executive Officer of the Company or Managers, and may confer upon such person(s), and from time to time modify or revoke, such title(s) and such duties and authorities as the Board of Directors may deem fit, subject to such limitations and restrictions as the Board of Directors may from time to time prescribe.  Unless otherwise determined by the Board of Directors, the General Manager shall have authority with respect to management of the Company in the ordinary course of business.
 
 
61

 
 
MINUTES
 
52.            Minutes .
 
(a)           Minutes of each General Meeting, of each meeting of the Board of Directors and of each meeting of a Committee of the Board of Directors shall be recorded and duly entered in books provided for that purpose, and shall be held by the Company at its principal office or such other place as shall be determined by the Board of Directors.  Such minutes shall, in all events, set forth the name of the persons present at the meeting and all resolutions adopted at the meeting.
 
(b)           Any such minutes, if purporting to be signed by the chairman of the meeting or by the chairman of the next succeeding meeting, shall constitute prima facie evidence of the matters recorded therein.
 
DIVIDENDS
 
53.            Declaration of Dividends; Dividend Preference; Withholding.
 
(a)            Subject to Article 73, the Board of Directors may from time to time declare, and cause the Company to pay, such interim dividend as may appear to the Board of Directors to be justified by the profits of the Company.  The Board of Directors shall be entitled to declare a final dividend in respect of any fiscal period.  The Board of Directors shall determine the time for payment of such dividends, both interim and final, and the record date for determining the Shareholders entitled thereto.  All dividends shall be distributed in the following manner:

(i)            First, to the holders of the Preferred D Shares, pro rata in accordance with their respective holdings at the record date of such distribution, until each holder of the Preferred D Shares has received aggregate distributions in an amount sufficient to give such holder its Preferred D Shares Preferred Amount through the date of such distribution.
 
(ii)            Next, to the holders of the Preferred C Shares, pro rata in accordance with their respective holdings at the record date of such distribution, until each holder of the Preferred C Shares has received aggregate distributions in an amount sufficient to give such holder its Preferred C Shares Preferred Amount through the date of such distribution.
 
(iii)            Next, to the holders of the Preferred A Shares, pro rata in accordance with their respective holdings at the record date of such distribution, until each holder of the Preferred A Shares has received aggregate distributions in an amount sufficient to give such holder its Preferred A Shares Preferred Amount through the date of such distribution.
 
 
62

 
 
(iv)            Next, to the holders of the Preferred B Shares, pro rata in accordance with their respective holdings at the record date of such distribution, until each holder of the Preferred B Shares has received aggregate distributions in an amount sufficient to give such holder its Preferred B Shares Preferred Amount through the date of such distribution.
 
(v)            Next, to the holders of the Preferred Shares, as a single class, pro rata in accordance with each holders' Deemed Preferred A Purchase Price, Deemed Preferred B Purchase Price, Deemed Preferred C Purchase Price and Deemed Preferred D Purchase Price, as applicable, at the record date of such distribution, until each holder of Preferred Shares has received distributions in an amount sufficient to return to each such holder its respective Deemed Purchase Price, as applicable; provided, that at such time as any holder of Preferred D Shares, Preferred C Shares, Preferred A Shares or Preferred B Shares shall have received distributions equal to its respective Deemed Purchase Price, distributions to such holder of Preferred D Shares, Preferred C Shares, Preferred A Shares or Preferred B Shares shall cease, but continue as to the other holders of Preferred D Shares, Preferred C Shares, Preferred A Shares or Preferred B Shares on a pari passu basis in relation to their respective Preferred Shareholdings at the time of such distribution until the other holders of Preferred D Shares, Preferred C Shares, Preferred A Shares and/or Preferred B Shares, respectively, have received distributions in an amount equal to each holder’s respective Deemed Purchase Price.
 
(vi)            Thereafter, to all Shareholders (of all classes) in a proportion equal to the number of Ordinary Shares held by each Shareholder (on a fully diluted basis giving effect to conversion of the Preferred Shares into Ordinary Shares whether or not converted) over the total number of Ordinary Shares issued and outstanding at such time (on a fully diluted basis giving effect to conversion of the Preferred Shares into Ordinary Shares whether or not converted).
 
(b)   Withholding.   The Company is authorized to withhold from distributions to be made to a Shareholder, and to pay over to a federal, state or local government, in Israel or elsewhere, any amounts required to be withheld pursuant to applicable law.  Any amounts so withheld shall be treated as distributed to such Shareholder for all purposes of these Articles.
 
54.            Funds Available for Payment of Dividends or Distributions to Shareholders .
 
(a)  Subject to Article 54(b), no dividend shall be paid otherwise than out of the profits of the Company.
 
(b)  The Company shall make commercially reasonable efforts to make or cause to be made distributions, or to advance funds to the holders of Ordinary Shares, Preferred A Shares and/or Preferred B Shares as are necessary to eliminate the impact of the reorganization and the transfer of certain assets or licensing of certain Company assets from Check-Cap LLC.  Notwithstanding the foregoing, the Company will not advance payments to holders of Ordinary Shares, Preferred A Shares and/or Preferred B Shares to address the fact that they will no longer receive a "pass through" of losses generated by the Company as they have while owning units of Check-Cap LLC. These advances, if and to the extent made, will be deducted from any distributions such Shareholders receive from the Company.
 
 
63

 
 
55.            Amount Payable by Way of Dividends .
 
Subject to Article 53, any dividend paid by the Company shall be allocated among the Shareholders entitled thereto in proportion to the sums paid up or credited as paid up on account of the nominal value of their respective holdings of the shares in respect of which such dividend is being paid without taking into account the premium paid up for the shares.  The amount paid up on account of a share that has not yet been called for payment or fallen due for payment and upon which the Company pays interest to the Shareholder shall not be deemed, for the purposes of this Article, to be a sum paid on account of the share.
 
56.            Interest .
 
No dividend shall carry interest as against the Company.
 
57.            Payment in Specie .
 
Upon the resolution of the Board of Directors and subject to Article 53, the Company (i) may cause any moneys, investments or other assets forming part of the undivided profits of the Company, standing to the credit of a reserve fund or to the credit of a reserve fund for the redemption of capital, or in the control of the Company and available for dividends, or representing premiums received on the issuance of shares and standing to the credit of the share premium account, to be capitalized and distributed among such of the Shareholders as would be entitled to receive the same if distributed by way of dividend and in the same proportion, on the basis that they become entitled thereto as capital, or may cause any part of such capitalized fund to be applied on behalf of such Shareholders in paying up in full, either at par or at such premium as the resolution may provide, any unissued shares or debentures or debenture stock of the Company that shall be distributed accordingly, in payment, in whole or in part, of the uncalled liability on any issued shares or debentures or debenture stock; and (ii) may cause such distribution or payment to be accepted by such Shareholders in full satisfaction of their interest in the said capitalized sum.
 
58.            Implementation of Powers under Article 57 .
 
For the purpose of giving full effect to any resolution under Article 57, and without derogating from the provisions of Article 7 hereof, the Board of Directors may settle any difficulty that may arise in regard to the distribution as it deems expedient, and in particular may issue fractional certificates, and may fix the value for distribution of any specific assets, and may determine that cash payments shall be made to any Shareholders upon the basis of the value so fixed, or that fractions of less value than the nominal value of one share may be disregarded in order to adjust the rights of all parties, and may vest any such cash, shares, debentures, debentures stock or specific assets in trustees upon such trusts for the persons entitled to the dividend or capitalized fund as may seem expedient to the Board of Directors.
 
 
64

 
 
59.            Dividends on Unpaid Shares .
 
Without derogating from Article 55, the Board of Directors may give an instruction that shall prevent the distribution of a dividend to the holders of shares on which the full nominal amount has not been paid up.
 
60.            Retention of Dividends .
 
(a)           The Board of Directors may retain any dividend or other moneys payable or property distributable in respect of a share on which the Company has a lien, and may apply the same in or toward satisfaction of the debts, liabilities or obligations in respect of which the lien exists.
 
(b)           The Board of Directors may retain any dividend or other moneys payable or property distributable in respect of a share in respect of which any person is, under Articles 22 and 23, entitled to become a Shareholder, or which any person is, under such Articles, entitled to transfer, until such person shall become a Shareholder in respect of such share or shall transfer the same.
 
61.            Unclaimed Dividends .
 
All unclaimed dividends or other moneys payable in respect of a share may be invested or otherwise made use of by the Board of Directors for the benefit of the Company until claimed.  The payment by the Board of Directors of any unclaimed dividend or such other moneys into a separate account shall not constitute the Company a trustee in respect thereof.  The principal (and only the principal) of an unclaimed dividend or such other moneys shall be, if claimed, paid to a person entitled thereto.
 
62.            Mechanics of Payment .
 
Any dividend or other moneys payable in cash in respect of a share may be paid by check or draft sent through the post to, or left at, the registered address of the person entitled thereto or by transfer to a bank account specified by such person (or, if two or more persons are registered as joint holders of such share or are entitled jointly thereto in consequence of the death or bankruptcy of the holder or otherwise, to the joint holder whose name is registered first in the Register of Shareholders or his bank account or the person whom the Company may then recognize as the owner thereof or entitled thereto under Article 22 or 23 hereof, as applicable, or such person's bank account), or to such person and at such other address as the person entitled thereto may by writing direct.  Every such check or draft shall be made payable to the order of the person to whom it is sent, or to such person as the person entitled thereto as aforesaid may direct, and payment of the check or draft by the bank upon which it is drawn shall be a good discharge to the Company.
 
 
65

 
 
63.            Receipt from a Joint holder .
 
If two or more persons are registered as joint holders of any share, or are entitled jointly thereto in consequence of the death or bankruptcy of the holder or otherwise, any one of them may give effectual receipts for any dividend or other moneys payable or property distributable in respect of such share.
 
ACCOUNTS; AUDITS
 
64.            Books of Account .
 
The Board of Directors shall cause accurate books of account to be kept in accordance with the provisions of the Companies Law and of any other applicable law.  Such books of account shall be kept at the principal office of the Company, or at such other place or places as the Board of Directors may deem fit, and they shall always be open to inspection by all Directors.  Such books of account and other corporate documents and records shall also be open to inspection by the Shareholders and by auditors appointed by the Shareholders, provided that such Shareholders and auditors shall enter into confidentiality undertakings reasonably satisfactory to the Board of Directors.
 
65.            Audit .
 
At least once in every Fiscal Year the accounts of the Company shall be audited and the correctness of the profit and loss account and balance sheet certified by one or more duly qualified auditors.
 
66.        Auditors .
 
The appointment, authorities, rights and duties of the auditor(s) of the Company shall be regulated by the Companies Law and subject to Article 73; provided, however, that the Board of Directors shall have the authority to fix the remuneration of the auditor(s).
 
RIGHTS OF SIGNATURE, STAMP AND SEAL
 
67.            Rights of Signature, Stamp and Seal .
 
(a)            Subject to Article 73, the Board shall be entitled to authorize any person or persons (who need not be Directors) to act and sign on behalf of the Company, and the acts and signature(s) of such person(s) on behalf of the Company shall bind the Company to the extent such person acted and signed within the scope of his or their authority.
 
 
66

 
 
(b)            The Board may provide for a seal.  If the Board so provides, it shall also provide for the safe custody thereof.  Such seal shall not be used except by the authority of the Board of Directors and in the presence of the person(s) authorized to sign on behalf of the Company, who shall sign every instrument to which such seal is affixed.
 
NOTICES
 
68.            Notices .
 
Unless a specific provision relating to notices is contained in any other Article, the following shall apply:
 
(a)            Any written notice or other document may be served by the Company upon any Shareholder either personally or by sending it by prepaid mail (airmail if sent internationally) addressed to such Shareholder at his address as it appears in the Register of Shareholders or such other address as he may have designated in writing for the receipt of notices and other documents or by telegram, telex, facsimile or electronic mail.  Any written notice or other document may be served by any Shareholder upon the Company by tendering the same in person to the Secretary or the General Manager of the Company at the principal office of the Company or by sending it by prepaid registered mail (airmail if posted outside Israel) to the Company at its principal office.  Any such notice or other document shall be deemed to have been served when actually tendered if hand delivered, or 72 hours (7 business days if sent internationally) after it has been posted (or when actually received by the addressee if sooner).  Notice sent by telegram, telex, facsimile or electronic mail shall be deemed to have been served when actually received by the addressee.  A notice that is defectively addressed or that otherwise fails to comply with the provisions of this Article shall nevertheless be deemed to have been served if and when actually received by the addressee.
 
(b)            All notices to be given to the Shareholders shall, with respect to any share to which such persons are jointly entitled, be given to whichever of such persons is named first in the Register of Shareholders, and any notice so given shall be sufficient notice to all the holders of such share.
 
(c)            Any Shareholder whose address is not listed in the Register of Shareholders, and who shall not have designated in writing an address for the delivery of notices, shall not be entitled to receive any notice from the Company.
 
INSURANCE, RELEASE AND INDEMNIFICATION OF OFFICERS
 
69.            Insurance

 
The Company may, from time to time and subject to any provision of law, enter into an agreement to insure an Office Holder against any liability, in whole or in part, that may be imposed upon such Office Holder as a result of an action or omission carried out in his capacity as an Office Holder in each of the following cases:
 
 
(i)
breach of duty of care towards the Company or towards another person;

 
67

 
 
 
(ii)
breach of fiduciary duty towards the Company, provided that the Office Holder acted in good faith and had reasonable grounds to assume that the action would not harm the interests of the Company;

 
(iii)
a monetary liability imposed on him in favor of another person.

 
(iv)
expenses, including reasonable litigation expenses and legal fees, incurred by the Office Holder as a result of an Administrative Proceeding instituted against the officer.

 
(v)
payments to an injured party imposed on the Office Holder pursuant to Section 52ND(a)(1)(a) of the Securities Law.
 
In the event that the insurance contract covers the liability of the Company as well, the Office Holder shall have precedence over the Company in collecting the insurance payments.
 
70.             Indemnification

 
(a)
The Company may, from time to time and subject to any provision of law, indemnify an Office Holder, to the fully extent permitted by the Companies Law, in respect of a liability or expense set out below which is imposed on him or incurred by him in his capacity as an Office Holder of the Company:
 
 
 
(i)
monetary liability imposed on him in favor of another person, or expended by him as a result of, a court judgment, including a settlement or a decision of an arbitrator which is given the force of a judgment by court order;

 
(ii)
reasonable litigation expenses, including legal fees, incurred by the Office Holder (i) as a result of an investigation or proceeding instituted against such Office Holder by a competent authority, where such investigation or proceeding has concluded without the filing of an indictment against the Office holder and without any financial obligation imposed on the Office holder in lieu of a criminal proceeding, or that is concluded without indictment of the Office holder but with the imposition of a financial obligation on the Office holder in lieu of a criminal proceeding, with respect to a crime that does not require proof of criminal intent (without derogating from Article 1.2(a) above, the phrases "proceeding that has concluded without the filing of an indictment" and "financial obligation in lieu of a criminal proceeding" shall have the meanings ascribed to such phrases in Section 260(a)(1a) of the Companies Law); or (ii) in connection with a monetary sanction (" Itzum Caspi "); and
 
 
68

 

 
 
(iii)
reasonable litigation expenses, including legal fees, which the Office Holder has incurred or is obliged to pay by the court in proceedings commenced against him by the Company or in its name or by any other person, or pursuant to a criminal proceeding in which he is acquitted or in any criminal proceeding of a crime which does not require proof of criminal intent in which he is convicted.
 
 
(iv) 
expenses, including reasonable litigation expenses and legal fees, incurred by an officer as a result of an Administrative Proceeding instituted against the Office Holder.
 
 
(v)
payments to an injured party imposed on the Office Holder pursuant to Section 52ND(a)(1)(a) of the Securities Law.

 
(b)
The Company may, from time to time and subject to any provision of law:

 
(a)
undertake in advance to indemnify an Office Holder of the Company for any of the following:

 
(i)
any liability as set out in Article 70(a)(i) above, provided that the undertaking to indemnify is limited to the events which in the opinion of the Board of Directors can be anticipated in light of the Company’s activities at the time of giving the indemnification undertaking, and for an amount and/or criteria which the Board of Directors has determined are reasonable in the circumstances and, the events and the amounts or criteria that the Board of Directors deem reasonable in the circumstances at the time of giving of the undertaking are stated in the undertaking; or

 
(ii)
any liability stated in Article 70(ii) or (iii) above;

 
(b)
indemnify an Officer Holder after the occurrence of the event which is the subject of the indemnity.
 
71.            Release from Liability
 
 
Subject to the provisions of applicable law, the Company may release an Office Holder in advance from liability, in whole or in part, for damage suffered as a result of breach of duty of care of the Office Holder towards the Company, other than for a breach of care in connection with a Distribution.
 
 
69

 
 
 
71A.
Articles 69-71 above are not intended and shall not in any way limit the Company’s ability to enter into any contract of insurance or to grant a release from liability or an indemnity:

 
(i)
in connection with a person who is not an Office Holder, including employees, contractors or consultants of the Company who are not Officer Holders;

 
(ii)
in connection with Officer Holders - to the extent that the insurance, release or indemnity is not prohibited by law.

 
71B.
The provisions of Article 69-71 above shall apply to a corporate representative of a Director and an Alternate Director.
 
DISSOLUTION OR LIQUIDATION OF THE COMPANY
 
                72.             If the Company is dissolved, the Board of Directors shall wind up its affairs.  On winding up of the Company, or upon the occurrence of a Deemed Liquidation Event, the assets of the Company shall be distributed, first, to creditors of the Company in satisfaction of the liabilities of the Company, and then the remaining proceeds to the Shareholders in accordance with the priorities set forth in Article 53.
 
MAJOR DECISIONS
 
73.               Major Decisions .
 
(a)            Decisions Requiring Approval of the Requisite Majority .  Until immediately prior to the closing of a Qualifying IPO or a Liquidation Event, the Company will not, without the consent of the Requisite Majority, take any action that (each, a " Major Decision "):

(i)               Changes the rights, preferences, or privileges of any shares;
 
(ii)              Amends any provision of these Articles;
 
(iii)              Increases or decreases the authorized number of shares;
 
 
(iv)
Creates (by reclassification or otherwise) any new class or series of shares, or issues any new class or series of shares (other than pursuant to the ESOP);
 
 
(v)
Results in the redemption or repurchase of any shares (other than pursuant to the ESOP);
 
(vi)              Results in a Deemed Liquidation Event;
 
 
70

 
 
 
(vii)
Results in a merger with or the acquisition of all or substantially all of the assets or stock of any entity not wholly owned by the Company;
 
 
(viii)
Establishes any mortgage, pledge, or lien against any material asset of the Company;
 
(ix)              Increases or decreases the authorized size of the Board;
 
(x)               Results in the payment or declaration of any distribution on any shares;
 
 
(xi)
Results in the acquisition by the Company of any other business or material asset;
 
 
(xii)
Results in any proprietary information being licensed from a third party and for which the total cost is in excess of US$150,000 per year;
 
 
(xiii)
Results in a material change in the business or strategic direction of the Company; or
 
 
(xiv)
Results in any amendment to the Company’s ESOP or any other similar incentive arrangement.
 
(b)        Breach of Covenant . In the event that the Company takes any action which is a decision under Article 73(a) without the consent of the Requisite Majority  , and as set forth in this Article 73, such action shall be void and of no force and effect.
 
71




Exhibit 10.1
 
Check-Cap, LLC
 
2006 UNIT OPTION PLAN
 
 
 

 
 
TABLE OF CONTENTS
 
1
1
5
8
9
9
9
10
10
11
12
13
14
15
15
16
16
17
18
18
19
19
19
20
20
20
20
 
 
 

 

 
Check-Cap, LLC

2006 UNIT OPTION PLAN
 
This plan, as amended from time to time, shall be known as the Check–Cap, LLC 2006 Unit Option Plan (the " Plan ").

1.

The purpose of the Plan is to foster and promote the long-term financial success of the Company and its Subsidiaries and materially increase member value by:

 
(a)
motivating superior performance by means of performance-related incentives;

 
(b)
encouraging and providing for the acquisition of an ownership interest in the Company by Eligible Persons; and

 
(c)
enabling the Company to attract and retain the services of outstanding management team and other qualified and dedicated employees upon whose judgment, interest and special effort the successful conduct of its operations is largely dependent.
 
2.

For purposes of interpreting the Plan and related documents (including the Option Agreement and its appendices), the following definitions shall apply:

 
(a)
" Administrator " - means the Board or the Committee as shall be administering the Plan, in accordance with Section 3 hereof.
 
 
(b)
"Affiliate" - means an entity, which is a Parent or Subsidiary of the Company, direct or indirect.
 
 
(c)
" Applicable Laws " - means the requirements relating to the taxation or administration of employee option plans or grants or exercises of options under the law of the State of Israel with respect to option grants made hereunder to persons subject to taxation by the State of Israel and the laws of the United States, the State of Illinois with respect to option grants made hereunder to persons not subject to taxation by the laws of the State of Israel, any stock exchange or quotation system on which equity interests in the Company are listed or quoted.
 
 
(d)
" Approved 102 Option " - means an Option granted pursuant to Section 102(b) of the Tax Ordinance and held in trust by the Trustee for the benefit of the Optionee.
 
 
(e)
" Board " - means the Board of Directors of the Manager of the Company which functions as the board of the Company.
 
 
(f)
"Cause" - means, (i) conviction of any felony involving moral turpitude or affecting the Company; (ii) any failure (as a result of gross negligence or willful misconduct) to carry out, as an employee of or service provider to the Company or its Affiliates, a reasonable directive of the chief executive officer, the Board or the Optionee’s direct supervisor, which involves the business of the Company or its Affiliates and which was capable of being lawfully performed by Optionee; (iii) embezzlement or theft of funds of the Company or its Affiliates; (iv) any breach of the Optionee’s fiduciary duties or duties of care of the Company; including, without limitation, self-dealing, prohibited disclosure of confidential information of, or relating to, the Company, or engagement in any business competitive to the business of the Company or of its Affiliates; and (v) any conduct (other than conduct in good faith) reasonably determined by the Administrator to be materially detrimental to the Company.
 
 
1

 
 
 
(g)
" Code " - means the United States Internal Revenue Code of 1986, as amended from time to time.

 
(h)
“Committee”   - shall mean a committee of the Board, designated by the Board to administer the Plan.

 
(i)
“Company” – shall mean Check-Cap, LLC, a Delaware limited Liability Company, and any successor thereto.

 
(j)
“Common Units” or “Units” – shall mean the common units of the Company, as may be adjusted pursuant to the Operating Agreement.

 
(k)
Consultant ” – means any person who is engaged by the Company to render consulting or advisory services to any of the Company entities; provided, however, that a consultant must be an individual who is providing or will be providing bona fide services to the Company, with such services (1) not being in connection with the offer or sale of securities in a capital-raising transaction, and (2) not directly or indirectly promoting or maintaining a market for securities of the Company.

 
(l)
Date of Grant ”- shall have the meaning set forth in Section 21 below.

 
(m)
Director ” – means a member of the Board.

 
(n)
“Disability” – means an Optionee’s inability to perform his or her duties with the Company, or any of its affiliates, for a consecutive period of at least 180 days, by reason of any medically determinable physical or mental impairment, as determined by a physician selected by the Optionee and acceptable to the Company.
 
 
(o)
“Effective Date” – shall mean the date on which the Plan is approved by the Board.

 
(p)
" Eligible Person " – shall mean an Employee, a Consultant or a Service Provider.

 
(q)
“Employee”   - shall mean any person, including an officer or Director of the Company or any Affiliate who is employed by the Company or its Affiliate.

 
(r)
“Employment” – shall mean for purposes of Section 10 continuous and regular salaried employment with the Company or a Subsidiary, which shall include (unless the Administrator shall otherwise determine) any period of paid vacation, or any approved leave of absence.

 
(s)
“Exchange Act” – shall mean the Securities Exchange Act of 1934, as now in effect or as hereafter amended, or under any similar law of any other jurisdiction.

 
(t)
“Exercise Price”   – shall mean the price for each Unit subject to an Option.
 
 
2

 
 
 
(u)
“Fair Market Value” – means, as of any date, the value of a Unit determined as follows:

If the Units are listed on any established stock exchange or a national market system, including without limitation the Israeli Stock Exchange, The Nasdaq National Market or The Nasdaq Small Cap Market of The Nasdaq Stock Market, their Fair Market Value shall be the closing sales price for such Units (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in print version of The Wall Street Journal or such other source as the Administrator deems reliable;

If the Units are regularly quoted by a recognized securities dealer but selling prices are not reported, their Fair Market Value shall be the average of the high bid and low asked prices for the Units on the last market trading day prior to the day of determination, or;

In the absence of an established market for the Units, the Fair Market Value thereof shall be determined in good faith by the Administrator.

 
(v)
IPO means the initial public offering of the Company’s Units or interests into which the Units are convertible or for which the Units are exchangeable pursuant to a registration statement filed with and declared effective under the Israeli Securities Law, 1968, or under the United States Securities Act of 1933, as amended, or under any similar law of any other jurisdiction.
 
 
(w)
" Operating Agreement " shall mean the amended and restated Operating Agreement of the Company, dated August 17, 2005, as it may be amended from time to time in accordance with its terms.

 
(x)
Option ” – shall mean the right to purchase the number of Units specified by the Administrator, at a price and for the term fixed by the Administrator in accordance with the Plan and subject to any other limitations and restrictions as this Plan and the Administrator shall impose.

 
(y)
Option Agreement – means a written or electronic agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement shall state, inter alia, the number of Units covered thereby, the dates when it may be exercised (subject to section 8), the Exercise Price and such other terms as the Administrator in its discretion may prescribe. The Option Agreement is subject to the terms and conditions of the Plan.

 
(z)
" Optionee " means an Eligible Person who receives or holds an Option under the Plan.

 
(aa)
"3(i) Options" - means Options granted to Optionees resident in the State of Israel that do not contain such terms as will qualify them under Section 102 of the Tax Ordinance.
 
 
3

 

 
(bb)
"102 Option" – means an Option that the Board intends to be a "102 Option" which shall only be granted to employees  resident in the State of Israel who are not Ten Percent Members, and shall be subject to and construed consistently with the requirements of Section 102 of the Tax Ordinance. The Company shall have no liability to an Optionee, or to any other party, if an Option (or any part thereof), which is intended to be a 102 Option, is not a 102 Option. Approved 102 Options may either be classified as Capital Gain Options ("CGO") or Ordinary Income Options ("OIO").
 
Approved 102 Options elected and designated by the Company to qualify under the capital gain tax treatment in accordance with the provisions of Section 102(b)(2) shall be referred to herein as CGO .

Approved 102 Options elected and designated by the Company to qualify under the ordinary income tax treatment in accordance with the provisions of Section 102(b)(1) shall be referred to herein as OIO .

The Company’s election of the type of Approved 102 Options as CGO or OIO granted to Employees (the " Election ") shall be appropriately filed with the Israeli Tax Authorities before the Date of Grant of any Approved 102 Option.

Such Election shall become effective beginning on the date of the first grant of an Approved 102 Option under the Plan and shall remain in effect until at least the end of the calendar year following the year during which the Company first granted Approved 102 Options. The Election shall obligate the Company to grant only the type of Approved 102 Option it has elected, and shall apply to all Approved 102 Options granted during the period indicated herein, all in accordance with the provisions of Section 102(g) of the Tax Ordinance. For the avoidance of doubt, such Election shall not prevent the Company from granting Unapproved 102 Options simultaneously.
 
All Approved 102 Options must be held in trust by a Trustee, as described in Section 13.

For the avoidance of doubt, the designation of Unapproved 102 Options and Approved 102 Options shall be subject to the terms and conditions set forth in Section 102 of the Ordinance and the regulations promulgated thereunder.

With regards to Approved 102 Options, the provisions of the Plan and/or the Option Agreement shall be subject to the provisions of Section 102 and the Tax Assessing Officer’s permit, and the said provisions and permit shall be deemed an integral part of the Plan and of the Option Agreement. Any provision of Section 102 and/or the said permit which is necessary in order to receive and/or to keep any tax benefit pursuant to Section 102, which is not expressly specified in the Plan or the Option Agreement, shall be considered binding upon the Company and the Optionees.

 
(cc)
" Parent " - means any entity (other than the Company) in an unbroken chain of entities ending with the Company if, at the time of granting an Option, each of the entities (other than the Company), owns equity interests representing fifty percent (50%) or more of total combined voting power of all classes of equity in one of the other entities in such chain.
 
 
(dd)
" Securities Law " means the Israeli Securities Law of 1968 as amended, the United States Securities Act of 1933, as amended, or any similar law of any other jurisdiction that is applicable.
 
 
 
4

 
 
(ee)
" Service Provider " - means an Employee, Director, supplier, Office Holders ([“ Nose Misra” ] - as such term is defined in the Companies Act, 1999, including, inter alia , any other person who is part of the upper management of the Company and who grants managerial services to the Company or an officer) of the Company.
 
 
(ff)
" Subsidiary " - shall mean any entity of which the Company owns directly or indirectly fifty percent (50%) or more of the total combined voting power of all classes of equity of such entity.

 
(gg)
" Successor Company " means any entity into or with which the Company is merged or by which the Company is acquired, pursuant to a Transaction in which the Company is not the surviving entity.

 
(hh)
" Tax Ordinance " - means the Israeli Income Tax Ordinance [New Version]-1961 and the rules and regulations promulgated thereunder as now in effect or as hereafter amended.
 
 
(ii)
" Ten Percent Member " - mean s a person who owns interests possessing more than ten percent (10%) of the total combined voting power of all classes of equity of the Company or of any of its Affiliates immediately before such Option is granted, and in accordance with Section 32(a) of the Tax Ordinance.
 
 
(jj)
" Transaction" - means (i) merger, acquisition or reorganization of the Company with one or more other entities in which the Company is not the surviving entity or (ii) a sale of all or substantially all of the assets or equity interests the Company.
 
 
(kk)
" Trustee " - means any individual appointed by the Company to serve as a trustee and approved in accordance with the laws of the State of Israel that may be replaced at the discretion of the Administrator.
 
 
(ll)
" Trust Agreement " – means Addendum B to the Israeli Income Tax rules (Tax Relief for Allocation of Units to Employees 2003), as now in effect or as hereafter amended.
 
 
(mm)
"Vesting Dates" - means, with respect to any Option, the date as of which the Optionee shall be entitled to exercise such Option, as set forth in Section 8 of the Plan.
 
 
(nn)
" Unapproved 102 Option " - means an Option granted pursuant to Section 102(c) of the Tax Ordinance and not held in trust by a Trustee.
 
3.

 
(a)
The Plan shall be administered by the Administrator. The Administrator shall have the authority in its sole discretion, subject and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities specifically granted to it under the Plan as necessary and advisable in the administration of the Plan.

 
(b)
Provided that the Board is entitled by law and pursuant to the Operating Agreement to delegate all and any of its powers and authority granted to it under the plan to a Committee, the Board may do so in a manner consistent therewith and the Committee shall be the Administrator.
 
 
5

 

 
 
(c)
The Administrator shall have the responsibility of construing and interpreting the Plan and of establishing and amending such rules and regulations, as it deems necessary or desirable for the proper administration of the Plan.  The Administrator shall keep records of its meetings and shall make such rules and regulations for the conduct of its business, as it shall deem advisable.
 
 
(e)
Subject to the provi­sions of the Plan, the Applicable Laws and, the Operating Agreement, and subject to the approval of any relevant authorities, the Administrator shall have the authority, in its discretion:

 
i.
to construe and interpret the terms of the Plan and any Options granted pursuant to the Plan;
 
 
ii.
(i)
to designate the Eligible Persons to whom Options may from time to time be granted hereunder;
 
 
iii.
(ii)
determine, on the date of grant, the terms and provisions of the respective Option Agreements (which need not be identical), including, but not limited to, the number of Options to be granted to each Optionee, the number of Units to be covered by each Option, provisions concerning the time and extent to which the Options may be exercised (but not beyond the Option expiration date), and the nature and duration of restrictions as to the transferability, or restrictions constituting substantial risk of forfeiture upon occurrence of certain events;
 
 
iv.
(iii)
to prescribe forms of agreement for use under the Plan;
 
 
v.
(iv)
to determine the terms of any Option granted hereunder;
 
 
vi.
designate the type of Options;
 
 
vii.
(vi)
to determine the Exercise Price of any Option granted hereunder;
 
 
viii.
to determine the Fair Market Value of Units, subject to the terms hereof;
 
 
ix.
cancel or suspend Options, as necessary;
 
 
x.
(viii)
to prescribe, amend and rescind the Plan, provided that any such amendment that would adversely effect the Optionee’s rights under an outstanding Option shall not apply to such outstanding Option without the Optionee’s written consent.
 
 
xi.
(ix)
to take all other action and make all other determinations necessary for the administration of the Plan.
 
 
6

 

 
(f)
Any decision or action taken or to be taken by the Administrator, arising out of or in connection with the construction, administration, interpretation and effect of the Plan, shall, to the maximum extent permitted by Applicable Law, be within its absolute discretion (except as otherwise specifically provided herein) and shall be conclusive and binding upon all Optionees and any person claiming under or through any Optionee.

 
(g)
No individual constituent of the Administrator shall be liable for any action taken or determination made in good faith with respect to the Plan or any Option granted hereunder.
 
 
7

 
 
 
(h)
Any individual constituent of the Administrator shall be eligible to receive Options under the Plan while serving as a constituent member of the Administrator, unless otherwise specified herein. No person shall be eligible to be a member of the Administrator if that person’s membership would prevent the Plan from complying with exemptions provided within the Applicable Laws.

4.

 
(a)
Options granted under this Plan may or may not contain such terms as will qualify the Options as, 102 Options or as 3(i) Options. Options granted under this Plan may or may not contain such terms as will qualify the Options as qualified options under Applicable Laws (" Qualified Options ").
 
 
(b)
Each Option, granted pursuant to the Plan, shall be evidenced by an Option Agreement, in such form as the Administrator shall from time to time approve. Each Option Agreement shall state, among other matters, the number of Units to which the Option relates, the type of Option granted thereunder (whether an CGO, OIO, Unapproved 102 Option or a 3(i) Option), the Vesting Dates, the Exercise Price, the expiration date and such other terms and conditions as the Administrator may prescribe, provided that they are consistent with the terms of this Plan and the Administrator's discretion hereunder. The written agreement shall be delivered to the Optionee and shall incorporate the terms of the Plan by reference and specify the terms and conditions thereof and any rules applicable thereto (each, an " Option Agreement ").
 
 
(c)
The persons eligible for participation in the Plan as Optionees shall include any Employees and/or Consultants and/or Service Providers; provided, however, that options qualified under Section 102 of the Tax Ordinance shall be granted only to Employees of the Company who are not Ten Percent Owners of the Company.

 
(d)
Neither this Plan nor any Agreement nor any offer of Options to an Optionee shall impose any obligation on the Company to continue to employ or to engage the services of any Optionee, and nothing in the Plan or in any Option granted pursuant hereto shall give any Optionee any right to continue his employment or service with the Company or restrict the right of the Company to terminate such employment or services at any time. Further, the Company and each Subsidiary expressly reserves the right at any time to dismiss an Optionee free from any liability, or any claim under the Plan, except as provided herein or in any Option Agreement.
 
 
(e)
The grant of an Option to an Optionee hereunder shall neither entitle such Optionee to participate, nor disqualify him from participating, in any other grant of Options pursuant to this Plan or any other incentive or Unit option plan of the Company or any of its Affiliates
 
 
(f)
Anything in the Plan to the contrary notwithstanding, all grants of Options to Directors and officers shall be authorized and implemented in accordance with the provisions of Applicable Law and the Operating Agreement.
 
 
8

 
 
5.

 
(a)
Maximum Number of Units The Company has reserved a total of 330.6417. Common Units which represented 10% of its equity prior to the issuance of its series Units and, as of the date hereof, represents 8.3006% of the Company [post Series B] Any Units which remain unissued and which are not subject to the outstanding Options at the termination of the Plan shall cease to be reserved for the purpose of the Plan, but until termination of the Plan the Company shall at all times reserve sufficient number of Units to meet the requirements of the Plan. Should any Option for any reason expire or be canceled prior to its exercise or relinquishment in full, the Units subject to such Option may again be subjected to an Option under the Plan or under the Company’s other Unit option plans subsequently adopted by the Company, provided , however, that Units that have actually been issued under the Plan shall not be returned to the Plan and shall not become available for future distribution under the Plan.

 
(b)
Units Available for Issuance . Units may be made available from the authorized but unissued Units of the Company or from Units not reserved for some other purpose. In addition, if any Option in respect of Units is canceled or forfeited for any reason without delivery of Units, the Units subject to such Option shall thereafter again be available for award pursuant to the Plan.
 
6.

If not previously exercised, each Option shall expire upon the tenth (10 th ) anniversary   of the date of the grant thereof or, upon the earlier termination of the Optionee's Employment (or, if applicable, on the day following the last day on which such Option is exercisable under Section 10 below), provided that the Administrator may establish a shorter term for an Option at the time of the grant of such Option.

7.

 
(a)
The Exercise Price of each Unit subject to an Option shall be determined, by the Administrator; provided, however that in no event will such Exercise Price be less than 100% of the Fair Market Value per Unit on the date of grant.

 
(b)
Each Option Agreement will contain the Exercise Price determined for each Option covered thereby.

 
(c)
The total consideration to be paid for the Units to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator and may consist entirely of (1) cash, (2) check, or (3) any combination of the foregoing methods of payment.  In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company.

 
(d)
The Exercise Price shall be denominated in the currency of the primary economic environment of, either the Company or the Optionee (that is the functional currency of the Company or the currency in which the Optionee is paid), as determined by the Administrator.
 
 
9

 
 
 
(e)
The proceeds received by the Company from the issuance of Units subject to the Options will be added to the general funds of the Company and used for any lawful business purposes.

8.

 
(a)
Subject to the provisions of the Plan, each Option shall vest and become exercisable commencing on the Vesting Date(s) thereof, as determined by the Administrator, for the number of Units as shall be provided in the Option Agreement. However, no Option shall be exercisable after its expiration date.

 
(b)
An Option may be subject to such other terms and conditions on the time or times when it may be exercised, as the Administrator may deem appropriate. The vesting provisions of individual Options may vary.

9.

 
(a)
Options shall be exercised by the Optionee by giving written notice to the Company, in such form and method as may be determined by the Company and when applicable, by the Trustee in accordance with the requirements of Section 102 of the Tax Ordinance, which exercise shall be effective upon receipt of such notice by the Company and the payment of the Exercise Price times the number of Units being purchased at the Company’s principal office. The notice shall specify the number of Units with respect to which the Option is being exercised.

 
(b)
The Options may be exercised by the Optionee in whole at any time or in part from time to time, to the extent that the Options become vested and exercisable, prior to the Expiration Date, and provided that, subject to the provisions of Section 10 below, the Optionee is employed by or providing services to the Company or any of its Affiliates, at all times during the period beginning with the granting of the Option and ending upon the date of exercise.

 
(c)
Units issued upon exercise of an Option shall be issued in the name of the Optionee. Prior to exercise and until the issuance (as evidenced by the appropriate entry on the books of the Company) of the stock certificate evidencing such Units, an Optionee, as such, shall have no right to vote or receive distribution or any other rights of a Member.

 
(d)
An Option may not be exercised unless, at the time the Optionee gives notice of exercise to the Company, the Optionee includes with such notice payment in cash or by bank check of all withholding taxes due, if any, on account of its acquired Units under the Option or gives other assurance satisfactory to the Administrator and the Trustee, if applicable, of the payment of those withholding taxes.

 
(e)
Units shall not be issued pursuant to the exercise of an Option unless the exercise of such Option, the method of payment and the issuance and delivery of such Units shall comply with Applicable Laws.
 
 
10

 

 
 
(f)
Upon their issuance, the Units shall carry equal voting rights on all matters where such vote is permitted by applicable laws of the jurisdiction of organization of the Company and subject to the terms of the Operating Agreement with respect to the voting rights of other Common Units issued by the Company, provided however, that the Company, at its sole discretion, may require that, until the earlier to occur of the consummation of an IPO by the Company or a successor or , the Tenth (10 th ) anniversary of the Date of Grant any Units issued upon exercise of Options (and securities of the Company issued with respect thereto) shall be voted by an irrevocable proxy (the " Proxy ") in the same manner as the votes of the majority of other Common Members of the Company present and voting at the applicable meeting or acting by written consent if permitted, such Proxy to be assigned to the person or persons designated by the Administrator and to provide for the power of such designated person(s) to act, on its behalf, with respect to any and all aspects of the Optionee’s Unit holdings in the Company. The Proxy may be contained in the Option Agreement of an Optionee or otherwise as the Administrator determines. If contained in the Option Agreement, no further document shall be required to implement such Proxy, and the signature of the Optionee on the Option Agreement shall indicate approval of the Proxy thereby granted. Such person or persons designated by the Board shall be indemnified and held harmless by the Company against any cost or expense (including counsel fees) reasonably incurred by him/her, or any liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act in connection with the voting of such Proxy unless arising out of such member's own fraud or bad faith, to the extent permitted by Applicable Law. Such indemnification shall be in addition to any rights of indemnification the person(s) may have as a director or otherwise under the Company's Operating Agreement or organizational documents, any agreement, any vote of Members or disinterested directors, insurance policy or otherwise. Without derogating from the above, with respect to Units issuable upon exercise of Approved 102 Options, such Units shall be voted in accordance with the provisions of Section 102 and of any rules, regulations or orders promulgated thereunder.
 
 
(g)
To avoid doubt, the Optionees shall not have any of the rights or privileges of Members of the Company in respect of any Units purchasable upon the exercise of any Options, until registration of the Optionee as holder of such Units in the Company’s records upon exercise of the Options in accordance with the provisions of the Plan and the Options.

 
(h)
Subject to the provisions of Section 20(c), if any law or regulation requires the Company to take any action with respect to the Units specified in such notice of exercise before the issuance thereof, then the date of their issuance shall be extended for the period necessary to take such action.

 
(i)
Exercise of an Option in any manner shall result in a decrease in the number of Units and the Options thereafter available, both for purposes of the Plan and for exercise under the Option, by the number of Units as to which the Option is exercised.

10.

 
(a)
Unless the Administrator shall otherwise determine at or after grant, in the event of termination of Optionee's Employment with the Company other than for Cause, Disability or death, or if applicable, the termination of services rendered by the Optionee to the Company other than for Cause, Disability or death, all Options granted to that Optionee, which are vested and exercisable at the time of such termination, may, unless earlier terminated in accordance with the provisions of the Plan or the Option Agreement, be exercised within three (3) months after the date of such termination (or within such shorter time period, not less than thirty (30) days, or within such longer time period, not exceeding five (5) years after the termination date as may be determined by the Administrator. but in any event, no later than the expiration date of the Options. If, on the date of termination, the Units subject to the Option have not vested in their entirety, any Units covered by the unvested portion of the Option shall expire and be of no further force and effect and revert to the Plan. To the extent the vested portion of the Option is not so exercised within the time specified herein, such unexercised vested portion of the Option shall expire and be of no further force and effect, and the Units covered by such unexercised vested portion of the Option shall revert to the Plan.  For the purposes of this section, termination of employment or engagement shall mean the effective date of the termination.
 
 
11

 
 
 
(b)
If the Optionee’s Employment is terminated because of Optionee's death or Disability (or the Optionee dies within three (3) months after a Optionee's termination other than for Cause), then Optionee's Options may be exercised, only to the extent that such Options are exercisable by Optionee termination date or within twelve (12) months after the Optionee termination date or as otherwise determined by the Administrator. Such Options must be exercised by Optionee (or Optionee's legal representative or authorized assignee), if at all, as to all or some of the then vested Units calculated as of the termination date or such other date determined by the Administrator, within twelve (12) months after the termination date but in any event no later than the expiration date of the Options. If, on the date of termination, there are Options, which are not entirely vested, the Units covered by the unvested portion of the Options shall revert to the Plan. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Units covered by such Option shall revert to the Plan.
 
 
(c)
In the event of termination of Optionee's employment with the Company for Cause, or if applicable, the termination of services rendered by the Optionee to the Company for Cause, all outstanding Options granted to such Optionee (whether vested or not) shall, to the extent not theretofore exercised, immediately expire and shall be of no further force and effect as of the date of such termination, unless otherwise determined by the Administrator.

 
(d)
An optionee shall not be deemed to have been terminated by the Company or an Affiliate in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between Affiliates of the Company, or any successor thereof.

11.

 
(a)
Changes in Capitalization Subject to the terms of the Operating Agreement, the number of Units covered by each outstanding Option, the number of Units which have been reserved for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of Options, as well as the Exercise Price per Unit of Units covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued Units resulting from a Unit split, reverse Unit split, Unit dividend, combination or reclassification of the Units, or any other increase or decrease in the number of issued Units without investment of cash. Such adjustment shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive.  Except as expressly provided herein, no issuance by the Company of equity of any class, or securities convertible into equity of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number of Units subject to an Option or the Exercise Price specified in an Option. If the Options or the Units issued upon the exercise of such Options will be deposited with a Trustee, as determined by the Administrator, all of the Units formed by these adjustments also will be deposited with the Trustee in the same terms and conditions as the original Options or Units.
 
 
(b)
Dissolution or Liquidation In the event of a dissolution or liquidation of the Company (either voluntary or involuntary) (the " Event "), the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such Event. The Administrator in its sole discretion may allow the exercise of any or all outstanding Options, whether or not vested, within a reasonable period of time prior to and in connection with the Event and subject to the provisions of the Applicable Laws. To the extent it has not been previously exercised, an Option will terminate immediately prior to the Event.
 
 
12

 
 
 
(c)
Merger, Acquisition, Units’ sale, Assets’ Sale
 
 
i.
In the event of a merger or consolidation of the Company with or into another entity resulting in such other entity being the surviving entity, an acquisition of all or substantially all of the outstanding capital of the Company, or the sale of substantially all of the assets of the Company (each such event, a " Transaction "), the Company shall send each Optionee notice of such Transaction not less than thirty (30) days prior to the closing of such Transaction.  The Optionee shall at that time be given the opportunity to exercise the Optionee's Option in connection with the Transaction and to receive in the Transaction such consideration as the holders of Common Units receive in the Transaction and may have the opportunity to retain his Option from the Company or may receive a substitute option from the surviving company, if any.
 
 
ii.
Anything herein to the contrary notwithstanding, if a Transaction shall occur prior to the consummation of an IPO, then each Optionee shall be obliged to sell or exchange, as the case may be, any Units such Optionee purchased under the Plan, in accordance with the instructions of the Board, at its sole and absolute discretion, in connection with the Transaction, and in the same terms as shall be applicable to all the Common Members of the Company.
 
12.

 
(a)
The Administrator may designate Options pursuant to Section 102 as Unapproved 102 Options or as Approved 102 Options.
 
 
(b)
The grant of an Approved 102 Option under the Plan shall be conditioned upon the approval of the Plan by the Israeli Tax Authorities.
 
 
(c)
Approved 102 Options may be classified as either Capital Gain Options or Ordinary Income Options.
 
 
(d)
Each Option Agreement shall state, inter alia, the type of Option granted thereunder (whether a CGO, OIO, Unapproved 102 Option or a 3(i) Option), the vesting provisions and the Exercise Price.
 
 
(e)
No Approved 102 Options may be granted under this Plan to any Employee, unless and until, the Company’s election of the type of Approved 102 Options as CGO or OIO granted to Employees (the " Election "), shall be appropriately filed with the Israeli Tax Authorities at least thirty (30) days before the first Date of Grant of an Approved 102 Option under this Plan. Such Election shall become effective beginning the first Date of Grant of an Approved 102 Option under the Plan and shall remain in effect until at least the end of the year following the year during which the Company first granted Approved 102 Options. The Election shall obligate the Company to grant only the type of Approved 102 Option it has elected, and shall apply to all Approved 102 Options granted during the period indicated herein, all in accordance with the provisions of Section 102(g) of the Tax Ordinance, as now in effect or as hereafter amended. For the avoidance of doubt, such Election shall not prevent, subject to the Board’s sole discretion, the Company from simultaneously (i) granting Unapproved 102 Options; or (ii) 3(i) Options.
 
 
(f)
All Approved 102 Options must be held in trust by a Trustee, as described in Section 13 below.
 
 
13

 
 
 
(g)
For the avoidance of doubt, the designation of Unapproved 102 Options and Approved 102 Options shall be subject to the terms and conditions set forth in Section 102 of the Tax Ordinance and regulations, rules, orders or procedures promulgated thereunder as now in effect or as hereafter amended.
 
 
(h)
With regard to Approved 102 Options, the provisions of the Plan and the Option Agreement shall be subject to the provisions of Section 102 and the Tax Assessing Officer’s permit, and the said provisions and permit shall be deemed an integral part of the Plan and of the Option Agreement. Any provision of Section 102 and/or the said permit which is necessary in order to receive and/or to keep any tax benefit pursuant to Section 102, which is not expressly specified in the Plan or the Option Agreement, shall be considered binding upon the Company and the Optionees.

13.

 
(a)
The Administrator may choose to deposit any or all Options granted pursuant to the Plan with a trustee (the   " Trustee "). In such event, the Trustee shall hold such Options, and any Units issued upon the exercise of any of such Options, in trust pursuant to the Company's instructions from time to time. The Trustee shall be entitled to make such provisions and take such steps as it may deem necessary or appropriate for the withholding of all taxes required by law to be withheld with respect to the exercise of the Options or their sale to a third party. The Company shall deliver the Trustee all the necessary information required by him. The Trustee shall be exempt from any liability with respect to any action or decision duly taken in its/his capacity as Trustee.

 
(b)
Anything herein to the contrary notwithstanding, Approved 102 Options granted under the Plan and/or all Units allocated or issued upon exercise of such Approved 102 Options and/or all other interests in the Company received subsequently following any realization of rights in connection with such Approved 102 Options or Units and all rights attached to Units described above or Approved 102 Options, shall be allocated or issued to the Trustee and held for the benefit of the Optionee for such period of time as required by Section 102 or any regulations, rules, orders or procedures promulgated there under as now in effect or as hereafter amended (the " Restricted Period Per Section 102 "). All of the rights attached to Units issued upon exercise of Approved 102 Options, including without limitation distributions in respect of the Units, shall be subject to the same tax treatment as the treatment to which such Options are subject. In case the requirements pursuant to Section 102 for an Approved 102 Options are not met, then the Approved 102 Options may be regarded as Unapproved 102 Options, all in accordance with the provisions of Section 102 and regulations, rules, orders or procedures promulgated there under as now in effect or as hereafter amended.

 
(c)
Notwithstanding anything to the contrary, the Trustee shall not enter into any transaction or take any action with respect to Approved 102 Options or Units issued upon exercise thereof, will not transfer, assign, release, pledge, mortgage voluntarily, or grant in connection therewith any proxy (except as provided for in Section 9(f) hereof) or assignment deed, whether immediately effective or effective at a future date, other than by will or by operation of law, until after the full payment of the Optionee’s tax liabilities arising from the grant of such Options or their exercise or release or transfer by the Trustee or after guarantying the payment of said taxes. If such Options or Units have been transferred by will or by operation of law, the provisions of Section 102 will apply with respect to the heirs or the transferees of the Optionee or Member, as the case may be.

 
14

 

 
(d)
Upon receipt of an Approved 102 Option, the Optionee will sign an undertaking to release the Trustee from any liability in respect of any action or decision duly taken and bona fide executed in relation with the Plan, or any Approved 102 Option or Unit held, released or transferred by the Trustee, in accordance with the terms of Section 102.

 
(f)
Subject to the provisions of Section 102 of the Tax Ordinance and any Rules promulgated there under as now in effect or as hereafter amended, during the Restricted Period Per Section 102 an Optionee may not release the Approved 102 Options or Shares issued upon exercise thereof from trust or sell such Options or Shares while they are held by the Trustee. A t any time there after each Optionee may require (but shall not be obligated to require) the Trustee to sell upon Optionee's direction, or transfer to the Optionee, any Approved 102 Options or Shares issued pursuant to the exercise of such Approved 102 Options , provided that (1) such transfer is in compliance with all applicable securities laws, and (2) all applicable tax due pursuant to such a sale or transfer has been paid in accordance with Section 102 of the Tax Ordinance and the Trustee has received an acknowledgment from the Israeli Tax Authorities that the Optionee has paid any applicable tax due pursuant to the Tax Ordinance. Notwithstanding the above, if any such sale or release occurs during the Restricted Period Per Section 102 , the sanctions under Section 102 of the Tax Ordinance and under any Rules promulgated there under as now in effect or as hereafter amended, shall apply to and shall be borne by such Optionee.

14.

Until the IPO, the sale or the transfer of the Units issued under this Plan and following the exercise of the Option, shall be subject to any and all restrictions on transfer applicable to Common Units in particular or Units in general issued by the Company.
 
15.

 
(a)
The Company’s obligation to issue or allocate Units upon exercise of an Option granted under the Plan is expressly conditioned upon: (a) the Company’s completion of any registration or other qualifications of such Units under all applicable laws, rules and regulations or (b) representations and undertakings by the Optionee (or his legal representative, heir or legatee, in the event of the Optionee’s death) to assure that the sale of the Units complies with any registration exemption requirements which the Company in its sole discretion shall deem necessary or advisable. Such required representations and undertakings may include representations and agreements that such Optionee (or his legal representative, heir, or legatee) is purchasing such Units for investment and not with any present intention of selling or otherwise disposing thereof.

 
(b)
The Optionee acknowledges that in the event that the Company’s Units or interests into which the Units are exchanged shall be registered for trading in any public market, Optionee’s rights to sell the Units may be subject to certain limitations (including a lock-up period), as will be requested by the Company or its underwriters, and the Optionee and his heirs or legal representatives unconditionally agree and accept any such limitations upon accepting any Options granted under this Plan.

 
(c)
If any Units shall be registered under the United States Securities Act of 1933, no public offering otherwise than on a national securities exchange (as defined in the United States Securities Exchange Act of 1934, as amended) or other securities market of any Units shall be made by the Optionee (or any other person) under such circumstances that he or she (or such other person) may be deemed an underwriter, as defined in the United States Securities Act of 1933.
 
 
15

 
 
 
(d)
Upon the grant of Options to an Optionee or the issuance of Units upon the exercise thereof, the Company shall obtain from such person the representations and undertakings as follows:

 
(i)
That the Optionee is familiar with the Company, its activity and its financial and commercial forecast, and that the Optionee knows that there is no certainty that the exercise of the Options will be financially worthwhile. The Optionee hereby undertakes not to make any claim against the Company or any of its Directors, Officers, Employees, Members, agents or advisors if it emerges, at the time of exercising the Options, that the Optionee’s investment in the Company‘s Units was not worthwhile, for any reason whatsoever.

 
(ii)
That the Optionee knows that his rights regarding the Options and the Units are subject, for all intents and purposes, to the terms of the Company’s Operating Agreement.

 
(iii)
That the Optionee knows that in addition to the allocations set forth above, the Company has allocated and/or is entitled to allocate Options and Units to other persons, and the Optionee shall have no claim regarding such allocations, their quantity, the relationship among them and between them and the Members of the Company, exercising of the option or any matter related to or stemming from them.

 
(iv)
That the Optionee knows that neither the Plan nor the grant of an Option or Units thereunder shall impose any obligation on the Company to continue the engagement of the Optionee, and nothing in the Plan or in any Option or Units granted pursuant thereto shall confer upon any Optionee any right to continue being engaged or employed by the Company, or restrict the right of the Company to terminate such engagement or employment at any time.

 
(v)
As a condition to the exercise of an Option, the Administrator may require the person exercising such Option to represent and warrant at the time of such exercise that the Units are being purchased only for investment and without any present intention to sell or distribute such Units if, in the opinion of counsel for the Company, such a representation is required.

16.

With respect to all Units (but excluding, for avoidance of any doubt, any unexercised Options) allocated or issued upon the exercise of Options purchased by the Optionee and held by the Optionee or by the Trustee, as the case may be, the Optionee shall be entitled to receive distributions in accordance with the quantity of such Units, subject to the provisions of the Operating Agreement and subject to any applicable taxation on distribution of dividends, and, when applicable, subject to the provisions of Section 102 (if applicable to such Optionee) and the rules, regulations or orders promulgated thereunder.
 
 
17.

 
(a)
No Option or any right with respect thereto, purchasable hereunder, whether fully paid or not, shall be assignable, transferable or given as collateral or any right with respect to it given to any third party whatsoever, except as specifically allowed under the Plan and the Operating Agreement. During the lifetime of the Optionee each and all of such Optionee's rights to purchase Units hereunder shall be exercisable only by the Optionee.
 
 
16

 
 
Any such action made directly or indirectly, for an immediate validation or for a future one, shall be void.

 
(b)
As long as Options and/or Units are held by the Trustee on behalf of the Optionee, all rights of the Optionee over the Units are personal, can not be transferred, assigned, pledged or mortgaged, other than by will or pursuant to the laws of descent and distribution.

 
(c)
Unless otherwise determined by the Administrator, following an IPO, an Optionee shall not have the right to effect a sale of Units issued upon the exercise of an Option during the period of any post-IPO lock-up period that the Administrator agrees will be applicable to Optionees or persons holding equity instruments as a result of exercising Options.

18.

 
(a)
The Plan was adopted by the Board of Directors of the Company on ______________ 2006.  The number of Units for which Options are issuable pursuant to the Plan may only be changed in accordance with the Operating Agreement.

 
(b)
The Board may, at any time and from time to time, terminate, alter, adjust, suspend or amend the Plan in any respect, except that if at any time the approval of the Members of the Company is required pursuant to the   Israeli Companies Law , 1999, under Section 57 or the regulations promulgated thereunder , the Board may not effect such modification or amendment without such approval. In no event may any action of the Company adversely alter or impair the rights of an Optionee, without such Optionee’s consent, under any Option previously granted to such Optionee.

 
(c)
Notwithstanding Subsection 18(b) above, no amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Company, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination.

 
(d)
The Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years after the earlier of its adoption by the Board, unless sooner terminated by the Board.
 
 
17

 
 
19.

 
(a)
With regard to Approved 102 Options, the provisions of the Plan and/or any Option Agreement for Approved 102 Options shall be subject to the provisions of Section 102 and the Income Tax Commissioner’s permit, and the said provisions and permit shall be deemed an integral part of the Plan and of the Option Agreement.

 
(b)
Any provision of Section 102 and/or the said permit which is necessary in order to receive and/or to keep any tax benefit pursuant to Section 102, which is not expressly specified in the Plan or the Option Agreement, shall be considered binding upon the Company and the Optionees holding such Options.

20.

 
(a)
Withholding . The Company shall have the right to deduct from all amounts paid to an Optionee in cash (whether under this Plan or otherwise) any taxes required by law to be withheld in respect of Options under this Plan. In the case of any Option satisfied in the form of Units, no Units shall be issued unless and until arrangements satisfactory to the Administrator shall have been made to satisfy any withholding tax obligations applicable with respect to such Option. Without limiting the generality of the foregoing and subject to such terms and conditions as the Administrator may impose, the Company shall have the right to retain, or the Administrator may, subject to such terms and conditions as it may establish from time to time, permit Optionees to elect to tender, Units (including Units issuable in respect of an Option) to satisfy, in whole or in part, the amount required to be withheld.

 
(b)
The Company may place a legend on each Unit certificate to the effect that such Units were acquired pursuant to an investment representation and are subject to limitations on offers, transfers and sales as the case may be and such other legends as may be specified in the Operating Agreement.

 
(c)
Compliance with Legal and Exchange Requirements . The Plan, the granting and exercising of Options thereunder, and the other obligations of the Company under the Plan, shall be subject to all Applicable Laws, rules, and regulations, and to such approvals by any regulatory or governmental agency as may be required.  The Company shall not be obligated by virtue of any provision of the Plan to recognize the exercise of any Option or to otherwise sell or issue Units in violation of any such laws, rules, or regulations; and any postponement of the exercise or settlement of any Option under this provision shall not extend the term of such Options, and neither the Company nor its directors or officers shall have any obligation or liability to the Optionee with respect to any Option (or Units issuable thereunder) that shall lapse because of such postponement.

 
(d)
Gender and Number . Except when otherwise indicated by the context, words in the masculine gender used in the Plan shall include the feminine gender, the singular shall include the plural, and the plural shall include the singular.
 
 
18

 
 
 
(e)
Governing Law.   The validity, construction, interpretation, administration and effect of the Plan and any rules, regulations and actions relating to the Plan will be governed by and construed exclusively in accordance with the laws of the State of Illinois, notwithstanding the conflicts of laws principles of any jurisdictions.  The Plan and all instruments issued thereunder or in connection therewith any Affiliates and/or Subsidiaries, shall be governed by, and interpreted in accordance with, the applicable laws with in the country of organization of the Affiliate and/or Subsidiary or the laws of any jurisdiction to which persons receiving Options employees under the Plan are subject.

21.

Subject to Applicable Laws, the Date of Grant of an Option shall, for all purposes, be the date on which the Administrator makes the determination granting such Option.

22.

 
Any tax consequences arising from the grant or exercise of any Option or from the disposition of Units or from any other event or act (whether of the Optionee or of the Company or of its Trustee) hereunder, shall be borne solely by the Optionee. The Company and/or the Trustee shall withhold taxes according to the requirements under the Applicable Laws, rules, and regulations, including withholding taxes at source. Furthermore, such Optionee shall agree to indemnify the Company that employs the Optionee and/or the Trustee, and/or the Company’s Members and/or directors and/or officers if applicable, and hold them harmless against and from any and all liability for any such tax or interest or penalty thereon, including without limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax from any payment made to the Optionee, provided that they acted in due care. Except as otherwise required by law, the Company shall not be obligated to honor the exercise of any Option by or on behalf of an Optionee until all tax consequences (if any) arising from the exercise of such Options are resolved in a manner reasonably acceptable to the Company.

23.
 
This Plan is intended to comply with the Applicable Law. Any provision of this Plan, which is inconsistent with the Applicable Law shall, without further act or amendment by the Company or the Administrator, be reformed to comply with the requirements of Applicable Law. An Option will not be effective unless such Option is in compliance with all Applicable Laws as applicable to the Company with respect to such Optionee as they are in effect on the date of grant of the Option and also on the date of exercise or other issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Units under this Plan prior to (i) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable, and/or (ii) compliance with any exemption, completion of any registration or other qualification of such Units under any applicable laws or ruling of any governmental body that the Company determines to be necessary or advisable. The Company will be under no obligation to register the Units with the Securities and Exchange Commission or to effect compliance with the exemption, registration, qualification or listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company will have no liability for any inability or failure to do so.
 
 
19

 
 
24.

The adoption of the Plan by the Board shall not be construed as amending, modifying or rescinding any previously approved incentive arrangements or as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of Options otherwise then under the Plan, and such arrangements may be either applicable generally or only in specific cases.  For the avoidance of doubt, prior grant of options to Optionees of the Company under their employment agreements, and not in the framework of any previous option plan, shall not be deemed an approved incentive arrangement for the purpose of this section.  Subject to the provisions of the Plan, in the event of a conflict between the terms and conditions of the Plan and the Option Agreement, the terms and conditions of the Plan shall prevail.

25.

The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance of any Units hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Units as to which such requisite authority shall not have been obtained.

26.

The terms of each Option may differ from other Options granted to each Optionee under the Plan at the same time.  The Administrator may also grant more than one Option to a given Optionee during the term of the Plan, either in addition to, or in substitution for, one or more Options previously granted to that Optionee.

27.

Any dispute or disagreement which may arise under or as a result of or pursuant to this Plan or the Option Agreements shall be determined by the Administrator and any interpretation made by the Administrator of the terms of the Plan or the Option Agreements shall be final, binding and conclusive.

 
Adopted by the Board on ____________, 2006.
       
   
Signed
 
       
   
Title
 
       
 
 
20

 
 
Approved by the Board on September 28, 2010
 
Amendments to the 2006 Units Option Plan (the "Plan")
 
 
1.
Anywhere in the Plan, the term "Operation Agreement" shall be replaced with the term "Company's Articles of Association".
 
 
2.
In section 7(a) of the Plan, the words "provided, however that in no event will such Exercise Price shall be less than 100% of the Fair Market Value per Unit on the date of grant" shall be deleted.
 
 
3.
In section 11(a) of the Plan, the following sentence will be inserted before the words "Except as expressly provided herein":
 
"In the event that the Company shall distribute a Unit dividend to all of the holders of shares of the Company ("Bonus Shares"), then the number of shares underlying the Options granted to each Optionee under the Plan shall be increased to include such number of Bonus Shares to which Optionee would have been entitled had the Options held thereby been exercised prior to the distribution of the Bonus Shares."
 


 

 


Exhibit 10.2
 
(Execution Copy)

AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT

THIS AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT (this " Agreement "), is made as of October 14, 2014, by and among (i) Check-Cap Ltd. (company number 51-4259811), a company organized under the laws of the State of Israel (the " Company "), (ii) Pontifax (Cayman) II L.P., Pontifax (Israel) II L.P., and Pontifax (Israel) II - Individual Investors L.P. (collectively, " Pontifax "), (iii) the Shareholders listed in Schedule A   hereto (together with Pontifax, the " Shareholders "), and (iv) the entities listed in Schedule B hereto (collectively, the " Lenders ").

W I T N E S S E T H :

WHEREAS , the Shareholders are holders of issued and outstanding share capital of the Company;

WHEREAS ,   the Company and the Lenders have entered into that certain Credit Line Agreement, dated as of August 20, 2014 (the " Credit Line Agreement "), and as an inducement to the Lenders to consummate the transactions under the Credit Line Agreement, the Company and the Shareholders who are signatories hereto wish to amend and restate in its entirety that certain Amended and Restated Shareholders' Agreement dated March, 2011, as supplemented by that certain Joinder Agreement, dated as of January 10, 2012 (together, " Prior Shareholders' Agreement "), to read as set forth below;

WHEREAS, pursuant to the Prior Shareholders' Agreement, such agreement may be amended by the written consent of the Company and the holders of more than 50% of the Registrable Securities (as defined in the Prior Shareholders' Agreement), including Pontifax (the " Requisite Majority "); and

WHEREAS, the Shareholders who are signatories to this Agreement constitute at least the Requisite Majority.
 
NOW, THEREFORE , in consideration of the premises, mutual covenants and agreements contained herein, it is hereby agreed that the Prior Shareholders' Agreement shall be amended and restated to read as follows:

1. 
Registration Rights

1.1            Definitions

" Affiliate " with respect to any Shareholder or Lender shall mean: (i) any Person controlling, controlled by or under common control with said Shareholder or Lender (including any partnership in which such shareholder or Lender serves as a general partner or any entity in which such shareholder, Lender, their Affiliates and any of their respective Immediate Family Shareholders own greater than 10% in the aggregate of the issued and outstanding voting equity); (ii) any officer, director, trustee limited or general partner of any shareholder or Lender or of any Person so controlling, controlled by or under common control with said shareholder or Lender; provided that the Company shall not be deemed an Affiliate of any shareholder or Lender; and (iii) any Person which a shareholder or Lender has the power to direct or cause the direction of the policies or management whether by voting power or otherwise;
 
 
 

 

 
" Damages " means any loss, damage, or liability (joint or several) to which a party hereto may become subject under the Securities Act or any other applicable law, insofar as such loss, damage, or liability (or any action in respect thereof) arises out of or is based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any registration statement of the Company, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; (ii) an omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (iii) any violation or alleged violation by the indemnifying party (or any of its agents or affiliates) of the Securities Act, or any rule or regulation promulgated thereunder.

" Exchange Act " means the U.S. Securities Act of 1934, as amended.

" Immediate Family Shareholder " means with respect to any shareholder or Lender who is a natural person, such shareholder’s or Lender’s parents (including step-parents), siblings (including step-siblings), spouse and children (including step-children).

" Lender Registrable Securities " means (a) any Ordinary Shares issued to the Lender pursuant to the Credit Line Agreement, including, without limitation, upon exercise of the Credit Line Warrant (as such term is defined in the Credit Line Agreement) and upon conversion of any Preferred Shares issued to the Lender under the Credit Line Agreement (including, without limitation, Preferred Shares issued upon conversion of the Credit Line Amount, as such term is defined in the Credit Line Agreement) and (b) any Ordinary Shares issued or issuable with respect to the securities referred to in clause (a) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other similar transaction. As to any particular Lender Registrable Securities, such securities shall cease to be Registrable Securities when they have been distributed to the public pursuant to an offering registered under the Securities Act or sold to the public through a broker, dealer or market maker in compliance with Rule 144 under the Securities Act (or any similar rule then in effect) or repurchased by the Company or any subsidiary of the Company.

" Permitted Transferee " with respect to a Shareholder or Lender means such Shareholder or Lender, such Shareholder's or Lender’s spouse or a descendant of such Shareholder or Lender, or a trust for the benefit of any of the foregoing,   (i) an Affiliate of a Shareholder or Lender, (ii) another Shareholder or Lender, (iii) the Company, (iv) the partners or shareholders of a Shareholder or Lender that is a partnership or limited liability company, respectively, or (v) a transferee approved by the Board of Directors.  Notwithstanding the foregoing, no competitor of the Company or Affiliate of a competitor can be a Permitted Transferee.
 
 
 

 

 
" Person " means an individual, corporation, partnership, joint venture, trust, and any other body corporate or unincorporated organization;

" Piggyback Registration " shall have the meaning ascribed to such term in Section 1.3 hereof.

" Qualifying IPO " means an initial public offering by the Company or a corporate successor of its equity interests in which at least $50 million is raised at a pre money Company valuation of at least $200 million.

" Preferred Registrable Securities " means (a) any Ordinary Shares issued upon conversion of Preferred A Shares, Preferred B Shares, Preferred C Shares or Preferred D Shares and (b) any Ordinary Shares issued or issuable with respect to the securities referred to in clause (a) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other similar transaction.  As to any particular Registrable Securities, such securities shall cease to be Registrable Securities when they have been distributed to the public pursuant to an offering registered under the Securities Act or sold to the public through a broker, dealer or market maker in compliance with Rule 144 under the Securities Act (or any similar rule then in effect) or repurchased by the Company or any subsidiary of the Company.

" Preferred Shares " shall have the meaning ascribed to such term in the Company’s Articles of Association, as in effect from time to time.

" Registrable Securities " means the Preferred Registrable Securities and the Lender Registrable Securities.

" Registration Expenses " shall mean all expenses incurred in connection with any Demand or Piggyback Registration pursuant to this Agreement, including, without limitation, all registration and filing fees, fees and expenses of compliance with securities or blue sky laws, printing expenses, messenger and delivery expenses, fees and disbursements of custodians, and fees and disbursements of counsel for the Company and all independent certified public accountants, underwriters (excluding discounts and commissions) and other Persons retained by the Company but including one counsel for the holders of the Registrable Securities.

" Securities Act " means the US Federal Securities Act of 1933, as amended.

" Securities and Exchange Commission " means the United States Securities and Exchange Commission.
 
 
 

 

 
1.2            Requests for Registration .

At any time after the shares of the Company are traded on a securities exchange, either the (i) holders of a majority of the aggregate of the Preferred D Shares and the Lender Registrable Securities, or (ii) the holders of a majority of the Preferred C Shares or (iii) the Persons holding at least twenty percent (20%) of the Registrable Securities may request registration under the Securities Act of all or any portion of their Registrable Securities.  There shall be a maximum of two such registrations (" Demand Registrations ") permitted under this Section 1.2 for each former holder of Preferred D Shares, each former holder of Preferred C Shares, each former holder of Preferred A Shares, each former Holder of Preferred B Shares with respect to all of such former holder's Registrable Securities and for each Lender with respect to all of such Lender’s Registrable Securities. Each request for a Demand Registration shall specify the approximate number of Registrable Securities requested to be registered and the anticipated per share price range for such offering. Within 10 days after receipt of any such request, the Company shall give written notice of such requested registration to all other holders of Registrable Securities and shall include in such registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 15 days after the receipt of the Company’s notice.

1.3            Right to Piggyback .

At any time after the shares of the Company are traded on a securities exchange, whenever the Company proposes to register any of its securities under the Securities Act (other than pursuant to a Demand Registration, registrations for employee stock plans or pursuant to Rule 145 under the Securities Act) and the registration form to be used may be used for the registration of Registrable Securities (a " Piggyback Registration "), the Company shall give prompt written notice to all holders of Registrable Securities of its intention to effect such a registration and shall include in such registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 20 days after the receipt of the Company’s notice.

1.4            Registration Expenses .

The Company shall pay all Registration Expenses including the cost of one counsel to represent all sellers of Registrable Securities.  A registration shall not count as a permitted registration until it has become effective and remained effective for at least 120 days; provided however, that the Company shall not be required to pay any Registration Expenses in connection with any registration initiated if such registration is subsequently withdrawn (other than a withdrawal due to a material adverse change not known to the holders of Registrable Securities at the time of such demand or requests by the Company or its underwriters to reduce the size of the offering and, because of such request, the holders of at least a majority of the Registrable Securities elect to withdraw).

 
 

 
 
1.5            Rule 144 .

If any proposed sale of Registrable Securities may be effected by the holders thereof pursuant to Rule 144 without any adverse effect on the proposed sale as reasonably determined by such holders, including without limitation the contemplated sale price or the quantity of Registrable Securities to be sold, then the holders of the Registrable Securities covenant to rely upon Rule 144 under the Securities Act in the sale thereof in lieu of requesting a Demand Registration.

1.6            Registration Procedures .

Whenever the holders of Registrable Securities have requested that any Registrable Securities be registered pursuant to this Agreement, the Company shall use its best efforts to effect the registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof, and pursuant thereto the Company shall as expeditiously as possible:

(i)             prepare and file with the Securities and Exchange Commission a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective (provided that before filing a registration statement or prospectus or any amendments or supplements thereto, the Company shall furnish to one (1) counsel selected by the holders of a majority of the Registrable Securities covered by such registration statement copies of all such documents proposed to be filed, which documents shall be subject to the review and comment of such counsel);

(ii)            notify each holder of Registrable Securities of the effectiveness of each registration statement filed hereunder and prepare and file with the Securities and Exchange Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than 120 days and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such registration statement;

(iii)           furnish to each seller of Registrable Securities such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller;

(iv)           use its best efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of any of the United States as a seller reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller (provided that the Company shall not be required to (a) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subsection, (b) subject itself to taxation in any such jurisdiction, or (c) consent to general service of process in any such jurisdiction);
 
 
 

 
 
(v)            notify each seller of such Registrable Securities, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of any such seller, the Company shall prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading;

(vi)           cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed, if any;

(vii)          provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement;

(viii)         enter into such customary agreements (including underwriting agreements in customary form) and take all such other actions, including arranging for provision by accountants of “comfort letters”, as the holders of a majority of the Registrable Securities being sold or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities (including effecting a stock split or a combination of shares);

(ix)           make available for inspection by any seller of Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by any such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company’s officers, directors, employees and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement;

(x)            otherwise use its best efforts to comply with all applicable rules and regulations of the Securities and Exchange Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least 12 months beginning with the first day of the Company’s first full calendar quarter after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder;
 
 
 

 
 
(xi)           if any such registration or comparable statement refers to any holder by name or otherwise as the holder of any securities of the Company and if in such holder's sole and exclusive judgment, such holder is or might be deemed to be an underwriter or a controlling person of the Company, (a) insert therein language, at such holder's request, in form and substance satisfactory to such holder and presented to the Company in writing, to the effect that the holding by such holder of such securities is not to be construed as a recommendation by such holder of the investment quality of the Company’s securities covered thereby and that such holding does not imply that such holder shall assist in meeting any future financial requirements of the Company, or (b) in the event that such reference to such holder by name or otherwise is not required by the Securities Act or any similar U.S. Federal statute then in force, delete the reference to such holder; provided that with respect to this clause (b) such holder shall furnish to the Company an opinion of counsel to such effect, which opinion and counsel shall be reasonably satisfactory to the Company;

(xii)          in the event of the issuance of any stop order suspending the effectiveness of a registration statement, or of any order suspending or preventing the use of any related prospectus or suspending the qualification of any ordinary shares included in such registration statement for sale in any jurisdiction, obtain the withdrawal of such order and notify each seller of Registrable Securities of such stop order;

(xiii)         in the event such registration is an underwritten public offering, enter into and perform the Company's obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering.

1.7          Registration Priority .

To the extent it is not in the Company's best interest for all of the Registrable Securities to participate in any Demand or Piggyback Registration, then the number of Registrable Securities that may be included in such registration such be allocated as follows: (i) first, Preferred Registrable Securities held by the former holders of Preferred D Shares as a result of their former Preferred D Shareholdings and the Lender Registrable Securities (together, the “ First Priority Registrable Securities ”), pro-rata to the number of First Priority Registrable Securities owned by each selling holder, before the Registrable Securities held by any person as a result of their holdings of Ordinary Shares or former holdings of Preferred C Shares, Preferred A Shares or Preferred B Shares may be registered and sold; (ii) second, Preferred Registrable Securities held by the former holders of Preferred C Shares as a result of their former Preferred C Shareholdings, pro-rata to the number of such Registrable Securities owned by each selling holder, before the Registrable Securities held by any person as a result of their holdings of Ordinary Shares or former holdings of Preferred A Shares or Preferred B Shares may be registered and sold; (iii) third, Preferred Registrable Securities held by the former holders of Preferred A Shares as a result of their former Preferred A Shareholdings, pro-rata to the number of such Registrable Securities owned by each selling holder, before the Registrable Securities held by any person as a result of their holdings of Ordinary Shares or former holdings of Preferred B Shares may be registered and sold; and (iv) fourth, Preferred Registrable Securities held by the former holders of Preferred B Securities as a result of their former Preferred B Shareholdings, pro-rata to the number of such Registrable Securities owned by each selling holder, before the Registrable Securities held by any person as a result of their holdings of Ordinary Shares.
 
 
 

 
 
1.8           Registrations Outside the United States .

The terms of this Agreement are drafted primarily in contemplation of securities offerings in the United States of America.  The parties recognize, however, the possibility that there may be one or more registrations in a jurisdiction other than the United States of America.  It is, accordingly, their intention that whenever this Agreement refers to a law or institution of the United States of America but the parties wish to effectuate a registration in a different jurisdiction (and without derogating from all rights or expanding any rights of shareholders and obligations of the Company’s regarding such registrations), reference in this Agreement to the laws or institutions of the United States shall be read as referring, mutatis mutandis , to the comparable laws or institutions of the jurisdiction in question.

1.9            Indemnification .

If any Registrable Securities are included in a registration statement under this Agreement:
 
1.9.1         To the extent permitted by law, the Company will indemnify and hold harmless each selling holder of Registrable Securities, and the partners, members, officers, directors, and shareholders of each such holder; legal counsel and accountants for each such holder; any underwriter (as defined in the Securities Act) for each such holder; and each Person, if any, who controls such holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any Damages, and the Company will pay to each such holder, underwriter, controlling Person, or other aforementioned Person any legal or other expenses reasonably incurred thereby in connection with investigating or defending any claim or proceeding from which Damages may result, as such expenses are incurred; provided, however, that the indemnity agreement contained in this Section 1.9.1 shall not apply to amounts paid in settlement of any such claim or proceeding if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable for any Damages to the extent that they arise out of or are based upon actions or omissions made in reliance upon and in conformity with written information furnished by or on behalf of any such holder, underwriter, controlling Person, or other aforementioned Person expressly for use in connection with such registration.
 
 
 

 
 
1.9.2         To the extent permitted by law, each selling holder, severally and not jointly, will indemnify and hold harmless the Company, and each of its directors, each of its officers who has signed the registration statement, each Person (if any), who controls the Company within the meaning of the Securities Act, legal counsel and accountants for the Company, any underwriter (as defined in the Securities Act), any other holder selling securities in such registration statement, and any controlling Person of any such underwriter or other Holder, against any Damages, in each case only to the extent that such Damages arise out of or are based upon actions or omissions made in reliance upon and in conformity with written information furnished by or on behalf of such selling holder expressly for use in connection with such registration; and each such selling holder will pay to the Company and each other aforementioned Person any legal or other expenses reasonably incurred thereby in connection with investigating or defending any claim or proceeding from which Damages may result, as such expenses are incurred; provided, however, that the indemnity agreement contained in this Section 1.9.2 shall not apply to amounts paid in settlement of any such claim or proceeding if such settlement is effected without the consent of the holder, which consent shall not be unreasonably withheld; and provided, further, that in no event shall any indemnity under this Section 1.9.2 exceed the proceeds from the offering received by such holder (net of any selling expenses paid by such holder), except in the case of fraud or willful misconduct by such holder.

1.9.3         Promptly after receipt by an indemnified party under this Section 1.9 of notice of the commencement of any action (including any governmental action) for which a party may be entitled to indemnification hereunder, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.9 , give the indemnifying party notice of the commencement thereof. The indemnifying party shall have the right to participate in such action and, to the extent the indemnifying party so desires, participate jointly with any other indemnifying party to which notice has been given, and to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such action. The failure to give notice to the indemnifying party within a reasonable time of the commencement of any such action shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.9 , to the extent that such failure materially prejudices the indemnifying party’s ability to defend such action. The failure to give notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.9 . After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party pursuant to the provisions of this Section 1.9 for any legal or other expense subsequently incurred by such indemnified party in connection with the defense thereof, unless (i) the indemnified party shall have employed counsel in accordance with the provision of the preceding sentence, (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after the notice of the commencement of the action and within fifteen (15) days after written notice of the indemnified party’s intention to employ separate counsel pursuant to the previous sentence, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. Following indemnification as provided for hereunder, the indemnifying party shall be subrogated to all rights of the indemnified party with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made.

 
 

 
 
1.9.4         Notwithstanding anything else herein to the contrary, the foregoing indemnity agreements of the Company and the selling holders are subject to the conditions that (i) insofar as they relate to any Damages arising from any untrue statement or alleged untrue statement of a material fact contained in, or omission or alleged omission of a material fact from, a preliminary prospectus (or necessary to make the statements therein not misleading) that has been corrected in the form of prospectus included in the registration statement at the time it becomes effective, or any amendment or supplement thereto filed with the SEC pursuant to Rule 424(b) under the Securities Act (the " Final Prospectus "), such indemnity agreement shall not inure to the benefit of any Person if a copy of the Final Prospectus was furnished to the indemnified party and such indemnified party failed to deliver, at or before the confirmation of the sale of the shares registered in such offering, a copy of the Final Prospectus to the Person asserting the loss, liability, claim, or damage in any case in which such delivery was required by the Securities Act and (ii) to the extent that such material statement or omission was the result of information provided by or on behalf of any selling holder to the Company to be included in the offering materials then the Company shall not be bound by this indemnity agreement with respect to such statements or omissions by a selling holder in the offering materials if not corrected in a Final Prospectus.

1.9.5         To provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (i) any party otherwise entitled to indemnification hereunder makes a claim for indemnification pursuant to this Section 1.9 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case, notwithstanding the fact that this Section 1.9 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any party hereto for which indemnification is provided under this Section 1.9 , then, and in each such case, such parties will contribute to the aggregate losses, claims, damages, liabilities, or expenses to which they may be subject (after contribution from others) in such proportion as is appropriate to reflect the relative fault of each of the indemnifying party and the indemnified party in connection with the statements, omissions, or other actions that resulted in such loss, claim, damage, liability, or expense, as well as to reflect any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or allegedly untrue statement of a material fact, or the omission or alleged omission of a material fact, relates to information supplied by the indemnifying party or by the indemnified party and the parties’ relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission; provided, however, that, in any such case, (x) no holder will be required to contribute any amount in excess of the public offering price of all such Registrable Securities offered and sold by such holder pursuant to such registration statement, and (y) no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation; and provided, further, that in no event shall a holder’s liability pursuant to this Section 1.9.5 , when combined with the amounts paid or payable by such holder pursuant to Section 1.9.2 , exceed the proceeds from the offering received by such holder (net of any selling expenses) paid by such holder), except in the case of willful misconduct or fraud by such holder.
 
 
 

 
 
1.9.6         Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in an underwriting agreement entered into in connection with an underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.

1.9.7         Unless otherwise superseded by an underwriting agreement entered into in connection with an underwritten public offering, the obligations of the Company and holders under this Section 1.9 shall survive the completion of any offering of Registrable Securities in a registration under this Agreement , and otherwise shall survive the termination of this Agreement.

2.
Issues Relating to the Board of Directors .

2.1           The Board of Directors of the Company (the " Board ") may form an HR Committee. To the extent that such committee is formed, it shall be comprised of the Director appointed by Pontifax to the Board (the " Pontifax Director "), the director representing the Company’s Preferred A Shareholders, and the director representing the Company’s Preferred B Shareholders. The HR Committee, to the extent formed, will review and approve the terms of employment of all VP level management of the Company.

2.2           The Board shall have the right to appoint, in the name of the Company, (an) advisor(s), counsel, (an) attorney(s), (a) consultant(s) or other third party to provide strategic advice, scientific assessments, legal advice, general business development advice or other specialist advice. The fees for such advice will be paid by the Company.

2.3           The Board of Directors may form a Business Development and Management Committee, including the Pontifax member of the Board. To the extent so formed, representatives of Pontifax will serve as external members of the Business Development and Management Committee.
 
 
 

 
 
2.4           The Pontifax Director shall have the right to determine the location of one "in person" Board meeting each year. The Company will reimburse the Pontifax Director and observer for reasonable out-of-pocket expenses incurred by them in connection with their attendance at Board meetings.

3
Information Rights .
 
The Company will deliver, when and as appropriate, the following to each of the Shareholders and the Lenders:
 
3.1           As soon as practicable after the end of each calendar quarter, and in any event within 45 days thereafter, a balance sheet of the Company as of the end of such period and the related statements of shareholders' equity, income and cash flow for such period and for the period commencing at the end of the previous fiscal year and ending with the end of such month, setting forth in each case in comparative form the corresponding figures for the corresponding period of the preceding fiscal year and fiscal year to date, all in reasonable detail, and duly certified (except for the absence of footnotes and subject to normal year-end adjustments and accruals) by the chief financial officer of the Company as having been prepared in accordance with GAAP or IFRS (as determined by the Company), except with regard to the valuation of the Company's underlying asset which shall be valued in accordance with Statutory Accounting Practices.

3.2           As soon as practicable after the end of each fiscal year, and in any event within 60 days thereafter, a balance sheet of the Company as of the end of such year and the related statements of shareholders' equity, income and cash flow for such fiscal year, setting forth in each case in comparative form the corresponding figures for the preceding fiscal year, setting forth in each case in comparative form the corresponding figures for the corresponding period of the preceding fiscal year and fiscal year to date, all in reasonable detail, and duly certified (except for the absence of footnotes and subject to normal year-end adjustments and accruals) by the chief financial officer of the Company as having been prepared in accordance with GAAP or IFRS (as determined by the Company), except with regard to the valuation of the Company's underlying asset which shall be valued in accordance with Statutory Accounting Practices.

3.3           As soon as available, and in any event within one hundred twenty (120) days after the end of each fiscal year, a balance sheet of the Company as of the end of such year and the related statements of shareholders' equity, income and cash flow for such fiscal year, setting forth in each case in comparative form the corresponding figures for the preceding fiscal year, as audited by a firm of independent certified public accountants of recognized national standing selected by the Board.

3.4           Promptly upon receipt thereof, any written report submitted to the Company by independent public accountants in connection with an annual or interim audit of the books of the Company made by such accountants.
 
 
 

 
 
3.5           Each of the financial statements referred to in Section 3.1 and 3.2 will be complete and correct in all material respects as of the dates and for the periods stated therein, subject in the case of the unaudited financial statements to changes resulting from normal year-end audit adjustments (none of which would, alone or in the aggregate, be materially adverse to the financial condition, operating results, assets, operations or business prospects of the Company).  Except as otherwise required by law or judicial order or decree or by any governmental agency or authority, the Shareholders and Lenders shall use their best efforts to maintain the confidentiality of all nonpublic information obtained by them hereunder which the Company has reasonably designated as proprietary or confidential in nature; provided that the Shareholders and Lenders may disclose such information in connection with the sale or transfer or proposed sale or transfer of any securities of the Company, if the transferee or proposed transferee agrees in writing to be bound by the provisions hereof.

3.6           In addition, the Company will deliver to the holders of Preferred C Shares, the holders of Preferred D Shares and the Lenders, within ten (10) business days of the end of each month, monthly and quarterly management reports in a form satisfactory to Pontifax.

3.7           In addition, the Company will deliver to the holders of Preferred C Shares, the holders of the Preferred D Shares and the Lenders, within sixty (60) days prior to the first day of the year covered by such plan and budget, an annual operating plan and budget.

3.8           The Company’s obligation to deliver the financial statements and other information to the Lenders under Section 3 hereof shall terminate and be of no further force or effect upon the earlier to occur of (i) release of the Credit Line Amount (as defined in the Credit Line Agreement) to the Lenders; (ii) placement of the Credit Line Amount in an IPO or conversion of the Conversion Amount upon a PO (as such terms are defined in the Credit Line Agreement); and (iii) an M&A Event (as defined in the Credit Line Agreement).

4
Distributions, Reorganization .

4.1           The Company shall make commercially reasonable efforts to make or cause to be made distributions, or to advance funds to the holders of Ordinary Shares, Preferred A Shares and/or Preferred B Shares as are necessary to eliminate the tax impact of the reorganization and the transfer of certain assets or licensing of certain Company assets from Check-Cap LLC (the " Reorganization ").  Notwithstanding the foregoing, the Company will not advance payments to holders of Ordinary Shares, Preferred A Shares and/or Preferred B Shares to address the fact that they will no longer receive a "pass through" of losses generated by the Company as they have while owning units of Check-Cap LLC. These advances, if and to the extent made, will be deducted from any distributions such shareholders receive from the Company.
 
 
 

 

 
4.2           In consideration for the respective Company securities issued to each of the Shareholders as part of the Reorganization, each of the Shareholders hereby irrevocably waives any and all right, claim or demand it, its successors and/or assigns, may have in connection with any of the transactions consummated or contemplated as part of the Reorganization, of whatsoever kind or nature, whether known or unknown, concealed or hidden, it had, has or shall have against Check-Cap LLC, the Company and/or their affiliates and subsidiaries, predecessors, successors and assigns, directors, shareholders, officers, employees and agents, whether current, past or in the future.

5
Miscellaneous .

5.1            Further Assurances .  Each of the parties hereto shall perform such further acts and execute such further documents as may reasonably be necessary to carry out and give full effect to the provisions of this Agreement and the intentions of the parties as reflected thereby, including as shall be necessary for the consummation of the Reorganization.

5.2            Governing Law; Jurisdiction .  This Agreement shall be governed by and construed according to the laws of the State of Israel, without regard to the conflict of laws provisions thereof.  Any dispute arising under or in relation to this Agreement shall be resolved in the competent court for Tel Aviv-Jaffa district, and each of the parties hereby irrevocably submits to the exclusive jurisdiction of such court.

5.3            Successors and Assigns; Assignment .  Except as otherwise expressly limited herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto.  None of the rights, privileges, or obligations set forth in, arising under, or created by this Agreement may be assigned or transferred without the prior consent in writing of the Company and holders of more than 50% of the Registrable Securities, with the exception of (a) assignments and transfers between the holders of the Preferred Shares of the same class, and (b) assignments and transfers to Permitted Transferees, provided, however, that (a) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address and any other requested relevant information of such transferee and the Registrable Securities with respect to which such rights are being transferred; (b) such transferee agrees in a written instrument delivered to the Company to be bound by and subject to the terms and conditions of this Agreement; and (c) such transferee delivers to the Company a duly signed declaration of waiver acknowledging prohibition of access to classified security information.

5.4            Entire Agreement; Amendment and Waiver .  This Agreement and the Schedules hereto constitute the full and entire understanding and agreement between the parties with regard to the subject matters hereof and thereof and supersedes any other agreements, promises and understandings regarding the transactions contemplated herein and therein, whether oral or written, between all or part of the parties thereto, including the Prior Shareholders' Agreement.  Any term of this Agreement may be amended and the observance of any term hereof may be waived (either prospectively or retroactively and either generally or in a particular instance) only with the written consent of the Company and the holders of more than 50% of the Registrable Securities.
 
 
 

 
 
5.5            Additional Lenders . Notwithstanding anything to the contrary contained herein, if the Company consummates one or more Deferred Closings with Additional Lender(s), as such terms are defined in and in accordance with the Credit Line Agreement, then subject to and upon any Deferred Closing, any such Additional Lender may become a party to this Agreement (as may be amended from time to time in accordance with the terms hereof) by executing and delivering a joinder to this Agreement, and thereafter shall be deemed a "Lender" for all intents and purposes hereunder and shall have all of the rights and obligations of a "Lender" hereunder. No action or consent by the parties hereto shall be required in connection with the execution of such a joinder to this Agreement by the Company and any such Additional Lender, so long as each such Additional Lender has agreed in writing to be bound by all of the obligations as a "Lender" hereunder.

5.6            Notices, etc.   All notices and other communications required or permitted hereunder to be given to a party to this Agreement shall be in writing and shall be telecopied or mailed by registered or certified mail, postage prepaid, or prepaid air courier, or otherwise delivered by hand or by messenger, if to the Shareholders,  addressed to such party's address as set forth in the Company’s Register of Shareholders and if to the Lenders, to the addresses set forth on Schedule B , or such other address with respect to a party as such party shall notify the Company in writing as above provided.  Any notice sent in accordance with this Section 5.5 shall be effective (i) if mailed, five (5) business days after mailing, (ii) if by air courier, two (2) business days after delivery to the courier service, (iii) if sent by messenger, upon delivery, and (iv) if sent via telecopier, upon transmission and electronic confirmation of receipt or (if transmitted and received on a non-business day) on the first business day following transmission and electronic confirmation of receipt.

5.7            Delays or Omissions .  No delay or omission to exercise any right, power, or remedy accruing to any party upon any breach or default under this Agreement, shall be deemed a waiver of any other breach or default theretofore or thereafter occurring.  Any waiver, permit, consent, or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing.  All remedies, either under this Agreement or by law or otherwise afforded to any of the parties, shall be cumulative and not alternative.
 
 
 

 

5.8            Severability .  If any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable under applicable law, then such provision shall be excluded from this Agreement and the remainder of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms; provided, however, that in such event this Agreement shall be interpreted so as to give effect, to the greatest extent consistent with and permitted by applicable law, to the meaning and intention of the excluded provision as determined by such court of competent jurisdiction.
 
5.9            Counterparts .  This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and enforceable against the parties actually executing such counterpart, and all of which together shall constitute one and the same instrument.
 
[Remainder of Page Left Intentionally Blank]
 
 
 

 

 
IN WITNESS WHEREOF the parties have signed this Amended and Restated Shareholders’ Agreement as of the date first hereinabove set forth.
 
COMPANY :
 
Check Cap Ltd.
 
By:      __________________________________
 
Title:   __________________________________
 
[SIGNATURE PAGE 1 OF 9 OF AMENDED AND RESTATED SHAREHOLDERS’ AGREEMENT]
 
 
 

 
 
IN WITNESS WHEREOF the parties have signed this Amended and Restated Shareholders’ Agreement as of the date first hereinabove set forth.
 
THE SHAREHOLDERS:

GE Ventures Limited
 
By:      __________________________________
 
Title:   __________________________________
 
BioSec Ltd.
 
By:      __________________________________
 
Title:   __________________________________
         
Pontifax (Israel) II – Individual Investor, L.P.
 
By:      __________________________________
 
Title:   __________________________________
 
Pontifax (Israel) II Ltd.
 
By:      __________________________________
 
Title:   __________________________________
 
Pontifax (Cayman) II L.P.
 
By:      __________________________________
 
Title:   __________________________________
Spearhead Investments (Bio) Ltd.
 
By:      __________________________________
 
Title:   __________________________________
Docor International B.V.
 
By:      __________________________________
 
Title:   __________________________________
Jacobs Investments Company LLC
 
By:      __________________________________
 
Title:   __________________________________
Counterpoint Ventures Fund LP
 
By:      __________________________________
 
Title:   __________________________________
 
Counterpoint Ventures Fund II LP
 
By:      __________________________________
 
Title:   __________________________________
 
BXR Portfolio Limited
 
By:      __________________________________
 
Title:   __________________________________
Remer Holdings Inc.
 
By:      __________________________________
 
Title:   __________________________________
Paddy McGwire
 
By:      __________________________________
 
OGI Infrastructure Telecom (pte) Ltd.
 
By:      __________________________________
 
Title:   __________________________________
Bamna Holdings Ltd.
 
By:      __________________________________
 
Title:   __________________________________
 
Asher Haddad
 
By:      __________________________________
 
Michael and Dorit Cohen
 
By:      __________________________________
 
 
 
[SIGNATURE PAGE 2 OF 9 OF AMENDED AND RESTATED SHAREHOLDERS’ AGREEMENT]
 
 
 

 
 
IN WITNESS WHEREOF the parties have signed this Amended and Restated Shareholders’ Agreement as of the date first hereinabove set forth.
 
THE SHAREHOLDERS:

Nachum Friedman
 
By:      __________________________________
 
 
J. Rieger Ltd.
 
By:      __________________________________
 
Title:   __________________________________
Mishor Dahan technologies Ltd.
 
By:      __________________________________
 
Title:   __________________________________
 
Tricko Fuchs Ltd.
 
By:      __________________________________
 
Title:   __________________________________
 
E.E.T. Holdings Ltd.
 
By:      __________________________________
 
Title:   __________________________________
      
87215 Canada Ltd.
 
By:      __________________________________
 
Title:   __________________________________
   
Anfield Ltd.
 
By:      __________________________________
 
Title:   __________________________________
 
Danny Silbiger
 
By:      __________________________________
Reuven Adler
 
By:      __________________________________
Ray Graf
 
By:      __________________________________
Michael Warren
 
By:      __________________________________
Jake Foley III
 
By:      __________________________________
 
ARZ Chemicals Ltd.
 
By:      __________________________________
 
Title:   __________________________________
 
Collace Services Ltd.
 
By:      __________________________________
 
Title:   __________________________________
       
Alon Barda
 
By:      __________________________________
Edward L. McCallum Jr.
 
By:      __________________________________
 
Gabriella Ravid
 
By:      __________________________________
Arik Lukatch
 
By:      __________________________________
Meir Heth
 
By:      __________________________________
Tal & Michal Rivkind
 
By:      __________________________________
Shevlin Ciral
 
By:      __________________________________
 
Moshit & Ron Yaffe
 
By:      __________________________________
 
Derek Locke
 
By:      __________________________________
Perry Goldberg
 
By:      __________________________________
 
[SIGNATURE PAGE 3 OF 9 OF AMENDED AND RESTATED SHAREHOLDERS’ AGREEMENT]
 
 
 

 
 
IN WITNESS WHEREOF the parties have signed this Amended and Restated Shareholders’ Agreement as of the date first hereinabove set forth.

THE SHAREHOLDERS:

Gary Kneisel
 
By:      __________________________________
LeRoy C. Prichard
 
By:      __________________________________
Cary Kalant and Maria Kalant JTWROS
 
By:      __________________________________
 
D. Gideon Searle
 
By:      __________________________________
MPI 2008
 
By:      __________________________________
 
Title:   __________________________________
       
Red Car Group
 
By:      __________________________________
 
Title:   __________________________________
 
Ari Kalman
 
By:      __________________________________
Lawrence & Terence Byrne JTWROS
 
By:      __________________________________
Eunice Diane Goldberg
 
By:      __________________________________
 
Larry Byrne
 
By:      __________________________________
Sheila Saporito
 
By:      __________________________________
Emigrant Alternative Investments LLC
 
By:      __________________________________
 
Title:   __________________________________
 
Shimon Yakobov
 
By:      __________________________________
Thomas C. Reynolds
 
By:      __________________________________
Stephen A. Frost
 
By:      __________________________________
 
E. Scott Jackson Irrevocable Family Trust
 
By:      __________________________________
 
Title:   __________________________________            
Fred B Walters Irrevocable Family Trust (together
with Roger Walters Irrevocable Family Trust)
 
By:      __________________________________
 
Title:   __________________________________
      
Marianne B. Kipper Separate Property Trust Est. 1-14-88,
Marianne B. Kipper, Trustee
 
By:      __________________________________
 
Title:   __________________________________
 
Amir Avni
 
By:      __________________________________
Norman Jackson
 
By:      __________________________________
Samuel and Renee Sax Trust u/a/d 3/3/2004
 
By:      __________________________________
 
Title:   __________________________________
 
 
 [SIGNATURE PAGE 4 OF 9 OF AMENDED AND RESTATED SHAREHOLDERS’ AGREEMENT]
 
 
 

 
 
IN WITNESS WHEREOF the parties have signed this Amended and Restated Shareholders’ Agreement as of the date first hereinabove set forth.
 
THE SHAREHOLDERS:

Lawrence Oberman
 
By:      __________________________________
Jody Williams
 
By:      __________________________________
David Gelfand
 
By:      __________________________________
 
Moked Ituran Ltd.
 
By:      __________________________________
 
Title:   __________________________________
 
Hertzel Bybabyov
 
By:      __________________________________
Sid Black
 
By:      __________________________________
Mark Sweeny
 
By:      __________________________________
 
Thomas F. Sax
 
By:      __________________________________
Eddo Dinstein
 
By:      __________________________________
Tamar Ozeri
 
By:      __________________________________
 
Sigalit Kimchy
 
By:      __________________________________
Yoav Kimchy
 
By:      __________________________________
Andy Logan
 
By:      __________________________________
John Hayes
 
By:      __________________________________
Stuart Schwartz
 
By:      __________________________________
 
William (Irwin) and Linda Horwitch
 
By:      __________________________________
Sebastian Sax Supplemental Needs Trust u/a/d 3/3/2004
 
By:      __________________________________
 
Title:   __________________________________
 
Grant McCullagh
 
By:      __________________________________
Peter Ricker
 
By:      __________________________________
Richard E. Kipper Separate Property Trust Est. 1-14-88,
Richard E. Kipper, Trustee
 
By:      __________________________________
 
Title:   __________________________________
Stanley Green and Adrienne Green, as joint
tenants
 
By:      __________________________________
 
 
[SIGNATURE PAGE 5 OF 9 OF AMENDED AND RESTATED SHAREHOLDERS’ AGREEMENT]
 
 
 

 
 
IN WITNESS WHEREOF the parties have signed this Amended and Restated Shareholders’ Agreement as of the date first hereinabove set forth.
 
THE SHAREHOLDERS:
 
Boaz Benzur
 
By:      __________________________________
Yitzchak Ostashinsky
 
By:      __________________________________
Yitzchak Abudy
 
By:      __________________________________
 
Dan Eilat
 
By:      __________________________________
 
Yoram Shafek
 
By:      __________________________________
Eldad Halevi
 
By:      __________________________________
Bruch Nachmias
 
By:      __________________________________
Zvika Kelich
 
By:      __________________________________
Ilan Eilat
 
By:      __________________________________
 
Helios Investments Pte Limited
 
By:      __________________________________
 
Title:   __________________________________
Rami Shlinger
 
By:      __________________________________
 
 
[SIGNATURE PAGE 6 OF 9 OF AMENDED AND RESTATED SHAREHOLDERS’ AGREEMENT]
 
 
 

 
 
IN WITNESS WHEREOF the parties have signed this Amended and Restated Shareholders’ Agreement as of the date first hereinabove set forth.
 
LENDERS WHO ARE NOT SHAREHOLDERS:
 
Shanghai Fosun Pharmaceutical Group Co. Ltd.
 
By:          ________________________________
 
Name:     ________________________________
 
Title:       ________________________________
 
Joshua Ehrlich
 
By:          ________________________________
 
Name:     ________________________________
 
Title:       ________________________________
Bart Superannuation Pty Ltd.
 
By:          ________________________________
 
Name:     ________________________________
 
Title:       ________________________________
 
Nir Grinberg
 
By:          ________________________________
 
Name:     ________________________________
 
Title:       ________________________________
Avraham Kuzitsky
 
By:          ________________________________
 
Name:     ________________________________
 
Title:       ________________________________
DPC Big Bay Properties Trust
 
By:          ________________________________
 
Name:     ________________________________
 
Title:       ________________________________
 
Pinchas Dekel
 
By:          ________________________________
 
Name:     ________________________________
 
Title:       ________________________________
 
Sharon Zaworbach
 
By:          ________________________________
 
Name:     ________________________________
 
Title:       ________________________________
Minrav Holdings Ltd.
 
By:          ________________________________
 
Name:     ________________________________
 
Title:       ________________________________
Moshe Haviv
 
By:          ________________________________
 
Name:     ________________________________
 
Title:       ________________________________
 
[SIGNATURE PAGE 7 OF 9 OF AMENDED AND RESTATED SHAREHOLDERS’ AGREEMENT]
 
 
 

 
 
IN WITNESS WHEREOF the parties have signed this Amended and Restated Shareholders’ Agreement as of the date first hereinabove set forth.

LENDERS WHO ARE NOT SHAREHOLDERS :
 
H.M.L.K Financial Consulting Ltd.
 
By:          ________________________________
 
Name:     ________________________________
 
Title:       ________________________________
 
Capital Point Ltd.
 
By:          ________________________________
 
Name:     ________________________________
 
Title:       ________________________________
Yossi Smira
 
By:          ________________________________
 
Name:     ________________________________
 
Title:       ________________________________
Norm Jackson
 
By:          ________________________________
 
Name:     ________________________________
 
Title:       ________________________________
 
Emil Mor- Business & Financial Consulting Ltd.
 
By:          ________________________________
 
Name:     ________________________________
 
Title:       ________________________________
 
Scott Jackson
 
By:          ________________________________
 
Name:     ________________________________
 
Title:       ________________________________
Uri Perelman
 
By:          ________________________________
 
Name:     ________________________________
 
Title:       ________________________________
Dor Benvenisty
 
By:          ________________________________
 
Name:     ________________________________
 
Title:       ________________________________
 
Everest Fund L.P.
 
By:          ________________________________
 
Name:     ________________________________
 
Title:       ________________________________
Harmony (Ben Dov) Ltd.
 
By:          ________________________________
 
Name:     ________________________________
 
Title:       ________________________________
 
 
[SIGNATURE PAGE 8 OF 9 OF AMENDED AND RESTATED SHAREHOLDERS’ AGREEMENT]
 
 
 

 
 
IN WITNESS WHEREOF the parties have signed this Amended and Restated Shareholders’ Agreement as of the date first hereinabove set forth.
 
LENDERS WHO ARE NOT SHAREHOLDERS :
 
Red Car Group
 
By:          ________________________________
 
Name:     ________________________________
 
Title:       ________________________________
Yossi Avraham
 
By:          ________________________________
 
Name:     ________________________________
 
Title:       ________________________________
 
[SIGNATURE PAGE 9 OF 9 OF AMENDED AND RESTATED SHAREHOLDERS’ AGREEMENT]
 
 
 

 
 
Schedule A

Shareholders

Ordinary Shareholders

Thomas F. Sax
Eddo Dinstein
 
Samuel and Renee Sax Trust u/a/d 3/3/2004
 
Tamar Ozeri
Sebastian Sax Supplemental Needs Trust u/a/d 3/3/2004
Sigalit Kimchy
 
Andy Logan
Yoav Kimchy

Preferred A Shareholders

Emigrant Alternative Investments LLC
 
William (Irwin) and Linda Horwitch
 
Counterpoint Ventures Fund LP
 
Stuart Schwartz
 
D. Gideon Searle
 
John Hayes
 
Richard E. Kipper Separate Property Trust Est. 1-14-88, Richard E. Kipper, Trustee
 
Grant McCullagh
Marianne B. Kipper Separate Property Trust Est. 1-14-88, Marianne B. Kipper, Trustee
 
Peter Ricker
Lawrence Oberman
Sid Black

Preferred B Shareholders

Emigrant Alternative Investments LLC
 
Stanley Green and Adrienne Green, as joint tenants
 
Counterpoint Ventures Fund LP
 
Lawrence & Terence Byrne JTWROS
 
D. Gideon Searle
 
Stephen A. Frost
 
Richard E. Kipper Separate Property Trust Est. 1-14-88, Richard E. Kipper, Trustee
 
Sheila Saporito
 
Marianne B. Kipper Separate Property Trust Est. 1-14-88, Marianne B. Kipper, Trustee
 
Eunice Diane Goldberg
 
Lawrence Oberman
Paddy McGwire
 
 
 

 
 
Preferred C Shareholders

D. Gideon Searle
 
MPI 2008
Pontifax (Cayman) II L.P.
 
Counterpoint Ventures Fund II LP
 
Ari Kalman
 
Pontifax (Israel) II L.P.
 
Docor International BV
Cary Kalant and Maria Kalant JTWROS
Pontifax (Israel) II Individual Investors L.P.
 
Larry Byrne
Jacobs Investment Company LLC
 
Eunice Diane Goldberg
Emigrant Alternative Investments LLC
 
E.Scott Jackson Irrevocable Family Trust
Fred B Walters Irrevocable Family Trust (together with Roger Walters Irrevocable Family Trust)
 
Mark Sweeny
Amir Avni
Norman Jackson
 
Samuel and Renee Sax Trust u/a/d 3/3/2004  
 
Lawrence Oberman
 
Jody Williams
 
Edward L.  McCallum
 
David Gelfand
 
Moked Ituran Ltd.
 
Hertzel Bybabyov
 
Sheila Saporito
 
Shimon Yakobov
 
Thomas C. Reynolds
 
Moshit and Ron Yaffe
 
Spearhead Investments (Bio) Ltd.
 
Boaz Benzur
Yitzchak Ostashinsky
Yitzchak Abudy
 
Dan Eilat
Yoram Shafek
Helios Investments Pte Limited
 
Eldad Halevi
Bruch Nachmias
Ilan Eilat
 
Zvika Kelich
Rami Shlinger
 
 
 
 

 
 
Preferred D Shareholders

BXR Portfolio Limited
 
Pontifax (Israel) II - Individual Investors, L.P.
 
Pontifax (Cayman) II L.P.
 
Pontifax (Israel) II L.P.
 
Bamna Holdings Ltd.
 
Remer Holdings Inc.
OGI Infrastructure & Telecom (pte) Ltd.
 
Docor International BV
 
Red Car Group
Asher Haddad
 
BioSec Ltd.
 
Jacobs Investment Company LLC
 
Michael and Dorit Cohen
 
Nachum Friedman
 
J. Rieger Ltd.
Mishor Dahan Technologies Ltd.
 
Tricko Fuchs Ltd.
 
E.E.T. Holdings Ltd.
 
87215 Canada Ltd.
 
Anfield Ltd.
 
Danny Silbiger
 
Reuven Adler
 
Ray Graf
Michael Warren
Jake Foley III
 
ARZ Chemicals Ltd.
 
Collace Services Limited
 
Alon Barda
 
Edward L. McCallum Jr.
 
Gabriella Ravid
 
Arik Lukatch
 
Meir Heth
 
Tal & Michal Rivkind
 
Shevlin Ciral
 
Moshit & Ron Yaffe
 
Derek Locke
 
Perry Goldberg
 
Gary Kneisel
 
LeRoy C. Prichard
 
Cary Kalant and Maria Kalant JTWROS
GE Ventures Limited
 

 
 

 
 
Schedule B

Lenders

No.
Lender's Name
Credit Line Amount
Address
 
1.
Shanghai Fosun Pharmaceutical Group Co. Ltd. and/or its subsidiary
US$ 4,000,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
with a copy to: (which shall not
constitute service on Fosun Pharma)
Herzog Fox & Neeman Law Offices
Asia House
4 Weizmann Street
Tel Aviv 6423904, Israel
Tel: +972-3-6922894
Fax: +972-3-6966464
Attention: Yair Geva, Adv.
2.
Counterpoint Ventures Fund II LP
 
US$ 255,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
3.
Pontifax (Cayman) II LP
US$ 733,256
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
4.
Pontifax (Israel) II Individual Investors LP
US$ 214,410
 
5.
Pontifax (Israel) II LP
US$ 552,334
6.
Docor International BV
US$ 500,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
7.
Bart Superannuation Pty Ltd.
US$ 500,000
__________________________
__________________________
Tel: +61-292335015
Fax: +61-29233411
Attention: Fred Bart
 
 
 

 
No.
Lender's Name
Credit Line Amount
Address
 
8.
Joshua Ehrlich
US$ 250,000
__________________________
__________________________
Tel: + 61-417040226
Fax: (02) 93277075
Attention: Joshua Ehrlich
9.
Scott Jackson
US$ 50,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
10.
Minrav Holdings Ltd
 
 
US$ 500,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
11.
Avraham Kuznitsky
 
US$ 250,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
12.
Pinchas Dekel
 
 
US$ 100,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
13.
Emil Mor- Business & Financial Consulting Ltd.
 
US$ 100,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
14.
Harmony (Ben Dov) Ltd
 
 
US$ 750,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
 
 
 

 
 
No.
Lender's Name
Credit Line Amount
Address
 
15.
GE Ventures Limited
 
 
US$ 350,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
16.
Yossi Smira
 
 
US$ 150,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
17.
H.M.L.K. Financial Consulting Ltd.
 
 
US$ 360,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
18.
Sharon Zaworbach
 
 
US$ 100,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
19.
Moshe Haviv
 
 
US$ 100,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
20.
Nir  Greenberg
 
 
US$ 100,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
21.
Dor Benvenisty
 
 
US$ 50,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
 
 
 

 
No.
Lender's Name
Credit Line Amount
Address
 
22.
Norm Jackson
 
 
US$ 50,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
23.
Shevlin Ciral
 
 
US$ 50,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
24.
Everest Fund L.P.
 
 
US$ 120,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
25.
Uri Perekman
 
 
US$ 70,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
26.
DPC Big Bay Properties Trust
 
 
US$ 100,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
27.
Capital Point Ltd.
 
 
US$ 500,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
28.
Yossi Avraham
 
 
US$ 250,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
 
 
 

 
No.
Lender's Name
Credit Line Amount
Address
 
29.
Red Car Group
 
 
US$ 200,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
30.
 
Beeston Nominees (Panama) Inc.
 
 
US$ 695,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________





Exhibit 10.4
 
CHECK-CAP LTD.
 
WARRANT

To purchase
______________   Preferred C1 Shares (subject to adjustment) of
Check-Cap Ltd.   (the " Company ")
at a per share price and subject to the terms detailed below
VOID AFTER 17:00 p.m. Israel Standard Time
on the last day of the Warrant Period (as defined below)

THIS IS TO CERTIFY THAT , ___________ (the " Holder "), is entitled to purchase from the Company, an aggregate of up to __________ (as may be adjusted hereunder) Preferred C1 Shares of the Company, nominal value NIS 0.01 per share (the " Warrant Shares "), at an aggregate purchase price of US$ __________ reflecting an exercise price of US$0.2495  per Warrant Share (as may be adjusted hereunder) (the " Exercise Price "), during the Warrant Period.
 
1.
EXERCISE OF WARRANT
 
1.1.
Warrant Period . This Warrant may be exercised, subject to the terms and conditions hereof, in whole or in part, at one time or from time to time during the period commencing on June 1 st , 2009, and for ten (10) years thereafter. The above period shall be referred to hereinafter as the "Warrant Period".
 
1.2.
Exercise for Cash . This Warrant may be exercised by presentation and surrender thereof to the Company at its principal office or at such other office or agency as it may designate from time to time, accompanied by:
 
 
1.2.1.
A duly executed notice of exercise, in the form attached hereto as Schedule 1.2.1 (the " Exercise Notice "); and
 
 
1.2.2.
Payment to the Company, for the account of the Company, of the aggregate Exercise Price, payable in immediately available funds by wire transfer to the Company's bank account. The Exercise Price will be paid in United States Dollars or the equivalent sum in NIS according to the Bank of Israel exchange rate as published upon Exercise.
 
1.3.
Exercise on Net Issuance Basis . In lieu of payment to the Company as set forth in Section 1.2 above, the Holder may elect to convert this Warrant into the number of Warrant Shares calculated pursuant to the formula below, by presentation and surrender thereof to the Company at its principal office or at such other office or agency it may designate from time to time, accompanied by a duly executed notice of exercise, in the form attached hereto as Schedule 1.3 (the " Net Issuance Notice "):
 
              Y*(A - B)
X         =              -----------------
    A
 
 
 

 

           Where:

 
X =
the number of Warrant Shares to be issued to the Holder;

 
Y =
the number of Warrant Shares otherwise purchasable upon exercise of this Warrant;

 
 
A =
the fair market value of one Warrant Share; and
 
 
 
B =
the Exercise Price per one Warrant Share.

For purposes of this Section 1.3, the " fair market value " of one (1) Warrant Share as of a particular date shall be: (a) if applicable, the average of the closing bid and asked prices of Warrant Shares (or of any securities to which the Warrant Shares have been converted to in accordance with the Company's organizational documents and applicable law) quoted in the over-the-counter market summary or the closing price quoted on any exchange on which the Warrant Share (or any securities to which the Warrant Shares have been converted to in accordance with the Company's organizational documents and applicable law) is listed, whichever is applicable, as published in the Wall Street Journal for the ten (10) trading days immediately prior to but not including the date of determination of fair market value, (b) if the exercise pursuant to this Section 1.3 is immediately prior to the consummation of a merger or sale of all or substantially all of the assets or shares of the Company (or other similar corporate transaction), then the fair market value of one (1) Warrant Share (or of any securities to which the Warrant Shares have been converted to in accordance with the Company's governing documents and applicable law) in such transaction. In the event that the price in the transaction is not in cash, then the applicable fair market value shall be determined by the Board of Directors of the Company; or (c) if the exercise pursuant to this Section 1.3 is immediately prior to the closing of an initial public offering by the Company or a corporate successor of its equity interests, then the public offering price (before deduction of discounts, commissions or expenses) in such offering.
 
1.4.
Issuance of Warrant Shares . Upon presentation and surrender of this Warrant, accompanied by (a) the duly executed Exercise Notice and the payment of the applicable aggregate Exercise Price pursuant to Section 1.2 above; or (b) the duly executed Net Issuance Notice pursuant to Section 1.3 above, as the case may be, the Company shall promptly (i) issue to the Holder the Warrant Shares to which the Holder is entitled; and (ii) deliver to the Holder the share certificate evidencing such Warrant Shares.
 
Upon receipt by the Company of this Warrant and the applicable duly executed notice of exercise (and the aggregate Exercise Price, if applicable), together with any other documents and/or approvals that may be required by law, the Holder shall be deemed to be the holder of record of the Warrant Shares issuable upon such exercise, notwithstanding that the share transfer books of the Company shall then be closed or that certificates representing such shares shall not then be actually delivered to the Holder.
 
1.5.
Fractional Shares . No fractions of Shares shall be issued in connection with the exercise of this Warrant, and the number of shares issued shall be rounded up to the nearest whole number.
 
1.6.
Additional Documents . The Holder will sign and deliver any and all documents or approvals required by law, to facilitate the issuance of shares upon exercise of this Warrant.
 
 
2

 
 
1.7.
Loss or Destruction of Warrant . Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably expenses reimbursement and satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date.
 
1.8.
Vesting .  Warrant Shares constituting 75% of the entire amount of Warrant Shares shall vest quarterly over a period of three (3) years, commencing  on March 8 th , 2008.
 
1.9.
Acceleration . Immediately prior to the consummation of a Notice Event (as defined in Section 5.2 below) then, notwithstanding the vesting periods set forth above, all of the Warrant Shares which have not yet vested shall be accelerated and become immediately vested and exercisable.
 
2.
TAXES
 
2.1.
The Holder acknowledges that the grant of the Warrant, the issue of the Warrant Shares and the execution and/or performance of this Warrant may have tax consequences to the Holder and that the Company is not able to ensure or represent to the Holder the nature and extent of such tax consequences.
 
2.2.
The Company shall pay all of the applicable taxes and other charges payable by the Company in connection with the issuance of the Warrant Shares and the preparation and delivery of share certificates pursuant to Section 1 in the name of the Holder (such as transfer taxes in respect of the issue or delivery of Warrant Shares on exercise of this Warrant), if any, but shall not pay any taxes payable by the Holder by virtue of the holding, issuance, exercise or sale of this Warrant or the Warrant Shares by the Holder.
 
3.
RESERVATION OF SHARES ; PRESERVATION OF RIGHTS OF HOLDER
 
3.1.
Reservation of Shares . The Company hereby agrees that, at all times prior to the expiration or exercise of this Warrant, it will maintain and reserve, free from pre-emptive or similar rights, such number of authorized but unissued shares so that this Warrant may be exercised without additional authorization of shares.
 
3.2.
Preservation of Rights . The Company will not, by amendment of its organizational documents or through reorganization, recapitalization, consolidation, merger, dissolution, transfer of assets, issue or sale of securities or any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations, conditions or terms to be observed or performed hereunder, but will at all times in good faith assist in the carrying out of all the provisions hereof and in taking of all such actions and making all such adjustments as may be necessary or appropriate in order to fulfill the provisions hereof.

4.
ADJUSTMENT
 
4.1.
The number of Warrant Shares purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time or upon exercise, as follows:
 
 
3

 
 
 
4.1.1.
Bonus Shares . In the event that during the Warrant Period the Company shall distribute a non-cash dividend or shares pursuant to a reclassification of its share capital, to all of the holders of shares of the Company (i.e., bonus shares), then this Warrant shall represent the right to acquire, in addition to the number of Warrant Shares indicated in the caption of this Warrant, the amount of such bonus shares that are distributed to persons holding the class of share capital for which the Warrant is exerciseable and/or to receive the stock dividends which are distributed to persons holding the class of share capital for which the Warrant is exerciseable, without payment of any additional consideration therefor, to which the Holder would have been entitled had this Warrant been exercised prior to the distribution of the stock dividends or the bonus shares.
 
 
4.1.2.
Consolidation and Division . In the event that during the Warrant Period the Company consolidates its share capital into shares of greater par value, or subdivides them into shares of lesser par value, then the number of Warrant Shares to be allotted on exercise of this Warrant after such consolidation or subdivision shall be reduced or increased accordingly, as the case may be, and in each case the Exercise Price shall be adjusted appropriately such that the aggregate consideration hereunder to the Company shall not change.
 
 
4.1.3.
Capital Reorganization . In the event that during the Warrant Period a reorganization of the share capital of the Company is effected (other than subdivision, combination or reclassification provided for elsewhere in this Section 4) and the Preferred C1 Shares are exchanged for other securities of the Company, then, as part of such reorganization, provision shall be made so that the Holder shall be entitled to purchase upon exercise of this Warrant such kind and number of shares or other securities of the Company to which the Holder would have been entitled had this Warrant been exercised without taking into effect such reorganization.
 
4.2.
Whenever an adjustment is effected hereunder, the Company shall promptly compute such adjustment and deliver to the Holder a certificate setting forth the number of Warrant Shares (or any other securities) for which this Warrant is exercisable and the Exercise Price as a result of such adjustment, a brief statement of the facts requiring such adjustment and the computation thereof and when such adjustment has or will become effective.
 
5.
NOTICE OF CERTAIN EVENTS
 
5.1.
If at any time during the Warrant Period, any of the Notice Events set forth in Section 5.2 below shall occur, then, in any one or more of such events, the Company shall deliver to the Holder written notice thereof, including the date on which (a) a record shall be taken in connection with such event (if applicable); and (b) the consummation date of such event. Such written notice shall be delivered to the Holder at least (if possible under the circumstances) thirty (30) days prior to the consummation of the applicable event and not less than thirty (30) days prior to the record date in respect thereto.
 
5.2.
For the purposes hereof, a " Notice Event " shall mean (i) an initial public offering by the Company or a corporate successor of its equity interests; (ii) the merger or sale of all or substantially all of the assets or shares of the Company (or other similar corporate transaction); and/or (iii) a voluntary or involuntary dissolution, liquidation or winding up of the Company.
 
 
4

 

6.
RIGHTS OF THE HOLDER
 
6.1.
This Warrant shall not entitle the Holder, by virtue hereof, to any voting rights or other rights as a shareholder of the Company, except for the rights expressly set forth herein.
 
6.2.
The Holder acknowledges that the Warrant Shares shall be subject to such certain rights, privileges, restrictions and limitations as set forth in this Warrant, and the organizational documents of the Company (or any other agreement with respect thereto), as may be amended from time to time, and that, as a result, inter alia , of such limitations, it may be difficult or impossible for the Holder to realize his investment and/or to sell or otherwise transfer the Warrant Shares. The Holder further acknowledges that the Company's shares are not publicly traded.
 
7.
REPRESENTATIONS OF THE COMPANY
 
The Company represents and warrants to the Holder as follows: (i) this Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms; (ii) the Warrant Shares are duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and not subject to any third party rights (except any rights thereto afforded by the Holder); and (iii) the execution and delivery of this Warrant are not, and the issuance of the Warrant Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company's governing documents, do not and will not contravene any law, governmental rule or regulation, judgment or order applicable to the Company, and do not and will not conflict with or contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration with or the taking of any action in respect of or by, any government authority or agency or other person, other than those consents or approvals that shall have been previously obtained.

8.
TERMINATION
 
Notwithstanding anything to the contrary, this Warrant and all the rights conferred hereby shall terminate and expire at the aforementioned time on the last day of the Warrant Period, unless the Warrant was previously exercised.
 
9.
MISCELLANEOUS
 
9.1.
Entire Agreement; Amendment . This Warrant sets forth the entire understanding of the parties with respect to the subject matter hereof and supersedes all existing agreements among them concerning such subject matter. All article and section headings herein are inserted for convenience only and shall not modify or affect the construction or interpretation of any provision of this Warrant. No modification or amendment of this Warrant will be valid unless executed in writing by the Company and the Holder.
 
 
5

 
 
9.2.
Waiver . No failure or delay on the part of any of the parties in exercising any right, power or privilege hereunder and/or under any applicable laws or the exercise of such right or power in a manner inconsistent with the provisions of this Warrant or applicable law shall operate as a waiver thereof. Any waiver must be evidenced in writing signed by the party against whom the waiver is sought to be enforced.
 
9.3.
Successors and Assigns; Assignment . Except as otherwise expressly limited herein, this Warrant shall inure to the benefit of, be binding upon, and be enforceable by the Holder and its respective successors, and administrators and is otherwise non-transferable without the prior consent of the Company. The Holder represents and warrants to the Company that this Warrant and the Warrant Shares, if and when purchased by the Holder, are for the Holder's own account and for investment purposes only and not with a view for resale or transfer and that all the rights pertaining to the Warrant or the Warrant Shares, by law or equity, shall be purchased and possessed by the Holder for the Holder exclusively.
 
9.4.
Governing Law .  This Warrant shall be exclusively governed and construed in accordance with the laws of the State of Israel, without regard to conflicts of laws provisions thereof.
 
9.5.
Arbitration .  Any dispute, controversy or claim arising in relation to this Warrant, including with regard to its validity, invalidity, breach, enforcement or termination, will be referred to a single arbitrator, who shall be appointed by the Head of the Israeli Bar Association.  Arbitration proceedings shall take place in Tel Aviv, Israel, and shall be conducted in English and according to the rules of substantive law (per Section 9.4 above). The arbitrator will not be bound by rules of evidence or procedure and will give the reasons for his judgment. The arbitrator's decision shall be final and enforceable in any court. This paragraph shall constitute an arbitration agreement between the parties.
 
9.6.
Notices .  Any notice required or permitted to be given to a party pursuant to the provisions of this Warrant will be in writing and will be effective and deemed delivered to such party on the earliest of the following: (a) all notices and other communications delivered in person or by courier service shall be deemed to have been delivered as of actual delivery thereof; (b) those given by facsimile transmission shall be deemed delivered on the following business day after transmission, with confirmed transmission thereof; and/or (c) all notices and other communications sent by registered mail (or air mail if the posting is international) shall be deemed given three (3) days after posting.
 
9.7.
Severability .  If any provision of this Warrant is held to be unenforceable, this Warrant shall be considered divisible and such provision shall be deemed inoperative to the extent it is deemed unenforceable, and in all other respects this Warrant shall remain in full force and effect; provided , however , that if any such provision may be made enforceable by limitation thereof, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by applicable law.
 
9.8.
Counterparts .  This Warrant may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.  Facsimile signatures of a party shall be binding as evidence of such party's agreement hereto and acceptance hereof.
 
9.9.
Amendments .  To the extent that any amendments to that certain Series C Preferred Share Purchase Agreement   dated June 1 st , 2009 ( the " Share Purchase Agreement ") or the transactions contemplated thereby results in a required amendment to the terms of this Warrant, this Warrant shall be deemed amended to the extent that the amendments to the Share Purchase Agreement are completed in accordance with the provisions of that agreement.
 
[THE REMAINDER OF THIS PAGE WAS INTENTIONALLY LEFT BLANK]
 
 
6

 
 
IN WITNESS WHEREOF , the Company has caused this Warrant to be executed by its officer thereunto duly authorized.
 
Dated:  June 1 st , 2009
 
 
Check-Cap Ltd.
 
By:   ______________________________
       Name:
       Title:
Check-Cap Ltd.
 
By:   ______________________________
       Name:
       Title:
 
AGREED AND ACCEPTED :

__________________________
 
___________________________
 
Name : ___________________
 
 
7

 
 
Schedule 1.2.1

Exercise Notice
 
Date: ____________
 
To:         Check-Cap Ltd.
 
The undersigned, pursuant to the provisions set forth in the Warrant to which this Exercise Notice is attached (the " Warrant :), hereby elects to purchase the Warrant Shares (as such term is defined in the Warrant) pursuant to Section 1.2 of the Warrant, and herewith makes payment of _____________, representing the full Exercise Price for such shares as provided for in such Warrant.
 
   Signature: 
   Address:                                                      
 
                                                                       
                                                                       
 
 
8

 
                                                      
Schedule 1.3

Net Issuance Notice
 
Date: ____________
 
To:         Check-Cap Ltd.                                                                        
 
The undersigned, pursuant to the provisions set forth in the Warrant to which this Exercise Notice is attached (the " Warrant "), hereby elects to exercise the Warrant for the purchase of Warrant Shares (as such term is defined in the Warrant), pursuant to the provisions of Section 1.3 of the Warrant.
 
   Signature: 
   Address:                                                      
 
                                                                       
                                                                       
 
9






 



Exhibit 10.5
 
CHECK-CAP LTD.
 
WARRANT

To purchase
____________   Preferred C2 Shares (subject to adjustment) of
Check-Cap Ltd.   (the " Company ")
at a per share price and subject to the terms detailed below
VOID AFTER 17:00 p.m. Israel Standard Time
on the last day of the Warrant Period (as defined below)
 
THIS IS TO CERTIFY THAT , _________________ (the " Holder "), is entitled to purchase from the Company, an aggregate of up to ___________ (as may be adjusted hereunder) Preferred C2 Shares of the Company, nominal value NIS 0.01 per share (the " Warrant Shares "), at an aggregate purchase price of US$ ____________, reflecting an exercise price of US$0.2690 (the " Exercise Price "), during the Warrant Period.
 
1.
EXERCISE OF WARRANT
 
1.1.
Warrant Period . This Warrant may be exercised, subject to the terms and conditions hereof, in whole or in part, at one time or from time to time during the period commencing on June 1 st , 2009, and for ten (10) years thereafter. The above period shall be referred to hereinafter as the "Warrant Period".
 
1.2.
Exercise for Cash . This Warrant may be exercised by presentation and surrender thereof to the Company at its principal office or at such other office or agency as it may designate from time to time, accompanied by:
 
 
1.2.1.
A duly executed notice of exercise, in the form attached hereto as Schedule 1.2.1 (the " Exercise Notice "); and
 
 
1.2.2.
Payment to the Company, for the account of the Company, of the aggregate Exercise Price, payable in immediately available funds by wire transfer to the Company's bank account. The Exercise Price will be paid in United States Dollars or the equivalent sum in NIS according to the Bank of Israel exchange rate as published upon Exercise.
 
1.3.
Exercise on Net Issuance Basis . In lieu of payment to the Company as set forth in Section 1.2 above, the Holder may elect to convert this Warrant into the number of Warrant Shares calculated pursuant to the formula below, by presentation and surrender thereof to the Company at its principal office or at such other office or agency it may designate from time to time, accompanied by a duly executed notice of exercise, in the form attached hereto as Schedule 1.3 (the " Net Issuance Notice "):
 
              Y*(A - B)
X         =              -----------------
    A
 
 
 

 

           Where:

 
X =
the number of Warrant Shares to be issued to the Holder;

 
Y =
the number of Warrant Shares otherwise purchasable upon exercise of this Warrant;

 
 
A =
the fair market value of one Warrant Share; and
 
 
 
B =
the Exercise Price per one Warrant Share.

For purposes of this Section 1.3, the " fair market value " of one (1) Warrant Share as of a particular date shall be: (a) if applicable, the average of the closing bid and asked prices of Warrant Shares (or of any securities to which the Warrant Shares have been converted to in accordance with the Company's organizational documents and applicable law) quoted in the over-the-counter market summary or the closing price quoted on any exchange on which the Warrant Share (or any securities to which the Warrant Shares have been converted to in accordance with the Company's organizational documents and applicable law) is listed, whichever is applicable, as published in the Wall Street Journal for the ten (10) trading days immediately prior to but not including the date of determination of fair market value, (b) if the exercise pursuant to this Section 1.3 is immediately prior to the consummation of a merger or sale of all or substantially all of the assets or shares of the Company (or other similar corporate transaction), then the fair market value of one (1) Warrant Share (or of any securities to which the Warrant Shares have been converted to in accordance with the Company's governing documents and applicable law) in such transaction. In the event that the price in the transaction is not in cash, then the applicable fair market value shall be determined by the Board of Directors of the Company; or (c) if the exercise pursuant to this Section 1.3 is immediately prior to the closing of an initial public offering by the Company or a corporate successor of its equity interests, then the public offering price (before deduction of discounts, commissions or expenses) in such offering.
 
1.4.
Issuance of Warrant Shares . Upon presentation and surrender of this Warrant, accompanied by (a) the duly executed Exercise Notice and the payment of the applicable aggregate Exercise Price pursuant to Section 1.2 above; or (b) the duly executed Net Issuance Notice pursuant to Section 1.3 above, as the case may be, the Company shall promptly (i) issue to the Holder the Warrant Shares to which the Holder is entitled; and (ii) deliver to the Holder the share certificate evidencing such Warrant Shares.
 
Upon receipt by the Company of this Warrant and the applicable duly executed notice of exercise (and the aggregate Exercise Price, if applicable), together with any other documents and/or approvals that may be required by law, the Holder shall be deemed to be the holder of record of the Warrant Shares issuable upon such exercise, notwithstanding that the share transfer books of the Company shall then be closed or that certificates representing such shares shall not then be actually delivered to the Holder.
 
1.5.
Fractional Shares . No fractions of Shares shall be issued in connection with the exercise of this Warrant, and the number of shares issued shall be rounded up to the nearest whole number.
 
1.6.
Additional Documents . The Holder will sign and deliver any and all documents or approvals required by law, to facilitate the issuance of shares upon exercise of this Warrant.
 
 
2

 
 
1.7.
Loss or Destruction of Warrant . Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably expenses reimbursement and satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date.
 
1.8.
Vesting .  Warrant Shares constituting 75% of the entire amount of Warrant Shares shall vest quarterly over a period of three (3) years, commencing  on March 8 th , 2008.
 
1.9.
Acceleration . Immediately prior to the consummation of a Notice Event (as defined in Section 5.2 below) then, notwithstanding the vesting periods set forth above, all of the Warrant Shares which have not yet vested shall be accelerated and become immediately vested and exercisable.
 
2.
TAXES
 
2.1.
The Holder acknowledges that the grant of the Warrant, the issue of the Warrant Shares and the execution and/or performance of this Warrant may have tax consequences to the Holder and that the Company is not able to ensure or represent to the Holder the nature and extent of such tax consequences.
 
2.2.
The Company shall pay all of the applicable taxes and other charges payable by the Company in connection with the issuance of the Warrant Shares and the preparation and delivery of share certificates pursuant to Section 1 in the name of the Holder (such as transfer taxes in respect of the issue or delivery of Warrant Shares on exercise of this Warrant), if any, but shall not pay any taxes payable by the Holder by virtue of the holding, issuance, exercise or sale of this Warrant or the Warrant Shares by the Holder.
 
3.
RESERVATION OF SHARES ; PRESERVATION OF RIGHTS OF HOLDER
 
3.1.
Reservation of Shares . The Company hereby agrees that, at all times prior to the expiration or exercise of this Warrant, it will maintain and reserve, free from pre-emptive or similar rights, such number of authorized but unissued shares so that this Warrant may be exercised without additional authorization of shares.
 
3.2.
Preservation of Rights . The Company will not, by amendment of its organizational documents or through reorganization, recapitalization, consolidation, merger, dissolution, transfer of assets, issue or sale of securities or any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations, conditions or terms to be observed or performed hereunder, but will at all times in good faith assist in the carrying out of all the provisions hereof and in taking of all such actions and making all such adjustments as may be necessary or appropriate in order to fulfill the provisions hereof.

4.
ADJUSTMENT
 
4.1.
The number of Warrant Shares purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time or upon exercise, as follows:
 
 
3

 
 
 
4.1.1.
Bonus Shares . In the event that during the Warrant Period the Company shall distribute a non-cash dividend or shares pursuant to a reclassification of its share capital, to all of the holders of shares of the Company (i.e., bonus shares), then this Warrant shall represent the right to acquire, in addition to the number of Warrant Shares indicated in the caption of this Warrant, the amount of such bonus shares that are distributed to persons holding the class of share capital for which the Warrant is exerciseable and/or to receive the stock dividends which are distributed to persons holding the class of share capital for which the Warrant is exerciseable, without payment of any additional consideration therefor, to which the Holder would have been entitled had this Warrant been exercised prior to the distribution of the stock dividends or the bonus shares.
 
 
4.1.2.
Consolidation and Division . In the event that during the Warrant Period the Company consolidates its share capital into shares of greater par value, or subdivides them into shares of lesser par value, then the number of Warrant Shares to be allotted on exercise of this Warrant after such consolidation or subdivision shall be reduced or increased accordingly, as the case may be, and in each case the Exercise Price shall be adjusted appropriately such that the aggregate consideration hereunder to the Company shall not change.
 
 
4.1.3.
Capital Reorganization . In the event that during the Warrant Period a reorganization of the share capital of the Company is effected (other than subdivision, combination or reclassification provided for elsewhere in this Section 4) and the Preferred C1 Shares are exchanged for other securities of the Company, then, as part of such reorganization, provision shall be made so that the Holder shall be entitled to purchase upon exercise of this Warrant such kind and number of shares or other securities of the Company to which the Holder would have been entitled had this Warrant been exercised without taking into effect such reorganization.
 
4.2.
Whenever an adjustment is effected hereunder, the Company shall promptly compute such adjustment and deliver to the Holder a certificate setting forth the number of Warrant Shares (or any other securities) for which this Warrant is exercisable and the Exercise Price as a result of such adjustment, a brief statement of the facts requiring such adjustment and the computation thereof and when such adjustment has or will become effective.
 
5.
NOTICE OF CERTAIN EVENTS
 
5.1.
If at any time during the Warrant Period, any of the Notice Events set forth in Section 5.2 below shall occur, then, in any one or more of such events, the Company shall deliver to the Holder written notice thereof, including the date on which (a) a record shall be taken in connection with such event (if applicable); and (b) the consummation date of such event. Such written notice shall be delivered to the Holder at least (if possible under the circumstances) thirty (30) days prior to the consummation of the applicable event and not less than thirty (30) days prior to the record date in respect thereto.
 
5.2.
For the purposes hereof, a " Notice Event " shall mean (i) an initial public offering by the Company or a corporate successor of its equity interests; (ii) the merger or sale of all or substantially all of the assets or shares of the Company (or other similar corporate transaction); and/or (iii) a voluntary or involuntary dissolution, liquidation or winding up of the Company.
 
 
4

 

6.
RIGHTS OF THE HOLDER
 
6.1.
This Warrant shall not entitle the Holder, by virtue hereof, to any voting rights or other rights as a shareholder of the Company, except for the rights expressly set forth herein.
 
6.2.
The Holder acknowledges that the Warrant Shares shall be subject to such certain rights, privileges, restrictions and limitations as set forth in this Warrant, and the organizational documents of the Company (or any other agreement with respect thereto), as may be amended from time to time, and that, as a result, inter alia , of such limitations, it may be difficult or impossible for the Holder to realize his investment and/or to sell or otherwise transfer the Warrant Shares. The Holder further acknowledges that the Company's shares are not publicly traded.
 
7.
REPRESENTATIONS OF THE COMPANY
 
The Company represents and warrants to the Holder as follows: (i) this Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms; (ii) the Warrant Shares are duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and not subject to any third party rights (except any rights thereto afforded by the Holder); and (iii) the execution and delivery of this Warrant are not, and the issuance of the Warrant Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company's governing documents, do not and will not contravene any law, governmental rule or regulation, judgment or order applicable to the Company, and do not and will not conflict with or contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration with or the taking of any action in respect of or by, any government authority or agency or other person, other than those consents or approvals that shall have been previously obtained.

8.
TERMINATION
 
Notwithstanding anything to the contrary, this Warrant and all the rights conferred hereby shall terminate and expire at the aforementioned time on the last day of the Warrant Period, unless the Warrant was previously exercised.
 
9.
MISCELLANEOUS
 
9.1.
Entire Agreement; Amendment . This Warrant sets forth the entire understanding of the parties with respect to the subject matter hereof and supersedes all existing agreements among them concerning such subject matter. All article and section headings herein are inserted for convenience only and shall not modify or affect the construction or interpretation of any provision of this Warrant. No modification or amendment of this Warrant will be valid unless executed in writing by the Company and the Holder.
 
 
5

 
 
9.2.
Waiver . No failure or delay on the part of any of the parties in exercising any right, power or privilege hereunder and/or under any applicable laws or the exercise of such right or power in a manner inconsistent with the provisions of this Warrant or applicable law shall operate as a waiver thereof. Any waiver must be evidenced in writing signed by the party against whom the waiver is sought to be enforced.
 
9.3.
Successors and Assigns; Assignment . Except as otherwise expressly limited herein, this Warrant shall inure to the benefit of, be binding upon, and be enforceable by the Holder and its respective successors, and administrators and is otherwise non-transferable without the prior consent of the Company. The Holder represents and warrants to the Company that this Warrant and the Warrant Shares, if and when purchased by the Holder, are for the Holder's own account and for investment purposes only and not with a view for resale or transfer and that all the rights pertaining to the Warrant or the Warrant Shares, by law or equity, shall be purchased and possessed by the Holder for the Holder exclusively.
 
9.4.
Governing Law .  This Warrant shall be exclusively governed and construed in accordance with the laws of the State of Israel, without regard to conflicts of laws provisions thereof.
 
9.5.
Arbitration .  Any dispute, controversy or claim arising in relation to this Warrant, including with regard to its validity, invalidity, breach, enforcement or termination, will be referred to a single arbitrator, who shall be appointed by the Head of the Israeli Bar Association.  Arbitration proceedings shall take place in Tel Aviv, Israel, and shall be conducted in English and according to the rules of substantive law (per Section 9.4 above). The arbitrator will not be bound by rules of evidence or procedure and will give the reasons for his judgment. The arbitrator's decision shall be final and enforceable in any court. This paragraph shall constitute an arbitration agreement between the parties.
 
9.6.
Notices .  Any notice required or permitted to be given to a party pursuant to the provisions of this Warrant will be in writing and will be effective and deemed delivered to such party on the earliest of the following: (a) all notices and other communications delivered in person or by courier service shall be deemed to have been delivered as of actual delivery thereof; (b) those given by facsimile transmission shall be deemed delivered on the following business day after transmission, with confirmed transmission thereof; and/or (c) all notices and other communications sent by registered mail (or air mail if the posting is international) shall be deemed given three (3) days after posting.
 
9.7.
Severability .  If any provision of this Warrant is held to be unenforceable, this Warrant shall be considered divisible and such provision shall be deemed inoperative to the extent it is deemed unenforceable, and in all other respects this Warrant shall remain in full force and effect; provided , however , that if any such provision may be made enforceable by limitation thereof, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by applicable law.
 
9.8.
Counterparts .  This Warrant may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.  Facsimile signatures of a party shall be binding as evidence of such party's agreement hereto and acceptance hereof.
 
9.9.
Amendments .  To the extent that any amendments to that certain Series C Preferred Share Purchase Agreement   dated June 1 st , 2009 ( the " Share Purchase Agreement ") or the transactions contemplated thereby results in a required amendment to the terms of this Warrant, this Warrant shall be deemed amended to the extent that the amendments are to the Share Purchase Agreement are completed in accordance with the provisions of that agreement.
 
[THE REMAINDER OF THIS PAGE WAS INTENTIONALLY LEFT BLANK]
 
 
6

 
 
IN WITNESS WHEREOF , the Company has caused this Warrant to be executed by its officer thereunto duly authorized.
 
Dated:  June 1 st , 2009
 
 
Check-Cap Ltd.
 
By:   ______________________________
       Name:
       Title:
Check-Cap Ltd.
 
By:   ______________________________
       Name:
       Title:
 
AGREED AND ACCEPTED :

__________________________
 
___________________________
 
Name : ___________________
 
 
7

 
 
Schedule 1.2.1

Exercise Notice
 
Date: ____________
 
To:         Check-Cap Ltd.
 
The undersigned, pursuant to the provisions set forth in the Warrant to which this Exercise Notice is attached (the " Warrant :), hereby elects to purchase the Warrant Shares (as such term is defined in the Warrant) pursuant to Section 1.2 of the Warrant, and herewith makes payment of _____________, representing the full Exercise Price for such shares as provided for in such Warrant.
 
   Signature: 
   Address:                                                      
 
                                                                       
                                                                       
 
 
8

 
                                                      
Schedule 1.3

Net Issuance Notice
 
Date: ____________
 
To:         Check-Cap Ltd.                                                                        
 
The undersigned, pursuant to the provisions set forth in the Warrant to which this Exercise Notice is attached (the " Warrant "), hereby elects to exercise the Warrant for the purchase of Warrant Shares (as such term is defined in the Warrant), pursuant to the provisions of Section 1.3 of the Warrant.
 
   Signature: 
   Address:                                                      
 
                                                                       
                                                                       
 
 
9

 
 
CHECK- CAP LTD.
 
WARRANT

To purchase
_________   Preferred C2 Shares (subject to adjustment) of
Check-Cap Ltd.   (the " Company ")
at a per share price and subject to the terms detailed below
VOID AFTER 17:00 p.m. Israel Standard Time
on the last day of the Warrant Period (as defined below)
 
THIS IS TO CERTIFY THAT , ________ (the " Holder "), is entitled to purchase from the Company, an aggregate of up to ________ (as may be adjusted hereunder) Preferred C2 Shares of the Company, nominal value NIS 0.01 per share (the " Warrant Shares "), at an aggregate purchase price of US$ __________reflecting an exercise price per share of US$0.2690 (the " Exercise Price "), during the Warrant Period.
 
1.
EXERCISE OF WARRANT
 
1.1.
Warrant Period . This Warrant may be exercised, subject to the terms and conditions hereof, during the period commencing on April 27, 2010 and terminated upon the earlier of (i) January 21, 2015, or (ii) the closing of the next investment transaction in the Company following the date hereof, provided that the Company provides the Holder a written notice at least fourteen (14) days prior to such closing. The above period shall be referred to hereinafter as the "Warrant Period".
 
1.2.
Exercise for Cash . This Warrant may be exercised by presentation and surrender thereof to the Company at its principal office or at such other office or agency as it may designate from time to time, accompanied by:
 
 
1.2.1.
A duly executed notice of exercise, in the form attached hereto as Schedule 1.2.1 (the " Exercise Notice "); and
 
 
1.2.2.
Payment to the Company, for the account of the Company, of the aggregate Exercise Price, payable in immediately available funds by wire transfer to the Company's bank account. The Exercise Price will be paid in United States Dollars or the equivalent sum in NIS according to the Bank of Israel exchange rate as published upon Exercise.
 
1.3.
Issuance of Warrant Shares . Upon presentation and surrender of this Warrant, accompanied by the duly executed Exercise Notice and the payment of the applicable aggregate Exercise Price pursuant to Section 1.2 above, the Company shall promptly (i) issue to the Holder the Warrant Shares to which the Holder is entitled; and (ii) deliver to the Holder the share certificate evidencing such Warrant Shares.
 
 
10

 
 
Upon receipt by the Company of this Warrant and the applicable duly executed notice of exercise and the aggregate Exercise Price, together with any other documents and/or approvals that may be required by law, the Holder shall be deemed to be the holder of record of the Warrant Shares issuable upon such exercise, notwithstanding that the share transfer books of the Company shall then be closed or that certificates representing such shares shall not then be actually delivered to the Holder.
 
1.4.
Fractional Shares . No fractions of Shares shall be issued in connection with the exercise of this Warrant, and the number of shares issued shall be rounded up to the nearest whole number.
 
1.5.
Additional Documents . The Holder will sign and deliver any and all documents or approvals required by law, to facilitate the issuance of shares upon exercise of this Warrant.
 
1.6.
Loss or Destruction of Warrant . Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably expenses reimbursement and satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date.
 
1.7.
Issuance of C3 Warrants . Upon the exercise of this Warrant in accordance with the terms and conditions set forth herein, the Company shall issue to the Holder a   warrant   (the " Ethos C3 Warrant ") to purchase such number of Preferred C3 Shares par value NIS 0.01 each of the Company (the " Preferred C3 Shares "), equal to the quotient obtained by dividing (A) the aggregate Exercise Price actually paid by Holder to the Company by (B) the C3 Exercise Price (as defined below). The Ethos C3 Warrant shall be substantially in the form of the C3 Warrants issued to other holders of the Company's Preferred C2 Shares, subject to appropriate adjustments.
 
For the purpose hereof, the term " C3 Exercise Price " shall mean the exercise price of the C3 Warrants issued to other holders of the Company's Preferred C2 Shares.
 
2.
TAXES
 
2.1.
The Holder acknowledges that the grant of the Warrant, the issue of the Warrant Shares and the execution and/or performance of this Warrant may have tax consequences to the Holder and that the Company is not able to ensure or represent to the Holder the nature and extent of such tax consequences.
 
2.2.
The Holder shall be responsible and shall pay any and all taxes due in connection with the holding, issuance, exercise or sale of this Warrant, the Ethos C3 Warrants (as defined below) or the Warrant Shares by the Holder.
 
3.
ADJUSTMENT
 
3.1.
The number of Warrant Shares purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time or upon exercise, as follows:
 
 
3.1.1.
Consolidation and Division . In the event that during the Warrant Period the Company consolidates its share capital into shares of greater par value, or subdivides them into shares of lesser par value, then the number of Warrant Shares to be allotted on exercise of this Warrant after such consolidation or subdivision shall be reduced or increased accordingly, as the case may be, and in each case the Exercise Price shall be adjusted appropriately such that the aggregate consideration hereunder to the Company shall not change.
 
 
11

 
 
 
3.1.2.
Capital Reorganization . In the event that during the Warrant Period a reorganization of the share capital of the Company is effected (other than subdivision, combination or reclassification provided for elsewhere in this Section 4) and the Preferred C2 Shares are exchanged for other securities of the Company, then, as part of such reorganization, provision shall be made so that the Holder shall be entitled to purchase upon exercise of this Warrant such kind and number of shares or other securities of the Company to which the Holder would have been entitled had this Warrant been exercised without taking into effect such reorganization.
 
3.2.
Whenever an adjustment is effected hereunder, the Company shall promptly compute such adjustment and deliver to the Holder a certificate setting forth the number of Warrant Shares (or any other securities) for which this Warrant is exercisable and the Exercise Price as a result of such adjustment, a brief statement of the facts requiring such adjustment and the computation thereof and when such adjustment has or will become effective.
 
4.
RIGHTS OF THE HOLDER
 
4.1.
This Warrant shall not entitle the Holder, by virtue hereof, to any voting rights or other rights as a shareholder of the Company, except for the rights expressly set forth herein.
 
4.2.
The Holder acknowledges that the Warrant Shares shall be subject to such certain rights, privileges, restrictions and limitations as set forth in this Warrant, and the organizational documents of the Company (or any other agreement with respect thereto), as may be amended from time to time, and that, as a result, inter alia , of such limitations, it may be difficult or impossible for the Holder to realize his investment and/or to sell or otherwise transfer the Warrant Shares. The Holder further acknowledges that the Company's shares are not publicly traded.
 
5.
TERMINATION
 
Notwithstanding anything to the contrary, this Warrant and all the rights conferred hereby shall terminate and expire at the aforementioned time on the last day of the Warrant Period, unless the Warrant was previously exercised.
 
6.
MISCELLANEOUS
 
6.1.
Entire Agreement; Amendment . This Warrant sets forth the entire understanding of the parties with respect to the subject matter hereof and supersedes all existing agreements among them concerning such subject matter. All article and section headings herein are inserted for convenience only and shall not modify or affect the construction or interpretation of any provision of this Warrant. No modification or amendment of this Warrant will be valid unless executed in writing by the Company and the Holder.
 
6.2.
Waiver . No failure or delay on the part of any of the parties in exercising any right, power or privilege hereunder and/or under any applicable laws or the exercise of such right or power in a manner inconsistent with the provisions of this Warrant or applicable law shall operate as a waiver thereof. Any waiver must be evidenced in writing signed by the party against whom the waiver is sought to be enforced.
 
6.3.
Successors and Assigns; Assignment . Except as otherwise expressly limited herein, this Warrant shall inure to the benefit of, be binding upon, and be enforceable by the Holder and its respective successors, and administrators and is otherwise non-transferable without the prior consent of the Company. The Holder represents and warrants to the Company that this Warrant and the Warrant Shares, if and when purchased by the Holder, are for the Holder's own account and for investment purposes only and not with a view for resale or transfer and that all the rights pertaining to the Warrant or the Warrant Shares, by law or equity, shall be purchased and possessed by the Holder for the Holder exclusively.
 
 
12

 
 
6.4.
Governing Law .  This Warrant shall be exclusively governed and construed in accordance with the laws of the State of Israel, without regard to conflicts of laws provisions thereof.
 
6.5.
Arbitration .  Any dispute, controversy or claim arising in relation to this Warrant, including with regard to its validity, invalidity, breach, enforcement or termination, will be referred to a single arbitrator, who shall be appointed by the Head of the Israeli Bar Association.  Arbitration proceedings shall take place in Tel Aviv, Israel, and shall be conducted in English and according to the rules of substantive law (per Section 9.4 above). The arbitrator will not be bound by rules of evidence or procedure and will give the reasons for his judgment. The arbitrator's decision shall be final and enforceable in any court. This paragraph shall constitute an arbitration agreement between the parties.
 
6.6.
Notices .  Any notice required or permitted to be given to a party pursuant to the provisions of this Warrant will be in writing and will be effective and deemed delivered to such party on the earliest of the following: (a) all notices and other communications delivered in person or by courier service shall be deemed to have been delivered as of actual delivery thereof; (b) those given by facsimile transmission shall be deemed delivered on the following business day after transmission, with confirmed transmission thereof; and/or (c) all notices and other communications sent by registered mail (or air mail if the posting is international) shall be deemed given three (3) days after posting.
 
6.7.
Severability .  If any provision of this Warrant is held to be unenforceable, this Warrant shall be considered divisible and such provision shall be deemed inoperative to the extent it is deemed unenforceable, and in all other respects this Warrant shall remain in full force and effect; provided , however , that if any such provision may be made enforceable by limitation thereof, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by applicable law.
 
6.8.
Counterparts .  This Warrant may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.  Facsimile signatures of a party shall be binding as evidence of such party's agreement hereto and acceptance hereof.
 
 
13

 
 
IN WITNESS WHEREOF , the Company has caused this Warrant to be executed by its officer thereunto duly authorized.
 
Dated:  ________________
 
Check-Cap Ltd.
 
 
By: ______________________________
       Name:
       Title:

AGREED AND ACCEPTED :
 
__________________________
 
__________________
 
 
14

 
 
Schedule 1.2.1

Exercise Notice
 
 
Date: ____________
 
To:         Check-Cap Ltd.
 
The undersigned, pursuant to the provisions set forth in the Warrant to which this Exercise Notice is attached (the " Warrant "), hereby elects to purchase the Warrant Shares (as such term is defined in the Warrant) pursuant to Section 1.2 of the Warrant, and herewith makes payment of _____________, representing the full Exercise Price for such shares as provided for in such Warrant.
 
   Signature: 
   Address:                                                      
 
                                                                       
                                                                       
 
15



 

 

 





 



Exhibit 10.6
 
NEITHER THIS SECURITY NOR THE SECURITIES FOR WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “ SECURITIES ACT ”), OR ANY STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD OR TRANSFERRED, DIRECTLY OR INDIRECTLY, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
 
CHECK- CAP LTD.
 
PREFERRED D1 WARRANT
 
To purchase
_________ Preferred D1 Shares (subject to adjustment) of
Check-Cap Ltd.   (the " Company ")
at a per share price and subject to the terms detailed below
VOID AFTER 17:00 p.m. Israel Standard Time
on the last day of the Warrant Period (as defined below)
 
THIS IS TO CERTIFY THAT , ________________  (the " Holder "), is entitled to purchase from the Company, an aggregate of up to ________ (as may be adjusted hereunder) Preferred D1 Shares of the Company, nominal value NIS 0.01 per share (the " Warrant Shares "), at an aggregate purchase price of US$ ________, reflecting an exercise price of US$0.37708  (the " Exercise Price "), during the Warrant Period.
 
 
 

 

 
1.
EXERCISE OF WARRANT
 
1.1.
Warrant Period . This Warrant may be exercised, subject to the terms and conditions hereof, in whole or in part, at one time or from time to time during the period commencing on March 17, 2011 (the " Initial Date "), and for four (4) years thereafter. The above period shall be referred to hereinafter as the " Warrant Period ".
 
1.2.
Exercise for Cash . This Warrant may be exercised by presentation and surrender thereof to the Company at its principal office or at such other office or agency as it may designate from time to time, accompanied by:
 
 
(a)
A duly executed notice of exercise, in the form attached hereto as Schedule 1.2.1 (the " Exercise Notice "); and
 
 
(b)
Payment to the Company, for the account of the Company, of the Exercise Price for the number of Warrant Shares purchased, payable in immediately available funds by wire transfer to the Company's bank account. The Exercise Price will be paid in United States Dollars or the equivalent sum in NIS according to the Bank of Israel exchange rate as published upon Exercise.
 
1.3.
Issuance of Warrant Shares . Upon presentation and surrender of this Warrant, accompanied by (a) the duly executed Exercise Notice and the payment of the applicable Exercise Price for the Warrant Shares being purchased pursuant to Section 1.2 above, the Company shall promptly (i) issue to the Holder the Warrant Shares to which the Holder is entitled; and (ii) deliver to the Holder the share certificate evidencing such Warrant Shares.
 
Upon receipt by the Company of this Warrant and the applicable duly executed notice of exercise and the Exercise Price for the Warrant Shares being purchased, together with any other documents and/or approvals that may be required by law, the Holder shall be deemed to be the holder of record of the Warrant Shares issuable upon such exercise, notwithstanding that the share transfer books of the Company shall then be closed or that certificates representing such shares shall not then be actually delivered to the Holder.
 
1.4.
Fractional Shares . No fractions of shares shall be issued in connection with the exercise of this Warrant, and the number of shares issued shall be rounded up to the nearest whole number.
 
1.5.
Additional Documents . The Holder will sign and deliver any and all documents or approvals required by law, to facilitate the issuance of shares upon exercise of this Warrant.
 
1.6.
Loss or Destruction of Warrant . Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonable reimbursement of expenses and satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date.
 
 
2

 
 
1.7.
Vesting .  All of the Warrant Shares shall be vested as of the Initial Date.
 
2.
TAXES
 
2.1.
The Holder acknowledges that the grant of the Warrant, the issue of the Warrant Shares and the execution and/or performance of this Warrant may have tax consequences to the Holder and that the Company is not able to ensure or represent to the Holder the nature and extent of such tax consequences.
 
2.2.
The Company shall pay all of the applicable taxes and other charges payable by the Company in connection with the issuance of the Warrant Shares and the preparation and delivery of share certificates pursuant to Section 1 in the name of the Holder (such as transfer taxes in respect of the issue or delivery of Warrant Shares on exercise of this Warrant), if any, but shall not pay any taxes payable by the Holder by virtue of the holding, issuance, exercise or sale of this Warrant or the Warrant Shares by the Holder.
 
3.
RESERVATION OF SHARES; PRESERVATION OF RIGHTS OF HOLDER
 
3.1.
Reservation of Shares . The Company hereby agrees that, at all times prior to the expiration or exercise of this Warrant, it will maintain and reserve, free from pre-emptive or similar rights, such number of authorized but unissued shares so that this Warrant may be exercised without additional authorization of shares.
 
3.2.
Preservation of Rights . The Company will not, by amendment of its organizational documents or through reorganization, recapitalization, consolidation, merger, dissolution, transfer of assets, issue or sale of securities or any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations, conditions or terms to be observed or performed hereunder, but will at all times in good faith assist in the carrying out of all the provisions hereof and in taking of all such actions and making all such adjustments as may be necessary or appropriate in order to fulfill the provisions hereof.
 
 
3

 
 
4.
ADJUSTMENT
 
4.1.
The number of Warrant Shares purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time or upon exercise, as follows:
 
 
(a)
Bonus Shares . In the event that during the Warrant Period the Company shall distribute a non-cash dividend or shares pursuant to a reclassification of its share capital, to all of the holders of shares of the Company (i.e., bonus shares), then this Warrant shall represent the right to acquire, in addition to the number of Warrant Shares indicated in the caption of this Warrant, the amount of such bonus shares that are distributed to persons holding the class of share capital for which the Warrant is exerciseable and/or to receive the stock dividends which are distributed to persons holding the class of share capital for which the Warrant is exerciseable, without payment of any additional consideration therefor, to which the Holder would have been entitled had this Warrant been exercised prior to the distribution of the stock dividends or the bonus shares.
 
 
(b)
Consolidation and Division . In the event that during the Warrant Period the Company consolidates its share capital into shares of greater par value, or subdivides them into shares of lesser par value, then the number of Warrant Shares to be allotted on exercise of this Warrant after such consolidation or subdivision shall be reduced or increased accordingly, as the case may be, and in each case the Exercise Price shall be adjusted appropriately such that the aggregate consideration hereunder to the Company shall not change.
 
 
(c)
Capital Reorganization . In the event that during the Warrant Period a reorganization of the share capital of the Company is effected (other than subdivision, combination or reclassification provided for elsewhere in this Section 4) and the Preferred D1 Shares are exchanged for other securities of the Company, then, as part of such reorganization, provision shall be made so that the Holder shall be entitled to purchase upon exercise of this Warrant such kind and number of shares or other securities of the Company to which the Holder would have been entitled had this Warrant been exercised without taking into effect such reorganization.
 
4.2.
Whenever an adjustment is effected hereunder, the Company shall promptly compute such adjustment and deliver to the Holder a certificate setting forth the number of Warrant Shares (or any other securities) for which this Warrant is exercisable and the Exercise Price as a result of such adjustment, a brief statement of the facts requiring such adjustment and the computation thereof and when such adjustment has or will become effective.
 
5.
NOTICE OF CERTAIN EVENTS
 
5.1.
If at any time during the Warrant Period, any of the Notice Events set forth in Section 5.2 below shall occur, then, in any one or more of such events, the Company shall deliver to the Holder written notice thereof, including the date on which (a) a record shall be taken in connection with such event (if applicable); and (b) the consummation date of such event. Such written notice shall be delivered to the Holder at least (if possible under the circumstances) thirty (30) days prior to the consummation of the applicable event and not less than thirty (30) days prior to the record date in respect thereto.
 
 
4

 
 
5.2.
For the purposes hereof, a " Notice Event " shall mean (i) an initial public offering by the Company or a corporate successor of its equity interests; (ii) the merger or sale of all or substantially all of the assets or shares of the Company (or other similar corporate transaction); and/or (iii) a voluntary or involuntary dissolution, liquidation or winding up of the Company.
 
6.
RIGHTS OF THE HOLDER
 
6.1.
This Warrant shall not entitle the Holder, by virtue hereof, to any voting rights or other rights as a shareholder of the Company, except for the rights expressly set forth herein.
 
6.2.
The Holder acknowledges that the Warrant Shares shall be subject to such certain rights, privileges, restrictions and limitations as set forth in this Warrant, and the organizational documents of the Company (or any other agreement with respect thereto), as may be amended from time to time, and that, as a result, inter alia , of such limitations, it may be difficult or impossible for the Holder to realize his investment and/or to sell or otherwise transfer the Warrant Shares. The Holder further acknowledges that the Company's shares are not publicly traded.
 
7.
REPRESENTATIONS OF THE COMPANY
 
The Company represents and warrants to the Holder as follows: (i) this Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms; (ii) the Warrant Shares are duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and not subject to any third party rights (except any rights thereto afforded by the Holder); and (iii) the execution and delivery of this Warrant are not, and the issuance of the Warrant Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company's governing documents, do not and will not contravene any law, governmental rule or regulation, judgment or order applicable to the Company, and do not and will not conflict with or contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration with or the taking of any action in respect of or by, any government authority or agency or other person, other than those consents or approvals that shall have been previously obtained.
 
 
5

 

8.
TERMINATION
 
Notwithstanding anything to the contrary, this Warrant and all the rights conferred hereby shall terminate and expire at the aforementioned time on the last day of the Warrant Period, unless the Warrant was previously exercised.
 
9.
MISCELLANEOUS
 
9.1.
Entire Agreement; Amendment . This Warrant sets forth the entire understanding of the parties with respect to the subject matter hereof and supersedes all existing agreements among them concerning such subject matter. All article and section headings herein are inserted for convenience only and shall not modify or affect the construction or interpretation of any provision of this Warrant. No modification or amendment of this Warrant will be valid unless executed in writing by the Company and the Holder.
 
9.2.
Waiver . No failure or delay on the part of any of the parties in exercising any right, power or privilege hereunder and/or under any applicable laws or the exercise of such right or power in a manner inconsistent with the provisions of this Warrant or applicable law shall operate as a waiver thereof. Any waiver must be evidenced in writing signed by the party against whom the waiver is sought to be enforced.
 
9.3.
Successors and Assigns; Assignment . Except as otherwise expressly limited herein, this Warrant shall inure to the benefit of, be binding upon, and be enforceable by the Holder and its respective successors, and administrators and is otherwise non-transferable without the prior consent of the Company. The Holder represents and warrants to the Company that this Warrant and the Warrant Shares, if and when purchased by the Holder, are for the Holder's own account and for investment purposes only and not with a view for resale or transfer and that all the rights pertaining to the Warrant or the Warrant Shares, by law or equity, shall be purchased and possessed by the Holder for the Holder exclusively.
 
9.4.
Governing Law .  This Warrant shall be exclusively governed and construed in accordance with the laws of the State of Israel, without regard to conflicts of laws provisions thereof.
 
9.5.
Arbitration .  Any dispute, controversy or claim arising in relation to this Warrant, including with regard to its validity, invalidity, breach, enforcement or termination, will be referred to a single arbitrator, who shall be appointed by the Head of the Israeli Bar Association.  Arbitration proceedings shall take place in Tel Aviv, Israel, and shall be conducted in English and according to the rules of substantive law (per Section 9.4 above). The arbitrator will not be bound by rules of evidence or procedure and will give the reasons for his judgment. The arbitrator's decision shall be final and enforceable in any court. This paragraph shall constitute an arbitration agreement between the parties.
 
 
6

 
 
9.6.
Notices .  Any notice required or permitted to be given to a party pursuant to the provisions of this Warrant will be in writing and will be effective and deemed delivered to such party on the earliest of the following: (a) all notices and other communications delivered in person or by courier service shall be deemed to have been delivered as of actual delivery thereof; (b) those given by facsimile transmission shall be deemed delivered on the following business day after transmission, with confirmed transmission thereof; and/or (c) all notices and other communications sent by registered mail (or air mail if the posting is international) shall be deemed given three (3) days after posting.
 
9.7.
Severability .  If any provision of this Warrant is held to be unenforceable, this Warrant shall be considered divisible and such provision shall be deemed inoperative to the extent it is deemed unenforceable, and in all other respects this Warrant shall remain in full force and effect; provided , however , that if any such provision may be made enforceable by limitation thereof, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by applicable law.
 
9.8.
Counterparts .  This Warrant may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.  Facsimile signatures of a party shall be binding as evidence of such party's agreement hereto and acceptance hereof.
 
[THE REMAINDER OF THIS PAGE WAS INTENTIONALLY LEFT BLANK]
 
 
7

 
 
IN WITNESS WHEREOF , the Company has caused this Warrant to be executed by its officer thereunto duly authorized.
 
Dated:  March 17, 2011
 
Check-Cap Ltd.
 
 
By: ______________________________
       Name:  Guy Neev
       Title:    CEO
 
AGREED AND ACCEPTED :
 
__________________________
 
Name : ______________________
 
 
8

 
 
Schedule 1.2.1
 
Exercise Notice
 
Date: ____________
 
To: 
Check-Cap Ltd.
 
The undersigned, pursuant to the provisions set forth in the Warrant to which this Exercise Notice is attached (the " Warrant :), hereby elects to purchase _________ Warrant Shares (as such term is defined in the Warrant) pursuant to Section 1.2 of the Warrant, and herewith makes payment of _____________, representing the full Exercise Price for such shares as provided for in such Warrant.
 
 
Signature:
 
Address:
 
9




Exhibit 10.7
 
NEITHER THIS SECURITY NOR THE SECURITIES FOR WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “ SECURITIES ACT ”), OR ANY STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD OR TRANSFERRED, DIRECTLY OR INDIRECTLY, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
 
CHECK- CAP LTD.
 
PREFERRED D2 WARRANT
 
To purchase
______ Preferred D2 Shares (subject to adjustment) of
Check-Cap Ltd.   (the " Company ")
at a per share price and subject to the terms detailed below
VOID AFTER 17:00 p.m. Israel Standard Time
on the last day of the Warrant Period (as defined below)
 
THIS IS TO CERTIFY THAT , ____________________ (the " Holder "), is entitled to purchase from the Company, an aggregate of up to __________ (as may be adjusted hereunder) Preferred D2 Shares of the Company, nominal value NIS 0.01 per share (the " Warrant Shares "), at an aggregate purchase price of US$ __________, reflecting an exercise price of US$0.47135  (the " Exercise Price "), during the Warrant Period.
 
 
 

 
 
1.
EXERCISE OF WARRANT
 
1.1.
Warrant Period . This Warrant may be exercised, subject to the terms and conditions hereof, in whole or in part, at one time or from time to time during the period commencing on ______________ (the " Initial Date "), and for four (4) years thereafter. The above period shall be referred to hereinafter as the " Warrant Period ".
 
1.2.
Exercise for Cash . This Warrant may be exercised by presentation and surrender thereof to the Company at its principal office or at such other office or agency as it may designate from time to time, accompanied by:
 
 
(a)
A duly executed notice of exercise, in the form attached hereto as Schedule 1.2.1 (the " Exercise Notice "); and
 
 
(b)
Payment to the Company, for the account of the Company, of the Exercise Price for the number of Warrant Shares purchased, payable in immediately available funds by wire transfer to the Company's bank account. The Exercise Price will be paid in United States Dollars or the equivalent sum in NIS according to the Bank of Israel exchange rate as published upon Exercise.
 
1.3.
Issuance of Warrant Shares . Upon presentation and surrender of this Warrant, accompanied by (a) the duly executed Exercise Notice and the payment of the applicable Exercise Price for the Warrant Shares being purchased pursuant to Section 1.2 above, the Company shall promptly (i) issue to the Holder the Warrant Shares to which the Holder is entitled; and (ii) deliver to the Holder the share certificate evidencing such Warrant Shares.
 
Upon receipt by the Company of this Warrant and the applicable duly executed notice of exercise and the Exercise Price for the Warrant Shares being purchased, together with any other documents and/or approvals that may be required by law, the Holder shall be deemed to be the holder of record of the Warrant Shares issuable upon such exercise, notwithstanding that the share transfer books of the Company shall then be closed or that certificates representing such shares shall not then be actually delivered to the Holder.
 
1.4.
Fractional Shares . No fractions of shares shall be issued in connection with the exercise of this Warrant, and the number of shares issued shall be rounded up to the nearest whole number.
 
1.5.
Additional Documents . The Holder will sign and deliver any and all documents or approvals required by law, to facilitate the issuance of shares upon exercise of this Warrant.
 
1.6.
Loss or Destruction of Warrant . Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonable reimbursement of expenses and satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date.
 
 
2

 
 
1.7.
Vesting .  All of the Warrant Shares shall be vested as of the Initial Date.
 
2.
TAXES
 
2.1.
The Holder acknowledges that the grant of the Warrant, the issue of the Warrant Shares and the execution and/or performance of this Warrant may have tax consequences to the Holder and that the Company is not able to ensure or represent to the Holder the nature and extent of such tax consequences.
 
2.2.
The Company shall pay all of the applicable taxes and other charges payable by the Company in connection with the issuance of the Warrant Shares and the preparation and delivery of share certificates pursuant to Section 1 in the name of the Holder (such as transfer taxes in respect of the issue or delivery of Warrant Shares on exercise of this Warrant), if any, but shall not pay any taxes payable by the Holder by virtue of the holding, issuance, exercise or sale of this Warrant or the Warrant Shares by the Holder.
 
3.
RESERVATION OF SHARES; PRESERVATION OF RIGHTS OF HOLDER
 
3.1.
Reservation of Shares . The Company hereby agrees that, at all times prior to the expiration or exercise of this Warrant, it will maintain and reserve, free from pre-emptive or similar rights, such number of authorized but unissued shares so that this Warrant may be exercised without additional authorization of shares.
 
3.2.
Preservation of Rights . The Company will not, by amendment of its organizational documents or through reorganization, recapitalization, consolidation, merger, dissolution, transfer of assets, issue or sale of securities or any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations, conditions or terms to be observed or performed hereunder, but will at all times in good faith assist in the carrying out of all the provisions hereof and in taking of all such actions and making all such adjustments as may be necessary or appropriate in order to fulfill the provisions hereof.
 
 
3

 
 
4.
ADJUSTMENT
 
4.1.
The number of Warrant Shares purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time or upon exercise, as follows:
 
 
(a)
Bonus Shares . In the event that during the Warrant Period the Company shall distribute a non-cash dividend or shares pursuant to a reclassification of its share capital, to all of the holders of shares of the Company (i.e., bonus shares), then this Warrant shall represent the right to acquire, in addition to the number of Warrant Shares indicated in the caption of this Warrant, the amount of such bonus shares that are distributed to persons holding the class of share capital for which the Warrant is exerciseable and/or to receive the stock dividends which are distributed to persons holding the class of share capital for which the Warrant is exerciseable, without payment of any additional consideration therefor, to which the Holder would have been entitled had this Warrant been exercised prior to the distribution of the stock dividends or the bonus shares.
 
 
(b)
Consolidation and Division . In the event that during the Warrant Period the Company consolidates its share capital into shares of greater par value, or subdivides them into shares of lesser par value, then the number of Warrant Shares to be allotted on exercise of this Warrant after such consolidation or subdivision shall be reduced or increased accordingly, as the case may be, and in each case the Exercise Price shall be adjusted appropriately such that the aggregate consideration hereunder to the Company shall not change.
 
 
(c)
Capital Reorganization . In the event that during the Warrant Period a reorganization of the share capital of the Company is effected (other than subdivision, combination or reclassification provided for elsewhere in this Section 4) and the Preferred D2 Shares are exchanged for other securities of the Company, then, as part of such reorganization, provision shall be made so that the Holder shall be entitled to purchase upon exercise of this Warrant such kind and number of shares or other securities of the Company to which the Holder would have been entitled had this Warrant been exercised without taking into effect such reorganization.
 
4.2.
Whenever an adjustment is effected hereunder, the Company shall promptly compute such adjustment and deliver to the Holder a certificate setting forth the number of Warrant Shares (or any other securities) for which this Warrant is exercisable and the Exercise Price as a result of such adjustment, a brief statement of the facts requiring such adjustment and the computation thereof and when such adjustment has or will become effective.
 
5.
NOTICE OF CERTAIN EVENTS
 
5.1.
If at any time during the Warrant Period, any of the Notice Events set forth in Section 5.2 below shall occur, then, in any one or more of such events, the Company shall deliver to the Holder written notice thereof, including the date on which (a) a record shall be taken in connection with such event (if applicable); and (b) the consummation date of such event. Such written notice shall be delivered to the Holder at least (if possible under the circumstances) thirty (30) days prior to the consummation of the applicable event and not less than thirty (30) days prior to the record date in respect thereto.
 
 
4

 
 
5.2.
For the purposes hereof, a " Notice Event " shall mean (i) an initial public offering by the Company or a corporate successor of its equity interests; (ii) the merger or sale of all or substantially all of the assets or shares of the Company (or other similar corporate transaction); and/or (iii) a voluntary or involuntary dissolution, liquidation or winding up of the Company.
 
6.
RIGHTS OF THE HOLDER
 
6.1.
This Warrant shall not entitle the Holder, by virtue hereof, to any voting rights or other rights as a shareholder of the Company, except for the rights expressly set forth herein.
 
6.2.
The Holder acknowledges that the Warrant Shares shall be subject to such certain rights, privileges, restrictions and limitations as set forth in this Warrant, and the organizational documents of the Company (or any other agreement with respect thereto), as may be amended from time to time, and that, as a result, inter alia , of such limitations, it may be difficult or impossible for the Holder to realize his investment and/or to sell or otherwise transfer the Warrant Shares. The Holder further acknowledges that the Company's shares are not publicly traded.
 
7.
REPRESENTATIONS OF THE COMPANY
 
The Company represents and warrants to the Holder as follows: (i) this Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms; (ii) the Warrant Shares are duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and not subject to any third party rights (except any rights thereto afforded by the Holder); and (iii) the execution and delivery of this Warrant are not, and the issuance of the Warrant Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company's governing documents, do not and will not contravene any law, governmental rule or regulation, judgment or order applicable to the Company, and do not and will not conflict with or contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration with or the taking of any action in respect of or by, any government authority or agency or other person, other than those consents or approvals that shall have been previously obtained.
 
 
5

 

8.
TERMINATION
 
Notwithstanding anything to the contrary, this Warrant and all the rights conferred hereby shall terminate and expire at the aforementioned time on the last day of the Warrant Period, unless the Warrant was previously exercised.
 
9.
MISCELLANEOUS
 
9.1.
Entire Agreement; Amendment . This Warrant sets forth the entire understanding of the parties with respect to the subject matter hereof and supersedes all existing agreements among them concerning such subject matter. All article and section headings herein are inserted for convenience only and shall not modify or affect the construction or interpretation of any provision of this Warrant. No modification or amendment of this Warrant will be valid unless executed in writing by the Company and the Holder.
 
9.2.
Waiver . No failure or delay on the part of any of the parties in exercising any right, power or privilege hereunder and/or under any applicable laws or the exercise of such right or power in a manner inconsistent with the provisions of this Warrant or applicable law shall operate as a waiver thereof. Any waiver must be evidenced in writing signed by the party against whom the waiver is sought to be enforced.
 
9.3.
Successors and Assigns; Assignment . Except as otherwise expressly limited herein, this Warrant shall inure to the benefit of, be binding upon, and be enforceable by the Holder and its respective successors, and administrators and is otherwise non-transferable without the prior consent of the Company. The Holder represents and warrants to the Company that this Warrant and the Warrant Shares, if and when purchased by the Holder, are for the Holder's own account and for investment purposes only and not with a view for resale or transfer and that all the rights pertaining to the Warrant or the Warrant Shares, by law or equity, shall be purchased and possessed by the Holder for the Holder exclusively.
 
9.4.
Governing Law .  This Warrant shall be exclusively governed and construed in accordance with the laws of the State of Israel, without regard to conflicts of laws provisions thereof.
 
9.5.
Arbitration .  Any dispute, controversy or claim arising in relation to this Warrant, including with regard to its validity, invalidity, breach, enforcement or termination, will be referred to a single arbitrator, who shall be appointed by the Head of the Israeli Bar Association.  Arbitration proceedings shall take place in Tel Aviv, Israel, and shall be conducted in English and according to the rules of substantive law (per Section 9.4 above). The arbitrator will not be bound by rules of evidence or procedure and will give the reasons for his judgment. The arbitrator's decision shall be final and enforceable in any court. This paragraph shall constitute an arbitration agreement between the parties.
 
 
6

 
 
9.6.
Notices .  Any notice required or permitted to be given to a party pursuant to the provisions of this Warrant will be in writing and will be effective and deemed delivered to such party on the earliest of the following: (a) all notices and other communications delivered in person or by courier service shall be deemed to have been delivered as of actual delivery thereof; (b) those given by facsimile transmission shall be deemed delivered on the following business day after transmission, with confirmed transmission thereof; and/or (c) all notices and other communications sent by registered mail (or air mail if the posting is international) shall be deemed given three (3) days after posting.
 
9.7.
Severability .  If any provision of this Warrant is held to be unenforceable, this Warrant shall be considered divisible and such provision shall be deemed inoperative to the extent it is deemed unenforceable, and in all other respects this Warrant shall remain in full force and effect; provided , however , that if any such provision may be made enforceable by limitation thereof, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by applicable law.
 
9.8.
Counterparts .  This Warrant may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.  Facsimile signatures of a party shall be binding as evidence of such party's agreement hereto and acceptance hereof.
 
[THE REMAINDER OF THIS PAGE WAS INTENTIONALLY LEFT BLANK]
 
 
7

 
 
IN WITNESS WHEREOF , the Company has caused this Warrant to be executed by its officer thereunto duly authorized.
 
Dated:  ___________, 2011
 
Check-Cap Ltd.
 
By: ______________________________
       Name:
       Title:
 
AGREED AND ACCEPTED :
 
__________________________
 
Name : ___________________
 
 
8

 
 
Schedule 1.2.1
 
Exercise Notice
 
Date: ____________
 
To: 
Check-Cap Ltd.
 
The undersigned, pursuant to the provisions set forth in the Warrant to which this Exercise Notice is attached (the " Warrant :), hereby elects to purchase _________ Warrant Shares (as such term is defined in the Warrant) pursuant to Section 1.2 of the Warrant, and herewith makes payment of _____________, representing the full Exercise Price for such shares as provided for in such Warrant.
 
 
Signature:
 
Address:
 
9




Exhibit 10.8
 
SHARE PURCHASE AGREEMENT
 
THIS SHARE PURCHASE AGREEMENT (this " Agreement "), is made as of the 4th day of March, 2011 (the " Effective Date "), by and between Check Cap Ltd., an Israeli company (registered no. 514259811) having its main place of business at Abba Hushi Ave, Isfiya, Haifa, Israel (the " Company "), and each of the Investors identified in each of those Investor's Schedules attached hereto, (each an " Investor " and together the " Investors ").
 
W I T N E S S E T H:
 
WHEREAS , the Company desires to issue and sell to the Investors, and the Investors desire to purchase from the Company shares of the Company and warrants to purchase shares of the Company as more fully described in this Agreement, on the terms and conditions more fully set forth in this Agreement;
 
NOW, THEREFORE , in consideration of the mutual promises and covenants set forth herein, the parties hereby agree as follows:
 
1.
Issue and Purchase of Initial Closing Shares.
 
Subject to the terms and conditions hereof, including the fulfillment (or waiver) of the conditions specified in Sections 6 and 7 below, at the Closing (as defined below):
 
1.1.
Initial Closing . At the Initial Closing (as defined below), the Company shall issue and allot to the Investors, and the Investors shall purchase from the Company, severally and not jointly, an aggregate of up to 26,519,571 of the Company's Preferred D-1 Shares (the “ Issued Shares ”), at a price per each Issued Share of US$0.37708 (the " Price Per Share "). The Price Per Share reflects a Company pre-money valuation of US$40,000,000 on a Fully Diluted Basis. The amount of Issued Shares to be purchased by each Investor, and the amount to be invested by each Investor, at the Initial Closing, is set forth in each Investor's Schedule attached hereto in Schedule 1 , in respect of each Investor.
 
For purposes of this Agreement, the term “ Fully Diluted Basis ” means all issued and outstanding shares of the Company, all securities that may be issued on the conversion of any existing convertible securities or loans, the exercise of all outstanding warrants, options, options reserved in the Company's employee stock option plan (whether allocated or unallocated, vested or unvested), and the issuance of securities pursuant to any anti-dilution rights of existing shareholders of the Company without taking into account (i) any rights of co-investment or pre-emptive rights of existing security holders of the Company and (ii) outstanding warrants for any Preferred C3 Shares as such term is defined in the New Articles .
 
 
 

 
 
1.2. 
Each Investor shall receive, for no additional consideration:
 
 
(a)
A Warrant (the " Warrant "), for the purchase of such number of Preferred D-2 Shares as set out in each Investor's Schedule   attached hereto, for each Investor, representing warrant coverage of 66% of the Issued Shares purchased by such Investor hereby (the " Warrant Coverage " and the " Warrant Shares ", respectively) at a price per each Warrant Share of US$0.47135 (the " Warrant Price Per Share "), all as pursuant to the terms and conditions of the warrant in the form attached hereto as Schedule 1.2(a)
 
The Preferred D-1 Shares and the Preferred D-2 Shares shall have such rights, preferences, privileges and restrictions as set forth in the Company's New Articles.
 
2.
Deferred Closing
 
2.1.
Subject to the terms and conditions hereof, the Company may consummate an additional closing or series of closings (each a “ Deferred Closing ”) with an additional investor or investors (each an " Additional Investor " and together the " Additional Investors ") on the same commercial terms as set out herein and provided that any such Deferred Closings shall occur no later than 90 days from the Effective Date. Such Additional Investors, together, shall be entitled to invest at the Deferred Closing(s) an aggregate amount that, together with the amounts invested at the Initial Closing, shall not exceed ten million U.S. dollars ($10,000,000).  Each Additional Investor shall be entitled to receive:
 
 
(a)
Such number of Preferred D-1 Shares equal to the amount invested by such Additional Investor (the " Additional Investor Purchase Price ") divided by the Price Per Share (the " Additional Investor Shares ").  At each Deferred Closing an additional Investor's Schedule shall be joined to this Agreement for each Additional Investor, to reflect the Additional Investor Purchase Price invested by each Additional Investor and the Additional Investor Shares issued to such Additional Investor; and such shares shall be deemed “Issued Shares” hereunder, and such Additional Investor shall be deemed an Investor hereunder.
 
 
2

 
 
 
(b)
For no additional consideration, a Warrant, for the purchase of such number of Warrant Shares representing the number of Additional Investor Shares multiplied by 66% (the " Additional Investor Warrant ") at the Warrant Price Per Share, all as pursuant to the terms and conditions of the warrant in the form attached hereto as Schedule 1.2(a) .
 
2.2.
INTENTIONALLY LEFT BLANK
 
2.3.
It is hereby clarified that in the event that that Company shall not have been able to raise at least US$4 million (including the amounts invested by the Investors and including no less than US$1.5 million from existing shareholders of the Company (the " Minimum Amount "), at the Initial Closing, then, at its sole option, the Company may terminate this Agreement upon written notice to the Investors, with no liability therefor.
 
2.4.
In addition, and notwithstanding any of the aforesaid, in the event that the Company determines, in its sole discretion, that the publication of a prospectus is required under the Israeli Securities Law, 1968 and all regulations promulgated thereunder (the " ISL ") due to the number of Investors and/or Additional Investors  who wish to participate in this Series D financing round, including the number of offerees or the number of persons acquiring securities pursuant to this Agreement or any other agreement on or prior to the date hereof, or in any other way, including through pre-emptive or similar rights, then the Company, in its sole discretion, may terminate this Agreement with respect to any or all such Investors and/or Additional Investor as determined by the Company in its sole discretion, upon written notice to such Investors and Additional Investors and  with no liability therefor.
 
2.5.
The Company agrees that it shall not, without the agreement of the Investors and the Additional Investors which at such time hold a majority of the Issued Shares, enter into substantially similar share purchase agreements with Additional Investors such that the Company raises more than US$10 million in this Series D financing round (including such amounts as raised hereunder but without taking into account any shares issued by the Company pursuant to any existing co-investment or preemptive rights (or similar rights) held by shareholders of the Company).
 
 
3

 
 
3.
Closing
 
3.1.
Initial Closing . Subject to the fulfillment (or waiver) of the conditions specified in Sections 6 and 7 below, the initial closing of the purchase of the Issued Shares, the issue and allotment of the Issued Shares and the Warrants by the Company to, and the registration of the Issued Shares in the name of the Investor in the register of shareholders of the Company (collectively, the " Initial Closing ") shall take place at the offices of Fischer Behar Chen Well Orion & Co. on March 7, 2011, or such other later date, time and place as notified by the Company to the Investors with reasonable notice, provided that if the Initial Closing shall not take place within 30 days of such date, and without derogating from the provisions of Sections 2.3, 2.4 or 3.4 hereof, then (a) the Company may terminate this Agreement vis a vis any of the Investors who fail to close provided that the failure to close was not due to any action or failure to take action of the Company and (b) any Investor may terminate this Agreement vis a vis the other parties hereto, provided that the failure to close was not due to any action or failure to act of such Investor.
 
3.2.
Transactions at Initial Closing:
 
At the Initial Closing, the following transactions shall occur, which transactions shall be deemed to take place simultaneously and no transaction shall be deemed to have been completed or any document delivered until all such transactions have been completed and all required documents delivered.
 
 
(a)
The Company shall deliver to the Investors the following documents:
 
 
(i)
An executed resolution of the Company's shareholders that, inter alia, replaces the Second Amended and Restated Articles of Association of the Company (the “ Articles ”) with the Third Amended and Restated Articles of Association of the Company, in the form attached hereto as Schedule 3.2(a)(i) B (the " New Articles ") and creates new classes of Preferred D1 Shares and Preferred D2 Shares (hereinafter, together the " Preferred D Shares ").
 
 
4

 
 
 
(ii)
True and correct copies of resolutions of the Board authorizing, inter alia, the (i) issuance and allotment of the Issued Shares to each of the  Investors against payment of the purchase price attributed to the Issued Shares allotted to such Investor at the Initial Closing, (ii) the issuance to each Investor, at the Initial Closing, of the Warrant for such number of Warrant Shares as allocated to it hereby; (iii) the issuance and allotment of  Warrant Shares to the Investor against payment of the Warrant Price Per Share for that number of Warrant Shares purchased pursuant to an exercise of the Warrant; (iv) reserving a sufficient number of shares of ordinary shares of the Company to be issued upon conversion of the Preferred D-1 Shares and the Warrant Shares and (v) reserving a sufficient number of Warrant Shares to be issued upon exercise of the Warrants, and (vii) entry into this Agreement and the performance of the transactions contemplated hereby.
 
 
(iii)
To each Investor, a validly executed share certificate covering such Issued Shares, issued in the name of that Investor pursuant to the terms hereof.
 
 
(iv)
A copy of the Company's shareholders' register updated as of immediately following the Initial Closing.
 
 
(v)
To each Investor, the Warrant for such number of Warrant Shares as specified herein to be issued in the name of the Investor.
 
 
(vi)
A legal opinion from the legal counsel to the Company, dated as of the date of the Initial Closing in substantially the form attached hereto as Schedule   3.2(a)(vi) .
 
 
(b)
Each Investor shall transfer the Price Per Share for each of the Issued Shares to be purchased by it to the Company by wire transfer (in immediately payable funds), banker's check, or such other form of payment as is mutually agreed by the Company and the Investor.
 
 
(c)
If so required by the Company, any Investor so requested by the Company shall deliver to the Company an executed OCS Undertaking (as defined in Section 8.2 below).
 
 
5

 
 
 
(d)
The Company shall deliver to the Investors a compliance certificate executed by an officer of the Company dated as of the Initial Closing Date, to the effect that the conditions specified in Sections 6.1 and 6.2 of this Agreement have been satisfied.
 
3.3.
Transactions at Deferred Closing .  At each Deferred Closing, (i) each Additional Investor shall provide the Company with: (A) a duly executed joinder agreement  and (B) payment of the Additional Investor Purchase Price; (ii) the Company shall deliver to each Additional Investor (A) a consent of the Board of Directors approving (a) the issuance of the Additional Investor Shares to the Additional Investor; (b) the issuance of the Additional Investor Warrant to the Additional Investor; (c) the issuance and allotment of Warrant Shares to the Additional Investor against payment of the Warrant Price Per Share for that number of Warrant Shares available upon exercise of the Additional Investor Warrant; (d) reserving a sufficient number of shares of ordinary shares of the Company to be issued upon conversion of the Additional Investor Shares and the Warrant Shares to be issued upon exercise of the Additional Investor Warrant and (e) reserving a sufficient number of Warrant Shares to be issued upon exercise of the Additional Investor Warrant and (B) a validly executed Share Certificate covering the applicable amount of Additional Investor Shares.
 
3.4.
Without derogating from the provisions of Section 2.3 or 2.4 hereof, failure of any of the Investors to consummate the transactions herein (a " Non-Closing Investor "), shall not affect the obligation of the Company or the other Investors hereunder to consummate this Agreement, provided that the post-Closing capitalization table of the Company  set forth in Schedule 4.2 shall be replaced with a capitalization table not taking into account such Investor  and not taking into account any shares no longer issuable to "finders" on account of introducing such Non-Closing Investor to the Company. 
 
4.
Representations and Warranties of the Company
 
Except as may be expressly set forth in the disclosure schedule delivered in connection herewith and attached hereto as Schedule  4 (the " Disclosure Schedule "), the Company hereby represents and warrants to the Investors as follows:
 
4.1.
Organization . The Company is a company duly incorporated and validly existing under the laws of the State of Israel. The Company has the power to own and lease its properties and to carry on its business as now being conducted and as proposed to be conducted.
 
The Company has all requisite power and authority to execute and deliver this Agreement and to consummate the transactions and perform its obligations contemplated hereby and thereby and any other agreements contemplated hereby or which are ancillary hereto. The New Articles will be in effect as of the Closing.
 
 
6

 
 
4.2.
Share Capital . The authorized share capital of the Company immediately prior to the Initial Closing shall consist of eleven million four hundred thousand New Israeli Shekels (NIS 11,400,000) divided into (i) 907,154,180 Ordinary Shares, of nominal value NIS 0.01 each, of which 23,027,854 Ordinary Shares are issued and outstanding, (ii) 6,750,000 Preferred A Shares, of nominal value NIS 0.01 each, all of which are issued and outstanding, (iii) 6,769,359 Preferred B Shares, of nominal value NIS 0.01 each, all of which are issued and outstanding, (iv) 17,493,491 Preferred C1 Shares, of nominal value NIS 0.01 each, of which 16 , 414,906 are issued and outstanding, (v) 31,832,969 Preferred C2 Shares, of nominal value NIS 0.01 each, of which 29,788,667 are issued and outstanding, (vi) 30,000,000 Preferred C3 Shares, of nominal value NIS 0.01 each, none of which are issued and outstanding, (vii) 80 ,000,000 Preferred D1 Shares, of nominal value NIS 0.01 each, none of which are issued and outstanding and (viii) 60,000,000 Preferred D2 Shares, of nominal value NIS 0.01 each, none of which are issued and outstanding .
 
Other than as set out in Schedule 4.2, and other than as pursuant to law, there are no other special rights held by the shareholders of the Company, including the holders of the Preferred Shares (as defined below), by virtue of such shareholding other than as set forth in the Articles. For purposes hereof, the Preferred A Shares, the Preferred B Shares, the Preferred C1 Shares, the Preferred C2 Shares and the Preferred C3 Shares, shall be collectively referred to as the " Preferred Shares ".
 
Schedule 4.2 A sets forth a capitalization table of the Company on a pre and post Closing Fully Diluted Basis without taking into account any shares or warrants issued to Additional Investors or to any "finders" on account of such Additional Investors. All issued and outstanding shares of the Company have been duly authorized, and are validly issued and outstanding and fully paid and nonassessable. The Issued Shares to be issued to the Investor, and the Warrant Shares issuable to the Investor upon exercise of its Warrant, when issued and allotted in accordance with this Agreement (and assuming payment in full therefor), will be duly authorized, validly issued, fully paid and nonassessable, and will have the rights, preferences, privileges, and restrictions set forth in the New Articles and duly registered in the name of the Investor in the Company's register of shareholders.
 
 
7

 
 
4.3.
Financial Statements . The Company has furnished the Investor with its (i) audited and consolidated financial statements as of and for the year ended December 31, 2009; and (ii) its unaudited financial statements for the quarter ending on September 30, 2010 (together, the “ Financial Statements ”) in translated form. Subject to that set out in the Disclosure Schedule, the Financial Statements are true and correct in all material respects, are in accordance with the books and records of the Company and have been prepared in accordance with International Financial Reporting Standards consistently applied, and fairly and accurately present in all material respects the financial position of the Company as of such dates and the results of its operations for the periods then ended, subject in the case of the unaudited financial statements to year end and other audit adjustments.
 
4.4.
Authorization; Approvals . All corporate action on the part of the Company, its shareholders and directors necessary for the authorization, execution, delivery, and performance of all of the Company's obligations to the Investor under this Agreement, and the other agreements contemplated hereby or which are ancillary hereto including the authorization, issuance, and allotment of the Issued Shares being sold to the Investor under this Agreement, and the issuance of the Warrant hereunder to the Investor has been (or will be) taken prior to the Closing. This Agreement, when executed and delivered by or on behalf of the Company, shall be duly and validly authorized, executed and delivered by the Company and shall constitute the valid and legally binding obligations of the Company, legally enforceable against the Company in accordance with their respective terms. Except as set forth in the Disclosure Schedule, no consent, approval, order, license, permit, action by, or authorization of or designation, declaration, or filing with any governmental authority on the part of the Company is required that has not been, or will not have been, obtained by the Company on or prior to the Closing in connection with the valid execution, delivery and performance of this Agreement and any other agreements contemplated hereby or ancillary hereto or the offer, sale, or issuance of the Issued Shares.
 
 
8

 
 
4.5.
Compliance with Other Instruments . The Company is not in material default (a) under the Articles or other organizational documents, or under any note, indenture, mortgage, lease, agreement, contract, purchase order or other instrument, document or agreement to which the Company is a party, or (b) with respect to any law, statute, ordinance, regulation, order, writ, injunction, decree, or judgment of any court or any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which default, in any such case, would materially adversely affect or in the future is reasonably likely to materially adversely affect the Company's business, prospects, condition (financial or otherwise), affairs, operations or assets.  To the Company's knowledge, no third party is in material default under any agreement, contract or other instrument, document or agreement to which the Company is a party.  The Company is not a party to or bound by any order, judgment, decree or award of any governmental authority, agency, court, tribunal or arbitrator.
 
4.6.
No Breach . Neither the execution and delivery of this Agreement and any other agreements contemplated hereby or ancillary hereto nor compliance by the Company with the terms and provisions hereof or thereof will conflict with, or result in a breach or violation of, any of the terms, conditions and provisions of: (i) the Articles (assuming the receipt of any and all consents required by the Articles), (ii) any judgment, order, injunction, decree, or ruling of any court or governmental authority, domestic or foreign, (iii) any agreement, contract, lease, license or commitment to which the Company is a party or to which it is subject, or (iv) applicable law. Such execution, delivery and compliance will not (a) give to others any rights, including rights of termination, cancellation or acceleration, in or with respect to any agreement, contract or commitment referred to in this paragraph, or to any of the properties of the Company, or (b) except as specified in the Articles, otherwise require the consent or approval of any person, which consent or approval has not heretofore been obtained.
 
 
9

 
 
4.7.
Taxes . The Company has accurately prepared and filed all tax returns and reports required by it under applicable law.  All tax returns and reports of the Company are true and correct in all material respects and the Company has paid on time all taxes and other assessments due.  No deficiency assessment or proposed adjustment of income or payroll taxes of the Company is pending and the Company has no knowledge of any proposed liability for any tax to be imposed.  The Company has not made any elections under applicable laws or regulations (other than elections that related solely to methods of accounting, depreciation or amortization) that would have a material adverse effect on the Company, its financial condition, its business as presently conducted or proposed to be conducted or any of its properties or assets.
 
4.8.
Litigation . No action, proceeding or governmental inquiry or investigation is pending or, to the Company's knowledge, threatened against the Company or against any of the Company's properties, or with regard to the Company’s business, before any court, arbitration board or tribunal or administrative or other governmental agency.
 
The Investor hereby acknowledges and agrees that the Company is not providing the Investor with any representations and warranties other than those representations and warranties set forth in this Section 4.
 
5.
Representations and Warranties of the Investor
 
The Investor hereby represents and warrants to the Company as follows and acknowledges that the Company is entering into this Agreement in reliance thereon:
 
5.1.
Enforceability . The Investor has full legal capacity, power and authority to execute, deliver, and perform its obligations under this Agreement, and all schedules thereof. This Agreement and the agreements to be executed by the Investor under this Agreement (if any), when executed and delivered by the Investor, will constitute the valid, binding and enforceable obligations of the Investor in accordance with their terms.
 
 
10

 
 
5.2.
No Breach . The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not result in the breach of any term of, or constitute a default under, any contract, agreement, commitment, indenture, mortgage, note or other instrument or obligation to which the Investor may be bound. No approval or consent from any person, entity or authority, is required by the Investor for the execution, delivery and performance by it of this Agreement and any other agreement hereunder.
 
5.3.
Securities Law . In the event that the Investor is a not a resident of Israel, at the time such Investor was offered to purchase securities of the Company, it was, and as of the date hereof it is, and at the Closing and on each date on which it exercises any Warrant, it will be either: (i) an “accredited investor” as defined in Rule 501(a) under the U.S. Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the " Securities Act ") or (ii) a “qualified institutional buyer” as defined in Rule 144A(a) under the Securities Act.
 
5.4.
Investment . The Investor is an investor in securities of companies in the development stage, including medical device companies and is able to bear the economic risk of its investment and has such knowledge and experience in financial or business matters, that it is capable of evaluating the merits and risks of an investment in companies in the development stage. The Investor also represents that it has (i) performed its own independent review of the data and documents it requested and received from the Company in connection with the Company and this Agreement and is aware, inter alia , that the Company is in the process of developing its product and does not yet have any operating history; (ii) been given the opportunity to ask questions of and receive answers from the Company regarding the Company, the terms and conditions of the Issued Shares and Warrants, and the Company’s current and proposed business, operations, properties, prospects, legal and financial condition; and (iii) reached the decision to purchase shares in the Company as a result of careful consideration, and with full knowledge of the risks inherent in such decision, including but  not limited to the risks concerning (a) the business of the Company, (b) the research, development and engineering undertaken or planned to be undertaken by the Company, (c) the clinical program of the Company, (d) the regulations and laws applying to the Company and its business, (e) the intellectual property of the Company, (f) the shares of the Company and the share price thereof, and (g) taxation (the " Enumerated Risks "). The Investor acknowledges and agrees that the Company makes no representation or warranty that the Enumerated Risks are either the only risks or the most important risks for the Investor to take into consideration hereunder. The Investor represents and agrees that the Issued Shares allotted to such Investor hereunder and the Warrant are purchased only for investment purposes, for its own account, and not as a nominee or agent, and not with the view to, or for resale in connection with, any distribution thereof.
 
 
11

 
 
5.5.
Restricted Securities .  The Investor understands that the Issued Shares allotted to such Investor hereunder and the Warrant are and, when issued, the Warrant Shares allotted to the Investor hereunder will be “restricted securities” (as defined in Rule 144 under the Securities Act) and have not been registered under the Securities Act or any applicable state securities law.
 
5.6.
General Solicitation .  The Investor is not purchasing the Issued Shares allotted to such Investor or the Warrant as a result of any advertisement, article, notice or other communication regarding the Issued Shares or the Warrants published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement (within the meaning of Regulation D under the Securities Act).
 
5.7.
No Public Market .  The Investor understands and acknowledges that no public market now exists for any of the securities issued by the Company and that the Company has made no assurances that a public market will ever exist for the Company’s securities.
 
6.
Conditions to Closing of the Investor
 
The obligations of each Investor to consummate the purchase of the Issued Shares allotted to such Investor hereunder and the Warrant hereunder are subject to the fulfillment, prior to or at the Initial Closing of each of the following conditions precedent (any or all of which may be waived in whole or in part by such Investor, which waiver shall be at the sole discretion of the Investor):
 
6.1.
Representations and Warranties . The representations and warranties made by the Company in this Agreement shall have been true and correct when made, and shall be true and correct as if made on the date of the Initial Closing.
 
 
12

 
 
6.2.
Covenants . All covenants, agreements, and conditions contained in this Agreement to be performed or complied with by the Company prior to or at the Initial Closing shall have been performed or complied with by the Company prior to or at the Initial Closing.
 
6.3.
Delivery of Deliverables . All of the deliverables to be delivered or performed by the Company pursuant to Section 3.2 shall have been delivered to the Investor.
 
6.4.
New Articles .  The New Articles shall have been adopted by the Company as required by the Articles and by law, and shall be in full force and effect.
 
7.
Conditions to Closing of the Company
 
The obligations of the Company hereunder are subject to the fulfillment at or before the Initial Closing of the following conditions precedent:
 
7.1.
Representations and Warranties . The representations and warranties made by the Investor in this Agreement shall have been true and correct when made, and shall be true and correct as of the date of the Initial Closing.
 
7.2.
Covenants . All covenants, agreements and conditions contained in this Agreement to be performed, or complied with, by the Investor prior to or at the Initial Closing shall have been performed or complied with by the Investor prior to or at the Initial Closing.
 
7.3.
Minimum Amount . The Company shall have raised and shall have closed, or shall close concurrently with the Initial Closing hereof, no less than the Minimum Amount for this round of Series D financing.
 
7.4.
Compliance with ISL . The Company shall not be required to publish a prospectus pursuant to the provisions of the ISL due to the number of Investors or Additional Investors who wish to participate in this Series D financing round, including the number of offerees or the number of persons acquiring securities pursuant to this Agreement or any other agreement on or prior to the date hereof.
 
The above conditions precedent may be waived in whole or in part by the Company, which waiver shall be at the sole discretion of the Company.
 
7.5.
Approvals . The Company shall have obtained all board and shareholder, governmental, regulatory and other third party consents and approvals, if any, necessary for the sale of the Issued Shares and Warrant and the performance of the transactions contemplated hereby.
 
 
13

 

 
8.
Affirmative Covenants.
 
8.1.
Expenses .  Each of the Company and each Investor shall bear its own costs and expenses in connection with the transaction contemplated hereunder.
 
8.2.
OCS Undertaking . To the extent that at any time hereinafter an Investor shall hold such number of securities of the Company such that it shall be legally required, in the view of the Company, to sign an undertaking to the OCS, then the Investor shall sign such undertaking as may be required by the OCS at such time (the " OCS Undertaking ").
 
9.
Confidentiality
 
Each Investor undertakes to keep all information concerning the Company (including, without limitation, information concerning its business, financials, operations, proprietary rights, business plans, research and development of the Company, products of the Company and lists of customers), in strict confidence and shall not divulge or otherwise make use of any such information, provided that such information is not in the public domain, or if in the public domain, provided that the Investor has not breached the provisions of this Section.
 
The Company and each Investor undertake to keep this Agreement confidential unless otherwise agreed by both parties or unless a party is required to disclose it according to applicable law.
 
10.
Additional Agreements
 
10.1. 
Transfer Restrictions .  The Issued Shares and the Warrant and, when issued, the Warrant Shares may only be disposed of in compliance with state and federal securities laws and with the laws of the State of Israel, as applicable. In connection with any transfer of Issued Shares, Warrants, or Warrant Shares, other than pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act, to the Company, the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred securities under the Securities Act.  As a condition of transfer, any such transferee shall agree in writing to be bound by the terms of this Agreement and shall have the rights and obligations of the Investor under this Agreement.
 
 
14

 
 
10.2. 
Legends .  Each Investor agrees to the imprinting, so long as is required by this Section 10, of a legend on any of the Issued Shares or the Warrant Shares in the following form:
 
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE " SECURITIES ACT "), OR ANY STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.
 
Each Investor agrees to the imprinting, for so long as required by this Section 10, of a legend on any of the Warrants in the following form:
 
NEITHER THIS SECURITY NOR THE SECURITIES FOR WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD OR TRANSFERRED, DIRECTLY OR INDIRECTLY, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
 
 
15

 
 
Each Investor agrees with the Company that it will only sell any Issued Shares, the Warrants or any Warrant Shares pursuant to either the registration requirements of the Securities Act, including any applicable prospectus delivery requirements, or an exemption therefrom, and that if any Issued Shares, Warrants or Warrant Shares are sold pursuant to a registration statement under the Securities Act, they will be sold in compliance with the plan of distribution set forth therein, and acknowledges that the removal of the restrictive legend from certificates representing any Issued Shares, the Warrant or any Warrant Shares as set forth in this Section 10 is predicated upon the Company’s reliance upon this understanding.
 
11.
Miscellaneous
 
11.1.
Further Assurances . Each of the parties hereto shall perform such further acts and execute such further documents as may reasonably be necessary to carry out and give full effect to the provisions of this Agreement and the intentions of the parties as reflected thereby.
 
11.2.
Governing Law; Jurisdiction . This Agreement shall be deemed to be a contract made under the laws of the State of Israel, and for all purposes shall be construed in accordance with the laws of said state, without regard to principles of conflict of laws. Any dispute arising under or in relation to this Agreement shall be resolved exclusively in the competent court for Tel Aviv-Jaffa district, and each of the parties hereby irrevocably submits to the exclusive jurisdiction of such court.
 
 
16

 
 
11.3.
Successors and Assigns; Assignment . Except as otherwise expressly limited herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto.  None of the rights, privileges, or obligations set forth in, arising under, or created by this Agreement may be assigned or transferred without the prior consent in writing of each party to this Agreement.
 
11.4.
Entire Agreement; Amendment and Waiver . This Agreement and the Schedules hereto and the other agreements hereunder constitute the full and entire understanding and agreement between the parties with regard to the subject matters hereof and thereof.  Any term of this Agreement may be amended and the observance of any term hereof may be waived (either prospectively or retroactively and either generally or in a particular instance) only with the written consent of each party to this Agreement.
 
11.5.
Notices, etc. . All notices and other communications required or permitted hereunder to be given to a party to this Agreement shall be in writing and shall be telecopied or mailed by registered or certified mail, postage prepaid, or prepaid air courier, or otherwise delivered by hand or by messenger, addressed to such party's address as set forth above or at such other address as the party shall have furnished to each other party in writing in accordance with this provision.
 
Any notice sent in accordance with this Section 11.5 shall be effective (i) if mailed, seven (7) business days after mailing, (ii) if by air courier two (2) business days after delivery to the courier service, (iii) if sent by messenger, upon delivery, and (iv) if sent via telecopier, upon transmission and electronic confirmation of receipt or (if transmitted and received on a non-business day) on the first business day following transmission and electronic confirmation of receipt (provided, however, that any notice of change of address shall only be valid upon receipt).
 
11.6.
Delays or Omissions . No delay or omission to exercise any right, power, or remedy accruing to any party upon any breach or default under this Agreement, shall be deemed a waiver of any other breach or default theretofore or thereafter occurring.  Any waiver, permit, consent, or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing.  All remedies, either under this Agreement or by law or otherwise afforded to any of the parties, shall be cumulative and not alternative.
 
 
17

 
 
11.7.
Severability . If any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable under applicable law, then such provision shall be excluded from this Agreement and the remainder of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms; provided, however, that in such event this Agreement shall be interpreted so as to give effect, to the greatest extent consistent with and permitted by applicable law, to the meaning and intention of the excluded provision as determined by such court of competent jurisdiction.
 
11.8.
Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and enforceable against the parties actually executing such counterpart, and all of which together shall constitute one and the same instrument.
 
IN WITNESS WHEREOF the parties have signed this Agreement as of the date first hereinabove set forth.
 
______________________________
Check Cap Ltd.
 
By:    ______________________
 
Title: ______________________
______________________
 
 
By:    ______________________
 
Title:  ______________________          

18



 


Exhibit 10.9
 
Date: ____________
 
To: _____________
 
WARRANT
 
To purchase Ordinary Shares of:
Check-Cap Ltd.
 
VOID AFTER 24:00 p.m. (prevailing Israel Standard Time)
 
On the last day of the Warrant Period (as defined below)
 
WHEREAS, on or about May 11, 2010   Check-Cap Ltd. (the " Company ")   has   granted Mr. Guy Neev options to purchase up to 1,995,475 Ordinary Shares par value NIS 0.01 each (the " Neev Options "); and
 
WHEREAS, the Company wish to issue to certain of its shareholders,   for no additional consideration, simultaneously with the issuance of the Neev Options, such number of options to purchase Ordinary Shares of the Company, in order to procure that the percentage holdings of each such holder immediately prior to the issuance of the Neev Options would remain unchanged;
 
THEREFORE, THIS IS TO CERTIFY THAT , __________ (the " Holder "), is entitled to purchase from the Company, an aggregate of up to ________ Ordinary Shares of the Company, nominal value NIS 0.01 per share (the " Warrant Shares "), for no consideration, during the Warrant Period.
 
1.
EXERCISE OF WARRANT
 
1.1.
Warrant Period . This Warrant may be exercised, subject to the terms and conditions hereof, during the period commencing on the Neev Exercise Date (as defined below) and terminated upon the later of (i) the lapse of 10 years from the date hereof (i.e. May 11, 2020), or (ii) the lapse of 3 months following the expiry of the Neev Options without being exercised, provided that the Company provides the Holder a written notice at least fourteen (14) days prior to such date. The above period shall be referred to hereinafter as the " Warrant Period ".
 
1.2.
Company Notice . Upon the receipt by the Company of an exercise notice by Mr. Guy Neev, according to which Mr. Guy Neev wishes to exercise the Neev Options, in whole or in part, the Company shall provide the Holder with a written notice, with the following details (the " Company Notice "):
 
 
1.2.1.
The anticipated date of exercise of the Neev Options (" Neev Exercise Date "), provided that the Neev Exercise Date shall occur not earlier than fourteen (14) days following the date of the Company Notice;
 
 
 

 
 
 
1.2.2.
The number of Neev Options exercised by Mr. Guy Neev;
 
 
1.2.3.
The number of Warrant Shares exercisable by the Holder, according to section 1.3 below.
 
1.3.
Partial Exercise. The number of Warrant Shares exercisable under this Warrant shall correspond to the portion of Neev Options actually exercised by Mr. Guy Neev, and shall be calculated as follows:
 
 
Y= (X / 1,995,475)*Z
 
Where:
 
Y- number of Warrant Shares exercisable by the Holder;
 
X- number of Neev Options exercised by Mr. Guy Neev;
 
Z- total number of Warrant Shares underlying this Warrant.
 
1.4.
Automatic Exercise. Provided that the Company provided the Company Notice, as detailed in Section 1.2, this Warrant will be deemed to have been automatically exercised by the Holder on the Neev Exercise Date, into such number of Warrant Shares as detailed in the Company Notice, unless the Holder has ordered the Company otherwise in writing, at least seven (7) days prior to the Neev Exercise Date.
 
1.5.
Non- Automatic Exercise . To the extent not automatically exercised on the Neev Exercise Date in accordance with Section 1.4 above, this Warrant may be exercised into such number of Warrant Shares as detailed in the Company Notice, by presentation and surrender thereof to the Company, on or prior to the last date of the Warrant Period, at its principal office or at such other office or agency as it may designate from time to time, accompanied by a duly executed notice of exercise, in the form attached hereto as Schedule 1.2.1 (the " Exercise Notice ").
 
1.6.
Issuance of Warrant Shares . Upon the earlier of (i) automatic exercise, as detailed in Section 1.4, or (ii) presentation and surrender of this Warrant, accompanied by the duly executed Exercise Notice, the Company shall promptly (a) issue to the Holder the Warrant Shares to which the Holder is entitled; and (b) deliver to the Holder the share certificate evidencing such Warrant Shares.
 
Upon automatic exercise, as detailed in Section 1.4, or, in case the Warrant was not automatically exercised, upon receipt by the Company of this Warrant and the applicable duly executed notice of exercise, together with any other documents and/or approvals that may be required by law, the Holder shall be deemed to be the holder of record of the Warrant Shares issuable upon such exercise, notwithstanding that the share transfer books of the Company shall then be closed or that certificates representing such shares shall not then be actually delivered to the Holder.
 
In the event that all Warrant Shares are automatically exercised, this Warrant shall become null and void upon the exercise thereof.
 
In the event that a portion of the Warrant Shares remains unexercised, the Company shall execute and deliver to the Holder a new Warrant, in lieu of this Warrant, representing the remaining unexercised Warrant Shares, and upon the delivery of such new Warrant to the Holder, this Warrant shall become null and void.
 
 
2

 
 
1.7.
Fractional Shares . No fractions of Shares shall be issued in connection with the exercise of this Warrant, and the number of shares issued shall be rounded up to the nearest whole number.
 
1.8.
Additional Documents . The Holder will sign and deliver any and all documents or approvals required by law, to facilitate the issuance of shares upon exercise of this Warrant.
 
1.9.
Loss or Destruction of Warrant . Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably expenses reimbursement and satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date.
 
2.
TAXES
 
2.1.
The Holder acknowledges that the grant of the Warrant, the issue of the Warrant Shares and the execution and/or performance of this Warrant may have tax consequences to the Holder and that the Company is not able to ensure or represent to the Holder the nature and extent of such tax consequences.
 
2.2.
The Holder shall be responsible and shall pay any and all taxes due in connection with the holding, issuance, exercise or sale of this Warrant or the Warrant Shares by the Holder.
 
3.
ADJUSTMENT
 
3.1.
The number of Warrant Shares purchasable upon the exercise of this Warrant shall be subject to adjustment from time to time or upon exercise, as follows:
 
 
3.1.1.
Consolidation and Division . In the event that during the Warrant Period the Company consolidates its share capital into shares of greater par value, or subdivides them into shares of lesser par value, then the number of Warrant Shares to be allotted on exercise of this Warrant after such consolidation or subdivision shall be reduced or increased accordingly, as the case may be.
 
 
3.1.2.
Capital Reorganization . In the event that during the Warrant Period a reorganization of the share capital of the Company is effected (other than subdivision, combination or reclassification provided for elsewhere in this Section 3) and the Ordinary Shares of the Company are exchanged for other securities of the Company, then, as part of such reorganization, provision shall be made so that the Holder shall be entitled to purchase upon exercise of this Warrant such kind and number of shares or other securities of the Company to which the Holder would have been entitled had this Warrant been exercised without taking into effect such reorganization.
 
 
3

 
 
3.2.
Whenever an adjustment is effected hereunder, the Company shall promptly compute such adjustment and deliver to the Holder a certificate setting forth the number of Warrant Shares (or any other securities) for which this Warrant is exercisable, a brief statement of the facts requiring such adjustment and the computation thereof and when such adjustment has or will become effective.
 
4.
RIGHTS OF THE HOLDER
 
4.1.
This Warrant shall not entitle the Holder, by virtue hereof, to any voting rights or other rights as a shareholder of the Company, except for the rights expressly set forth herein.
 
4.2.
The Holder acknowledges that the Warrant Shares shall be subject to such certain rights, privileges, restrictions and limitations as set forth in this Warrant, and the organizational documents of the Company (or any other agreement with respect thereto), as may be amended from time to time, and that, as a result, inter alia , of such limitations, it may be difficult or impossible for the Holder to realize his investment and/or to sell or otherwise transfer the Warrant Shares. The Holder further acknowledges that the Company's shares are not publicly traded.
 
5.
TERMINATION
 
 
Notwithstanding anything to the contrary, this Warrant and all the rights conferred hereby shall terminate and expire at the aforementioned time on the last day of the Warrant Period, unless the Warrant was previously exercised.

6.
MISCELLANEOUS
 
6.1.
Entire Agreement; Amendment . This Warrant sets forth the entire understanding of the parties with respect to the subject matter hereof and supersedes all existing agreements among them concerning such subject matter. All article and section headings herein are inserted for convenience only and shall not modify or affect the construction or interpretation of any provision of this Warrant. No modification or amendment of this Warrant will be valid unless executed in writing by the Company and the Holder.
 
6.2.
Waiver . No failure or delay on the part of any of the parties in exercising any right, power or privilege hereunder and/or under any applicable laws or the exercise of such right or power in a manner inconsistent with the provisions of this Warrant or applicable law shall operate as a waiver thereof. Any waiver must be evidenced in writing signed by the party against whom the waiver is sought to be enforced.
 
6.3.
Successors and Assigns; Assignment . Except as otherwise expressly limited herein, this Warrant shall inure to the benefit of, be binding upon, and be enforceable by the Holder and its respective successors and administrators and is otherwise non-transferable without the prior consent of the Company. The Holder represents and warrants to the Company that this Warrant and the Warrant Shares, if and when purchased by the Holder, are for the Holder's own account and for investment purposes only and not with a view for resale or transfer and that all the rights pertaining to the Warrant or the Warrant Shares, by law or equity, shall be purchased and possessed by the Holder for the Holder exclusively.
 
6.4.
Governing Law .  This Warrant shall be exclusively governed and construed in accordance with the laws of the State of Israel, without regard to conflicts of laws provisions thereof.
 
 
4

 
 
6.5.
Arbitration .  Any dispute, controversy or claim arising in relation to this Warrant, including with regard to its validity, invalidity, breach, enforcement or termination, will be referred to a single arbitrator, who shall be appointed by the Head of the Israeli Bar Association.  Arbitration proceedings shall take place in Tel Aviv, Israel, and shall be conducted in English and according to the rules of substantive law. The arbitrator will not be bound by rules of evidence or procedure and will give the reasons for his judgment. The arbitrator's decision shall be final and enforceable in any court. This paragraph shall constitute an arbitration agreement between the parties.
 
6.6.
Notices .  Any notice required or permitted to be given to a party pursuant to the provisions of this Warrant will be in writing and will be effective and deemed delivered to such party on the earliest of the following: (a) all notices and other communications delivered in person or by courier service shall be deemed to have been delivered as of actual delivery thereof; (b) those given by facsimile transmission shall be deemed delivered on the following business day after transmission, with confirmed transmission thereof; and/or (c) all notices and other communications sent by registered mail (or air mail if the posting is international) shall be deemed given three (3) days after posting.
 
6.7.
Severability .  If any provision of this Warrant is held to be unenforceable, this Warrant shall be considered divisible and such provision shall be deemed inoperative to the extent it is deemed unenforceable, and in all other respects this Warrant shall remain in full force and effect; provided , however , that if any such provision may be made enforceable by limitation thereof, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by applicable law.
 
6.8.
Counterparts .  This Warrant may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.  Facsimile signatures of a party shall be binding as evidence of such party's agreement hereto and acceptance hereof.
 
IN WITNESS WHEREOF , the Company has caused this Warrant to be executed by its officer thereunto duly authorized.
 
Dated:  _________________
 
Check-Cap Ltd.
 
By: ______________________________
 
       Name:
 
       Title:
 
 
5

 
 
AGREED AND ACCEPTED :
 
__________________________
 
_________________
 
 
6

 
 
Schedule 1.2.1
 
Exercise Notice
 
Date: ____________
 
To:         Check-Cap Ltd.
 
The undersigned, pursuant to the provisions set forth in the Warrant to which this Exercise Notice is attached (the " Warrant "), hereby elects to purchase the Warrant Shares (as such term is defined in the Warrant) pursuant to Section 1.5 of the Warrant.
 
 
Signature:                                                        
 
Address: ________________
                 ________________
 
 
7

 
 
Date: ____________________
 
To: ___________________
 
WARRANT
 
To purchase Ordinary Shares of:
Check-Cap Ltd.
 
VOID AFTER 24:00 p.m. (prevailing Israel Standard Time)
 
On the last day of the Warrant Period (as defined below)
 
WHEREAS, on or about May 11, 2010   Check-Cap Ltd. (the " Company ")   has   granted Mr. Guy Neev options to purchase up to 1,995,475 Ordinary Shares par value NIS 0.01 each (the " Neev Options "); and

WHEREAS, the Company wish to issue to certain of its shareholders,   for no additional consideration, simultaneously with the issuance of the Neev Options, such number of options to purchase Ordinary Shares of the Company, in order to procure that the percentage holdings of each such holder immediately prior to the issuance of the Neev Options would remain unchanged;

THEREFORE, THIS IS TO CERTIFY THAT , _____________ (the " Holder "), is entitled to purchase from the Company, an aggregate of up to _____________ Ordinary Shares of the Company, nominal value NIS 0.01 per share (the " Warrant Shares "), for no consideration, during the Warrant Period.

1.
EXERCISE OF WARRANT
 
1.1.
Warrant Period . This Warrant may be exercised, subject to the terms and conditions hereof, during the period commencing on the Neev Exercise Date (as defined below) and terminated upon the later of (i) the lapse of 10 years from the date hereof (i.e. May 11, 2020), or (ii) the lapse of 3 months following the expiry of the Neev Options without being exercised, provided that the Company provides the Holder a written notice at least fourteen (14) days prior to such date. The above period shall be referred to hereinafter as the " Warrant Period ".
 
1.2.
Company Notice . Upon the receipt by the Company of an exercise notice by Mr. Guy Neev, according to which Mr. Guy Neev wishes to exercise the Neev Options, in whole or in part, the Company shall provide the Holder with a written notice, with the following details (the " Company Notice "):
 
 
1.2.1.
The anticipated date of exercise of the Neev Options (" Neev Exercise Date "), provided that the Neev Exercise Date shall occur not earlier than fourteen (14) days following the date of the Company Notice;
 
 
1.2.2.
The percentage of Neev Options exercised by Mr. Guy Neev;
 
 
1.2.3.
The number of Warrant Shares exercisable by the Holder, according to section 1.3 below.
 
 
1

 
 
1.3.
Partial Exercise. The number of Warrant Shares exercisable under this Warrant shall correspond to (a) the portion of Neev Options actually exercised by Mr. Guy Neev and (b) the number of warrants exercised by the Holder prior to the exercise of this Warrant, and shall be calculated as follows:
 
 
Y= [X *Z*(A/B)]-P
 
Where:
 
Y- number of Warrant Shares exercisable by the Holder under this Warrant;
 
X- the aggregate percentage of Neev Options actually exercised by Mr. Guy Neev as of the specific date of exercise of this Warrant;
 
Z- total maximum number of Warrant Shares underlying this Warrant.
        
 
  B- Warrants to purchase up to __________ C-1 Preferred Shares of the Company   and __________ C-2 Preferred Shares of the Company, which constitute the aggregate number
of  warrants granted to the Holder by the Company on or prior to the date hereof (other than this Warrant) (the " Exisiting Warrants ").
 
 
A- The number of warrant shares that were issued upon exercise (or any partial exercise) by the Holder of the Exisiting Warrants (as defined above) on or prior to the date of
exercise (or any partial exercise) of this Warrant.
 
 
P – The aggregate number of Warrant Shares, out of this Warrant, that have been previously issued to the Holder prior to any specific exercise of this Warrant.
 
1.4.
Automatic Exercise. Provided that the Company provided the Company Notice, as detailed in Section 1.2, this Warrant will be deemed to have been automatically exercised by the Holder on the Neev Exercise Date, into such number of Warrant Shares as detailed in the Company Notice, unless the Holder has ordered the Company otherwise in writing, at least seven (7) days prior to the Neev Exercise Date.
 
1.5.
Non- Automatic Exercise . To the extent not automatically exercised on the Neev Exercise Date in accordance with Section 1.4 above, this Warrant may be exercised into such number of Warrant Shares as detailed in the Company Notice, by presentation and surrender thereof to the Company, on or prior to the last date of the Warrant Period, at its principal office or at such other office or agency as it may designate from time to time, accompanied by a duly executed notice of exercise, in the form attached hereto as Schedule 1.2.1 (the " Exercise Notice ").
 
 
2

 
 
1.6.
Issuance of Warrant Shares . Upon the earlier of (i) automatic exercise, as detailed in Section 1.4, or (ii) presentation and surrender of this Warrant, accompanied by the duly executed Exercise Notice, the Company shall promptly (a) issue to the Holder the Warrant Shares to which the Holder is entitled; and (b) deliver to the Holder the share certificate evidencing such Warrant Shares.
 
Upon automatic exercise, as detailed in Section 1.4, or, in case the Warrant was not automatically exercised, upon receipt by the Company of this Warrant and the applicable duly executed notice of exercise, together with any other documents and/or approvals that may be required by law, the Holder shall be deemed to be the holder of record of the Warrant Shares issuable upon such exercise, notwithstanding that the share transfer books of the Company shall then be closed or that certificates representing such shares shall not then be actually delivered to the Holder.
 
In the event that all Warrant Shares are automatically exercised, this Warrant shall become null and void upon the exercise thereof.
 
In the event that a portion of the Warrant Shares remains unexercised, the Company shall execute and deliver to the Holder a new Warrant, in lieu of this Warrant, representing the remaining unexercised Warrant Shares, and upon the delivery of such new Warrant to the Holder, this Warrant shall become null and void.
 
1.7.
Fractional Shares . No fractions of Shares shall be issued in connection with the exercise of this Warrant, and the number of shares issued shall be rounded up to the nearest whole number.
 
1.8.
Additional Documents . The Holder will sign and deliver any and all documents or approvals required by law, to facilitate the issuance of shares upon exercise of this Warrant.
 
1.9.
Loss or Destruction of Warrant . Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably expenses reimbursement and satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date.
 
2.
TAXES
 
2.1.
The Holder acknowledges that the grant of the Warrant, the issue of the Warrant Shares and the execution and/or performance of this Warrant may have tax consequences to the Holder and that the Company is not able to ensure or represent to the Holder the nature and extent of such tax consequences.
 
2.2.
The Holder shall be responsible and shall pay any and all taxes due in connection with the holding, issuance, exercise or sale of this Warrant or the Warrant Shares by the Holder.
 
 
3

 
 
3.
ADJUSTMENT
 
3.1.
The number of Warrant Shares purchasable upon the exercise of this Warrant shall be subject to adjustment from time to time or upon exercise, as follows:
 
 
3.1.1.
Consolidation and Division . In the event that during the Warrant Period the Company consolidates its share capital into shares of greater par value, or subdivides them into shares of lesser par value, then the number of Warrant Shares to be allotted on exercise of this Warrant after such consolidation or subdivision shall be reduced or increased accordingly, as the case may be.
 
 
3.1.2.
Capital Reorganization . In the event that during the Warrant Period a reorganization of the share capital of the Company is effected (other than subdivision, combination or reclassification provided for elsewhere in this Section 3) and the Ordinary Shares of the Company are exchanged for other securities of the Company, then, as part of such reorganization, provision shall be made so that the Holder shall be entitled to purchase upon exercise of this Warrant such kind and number of shares or other securities of the Company to which the Holder would have been entitled had this Warrant been exercised without taking into effect such reorganization.
 
3.2.
Whenever an adjustment is effected hereunder, the Company shall promptly compute such adjustment and deliver to the Holder a certificate setting forth the number of Warrant Shares (or any other securities) for which this Warrant is exercisable, a brief statement of the facts requiring such adjustment and the computation thereof and when such adjustment has or will become effective.
 
4.
RIGHTS OF THE HOLDER
 
4.1.
This Warrant shall not entitle the Holder, by virtue hereof, to any voting rights or other rights as a shareholder of the Company, except for the rights expressly set forth herein.
 
4.2.
The Holder acknowledges that the Warrant Shares shall be subject to such certain rights, privileges, restrictions and limitations as set forth in this Warrant, and the organizational documents of the Company (or any other agreement with respect thereto), as may be amended from time to time, and that, as a result, inter alia , of such limitations, it may be difficult or impossible for the Holder to realize his investment and/or to sell or otherwise transfer the Warrant Shares. The Holder further acknowledges that the Company's shares are not publicly traded.
 
5.
TERMINATION
 
 
Notwithstanding anything to the contrary, this Warrant and all the rights conferred hereby shall terminate and expire at the aforementioned time on the last day of the Warrant Period, unless the Warrant was previously exercised.
 
 
4

 
 
6.
MISCELLANEOUS
 
6.1.
Entire Agreement; Amendment . This Warrant sets forth the entire understanding of the parties with respect to the subject matter hereof and supersedes all existing agreements among them concerning such subject matter. All article and section headings herein are inserted for convenience only and shall not modify or affect the construction or interpretation of any provision of this Warrant. No modification or amendment of this Warrant will be valid unless executed in writing by the Company and the Holder.
 
6.2.
Waiver . No failure or delay on the part of any of the parties in exercising any right, power or privilege hereunder and/or under any applicable laws or the exercise of such right or power in a manner inconsistent with the provisions of this Warrant or applicable law shall operate as a waiver thereof. Any waiver must be evidenced in writing signed by the party against whom the waiver is sought to be enforced.
 
6.3.
Successors and Assigns; Assignment . Except as otherwise expressly limited herein, this Warrant shall inure to the benefit of, be binding upon, and be enforceable by the Holder and its respective successors and administrators and is otherwise non-transferable without the prior consent of the Company. The Holder represents and warrants to the Company that this Warrant and the Warrant Shares, if and when purchased by the Holder, are for the Holder's own account and for investment purposes only and not with a view for resale or transfer and that all the rights pertaining to the Warrant or the Warrant Shares, by law or equity, shall be purchased and possessed by the Holder for the Holder exclusively.
 
6.4.
Governing Law .  This Warrant shall be exclusively governed and construed in accordance with the laws of the State of Israel, without regard to conflicts of laws provisions thereof.
 
6.5.
Arbitration .  Any dispute, controversy or claim arising in relation to this Warrant, including with regard to its validity, invalidity, breach, enforcement or termination, will be referred to a single arbitrator, who shall be appointed by the Head of the Israeli Bar Association.  Arbitration proceedings shall take place in Tel Aviv, Israel, and shall be conducted in English and according to the rules of substantive law. The arbitrator will not be bound by rules of evidence or procedure and will give the reasons for his judgment. The arbitrator's decision shall be final and enforceable in any court. This paragraph shall constitute an arbitration agreement between the parties.
 
6.6.
Notices .  Any notice required or permitted to be given to a party pursuant to the provisions of this Warrant will be in writing and will be effective and deemed delivered to such party on the earliest of the following: (a) all notices and other communications delivered in person or by courier service shall be deemed to have been delivered as of actual delivery thereof; (b) those given by facsimile transmission shall be deemed delivered on the following business day after transmission, with confirmed transmission thereof; and/or (c) all notices and other communications sent by registered mail (or air mail if the posting is international) shall be deemed given three (3) days after posting.
 
 
5

 
 
6.7.
Severability .  If any provision of this Warrant is held to be unenforceable, this Warrant shall be considered divisible and such provision shall be deemed inoperative to the extent it is deemed unenforceable, and in all other respects this Warrant shall remain in full force and effect; provided , however , that if any such provision may be made enforceable by limitation thereof, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by applicable law.
 
6.8.
Counterparts .  This Warrant may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.  Facsimile signatures of a party shall be binding as evidence of such party's agreement hereto and acceptance hereof.
 
 
6

 
 
IN WITNESS WHEREOF , the Company has caused this Warrant to be executed by its officer thereunto duly authorized.
 
Dated:  _________________
 
Check-Cap Ltd.
 
By: ______________________________
       Name:
       Title:
 
AGREED AND ACCEPTED :
 
__________________________
 
Avraham Inbar
 
 
7

 
 
Schedule 1.2.1

Exercise Notice
 
Date: ____________
 
To:         Check-Cap Ltd.
 
The undersigned, pursuant to the provisions set forth in the Warrant to which this Exercise Notice is attached (the " Warrant "), hereby elects to purchase the Warrant Shares (as such term is defined in the Warrant) pursuant to Section 1.5 of the Warrant.
 
 
Signature:
 
Address: _____________
 
                 _____________
 
8




Exhibit 10.10
 
ASSET TRANSFER AGREEMENT
 
This ASSET TRANSFER AGREEMENT (this Agreement ) is made and entered into as of May 31, 2009 (the Effective Date ) by and among Check-Cap, LLC., a Delaware corporation (the Company ), and Check-Cap Ltd. an Israeli company ( New Check-Cap ).
 
RECITALS
 
WHEREAS , all the members of the Company are the shareholders of New Check-Cap; and
 
WHEREAS , the Company has agreed to transfer all its assets and activities to New Check-Cap; and
 
WHEREAS , New Check-Cap has agreed to accept such assets and activities;
 
NOW,   THEREFORE , in consideration of the foregoing recitals and the mutual promises, representations, warranties and covenants hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, intending to be legally bound hereby, the parties hereto agree as follows:
   
1. DEFINITION
   
 
The term Intellectual Property means (i) inventions (whether or not patentable), trade secrets, technical data, databases, customer lists, designs, tools, methods, processes, technology, ideas, know how and other confidential or proprietary information and materials; (ii) trade marks and service marks (whether or not registered), applications for trade marks and service marks, trade names, logos, trade dress and other proprietary indicia and all goodwill associated therewith; (iii) documentation, advertising copy, marketing materials, specifications, mask works, drawings, graphics, databases, recordings and other works of authorship, whether or not protected by copyright; (iv) source code, object code, data and operating files, user manuals, documentation, flow charts, algorithms, compilers, development tools, maintenance records and other materials related to computer programs; (v) internet web-sites and domain names; and (vi) all forms of legal rights and protections that may be obtained for, or may pertain to, the Intellectual Property set forth in clauses (i) through (v) in any country of the world, including, without limitation, all letters patent, patent applications, provisional patents, design patents, PCT filings and other rights to inventions or designs, all registered and unregistered copyrights in both published and unpublished works, trade secret rights, mask works, moral rights or other literary property or authors rights, rights regarding trademarks and other proprietary indicia, and all applications, registrations, issuances, divisions, continuations, renewals, reissuances and extensions of the foregoing.
 
 
1

 
 
     
2. TRANSFER AND DELIVERY OF ASSETS
   
  2.1      The Company hereby assigns, transfers and delivers to New Check-Cap, free and clear of any and all liabilities, judgments, pledges, liens, tax liens, obligations, asserted or unasserted claims (including, without limitation, employee claims), charges, security interests, exceptions or encumbrances whatsoever, except as set forth in Section 2.1 (each, an Encumbrance and together the Encumbrances ), all of the Company’s right, title and interest in and to all of its assets (the Transferred Assets ), which include, without limitation, the following assets:
     
   
2.1.1   all tangible personal property used or held for use primarily in connection with the business of the Company, including, without limitation, all machinery, equipment, parts, vehicles, furniture, office equipment, hardware, supplies and other items of tangible personal property owned by the Company;
 
2.1.2   all of the Company’s interest and right to any Intellectual Property, together with related registrations, applications, assignments and amendments;
 
2.1.3   all of the interest of the Company in the contracts listed in Schedule 2.1. 3 (“ Assumed Contracts ”) ;
 
2.1.4   all leasehold interests of the Company;
 
2.1.5   all licenses, authorizations, permits and other approvals issued by any governmental entity, and all applications therefore pending, used or held for use in connection with the Company’s business;
 
2.1.6   all other records of the Company relating to its business;
 
2.1.7   all cash and other cash equivalent assets, except for US $ 100,000 , which shall be used to finance the ongoing operations of the Company, including, without limitation, payment of governmental fees, legal expenses, audit expenses and insurance expenses ;
 
2.1.8   all pending or threatened contest, claim, demand, assessment, action, or cause of action, that the Company may have against any person relating to or arising out of any Transferred Asset.
     
  2.2      Notwithstanding anything in Section 2.1 to the contrary, the following assets of the Company (collectively, the Excluded Assets ) shall be excluded from this Agreement, and shall not be assigned or transferred to New Check-Cap and shall be retained by the Company:
     
   
2.2.1   the assets of the Company that are listed on Schedule 2.2.1 attached hereto;
 
2.2.2   any and all losses which are not assignable pursuant to the requirements of any applicable law, including such loss that has been attributable to, or allocated to, or is required to be attributable to the members of the Company.
 
 
2

 
 
       
     
2.2.3   all books, records, files and correspondence (whether in original or photostatic form) to the extent used or held for use in connection with, or relating to the business, tax records and corporate records.
       
    2.3 Assumed Liabilities and Obligations .
       
     
2.3.1   Except for those obligations specifically identified in Schedule 2.3 attached hereto (collectively, the “Assumed Liabilities” ), New Check-Cap will not and hereby does not assume or undertake to pay, perform, satisfy or discharge any liability or undertaking of the Company with respect to the Transferred Assets, whether existing on, before or after the Effective Date or arising out of any transaction entered into or any state of facts existing on, prior to or after the Effective Date.
       
     
2.3.2   New Check-Cap shall assume all performance obligations for contracts assigned to New Check-Cap from the Company pursuant to this Agreement.
       
   
2.4      Except as explicitly detailed herein, New Check-Cap shall not assume any liability or obligation of the Company whatsoever.
 
2.5      The Company undertakes to cause the key employees listed in Schedule 2.5 (“ Key Employees ”) to enter into employment agreements with New Check-Cap, at terms substantially similar to their terms of employment by the Company.
 
2.6      No consideration shall be paid by New Check-Cap to the Company.
       
  3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
       
 
Each of the Company and its Manager, Check-Cap Ltd., hereby jointly and severally represents and warrants to New Check-Cap that, except as otherwise set forth in the schedules referred to in this Agreement, the following representations and warranties are, as of the Effective Date, true and correct.
       
    3.1 Organization and Existence .
       
   
The Company is a company duly organized, validly existing and in good standing under the laws of its state of incorporation. The Company has full corporate power and authority to own its properties and, specifically, to own the Transferred Assets.
       
    3.2 Execution and Effect of Agreement .
       
    The Company has the power and authority to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement has been duly executed and delivered and the transactions contemplated hereby have been duly authorized by its corporate bodies.
       
    3.3 Title and Liens .
       
    Except as set froth in Schedule 3.3 , the Company owns all the Transferred Assets free and clear of any Encumbrances, and New Check-Cap shall receive good and marketable title to the Transferred Assets owned by the Company. Except as set froth in Schedule 3.3 , the Company has the full and unrestricted power to sell, assign, transfer and deliver the Transferred Assets to New Check-Cap upon the terms and subject to the conditions of this Agreement. The Transferred Assets, when taken together with the Excluded Assets, constitute all properties, assets and leasehold estates, real, personal and mixed, tangible and intangible, comprising, used or useful in the operation of the Company s business on the date hereof.
 
 
3

 
 
       
   
3.4       The execution, delivery and performance of this Agreement by the Company will not violate any statute, regulation, rule, injunction, judgment, order, decree, ruling, charge or restriction of any governmental authority or court to which the Company is a party or to which it is bound or subject, or the provisions of its Limited Liability Company Agreement, bylaws and/or certificate of incorporation, nor will it constitute a breach of any agreement, understanding, arrangement or any other settlement of any type with any third party, including, without limitation, employees, consultants, licensees, etc.
 
3.5       There is no pending action, arbitration, audit, hearing, investigation, litigation or suit (whether civil, criminal, administrative, investigative or informal) commenced, brought, conducted, or otherwise involving, any court, governmental authority, arbitrator or other third party, whether at law or in equity (a Proceeding ) that (a) has been commenced by or against the Company or that otherwise relates to or may affect the Transferred Assets or (b) challenges or may prevent, make illegal, or otherwise interfere with the transactions contemplated hereby.
 
3.6       The Company is not subject to or limited by any order of any governmental authority. Except as set forth in Schedule 3.6 , no consent, waiver, approval, permit, authorization of, declaration to or filing with any third party or governmental authority on the part of the Company is required in connection with the execution and delivery of this Agreement.
 
3.7       Except as listed in Schedule 3.7, each of the Assumed Contracts constitutes the valid and legally binding obligation of the Company and of the other parties thereto, and is enforceable in accordance with its terms. Each of the Assumed Contracts constitutes the entire agreement of the respective parties thereto relating to the subject matter thereof. All obligations required to be performed under the terms of the Assumed Contracts by the date hereof have been performed. All obligations required to be performed under the terms of the Assumed Contracts have been performed. No act or omission has occurred or failed to occur which, with the giving of notice, the lapse of time or both would constitute a default under any of the Assumed Contracts or permit termination, modification or acceleration thereunder, and each of the Assumed Contracts is in full force and effect without default on the part of the Company and, to the Company’s knowledge, of the other parties thereto.
 
3.8       Except as listed in Schedule 3.8, the representations and warranties made by the Company in section 3.12 of the Convertible Loan Agreement between the Company and the parties thereto, dated February 12, 2008, are true and correct on the date hereof.
       
  4 REPRESENTATIONS AND WARRANTIES OF NEW CHECK-CAP
       
  New Check-Cap hereby represents and warrants to the Company that the following representations and warranties are, as of the Effective Date, true and correct.
 
 
4

 
 
       
  4.1 Organization and Existence .
       
  New Check-Cap is a corporation duly organized and validly existing under the laws of the State of Israel. New Check-Cap has full corporate power and authority to own the Transferred Assets.
       
  4.2 Execution and Effect of Agreement .
       
  New Check-Cap has the power and authority to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement has been duly executed and delivered and the transactions contemplated hereby have been duly authorized by New Check-Cap’s board of directors. No other proceeding on the part of New Check-Cap is necessary to authorize the execution, delivery and performance of this Agreement and the transactions contemplated hereby.
       
  4.3 No Violation .
       
  The execution of this Agreement by New Check-Cap will not violate any statute, regulation, rule, injunction, judgment, order, decree, ruling, charge or restriction of any governmental authority or court to which New Check-Cap is a party or to which it is bound or subject, or the provisions of New Check-Cap’s Articles of Association, nor will it constitute a breach of any agreement, understanding, arrangement or any other settlement of any type with any third party.
       
  4.4 Consents .
       
  Except for the Tax Ruling provided by the Israeli Tax Authority to the Company and New Check-Cap on May 21, 2009, no consent, waiver, approval, permit, authorization of, declaration to or filing with any third party or governmental authority on the part of New Check-Cap is required in connection with the execution and delivery of this Agreement.
       
  5. INDEMNIFICATION
       
  5.1 The Company hereby agrees to hold harmless and indemnify New Check-Cap, and its respective partners, executive officers, directors, employees, stockholders, agents and representatives (collectively, referred to as the “ Company Indemnitees ”) against any and all damages, liabilities, losses, costs and expenses (including attorneys’ fees and expenses), whether or not arising out of third-party claims, based upon, or arising out of, or relating to, (i) any breach by the Company of, any representation or warranty or other statement contained in this Agreement or any other agreement, certificate, document or instrument furnished pursuant hereto, or (ii) any breach of any covenant or agreement contained in this Agreement or any other agreement, certificate, document or instrument furnished pursuant hereto (collectively, the “ Company Indemnifiable Claims ”).
       
  5.2   The Company shall reimburse, promptly following request therefor, all necessary expenses actually incurred by an Company Indemnitee in connection with any Company Indemnifiable Claim, as the case may be, including, without limitation, any threatened, pending or completed action, suit, arbitration, investigation or other proceeding arising out of, or relating to, any Indemnifiable Claim.
 
 
5

 
 
       
  5.3   The rights to indemnification set forth in this Section 5.3 are in addition to, and not in limitation of, all rights and remedies to which New Check-Cap may be entitled under law. All remedies, either under this Agreement or otherwise afforded to any party, shall be cumulative and not alternative.
 
6.          Distributions to Shareholders .
New Check-Cap shall make commercially reasonable efforts to procure that distributions or advance funds are made to the holders of Ordinary Shares, Preferred A Shares and/or Preferred B Shares of New Check-Cap, as are necessary to eliminate the impact of the reorganization and the transfer of the Transferred Assets from the Company to New Check-Cap. Notwithstanding the foregoing, New Check-Cap will not advance payments to holders of Ordinary Shares, Preferred A Shares and/or Preferred B Shares to address the fact that they will no longer receive a “pass through” of losses generated by New Check-Cap as they have while owning units of Check-Cap LLC. These advances, if and to the extent made, will be deducted from any distributions such Shareholders are entitled to receive from New Check-Cap.
 
7.          NON-COMPETITION
 
Commencing as of the date hereof, the Company will not engage in any way, whether as owner, principal, consultant or in any other capacity, in any business or other activity competitive with New Check-Cap s business, anywhere in the world. The Company shall not hire or otherwise engage any employee or consultant of New Check-Cap except for insignificant legal, financial or administrative tasks. The Company acknowledges and agrees that the provisions of this section, as such apply to it, are reasonable and supported by adequate consideration, that New Check-Cap would not have entered into this Agreement without having received the benefit of the provisions of this section, and that any breach of the provisions of this section would result in substantial and irreparable harm to New Check-Cap and its affiliates and, therefore, that New Check-Cap will be entitled to seek an injunction to prohibit any such breach or anticipated breach, without the necessity of posting a bond, cash or otherwise, in addition to all of its other legal and equitable remedies, including the remedies provided by this Agreement.
 
8. MISCELLANEOUS
 
8.1            Further Assurances . Each of the parties hereto shall perform such further acts and execute such further documents as may reasonably be necessary to carry out and give full effect to the provisions of this Agreement and the intentions of the parties as reflected thereby.
 
8.2            Governing Law; Jurisdiction . This Agreement shall be governed by and construed according to the laws of the State of Israel, without regard to the conflict of laws provisions thereof. Any dispute arising under or in relation to this Agreement shall be resolved in the competent court for Tel Aviv-Jaffa district, and each of the parties hereby irrevocably submits to the exclusive jurisdiction of such court.
 
8.3            Successors and Assigns; Assignment . Except as otherwise expressly limited herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto.
 
 
6

 
 
8.4            Entire Agreement; Amendment and Waiver . This Agreement and the Schedules hereto constitute the full and entire understanding and agreement between the parties with regard to the subject matters hereof and thereof. Any term of this Agreement may be amended and the observance of any term hereof may be waived (either prospectively or retroactively and either generally or in a particular instance) only with the written consent of the Company and New Check-Cap.
 
8.5            Notices, etc. All notices and other communications required or permitted hereunder to be given to a party to this Agreement shall be in writing and shall be telecopied or mailed by registered or certified mail, postage prepaid, or prepaid air courier, or otherwise delivered by hand or by messenger, addressed to such party s address as set forth herein, or such other address with respect to a party as such party shall notify the other party in writing as above provided. Any notice sent in accordance with this Section 8.5 shall be effective (i) if mailed, five (5) business days after mailing, (ii) if by air courier, two (2) business days after delivery to the courier service, (iii) if sent by messenger, upon delivery, and (iv) if sent via telecopier, upon transmission and electronic confirmation of receipt or (if transmitted and received on a non-business day) on the first business day following transmission and electronic confirmation of receipt.
 
8.6            Delays or Omissions . No delay or omission to exercise any right, power, or remedy accruing to any party upon any breach or default under this Agreement, shall be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent, or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any of the parties, shall be cumulative and not alternative.
 
8.7            Severability . If any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable under applicable law, then such provision shall be excluded from this Agreement and the remainder of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms; provided, however, that in such event this Agreement shall be interpreted so as to give effect, to the greatest extent consistent with and permitted by applicable law, to the meaning and intention of the excluded provision as determined by such court of competent jurisdiction.
 
8.8            Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and enforceable against the parties actually executing such counterpart, and all of which together shall constitute one and the same instrument.
 
 
7

 
 
IN WITNESS WHEREOF the parties have signed this Agreement as of the date first hereinabove set forth.
 
Check-Cap LTD
 
By:             (GRAPHIC)
 
Name: Guy Neev
 
Title: CEO
 
Check-Cap LLC.
 
By its Manager:
 
Check-Cap Ltd. (The Manager)
 
By:             (GRAPHIC)
 
Name: Guy Neev
 
Title: CEO
 
 
8

 
 
List of Schedules
 
Schedule 2.1 - Encumbrances over the Transferred Assets
 
Schedule 2.1.3 -- Assigned Contracts
 
Schedule 2.2.1 -- Excluded Assets
 
Schedule 2.3 -- Assumed Liabilities
 
Schedule 2.5 - Key Employees
 
Schedule 3.3 - Title and Liens
 
Schedule 3.6 - Consents
 
Schedule 3.8 - IP
 
9
 
 

 
 
Schedules to Asset Transfer Agreement
 
Definitions :
 
Agreement ” means the Asset Transfer Agreement by and among the Company and New Check-Cap, dated May 31, 2009;
 
Company ” means Check-Cap, LLC;
 
" New Check-Cap " means Check-Cap, Ltd., a company incorporated under the laws of the state of Israel.
 
" Manager " means Check-Cap Ltd., a Delaware corporation, the shares of which are owned by Yoav Kimchy, and which acts as the manager of the Company.
 
" Convertible Loan Agreement " means that certain Convertible Loan Agreement dated February 12, 2008 between the Company, Pontifax (Cayman) II L.P., Pontifax (Israel) II L.P., and Pontifax (Israel) II - Individual Investors L.P. (collectively, the " Lead Lender ") and the lenders detailed in Schedule 1 thereto.
 
Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement.
 
 
 

 
 
Schedule 2.1
 
Encumbrances over the Transferred Assets
 
 
1.
The Company has obligated to deposit a bank check in an amount of NIS 40,000 with S. Halbi Ltd., the owner of the premises rented by the Company pursuant to that certain lease agreement dated April 2, 2009.
 
 
2.
See schedule 3.3(2) below, pertaining to the pledge over the intellectual property of the Company.
 

 
 
 

 
Schedule 2.1.3
 
Assumed Contracts
 
Employment Agreements
 
 
1.
Employment Agreement dated February 1, 2005 by and between Check-Cap, LLC and Yoav Kimchy, and any and all amendments thereto.
 
 
2.
Employment Agreement dated September 11, 2005 by and between Check-Cap, LLC and Rebecca Zeitler, and any and all amendments thereto.
 
 
3.
Employment Agreement dated February 12, 2006 by and between Check-Cap, LLC and Rafi Sommer, and any and all amendments thereto.
 
 
4.
Employment Agreement dated January 1, 2007 by and between Check-Cap, LLC and Gideon Baum, and any and all amendments thereto.
 
 
5.
Employment Agreement dated May 1, 2007 by and between Check-Cap, LLC and Guy Neev, and any and all amendments thereto.
 
 
6.
Employment Agreement dated July 28, 2008 by and between Check-Cap, LLC and Oleg Obodovsky, and any and all amendments thereto.
 
 
7.
Employment Agreement dated June 10, 2008 by and between Check-Cap, LLC and Gitit Keidar, and any and all amendments thereto.
 
Consulting & Services Agreements
 
 
8.
Agreement dated September 5th 2004 by and between Check-Cap, LLC and Pedersen & Houpt.
 
 
9.
Sub-Contractor Agreement dated March 27, 2005 by and between Check-Cap, LLC and Itzhak Klein, and any and all amendments thereto.
 
 
10.
Sub-Contractor Agreement dated March 27, 2005 by and between Check-Cap, LLC and Gal Ben-David, and any and all amendments thereto.
 
 
11.
Sub-Contractor Agreement dated March 27, 2005 by and between Check-Cap, LLC and Shlomo Lewkovwicz, and any and all amendments thereto.
 
 
12.
Agreement dated March 28 th 2005 by and between Check-Cap, LLC and  Sorek Nuclear Research Center.
 
 
13.
Services Agreement dated June 21 st 2005 by and between Check-Cap, LLC and Moshe Oren.
 
 
 

 
 
 
14.
Independent Contractor Agreement dated July 1, 2005 by and between Check-Cap, LLC and Hadar Kimchy, and any and all amendments thereto.
 
 
15.
Accounting Services Agreement (letter dated January 15 th 2006) between Check Cap, LLC and Dan Bennet, CPA, and the letter dated February 15, 2009 regarding the consideration paid for such services.
 
 
16.
Independent Contractor Agreement dated February 12, 2006 by and between Check-Cap, LLC and Singer Instruments & Control Ltd.
 
 
17.
ASIC Design and Development Agreement dated January 4, 2008 by and between Check-Cap, LLC and Politecnico Di Milano.
 
 
18.
Terms of Consulting Services – letter dated July 10, 2008 from Mayo Foundation for Medical Education and Research to Check-Cap, LLC, regarding services provided by Mayo's employee - Michael Camilleri, M.D.
 
 
19.
Business Development and Strategic Consulting Agreement dated June 27, 2007 by and between Check-Cap, LLC and AxcessNet LLC.
 
 
20.
Consulting Agreement dated April 23, 2008 by and between Check-Cap, LLC and Prof. Zvi Fireman.
 
 
21.
Consulting Agreement dated July 1, 2008 by and between Check-Cap, LLC and HADASIT MEDICAL RESEARCH SERVICES AND DEVELOPMENT LIMITED and Prof. Jacob Susna.
 
 
22.
Services Agreement dated August 15, 2008 by and between Check-Cap, LLC and Mr. Zvika Blutstein (Time & Knowledge), and any and all amendments thereto.
 
 
23.
Services Agreement dated September 22, 2008 by and between Check-Cap, LLC and Mr. Yosef Pahima (PAI Antennas).
 
 
24.
Services Agreement dated September 24, 2008 by and between Check-Cap, LLC and Push-Med LLC, and any and all amendments thereto.
 
 
25.
Services Agreement dated November 19, 2008 by and between Check-Cap, LLC and FreeMind Ltd.
 
 
26.
Services Agreement by and between Check Cap LLC and the University of Missouri, Columbia, which closing is currently pending .
 
 
27.
Service Agreement dated September 17 th 2008 by and between Check Cap LLC and the Mr Eli Baruch.
 
 
28.
Trust Agreement dated January 1, 2009 by and between Check-Cap, LLC and SGS Trustees Ltd.
 
 
 

 
 
Lease Agreements
 
 
29.
Operative Leasing Agreement dated November 17, 2005 by and between Check-Cap, LLC and Sa Gal Transportation Ltd, and any and all schedules thereto.
 
 
30.
Lease Agreement dated August 5, 2007 by and between Check-Cap, LLC and G.R.A.S Designs and Combination Ltd, and the extension thereof, effective as of March 1, 2009.
 
 
31.
Lease Agreement dated April 2, 2009 by and between Check-Cap, LLC and S.Halbi Ltd.
 
Insurance
 
 
32.
Insurance policy by Harel Insurance Company, #2621122, for the period March 1, 2009 – February 28, 2010.
 
 
33.
Management Liability Insurance (including D&O insurance), # 835634, for the period July 5, 2008 – July 5, 2009.
 
 
34.
Key man insurance policy by Harel Insurance Company, # 91219765-8, for the period May 1, 2008 – May 1, 2010.
 
 
35.
Management Liability (D&O) Insurance, Policy No. 6835634, by Carolina Cas. Ins. Co., term: 07/05/08-01/05/2010.
 
 
36.
Commercial Package Insurance, Policy No. SBARX6290, by Hartford Casualty Ins. Co., term: 03/15/2009-03/15/2010.
 
 
37.
Foreign Package Insurance, Policy No. PHFD3682413A by Ace American Ins. Co., term: 03/25/09-03/25/2010.
 
Other
 
 
38.
Authorization to use radioactive material or a product containing radioactive material, #(3100)631403/9406806, issued by the Israeli Ministry of Environment Protection, effective until April 3 rd , 2010.
 
 
39.
Agreement dated January 9 th 2006 by and between Check-Cap, LLC and Delek and any and all addendums thereof.
 
 
 

 
 
Schedule 2.2.1
 
Excluded Assets
 
 
1.
Subscription agreements with Series A Unit Holders and Series B Unit Holders.
 
 
2.
An amount of US $100,000 in cash.
 
 
 

 
 
Schedule 2.3
 
Assumed Liabilities
 
 
1.
Any liabilities arising from (a) the operations of the Company or the Manager, prior to the Effective Date or (b) arising from any agreement entered by the Company or the Manager prior to the Effective Date, or (c) any liabilities of Company or the Manager arising following the Effective Date, which are related or attributable to the business of New Check-Cap, including, without limitations:
 
 
a.
Any liabilities of the Manager towards Mr. Tom Sax, pursuant to that certain Employment Agreement dated January 1 st 2008 between the Manager and Mr. Tom Sax.
 
 
b.
Any liabilities arising from the continuous operation, dissolution, liquidation or winding up of the Company.
 
 
c.
Any liabilities related to the normal business, including without limitations debt of approximately $15,000 to Singer Instruments, royalties of approximately $20,000 to Freemind (related to the receipt of OCS grant).
 
 
d.
Grant of options to the following employees and consultants – as approved in the board meeting of the Company, held in June 2008:
 
 
i.
Israel Ohana
 
 
ii.
David Ben Ami
 
 
iii.
Douglas Rex
 
 
iv.
Peter Fitzgerald
 
 
v.
Yuval Singer
 
 
vi.
Oleg Obodovsky
 
 
vii.
Gitit Keidar
 
 
 

 
 
Schedule 2.5
 
Key Employees
 
 
1.
Yoav Kimchy.
 
 
2.
Guy Neev.
 
 
 

 
 
Schedule 3.3
 
Title and Liens
 
 
1.
See schedule 2.1 above.
 
 
2.
The Company's Intellectual Property is pledged, by way of first ranking floating charge, in favor of the Lead Lender, for itself and as agent for the other lenders who extended convertible loan to the Company under the Convertible Loan Agreement. According to the terms of the Convertible Loan Agreement, the pledge will automatically terminate upon the conversion of the loan amounts into shares of New Check Cap, in accordance with the terms of the Convertible Loan Agreement.
 
 
 

 
 
Schedule 3.6
 
Consents
 
 
1.
The Company has received a tax ruling from the Israeli tax Authorities, which set forth the terms and conditions prevailing the transfer of the Transferred Assets from the Company to New Check-Cap.
 
 
2.
The Company has applied, on behalf of New Check-Cap, to the Office of the Chief Scientist of the Israeli Ministry of Industry and Trade, for governmental support (the "Grant") under the Encouragement of Industrial Research and Development Law, 5744-1984 (the "R&D Law"). Upon the approval of such application and the receipt of the Grant by New Check-Cap, New Check-Cap shall become subject to the provisions of the R&D Law, including, inter alia, payment of royalties and certain restrictions on the transfer of manufacturing and IP rights.
 
 
 

 
 
Schedule 3.7
 
[None]
 
 
 

 
 
Schedule 3.8
 
IP
 
 
1.
Yoav Kimchy and Gideon Baum have applied for a provisional patent application over the "Apparatus Method For Imaging Tissue", application no. PCT/IL2008/000765, and assigned to New Check-Cap on May 21 st , 2009.
 
 
2.
Yoav Kimchy, Gideon Baum, Rafi Sommer and Yitzak Klein have applied for a provisional patent over the "Intra-Lumen Polyp Detection", application no. PCT/IL2008/000163, and assigned it to New Check-Cap on May 21 st , 2009.
 
 




 
Exhibit 10.11
 
AGREEMENT FOR ASIC DESIGN AND DEVELOPMENT
BY AND BETWEEN POLITECNICO DI MILANO AND
CHECK-CAP, LTD
 
Agreement For ASIC Design And Development
 
THIS AGREEMENT FOR ASIC DESIGN AND DEVELOPMENT (the “ Agreement ”) is entered into as of November 26, 2009 by and between Politecnico di Milano (hereinafter referred to as “ Politecnico ”), Polo di Como, a separate Polo of Politecnico di Milano (hereinafter referred to as “ Polo di Como ”), with seat in Piazza Leonardo da Vinci, 32, post code 20133 Milano (taxpayer’s code number 80057930150, VAT number 04376620151) represented by Pro-rector of Polo Regionale di Como, Prof. Roberto Negrini, authorized to enter into this Agreement according to art. 7 of the Regulation concerning Performances on commission issued with Rectorial Decree No. 7/AG dated 28/01/2005 (for the agreements signed by the Management the authorization according to art. 4.4 of the above-mentioned Regulation is compulsory).
 
and
 
Check-Cap LTD, an Israeli Company, of Abba Hushi Ave., P.O. Box 1271, Isfiya 30091, Mount Carmel, Israel (hereinafter referred to as “ Check Cap ” or “ Check Cap Ltd ”), represented by the CEO, Guy Neev. Each of Polo di Como and Check Cap may be referred to herein as a “ Party ”, and collectively, the “ Parties ”.
 
WHEREAS
     
 
(a)
Politecnico di Milano Department of Electronics Engineering and Information Science, and Check Cap LLC, an affiliate of Check Cap Ltd, have previously entered into a certain Agreement for Asic Design and Development, dated December 21, 2007 (the “ Previous Agreement ”) which has terminated in accordance with the Termination Letter attached hereto as   Exhibit  A ; and
 
IMAGE
 
 
 

 
 
     
 
(b)
Check Cap intends to entrust Polo di Como with a research in the field of design and development of a CCA-2 Application Specific Integrated Circuit (the “ CCA-2 ASIC ”) as more fully specified herein, in continuation of the research and development process that has been made under the Previous Agreement.
     
 
(c)
As far as Polo di Como is concerned, the decree of the Republic’s President No. 382 dated 11/7/80 allows, according to art. 66, the performance of research and consultancy activities established through private law agreements or conventions;
     
 
(d)
This set of rules is completed by the current Regulation concerning Performances on commission of Politecnico di Milano issued with Rectorial Decree No. 7/AG dated 28/01/2005.
 
AFTER CONSULTING
 
The person in charge of the research, Prof. Giuseppe Bertuccio, countersigns for acceptance of this Agreement.
 
THE FOLLOWING IS AGREED AND ENTERED INTO:
 
1.     SCOPE OF WORK
 
Check-Cap entrusts Polo di Como with the performance of the following research programme: “DESIGN OF LOW POWER LOW NOISE ASIC FOR MEDICAL DEVICE - VERSION 2”.
     
 
1.1.
This programme consists of (i) a design of the CCA-2 ASIC, based on improvements to the latest version of the ASIC designed under the Previous Agreement, which are detailed in Exhibit B attached hereto, and in accordance with the specifications provided to Polo di Como by Check Cap from time to time, and (ii) the delivery of 30 samples of the CCA-2 ASIC as bare chips (the “ Samples ”). The final CCA-2 ASIC and the Samples, collectively, the “ Deliverables ”.
     
 
1.2.
Polo di Como shall deliver to Check Cap specifications, performance data, and any other documentation or information that would reasonably accompany or is reasonably necessary for Check-Cap to manufacture the CCA-2 ASIC independently of any assistance by Polo di Como after the end of this Agreement. Check Cap declares to have verified the possibility to manufacture the CCA-2 ASIC chip Samples at the foundry austriamicrosystems AG. Tobelbaderstrasse 30, 8141 Unterpremstaetten, Austria. Nothing herein shall limit Check Cap, following the end of this Agreement, from manufacturing the final CCA-2 ASIC at any foundry, as shall be determined at Check Cap’s sole discretion.
 
IMAGE
 
 
2

 
 
       
 
1.3.
Progress Reports. Polo di Como will provide Check-Cap with written progress reports every two months, as requested by Check-Cap, starting two months after the date hereof and ending on the date of Check-Cap’s final acceptance of the CCA-2 ASIC and receipt of all Deliverbles. Each report shall indicate progress as follows:
       
     
     (a)   Status of progress toward the next scheduled task, according to the tasks set forth in   Exhibit C attached hereto:
       
     
     (b)   Short description of problems in meeting such task, if any;
       
     
     (c)   Proposed recovery method to meet the next task, if necessary;
       
     
     (d)   Probability of meeting the next task;
       
     
     (e)   Any changes in Polo di Como’s estimate of time required for meeting the next task with respect to the schedule attached hereto as   Exhibit C , and
       
     
     (f)   Any changes in Polo di Como’s estimate of recurring manufacturing costs for the CCA-2 ASIC.
       
      In addition, the parties shall have a regularly scheduled conference call, organized and paid by Check Cap, that will take place following receipt of each progress report, or more often if necessary if, for example, a task has been compromised.
       
 
1 .4.
The responsibility for the performance of the programme will be given to Prof. Giuseppe Bertuccio, who, in case of necessity, will be able to use external professional services, according to the provisions of the Regulation concerning Performances on commission of Politecnico di Milano.
 
IMAGE
 
 
3

 
 
2.      SCHEDULE.
 
This Agreement will last until March 31 st , 2010 (the “ Expiry Date ”), unless one of the parties asks for its extension with a written and grounded request, which has to be sent to the other party by registered letter with return receipt at least 2 months before the Expiry Date and provided that the other Party accepts in a written form the extension’s proposal within 14 days from the date of receipt of such note. Check-Cap will have the right to terminate the Agreement for any reason with 30 days prior written notice.
 
The schedule, including all tasks, substantial and final completion, applicable to the scope of work is attached hereto as Exhibit C .
 
The activities which are the object of this Agreement will be carried out at Polo di Como.
 
3.      PAYMENT.
       
 
3.1.
For the performance of the research programme, according to Section 1, Check-Cap undertakes to pay to Polo di Como an amount of 44,182 plus 8,836 for VAT with tax rate at 20% (the “ Consideration ”).
     
 
3.2.
The Consideration will be paid in three (3) installments as follows:
       
   
3.2.1.
10,000 +  2,000 for VAT with tax rate at 20%, upon signing the contract
       
   
3.2.2.
20,000 +   4,000 for VAT with tax rate at 20%, on December 10th, 2009, subject to the successful completion of WP 100, 200, 210, 220 and 300 as detailed in   Exhibit C ;
       
   
3.2.3.
14,182 +   2,836 for VAT with tax rate at 20%, upon the delivery of the CCA-2 ASIC chip Samples to Check Cap’s (i.e. completion of WP 400, 500, 600, 610, 620 and 630 as detailed in Exhibit C ) .
 
IMAGE
 
 
4

 
 
     
 
3.3.
In addition to the Consideration due under paragraph 3.1, provided that the project was successfully completed, and INSTEAD OF ANY ROYALTIES DUE UNDER THE PREVIOUS AGREEMENT. Polo di Como shall be entitled to royalty payments totaling 200,000 (Two Hundreds Thousands Euros) payable at the rate of  0.5 for each CCA-2 ASIC incorporated into a Check Cap product which is sold by Check-Cap. Royalty payments under this Section 3.3 shall be payable quarterly. After payment of 200,000 no further royalties shall be due or payable.
     
 
3.4.
Any payment shall be made against the submission of an appropriate pro-forma invoice by Polo di Como to Check Cap.
     
 
3.5.
The amounts due under this Section 3 will be paid by Check-Cap to Polo di Como, bank account No. 1600X69 at Banca Popolare di Sondrio Agenzia n.21 Via Bonardi 4 20133 Milano (ABI : 05696, CAB : 01620, CIN: T, IBAN : IT34T0569601620000001600X69)
     
 
3.6.
Polo di Como will open a research grant of  21,000.00 for this research programme.
     
 
3.7.
Polo di Como will make use of Europractice Consortium, of which Politecnico di Milano is member, in order to complete the project. Polo di Como predicts to assign 7200 +  1440 for VAT with a tax rate of 20%, out of the Consideration paid to Polo di Como by Check Cap according to Section 3.1 above, to the Europractice finalized to the project’s activities. To avoid any doubt, any work made or services provided by the Europractice Consortium shall be considered as work or services performed by Polo di Como, and the terms of this Agreement shall apply to any such work or services provided by the Europractice Consortium, including, without limitation, the terms of Sections 4 and 8 below.
 
4.      INTELLECTUAL PROPERTY AND LICENSES.
     
 
4.1
Politecnico shall have no rights to any Check-Cap technology, trade secrets, related intellectual property rights, patents (including continuations, continuations in part, and reissues) or know-how in existence prior to the date of this Agreement whether or not used in the design and manufacture of the CCA-2 ASIC.
 
IMAGE
 
 
5

 

       
 
4.2.
Check-Cap shall have no rights, other than as licensed under this Agreement or under the Previous Agreement, to any Politecnico’s technology, trade secrets, related intellectual property rights, patents (including continuations, continuations in part, and reissues) or know-how in existence prior to the date of this Agreement, whether or not used in the design and manufacture of the CCA-2 ASIC.
     
 
4.3.
In case the results of the research which is the subject of this Agreement are protectable with industrial property rights, whether such inventions were developed by Politecnico’s staff alone or together with Check Cap’s staff, Check-Cap shall be immediately informed by Politecnico di Milano. Check Cap shall express, through written communication, its interest in each of such inventions. In case Check-Cap is interested in filing a patent with respect to any such invention, the following terms shall apply to such invention:
       
   
4.3.1.
Politecnico and Check Cap shall be the joint owners of such invention, each having 50% of the ownership interest in the invention.
       
   
4.3.2.
To the extent that the invention is patentable, Check-Cap is entitled to the right to write and file the patent as the joint owner thereof, together with Politecnico; It is hereby clarified that Check-Cap may decide, in its sole discretion, whether or not to file the patent, and in which jurisdictions.
       
   
4.3.3.
Politecnico and Check-Cap shall be indicated as assignees, and shall indicate the names of their respective inventors;
       
   
4.3.4.
Politecnico shall grant Check-Cap an exclusive perpetual, world-wide, transferable and sub-licensable, royalty free license (except for the payments made pursuant to Section 4.3.6 below) for Politecnico’s share of ownership in the invention, for all usage and purpose;
 
IMAGE
 
 
6

 
 
       
   
4.3.5.
Check-Cap shall bear any costs of filing and any subsequent costs for extension procedures and maintenance; It is hereby clarified that Check-Cap may decide, in its sole discretion, whether or not to extend and maintain the patent in any jurisdiction in which it has been filed.
       
   
4.3.6.
Upon the first filing of the patent application, Check-Cap shall award Politecnico a sum of 7.000,00; upon the filing of the first national phase application, Check-Cap shall award the Politecnico a further sum of 7.000,00. In no event should the payment to Politecnico exceed 14.000,00, in regard to the same invention. No other sum shall be payable by Check-Cap to Politecnico or to the inventors indicated by Politecnico as far as the filed application is concerned;
       
   
4.3.7.
Politecnico shall be entitled to the free and perpetual right to use the patent solely for scientific, didactical and non-commercial purposes;
       
   
4.3.8.
Should Check-Cap decides not to file a patent in any jurisdiction, or to cease the international extension or not to maintain the patent, in any and all jurisdictions in which it has been filed, it shall promptly inform Politecnico, which will then have the option without consideration of receiving full ownership of the patent not of interest to Check-Cap.
       
 
4.4.
Politecnico hereby grants Check-Cap a world-wide, exclusive, perpetual, royalty-free, transferable and sub-licensable (subject to the terms set forth below) license and, as necessary, to any and all technology, trade secrets, related intellectual property rights or know-how of the research group responsible of, or involved in, the research under this Agreement, that does or may belong to Politecnico, that is included or incorporated into the CCA-2 ASIC with limitation that Check-Cap may not sell or sub-license the CCA-2 ASIC s as a stand-alone product for sale or use by others. The license under this Section 5.4 shall, among other things, enable Check-Cap to directly manufacture or sub-license to others the right to manufacture the CCA-2 ASIC for use, sale and/or distribution in Check-Cap’s existing or future products as well as existing or future products licensed by Check-Cap for distribution, manufacture and sale by others.
 
 
 
7

 
 
5.     PUBLICATIONS
 
Polo di Como will be able to make free use of the research’s results, different from those regulated by the previous Section 4, with the aim of making scientific publications.
 
Confidential documents, studies and results provided by Check-Cap can be used as materials for the development of degree thesis only through specific written authorization on behalf of Check-Cap itself.
 
In case of publication, in the technical-scientific field, of the research’s results, which are not, bound to confidentiality/secrecy under Section 8 below, Check-Cap undertakes to quote Polo di Como expressly.
 
Polo di Como cannot be quoted in occasions different from technical-scientific ones and, in any case, with advertising aims.
 
6.     RESTRICTIONS ON LICENSE.
 
Notwithstanding anything in this Agreement to the contrary, Polo di Como hereby agrees that it shall not either manufacture or license the CCA-2 ASIC other than to “Permitted Users”, where “Permitted Users” is defined and limited to mean users, customers and/or industries unrelated to Check-Cap’s existing or future products or businesses that cannot be reasonably construed to be Check Cap competitors. To ensure compliance with this provision, Polo di Como shall enter into an appropriate restrictive covenant with any customer for the CCA-2 ASIC restricting the use of the CCA- 2 ASIC as required by this Section 6 and name Check-Cap as an intentional third-party beneficiary of the license so that Check-Cap may independently enforce this restriction.
 
7.     COMPLIANCE WITH LAWS, RESPONSIBILITY.
     
 
7.1.
Each Party shall provide the by law foreseen insurances relevant to its personnel, working in the framework of this Agreement, at the different seats where the activities are executed.
 
 
 
8

 
 
     
 
7.2.
The personnel of each Party has to comply with the security and disciplinary rules adopted at the seats where the activities relevant to this Agreement are developed, in mutual accordance to the rules of the country where the activities are executed.
     
 
7.3.
The personnel of the Parties, included the external collaborators, shall have  before entering the seats where the activities are executed to get the information relevant to security, prevention, protection and health, and to comply with any rules and procedures there foreseen.
     
 
7.4.
The head subject of the host Party is in charge of any obligations relevant to information, training and arrangement of the needed measures for prevention and protection.
     
 
7.5.
Check-Cap exonerates Polo di Como From every responsibility deriving from damages caused by its own staff to people and/or objects as a result of the activities provided for by this Agreement. Polo di Como exonerates Check-Cap from any damages caused to Polo di Como’s staff in providing the services to Check Cap under this Agreement.
     
8.
CONFIDENTIALITY AND PROPRIETARY NOTICE
     
 
8.1.
For purposes hereof, “ Confidential Information ” shall mean and include all information of the disclosing party, whether written, oral or recorded on any other media, including but not limited to trade secrets, patents, and processes, formulas, designs, source codes, data, writings, know-how, improvements, hardware, software, technologies, product specifications, schematics, net lists, firmware, interfaces, pinouts, designs, test vectors, tooling, customer and supplier information, drawings, financial information, pricing and marketing plans, which has been heretofore or may hereafter be transmitted or otherwise disclosed to the receiving party by the disclosing party, and which relates to the business, technology, products, marketing or activities of the disclosing party.
 
 
 
9

 
 
     
 
8.2.
Each Party acknowledges that by reason of its relationship to the other hereunder, it will access to other Party’s Confidential Information. Each Party agrees that it shall not use in any way for its account or the account of any third party, nor disclose to any third party any Confidential Information revealed to it by the other Party. Neither Party shall use the Confidential Information of the other Party for purposes other than those necessary to directly further the purposes of this Agreement. Each Party shall take every necessary precaution to protect the confidentiality of all Confidential Information.
     
 
8.3.
Any breach of the restrictions contained in this Section 8 is a breach of this Agreement which will cause irreparable harm to the other Party, entitling the other Party to injunctive relief in addition to all legal remedies.
     
 
8.4.
Check-Cap is bound to keep secret to every person not authorized by Polo di Como, facts, information, notions, documents or objects he/she has learnt about or has been acquainted with by Polo di Como under this Agreement. Polo di Como, similarly, will keep secret to every person not authorized by Check-Cap, facts, information, notions, documents or objects he/she has learnt about or has been acquainted with by Check-Cap under this Agreement.
     
 
8.5.
The confidentiality obligations under this Section 8 will survive the termination or expiration of this Agreement, until such facts, information, documents or objects will be disclosed to the public or, by no action or inaction of the Party receiving such facts, information, documents or objects.
     
 
8.6.
The Parties would not be responsible for possible damages deriving from the violation of the regulations of this Section 8 if they can prove that such violation has taken place despite the use of the normal diligence in relation with those circumstances.
     
 
8.7.
The Parties agree, from now on, that possible actions for the compensation of damages deriving from the violation of this Section 8’s regulations could not deal with a compensation for an amount higher than that provided for by the Agreement and the Previous Agreement.
 
 
 
10

 
 
     
 
8.8.
Every document, specification, drawing or sample and every other information which Check-Cap could have provided to Polo di Como with reference to the object of this Agreement is and will remain property of Check-Cap. Polo di Como undertakes to give Check-Cap back those documents, specifications, drawings and samples for which a request of return has been made by Check-Cap, even before the expiry of the Agreement, unless the use of such material is deemed as necessary from the person responsible for the Agreement to continue the research; in this case, by fulfilling the return’s request, the Agreement is terminated by law and every disbursement met by Polo di Como will be reimbursed up to the moment of the actual collection of the above mentioned material, and a further sum amounting to 10% of the disbursement will be paid as total compensation for every further sum due.
 
9.     GOVERNING LAW
 
This Agreement is regulated by the Italian law in force.
 
Check-Cap and Polo di Como accept to solve out-of-court every dispute arising from these activities and, in case no agreement could be met in such way, to settle every possible dispute by arbitration, according to art. 806 and following of the Italian Code of Civil Procedure, through a Board of Arbitrators composed of three members appointed one by each Party and the third, acting as President of the Arbitration Board and appointed by the other two members, or, in case of disagreement between the arbitrators or failure of appointment of one of the contracting Parties, by the President of the Court of Milan, city where the Arbitration Board will have its seat.
 
10.   TAXES
 
All direct and indirect taxes deriving from this Agreement will be paid by Check-Cap.
   
11.
This Agreement has to be registered only in case of use according to Art. 1, letter b), of the Tariff Second Part, attached to the Decree of the Italian Republic’s President dated 26/4/1986 No. 131.
   
12.
The Parties declare to agree that the personal data communicated, even verbally, during the pre-contractual activities, and/or during the negotiation of the Agreement, and/or its execution, may be used exclusively within the framework of this Agreement and that they can be used only anonymously for statistical aims.
 
 
 
11

 

   
13.
Polo di Como can make free use of the research’s title of this Agreement, in a general form, with the aim of updating the database of the researches carried out by the University, which cannot be published without reference to the Company, in the website of Politecnico. Polo di Como or Politecnico can also insert the name of Check-Cap without reference to the performed research, in a list of customers of the University, which can be published on its website.
 
Como,
   
     
POLITECNICO DI MILANO
 
CHECK-CA P LTD
 
Polo Regionale di Como
  By: Guy Neev, CEO  
       
The Pro-rector
     
(Prof. Roberto Negrini)      
     
       
The Person Responsible for the Research      
(Prof. Giuseppe Bertuccio)      
     
 
 
 
12

 
 
Exhibit A
 
Termination Letter
 
To:  
Date: October 20th, 2009
Prof. Gian Antonio Magnani, Giuseppe Bertuccio
Politecnico di Milano
Department of Electronics Engineering and Information Science
Piazza Leonardo Da Vinchi 32
Milano 20133
 
Dear Sirs,
 
Re: Termination of Agreement for ASIC Design and Development
 
Reference is made to that certain Agreement for ASIC Design and Development by and between Politecnico di Milano - Department of Electronics Engineering and Information Science (“ Politecnico ”) and Check Cap LLC, dated December 21, 2007 (the “ Agreement ”) and to that certain Assignment letter dated May 11, 2009, pertaining to the assignment of the Agreement from Check Cap LLC to Check Cap Ltd. (“ Check Cap ”);
 
Whereas, according to Article 2 of the Agreement, the Agreement has expired on February 21, 2009; and
 
Whereas, Politecnico and Check Cap have continued their joint work following the expiry of the Agreement, without extending the Agreement in a written form; and
 
Whereas, Check Cap wish to replace the research program under the Agreement and to assign it to Polo di Como, a separates Polo of Politecnico di Milano (“ Polo di Como ”), in order to develop the CCA-2 ASIC (the “ New ASIC ”), which is an improved version of the ASIC (as such term is defined in the Agreement); and
 
Whereas, Check Cap and Polo di Como have entered into a new agreement with respect to the design and development of the New ASIC, dated as of the date hereof, in the form attached hereto (the “ New Agreement ”);
 
 
 
 

 
 
Therefore, we hereby notify you of the termination of the Agreement, effective as of the date hereof:
 
Notwithstanding the aforesaid, it is hereby agreed and acknowledged that Check Cap will pay royalties with respect to the New ASIC in accordance with the terms of Section 3.3 of the New Agreement, and such payment will be INSTEAD OF the payment of royalties with respect to the ASIC in accordance with Article 3.4 of the Agreement. It is clarified that Check Cap shall not be required to pay any royalties pursuant to the Agreement.
 
The provisions of Articles 4, 5.1 and 5.2 of the Agreement shall survive the termination of the Agreement with respect to any results of the research that have been made prior to the date hereof.
 
The provisions of Article 8 of the Agreement shall survive the termination of the Agreement with respect to any confidential information provided or created, prior to the date hereof, during the performance of the research under the Agreement.
 
 
Sincerely,
 
   
Check Cap Ltd.
 
   
By:
 
       
    Title: CTO  
       
Agreed and Acknowledged:
     
       
Politecnico di Milano
     
       
Department of Electronics Engineering and Information Science
     
 
 
 
       
Prof. Gian Antonio Magnani  
Prof. Giuseppe Bertuccio
 
       
Title: The Director    
Title: the person responsible for the research.
 
 
 
 
 

 
 
Exhibit B
 
List of Improvements to ASIC
 
Upgrade CCA-1 (ASIC3) to CCA-2 (ASIC 4)
 
as discussed in Como, 15-16 July 2009
Check Cap: Yoav, Isaak, Oleg; Politeenico: Giuseppe, Stefano
 
1) ASIC operating from 3.1V down to 2.5V  
a) verify the sensitivity of the gain w.r.t. Vdda  
         
2)
AC coupling (Priority A)
 
     
a) reduce the time constant of Discriminator AC Coupler down to 10-50 ms  
b) no change required for theo AC coupling in the analog chain (shaper).  
     
3) ASIC Enable (Priority A)  
         
    a) It is necessary to switch on/off the ASIC with a digital signal at a pin  
    b) Only the Analog part. Digital is always connected to Vddd  
    c) study how to save the preamplifier input (switch toward ground).  
    d) the detector bias voltage is lowered from 100V down to few volts in 100-200ms (8nA current from the detector)  
         
4)
Ipre (Priority B)
 
         
    a)
integrate the Ipre generator?
 
    b)
eventually it is not a problem to put 50Mohm/6ch (all ASICs) into the capsule
 
    c)
pad for testing purpose (to eventually correct Ipre)
 
    d) see I leak from detector statistic to eventually set Ipre=100pA  
    e) Yoav will send us the Ileak statistic  
         
5) Discriminators  
         
    a)
7 bits threshold control for LLD and MLD in the whole range (10keV to 86keV)
 
    b) 3 bits for HLD, NLD  
    c) same energy threshold NLD, HLD  
    d) Monte Carlo simulation to see the dispersion of the effective threshold levels.  
 
 
 
 

 
 
6) Threshold Course Control  
      a) to be removed, not needed  
         
7)
Vrefsh
 
         
    a) 0.85V internally generated  
    b) MC for dispersion  
    c) ASIC test version with pad for eventually modify its value from external  
    d) +37 ° C, temperature sensitivity?  
    e) check stability from 3.1V down to 2.5V  
 
 
 
 

 
 
Exhibit C
 
Description of Services and Time Schedule
                       
CCA-2 ASIC for Check Cap Capsule - Time schedule
WP
Activity
Time
M0
M1
M2
M3
M4
M5
M6
M7
M8
   
no. weeks
July 2009
Aug
Sept
Oct
Nov
Dec
Jan 2010
Feb
March
100
CCA-2 Design Specification Definition & Study
1
                   
200
Circuit Design & Simulation
7
                   
210
ASIC MC & Comer simulations - design refinement
4
                     
220
Layout of CCA-2 and of Test Circuits
5
                   
                       
300
CCA-2 chip assembly & final check
                    
310
CCA-2 chip submission to Foundry
                   
320
CCA-2 chip fabrication (Run1)
8
                   
330
CCA-2 chip delivery from Foundry
             
                       
400
Hybrid board design, fabrication and test
2
                   
                       
500
Interface software design & test (PAIC 2)
3
                       
                       
600
CCA-2 ASIC bonding on hybrid board
                 ▼▲  
610
Test circuits characterization
4
                 
620
CCA-2 functionality test & charactensation
8
                 
630
CCA-2 ASIC chips delivery to Check Cap
                 
 
 
 
 

 
 
       
 
CCA-2 ASIC for Check Cap Capsule
   
       
 
ITEM DESCRIPTION
Cost (Euro)
 
       
1
CCA-2 ASIC from design to sample test & characterization
28,720
 
       
2
CCA-2 ASIC MPW Run
7,200
 
3
sub total     
35,920
 
       
4
overhead     
8,262
 
       
       
5
TOTAL     
44,182
 
       
 




Exhibit 10.12
 
INDEMNIFICATION AGREEMENT
 
This Indemnification Agreement (this " Agreement ")   is made as of _________, 2014, by and between Check-Cap Ltd., a company incorporated under the laws of the State of Israel (the "Company ") and Mr. _________ , ID No. __________ (" Indemnitee ").
 
WHEREAS, the Company desires to attract and retain qualified directors and officers and to provide them with protection against liability and expenses incurred while acting in that capacity; and
 
WHEREAS, Indemnitee is or is about to become   a   director or an officer of the Company. In order to induce Indemnitee to serve as a director or officer of the Company, as applicable, the Company agrees to indemnify Indemnitee upon certain occurrences and exempt Indemnitee from liability, all under the terms of this Agreement.
 
NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the parties hereby agree as follows:
 
1. 
Contractual Indemnity . The Company hereby agrees, subject to the limitations set forth in this Agreement, to indemnify Indemnitee to the greatest extent possible under any applicable law against any liability or expense that may be imposed or incurred by the Indemnitee due to any act or omission of the Indemnitee in his capacity as a director or officer of the Company, either prior to or after the date hereof, in respect of the following (each of the following shall be hereinafter referred to as a " Claim "):
 
 
1.1.
a financial obligation imposed on Indemnitee in favor of another person by a court judgment, including a compromise judgment or an arbitrator's award approved by court;
 
 
1.2.
reasonable litigation expenses, including attorneys' fees, expended by Indemnitee (i) as a result of an investigation or proceeding instituted against him by a competent authority   that is authorized to conduct such investigation or proceeding, which investigation or proceeding has not ended in a criminal charge or in a financial liability in lieu of a criminal proceeding, or has ended in a financial obligation in lieu of a criminal proceeding for an offence that does not require proof of criminal intent (the phrases "proceeding that has not ended in a criminal charge" and "financial obligation in lieu of a criminal proceeding" shall have the meaning as defined in Section 260(al) of the Companies Law, 1999 (the " Companies Law ")); or (ii) in connection with a monetary sanction (" Itzum Caspi ")
 
 
 

 
 
 
1.3.
reasonable litigation expenses, including attorneys' fees, expended by Indemnitee or charged to him by a court, in a proceeding instituted against him by the Company or on its behalf or by another person, or in a criminal charge from which he was acquitted or in any criminal proceeding of a crime which does not require proof of criminal intent in which the Indemnitee is convicted;
 
 
1.4.
expenses, including reasonable litigation expenses and legal fees, incurred by the Indemnitee as a result of an Administrative Proceeding instituted against the Indemnitee. "Administrative Proceeding" shall mean a proceeding instituted pursuant to (a) Chapter H3 of the Israeli Securities Law 5728-1968 (the " Securities Law "), "Imposition of Monetary Sanctions by the Securities Authority"; (b) Chapter H4 of the Securities Law, "Imposition of Administrative Enforcement Sanctions by the Enforcement Committee"; (c) Chapter I1 of the Securities Law, "Arrangement for the Avoidance of Proceedings or Termination of Proceedings, which is Subject to Conditions" or (d) pursuant to Chapter I4(d) of the Companies Law; and
 
 
1.5.
payments to an injured party imposed on the Indemnitee pursuant to Section 52ND(a)(1)(a) of the Securities Law.
 
 
The above indemnification will also apply to any action taken by the Indemnitee in his capacity as a director or officer of any other company controlled, directly or indirectly, by the Company (a " Subsidiary ")   or in his capacity as a director or officer of a company not controlled by the Company but where his appointment as a director or officer results from the Company's holdings in such company (" Affiliate ").
 
2. 
Limitations on Contractual Indemnity .
 
 
2.1.
The total indemnification obligation that the Company undertakes towards all directors and officers of the Company (in all cases, whether serving as of the date hereof or who shall serve as directors and officers of the Company following the date hereof) shall in no event exceed   an aggregate amount equal to   the greater of: (i) US$5,000,000, or (ii) an amount equal to 25% of the Company's shareholders equity (on a consolidated basis), based on the Company's most recent consolidated financial statements available before the date on which the indemnity payment is made (the " Maximum Cumulative Indemnification ").  Such amount has been determined by the Board of Directors of the Company to be reasonable under the circumstances. The indemnification provided under this Agreement shall not be subject to the limitations imposed by this Section 2.1 if and to the extent such limits are no longer required by the Companies Law.
 
 
 

 
 
 
 
In the event that the sum of all indemnification payments to directors and officers required to be made by the Company at any time, together with all indemnification payments to directors and officers previously paid by the Company, exceeds the Maximum Cumulative Indemnification, then the Maximum Cumulative Indemnification, or the remaining portion thereof, as applicable, shall be allocated among the directors and officers that are entitled to such indemnification and to whom the Company has not paid theretofore, in a manner that the indemnification amount that will be actually paid to each of them will be calculated according to the ratio between (a) the indemnification amount to which each of them would have been entitled absent of the Maximum Cumulative Indemnification; and (b) the aggregate amount of the then outstanding indemnification to the directors and officers who would have been entitled, absent of the Maximum Cumulative Indemnification, to indemnification pursuant to their indemnification request.
 
Upon payment by the Company of the Maximum Cumulative Indemnification, the Company shall not bear any additional indemnifications, except to the extent that an increase of the Maximum Cumulative Indemnification has been approved by the authorized organs of the Company.
 
 
2.2.
Indemnitee shall not be entitled to indemnification under Section 1, for any amount imposed on him consequent to any of the following: (i) a breach of the duty of loyalty to the Company, a Subsidiary and/or an Affiliate thereof (as applicable) by Indemnitee, except, to the extent permitted by law, for a breach of a duty of fidelity to the Company, the Subsidiary and/or the Affiliate (as applicable) while acting in good faith and having reasonable cause to assume that such act would not prejudice the interests of the Company the Subsidiary and/or the Affiliate (as applicable); (ii) a violation of the Indemnitee's duty of care towards the Company, a Subsidiary and/or an Affiliate thereof (as applicable), which was committed intentionally or recklessly, but not if only committed negligently; (iii) an act committed with the intention to realize a personal unlawful profit; (iv) a fine, monetary sanction or forfeit levied imposed on Indemnitee; (v) a counterclaim made by the Company, a Subsidiary and/or an Affiliate thereof (as applicable) or in their names in connection with a claim against the Company, the Subsidiary and/or the Affiliate (as applicable)  filed by Indemnitee, other than by way of defense or by way of third party notice in connection with claim brought against the Indemnitee, or in specific cases in which the Company's Board of Directors has approved the initiation or bringing of such suit by Indemnitee, which approval shall not be unreasonably withheld; or (vi) any other act, event or circumstance with respect to which it is prohibited to do so under applicable law.
 
 
 

 
 
3. 
Limitation of Categories of Claims . The indemnification pursuant to Section 1.1 above, shall only apply to liabilities or expenses arising in connection with acts or omissions of Indemnitee in his capacity as a director or an officer of the Company, in respect of the events and circumstances set forth in Exhibit A to this Agreement, which are deemed by the Company's Board of Directors to be foreseeable at the date hereof in view of the Company's current activities. The indemnification provided under this Agreement shall not be subject to the limitations imposed by this Section 3 and Exhibit A if and to the extent such limits are no longer required by the Companies Law.
 
4. 
Expenses; Indemnification Procedure . The Company shall advance Indemnitee all expenses incurred by Indemnitee in connection with a Claim on the date on which such amounts are first payable ( "Time of Indebtness" ), and with respect to items mentioned in Section 1.1 , 1.3 or 1.4 above, even prior to a court decision, but has no duty to advance payments in less than seven (7) days following delivery of a written request therefor by Indemnitee to the Company, subject to Indemnitee undertaking to repay such advances if it is determined, in accordance with the terms of this Agreement or the provisions of any applicable law, that the Indemnitee is not entitled to such indemnification. Advances given to cover litigation expenses in accordance with Section 1.2 above will be repaid by Indemnitee to the Company if such investigation or proceeding has ended in a criminal charge or in a financial liability was imposed in lieu of a criminal proceeding for a crime which requires a finding of criminal intent, within thirty (30) days as of the court's decision. Advances given to cover litigation expenses in accordance with Section 1.3 above will be repaid in full by Indemnitee to the Company, if Indemnitee is found guilty of a crime that requires proof of criminal intent, within thirty (30) days as of the court's decision. Other advances will be repaid by Indemnitee to the Company if it is determined by a competent court, the applicable governmental authority or the Company, at the advise of its legal counsel, that Indemnitee is not entitled to such indemnification, within thirty (30) days as of such decision . As part of the aforementioned undertaking, the Company will make available to Indemnitee any security or guarantee that Indemnitee may be required to post in accordance with an interim decision given by a court or an arbitrator, including for the purpose of substituting liens imposed on Indemnitee's assets. Such security or guarantee amount to be deemed included within the Maximum Cumulative Indemnification, for as long as it is outstanding.
 
 
 

 
 
5. 
Notification and Defense of Claim . If any Claim is brought against Indemnitee in respect of which indemnity is sought under this Agreement:
 
 
5.1.
Indemnitee will notify the Company in writing of the commencement thereof as soon as possible following Indemnitee first becoming aware thereof provided, however, that Indemnitee's failure to notify the Company as aforesaid shall not derogate from Indemnitee's right to be indemnified as provided herein except and to the extent that such failure to provide notice adversely prejudices the Company's ability to defend against such action or to conduct any directly related legal proceeding (similarly, Indemnitee must notify the Company in writing on an ongoing and current basis concerning all events that Indemnitee suspects may possibly give rise to the initiation of legal proceedings against Indemnitee). Notice to the Company shall be directed to the Chief Executive Officer of the Company (or in the case of a notice from the Chief Executive Officer, to the Chairman of the Company) at the address of the Company's principal office (or at such other address as the Company shall advise the Indemnitee). In addition, the Indemnitee will deliver to the Company, or to such person as it shall advise Indemnitee, without delay all documents Indemnitee receives or possesses in connection with the Claim, and the Company will be entitled to participate therein at its own expense or to assume the defense thereof and to employ counsel reasonably satisfactory to Indemnitee. Indemnitee shall have the right to employ its own counsel in connection with any such Claim and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of Indemnitee unless: (i) the Company shall have authorized the employment of counsel by Indemnitee; (ii) the Company shall have not assumed the defense of the Claim within a reasonable time; or (iii) the named parties to any such action (including any impleaded parties) include both Indemnitee and the Company, and joint representation is inappropriate under applicable standards of professional conduct due to a conflict of interest between Indemnitee and the Company, in either of which events reasonable fees and expenses of such counsel to Indemnitee shall be borne by the Company. The Company and/or its attorney shall be entitled to conclude such proceedings, all as it see fit, including by way of settlement. At the request of the Company, Indemnitee shall execute all documents required to enable the Company and/or its attorney as aforesaid to conduct Indemnitee's defense and to represent him in all matters connected therewith. For the avoidance of doubt, in the case of criminal proceedings the Company and/or the attorneys as aforesaid will not have the right to plead guilty in Indemnitee's name or to agree to a plea-bargain in his name without his prior written consent. Furthermore, in a civil proceeding (whether before a court or as a part of a compromise arrangement), the Company and/or its attorneys will not have the right to admit to any occurrences that are not indemnifiable pursuant to this Agreement and/or pursuant to law, without Indemnitee's prior written consent. However, the aforesaid will not prevent the Company and/or its attorneys as aforesaid, with the approval of the Company, to come to a financial arrangement with a plaintiff in a civil proceeding without Indemnitee's consent so long as such arrangement will not be an admittance of an occurrence not fully indemnifiable pursuant to this Agreement and/or pursuant to law.
 
 
 

 
 
 
5.2.
The Company shall not be liable to indemnify Indemnitee for any amounts paid in settlement of any Claim affected without the Company's written consent.
 
 
5.3.
Indemnitee shall give the Company such information and cooperation as may be reasonably required.
 
6. 
Partial Indemnification . If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses actually or reasonably incurred by Indemnitee in connection with a Claim or Claims, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses to which Indemnitee is entitled.
 
7. 
Other Indemnification . The Company will not indemnify Indemnitee for any liability or expenses with respect to which Indemnitee has received payment by virtue of an insurance policy or other indemnification agreement, other than for amounts, which are in excess of the amount paid to Indemnitee pursuant to such policy or agreement and other than a deductible payable by the Indemnitee under an insurance policy or indemnification agreement.
 
 
 

 
 
8. 
Collection from a Third Party . The Company will be entitled to any amount collected from a third party in connection with a Claim or Claims actually indemnified hereunder by the Company, to be paid by the Indemnitee to the Company within fifteen (15) days as of the receipt of the said amount.
 
9. 
Exemption . The Company hereby irrevocably exempts Indemnitee, to the fullest extent permitted by law, from any liability for damages caused as a result of a breach of his duty of care to the Company, provided that in no event shall he be exempt with respect to (i) any actions listed in Section 2.2 above; or (ii) a violation of the Indemnitee's duty of care towards the Company in connection with any Distribution (as such term is defined in the Companies Law).
 
10. 
Post Factum Indemnification . It is hereby clarified that nothing in here shall limit the Company's right to indemnify the Indemnitee, post factum, for any and all amounts which Indemnitee may be obligated to pay as set forth in Section 1 without the limitations set forth in Sections 2.1, 3, 5, 7 and 8. Indemnitee's rights of indemnification hereunder shall not be deemed exclusive of any other rights Indemnitee may have under the Company’s Articles of Association,  applicable law or otherwise.
 
11.
Severability . Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof. Further, if, and solely to the extent that, any provision of this Agreement shall for any reason be held to be excessively broad, the provision shall be construed in such manner as to enable it to be enforced to the extent compatible with applicable law.
 
12.
Termination of services . For the avoidance of doubt, the Company will indemnify Indemnitee even if at the relevant Time of Indebtness Indemnitee is no longer a director or an officer of the Company or of a Subsidiary or an Affiliate, as applicable, provided, that the obligations are in respect of actions taken by the Indemnitee while serving as a director or an officer, as aforesaid, and in such capacity.
 
13.
Further Assurances . The parties will do, execute and deliver, or will cause to be done, executed and delivered, all such further acts, documents and things as may be reasonably required for the purpose of giving effect to this Agreement and the transactions contemplated hereby. Notwithstanding anything to the contrary, if for the validation of any of the undertakings in this Agreement any act, resolution, approval or other procedure is required, the Company undertakes to cause them to be done or adopted in a manner which will enable the Company to fulfill all its undertakings as aforesaid.
 
 
 

 
 
14.
Entire Agreement; Amendments . This Agreement constitutes the entire agreement between the parties with respect to its subject matter, and supersedes and cancels all prior agreements, proposals, representations and communications between the parties regarding the subject matter hereof. No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing and signed by the parties hereto. In the event that according to changes in the governing law, the governing law enables any further indemnification rights to be granted by the Company to the Indemnitee, then the Company shall use its best efforts to take such corporate actions as required by law, in order to apply such indemnification rights to the Indemnitee and to amend this Agreement accordingly.
 
15.
Binding Effect; No Assignment . This Agreement shall be binding upon Indemnitee and the Company, their successors and assigns, and shall inure to the benefit of Indemnitee, his heirs, personal representatives and assigns and to the benefit of the Company, its successors and assigns. Indemnitee shall not assign or otherwise transfer his rights or obligations under this Agreement and any attempt to assign or transfer such rights or obligations shall be deemed null and void.
 
16.
Notice . All notices and other communications pursuant to this Agreement shall be in writing and shall be deemed provided if delivered personally, telecopied, sent by electronic facsimile, email, reputable overnight courier or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at the addresses shown in the preamble to this Agreement, or to such other address as the party to whom notice is to be given may have furnished to the other party hereto in writing in accordance herewith. Any such notice or communication shall be deemed to have been delivered and received (i) in the case of personal delivery, on the date of such delivery, (ii) in the case of telecopier or an electronic facsimile or email, upon transmission and electronic confirmation of receipt or, if transmitted and received on a non-business day, on the first business day following transmission and electronic confirmation of receipt, (iii) if by courier two (2) business days after delivery to the courier service, and (iv) in the case of mailing, three (3) business days after mailing, or five (5) business days if sent internationally (provided, however, that any notice of change of address shall only be valid upon receipt).
 
 
 

 
 
17.
Governing Law; Jurisdiction . This Agreement shall be interpreted and enforced in accordance with the laws of the State of Israel, without regard to their rules of conflict of laws, and any dispute arising from   or in connection with this Agreement is hereby submitted to the sole and exclusive jurisdiction of the competent courts in Tel Aviv, Israel.
 
18.
Neither party nor any of its agents, employees, directors or officers shall make any statement to the public or to any other person regarding any settlement of claims made pursuant to this Agreement against the other party that would in any manner cast any negative light, inference or aspersion against any of the parties.
 
[Reminder of page intentionally left blank]
 
 
 

 
 
IN WITNESS WHEREOF , the parties hereto have executed this Agreement as of the day and year first above written, in one or more counterparts.
 
Check-Cap Ltd.
 
By:
   
Name and title:
   
 
[_____________]
 
Name:
   
Signature:
   
 

 
 

 
 
EXHIBIT A
 
In this Exhibit, the term "Company" includes and refers to the Company itself and any Subsidiary and Affiliate of the Company.
 
1.
Negotiations, execution, delivery and performance of agreements on behalf of the Company, whether written or oral, including, inter alia, any claim or demand made by a customer, supplier, contractor or other third party transacting any form of business with the Company, relating to the negotiations or performance of such transactions, and/or to representations or inducements provided in connection thereto or otherwise;
 
2.
Anticompetitive acts and acts of commercial wrongdoing;
 
3.
Acts in regard of invasion of privacy including with respect to databases and acts in regard of slander;
 
4.
Any proceedings relating to intellectual property rights and/or any claim or demand made for actual or alleged infringement, misappropriation or misuse of any third party's intellectual property rights including, but not limited to confidential information, patents, copyrights, design rights, service marks, trade secrets, copyrights, misappropriation of ideas by the Company;
 
5.
Any claim and/or demand and/or any proceeding in connection with the intellectual property of the Company and its protection, including the registration or assertion of rights to intellectual property and the defense of claims related to intellectual property;
 
6.
The offering of securities by the Company and/or by a shareholder to the public and/or to private investors or the offer by the Company to purchase securities from the public and/or from private investors or other holders pursuant to a prospectus, agreements, notices, reports, tenders and/or other proceedings;
 
7.
Occurrences resulting from the Company's status as a public company, and/or from the fact that the Company's securities were offered to the public and/or are traded on a stock exchange, whether in the United States or in any other jurisdiction;
 
8.
Occurrences in connection with investments the Company make in other corporations whether before and/or after the investment is made, entering into the transaction, the execution, development and monitoring thereof, including actions taken by you in the name of the Company  as a director or officer of the Company;
 
9.
The sale, purchase and holding of negotiable securities or other investments for or in the name of the Company;
 
 
 

 
 
10.
Actions in connection with the merger of the Company with or into another entity;
 
11.
Actions in connection with the sale of outstanding share capital, operations and/or business, or part thereof, of the Company;
 
12.
Without derogating from the generality of the above, actions in connection with the purchase or sale of companies, legal entities or assets, and the division or consolidation thereof;
 
13.
Actions taken in connection with labor relations and/or employment matters in the Company and trade relations of the Company , including with employees, independent contractors, customers, suppliers and various service providers;
 
14.
Actions concerning the approval of transactions of the Company with officers and/or directors and/or holders of controlling interests in the Company or any other transaction with a related party;
 
15.
Actions in connection with the testing of products developed by the Company or in connection with the distribution, sale, license or use of such products;
 
16.
Actions taken in connection with the intellectual property of the Company , and its protection, including the registration or assertion of rights to intellectual property and the defense of claims relating thereof;
 
17.
Participation and/or non-participation at the Company's board meetings, bona fide expression of opinion and/or voting and/or abstention from voting at the Company's board meetings;
 
18.
Approval of corporate actions including the approval of the acts of the Company's management, their guidance and their supervision;
 
19.
Claims of failure to exercise business judgment and a reasonable level of proficiency, expertise and care in regard of the Company's business;
 
20.
Actions taken pursuant to or in accordance with the policies and procedures of the Company, whether such policies and procedures are published or not;
 
21.
Violations of securities laws of any jurisdiction, including without limitation, fraudulent disclosure claims, failure to comply with SEC and/or the Israeli Securities Authority and/or another applicable state securities authority and/or any stock exchange disclosure or other rules and any other claims relating to relationships with investors, shareholders and the investment community and any claims related to the Sarbanes-Oxley Act of 2002 or a similar law of another jurisdiction, all as amended from time to time;
 
 
 

 
 
22.
Any claim or demand made under any securities laws of any jurisdiction and/or any stock exchange rules and regulations of any jurisdiction or by reference thereto, or related to the failure to disclose any information in the manner or time such information is required to be disclosed pursuant to such laws, rules or regulations, or related to inadequate or improper disclosure of information to shareholders, or prospective shareholders, or related to the purchasing, offering, holding or disposition of securities of the Company or any other investment activity involving or affected by such securities, including any actions relating to an offer or issuance of securities of the Company to the public by prospectus or privately by private placement, in Israel or abroad, including the details that shall be set forth in the documents in connection with execution thereof;
 
23.
Violations of laws requiring the Company to obtain regulatory and governmental licenses, permits and authorizations or laws related to any governmental grants in any jurisdiction;
 
24.
Actions taken in connection with the Company’s financial reports and tax returns, including the preparation thereof;
 
25.
Claims in connection with publishing or providing any information, including any filings with any governmental authorities, on behalf of the Company in the circumstances required under any applicable laws;
 
26.
Any claim or demand made by employees, consultants, agents or other individuals or entities employed by or providing services to the Company relating to compensation owed to them or damages or liabilities suffered by them in connection with such employment or service;
 
27.
Resolutions and/or actions relating to employment matters of the Company;
 
28.
Events, pertaining to the employment conditions of employees and to the employer - employee relations, including the promotion of workers, handling pension arrangements, insurance and saving finds, options and other benefits;
 
29.
Any claim or demand made by any lenders or other creditors or for moneys borrowed by, or other indebtedness of, the Company;
 
30.
Any claim or demand made by any third party suffering any personal injury and/or bodily injury and/or intellectual property damage to business or personal property through any act or omission attributed to the Company, or its respective employees, agents or other persons acting or allegedly acting on its behalf;
 
 
 

 
 
31.
Any claim or demand made directly or indirectly in connection with complete or partial failure, by the Company or its respective directors, officers and employees, to pay, report, keep applicable records or otherwise, of any foreign, federal, state, country, local, municipal or city taxes or other compulsory payments of any nature whatsoever, including without limitation, income, sales, use, transfer, excise, value added, registration, severance, stamp, occupation, customs, duties, real property, personal property, capital stock, social security, unemployment, disability, payroll or employee withholding or other withholding, including any interest, penalty or addition thereto, whether disputed or not;
 
32.
Any claim or demand made by purchasers, holders, lessors or other users of products or assets of the Company, or individuals treated with such products, for damages or losses related to such trading, use or treatment;
 
33.
Any administrative, regulatory or judicial actions, orders, decrees, suits, demands, demand letters, directives, claims, liens, investigations proceedings or notices of noncompliance or violation by any governmental entity or other person alleging potential responsibility or liability (including potential responsibility or liability for costs of enforcement, investigation, cleanup, governmental response, removal or remediation, for natural resources damages, property damage, personal injuries, or penalties or contribution, indemnification, cost recovery, compensation, or injunctive relief) arising out of, based on or related to (i) the presence of, release spill, emission, leaking, dumping, pouring, deposit, disposal, discharge, leaching or migration into the environment (each a " Release ")   or threatened Release of, or exposure to, any hazardous, toxic, explosive or radioactive substance, wastes or other substances or wastes of any nature regulated pursuant to any environmental law, at any location, whether or not owned, operated, leased or managed by the Company, or (ii) circumstances forming the basis of any violation of any environmental law, environmental permit, license, registration or other authorization required under applicable environmental and/or public health law;
 
34.
Actions in connection with the Company's development, use, sale, licensing, distribution, marketing or offer of products and/or services;
 
35.
Resolutions and/or actions relating to a merger of the Company, the issuance of shares or securities exercisable into shares of the Company, changing the share capital of the Company, formation of subsidiaries, reorganization, winding up or sale of all or part of the business, operations or shares the Company;
 
 
 

 
 
36.
Resolutions and/or actions relating to investments in the Company and/or the purchase or sale of assets, including the purchase or sale of companies and/or businesses, and/or investments in corporate or other entities and/or investments in traded securities and/or any other form of investment;
 
37.
Any administrative, regulatory or judicial actions, orders, decrees, suits, demands, demand letters, directives, claims, liens, investigations, proceedings or notices of noncompliance or violation by any governmental entity or other person alleging the failure of the Company to comply with any statute, law, ordinance, rule, regulation, order or decree of a competent authority regarding the Company or any of its respective business operations;
 
38.
Any form of business with the Company in the ordinary course of their respective businesses, relating to the negotiations or performance of such transactions, representations or inducements provided in connection thereto or otherwise;
 
39.
Any claim or demand, not covered by any of the categories of events described above, which, pursuant to any applicable law, a director or officer of the Company may be held liable to any government or agency thereof, or any person or entity, in connection with actions taken by such director or officer in such capacity;
 
40.
Claims related to occurrences in connection with the Company's registration in any stock exchange outside Israel and/or from the fact that the Company is public in any stock exchange;  
 
41.
Any claim or demand filed in relation to an act that pertains to a report or notice filed pursuant to any applicable law, including regulations promulgated thereunder, or according to laws and regulations dealing with similar matters outside of Israel, or according to rules or procedures that apply at a stock exchange in Israel or abroad and/or the failure to file a report of notice as aforesaid.
 
 




Exhibit 10.13
 
Execution Copy
 
CREDIT LINE AGREEMENT
 
This Credit Line Agreement (this " Agreement ") is made as of the 20 day of August, 2014 (the " Effective Date "), by and between Check-Cap Ltd., an Israeli company number 51-425981-1, with offices at Abba Ushi Avenue, Isfiya 30090, Mount Carmel, Israel (the " Company ") and each of the lenders identified in Exhibit A attached hereto (each, a " Lender " and together, the " Lenders " and each Lender and the Company separately, a " Party " and together, the " Parties ").
 
WHEREAS , the Company wishes to obtain a credit line from the Lenders in an aggregate principal amount of at least US$8,000,000 (Eight Million U.S. Dollars) (the " Minimum CLA "), and not exceeding US$12,000,000 (Twelve Million U.S. Dollars) (the " Credit Line Amount ");
 
WHEREAS , the Lenders wish to extend the credit line to the Company on the terms and conditions set forth in this Agreement;
 
NOW, THEREFORE , the Parties hereby agree as follows:
 
1.
Credit Line Amount ; Escrow Account
 
 
1.1
At the Closing (as defined below) and subject thereto, each of the Lenders, severally but not jointly, shall deposit its portion of the Credit Line Amount, as set forth opposite such Lender's name on Exhibit A attached hereto, in an escrow account (the " Escrow Account "), to be held in the name of Meitav Dash Trusts Ltd. (the " Escrow Agent "), in accordance with the terms of the escrow agreement in the form attached hereto as Exhibit B (the " Escrow Agreement "), to be entered into by and among the Company, each Lender, Shanghai Fosun Pharmaceutical Group Co. Ltd. or, to the extent that its portion of the Credit Line Amount will be extended by its subsidiary, the subsidiary extending its portion of the Credit Line Amount (" Fosun Pharma "), as the Lenders' representative (the " Lenders' Representative ") and the Escrow Agent at the Closing.
 
 
1.2
The Credit Line Amount shall be transferred to the Escrow Account in U.S. dollars or in New Israeli Shekels (" NIS "), calculated at the last representative exchange rate published by the Bank of Israel on the date immediately prior to the Closing Date (as defined below) (net of any transfer fees).
 
 
 

 
 
 
1.3
Any interest that may accrue on the deposited Credit Line Amount shall, other than Interest (as such terms are defined in Exhibit 4.2 attached hereto) that may accrue on the Loan Amount (as defined below) in accordance with Exhibit 4.2 attached hereto, accrue to the account of the Company, including in the event of the release of the Credit Line Amount to the Lenders in accordance with Sections 4.3 and 5.2 below.
 
2.
Credit Line Warrants
 
 
2.1
At the Closing and subject thereto, the Company shall issue to each Lender a warrant to purchase such number of ordinary shares, par value NIS 0.01, of the Company (" Ordinary Shares ") that is equal to the number arrived at by multiplying (i) such number of Ordinary Shares constituting 2% of the Company's share capital on a Fully Diluted Basis (as defined below) as of the Closing by (ii) a fraction, the numerator of which is such Lender's portion of the Credit Line Amount (in U.S. Dollars) and the denominator of which is US$1,000,000 (one Million US Dollars) (the " Fraction "), all subject to the terms and the conditions of the warrant certificate attached hereto as Exhibit 2   (collectively, the " Credit Line Warrants ").
 
The Credit Line Warrants shall be exercisable, at the discretion of the Lenders at any time commencing at the Closing Date and ending on the tenth anniversary thereof at an exercise price per share equal to NIS 0.01 and may be exercised on a net issuance basis. The Credit Line Warrants will be transferable subject to the same restrictions on transfer set forth in the Amended Shareholders' Agreement (as defined below) and the Company's Articles of Association as shall be in effect from time to time, mutatis mutandis.
 
 
2.2
In this Agreement, the term " Fully Diluted Basis " means the issued and outstanding share capital of the Company, assuming all existing outstanding options, warrants, convertible securities, or any other right to acquire shares (excluding any securities issued in connection with the transactions contemplated under this Agreement) were exercised or converted (assuming conversion of all the convertible securities of the Company into Ordinary Shares on a 1:1 basis).
 
 
2

 
 
3.
Deferred Closing
 
 
3.1
Subject to the terms and conditions hereof, the Company may consummate an additional closing or series of closings (each, a " Deferred Closing ") with an additional lender or lenders (each, an " Additional Lender " and collectively, the " Additional Lenders ") on the same terms and conditions set forth in this Agreement; provided that any such Deferred Closings shall occur no later than forty five (45) days from the Closing. The aggregate amount to be extended by the Additional Lenders (the " Additional Credit Line Amount ") shall, together with the Credit Line Amount that was deposited in the Escrow Account at the Closing, not exceed the maximum Credit Line Amount. Simultaneously with the consummation of a Deferred Closing, the Additional Lenders shall execute and deliver to the Company a joinder agreement in the form to be mutually agreed upon by the Company and the Majority Lenders until the Closing and to be attached as attached as Exhibit 3 hereto, pursuant to which each such Additional Lender shall become a party to this Agreement and for all purposes under this Agreement, the Additional Lender shall be deemed to be a "Lender" and the Additional Credit Line Amount shall be deemed to be part of the "Credit Line Amount."
 
 
3.2
Following each Deferred Closing (if any), the number of Ordinary Shares underlying the Credit Line Warrants shall be increased, such that following such increase, the number of Ordinary Shares underlying each Lender's Credit Line Warrants shall be equal to the number obtained by multiplying (i) such number of Ordinary Shares constituting 2% of the Company's share capital on a Fully Diluted Basis as of such Deferred Closing by (ii)   the Fraction.
 
4.
Call of Credit Line Amount
 
 
4.1
If the Company does not consummate an initial public offering of its shares (an " IPO ") on or prior to February 18, 2015 (the " Last IPO Date ") (and for the purpose of this Agreement, an IPO shall be deemed consummated on or prior to the Last IPO Date if the registration statement for the registration of the Company' shares, was declared effective on or prior to the Last IPO Date and provided that the Company has ultimately issued shares pursuant to such registration statement no later than twenty one (21) days following the date on which such registration statement was declared effective), the Company may call the Credit Line Amount at any time until eighteen (18) months from the Closing Date (the " Last Date "), by sending a written notification to the Escrow Agent (with a copy to the Lenders)in accordance with the Escrow Agreement; provided that either (i) the Credit Line Amount actually called by the Company (the " Loan Amount ") is at least US$8,000,000; or (ii) the Loan Amount, together with any additional amounts raised by the Company from the Closing Date until such date of call, shall equal at least US$8,000,000. Any amounts so called will be called pro rata among the Lenders based on their actual contribution to the Credit Line Amount as a proportion of the Credit Line Amount.
 
 
3

 
 
Upon receipt of such notice from the Company, the Escrow Agent shall release the Loan Amount and transfer it to the account indicated by the Company in its written notification and any portion of the Credit Line Amount not called by the Company shall be released to the Lenders, all in accordance with the Escrow Agreement.
 
 
4.2
If the Loan Amount is called by the Company on or prior to the Last Date pursuant to Section 4.1 hereof, the provisions set forth on Exhibit 4.2 attached hereto shall govern the Loan Amount.
 
 
4.3
If the Company does not consummate an IPO on or prior to the Last IPO Date and the Credit Line Amount is not called by the Company on or prior to the Last Date, the Credit Line Amount shall be released from the Escrow Account to the Lenders in accordance with the Escrow Agreement.
 
5.
Placement of the Credit Line Amount in an IPO
 
 
5.1
In the event that the Company intends to consummate an IPO and such IPO is expected to be consummated on or prior to Last IPO Date, then the Company shall be entitled, at its sole and absolute discretion, to request that each Lender place an irrevocable order with the Company or its underwriters to invest its portion of the Credit Line Amount in the IPO at the IPO price, as shall be determined by the Company and its underwriters, at their sole discretion; provided that such irrevocable order shall become effective only if the Company consummated an IPO on or prior to the Last IPO Date. At the Closing, the Lenders will execute an irrevocable instruction letter to that effect. It is clarified that the Company and the underwriters shall be entitled to place such amount of the Credit Line Amount in the IPO as they shall determine, at their sole discretion , and shall have no obligation to place any or all of the Credit Line Amount in the IPO.  Any amounts so placed will be placed pro rata among the Lenders based on their actual contribution to the Credit Line Amount as a proportion of the Credit Line Amount.
 
 
4

 
 
 
5.2
If the Company consummated an IPO on or prior to the Last IPO Date, the right of the Company to call the Credit Line Amount in accordance with Section 4.1 above will automatically terminate and to the extent not placed in the IPO pursuant to Section 5.1 above, the Credit Line Amount shall be released from the Escrow Account to the Lenders in accordance with the Escrow Agreement.
 
6.
Replacement of Company's Articles of Association and Amendment of Shareholders Agreement
 
Upon and subject to the Closing: (i) the Company's current Articles of Association shall be replaced with the Fifth Amended and Restated Articles of Association, in the form attached hereto as Exhibit 6 (a) (the " Amended Articles "); and (ii) the Amended and Restated Shareholders' Agreement as currently in effect shall be replaced with the Amended and Restated Shareholders’ Agreement, in the form attached hereto as Exhibit 6 (b) (the " Amended Shareholders' Agreement ").
 
7.
C losing
 
 
7.1
Time and Place of the Closing . The closing of the transactions contemplated hereby (the " Closing ") shall take place at the offices of Fischer Behar Chen & Co., within three Business Days (as defined in Section 16.5 hereof) of satisfaction and fulfillment, or waiver, of the conditions to Closing set forth in Sections 8 and 8.7, or at such other time and place as the Company and the Lenders that committed to extend to the Company an aggregate amount of at least fifty percent (50%) of the Credit Line Amount, which group must include Fosun Pharma (the " Majority Lenders "), shall mutually agree in writing (the " Closing Date ").
 
 
7.2
Deliveries and Transactions at the Closing .   At the Closing, the following transactions shall occur simultaneously (no transaction shall be deemed to have been completed or any document delivered until all such transactions have been completed and all required documents delivered):
 
 
7.2.1
Board Resolutions . Copies of duly executed resolutions of the Board of Directors of the Company, in the form attached hereto as Exhibit 7.2.1 shall be delivered to the Lenders (the " Board Resolutions "), approving, inter alia, the execution, delivery and performance by the Company of this Agreement, the Escrow Agreement, the Amended Shareholders' Agreement and all other documents and agreements ancillary to such agreements (collectively, the " Transaction Documents "), to which the Company is a party, and the transactions contemplated hereby and thereby, including the issuance of the Issued Securities (as defined below).
 
 
5

 
 
 
7.2.2
Shareholders Resolutions . Copies of duly executed resolutions of the Company's shareholders, in the forms attached hereto as Exhibit 7.2.2(a) , shall be delivered to the Lenders (the " Shareholder Resolutions "), approving, inter alia: (i) the execution, delivery and performance by the Company of this Agreement and the transactions contemplated hereby, including the issuance of the Issued Securities; (ii) the execution, delivery and performance by the Company of the Amended Shareholders' Agreement; (iii) the replacement of the Company's current Articles of Association with the Amended Articles, subject to and upon the Closing; and (iv) the execution, delivery and performance by the Company of an employment agreement with Yoav Kimchy, the Company's Chief Technology Officer, substantially in the form attached hereto as Exhibit 7.2.2(b) , which shall replace Mr. Kimchy's current employment agreement in its entirety (the " CTO Employment Agreement ").
 
 
7.2.3
The Company and the parties to the Amended and Restated Shareholders’ Agreement dated March 17, 2011 (either as an original signatory or by virtue of a joinder thereto) shall execute and deliver the Amended Shareholders' Agreement.
 
 
7.2.4
The Company shall deliver to the Lenders satisfactory evidence that all pre-emptive rights relating to this Agreement have been waived or expired.
 
 
7.2.5
The Company shall deliver to each Lender a validly executed Credit Line Warrant   in the name of such Lender.
 
 
7.2.6
The Company shall deliver to the Lenders a legal opinion of counsel to the Company in the form to be mutually agreed upon by the Company and the Majority Lenders until the Closing and to be attached as Exhibit 7.2.6 hereto.
 
 
7.2.7
The Company shall deliver a certificate duly executed by the Chief Executive Officer of the Company, certifying and having attached, as applicable, thereto: (i) the Amended Articles; (ii)  the Board Resolutions; (iii)  the Shareholders Resolutions; (iv)  that, the representations and warranties made by the Company in this Agreement shall have been true and correct when made, and are true and correct in all material respects as of the Closing Date; and (v) that all covenants, agreements, and conditions contained in this Agreement to be performed or complied with by the Company as of the Closing Date, to the extent not waived by the Majority Lenders, have been performed or complied with by the Company, prior to or at the Closing Date.
 
 
6

 
 
 
7.2.8
Each Lender shall deposit in the Escrow Account its respective portion of the Credit Line Amount, as set forth opposite such Lender's name on Exhibit A attached hereto, in accordance with Section 1 above.
 
 
7.2.9
The Company, the Lenders, the Lenders' Representative and the Escrow Agent shall execute and deliver the Escrow Agreement.
 
 
7.2.10
Each Lender shall execute and deliver an irrevocable letter of instructions for the investment of its portion of the Credit Line Amount in an IPO, in accordance with the provisions of Section 5.1 above, in the form to be mutually agreed upon by the Company and the Majority Lenders until the Closing and to be attached as Exhibit   7.2.10 hereto.
 
 
7.2.11
Each Lender shall execute and deliver an irrevocable letter of instructions for the investment of such Lender's Escrow Amount in a PO, as such term is defined in, and in accordance with the provisions of, Section 2 of Exhibit 4.2 , in the form to be mutually agreed upon by the Company and the Majority Lenders until the Closing and to be attached as Exhibit 7.2.11 hereto.
 
 
7.2.12
The Company and Yoav Kimchy shall execute and deliver the CTO Employment Agreement.
 
 
7.2.13
The Company shall provide Fosun Pharma confirmation of the participation in the Credit Line Amount, of an amount not to be less than US$2,000,000, from existing shareholders.
 
 
7.3
If the Closing does not occur within forty five (45) days from the Effective Date, each of the Company and the Majority Lenders on behalf of the Lenders may terminate this Agreement and the transactions contemplated hereby may be abandoned by written notice to the other party, without further action of any of the parties hereto, without giving rise to any right or claim by the other party, excluding claims for breaches of obligations by any party prior to such termination .   Any such termination by the Majority Lenders shall apply with respect to all Lenders.
 
 
7

 
 
8.
Conditions to Closing by the Lenders
 
The Lenders obligation to consummate the transactions contemplated hereby at the Closing is subject to the satisfaction and fulfillment, prior to or at the Closing, of each of the following conditions precedent (any or all of which may be waived, in whole or in part, by the Majority Lenders, which waiver shall be at the sole discretion of the Majority Lenders and shall apply with respect to all Lenders):
 
 
8.1
Accurate Representations and Warranties . The representations and warranties of the Company in this Agreement shall be true and correct when made and shall be true and correct in all material respects as of the Closing Date.
 
 
8.2
Compliance with Covenants . The Company shall have performed and complied with all of its covenants, agreements and undertakings set forth herein.
 
 
8.3
Actions Taken; Delivery of Documents .   All the actions to be taken by the Company’s shareholders or by the Company as set forth in Section 7.2 above shall have been completed to the satisfaction of the Majority Lenders.
 
 
8.4
Proceedings and Documents . All corporate and other proceedings in connection with the transactions contemplated by this Agreement shall be satisfactory in substance and form to the Lenders, and the Lenders shall have received all such counterpart copies of such documents as the Lenders may reasonably request.
 
 
8.5
Consents .  The Company shall have secured all permits, consents and authorizations that shall be necessary or required lawfully to consummate this Agreement.
 
 
8.6
Minimum Credit Line Amount . The aggregate Credit Line Amount the Lenders committed to extend shall be at least the Minimum CLA.
 
 
8.7
CTO Employment Agreement . The Company and Yoav Kimchy shall have entered into the CTO Employment Agreement.
 
9.
Conditions to Closing by the Company
 
The Company’s obligation at the Closing to consummate the transactions contemplated hereby is subject to the satisfaction and fulfillment, prior to or at the Closing, of each of the following conditions precedent (any or all of which may be waived, in whole or in part, by the Company, which waiver shall be at the sole discretion of the Company):
 
 
9.1
Accurate Representations and Warranties . The representations and warranties of the Lenders in this Agreement shall be true and correct when made and shall be true and correct in all material respects as of the Closing Date.
 
 
8

 
 
 
9.2
Compliance with Covenants . The Lenders shall have performed and complied with all of their covenants, agreements, and undertakings as set forth in this Agreement.
 
 
9.3
Waiver of Anti-dilution Rights . The requisite majority of shareholders have waived their anti-dilution rights in connection with the transactions contemplated under this Agreement, including, without limitation, in connection with the issuance of the Credit Line Warrants and their underlying shares, the securities issued upon conversion of the Conversion Amount as such term is defined in Section 1.2 of Exhibit 4.2 ) and any other Issued Securities.
 
 
9.4
Minimum Credit Line Amount . The aggregate Credit Line Amount the Lenders committed to extend shall be at least the Minimum CLA.
 
10.
Representations and Warranties of the Company
 
 
10.1
Definitions . Capitalized terms used in this Section 10 and not otherwise defined in this Agreement shall have the meanings ascribed to them below:
 
" Company Intellectual Property " means any Intellectual Property that is owned by the Company.
 
" Company Products " shall mean any hardware, software, software-as-a-service or other product or service currently developed by the Company.
 
" Company Registered Intellectual Property " means all Registered Intellectual Property owned by, filed in the name of, assigned to or applied for by, the Company.
 
" Company Technology " means all Technology owned or developed by the Company.
 
 
9

 
 
" Intellectual Property " means (a) national and multinational statutory invention registrations, patents and patent applications (including all renewals, reissues, divisions, substitutions, continuations, continuations-in-part, extensions and reexaminations thereof) registered or applied for in the United States and all other nations throughout the world, (b) trademarks, service marks, trade dress, logos, slogans, trade names and corporate names (whether or not registered) in the United States and all other nations throughout the world, including all variations, derivations, combinations, registrations and applications for registration or renewals of the foregoing and all goodwill associated therewith, (c) copyrights and rights under copyrights throughout the world, including all derivative works, renewals, extensions, reversions or restorations associated with such copyrights, regardless of the medium of fixation or means of expression (including computer software, Open Source Software, source code, executable code, data, databases and documentation), (d) trade secrets, including pricing and cost information, business and marketing plans and customer and supplier lists, technology, specifications, designs, formulae, techniques, technical data and manuals, research and development information, know how, methods and processes (including manufacturing and production processes), and invention disclosures, (e) industrial designs (whether or not registered), (f)inventions, whether or not patentable, reduced to practice or made the subject of one or more pending patent applications, and all improvements thereto, (g) all rights in all of the foregoing provided by treaties, conventions and common law, (h) all rights to sue or recover and retain damages and costs and attorneys’ fees for past, present and future infringement or misappropriation of any of the foregoing, and (i) all other proprietary or intellectual property rights recognized as such in any jurisdiction in which the Company is operating the Company's business.
 
" Key Employee " means the Chief Executive Officer of the Company, the Chief Financial Officer of the Company, Chief Technology Officer and any executive-level employee of the Company as well as any employee or consultant who either alone or in concert with others develops, invents, programs or designs any Intellectual Property.
 
" License " means any contract or agreement that grants a person the right to use or otherwise enjoy the benefits of any Intellectual Property (including any covenants not to sue with respect to any Intellectual Property).
 
" Non-Critical Software " means off-the-shelf and/or mass-marketed software for use on personal computers licensed on a non-exclusive basis in object-code format that is made generally available on standard terms with a replacement cost and/or annual fee of less than $50,000.
 
" Open Source Software " means any Software that is licensed under (a) licenses substantially similar to those approved by the Open Source Initiative and listed at http://www.opensource.org/licenses, which licenses include the GNU General Public License (GPL), the GNU Lesser General Public License (LGPL), the Mozilla Public License, the BSD License and the Apache License, or (b) or other licensing regimes that purport to (i) restrict the free use, license or distribution of any such Software, or (ii) require as a condition of use, modification or distribution that such Software or other Software incorporated into, derived from or distributed with such Software: (x) be disclosed or distributed in source code form; (y) be licensed for the purpose of making derivative works; or (z) be redistributable at no or a nominal charge.
 
 
10

 
 
" PTO " means the United States Patent and Trademark Office.
 
" Registered Intellectual Property " shall mean all United States, international, foreign and other non-US patents and trademarks that have been recorded or registered in any applicable jurisdiction.
 
" Software " means computer software, firmware, and programs in source code or executable code, databases, tools, developers kits, and utilities, and all versions, updates, corrections, enhancements and modifications thereof, and all related manuals and documentation.
 
" Technology " means tangible embodiments of Intellectual Property, whether in electronic, written or other media, including Software, technical documentation, specifications, designs, bills of material, build instructions, test reports, schematics, algorithms, application programming interfaces, user interfaces, routines, formulae, test vectors, IP cores, mask works, tooling requirements, databases, lab notebooks, invention disclosures, processes, prototypes, samples, studies, and all know-how and works of authorship.
 
 
10.2
Representations and Warranties of the Company
 
Except as may be expressly set forth in the disclosure schedule delivered in connection herewith and attached hereto as Schedule   10.2   (the " Disclosure Schedule "), which exceptions shall be deemed to be representations and warranties made hereunder when read in conjunction with the applicable section, the Company hereby represents and warrants to the Lenders and acknowledges that the Lenders are entering into this Agreement in reliance thereon, as follows:
 
 
10.2.1
Organization . The Company is a company duly organized and validly existing under the laws of the State of Israel. The Company has the power to own and lease its properties and to carry on its business as now being conducted and as proposed to be conducted.
 
The Company has all requisite power and authority to execute and deliver this Agreement and to consummate the transactions and perform its obligations contemplated hereby and thereby and any other agreements contemplated hereby or which are ancillary hereto. The Amended Articles will be in effect as of the Closing.
 
 
11

 
 
 
10.2.2
Share Capital . The authorized share capital of the Company immediately prior to the Closing shall consist of eleven million five hundred thousand New Israeli Shekels (NIS 11,500,000) divided into (i) 907,154,180 Ordinary Shares, of nominal value NIS 0.01 each, of which 23,042,634 are issued and outstanding and of which 16,265,732 are reserved for issuance to employees, consultants, officers, or directors of the Company pursuant to the company's share incentive plans or agreements to be approved by the board of directors, of which 14,475,641  are underlying issued, committed and allocated options (ii) 6,750,000 Preferred A Shares, of nominal value NIS 0.01 each, all of which are issued and outstanding, (iii) 6,769,359 Preferred B Shares, of nominal value NIS 0.01 each, all of which are issued and outstanding, (iv) 17,493,491 Preferred C1 Shares, of nominal value NIS 0.01 each, of which 16,414,906 are issued and outstanding (v) 31,832,970 Preferred C2 Shares, of nominal value NIS 0.01 each, of which 29,788,667 are issued and outstanding (vi) 30,000,000 Preferred C3 Shares, of nominal value NIS 0.01 each, none of which are issued and outstanding (vii) 80,000,000 Preferred D1 Shares, of nominal value NIS 0.01 each, of which 24,545,195 are issued and outstanding (viii) 60,000,000 Preferred D2 Shares, of nominal value NIS 0.01 each, none of which are issued and outstanding (ix) 5,000,000 Preferred D3 Shares, of nominal Value NIS 0.01 each, of which 2,510,783 are issued and outstanding and (x) 5,000,000 Preferred D4 Shares, of nominal Value NIS 0.01 each, none of which are issued and outstanding.
 
Other than as set out in Schedule 10.2.2(a) and Schedule 10.2.2(b) to the Disclosure Schedule, and other than as pursuant to law, there are no other special rights held by the shareholders of the Company (the " Shareholders "), including the holders of the Preferred Shares (as defined below), by virtue of such shareholding, other than as set forth in the Company's Articles of Association (the " Articles "). For purposes hereof, the Preferred A Shares, the Preferred B Shares, the Preferred C1 Shares, the Preferred C2 Shares, the Preferred C3 Shares, the Preferred D1 Shares, the Preferred D2 Shares and the Preferred D3 Shares shall be collectively referred to as the " Preferred Shares ".
 
 
12

 
 
Attached as Schedule 10.2.2(b)   to the Disclosure Schedule is the capitalization table of the Company on a pre and post Closing Fully Diluted Basis, the number and class of shares held by each Shareholder, the total number of reserved and granted options, warrants, and all other rights to subscribe for, purchase or acquire from the Company any share capital of the Company, except as set forth in Schedule 10.2.2(c) to the Disclosure Schedule and excluding the Issued Securities (as defined below) other than the Credit Line Warrants issued at the Closing. All issued and outstanding shares of the Company have been duly authorized, and are validly issued and outstanding and fully paid and nonassessable. The Credit Line Warrants, the shares issuable upon exercise thereof and the other securities contemplated to be issued to the Lenders in accordance with this Agreement and any shares issuable upon conversion thereof (collectively, the " Issued Securities "), when issued in accordance with this Agreement (and assuming payment in full therefor), will be duly authorized, validly issued, fully paid and nonassessable, and will have the rights, preferences, privileges, and restrictions set forth in the Company's Articles of Association as shall be in effect from time to time.  Any Issued Securities that are shares of the Company, when issued in accordance with this Agreement, will be duly registered in the name of such Lender in the Company's register of shareholders.
 
 
10.2.3
Financial Statements . The Company has furnished the Lenders with its (i) audited financial statements as of and for the year ended December 31, 2013, attached hereto as Schedule 10.2.3(i) to the Disclosure Schedule; (ii) its unaudited and unreviewed financial statements for the six months ended June 30, 2014, attached hereto as Schedule 10.2.3(ii) to the Disclosure Schedule (together, the " Financial Statements "). The Financial Statements are true and correct in all material respects, are in accordance with the books and records of the Company and have been prepared in accordance with International Financial Reporting Standards consistently applied, and fairly and accurately present in all material respects the financial position of the Company as of such dates and the results of its operations for the periods then ended, subject in the case of the unaudited and unreviewed financial statements to period-end adjustments.
 
 
13

 
 
 
10.2.4
Authorization; Approvals . All corporate action on the part of the Company, its Shareholders and directors necessary for the authorization, execution, delivery, and performance of all of the Company's obligations to the Lenders under the Transaction Documents, including the authorization, issuance, and delivery of the Issued Securities to the Lenders under this Agreement has been (or will be) taken prior to Closing. The Transaction Documents, when executed and delivered by or on behalf of the Company, shall be duly and validly authorized, executed and delivered by the Company and shall constitute the valid and legally binding obligations of the Company, legally enforceable against the Company in accordance with their respective terms. Except as set forth in Schedule 10.2.4 to the Disclosure Schedule, no consent, approval, order, license, permit, action by, or authorization of or designation, declaration, or filing with any governmental authority on the part of the Company is required that has not been, or will not have been, obtained by the Company on or prior to the Closing in connection with the valid execution, delivery and performance of Transaction Documents, including the issuance of the Issued Securities (other than filing with the Israeli Registrar of Companies which shall be made promptly following each issuance of Issued Securities that are shares pursuant to this Agreement).
 
 
10.2.5
Compliance with Other Instruments . The Company is not in material default (a) under the Articles or other organizational documents, or under any note, indenture, mortgage, lease, agreement, contract, purchase order or other instrument, document or agreement to which the Company is a party, or (b) with respect to any law, statute, ordinance, regulation, order, writ, injunction, decree, or judgment of any court or any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which default, in any such case, would materially adversely affect or in the future is reasonably likely to materially adversely affect the Company's business, prospects, condition (financial or otherwise), affairs, operations or assets. To the Company's knowledge, no third party is in material default under any agreement, contract or other instrument, document or agreement to which the Company is a party. The Company is not a party to or bound by any order, judgment, decree or award of any governmental authority, agency, court, tribunal or arbitrator.
 
 
14

 
 
 
10.2.6
No Breach . Neither the execution and delivery of the Transaction Documents nor compliance by the Company with the terms and provisions thereof will conflict with, or result in a breach or violation of, any of the terms, conditions and provisions of: (i) the Articles (assuming the receipt of any and all consents required pursuant to the Articles), (ii) any judgment, order, injunction, decree, or ruling of any court or governmental authority, domestic or foreign, (iii) any agreement, contract, lease, license or commitment to which the Company is a party or to which it is subject, or (iv) applicable law. Such execution, delivery and compliance will not (a) give to others any rights, including rights of termination, cancellation or acceleration, in or with respect to any agreement, contract or commitment referred to in this paragraph, or to any of the properties of the Company, except as set forth on Schedule 2.6 to the Disclosure Schedule, or (b) except as specified in the Articles and Schedule 10.2.4 to the Disclosure Schedule, otherwise require the consent or approval of any person, which consent or approval has not heretofore been obtained.
 
 
10.2.7
Taxes . The Company has accurately prepared and timely   filed all tax returns and reports required by it under applicable law. All tax returns and reports of the Company are true and correct in all material respects and the Company has paid on time all taxes and other assessments due. No deficiency assessment or proposed adjustment of income or payroll taxes of the Company is pending and the Company has no knowledge of any proposed liability for any tax to be imposed.  Except as set forth in Schedule 10.2.7 to the Disclosure Schedule, the Company has not made any elections under applicable laws or regulations (other than elections that related solely to methods of accounting, depreciation or amortization) that would have a material adverse effect on the Company, its financial condition, its business as presently conducted or proposed to be conducted or any of its properties or assets.  The Company is not currently liable for any income tax, capital gains tax, value added tax, or other tax other than current monthly payments in the ordinary course of business.
 
 
15

 
 
 
10.2.8
Litigation . No action, proceeding or governmental inquiry or investigation is pending or, to the Company's knowledge, threatened against the Company or any of its officers, directors, or employees (in their capacity as such) or against any of the Company's properties, or with regard to the Company’s business, before any court, arbitration board or tribunal or administrative or other governmental agency, nor is the Company aware of any basis for the foregoing. There is no action, suit, proceeding or investigation by the Company currently pending or that the Company intends to initiate.
 
 
10.2.9
Brokers .  Except as set forth in Schedule 10.2.9 to the Disclosure Schedule, no agent, broker, investment banker, person or firm acting in a similar capacity on behalf of or under the authority of the Company is or will be entitled to any broker’s or finder’s fee or any other commission or similar fee, directly or indirectly, on account of any action taken by the Company in connection with any of the transactions contemplated under this Agreement.
 
 
16

 
 
 
10.2.10
Government Funding . Schedule 2.10 identifies each governmental funding that the Company has received, approvals for funding to be received in the future and pending applications for governmental funding (collectively, the " Governmental Funding "). Except as set forth on Schedule 2.10 , the Company has not received any governmental funding and there are no pending applications therefor. The Company has delivered to Lenders accurate and complete copies of: (i) all applications and undertakings submitted by the Company to any governmental entity in relation to Governmental Funding (including, funding from the Office of the Chief Scientist of the Ministry of Economy (" OCS ")); and (ii) all certificates of approval and letters of approval (and supplements thereto) granted to the Company by the OCS or any other governmental entity or other material documentation in relation to Governmental Funding. The Company is in compliance with the material terms, conditions and requirements of all Governmental Funding and has duly fulfilled all material conditions, undertakings and other obligations relating thereto. To the knowledge of the Company, no event has occurred and no circumstance or condition exists, that would reasonably be expected to give rise to or serve as the basis for (i) the annulment, revocation, withdrawal, suspension, cancellation, recapture or modification of the Governmental Funding, (ii) the imposition of any material limitation on the Governmental Funding or any benefit available in connection with the Governmental Funding, or (iii) a requirement that the Company return or refund any benefits provided under the Governmental Funding.  The Company has not deposited in escrow any know-how (as such term is defined in the R&D Law) funded by the Governmental Funding nor has it pledged any such know-how.
 
 
10.2.11
Interested Party Transactions . Except as set forth in Schedule 10.2.11 to   the Disclosure Schedule, no officer, director or Shareholder, or, to the knowledge of the Company, any affiliate of any such person or entity, either directly or indirectly, (i) is involved in or proposes any business arrangement or relationship with the Company which is material to the Company or its business, (ii) has a beneficial interest in any contract or agreement to which the Company is a party or currently proposes to be a party, (iii) has any interest in or owns any property or right, including Intellectual Property (as defined below), material to the Company in the conduct of its business as presently conducted and, to the knowledge of the Company, as currently proposed by the Company to be conducted, or (iv) has lent or advanced any money to, or borrowed any money from, or guaranteed or otherwise become liable for any indebtedness or other obligations of the Company.
 
 
17

 
 
 
10.2.12
Employees. Schedule 10.2.12(i) to the Disclosure Schedule lists (a) all the employees of the Company, and (b) all employment, non-competition and confidentiality agreements between the Company and any employee or consultant of the Company. Except as set forth in Schedule 10.2.12(ii) to   the Disclosure Schedule, the Company has no employment contract with any officer or employee or any other consultant which is not terminable by it without liability, upon thirty (30) days prior notice. Except as set forth in Schedule 10.2.12(iii) to the Disclosure Schedule, as of the date hereof, the Company has no deferred compensation or stock option plan covering any of its officers or employees. The Company has complied in all respects with all applicable employment laws, policies, procedures and agreements relating to employment, terms and conditions of employment and to the proper withholding and remission to the proper tax and other authorities of all sums required to be withheld from employees under applicable laws respecting such withholding. The Company has paid in full to all of its respective employees, wages, salaries, commissions, bonuses, benefits and other compensation due and payable to such employees on or prior to the date hereof, other than payments in the ordinary course of business. The Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union except for those provisions of general agreements between the Histadrut and any Employers’ Union or Organization that are applicable to all the employees in Israel (or to all employees in certain industries) by Extension Order(s).  To the Company’s knowledge, no labor union has requested or has sought to represent any of the employees, representatives or agents of the Company. To the Company’s knowledge, neither the employment by the Company of any of its employees nor the engagement by it with any of its respective consultants, constitutes or is likely to constitute a breach of any such person’s obligations to third parties, including non-competition or confidentiality obligations. To the Company’s knowledge, no employee has violated any material term of his or her employment agreement or expressed his or her intention to terminate employment. To the Company's knowledge, none of the employees or consultants is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with such employee's or consultant's duties under his respective employment or consulting agreement. To the Company’s knowledge, no Key Employee intends to terminate employment with the Company, or is otherwise likely to become unavailable to continue as a Key Employee, nor does the Company have a present intention to terminate the employment of any of the foregoing.  Except as set forth in Schedule 10.2.12(iv) to the Disclosure Schedule and in their respective employment agreements listed in Schedule 2.12(i) to the Disclosure Schedule or as required by applicable law, upon termination of the employment of any such employees, no severance or other payments will become due. Except as set forth in Schedule 10.2.12(v) to the Disclosure Schedule, the Company has no policy, practice, plan or program of paying severance pay or any form of severance compensation in connection with the termination of employment services. All employees and consultants of the Company have signed and executed an employment or consulting agreement substantially in one of the forms provided to the Lenders. Such agreements include, with respect to an employee or a consultant that were involved in the creation or development of any Company Intellectual Property, the assignment of all Intellectual Property created by such employee or consultant to the Company.
 
 
18

 
 
 
10.2.13
Insurance . Schedule 10.2.13 to the Disclosure Schedule contains a list of each current insurance and indemnity policy in respect of which the Company has an interest (collectively, the " Policies "). There is no claim by the Company pending under any of the Policies. All premiums due under the Policies have been paid and the Company is otherwise in full compliance with the terms and conditions of all the Policies.  Each of the Policies is valid, in full force and effect. The Company has not undertaken any action, or omitted to take any action, which would render any such Policy void or voidable or which could result in a material increase in the premium for any such Policy.
 
 
10.2.14
Subsidiaries . The Company has no subsidiaries and does not own or control, directly or indirectly, any shares of any corporation or any interest in any partnership, joint venture or other non-corporate business enterprise.
 
 
10.2.15
Ownership of Assets . Except as set forth in Schedule 10.2.15(i) to   the Disclosure Schedule, the Company does not currently lease or license any property. Except as set forth in Schedule 10.2.15(ii) to   the Disclosure Schedule, the Company has good and marketable title to all of its assets, free and clear of any mortgage, pledge, lien, security interest, conditional sale agreement, encumbrance or charge, and such assets are sufficient for the conduct of the Company’s business as currently conducted. The Company is not in default or in breach of any material provision of its leases, and the Company holds a valid leasehold interest in the property it leases.
 
 
19

 
 
 
10.2.16
Contracts . Schedule 10.2.16 to the Disclosure Schedule contains a true and complete list of all material contracts, agreements, instruments and undertakings (oral or written) to which the Company is a party or by which, to the Company's knowledge, its property is bound, including, without limitation: (i) any contract for the lease of (a) personal property from or to third parties, or (b) real property, by the Company; (ii) any contract concerning a partnership or joint venture with the Company; (iii) any contract concerning non-competition, other than standard forms of agreements between the Company and its employees and consultants; (iv) any contract or commitment with respect to any loan, guarantee or the investment of funds to or in other persons, by the Company; (v) any contract under which the Company undertook to indemnify a third party; (vi) any license of any patent, copyright, trade secret or other proprietary right to or from the Company; (vii) any contract restricting, affecting or otherwise with respect to the development, manufacture or distribution of the Company's products or services; and (viii) any other contract to which the Company is a party, the total value of which is in excess of US$ 65,000.
 
 
10.2.17
Intellectual Property Rights
 
 
(a)
Schedule 10.2.17(a)(i) to the Disclosure Schedule contains a true and complete list of all Company Registered Intellectual Property as of the date hereof, including the following: (i) for each patent and patent application, the patent number or application serial number for each jurisdiction in which the patent or application has been filed or from which the registration issued, such jurisdiction, and the date of filing or issuance, and the present status thereof; (ii) for each registered trademark, trade name or service mark, the application serial number or registration number, for each country, province or state in which the mark or application has been filed or from which the registration issued, such country, province or state, the date of filing or issuance, and the class of goods covered, and the present status thereof. In addition, Schedule 10.2.17(a)(ii) to the Disclosure Schedule contains a true and complete list of all trademarks, trade names, or service marks that the Company has used with the intent of creating or benefiting from any common law rights relating to such marks.
 
 
20

 
 
 
(b)
Each item of Company Registered Intellectual Property is valid, subsisting and enforceable (except that the foregoing does not pertain, with respect to enforceability, to any patent application) and all necessary registration, maintenance, renewal fees, annuity fees and taxes in connection with the Company Registered Intellectual Property have been paid and all necessary documents and certificates in connection with the Company Registered Intellectual Property have been filed with the relevant patent, trademark or other authorities in the United States or foreign jurisdictions in accordance with applicable law for the purposes of obtaining and maintaining the registration for such Company Registered Intellectual Property, and all assignments (and licenses where required by applicable law) of the Company Registered Intellectual Property have been duly recorded with the appropriate governmental or regulatory authority in which such Company Registered Intellectual Property was registered. The Company has complied in all material respects with all applicable notice and marking requirements for the Company Registered Intellectual Property. In each case in which the Company has acquired ownership of any Intellectual Property from any person, the Company has obtained a valid and enforceable assignment sufficient to irrevocably transfer all rights in such Intellectual Property (including the right to seek past and future damages with respect to such Intellectual Property) to the Company.
 
 
(c)
The Company is not aware of any information material to a determination of patentability regarding its patent applications not called to the attention of the USPTO or any relevant foreign patent office, including any information that would preclude the grant of a patent for such patent applications.  The Company has no knowledge of any information that would preclude the Company from having clear title to such patent applications and to the patents which have issued or which may issue therefrom. To the knowledge of the Company, all printed publications and patent references material to the patentability of the inventions claimed in such patent applications have been disclosed to those patent offices so requiring.
 
 
21

 
 
 
(d)
Schedule 10.2.17(d)(i) to the Disclosure Schedule sets forth a true and complete list of all material Licenses pursuant to which the Company has licensed or otherwise received rights under any Technology or Intellectual Property owned by a third party (each, an " Inbound License "), including all material Licenses pursuant to which the Company is granted rights in any such Technology or Intellectual Property used or held for use by the Company in the operation of the business (except for Non-Critical Software), as well as a summary of the Company’s remaining royalty payment obligations, if any, with respect to each of the Inbound Licenses. Schedule 10.2.17(d)(ii) to the Disclosure Schedule sets forth all material Licenses pursuant to which the Company has licensed or otherwise granted any rights under any Company Intellectual Property (each, an " Outbound License ").
 
 
(e)
The Company has not (A)(i) transferred ownership of or (ii) except pursuant to Outbound Licenses listed on Schedule 10.2.17(d)(ii) to the Disclosure Schedule, granted (and is not obligated to grant) to any other person any License of, any Intellectual Property that is Company Intellectual Property, or (B) authorized any other person to retain any right to use any Intellectual Property that is or was Company Intellectual Property, except pursuant to Outbound Licenses set forth in Schedule 10.2.17(d)(ii) to the Disclosure Schedule.
 
 
(f)
The Company Intellectual Property, together with the Intellectual Property licensed to Company under the Inbound Licenses, includes all the Intellectual Property used in, or held for use in, or reasonably deemed necessary for the conduct of the Company's business as presently conducted (and for greater certainty, without limiting the Company from licensing additional Intellectual Property under Inbound Licenses in the future for the conduct of its business).
 
 
(g)
Except as provided in Schedule 10.2.17(g) to the Disclosure Schedule , the Company owns full title and ownership or has obtained the good and valid right or license to use, free and clear of all liens, claims and restrictions, all of the Company Intellectual Property, except as provided under any applicable law (including any conventions and treaties).
 
 
22

 
 
 
(h)
Except as provided in Schedule 10.2.17(h) to the Disclosure Schedule the Company is not obligated to provide any consideration (whether financial or otherwise) or account to any third party with respect to any exercise of rights by the Company, or any successor to the Company, in any Company Intellectual Property, Company Technology or Company Product.
 
 
(i)
No Open Source Software is incorporated directly by the Company into any of the Company Products.  The Company has not used and does not use any Open Source Software in a manner that requires the Company to grant to any third party any rights in or immunities under any Company Intellectual Property, including by using any Open Source Software in a manner that requires, as a condition of use, modification or distribution of such Open Source Software, that any Company Intellectual Property or Company Technology incorporated into, derived from or distributed with such Open Source Software be (x) disclosed or distributed in source code form, (y) licensed for the purpose of making derivative works, or (z) be redistributable at no charge or for a nominal charge.
 
 
(j)
To the knowledge of the Company, no person has interfered with, violated, infringed upon, or misappropriated, or otherwise misused any Company Intellectual Property, or is currently doing so. The Company has not brought any action or proceeding for infringement or violation of Intellectual Property or breach of any License or other contract involving Intellectual Property against any person. There is no action or proceeding pending or, to the knowledge of the Company, threatened (i) alleging infringement, misappropriation or any other violation of any Intellectual Property of any person by the Company or any Company Product, or (ii) challenging the scope, ownership, validity, or enforceability of any Company Intellectual Property. To the knowledge of the Company, neither the Company Intellectual Property nor the Company Technology is subject to any outstanding judgment, decree, order, writ, award, injunction or determination of an arbitrator or court or other government or regulatory authority (other than office actions and correspondence regarding pending patent applications and trademark applications) restricting or otherwise affecting the rights of the Company with respect thereto.
 
 
23

 
 
 
(k)
To the Company's knowledge, the operation of the business of the Company does not (and did not at any time): (i) infringe or misappropriate the Intellectual Property rights of any person in any jurisdiction in which the Company currently operates or, without the Company having conducted an independent search, infringe or misappropriate the Intellectual Property rights of any person in any jurisdiction in which the Company is reasonably anticipating to operate in accordance with the Company’s current plan; (ii) violate any term or provision of any License concerning the Intellectual Property rights of the licensor under such License or; (iii) violate any right of any person to privacy or publicity; or (iv) constitute unfair competition or an unfair trade practice under any applicable law in any jurisdiction in which the Company operates. The Company has not received from any person any notice claiming that such operation or any Company Product infringes or misappropriates the Intellectual Property of any person or constitutes unfair competition or trade practices under any applicable law.
 
 
(l)
The Company has taken reasonable steps consistent with industry standard practices to safeguard and maintain the secrecy and confidentiality of trade secrets and other confidential information in the possession of the Company. Without limiting the generality of the foregoing: (i) to the knowledge of the Company there has been no misappropriation or disclosure of any trade secrets or other confidential Company Intellectual Property or Company Technology, other than pursuant to an appropriate confidentiality agreement or as required under any applicable law (ii) to the knowledge of the Company, no employee, independent contractor or agent of the Company has misappropriated any trade secrets or other confidential Company Intellectual Property or Company Technology of any other person in the course of performance as an employee, independent contractor or agent of the Company; and (iii) to the knowledge of the Company, no employee, independent contractor or agent of the Company is in default or breach of any term of any nondisclosure undertaking or obligation, assignment of invention undertaking or obligation or similar undertaking, obligation or contract relating in any way to the protection, ownership, development, use or transfer of any Company Intellectual Property or Company Technology. The Company has not disclosed any confidential information of the Company that is not pursuant to an appropriate confidentiality agreement.  The Company has not disclosed any third party confidential information that is protected by a confidentiality agreement in breach of that confidentiality agreement.
 
 
24

 
 
 
(m)
All rights in, to and under all Intellectual Property and Technology created by Yoav Kimchy, the Company’s founder (the " Founder ") (i) for or on behalf or in contemplation of the Company (A) prior to the inception of the Company; or (B) prior to his commencement of employment with the Company; or (ii) presently embodied in, proposed to be embodied in, or distributed with the Company Products or utilized in the development, manufacture, use or support of the Company Products, has in each case been duly and validly assigned to the Company, and the Company has no reason to believe that the Founder is unwilling to provide the Company with such cooperation as may reasonably be required to complete and prosecute all U.S. and foreign patent and copyright filings related thereto.
 
 
(n)
The Company has taken reasonable steps consistent with industry standard practices to protect and preserve the ownership of all Company Intellectual Property.
 
 
(o)
Except as set forth in Schedule 2.10 of the Disclosure Schedule, no funding from any government authority was used in the development of the Company Intellectual Property.
 
 
25

 
 
 
10.2.18
Environmental and Safety Laws . (a) The Company is and has been at all times in compliance with all Environmental Laws (as hereinafter defined); (b) there has been no release of any pollutant, contaminant or toxic or hazardous material, substance or waste, or petroleum or any fraction thereof (each a " Hazardous Substance ") on, upon, into or from any site currently or heretofore owned, leased or otherwise used by the Company; (c) there have been no Hazardous Substances generated by the Company that have been disposed of or come to rest at any site that has been included in any list of hazardous or toxic waste sites published by any governmental authority; and (d) there are no underground storage tanks located on, no polychlorinated biphenyls (" PCBs ") or PCB-containing equipment used or stored on, and no hazardous waste stored on, any site owned or operated by the Company.
 
For purposes hereof, " Environmental Laws " means any law, regulation, or other applicable requirement relating to (a) releases or threatened release of Hazardous Substance; (b) pollution or protection of employee health or safety, public health or the environment; or (c) the manufacture, handling, transport, use, treatment, storage, or disposal of Hazardous Substances.
 
 
10.2.19
No Adverse Change . Other than as set forth in Schedule 10.2.19 to the Disclosure Schedule, since June 30, 2014, there has not been:
 
 
(a)
any change in the assets, liabilities, financial condition or operating results of the Company from that reflected in the Financial Statements, except changes in the ordinary course of business that have not caused, in the aggregate, a material adverse effect on the assets, financial condition or business of the Company as currently conducted (a " Material Adverse Effect ");
 
 
(b)
any damage, destruction or loss, whether or not covered by insurance, that would have a Material Adverse Effect;
 
 
(c)
any waiver or compromise by the Company of a valuable right or of a material debt owed to it;
 
 
(d)
any satisfaction or discharge of any material lien, material claim, or material encumbrance or payment of any material obligation by the Company, except in the ordinary course of business and the satisfaction or discharge of which would not have a Material Adverse Effect;
 
 
26

 
 
 
(e)
any material change to a material contract or material agreement by which the Company or any of its assets is bound or subject;
 
 
(f)
any material change in any compensation arrangement or agreement with any officer, director or shareholder of the Company;
 
 
(g)
any resignation or termination of employment of any officer of the Company;
 
 
(h)
any mortgage, pledge, transfer of a security interest in, or lien, created by the Company, with respect to any of its properties or assets, except liens for taxes not yet due or payable and liens that arise in the ordinary course of business and do not materially impair the Company’s ownership or use of such property or assets;
 
 
(i)
any loans or guarantees made by the Company to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances and other advances made in the ordinary course of its business;
 
 
(j)
any declaration, setting aside or payment or other distribution in respect of any of the Company’s capital, or any direct or indirect redemption, purchase, or other acquisition of any of such capital by the Company;
 
 
(k)
any sale, assignment or transfer of any of the Company's Intellectual Property not in the ordinary course of business of the Company;
 
 
(l)
any other event or condition of any character, other than events affecting the economy or the Company’s industry generally, that could reasonably be expected to result, individually or cumulatively, in a Material Adverse Effect and which would have been reflected in the Financial Statements had the Financial Statements been dated as of the date hereof; or
 
 
(m)
any arrangement or commitment by the Company to do any of the things described in this Section  10.2.19.
 
 
10.2.20
Fu ll Disclosure . Neither this Agreement including the Schedules attached hereto nor any certificate made or delivered in connection herewith or therewith contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements herein or therein not misleading, in view of the circumstances in which they were made.
 
 
27

 
 
 
10.3
The Lenders hereby acknowledge and agree that the Company is not providing the Lenders with any representations and warranties other than those representations and warranties set forth in Section 10.2.
 
11.
Representation and Warranties of the Lenders
 
Each of the Lenders hereby represents and warrants with respect to itself, severally but not jointly with the other Lenders, to the Company as follows:
 
 
11.1
The Lender is duly organized, validly existing and in good standing under the laws of jurisdiction of its incorporation or organization. All corporate action on the part of the Lender necessary for the authorization, execution, delivery, and performance of all of the Lender's obligations under the Transaction Documents has been taken. The Transaction Documents, when executed and delivered by or on behalf of the Lender, shall constitute the valid and legally binding obligations of the Lender, legally enforceable against the Lender in accordance with their terms .
 
 
11.2
The execution and delivery of the Transaction Documents and the consummation of the transactions contemplated thereby will not result in the breach of any term of, or constitute a default under, any contract or agreement to which the Lender may be bound. No approval or consent from any person, entity or authority, is required by the Lender for the execution, delivery and performance by it of the Transaction Documents that has not been, or will not have been, obtained by the Lender on or prior to the Closing.
 
 
11.3
The Lender is an "accredited investor" as defined in Rule 501(a) under the U.S. Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
 
 
11.4
The Lender has knowledge and experience in financial and business matters, is capable of evaluating the merits and risks of the transactions evidenced by this Agreement, and can bear the economic consequences of its investment for an indefinite period of time.  Without derogating from the Lender's right to rely on the representations and warranties of the Company set forth in Section 10 above and the indemnification provisions in Section 14 hereof, the Lender acknowledges that it and its advisers and representatives have had an opportunity to ask questions of, and receive answers from the Company and any other person acting on behalf of the Company concerning such investment.
 
 
28

 
 
 
11.5
The Lender understands that the Issued Securities, have not been, and may not be, registered under the Israeli securities law or any other securities regulations by reason of a specific exemption from the registration provisions of such securities regulations.
 
 
11.6
The Lender represents and agrees that the Issued Securities, when issued to such Lender hereunder, are or will be purchased only for investment purposes, for its own account, and not as a nominee or agent, and not with the view to, or for resale in connection with, any distribution thereof.
 
 
11.7
The Lender acknowledges and agrees that in the event that the Company consummates a PO (including an IPO), the following securities (as applicable) will be subject to lock-up restrictions to the extent and in the form and substance determined by the Company and its underwriters, provided that such lock-up shall not exceed 180 days (unless a longer period is required under any applicable law or otherwise agreed by the Lender), without derogating from any re-sell restrictions that may apply under any applicable law: (i) the securities issued in consideration of such Lender's Credit Line Amount placed in the IPO in accordance with Section 5.1 above; (ii) the securities issued upon conversion of such Lender's Conversion Amount or according to the Lender's irrevocable letter of instructions in accordance with Exhibit 4.2 , as applicable; (iii) the Credit Line Warrants and their underlying shares; and (iv) any other Company securities held by the Lender on or prior to the Closing, as shall be determined by the Company and its underwriters.
 
12.
Covenants
 
 
12.1
Use of Proceeds . To the extent called by the Company, the Company will use the Loan Amount to finance its activities in accordance with a budget approved and amended from time to time by its Board of Directors.
 
 
12.2
OCS Undertaking . To the extent that at any time hereinafter a Lender shall hold such number of securities of the Company such that it shall be legally required to sign an undertaking to the OCS, then such Lender shall sign such undertaking as may be required by the OCS at such time.
 
 
29

 
 
13.
Event of Default
 
 
13.1
If not repaid, placed in an IPO, converted earlier according to the provisions of this Agreement, or otherwise directed by the Majority Lenders in writing, the Credit Line Amount shall be immediately released from the Escrow Account to the Lenders, or if already called by the Company and not converted earlier or placed in a PO in accordance with Exhibit 4.2 , the Credit Line Amount shall immediately become due and payable, without demand, in cash, upon the occurrence of the earlier of the following events: (i) the execution by the Company of a general assignment for the benefit of creditors; (ii) the filing by or against the Company of any petition in bankruptcy or liquidation proceedings of the Company   or any petition for relief under the provisions of any law for the relief of debtors, and the continuation of such petition without dismissal for a period of thirty (30) days or more; (iii) the appointment of a receiver, a trustee or a special manager to take possession of a portion of the property or assets of the Company and the continuation of such appointment without dismissal for a period of thirty (30) days or more; (iv) the commencement by the Company of any liquidation proceedings, or the adoption of a winding up resolution by the Company, or the calling by the Company of a meeting of creditors for the purpose of entering into a scheme or arrangement with them or any resolution in favor of any of the foregoing by the board of directors of the Company or shareholders of the Company; (v) the cessation of conduct of substantially all of the Company's business affairs as now being conducted for a consecutive period of more than forty (45) days; or (vi) a material breach of the representations, warranties or other statements which were made by or on behalf of the Company under this Agreement, which is not cured, if curable, within thirty (30) days following receipt by the Company of a written notice of such breach (each, an " Event of Default "). The Company undertakes to notify the Majority Lenders immediately following occurrence of any of the events detailed in clauses (i) to (vi) above.
 
 
13.2
If an M&A Event (as defined below) shall occur on or prior to either: (i) the consummation of an IPO on or prior to the Last IPO Date; or (2) the Last Date, if the Company did not consummate an IPO on or prior to the Last IPO Date and the Credit Line Amount was not called by the Company on or prior to the Last Date, then the Credit Line Amount shall be immediately released from the Escrow Account to the Lenders, unless otherwise directed by the Majority Lenders in writing. The Company undertakes to notify the Majority Lenders at least fourteen (14) days prior to the occurrence of an M&A Event.
 
The term " M&A Event " in this Agreement means an acquisition of the Company by way of consolidation, merger or reorganization of the Company with or into another entity, or the sale or license of all or substantially all of the Company's assets or intellectual property, or all or substantially all of the Company's issued and outstanding share capital, or any other transaction having the same effect of any of the foregoing.
 
 
30

 
 
14.
Effectiveness; Survival; Indemnification and Limits on Indemnification
 
 
14.1
Each representation and warranty made by the Company in Section 10 hereof shall survive and remain in full force and effect following the  Closing: (i) for a period of twenty four (24) months from the  Closing Date; or (ii) with respect to Sections 10.2.2 (Share Capital), 10.2.4 (Authorization; Approvals), 10.2.17 (Intellectual Property Rights) and 10.2.7 (Taxes) for a period of four (4) years from the Closing Date (respectively, the " Expiration Date ").  The Company shall not have any liability with respect to any such representation and warranty unless a claim is made in writing and received by the Company prior to the Expiration Date and provided that prior to the submission of the written notice to the Company either the Credit Line Amount has been placed in an IPO or the Loan Amount has converted or been placed in a PO in accordance with the terms of this Agreement. Notwithstanding the aforesaid, any breach by the Company of any of its representations, covenants or warranties contained in this Agreement involving fraud or willful misrepresentation, shall survive indefinitely. The representations, warranties, covenants and obligations of the Company and the rights and remedies that may be exercised by the Lenders, shall not be limited or otherwise affected by or as a result of any information furnished to, or any investigation made by, the Lenders or any of its representatives, unless such information is included in the Transaction Documents.
 
 
14.2
Subject to the further provisions of this Section 14, the Company shall indemnify each of the Lenders and hold it harmless from any and all direct loss, damage (including, without limitation, any decrease in the value of the securities issued upon conversion of the Loan Amount), liability and expense (including reasonable legal fees and costs) sustained or incurred by any of the Lenders as a result of (i) the breach or misrepresentation of any warranty or representation made by the Company in Section 10 hereof; and (ii) the breach of any covenant of the Company contained in the Transaction Documents.
 
 
31

 
 
 
14.3
Notwithstanding anything to the contrary in this Agreement, including, without limitation, in Section 14.1 above, in the event that the representations and warranties contained in Section 10.2.2 (Share Capital) (for greater certainty, when read together with the exceptions included in the Disclosure Schedule), shall not have been true and correct as of the date of Closing except for non-material changes or changes specifically approved by Majority Lenders (any such breach, a " Capitalization Breach "), which results in the percentage shareholdings of the Lenders, upon conversion of the Credit Line Amount, being reduced (a " Dilutive Issuance "), at the election of any Lender, in his sole and absolute discretion and as the Lender's sole remedy, in lieu of the remedies available pursuant to Section 14.2, the Company shall issue to such Lender additional securities (the " Indemnification Shares "), for no additional consideration (other than the par value thereof), so that following the issuance of the Indemnification Shares the percentage holding of such Lender on a Fully Diluted Basis immediately after the conversion of the Credit Line Amount shall be equal to the same percentage holding on a Fully Diluted Basis that such Lender would have held had there not been a Capitalization Breach. The remedy provided in this Section shall not be limited or otherwise affected by or as a result of any information furnished to, or any investigation made by, the Lenders or any of its representatives, unless such information is set forth in this Agreement and/or the Disclosure Schedule.
 
 
14.4
Notwithstanding anything to the contrary contained in this Agreement, other than in the case of fraud, intentional misrepresentation or willful misconduct the liability of the Company under this Section 14 shall be limited to the actual Credit Line Amount extended to the Company pursuant to this Agreement that was not released or repaid to the Lender pursuant to this Agreement (including, without limitation, repayment in an Event of Default pursuant to Section 13 of this Agreement).
 
 
14.5
Notwithstanding anything to the contrary herein, other than in the case of fraud, willful misconduct or intentional misrepresentation, no party hereto shall have any liability under any provision of this Agreement for any punitive, incidental, consequential, special or indirect damages, including business interruption, loss of future revenue, profits or income, or loss of business reputation or opportunity relating to the breach or alleged breach of this Agreement, except with respect to any act or omission of fraud or willful breach.
 
 
14.6
Notwithstanding anything to the contrary contained in this Agreement, other than in the case of fraud, intentional misrepresentation or willful misrepresentation, the Company shall not be liable for any claim for indemnification pursuant to this Section 14, unless and until the aggregate amount of all losses equals or exceeds $80,000, and then such claim may be brought from the first dollar of such losses.
 
 
32

 
 
 
14.7
The parties agree that the sole and exclusive remedy with respect to any and all claims relating to the subject matter of this Agreement and the transactions contemplated hereby shall be pursuant to the indemnification provisions set forth in this Section 14, whether arising in tort, contract or otherwise (except in an Event of Default, in which case the provisions of Section 13 shall apply).
 
15.
Taxes; Withholding
 
To the extent required pursuant to applicable law, VAT shall be added by the Company to any payment to be made by the Company pursuant to this Agreement. The Company shall be entitled to deduct and withhold any withholding taxes which the Company determines it is legally required to deduct or withhold from any payment to be made by the Company pursuant to this Agreement.
 
16.
Miscellaneous
 
 
16.1
This Agreement (together with the exhibits attached hereto) constitute the full and entire understanding of the Parties with respect to its subject matter and supersedes all prior negotiations, discussions, commitments and understandings between them with respect to the subject matter hereof. In case of any conflict between the provisions of this Agreement and the Amended Articles or the Amended and Restated Shareholders’ Agreement, the provisions of this Agreement shall prevail and the Company's shareholders shall act to amend the Amended Articles or the Amended and Restated Shareholders’ Agreement accordingly.
 
 
16.2
References herein to this Agreement shall be deemed to include the exhibits and schedules hereto.
 
 
16.3
Any term of this Agreement may be amended and the observance of any term hereof may be waived, discharged, postponed or terminated (either prospectively or retroactively and either generally or in a particular instance, in whole or in part) only with the written consent of the Company and the Majority Lenders.
 
 
16.4
Neither Party may assign, transfer or otherwise convey any of its rights or delegate any of its obligations under this Agreement without the prior written consent of the other Party; provided, that a Party may assign its rights without the prior written consent of the other Party to its Permitted Transferees (as such term is defined in the Company's Articles of Association as shall be in effect from time to time, mutatis mutandis ); and further provided that the Company may assign its rights and obligations under this Agreement without the prior written consent of the Lenders if such assignment is made in the framework of an M&A Event. Any purported assignment in violation of this clause is void. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the Lenders and the Company and their respective successors and assigns.
 
 
33

 
 
 
16.5
All notices and other communications required or permitted hereunder to be given to a Party to this Agreement shall be in writing and shall be sent by facsimile or mailed by registered or certified airmail, postage prepaid, or otherwise delivered by hand or by messenger in accordance with this provision:
 
if to the Lenders:
to the respective address set forth on Exhibit A
 
 
if to the Company:
Check-Cap Ltd.
 
 
Check-Cap Building
 
 
Abba Hushi Avenue
 
 
P.O. Box 1271
 
 
Isfiya, 30090
 
 
Mount Carmel, Israel
 
 
Tel: +972-4-8303400
 
 
Fax: +972-4-8211267
 
 
Attention: Guy Neev, CEO
 
     
with a copy to:
   
(which shall not constitute service on the Company)
 
     
 
Fischer Behar Chen Well Orion & Co
 
 
3 Daniel Frisch Street
 
 
Tel-Aviv 64731, Israel
 
 
Tel: +972-3-6944166
 
 
Fax: + 972- 3-6912948
 
 
Attention: Eran Yaniv, Adv.
 
 
or such other address with respect to a Party as such Party shall notify each other Party in writing as above provided. Any notice sent in accordance with this Section 16.5 shall be effective: (i) if mailed, seven (7) Business Days after mailing; (ii) if sent by messenger, upon delivery; and (iii) if sent via facsimile, upon transmission and electronic confirmation of receipt or (if transmitted and received on a non-Business Day) on the first Business Day following transmission and electronic confirmation of receipt. The term " Business Day " means a day on which the banks are open for business in the country of receipt of any notice.
 
 
34

 
 
 
16.6
No delay or omission to exercise any right, power, or remedy accruing to any Party upon any breach or default under this Agreement, shall be deemed a waiver of any other breach or default theretofore or thereafter occurring. All remedies, either under this Agreement or by law or otherwise afforded to any of the Parties, shall be cumulative and not alternative.
 
 
16.7
If any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable under applicable law, then such provision shall be excluded from this Agreement and the remainder of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms; provided, however, that in such event this Agreement shall be interpreted so as to give effect, to the greatest extent consistent with and permitted by applicable law, to the meaning and intention of the excluded provision as determined by such court of competent jurisdiction.
 
 
16.8
Each Party shall bear its own fees and expenses incurred in connection with the transactions contemplated by this Agreement, except that the Company shall reimburse Fosun Pharma's Israeli legal counsel, subject to and upon the Closing, for Fosun Pharma's legal fees actually incurred with respect to the transactions set forth in this Agreement in an amount not exceeding US$20,000 (exclusive of VAT).
 
 
16.9
All article and section headings herein are inserted for convenience only and shall not modify or affect the construction or interpretation of any provision of this Agreement.
 
 
16.10
At any time and from time to time, each Party agrees, without further consideration, to take such actions and to execute and deliver such documents as may be reasonably necessary to effectuate the purposes of this Agreement. Without limiting the foregoing, upon the issuance of any shares pursuant to the terms of this Agreement (including, without limitation, upon the exercise of the Credit Line Warrant and conversion of the Conversion Amount, as defined and in accordance with Exhibit 4.2 ), any Lender that is (i) a non-Israeli resident individual, shall deliver to the Company a copy of his passport; or (ii) an entity organized or incorporated outside of Israel, shall deliver to the Company a copy of its certificate of incorporation and a certificate of good standing, all of which documents shall be certified in accordance with the Israeli Companies Regulations (Reports, Registration Details and Forms), 1999.
 
 
35

 
 
 
16.11
This Agreement shall be deemed to be a contract made under the laws of the State of Israel, and for all purposes shall be construed in accordance with the laws of said state, without regard to principles of conflict of laws. Any dispute arising under or in relation to this Agreement shall be resolved exclusively in the competent court for Tel Aviv-Jaffa district, and each of the Parties hereby irrevocably submits to the exclusive jurisdiction of such court.
 
 
16.12
This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.
 
[Signature Page Follows]
 
 
36

 
 
IN WITNESS WHEREOF the Parties have signed this Credit Line Agreement as of the date first hereinabove set forth.
 
THE COMPANY:

Check-Cap Ltd.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
   
 
THE LENDERS:
 
Shanghai Fosun Pharmaceutical Group Co. Ltd.
 
By:     _________________________
 
Name: _________________________
 
Title:  _________________________
Counterpoint Ventures Fund II LP
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Pontifax (Cayman) II L.P.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
Pontifax (Israel) II Individual Investors L.P.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Pontifax (Israel) II L.P.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
Docor International BV
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
[Signature Page 1 to Credit Line Agreement]
 
 
37

 
 
IN WITNESS WHEREOF the Parties have signed this Credit Line Agreement as of the date first hereinabove set forth.

THE LENDERS:

Bart Superannuation Pty Ltd.
 
By:     _________________________
 
Name: _________________________
 
Title:  _________________________
 
Joshua Ehrlich
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Nir Grinberg
 
By:     _________________________
 
Name: _________________________
 
Title:  _________________________
 
DPC Big Bay Properties Trust
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Avraham Kuzitsky
 
By:     _________________________
 
Name: _________________________
 
Title:  _________________________
 
Pinchas Dekel
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Minrav Holdings Ltd.
 
By:     _________________________
 
Name: _________________________
 
Title:  _________________________
 
Sharon Zaworbach
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Moshe Haviv
 
By:     _________________________
 
Name: _________________________
 
Title:  _________________________
H.M.L.K Financial Consulting Ltd.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
[Signature Page 2 to Credit Line Agreement]
 
 
38

 
 
IN WITNESS WHEREOF the Parties have signed this Credit Line Agreement as of the date first hereinabove set forth.
 
THE LENDERS:
 
Yossi Smira
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Capital Point Ltd.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Emil Mor- Business & Financial Consulting Ltd.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Norman Jackson
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Shevlin Ciral
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Scott Jackson
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
GE Ventures Limted
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
Dor Benvenisty
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________

[Signature Page 3 to Credit Line Agreement]

 
39

 

IN WITNESS WHEREOF the Parties have signed this Credit Line Agreement as of the date first hereinabove set forth.

THE LENDERS:
 
Uri Perelman
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Everest Fund L.P.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Harmony (Ben Dov) Ltd.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
Beetson Nominees (Panama) Inc.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Red Car Group
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Yossi Avraham
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
[Signature Page 4 to Credit Line Agreement]
 
 
40

 
 
Exhibit A
Lenders

No.
Lender's Name
Credit Line Amount
Address
 
1.
Shanghai Fosun Pharmaceutical Group Co. Ltd. and/or its subsidiary
US$ 4,000,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
with a copy to: (which shall not constitute service on Fosun Pharma)
Herzog Fox & Neeman Law Offices
Asia House
4 Weizmann Street
Tel Aviv 6423904, Israel
Tel: +972-3-6922894
Fax: +972-3-6966464
Attention: Yair Geva, Adv.
2.
Counterpoint Ventures Fund II LP
 
US$ 255,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
3.
Pontifax (Cayman) II LP
US$ 733,256
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
4.
Pontifax (Israel) II Individual Investors LP
US$ 214,410
 
5.
Pontifax (Israel) II LP
US$ 552,334
6.
Docor International BV
US$ 500,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
7.
Bart Superannuation Pty Ltd.
US$ 500,000
__________________________
__________________________
Tel: +61-292335015
Fax: +61-29233411
Attention: Fred Bart
8.
Joshua Ehrlich
US$ 250,000
__________________________
__________________________
Tel: + 61-417040226
Fax: (02) 93277075
Attention: Joshua Ehrlich
 
 
41

 
 
No.
Lender's Name
Credit Line Amount
Address
 
9.
Scott Jackson
US$ 50,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
10.
Minrav Holdings Ltd
 
 
US$ 500,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
11.
Avraham Kuznitsky
 
US$ 250,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
12.
Pinchas Dekel
 
 
US$ 100,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
13.
Emil Mor- Business & Financial Consulting Ltd.
 
US$ 100,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
14.
Harmony (Ben Dov) Ltd
 
 
US$ 750,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
15.
GE Ventures Limited
 
 
US$ 350,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
16.
Yossi Smira
 
 
US$ 150,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
 
 
42

 

No.
Lender's Name
Credit Line Amount
Address
 
17.
H.M.L.K. Financial Consulting Ltd.
 
 
US$ 360,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
18.
Sharon Zaworbach
 
 
US$ 100,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
19.
Moshe Haviv
 
 
US$ 100,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
20.
Nir  Greenberg
 
 
US$ 100,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
21.
Dor Benvenisty
 
 
US$ 50,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
22.
Norm Jackson
 
 
US$ 50,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
23.
Shevlin Ciral
 
 
US$ 50,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
24.
Everest Fund L.P.
 
 
US$ 120,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
 
 
43

 
 

No.
Lender's Name
Credit Line Amount
Address
 
25.
Uri Perekman
 
 
US$ 70,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
26.
DPC Big Bay Properties Trust
 
 
US$ 100,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
27.
Capital Point Ltd.
 
 
US$ 500,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
28.
Yossi Avraham
 
 
US$ 250,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
29.
Red Car Group
 
 
US$ 200,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________
30.
Beeston Nominees (Panama) Inc.
 
 
US$ 695,000
__________________________
__________________________
__________________________
Tel: ______________________
Fax: ______________________
Attention: _________________

 
44

 
 
Exhibit 4.2
 
Terms Governing the Called Loan Amount
 
In the event that the Company does not consummate an IPO on or prior to the Last IPO Date and the Loan Amount is called by the Company on or prior to the Last Date in accordance with Section 4 of the Agreement, the following provisions shall apply:
 
1.
Interest .
 
 
1.1.
The Loan Amount shall bear interest at an annual rate of 7% (seven percent), on the basis of a 365-day year; provided that if the Loan Amount is converted or repaid pursuant to this Agreement before the lapse of one year from the Closing Date, the aggregate accrued interest on the Loan Amount shall be at least 5% (five percent) (the " Interest "). The Interest shall accrue on the Loan Amount from the date of the deposit of the called Credit Line Amount in the Escrow Account until the date of conversion or repayment of the Loan Amount, as set forth herein.
 
 
1.2.
Upon conversion of the Loan Amount in accordance with the terms hereof, all Interest accrued thereon shall be converted together with the Loan Amount or repaid to the Lenders in cash, after deduction of all applicable taxes with respect thereto, as shall be determined by the Company, at its sole discretion. The actual amount to be converted in accordance with the Company's election, as specified in the preceding sentence, shall be hereinafter referred to as the " Conversion Amount ."
 
2.
Conversion of Conversion Amount
 
 
2.1.
Automatic Conversion upon a QFR
 
 
2.1.1.
To the extent not previously converted or repaid according to the terms hereof, the Conversion Amount shall be automatically converted, immediately prior and subject to the closing of a QFR (as defined below), on the same terms and conditions applicable to the QFR such that the Lenders shall receive the same type of securities issued, and any other rights granted to the investors in such QFR (the " QFR Securities "), under the same terms as if the Lenders had participated in the QFR as investors (including any warrants or any other securities granted to the investors therein), but at a conversion price reflecting a 25% discount on the price paid for the shares issued in the QFR (the " QFR Conversion Price ") (and if the price in such QFR is fixed per each unit offered in the QFR, the discount shall be applicable to such unit price).
 
 
45

 
 
It being agreed and acknowledged that (a) the original issue price (or any equivalent term used under the then applicable Articles of Association of the Company) of QFR Securities issued to the Lenders shall be set to be the QFR Conversion Price,   and any rights that are attached to the QFR Securities issued to the Lenders which are determined, derived, calculated, triggered, or otherwise based on the original price of such shares (including, without limitation, liquidation and dividend preferences, anti-dilution rights or the like) shall be determined, calculated, triggered or otherwise based on the actual QFR Conversion Price; and (b) in the event that the QFR Securities also comprise of warrants to purchase, or other securities convertible into, shares of the Company (any such preceding convertible security a " Convertible Security "), then (i) upon such conversion, each Lender shall be entitled to receive such number of warrants and/or Convertible Securities of the same class or type that are issued to the investors in the framework of the QFR, in a number which shall be determined using the same warrant and/or Convertible Securities coverage ratio offered to the investors in such QFR, such that the ratio between the shares and the warrants and/or Convertible Securities issued to each Lender shall be equal to the ratio between the shares and the warrants and/or Convertible Securities issued to each investor in such QFR; and (ii) the discount rate delineated above shall not apply in respect of the exercise price or conversion price (as applicable) of such warrants and/or Convertible Securities.
 
For example, if the terms of the QFR are as follows:
 
 
·
The QFR unit price is US$10.
 
 
·
Each unit is comprised of two (2) Ordinary Shares and one (1) warrant to purchase one (1) Ordinary Share.
 
 
·
The discount rate of the Lender is 25%.
 
 
·
The exercise price of the warrants issued in the QFR is US$12.
 
 
·
The Conversion Amount of the Lender is US$1,500.
 
then, in the framework of such QFR, the Lender shall be issued, upon conversion of the Conversion Amount, 200 Ordinary Shares ((US$1,500))/((1-25%)*US$10)) and 100 warrants to purchase 100 Ordinary Shares (200/2), at an exercise price per share of US$12, while an investor, who is not a Lender, and invests in the QFR the same amount (i.e., US$1,500), shall be issued only 150 Ordinary Shares and 75 warrants to purchase 75 Ordinary Shares, at an exercise price per share of US$12.
 
 
46

 
 
The term " QFR " means the first financing round consummated by the Company after the date that the Company has called the Loan Amount, through an equity investment (including by means of a PO (as defined below)), either in one transaction or in a series of related transactions, with an aggregate investment amount of not less than US$11,000,000 (Eleven Million US Dollars) (including the Loan Amount), of which at least US$3,000,000 (Three Million US Dollars) shall be from a new investor(s) who is not an affiliate of any existing shareholders of the Company or Lenders (" New Investors ").
 
 
2.1.2.
Alternatively, in the event that the QFR is a public offering (including an IPO) (" PO "), the Company shall be entitled, at its sole discretion, in lieu of effecting an automatic conversion in accordance with the provisions of Section 2.1.1 above, to: (i) deposit an amount equal to each Lender's Escrow Amount (as defined below) in an escrow account to be managed by a trustee designated by the Company (the " Trustee "); and (ii) irrevocably instruct the Trustee to submit an offer, on behalf of such Lender, for the purchase of shares and/or units offered in the PO, at a price per share and/or unit (as applicable) equal to the PO pricing determined by the Company's lead underwriters, for an aggregate amount equal to the Escrow Amount less any applicable taxes, if any, due by such Lender in connection with the placement of the Escrow Amount in the PO as set forth herein. By executing this Agreement, each Lender hereby agrees and instructs the Company and the Trustee to submit such irrevocable letters of instructions as aforesaid, and further undertakes to countersign such letter of instructions and to execute such further documents as may be requested by the Company or the Trustee.
 
The term " Escrow Amount " means, with respect to each Lender, an amount equal to the result of the following calculation:
 
EA = P/(0.75)
 
EA= Lender's Escrow Amount
 
P = Lender's Conversion Amount
 
 
47

 
 
 
2.2.
Automatic Conversion upon an M&A Event .
 
In the event that, prior to the conversion of the Loan Amount or its repayment pursuant to any of the terms hereunder, an M&A Event shall occur, then immediately prior and subject to the closing of such M&A Event, the Conversion Amount shall be automatically converted into the then most senior class of shares in the Company (the " M&A Senior Shares "), at a conversion price per share equal to the lower of (i) a price per share reflecting a 25% discount on the price per share paid by the Company's investors in consideration for each such M&A Senior Share; and (ii) the price per share reflecting a 25% discount on the lowest price per share consideration paid with respect to such M&A Senior Share in the M&A Event (such price in clause (i) or (ii), the " M&A Conversion Price "). In the event that during the period commencing on the Effective Date and ending on the closing of the M&A event, the Company shall not have issued shares to New Investors against equity investment in the Company, then the Preferred D-3 Shares of the Company shall be deemed the M&A Senior Shares and such Preferred D-3 Shares shall be issued at a 25% discount to the original issue price of the Preferred D-3 Shares.
 
It being agreed and acknowledged that (a) the original issue price (or any equivalent term used under the then applicable Articles of Association of the Company) of the M&A Senior Shares issued to the Lenders shall be set to be the M&A Conversion Price,   and any rights that are attached to such M&A Senior Shares issued to the Lenders which are determined, derived, calculated, triggered, or otherwise based on the original price of such shares (including, without limitation, liquidation and dividend preferences, anti-dilution rights or the like) shall be determined, calculated, triggered or otherwise based on the actual M&A Conversion Price; and (b) in the event that the securities issued in the framework of the financing round in which the M&A Senior Shares were issued to the investors (in this section, the " Financing Round ") also comprised of warrants and/or other Convertible Securities, then (i) upon such conversion, each Lender shall be entitled to receive such number of warrants and/or Convertible Securities of the same class or type that were issued to the investors in the framework of such Financing Round, in a number which shall be determined using the same warrant and/or Convertible Securities coverage ratio offered to the investors in such Financing Round, such that the ratio between the shares and the warrants and/or Convertible Securities issued to each Lender shall be equal to the ratio between the shares and the warrants and/or Convertible Securities issued to each investor in such Financing Round; and (ii) the discount rate delineated above shall not apply in respect of the exercise price or conversion price (as applicable) of such warrants and/or Convertible Securities.
 
 
48

 
 
 
2.3.
Voluntary Conversion upon a NQFR .
 
In the event that, prior to the conversion of the Loan Amount or its repayment pursuant to any of the terms hereunder, the Company shall consummate a financial round through an equity investment (either in one transaction or in series of transactions), which is not a QFR (a " NQFR "), then the Lenders who extended the Company an aggregate amount of at least fifty percent (50%) of the Loan Amount (which group must include Fosun Pharma if and to the extent that it has extended the Company any part of the Loan Amount) (the " Entitled Lenders "), shall be entitled, no later than fourteen (14) days prior to the closing of such NQFR, to notify the Company in writing of their choice to convert the entire Conversion Amount. In such event the entire Conversion Amount shall be converted immediately prior and subject to the closing of the NQFR, on the same terms and conditions specified in Section 2 above (" Automatic Conversion upon a QFR "), mutatis mutandis . The election of the Entitled   Lenders to convert the entire Conversion Amount shall be binding on all Lenders and each Lender shall be deemed to have elected to convert its respective portion of the Conversion Amount in accordance with the terms and conditions specified herein.
 
 
2.4.
Automatic Conversion upon Maturity Date .
 
To the extent not converted or repaid according to the terms set forth herein prior to the Last Date, the Conversion Amount will be automatically converted into the then most senior class of outstanding shares of the Company (the " Maturity Senior Shares "), at a conversion price per share reflecting the lesser of: (i) a 25% discount on the price per share paid by the Company's investors in consideration for each such Maturity Senior Share; and (ii) a 25% discount on the price per share paid by the Company’s investors in consideration for the Preferred D-3 Shares (the " Maturity Conversion Price "). It is hereby clarified that in the event that during the period commencing on the Effective Date and ending on the Last Date, the Company shall not have issued shares to third party investors against equity investment in the Company, then the Preferred D-3 Shares of the Company shall be deemed the Maturity Senior Shares and such Preferred D-3 Shares shall be issued at a 25% discount to the original issue price of the Preferred D-3 Shares.
 
 
49

 
 
It being agreed and acknowledged that (a) the original issue price (or any equivalent term used under the then applicable Articles of Association of the Company) of the Maturity Senior Shares issued to the Lenders shall be set to be the Maturity Conversion Price,   and any rights that are attached to the Maturity Senior Shares issued to the Lenders which are determined, derived, calculated, triggered, or otherwise based on the original price of such shares (including, without limitation, liquidation and dividend preferences, anti-dilution rights or the like) shall be determined, calculated, triggered or otherwise based on the actual Maturity Conversion Price; and (b) in the event that the securities issued in the framework of the financing round in which the Maturity Senior Shares were issued to the investors (in this section, the " Financing Round ") also comprised of warrants and/or Convertible Securities, then (i) upon such conversion, each Lender shall be entitled to receive such number of warrants and/or Convertible Securities of the same class or type that were issued to the investors in the framework of such Financing Round, in a number which shall be determined using the same warrant and/or Convertible Securities coverage ratio offered to the investors in such Financing Round, such that the ratio between the shares and the warrants and/or Convertible Securities issued to each Lender shall be equal to the ratio between the shares and the warrants and/or Convertible Securities issued to each investor in such Financing Round; and (ii) the discount rate delineated above shall not apply in respect of the exercise price or conversion price (as applicable) of such warrants and/or Convertible Securities.
 
50




Exhibit 10.14
 
NEITHER THIS WARRANT CERTIFICATE NOR THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT CERTIFICATE HAVE BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR ANY OTHER SECURITIES ACT, AND THIS WARRANT CERTIFICATE AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT CERTIFICATE MAY NOT BE SOLD, OFFERED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH APPLICABLE SECURITIES LAWS AND THE RESTRICTIONS, TERMS AND CONDITIONS SET FORTH HEREIN.
 
CHECK-CAP LTD.
 
ORDINARY SHARES WARRANT CERTIFICATE
 
To purchase
_________ Ordinary Shares (subject to adjustment) of
Check-Cap Ltd.   (the " Company ")
at a per share price and subject to the terms detailed below
VOID AFTER 17:00 p.m. Israel Standard Time
on the last day of the Warrant Period (as defined below)

THIS IS TO CERTIFY THAT , ________________ (the " Holder "), is entitled to purchase from the Company, an aggregate of up to ________ (as may be adjusted hereunder) Ordinary Shares (" Shares ") of the Company, nominal value NIS 0.01 per share (the " Warrant Shares "), at an aggregate purchase price of NIS________, reflecting an exercise price per share of NIS 0.01 (the " Exercise Price "), during the Warrant Period.
 
This Warrant Certificate (this " Warrant ") is issued to the Holder in connection with that certain Credit Line Agreement, dated August 20, 2014 among the Company and the Lenders listed on Exhibit A thereto (the " Credit Line Agreement ").
 
 
 

 
 
1.
EXERCISE OF WARRANT
 
1.1.       Warrant Period . This Warrant may be exercised, subject to the terms and conditions hereof, in whole or in part, at one time or from time to time during the period commencing on October 14, 2014 (the " Initial Date "), until the earlier of: (i) ten (10) years thereafter (i.e. October 14, 2024) (the " Last Date "); and (ii) the closing of an Exit Event (as defined in Section 5 below); provided that such Exit Event is consummated within 180 days from the Exit Event Notice (each of (i) or (ii), the " Expiry Date "). The period between the Initial Date and the Expiry Date shall be referred to hereinafter as the " Warrant Period ."
 
 
1.2.
Exercise for Cash . This Warrant may be exercised by presentation and surrender thereof to the Company at its principal office or at such other office or agency as it may designate from time to time, accompanied by:
 
 
(a)
A duly executed notice of exercise, in the form attached hereto as Schedule 1.2 (the " Exercise Notice "); and
 
 
(b)
Payment to the Company, for the account of the Company, of the Exercise Price for the number of Warrant Shares purchased payable in immediately available funds by wire transfer to the Company's bank account. The Exercise Price will be paid in United States Dollars or the equivalent sum in NIS according to the Bank of Israel exchange rate as published upon the date immediately prior to the exercise date.
 
 
1.3.
Exercise on Net Issuance Basis . In lieu of payment to the Company as set forth in Section 1.2 above, the Holder may elect to exercise this Warrant into the number of Warrant Shares calculated pursuant to the formula below, by presentation and surrender thereof to the Company at its principal office or at such other office or agency it may designate from time to time, accompanied by a duly executed notice of exercise, in the form attached hereto as Schedule 1.3 (the " Net Issuance Notice "):
 
                   Y*(A - B)
X         =     -----------------
                A
 
Where:
 
 
X =
the number of Warrant Shares to be issued to the Holder;
 
 
Y =
the number of Warrant Shares in respect of which the net issuance election is being made;
 
 
A =
the Fair Market Value (as defined below) of one Warrant Share; and
 
 
B =
the Exercise Price of one Warrant Share.
 
 
2

 
For purposes of this Section 1.3, the " Fair Market Value " of one Warrant Share as of a particular date (the "Determination Date" ) shall be:
 
 
(a)
If the net issuance right is exercised in connection with and contingent upon an initial public offering of the Company’s shares, then the initial “price to public” (i.e., before deduction of discounts, commissions or expenses) specified in the final prospectus or registration statement with respect to such offering.
 
 
(b)
If the net issuance right is exercised in connection with and contingent upon an Exit Event the price per Share in such Exit Event.
 
 
(c)
If the net issuance right is not exercised in connection with and contingent upon an initial public offering or an Exit Event, then as follows:
 
 
(i)
If the Shares are traded on a securities exchange, the Fair Market Value shall be deemed to be the average of the closing prices of the Shares on such exchange over the fifteen (15) trading days immediately prior to (but not including) the Determination Date;
 
 
(ii)
If the Shares are quoted for trading on an over-the-counter system, the Fair Market Value shall be deemed to be the average of the closing bid prices of the Shares over the fifteen (15) trading days immediately prior to (but not including) the Determination Date; and
 
 
(iii)
If there is no public market for the Shares, the Fair Market Value of the shares shall be determined in good faith by the Board of Directors of the Company.
 
 
1.4.
In the event that, upon the Last Date, the Fair Market Value of one Warrant Share (or other security issuable upon the exercise hereof) as determined in accordance with Section 1.3 above is greater than the Exercise Price in effect on such date, then, unless otherwise directed in writing by the Holder, this Warrant shall automatically be deemed on and as of such date to be exercised pursuant to Section 1.3 above with respect to all Warrant Shares (or such other securities) for which it shall not previously have been exercised, and the Company shall promptly deliver a certificate representing such number of Warrant Shares (or such other securities) issued upon such exercise to Holder.
 
 
3

 
 
 
1.5.
Issuance of Warrant Shares . Upon presentation and surrender of this Warrant, accompanied by (a) the duly executed Exercise Notice and the payment of the applicable Exercise Price for the Warrant Shares being purchased pursuant to Section 1.2 above; or (b) the duly executed Net Issuance Notice pursuant to Section 1.3 above, as the case may be, the Company shall promptly (i) issue to the Holder the Warrant Shares to which the Holder is entitled; and (ii) deliver to the Holder the share certificate evidencing such Warrant Shares.
 
Upon receipt by the Company of this Warrant and the applicable duly executed notice of exercise (and the Exercise Price for the Warrant Shares being purchased, if applicable), together with any other documents and/or approvals that may be required by law, the Holder shall be deemed to be the holder of record of the Warrant Shares issuable upon such exercise, notwithstanding that the share transfer books of the Company shall then be closed or that certificates representing such shares shall not then be actually delivered to the Holder.
 
 
1.6.
Fractional Shares . No fractions of shares shall be issued in connection with the exercise of this Warrant, and the number of shares issued shall be rounded up to the nearest whole number.
 
 
1.7.
Partial Exercise . If this Warrant is exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder to purchase the balance of the Warrant Shares purchasable hereunder.
 
 
1.8.
Additional Documents . The Holder will sign and deliver any and all documents or approvals required by law, to facilitate the issuance of the Warrant Shares upon exercise of this Warrant.
 
 
1.9.
Loss or Destruction of Warrant . Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonable reimbursement of expenses and satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date.
 
 
4

 
 
2.
TAXES
 
 
2.1.
The Holder acknowledges that the grant of the Warrant, the issuance of the Warrant Shares and the execution and/or performance of this Warrant may have tax consequences to the Holder and that the Company is not able to ensure or represent to the Holder the nature and extent of such tax consequences.
 
 
2.2.
The Company shall pay all of the applicable taxes and other charges payable by the Company in connection with the issuance of the Warrant Shares and the preparation and delivery of share certificates in the name of the Holder (such as transfer taxes in respect of the issuance or delivery of Warrant Shares upon exercise of this Warrant), if any, but shall not pay any taxes payable by the Holder by virtue of the holding, issuance, exercise or sale of this Warrant or the Warrant Shares by the Holder.
 
3.
RESERVATION OF SHARES; PRESERVATION OF RIGHTS OF HOLDER
 
 
3.1.
Reservation of Shares . The Company hereby agrees that, at all times prior to the expiration or exercise of this Warrant, it will maintain and reserve, free from pre-emptive or similar rights, such number of authorized but unissued shares so that this Warrant may be exercised without additional authorization of shares.
 
 
3.2.
Preservation of Rights . The Company will not, by amendment of its organizational documents or through reorganization, recapitalization, consolidation, merger, dissolution, transfer of assets, issue or sale of securities or any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations, conditions or terms to be observed or performed hereunder, but will at all times in good faith assist in the carrying out of all the provisions hereof and in taking of all such actions and making all such adjustments as may be necessary or appropriate in order to fulfill the provisions hereof.
 
 
5

 
 
4.
ADJUSTMENT
 
 
4.1.
The number of Warrant Shares purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time or upon exercise, as follows:
 
 
(a)
If the Company at any time or from time to time after the date hereof effects a subdivision of the outstanding Shares or consolidates the outstanding Shares, then the Exercise Price shall be adjusted to that price determined by multiplying the Exercise Price immediately prior to such event by a fraction:
 
 
(i)
the numerator of which shall be the total number of outstanding Shares immediately prior to such event; and
 
 
(ii)
the denominator of which shall be the total number of outstanding Shares immediately after such event.
 
Upon each adjustment of the Exercise Price as provided in this paragraph (a), the Holder shall thereafter be entitled to acquire, at the Exercise Price resulting from such adjustment, the number of Shares (calculated to the nearest Share) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Shares which may be acquired hereunder immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment.
 
 
(b)
If the Company at any time or from time to time after the date hereof makes, or fixes a record date for the determination of holders of Shares entitled to receive a dividend or other distribution payable in additional Shares, then in each such event the Exercise Price that is then in effect shall be adjusted as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, by multiplying the Exercise Price then in effect by a fraction:
 
 
(i)
the numerator of which is the total number of Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date; and
 
 
(ii)
the denominator of which is the total number of Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of Shares issuable in payment of such dividend or distribution;
 
 
6

 
 
provided, however , that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Exercise Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Exercise Price shall be adjusted pursuant to this section to reflect the actual payment of such dividend or distribution.  Upon each adjustment of the Exercise Price as provided in this paragraph (b), the Holder shall thereafter be entitled to acquire, at the Exercise Price resulting from such adjustment, the number of Shares (calculated to the nearest Share) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Shares which may be acquired hereunder immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment.
 
 
(c)
If the Company at any time or from time to time after the date hereof makes, or fixes a record date for the determination of holders of Shares entitled to receive, a dividend or other distribution payable in securities of the Company other than Shares, then in each such event provision shall be made so that the Holder shall receive upon exercise of this Warrant, in addition to the number of Shares receivable thereupon, the amount of other securities of the Company which it would have received had this Warrant been exercised for such number of Shares immediately prior to the date of such event (or record date of such event) and had the Holder thereafter, during the period from the date of such event to and including the exercise date, retained such securities receivable by it as aforesaid during such period, subject to all other adjustments called for during such period under this section and the Company's Articles of Association as shall be in effect from time to time, with respect to the rights of the Holder.
 
 
(d)
In case the Shares issuable upon exercise of this Warrant are changed into the same or different number of shares of any class or classes of shares, whether by recapitalization, reclassification or otherwise (other than a subdivision or consolidation of shares, share dividend or other reorganization, provided for elsewhere in this Section), then in each such event this Warrant shall be exercised into the kind and amount of shares or other securities and property receivable on such recapitalization, reclassification or other change that the Holder would have been entitled to receive thereupon had the Holder been the registered holder of the number of Shares into which this Warrant might have been exercised immediately prior thereto.
 
 
7

 
 
 
4.2.
Whenever an adjustment is effected hereunder, the Company shall, at its expense, promptly compute such adjustment and deliver to the Holder a certificate setting forth the number of Warrant Shares (or any other securities) for which this Warrant is exercisable and the Exercise Price as a result of such adjustment, a brief statement of the facts requiring such adjustment and the computation thereof and when such adjustment has or will become effective.
 
 
4.3.
Except as otherwise provided herein, Sections 4.1(a) to 4.1(d) hereof are intended to operate independently of one another. If an event occurs that requires the application of more than one subsection, all applicable subsections shall be given independent effect, but there shall be no duplicate adjustments if two separate subsections provide the same protection.
 
 
4.4.
Notices of Certain Transactions .  In case:
 
 
(a)
the Company shall take a record of the holders of its Shares (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or
 
 
(b)
of the voluntary or involuntary dissolution, liquidation or winding-up of the Company
 
then, and in each such case, the Company will mail or cause to be mailed to the Holder a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend or distribution, and stating the amount and character of such dividend or distribution, or (ii) the effective date on which such voluntary dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Shares (or such other shares or securities at the time deliverable upon such voluntary dissolution, liquidation or winding-up) are to be determined.  Such notice shall be mailed at least ten (10) days prior to the record date or effective date for the event specified in such notice.
 
 
8

 
 
 
4.5.
In addition, in the event that the Company consummates a Deferred Closing (as defined in the Credit Line Agreement), the number of Warrant Shares issuable upon exercise of this Warrant shall be increased, such that following the adjustment, the number of the Warrant Shares underlying this Warrant shall be equal to the amount obtained by multiplying (i) such number of Ordinary Shares constituting 2% of the Company's share capital on a Fully Diluted Basis (as defined in the Credit Line Agreement) as of each such Deferred Closing by (ii) a fraction, the numerator of which is [___________] [such Lender’s portion of the Credit Line Amount in U.S. Dollars to be inserted] and the denominator of which is US$1,000,000.
 
5.
EXERCISE OF THE WARRANT UPON AN EXIT EVENT
 
Notwithstanding anything to the contrary in this Warrant, if at any time during the Warrant Period, the Company consummates an Exit Event, or at the discretion of the Board of Directors of the Company, in the event that the Company believes that an Exit Event is likely to be consummated during such period, the Company shall provide written notice of such Exit Event (or, if applicable, an anticipated Exit Event) to the Holder (the " Exit Event Notice "). Within fourteen (14) days after Holder’s receipt of the Exit Event Notice, Holder must notify the Company if it intends to exercise this Warrant pursuant to Section 1.2 or 1.3 of this Warrant, in which case such exercise shall be effective contingent upon and immediately prior to the consummation of the Exit Event. Thereafter, so long as the Company consummates such Exit Event within one hundred and eighty (180) days after Holder’s receipt of the Exit Event Notice (to the extent the Exit Event shall not have occurred prior to the Exit Event Notice), Holder shall have no further rights hereunder and this Warrant shall be automatically terminated if not so exercised. If the Company fails to consummate such Exit Event within such time, then this Warrant shall remain in effect subject to the provisions contained herein
 
For the purposes hereof, an " Exit Event " shall mean the closing of (i) a merger of the Company with or into another corporation, (ii) an acquisition of all or substantially all of the shares of the Company, (iii) the sale or license of all or substantially all of the assets of the Company, in all cases, other than a merger or transaction in which the persons that beneficially owned, directly or indirectly, a majority of the share capital of the Company immediately prior to such merger or transaction, beneficially own, directly or indirectly, a majority of the total shares of capital stock of the surviving or transferee entity. For greater certainty an initial public offering of the securities of the Company shall not be considered an "Exit Event".
 
 
9

 
 
6.
RIGHTS OF THE HOLDER
 
 
6.1.
This Warrant shall not entitle the Holder, by virtue hereof, to any voting rights or other rights as a shareholder of the Company, except for the rights expressly set forth herein.
 
 
6.2.
The Holder acknowledges that the Warrant Shares shall be subject to such rights, privileges, restrictions and limitations as set forth in this Warrant and the organizational documents of the Company (or any other agreement with respect thereto), as may be amended from time to time, and that, as a result, inter alia , of such limitations, it may be difficult or impossible for the Holder to realize his investment and/or to sell or otherwise transfer the Warrant Shares. The Holder further acknowledges that the Company's shares are not publicly traded.
 
7.
TERMINATION
 
Notwithstanding anything to the contrary, this Warrant and all the rights conferred hereby shall terminate and expire at the aforementioned time on the Expiry Date.
 
8.
MISCELLANEOUS
 
 
8.1.
Entire Agreement; Amendment . This Warrant sets forth the entire understanding of the parties with respect to the subject matter hereof and supersedes all existing agreements among them concerning such subject matter. All article and section headings herein are inserted for convenience only and shall not modify or affect the construction or interpretation of any provision of this Warrant. Subject to Section 8.9 below, no modification or amendment of this Warrant will be valid unless executed in writing by the Company and the Holder.
 
 
8.2.
Waiver . No failure or delay on the part of any of the parties in exercising any right, power or privilege hereunder and/or under any applicable law or the exercise of such right or power in a manner inconsistent with the provisions of this Warrant or applicable law shall operate as a waiver thereof. Any waiver must be evidenced in writing signed by the party against whom the waiver is sought to be enforced.
 
 
10

 
 
 
8.3.
Successors and Assigns Transfer of this Warrant . Except as otherwise expressly limited herein, this Warrant shall inure to the benefit of, be binding upon, and be enforceable by the Holder and its respective successors, and administrators. This Warrant may be transferred by the Holder to its Permitted Transferees (as such term is defined in the Company's Articles of Association as shall be in effect from time to time) and any other transfer shall be subject to the same restrictions on transfer set forth in the Amended Shareholders' Agreement (as defined in the Credit Line Agreement) as may be amended from time to time and the Company's Articles of Association as shall be in effect from time to time, mutatis mutandis. The transfer shall be recorded on the books of the Company upon the surrender of this Warrant, properly endorsed, to the Company at its principal offices, and the payment to the Company of all transfer taxes and other governmental charges imposed on such transfer. In the event of a partial transfer, the Company shall issue to the holders one or more appropriate new warrants.
 
 
8.4.
Governing Law . This Warrant shall be exclusively governed and construed in accordance with the laws of the State of Israel, without regard to conflicts of laws provisions thereof.
 
 
8.5.
Arbitration . Any dispute, controversy or claim arising in relation to this Warrant, including with regard to its validity, invalidity, breach, enforcement or termination, will be referred to a single arbitrator, who shall be appointed by the Head of the Israeli Bar Association.  Arbitration proceedings shall take place in Tel Aviv, Israel, and shall be conducted in English and according to the rules of substantive law (per Section 8.4 above). The arbitrator will not be bound by rules of evidence or procedure and will give the reasons for his judgment. The arbitrator's decision shall be final and enforceable in any court. This paragraph shall constitute an arbitration agreement between the parties.
 
 
11

 
 
 
8.6.
Notices . Any notice required or permitted to be given to a party pursuant to the provisions of this Warrant will be in writing and will be effective and deemed delivered to such party on the earliest of the following: (a) all notices and other communications delivered in person or by courier service shall be deemed to have been delivered as of actual delivery thereof; (b) those given by facsimile transmission shall be deemed delivered on the following business day after transmission, with confirmed transmission thereof; and/or (c) all notices and other communications sent by registered mail (or air mail if the posting is international) shall be deemed given three (3) days after posting.
 
 
8.7.
Severability .  If any provision of this Warrant is held to be unenforceable, this Warrant shall be considered divisible and such provision shall be deemed inoperative to the extent it is deemed unenforceable, and in all other respects this Warrant shall remain in full force and effect; provided , however , that if any such provision may be made enforceable by limitation thereof, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by applicable law.
 
 
8.8.
Counterparts . This Warrant may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.  Facsimile or electronic signatures of a party shall be binding as evidence of such party's agreement hereto and acceptance hereof.
 
 
8.9.
Amendments . To the extent that any amendment(s) to the Credit Line Agreement or the transactions contemplated thereby result in a required amendment to the terms of this Warrant, this Warrant shall be deemed amended to the extent that the amendment(s) to the Credit Line Agreement are completed in accordance with the terms thereof.
 
[THE REMAINDER OF THIS PAGE WAS INTENTIONALLY LEFT BLANK]
 
 
12

 
 
IN WITNESS WHEREOF , the Company has caused this Warrant to be executed by its officer thereunto duly authorized.
 
Dated:  October 14, 2014
 
Check-Cap Ltd.
Signature: __________________
Name:  Guy Neev
Title:    CEO

 
 
13

 
 
Schedule 1.2
 
Exercise Notice
 
Date: ____________
 
To: Check-Cap Ltd.
 
The undersigned, pursuant to the provisions set forth in the Warrant to which this Exercise Notice is attached (the " Warrant "), hereby elects to purchase _________ Warrant Shares (as such term is defined in the Warrant) pursuant to Section 1.2 of the Warrant, and herewith makes payment of _____________, representing the full Exercise Price for such shares as provided for in such Warrant.
 
The undersigned hereby irrevocably directs that the said shares (or such other securities into which the Warrant is exercisable) be issued and registered in the name of the undersigned and/or in the name of its Permitted Transferee(s) (as such term is defined in the Company's Articles of Association), as set forth below.
 
Names
Address
No. of Shares
________________________
_____________________________
____________________
________________________
_____________________________
____________________
 
Signature:  ______________________
 
Address: _________________________
 
 
14

 

Schedule 1.3
 
Net Issuance Notice
 
Date: ____________
 
To:         Check-Cap Ltd.                                                                        
 
The undersigned, pursuant to the provisions set forth in the Warrant to which this Exercise Notice is attached (the " Warrant "), hereby elects to exercise the Warrant for the purchase of Warrant Shares (as such term is defined in the Warrant), pursuant to the provisions of Section 1.3 of the Warrant.
 
The undersigned hereby irrevocably directs that the said shares (or such other securities into which the Warrant is exercisable) be issued and registered in the name of the undersigned and/or in the name of its Permitted Transferees(s) (as such term is defined in the Company's Articles of Association), as set forth below.
 
Names
Address
No. of Shares
________________________
_____________________________
____________________
________________________
_____________________________
____________________
 
Signature: ______________________
 
Address: _________________________
 
15




Exhibit 10.15
 
NEITHER THIS WARRANT CERTIFICATE NOR THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT CERTIFICATE HAVE BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR ANY OTHER SECURITIES ACT, AND THIS WARRANT CERTIFICATE AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT CERTIFICATE MAY NOT BE SOLD, OFFERED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH APPLICABLE SECURITIES LAWS AND THE RESTRICTIONS, TERMS AND CONDITIONS SET FORTH HEREIN.
 
CHECK-CAP LTD.
 
ORDINARY SHARES WARRANT CERTIFICATE
 
To purchase
________ Ordinary Shares (subject to adjustment) of
Check-Cap Ltd. (the " Company ")
at a per share price and subject to the terms detailed below
VOID AFTER 17:00 p.m. Israel Standard Time
on the last day of the Warrant Period (as defined below)

THIS IS TO CERTIFY THAT , ____________ (the " Holder "), is entitled to purchase from the Company, an aggregate of up to ________ (as may be adjusted hereunder) Ordinary Shares (" Shares ") of the Company, nominal value NIS 0.01 per share (the " Warrant Shares "), at an aggregate purchase price of NIS ________reflecting an exercise price per share of NIS 0.01 (the " Exercise Price "), during the Warrant Period.
 
This Warrant Certificate (this " Warrant ") is issued to the Holder in consideration of its commitment to provide the following services to the Company, if and to the extent requested by the Company, for no consideration: (i) business development services, in such scope and substance as shall be agreed between the Company and the Holder; and (ii) a representative designated by the Holder to serve as the chairman of the Board of Directors of the Company. The Company shall have no obligation to actually retain business development services from the Holder and/or to appoint the Holder's representative as the chairman of the Board of Directors of the Company; provided that if the Company elects not to retain such services and/or appoint the Holder's representative as the chairman of the Board of Directors of the Company, the Holder shall still be entitled to exercise this Warrant in its entirety, subject to the vesting schedule set forth in this Warrant.
 

 
 

 
 
1.
EXERCISE OF WARRANT
 
 
1.1.
Warrant Period . This Warrant, may be exercised, subject to the terms and conditions hereof, in whole or in part, at one time or from time to time, in accordance with the vesting schedule set forth in Section 1.2 below, during the period commencing on October 14, 2014 (the " Initial Date "), until the earlier of: (i) eight (8) years thereafter (i.e. October 14, 2022) (the " Last Date "); and (ii) the closing of an Exit Event (as defined in Section 5 below); provided that such Exit Event is consummated within 180 days from the Exit Event Notice (each of (i) or (ii), the " Expiry Date "). The period between the Initial Date and the Expiry Date shall be referred to hereinafter as the " Warrant Period ."
 
 
1.2.
Vesting Schedule . This Warrant shall vest on a quarterly basis in eight installments during a period of 24 months from the Initial Date, such that _____ of the Warrant Shares shall become vested and exercisable on January 14, 2015, and an additional ______ of the Warrant Shares shall become vested and exercisable at the end of each three (3) month period thereafter until 100% of the Warrant Shares are vested and exercisable. Notwithstanding the foregoing, subject to and upon the closing of an initial public offering, reverse merger, private placement, PIPE (private investment in public equity) transaction or any other form of equity financing in the Company, any unvested portion of this Warrant shall become fully vested and exercisable.
 
 
1.3.
Exercise for Cash . Subject to the vesting schedule set forth above, this Warrant may be exercised by presentation and surrender thereof to the Company at its principal office or at such other office or agency as it may designate from time to time, accompanied by:
 
 
(a)
A duly executed notice of exercise, in the form attached hereto as Schedule 1.3 (the " Exercise Notice "); and
 
 
(b)
Payment to the Company, for the account of the Company, of the Exercise Price for the number of Warrant Shares purchased payable in immediately available funds by wire transfer to the Company's bank account. The Exercise Price will be paid in United States Dollars or the equivalent sum in NIS according to the Bank of Israel exchange rate as published upon the date immediately prior to the exercise date.
 
 
2

 
 
 
1.4.
Exercise on Net Issuance Basis . In lieu of payment to the Company as set forth in Section 1.3 above and subject to the vesting schedule set forth above, the Holder may elect to exercise this Warrant into the number of Warrant Shares calculated pursuant to the formula below, by presentation and surrender thereof to the Company at its principal office or at such other office or agency it may designate from time to time, accompanied by a duly executed notice of exercise, in the form attached hereto as Schedule 1.4 (the " Net Issuance Notice "):
 
 
 
                    Y*(A - B)
X         =   -----------------
                     A
 
Where:
 
 
X =
the number of Warrant Shares to be issued to the Holder;
 
 
Y =
the number of Warrant Shares in respect of which the net issuance election is being made;
 
 
A =
the Fair Market Value (as defined below) of one Warrant Share; and
 
 
B =
the Exercise Price of one Warrant Share.
 
For purposes of this Section 1.4, the " Fair Market Value " of one Warrant Share as of a particular date (the "Determination Date" ) shall be:
 
 
(a)
If the net issuance right is exercised in connection with and contingent upon an initial public offering of the Company’s shares, then the initial “price to public” (i.e., before deduction of discounts, commissions or expenses) specified in the final prospectus or registration statement with respect to such offering.
 
 
(b)
If the net issuance right is exercised in connection with and contingent upon an Exit Event, the price per Share in such Exit Event.
 
 
3

 
 
 
(c)
If the net issuance right is not exercised in connection with and contingent upon an initial public offering or an Exit Event, then as follows:
 
 
(i)
If the Shares are traded on a securities exchange, the Fair Market Value shall be deemed to be the average of the closing prices of the Shares on such exchange over the fifteen (15) trading days immediately prior to (but not including) the Determination Date;
 
 
(ii)
If the Shares are quoted for trading on an over-the-counter system, the Fair Market Value shall be deemed to be the average of the closing bid prices of the Shares over the fifteen (15) trading days immediately prior to (but not including) the Determination Date; and
 
 
(iii)
If there is no public market for the Shares, the Fair Market Value of the shares shall be determined in good faith by the Board of Directors of the Company.
 
 
1.5.
In the event that, upon the Last Date, the Fair Market Value of one Warrant Share (or other security issuable upon the exercise hereof) as determined in accordance with Section 1.4 above is greater than the Exercise Price in effect on such date, then, unless otherwise directed in writing by the Holder, this Warrant shall automatically be deemed on and as of such date to be exercised pursuant to Section 1.4 above with respect to all Warrant Shares (or such other securities) for which it shall not previously have been exercised, and the Company shall promptly deliver a certificate representing such number of Warrant Shares (or such other securities) issued upon such exercise to Holder.
 
 
1.6.
Issuance of Warrant Shares . Upon presentation and surrender of this Warrant, accompanied by (a) the duly executed Exercise Notice and the payment of the applicable Exercise Price for the Warrant Shares being purchased pursuant to Section 1.3 above; or (b) the duly executed Net Issuance Notice pursuant to Section 1.4 above, as the case may be, the Company shall promptly (i) issue to the Holder the Warrant Shares to which the Holder is entitled; and (ii) deliver to the Holder the share certificate evidencing such Warrant Shares.
 
Upon receipt by the Company of this Warrant and the applicable duly executed notice of exercise (and the Exercise Price for the Warrant Shares being purchased, if applicable), together with any other documents and/or approvals that may be required by law, the Holder shall be deemed to be the holder of record of the Warrant Shares issuable upon such exercise, notwithstanding that the share transfer books of the Company shall then be closed or that certificates representing such shares shall not then be actually delivered to the Holder.
 
 
4

 
 
 
1.7.
Fractional Shares . No fractions of shares shall be issued in connection with the exercise of this Warrant, and the number of shares issued shall be rounded up to the nearest whole number.
 
 
1.8.
Partial Exercise . If this Warrant is exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder to purchase the balance of the Warrant Shares purchasable hereunder.
 
 
1.9.
Additional Documents . The Holder will sign and deliver any and all documents or approvals required by law, to facilitate the issuance of the Warrant Shares upon exercise of this Warrant.
 
 
1.10.
Loss or Destruction of Warrant . Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonable reimbursement of expenses and satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date.
 
2.
TAXES
 
 
2.1.
The Holder acknowledges that the grant of the Warrant, the issuance of the Warrant Shares and the execution and/or performance of this Warrant may have tax consequences to the Holder and that the Company is not able to ensure or represent to the Holder the nature and extent of such tax consequences.
 
 
2.2.
The Company shall pay all of the applicable taxes and other charges payable by the Company in connection with the issuance of the Warrant Shares and the preparation and delivery of share certificates in the name of the Holder (such as transfer taxes in respect of the issuance or delivery of Warrant Shares upon exercise of this Warrant), if any, but shall not pay any taxes payable by the Holder by virtue of the holding, issuance, exercise or sale of this Warrant or the Warrant Shares by the Holder.
 
 
5

 
 
3.
RESERVATION OF SHARES; PRESERVATION OF RIGHTS OF HOLDER
 
 
3.1.
Reservation of Shares . The Company hereby agrees that, at all times prior to the expiration or exercise of this Warrant, it will maintain and reserve, free from pre-emptive or similar rights, such number of authorized but unissued shares so that this Warrant may be exercised without additional authorization of shares.
 
 
3.2.
Preservation of Rights . The Company will not, by amendment of its organizational documents or through reorganization, recapitalization, consolidation, merger, dissolution, transfer of assets, issue or sale of securities or any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations, conditions or terms to be observed or performed hereunder, but will at all times in good faith assist in the carrying out of all the provisions hereof and in taking of all such actions and making all such adjustments as may be necessary or appropriate in order to fulfill the provisions hereof.
 
4.
ADJUSTMENT
 
 
4.1.
The number of Warrant Shares purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time or upon exercise, as follows:
 
 
(a)
If the Company at any time or from time to time after the date hereof effects a subdivision of the outstanding Shares or consolidates the outstanding Shares, then the Exercise Price shall be adjusted to that price determined by multiplying the Exercise Price immediately prior to such event by a fraction:
 
 
(i)
the numerator of which shall be the total number of outstanding Shares immediately prior to such event; and
 
 
(ii)
the denominator of which shall be the total number of outstanding Shares immediately after such event.
 
Upon each adjustment of the Exercise Price as provided in this paragraph (a), the Holder shall thereafter be entitled to acquire, at the Exercise Price resulting from such adjustment, the number of Shares (calculated to the nearest Share) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Shares which may be acquired hereunder immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment.
 
 
6

 
 
 
(b)
If the Company at any time or from time to time after the date hereof makes, or fixes a record date for the determination of holders of Shares entitled to receive a dividend or other distribution payable in additional Shares, then in each such event the Exercise Price that is then in effect shall be adjusted as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, by multiplying the Exercise Price then in effect by a fraction:
 
 
(i)
the numerator of which is the total number of Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date; and
 
 
(ii)
the denominator of which is the total number of Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of Shares issuable in payment of such dividend or distribution;
 
provided, however , that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Exercise Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Exercise Price shall be adjusted pursuant to this section to reflect the actual payment of such dividend or distribution. Upon each adjustment of the Exercise Price as provided in this paragraph (b), the Holder shall thereafter be entitled to acquire, at the Exercise Price resulting from such adjustment, the number of Shares (calculated to the nearest Share) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Shares which may be acquired hereunder immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment.
 
 
7

 
 
 
(c)
If the Company at any time or from time to time after the date hereof makes, or fixes a record date for the determination of holders of Shares entitled to receive, a dividend or other distribution payable in securities of the Company other than Shares, then in each such event provision shall be made so that the Holder shall receive upon exercise of this Warrant, in addition to the number of Shares receivable thereupon, the amount of other securities of the Company which it would have received had this Warrant been exercised for such number of Shares immediately prior to the date of such event (or record date of such event) and had the Holder thereafter, during the period from the date of such event to and including the exercise date, retained such securities receivable by it as aforesaid during such period, subject to all other adjustments called for during such period under this section and the Company's Articles of Association as shall be in effect from time to time, with respect to the rights of the Holder.
 
 
(d)
In case the Shares issuable upon exercise of this Warrant are changed into the same or different number of shares of any class or classes of shares, whether by recapitalization, reclassification or otherwise (other than a subdivision or consolidation of shares, share dividend or other reorganization, provided for elsewhere in this Section), then in each such event this Warrant shall be exercised into the kind and amount of shares or other securities and property receivable on such recapitalization, reclassification or other change that the Holder would have been entitled to receive thereupon had the Holder been the registered holder of the number of Shares into which this Warrant might have been exercised immediately prior thereto.
 
 
4.2.
Whenever an adjustment is effected hereunder, the Company shall, at its expense, promptly compute such adjustment and deliver to the Holder a certificate setting forth the number of Warrant Shares (or any other securities) for which this Warrant is exercisable and the Exercise Price as a result of such adjustment, a brief statement of the facts requiring such adjustment and the computation thereof and when such adjustment has or will become effective.
 
 
4.3.
Except as otherwise provided herein, Sections 4.1(a) to 4.1(d) hereof are intended to operate independently of one another. If an event occurs that requires the application of more than one subsection, all applicable subsections shall be given independent effect, but there shall be no duplicate adjustments if two separate subsections provide the same protection.
 
 
8

 
 
 
4.4.
Notices of Certain Transactions . In case:
 
 
(a)
the Company shall take a record of the holders of its Shares (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or
 
 
(b)
of the voluntary or involuntary dissolution, liquidation or winding-up of the Company
 
then, and in each such case, the Company will mail or cause to be mailed to the Holder a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend or distribution, and stating the amount and character of such dividend or distribution, or (ii) the effective date on which such voluntary dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Shares (or such other shares or securities at the time deliverable upon such voluntary dissolution, liquidation or winding-up) are to be determined. Such notice shall be mailed at least ten (10) days prior to the record date or effective date for the event specified in such notice.
 
5.
EXERCISE OF THE WARRANT UPON AN EXIT EVENT
 
Notwithstanding anything to the contrary in this Warrant, if at any time during the Warrant Period, the Company consummates an Exit Event, or at the discretion of the Board of Directors of the Company, in the event that the Company believes that an Exit Event is likely to be consummated during such period, the Company shall provide written notice of such Exit Event (or, if applicable, an anticipated Exit Event) to the Holder (the " Exit Event Notice "). Within fourteen (14) days after Holder’s receipt of the Exit Event Notice, Holder must notify the Company if it intends to exercise this Warrant pursuant to Section 1.3 or 1.4 of this Warrant, in which case such exercise shall be effective contingent upon and immediately prior to the consummation of the Exit Event. Thereafter, so long as the Company consummates such Exit Event within one hundred and eighty (180) days after Holder’s receipt of the Exit Event Notice (to the extent the Exit Event shall not have occurred prior to the Exit Event Notice), Holder shall have no further rights hereunder and this Warrant shall be automatically terminated if not so exercised. If the Company fails to consummate such Exit Event within such time, then this Warrant shall remain in effect subject to the provisions contained herein
 
For the purposes hereof, an " Exit Event " shall mean the closing of (i) a merger of the Company with or into another corporation, (ii) an acquisition of all or substantially all of the shares of the Company, (iii) the sale or license of all or substantially all of the assets of the Company, in all cases, other than a merger or transaction in which the persons that beneficially owned, directly or indirectly, a majority of the share capital of the Company immediately prior to such merger or transaction, beneficially own, directly or indirectly, a majority of the total shares of capital stock of the surviving or transferee entity. For greater certainty an initial public offering of the securities of the Company shall not be considered an "Exit Event".
 
 
9

 
 
6.
RIGHTS OF THE HOLDER
 
 
6.1.
This Warrant shall not entitle the Holder, by virtue hereof, to any voting rights or other rights as a shareholder of the Company, except for the rights expressly set forth herein.
 
 
6.2.
The Holder acknowledges that the Warrant Shares shall be subject to such rights, privileges, restrictions and limitations as set forth in this Warrant and the organizational documents of the Company (or any other agreement with respect thereto), as may be amended from time to time, and that, as a result, inter alia , of such limitations, it may be difficult or impossible for the Holder to realize his investment and/or to sell or otherwise transfer the Warrant Shares. The Holder further acknowledges that the Company's shares are not currently publicly traded.
 
7.
TERMINATION
 
Notwithstanding anything to the contrary, this Warrant and all the rights conferred hereby shall terminate and expire at the aforementioned time on the Expiry Date.
 
 
10

 
 
8.
MISCELLANEOUS
 
 
8.1.
Entire Agreement; Amendment . This Warrant sets forth the entire understanding of the parties with respect to the subject matter hereof and supersedes all existing agreements among them concerning such subject matter. All article and section headings herein are inserted for convenience only and shall not modify or affect the construction or interpretation of any provision of this Warrant. No modification or amendment of this Warrant will be valid unless executed in writing by the Company and the Holder.
 
 
8.2.
Waiver . No failure or delay on the part of any of the parties in exercising any right, power or privilege hereunder and/or under any applicable law or the exercise of such right or power in a manner inconsistent with the provisions of this Warrant or applicable law shall operate as a waiver thereof. Any waiver must be evidenced in writing signed by the party against whom the waiver is sought to be enforced.
 
 
8.3.
Successors and Assigns Transfer of this Warrant . Except as otherwise expressly limited herein, this Warrant shall inure to the benefit of, be binding upon, and be enforceable by the Holder and its respective successors, and administrators. This Warrant may be transferred by the Holder to its Permitted Transferees (as such term is defined in the Company's Articles of Association as shall be in effect from time to time) and any other transfer shall be subject to the same restrictions on transfer set forth in the Amended Shareholders' Agreement (as defined in the Credit Line Agreement) as may be amended from time to time, and the Company's Articles of Association as shall be in effect from time to time, mutatis mutandis. The transfer shall be recorded on the books of the Company upon the surrender of this Warrant, properly endorsed, to the Company at its principal offices, and the payment to the Company of all transfer taxes and other governmental charges imposed on such transfer. In the event of a partial transfer, the Company shall issue to the holders one or more appropriate new warrants.
 
 
8.4.
Governing Law . This Warrant shall be exclusively governed and construed in accordance with the laws of the State of Israel, without regard to conflicts of laws provisions thereof.
 
 
11

 
 
 
8.5.
Arbitration . Any dispute, controversy or claim arising in relation to this Warrant, including with regard to its validity, invalidity, breach, enforcement or termination, will be referred to a single arbitrator, who shall be appointed by the Head of the Israeli Bar Association. Arbitration proceedings shall take place in Tel Aviv, Israel, and shall be conducted in English and according to the rules of substantive law (per Section 8.4 above). The arbitrator will not be bound by rules of evidence or procedure and will give the reasons for his judgment. The arbitrator's decision shall be final and enforceable in any court. This paragraph shall constitute an arbitration agreement between the parties.
 
 
8.6.
Notices . Any notice required or permitted to be given to a party pursuant to the provisions of this Warrant will be in writing and will be effective and deemed delivered to such party on the earliest of the following: (a) all notices and other communications delivered in person or by courier service shall be deemed to have been delivered as of actual delivery thereof; (b) those given by facsimile transmission shall be deemed delivered on the following business day after transmission, with confirmed transmission thereof; and/or (c) all notices and other communications sent by registered mail (or air mail if the posting is international) shall be deemed given three (3) days after posting.
 
 
8.7.
Severability . If any provision of this Warrant is held to be unenforceable, this Warrant shall be considered divisible and such provision shall be deemed inoperative to the extent it is deemed unenforceable, and in all other respects this Warrant shall remain in full force and effect; provided , however , that if any such provision may be made enforceable by limitation thereof, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by applicable law.
 
 
8.8.
Counterparts . This Warrant may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. Facsimile or electronic signatures of a party shall be binding as evidence of such party's agreement hereto and acceptance hereof.
 

 
12

 
 
IN WITNESS WHEREOF , the Company has caused this Warrant to be executed by its officer thereunto duly authorized.
 
Dated:  _________, 2014
 
Check-Cap Ltd.
Signature: __________________
Name:  Guy Neev
Title:    CEO

 
 
13

 

Schedule 1.3
 
Exercise Notice
 
 
Date: ____________
 
To: Check-Cap Ltd.
 
The undersigned, pursuant to the provisions set forth in the Warrant to which this Exercise Notice is attached (the " Warrant "), hereby elects to purchase _________ Warrant Shares (as such term is defined in the Warrant) pursuant to Section 1.3 of the Warrant, and herewith makes payment of _____________, representing the full Exercise Price for such shares as provided for in such Warrant.
 
The undersigned hereby irrevocably directs that the said shares (or such other securities into which the Warrant is exercisable) be issued and registered in the name of the undersigned and/or in the name of its Permitted Transferee(s) (as such term is defined in the Company's Articles of Association), as set forth below.
 
Names
 
Address
No. of Shares
________________________
_____________________________
____________________
________________________
_____________________________
____________________
 
Signature:  ______________________
 
Address: _________________________
 
 
 
14

 

Schedule 1.4
 
Net Issuance Notice
 

Date: ____________
 
To:         Check-Cap Ltd.                                                                        
 
The undersigned, pursuant to the provisions set forth in the Warrant to which this Exercise Notice is attached (the " Warrant "), hereby elects to exercise the Warrant for the purchase of Warrant Shares (as such term is defined in the Warrant), pursuant to the provisions of Section 1.4 of the Warrant.
 
The undersigned hereby irrevocably directs that the said shares (or such other securities into which the Warrant is exercisable) be issued and registered in the name of the undersigned and/or in the name of its Permitted Transferees(s) (as such term is defined in the Company's Articles of Association), as set forth below.
 
Names
 
Address
No. of Shares
________________________
_____________________________
____________________
________________________
_____________________________
____________________
 
Signature: ______________________
 
Address: _________________________
 
 
15

 
 
NEITHER THIS WARRANT CERTIFICATE NOR THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT CERTIFICATE HAVE BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR ANY OTHER SECURITIES ACT, AND THIS WARRANT CERTIFICATE AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT CERTIFICATE MAY NOT BE SOLD, OFFERED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH APPLICABLE SECURITIES LAWS AND THE RESTRICTIONS, TERMS AND CONDITIONS SET FORTH HEREIN.
 
CHECK-CAP LTD.
 
ORDINARY SHARES WARRANT CERTIFICATE
 
To purchase
________ Ordinary Shares (subject to adjustment) of
Check-Cap Ltd. (the " Company ")
at a per share price and subject to the terms detailed below
VOID AFTER 17:00 p.m. Israel Standard Time
on the Expiry Date (as defined below)

THIS IS TO CERTIFY THAT , _________ (the " Holder "), is entitled to purchase from the Company, an aggregate of up to _________(as may be adjusted hereunder) Ordinary Shares (" Shares ") of the Company, nominal value NIS 0.01 per share (the " Warrant Shares "), at an aggregate purchase price equal to ____________ multiplied by the price per share at which Shares are sold to the public in the initial public offering of the Company’s securities  (the " IPO " and the " Exercise Price ", respectively), subject to the terms and conditions herein.
 
This Warrant Certificate (this " Warrant ") is issued to the Holder in consideration of its commitment to provide the following services to the Company, if and to the extent requested by the Company, for no consideration: (i) business development services, in such scope and substance as shall be agreed between the Company and the Holder; and (ii) a representative designated by the Holder to serve as the chairman of the Board of Directors of the Company. The Company shall have no obligation to actually retain business development services from the Holder and/or to appoint the Holder's representative as the chairman of the Board of Directors of the Company; provided that if the Company elects not to retain such services and/or appoint the Holder's representative as the chairman of the Board of Directors of the Company, the Holder shall still be entitled to exercise this Warrant in its entirety, subject to the terms and the conditions of this Warrant, including the vesting of the Warrant as set forth in this Warrant.
 
 
 

 
 
1.
EXERCISE OF WARRANT
 
 
1.1.
Warrant Period . This Warrant, may be exercised, subject to the terms and conditions hereof, in whole or in part, at one time or from time to time, subject to and following the vesting of the Warrant as set forth in Section 1.2 below, until the earlier of: (i) October 14, 2022 (the " Last Date "); and (ii) the closing of an Exit Event (as defined in Section 5 below); provided that such Exit Event is consummated within 180 days from the Exit Event Notice (each of (i) or (ii), the " Expiry Date ").
 
 
1.2.
Vesting Schedule . This Warrant shall vest and become exercisable only upon the consummation of the IPO and provided that the IPO is consummated on or prior to the Expiry Date. For the avoidance of doubt, if the IPO is not consummated on or prior to the Expiry Date, the Warrant shall not be exercisable and shall expire.
 
 
1.3.
Exercise for Cash . Subject to the vesting schedule set forth above, this Warrant may be exercised by presentation and surrender thereof to the Company at its principal office or at such other office or agency as it may designate from time to time, accompanied by:
 
 
(a)
A duly executed notice of exercise, in the form attached hereto as Schedule 1.3 (the " Exercise Notice "); and
 
 
(b)
Payment to the Company, for the account of the Company, of the Exercise Price for the number of Warrant Shares purchased payable in immediately available funds by wire transfer to the Company's bank account. The Exercise Price will be paid in United States Dollars or the equivalent sum in NIS according to the Bank of Israel exchange rate as published upon the date immediately prior to the exercise date.
 
 
2

 
 
 
1.4.
Exercise on Net Issuance Basis . In lieu of payment to the Company as set forth in Section 1.3 above and subject to the vesting schedule set forth above, the Holder may elect to exercise this Warrant into the number of Warrant Shares calculated pursuant to the formula below, by presentation and surrender thereof to the Company at its principal office or at such other office or agency it may designate from time to time, accompanied by a duly executed notice of exercise, in the form attached hereto as Schedule 1.4 (the " Net Issuance Notice "):
 
 
 
                     Y*(A - B)
X         =     -----------------
                       A
 
Where:
 
 
X =
the number of Warrant Shares to be issued to the Holder;
 
 
Y =
the number of Warrant Shares in respect of which the net issuance election is being made;
 
 
A =
the Fair Market Value (as defined below) of one Warrant Share; and
 
 
B =
the Exercise Price of one Warrant Share.
 
For purposes of this Section 1.4, the " Fair Market Value " of one Warrant Share as of a particular date (the "Determination Date" ) shall be:
 
 
(a)
If the net issuance right is exercised in connection with and contingent upon an Exit Event, the price per Share in such Exit Event.
 
 
(b)
If the net issuance right is not exercised in connection with and contingent upon an Exit Event, then as follows:
 
 
(i)
If the Shares are traded on a securities exchange, the Fair Market Value shall be deemed to be the average of the closing prices of the Shares on such exchange over the fifteen (15) trading days immediately prior to (but not including) the Determination Date;
 
 
(ii)
If the Shares are quoted for trading on an over-the-counter system, the Fair Market Value shall be deemed to be the average of the closing bid prices of the Shares over the fifteen (15) trading days immediately prior to (but not including) the Determination Date; and
 
 
(iii)
If there is no public market for the Shares, the Fair Market Value of the shares shall be determined in good faith by the Board of Directors of the Company.
 
 
3

 
 
 
1.5.
In the event that, upon the Last Date, the Fair Market Value of one Warrant Share (or other security issuable upon the exercise hereof) as determined in accordance with Section 1.4 above is greater than the Exercise Price in effect on such date, then, unless otherwise directed in writing by the Holder, this Warrant shall automatically be deemed on and as of such date to be exercised pursuant to Section 1.4 above with respect to all Warrant Shares (or such other securities) for which it shall not previously have been exercised, and the Company shall promptly deliver a certificate representing such number of Warrant Shares (or such other securities) issued upon such exercise to Holder.
 
 
1.6.
Issuance of Warrant Shares . Upon presentation and surrender of this Warrant, accompanied by (a) the duly executed Exercise Notice and the payment of the applicable Exercise Price for the Warrant Shares being purchased pursuant to Section 1.3 above; or (b) the duly executed Net Issuance Notice pursuant to Section 1.4 above, as the case may be, the Company shall promptly (i) issue to the Holder the Warrant Shares to which the Holder is entitled; and (ii) deliver to the Holder the share certificate evidencing such Warrant Shares.
 
Upon receipt by the Company of this Warrant and the applicable duly executed notice of exercise (and the Exercise Price for the Warrant Shares being purchased, if applicable), together with any other documents and/or approvals that may be required by law, the Holder shall be deemed to be the holder of record of the Warrant Shares issuable upon such exercise, notwithstanding that the share transfer books of the Company shall then be closed or that certificates representing such shares shall not then be actually delivered to the Holder.
 
 
1.7.
Fractional Shares . No fractions of shares shall be issued in connection with the exercise of this Warrant, and the number of shares issued shall be rounded up to the nearest whole number.
 
 
1.8.
Partial Exercise . If this Warrant is exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder to purchase the balance of the Warrant Shares purchasable hereunder.
 
 
4

 
 
 
1.9.
Additional Documents . The Holder will sign and deliver any and all documents or approvals required by law, to facilitate the issuance of the Warrant Shares upon exercise of this Warrant.
 
 
1.10.
Loss or Destruction of Warrant . Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonable reimbursement of expenses and satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date.
 
2.
TAXES
 
 
2.1.
The Holder acknowledges that the grant of the Warrant, the issuance of the Warrant Shares and the execution and/or performance of this Warrant may have tax consequences to the Holder and that the Company is not able to ensure or represent to the Holder the nature and extent of such tax consequences.
 
 
2.2.
The Company shall pay all of the applicable taxes and other charges payable by the Company in connection with the issuance of the Warrant Shares and the preparation and delivery of share certificates in the name of the Holder (such as transfer taxes in respect of the issuance or delivery of Warrant Shares upon exercise of this Warrant), if any, but shall not pay any taxes payable by the Holder by virtue of the holding, issuance, exercise or sale of this Warrant or the Warrant Shares by the Holder.
 
3.
RESERVATION OF SHARES; PRESERVATION OF RIGHTS OF HOLDER
 
 
3.1.
Reservation of Shares . The Company hereby agrees that, at all times prior to the expiration or exercise of this Warrant, it will maintain and reserve, free from pre-emptive or similar rights, such number of authorized but unissued shares so that this Warrant may be exercised without additional authorization of shares.
 
 
3.2.
Preservation of Rights . The Company will not, by amendment of its organizational documents or through reorganization, recapitalization, consolidation, merger, dissolution, transfer of assets, issue or sale of securities or any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations, conditions or terms to be observed or performed hereunder, but will at all times in good faith assist in the carrying out of all the provisions hereof and in taking of all such actions and making all such adjustments as may be necessary or appropriate in order to fulfill the provisions hereof.
 
 
5

 
 
4.
ADJUSTMENT
 
 
4.1.
The number of Warrant Shares purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time or upon exercise, as follows:
 
 
(a)
If the Company at any time or from time to time after the date hereof effects a subdivision of the outstanding Shares or consolidates the outstanding Shares, then the Exercise Price shall be adjusted to that price determined by multiplying the Exercise Price immediately prior to such event by a fraction:
 
 
(i)
the numerator of which shall be the total number of outstanding Shares immediately prior to such event; and
 
 
(ii)
the denominator of which shall be the total number of outstanding Shares immediately after such event.
 
 
 
Upon each adjustment of the Exercise Price as provided in this paragraph (a), the Holder shall thereafter be entitled to acquire, at the Exercise Price resulting from such adjustment, the number of Shares (calculated to the nearest Share) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Shares which may be acquired hereunder immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment.
 
 
(b)
If the Company at any time or from time to time after the date hereof makes, or fixes a record date for the determination of holders of Shares entitled to receive a dividend or other distribution payable in additional Shares, then in each such event the Exercise Price that is then in effect shall be adjusted as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, by multiplying the Exercise Price then in effect by a fraction:
 
 
6

 
 
 
(i)
the numerator of which is the total number of Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date; and
 
 
(ii)
the denominator of which is the total number of Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of Shares issuable in payment of such dividend or distribution;
 
 
 
provided, however , that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Exercise Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Exercise Price shall be adjusted pursuant to this section to reflect the actual payment of such dividend or distribution. Upon each adjustment of the Exercise Price as provided in this paragraph (b), the Holder shall thereafter be entitled to acquire, at the Exercise Price resulting from such adjustment, the number of Shares (calculated to the nearest Share) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Shares which may be acquired hereunder immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment.
 
 
(c)
If the Company at any time or from time to time after the date hereof makes, or fixes a record date for the determination of holders of Shares entitled to receive, a dividend or other distribution payable in securities of the Company other than Shares, then in each such event provision shall be made so that the Holder shall receive upon exercise of this Warrant, in addition to the number of Shares receivable thereupon, the amount of other securities of the Company which it would have received had this Warrant been exercised for such number of Shares immediately prior to the date of such event (or record date of such event) and had the Holder thereafter, during the period from the date of such event to and including the exercise date, retained such securities receivable by it as aforesaid during such period, subject to all other adjustments called for during such period under this section and the Company's Articles of Association as shall be in effect from time to time, with respect to the rights of the Holder.
 
 
7

 
 
 
(d)
In case the Shares issuable upon exercise of this Warrant are changed into the same or different number of shares of any class or classes of shares, whether by recapitalization, reclassification or otherwise (other than a subdivision or consolidation of shares, share dividend or other reorganization, provided for elsewhere in this Section), then in each such event this Warrant shall be exercised into the kind and amount of shares or other securities and property receivable on such recapitalization, reclassification or other change that the Holder would have been entitled to receive thereupon had the Holder been the registered holder of the number of Shares into which this Warrant might have been exercised immediately prior thereto.
 
 
4.2.
Whenever an adjustment is effected hereunder, the Company shall, at its expense, promptly compute such adjustment and deliver to the Holder a certificate setting forth the number of Warrant Shares (or any other securities) for which this Warrant is exercisable and the Exercise Price as a result of such adjustment, a brief statement of the facts requiring such adjustment and the computation thereof and when such adjustment has or will become effective.
 
 
4.3.
Except as otherwise provided herein, Sections 4.1(a) to 4.1(d) hereof are intended to operate independently of one another. If an event occurs that requires the application of more than one subsection, all applicable subsections shall be given independent effect, but there shall be no duplicate adjustments if two separate subsections provide the same protection.
 
 
4.4.
Notices of Certain Transactions . In case:
 
 
(a)
the Company shall take a record of the holders of its Shares (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or
 
 
(b)
of the voluntary or involuntary dissolution, liquidation or winding-up of the Company
 
then, and in each such case, the Company will mail or cause to be mailed to the Holder a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend or distribution, and stating the amount and character of such dividend or distribution, or (ii) the effective date on which such voluntary dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Shares (or such other shares or securities at the time deliverable upon such voluntary dissolution, liquidation or winding-up) are to be determined. Such notice shall be mailed at least ten (10) days prior to the record date or effective date for the event specified in such notice.
 
 
8

 
 
5.
EXERCISE OF THE WARRANT UPON AN EXIT EVENT
 
Notwithstanding anything to the contrary in this Warrant, if at any time commencing as of the consummation of the IPO and ending on the Last Date, the Company consummates an Exit Event, or at the discretion of the Board of Directors of the Company, in the event that the Company believes that an Exit Event is likely to be consummated during such period, the Company shall provide written notice of such Exit Event (or, if applicable, an anticipated Exit Event) to the Holder (the " Exit Event Notice "). Within fourteen (14) days after Holder’s receipt of the Exit Event Notice, Holder must notify the Company if it intends to exercise this Warrant pursuant to Section 1.3 or 1.4 of this Warrant, in which case such exercise shall be effective contingent upon and immediately prior to the consummation of the Exit Event. Thereafter, so long as the Company consummates such Exit Event within one hundred and eighty (180) days after Holder’s receipt of the Exit Event Notice (to the extent the Exit Event shall not have occurred prior to the Exit Event Notice), Holder shall have no further rights hereunder and this Warrant shall be automatically terminated if not so exercised. If the Company fails to consummate such Exit Event within such time, then this Warrant shall remain in effect subject to the provisions contained herein.
 
For the purposes hereof, an " Exit Event " shall mean the closing of (i) a merger of the Company with or into another corporation, (ii) an acquisition of all or substantially all of the shares of the Company, (iii) the sale or license of all or substantially all of the assets of the Company, in all cases, other than a merger or transaction in which the persons that beneficially owned, directly or indirectly, a majority of the share capital of the Company immediately prior to such merger or transaction, beneficially own, directly or indirectly, a majority of the total shares of capital stock of the surviving or transferee entity. For greater certainty the IPO shall not be considered an "Exit Event."
 
 
9

 
 
6.
RIGHTS OF THE HOLDER
 
 
6.1.
This Warrant shall not entitle the Holder, by virtue hereof, to any voting rights or other rights as a shareholder of the Company, except for the rights expressly set forth herein.
 
 
6.2.
The Holder acknowledges that the Warrant Shares shall be subject to such rights, privileges, restrictions and limitations as set forth in this Warrant and the organizational documents of the Company (or any other agreement with respect thereto), as may be amended from time to time, and that, as a result, inter alia , of such limitations, it may be difficult or impossible for the Holder to realize his investment and/or to sell or otherwise transfer the Warrant Shares. The Holder further acknowledges that the Company's shares are currently not publicly traded.
 
7.
TERMINATION
 
Notwithstanding anything to the contrary, this Warrant and all the rights conferred hereby shall terminate and expire at the aforementioned time on the Expiry Date.
 
8.
MISCELLANEOUS
 
 
8.1.
Entire Agreement; Amendment . This Warrant sets forth the entire understanding of the parties with respect to the subject matter hereof and supersedes all existing agreements among them concerning such subject matter. All article and section headings herein are inserted for convenience only and shall not modify or affect the construction or interpretation of any provision of this Warrant. No modification or amendment of this Warrant will be valid unless executed in writing by the Company and the Holder.
 
 
8.2.
Waiver . No failure or delay on the part of any of the parties in exercising any right, power or privilege hereunder and/or under any applicable law or the exercise of such right or power in a manner inconsistent with the provisions of this Warrant or applicable law shall operate as a waiver thereof. Any waiver must be evidenced in writing signed by the party against whom the waiver is sought to be enforced.
 
 
10

 
 
 
8.3.
Successors and Assigns Transfer of this Warrant . Except as otherwise expressly limited herein, this Warrant shall inure to the benefit of, be binding upon, and be enforceable by the Holder and its respective successors, and administrators. This Warrant may be transferred by the Holder to its Permitted Transferees (as such term is defined in the Company's Articles of Association as shall be in effect from time to time) and any other transfer shall be subject to the same restrictions on transfer set forth in the Amended and Restated Shareholders' Agreement as may be amended from time to time, and the Company's Articles of Association as shall be in effect from time to time, mutatis mutandis. The transfer shall be recorded on the books of the Company upon the surrender of this Warrant, properly endorsed, to the Company at its principal offices, and the payment to the Company of all transfer taxes and other governmental charges imposed on such transfer. In the event of a partial transfer, the Company shall issue to the holders one or more appropriate new warrants.
 
 
8.4.
Governing Law . This Warrant shall be exclusively governed and construed in accordance with the laws of the State of Israel, without regard to conflicts of laws provisions thereof.
 
 
8.5.
Arbitration . Any dispute, controversy or claim arising in relation to this Warrant, including with regard to its validity, invalidity, breach, enforcement or termination, will be referred to a single arbitrator, who shall be appointed by the Head of the Israeli Bar Association. Arbitration proceedings shall take place in Tel Aviv, Israel, and shall be conducted in English and according to the rules of substantive law (per Section 8.4 above). The arbitrator will not be bound by rules of evidence or procedure and will give the reasons for his judgment. The arbitrator's decision shall be final and enforceable in any court. This paragraph shall constitute an arbitration agreement between the parties.
 
 
8.6.
Notices . Any notice required or permitted to be given to a party pursuant to the provisions of this Warrant will be in writing and will be effective and deemed delivered to such party on the earliest of the following: (a) all notices and other communications delivered in person or by courier service shall be deemed to have been delivered as of actual delivery thereof; (b) those given by facsimile transmission shall be deemed delivered on the following business day after transmission, with confirmed transmission thereof; and/or (c) all notices and other communications sent by registered mail (or air mail if the posting is international) shall be deemed given three (3) days after posting.
 
 
11

 
 
 
8.7.
Severability . If any provision of this Warrant is held to be unenforceable, this Warrant shall be considered divisible and such provision shall be deemed inoperative to the extent it is deemed unenforceable, and in all other respects this Warrant shall remain in full force and effect; provided , however , that if any such provision may be made enforceable by limitation thereof, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by applicable law.
 
 
8.8.
Counterparts . This Warrant may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. Facsimile or electronic signatures of a party shall be binding as evidence of such party's agreement hereto and acceptance hereof.
 
[THE REMAINDER OF THIS PAGE WAS INTENTIONALLY LEFT BLANK]
 
 
12

 
 
IN WITNESS WHEREOF , the Company has caused this Warrant to be executed by its officer thereunto duly authorized.
 
Dated:  _________, 2014
 
Check-Cap Ltd.
Signature: __________________
Name:  Guy Neev
Title:    CEO

 
13

 
 
Schedule 1.3
 
Exercise Notice
 
 
Date: ____________
 
To: Check-Cap Ltd.
 
The undersigned, pursuant to the provisions set forth in the Warrant to which this Exercise Notice is attached (the " Warrant "), hereby elects to purchase _________ Warrant Shares (as such term is defined in the Warrant) pursuant to Section 1.3 of the Warrant, and herewith makes payment of _____________, representing the full Exercise Price for such shares as provided for in such Warrant.
 
The undersigned hereby irrevocably directs that the said shares (or such other securities into which the Warrant is exercisable) be issued and registered in the name of the undersigned and/or in the name of its Permitted Transferee(s) (as such term is defined in the Company's Articles of Association), as set forth below.
 
Names
 
Address
No. of Shares
________________________
_____________________________
____________________
________________________
_____________________________
____________________
 
Signature:  ______________________
 
Address: _________________________
 
 
 
14

 

Schedule 1.4
 
Net Issuance Notice
 
Date: ____________
 
To:         Check-Cap Ltd.                                                                        
 
The undersigned, pursuant to the provisions set forth in the Warrant to which this Exercise Notice is attached (the " Warrant "), hereby elects to exercise the Warrant for the purchase of Warrant Shares (as such term is defined in the Warrant), pursuant to the provisions of Section 1.4 of the Warrant.
 
The undersigned hereby irrevocably directs that the said shares (or such other securities into which the Warrant is exercisable) be issued and registered in the name of the undersigned and/or in the name of its Permitted Transferees(s) (as such term is defined in the Company's Articles of Association), as set forth below.
 
Names
 
Address
No. of Shares
________________________
_____________________________
____________________
________________________
_____________________________
____________________
 
Signature: ______________________
 
Address: _________________________
 
15



 

 


Exhibit 10.16
 
ADDENDUM TO CREDIT LINE AGREEMENT
 
This Addendum to Credit Line Agreement (the " Addendum ") dated as of October 14, 2014, is made by and among Check-Cap Ltd. (the " Company ") and the Lenders listed in the Agreement, as defined below (each, a " Lender " and collectively, the " Lenders "). Each Lender and the Company separately, a " Party " and together, the " Parties ".
 
WHEREAS ,
the Parties are parties to that certain Credit Line Agreement, dated August 20, 2014 (the " Agreement "). Capitalized terms used, but not defined herein, shall have the meaning ascribed to such terms in the Agreement, of which this Addendum constitutes an integral part; and
 
WHEREAS
the Parties desire to clarify and amend certain provisions in the Agreement, as more fully set forth herein.
 
NOW THEREFORE , for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:
 
1.
The Agreement shall be clarified and amended as follows:
 
 
(a)
In Section 6 of the Agreement , the words "the Fifth Amended and Restated Articles of Association" in the second sentence, shall be deleted in their entirety and replaced by the words "the Sixth Amended and Restated Articles of Association." Accordingly, Exhibit 6(a) of the Agreement shall be replaced with the Sixth Amended and Restated Articles of Association in the form attached hereto as Exhibit A .
 
 
(b)
Section 7.2.3 of the Agreement shall be amended and restated to read in its entirety as follows: "The Company, the Lenders and the parties to the Amended and Restated Shareholders’ Agreement dated March 17, 2011 (either as an original signatory or by virtue of a joinder thereto) shall execute and deliver the Amended Shareholders' Agreement."
 
 
(c)
In Section 10.2.2 of the Agreement , the words "907,154,180 Ordinary Shares" in subsection (i) shall be deleted in their entirety and replaced with the words "867,154,180 Ordinary Shares," and the words "5,000,000 Preferred D3 Shares" in subsection (ix) shall be deleted in their entirety and replaced with the words "45,000,000 Preferred D3 Shares."
 
 
 

 
 
 
(d)
Section 11.3 of the Agreement shall be amended and restated to read in its entirety as follows: "The Lender is either (i) an "accredited investor" as defined in Rule 501(a) under the U.S. Securities Act of 1933, as amended (the " Securities Act "), and the rules and regulations promulgated thereunder; or (ii) outside the United States and is not a "U.S. Person," as such term is defined in Rule 902 of Regulation S under the Securities Act."
 
 
(e)
In Section 2.2 of Exhibit 4.2 of the Agreement ( Automatic Conversion Upon an M&A Event ), the last sentence in the first paragraph shall be amended and restated to read in its entirety as follows: "In the event that during the period commencing on the Effective Date and ending on the closing of the M&A event, the Company shall not have issued shares to New Investors against equity investment in the Company, then the Preferred D-3 Shares of the Company shall be deemed the M&A Senior Shares and the M&A Conversion Price shall be equal to the lower of (i) a price per share reflecting a 25% discount on the original issued price of the Preferred D-3 Shares; and (ii) a price per share reflecting a 25% discount on the lowest price per share consideration paid with respect to the Preferred D-3 Shares in the M&A Event."
 
2.
Except as otherwise provided herein, the provisions of the Agreement (including its exhibits and schedules) shall remain in full force and effect. In the event of any inconsistency between the provisions of this Addendum and the terms of the Agreement, the provisions of this Addendum will prevail.
 
3.
This Addendum may be signed in counterparts and delivered electronically or via facsimile, each such counterpart (whether delivered electronically, via facsimile or otherwise), when executed, shall be deemed an original and all of which together constitute one and the same agreement.
 
[ Signature Pages to Follow ]
 
 
2

 
 
IN WITNESS WHEREOF , the Parties have signed this Addendum to Credit Line Agreement as of the date first hereinabove set forth.
 
THE COMPANY:

Check-Cap Ltd.
 
By      _________________________
 
Name: _________________________
 
Title:    _________________________
   

[Company Signature Page to Addendum to Credit Line Agreement]
 
 
3

 

IN WITNESS WHEREOF , the Parties have signed this Addendum to Credit Line Agreement as of the date first hereinabove set forth.
 
THE COMPANY:
 
Shanghai Fosun Pharmaceutical Group Co. Ltd.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
Counterpoint Ventures Fund II LP
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Pontifax (Cayman) II L.P.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
Pontifax (Israel) II Individual Investors L.P.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Pontifax (Israel) II L.P.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
Docor International BV
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Bart Superannuation Pty Ltd.
 
By:      _________________________
 
Name: _________________________
 
Title:  _________________________
 
 
Joshua Ehrlich
 
By:      _________________________
 
Name: _________________________
 
Title:  _________________________
 
 
[Lenders Signature Page 1 to Addendum to Credit Line Agreement]
 
 
4

 
 
IN WITNESS WHEREOF , the Parties have signed this Addendum to Credit Line Agreement as of the date first hereinabove set forth.

THE LENDERS:
 
Nir Grinberg
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
DPC Big Bay Properties Trust
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Avraham Kuzitsky
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
Pinchas Dekel
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Minrav Holdings Ltd.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
Sharon Zaworbach
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Moshe Haviv
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
H.M.L.K Financial Consulting Ltd.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
[Lenders Signature Page 2 to Addendum to Credit Line Agreement]

 
5

 
 
IN WITNESS WHEREOF , the Parties have signed this Addendum to Credit Line Agreement as of the date first hereinabove set forth.

THE LENDERS:
 
Yossi Smira
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
Capital Point Ltd.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Emil Mor- Business & Financial Consulting Ltd.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
Norman Jackson
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Shevlin Ciral
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
Scott Jackson
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
GE Ventures Limited
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
Dor Benvenisty
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
[Lenders Signature Page 3 to Addendum to Credit Line Agreement]

 
6

 
 
IN WITNESS WHEREOF , the Parties have signed this Addendum to Credit Line Agreement as of the date first hereinabove set forth.

THE LENDERS:
 
Uri Perelman
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
Everest Fund L.P.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Harmony (Ben Dov) Ltd.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Beetson Nominees (Panama) Inc.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Red Car Group
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Yossi Avraham
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
[Lenders Signature Page 4 to Addendum to Credit Line Agreement]
 
7




Exhibit 10.17
 
SECOND ADDENDUM TO CREDIT LINE AGREEMENT
 
This Second Addendum to Credit Line Agreement (the " Addendum ") dated as of December 22, 2014, is made by and among Check-Cap Ltd. (the " Company ") and the Lenders listed on Exhibit A of the Agreement, as defined below (each, a " Lender " and collectively, the " Lenders "). Each Lender and the Company separately, a " Party " and together, the " Parties ".
 
WHEREAS ,
the Parties are parties to that certain Credit Line Agreement dated August 20, 2014, as amended by the Addendum to Credit Line Agreement dated October 14, 2014 (together and collectively with all exhibits and schedules thereto, the " Agreement "). Capitalized terms used, but not defined herein, shall have the meaning ascribed to such terms in the Agreement, of which this Addendum constitutes an integral part; and
 
WHEREAS ,
the Parties desire to clarify and amend certain provisions in the Agreement, as more fully set forth herein.
 
NOW THEREFORE , for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:
 
1.
The Parties hereto acknowledge and agree that in the event that the Company shall exercise its right under Section 5.1 of the Agreement, the Lenders’ investment and acquisition of securities of the Company pursuant thereto shall be made in a separate private placement that shall be consummated simultaneously with the consummation of the IPO (the " Simultaneous Private Placement ") and such investment shall not be part of the IPO itself.
 
2.
Accordingly, the phrases "in an IPO" and "in the IPO" in the Agreement, the Irrevocable Letters of Instructions delivered by the Lenders pursuant to Section 7.2.10 of the Agreement and the Escrow Agreement (including the Exhibits thereto), shall be replaced with the phrases "in a Simultaneous Private Placement" and "in the Simultaneous   Private Placement," respectively.
 
3.
Each Lender hereby acknowledges and agrees to the representation and warranties set forth on Exhibit A hereto.
 
4.
Except as otherwise provided herein, the provisions of the Agreement shall remain in full force and effect. In the event of any inconsistency between the provisions of this Addendum and the terms of the Agreement, the provisions of this Addendum will prevail.
 
 
 

 
 
5.
This Addendum may be signed in counterparts and delivered electronically or via facsimile, each such counterpart (whether delivered electronically, via facsimile or otherwise), when executed, shall be deemed an original and all of which together constitute one and the same agreement.
 
IN WITNESS WHEREOF , the Parties have signed this Second Addendum to Credit Line Agreement as of the date first hereinabove set forth.
 
THE COMPANY:

Check-Cap Ltd.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
   

 
2

 
 
THE LENDERS:

Shanghai Fosun Pharmaceutical Group Co. Ltd.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
Counterpoint Ventures Fund II LP
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Pontifax (Cayman) II L.P.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
Pontifax (Israel) II Individual Investors L.P.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Pontifax (Israel) II L.P.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
Docor International BV
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
[Lenders Signature Page 1 to Second Addendum to Credit Line Agreement]

 
3

 

Bart Superannuation Pty Ltd.
 
By:      _________________________
 
Name: _________________________
 
Title:  _________________________
 
 
Joshua Ehrlich
 
By:      _________________________
 
Name: _________________________
 
Title:  _________________________
 
Nir Grinberg
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
DPC Big Bay Properties Trust
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Avraham Kuzitsky
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
Pinchas Dekel
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Minrav Holdings Ltd.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
Sharon Zaworbach
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Moshe Haviv
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
H.M.L.K Financial Consulting Ltd.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
[Lenders Signature Page 2 to Second Addendum to Credit Line Agreement]

 
4

 
 
Yossi Smira
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
Capital Point Ltd.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Emil Mor- Business & Financial Consulting Ltd.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
Norman Jackson
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Shevlin Ciral
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
Scott Jackson
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
GE Ventures Limited
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
Dor Benvenisty
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
[Lenders Signature Page 3 to Second Addendum to Credit Line Agreement]

 
5

 
 
Uri Perelman
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
 
Everest Fund L.P.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Harmony (Ben Dov) Ltd.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Beetson Nominees (Panama) Inc.
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Red Car Group
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
Yossi Avraham
 
By:      _________________________
 
Name: _________________________
 
Title:   _________________________
 
[Lenders Signature Page 4 to Second Addendum to Credit Line Agreement]

 
6

 
 
Exhibit A
 
(1)
Each Lender acknowledges and understands that any securities purchased by and issued to such  Lender pursuant to the Agreement, including, without limitation, in connection with the Simultaneous Private Placement in accordance with Section 5 above and upon conversion of the Conversion Amount or placement of the Escrow Amount in accordance with Exhibit 4.2 of the Agreement   (i)  will be acquired from the Company in a transaction not involving a public offering in the United States within the meaning of the Securities Act; and (ii) have not been and will not be registered under the Securities Act.  Each Lender further acknowledges that if in the future it decides to offer, resell, pledge or otherwise transfer such securities, such securities may be offered, resold, pledged or otherwise transferred only pursuant to an effective registration statement filed under the Securities Act or in a transaction that is exempt from the registration requirements of the Securities Act. Each Lender further acknowledges that such Lender is acquiring such securities solely for investment purposes, for such Lender’s own account and not for the account or benefit of any other person, and not with a view towards the distribution or dissemination thereof and that such Lender has no present arrangement to sell such securities to or through any person or entity.  Each Lender acknowledges that it is able to bear the economic risk of its investment in such securities for an indefinite period of time and that such securities must be held indefinitely unless such securities are subsequently registered under the Securities Act or an exemption from registration is available.  Each Lender represents that it is sophisticated in financial matters and is able to evaluate the risks and benefits of the investment in such securities.  Each Lender acknowledges, in making the decision to acquire such securities, it has relied upon an independent investigation of the Company and has not relied upon any information or representations made by any third parties or upon any oral or written representations or assurances from the Company, its officers, directors or employees or any other representatives or agents of the Company, other than as set forth in this Agreement. Each Lender acknowledges that it is familiar with the business, operations and financial condition of the Company and has had an opportunity to ask questions of, and receive answers from, the Company’s officers and directors concerning the Company and the terms and conditions of the offering of such securities and has had full access to such other information concerning the Company as such Lender has requested. Each Lender understands that such securities are being offered and sold to such Lender in reliance on specific provisions of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of the Lender set forth in this Agreement in order to determine the applicability of such provisions.
 
 
7

 
 
(2)
Each Lender acknowledges and understands that any securities purchased by and issued to the Lender pursuant to the Agreement, including, without limitation, in connection with the Simultaneous Private Placement in accordance with Section 5 or upon conversion of the Conversion Amount or placement of the Escrow Amount in accordance with Exhibit 4.2 of the Agreement will bear the following legend:
 
“THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND THESE SECURITIES MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE SECURITIES ACT, (B) TO A NON-U.S. PERSON IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (C) PURSUANT TO THE RESALE LIMITATIONS SET FORTH IN RULE 905 OF REGULATIONS S UNDER THE SECURITIES ACT, (D) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (E) PURSUANT TO ANY OTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER JURISDICTION. HEDGING TRANSACTIONS INVOLVING THESE SECURITIES MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT.”
 
8


 


Exhibit 23.1
 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
We consent to the use in this Registration Statement on Form F-1 of our report dated July 3, 2014 relating to the financial statements of Check-Cap Ltd appearing in the Prospectus, which is part of this Registration Statement.
 
We also consent to the reference to us under the headings "Experts" in such Prospectus.
 
/s/ Brightman Almagor Zohar & Co.
Brightman Almagor Zohar & Co.
Certified Public Accountants
A Member Firm of Deloitte Touche Tohmatsu
Tel Aviv, Israel
December 23, 2014