UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
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☒
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
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OR
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Date of event requiring this shell company report ________________
Commission file number 001-38367
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Sol-Gel Technologies Ltd.
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(Exact name of Registrant as specified in its charter)
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N/A
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(Translation of Registrant’s name into English)
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Israel
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(Jurisdiction of incorporation or organization)
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7 Golda Meir St., Weizmann Science Park, Ness Ziona, 7403650, Israel
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(Address of principal executive offices)
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Adv. Tamar Fishman Jutkowitz, Vice President & General Counsel
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7 Golda Meir St., Weizmann Science Park, Ness Ziona, 7403650, Israel
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Tel: 972-8-9313429; email: tami.fishman@sol-gel.com
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(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
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Securities registered or to be registered pursuant to Section 12(b) of the Act.
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Ordinary Shares, par value NIS 0.1 per share
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SLGL
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The Nasdaq Stock Market LLC
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Securities registered or to be registered pursuant to Section 12(g) of the Act:
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None
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(Title of Class)
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Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
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None
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(Title of Class)
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Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 27,857,620 Ordinary Shares, par value NIS 0.1 per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act 1934.
Yes ☐ No ☒
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large Accelerated filer ☐
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Accelerated filer ☐
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Non-accelerated filer ☒
Emerging growth company ☐ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive- based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☒
International Financing Reporting Standards as issued by the International Accounting Standards Board ☐ Other ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
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INTRODUCTION
All references to “Sol-Gel,” “Sol-Gel Technologies,” “we,”
“us,” “our,” “the Company” and similar designations refer to Sol-Gel Technologies Ltd. The terms “shekels,”
“Israeli shekels” and “NIS” refer to New Israeli Shekels, the lawful currency of the State of Israel, the terms
“dollar,” “US$” or “$” refer to U.S. dollars, the lawful currency of the United States. Unless derived
from our financial statements or otherwise indicated, U.S. dollar translations of NIS amounts presented in this annual report are translated
using the rate of NIS3.627, NIS 3.519 and NIS 3.11 to $1.00, based on the exchange rates reported by the Bank of Israel on December 31,
2023, December 31, 2022, and December 31, 2021, respectively.
References to the terms below in this Annual Report have
the meanings referred to below:
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“SGT-610” - SGT-610 (patidegib), an investigational topical treatment designed to prevent new Basel Cell Carcinomas (BCCs)
formation in adults with Gorlin Syndrome; |
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“SGT-210” - SGT-210 (erlotinib), an investigational topical ointment for the treatment of rare hyperkeratinization disorders;
“erlotinib” refers to an epidermal growth factor receptor inhibitor; |
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“Twyneo” - our novel, once-daily, non-antibiotic topical cream that has been approved by the Food and Drug Administration
for the treatment of acne vulgaris, or acne; |
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“Epsolay” - our novel, once-daily topical cream containing encapsulated benzoyl peroxide that has been approved by the
Food and Drug Administration for the treatment of papulopustular (subtype II) rosacea; |
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“investigational product candidates” - include SGT-610 and SGT-210; |
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“approved products” - Twyneo and Epsolay; |
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"generic product candidate" - a generic program developed in collaboration with Padagis Israel Pharmaceuticals Ltd ("Padagis");
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“product candidates” - both investigational product candidates and generic product candidates; and |
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“our products” - both approved products and product candidates. |
Solely for convenience, the trademarks, service marks, and
trade names referred to in this annual report are without the ® and ™ symbols, but such references are not intended to indicate,
in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors
to these trademarks, service marks and trade names. This annual report contains additional trademarks, service marks and trade names of
others, which are the property of their respective owners. All trademarks, service marks and trade names appearing in this annual report
are, to our knowledge, the property of their respective owners. We do not intend our use or display of other companies’ trademarks,
service marks or trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
This annual report includes statistics and other data relating
to markets, market sizes and other industry data pertaining to our business that we have obtained from industry publications and surveys
and other information available to us. Industry publications and surveys generally state that the information contained therein has been
obtained from sources believed to be reliable. Market data and statistics are inherently predictive and speculative and are not necessarily
reflective of actual market conditions. Such statistics are based on market research, which itself is based on sampling and subjective
judgments by both the researchers and the respondents, including judgments about what types of products and transactions should be included
in the relevant market. In addition, the value of comparisons of statistics for different markets is limited by many factors, including
that (i) the markets are defined differently, (ii) the underlying information was gathered by different methods, and (iii) different
assumptions were applied in compiling the data. Accordingly, the market statistics included in this annual report should be viewed with
caution. We believe that information from these industry publications included in this annual report is reliable.
We make forward-looking statements in this annual report that are
subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our
business, financial condition, results of operations, liquidity, plans and objectives. In some cases, you can identify forward-looking
statements by terminology such as “believe,” “may,” “estimate,” “continue,” “anticipate,”
“intend,” “should,” “plan,” “expect,” “predict,” “potential,”
or the negative of these terms or other similar expressions. Forward-looking statements are based on information we have when these statements
are made or our management’s good faith belief as of that time with respect to future events and are subject to risks and uncertainties
that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements.
Important factors that could cause such differences include, but are not limited to:
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the adequacy of our financial and other resources, particularly in light of our history of recurring losses and the uncertainty regarding
the adequacy of our liquidity to pursue our complete business objectives; |
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our ability to successfully integrate SGT-610 into our product candidate pipeline, and the benefits of and projections of our future
financial performance as a result of our acquisition of SGT-610; |
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our ability to enroll patients in our clinical trials and the possibility that patients would discontinue their participation in
our clinical trials. |
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our ability to complete the development of our product candidates; |
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our ability to obtain the benefits associated with orphan drug designation, such as orphan drug exclusivity and, even if we do, that
exclusivity may not prevent the U.S. Food and Drug Administration, or FDA, or other comparable foreign regulatory authorities from approving
competing products; |
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the timing and results of clinical trials that we may conduct or that our competitors and others may conduct relating to our or their
product candidates; |
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our dependence on the success of
Galderma Holding SA (“Galderma”) and Searchlight Pharma Inc. (“Searchlight”) in commercializing our approved
products in the U.S. and in Canada, respectively; |
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the ability of Sol-Gel and Searchlight to obtain and maintain the regulatory approval of Twyneo and Epsolay in Canada; |
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our ability to obtain and maintain regulatory approvals for our product candidates in our target markets and the possibility of adverse
regulatory or legal actions relating to our product candidates even if regulatory approval is obtained; |
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our ability to find suitable co-development, contract manufacturing and marketing partners to our products; |
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our ability to commercialize and launch our investigational product candidates; |
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our ability to obtain and maintain adequate protection of our intellectual property; |
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our ability to manufacture our product candidates in commercial quantities, at an adequate quality or at an acceptable cost;
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acceptance of our products by healthcare professionals and patients; |
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the possibility that we may face third-party claims of intellectual property infringement; |
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intense competition in our industry, with competitors having substantially greater financial, technological, research and development,
regulatory and clinical, manufacturing, marketing and sales, distribution and personnel resources than we do; |
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potential product liability claims; |
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potential adverse federal, state and local government regulation in the United States, Europe or Israel; |
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the impact of the current global macroeconomic climate on our ability to source supplies for our operations or our ability or capacity
to manufacture, sell and support the use of Twyneo, Epsolay and our product candidates; and |
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loss or retirement of key executives and research scientists. |
You should review carefully the risks and uncertainties described
under the heading “Risk Factors” in this annual report for a discussion of these and other risks that relate to our business
and investing in our ordinary shares. The forward-looking statements contained in this annual report are expressly qualified in their
entirety by this cautionary statement. Except as required by law, we undertake no obligation to update publicly any forward-looking statements
after the date of this annual report to conform these statements to actual results or to changes in our expectations.
Not applicable.
ITEM 2. OFFER
STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
Not applicable.
B. Capitalization and
Indebtedness
Not applicable.
C. Reasons
for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
You should carefully consider the risks we
describe below, in addition to the other information set forth elsewhere in this annual report, including our financial statements and
the related notes beginning on page F-1, before deciding to invest in our ordinary shares, or the “Ordinary Shares. The risks and
uncertainties described below in this annual report on Form 20-F for the year ended December 31, 2023, are not the only risks facing us.
We may face additional risks and uncertainties not currently known to us or that we currently deem to be immaterial. Any of the risks
described below or incorporated by reference in this Form 20-F, and any such additional risks, could materially adversely affect our business,
financial condition or results of operations. In such case, you may lose all or part of your investment.
Summary of Risk Factors
The following is a summary of some of the principal risks we
face. The list below is not exhaustive, and investors should read this “Risk factors” section in full.
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We are a dermatology company and have incurred significant losses since our inception. We expect to incur losses for the foreseeable
future and may never achieve or maintain profitability. |
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We may need substantial additional funding to pursue our business objectives. If we are unable to raise capital when needed, we could
be forced to curtail our planned operations and the pursuit of our growth strategy. If we are successful in raising additional capital,
this may cause dilution to our shareholders, restrict our operations or require us to relinquish rights to our technologies or products.
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All of our product candidates are in development
stage; therefore, we have not yet obtained regulatory approval for our product candidates in the United States or any other country.
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We are largely dependent on the success of Twyneo, Epsolay and our product candidates for the treatment of topical dermatological
conditions. |
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Our business is highly dependent on market perception of us and the safety and quality
of Twyneo, Epsolay and our product candidates, if approved. Our business or products could be subject to negative publicity, which could
have a material adverse effect on our business. |
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Although we have entered into exclusive license agreements with Galderma and Searchlight for all U.S. and Canadian commercial activities
for Twyneo and Epsolay, we have a limited operating history in the dermatological prescription drug space which may make it difficult
to evaluate the success of our business to date and to assess our future viability. |
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Twyneo, Epsolay and our product candidates, even if they receive regulatory approval, may fail to achieve the broad degree of physician
adoption and market acceptance necessary for commercial success. |
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Clinical drug development involves a lengthy and expensive process with an uncertain
outcome, and results of earlier studies and clinical trials may not be predictive of future trial results, which could result in development
delays or a failure to obtain marketing approval. |
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We may find it difficult to enroll patients in our clinical trials, and patients could
discontinue their participation in our or our collaborators’ clinical trials, which could delay or prevent clinical trials for our
product candidates. |
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Twyneo and Epsolay, and our product candidates, if approved, will face, significant competition and our failure to compete effectively
may prevent us and our commercial partners from achieving significant market penetration and expansion. |
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We rely on Galderma
to commercialize Twyneo and Epsolay in the U.S., on Searchlight to commercialize Twyneo and Epsolay in Canada and on Padagis to develop
and commercialize our generic product candidates and may depend on other parties for commercialization of Twyneo and Epsolay outside of
the U.S. and Canada, and the development and commercialization of our investigational product candidates, if approved. We also rely on
Galderma to provide us with accurate reports in order for us to accurately report our royalty revenues and
sales based milestone payments. Any collaborative arrangements that we have (including our agreements with Galderma, Searchlight and Padagis)
or may establish in the future may not be successful or we may otherwise not realize the anticipated benefits from these collaborations.
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We and our partners rely on third parties and consultants to assist us in conducting our clinical trials. If these third parties
or consultants do not successfully carry out their contractual duties or meet expected deadlines, we may be unable to obtain regulatory
approval for or commercialize our product candidates and our business could be substantially harmed. |
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The manufacture of pharmaceutical products is complex, and manufacturers often encounter difficulties in production. If we, our partners,
or any of our third-party manufacturers encounter any difficulties, our ability to provide product candidates for clinical trials or our
approved products to patients, and the development or commercialization of our product candidates could be delayed or stopped. |
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We depend on our intellectual property, and our future success is dependent on our ability to protect our intellectual property and
not infringe on the rights of others. |
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If we are unable to protect the confidentiality of our trade secrets or know-how, such proprietary information may be used by others
to compete against us. |
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If we are not able to retain our key management, or attract and retain qualified scientific, technical and business personnel, our
ability to implement our business plan may be adversely affected. |
Risks Related to Our Business and Industry
We are a dermatology company and have incurred significant losses
since our inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.
We are a dermatology company with a limited
operating history. We have incurred net losses since our formation in 1997. In particular, we incurred a loss of $14.9 million in 2022
and a loss of $ 27.2 million in 2023. As of December 31, 2023, we had an accumulated deficit of $220.3 million. Our losses have resulted
principally from expenses incurred in research and development of Twyneo, Epsolay, SGT-610 and our investigational product candidates
and from general and administrative expenses that we have incurred while building our business infrastructure. We expect to continue to
incur net losses for the foreseeable future as we continue to invest in research and development and seek to obtain regulatory approval
and commercialization of our product candidates. The extent of our future operating losses and the timing of generating revenues and becoming
profitable are highly uncertain, and we may never achieve or sustain profitability. Recently, based on lower than expected future
revenue streams from Twyneo and Epsolay and a delay in the development of SGT-210, we adopted cost-saving measures, including a headcount
reduction of about 25 employees, to maintain the cash runway for at least 12 months from the filing date of this annual report.
We anticipate that our expenses will increase substantially as
we:
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complete Phase III clinical study of SGT-610; |
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conduct Phase I clinical studies of SGT-210 and continue the research and development of other future investigational product candidates;
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seek regulatory approvals for any product candidate that successfully completes clinical development; |
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establish commercial manufacturing capabilities through one or more contract manufacturing organizations to commercialize our approved
products; |
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continue the development, bioequivalence and other studies required for abbreviated new drug application, or ANDA, submissions for
our generic product candidates; |
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seek new drug candidates and expand our disease portfolio; |
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maintain, expand and protect our intellectual property portfolio; |
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seek to enhance our technology platform; |
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add clinical, scientific, operational, financial and management information systems and personnel, including personnel to support
our product development; and |
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experience any delays or encounter any issues with any of the above, including but not limited to failed studies, complex results,
safety issues or other regulatory challenges. |
We have financed our operations primarily through public offerings
in the U.S., private placements of equity securities and investments and loans from our controlling shareholder. To date, we have devoted
a significant portion of our financial resources and efforts to developing our products. Although we have received approval from the FDA
with respect to our marketing applications for Twyneo in 2021 and Epsolay in 2022, to succeed we must successfully develop and eventually
commercialize product candidates that generate significant revenue. This will require us to be successful in a range of challenging activities,
including successfully commercializing our approved products, completing clinical trials for our product candidates, discovering and developing
additional product candidates, obtaining regulatory approval for any product candidates that successfully complete clinical trials, establishing
manufacturing and marketing capabilities and ultimately selling any product candidates for which we may obtain regulatory approval. We
are only in the preliminary stages of most of these activities. We may never succeed in these activities and, even if we do, may never
generate revenue that is significant enough to achieve profitability.
Because of the numerous risks and uncertainties associated
with pharmaceutical products, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be
able to achieve profitability. If we are required by the FDA or other regulatory authorities to perform studies in addition to those we
currently anticipate, or if there are any delays in completing our clinical trials, our expenses could increase, and revenue could be
further delayed.
We may never achieve or sustain profitability on a quarterly or
annual basis. Our failure to sustain profitability would depress the market price of our ordinary shares and could impair our ability
to raise capital, expand our business, diversify our product offerings or continue our operations. A decline in the market price of our
ordinary shares also could cause you to lose all or a part of your investment.
We may need substantial additional
funding to pursue our business objectives. If we are unable to raise capital when needed, we could be forced to curtail our planned operations
and the pursuit of our growth strategy.
Conducting pre-clinical studies and clinical trials is a time-consuming,
expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain
regulatory approval and achieve product sales of our product candidates. We expect to continue to incur significant expenses and operating
losses over the next several years as we conduct Phase III clinical studies for SGT-610 and conduct Phase I clinical studies of SGT-210.
In addition, Twyneo and Epsolay, and our product candidates, if approved, may not achieve commercial success. Substantial revenue, if
any, will be derived from sales of Twyneo and Epsolay, and other product candidates, if approved. We have based this estimate on assumptions
that may prove to be wrong, and we could use our capital resources sooner than we currently expect. Recently, based on lower than
expected future revenue streams from Twyneo and Epsolay and a delay in the development of SGT-210, we adopted cost-saving measures, including
a headcount reduction of about 25 employees, to maintain the cash runway for at least 12 months from the filing date of this annual report.
Our future capital requirements will depend on many factors, including:
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the progress and results of our development activities for SGT-610 and SGT-210; |
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the cost of manufacturing clinical supplies and exhibition batches of our investigational product candidates; |
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the timing of future commercialization activities, including manufacturing, marketing, sales and distribution, for any of our product
candidates for which we receive marketing approval; |
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the amount of revenue received from commercial sales of Twyneo, Epsolay and, if any, from our product candidates for which we may
receive marketing approval; |
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the scope, progress, results and costs of development, laboratory testing and clinical trials for our generic product candidates;
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the costs, timing and outcome of regulatory reviews of any of our product candidates; |
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the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property
rights and defending any intellectual property-related claims by third parties that we are infringing upon their intellectual property
rights; and |
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the extent to which we acquire or invest in businesses, product candidates and technologies, including entering into licensing or
collaboration arrangements for any of our investigational product candidates. |
In order to continue our future operations, we will need to raise
additional capital until becoming profitable. If we are unable to raise sufficient additional capital, we could be forced to curtail
our planned operations and the pursuit of our growth strategy.
All of our product candidates
are in development stage; therefore we have not yet obtained regulatory approval for our product candidates in the United States
or any other country.
Although we have obtained regulatory approvals in the United States
for Twyneo and Epsolay and our collaborator obtained regulatory approvals for two generic products, the rights to such generic products
we have since sold, none of our current product candidates, has obtained regulatory approval for sale in the United States or any other
country, and we cannot guarantee that our current or future product candidates will ever obtain such approvals. Our business is substantially
dependent on our ability to complete the development of, obtain regulatory approval for and successfully commercialize product candidates
in a timely manner. We or our partners cannot commercialize our product candidates in the United States without first obtaining regulatory
approval to market each product candidate from the FDA. Similarly, we or our partners cannot commercialize product candidates outside
of the United States without obtaining regulatory approval from comparable foreign regulatory authorities.
Before obtaining regulatory approvals for the commercial sale of
any product candidate for a target indication, we or our partners must demonstrate in pre-clinical studies and well-controlled clinical
trials that the product candidate is safe and effective for use for its target indication and that the related manufacturing facilities,
processes and controls are adequate. In the United States, we or our partners are required to submit and obtain the FDA’s approval
of a new drug application, or NDA, before marketing any product candidate. An NDA must include extensive preclinical and clinical data
and supporting information to establish the product candidate’s safety and efficacy for each desired indication and, when subject
to the requirements of section 505(b)(2) of the Federal Food, Drug and Cosmetic Act, or FDCA, we or our partners may rely in part on published
scientific literature and/or the FDA’s prior findings of safety and efficacy in its approvals of similar products. The NDA must
also include significant information regarding the chemistry, manufacturing and controls for the product candidate. The FDA will also
inspect our or our partners manufacturing facilities to ensure that the facilities can manufacture each product candidate that is the
subject of an NDA, in compliance with current good manufacturing practice, or cGMP requirements, and may inspect our or our partners clinical
trial sites to ensure that the clinical trials conducted at the inspected site were performed in accordance with good clinical practices,
or GCP, and our or our partners clinical protocols.
Approval to market and distribute drugs that are shown to be equivalent
to proprietary drugs previously approved by the FDA through its NDA process is obtained by submitting an ANDA to the FDA. An ANDA is a
comprehensive submission that contains, among other things, data and information pertaining to the active pharmaceutical ingredient, drug
product formulation, specifications and stability of the generic drug, as well as analytical methods, manufacturing process validation
data, and quality control procedures. Premarket applications for generic drugs are termed abbreviated because they generally do not include
pre-clinical and clinical data to demonstrate safety and effectiveness. Instead, a generic applicant must demonstrate that its product
is bioequivalent to the innovator drug.
Obtaining approval of an NDA or an ANDA is a lengthy, expensive
and uncertain process, and approval is never guaranteed. Upon submission of an NDA or ANDA, the FDA must make an initial determination
that the application is sufficiently complete to accept the submission for filing. We cannot be certain that any submissions will be accepted
for filing and review by the FDA, or ultimately be approved. If the application is not accepted for review or approved, the FDA may require
that we or our partners conduct additional clinical trials or pre-clinical studies or take other actions before it will reconsider our
or our partners' application. If the FDA requires us or our partners to provide additional studies or data to support such applications,
we would incur increased costs and delays in the marketing approval process, which may require us to expend more resources than anticipated
or that we have available. In addition, the FDA may not consider any additional information to be complete or sufficient to support approval.
To date, we have submitted two NDAs that were accepted for filing
by the FDA, one for Twyneo, and one for Epsolay, both of which were subsequently approved by the FDA. We have also submitted five ANDAs
with our partner Padagis, out of which two have been approved by the FDA.
Regulatory authorities outside of the United States also have requirements
for approval of drugs for commercial sale with which we must comply prior to marketing our product candidates in those countries. Regulatory
requirements can vary widely from country to country and could delay or prevent the introduction of our product candidates. Clinical trials
conducted in one country may not be accepted by regulatory authorities in other countries, and obtaining regulatory approval in one country
does not mean that regulatory approval will be obtained in any other country. However, the failure to obtain regulatory approval in one
jurisdiction could have a negative impact on our ability to obtain approval in a different jurisdiction. Approval processes vary among
countries and can involve additional product candidate testing, development, validation and additional administrative review periods.
Seeking regulatory approval outside of the United States could require additional chemical manufacturing control data, pre-clinical studies
or clinical trials, which could be costly and time consuming. Obtaining regulatory approval outside of the United States may include all
of the risks associated with obtaining FDA approval.
We are largely dependent on the
success of Twyneo, Epsolay and our product candidates, if approved, for
the treatment of topical dermatological conditions.
We have invested a majority of our efforts and financial resources
in the research and development of Twyneo and Epsolay. In June 2021, we entered into two five-year exclusive license agreements with
Galderma pursuant to which Galderma has the exclusive right to, and is responsible for, all U.S. commercial activities for Twyneo and
Epsolay. In June 2023, we also entered into exclusive license agreements with Searchlight, pursuant to which Searchlight has the
exclusive right to, and is responsible for, all Canadian commercial activities for Twyneo and Epsolay over a fifteen-year term that is
renewable for subsequent five-year periods. The success of our business depends largely on Galderma and Searchlight's success in commercializing
Twyneo and Epsolay and our ability to fund, execute and complete the development of, obtain regulatory approval for and successfully commercialize
our product candidates in a timely manner.
Our business is highly dependent
on market perception of us and the safety and quality of Twyneo, Epsolay and our product candidates, if approved. Our business or products
could be subject to negative publicity, which could have a material adverse effect on our business.
Market perception of our business is very important, especially
market perception of the safety and quality of our products. If Twyneo, Epsolay any of our product candidates, or similar products
that other companies distribute, or third-party products from which our investigational product candidates are derived, are subject to
market withdrawal or recall or are proven to be, or are claimed to be, harmful to consumers, it could have a material adverse effect on
our business. Negative publicity associated with product quality, illness or other adverse effects resulting from, or perceived to result
from, our products could have a material adverse impact on our business.
Additionally, continuing and increasingly sophisticated studies
of the proper utilization, safety and efficacy of pharmaceutical products are being conducted by the industry, government agencies and
others which could call into question the utilization, safety and efficacy of previously marketed products. In some cases, studies have
resulted, and may in the future result, in the discontinuance of product marketing or other costly risk management programs such as the
need for a patient registry.
Although we have entered into
exclusive license agreements with Galderma and Searchlight for all U.S. and Canadian commercial activities for Twyneo and Epsolay,
we have a limited operating history in the dermatological prescription drug space which may make it difficult to evaluate the success
of our business to date and to assess our future viability.
We have a limited operating history in the dermatological prescription
drug space and have focused much of our efforts, to date, on the research and development of our product candidates, rather than commercialization.
In June 2021, we entered into two five-year exclusive license agreements with Galderma pursuant to which Galderma has the exclusive
right to, and is responsible for, all U.S. commercial activities for Twyneo, and Epsolay. In June 2023, we also entered into exclusive
license agreements with Searchlight, pursuant to which Searchlight has the exclusive right, and is responsible for all commercial activities
for Twyneo and Epsolay in Canada, over a fifteen-year term that is renewable for subsequent five-year periods. We also expect to collaborate
with third parties that have sales and marketing experience in order to commercialize Twyneo and Epsolay in other territories, and
our other investigational product candidates, if approved, in lieu of our own sales force and distribution systems. We cannot provide
any assurances as to when, if ever, we will obtain approvals from governmental authorities outside of the U.S. or generate sufficient
revenues to achieve sustained profitability. Our and our partners’ ability to successfully commercialize our approved products and
product candidates, if approved, and become profitable is subject to a number of challenges, including, among others, that:
| • |
we may not have adequate financial or other resources; |
| • |
we or our partners may not be able to manufacture our products in commercial quantities, in an adequate quality or at an acceptable
cost; |
| • |
we or our partners may not be able to establish adequate sales, marketing and distribution channels for our products; |
| • |
we or our partners may not be able to find suitable co-development, contract manufacturing or marketing partners; |
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healthcare professionals and patients may not accept our products; |
| • |
we may not be aware of possible complications from the continued use of our investigational product candidates since we have limited
clinical experience with respect to the actual use of our investigational product candidates; |
| • |
changes in the market, new alliances between existing market participants and the entrance of new market participants may interfere
with our or our partners market penetration efforts; |
| • |
third-party payors may not agree to reimburse patients for any or all of the purchase price of our products, which may adversely
affect patients’ willingness to purchase our approved products or product candidates, once approved; |
| • |
uncertainty as to market demand may result in inefficient pricing of our approved products and product candidates, once approved;
|
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we may face third-party claims of intellectual property infringement; |
| • |
we or our partners may fail to obtain and maintain regulatory approvals for our product candidates in our target markets or may face
adverse regulatory or legal actions relating to our product candidates even if regulatory approval is obtained; |
| • |
we are dependent upon the results of ongoing clinical trials relating to our product candidates and the products of our competitors;
|
| • |
we may become involved in lawsuits pertaining to our clinical trials; and |
| • |
we may experience delays due to shortages in supply and human resources resulting from geopolitical instability (for more information,
see “Item 3. Key Information – D. Risk Factors – Risks Related to Our Operations in Israel”). |
The occurrence of any one or more of these events may limit
our or our partners' ability to successfully commercialize our approved products and product candidates, once approved, which in turn
could have a material adverse effect on our business, financial condition and results of operations. Consequently, there can be no guaranty
of the accuracy of any predictions about our future success or viability.
Raising additional
capital may cause dilution to our shareholders, restrict our operations or require us to relinquish rights to our technologies or products.
Until such time, if ever, as we can generate substantial revenue,
we may finance our cash needs through a combination of equity offerings, debt financings and license and collaboration agreements. We
do not currently have any committed external source of funds. To the extent that we raise additional capital through the sale of equity
or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or
other preferences that adversely affect your rights as an ordinary shareholder. Debt financing and preferred equity financing, if available,
may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional
debt, making capital expenditures or declaring dividends.
If we raise additional funds through collaborations, strategic
alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable rights to
our technologies, future revenue streams or our products or grant licenses on terms that may not be favorable to us. If we are unable
to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product
development or future commercialization efforts or grant rights to develop and market our products that we would otherwise prefer
to develop and market ourselves.
Risks Related to Development and Clinical Testing of Our Product Candidates
Clinical drug development involves
a lengthy and expensive process with an uncertain outcome, and results of earlier studies and clinical trials may not be predictive of
future trial results, which could result in development delays or a failure to obtain marketing approval.
Clinical testing, of both innovative and generic products, and
the submission of NDAs and ANDAs to the FDA is expensive, time consuming and has an inherently uncertain outcome. Failure can occur at
any time during the clinical trial process, even with active ingredients that have been previously approved by the FDA or comparable foreign
regulatory authorities as safe and effective. Favorable results in pre-clinical studies and early clinical trials for one or more of our
product candidates may not be predictive of similar results in future clinical trials for such product candidate. Also, interim results
during a clinical trial do not necessarily predict final results. Product candidates in later stages of clinical trials may fail to show
the desired safety and efficacy traits despite having progressed through pre-clinical studies and initial clinical trials. A number of
companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in clinical trials even after achieving
promising results in early-stage development. Accordingly, the results from the completed pre-clinical studies and clinical trials for
our product candidates may not be predictive of the results we may obtain in later stage trials for such product candidates. Our and our
partners’ clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct
additional clinical trials. Clinical trial results may be inconclusive, or contradicted by other clinical trials, particularly larger
clinical trials. Moreover, clinical data are often susceptible to varying interpretations and analyses, and many companies that believed
their product candidates performed satisfactorily in pre-clinical studies and clinical trials have nonetheless failed to obtain FDA, or
other applicable regulatory agency, approval for their product candidates.
We or our partners may experience delays in our clinical trials,
and we do not know whether planned clinical trials will begin on time, need to be redesigned, enroll patients on time or be completed
on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including delays related to:
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inability to generate sufficient preclinical, toxicology, or other in vivo or in vitro data to support the initiation or continuation
of clinical trials; |
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reaching a consensus with regulatory authorities on study design or implementation of clinical trials; |
| • |
obtaining regulatory authorization to commence a trial; |
| • |
reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms
of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites; |
| • |
identifying, recruiting and training suitable clinical investigators; |
| • |
obtaining institutional review board, or IRB, or ethics committee approval at each site; |
| • |
recruiting suitable patients to participate in a trial; |
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having patients complete a trial or return for post-treatment follow-up; |
| • |
clinical sites deviating from FDA regulations, or similar foreign requirements (where applicable), including GCPs, or the study protocol,
or dropping out of a trial; |
| • |
adding new clinical trial sites; |
| • |
occurrence of adverse events associated with the product candidate that are viewed to outweigh its potential benefits, or occurrence
of adverse events in trial of the same class of agents conducted by other companies; |
| • |
the cost of clinical trials of our product candidates being greater than we or our partners anticipate; |
| • |
transfer of manufacturing processes to larger-scale facilities operated by a contract manufacturing organization, or CMO, and delays
or failure by our or our partners CMOs or us to make any necessary changes to such manufacturing process; |
| • |
third parties being unwilling or unable to satisfy their contractual obligations to us; |
| • |
manufacturing sufficient quantities of a product candidate for use in clinical trials; and damage to clinical supplies of a product
candidate caused during storage and/or transportation. |
In addition, we may encounter delays if a clinical trial
is suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted, by any Data Safety Monitoring
Board for such trial, by the FDA or other regulatory authorities. Such authorities may impose such a suspension or termination due to
a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols,
inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a
clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental
regulations or administrative actions or lack of adequate funding to continue the clinical trial. If we or our partners experience delays
in the completion of any clinical trial for our product candidates or if any clinical trials are terminated, the commercial prospects
of our product candidates will be harmed, and our ability to generate product revenues from any of these product candidates will be delayed.
Moreover, changes in regulatory requirements and guidance or unanticipated
events during our or our partners’ clinical trials may occur, as a result of which we or our partners may need to amend clinical
trial protocols. Amendments may require us or our partners to resubmit our clinical trial protocols for review and approval, which may
adversely affect the cost, timing and successful completion of a clinical trial. If we or our partners experience delays in the completion
of, or if we or our partners terminate, any of our clinical trials, the commercial prospects for our affected product candidates would
be harmed and our ability to generate product revenue would be delayed, possibly materially.
In addition, the FDA’s and other regulatory authorities’
policies with respect to clinical trials may change and additional government regulations may be enacted. For instance, the regulatory
landscape related to clinical trials in the European Union, or EU, recently evolved. The EU Clinical Trials Regulation, or CTR, which
was adopted in April 2014 and repeals the EU Clinical Trials Directive, became applicable on January 31, 2022. While the EU Clinical Trials
Directive required a separate clinical trial application, or CTA, to be submitted in each member state in which the clinical trial takes
place, to both the competent national health authority and an independent ethics committee, the CTR introduces a centralized process and
only requires the submission of a single application for multi-center trials. The CTR allows sponsors to make a single submission to both
the competent authority and an ethics committee in each member state, leading to a single decision per member state. The assessment procedure
of the CTA has been harmonized as well, including a joint assessment by all member states concerned, and a separate assessment by each
member state with respect to specific requirements related to its own territory, including ethics rules. Each member state’s decision
is communicated to the sponsor via the centralized EU portal. Once the CTA is approved, clinical study development may proceed. The CTR
foresees a three-year transition period. The extent to which ongoing and new clinical trials will be governed by the CTR varies. Clinical
trials for which an application was submitted (i) prior to January 31, 2022 under the EU Clinical Trials Directive, or (ii) between January
31, 2022 and January 31, 2023 and for which the sponsor has opted for the application of the EU Clinical Trials Directive remain governed
by said Directive until January 31, 2025. After this date, all clinical trials (including those which are ongoing) will become subject
to the provisions of the CTR. Compliance with the CTR requirements by us and our third-party service providers, such as CROs, may impact
our developments plans.
Any delays in completing our or our partners’ clinical trials
will increase our costs, slow down our product candidates’ development and regulatory review and approval process and jeopardize
our or our partners ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial
condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion
of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.
We may find it difficult to enroll patients
in our clinical trials, and patients could discontinue their participation in our or our collaborators’ clinical trials, which could
delay or prevent clinical trials for our product candidates.
Identifying and qualifying patients to participate in clinical
trials for our product candidates is critical to our success. The timing of our clinical trials depends on the speed at which we or our
partners can recruit patients to participate in testing our product candidates. Some of the indications we are pursuing include orphan
diseases (including Gorlin syndrome) for which the patient population is significantly small. If we or our partners are unable to locate
qualified patients or if patients are unwilling to participate in our or our partners’ clinical trials because of negative publicity
from adverse events in the biotechnology or pharmaceutical industries or for other reasons, including competitive clinical trials for
similar patient populations, the timeline for recruiting patients, conducting clinical trials and obtaining regulatory approval of product
candidates may be delayed. These delays could result in increased costs, delays in advancing our product candidates development, or termination
of the clinical trials altogether.
Patient enrollment may be affected by numerous factors, including:
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severity of the disease under investigation; |
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size and nature of the patient population; |
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eligibility criteria for the trial; |
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design of the trial protocol; |
| • |
perceived risks and benefits of the product candidate under study; |
| • |
physicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available
therapies, including any drugs that may be approved for the same indications we are investigating; |
| • |
proximity to and availability of clinical trial sites for prospective patients; |
| • |
availability of competing therapies and clinical trials; and |
| • |
ability to monitor patients adequately during and after treatment. |
We or our partners face intense competition with regard to patient
enrollment in clinical trials from other dermatological companies which also seek to enroll subjects from the same patient populations.
In addition, patients enrolled in our clinical trials may discontinue their participation at any time during the trial as a result of
a number of factors, including withdrawing their consent or experiencing adverse clinical events, which may or may not be judged related
to our product candidates under evaluation. The discontinuation of patients in any one of our trials may cause us to delay or abandon
our clinical trial or cause the results from that trial not to be positive or sufficient to support a filing for regulatory approval of
the applicable product candidate.
The regulatory approval processes
of the FDA and comparable foreign authorities are lengthy, time consuming and inherently unpredictable, and if we are ultimately unable
to obtain regulatory approval for our product candidates, our business will be substantially harmed.
The time required to obtain approval by the FDA and comparable
foreign authorities is unpredictable but typically takes many years following the commencement of clinical trials and depends upon numerous
factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations, or the type
and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development
and may vary among jurisdictions. Although the FDA has approved Twyneo and Epsolay for marketing, it is possible that Twyneo and Epsolay
will not receive approval by comparable foreign authorities, and that none of our existing product candidates or any product candidates
we may seek to develop in the future will ever obtain regulatory approval.
Our product candidates could fail to receive regulatory approval
for many reasons, including the following:
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the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;
|
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we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a product candidate
is safe and effective for its proposed indication; |
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the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory
authorities for approval; |
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we may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks; |
| • |
the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from pre-clinical studies or clinical
trials; |
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the data collected from clinical trials of our product candidates may not be sufficient to support the submission of an NDA or other
submission or to obtain regulatory approval in the United States or elsewhere; |
| • |
the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party
manufacturers with which we contract for clinical and commercial supplies; or |
the approval policies or regulations of the FDA or comparable foreign regulatory authorities
may significantly change in a manner rendering our clinical data insufficient for approval.
This lengthy approval process as well as the unpredictability of
future clinical trial results may result in our failing to obtain regulatory approval to market our product candidates, which would significantly
harm our business, results of operations and prospects.
In addition, even if we were to obtain approval, regulatory authorities
may approve any of our product candidates for fewer or more limited indications than we request, may not approve the price we intend to
charge for our product candidates, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve
a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization
of that product candidate. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates.
We cannot be certain that Twyneo and Epsolay will receive approval
by foreign authorities or that any of our product candidates will receive regulatory approval. If we do not receive regulatory approvals
for our product candidates, we may not be able to continue our development operations. Our revenue will be dependent, to a significant
extent, upon the size of the markets in the territories for which we gain regulatory approval. If the markets for patients or indications
that we are targeting are not as significant as we estimate, we may not generate significant revenue from sales of such products, even
if approved by the FDA or by comparable foreign authorities.
Adverse side effects or other
safety risks associated with our product candidates could delay or preclude approval, cause us to suspend, discontinue clinical trials
or abandon product candidates. Adverse side effects or other safety risks associated with our approved products , could limit their commercial
profile.
Undesirable side effects caused by our product candidates could
result in the delay, suspension or termination of clinical trials by us, our collaborators, the FDA or other regulatory authorities for
a number of reasons. Results of our clinical trials for product candidates could reveal a high and unacceptable severity and prevalence
of these or other side effects. In such an event, our clinical trials could be suspended or terminated, and the FDA or comparable foreign
regulatory authorities could order us to cease further development of or deny approval of our product candidates for any or all targeted
indications. The drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial
or result in potential product liability claims. If we or our partners elect or are required to delay, suspend or terminate any clinical
trial for any product candidates, the commercial prospects of such product candidates will be harmed and our ability to generate product
revenues from any of these product candidates will be delayed or eliminated. Any of these occurrences may harm our business, prospects,
financial condition and results of operations significantly.
Additionally, with respect to our approved products and any one
or more of our products, for which we obtain regulatory approval, if we or others later identify undesirable side effects caused by such
products, a number of potentially significant negative consequences could result, including:
| • |
regulatory authorities may withdraw approvals of such products; |
| • |
regulatory authorities may require additional warnings on the label; |
| • |
we may be required to create a medication guide outlining the risks of such side effects for distribution to patients; |
| • |
we may be required to implement a risk evaluation and mitigation strategy, or REMS, which may include a medication guide or patient
package insert, a communication plan to educate healthcare providers of the drug’s risks, or other elements to assure safe use;
|
| • |
we could be sued and held liable for harm caused to patients; and |
| • |
our reputation may suffer. |
Any of these events could prevent us from achieving or maintaining
market acceptance of our products, and could significantly harm our business, results of operations and prospects.
There is a substantial risk of
product liability claims in our business, and a product liability claim against us could adversely affect our business.
Our business exposes us to significant potential product liability
risks that are inherent in the development, manufacturing and marketing of pharmaceutical products. Product liability claims could delay
or prevent completion of our development and commercialization programs. Such claims could result in a recall of our products or a change
in the approved indications for which they may be used. While we maintain product liability insurance that we believe is adequate for
our operations, such coverage may not be adequate to cover any incident or all incidents. Furthermore, product liability insurance is
becoming increasingly expensive. As a result, we may be unable to maintain sufficient insurance at a reasonable cost to protect us against
losses that could have a material adverse effect on our business. These liabilities could prevent or interfere with our product development
and commercialization efforts.
The regulatory approval processes
of the FDA and other comparable foreign regulatory authorities are lengthy, time consuming and inherently unpredictable, and we have never
obtained approval of a product from the FDA through the 505(b)(1) NDA pathway. If we are not able to obtain, or if there are delays
in obtaining, required regulatory approvals for our investigational product candidates, we will not be able to commercialize, or
will be delayed in commercializing, these product candidates, and our ability to generate revenue from these products will be materially
impaired.
Before obtaining regulatory approvals for the commercial sale
of our investigational product candidates, we must demonstrate through lengthy, complex and expensive preclinical studies and clinical
trials that our product candidates are both safe and effective for each targeted indication. The process of obtaining regulatory approvals,
both in the United States and abroad, is unpredictable, expensive and typically takes many years following commencement of clinical trials,
if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty
of the product candidates involved. Our current investigational product candidate SGT-610 is a new chemical entity that has never been
approved by the FDA and we believe we will be required to seek approval for such product candidates through the FDA’s 505(b)(1)
NDA pathway, which requires full reports of investigations of safety and effectiveness without reliance on the FDA’s prior approval
of another product candidate.
We have never obtained approval of a product through the 505(b)(1)
NDA pathway and may never succeed in doing so. The FDA and comparable authorities in other countries have substantial discretion in the
approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional
preclinical, clinical or other data. If we are unable to submit and obtain regulatory approval for our investigational product candidates,
we will not be able to commercialize or obtain revenue in connection with these product candidates.
For our product candidates that
we may seek to develop through the Section 505(b)(2) NDA or ANDA pathways, if the FDA does not conclude that our product candidates satisfy
the requirements of the applicable regulatory approval pathway, or if the requirements for approval of our product candidates are not
as we expect, the approval pathway for such product candidates will likely take significantly longer, cost significantly more and entail
significantly greater complications and risks than anticipated, and in all cases may not be successful.
Section 505 of the FDCA describes three types of new drug applications:
(1) an application that contains full reports of investigations of safety and effectiveness, or a Section 505(b)(1) NDA; (2) an application
that contains full reports of investigations of safety and effectiveness but where at least some of the information required for approval
comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference, or a Section
505(b)(2) NDA; and (3) an application that contains information to show that the proposed product is identical in active ingredient, dosage
form, strength, route of administration, labeling, quality, performance characteristics, and intended use, among other things, to a previously
approved product, or a Section 505(j) ANDA. We are developing product candidates for which we are seeking or intend to seek FDA approval
through each of these regulatory pathways. Both Twyneo and Epsolay were submitted for approval in Section 505(b)(2) NDAs, and we
may develop and seek approval for our product candidates through this regulatory pathway in the future.
Section 505(b)(2), if applicable to us under the FDCA, would allow
an NDA we submit to the FDA to rely in part on data in the public domain or the FDA’s prior conclusions regarding the safety and
effectiveness of approved drugs, which could expedite the development program for our product candidates by potentially decreasing the
amount of clinical data that we would need to generate in order to obtain FDA approval. If the FDA does not allow us to pursue the Section
505(b)(2) regulatory pathway as anticipated, we may need to conduct additional clinical trials, provide additional data and information,
and meet additional standards for regulatory approval. If this were to occur, the time and financial resources required to obtain FDA
approval for these product candidates, and complications and risks associated with these product candidates, would likely substantially
increase. Moreover, any inability to pursue the Section 505(b)(2) regulatory pathway may result in new competitive products reaching the
market more quickly than our product candidates, which would likely materially adversely impact our competitive position and prospects.
Even if we are allowed to pursue the Section 505(b)(2) regulatory pathway, our product candidates may not receive the requisite approvals
for commercialization.
In addition, the pharmaceutical industry is highly competitive,
and both ANDAs and Section 505(b)(2) NDAs are subject to special requirements designed to protect the patent rights of sponsors of previously
approved drugs that are referenced in an ANDA or Section 505(b)(2) NDA. These requirements may give rise to patent litigation and mandatory
delays in approval of our applications for up to 30 months or longer depending on the outcome of any litigation. It is not uncommon for
a manufacturer of an approved product to file a citizen petition with the FDA seeking to delay approval of, or impose additional approval
requirements for, pending competing products. If successful, such petitions can significantly delay, or even prevent, the approval of
the new product. However, even if the FDA ultimately denies such a petition, the FDA may substantially delay approval while it considers
and responds to the petition. In addition, even if we are able to utilize the Section 505(b)(2) regulatory pathway, there is no guarantee
this would ultimately lead to accelerated product development or earlier approval.
We may not be able to obtain the
benefits associated with orphan drug designation, such as orphan drug exclusivity and, even if we do, that exclusivity may not prevent
the FDA or other comparable foreign regulatory authorities from approving competing products.
Our product candidate, SGT-610, has obtained orphan drug designation
in Gorlin syndrome by both the FDA and the European Commission, or EC. Regulatory authorities in these jurisdictions may designate drugs
for relatively small patient populations as orphan drugs, but there is no guarantee we will maintain the benefits of such designations.
In the United States, the FDA may designate a product as an orphan
drug if it is a drug intended to treat a rare disease or condition, which is defined as a patient population of fewer than 200,000 individuals
annually in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation
that the cost of developing and making available the drug will be recovered from sales in the United States. Orphan designation entitles
a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages and user-fee waivers.
In addition, if a product that has orphan designation subsequently receives the first FDA approval for a particular active ingredient
for the rare disease or condition for which it has such designation, the product is entitled to orphan drug exclusivity. Orphan exclusivity
in the United States provides that the FDA may not approve any other applications, including a full NDA, to market the same drug for the
same rare disease or condition for seven years, except in limited circumstances such as a showing of clinical superiority to the product
with orphan exclusivity or if FDA finds that the holder of the orphan exclusivity has not shown that it can ensure the availability of
sufficient quantities of the orphan drug to meet the needs of patients with the rare disease or condition for which the product was designated.
In the EU, the EC grants orphan designation on the basis of the
European Medicines Agency’s (EMA) Committee for Orphan Medicinal Products scientific opinion. A medicinal product may be designated
as orphan if (1) it is intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition;
(2) either (a) such condition affects no more than five in 10,000 persons in the EU when the application is made, or (b) the product,
without the benefits derived from orphan status, would not generate sufficient return in the EU to justify investment; and (3) there exists
no satisfactory method of diagnosis, prevention or treatment, of such condition authorized for marketing in the EU, or if such a method
exists, the product will be of significant benefit to those affected by the condition. In the EU, orphan designation entitles a party
to financial incentives such as reduction of fees or fee waivers, protocol assistance, and access to the centralized marketing authorization
procedure. Moreover, upon grant of a marketing authorization and assuming the requirement for orphan designation are also met at the time
the marketing authorization is granted, orphan medicinal products are entitled to a ten-year period of market exclusivity for the approved
therapeutic indication. The period of market exclusivity is extended by two years for orphan medicinal products that have also complied
with an agreed Pediatric Investigation Plan, or PIP.
Even though our SGT-610 product candidate has obtained orphan drug
designation, we may not be able to obtain or maintain orphan drug exclusivity for this or any other future orphan designated product candidate.
We may not be the first to obtain marketing approval of any product candidate for which we have obtained designation in the specific rare
disease or condition due to the uncertainties associated with developing pharmaceutical products. In addition, exclusive marketing rights
in the United States may be limited if we seek approval for an indication broader than the orphan-designated indication or may be lost
if the FDA later determines that the request for designation was materially defective or if we are unable to ensure sufficient quantities
of the product to meet the needs of patients with the rare disease or condition. Further, even if we obtain orphan drug exclusivity for
a product, that exclusivity may not effectively protect the product from competition because different drugs with different active moieties
may be approved for the same condition. Even after an orphan drug is approved, the FDA can subsequently approve the same drug with the
same active moiety for the same disease or condition if the FDA concludes that the later drug is clinically superior in that it is shown
to be safer, more effective or makes a major contribution to patient care. In the EU, during the exclusivity period, marketing authorizations
may be granted to a similar medicinal product with the same orphan indication if: (i) the applicant can establish that the second medicinal
product, although similar to the orphan medicinal product already authorized is safer, more effective or otherwise clinically superior
to the orphan medicinal product already authorized; (ii) the marketing authorization holder for the orphan medicinal product grants its
consent; or (iii) if the marketing authorization holder of the orphan medicinal product is unable to supply sufficient quantities of product.
The European exclusivity period can be reduced to six years, if, at the end of the fifth year a medicine no longer meets the criteria
for orphan designation (i.e. the prevalence of the condition has increased above the orphan designation threshold or it is judged that
the product is sufficiently profitable so as not to justify maintenance of market exclusivity). Orphan drug designation neither shortens
the development time or regulatory review time of a drug nor gives the product candidate any advantage in the regulatory review or approval
process.
We may seek and fail to obtain fast track or
breakthrough therapy designations for our current or future product candidates. Even if we are successful, these programs may not lead
to a faster development or regulatory review process, they do not guarantee we will receive approval for any product candidate and the
FDA may later rescind fast track or breakthrough therapy designation if it believes a product candidate no longer meets the conditions
for qualification. We may also seek to obtain accelerated approval for one or more of our product candidates, but the FDA may disagree
that we have met the requirements for such approval.
If a product is intended for the treatment of a serious or life-threatening
condition and preclinical or clinical data demonstrate the potential to address an unmet medical need for this condition, the product
sponsor may apply for fast track designation. The sponsor of a fast track product candidate has opportunities for more frequent interactions
with the applicable FDA review team during product development and, once an NDA is submitted, the product candidate may be eligible for
priority review. A fast track product candidate may also be eligible for rolling review, where the FDA may consider for review sections
of the NDA on a rolling basis before the complete application is submitted, if the sponsor provides a schedule for the submission of the
sections of the NDA, the FDA agrees to accept sections of the NDA and determines that the schedule is acceptable, and the sponsor pays
any required user fees upon submission of the first section of the NDA. The FDA has broad discretion whether or not to grant this
designation, so even if we believe a particular product candidate is eligible for this designation, we cannot assure you that the FDA
would decide to grant it. Even if we do receive fast track designation, we may not experience a faster development process, review or
approval compared to conventional FDA procedures. The FDA may rescind the fast track designation if it believes that the designation is
no longer supported by data from our clinical development program.
Our product candidate SGT-610 has received breakthrough therapy
designation from the FDA, and we may also seek breakthrough therapy designation for other product candidates that we develop. A breakthrough
therapy is defined as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening
disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over currently
approved therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development.
For product candidates that have been designated as breakthrough therapies, interaction and communication between the FDA and the sponsor
can help to identify the most efficient path for clinical development. Product candidates designated as breakthrough therapies by the
FDA may also be eligible for priority review. Like fast track designation, breakthrough therapy designation is within the discretion of
the FDA. Accordingly, even if we believe a product candidate we develop meets the criteria for designation as a breakthrough therapy,
the FDA may disagree and instead determine not to make such designation. In any event, the receipt of breakthrough therapy designation
for a product candidate, such as the designation for SGT-610, may not result in a faster development process, review or approval compared
to drugs considered for approval under conventional FDA procedures and does not assure ultimate approval by the FDA. In addition, even
if a product candidate we develop qualifies as a breakthrough therapy, the FDA may later decide that the drug no longer meets the conditions
for qualification and rescind the designation.
Separate from fast track or breakthrough therapy designation, we
may seek accelerated approval for one or more of our product candidates. A product candidate intended to treat serious or life-threatening
diseases or conditions may be eligible for accelerated approval if it is determined to have an effect on a surrogate endpoint that is
reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality,
that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the
severity, rarity or prevalence of the condition and the availability or lack of alternative treatments. As a condition of accelerated
approval, the FDA will generally require the sponsor to perform adequate and well-controlled post-approval clinical studies to verify
and describe the anticipated effect on irreversible morbidity or mortality or other clinical benefit. If such post-approval studies fail
to confirm the drug’s clinical benefit, or if the sponsor fails to conduct the required studies in a diligent manner, the FDA may
withdraw its approval of the drug on an expedited basis. In December 2022, President Biden signed an omnibus appropriations bill that
included the Food and Drug Omnibus Reform Act of 2022, which among other things provided the FDA with new statutory authority to mitigate
potential risks to patients from continued marketing of ineffective products previously granted accelerated approval and additional oversight
over confirmatory trials. Under these provisions, the FDA may, among other things, require a sponsor of a product seeking accelerated
approval to have a confirmatory trial underway prior to such approval being granted. In addition, the FDA currently requires pre-approval
of promotional materials for accelerated approval products, once approved. We cannot guarantee that the FDA will agree any of our product
candidates has met the criteria to receive accelerated approval, which would require us to conduct additional clinical testing prior to
seeking FDA approval. Even if any of our product candidates received approval through this pathway, the required post-approval confirmatory
clinical trials may fail to verify the predicted clinical benefit of the product, and we may be required to remove the product from the
market or amend the product label in a way that adversely impacts its marketing.
Twyneo, Epsolay and our product
candidates for which we obtain regulatory approval may continue to face future developmental and regulatory difficulties. In addition,
we will be subject to ongoing obligations and continued regulatory review.
Even if we complete clinical testing and receive approval of any
of our product candidates, the FDA may grant approval contingent on the performance of additional post-approval clinical trials, risk
mitigation requirements such as the implementation of a REMS, and/or surveillance requirements to monitor the safety or efficacy of the
product, which could negatively impact us by reducing revenues or increasing expenses, and cause the approved product candidate not to
be commercially viable. Absence of long-term safety data may further limit the approved uses of our product candidates, if any.
Similar foreign requirements may also apply in foreign jurisdictions.
The FDA or comparable foreign regulatory authorities also may approve
our product candidates for a more limited indication or a narrower patient population than we initially request or may not approve the
labeling that we believe is necessary or desirable for the successful commercialization of our product candidates. Furthermore, Twyneo
Epsolay, and any other product candidate for which we obtain approval will remain subject to extensive regulatory requirements, including
requirements relating to manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion, distribution and
recordkeeping. These requirements include registration with the FDA, listing of our product candidates, payment of annual fees, as well
as continued compliance with GCP requirements for any clinical trials that we or our partners conduct post-approval. Similar foreign requirements
may also apply in other jurisdictions. Application holders must notify the FDA, and depending on the nature of the change, obtain FDA
pre-approval for product manufacturing changes. In addition, manufacturers of drug products and their facilities are subject to continual
review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP requirements.
If we or our partners fail to comply with the regulatory requirements
of the FDA or comparable foreign regulatory authorities or previously unknown problems with any approved commercial products, manufacturers
or manufacturing processes are discovered, we could be subject to administrative or judicially imposed sanctions or other setbacks, including
the following:
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the FDA or comparable foreign regulatory authorities could suspend or impose restrictions on operations, including costly new
manufacturing requirements; |
| • |
the FDA or comparable foreign regulatory authorities could refuse to approve pending applications or supplements to applications;
|
| • |
the FDA or comparable foreign regulatory authorities could suspend any ongoing clinical trials; |
| • |
the FDA or comparable foreign regulatory authorities could suspend or withdraw marketing approval; |
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the FDA or comparable foreign regulatory authorities could seek an injunction or impose civil or criminal penalties or monetary fines;
|
| • |
the FDA or comparable foreign regulatory authorities could ban or restrict imports and exports; |
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the FDA or comparable foreign regulatory authorities could issue warning letters or untitled letters or similar enforcement actions
alleging noncompliance with regulatory requirements; or |
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the FDA or other governmental authorities including comparable foreign regulatory authorities could take other actions, such as imposition
of product seizures or detentions, clinical holds or terminations, refusals to allow the import or export of products, disgorgement, restitution,
or exclusion from federal healthcare programs. |
In addition, our or our partners’ product labeling, advertising
and promotional materials for our approved products, if approved by the FDA, would be subject to regulatory requirements and continuing
review by the FDA. The FDA strictly regulates the promotional claims that may be made about prescription drug products. In particular,
a product may not be promoted for uses that are not approved by the FDA as reflected in the product’s approved labeling, a practice
known as off-label promotion. Similar requirements may apply in foreign jurisdictions. Physicians may nevertheless prescribe products
to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may
become subject to significant liability and government fines. The FDA and other foreign agencies actively enforce the laws and regulations
prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to
significant sanctions. The federal government has levied large civil and criminal fines against companies for alleged improper promotion
and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent
decrees or permanent injunctions under which specified promotional conduct is changed or curtailed.
Moreover, the FDA’s policies may change and additional government
regulations may be enacted that could prevent, limit or delay marketing approval of our investigational product candidates, and the sale
and promotion of Twyneo, Epsolay and our product candidates, once approved. We also cannot predict the likelihood, nature or extent of
government regulation that may arise from future legislation or administrative action, either in the United States or abroad. For instance,
the EU pharmaceutical legislation is currently undergoing a complete review process, in the context of the Pharmaceutical Strategy for
Europe initiative, launched by the EC in November 2020. The EC’s proposal for revision of several legislative instruments related
to medicinal products (potentially reducing the duration of regulatory data protection, revising the eligibility for expedited pathways,
etc.) was published on April 26, 2023. The proposed revisions remain to be agreed and adopted by the European Parliament and European
Council and the proposals may therefore be substantially revised before adoption, which is not anticipated before early 2026. The revisions
may however have a significant impact on the biopharmaceutical industry in the long term. If we are slow or unable to adapt to changes
in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we
may be subject to enforcement action and we may not achieve or sustain profitability.
Disruptions at the FDA and
other government agencies caused by Covid-19 and funding shortages or global health concerns could hinder their ability to hire, retain
or deploy key leadership and other personnel, or otherwise prevent new or modified products from being developed, approved or commercialized
in a timely manner or at all, which could negatively impact our business.
The ability of the FDA and foreign regulatory authorities
to review and approve new products can be affected by a variety of factors, including government budget and funding levels, statutory,
regulatory, and policy changes, the FDA’s or foreign regulatory authorities’ ability to hire and retain key personnel and
accept the payment of user fees, and other events that may otherwise affect the FDA’s or foreign regulatory authorities’ ability
to perform routine functions. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S.
government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees
and stop critical activities. In addition, government funding of other government agencies that fund research and development activities
is subject to the political process, which is inherently fluid and unpredictable. Disruptions at the FDA and other agencies,
such as the EMA following its relocation to Amsterdam and resulting in staff changes, may slow the time necessary for new drugs or modifications
to approved drugs to be reviewed and/or approved by necessary government agencies, which would adversely affect our business.
Separately, in response to the COVID-19 pandemic the FDA postponed
most inspections of both foreign and domestic manufacturing facilities and clinical trial sites at various points. Even though the FDA
has since resumed standard inspection operations, the FDA has continued to monitor and implement changes to its inspectional activities
to ensure the safety of its employees and those of the firms it regulates. Regulatory authorities outside the United States adopted similar
restrictions or other policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown occurs,
or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews,
or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review
and process our regulatory submissions, which could have a material adverse effect on our business.
Twyneo, Epsolay and our product
candidates, if they receive regulatory approval, may fail to achieve the broad degree of physician adoption and market acceptance necessary
for commercial success.
The commercial success of Twyneo Epsolay and our product candidates,
if approved, will depend significantly on their broad adoption by dermatologists, pediatricians and other physicians for approved indications
and other therapeutic or aesthetic indications for which we may seek approval from the FDA and other regulatory authorities.
The degree and rate of physician and patient adoption of Twyneo
Epsolay and our product candidates, if approved, will depend on a number of factors, including:
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the clinical indications for which the product is approved; |
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the safety and efficacy of our product as compared to existing therapies for those indications; |
| • |
the prevalence and severity of adverse side effects; |
| • |
patient satisfaction with the results and administration of our product and overall treatment experience, including relative convenience,
ease of use and avoidance of, or reduction in, adverse side effects; |
| • |
patient demand for the treatment of acne and rosacea or other indications; |
| • |
the cost of treatment in relation to alternative treatments, the extent to which these costs are covered and reimbursed by third-party
payors, and patients’ willingness to pay for our products and product candidates, if approved; and |
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the effectiveness of our sales and marketing efforts, including any head-to-head studies, if conducted, especially the success of
any targeted marketing efforts directed toward dermatologists, pediatricians, other physicians, clinics and any direct-to-consumer marketing
efforts we may initiate. |
We expend a significant amount of resources on
research and development efforts that may not lead to successful product candidate introductions or the recovery of our research and development
expenditures.
We conduct research and development primarily to enable us
to manufacture and market topical dermatological creams containing drugs in accordance with FDA regulations as well as similar foreign
requirements enforced by foreign regulatory authorities. We spent approximately $20.4 million, $12.7 million and $23.5million on research
and development activities during the years ended December 31, 2021, 2022 and 2023, respectively. We are required to obtain FDA and
other regulatory authority approvals before marketing our product candidates in the United States or in other jurisdictions. The regulatory
authority approval process is costly, time consuming and inherently risky, as is that applicable in other jurisdictions.
We cannot be certain that any investment made in developing product
candidates will be recovered, even if we are successful in commercialization. To the extent that we expend significant resources on research
and development efforts and are not able to introduce successful new product candidates as a result of those efforts, we will be unable
to recover those expenditures.
Our efficacy clinical trials for
Twyneo, Epsolay and our product candidates were not, and will not be, conducted head-to-head with the applicable leading products of our
competitors, and the comparison of our results to those of existing drugs, and the conclusions we have drawn from such comparisons, may
be inaccurate.
Our efficacy clinical trials for Twyneo, Epsolay and our
product candidates were not, and will not be, conducted head-to-head with the drugs considered the applicable standard of care for the
relevant indications. This means that none of the patient groups participating in these trials were, and will not in the future be, treated
with the applicable standard of care drugs alongside the groups treated with our investigational product candidates. Instead, we have
compared and plan to continue comparing the results of our clinical trials with historical data from prior clinical trials conducted by
third parties for the applicable standard of care drugs, and which results are presented in their respective product labels.
Direct comparison generally provides more reliable information
about how two or more drugs compare, and reliance on indirect comparison for evaluating their relative efficacy or other qualities is
problematic due to lack of objective or validated methods to assess trial similarity. For example, the various trials were likely conducted
in different countries with different demographic features and in patients with different baseline conditions and different hygiene standards,
among other relevant asymmetries. Therefore, the conclusions we have drawn from comparing the results of our clinical trials with those
published in the product labels for these current standard of care drugs, including conclusions regarding the relative efficacy and expediency
of Twyneo and Epsolay, may be distorted by the inaccurate methodology of the comparison. Moreover, the FDA generally requires head-to-head
studies to make labeling and advertising claims regarding superiority or comparability, and our failure to collect head-to-head data may
limit the types of claims we may make for Twyneo, Epsolay and our product candidates for which we obtain approval.
We may be subject to risk as a
result of international manufacturing operations.
Twyneo, Epsolay and certain of our product candidates may be
manufactured, warehoused and/or tested at third-party facilities located in territories outside of Israel, in addition to our facility
in Israel, and therefore our operations are subject to risks inherent in doing business internationally. Such risks include the adverse
effects on operations from corruption, war, public health crises, such as pandemics and epidemics, international terrorism, civil disturbances,
political instability, governmental activities, deprivation of contract and property rights and currency valuation changes. Any of these
changes could have a material adverse effect on our reputation, business, financial condition or results of operations.
If in the future we acquire or
in-license technologies or additional product candidates, we may incur various costs, may have integration difficulties and may experience
other risks that could harm our business and results of operations.
In January 2023, we purchased assets related to
our SGT-610 product candidate, which included certain intellectual property rights owned by PellePharm and licensed to PellePharm by Royalty
Security LLC. In the future, we may acquire or in-license additional potential products and technologies. Any potential product or technology
we in-license or acquire will likely require additional development efforts prior to commercial sale, including extensive pre-clinical
studies, clinical trials, or both, and approval by the FDA or other applicable foreign regulatory authorities, if any. All potential products
are prone to risks of failure inherent in pharmaceutical product development, including the possibility that the potential product, or
product developed based on in-licensed technology, will not be shown to be sufficiently safe and effective for approval by regulatory
authorities. If intellectual property related to potential products or technologies, we in-license or our own know-how is not adequate,
we may not be able to commercialize the affected potential products even after expending resources on their development. In addition,
we may not be able to manufacture economically or successfully commercialize any potential product that we develop based on acquired or
in-licensed technology that is granted regulatory approval, and such potential products may not gain wide acceptance or be competitive
in the marketplace. Moreover, integrating any newly acquired or in-licensed potential products could be expensive and time-consuming.
If we cannot effectively manage these aspects of our business strategy, our business may not succeed. Lastly, our license with Royalty
Security LLC requires us, and future in-license agreements will likely require us, to make payments and satisfy various performance obligations
in order to maintain our rights to our SGT-610 product candidate or other future product candidate, as the case may be. If we do
not satisfy our obligations under our agreement with Royalty Security LLC or under future in-license agreements, or if other events occur
that are not within our control, we could lose the rights to develop and commercialize our SGT-610 product candidate and other future
product candidate covered by such future in-license agreements.
The time necessary to develop
generic API or generic drug products may adversely affect whether, and the extent to which, we receive a return on our capital.
The development process, including drug formulation where applicable,
testing, and FDA or foreign regulatory authorities review and approval for generic drug products often takes many years. This process
requires that we expend considerable capital to pursue activities that do not yield an immediate or near-term return. Also, because of
the significant time necessary to develop a generic product, the actual market for a generic product at the time it is available for sale
may be significantly less than the originally projected market for the generic product. If this were to occur, our potential return on
our investment in developing the generic product, if approved for marketing by the FDA or foreign regulatory authorities, would be adversely
affected and we may never receive a return on our investment in the generic product. It is also possible for the manufacturer of the brand-name
product for which we are developing a generic drug to obtain approvals from the FDA or foreign regulatory authorities to switch the brand-name
drug from the prescription market to the over-the-counter, or OTC market. If this were to occur, we would be prohibited from marketing
our generic product other than as an OTC drug, in which case our revenues could be significantly impacted.
Risks Related to Regulatory Matters
Healthcare reform in the United States and the
EU may harm our future business.
Healthcare costs in the United States have risen significantly
over the past decade. In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education
Reconciliation Act, collectively referred to as the ACA, was signed into law, which, among other things, required most individuals to
have health insurance, established new regulations on health plans, created insurance exchanges and imposed new requirements and changes
in reimbursement or funding for healthcare providers, device manufacturers and pharmaceutical companies. The ACA also included a number
of changes which may impact our products and product candidates, once approved:
| • |
revisions to the Medicaid rebate program by: (a) increasing the rebate percentage for branded drugs to 23.1% of the average
manufacturer price, or AMP, with limited exceptions, (b) increasing the rebate for outpatient generic, multiple source drugs dispensed
to 13% of AMP; (c) changing the definition of AMP; and (d) extending the Medicaid rebate program to Medicaid managed care plans, with
limited exceptions; |
| • |
the imposition of annual fees upon manufacturers or importers of branded prescription drugs, which fees will be in amounts determined
by the Secretary of Treasury based upon market share and other data; |
| • |
providing a discount on brand-name prescriptions filled in the Medicare Part D coverage gap as a condition for the manufacturers’
outpatient drugs to be covered under Medicare Part D; |
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imposing increased penalties for the violation of fraud and abuse laws and funding for anti-fraud activities; and |
| • |
expanding the definition of “covered entities” that purchase certain outpatient drugs in the 340B Drug Pricing Program
of Section 340B of the Public Health Service Act. |
Since its enactment, there have been judicial, executive and Congressional
challenges to certain aspects of the ACA. On June 17, 2021, the U.S. Supreme Court dismissed the most recent judicial challenge to the
ACA brought by several states without specifically ruling on the constitutionality of the ACA. It is unclear how other healthcare reform
measures enacted by Congress or implemented by the Biden administration, if any, will impact our business.
Moreover, other legislative changes have been proposed and adopted
since the ACA was enacted. For example, the Budget Control Act of 2011 resulted in aggregate reductions to Medicare payments to providers,
which went into effect on April 1, 2013, and will remain in effect through the first six months of fiscal year 2032, with the exception
of a temporary suspension from May 1, 2020 through March 31, 2022. On January 2, 2013, the American Taxpayer Relief Act of 2012 was
signed into law, which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers
and cancer treatment centers and increased the statute of limitations period for the government to recover overpayments to providers from
three to five years. More recently, on March 11, 2021, the American Rescue Plan Act of 2021 was signed into law, which eliminated
the statutory Medicaid drug rebate beginning January 1, 2024. Previously, the Medicaid rebate was capped at 100% of a
drug’s average manufacturer price, or AMP.
The cost of prescription pharmaceuticals in the United States has
also been the subject of considerable discussion. There have been several Congressional inquiries, as well as proposed and enacted legislation
designed, among other things, to bring more transparency to product pricing, review the relationship between pricing and manufacturer
patient programs and reform government program reimbursement methodologies for pharmaceutical products. Most significantly, on August
16, 2022, President Biden signed the Inflation Reduction Act of 2022, or IRA, into law. Among other things, the IRA requires manufacturers
of certain drugs to engage in price negotiations with Medicare (beginning in 2026) with prices that can be negotiated subject to a cap,
imposes rebates under Medicare Part B and Medicare Part D to penalize price increases that outpace inflation (first due in 2023), and
replaces the Part D coverage gap discount program with a new discounting program (beginning in 2025). In part because the IRA permits
the Secretary of the Department of Health and Human Services, or HHS, to implement many of these provisions through guidance for the initial
years, as opposed to regulation, it is currently unclear how the IRA will be effectuated. HHS has and will continue to issue and update
guidance as these programs are implemented. On August 29, 2023, HHS announced the list of the first ten drugs that will be subject
to price negotiations, although the Medicare drug price negotiation program is currently subject to legal challenges. The impact of the
IRA on the pharmaceutical industry cannot yet be fully determined, but is likely to be significant. Further, the Biden administration
released an additional executive order on October 14, 2022, directing HHS to submit a report within 90 days on how the Center for Medicare
and Medicaid Innovation can be further leveraged to test new models for lowering drug costs for Medicare and Medicaid beneficiaries. In
response to the executive order, on February 14, 2023, HHS released a report outlining three new models for testing by the CMS Innovation
Center which will be evaluated on their ability to lower the cost of drugs, promote accessibility and improve quality of care. It is unclear
whether the models will be utilized in any health reform measures in the future.
Individual states in the United States have also become increasingly
active in passing legislation and implementing regulations designed to control pharmaceutical product pricing, including price or patient
reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures,
and, in some cases, designed to encourage importation from other countries and bulk purchasing. We expect that additional state and federal
healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will
pay for healthcare products and services, which could result in reduced demand for Twyneo, Epsolay and our other product candidates, once
approved, or additional pricing pressure.
In 2011, Directive 2011/24/EU was adopted at the EU level. This
Directive establishes a voluntary network of national authorities or bodies responsible for Health Technology Assessment (HTA) in the
individual EU member states. The network facilitates and supports the exchange of scientific information concerning HTAs. Further to this,
on December 13, 2021, Regulation No 2021/2282 on HTA, amending Directive 2011/24/EU, was adopted. While the Regulation entered into force
in January 2022, it will only begin to apply from January 2025 onwards, with preparatory and implementation-related steps to take
place in the interim. Once applicable, it will have a phased implementation depending on the concerned products. The Regulation intends
to boost cooperation among EU member states in assessing health technologies, including new medicinal products, and provide the basis
for cooperation at the EU level for joint clinical assessments in these areas. It will permit EU member states to use common HTA tools,
methodologies, and procedures across the EU, working together in four main areas, including joint clinical assessment of the innovative
health technologies with the highest potential impact for patients, joint scientific consultations whereby developers can seek advice
from HTA authorities, identification of emerging health technologies to identify promising technologies early, and continuing voluntary
cooperation in other areas. Individual EU member states will continue to be responsible for assessing non-clinical (e.g., economic, social,
ethical) aspects of health technology, and making decisions on pricing and reimbursement.
In the EU, similar developments may affect our ability to profitably
commercialize our product candidates, if approved. In addition to continuing pressure on prices and cost containment measures, legislative
developments at the EU or member state level may result in significant additional requirements or obstacles that may increase our operating
costs. The delivery of healthcare in the EU, including the establishment and operation of health services and the pricing and reimbursement
of medicines, is almost exclusively a matter for national, rather than EU, law and policy. National governments and health service providers
have different priorities and approaches to the delivery of health care and the pricing and reimbursement of products in that context.
In general, however, the healthcare budgetary constraints in most EU member states have resulted in restrictions on the pricing and reimbursement
of medicines by relevant health service providers. Coupled with ever-increasing EU and national regulatory burdens on those wishing to
develop and market products, this could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval
activities and affect our ability to commercialize our product candidates, if approved. In markets outside of the U.S. and EU, reimbursement
and healthcare payment systems vary significantly by country, and many countries have instituted price ceilings on specific products and
therapies.
Risks Related to Commercialization
Our continued growth is dependent on our ability
to successfully develop new product candidates and commercialize our approved products and new product candidates, if approved, in a timely
manner.
Our financial results depend upon our ability to introduce and
commercialize additional product candidates in a timely manner. Generally, revenue from new innovative products increases following launch
and then following patent or exclusivity expiry, declines over time, as new competitors enter the market. Our growth is therefore dependent
upon our and our partners' ability to successfully commercialize our approved products and successfully introduce and commercialize our
product candidates, if approved.
The FDA and other foreign regulatory authorities may not approve
marketing applications at all or in a timely fashion for our product candidates under development. Additionally, we or our partners may
not successfully complete our development efforts for other reasons, such as poor results in clinical trials or a lack of funding to complete
the required trials. Even if the FDA or another foreign regulatory authority approves marketing applications for our product candidates,
we or our partners may not be able to market our products successfully or profitably. Our future results of operations will depend significantly
upon our or our partners' ability to timely develop, receive FDA or foreign regulatory authority approval for, and market our products
or otherwise develop new product candidates or acquire the rights to other products.
Twyneo, Epsolay face, and our
product candidates, if approved, will face, significant competition and our failure to compete effectively may prevent us from achieving
significant market penetration and expansion.
The facial aesthetic market in general, and the market for acne
and rosacea treatments in particular, are highly competitive and dynamic. Twyneo and Epsolay
face significant competition from other approved products, including topical anti-acne drugs such as Acanya, Ziana, Epiduo, Epiduo Forte,
Benzaclin, Aczone, Onexton, Differin, Arazlo, Aklief and Amzeeq, Winlevi and topical drugs for the treatment of rosacea such as Metrogel,
Finacea, Soolantraand Zilxi, oral drugs such as Solodyn, Doryx, Dynacin, Oracea and Minocin. Twyneo and Epsolay also competes with
non-prescription anti-acne products as well as unapproved and off-label treatments. In addition, Twyneo competes with drug products utilizing
other technologies that can separate two drug substances, such as dual chamber tubes, dual pouches or dual sachets. Competing in the facial
aesthetic market could result in price-cutting, reduced profit margins and loss of market share, any of which has and would harm our business,
financial condition and results of operations.
There are fewer limitations on the claims that our competitors
in international markets can make about the effectiveness of their products and the manner in which they can market them. As a result,
we may face more competition in markets outside of the United States.
In addition, we may not be able to price Twyneo, Epsolay, and our
product candidates, if approved, competitively with the current standards of care or other competing products for their respective indications
or their price may drop considerably due to factors outside our control. If this happens or the price of materials and the cost to manufacture
our product candidates increases dramatically, our ability to continue to operate our business would be materially harmed and we may be
unable to commercialize our investigational product candidates, once approved, successfully.
We believe that our principal competitors are Bausch Health Companies, Inc., Galderma
S.A. (other than with respect to Twyneo and Epsolay, which it commercializes in the United States), Almirall, LLC and Sun Pharmaceutical
Industries Ltd. These competitors are large and experienced companies that enjoy significant competitive advantages over us, such
as greater financial, research and development, manufacturing, personnel and marketing resources, greater brand recognition, and more
experience and expertise in obtaining marketing approvals from the FDA and foreign regulatory authorities.
With respect to generic pharmaceutical products, the FDA approval
process often results in the FDA granting final approval to a number of ANDAs for a given product at the time a relevant patent for a
corresponding branded product or other regulatory and/or market exclusivity expires. As competition from other manufacturers intensifies,
selling prices and gross profit margins often decline. Accordingly, the level of market share, revenue and gross profit attributable to
a particular generic product that we develop is generally related to the number of competitors in that product’s market and the
timing of that product’s regulatory approval and commercial launch, in relation to competing approvals and launches. Additionally,
ANDA approvals often continue to be granted for a given product subsequent to the initial launch of the first generic product. These circumstances
generally result in significantly lower prices and reduced margins for generic products compared to brand products. New generic market
entrants generally cause continued price and margin erosion over the generic product life cycle.
In addition to the competition we face from other generic manufacturers,
we face competition from brand-name manufacturers related to our product candidates. Branded pharmaceutical companies may sell their branded
products as “authorized generics,” where an approved brand name drug is marketed, either by the brand name drug company or
by another company with the brand company’s permission, as a generic product without the brand name on its label, and potentially
sold at a lower price than the brand name drug. Further, branded pharmaceutical companies may seek to delay FDA approval of our 505(b)(2)
applications and ANDAs or reduce competition by, for example, obtaining new patents on drugs whose original patent protection is about
to expire, filing patent infringement suits that could delay FDA approval of 505(b)(2) and generic products, developing new versions of
their products to obtain FDA market exclusivity, filing citizen petitions contesting FDA approvals of 505(b)(2) and generic products such
as on alleged health and safety grounds, developing “next generation” versions of products that reduce demand for the 505(b)(2)
and generic versions we are developing, changing product claims and labeling, and seeking approval to market as OTC branded products.
Moreover, competitors may, upon the approval of an NDA, or an NDA
supplement, obtain a three-year period of exclusivity for a particular condition of approval, or change to a marketed product, such as
a new formulation for a previously approved product, if one or more new clinical trials (other than bioavailability or bioequivalence
studies) was essential to the approval of the application and was conducted/sponsored by the applicant. Such exclusivity may prevent the
FDA from approving one or more of our product candidates that are being developed, and for which we would seek the FDA’s approval
under the 505(b)(2) regulatory pathway, if we were to seek approval for the same conditions of approval as that protected by the period
of exclusivity. Recent litigation against the FDA has affirmed the FDA’s interpretation of the scope of exclusivity as preventing
the approval of a 505(b)(2) NDA for the same change to a previously approved drug, regardless of whether or not the 505(b)(2) applicant
relies on the competitor’s product as a listed drug in its 505(b)(2) application. Exclusivity determinations are highly fact-dependent
and are made by the FDA on a case-by-case basis at the end of the review period for a 505(b)(2) NDA. As such, we may not know until very
late in the FDA’s review of our 505(b)(2) product candidates whether or not approval may be delayed because of a competitor’s
period of exclusivity.
Other pharmaceutical companies
may develop competing products for acne, rosacea, Gorlin syndrome and other indications we are pursuing and enter the market ahead of
us.
Other pharmaceutical companies are engaged in developing, patenting,
manufacturing and marketing healthcare products that compete with those that we are developing. These potential competitors include large
and experienced companies that enjoy significant competitive advantages over us, such as greater financial, research and development,
manufacturing, personnel and marketing resources, greater brand recognition and more experience and expertise in obtaining marketing approvals
from the FDA and foreign regulatory authorities.
Several of these potential competitors are privately-owned
companies that are not bound by public disclosure requirements and closely guard their development plans, marketing strategies and other
trade secrets. Publicly-traded pharmaceutical companies are also able to maintain a certain degree of confidentiality over their pipeline
developments and other sensitive information. As a result, we do not know whether these potential competitors are already developing,
or plan to develop other topical treatments for acne, rosacea, Gorlin syndrome, or other indications we are pursuing, and we will likely
be unable to ascertain whether such activities are underway in the future. These potential competitors may therefore introduce competing
products without our prior knowledge and without our ability to take preemptive measures in anticipation of their commercial launch.
Furthermore, such potential competitors may enter the market before
us, and their products may be designed to circumvent our granted patents and pending patent applications. They may also challenge, narrow
or invalidate our granted patents or our patent applications, and such patents and patent applications may fail to provide adequate protection
for our product candidates.
Third-party payor coverage and
adequate reimbursement may not be available for Twyneo or Epsolay and our product candidates, once approved, which could make it difficult
for us or our partners to sell them profitably.
Sales of Twyneo, Epsolay, or our product candidates, once approved,
will depend, in part, on the extent to which the costs of our product candidates will be covered by third-party payors, such as government
health programs, private health insurers and managed care organizations. Third-party payors generally decide which drugs they will cover
for which indications and establish certain reimbursement levels for such drugs. In particular, in the United States, private health insurers
and other third-party payors often provide reimbursement for products and services based on the level at which the government (typically
through the Medicare or Medicaid programs) provides reimbursement for such treatments. Patients who are prescribed treatments for their
conditions and providers performing the prescribed services generally rely on third-party payors to reimburse all or part of the associated
healthcare costs. Patients are unlikely to use our products or product candidates, once approved, unless coverage is provided and reimbursement
is adequate to cover a significant portion of the cost of our products. Sales of Twyneo, Epsolay depend, and our product candidates, once
approved, will depend, substantially on the extent to which the costs of Twyneo, Epsolay and our product candidates will be paid by third-party
payors. Additionally, the market for Twyneo, Epsolay and our product candidates, once approved, will depend significantly on access to
third-party payors’ formularies without prior authorization, step therapy, or other limitations such as approved lists of treatments
for which third-party payors provide coverage and reimbursement. If our products and our product candidates, once approved, are not included
within an adequate number of formularies or adequate reimbursement levels are not provided, or if those policies increasingly favor generic
products, this could have a material adverse effect on our business, financial condition, cash flows and results of operations or result
in additional pricing pressure on our products and product candidates. Coverage and reimbursement for therapeutic products can differ
significantly from payor to payor. One third-party payor’s decision to cover a particular medical product or service does not ensure
that other payors will also provide coverage for the medical product or service, or will provide coverage at an adequate reimbursement
rate. As a result, the coverage determination process will require us to provide scientific and clinical support for the use of our products
and product candidates to each payor separately and will be a time-consuming process.
Third-party payors are developing increasingly sophisticated methods
of controlling healthcare costs and increasingly challenging the prices charged for medical products and services. Additionally, the containment
of healthcare costs has become a priority of federal and state governments and the prices of drugs have been a focus in this effort. The
United States government, state legislatures and foreign governments have shown significant interest in implementing cost-containment
programs, including price controls and transparency requirements, restrictions on reimbursement and requirements for substitution of generic
products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing
controls and measures, could limit our revenue and operating results. Additionally, policy efforts designed to reduce patient out-of-pocket
costs for medicines could result in new mandatory rebates and discounts or other pricing restrictions. If third-party payors do not consider
Twyneo, Epsolay or our product candidates to be medically necessary or cost-effective compared to other therapies, they may not cover
Twyneo, Epsolay or our product candidates once approved as a benefit under their plans or, if they do, the level of reimbursement may
not be sufficient to allow us or our partners to sell our products or our product candidates once approved on a profitable basis. Decreases
in third-party reimbursement for our products or our product candidates, once approved, or a decision by a third-party payor to not cover
our products or product candidates could reduce or eliminate utilization of our products or product candidates, once approved, and
have an adverse effect on our sales, results of operations and financial condition. In addition, state and federal healthcare reform measures
have been and may be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare
products and services, and could result in reduced demand for products and product candidates once approved or additional
pricing pressures.
Outside the United States, sales of any approved products are generally
subject to extensive governmental price controls and other market regulations, and we believe the increasing emphasis on cost-containment
initiatives in Europe and other countries has and will continue to put pressure on the pricing and usage of our products and product
candidates once approved, if any. In many countries, the prices of medical products are subject to varying price control mechanisms as
part of national health systems. Other countries allow companies to fix their own prices for medical products but monitor and control
company profits. Additional foreign price controls or other changes in pricing regulation could restrict the amount that we are able to
charge for our products and our product candidates once approved. Accordingly, in markets outside the United States, the reimbursement
for our products and our product candidates once approved may be reduced compared with the United States and may be insufficient to generate
commercially reasonable revenue and profits.
Our current and future relationships
with investigators, health care professionals, consultants, third-party payors, and customers are subject to applicable healthcare regulatory
laws, which could expose us to penalties.
Our business operations and current and future arrangements with
investigators, healthcare professionals, consultants, third-party payors and customers, may expose us to broadly applicable fraud and
abuse and other healthcare laws and regulations. These laws may constrain the business or financial arrangements and relationships through
which we and our commercial partners operate, including how we or our partners research, market, sell and distribute our products and
product candidates, once approved, for which we or our partners obtain marketing approval. Such laws include:
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the federal Anti-Kickback Statute prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering,
receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral
of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service, for which payment may be
made, in whole or in part, under a federal healthcare program such as Medicare and Medicaid. A person or entity does not need to have
actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it in order to have committed a violation; |
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the federal false claims laws, including the civil False Claims Act, impose criminal and civil penalties, including through civil
whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal
government, claims for payment that are false or fraudulent, knowingly making, using or causing to be made or used, a false record or
statement material to a false or fraudulent claim, or knowingly making a false statement to avoid, decrease or conceal an obligation to
pay money to the federal government. In addition, the government may assert that a claim including items and services resulting from a
violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act;
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the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for, among
other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or making
false or fraudulent statements relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not
need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation; |
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the federal Physician Payment Sunshine Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies
for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to
report annually to the government information related to certain payments or other “transfers of value” made to physicians
(defined to include doctors, dentists, optometrists, podiatrists and chiropractors), certain non-physician practitioners (nurse practitioners,
certified nurse anesthetists, physician assistants, clinical nurse specialists, anesthesiology assistants and certified nurse midwives),
and teaching hospitals, and requires applicable manufacturers and group purchasing organizations to report annually to the government
ownership and investment interests held by the physicians described above and their immediate family members and payments or other “transfers
of value” to such physician owners. Covered manufacturers are required to submit reports to the government by the 90th
day of each calendar year; |
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federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially
harm consumers; |
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analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to our business practices, including
but not limited to, research, distribution, sales and marketing arrangements and claims involving healthcare items or services reimbursed
by non-governmental third-party payors, including private insurers; state laws that require pharmaceutical companies to comply with the
pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government,
or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require
licensing or reporting of sales representatives; and state laws that require drug manufacturers to report information related to payments
and other transfers of value to physicians and other healthcare providers or that require the reporting of pricing information and marketing
expenditures; |
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similar healthcare laws and regulations in foreign jurisdictions, including reporting requirements detailing interactions with and
payments to healthcare providers. |
Efforts to ensure that our current and future business arrangements
with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental
authorities will conclude that our business practices do not comply with current or future statutes, regulations, agency guidance or case
law involving applicable healthcare laws. If our operations are found to be in violation of any of these or any other health regulatory
laws that may apply to us, we may be subject to significant penalties, including the imposition of significant civil, criminal and administrative
penalties, damages, monetary fines, disgorgement, individual imprisonment, possible exclusion from participation in Medicare, Medicaid
and other federal healthcare programs or similar programs in other countries or jurisdictions, integrity oversight and reporting obligations
to resolve allegations of non-compliance, contractual damages, reputational harm, diminished profits and future earnings, and curtailment
or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.
Defending against any such actions can be costly, time-consuming and may require significant financial and personnel resources. Therefore,
even if we are successful in defending against any such actions that may be brought against us, our business may be impaired.
Actual or perceived failures to comply with
applicable data protection, privacy and security laws, regulations, standards and other requirements could adversely affect our business,
results of operations, and financial condition.
The global data protection landscape is rapidly evolving, and
we are or may become subject to numerous state, federal and foreign laws, requirements and regulations governing the collection, use,
disclosure, retention, and security of personal information, such as information that we may collect in connection with clinical trials.
Any failure or perceived failure by us to comply with federal, state or foreign laws or regulations, our internal policies and procedures
or our contracts governing our processing of personal information could result in negative publicity, government investigations and enforcement
actions, claims by third parties and damage to our reputation, any of which could have a material adverse effect on our business, results
of operation, and financial condition.
In the U.S., HIPAA, as amended by the Health Information Technology
for Economic and Clinical Health Act, and regulations implemented thereunder, or collectively, HIPAA imposes obligations, including certain
mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information.
Most healthcare providers, including research institutions from which we obtain patient health information, are subject to privacy and
security regulations promulgated under HIPAA. While we do not believe that we are currently acting as a covered entity or business associate
under HIPAA and thus are not directly regulated under HIPAA, depending on the facts and circumstances, we could face substantial criminal
penalties if we knowingly receive individually identifiable health information from a HIPAA-covered healthcare provider or research institution
that has not satisfied HIPAA’s requirements for disclosure of individually identifiable health information.
Certain states have also adopted comparable privacy and security
laws and regulations, which govern the privacy, processing and protection of health-related and other personal information. Such laws
and regulations will be subject to interpretation by various courts and other governmental authorities, thus creating potentially complex
compliance issues for us and our future customers and strategic partners. For example, the California Consumer Privacy Act, as amended
by the California Privacy Rights Act, or collectively, the CCPA, requires certain businesses that process personal information of California
residents to, among other things: provide certain disclosures to California residents regarding the business’s collection, use,
and disclosure of their personal information; receive and respond to requests from California residents to access, delete, and correct
their personal information, or to opt-out of certain disclosures of their personal information; and enter into specific contractual provisions
with service providers that process California resident personal information on the business’s behalf. Similar laws have passed
in other states and are continuing to be proposed at the state and federal level, reflecting a trend toward more stringent privacy legislation
in the United States.
We are also subject to rapidly evolving data
protection laws, rules and regulations in foreign jurisdictions, including the EU General Data Protection Regulation, or GDPR, which went
into effect in May 2018 and imposes obligations and restrictions on the processing of personal data of individuals located in the European
Economic Area, or EEA, or in the context of our activities within the EEA. Companies that must comply with the GDPR face increased
compliance obligations and risk, including more robust regulatory enforcement of data protection requirements and potential fines for
noncompliance of up to €20 million or 4% of the annual global revenues of the noncompliant undertaking, whichever is greater. Further,
the GDPR imposes strict rules on the transfer of personal data out of the European Union to the United States and other regions that have
not been deemed to offer “adequate” privacy protection and the efficacy and longevity of current transfer mechanisms between
the EEA, and the United States remains uncertain. Case law from the Court of Justice of the European Union states that reliance on the
standard contractual clauses, or SCCs - a standard form of contract approved by the EC as an adequate personal data transfer mechanism
- alone may not necessarily be sufficient in all circumstances and that transfers must be assessed on a case-by-case basis. On July 10,
2023, the EC adopted its Adequacy Decision in relation to the new EU-U.S. Data Privacy Framework, or DPF, rendering the DPF effective
as a GDPR transfer mechanism to U.S. entities self-certified under the DPF. We expect the existing legal complexity and uncertainty regarding
international personal data transfers to continue. In particular, we expect the DPF Adequacy Decision to be challenged and international
transfers to the United States and to other jurisdictions more generally to continue to be subject to enhanced scrutiny by regulators.
As supervisory authorities issue further guidance on personal data export mechanisms, including circumstances where the SCCs cannot be
used, and/or start taking enforcement action, we could suffer additional costs, complaints and/or regulatory investigations or fines,
and/or if we are otherwise unable to transfer personal data between and among countries and regions in which we operate, it could affect
the manner in which we provide our services, the geographical location or segregation of our relevant systems and operations, and could
adversely affect our financial results.
Additionally, following the United Kingdom’s withdrawal
from the European Union, we have to comply with the United Kingdom General Data Protection Regulation and Data Protection Act 2018, collectively,
the UK GDPR, which imposes separate but similar obligations to those under the GDPR and comparable penalties, including fines of up to
£17.5 million or 4% of a noncompliant undertaking’s global annual turnover, whichever is greater. On October 12, 2023, the
UK Extension to the DPF came into effect (as approved by the UK Government), as a data transfer mechanism from the UK to U.S. entities
self-certified under the DPF. The relationship between the United Kingdom and the European Union in relation to certain aspects of data
protection law remains unclear, for example around how data can lawfully be transferred between each jurisdiction, which exposes us to
further compliance risk.
Although we work to comply with applicable laws, regulations
and standards, our contractual obligations and other legal obligations, these requirements are evolving and may be modified, interpreted
and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another or other legal obligations with
which we must comply. Any failure or perceived failure by us or our employees, representatives, contractors, consultants, collaborators,
or other third parties to comply with such requirements or adequately address privacy and security concerns, even if unfounded, could
result in additional cost and liability to us, damage our reputation, and adversely affect our business and results of operations.
The illegal distribution and sale
by third parties of counterfeit versions of Twyneo, Epsolay or our product candidates or of stolen products could have a negative impact
on our reputation and a material adverse effect on our business, results of operations and financial condition.
Third parties could illegally distribute and sell counterfeit versions
of our products, which do not meet the rigorous manufacturing and testing standards that our products undergo. Counterfeit products are
frequently unsafe or ineffective and can be life-threatening. Counterfeit medicines may contain harmful substances, the wrong dose of
the active pharmaceutical ingredient or no active pharmaceutical ingredient at all. However, to distributors and users, counterfeit products
may be visually indistinguishable from the authentic version.
Reports of adverse reactions to counterfeit drugs similar to our
products or increased levels of counterfeiting such products could materially affect physician and patient confidence in our authentic
products. It is possible that adverse events caused by unsafe counterfeit products will mistakenly be attributed to our authentic products.
In addition, thefts of our inventory at warehouses, plant or while in-transit, which are not properly stored and which are sold through
unauthorized channels could adversely impact patient safety, our reputation and our business.
Public loss of confidence in the integrity of our products as a
result of counterfeiting or theft could have a material adverse effect on our business, financial position and results of operations.
Risks Related to Dependence on Third Parties
We rely
on Galderma to commercialize Twyneo and Epsolay in the U.S., on Searchlight to commercialize Twyneo and Epsolay in Canada and on Padagis
to develop and commercialize our generic product candidates and may depend on other parties for commercialization of Twyneo and Epsolay
outside of the U.S. and Canada, and the development and commercialization of our investigational product candidates, if approved. We
also rely on Galderma, to provide us with accurate reports in order for us to accurately report our royalty revenues and sales based milestone
payments. Any collaborative arrangements that we have or may establish in the future may not be successful or we may otherwise not
realize the anticipated benefits from these collaborations. We do not control third parties with whom we have or may have collaborative
arrangements, and we will rely on them to achieve results which may be significant to us. In addition, any current or future collaborative
arrangements may place the development and commercialization of our product candidates outside our control, may require us to relinquish
important rights or may otherwise be on terms unfavorable to us.
In June 2021, we entered into two five-year
exclusive license agreements with Galderma pursuant to which Galderma has the exclusive right to, and is responsible for, all U.S.
commercial activities for Twyneo and Epsolay. In consideration for the grant of such rights, we received $11 million in upfront
payments and regulatory approval milestone payments. We are also eligible to receive tiered double-digit royalties ranging from mid-teen
to high-teen percentage of net sales as well as up to $9 million in sales milestone payments. We cannot provide any assurance with
respect to the success of the license agreements with Galderma, and we may never receive any sales milestone payments pursuant to these
agreements. Following the expiration of the initial term of our agreement with Galderma, if the agreement is not renewed all rights related
to the Twyneo and Epsolay will revert to us. We will be required upon such expiration to either establish our own marketing and commercialization
infrastructure or collaborate with a new partner, and may not be able to do so.
In June 2023, we entered into exclusive license agreements with
Searchlight, a private Canadian specialty pharmaceutical company, pursuant to which Searchlight has the exclusive right, and is responsible
for all commercial activities for Twyneo and Epsolay in Canada over a fifteen-year term that is renewable for subsequent five-year periods.
Searchlight will be responsible for obtaining and maintaining any regulatory approvals required to market and sell the drugs in Canada
with support from us. In consideration for the grant of such rights, we will receive up to $11 million in potential upfront payments and
regulatory and sales milestones for both drugs, combined. In addition, we will be entitled to royalty percentages of all Canadian net
sales ranging from low-double-digits to high teens.
We are currently a party to collaborative arrangements with respect
to the development, manufacture, study and commercialization of our generic product candidates with Padagis (formerly a division of Perrigo
Company plc, or Perrigo Plc), by assignment from Perrigo Plc.
We cannot and will not control these third party collaborators,
but we rely on them to achieve results, which may be significant to us. Relying upon collaborative arrangements to commercialize Twyneo,
Epsolay and to develop and, if approved, commercialize our product candidates subjects us to a number of risks, including:
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we may not be able to control the amount and timing of resources that our collaborators may devote to Twyneo, Epsolay and our
product candidates; |
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we may not be able to locate third party partners for the commercialization of Twyneo and Epsolay for territories other than the
United States and Canada; |
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our current or future collaborators’ partners may fail to secure adequate commercial supplies of Twyneo, Epsolay and our product
candidates, if approved; |
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should a collaborator fail to comply with applicable laws, rules, or regulations when performing services for us, we could be held
liable for such violations; |
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our current or future collaborators may fail to comply with local or any foreign health authorities’ laws and regulations,
and as a result, the receipt of a site manufacturing, export or import license may be delayed or withheld for an undefined period;
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our current or future collaborators may experience financial difficulties or changes in business focus; |
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our current or future collaborators’ partners may have a shortage of qualified personnel; |
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we may be required to relinquish important rights, such as marketing and distribution rights; |
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business combinations or significant changes in a collaborator’s business strategy may adversely affect a collaborator’s
willingness or ability to complete its obligations under any arrangement; |
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under certain circumstances, a collaborator could move forward with a competing product developed either independently or in collaboration
with others, including our competitors; |
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our current or future collaborators may utilize our proprietary information in a way that could expose us to competitive harm; and
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collaborative arrangements are often terminated or allowed to expire, which could delay the development and may increase the cost
of developing our product candidates. |
We also currently rely on Galderma, and
will rely on Searchlight and Padagis, to provide us with accurate reports in order for us to accurately report our royalty revenues and
calculate our rights to receive sales based milestone payments. Royalty payments under our agreements with Galderma and Searchlight
are calculated and paid in accordance with reports we receive from Galderma and Searchlight, and we have limited audit rights and information
with respect to these reports. In August 2023, we revised previously reported revenue for the first quarter and revenue for the second
quarter due to a disruption in Galderma’s first quarter wholesaler ordering patterns ahead of Galderma’s implementation of
a new enterprise resource planning system, which impacted its standard forecasting procedures and its quarterly assessment of rebate accruals.
We cannot provide any assurance that future reports provided by Galderma, Searchlight or any other third parties with whom we have or
may have collaborative arrangements will be accurate or timely provided. If the reports we receive from them are inaccurate or delayed,
our ability to accurately and timely report our royalty revenues and sales based milestone payments may be adversely affected.
In addition, if disputes arise between us and our collaborators,
it could result in the delay or termination of the development, manufacturing or commercialization of Twyneo, Epsolay and our product
candidates, lead to protracted and costly legal proceedings, or cause collaborators to act in their own interest, which may not be in
our interest. As a result, there can be no assurance that the collaborative arrangements that we have entered into, or may enter into
in the future, will achieve their intended goals.
If any of these scenarios materialize, they could have an adverse
effect on our business, financial condition or results of operations.
It may be desirable or essential to enter into agreements
with a collaborator who has greater financial resources or different expertise than us, but for which we are unable to find an appropriate
collaborator or are unable to do so on favorable terms with respect to our current of future investigational product candidates. If we
fail to enter into such collaborative agreements on favorable terms, it could materially delay or impair our ability to develop and commercialize
our investigational product candidates and increase the costs of development and commercialization of such investigational product candidates.
We currently contract with third-party
manufacturers and suppliers for certain compounds and components necessary to produce our investigational product candidates for clinical
trials, and for commercial scale of production of our approved products. Our approved products are manufactured by third party manufacturers
that were identified and qualified by us. This dependence on third-party manufacturers increases the risk that we or our partners may
not have access to sufficient quantities or such quantities at an acceptable cost, which could delay, prevent or impair our and our partners’
development or commercialization efforts.
We and our partners currently rely on third parties for the manufacture
and supply of certain compounds and components necessary to produce our investigational product candidates for our clinical trials, and
to prepare for commercial scale production of such investigational product candidates, including active ingredients and excipients used
in the formulation of our investigational product candidates, as well as primary and secondary packaging and labeling materials. We lack
the resources and the capability to manufacture our approved products or any of our investigational product candidates on a large
clinical or commercial scale, and we expect that we and our partners will continue to rely on third parties to support commercial requirements
for our product candidates if approved for marketing by the FDA or other foreign regulatory authorities.
The facilities used by our contract manufacturers to manufacture
our product candidates must be approved by the FDA pursuant to inspections that are conducted after we or our partners submit our marketing
applications to the FDA. As part of the development of Twyneo and Epsolay we qualified CMOs, the facilities of which have been approved
by the FDA. Our current and future potential collaborators commercializing Twyneo and Epsolay, engaged and will engage these CMOs for
the commercial supply of our approved products. We are completely dependent on, our contract manufacturing partners for compliance with
the regulatory requirements, known as current good manufacturing practices, or cGMPs, for manufacture of both active drug substances and
finished drug products. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and
the strict regulatory requirements of the FDA or others, they will not be able to secure and/or maintain regulatory approval for their
manufacturing facilities. In addition, we have no control over the ability of our contract manufacturers to maintain adequate quality
control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority does not approve these facilities
for the manufacture of our product candidates or if it withdraws any such approval in the future, we or our partners may need to find
alternative manufacturing facilities, which would significantly impact our or our partners ability to develop, obtain regulatory approval
for or market Twyneo, Epsolay or our product candidates.
Reliance on third-party manufacturers and suppliers entails a number
of risks, including reliance on the third party for regulatory compliance and quality assurance, the possible breach of the manufacturing
or supply agreement by the third party, the possibility that the supply is inadequate or delayed, the risk that the third party may enter
the field and seek to compete and may no longer be willing to continue supplying, and the possible termination or nonrenewal of the agreement
by the third party at a time that is costly or inconvenient for us. If any of these risks transpire, we may be unable to timely retain
an alternate manufacturer or suppliers on acceptable terms and with sufficient quality standards and production capacity, which may disrupt
and delay our clinical trials for our product candidates or the manufacture and commercial sale of Twyneo, Epsolay, and our product
candidates, if approved.
Our failure or the failure of our third-party manufacturers and
suppliers to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties,
delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal
prosecutions, any of which could significantly and adversely affect supplies of our product candidates that we may develop. Any failure
or refusal to supply or any interruption in supply of the components for Twyneo, Epsolay or any of our product candidates could delay,
prevent or impair our clinical development or commercialization efforts.
We and our partners rely on third
parties and consultants to assist us in conducting clinical trials. If these third parties or consultants do not successfully carry out
their contractual duties or meet expected deadlines, we or our partners may be unable to obtain regulatory approval for or commercialize
our product candidates and our business could be substantially harmed.
We and our partners do not have the ability to independently perform
all aspects of our anticipated pre-clinical studies and clinical trials. We and our partners rely on medical institutions, clinical investigators,
CROs, contract laboratories, collaborative partners and other third parties to assist us in conducting our clinical trials and studies
for our product candidates. The third parties with whom we and our partners contract for execution of our clinical trials play a significant
role in the conduct of these trials and the subsequent collection and analysis of data. However, these third parties are not employees,
and except for contractual duties and obligations, we and our partners have limited ability to control the amount or timing of resources
that they devote to our programs.
In addition, the execution of pre-clinical studies and clinical
trials, and the subsequent compilation and analysis of the data produced, require coordination among these various third parties. In order
for these functions to be carried out effectively and efficiently, it is imperative that these parties communicate and coordinate with
one another, which may prove difficult to achieve. Moreover, these third parties may also have relationships with other commercial entities,
some of which may compete with us. Our and our partners agreement with these third parties may inevitably enable them to terminate such
agreements upon reasonable prior written notice under certain circumstances.
Although we and our partners rely on these third parties to conduct
certain aspects of our clinical trials and other studies and clinical trials, we remain responsible for ensuring that each of our and
our partners studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our and
our partners reliance on these third parties does not relieve us or our partners of our and our partners regulatory responsibilities.
Moreover, the FDA and foreign regulatory authorities require us to comply with GCPs, which are the regulations and standards for conducting,
monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and
accurate, and that the trial subjects are adequately informed of the potential risks of participating in clinical trials. We and our partners
also rely on our consultants to assist us in the execution, including data collection and analysis of our and our partners clinical trials.
If we or any of our and our partners third-party contractors fail to comply with applicable GCPs, the clinical data generated in the clinical
trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us or our partners to perform additional
clinical trials before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority,
such regulatory authority will determine that any of our or our partners clinical trials complies with GCP regulations. In addition, our
and our partners clinical trials must be conducted with product produced under cGMP regulations or similar foreign requirements. Our or
our partners failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval
process.
If the third parties or consultants that assist us and our partners
in conducting our clinical trials do not perform their contractual duties or obligations, experience work stoppages, do not meet expected
deadlines, terminate their agreements with us or our partners, or need to be replaced, or if the quality or accuracy of the clinical
data they obtain is compromised due to the failure to adhere to our clinical trial protocols, regulatory requirements or GCPs, or for
any other reason, we or our partners may need to conduct additional clinical trials or enter into new arrangements with alternative third
parties, which could be difficult, costly or impossible, and our or our partners clinical trials may be extended, delayed or terminated
or may need to be repeated. If any of the foregoing were to occur, we or our partners may not be able to obtain, or may be delayed in
obtaining, regulatory approval for the product candidates being tested in such trials, and will not be able to, or may be delayed in our
or our partners efforts to, successfully commercialize these product candidates, if approved.
The manufacture of pharmaceutical
products is complex, and manufacturers often encounter difficulties in production. If we or any of our third-party manufacturers encounter
any difficulties, our, or our partners’ ability to provide product candidates for clinical trials or our products or product candidates,
once approved, to patients, and the development or commercialization of our product candidates could be delayed or stopped.
The manufacture of pharmaceutical products is complex and requires
significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. We
and our or our partners’ contract manufacturers must comply with cGMP or similar requirements. Manufacturers of pharmaceutical products
often encounter difficulties in production, particularly in scaling up and validating initial production and contamination controls. These
problems include difficulties with production costs and yields, quality control, including stability of the product, quality assurance
testing, operator error, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations.
Furthermore, if microbial, viral or other contaminations are discovered in our products or in the manufacturing facilities in which our
products are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination.
We cannot assure you that any stability or other issues relating
to the manufacture of any of our products will not occur in the future. Additionally, we, our partners and our third-party manufacturers
may experience manufacturing difficulties due to resource constraints or as a result of labor disputes or unstable political environments.
If we, our partners, or our third-party manufacturers were to encounter any of these difficulties, our or our partners ability to provide
any product candidates to patients in clinical trials and approved products to patients would be jeopardized. Any delay or interruption
in the supply of clinical trial supplies could delay the initiation or completion of clinical trials, increase the costs associated with
maintaining clinical trial programs and, depending upon the period of delay, require us or our partners to commence new clinical trials
at additional expense or terminate clinical trials completely. Any adverse developments affecting clinical or commercial manufacturing
of our products may result in shipment delays, inventory shortages, lot failures, product withdrawals or recalls, or other interruptions
in the supply of our products. We may also have to take inventory write-offs and incur other charges and expenses for products that fail
to meet specifications, undertake costly remediation efforts or seek more costly manufacturing alternatives. Accordingly, failures or
difficulties faced at any level of our supply chain could materially adversely affect our business and delay or impede the development
and commercialization of any of our products and could have a material adverse effect on our business, prospects, financial condition
and results of operations.
Risks Related to Our Intellectual Property
We depend on our intellectual property, and our future
success is dependent on our ability to protect our intellectual property and not infringe on the rights of others.
Our success depends, in part, on our ability to obtain patent protection
for our products and product candidates, maintain the confidentiality of our trade secrets and know how, operate without infringing on
the proprietary rights of others and prevent others from infringing our proprietary rights. We try to protect our proprietary position
by, among other things, filing U.S., European, and other patent applications related to our products and product candidates, inventions
and improvements that may be important to the continuing development of our product candidates. While we generally apply for patents in
those countries where we intend to make, have made, use, or sell patented products, we may not accurately predict all of the countries
where patent protection will ultimately be desirable. If we fail to timely file a patent application in any such country, we may be precluded
from doing so at a later date. In addition, we cannot assure you that:
| • |
any of our future processes or product candidates will be patentable; |
| • |
our processes or products and product candidates will not infringe upon the patents of third parties; or |
| • |
we will have the resources to defend against charges of patent infringement or other violation or misappropriation of intellectual
property by third parties or to protect our own intellectual property rights against infringement, misappropriation or violation by third
parties. |
Because the patent position of pharmaceutical companies involves
complex legal and factual questions, we cannot predict the validity and enforceability of patents with certainty. Changes in either the
patent laws or in interpretations of patent laws may diminish the value of our intellectual property. Accordingly, we cannot predict the
breadth of claims that may be allowable or enforceable in our patents (including patents owned by or licensed to us). Our issued patents
may not provide us with any competitive advantages, may be held invalid or unenforceable as a result of legal challenges by third parties
or could be circumvented. Our competitors may also independently develop formulations, processes and technologies or products similar
to ours or design around or otherwise circumvent patents issued to, or licensed by, us. Thus, any patents that we own or license from
others may not provide any protection against competitors. Our pending patent applications, those we may file in the future or those we
may license from third parties may not result in patents being issued. If these patents are issued, they may not be of sufficient scope
to provide us with meaningful protection. The degree of future protection to be afforded by our proprietary rights is uncertain because
legal means afford relatively limited protection and may not adequately protect our rights or permit us to gain or keep our competitive
advantage.
Patent rights are territorial; thus, the patent protection we do
have will only extend to those countries in which we have issued patents. Even so, the laws of certain countries do not protect our intellectual
property rights to the same extent as do the laws of the United States and the European Union. Therefore, we cannot assure you that the
patents issued, if any, as a result of our foreign patent applications will have the same scope of coverage as our U.S. patents. Competitors
may successfully challenge our patents, produce similar drugs or products that do not infringe our patents, or produce drugs in countries
where we have not applied for patent protection or that do not respect our patents. Furthermore, it is not possible to know the scope
of claims that will be allowed in published applications and it is also not possible to know which claims of granted patents, if any,
will be deemed enforceable in a court of law.
After the completion of development and registration of our patents,
third parties may still act to manufacture and/or market products in infringement of our patent protected rights, and we may not have
adequate resources to enforce our patents. Any such manufacture and/or market of products in infringement of our patent protected rights
is likely to cause us damage and lead to a reduction in the prices of our products , thereby reducing our anticipated cash flows and profits,
if any.
In addition, due to the extensive time needed to develop, test
and obtain regulatory approval for our products , any patents that protect our products may expire early during commercialization. This
may reduce or eliminate any market advantages that such patents may give us. Following patent expiration, we may face increased competition
through the entry of competing products into the market and a subsequent decline in market share and profits.
We have granted, and may in the future grant, to third parties
licenses to use our intellectual property. Generally, other than the licenses granted to Galderma and Searchlight, these licenses have
granted rights to commercialize products outside the pharmaceutical field or to technology we no longer use or to otherwise use our intellectual
property for a limited purpose outside the scope of our business interests. For example, in August 2013 we entered into an assignment
agreement with Medicis Pharmaceutical Corporation (“Medicis”), according to which Medicis assigned to us its entire interest
in one of the patents upon which we rely for Twyneo for the treatment of acne. As part of this assignment agreement, we granted
to Medicis a non-exclusive, transferable, sub-licensable, royalty-free, perpetual, license to practice the inventions claimed under the
patent.
However, our business interests may change or our licensees may
disagree with the scope of our license grant. In such cases, such licensing arrangements may result in the development, manufacturing,
marketing and sale by our licensees of products substantially similar to our products, causing us to face increased competition, which
could reduce our market share and significantly harm our business, results of operations and prospects.
If we are unable to protect the
confidentiality of our trade secrets or know-how, such proprietary information may be used by others to compete against us.
In addition to filing patent applications, we generally try to
protect our trade secrets, know-how, technology and other proprietary information by entering into confidentiality or non-disclosure agreements
with parties that have access to it, such as our development and/or commercialization partners, employees, contractors and consultants.
We also enter into agreements that purport to require the disclosure and assignment to us of the rights to the ideas, developments, discoveries
and inventions of our employees, advisors, research collaborators, contractors and consultants while we employ or engage them. However,
we cannot assure you that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information
in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information
because these agreements can be difficult and costly to enforce or may not provide adequate remedies. Any of these parties may breach
the confidentiality agreements and willfully or unintentionally disclose our confidential information, or our competitors might learn
of the information in some other way. The disclosure to, or independent development by, a competitor of any trade secret, know-how or
other technology not protected by a patent could materially adversely affect any competitive advantage we may have over any such competitor.
To the extent that any of our employees, advisors, research collaborators,
contractors or consultants independently develop, or use independently developed, intellectual property in connection with any of our
projects, disputes may arise as to the proprietary rights to this type of information. If a dispute arises with respect to any proprietary
right, enforcement of our rights can be costly and unpredictable, and a court may determine that the right belongs to a third party.
Legal proceedings or third-party
claims of intellectual property infringement and other challenges may require us to spend substantial time and money and could prevent
us from developing or commercializing our products.
The development, manufacture, use, offer for sale, sale or importation
of our products may infringe on the claims of third-party patents or other intellectual property rights. The nature of claims contained
in unpublished patent filings around the world is unknown to us and it is not possible to know which countries patent holders may choose
for the extension of their filings under the Patent Cooperation Treaty, or other mechanisms. Therefore, there is a risk that we could
adopt a technology without knowledge of a pending patent application, which technology would infringe a third-party patent once that patent
is issued. We may also be subject to claims based on the actions of employees and consultants with respect to the usage or disclosure
of intellectual property learned at other employers. The cost to us of any intellectual property litigation or other infringement proceeding,
even if resolved in our favor, could be substantial. Any claims of patent infringement, even those without merit, could: be expensive
and time consuming to defend; cause us or our partners to cease making, licensing or using products that incorporate the challenged intellectual
property; require us or our partners to redesign, reengineer or rebrand our products and product candidates, if feasible; cause us to
stop from engaging in normal operations and activities, including developing and marketing our products and product candidates; and divert
management’s attention and resources. Some of our competitors may be able to sustain the costs of such litigation or proceedings
more effectively because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation
or defense of intellectual property litigation or other proceedings could have a material adverse effect on our ability to compete in
the marketplace. Intellectual property litigation and other proceedings may also absorb significant management time. Consequently, we
are unable to guarantee that we or our partners will be able to manufacture, use, offer for sale, sell or import our products in the event
of an infringement action.
In the event of patent infringement claims, or to avoid potential
claims, we or our partners may choose or be required to seek a license from a third party and would most likely be required to pay license
fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we or our partners were able to
obtain a license, the rights may be non-exclusive, which could potentially limit our competitive advantage. Ultimately, we or our partners
could be prevented from commercializing a product or be forced to cease some aspect of our business operations if, as a result of actual
or threatened patent infringement or other claims, we or our partners are unable to enter into licenses on acceptable terms. This inability
to enter into licenses could harm our business significantly.
In addition, because of our developmental stage, claims that our
products infringe on the patent rights of others are more likely to be asserted after commencement of commercial sales incorporating our
technology.
We may be subject to claims that
our or our partners' employees, consultants, or independent contractors have wrongfully used or disclosed confidential information of
third parties or that our or our partners' employees have wrongfully used or disclosed alleged trade secrets of their former employers.
We employ individuals who were previously employed at universities
or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that
our employees, consultants, and independent contractors do not use the proprietary information or know-how of others in their work for
us, we may be subject to claims that we or our or our partners employees, consultants, or independent contractors have inadvertently or
otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of any of our or our partners'
employees’ former employers or other third parties. Litigation may be necessary to defend against these claims. If we fail in defending
any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely
impact our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a
distraction to management and other employees.
Although we believe that we and our partners take reasonable steps
to protect our intellectual property, including the use of agreements relating to the non-disclosure of confidential information to third
parties, as well as agreements that purport to require the disclosure and assignment to us or our partners of the rights to the ideas,
developments, discoveries and inventions of our or our partners' employees and consultants while we or our partners employ them, the agreements
can be difficult and costly to enforce. Although we seek to obtain these types of agreements from our contractors, consultants, advisors
and research collaborators, to the extent that employees and consultants utilize or independently develop intellectual property in connection
with any of our projects, disputes may arise as to the intellectual property rights associated with our products. If a dispute arises,
a court may determine that the right belongs to a third party. In addition, enforcement of our rights can be costly and unpredictable.
We also rely on trade secrets and proprietary know-how that we seek to protect in part by confidentiality agreements with our employees,
contractors, consultants, advisors or others. Despite the protective measures we employ, we still face the risk that:
| • |
these agreements may be breached; |
| • |
these agreements may not provide adequate remedies for the applicable type of breach; |
| • |
our trade secrets or proprietary know-how will otherwise become known; or |
| • |
our competitors will independently develop similar technology or proprietary information. |
International patent protection
is particularly uncertain, and if we are involved in opposition proceedings in foreign countries, we may have to expend substantial sums
and management resources.
Patent law outside the United States may be different than in the
United States. Further, the laws of some foreign countries may not protect our intellectual property rights to the same extent as the
laws of the United States, if at all. A failure to obtain sufficient intellectual property protection in any foreign country could materially
and adversely affect our business, results of operations and future prospects. Moreover, we may participate in opposition proceedings
to determine the validity of our foreign patents or our competitors’ foreign patents, which could result in substantial costs and
divert management’s resources and attention. Additionally, due to uncertainty in patent protection law, we have not filed applications
in many countries where significant markets exist.
An NDA submitted under Section
505(b)(2) subjects us to the risk that we may be subject to a patent infringement lawsuit that would delay or prevent the review or approval
of our product candidates.
In the United States, we or our partners have filed and may in the future file NDAs
for our product candidates for approval under Section 505(b)(2) of the FDCA. Section 505(b)(2) permits the submission of an NDA where
at least some of the information required for approval comes from studies that were not conducted by, or for, the applicant and on which
the applicant has not obtained a right of reference. To date we have filed two NDAs under this section. In October 2020, we submitted
an NDA for marketing approval for Twyneo, which was granted by the FDA, and in June 2020, we submitted an NDA for marketing approval for
Epsolay, which was granted by the FDA. Both of these NDA’s were accepted for filing by the FDA. The FDA granted marketing
approval for Twyneo in July 2021, and for Epsolay in April, 2022.
A 505(b)(2) application enables us to reference published literature
and/or the FDA’s previous findings of safety and effectiveness for the branded reference drug. For NDAs submitted under Section
505(b)(2) of the FDCA, the patent certification and related provisions of the Hatch-Waxman Act apply. In accordance with the Hatch-Waxman
Act, such NDAs may be required to include certifications, known as paragraph IV certifications, that certify that any patents listed in
the FDA’s publication, “Approved Drug Products with Therapeutic Equivalence Evaluations,” commonly known as the Orange
Book, with respect to any product referenced in the 505(b)(2) application, are invalid, unenforceable or will not be infringed by the
manufacture, use or sale of the product that is the subject of the 505(b)(2) NDA. Applicants must also notify the holder of the approved
NDA for any product referenced in the 505(b)(2) application, along with all patent owners, regarding submission of a paragraph IV certification
with respect to applicable patents listed in the Orange Book.
Under the Hatch-Waxman Act, the NDA holder and patent owner(s)
may file a patent infringement lawsuit after receiving notice of the paragraph IV certification. Filing of a patent infringement lawsuit
against the filer of the 505(b)(2) application within 45 days of the patent owner’s receipt of notice triggers a one-time, automatic,
30-month stay of the FDA’s ability to approve the 505(b)(2) NDA, unless patent litigation is resolved in the favor of the paragraph
IV filer or the patent expires before that time. Accordingly, we or our partners may invest a significant amount of time and expense in
the development of one or more product candidates only to be subject to significant delay and patent litigation before such product candidates
may be commercialized, if at all. Further, although the Section 505(b)(1) regulatory pathway is not subject to the same patent certification
requirements as Section 505(b)(2) applications or ANDAs and is accordingly not associated with litigation under the Hatch-Waxman Act,
we may still face non-Hatch-Waxman patent litigation for products developed through the Section 505(b)(1) pathway.
In addition, a 505(b)(2) application will not be approved until
any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, or NCE, listed in the Orange Book for
the referenced product has expired. The FDA may also require us or our partners to perform one or more additional clinical trials or measurements
to support the change from the branded reference drug, which could be time consuming and could substantially delay our achievement of
regulatory approvals for such product candidates. The FDA may also reject our future 505(b)(2) submissions and require us or our partners
to file such submissions under Section 505(b)(1) of the FDCA, which would require us to provide extensive data to establish safety and
effectiveness of the drug for the proposed use and could cause delay and be considerably more expensive and time consuming. For products
we develop under the Section 505(b)(1) pathway, the FDA may disagree that our clinical data is sufficient for submission through this
pathway, which could result in our inability to seek approval for such products candidates. These factors, among others, may limit our
or our partners' ability to successfully commercialize our product candidates.
Companies that produce branded reference drugs routinely bring
litigation against ANDA or 505(b)(2) applicants that seek regulatory approval to manufacture and market generic and reformulated forms
of their branded products. These companies often allege patent infringement or other violations of intellectual property rights as the
basis for filing suit against an ANDA or 505(b)(2) applicant. Likewise, patent holders may bring patent infringement suits against companies
that are currently marketing and selling their approved generic or reformulated products.
Litigation to enforce or defend intellectual property rights is
often complex and often involves significant expense and can delay or prevent introduction or sale of our product candidates. If patents
are held to be valid and infringed by our product candidates in a particular jurisdiction, we or our partners would, unless we or our
partners could obtain a license from the patent holder, be required to cease selling in that jurisdiction and may need to relinquish or
destroy existing stock in that jurisdiction. There may also be situations where we and our partners use our business judgment and decide
to market and sell our approved product candidates, notwithstanding the fact that allegations of patent infringement(s) have not been
finally resolved by the courts, which is known as an “at-risk launch.” The risk involved in doing so can be substantial because
the remedies available to the owner of a patent for infringement may include, among other things, damages measured by the profits lost
by the patent owner and not necessarily by the profits earned by the infringer. In the case of a willful infringement, the definition
of which is subjective, such damages may be increased up to three times. Moreover, because of the discount pricing typically involved
with ANDA and, to a lesser extent, 505(b)(2), products, patented branded products generally realize a substantially higher profit margin
than ANDA and, to a lesser extent, 505(b)(2), products, resulting in disproportionate damages compared to any profits earned by the infringer.
An adverse decision in patent litigation could have a material adverse effect on our business, financial position and results of operations
and could cause the market value of our ordinary shares to decline.
Risks Related to Our Operations in Israel
Our headquarters, manufacturing and other significant
operations are located in Israel and, therefore, our business and operations may be adversely affected by political, economic and military
conditions in Israel.
Our business and operations will be directly influenced by the
political, economic and military conditions affecting Israel at any given time. A change in the security and political situation in Israel
and in the economy could impede the raising of the funds required to finance our research and development plans and to create joint ventures
with third parties and could otherwise have a material adverse effect on our business, operating results and financial condition. Since
the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors,
including Hezbollah in Lebanon (and Syria) and Hamas in the Gaza Strip, both of which involved missile strikes in various parts of Israel
causing the disruption of economic activities. Our principal offices are located within the range of rockets that could be fired from
Lebanon, Syria or the Gaza Strip into Israel. In addition, Israel faces many threats from more distant neighbors, in particular, Iran.
Parties with whom we do business have sometimes declined to travel to Israel during periods of heightened unrest or tension, forcing us
to make alternative arrangements when necessary.
In October 2023, Hamas terrorists infiltrated Israel’s southern
border from the Gaza Strip and conducted a series of attacks on civilian and military targets. Hamas also launched extensive rocket attacks
on Israeli population and industrial centers located along Israel’s border with the Gaza Strip and in other areas within the State
of Israel. These attacks resulted in extensive deaths, injuries and kidnapping of civilians and soldiers. Following the attack, Israel’s
security cabinet declared war against Hamas and a military campaign against this terrorist organization commenced in parallel to its continued
rocket and terror attacks. Moreover, the clash between Israel and Hezbollah in Lebanon may escalate in the future into a greater regional
conflict. Additionally, Yemeni rebel group, the Houthis, launched series of attacks on global shipping routes in the Red Sea, causing
disruptions of supply chain. These geopolitical developments may adversely affect our ability to continue carrying out various administrative,
research, operational and commercial functions and activities both in Israel and globally.
We currently do not anticipate any material risk to the Company
resulting from the war. Other than SGT-210, which is manufactured in Israel and has not been impacted, all of the drug production
for our products and investigational drug products has either been completed or is conducted outside of Israel. In addition, the Phase
III clinical trial for SGT-610 is being conducted in the U.S. and Europe and while our Phase 1 clinical study of SGT-210 is expected to
be conducted in Israel, we currently do not expect a delay or disruption of this trial as a result of the recent war. A delay or disruption
in our Phase 1 trial of SGT-210 could impact the value of our securities and require us to raise additional capital. If we are unable
to do so on terms acceptable to us, we may be required to reduce our operating expenses and limit our product development activities.
See “- We may need substantial additional funding to pursue our business objectives. If we are unable to raise capital when needed,
we could be forced to curtail our planned operations and the pursuit of our growth strategy. Additionally, we cannot guarantee that the
war will not deter potential investors from investing in Israeli companies such as ours, which could in turn affect our business, operating
results and financial condition. It is currently not possible to predict the duration or severity of the ongoing conflict or its effect
on our business, operations and financial conditions. The ongoing conflict is rapidly evolving and developing and could disrupt our business
and operations, interrupt our sources and availability of supply and hamper our ability to raise additional funds or sell our securities,
among other possible effects.
In addition, as a result of the war, the international rating agency,
Moody’s, has cut Israel's credit rating from A1 to A2 and has also lowered Israel's outlook from stable to negative, stating that
it sees a possible further downgrade in the future. Lowered credit rating of Israel could materially impact our ability to raise capital
and ability to secure loans, if needed, in each case on reasonable terms.
The political and security situation in Israel may result in parties
with whom we have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those
agreements pursuant to force majeure provisions in such agreements. Any hostilities involving Israel or the interruption or curtailment
of trade between Israel and its present trading partners could result in damage to our facilities and likewise have a material adverse
effect on our business, operating results and financial condition. Furthermore, prior to Hamas attack in October 2023 the Israeli
government p extensive changes to Israel’s judicial system which sparked extensive political debate and unrest. In response
to the foregoing, individuals, organizations and institutions, both within and outside of Israel, voiced concerns that the proposed changes
may negatively impact the business environment in Israel. To date, these initiatives have been substantially put on hold. If such changes
to Israel’s judicial system are again pursued by the government and approved by the parliament, this may have an adverse effect
on our business, our results of operations and our ability to raise additional funds, if deemed necessary by our management and board
of directors. 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 Twyneo, Epsolay and our product candidates, if approved, to customers in those
countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners,
or significant downturns in the economic or financial condition of Israel, could adversely affect our operations and product development,
cause our revenues to decrease and adversely affect the share price of publicly traded companies having operations in Israel, such as
us. Similarly, Israeli corporations are limited in conducting business with entities from several countries. Our commercial insurance
does not cover losses that may occur as a result of an event associated with the security situation in the Middle East. Although the Israeli
government is currently committed to covering the reinstatement value of direct damages that are caused by terrorist attacks or acts of
war, there can be no assurance that this government coverage will be maintained, or if maintained, will be sufficient to compensate us
fully for damages incurred. Any losses or damages incurred by us could have a material adverse effect on our business, financial condition
and results of operations.
Exchange rate fluctuations between
the U.S. dollar, the New Israeli Shekel and other foreign currencies, may negatively affect our future revenues.
In the future, we expect that a substantial portion of our revenues
will be generated in U.S. dollars, Euros and other foreign currencies, although we currently incur a significant portion of our expenses
in currencies other than U.S. dollars, and mainly in NIS. Our financial records are maintained, and will be maintained, in U.S. dollars,
which is our functional currency. As a result, our financial results may be affected by fluctuations in the exchange rates of currencies
in the countries in which Twyneo, Epsolay or our prospective product candidates, if approved, may be sold.
Our operations may be affected by negative labor
conditions in Israel.
Strikes and work-stoppages occur relatively frequently in Israel.
If Israeli trade unions threaten additional strikes or work-stoppages and such strikes or work-stoppages occur, those may, if prolonged,
have a material adverse effect on the Israeli economy and on our business, including our ability to deliver products to our customers
and to receive raw materials from our suppliers in a timely manner.
Our operations could be disrupted
as a result of the obligation of our personnel to perform military service.
Most of our executive officers and key employees reside in Israel
and, although most of them are no longer required to perform reserve duty, some may be required to perform annual military reserve duty
and may be called for active duty under emergency circumstances at any time. Our operations could be disrupted by the absence for a significant
period of time of one or more of these officers or key employees due to military service. Any such disruption could adversely affect our
business, results of operations and financial condition.
The termination or reduction of
tax and other incentives that the Israeli Government provides to domestic companies may increase the costs involved in operating a company
in Israel.
The Israeli government currently provides tax and capital investment
incentives to domestic companies, as well as grant and loan programs relating to research and development and marketing and export activities.
We may take advantage of these benefits and programs in the future; however, there is no assurance that such benefits and programs would
continue to be available in the future to us. If such benefits and programs were terminated or further reduced, it could have an adverse
effect on our business, operating results and financial condition.
The Israeli government grants that we have received
for research and development expenditures require us to meet several conditions and may restrict our ability to manufacture some of our
product candidates and transfer relevant know-how outside of Israel and require us to satisfy specified conditions.
We have received royalty-bearing grants from the government of
Israel through the National Authority for Technological Innovation, or the Israel Innovation Authority, also known as the IIA (formerly
known as the Office of the Chief Scientist of the Ministry of Economy and Industry, or the OCS), for the financing of a portion of our
research and development expenditures in Israel. These IIA grants relate to a peripheral line of product candidates which forms a negligible
part of our activities. We are required to pay the IIA royalties from the revenues generated from the sale of products (and related services)
developed (in all or in part), directly or indirectly, using the IIA grants we received as part of a research and development program
funded by the IIA, or the Approved Program, (at rates which are determined under the IIA rules), up to the aggregate amount of the total
grants received by the IIA, plus Annual Interest for a File (as defined under the IIA's rules). As we received grants from the IIA, we
are subject to certain restrictions under the Encouragement of Research, Development and Technological Innovation in the Industry Law
5744-1984, or the Innovation Law, the regulations promulgated thereunder and the IIA's rules and guidelines. These restrictions may impair
our ability to perform or outsource manufacturing of IIA funded products outside of Israel, granting licenses for R&D purposes or
otherwise transfer outside of Israel the know-how resulting, directly or indirectly, in whole or in part, in accordance with or as a result
of, research and development activities made according to an Approved Program, as well as any rights associated with such know-how (including
later developments, which derive from, are based on, or constitute improvements or modifications of such know-how), or the IIA Funded
Know-How.
The restrictions under the IIA’s rules and guidelines continue to apply even after
payment to the IIA of the full amount of royalties payable pursuant to the grants. In addition, the IIA may from time to time audit sales
of products which it claims incorporate IIA Funded Know-How and this may lead to additional royalties being payable on additional product
candidates, and may subject such products to the restrictions and obligations specified hereunder. Following an audit conducted by the
IIA, the IIA confirmed to us that products based on encapsulation technology of solid material are exempt from royalty payment obligations
to the IIA. Twyneo and Epsolay fall within the category of products based on encapsulation technology of solid material. However, there
can be no guarantee that the IIA will not in the future attempt to claim royalties with respect to these products, or that future products
will not be subject to royalties.
These restrictions may impair our ability to perform or outsource
manufacturing rights of IIA funded products outside of Israel, or otherwise transfer or license for R&D purpose our IIA Funded Know-How
in and outside of Israel without the approval of the IIA, and we cannot be certain that any approval of the IIA will be obtained on terms
that are acceptable to us, or at all. Furthermore, in the event that we undertake a transaction involving the transfer to a non-Israeli
entity of IIA Funded Know-How pursuant to a merger or similar transaction, or in the event we undertake a transaction involving the licensing
of IIA Funded Know-How for R&D purposes to a non-Israeli entity, the consideration available to our shareholders may be reduced by
the amount we are required to pay to the IIA. Any approval, if given, will generally be subject to additional financial obligations. Failure
to comply with certain requirements under the IIA’s rules and guidelines and the Innovation Law may subject us to financial sanctions,
to mandatory repayment of grants received by us (together with interest and penalties), as well as may expose us to criminal proceedings.
Enforcing a U.S. judgment against us and our current
executive officers and directors, or asserting U.S. securities law claims in Israel, may be difficult.
We are incorporated in Israel. All of our current executive officers
and directors reside in Israel (other than two of our directors who reside in the United States) and most of our assets reside outside
of the United States. Therefore, a judgment obtained against us or any of these persons in the United States, including one based on the
civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by
an Israeli court. It may also be difficult to effect service of process on these persons in the United States or to assert U.S. securities
law claims in original actions instituted in Israel.
Even if an Israeli court agrees to hear such a claim, it may determine
that Israeli, and not U.S., law is applicable to the claim. Under Israeli law, if U.S. law is found to be applicable to such a claim,
the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process, and certain matters of
procedure would be governed by Israeli law. There is little binding case law in Israel addressing these matters.
Israeli law and tax considerations may delay, prevent
or make difficult an acquisition of us, which could prevent a change of control and negatively affect the price of our ordinary shares.
Israeli corporate law regulates mergers, requires tender offers
for acquisitions of shares above specified thresholds, requires special approvals for certain transactions involving directors, officers
or significant shareholders and regulates other matters that may be relevant to these types of transactions. These provisions of Israeli
law may delay, prevent or make difficult an acquisition of us, which could prevent a change of control and therefore depress the price
of our ordinary shares.
Furthermore, Israeli tax considerations may make potential transactions
unappealing to us or to our shareholders, especially for those shareholders whose country of residence does not have a tax treaty with
Israel which exempts such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the
same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral
contingent on the fulfillment of a number of conditions, including, in some cases, a holding period of two years from the date of the
transaction during which sales and dispositions of shares of the participating companies are subject to certain restrictions. Moreover,
with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable
even if no disposition of the shares has occurred.
We may become subject to claims for remuneration
or royalties for assigned service invention rights by our employees, which could result in litigation and adversely affect our business.
We have entered into assignment of invention agreements with our
employees pursuant to which such individuals agree to assign to us all rights to any inventions created during and as a result of their
employment or engagement with us. A significant portion of our intellectual property has been developed by our employees in the course
of their employment for us. Under the Israeli Patents Law, 5727-1967, or the Patents Law, inventions conceived by an employee during the
scope of his or her employment with a company and as a result thereof are regarded as “service inventions,” which belong to
the employer, absent a specific agreement between the employee and employer giving the employee service invention rights. The Patents
Law also provides that if there is no agreement between an employer and an employee with respect to the employee’s right to receive
compensation for such “service inventions,” the Israeli Compensation and Royalties Committee, or the Committee, a body constituted
under the Patents Law, has the authority to determine whether the employee is entitled to remuneration for service inventions developed
by such employee and the scope and conditions for such remuneration. Case law clarifies that the right to receive consideration for “service
inventions” can be waived by the employee and that in certain circumstances, such waiver does not necessarily have to be explicit.
The Committee will examine, on a case-by-case basis, the general contractual framework between the parties, using interpretation rules
of the general Israeli contract laws. Further, the Committee has not yet determined one specific formula for calculating this remuneration,
but rather uses the criteria specified in the Patents Law. Although our employees have agreed to assign to us service invention rights
and have waived their right to receive remuneration for their service inventions, as a result of uncertainty under Israeli law with respect
to the efficacy of waivers of service invention rights, we may face claims demanding remuneration in consideration for assigned inventions.
As a consequence of such claims, we could be required to pay additional remuneration or royalties to our current and/or former employees,
or be forced to litigate such claims, which could negatively affect our business.
The government tax benefits that we currently are entitled to receive
require us to meet several conditions and may be terminated or reduced in the future.
Some of our operations in Israel may entitle us to certain tax
benefits under the Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law, once we begin to produce revenues.
If we do not meet the requirements for maintaining these benefits, they may be reduced or cancelled and the relevant operations would
be subject to Israeli corporate tax at the standard rate, which is set at 23% in 2023. In addition to being subject to the standard corporate
tax rate, we could be required to refund any tax benefits that we have already received, plus interest and penalties thereon. Even if
we continue to meet the relevant requirements, the tax benefits that our current “Benefited Enterprise” is entitled to may
not be continued in the future at their current levels or at all. If these tax benefits were reduced or eliminated, the amount of taxes
that we pay would likely increase, as all of our operations would consequently be subject to corporate tax at the standard rate, which
could adversely affect our results of operations. Additionally, if we increase our activities outside of Israel, for example, by way of
acquisitions, our increased activities may not be eligible for inclusion in Israeli tax benefits programs. See “Item 10. Additional
Information — Israeli Tax Considerations and Government Programs — Tax Benefits Under the 2011 Amendment” for additional
information concerning these tax benefits.
Your rights and responsibilities
as a shareholder will be governed by Israeli law, which differs in some material respects from the rights and responsibilities of shareholders
of U.S. companies.
The rights and responsibilities of the holders of our ordinary
shares are governed by our amended and restated articles of association and by Israeli law. These rights and responsibilities differ in
some material respects from the rights and responsibilities of shareholders in U.S. corporations. For example, a shareholder of an Israeli
company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the
company and other shareholders, and to refrain from abusing its power in the company, including, among other things, voting at a general
meeting of shareholders on matters such as amendments to a company’s articles of association, increases in a company’s authorized
share capital, mergers and acquisitions and related party transactions requiring shareholder approval. In addition, a shareholder who
is aware that it possesses the power to determine the outcome of a shareholder vote or to appoint or prevent the appointment of a director
or executive officer in the company has a duty of fairness toward the company. There is limited case law available to assist us in understanding
the nature of these duties or the implications of these provisions. These provisions may be interpreted to impose additional obligations
and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations.
Risks Related to Employee Matters
If we are not able to retain our
key management, or attract and retain qualified scientific, technical and business personnel, our ability to implement our business plan
may be adversely affected.
Our success largely depends on the skill, experience and effort
of our senior management. The loss of the service of any of these persons, including the chairman of our board of directors, Mr. Moshe
Arkin, and our chief executive officer, Dr. Alon Seri-Levy, would likely result in a significant loss in the knowledge and experience
that we possess and could significantly delay or prevent successful product development and other business objectives. There is intense
competition from numerous pharmaceutical and biotechnology companies, universities, governmental entities and other research institutions,
seeking to employ qualified individuals in the technical fields in which we operate, and we may not be able to attract and retain the
qualified personnel necessary for the successful development and commercialization of our products.
Under applicable employment laws, we may not
be able to enforce covenants not to compete.
Our employment agreements generally include covenants not to compete.
These agreements prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors
for a limited period. We may be unable to enforce these agreements under the laws of the jurisdictions in which our employees work. For
example, Israeli courts have required employers seeking to enforce covenants not to compete to demonstrate that the competitive activities
of a former employee will harm one of a limited number of material interests of the employer, such as the secrecy of a company’s
confidential commercial information or the protection of its intellectual property. If we cannot demonstrate that such an interest will
be harmed, we may be unable to prevent our competitors from benefiting from the expertise of our former employees and our competitiveness
may be diminished.
Risks Related to Our Ordinary Shares
The controlling share ownership
position of M. Arkin Dermatology will limit your ability to elect the members of our board of directors, may adversely affect our share
price and will result in our non-affiliated investors having very limited, if any, influence on corporate actions.
M. Arkin Dermatology Ltd. (“Arkin Dermatology) is currently
our controlling shareholder. As of March 1, 2024, Arkin Dermatology, and its sole beneficial owner, Mr. Moshe Arkin, collectively beneficially
owned approximately 58% of the voting power of our outstanding ordinary shares. Therefore, Arkin Dermatology has the ability to substantially
influence us and exert significant control through this ownership position. For example, Arkin Dermatology is able to control elections
of directors, amendments of our organizational documents, and approval of any merger, amalgamation, sale of assets or other major corporate
transaction. Arkin Dermatology’s interests may not always coincide with our corporate interests or the interests of other shareholders,
and it may exercise its voting and other rights in a manner with which you may not agree or that may not be in the best interests of our
other shareholders. So long as it continues to own a significant amount of our equity, Arkin Dermatology will continue to be able to strongly
influence and significantly control our decisions.
We are a “controlled company”
within the meaning of Nasdaq listing standards and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate
governance requirements.
As a result of the number of shares owned by Arkin Dermatology,
we are a “controlled company” under the Nasdaq corporate governance rules. A “controlled company” is a company
of which more than 50% of the voting power is held by an individual, group or another company. Pursuant to the “controlled company”
exemption, we are not required to, and do not comply with, the requirement that a majority of our board of directors consist of
independent directors and we are not required to, and do not currently comply with, the requirement that we have a nominating committee
composed entirely of independent directors with a written charter addressing such committee’s purpose and responsibilities.
Accordingly, you do not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance
requirements of the Nasdaq Global Market.
The market price of our ordinary
shares could be negatively affected by future sales of our ordinary shares.
As of March 1, 2024, there were 27,857,620 ordinary
shares outstanding. Future sales by us or our shareholders of a substantial number of our ordinary shares in the public market, or the
perception that these sales might occur, could cause the market price of our ordinary shares to decline or could impair our ability to
raise capital through a future sale of, or pay for acquisitions using, our equity securities. Of our issued and outstanding shares, all
of the ordinary shares listed for trading are freely transferable, except for any shares held by our “affiliates,” as that
term is defined in Rule 144 under the Securities Act of 1933, as amended, or the Securities Act. In addition, we have filed a registration
statements on Form S-8 with the Securities and Exchange Commission, or the SEC, covering all of the ordinary shares issuable under our
2014 Share Incentive Plan, and we intend to file one or more registration statements on Form S-8 covering all of the ordinary shares issuable
under any other equity incentive plans that we may adopt, and such shares will be freely transferable, except for any shares held
by “affiliates,” as such term is defined in Rule 144 under the Securities Act. Upon the filing of the registration statements,
the number of ordinary shares that are potentially available for sale in the open market will increase materially, which could make it
harder for the value of our ordinary shares to appreciate unless there is a corresponding increase in demand for our ordinary shares.
This increase in available shares could result in the value of your investment in our ordinary shares decreasing.
In addition, a sale by us of additional ordinary shares or similar
securities in order to raise capital might have a similar negative impact on the share price of our ordinary shares. A decline in the
price of our ordinary shares might impede our ability to raise capital through the issuance of additional ordinary shares or other equity
securities and may cause you to lose part or all of your investment in our ordinary shares.
Arkin Dermatology, our controlling shareholder, as holder of 16,154,564
of our ordinary shares as of March 1, 2024, is entitled to require that we register under the Securities Act the resale of these shares
into the public markets. All shares sold pursuant to an offering covered by such registration statement will be freely transferable. See
“Item 7.B — Related Party Transactions — Registration Rights Agreement”.
Our Outstanding Warrants are exercisable for
our ordinary shares, which will increase the number of ordinary shares eligible for future resale in the public market and result in dilution
to our shareholders.
As of March 1, 2024, we had 4,560,000 outstanding
warrants to purchase an aggregate of 4,560,000 ordinary shares. All warrants are exercisable at any time before January 27, 2028, subject
to certain limitations and exceptions. The exercise price of the warrants is $5.85 per ordinary share, which is above the current
market price of our ordinary share, which was $$1.13 per share based on the closing price of the ordinary shares on Nasdaq on March
1, 2024. The likelihood that the holders of our warrants will exercise their warrants, and the amount of any cash proceeds that
we would receive upon such exercise, is dependent upon the market price of the ordinary shares. To the extent that our outstanding warrants
are exercised, additional shares of the ordinary shares will be issued, which will result in dilution to our shareholders and increase
the number of shares of the ordinary shares eligible for resale in the public market. Sales of substantial numbers of such shares in the
public market or the fact that such outstanding warrants may be exercised could adversely affect the market price of the ordinary shares.
However, there is no guarantee that our outstanding warrants will be in the money prior to their respective expirations, and as such,
they may expire worthless.
We have broad discretion as to
the use of the net proceeds from our public offerings and may not use them effectively.
We used the net proceeds from our public offering in January 2023
(and concurrent private placement) to fund the acquisition of SGT-610. The remaining proceeds
will be used for other research and development activities, as well as for working capital and general corporate purposes. However, our
management has broad discretion in the application of the net proceeds. Our shareholders may not agree with the manner in which our management
chooses to allocate the net proceeds from such offering. The failure by our management to apply these funds effectively could have a material
adverse effect on our business, financial condition and results of operation. Pending their use, we may invest the net proceeds from our
public offering in a manner that does not produce income.
We do not intend to pay dividends
on our ordinary shares for at least the next several years.
We do not anticipate paying any cash dividends on our ordinary
shares for at least the next several years. We currently intend to retain all available funds and any future earnings to fund the development
and growth of our business. As a result, capital appreciation, if any, of our ordinary shares will be the investors’ sole source
of gain for at least the next several years. In addition, Israeli law limits our ability to declare and pay dividends and may subject
us to certain Israeli taxes. For more information, see “Item 8. Financial Information – A. Financial Statements and Other
Financial Information – Dividend Policy.”
As a foreign private issuer whose
shares are listed on The Nasdaq Global Market, we intend to follow certain home country corporate governance practices instead of certain
Nasdaq requirements.
As a foreign private issuer whose shares are listed on The Nasdaq
Global Market, we are permitted to follow certain home country corporate governance practices instead of certain requirements of the rules
of The Nasdaq Global Market. Pursuant to the “foreign private issuer exemption”:
| • |
we established a quorum requirement such that the quorum for any meeting of shareholders is two or more shareholders holding at least
33 1∕3% of our voting rights, which complies with Nasdaq requirements; however, if the meeting is adjourned for lack of quorum,
the quorum for such adjourned meeting will be any number of shareholders, instead of 33 1∕3% of our voting rights; |
| • |
we also intend to adopt and approve material changes to equity incentive plans in accordance with Israeli Companies Law, 5759-1999,
or with the Companies Law, which does not impose a requirement of shareholder approval for such actions. In addition, we intend to follow
Israeli corporate governance practice in lieu of Nasdaq Marketplace Rule 5635(c), which requires shareholder approval prior to an issuance
of securities in connection with equity-based compensation of officers, directors, employees or consultants; |
| • |
as opposed to making periodic reports to shareholders in the manner specified by the Nasdaq corporate governance rules, the Companies
Law does not require us to distribute periodic reports directly to shareholders, and the generally accepted business practice in Israel
is not to distribute such reports to shareholders but to make such reports available through a public website. We will only mail such
reports to shareholders upon request; and |
| • |
we will follow Israeli corporate governance practice instead of Nasdaq requirements to obtain shareholder approval for certain dilutive
events (such as issuances that will result in a change of control, certain transactions other than a public offering involving issuances
of a 20% or greater interest in us and certain acquisitions of the stock or assets of another company). Accordingly, our shareholders
may not be afforded the same protection as provided under Nasdaq corporate governance rules. |
Otherwise, we intend to comply with the rules generally applicable
to U.S. domestic companies listed on the Nasdaq Global Market. However, we may in the future decide to use the foreign private issuer
exemption with respect to some or all of the other Nasdaq corporate governance rules. Following our home country governance practices
as opposed to the requirements that would otherwise apply to a U.S. company listed on the Nasdaq Global Market may provide less protection
than is accorded to investors of domestic issuers. See “Item 16G. Corporate Governance – Controlled Company".
In addition, as a foreign private issuer, we are exempted from
the rules and regulations under the United States Securities Exchange Act of 1934, as amended, or the Exchange Act, related to the furnishing
and content of proxy statements (including disclosures with respect to executive compensation), and our officers, directors, and principal
shareholders are exempted from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In
addition, we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC
as frequently or as promptly as domestic companies whose securities are registered under the Exchange Act.
We may lose our foreign private
issuer status, which would then require us to comply with the Exchange Act’s domestic reporting regime and cause us to incur significant
legal, accounting and other expenses.
We are a foreign private issuer and therefore we are not required
to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act applicable to U.S. domestic issuers.
In order to maintain our current status as a foreign private issuer, either (a) a majority of our ordinary shares must be either directly
or indirectly owned of record by non-residents of the United States or (b)(i) a majority of our executive officers or directors may not
be U.S. citizens or residents, (ii) more than 50 percent of our assets cannot be located in the United States and (iii) our business must
be administered principally outside the United States. If we were to lose this status, we would be required to comply with the Exchange
Act reporting and other requirements applicable to U.S. domestic issuers, which are more detailed and extensive than the requirements
for foreign private issuers. We may also be required to make changes in our corporate governance practices in accordance with various
SEC and Nasdaq rules. The regulatory and compliance costs to us under U.S. securities laws if we are required to comply with the reporting
requirements applicable to a U.S. domestic issuer may be significantly higher than the cost we would incur as a foreign private issuer.
As a result, we expect that a loss of foreign private issuer status would increase our legal and financial compliance costs and would
make some activities highly time consuming and costly. We also expect that if we were required to comply with the rules and regulations
applicable to U.S. domestic issuers, it would make it more difficult and expensive for us to obtain director and officer liability insurance,
and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These rules and regulations
could also make it more difficult for us to attract and retain qualified members of our supervisory board.
We believe that we
were a passive foreign investment company for U.S. federal income tax purposes for our 2023 taxable year, which could result in materially
adverse U.S. federal income tax consequences to U.S. Holders of our ordinary shares or warrants.
A
non-U.S. entity treated as a corporation for U.S. federal income tax purposes will generally be a PFIC for U.S. federal income tax purposes
for any taxable year if either (i) at least 75% of its gross income for such year is passive income (such as interest income); or (ii)
at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to
cash or other assets that produce passive income or are held for the production of passive income. Because the value of our assets for
purposes of the PFIC asset test will generally be determined by reference to the market price of our ordinary shares, based on the value
and composition of our assets for our 2023 taxable year (including, in particular, the size of our cash and other passive assets) and
the changes in the market price of our ordinary shares during our 2023 taxable year, we expect that we will be treated as a PFIC for U.S.
federal income tax purposes for our 2023 taxable year.
If we are a PFIC for any taxable year during which a U.S. Holder
holds our ordinary shares or under proposed regulations, our warrants, the U.S. Holder may be subject to adverse tax consequences, including
(i) the treatment of all or a portion of any gain on disposition as ordinary income, (ii) the application of a deferred interest charge
on such gain and the receipt of certain dividends and (iii) compliance with certain reporting requirements.
For further discussion of the adverse U.S. federal income tax consequences
of our classification as a PFIC, see “Item 10. Additional Information — U.S. Federal Income Tax Considerations –
Passive Foreign Investment Company.”
If a United States person is treated
as owning at least 10% of our ordinary shares, such holder may be subject to adverse U.S. federal income tax consequences.
If a United States person is treated as owning (directly, indirectly
or constructively) at least 10% of the value or voting power of our ordinary shares, such person may be treated as a “United States
shareholder” with respect to each “controlled foreign corporation” in our group (if any). If our group includes
one or more U.S. subsidiaries, under recently-enacted rules, certain of our non-U.S. subsidiaries, of which there are none at present,
could be treated as controlled foreign corporations regardless of whether we are not treated as a controlled foreign corporation (although
there is currently a pending legislative proposal to significantly limit the application of these rules). A United States shareholder
of a controlled foreign corporation may be required to report annually and include in its U.S. taxable income its pro rata share of “Subpart
F income,” “global intangible low-taxed income” and investments in U.S. property by controlled foreign corporations,
regardless of whether we make any distributions. An individual that is a United States shareholder with respect to a controlled
foreign corporation generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a United States
shareholder that is a U.S. corporation. Failure to comply with these reporting obligations may subject you to significant monetary penalties
and may prevent the statute of limitations with respect to your U.S. federal income tax return for the year for which reporting was due
from starting. We cannot provide any assurances that we will assist investors in determining whether any of our non-U.S. subsidiaries
are treated as a controlled foreign corporation or whether such investor is treated as a United States shareholder with respect to any
of such controlled foreign corporations or furnish to any United States shareholders information that may be necessary to comply with
the aforementioned reporting and tax paying obligations. A United States investor should consult its advisors regarding the potential
application of these rules to an investment in the ordinary shares or warrants.
General Risk Factors
Our business and operations
may suffer in the event of information technology system failures, cyberattacks or deficiencies in our cyber-security.
We collect and maintain information in digital form that is necessary
to conduct our business, and we are increasingly dependent on information technology systems and infrastructure to operate our business.
In the ordinary course of our business, we collect, store and transmit large amounts of confidential information, including intellectual
property, proprietary business information, preclinical and clinical trial data and personal information of our employees and contractors,
or collectively, Confidential Information. It is critical that we do so in a secure manner to maintain the confidentiality and integrity
of such Confidential Information.
Despite the implementation of security measures, our information
technology systems, and those of third parties on which we rely, are vulnerable to attack, damage and interruption from computer viruses,
malware (e.g. ransomware), misconfigurations, bugs or other vulnerabilities, malicious code, natural disasters, terrorism, war,
telecommunication and electrical failures, cyberattacks, hacking, phishing attacks and other social engineering schemes, employee
theft or misuse, human error, fraud, denial or degradation of service attacks and, sophisticated nation-state and nation-state-supported
actors.
The risk of a security breach or disruption, particularly through
cyberattacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as
the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Furthermore, because
the techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and often are not recognized until launched
against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. We may also experience
security breaches that may remain undetected for an extended period. Even if identified, we may be unable to adequately investigate or
remediate incidents or breaches due to attackers increasingly using tools and techniques that are designed to circumvent controls, to
avoid detection, and to remove or obfuscate forensic evidence. There can also be no assurance that our and our third-party service providers’,
strategic partners’, contractors’, consultants’, CROs’ and collaborators’ cybersecurity risk management
program and processes, including policies, controls or procedures, will be fully implemented, complied with or effective in protecting
our systems, networks and Confidential Information.
We and certain of our service providers are from time to time subject
to cyberattacks and security incidents. While we do not believe that we have experienced any significant system failure, accident or security
breach to date, if such an event were to occur and cause interruptions in our operations or the operations of our partners and service
providers, it could result in a material disruption of our product development programs. For example, the loss of clinical trial data
from completed or ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase
our costs to recover or reproduce the data. To the extent that any disruption or security breach was to result in a loss of or damage
to our data or applications, or inappropriate access to or disclosure of Confidential Information, the costs associated with the investigation,
remediation and potential notification of the breach to counter-parties and data subjects could be material, we could be subject to regulatory
investigations and enforcement actions including fines and penalties, we could incur material legal claims and liability (including class
actions), we could suffer damage to our reputation, and the further development of our product candidates could be delayed. Further, our
insurance coverage may not be sufficient to cover the financial, legal, business or reputational losses that may result from an interruption
or breach of our systems.
We may incur substantial expenses as a result of the
limited nature of our disaster recovery and business continuity plan.
We have implemented a business continuity plan to prevent the collapse
of critical business processes to a large extent or to enable the resumption of critical business processes in case a natural disaster,
public health emergency, such as the global pandemic of Novel Coronavirus Disease 2019, or COVID-19, or other serious event occurs. However,
depending on the severity of the situation, it may be difficult or in certain cases impossible for us to continue our business for a significant
period of time. Our contingency plans for disaster recovery and business continuity may prove inadequate in the event of a serious disaster
or similar event and we may incur substantial costs that could have a material adverse effect on our business.
If we do not comply with laws regulating the protection
of the environment and health and human safety, our business could be adversely affected.
Our research and development and manufacturing involve the use
of hazardous materials and chemicals and related equipment. If an accident occurs, we could be held liable for resulting damages, which
could be substantial. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those
governing laboratory procedures and the handling of biohazardous materials. We do not maintain insurance for environmental liability claims
that may be asserted against us. Moreover, additional foreign and local laws and regulations affecting our operations may be adopted in
the future. We may incur substantial costs to comply with such regulations and pay substantial fines or penalties if we violate any of
these laws or regulations.
With respect to environmental, safety and health laws and regulations,
we cannot accurately predict the outcome or timing of future expenditures that we may be required to make in order to comply with such
laws as they apply to our operations and facilities. We are also subject to potential liability for the remediation of contamination associated
with both present and past hazardous waste generation, handling, and disposal activities. We will be periodically subject to environmental
compliance reviews by environmental, safety, and health regulatory agencies. Environmental laws are subject to change and we may become
subject to stricter environmental standards in the future and face larger capital expenditures in order to comply with environmental laws
which could have a material adverse effect on our business.
The price of our ordinary shares may be volatile
and may fluctuate due to factors beyond our control.
The share price of publicly traded emerging biopharmaceutical and
drug discovery and development companies has been highly volatile and is likely to remain highly volatile in the future. The market price
of our ordinary shares may fluctuate significantly due to a variety of factors, including:
| • |
positive or negative results of testing and clinical trials by us, strategic partners and competitors; |
| • |
delays in entering into strategic relationships with respect to the commercialization of Twyneo and Epsolay outside the U.S. and
Canada or with respect to the development and/or commercialization of our product candidates or entry into strategic relationships on
terms that are not deemed to be favorable to us; |
| • |
technological innovations or commercial product introductions by us or competitors; |
| • |
changes in government regulations; |
| • |
developments concerning proprietary rights, including patents and litigation matters; |
| • |
public concern relating to the commercial value or safety of any of our products; |
| • |
financing or other corporate transactions; |
| • |
publication of research reports or comments by securities or industry analysts; |
| • |
general market conditions in the pharmaceutical industry or in the economy as a whole; or |
| • |
other events and factors, many of which are beyond our control. |
These and other market and industry factors may cause the market
price and demand for our ordinary shares to fluctuate substantially, regardless of our actual operating performance, which may limit or
prevent investors from readily selling their ordinary shares and may otherwise negatively affect the liquidity of our ordinary shares.
In addition, the stock market in general, and biopharmaceutical companies in particular, have experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance of these companies.
If equity research analysts do
not publish research or reports about our business or if they issue unfavorable commentary or downgrade our ordinary shares, the price
of our ordinary shares could decline.
The trading market for our ordinary shares relies in part on the
research and reports that equity research analysts publish about us and our business. The price of our ordinary shares could decline if
one or more securities analysts downgrade our ordinary shares or if those analysts issue other unfavorable commentary or cease publishing
reports about us or our business.
We have been incurring and will
continue to incur increased costs as a result of operating as a public company, and our management will be required to devote substantial
time to new compliance initiatives.
As a public company whose ordinary shares are listed in the United
States, we have been incurring and will continue to incur accounting, legal and other expenses that we did not incur as a private company,
including costs associated with our reporting requirements under the Exchange Act. We also have incurred and anticipate that we will continue
to incur costs associated with corporate governance requirements, including requirements under Section 404 and other provisions of the
Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules implemented by the SEC and The Nasdaq Global Market, and provisions
of Israeli corporate law applicable to public companies. These rules and regulations increase our legal and financial compliance costs,
introduce new costs such as investor relations and stock exchange listing fees, and make some activities more time-consuming and costly.
Our board and other personnel need to devote a substantial amount of time to these initiatives. Due to developments with respect to these
rules from time to time, we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. Due to
our current ‘public float’ we are eligible to take advantage of an exemption from the requirement to comply with the auditor
attestation requirements of Section 404 of the Sarbanes-Oxley Act (and the rules and regulations of the SEC thereunder). When these exemptions
cease to apply, we expect to incur additional expenses and devote increased management effort toward ensuring compliance with them.
Pursuant to Section 404 of the Sarbanes-Oxley Act
and the related rules adopted by the SEC and the Public Company Accounting Oversight Board, our management is required to report on the
effectiveness of our internal control over financial reporting. In addition, once our public float exceeds $75 million, we will lose the
ability to rely on the exemptions related thereto discussed above, and our independent registered public accounting firm may also need
to attest to the effectiveness of our internal control over financial reporting under Section 404. The process of determining whether
our existing internal controls over financial reporting systems are compliant with Section 404 and whether there are any material weaknesses
or significant deficiencies in our existing internal controls requires the investment of substantial time and resources, including by
our chief financial officer and other members of our senior management. As a result, this process may divert internal resources and take
a significant amount of time and effort to complete. In addition, while our assessment of our internal control over financial reporting
resulted in our conclusion that as of December 31, 2023, our internal control over financial reporting was effective, we cannot predict
the outcome of this determination in future years and whether we will need to implement remedial actions in order to implement effective
controls over financial reporting. The determination and any remedial actions required could result in us incurring additional costs that
we did not anticipate, including the hiring of outside consultants. As a result, we may experience higher than anticipated operating expenses,
as well as higher independent auditor fees during and after the implementation of these changes. If we are unable to implement any of
the required changes to our internal control over financial reporting effectively or efficiently or are required to do so earlier than
anticipated, it could adversely affect our operations, financial reporting and/or results of operations and could result in an adverse
opinion on internal controls from our independent auditors.
Changes in the laws and regulations affecting public companies
will result in increased costs to us as we respond to their requirements. These laws and regulations could make it more difficult or more
costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept
reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements
could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees
or as executive officers. We cannot predict or estimate the amount or timing of additional costs we may incur in order to comply with
such requirements.
If we fail to maintain an effective
system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As
a result, shareholders could lose confidence in our financial and other public reporting, which would harm our business and the trading
price of our ordinary shares.
Effective internal control over financial reporting is necessary
for us to provide reliable financial reports. Any failure to implement required new or improved controls, or difficulties encountered
in their implementation could cause us to fail to meet our reporting obligations. While our assessment of our internal control over financial
reporting resulted in our conclusion that as of December 31, 2023, our internal control over financial reporting was effective, we cannot
predict the outcome of our testing or any subsequent testing by our auditor in future periods. Any testing by us conducted in connection
with Section 404, or any subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal
controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to
our financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors
to lose confidence in our reported financial information and affect our reputation, which could have a negative effect on the trading
price of our ordinary shares.
Our management will be required to assess the effectiveness of
our internal controls and procedures and disclose changes in these controls on an annual basis. However, for so long as we have
a ‘public float’ of less than $75 million on the last trading day of our second fiscal quarter, our independent
registered public accounting firm will not be required to attest to the effectiveness of our internal controls over financial reporting
pursuant to Section 404. An independent assessment of the effectiveness of our internal controls could detect problems that our management’s
assessment might not. Undetected material weaknesses in our internal controls could lead to financial statement restatements and require
us to incur the expense of remediation.
ITEM 4.
INFORMATION ON THE COMPANY
A.
History and Development of the Company
Our legal and commercial name is Sol-Gel Technologies
Ltd. Our company was incorporated on October 28, 1997 and was registered as a private company limited by shares under the laws of
the State of Israel. Our principal executive offices are located at 7 Golda Meir St., Weizmann Science Park, Ness Ziona, 7403650
Israel and our telephone number is 972-8-931 3433. Our website address is http://www.sol-gel.com.
The information contained therein, or that can be accessed therefrom, does not constitute a part of this annual report and is not incorporated
by reference herein. We have included our website address in this annual report solely for informational purposes.
In February 2018 we completed our initial public offering
on The Nasdaq Global Market, pursuant to which we issued 7,187,500 Ordinary Shares for aggregate gross proceeds of approximately $86.25
million before deducting underwriting discounts and commissions and offering expenses payable by us, including the full exercise by the
underwriters of their option to purchase additional shares. Our Ordinary Shares are traded on The Nasdaq Global Market under the symbol
“SLGL”.
Our capital expenditures for the years ended December 31, 2021,
2022 and 2023 were approximately $143, $171 and $134 respectively. Our current capital expenditure involves equipment and leasehold improvements.
B. Business
Overview
Our Company
Sol-Gel is an innovative dermatology company with a successful
track record of two NDA approvals and an advanced pipeline of product candidates being developed for orphan indications. Sol-Gel successfully
developed pioneer topical drugs Twyneo and Epsolay, respectively approved for the treatments of acne and inflammatory lesions of rosacea.
Since 2022, both products have been marketed in the U.S. by our U.S. commercial partner, Galderma. In terms of our proprietary assets
in development, we are developing topical patidegib (SGT-610) for prevention of BCC in Gorlin syndrome patients and topical
erlotinib (SGT-210) for the treatment of rare hyperkeratinization disorders.
Products and Pipeline
We are a dermatology company leveraging innovative approaches
to develop pioneering treatments for patients with severe skin conditions, conducting a Phase 3 clinical trial of SGT-610 (patidegib gel,
2%) for Gorlin syndrome, and with two approved large-category dermatology products, Twyneo and Epsolay.
Our current product candidate pipeline includes SGT-610 (Patidegib
Topical Gel), a new chemical entity hedgehog signaling pathway blocker, for the chronic use and prevention of new BCC in Gorlin syndrome
patients, and the topical drug candidate SGT-210 for the treatment of rare hyperkeratinization disorders such as Darier ,PC , PPK, Olmsted,
etc..
Our FDA-approved product, Twyneo, is a novel, once-daily, non-antibiotic
topical cream containing a fixed-dose combination of encapsulated benzoyl peroxide, or BPO, and encapsulated tretinoin, developed for
the treatment of acne vulgaris, or acne. Our FDA-approved product, Epsolay, is a novel, once-daily topical cream containing encapsulated
BPO that we have developed for the treatment of inflammatory lesions of rosacea.
In June 2021, we entered into two five-year exclusive license agreements with
Galderma pursuant to which Galderma has the exclusive right to, and is responsible for, all U.S. commercial activities for Twyneo, and,
Epsolay. In June 2023, we entered into two exclusive license agreements with Searchlight pursuant to which Searchlight has the exclusive
right, and is responsible for, all regulatory and commercial activities for Twyneo and Epsolay in Canada, over a fifteen-year term that
is renewable for subsequent five-year periods.
The following chart represents our current approved products and
candidate pipeline.
We are developing the new chemical entity
SGT-610 (Patidegib Topical Gel), a hedgehog signaling pathway blocker, for the chronic use and prevention of new BCC in Gorlin syndrome
patients. Gorlin syndrome is a rare disease with no therapies approved by the FDA or the EC for this disease. SGT-610 is aimed to prevent
new BCCs in adults with Gorlin syndrome without systemic adverse events. We believe it has the potential to be the first drug approved
for the treatment of Gorlin syndrome patients. SGT-610 has been granted Orphan Drug Designation by the FDA and the EC as well as Breakthrough
Designation by the FDA. If approved by the FDA, SGT-610 has the potential to generate, at peak, annual net sales in excess of $300 million
(based in part on independent sources and also based on our good faith estimates). Although we believe such data and estimate to be reliable,
it involves a number of assumptions and limitations, including without limitations the number of patients, the penetration level of the
treatment, and the expected treatment annual price.
On November 30, 2023 we announced that we have begun screening
patients for our Phase 3 study. In the patidegib’s seller, PellePharm Inc. (“PellePharm”) study the SGT-610 arm was
found to be as tolerable as the vehicle and the significant adverse events commonly seen with oral hedgehog inhibitors were not observed.
Our clinical study includes essential modifications to the former Phase 3 study conducted by PellePharm. We have refined screening criteria
in order to enroll subjects with more severe disease at baseline reflected in a higher baseline number of facial BCC lesions. This refinement
may help to better demonstrate the preventive effect of our medication candidate. We are also pre-screening patients for a specific genetic
mutation associated with Gorlin syndrome that is considered relevant for HH inhibitors. In an effort to increase patient study compliance
we reduced the number of study visits over the 12 months of treatment. We plan to conduct the Phase 3 study to investigate SGT-610
in approximately 140 subjects at approximately 40 experienced clinical centers in North America, United Kingdom and Europe. We
currently expect results of our Phase 3 study by the end of 2025.
The rights to SGT-610 were purchased on January 30, 2023, pursuant
to an asset purchase agreement with PellePharm, dated January 23, 2023.
Under the terms of the agreement upon closing of the transaction,
we paid an upfront payment of $4 million to PellePharm, and the remaining principal amount outstanding of $0.7 million has not been transferred
as of the issuance date of this report. We are also required to pay:
| • |
up to $6 million in total development and NDA acceptance milestone payments; |
| • |
up to $64 million in commercial milestone payments, which amount increases to $89 million when sales exceed $500 million; and
|
| • |
single digit royalties, which increase to double digit royalties when sales exceed $500 million. |
SGT-210 (erlotinib) is a topical drug candidate for the treatment
of rare hyperkeratinization disorders. Erlotinib is a tyrosine kinase receptor inhibitor which acts on the epidermal growth factor receptor,
a protein expressed on the surface of cells, whose job is to help cells grow and divide. Published clinical research has shown that orally
administered erlotinib improved the quality of life of pachyonychia congenita patients but was associated with significant adverse events,
while topically applied erlotinib, 0.2%, failed to display significant improvement1. Sol-Gel’s scientists have developed a topical
product with a significantly higher concentration of erlotinib than that which was reported to be inefficient. SGT-210 is expected
to treat rare hyperkeratinization disorders with limited adverse events caused by oral erlotinib. Our Phase-1 study has been completed,
with results supporting further development of this product candidate. We expect to initiate a phase 1 clinical trial for an indication
within the hyperkeratinization disorders during H1 2024.
Twyneo, is a once-daily, non-antibiotic topical cream,
containing a fixed-dose combination of encapsulated benzoyl peroxide, or E-BPO, and encapsulated tretinoin for the treatment of acne.
Acne is one of the three most prevalent skin diseases in the world and is the most commonly treated skin disease in the United States.
According to the American Academy of Dermatology, acne affects approximately 40 to 50 million people in the United States, of which approximately
10% are treated with prescription medications. Tretinoin and benzoyl peroxide, the two active components in Twyneo, are both widely-used
therapies for the treatment of acne that historically have not been conveniently co-administered due to stability concerns. Twyneo
was approved for marketing by the FDA in July 2021 in the United States and was licensed in the United States exclusively to Galderma
in June 2021, and in Canada exclusively to Searchlight in June 2023.
Epsolay, is a once-daily topical cream containing 5% encapsulated
benzoyl peroxide, that we have developed for the treatment of inflammatory lesions of rosacea in adults. Rosacea is a chronic skin disease
characterized by facial redness, inflammatory lesions, burning and stinging. According to the U.S. National Rosacea Society, approximately
16 million people in the United States are affected by rosacea. Subtype II rosacea is characterized by small, dome-shaped erythematous
papules, tiny surmounting pustules on the central aspects of the face, solid facial erythema and edema, and thickening/overgrowth of skin.
Subtype II rosacea resembles acne, except that comedowns are absent, and patients may report associated burning and stinging sensations.
Current topical therapies for subtype II rosacea are limited due to tolerability concerns. For example, BPO, a common therapy for acne,
is not used for the treatment of subtype II rosacea due to side effects. As encapsulated BPO, Epsolay is designed to redefine the standard
of care for the treatment of subtype II rosacea. Epsolay, is the first product containing BPO that is marketed for the treatment
of subtype II rosacea. Epsolay was approved for marketing by the FDA in April 2022 and was licensed in the United States exclusively
to Galderma in June 2021 and in Canada exclusively to Searchlight in June 2023.
We are also currently developing a generic program in collaboration
with Padagis, by assignment from Perrigo. Under the terms of the agreement with Padagis, we received $21.5 million over 24 months, in
lieu of our share in ten generic programs, two of which were approved by the FDA and eight of which remain unapproved.
In June 2021, we entered into two exclusive license agreements with
Galderma, pursuant to which Galderma has the exclusive right to, and is responsible for, all U.S. commercial activities for Twyneo
and Epsolay, including promotion and distribution, and we were responsible for obtaining all regulatory approvals of the products in the
United States, which we completed in July 2021 and April 2022, respectively. Each of the license agreements has a term of five years from
the date of Galderma’s first commercial sale of the applicable product in the United States. The license agreements provide that
Galderma is responsible for all filings and communications with regulatory authorities in the U.S. until expiration of the applicable
license agreement. In connection with the licenses, we and Galderma have entered into a three-party supply agreement with Douglas Manufacturing
Limited, which will supply Galderma the Twyneo product, and Galderma entered into a supply agreement with a third party for the supply
of the Epsolay product. In consideration for the grant of such rights, Galderma has paid us $11 million in upfront payments and
regulatory approval milestone payments. We are also eligible to receive tiered double-digit royalties ranging from mid-teen to high-teen
percentage of net sales as well as up to $9 million in sales milestone payments.
In June 2023, we entered into exclusive license agreements with
Searchlight, a private Canadian specialty pharmaceutical company, pursuant to which Searchlight has the exclusive right, and is responsible
for all commercial activities for Twyneo and Epsolay in Canada, over a fifteen-year term that is renewable for subsequent five-year periods.
Searchlight will be responsible for obtaining and maintaining ay regulatory approvals required to market and sell the drugs in Canada
with support from us. In consideration for the grant of such rights, we will receive up to $11 million in potential upfront payments and
regulatory and sales milestones for both drugs, combined. In addition, we will be entitled to royalty percentages of all Canadian net
sales ranging from low-double-digits to high teens.
Our Products
SGT-610 for Gorlin Syndrome
We are developing SGT-610 for chronic use in Gorlin syndrome
patients to reduce the significant tumor burden of persistently developing basal cell carcinomas (BCCs) with a minimum systemic tolerability
side effects seen with and approved oral formulations of Hedgehog (HH) pathway inhibitors. SGT-610 has been granted Orphan Drug Designation
by the FDA and the EC, as well as Breakthrough Therapy Designation by the FDA. Both FDA and the European Medicines Agency (EMA) have agreed
that a single pivotal Phase 3 study may be used for the approval of this investigational drug. If approved by the FDA, SGT-610 has the
potential to generate, at peak, annual net sales in excess of $300 million (based on good faith estimates derived from our knowledge and
based in part on independent sources). Although we believe such data and estimate it to be reliable, it involves a number of assumptions
and limitations, including without limitation the number of patients, the penetration level of the treatment, and the expected treatment
annual price.
On November 30, 2023, we announced that we began screening patients
for our Phase 3 study. In PellePharm’s study the SGT-610 arm was found to be as tolerable as the vehicle and the significant
adverse events commonly seen with oral hedgehog inhibitors were rarely observed.
Our clinical study includes essential modifications to the former
Phase 3 study conducted by patidegib’s seller, PellePharm. We refined screening criteria in order to enroll subjects with a more
severe disease at baseline reflected in a higher baseline number of facial BCC lesions. This refinement may help to better demonstrate
the preventive effect of our medication candidate. We are also screening patients for a specific genetic mutation associated with Gorlin
syndrome that is considered relevant for HH signaling pathway. In an effort to increase patient study compliance we reduced the number
of study on site visits over the 12 months of treatment. We will conduct the Phase 3 study to investigate SGT-610 in approximately
140 subjects at approximately 40 experienced clinical centers in North America, United Kingdom and Europe. We
currently expect results of our Phase 3 study by the end of 2025.
Basal Cell Carcinomas
Basal cell carcinomas, BCCs are the most common of human cancers,
occurring in an estimated 2 to 3 million Americans each year. The overwhelming majority of BCCs occur at a low tempo with a strong predilection
for sun exposed skin sites in persons of Northern European descent who have had excessive sun exposure. They are most commonly seen starting
in the fourth decade of life. Some patients develop BCCs at a higher tempo and often at a younger age. They are referred to as having
High Frequency BCC (HF-BCC). These include patients with rare genetic BCC syndromes that have been well characterized along a spectrum
of severity and frequency of BCC formation. Gorlin syndrome is the most common of these rare conditions. More recently, a subset of patients
with HF-BCC has been identified who develop multiple BCCs throughout life at an unusually high frequency, but who do not qualify for a
diagnosis of Gorlin syndrome. This patient population is referred to as non Gorlin high frequency basal cell carcinoma.
Gorlin Syndrome
Gorlin syndrome is a rare disease with no therapies currently approved
by the FDA or the EC for this disease. Gorlin syndrome affects approximately 1 in 31,000 people and is an autosomal dominant genetic
disorder, mostly caused by inheritance of one defective copy of the tumor suppressor gene PTCH1. The PTCH1 gene blocks the SMO gene, turning
off the hedgehog signaling pathway when it is not needed. However, mutations in PTCH1 may cause loss of PTCH1 function, release
of SMO, and may allow BCC tumor cells to divide uncontrollably. Gorlin syndrome is also called nevoid BCC syndrome because approximately
90% of individuals with this syndrome develop multiple BCCs, ranging from a few to many thousands of lesions during a patient’s
lifetime. Gorlin syndrome patients are also susceptible to many abnormalities, including, most frequently, palmar and plantar pits and
jaw cysts, and, most devastatingly, medulloblastomas. We estimate that there are approximately 17,000 Gorlin syndrome patients with
multiple BCCs worldwide. Painful surgical excision is currently the treatment of choice for BCCs. However, as multiple BCCs continue
to evolve, repeated surgical intervention becomes practically impossible, which makes the prevention of the development of new BCCs a
critical treatment consideration. Patidegib, the active substance in SGT-610, is designed to block the SMO signal, thus allowing
cells to function normally and reduce production of new tumors.
Current Treatment Options for Gorlin Syndrome
In general, patients with Gorlin syndrome have their BCCs treated
as they become problematic, such as when the BCCs present a risk of invasion of vital structures on the face such as eyes, nose, or ears,
or become large enough off the face that they are uncomfortable, bleed, etc. Patients with Gorlin syndrome are typically never free of
BCCs. Although currently available oral drug treatments can produce partial or complete clinical clearing, once the drug is stopped the
BCCs recur.
Topical Treatment:
Several topically-applied drugs are used in the treatment of BCCs, in particular imiquimod and 5-fluorouracil. Based on clinical trials
performed both of these topical products can cure approximately 80% of the superficial subtype of BCCs, most of which generally occur
off the face. However, clinical trials demonstrate that these treatments generally are not useful against nodular BCCs, which are the
more prevalent subtype, especially on the face. In addition, clinical trials show that both typically cause significant inflammation at
sites of application, which render them inadequate for the long-term management of a chronic condition.
Retinoid Treatment:
Oral retinoid treatment of patients with Gorlin syndrome can reduce the rate of development of BCCs, but based on clinical trials is does
so only at a dose that usually produces intolerable side effects.
Oral HH Inhibitors:
With identification of uncontrolled HH signaling as the driving molecular abnormality in all BCCs, several anti-HH drugs have been developed
for oral treatment of BCCs, and two of these - vismodegib and sonidegib - have been approved for systemic treatment of advanced
BCCs defined as BCCs whose surgical excision likely would produce unsatisfactory results (i.e. “locally advanced”) or those
which have become metastatic. Clinical trials demonstrate that approximately 50% of such advanced BCCs fail to respond initially, frequently
due to mutations in the SMOOTHENED (SMO) gene, which encodes the protein to which these HH inhibitor drugs bind. Clinical trials further
evidence that of those that do respond, a significant proportion develop secondary resistance, often due to mutations in the drug binding
pocket of the SMO protein.
Vismodegib has been studied for efficacy against BCCs in patients
with Gorlin syndrome and has demonstrated a combined result of shrinkage of existing BCCs and prevention of the development of new BCCs
as long as patients continue to take vismodegib. However, clinical trials show that most patients discontinue vismodegib because of class-specific
side effects that affect their quality of life. Clinical trials demonstrate that oral HH inhibitors have a poor long-term safety and tolerability
record for a chronic condition due to unacceptable side effects such as loss of hair, sense of taste, and weight; fatigue; and intense
muscle cramps. The severity of the adverse events (AEs) associated with vismodegib is illustrated by the fact that 54% of patients with
Gorlin syndrome in an oral vismodegib clinical trial discontinued treatment because of adverse effects despite clear efficacy against
their BCCs.
Surgical Treatment of
BCCs: Given the lack of alternate treatment options, patients who develop a high rate
of BCCs often need surgery for their chronic tumors. However, studies show that surgery has significant morbidity (e.g., scarring, disfigurement,
functional loss of eyelid, nose, ear) and multiple surgeries may lead to psychological distress of the patient. The number of surgically
eligible BCCs and specifically, the chronic surgical intervention, constitutes a significant burden of disease in patients with Gorlin
syndrome.
Twyneo for Acne
Using our proprietary, silica-based microencapsulation technology
platform, we developed Twyneo to become a preferred treatment for acne by dermatologists and their patients.
Twyneo is a novel, once-daily, non-antibiotic topical cream containing
a fixed-dose combination of encapsulated benzoyl peroxide and encapsulated tretinoin that we developed for the treatment of acne. Studies
have shown that benzoyl peroxide and tretinoin are effective in treating acne as monotherapies; moreover, according to an article
in the American Academy of Dermatology (2009), dermatologists recommend combining the two monotherapies as a first-line approach for acne,
but a drug-drug interaction that causes the degradation of tretinoin has previously prohibited the development of a combination therapy.
By encapsulating the two agents separately through the use of our technology platform, Twyneo is designed to be a fixed-dose combination
that otherwise would not be stable. Similar to other combination drug products, such as clindamycin and benzoyl peroxide, Twyneo is required
to be kept refrigerated throughout the supply chain and then stored in ambient conditions upon its distribution to patients. Pre-clinical
data suggests that Twyneo may be more tolerable than generic tretinoin gel 0.1% and Epiduo, a branded fixed-dose combination of benzoyl
peroxide and adapalene, without a corresponding loss in efficacy. In addition, Epiduo and its successor Epiduo Forte contain adapalene
as opposed to tretinoin, which is widely considered to be more effective than adapalene, but generally causes greater irritation. In the
U.S. Twyneo competes directly with Winlevi, Aklief, Epiduo, Epiduo Forte and Cabtreo. On December 30, 2019, we announced top-line
results from two pivotal Phase 3 clinical trials evaluating Twyneo for the treatment of acne. Twyneo met all co-primary endpoints in both
Phase 3 trials. The Phase 3 program enrolled an aggregate of 858 patients aged nine and older in two multicenter, randomized, double-blind,
parallel group, vehicle-controlled trials at 63 sites across the United States. Twyneo demonstrated statistically significant improvement
in each of the co-primary endpoints of (1) the proportion of patients who succeeded in achieving at least a two grade reduction from
baseline and Clear (grade 0) or Almost Clear (grade 1) at Week 12 on a 5-point Investigator Global Assessment (IGA) scale, (2) an absolute
change from baseline in inflammatory lesion count at Week 12, and (3) and an absolute change from baseline in non-inflammatory lesion
count at Week 12. In addition, Twyneo was found to be well-tolerated. Twyneo was approved for marketing by the FDA in July 2021.
Acne Market Opportunity
Acne is a disease characterized by areas of scaly red skin, non-inflammatory blackheads
and whiteheads, inflammatory lesions, papules and pustules and occasionally boils and scarring that occur on the face, neck, chest, back,
shoulders and upper arms. The development of acne lesions is caused by genetic and environmental factors that arise from the interplay
of the following pathogenic factors:
| • |
blockage of hair follicles through abnormal keratinization in the follicle, which narrows pores; |
| • |
increase in oils, or sebum production, secreted by the sebaceous gland; |
| • |
overgrowth of naturally occurring bacteria caused by the colonization by the anaerobic lipohilic bacterium Propionibacterium
acnes, or P. acnes; |
| • |
inflammatory response due to relapse of pro-inflammatory mediators into the skin. |
Due to the frequency of recurrence and relapse, acne is characterized
as a chronic inflammatory disease, which may require treatment over a prolonged period of time. Acne is one of the three most prevalent
skin diseases in the world and is the most commonly treated skin disease in the United States. According to the American Academy of Dermatology,
acne affects approximately 40 to 50 million people in the United States and approximately 85% of people between the ages of 12 and 24
experience some form of acne. Acne patients suffer from the appearance of lesions on areas of the body with a large concentration of oil
glands, such as the face, chest, neck and back. These lesions can be inflamed (papules, pustules, nodules) or non-inflamed (comedones).
Early effective treatment is recommended to lessen the overall long-term impact. For most people, acne diminishes over time and tends
to disappear, or at least to decrease, by the age of 25. There is, however, no way to predict how long it will take for symptoms to disappear
entirely, and some individuals continue to suffer from acne well into adulthood.
Current Treatment Landscape for Acne
The treatment options for acne depend on the severity of the disease and consist of
topical and oral drugs:
| • |
Mild acne: characterized by few papules or pustules (both comedonal and inflammatory);
treated with an over-the-counter product or topical prescription therapies. |
| • |
Moderate acne: characterized by multiple papules and pustules with moderate inflammation and
seborrhea (scaly red skin); treated with a combination of oral antibiotics and topical therapies. |
Severe acne: characterized
by substantial papulopustular disease, many nodules and/or cysts and significant inflammation and seborrhea; treated with oral and topical
combination therapies and photodynamic therapy as a third-line treatment. Topical therapies dominate the acne market as physicians and
patients often prefer therapies that act locally on the skin, while minimizing side effects. For more pronounced symptoms, patients are
typically treated with a combination of topical and oral therapies.
The acne prescription treatment landscape is comprised of four classes of topical
products and two classes of oral products:
| • |
Topical over-the-counter monotherapies such as adapalene 0.1%, benzoyl peroxide and
salicylic acid, in different concentrations, are the most commonly used therapies. These are generally tolerable first-line treatments
for mild acne, but less efficacious than prescription therapies. |
| • |
Topical prescription antibiotic monotherapies such as clindamycin and erythromycin that are
most commonly used as topical therapies in cases of mild-to-moderate acne. |
| • |
Topical prescription retinoid monotherapies such as tretinoin, adapalene 0.3% and tazarotene.
Physicians view retinoids as moderately efficacious, but they have high rates of skin irritation. |
| • |
Topical prescription combination products such as combinations of BPO/adapalene, BPO/clindamycin,
BPO/adapalene/clinidamycin, BPO/erythromycin and clindamycin/tretinoin. These target multiple components that contribute to the development
of acne, though topical side effects are common. |
| • |
Oral prescription antibiotics such as doxycycline and minocycline. These are typically used
as step-up treatments for more severe cases of acne, with risk of systemic side effects. |
| • |
Oral prescription isotretinoin, which is primarily used for severe cystic acne and acne that
has not responded to other treatments. The use of oral prescription isotretinoin is tightly controlled due to tolerability issues.
|
Epsolay for Subtype II Rosacea
Epsolay Overview
Epsolay is a once-daily investigational topical cream containing
5% encapsulated benzoyl peroxide that we have developed for the treatment of papulopustular (subtype II) rosacea. Subtype II rosacea is
characterized by small, dome-shaped erythematous papules, tiny surmounting pustules on the central aspects of the face, solid facial erythema
and edema, and thickening/overgrowth of skin. Subtype II rosacea resembles acne, except that comedones are absent, and patients may report
associated burning and stinging sensations. In the U.S. Epsolay competes directly with Soolantra. We utilized the FDA’s 505(b)(2)
regulatory pathway in seeking approval of Epsolay in the United States. On July 8, 2019,
we announced positive top-line results from our Phase 3 program evaluating Epsolay. The program enrolled 733 patients
aged 18 and older in two identical, double-blind, vehicle-controlled Phase 3 clinical trials at 54 sites across the United States. Epsolay
demonstrated statistically significant improvement in both co-primary endpoints of (1) the number of patients achieving “clear”
or “almost clear” in the Investigator Global Assessment (IGA) relative to baseline at week 12 and (2) absolute mean reduction
from baseline in inflammatory lesion count at week 12. In an additional analysis, Epsolay demonstrated rapid efficacy, achieving statistically
significant improvements on both co-primary endpoints compared with vehicle as early as Week 2. In addition, Epsolay was found to be well-
tolerated. On February 12, 2020, we announced positive topline results from our open-label, long-term safety study, evaluating Epsolay
for a treatment duration up to 52 weeks. Epsolay was approved by the FDA in April 2022.
Current Treatment Landscape for Subtype II Rosacea
As there is no cure for rosacea, treatment is largely focused on
managing the disease. We believe that a significant market opportunity exists for a subtype II rosacea treatment option that can provide
both efficacy and higher tolerability than existing treatments. There are currently five approved drugs for the treatment of subtype II
rosacea: Soolantra, Metrogel, Oracea, Zilixi and generic metronidazole. In certain cases, dermatologists often prescribe oral antibiotics
either as monotherapies or in conjunction with approved medications.
Our Solution for Subtype II Rosacea — Epsolay
Benzoyl peroxide is approved by the FDA for the treatment of
acne and is widely considered to be safe and effective. Previously, there was no benzoyl peroxide product approved for the treatment
of rosacea as a result of potential tolerability issues, despite clinical studies showing that treatment with benzoyl peroxide could be
efficacious. According to a published study, benzoyl peroxide was found to be an effective treatment for rosacea but caused irritation.
Using our proprietary, silica-based microencapsulation technology platform, we believe our Epsolay treatment of papulopustular (subtype
II) rosacea can improve on current subtype II rosacea treatments in the following ways:
| • |
Epsolay creates a silica-based barrier between benzoyl peroxide crystals and the skin and, as a result, can reduce irritation typically
associated with topical application of benzoyl peroxide, increasing the potential for more tolerable application to rosacea-affected skin.
|
| • |
Epsolay’s release of the drug can reduce irritation while maintaining efficacy. |
Epsolay is an innovative topical cream, and the first FDA approved
product containing benzoyl peroxide for the treatment of subtype II rosacea.
SGT-210 for Hyperkeratinization Disorders
We are developing SGT-210
for the treatment of rare hyperkeratinization disorders, such as Darier, PC, PPK, Olmsted, etc. a group of skin conditions characterized
by thickening of the skin. SGT-210 is designed to be used alone or in combination for the treatment of hyperproliferation and hyperkeratinization
disorders. On January 2, 2020, we announced the initiation of a Phase 1 clinical study of SGT-210 in patients with palmoplantar keratoderma.
The Phase 1 concept study SGT-84-01 is a single-center, single-blinded, vehicle-controlled study designed to evaluate the bioavailability,
safety and tolerability of SGT-210 as well as inform on potential efficacy. During the third quarter of 2021, we reported that the study
with respect to six (6) palmoplantar keratoderma (PPK) patients has been completed and indicated modest improvement and a favorable safety
results. Two elevated concentrations of topical erlotinib were investigated in MUSE –PK Phase I study on healthy volunteers
initiated in December 2022. The study was finalized by second quarter of 2023, where topical erlotinib was generally safe and well tolerated
and minimal absorbance regardless of its concretion was observed. We believe these results support further development of this product
candidate. We expect to initiate a phase 1 clinical trial for an indication within the hyperkeratinization disorders during H1 2024.
Generic Drug Product Candidate
In addition to our investigational product candidates, we are also currently developing
a generic topical dermatological product candidate in collaboration with Padagis by assignment from Perrigo. Padagis has significant experience
in the development of generic drugs.
We previously had collaboration arrangements with Perrigo to
develop a portfolio of 11 generic topical dermatological product candidates. In November 2021, we announced that we had signed an agreement
with Padagis, pursuant to which we sold our rights related to 10 generic collaborative agreements between the parties. Under the terms
of this agreement with Padagis, effective as of we received $21.5 million over 24 months, in lieu of our share in the ten generic programs,
two of which were approved by the FDA, and eight of which are unapproved. Pursuant to the agreement, effective as of November 1,
2021, we ceased paying any outstanding and future operational costs related to these 10 collaborative agreements.
We currently have one active collaboration agreement with Padagis
for the development, manufacturing and commercialization of a generic program. Under this agreement, Padagis will conduct the regulatory
(if relevant), scientific, clinical and technical activities necessary to develop the generic product candidate and seek regulatory approval
with the FDA for this generic product candidate. If approved by the FDA, Padagis has agreed to commercialize the generic product candidate
in the United States. We and Padagis will share the development costs and the gross profits generated from the sales of the generic
product candidate, if approved by the FDA.
Our Proprietary Silica-Based Microencapsulation Technology Platform
Encapsulation of a drug substance can be made using a variety
of techniques, such as solvent evaporation, coacervation, and interfacial polymerization. Most encapsulations involve organic polymers,
such as poly-methyl methacrylate, chitosan and cellulose. The resultant encapsulated drug substance can be an aqueous dispersion of varying
payload and volume fraction or a dried powder. Control over the encapsulation process when organic polymers are used is challenging and
is mainly limited to shell thickness. Other properties of the organic polymer encapsulating material are hard to control.
In contrast, we use proprietary ‘sol-gel’ processes
to shape silica on site to form microcapsule shells of almost any size and release profile. Sol-gel is a chemical process whereby amorphous
silica, or other metal oxides, are made by forming interconnections among colloidal particles (the “sol”) under increasing
viscosity until a rigid silica shell (the “gel”) is formed. The drug substance that is added during the sol-gel reaction is
encapsulated, using a patented technique, by which a core-shell structure is formed. The drug substance is in the core and the silica
is the capsule shell. At the end of the process, the microcapsules are in the shape of small beads ranging from 1 – 50
micron in size. This process results in an aqueous suspension in which the drug substances are entrapped in silica particles.
Intellectual Property
Our intellectual property and proprietary technology are directed
to the development, manufacture and sale of our products. We seek to protect our intellectual property, core technologies and other know-how,
through a combination of patents, trademarks, trade secrets, non-disclosure and confidentiality agreements, assignments of invention and
other contractual arrangements with our employees, consultants, partners, suppliers, customers and others.
We will be able to protect our technology from unauthorized use
by third parties only to the extent it is covered by valid and enforceable patents or is effectively maintained as trade secrets. Patents
and other proprietary rights are an essential element of our business. If any of the below described applications are not approved, or
any of the below described patents are invalidated, deemed unenforceable or otherwise successfully challenged, such loss would have a
material effect on the commercialization of Twyneo, Epsolay, our investigational product candidates (once approved), if approved, and
our future prospects.
Our patent portfolio that is directed to Twyneo, Epsolay
and our other investigational product candidates includes 158 patents and patent applications and claims processes for manufacture (including
silica microencapsulation platform and other technologies), formulations, composition of matter, and methods of use. Of these 158 patents
and patent applications, 97 are granted patents (23 in the United States and 74 in other countries) and 61 are pending applications (39
in the United States and 22 in other countries).
For
SGT-610, we have one not yet published international application that refers to a method of treatment with SGT-610, and one pending
application in the United States that refers to a method of treatment with SGT-610 for a period of more than 12 months; and we purchased
from PellePharm 3 granted patents in the US (with a term until 2036), 2 granted patents in South Africa, and granted patents in Israel,
Japan, Mexico, Canada, Brazil, and Australia and pending applications in Chile, Europe and Hong Kong. We also licensed from Royalty
Security LLC (as part of the asset purchase from PellePharm) 21 granted patents in the US (with terms 2027-2031), 1 granted patent
in Canada , 36 granted patents in Europe (Norway and EPO members such as France, Germany, Ireland, Switzerland, United Kingdom, Spain,
Italy, etc.) 39 Granted patents in the rest of the world (such as Argentina, Australia, Brazil, Chile, China, Hong-Kong, Israel, India,
Japan, Korea, Mexico, New Zealand, Philippines, Russia, Singapore, Thailand, Taiwan, Ukraine, South Africa).
For Twyneo, we have obtained patent protection for the composition
of matter in the United States, Canada, Europe (validated in France, Germany, Ireland, Italy, Spain, Switzerland and the United
Kingdom) and Mexico (with a term until 2028). There are four patent families protecting the process for the encapsulation of the active
agents of our Twyneo product (one patent family has patents granted in Canada, India, Mexico, and Europe (validated in France, Germany,
Ireland, Italy, Spain, Switzerland and the United Kingdom) (with a term until 2028) and applications pending in the United States; the
second patent family has patents granted in Mexico, Canada and the United States (with a term until 2029); the third patent family has
patents granted in Europe (validated in France, Germany, Ireland, Italy, Spain, Switzerland and the United Kingdom), China, India, Canada,
Mexico and the United States (with a term until 2030) and an application pending in the United States); and the fourth patent family has
patents granted in Canada, China, Israel, India, Mexico and the United States. We own a pending patent for the formulation of our Twyneo
product in the United States (with a term until 2032), and patents granted in China, Canada, Mexico and Europe (validated in France, Germany,
Ireland, Italy, Spain, Switzerland, United Kingdom) (with a term until 2032). We have patents granted in Canada, India and Mexico (with
a term until 2038) and pending patent applications in the United States, China and Europe for the composition of our Twyneo product and
patents granted in the United States, China and Europe for the method of treatment of Twyneo (with a term until 2038).
We have five trademarks registered for our Twyneo product in Israel, Europe, the United
States and Canada. Twyneo was also filed for registration in China, Australia, Mexico, and Brazil. For Epsolay, we have
obtained patents in China, Canada, Europe (validated in France, Germany, Ireland, Italy, Spain, Switzerland and the United Kingdom),
Mexico and the United States (with a term until 2032) covering the composition for topical treatment of rosacea. We have further one pending
application for this composition in the United States. There are two patent families directed to the process for encapsulation of the
active agents of Epsolay (one patent family has granted patents in Canada, India, Mexico, and Europe (validated in France, Germany, Ireland,
Italy, Spain, Switzerland and the United Kingdom) (with a term until 2028) and pending applications in the United States; and the
second patent family has patents granted in Canada, China, Israel, India, Mexico and the United States. We also have 7 granted patents
in the United States (with a term until 2040) and 4 patent applications pending in the United States covering the methods of use of Epsolay
for the treatment of rosacea. We have one published international application and one US application with a term until 2042.
We have pending applications in Australia, Brazil, Chile, Colombia,
Korea, Malaysia, New Zealand, Philippines, Thailand, Vietnam and South Africa, and four pending applications in the United States
covering the compositions of Epsolay and Twyneo, the processes for the encapsulation of the active agents of our Epsolay and Twyneo, and
the methods of use.
We have four registered trademarks in Europe, Canada, the United
States and Israel. These registrations cover potential brand names for our Epsolay in Israel, Europe, Canada and the United States. Epsolay
was also filed for registration in Brazil, Mexico, and Australia.
For SGT-210, we have seven pending applications in Korea,
Mexico and the United States, and one published international application, and one granted patent in the United States that refer to methods
and compositions of use in the treatment of psoriasis.
Competition
The pharmaceutical industry is subject to intense competition as well as rapid technological
changes. Our ability to compete is based on a variety of factors, including product efficacy, safety, cost-effectiveness, patient compliance,
patent position and effective product promotion. Competition is also based upon the ability of a company to offer a broad range of other
product offerings, large direct sales forces and long-term customer relationships with target physicians.
There are numerous companies that have branded or generic products
or product candidates in the dermatology market. Among them are Aclaris Therapeutics, Inc., Akorn, Inc., Almirall S.A., Aqua Pharmaceuticals
LLC, Arcutis Biotherapeutics, Bausch Health Companies Inc., Bayer HealthCare AG, Cassiopea SpA, Dermavant Sciences, Galderma
Pharma S.A., Glenmark Pharmaceuticals Ltd., G&W Laboratories, Inc., LEO Pharma A/S, Mylan N.V., Novan, Inc., Novartis AG, Palvella
Therapeutic, Padagis US LLC, Pfizer, Inc., Spear Therapeutics, Ltd., Sun Pharmaceutical Industries Ltd., Teligent, Inc., Teva Pharmaceutical
Industries Ltd. And Vyne Pharmaceuticals Ltd..
In order for Twyneo, Epsolay and our product candidates, if approved,
to compete successfully in the dermatology market, we will have to demonstrate that their efficacy, safety and cost-effectiveness provide
an attractive alternative to existing therapies, some of which are widely known and accepted by physicians and patients, as well as to
future new therapies. Such competition could lead to reduced market share for Twyneo, Epsolay and our product candidates and contribute
to downward pressure on the pricing of Twyneo, Epsolay and our product candidates, which could harm our business, financial condition,
operating results and prospects.
Many of the companies, academic research institutions, governmental
agencies and other organizations involved in the field of dermatology have substantially greater financial, technical and human resources
than we do, and may be better equipped to discover, develop, test and obtain regulatory approvals for products that compete with ours.
They may also be better equipped to manufacture, market and sell products. These companies, institutions, agencies and organizations may
develop and introduce products and drug delivery technologies competitive with or superior to ours which could inhibit our market penetration
efforts.
SGT-610 is expected to be the first, if approved, product for the
prevention of new BCCs in Gorlin syndrome patients. We believe that the competition will be limited in the short term after launch.
Twyneo and Epsolay target the well-established acne and rosacea
markets. Twyneo and Epsolay compete with current standard-of-care treatments, whether branded, generic or over-the-counter, as well as
with new treatments to be approved in the future. The current standard-of-care for acne includes topical anti-bacterial drugs such as
benzoyl peroxide that are broadly available over-the-counter, prescription drug products that are based on single retinoid drug products
such as Differin, Atralin, Retin-A, Retin-A Micro, Tazorac and Altreno, fixed-dose combinations of benzoyl peroxide and adapalene, such
as Epiduo and Epiduo Forte, fixed-dose combinations of benzoyl peroxide and clindamycin, such as Duac, Benzaclin, Onexton and Acanya,
and fixed-dose combinations of benzoyl peroxide, clindamycin and adapalene, such as Cabtreo, fixed-dose combinations of tretinoin and
clindamycin such as Ziana and Veltin, topical antiandrogen such as Winlevi and topical antibiotics such as Aczone and Amzeeq. The current
standard of care for rosacea includes Metrogel, Finacea, Soolantra and Zilxi, as well as oral Oracea (doxycycline embedded in a technology
platform). As a fixed-dose combination product candidate, Twyneo may also compete with drug products utilizing other technologies that
can separate two drug substances, such as dual chamber tubes, dual pouches or dual sachets. In addition to these products, our generic
drug product candidates are expected to face direct competition from branded drugs and authorized generics which are prescription drugs
produced by the branded pharmaceutical companies and marketed under a private label, at generic prices.
Marketing, Sales and Distribution
We currently have limited sales, marketing and distribution capabilities.
In June 2021, we entered into two five-year exclusive license agreements with Galderma pursuant to which Galderma has the exclusive
right to, and is responsible for, all U.S. commercial activities for Twyneo and Epsolay. Pursuant to the agreements, we received
$11 million in upfront payments and regulatory approval milestone payments. We are also eligible to receive tiered double-digit royalties
ranging from mid-teen to high-teen percentage of net sales as well as up to $9 million in sales milestone payments. In June 2023,
we entered into exclusive license agreements with Searchlight, pursuant to which, Searchlight has the exclusive right, and is responsible
for all commercial activities for Twyneo and Epsolay in Canada, over a fifteen-year term that is renewable for subsequent five-year periods.
In consideration for the grant of such rights, we will receive up to $11 million in potential upfront payments and regulatory and sales
milestones for both drugs, combined. In addition, we will be entitled to royalty percentages of all Canadian net sales ranging from low-double-digits
to high teens. We expect to collaborate with third parties that have sales and marketing experience in order to commercialize Twyneo and
Epsolay outside of the United States and Canada, and our other investigational product candidates, if approved by the FDA for commercial
sale, in lieu of our own sales force and distribution systems. If we are unable to enter into such arrangements for our product candidates
on acceptable terms or at all, we may not be able to successfully commercialize them. In other markets, we also expect to selectively
pursue strategic collaborations with third parties in order to maximize the commercial potential of our product candidates.
Manufacturing
For the supply of current good manufacturing practice-grade, or
cGMP-grade and clinical trial materials we rely on and expect to continue to rely on third-party CMOs, or on in-house manufacturing capabilities.
As of August 2018, our in-house manufacturing operations have been audited for current good manufacturing, or cGMP, compliance, and were
granted a cGMP certification by the Israel Ministry of Health. This certification allowed us to manufacture Twyneo and its intermediates
to support Phase 3 clinical trials. This cGMP certification expired in 2020, and since no other manufacturing for Phase 3 clinical trials
is planned at the Company during 2021, the Company and the Israel Ministry of Health have mutually concluded that the cGMP certification
will be reassessed and renewed for other products as they reach relevant stages of development. ISO 14001:2015 and ISO 45001:2018 certifications
continue to be maintained and are due for renewal in May 2024. For commercial manufacturing of our products, we intend to rely solely
on CMOs. It is our policy to have multiple or alternative sources where possible for every service and material we use in our products.
Government Regulation
Regulation by governmental authorities in Israel, the United States
and other countries is a significant factor in the development, manufacturing and commercialization of Twyneo, Epsolay and our product
candidates and in our ongoing research and development activities. Our business is subject to extensive government regulation in Israel
for its manufacturing activities involving drug products, drug product intermediates, and drug product active substances to be used in
clinical trials.
Product Approval Process in the United States
Review and approval of drugs
In the United States, pharmaceutical products are subject to
extensive regulation by the FDA. The Federal Food, Drug and Cosmetic Act, or FDCA, and other federal and state statutes and implementing
regulations govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion
and marketing, distribution, post-approval monitoring and reporting, sampling, and import and export of pharmaceutical products. Failure
to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval
may subject an applicant to a variety of administrative or judicial sanctions and enforcement actions brought by the FDA, the Department
of Justice or other governmental entities. Possible sanctions may include the FDA’s refusal to approve pending applications, withdrawal
of an approval, imposition of a clinical hold, issuance of warning letters or untitled letters, product recalls, product seizures, total
or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement and
civil or criminal penalties.
FDA approval of a new drug application is required before any new
unapproved drug or dosage form, can be marketed in the United States. Section 505 of the FDCA describes three types of new drug applications:
(1) an application that contains full reports of investigations of safety and effectiveness (section 505(b)(1)); (2) an application that
contains full reports of investigations of safety and effectiveness but where at least some of the information required for approval comes
from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference (section 505(b)(2));
and (3) an application that contains information to show that the proposed product is identical in active ingredient, dosage form, strength,
route of administration, labeling, quality, performance characteristics, and intended use, among other things, to a previously approved
product (section 505(j)). Section 505(b)(1) and 505(b)(2) new drug applications are referred to as NDAs, and section 505(j) applications
are referred to as ANDAs.
In general, the process required by the FDA prior to marketing
and distributing a new drug, as opposed to a generic drug subject to section 505(j), in the United States usually involves the following:
| • |
completion of pre-clinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s good laboratory
practices, or GLP, requirements or other applicable regulations; |
| • |
submission to the FDA of an investigational new drug application, or IND, which must become effective before human clinical trials
in the United States may begin; |
| • |
approval by an independent institutional review board, or IRB, or ethics committee at each clinical site before each trial may be
initiated; |
| • |
performance of adequate and well-controlled human clinical trials in accordance with good clinical practice, or GCP, requirements
to establish the safety and efficacy of the proposed drug for its intended use; |
| • |
preparation and submission to the FDA of an NDA; |
| • |
satisfactory completion of an FDA advisory committee review, if applicable; |
| • |
satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities at which the product or components
thereof are produced, to assess compliance with current good manufacturing practices, or cGMPs, and to assure that the facilities, methods
and controls are adequate to preserve the drug’s identity, strength, quality and purity; |
| • |
satisfactory completion of FDA audits of clinical trial sites to assure compliance with GCPs and the integrity of the clinical data;
and |
| • |
payment of user fees and FDA review and approval of the NDA. |
Pre-clinical studies
Pre-clinical studies include laboratory evaluation or product chemistry,
formulation and toxicity, as well as animal studies to assess the potential safety and efficacy of the product candidate. Pre-clinical
safety tests must be conducted in compliance with the FDA regulations. The results of the pre-clinical studies, together with manufacturing
information and analytical data, are submitted to the FDA as part of an investigational new drug application, or IND, which must become
effective before clinical trials may commence. An IND is a request for authorization from the FDA to administer an investigational new
drug product to humans. The central focus of an IND submission is on the general investigational plan and the protocol(s) for clinical
studies. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30- day time period,
raises safety concerns or questions about the proposed clinical trial. In such a case, the IND may be placed on clinical hold and the
IND sponsor, and the FDA must resolve any outstanding concerns or questions before the clinical trial can begin. Submission of an IND
therefore may or may not result in FDA authorization to begin a clinical trial. Long-term pre-clinical studies, such as animal tests of
reproductive toxicity and carcinogenicity, may continue after the IND application is submitted.
Clinical trials
Clinical trials involve the administration of an investigational
product to human subjects under the supervision of qualified investigators in accordance with GCP requirements, which include, among other
things, the requirement that all research subjects provide their informed consent in writing before their participation in any clinical
trial. Clinical trials are conducted under written trial protocols detailing, among other things, the objectives of the trial, the parameters
to be used in monitoring safety, and the effectiveness criteria to be evaluated. A protocol for each clinical trial and any subsequent
protocol amendments must be submitted to the local institutional review board, or IRB, and to the FDA as part of the IND.
An IRB representing each institution participating in the clinical
trial must review and approve the plan for any clinical trial before it commences at that institution, and the IRB must conduct continuing
review at least annually. The IRB must review and approve, among other things, the trial protocol information to be provided to trial
subjects. An IRB must operate in compliance with FDA regulations. Some studies also include oversight by an independent group of qualified
experts organized by the clinical study sponsor, known as a data safety monitoring board, which provides authorization for whether or
not a study may move forward at designated check points based on access to certain data from the study and may
halt the clinical trial if it determines that there is an unacceptable safety risk for subjects or other grounds, such as no demonstration
of efficacy. Depending on its charter, this group may determine whether a trial may move forward at designated check points based on access
to certain data from the trial. The FDA or the sponsor may suspend a clinical trial at any time on various grounds, including a finding
that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval
of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or
if the drug has been associated with unexpected serious harm to patients. There are also requirements governing the reporting of
ongoing clinical studies and clinical study results to public registries.
Clinical trials are typically conducted in three sequential phases,
which may overlap or be combined:
| • |
Phase 1: The drug is initially introduced into healthy human subjects or patients with the
target disease or condition and tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and, if possible,
to gain an early indication of its effectiveness and to determine optimal dosage. |
| • |
Phase 2: The drug is administered to a limited patient population to identify possible short-term
adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine
dosage tolerance and optimal dosage. |
| • |
Phase 3: The drug is administered to an expanded patient population, generally at geographically
dispersed clinical trial sites, in well-controlled clinical trials to generate enough data to statistically evaluate the efficacy and
safety of the product for approval, to establish the overall risk-benefit profile of the product, and to provide adequate information
for the labeling of the product. |
In some cases, the FDA may require, or companies may voluntarily
pursue, additional clinical trials after a product is approved to gain more information about the product. These so-called Phase 4 studies,
may be conducted after initial marketing approval, and may be used to gain additional experience from the treatment of patients in the
intended therapeutic indication. In certain instances, the FDA may mandate the performance of Phase 4 clinical trials as a condition of
approval of an NDA.
Concurrent with clinical trials, companies usually complete additional
animal studies and must also develop additional information about the chemistry and physical characteristics of the drug and finalize
a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must
be capable of consistently producing quality batches of the product candidate and, among other things, the manufacturer must develop methods
for testing the identity, strength, quality and purity of the final drug. In addition, appropriate packaging must be selected and tested,
and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its
shelf life.
While the IND is active and before approval, progress reports summarizing
the results of the clinical trials and nonclinical studies performed since the last progress report must be submitted at least annually
to the FDA, and written IND safety reports must be submitted to the FDA and investigators for serious and unexpected suspected adverse
events, findings from other studies suggesting a significant risk to humans exposed to the same or similar drugs, findings from animal
or in vitro testing suggesting a significant risk to humans, and any clinically important increased
incidence of a serious suspected adverse reaction compared to that listed in the protocol or investigator brochure.
In addition, during
the development of a new drug, sponsors are given opportunities to meet with the FDA at certain points. These points may be prior to submission
of an IND, at the end of Phase 2, and before an NDA is submitted. Meetings at other times may be requested. These meetings can provide
an opportunity for the sponsor to share information about the data gathered to date, for the FDA to provide advice, and for the sponsor
and the FDA to reach agreement on the next phase of development. Sponsors typically use the meetings at the end of the Phase 2 trial to
discuss Phase 2 clinical results and present plans for the pivotal Phase 3 clinical trials that they believe will support approval of
the new drug.
ANDA products must be shown to be the similar to, and bioequivalent
to, a reference listed drug, or RLD. A product is considered bioequivalent if there is no significant difference in the rate and extent
to which the active ingredient in the generic product and in the RLD becomes available at the site of drug action when administered at
the same molar dose under similar conditions in an appropriately designed study. Accordingly, an applicant typically compares the systemic
exposure profile of the generic test drug product to that of the RLD at the same regimen and exposure period as the RLD to demonstrate
bioequivalence. For most ANDAs, bioequivalence must be shown in human clinical trials, but in some cases, FDA will accept in vitro data.
Specific requirements are typically outlined by FDA in product-specific bioequivalence guidance.
Submission of an NDA to the FDA
Assuming successful completion of all required testing with all
applicable regulatory requirements, the results of the pre-clinical studies and clinical trials, together with other detailed information,
including information on the manufacture, control and composition of the product, are submitted to the FDA as part of an NDA requesting
approval to market the product candidate for a proposed indication. Under the Prescription Drug User Fee Act, as amended, applicants are
required to pay fees to the FDA for reviewing an NDA. These application user fees, as well as the annual program fees required for approved
products, can be substantial. The NDA application review fee alone can exceed $2.5 million, subject to certain limited deferrals, waivers
and reductions that may be available.
The FDA has 60 days from its receipt of an NDA to determine whether
the application will be accepted for filing based on the agency’s threshold determination that it is sufficiently complete to permit
substantive review. The FDA may request additional information rather than accept an NDA for filing. In this event, the NDA must be resubmitted
with the additional information and is subject to payment of additional user fees. The resubmitted application is also subject to review
before the FDA accepts it for filing. If found complete, the FDA will accept the NDA for filing. Once the submission is accepted for filing,
the FDA begins an in-depth substantive review.
Under the PDUFA, the FDA has agreed to certain performance goals
in the review of NDAs through a two-tiered classification system, Standard Review and Priority Review. An NDA is eligible for Priority
Review if the product candidate is designed to treat serious or life-threatening disease or condition, and if approved by the FDA, would
provide a significant improvement in the treatment, diagnosis or prevention of a serious disease or condition compared to marketed products.
For new molecular entities, or NMEs, such as those typically submitted in 505(b)(1) NDAs, the FDA endeavors to review applications subject
to Standard Review within 10 months 60-day filing date, or within 6 months of the 60-day filing date for Priority Review. For non-NMEs,
such as those typically submitted in 505(b)(2) NDAs, FDA’s goal is to review applications subject to Standard Review within 10 months
of receipt, and those subject to Priority Review within 6 months of receipt. The FDA, however, may not approve a drug within these established
goals, as the review process is often significantly extended by FDA requests for additional information or clarification, and its review
goals are subject to change from time to time.
Before approving an NDA, the FDA inspects the facilities at which
the product is manufactured or facilities that are significantly involved in the product development and distribution process and will
not approve the product unless cGMP compliance is satisfactory. Additionally, the FDA will typically inspect one or more clinical sites
to assure compliance with GCP requirements. The FDA may also refer applications for novel drug products or drug products which present
difficult questions of safety or efficacy to an advisory committee for review, evaluation and recommendation as to whether the application
should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such
recommendations carefully when making decisions.
After the FDA evaluates the NDA and the manufacturing facilities,
it issues either an approval letter or a complete response letter. An approval letter authorizes commercial marketing of the product with
specific prescribing information for specific indications. A complete response letter indicates that the review cycle for an application
is complete and that the application is not ready for approval. A complete response letter generally outlines the deficiencies in the
submission and may require substantial additional testing, or information, in order for the FDA to reconsider the application. Even with
submission of this additional information, the FDA may ultimately decide that an application does not satisfy the regulatory criteria
for approval. If, or when, the deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA
will issue an approval letter.
If a product is approved, the approval will impose limitations
on the indicated uses for which the product may be marketed, may require that warning statements be included in the product labeling,
may require that additional studies or trials be conducted following approval as a condition of the approval, may impose restrictions
and conditions on product distribution, prescribing or dispensing in the form of a risk management plan, or impose other limitations.
For example, as a condition of NDA approval, the FDA may require a risk evaluation and mitigation strategy, or REMS, to ensure that the
benefits of the drug outweigh the potential risks. If the FDA determines a REMS is necessary during review of the application, the drug
sponsor must agree to the REMS plan at the time of approval. A REMS may be required to include various elements, such as a medication
guide or patient package insert, a communication plan to educate healthcare providers of the drug’s risks, limitations on who may
prescribe or dispense the drug, or other elements to assure safe use, such as special training or certification for prescribing or dispensing,
dispensing only under certain circumstances, special monitoring and the use of patient registries. In addition, the REMS must include
a timetable to periodically assess the strategy. The requirement for a REMS can materially affect the potential market and profitability
of a drug.
Further changes to some of the conditions established in an approved
application, including changes in indications, labeling, or manufacturing processes or facilities, require submission and FDA approval
of a new NDA or NDA supplement before the change can be implemented, which may require manufacturers to develop additional data or conduct
additional pre-clinical studies and clinical trials. An NDA supplement for a new indication typically requires clinical data similar to
that in the original application, and the FDA uses the similar procedures in reviewing NDA supplements as it does in reviewing NDAs.
Any drug products receiving FDA approval will be subject to continuing
regulation by the FDA. Certain requirements include, among other things, record-keeping requirements, reporting of adverse experiences
with the product, providing the FDA with updated safety and efficacy information on an annual basis or more frequently for specific events,
product sampling and distribution requirements, complying with certain electronic records and signature requirements and complying with
FDA promotion and advertising requirements. These promotion and advertising requirements include standards for direct-to-consumer advertising,
prohibitions against promoting drugs for uses or patient populations that are not described in the drug’s approved labeling, known
as “off-label use,” and other promotional activities, such as those considered to be false or misleading.
Although physicians may prescribe legally available drugs for off-label
uses, manufacturers may not encourage, market or promote such off-label uses. As a result, “off-label promotion” has formed
the basis for litigation under the Federal False Claims Act, violations of which are subject to significant civil fines and penalties.
In addition, manufacturers of prescription products are required to disclose annually to the Center for Medicaid and Medicare any payments
made to physicians in the United States under the Sunshine Act of 2012. These payments could be in cash or kind, could be for any reason,
and are required to be disclosed even if the payments are not related to the approved product. A failure to fully disclose or not report
in time could lead to penalties of up to $1 million per year.
The manufacturing of any drug products must comply with applicable
FDA manufacturing requirements contained in the FDA’s cGMP regulations. The FDA’s cGMP regulations require, among other things,
quality control and quality assurance, as well as the corresponding maintenance of comprehensive records and documentation. Drug manufacturers
and other entities involved in the manufacture and distribution of approved drugs are also required to register their establishments and
list any products they make with the FDA and to comply with related requirements in certain states. Changes to the manufacturing process
are strictly regulated and often require prior FDA approval before being implemented. FDA regulations also require investigation and correction
of any deviations from cGMP requirements and impose reporting and documentation requirements upon the sponsor and any third-party manufacturers
that the sponsor may decide to use. These entities are further subject to periodic unannounced inspections by the FDA and certain state
agencies for compliance with cGMP and other laws. Accordingly, manufacturers must continue to expend time, money and effort in the area
of production and quality control to maintain cGMP compliance.
Discovery of problems with a product after approval may result
in serious and extensive restrictions on a product, manufacturer or holder of an approved NDA, as well as lead to potential market disruptions.
These restrictions may include recalls, suspension of a product until the FDA is assured that quality standards can be met, and continuing
oversight of manufacturing by the FDA under a “consent decree,” which frequently includes the imposition of costs and continuing
inspections over a period of many years, as well as possible withdrawal of the product from the market. In addition, changes to the manufacturing
process generally require prior FDA approval before being implemented. Other types of changes to the approved product, such as adding
new indications and additional labeling claims, are also subject to further FDA review and approval. There also are continuing, annual
program user fee requirements for any approved products, as well as new application fees for supplemental applications with clinical data.
The FDA also may require post-marketing testing, or Phase IV testing,
as well as surveillance to monitor the effects of an approved product or place conditions on an approval that could otherwise restrict
the distribution or use of our product candidates.
Once approval is granted, the FDA may withdraw the approval if
compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later
discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing
processes, or failure to comply with regulatory requirements, may result in mandatory revisions to the approved labeling to add new safety
information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions
under a REMS program. Other potential consequences include, among other things:
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restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;
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fines, warning letters or holds on post-approval clinical trials; |
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refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product approvals;
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product seizure or detention, or refusal to permit the import or export of products; or |
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injunctions or the imposition of civil or criminal penalties. |
Pediatric trials and exclusivity
Even when not pursuing a pediatric indication, under the Pediatric
Research Equity Act of 2003, an NDA or supplement thereto must contain data that is adequate to assess the safety and effectiveness of
the drug product for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each
pediatric subpopulation for which the product is safe and effective. Sponsors must also submit pediatric study plans prior to the assessment
data. Those plans must contain an outline of the proposed pediatric trials the applicant plans to conduct, including trial objectives
and design, any deferral or waiver requests, and other information required by the statute. The applicant, the FDA, and the FDA’s
internal review committee must then review the information submitted, consult with each other, and agree upon a final plan. The FDA or
the applicant may request an amendment to the plan at any time.
The FDA may also, on its own initiative or at the request of the
applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full
or partial waivers from the pediatric data requirements.
Separately, in the event the FDA makes a written request for pediatric
data relating to a drug product, an NDA sponsor who submits such data may be entitled to pediatric exclusivity. Pediatric exclusivity
is a type of non-patent marketing exclusivity in the United States and, if granted, provides for the attachment of an additional six months
of marketing protection to the term of any existing non-patent exclusivity.
The Hatch-Waxman Amendments
ANDA Approval Process
The Hatch-Waxman Amendments established abbreviated FDA approval
procedures for drugs that are shown to be equivalent to proprietary drugs previously approved by the FDA through the NDA process. Approval
to market and distribute these drugs is obtained by submitting an ANDA to the FDA. An ANDA is a comprehensive submission that contains,
among other things, data and information pertaining to the active pharmaceutical ingredient, drug product formulation, specifications
and stability of the generic drug, as well as analytical methods, manufacturing process validation data, and quality control procedures.
Premarket applications for generic drugs are termed abbreviated because they generally do not include pre-clinical and clinical data to
demonstrate safety and effectiveness. Instead, a generic applicant must demonstrate that its product is bioequivalent to the innovator
drug. In certain situations, an applicant may obtain ANDA approval of a generic product with a strength or dosage form that differs from
a referenced innovator drug pursuant to the filing and approval of an ANDA Suitability Petition. The FDA will approve the generic product
as suitable for an ANDA application if it finds that the generic product does not raise new questions of safety and effectiveness as compared
to the innovator product. A product is not eligible for ANDA approval if the FDA determines that it is not bioequivalent to the referenced
innovator drug, if it is intended for a different use, or if it is not subject to an approved Suitability Petition. However, such a product
might be approved under an NDA, with supportive data from clinical trials.
505(b)(2) NDAs
Section 505(b)(2) was enacted as part of the Hatch-Waxman Amendments
and permits the filing of an NDA where at least some of the information required for approval comes from studies or trials not conducted
by or for the applicant and for which the applicant has not obtained a right of reference. Section 505(b)(2) typically serves as an alternative
path to FDA approval for modifications to formulations or uses of products previously approved by the FDA. If the 505(b)(2) applicant
can establish that reliance on the FDA’s previous findings of safety and effectiveness is scientifically appropriate, it may eliminate
the need to conduct certain pre-clinical studies or clinical trials for the new product. The FDA may also require companies to perform
additional studies or measurements, including clinical trials, to support the change from the approved branded reference drug. The FDA
may then approve the new product candidate for all, or some, of the labeled indications for which the branded reference drug has been
approved, as well as for any new indication sought by the 505(b)(2) applicant.
Orange Book Listing
In seeking approval for a drug through an NDA, including a 505(b)(1)
and 505(b)(2) NDA, applicants are required to list with the FDA certain patents whose claims cover the applicant’s product or method
of using the product. Upon approval of an NDA, each of the patents listed in the application for the drug is then published in the FDA’s
publication of Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the “Orange Book.” Any applicant
who submits an ANDA seeking approval of a generic equivalent of a drug listed in the Orange Book or a Section 505(b)(2) NDA referencing
a drug listed in the Orange Book must certify to the FDA (1) that no patent information on the drug product that is the subject of the
application has been submitted to the FDA; (2) that such patent has expired; (3) the date on which such patent expires; or (4) that such
patent is invalid or will not be infringed upon by the manufacture, use, or sale of the drug product for which the application is submitted.
This last certification is known as a Paragraph IV certification. The applicant may also elect to submit a “section viii”
statement certifying that its proposed label does not contain (or carves out) any language regarding a patented method-of-use rather than
certify to a listed method-of-use patent.
If the applicant does not challenge one or more listed patents
through a Paragraph IV certification, the FDA will not approve the ANDA or Section 505(b)(2) NDA until all the listed patents claiming
the referenced product have expired. Further, the FDA will also not approve, as applicable, an ANDA or Section 505(b)(2) NDA until any
non-patent exclusivity, as described in greater detail below, has expired.
If the ANDA or Section 505(b)(2) NDA applicant has provided a Paragraph
IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the owner of the referenced NDA
for the previously approved product and relevant patent holders within 20 days after the ANDA or Section 505(b)(2) NDA has been accepted
for filing by the FDA. The NDA and patent holders may then initiate a patent infringement suit against the ANDA or Section 505(b)(2) applicant.
Under the FDCA, the filing of a patent infringement lawsuit within 45 days of receipt of the notification regarding a Paragraph IV certification
automatically prevents the FDA from approving the ANDA or Section 505(b)(2) NDA until the earliest to occur of 30 months beginning on
the date the patent holder receives notice, expiration of the patent, settlement of the lawsuit, or until a court deems the patent unenforceable,
invalid or not infringed. Even if a patent infringement claim is not brought within the 45-day period, a patent infringement claim may
be brought under traditional patent law, but it does not invoke the 30-month stay.
Moreover, in cases where an ANDA or Section 505(b)(2) application
containing a Paragraph IV certification is submitted after the fourth year of a previously approved drug’s five-year NCE exclusivity
period, as described more fully below, and the patent holder brings suit within 45 days of notice of the Paragraph IV certification, the
30-month period is automatically extended to prevent approval of the Section 505(b)(2) application until the date that is seven and one-half
years after approval of the previously approved reference product that has the five-year NCE exclusivity. The court also has the ability
to shorten or lengthen either the 30-month or the seven and one-half year period if either party is found not to be reasonably cooperating
in expediting the litigation.
Further, although applications submitted in a Section 505(b)(1)
NDA are not subject to the same patent certification requirements as Section 505(b)(2) applications or ANDAs, and are not associated with
litigation under the Hatch-Waxman Act, applicants may still face non-Hatch-Waxman patent litigation for products developed through the
Section 505(b)(1) pathway.
Non-Patent Exclusivity
In addition to patent exclusivity, NDA holders may be entitled
to a period of non-patent exclusivity, during which the FDA cannot approve an ANDA or 505(b)(2) application that relies on the listed
drug. For example, a pharmaceutical manufacturer may obtain five years of non-patent exclusivity upon NDA approval of a new chemical entity,
or NCE, which is a drug that contains an active moiety that has not been approved by FDA in any other NDA. An “active moiety”
is defined as the molecule or ion responsible for the drug substance’s physiological or pharmacologic action. During the five year
exclusivity period, the FDA cannot accept for filing any ANDA seeking approval of a generic version of that drug or any 505(b)(2) NDA
for the same active moiety and that relies on the FDA’s findings regarding that drug, except that FDA may accept an application
for filing after four years if the ANDA or 505(b)(2) applicant makes a Paragraph IV certification.
Another form of non-patent exclusivity is clinical investigation
exclusivity. A drug, including one approved under Section 505(b)(2), may obtain a three-year period of exclusivity for a particular condition
of approval, or change to a marketed product, such as a new formulation for a previously approved product, if one or more new clinical
investigations (other than bioavailability or bioequivalence studies) was essential to the approval of the application and was conducted
or sponsored by the applicant. Should this occur, the FDA would be precluded from approving any ANDA or 505(b)(2) application for the
protected modification until after that three-year exclusivity period has run. However, unlike NCE exclusivity, the FDA can accept an
application and begin the review process during the exclusivity period.
Review and Approval of Drug Products
Outside the United States
To market any product outside of the United States, we would need
to comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy and governing, among other
things, manufacturing, clinical trials, marketing authorization, commercial sales and distribution of our products. The foreign regulatory
approval process includes all of the risks associated with FDA approval set forth above, as well as additional country-specific regulation.
Whether or not we obtain FDA approval for a product candidate, we must obtain approval of the product by the comparable regulatory authorities
of foreign countries before commencing clinical trials or marketing in those countries. Approval by one regulatory authority does not
ensure approval by regulatory authorities in other jurisdictions. The approval process varies from country to country, and the time may
be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing,
pricing, promotion and reimbursement vary greatly from country to country.
Non-clinical Studies and Clinical Trials in the EU
Similarly to the United States, the various phases of non-clinical
and clinical research in the EU are subject to significant regulatory controls.
Non-clinical studies are performed to demonstrate the health or
environmental safety of new chemical or biological substances. Non-clinical (pharmaco-toxicological) studies must be conducted in compliance
with the principles of good laboratory practice, or GLP, as set forth in EU Directive 2004/10/EC (unless otherwise justified for certain
particular medicinal products – e.g., radio-pharmaceutical precursors for radio-labeling purposes). In particular, non-clinical
studies, both in vitro and in vivo, must be planned, performed, monitored, recorded, reported and archived in accordance with the GLP
principles, which define a set of rules and criteria for a quality system for the organizational process and the conditions for non-clinical
studies. These GLP standards reflect the Organization for Economic Co-operation and Development requirements.
Clinical trials of medicinal products in the EU must be conducted
in accordance with EU and national regulations and the International Council for Harmonization of Technical Requirements for Pharmaceuticals
for Human Use, or ICH, guidelines on Good Clinical Practices, or GCP, as well as the applicable regulatory requirements and the ethical
principles that have their origin in the Declaration of Helsinki. If the sponsor of the clinical trial is not established within the EU,
it must appoint an EU entity to act as its legal representative. The sponsor must take out a clinical trial insurance policy, and in most
EU member states, the sponsor is liable to provide ‘no fault’ compensation to any study subject injured in the clinical trial.
The regulatory landscape related to clinical trials in the EU has
been subject to recent changes. The EU Clinical Trials Regulation, or CTR, which was adopted in April 2014 and repeals the EU Clinical
Trials Directive, became applicable on January 31, 2022. Unlike directives, the CTR is directly applicable in all EU member states without
the need for member states to further implement it into national law. The CTR notably harmonizes the assessment and supervision processes
for clinical trials throughout the EU via a Clinical Trials Information System, which contains a centralized EU portal and database.
While the EU Clinical Trials Directive required a separate clinical
trial application, or CTA, to be submitted in each member state in which the clinical trial takes place, to both the competent national
health authority and an independent ethics committee, much like the FDA and IRB respectively, the CTR introduces a centralized process
and only requires the submission of a single application for multi-center trials. The CTR allows sponsors to make a single submission
to both the competent authority and an ethics committee in each member state, leading to a single decision per member state. The CTA must
include, among other things, a copy of the trial protocol and an investigational medicinal product dossier containing information about
the manufacture and quality of the medicinal product under investigation. The assessment procedure of the CTA has been harmonized as well,
including a joint assessment by all member states concerned, and a separate assessment by each member state with respect to specific requirements
related to its own territory, including ethics rules. Each member state’s decision is communicated to the sponsor via the centralized
EU portal. Once the CTA is approved, clinical study development may proceed.
The CTR foresees a three-year transition period. The extent to
which ongoing and new clinical trials will be governed by the CTR varies. Clinical trials for which an application was submitted (i) prior
to January 31, 2022 under the EU Clinical Trials Directive, or (ii) between January 31, 2022 and January 31, 2023 and for which the sponsor
has opted for the application of the EU Clinical Trials Directive remain governed by said Directive until January 31, 2025. After this
date, all clinical trials (including those which are ongoing) will become subject to the provisions of the CTR.
Medicines used in clinical trials must be manufactured in accordance with Good Manufacturing Practice,
or GMP. Other national and EU-wide regulatory requirements may also apply.
Marketing Authorization
In order to market our product candidates in the EU and many
other foreign jurisdictions, we must obtain separate regulatory approvals. More concretely, in the EU, medicinal product candidates can
only be commercialized after obtaining a marketing authorization, or MA. To obtain regulatory approval of a product candidate under EU
regulatory systems, we must submit a MA application, or MAA. The process for doing this depends, among other things, on the nature of
the medicinal product. There are two types of MAs:
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“Centralized MAs” are issued by the EC through the centralized procedure based on the opinion of the Committee
for Medicinal Products for Human Use, or CHMP, of the European Medicines Agency, or EMA, and are valid throughout the EU. The centralized
procedure is compulsory for certain types of medicinal products such as (i) medicinal products derived from biotechnological processes,
(ii) designated orphan medicinal products, (iii) advanced therapy medicinal products, or ATMPs (such as gene therapy, somatic cell therapy
and tissue engineered products) and (iv) medicinal products containing a new active substance indicated for the treatment of certain diseases,
such as HIV/AIDS, cancer, diabetes, neurodegenerative diseases or autoimmune diseases and other immune dysfunctions, and viral diseases.
The centralized procedure is optional for products containing a new active substance not yet authorized in the EU, or for products that
constitute a significant therapeutic, scientific or technical innovation or which are in the interest of public health in the EU.
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“National MAs” are issued by the competent authorities of the EU member states, only cover their respective territory,
and are available for product candidates not falling within the mandatory scope of the centralized procedure. Where a product has already
been authorized for marketing in an EU member state, this national MA can be recognized in another member state through the mutual recognition
procedure. If the product has not received a national MA in any member state at the time of application, it can be approved simultaneously
in various member states through the decentralized procedure. Under the decentralized procedure an identical dossier is submitted to the
competent authorities of each of the member states in which the MA is sought, one of which is selected by the applicant as the reference
member state. |
Under the centralized procedure the maximum timeframe for the evaluation
of an MAA by the EMA is 210 days, excluding clock stops.
Under the above described procedures, in order to grant the MA,
the EMA or the competent authorities of the EU member states make an assessment of the risk benefit balance of the product on the basis
of scientific criteria concerning its quality, safety and efficacy. MAs have an initial duration of five years. After these five years,
the authorization may be renewed on the basis of a reevaluation of the risk-benefit balance.
Data and Marketing Exclusivity
In the EU, new products authorized for marketing (i.e., reference
products) generally receive eight years of data exclusivity and an additional two years of market exclusivity upon MA. If granted, the
data exclusivity period prevents generic and biosimilar applicants from relying on the preclinical and clinical trial data contained in
the dossier of the reference product when applying for a generic or biosimilar MA in the EU during a period of eight years from the date
on which the reference product was first authorized in the EU. The market exclusivity period prevents a successful generic or biosimilar
applicant from commercializing its product in the EU until ten years have elapsed from the initial MA of the reference product in the
EU. The overall ten-year market exclusivity period can be extended to a maximum of eleven years if, during the first eight years of those
ten years, the MA holder obtains an authorization for one or more new therapeutic indications, which, during the scientific evaluation
prior to their authorization, are held to bring a significant clinical benefit in comparison with existing therapies. However, there is
no guarantee that a product will be considered by the EU’s regulatory authorities to be a new chemical or biological entity, and
products may not qualify for data exclusivity.
Orphan Medicinal Products
The criteria for designating an “orphan medicinal product”
in the EU are similar in principle to those in the United States. A medicinal product can be designated as an orphan if its sponsor can
establish that: (1) the product is intended for the diagnosis, prevention or treatment of a life threatening or chronically debilitating
condition (2) either (a) such condition affects not more than five in 10,000 persons in the EU when the application is made, or (b) the
product, without the benefits derived from the orphan status, would not generate sufficient return in the EU to justify the necessary
investment; and (3) there exists no satisfactory method of diagnosis, prevention or treatment of the condition in question that has been
authorized for marketing in the EU or, if such method exists, the product will be of significant benefit to those affected by that condition.
Orphan designation must be requested before submitting an MAA.
An EU orphan designation entitles a party to incentives such as reduction of fees or fee waivers, protocol assistance, and access to the
centralized procedure. Upon grant of a MA, orphan medicinal products are entitled to ten years of market exclusivity for the approved
indication, which means that the competent authorities cannot accept another MAA, or grant a MA, or accept an application to extend a
MA for a similar medicinal product for the same indication for a period of ten years. The period of market exclusivity is extended by
two years for orphan medicinal products that have also complied with an agreed pediatric investigation plan, or PIP. No extension to any
supplementary protection certificate can be granted on the basis of pediatric studies for orphan indications. Orphan designation does
not convey any advantage in, or shorten the duration of, the regulatory review and approval process.
The orphan exclusivity period may be reduced to six years if, at
the end of the fifth year, it is established that the product no longer meets the criteria for which it received orphan destination, including
where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity or where the prevalence
of the condition has increased above the threshold. Orphan designation must be requested before submitting an MAA. Additionally, MA may
be granted to a similar product for the same indication at any time if (i) the second applicant can establish that its product, although
similar, is safer, more effective or otherwise clinically superior; (ii) the applicant consents to a second orphan medicinal product application;
or (iii) the applicant cannot supply enough orphan medicinal product.
Pediatric Development
In the EU, MAAs for new medicinal products have to include the
results of studies conducted in the pediatric population, in compliance with a PIP agreed with the EMA’s Pediatric Committee, or
PDCO. The PIP sets out the timing and measures proposed to generate data to support a pediatric indication of the drug for which MA is
being sought. The PDCO can grant a deferral of the obligation to implement some or all of the measures of the PIP until there are sufficient
data to demonstrate the efficacy and safety of the product in adults. Further, the obligation to provide pediatric clinical trial data
can be waived by the PDCO when these data is not needed or appropriate because the product is likely to be ineffective or unsafe in children,
the disease or condition for which the product is intended occurs only in adult populations, or when the product does not represent a
significant therapeutic benefit over existing treatments for pediatric patients. Once the MA is obtained in all the EU member states and
study results are included in the product information, even when negative, the product is eligible for six months’ supplementary
protection certificate extension (if any is in effect at the time of approval) or, in the case of orphan pharmaceutical products, a two
year extension of the orphan market exclusivity is granted.
The aforementioned EU rules are generally applicable in the European
Economic Area, or EEA, which consists of the 27 EU member states plus Norway, Liechtenstein and Iceland.
Failure to comply with EU and member state laws that apply to the
conduct of clinical trials, manufacturing approval, MA of medicinal products and marketing of such products, both before and after grant
of the MA, manufacturing of pharmaceutical products, statutory health insurance, bribery and anti-corruption or with other applicable
regulatory requirements may result in administrative, civil or criminal penalties. These penalties could include delays or refusal to
authorize the conduct of clinical trials, or to grant MA, product withdrawals and recalls, product seizures, suspension, withdrawal or
variation of the MA, total or partial suspension of production, distribution, manufacturing or clinical trials, operating restrictions,
injunctions, suspension of licenses, fines and criminal penalties.
Pharmaceutical Coverage, Pricing and Reimbursement
Significant uncertainty exists as to the coverage and reimbursement
status of Twyneo, Epsolay, and any product candidates for which we obtain regulatory approval. In the United States and other markets,
sales of any product candidates for which we receive regulatory approval for commercial sale will depend in part on the availability of
coverage and reimbursement from third-party payors. Third-party payors include government health administrative authorities, managed care
providers, private health insurers and other organizations. The process for determining whether a payor will provide coverage for a drug
product may be separate from the process for setting the price or reimbursement rate that the payor will pay for the drug product. Third-party
payors may limit coverage to specific drug products on an approved list, or formulary, which might not include all of the FDA-approved
drug products for a particular indication.
Third-party payors are increasingly challenging the price and
examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy. We
or Galderma may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness
of Epsolay, Twyneo or our product candidates once approved. For example, some third-party payors may not consider Epsolay, Twyneo and
other product candidates once approved medically necessary or cost-effective and may decide to impose coverage or other utilization limits
on their use. A payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will
be approved. Adequate third-party payor reimbursement may not be available to enable us to maintain price levels sufficient to realize
an appropriate return on our investment in product development.
In international markets, reimbursement and healthcare payment
systems vary significantly by country, and many countries have instituted price ceilings on specific products and therapies. In the EU,
pricing and reimbursement schemes vary widely from country to country. Some countries operate positive and negative list systems under
which products may be marketed only after a reimbursement price has been agreed to by the government. To obtain reimbursement or pricing
approval, some countries may require the completion of additional studies or trials that compare the cost-effectiveness of a particular
product candidate to currently available therapies. For example, the EU provides options for its member states to restrict the range of
drug products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products
for human use. EU member states may approve a specific price or level of reimbursement for a pharmaceutical product, or it may instead
adopt a system of direct or indirect controls on the profitability of the company placing the pharmaceutical product on the market, including
volume-based arrangements, caps and reference pricing mechanisms. Other member states allow companies to fix their own prices for drug
products but monitor and control company profits. There can be no assurance that any country that has price controls or reimbursement
limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products. The downward
pressure on health care costs in general, particularly prescription drugs, has become intense. As a result, there are increasingly high
barriers to entry for new products. In addition, in some countries, cross-border imports from low-priced markets exert competitive pressure
that may reduce pricing within a country. Any country that has price controls or reimbursement limitations for drug products may not allow
favorable reimbursement and pricing arrangements.
Healthcare Reform
In March 2010, the President of the United States signed the
ACA, one of the most significant healthcare reform measures in decades. The ACA substantially changed the way healthcare is financed by
both governmental and private insurers, and significantly impacted the pharmaceutical industry. The ACA contained a number of provisions,
including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse, which impacted existing
government healthcare programs and will result in the development of new programs, including Medicare payment for performance initiatives
and improvements to the physician quality reporting system and feedback program. Additionally, the ACA increased the minimum level
of rebates payable by manufacturers of brand-name drugs from 15.1% to 23.1%, and imposed a non-deductible annual fee on pharmaceutical
manufacturers or importers who sell “branded prescription drugs” to specified federal government programs.
Since its enactment, there have been judicial, executive
and Congressional challenges to certain aspects of the ACA. On June 17, 2021, the U.S. Supreme Court dismissed the most recent judicial
challenge to the ACA without specifically ruling on the constitutionality of the ACA.
In addition, other legislative changes have been proposed and adopted
since the Affordable Care Act was enacted. For example, the Budget Control Act of 2011 resulted in aggregate reductions to Medicare payments
to providers, which went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will stay in
effect through 2031, with the exception of a temporary suspension from May 1, 2020 through March 31, 2022. Additionally, in January 2013,
the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several
providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.
On March 11, 2021, the American Rescue Plan Act of 2021 was signed into law, which eliminated the statutory Medicaid drug rebate
cap beginning January 1, 2024.
The cost of prescription pharmaceuticals in the United States has
also been the subject of considerable discussion. There have been several Congressional inquiries, as well as proposed and enacted legislation
designed, among other things, to bring more transparency to product pricing, review the relationship between pricing and manufacturer
patient programs and reform government program reimbursement methodologies for pharmaceutical products. Most significantly, on August
16, 2022, President Biden signed the IRA into law. Among other things, the IRA requires manufacturers of certain drugs to engage in price
negotiations with Medicare (beginning in 2026) with prices that can be negotiated subject to a cap, imposes rebates under Medicare Part
B and Medicare Part D to penalize price increases that outpace inflation (first due in 2023), and replaces the Part D coverage gap discount
program with a new discounting program (beginning in 2025). On August 29, 2023, HHS announced the list of the first ten drugs that
will be subject to price negotiations, although the Medicare drug price negotiation program is currently subject to legal challenges.
Further, the Biden administration released an additional executive order on October 14, 2022, directing HHS to submit a report within
90 days on how the Center for Medicare and Medicaid Innovation can be further leveraged to test new models for lowering drug costs for
Medicare and Medicaid beneficiaries. In response to the executive order, on February 14, 2023, HHS released a report outlining three new
models for testing by the CMS Innovation Center which will be evaluated on their ability to lower the cost of drugs, promote accessibility
and improve quality of care. Individual states in the United States have also become increasingly active in passing legislation and implementing
regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions
on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation
from other countries and bulk purchasing. We expect that additional state and federal healthcare initiatives will be adopted in the future,
any of which could impact the coverage and reimbursement for drugs, including Twyneo Epsolay and our other product candidates, once approved.
Similar political, economic and regulatory developments are
occurring in the EU and may affect the ability of pharmaceutical companies to profitably commercialize their products. In addition to
continuing pressure on prices and cost containment measures, legislative developments at the EU or member state level may result in significant
additional requirements or obstacles. The delivery of healthcare in the EU, including the establishment and operation of health services
and the pricing and reimbursement of medicines, is almost exclusively a matter for national, rather than EU, law and policy. National
governments and health service providers have different priorities and approaches to the delivery of health care and the pricing and reimbursement
of products in that context. In general, however, the healthcare budgetary constraints in most EU member states have resulted in restrictions
on the pricing and reimbursement of medicines by relevant health service providers. Coupled with ever-increasing EU and national regulatory
burdens on those wishing to develop and market products, this could restrict or regulate post-approval activities and affect the ability
of pharmaceutical companies to commercialize their products. In international markets, reimbursement and healthcare payment systems vary
significantly by country, and many countries have instituted price ceilings on specific products and therapies.
On December 13, 2021, Regulation No 2021/2282 on Health Technology
Assessment, or HTA, amending Directive 2011/24/EU, was adopted. While the Regulation entered into force in January 2022, it will only
begin to apply from January 2025 onwards, with preparatory and implementation-related steps to take place in the interim. Once applicable,
it will have a phased implementation depending on the concerned products. The Regulation intends to boost cooperation among EU member
states in assessing health technologies, including new medicinal products, and provide the basis for cooperation at the EU level for joint
clinical assessments in these areas. It will permit EU member states to use common HTA tools, methodologies, and procedures across the
EU, working together in four main areas, including joint clinical assessment of the innovative health technologies with the highest potential
impact for patients, joint scientific consultations whereby developers can seek advice from HTA authorities, identification of emerging
health technologies to identify promising technologies early, and continuing voluntary cooperation in other areas. Individual EU member
states will continue to be responsible for assessing non-clinical (e.g., economic, social, ethical) aspects of health technology, and
making decisions on pricing and reimbursement.
Healthcare Laws and Regulations
Our current and future business operations may be subject to
additional healthcare regulation and enforcement by the federal government and by authorities in the states and foreign jurisdictions
in which we conduct our business. Such laws include, without limitation, state and federal anti-kickback, fraud and abuse, false claims,
price reporting and physician and other healthcare provider payment transparency laws. Some of our pre-commercial activities are subject
to some of these laws.
The federal Anti-Kickback Statute makes it illegal for any person
or entity, including a prescription drug manufacturer or a party acting on its behalf to knowingly and willfully, directly or indirectly
solicit, receive, offer, or pay any remuneration that is intended to induce the referral of business, including the purchase, order, lease
of any good, facility, item or service for which payment may be made under a federal healthcare program, such as Medicare or Medicaid.
The term “remuneration” has been broadly interpreted to include anything of value. The Anti-Kickback Statute has been interpreted
to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, formulary managers, and beneficiaries
on the other. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution,
the exceptions and safe harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce prescribing,
purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of
the requirements of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under
the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review
of all its facts and circumstances. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose
of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the Anti-Kickback Statute has
been violated. In addition, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it
in order to have committed a violation.
The federal civil False Claims Act prohibits, among other things,
any person or entity from knowingly presenting, or causing to be presented, for payment to, or approval by, federal programs, including
Medicare and Medicaid, claims for items or services, including drugs, that are false or fraudulent or not provided as claimed, knowingly
making, using or causing to be made or used, a false record or statement material to a false or fraudulent claim, or from knowingly making
a false statement to avoid, decrease or conceal an obligation to pay money to a federal program. Persons and entities can be held liable
under these laws if they are deemed to “cause” the submission of false or fraudulent claims by, for example, providing inaccurate
billing or coding information to customers or promoting a product off-label. In addition, our future activities relating to the reporting
of wholesaler or estimated retail prices for our products or product candidates, once approved, the reporting of prices used to calculate
Medicaid rebate information and other information affecting federal, state and third-party reimbursement for our products and product
candidates, once approved, and the sale and marketing of our products and product candidates, once approved, are subject to scrutiny under
this law. Moreover, a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a
false or fraudulent claim for purposes of the federal civil False Claims Act.
HIPAA created new federal criminal statutes that prohibit among
other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including
private third-party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a
criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making
any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items
or services. Like the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific
intent to violate it in order to have committed a violation.
The civil monetary penalties statute imposes penalties against
any person or entity that, among other things, is determined to have presented or caused to be presented a claim to a federal health program
that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.
The federal Physician Payment Sunshine Act requires certain manufacturers
of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health
Insurance Program (with certain exceptions) to report annually to the government information about covered manufacturers for certain
payments and other “transfers of value” provided to physicians (defined to include doctors, dentists, optometrists, podiatrists
and chiropractors), certain non-physician practitioners (nurse practitioners, certified nurse anesthetists, physician assistants,
clinical nurse specialists, anesthesiology assistants and certified nurse midwives), and teaching hospitals, as well as certain ownership
and investment interests held by physicians as defined by statute and their immediate family members. Covered manufacturers are required
to submit reports to the government by the 90th day of
each calendar year.
Also, many states have similar fraud and abuse statutes or regulations
that may be broader in scope and may apply regardless of payor, in addition to items and services reimbursed under Medicaid and other
state programs. Additionally, to the extent that any of our products or product candidates, once approved, are sold in a foreign country,
we may be subject to similar foreign laws and regulations, which may also be broader in scope than the provisions described above. These
laws and regulations may differ from one another in significant ways, thus further complicating compliance efforts. For instance, in the
EU, many EU member states have adopted specific anti-gift statutes that further limit commercial practices for medicinal products, in
particular vis-à-vis healthcare professionals and organizations. Additionally, there has been a recent trend of increased regulation
of payments and transfers of value provided to healthcare professionals or entities and many EU member states have adopted national “Sunshine
Acts” which impose reporting and transparency requirements (often on an annual basis), similar to the requirements in the United
States, on pharmaceutical companies. Certain countries also mandate implementation of compliance programs, or require reporting of marketing
expenditures and pricing information.
If our operations are found to be in violation of any of
such laws or any other governmental regulations that apply to us, we may be subject to penalties, including, without limitation, administrative,
civil and criminal penalties, damages, fines, disgorgement, contractual damages, reputational harm, diminished profits and future earnings,
the curtailment or restructuring of our operations, exclusion from participation in federal and state healthcare programs or similar programs
in other countries or jurisdictions, integrity oversight and reporting obligations, and imprisonment, any of which could adversely affect
our ability to operate our business and our financial results.
Data Privacy and Security Laws
Numerous state, federal and foreign laws, regulations and standards
govern the collection, use, access to, confidentiality and security of health-related and other personal information and could apply now
or in the future to our operations or the operations of our partners. In the United States, numerous federal and state laws and regulations,
including data breach notification laws, health information privacy and security laws and consumer protection laws and regulations govern
the collection, use, disclosure, and protection of health-related and other personal information. In addition, certain foreign laws govern
the privacy and security of personal data, including health-related data. Privacy and security laws, regulations, and other obligations
are constantly evolving, may conflict with each other to complicate compliance efforts, and can result in investigations, proceedings,
or actions that lead to significant civil and/or criminal penalties and restrictions on data processing.
Innovation
Authority We have received royalty-bearing grants from the IIA, for the financing of a portion of our research and
development expenditures in Israel.
Under the Innovation Law and the IIA’s rules and guidelines,
recipients of grants, or Recipient Company(ies), are subject to certain obligations and restrictions with respect to the use of their
IIA Funded Know-How, including, the following:
| • |
Royalty Payment Obligation. In general, the Recipient Company may be obligated to pay the
IIA royalties from any income deriving from the products (and related know-how and services), whether received by the grant recipient
or any affiliated entity, developed (in all or in part), directly or indirectly, as a result of, an Approved Program, or deriving therefrom,
at rates which are determined under the IIA’s rules and guidelines (currently a yearly rate of between 3% to 5% on sales of products
or services developed under the Approved Programs, depending on the type of the Recipient Company — i.e., whether it
is a “Small Company,” or a “Large Company” as such terms are defined in the IIA’s rules and guidelines),
up to the aggregate amount of the total grants received by the IIA, plus Annual Interest for a File (as such term is defined in the IIA’s
rules and guidelines). |
Reporting Obligations. The
Recipient Company is subject to certain reporting obligations (such as, periodic reports regarding the progress of the research and development
activities under the Approved Program and the related research expenses, and regarding the scope of sales of the Recipient Company’s
products). In addition, any direct change in control of a Recipient Company must be notified to the IIA. In the event that a non-Israeli
entity or a non-Israeli citizen or resident person becomes an “Interested Party” (as such term is defined in the Israeli Securities
Law, 5728-1968) in the Recipient Company, notification to the IIA is required, accompanied by a written undertaking (in the form available
on the IIA's website) by such party to be bound by the Innovation Law and by the terms of the Approved Program;
| • |
Local Manufacturing Obligation. Products developed using the IIA grants must, as a general
matter, be manufactured in Israel. The transfer of manufacturing capacity outside of Israel in a manner that exceeds the manufacturing
capacity that was declared in the Recipient Company's original IIA grant application is subject to prior written approval from the IIA
(except for the transfer of less than 10% of the manufacturing capacity in the aggregate, which event requires only a notice to the IIA,
which shall be provided in writing prior to the transfer of such manufacturing rights abroad, while the IIA has a right to deny such transfer
within 30 days following the receipt of such notice). In general, the transfer of manufacturing capacity outside of Israel may be subject
an increase in the royalties' cap (inter alia, depending on the manufacturing volume that is performed
outside of Israel) and such transfer will be subject to payment of royalties in accelerated rate; and |
| • |
IIA Funded Know-How transfer limitation. Under
the IIA’s rules and guidelines, a Recipient Company is prohibited from transferring the IIA Funded Know-How outside of Israel except
with the approval of the Research Committee and in certain circumstances, subject to certain payments to the IIA calculated according
to formulas provided under the IIA’s rules and guidelines (which are capped to amounts specified under such rules and guidelines,
generally up to 6 time the grants received plus Annual Interest as such term is defined under the rules, or A Redemption Fee). For
calculating the Redemption Fee which shall be paid to the IIA in the event of a transfer of IIA Funded Know-How outside of Israel, inter
alia, the following factors will be taken into account: the scope of the IIA support received, the royalties that have already paid to
the IIA, the amount of time that has lapsed since the Recipient Company has finalized the IIA Approved Program, the sale price and the
form of transaction. A transfer for the purpose of the Innovation Law and the IIA’s rules means an actual sale of the IIA-Funded
Know-How, or any other transaction which in essence constitutes a transfer of such know-how (such as providing an exclusive license to
a foreign entity for R&D purposes, which precludes the Recipient Company from further using such IIA Funded Know-How). A mere license
solely to market products resulting from the IIA Funded Know-How would not be deemed a transfer for the purpose of the Innovation Law
and the IIA’s rules. Upon payment of the Redemption Fee, the IIA Funded Know-How and the manufacturing rights of the products developed
using such IIA funding cease to be subject to the Innovation Law and the IIA’s rules. |
| • |
Subject to the IIA’s prior approval, a Recipient Company may transfer IIA Funded Know-How to another Israeli company, provided
that the acquiring company assumes all of the Recipient Company’s responsibilities towards the IIA. Such transfer will not be subject
to the payment of the Redemption Fee; however, the income from such transaction will generally be subject to the obligation to pay royalties
to the IIA (other than in specific circumstances that will be examined by the IIA, mainly when the transfer is between related entities).
|
| • |
IIA Funded Know-How license limitation. The grant
to a foreign entity of a right to use the IIA Funded Know-How for R&D purposes (which does not entirely prevent the Recipient Company
from using the Funded Know-How) is subject to receipt of the IIA’s prior approval. This approval is subject to payment to the IIA
in accordance with the formulas stipulated in the IIA's rules (which distinguish between the manner of the payment for such license grant,
i.e., one-time payment or payment in installments) and such payment shall be no less than the amount of the IIA grants received (plus
Annual Interest), and no more than the cap stated in the IIA’s rules and will generally be due only upon the receipt of the license
fee from the licensee). |
The IIA’s rules also include a mechanism with respect to
the grant of a license by a Recipient Company (which is part of a multinational corporation) to its group entities to use its IIA Funded
Know-How. Such license is subject to the IIA’s prior approval and to the payment of 5% royalties from the income deriving from such
license, with the cap of the royalties increasing to 150% of the grant amount. Such mechanism includes certain requirements which must
be met in order to be able to enjoy such lower royalty payment.
We have received grants from the IIA in connection with our research
and development of a peripheral line of product candidates, which forms a negligible part of our activities, and therefore, we are subject
to the aforementioned restrictions with respect to such product candidates. The obligation to comply with the Innovation Law and the IIA's
rules (including with respect to the restriction of the transfer of IIA Funded Know-How and manufacturing rights outside of Israel) remains
in effect even after full repayment of all amounts payable to the IIA. Once a Redemption Fee is paid on a transfer of IIA Funded Know-How
outside Israel, all obligations towards the IIA (including the royalty obligation) cease.
The government of Israel does not own intellectual property rights
in technology developed with IIA funding and the IIA’s approval is not required for the export of any products resulting from the
IIA research or development grants.
Environmental, Health and Safety Matters
We are subject to extensive environmental, health and safety laws
and regulations in a number of jurisdictions including Israel. These laws and regulations govern, among other things, (i) the use, storage,
registration, handling, emission and disposal of chemicals, waste materials and sewage and (ii) chemical, air, water and ground contamination,
air emissions and the cleanup of contaminated sites, including any contamination that results from spills due to our failure to properly
dispose of chemicals, waste materials and sewage. Our operations at our Ness Ziona facility use chemicals and produce waste materials
and sewage. Our activities require permits from various governmental authorities, including local municipal authorities, the Ministry
of Environmental Protection and the Ministry of Health. The Ministry of Environmental Protection and the Ministry of Health, local authorities
and the municipal water and sewage company conduct periodic inspections in order to review and ensure our compliance with the various
regulations. Our business permit is currently in effect until December 31, 2026.
These laws, regulations and permits could potentially require the
expenditure by us of significant amounts for compliance or remediation. If we fail to comply with such laws, regulations or permits, we
may be subject to fines and other civil, administrative or criminal sanctions, including the revocation of permits and licenses necessary
to continue our business activities. In addition, we may be required to pay damages or civil judgments in respect of third-party claims,
including those relating to personal injury (including exposure to hazardous substances we use, store, handle, transport, manufacture
or dispose of), property damage or contribution claims. Some environmental, health and safety laws allow for strict, joint and several
liability for remediation costs, regardless of comparative fault. We may be identified as a responsible party under such laws. Such developments
could have a material adverse effect on our business, financial condition and results of operations.
In addition, laws and regulations relating to environmental, health
and safety matters are often subject to change. In the event of any changes or new laws or regulations, we could be subject to new compliance
measures or to penalties for activities which were previously permitted.
The operations of our subcontractors and suppliers are also subject
to various Israeli and foreign laws and regulations relating to environmental, health and safety matters, and their failure to comply
with such laws and regulations could have a material adverse effect on our business and reputation, result in an interruption or delay
in the development or manufacture of our product candidates, or increase the costs for the development or manufacture of our product candidates.
Properties
Our principal executive offices are located in a leased facility
in Weizmann Science Park, Ness Ziona 7403650, Israel. The facility is 2,040 square meters, and houses our offices, warehouse, laboratories
and production area. Our lease will expire on December 31, 2025.
Legal Proceedings
We are not subject to any material legal proceedings.
C.
Organizational Structure
Not applicable.
D. Property, Plant
and Equipment
See “Item 4. Information on the Company—B. Business
Overview—Properties”.
ITEM
4A. UNRESOLVED STAFF COMMENTS
None.
ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion of our financial
condition and results of operations in conjunction with the consolidated financial statements
and the notes thereto included elsewhere in this annual report. The following discussion contains forward-looking statements
that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking
statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this annual
report, particularly those in “Item 3. Key Information – D.
Risk Factors.”
Overview
We are an innovative dermatology company with a successful track
record of two NDA approvals and advanced orphan drugs pipeline. We successfully developed pioneer topical drugs Twyneo and Epsolay, respectively
approved for the treatments of acne and inflammatory lesions of rosacea. Since 2022, both products have been marketed in the United States
by our U.S. commercial partner, Galderma. In terms of our proprietary assets in development, we are developing topical patidegib (SGT-610)
for the prevention of new BCC in Gorlin syndrome patients, and topical erlotinib (SGT-210) for the treatment of rare hyperkeratinization
disorders.
Gorlin syndrome is a rare disease with no therapies currently approved
by the FDA or the EC for this disease. Gorlin syndrome affects approximately 1 in 31,000 people and is an autosomal dominant genetic
disorder, mostly caused by inheritance of one defective copy of the tumor suppressor gene PTCH1. The PTCH1 gene blocks the SMO gene, turning
off the hedgehog signaling pathway when it is not needed. However, mutations in PTCH1 may cause loss of PTCH1 function, release
of SMO, and may allow BCC tumor cells to divide uncontrollably. Gorlin syndrome is also called nevoid BCC syndrome because approximately
90% of individuals with this syndrome develop multiple BCCs, ranging from a few to many thousands of lesions during a patient’s
lifetime. Gorlin syndrome patients are also susceptible to many abnormalities, including, most frequently, palmar and plantar pits and
jaw cysts, and, most devastatingly, medulloblastomas.
We are developing the new chemical entity SGT-610
(Patidegib Topical Gel), a hedgehog signaling pathway blocker, for the chronic use and prevention of new BCC in Gorlin syndrome patients.
Gorlin syndrome is a rare disease with no therapies approved by the FDA or the EC for this disease. SGT-610 is aimed to prevent new BCCs
in adults with Gorlin syndrome without systemic adverse events. We believe it has the potential to be the first drug approved for the
treatment of Gorlin syndrome patients. SGT-610 has been granted Orphan Drug Designation by the FDA and the EC as well as Breakthrough
Designation by the FDA. If approved by the FDA, SGT-610 has the potential to generate, at peak, annual net sales in excess of $300 million
(based on good faith estimates derived from our knowledge and based in part on independent sources). Although we believe such data and
estimate to be reliable, it involves a number of assumptions and limitations, including without limitations the number of patients, the
penetration level of the treatment, and the expected treatment annual price.
On November 30, 2023 we announced that we have begun screening
patients for our Phase 3 study. In the patidegib’s seller, PellePharm Inc. (“PellePharm”) study the SGT-610 arm was
found to be as tolerable as the vehicle and the significant adverse events commonly seen with oral hedgehog inhibitors were not observed.
Our clinical study includes essential modifications to the former Phase 3 study conducted by PellePharm. We have refined screening criteria
in order to enroll subjects with more severe disease at baseline reflected in a higher baseline number of facial BCC lesions. This refinement
may help to better demonstrate the preventive effect of our medication candidate. We are also pre-screening patients for a specific genetic
mutation associated with Gorlin syndrome that is considered relevant for HH inhibitors. In an effort to increase patient study compliance
we reduced the number of study visits over the 12 months of treatment. We plan to conduct the Phase 3 study to investigate SGT-610
in approximately 140 subjects at approximately 40 experienced clinical centers in North America, United Kingdom and Europe. We
currently expect results of our Phase 3 study by the end of 2025.
The rights to SGT-610 were purchased on January 30, 2023, pursuant
to an asset purchase agreement with PellePharm, dated January 23, 2023.
Twyneo, is a once-daily, non-antibiotic topical cream, containing
a fixed-dose combination of encapsulated benzoyl peroxide, or E-BPO, and encapsulated tretinoin for the treatment of acne. Acne is one
of the three most prevalent skin diseases in the world and is the most commonly treated skin disease in the United States. According to
the American Academy of Dermatology, acne affects approximately 40 to 50 million people in the United States, of which approximately 10%
are treated with prescription medications. Tretinoin and benzoyl peroxide, the two active components in Twyneo, are both widely-used therapies
for the treatment of acne that historically have not been conveniently co-administered due to stability concerns. Twyneo was approved
for marketing by the FDA in July 2021in the United States and was licensed to Galderma exclusively in the United States in June 2021.
Epsolay, is a once-daily topical cream containing 5% encapsulated
benzoyl peroxide, that we have developed for the treatment of inflammatory lesions of rosacea in adults. Rosacea is a chronic skin
disease characterized by facial redness, inflammatory lesions, burning and stinging. According to the U.S. National Rosacea Society, approximately
16 million people in the United States are affected by rosacea. According to a study we commissioned in 2017, approximately 4.8 million
people in the United States experience subtype II symptoms. Subtype II rosacea is characterized by small, dome-shaped erythematous papules,
tiny surmounting pustules on the central aspects of the face, solid facial erythema and edema, and thickening/overgrowth of skin. Subtype
II rosacea resembles acne, except that comedowns are absent, and patients may report associated burning and stinging sensations. Current
topical therapies for subtype II rosacea are limited due to tolerability concerns. For example, BPO, a common therapy for acne, is not
used for the treatment of subtype II rosacea due to side effects. As encapsulated BPO, Epsolay is designed to redefine the standard of
care for the treatment of subtype II rosacea. Epsolay, is the first product containing BPO that is marketed for the treatment of
subtype II rosacea. Epsolay was approved for marketing by the FDA in April 2022 and was licensed to Galderma exclusively in the United
States in June 2021.
Our other investigational product candidate is SGT-210 that we
are developing for the treatment of rare hyperkeratinization disorders, such as Darier PC, PPK, and Olmsted, a group of skin conditions
characterized by thickening of the skin, among others. SGT-210 is designed to be used alone or in combination for the treatment of hyperproliferation
and hyperkeratinization disorders.
In June 2021, we entered into two five-year exclusive license
agreements with Galderma pursuant to which Galderma has the exclusive right to, and is responsible for, all U.S. commercial activities
for Twyneo and Epsolay. Pursuant to the agreement, we received $11 million in upfront payments to and regulatory approval milestone
payments. We are also eligible to receive tiered double-digit royalties ranging from mid-teen to high-teen percentage of net sales as
well as up to $9 million in sales milestone payments. We also expect to collaborate with third parties that have sales and
marketing experience in order to commercialize Epsolay and Twyneo outside of the United States and our investigational product candidates,
if approved by the FDA for commercial sale, in lieu of our own sales force and distribution systems. In other markets, we also expect
to selectively pursue strategic collaborations with third parties in order to maximize the commercial potential of our product candidates.
In June 2023, we entered into exclusive license agreements with
Searchlight pursuant to which the agreements, Searchlight has the exclusive right, and is responsible for, all commercial activities for
Twyneo and Epsolay in Canada, over a fifteen-year term that is renewable for subsequent five-year periods. Searchlight will be responsible
for obtaining and maintaining ay regulatory approvals required to market and sell the drugs in Canada with support from us. In consideration
for the grant of such rights, we will receive up to $11 million in potential upfront payments and regulatory and sales milestones for
both drugs, combined. In addition, we will be entitled to royalty percentages of all Canadian net sales ranging from low-double-digits
to high teens.
In November 2021, we announced that we had signed an agreement
with Padagis, pursuant to which we sold our rights related to 10 generic collaborative programs and retained the collaboration rights
to two generic programs. Under the terms of the agreement with Padagis, effective as of November 2021, we received $21.5 million over
24 months, in lieu of our share in ten generic programs, two of which were approved by the FDA, and eight of which are unapproved.
Pursuant to the agreement, effective as of November 1, 2021, we ceased paying any outstanding and future operational costs related to
those collaborative programs, the rights of which were sold to Padagis.
In January 2023, we entered into an asset purchase agreement
with PellePharm, pursuant to which we purchased the topically-applied patidegib, a hedgehog signaling pathway blocker, for the treatment
of Gorlin syndrome. Under the terms of the agreement upon closing of the transaction, the Company paid an upfront payment of $4 million
to PellePharm, the remaining principal amount outstanding of $0.7 million has not been transferred as of the issuance date of this report.
We are also required to pay:
| • |
up to $6 million in total development and NDA acceptance milestone payments; |
| • |
up to $64 million in commercial milestone payments, which amount increases to $89 million when sales exceed $500 million; and
|
| • |
single digit royalties, which increase to double digit royalties when sales exceed $500 million. |
Since our inception, we have incurred significant
operating losses. We generated a net profit of $3.2 million for the year ended December 31, 2021, and we incurred a net losses of $14.9
million and $ 27.2 million for the years ended December 31, 2022 and December 31, 2023, respectively. As of December 31, 2023, we
had an accumulated deficit of $220.3 million. We expect to incur significant expenses and operating losses for the foreseeable future
as we advance our product candidates from formulation development through pre-clinical development and clinical trials, seek regulatory
approval and pursue commercialization of any approved product candidate. In addition, we may incur expenses in connection with the in-license
or acquisition of additional product candidates.
In February 2018 we closed our initial public offering, at
which time we sold a total of 7,187,500 ordinary shares in the offering and received net proceeds of approximately $78.8 million, after
deducting underwriting discounts and commissions and without deducting other offering expenses.
On August 12, 2019, we completed an underwritten public offering,
in which we issued 1,437,500 ordinary shares, including the full exercise by the underwriters of their option to purchase 187,500 additional
ordinary shares, at a public offering price of $8.00 per ordinary share. The total proceeds received from the offering were approximately
$10.8 million net of underwriting discounts and commissions and without deducting other offering expenses.
On February 19, 2020. we completed an underwritten public offering
in which we issued 2,091,907 ordinary shares together with ordinary share warrants to purchase 1,673,525 ordinary shares. The ordinary
shares and warrants were sold together at a combined public offering price of $11.00 per ordinary share and accompanying warrant to purchase
0.80 of an ordinary share. The warrants have an initial exercise price of $14.00 per share, subject to certain adjustments
and expired on February 19, 2023. The total proceeds received from the offering were approximately $21.6 million net of underwriting
discounts and commissions and without deducting other offering expenses.
In addition, following the approval of our shareholders, Arkin
Dermatology Ltd., our controlling shareholder, purchased 454,628 ordinary shares and warrants to purchase up to 363,702 ordinary shares
in a concurrent private placement, exempt from the registration of the Securities Act, at a price equal to the public offering price of
the ordinary shares and accompanying warrants in the February 2020 public offering. The private placement, which closed on April 13, 2020, generated
proceeds of approximately $5 million.
On January 27, 2023, we entered into a securities purchase agreement with Armistice
Capital pursuant to which the Company issued to Armistice Capital (i) 2,560,000 ordinary shares in a registered direct offering at a price
of $5.00 per ordinary share and (ii) in a concurrent private placement unregistered warrants to purchase up to 2,560,000 Ordinary
Shares. The gross proceeds from the offering were approximately $12.8 million. Concurrently with the signing of the purchase agreement,
we also entered into a subscription agreement with Arkin Dermatology Ltd., pursuant to which Arkin Dermatology Ltd. purchased 2,000,000
unregistered ordinary shares and unregistered warrants to purchase up to 2,000,000 ordinary shares in a concurrent private placement
exempt from the registration of the Securities Act, at a price equal to the offering price of the ordinary shares in the offering. This
private placement closed in April 2023 following shareholder approval. The aggregate gross proceeds to us from the transaction with Armistice
Capital and Arkin Dermatology Ltd. were approximately $22.8 million.
A. Operating Results
Collaboration Revenues
From 2013 until December 31, 2018, other than revenues of approximately
$0.2 million and $0.1 million on royalties generated in 2017 and 2018, respectively, pursuant to sales of products overseas under past
collaboration agreements with Merck, we did not recognize any revenue. We were previously a party to collaboration agreements with
Perrigo pursuant to which we shared development costs with Perrigo and shared equally the gross profits generated from sales of the product. During
the years ended December 31, 2019 and December 2020, the Company recognized revenues from royalties related to sales of one of the products
from this collaboration in the amount of $22.9 million and $8.7 million, respectively. During the year ended December 31, 2021,
we generated a total of $31.3 million in revenue, out of which $20.4 million was generated from the sale to Padagis of 10 generic
collaborative programs, $3.3 million was generated from our collaboration agreements with Perrigo, with respect to products the rights
for which were later sold to Padagis, and $7.5 million was generated from our license agreements with Galderma. During the years ended
December 31, 2022 and 2023, we recognized revenues from royalties and milestone payment related to our collaboration agreements
with Galderma and Searchlight in the amount of $3.9 million and $1.6 million, respectively.
Operating expenses
Our current operating expenses consist primarily of research and
development as well as general and administrative expenses.
Research and development expenses
Research and development expenses consist principally of:
| • |
salaries for research and development staff and related expenses, including employee benefits and share-based compensation expenses;
|
| • |
expenses paid to suppliers of disposables and raw materials, including drug substances, and related expenses, such as, external laboratory
testing and development of analytical methods; |
| • |
expenses for production of Twyneo, Epsolay and our product candidates both in-house and by contract manufacturers; |
| • |
expenses paid to contract research organizations and other third parties in connection with the performance of pre-clinical studies,
clinical trials and related expenses; |
| • |
expenses incurred under agreements with other third parties, including subcontractors, suppliers and consultants that conduct formulation
development, regulatory activities and pre-clinical studies; |
| • |
expenses incurred to acquire, develop and manufacture materials for use in pre-clinical and other studies; |
| • |
expenses incurred from the purchase and transfer of product candidates; and |
| • |
facilities, depreciation of fixed assets used to develop our product candidates, maintenance of equipment used to develop our product
candidates and other expenses, including direct and allocated expenses for rent, maintenance of facilities, insurance and other operating
expenses. |
Research and development activities are central to our business
model. Product candidates in later stages of clinical development generally have higher development expenses than those in earlier stages
of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect to continue to incur
research and development expenses over the next several years as we conduct pre-clinical studies and clinical trials and prepare regulatory
filings for our product candidates.
Due to the inherently unpredictable and highly uncertain nature
of clinical development processes, we cannot reasonably estimate the nature, timing and expenses of the efforts that will be necessary
to complete the remainder of the development of our product candidates, or when, if ever, material net cash inflows may commence from
any of our product candidates. Clinical development timelines, the probability of success and development expenses can differ materially
from expectations. This is due to numerous risks and uncertainties associated with developing drugs, including the uncertainty of:
| • |
the scope, rate of progress and expense of our research and development activities; |
| • |
clinical trials and early-stage results; |
| • |
the terms and timing of regulatory requirements and approvals; |
| • |
the expense of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; and |
| • |
the ability to market, commercialize and achieve market acceptance of any product candidate that we are developing or may develop
in the future. |
While we are currently focused on advancing our product development,
our future research and development expenses will depend on the clinical success of our product candidates, as well as ongoing assessments
of the product candidates’ commercial potential. As we obtain results from clinical trials, we or our partners may elect to discontinue
or delay clinical trials for one or more of our product candidates in certain indications in order to focus our resources on more promising
product candidates. Completion of clinical trials may take several years or more, but the length of time generally varies according to
the type, complexity, novelty and intended use of a product candidate.
The lengthy process of completing clinical trials and seeking regulatory
approval for our product candidates requires the expenditure of substantial resources. Any failure or delay in completing clinical trials,
or in obtaining regulatory approvals, could cause a delay in generating product revenue and cause our research and development expenses
to increase and, in turn, have a material adverse effect on our operations.
General and administrative expenses
Our general and administrative expenses consist primarily of salaries
and related expenses, including employee benefits and share-based compensation expenses, legal expenses and professional fees for auditors
and other expenses not related to research and development activities.
Financial income, net
Our financial income, net consists primarily of income generated
on our marketable securities and bank deposits net of expenses related to bank charges and foreign currency exchange transactions.
Results of operations
The following table summarizes our results of operations for the
indicated periods:
|
|
Year ended
December 31, |
|||||||||||
|
|
2021
|
2022
|
2023
|
|||||||||
|
|
(in thousands)
|
|||||||||||
|
|
||||||||||||
|
Collaboration Revenues |
$ |
23,772 |
$ |
$ | ||||||||
|
License Revenues |
7,500 |
3,883 |
1,554 |
|||||||||
|
Total Revenues |
$ |
31,272 |
$ |
3,883 |
1,554 |
|||||||
|
Research and development |
20,381 |
12,682 |
23,541 |
|||||||||
|
General and administrative |
8,451 |
7,445 |
7,373 |
|||||||||
|
OTHER INCOME, net |
524 |
- |
55 |
|||||||||
|
Total operating income (loss) |
2,964 |
(16,244 |
)
|
(29,305 |
)
| |||||||
|
Financial income, net |
257 |
1,321 |
2,067 |
|||||||||
|
Income (Loss) before income taxes |
3,221 |
(14,923 |
) |
(27,238 |
) | |||||||
|
Income (loss) for the year |
$ |
3,221 |
$ |
(14,923 |
) |
$ |
(27,238 |
) | ||||
Year ended December 31, 2022 compared to year ended December 31, 2023
Revenues
We generated a total of $1.6 million in revenues in 2023,
mainly related to the license agreements with Galderma and Searchlight, comprised of milestone and royalty payments, compared with $3.9
million total revenues in 2022. The decrease in revenues in 2023 resulted mainly from the milestone payment from Galderma in the
amount of $3.5 million in relation to FDA approval of Epsolay in 2022.
Research and development expenses
The following table describes the breakdown of our research and development expenses
for the indicated periods:
|
|
|
Year Ended December 31, |
| |||||
|
|
|
2022 |
|
|
2023 |
| ||
|
|
|
(in thousands) |
| |||||
|
|
|
|
| |||||
|
Payroll and related expenses |
|
$ |
6,530 |
|
|
$ |
5,650 |
|
|
Clinical and preclinical trials expenses |
|
|
602 |
|
|
|
5,745 |
|
|
Professional consulting and subcontracted work |
|
|
2,173 |
|
|
|
10,134 |
|
|
Other |
|
|
3,376 |
|
|
|
2,012 |
|
|
Total research and development expenses |
|
$ |
12,682 |
|
|
$ |
23,541 |
|
Our research and development expenses were $12.7
million for the year ended December 31, 2022 compared to $23.5 million for the year ended December 31, 2023. The increase of $10.9 million
was primarily attributed to the $4.7 million upfront payment associated with the acquisition of topically applied patidegib, or SGT-610,
$4.2 million related to the pivotal Phase 3 clinical trial for SGT-610 and $2.8 million related to clinical expenses for a generic product.
General and administrative expenses
Our general and administrative expenses were $7.4 million for the year ended December
31, 2022, compared to $7.4 million for the year ended December 31, 2023.
Financial income, net
Our financial income, net, was $1.3 million for the year ended December 31, 2022 compared
to $2.1 million for the year ended December 31, 2023.
Year ended December 31, 2021 compared to year ended December 31, 2022
This analysis can be found in Item 5 of the Company’s
Annual Report on Form 20‑F for the year ended December 31, 2022.
JOBS Act
On April 5, 2012, the JOBS Act was signed into law. Subject
to certain conditions set forth in the JOBS Act, an “emerging growth company,” may elect to rely on certain exemptions, including
without limitation, not (i) providing an auditor’s attestation report on our system of internal controls over financial reporting
pursuant to Section 404 and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding
mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial
statements (auditor discussion and analysis). Although we have ceased to be an “emerging growth company” and accordingly we
are no longer exempt from the requirement to comply with any requirement that may be adopted by the Public Company Accounting Oversight
Board regarding supplement to the auditor’s report providing additional information about the audit and the financial statements.
Due to our ‘public float’ we are currently exempt from the requirement to provide an auditor’s attestation report on
our system of internal controls over financial reporting pursuant to Section 404.
B. Liquidity and Capital
Resources
Overview
Since our inception, we have devoted substantially all of our resources
to developing Twyneo, Epsolay, SGT-610, and our product candidates, building our intellectual property portfolio, developing our supply
chain, business planning, raising capital and providing for general and administrative support for these operations. Other than Twyneo
and Epsolay, we do not currently have any approved products.
From inception through December 31, 2023, we have funded our operations
primarily through proceeds from our public offerings, the issuance of equity securities to, and loans and investments from, our controlling
shareholder, funding received from the IIA and from amounts received pursuant to past and current collaboration agreements. As of
December 31, 2023, our cash and cash equivalents, bank deposits and marketable securities were $38.0million.
In July 2021, we entered into an ATM sales agreement with Jefferies
LLC ("Jefferies"), pursuant to which we were entitled, at our sole discretion, to offer and sell through Jefferies, acting as sales agent,
Shares having an aggregate offering price of up to $25.0 million throughout the period during which the ATM facility remains in effect.
We agreed to pay Jefferies a commission of 3.0% of the gross proceeds from the sale of shares under the facility.
From
the effective date of the agreement through April 2022, 41,154 shares were sold under the program for total gross proceeds of approximately
$0.5 million. In April 2022, we terminated this agreement.
On January 27, 2023, we entered into a securities purchase agreement
with Armistice Capital pursuant to which we issued to Armistice Capital (i) 2,560,000 ordinary shares in a registered direct offering
at a price of $5.00 per ordinary share and (ii) in a concurrent private placement unregistered warrants to purchase up to 2,560,000
Ordinary Shares. Concurrently with the signing of the purchase agreement, we also entered into a subscription agreement with Arkin Dermatology
Ltd., pursuant to which Arkin Dermatology Ltd. purchased 2,000,000 unregistered ordinary shares and unregistered warrants to purchase
up to 2,000,000 ordinary shares in a concurrent private placement exempt from the registration of the Securities Act, at a price
equal to the offering price of the ordinary shares in the offering. The aggregate gross proceeds to the Company from these transactions
were approximately $22.8 million.
The
table below summarizes our cash flow activities for the indicated periods:
|
|
Year Ended
December 31, |
|||||||||||
|
|
2021 |
2022 |
2023 |
|||||||||
|
|
(in thousands) |
|||||||||||
|
|
||||||||||||
|
Net cash used in operating activities
|
$ |
(7,691 |
) |
(9,484 |
) |
$ |
(17,730 |
) | ||||
|
Net cash provided by (used in) investing activities
|
19,872 |
1,699 |
(9,742 |
) | ||||||||
|
Net cash provided by financing activities
|
837 |
15 |
21,810 |
|||||||||
|
Effect of exchange rates on cash and cash equivalents |
$ |
(55 |
) |
133 |
(73 |
) | ||||||
|
Increase (decrease) in cash and cash equivalents |
$ |
12,908 |
$ |
(7,637 |
) |
$ |
(5,735 |
) | ||||
Operating Activities
Net cash used in operating activities was $9.5 million during the
year ended December 31, 2022 compared to $17.7million during the year ended December 31, 2023.
Net cash used in operating activities in the year ended December
31, 2023 primarily resulted from our loss of $27.2 million during the period, net of $7.7 million of net changes in working capital
and non-cash expenses of $1.9 million share-based compensation expenses and $0.3 million of depreciation of property and equipment.
Net cash used in operating activities in the year ended December
31, 2022, primarily resulted from our net loss of $14.9 million during the period, net of $3.5 million of net changes in working
capital and non-cash expenses of $1.5 million share-based compensation expenses and $0.6 million of depreciation of property and equipment.
Investing Activities
Net cash provided by investing activities was $1.7 million during
the year ended December 31, 2022, compared to net cash used in investing activities of $9.7 million during the year ended December 31,
2023. The 2022 net cash provided by investing activities resulted mainly from $10 million investments in marketable securities,
net of $3 million proceeds from sale and maturity of marketable securities, offset by proceeds from bank deposits of $8.9 million.
The 2023 net cash used in investing activities resulted mainly from $23.2 million investments in marketable securities net of $11.8
million proceeds from sale and maturity of marketable securities, offset by proceeds from bank deposits of $1.7 million.
Financing Activities
Net cash from financing activities was effectively none during
the year ended December 31, 2022, , compared to $21.8 million during the year ended December 31, 2023, mainly from issuance of shares
and warrants through public offering and private placement from the controlling shareholder, net of issuance cost.
Funding Requirements
Our primary uses of cash have been to fund working capital requirements
and research and development. We expect to continue to incur net losses for the foreseeable future as we continue to invest in research
and development and seek to obtain regulatory approval for and commercialize our product candidates. We believe that the net proceeds
from the 2023 registered direct offering and the concurrent private placement, together with its existing cash resources, will be sufficient
to enable us to fund our operating expenses and capital expenditure requirements for at least 12 months from the filing date of this annual
report. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently
expect. Recently, based on lower than expected future revenue streams from Twyneo and Epsolay and a delay in the development of SGT-210,
we adopted cost-saving measures, including a headcount reduction of about 25 employees, to maintain the cash runway for at least
12 months from the filing date of this annual report, and delayed the planned clinical study for SGT-210.
Developing drugs, conducting clinical trials, obtaining commercial
manufacturing capabilities and commercializing products is expensive and we will need to raise substantial additional funds to achieve
our strategic objectives. We will require significant additional financing in the future to fund our operations, including if and when
we progress into additional clinical trials for our product candidates, obtain regulatory approval for one or more of our product candidates,
obtain commercial manufacturing capabilities and commercialize one or more of our product candidates. Our future funding requirements
will depend on many factors, including, but not limited to:
| • |
the progress and expenses of our pre-clinical studies, clinical trials and other research and development activities; |
| • |
the scope, prioritization and number of our clinical trials and other research and development programs; |
| • |
the expenses and timing of obtaining regulatory approval, if any, for our product candidates; |
| • |
the expenses of filing, prosecuting, enforcing and defending patent claims and other intellectual property rights; and |
| • |
the expenses of, and timing for, expanding our manufacturing agreements for production of sufficient clinical and commercial quantities
of our product candidates. |
Other than revenue that we expect to generate from the commercialization
of Twyneo and Epsolay, until we can generate recurring revenues, we expect to satisfy our future cash needs through existing cash resources,
additional debt or equity financings or by entering into collaborations with third parties in connection with our products. We cannot
be certain that additional funding will be available to us on acceptable terms, if at all. In addition, the terms of any securities we
issue in future financings may be more favorable to new investors and may include preferences, superior voting rights and the issuance
of warrants or other derivative securities, which may have a further dilutive effect on the holders of any of our securities then outstanding.
If we raise additional funds through collaborations with third parties, we may be required to relinquish valuable rights to our technologies,
future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are
unable to obtain adequate funds on reasonable terms, we will need to curtail operations significantly, including possibly postponing anticipated
clinical trials or entering into financing agreements with unattractive terms.
C. Research
and Development, Patents and Licenses
For a description of our research and development programs and
the amounts that we have incurred over the last two years pursuant to those programs, please see “Item 5. Operating and Financial
Review and Prospects — A. Operating Results — Research and Development Expenses”; and “Item 5. Operating and Financial
Review and Prospects — A. Operating Results — Year Ended December 31, 2022 compared to Year ended December 31, 2023 - Research
and Development Expenses.”
D. Trend
Information
Other than as disclosed elsewhere in this annual report, we are
not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2023 to December 31, 2023 that are
reasonably likely to have a material adverse effect on our revenue, income, profitability, liquidity or capital resources, or that caused
that disclosed financial information to be not necessarily indicative of future operating results or financial condition.
E.
Critical Accounting Policies
Significant Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity
with U.S. GAAP. We describe our significant accounting policies and estimates more fully in Note 2 to our consolidated financial statements
as of and for the year ended December 31, 2023, included elsewhere in this annual report. We believe that the accounting policies
and estimates below are critical in order to fully understand and evaluate our financial condition and results of operations. In preparing
these consolidated financial statements, our management has made estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of expenses during the reporting periods recognized in our financial statements. Actual results may differ from these estimates. As applicable
to the consolidated financial statements included in this annual report, the most significant estimates and assumptions relate to the
fair value of share-based compensation.
Share-based Compensation
Share-based compensation reflects the compensation expense of our
share option programs granted to employees which compensation expense is measured at the grant date fair value of the options. The grant
date fair value of share-based compensation is recognized as an expense over the requisite service period, net of estimated forfeitures.
We recognize compensation expense for awards conditioned only on continued service that have a graded vesting schedule using the accelerated
method based on the multiple-option award approach, and classify these amounts in our statement of operations based on the department
to which the related employee reports.
Options Valuation
We selected the Black-Scholes option pricing model as the most
appropriate method for determining the estimated fair value of the shared based compensation. For the purpose of the evaluation
of the fair value and the manner of the recognition of share-based compensation, our management is required to estimate, among others,
various subjective and complex parameters that are included in the calculation of the fair value of the option. The Company calculates
the fair value of stock-based option awards on the date of grant using the Black-Scholes option pricing model. The option-pricing model
requires a number of assumptions, of which the most significant are the expected share price volatility and the expected option term.
The computation of expected volatility is based on historical volatility of the Company’s shares and of similar companies in the
healthcare sector. The expected option term is calculated using the simplified method, as the Company concludes that its historical share
option exercise experience does not provide a reasonable basis to estimate its expected option term. The interest rate for periods within
the expected term of the award is based on the U.S. Treasury yield curve in effect at the time of grant. The Company’s expected
dividend rate is zero since the Company does not currently pay cash dividends on its shares and does not anticipate doing so in the foreseeable
future. Each of the above factors requires the Company to use judgment and make estimates in determining the percentages and time periods
used for the calculation. If the Company were to use different percentages or time periods, the fair value of stock-based option awards
could be different. The fair values of the Company’s RSUs are measured based on the fair value of the Company’s ordinary shares
on the date of grant.
ITEM
6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
Directors and Senior Management
The following table sets forth information concerning our
directors and senior management, which includes members of our administrative, supervisory and management bodies, including their ages,
as of the date of this annual report:
|
Name |
|
Age |
Position |
| |
|
|
|
|
|
| |
|
Moshe Arkin |
|
71 |
Executive Chairman of the Board of Directors |
| |
|
Alon Seri-Levy |
|
62 |
Chief Executive Officer and Director |
| |
|
Gilad Mamlok |
|
55 |
Chief Financial Officer |
| |
|
Ofer Toledano |
|
59 |
Vice President Research and Development |
| |
|
Ofra Levy-Hacham |
|
57 |
Vice President Clinical, Regulatory Affairs and Quality |
| |
|
Michael Glezin |
|
42 |
Vice President Business Development |
| |
|
Karine Neimann |
|
52 |
Vice President Projects and Planning, Chief Chemist |
| |
|
Itzik Yosef |
|
47 |
Chief Operating Officer |
| |
|
Tamar Fishman Jutkowitz |
|
48 |
Vice President and General Counsel |
| |
|
Itai Arkin |
|
35 |
Director |
| |
|
Hani Lerman |
|
51 |
Director |
| |
|
Sharon Kochan |
55 |
Director |
|||
|
Jonathan B. Siegel |
|
50 |
Independent Director |
| |
|
Ran Gottfried |
|
79 |
Lead Independent Director |
| |
|
Jerrold S. Gattegno |
|
71 |
Independent Director |
| |
|
Yuval Yanai |
71 |
Independent Director |
Mr. Moshe Arkin
has served as chairman of our board of directors since 2014. in May 2022 Mr. Moshe Arkin's role has been expanded to Executive
Chairman to reflect Mr. Arkin’s expanded role at the Company. Mr. Moshe Arkin currently sits on the board of directors of several
private pharmaceutical and medical device companies including SoniVie Ltd., a company developing systems for the treatment of pulmonary
arterial hypertension, Digma Medical, a company developing systems to treat insulin resistance present in type 2 diabetes and other metabolic
syndrome diseases, and Valcare Medical, a company developing heart valve devices. From 2005 to 2008, Mr. Moshe Arkin served as the head
of generics at Perrigo Company and from 2005 until 2011 as the vice chairman of its board of directors. Prior to joining us, Mr. Moshe
Arkin served as a director of cCAM Biotherapeutics Ltd., a company focused on the discovery and development of novel immunotherapies to
treat cancer from 2012 until its acquisition in 2015 by Merck & Co., Inc. Mr. Moshe Arkin served as chairman of Agis Industries Ltd.
from its inception in 1972 until its acquisition by Perrigo Company in 2005. Mr. Moshe Arkin holds a B.A. in psychology from the Tel Aviv
University, Israel.
Dr. Alon Seri-Levy
co-founded Sol-Gel and has served as our chief executive officer since our inception in 1997 and as a member of our board of directors
until 2014. Prior to founding Sol-Gel, Dr. Seri-Levy established the computer-aided drug design department at Peptor Ltd., an Israeli
research and development company that specialized in the development of peptide-based drug products. Dr. Seri-Levy holds a Ph.D.
in Chemistry (summa cum laude) from The Hebrew University of Jerusalem, Israel, and conducted his post-doctoral studies at Oxford University,
United Kingdom. Dr. Seri-Levy was appointed to our board of directors immediately following the pricing of our initial public offering.
Mr. Gilad Mamlok
has served as our Chief Financial Officer since February 2017. Mr. Mamlok has over two decades of track record in public and private companies
and the public sector. Mr. Mamlok served as a member of the senior management team of leading technology companies and worked closely
with CEO’s and Board of Directors. In 2015 to 2016, Mr. Mamlok served as the CFO of Medigus (NASDAQ: MDGS). From September 2005
to July 2015, Mr. Mamlok served as Senior Vice President of Global Finance and Accounting at Given Imaging (NASDAQ: GIVN, sold to Medtronic
in 2014 (NYSE: MDT). Before that, from 2002 to 2005, Mr. Mamlok served in a few CFO positions at Medical device companies (Simbionix,
Impulse Dynamics, and MetaCure), and from 1997-2001, Mr. Mamlok served as a Director of Finance at Nice Systems. (Nasdaq: NICE). Mr. Mamlok
holds a Master’s degree in business economics from Tel-Aviv University and a B.A. in economics (magna cum laude) from Tel-Aviv University,
Israel.
Dr. Ofer Toledano
has served as our vice president of research and development since 2004. Prior to joining Sol-Gel, Dr. Toledano served as manager
of the formulation department at ADAMA Agricultural Solutions Ltd. (formerly known as Makhteshim Agan Industries Ltd.), an Israeli manufacturer
and distributor of crop protection products from 1998 until 2004. Dr. Toledano holds a Ph.D. in chemistry from The Hebrew University of
Jerusalem, Israel.
Dr. Ofra
Levy-Hacham has served as our vice president of quality, clinical and regulatory affairs since January 2024, as our vice president
of clinical and regulatory affairs since 2018, and as our vice president of quality and regulatory affairs from 2011 to 2018. Prior to
joining Sol-Gel, Dr. Levy-Hacham served as a scientific specialist and project manager at Biotechnology General Ltd., a wholly owned subsidiary
of Ferring Pharmaceuticals Ltd., and a fully integrated biopharmaceutical services private company from 2010 until 2011. From 2005 until
2010, Dr. Levy-Hacham served as vice president chemistry, manufacturing and controls at HealOr Ltd., a private company engaging in the
development of therapeutics for the treatment of various skin disorders. Dr. Levy-Hacham holds a Ph.D. in chemistry from The Technion
– Israel Institute of Technology, Israel.
Mr. Michael
Glezin has served as our vice president of business development since September 2022. Prior to joining Sol-Gel Mr. Glezin
served from 2011 to 2022 as the Head of Generic Business Development and in various other business development positions at Dexcel Pharma,
an international specialty pharmaceutical company. Mr. Glezin has over a decade of experience leading both in-licensing and out-licensing
deals in multiple territories such as Europe,the U.S. and Israel. Throughout his career, he has identified technology transfer opportunities
for both prescription and over-the-counter drug segments, as well as led numerous merger and acquisition deals in Europe and surrounding
areas. Mr. Glezin has an Executive MBA from Haifa University in Israel in partnership with Tongi University in China. He has a BA from
Haifa University in Economics and Management and he studied Accounting at Bar Ilan University.
Dr. Karine
Neimann has served as our vice president of projects and planning and chief chemist since September 2016. Since joining us in 2008,
Dr. Neimann held various positions, including as chief chemist and laboratory manager. Dr. Neimann holds a Ph.D. in chemistry from The
Hebrew University of Jerusalem, Israel.
Dr. Itzik Yosef
has served as Chief Operating Officer since 2020, and as our vice president of operations since from 2016 until 2020. Since joining us
in 2010, Dr. Yosef held various positions including as head of operations. Dr. Yosef holds a Ph.D. in chemistry from The Hebrew University
of Jerusalem, Israel.
Adv. Tamar
Fishman Jutkowitz joined us as our vice president and general counsel in March 2023. From August 2015 to March 2023, Ms. Fishman
Jutkowitz worked at Gross & Co. Law Firm, where she was a partner from January 2018. From December 2011 to March 2015, Ms. Fishman
Jutkowitz served as general counsel of Compugen Ltd., a biotechnology company dual listed on Nasdaq and TASE. From February 2006 to December
2011, Ms. Fishman Juktowitz served as General Counsel of Rosetta Genomics Ltd., a biotechnology company listed on Nasdaq. Ms. Fishman
Jutkowitz holds a Master’s degree in business economics from Bar Ilan University and a L.L.B degree (cum laude) from Bar-Ilan University,
Israel.
Mr. Itai
Arkin became a member of our board of directors immediately following the pricing of our initial public offering. Mr. Itai Arkin
currently serves as Investment Manager at Arkin Holdings Ltd. Mr. Itai Arkin holds a B.A. in business administration (cum laude) from
Interdisciplinary Center, Herzliya, Israel, and an MBA (cum laude) from Tel Aviv University. Mr. Itai Arkin is the son of Mr. Moshe Arkin,
the chairman of our board of directors and sole beneficial owner of Arkin Dermatology, our controlling shareholder.
Ms. Hani Lerman
became a member of our board of directors immediately following pricing of our initial public offering. Ms. Lerman has served as chief
financial officer at Arkin Holdings since 2015. From 2010 until 2014, Ms. Lerman served as chief financial officer of Sansa Security (f/k/a
Discretix Technologies), and from 2006 until 2010, she served as chief financial officer of Storwize, which was acquired by IBM in 2010.
She served as a board member of Exalenz Bioscience and of Sphera Global Healthcare. She holds a Master's degree in business administration
with a major in finance from Tel-Aviv University, Israel, and a B.A. in economics and accounting from Tel-Aviv University, Israel.
Mr. Sharon
Kochan became a member of our board of directors in June 2023. Mr. Kochan serves as Operating Director with SK Capital Partners
of NYC, board member of Apotex Inc. of Toronto, and Woodstock Sterile Solutions Inc. of Chicago since January 15th, 2024, as well as Director
with Top Gum Industries Ltd. (TASE). Prior to that, Mr. Kochan has served as President and CEO of Padagis LLC from its incorporation in
July 2021, when it was carved out of Perrigo Company Plc. ("Perrigo"), a global, over-the-counter, consumer goods and specialty pharmaceutical
company listed on the New York Stock Exchange, until February 2023. Prior to that, Mr. Kochan served as Executive Vice President &
President Pharmaceuticals from 2018 for Perrigo, President International, from 2012 until 2018, and President Prescription Pharmaceuticals
from 2007. From 2005 to 2007, Mr. Kochan served as Senior Vice President of Business Development and Strategy for Perrigo. Mr. Kochan
was Vice President, Business Development of Agis Industries (1983) Ltd. ("Agis") from 2001 until Perrigo acquired Agis in 2005. Mr. Kochan
has served as a board member of MediWound Ltd. from July 2017 to June 2023 and served as a board member of Exalenz BioScience Ltd. from
July 2016 to March 2020 when it was acquired by Meridian. Mr. Kochan completed the Senior Management Program at the Technion Institute
of Management in Haifa, Israel, received a Master of Science in Operations Research & Management Science from Columbia University
in New York City and received a Bachelor of Science in Industrial Engineering from Tel-Aviv University, Israel.
Jonathan
B. Siegel became a member of our board of directors on September 13, 2018. Mr. Siegel is the founder and CEO of JBS Healthcare
Ventures since its formation in 2017. In June 2021, he also assumed the role as CEO and Chairman of the board of OPY Acquisition Corp.
I, that was a public Nasdaq-listed company between October 2021 and December 2023. Previously, he was a partner and healthcare sector
head at Kingdon Capital Management from 2011 until 2017. Prior to joining Kingdon, Mr. Siegel was a healthcare portfolio manager at SAC
Capital Advisors from 2005 until 2011; an associate director of pharmaceutical and specialty pharmaceutical research at Bear, Stearns
& Co.; a pharmaceuticals research associate at Dresdner Kleinwort Wasserstein; and a consultant to the Life Sciences Division of Computer
Sciences Corporation. Mr. Siegel has worked as a research associate at the Novartis Center for Immunobiology at Harvard Medical School
and as a research assistant at Tufts University School of Medicine. He is also a director at Jaguar Health, Inc., a Nasdaq listed company
since 2018, and has served on the board of advisors of Vitalis LLC, a private pharmaceutical company, since March 2019 and as a director
of Napo Therapeutics S.p.A, the majority owned Italian subsidiary of Napo Pharmaceuticals and Jaguar Health, Inc. since November 2021.
Mr. Siegel received a BS in Psychology from Tufts University in 1995 and an MBA from Columbia Business School in 1999.
Mr. Ran Gottfried
became a member of our board of directors immediately following the pricing of our initial public offering and serves as an external director
under the Companies Law and as the lead independent director. Since 1975, Mr. Gottfried has served as a chief executive officer,
consultant and director of private companies in Israel and Europe in the areas of retail and distribution of pharmaceuticals, consumer
and household products. Mr. Gottfried served as a director of Perrigo Company from 2006 until 2015. From 2006 until 2008, Mr. Gottfried
served as chairman and chief executive officer of Powerpaper Ltd., a leading developer and manufacturer of micro electrical cosmetic and
pharmaceutical patches. From 2005 until 2010, Mr. Gottfried served as a director of Bezeq, Israel’s leading telecommunications provider
and from 2003 until its acquisition by Perrigo Company in 2005, Mr. Gottfried served as a director of Agis Industries Ltd. He served as
a director at Shufersal Ltd from 2018 until 2022.
Mr. Jerrold
S. Gattegno became a member of our board of directors immediately following the pricing of our initial public offering and serves
as an external director under the Companies Law. Mr. Gattegno worked in the New York, Washington D.C. and London offices of Deloitte Touche
Tohmatsu Limited, a public accounting firm, from 1973 until 2015, where he served in various senior positions, including as a managing
partner in Deloitte’s Washington National Tax Office, as the partner-in-charge and founding partner of Deloitte’s multistate
tax practice and as managing director and principal of Deloitte Tax Overseas Services LLC. Mr. Gattegno served as a governing board
member of the Hispanic Association of Colleges and Universities and a member of its finance and audit committee, from 2012 until 2015.
Mr. Gattegno is a certified public accountant and holds a B.S. in accounting (cum laude) from the City University of New York and an M.B.A.
in taxation (with honors) from Pace University, New York.
Mr. Yuval Yanai became a
member of our board of directors in February 2024. Mr. Yanai currently
serves as a director in multiple companies, both public and private. He is currently a director and the Chairman of the Audit Committee,
Chairman of the Finance Committee and Chairman of the Compensation Committee of Check-Cap Ltd., a medical company traded on Nasdaq Stock
Market; an external director and Chairman of the Finance (Balance Sheet), Compensation and Audit Committee of Clal Biotechnology Industries,
an Israeli life sciences investment company traded on the Tel Aviv Stock Exchange; a director in S&P Global Ratings Maalot Ltd., a
finance rating company; and a director in PulseNmore Ltd., a medical device company traded on the Tel Aviv Stock Exchange. Mr. Yanai also
serves as a director at a number of private medical companies. From 2005 until 2014, Mr. Yanai served as CFO of Given Imaging Ltd.,
a medical company traded on Nasdaq Stock Marketand on the Tel Aviv Stock Exchange, and from 2000 until 2005. Mr. Yanai served as Senior
Vice President and CFO of Koor Industries Ltd., an industrial holding company traded on the New York Stock Exchange and on the Tel Aviv
Stock Exchange. From 1998 until 2000, Mr. Yanai served as CFO of Nice Systems Ltd., a technology company traded on the Nasdaq Stock Market,
and from 1985 until 1998, Mr. Yanai served as CFO of Elscint Ltd., a technology company traded on the New York Stock Exchange. Mr. Yanai
holds a B.A. in accounting and finance from Tel-Aviv University, Israel.
B. Compensation
The aggregate compensation paid by us to our executive
officers and directors for the year ended December 31, 2023 was approximately $2.7 million. This amount includes approximately $0.4million
set aside or accrued to provide pension, severance, retirement or similar benefits or expenses, but does not include business travel,
relocation, professional and business association dues and expenses reimbursed to officers, and other benefits commonly reimbursed or
paid by companies in Israel.
The table and summary below outline the compensation granted to
our five highest compensated directors and officers during the year ended December 31, 2023. The compensation detailed in the table
below refers to actual compensation granted or paid to the director or officer during the year 2023.
|
Name and Position of director or
officer |
Base
Salary
or
Other
Payment
(1) |
Value of
Social
Benefits
(2) |
Value of
Equity Based
Compensation
Granted
(3) |
All Other
Compensation
(4) |
Total |
|||||||||||||||
|
(Amounts in U.S. dollars are based on 2023 monthly average representative U.S. dollar
– NIS rate of exchange) |
||||||||||||||||||||
|
Alon Seri-Levy / Chief Executive Officer |
325 |
63 |
787 |
23 |
1,198 |
|||||||||||||||
|
Gilad Mamlok / Chief Financial Officer |
263 |
54 |
276 |
50 |
643 |
|||||||||||||||
|
Ofer Toledano / VP R&D |
205 |
57 |
196 |
24 |
482 |
|||||||||||||||
|
Ofra Levy-Hacham / VP Clinical, RA & QAA |
172 |
49 |
157 |
24 |
403 |
|||||||||||||||
|
Itzik Yosef / Chief Operating Officer |
163 |
47 |
52 |
26 |
288 |
|||||||||||||||
|
(1) |
“Base Salary or Other Payment” means the aggregate yearly gross monthly
salaries or other payments with respect to the Company's Executive Officers and members of the board of directors for the year 2023.
|
|
(2) |
“Social Benefits” include payments to the National Insurance Institute,
advanced education funds, managers’ insurance and pension funds; vacation pay; and recuperation pay as mandated by Israeli law.
|
|
(3) |
Consists of the fair value of the equity-based compensation granted during 2023 in
exchange for the directors and officers services recognized as an expense in profit or loss and is carried to the accumulated deficit
under equity. The total amount recognized as an expense over the vesting period of the options. |
|
(4) |
“All Other Compensation” includes, among other things, car-related
expenses, communication expenses, basic health insurance, holiday presents, and 2021, 2022 and 2023 special bonuses that officers received.
|
In addition, all of our directors and executive officers are
covered under our directors’ and executive officers’ liability insurance policies and were granted letters of indemnification
by us.
Employment Agreements
We have entered into written employment agreements with each of
our executive officers. These agreements provide for notice periods of varying duration for termination of the agreement by us or by the
relevant executive officer, during which time the executive officer will continue to receive base salary and benefits. These agreements
also contain customary provisions regarding noncompetition, confidentiality of information and assignment of inventions. However, the
enforceability of the noncompetition provisions may be limited under applicable law. See “Item 3. Key Information – D. Risk
Factors — Risks Related to Employee Matters" — Under applicable employment laws, we may not be able to enforce covenants not
to compete” for a further description of the enforceability of non-competition clauses.
For information on exemption and indemnification letters granted
to our directors and officers, please see “Item 6. Directors, Senior Management and Employees - C. Board Practices – Exculpation,
Insurance and Indemnification of Directors and Officers”.
Director Compensation
We currently pay our external directors and our other independent
directors is as follows: (i) $40,000 annually in cash; (ii) $5,000 annually in cash for service on each of the Audit Committee and/or
Compensation Committee (as the case may be) and (iii) $10,000 annually in cash for service as chairman of the Audit Committee and/or Compensation
Committee (as the case may be), which includes amounts payable under clause (ii) (all cash amounts to be paid quarterly).
In addition, in 2018 and 2019 each of our external
directors and our other independent directors received an aggregate of 11,500 Restricted Share Units ("RSUs") for the first three years
of their service as a director, with a three-year vesting and in accordance with the Company's 2014 Share Incentive Plan, in 2021 each
of our external directors and our other independent directors received 45,000 options ("Options"), at an exercise price of $10.02 with
a three-year vesting and in accordance with the Company's 2014 Share Incentive Plan. On February 28, 2024 our shareholders approved
the grant of options to purchase 75,000 ordinary shares of the Company at an exercise price equal to $1.20 per ordinary share to each
of our external and independent directors (other than Mr. Jerrold S Gattegno whose term of office ends on March 22, 2024) with a three-year
vesting and in accordance with the Company's 2014 Share Incentive Plan.
There is no limit regarding the number and/or hours of meetings,
and the director compensation includes all meetings of the Board and any Board’s committees. We do not pay compensation to the other
directors of the Company in their capacity as directors.
Compensation Policy
Our compensation policy, which became effective immediately after
the pricing of our initial public offering, and was amended on our annual general meetings held on June 23, 2022 and on July
26, 2023, is designed to promote retention and motivation of directors and executive officers, incentivize superior individual excellence,
align the interests of our directors and executive officers with our long-term performance and provide a risk management tool. To that
end, a portion of an executive officer compensation package is targeted to reflect our short and long-term goals, as well as the executive
officer’s individual performance. On the other hand, our compensation policy includes measures designed to reduce the executive
officer’s incentives to take excessive risks that may harm us in the long-term, such as limits on the value of cash bonuses and
equity-based compensation, limitations on the ratio between the variable and the total compensation of an executive officer and minimum
vesting periods for equity-based compensation.
Our compensation policy also addresses our executive officer’s
individual characteristics (such as his or her respective position, education, scope of responsibilities and contribution to the attainment
of our goals) as the basis for compensation variation among our executive officers and considers the internal ratios between compensation
of our executive officers and directors and other employees. Pursuant to our compensation policy, the compensation that may be granted
to an executive officer may include: base salary, annual bonuses and other cash bonuses (such as a signing bonus and special bonuses with
respect to any special achievements, such as outstanding personal achievement, outstanding personal effort or outstanding company performance),
equity-based compensation, benefits and retirement and termination of service arrangements. All cash bonuses are limited to a maximum
amount linked to the executive officer’s base salary. Our compensation policy for the following maximum base salaries: (i) for a
Company CEO resident in Israel, a maximum monthly base salary not exceeding NIS 120,000 and total fixed and variable compensation (including
equity based compensation) not to exceed NIS 5 million per year; (ii) for Company executive officers (other than Board of Directors member
or CEO) resident in Israel, a monthly base salary not exceeding NIS 90,000; (iii) for a Company CEO resident in the U.S. or another location
outside of Israel, such base salary as shall be determined by the shareholders pursuant to applicable law; and (iv) for Company executive
officers (other than Board of Directors member or CEO) resident in the U.S. or another location outside of Israel, an annual base salary
not exceeding USD 400,000, in each case subject to increases in the consumer price index in the relevant jurisdiction in which the executive
resides. For purposes of calculating the maximum fixed and variable compensation each year, the value of any equity award will be allocated
equally over the number of years during which such equity award vests In addition, the total variable compensation components (cash bonuses
and equity-based compensation) may not exceed 85% of each executive officer’s total compensation package with respect to any given
calendar year.
An annual cash bonus may be awarded to executive officers upon
the attainment of pre-set periodic objectives and individual targets. The annual cash bonus that may be granted to our executive officers
other than our chief executive officer will be based on performance objectives and a discretionary evaluation of the executive officer’s
overall performance by our chief executive officer and subject to minimum thresholds. The annual cash bonus that may be granted to executive
officers other than our chief executive officer may be based entirely on a discretionary evaluation. Furthermore, our chief executive
officer will be entitled to recommend performance objectives, and such performance objectives will be approved by our compensation committee
(and, if required by law, by our board of directors).
The performance measurable objectives of our chief executive officer
will be determined annually by our compensation committee and board of directors, will include the weight to be assigned to each achievement
in the overall evaluation. A less significant portion of the chief executive officer’s annual cash bonus may be based on a discretionary
evaluation of the chief executive officer’s overall performance by the compensation committee and the board of directors based on
quantitative and qualitative criteria.
The equity-based compensation under our compensation policy for
our executive officers (including members of our board of directors) is designed in a manner consistent with the underlying objectives
in determining the base salary and the annual cash bonus, with its main objectives being to enhance the alignment between the executive
officers’ interests with our long-term interests and those of our shareholders and to strengthen the retention and the motivation
of executive officers in the long term. Our compensation policy provides for executive officer compensation in the form of share options
or other equity-based awards, such as restricted shares and restricted share units, in accordance with our share incentive plan then in
place. All equity-based incentives granted to executive officers shall be subject to vesting periods in order to promote long-term retention
of the awarded executive officers. The equity-based compensation shall be granted from time to time and be individually determined and
awarded according to the performance, educational background, prior business experience, qualifications, role and the personal responsibilities
of the executive officer.
In addition, our compensation policy contains compensation recovery
provisions which allows us under certain conditions to recover bonuses paid in excess, enables our chief executive officer to approve
an immaterial change in the terms of employment of an executive officer (provided that the changes of the terms of employment are in accordance
our compensation policy) and allows us to exculpate, indemnify and insure our executive officers and directors subject to certain limitations
set forth thereto.
Our compensation policy provides for the following maximum compensation
of our external directors and our other independent directors: (i) $67,275 annually in cash; (ii) $7,475 annually in cash for service
on each of the Audit Committee and/or Compensation Committee (as the case may be), (iii) $37,375 annually in cash for service as chairman
of the Board, (iv) $14,950 annually in cash for service as chairman of the Audit Committee and/or Compensation Committee (as the case
may be), which includes amounts payable under clause (ii), and (v) $14,950 annually in cash for service as a lead independent director
(all cash amounts to be paid quarterly). Equity based-compensation granted to the Company’s directors shall not exceed 55% of the
total compensation paid to the Company’s directors. Our compensation policy also provides for compensation to the members
of our board of directors either (i) in accordance with the amounts provided in the Companies Regulations (Rules Regarding the Compensation
and Expenses of an External Director) of 2000, as amended by the Companies Regulations (Relief for Public Companies Traded in Stock Exchange
Outside of Israel) of 2000, as such regulations may be amended from time to time, or (ii) in accordance with the amounts determined in
our compensation policy.
Policy for Recovery of Erroneously Awarded Compensation
In accordance with the Nasdaq listing rules, our Company
has adopted a Policy for Recovery of Erroneously Awarded Compensation, or a Clawback Policy, which became effective as of October 2, 2023.
C.
Board Practices
Appointment of Directors and Terms of Officers
Our board of directors currently consists of nine directors,
including three external directors, and appointment fulfills the requirements of the Companies Law for the company to have two external
directors (see “Item 6. Directors, Senior Management and Employees - C. Board Practices – External Directors”). These
three directors, as well as two additional directors, qualify as independent directors under the corporate governance standards of the
Nasdaq corporate governance rules and the independence requirements of Rule 10A-3 of the Exchange Act.
Under our amended and restated articles of association, the number
of directors on our board of directors will be no less than five (5) and no more than nine (10), including any external directors required
to be appointed under the Companies Law. The minimum and maximum number of directors may be changed, at any time and from time to time,
by a special 66 2∕3% majority shareholder vote.
Other than external directors, for whom special
election requirements apply under the Companies Law, as detailed below, the Israeli Companies Law and our articles of association provide
that directors are elected annually at the general meeting of our shareholders by a vote of the holders of a majority of the voting power
represented present and voting, in person or by proxy, at that meeting. We have only one class of directors. Mr. Ran Gottfried , Mr. Jerrold
S Gattegno and Mr. Yuval Yanai currently serve as our external directors. On February 28, 2024, Mr. Ran Gottfried was re-appointed, and
Mr. Yuval Yanai was appointed, as external directors for a term of three years. Mr. Gattegno’s term as external director ends
on March 22, 2024.
Under our amended and restated articles of association, our board
of directors may elect new directors if the number of directors is below the maximum provided therein. External directors are elected
for an initial term of three years and may be elected for up to two additional three-year terms (or more) under the circumstances described
below. External directors may be removed from office only under the limited circumstances set forth in the Companies Law. See “Item
6. Directors, Senior Management and Employees - C. Board Practices – External Directors— Election and Dismissal of External
Directors” for a description of the procedure for the election of external directors.
Under Israeli law, the chief executive officer of a public company
may not serve as the chairman of the board of directors of the company unless approved by a special majority of our shareholders as required
under the Companies Law.
In addition, under the Companies Law, our board of directors must
determine the minimum number of directors who are required to have financial and accounting expertise. Under applicable regulations, a
director with financial and accounting expertise is a director who, by reason of his or her education, professional experience and skill,
has a high level of proficiency in and understanding of business accounting matters and financial statements. See “Item 6. Item
6. Directors, Senior Management and Employees - C. Board Practices – External Directors — Qualifications of External
Directors.” He or she must be able to thoroughly comprehend the financial statements of the company and initiate debate regarding
the manner in which financial information is presented. In determining the number of directors required to have such expertise, the board
of directors must consider, among other things, the type and size of the company and the scope and complexity of its operations. Our board
of directors has determined that we require at least one director with the requisite financial and accounting expertise and that has such
expertise.
There are no family relationships among any of our office holders
(including directors), other than Mr. Itai Arkin who is the son of Mr. Moshe Arkin.
Alternate Directors
Our amended and restated articles of association provide, as allowed
by the Companies Law, that any director may, by written notice to us, appoint another person who is qualified to serve as a director to
serve as an alternate director. The alternate director will be regarded as a director. Under the Companies Law, a person who is not qualified
to be appointed as a director, a person who is already serving as a director or a person who is already serving as an alternate director
for another director, may not be appointed as an alternate director. Nevertheless, a director who is already serving as a director may
be appointed as an alternate director for a member of a committee of the board of directors as long as he or she is not already serving
as a member of such committee, and if the alternate director is to replace an external director, he or she is required to be an external
director and to have either “financial and accounting expertise” or “professional expertise,” depending on the
qualifications of the external director he or she is replacing. The term of appointment of an alternate director may be for one meeting
of the board of directors or until notice is given of the cancellation of the appointment. A person who does not have the requisite “financial
and accounting experience” or the “professional expertise,” depending on the qualifications of the external director
he or she is replacing, may not be appointed as an alternate director for an external director.
External Directors
Qualifications of External Directors
Under the Companies Law, companies incorporated under the laws
of the State of Israel that are “public companies,” including companies with shares listed on The Nasdaq Global Market, are
generally required to appoint at least two external directors who meet the qualification requirements set forth in the Companies Law.
A person may not be appointed as an external director if
the person is a relative of a controlling shareholder or if on the date of the person’s appointment or within the preceding two
years the person or his or her relatives, partners, employers or anyone to whom that person is subordinate, whether directly or indirectly,
or entities under the person’s control have or had any affiliation with any of (each an “Affiliated Party”):
(1) us; (2) any person or entity controlling us on the date of such appointment; (3) any relative of a controlling shareholder; or (4)
any entity controlled, on the date of such appointment or within the preceding two years, by us or by a controlling shareholder. If there
is no controlling shareholder or any shareholder holding 25% or more of voting rights in the company, a person may not be appointed as
an external director if the person has any affiliation to the chairman of the board of directors, the general manager (chief executive
officer), any shareholder holding 5% or more of the company’s shares or voting rights or the senior financial officer as of the
date of the person’s appointment.
The term “controlling shareholder” means a shareholder
with the ability to direct the activities of the company, other than by virtue of being an office holder. A shareholder is presumed to
have “control” of the company and thus to be a controlling shareholder of the company if the shareholder holds 50% or more
of the “means of control” of the company. “Means of control” is defined as (1) the right to vote at a general
meeting of a company or a corresponding body of another corporation; or (2) the right to appoint directors of the corporation or its general
manager. For the purpose of approving related-party transactions, the term also includes any shareholder that holds 25% or more of the
voting rights of the company if the company has no shareholder that owns more than 50% of its voting rights. For the purpose of determining
the holding percentage stated above, two or more shareholders who have a personal interest in a transaction that is brought for the company’s
approval are deemed as joint holders.
| • |
The term affiliation includes: |
| • |
an employment relationship; |
| • |
a business or professional relationship maintained on a regular basis; |
| • |
control; and |
| • |
service as an office holder, excluding service as a director in a private company prior to the first offering of its shares to the
public if such director was appointed as a director of the private company in order to serve as an external director following the initial
public offering. |
The term “relative” is defined as a spouse, sibling,
parent, grandparent, descendant, spouse’s descendant, sibling and parent and the spouse of each of the foregoing.
The term “office holder” is defined as a general manager,
chief business manager, deputy general manager, vice general manager, director or manager directly subordinate to the general manager
or any other person assuming the responsibilities of any of the foregoing positions, without regard to such person’s title.
A person may not serve as an external director if that person or
that person’s relative, partner, employer, a person to whom such person is subordinate (directly or indirectly) or any entity under
the person’s control has a business or professional relationship with any entity that has an affiliation with any Affiliated Party,
even if such relationship is intermittent (excluding insignificant relationships). Additionally, any person who has received compensation
intermittently (excluding insignificant relationships) other than compensation permitted under the Companies Law may not continue to serve
as an external director.
No person can serve as an external director if the person’s
position or other affairs create, or may create, a conflict of interest with the person’s responsibilities as a director or may
otherwise interfere with the person’s ability to serve as a director or if such a person is an employee of the Israeli Securities
Authority or of an Israeli stock exchange. If at the time an external director is appointed all current members of the board of directors,
who are not controlling shareholders or relatives of controlling shareholders, are of the same gender, then the external director to be
appointed must be of the other gender. In addition, a person who is a director of a company may not be elected as an external director
of another company if, at that time, a director of the other company is acting as an external director of the first company.
The Companies Law provides that an external director must meet
certain professional qualifications or have financial and accounting expertise and that at least one external director must have financial
and accounting expertise. However, if at least one of our other directors (1) meets the independence requirements of the Exchange
Act, (2) meets the standards of the Nasdaq corporate governance rules for membership on the audit committee and (3) has financial and
accounting expertise as defined in the Companies Law and applicable regulations, then neither of our external directors is required to
possess financial and accounting expertise as long as both possess other requisite professional qualifications. The determination of whether
a director possesses financial and accounting expertise is made by the board of directors. A director with financial and accounting expertise
is a director who by virtue of his or her education, professional experience and skill, has a high level of proficiency in and understanding
of business accounting matters and financial statements so that he or she is able to fully understand our financial statements and initiate
debate regarding the manner in which the financial information is presented.
The regulations promulgated under the Companies Law define an external
director with requisite professional qualifications as a director who satisfies one of the following requirements: (1) the director holds
an academic degree in either economics, business administration, accounting, law or public administration, (2) the director either holds
an academic degree in any other field or has completed another form of higher education in the company’s primary field of business
or in an area which is relevant to his or her office as an external director in the company, or (3) the director has at least five years
of experience serving in any one of the following, or at least five years of cumulative experience serving in two or more of the following
capacities: (a) a senior business management position in a company with a substantial scope of business, (b) a senior position in the
company’s primary field of business or (c) a senior position in public administration.
Until the lapse of a two-year period from the date that an
external director of a company ceases to act in such capacity, the company in which such external director served, and its controlling
shareholder or any entity under control of such controlling shareholder may not, directly or indirectly, grant such former external director,
or his or her spouse or child, any benefit, including via (i) the appointment of such former director or his or her spouse or his child
as an officer in the company or in an entity controlled by the company’s controlling shareholder, (ii) the employment of such former
director, and (iii) the engagement, directly or indirectly, of such former director as a provider of professional services for compensation,
directly or indirectly, including via an entity under his or her control. With respect to a relative who is not a spouse or a child, such
limitations shall only apply for one year from the date such external director ceased to be engaged in such capacity.
Election and Dismissal of External
Directors
Under Israeli law, external directors are elected by a majority
vote at a shareholders’ meeting, provided that either:
| • |
the majority of the shares that are voted at the meeting in favor of the election of the external director, excluding abstentions,
include at least a majority of the votes of shareholders who are not controlling shareholders and do not have a personal interest in the
appointment (excluding a personal interest that did not result from the shareholder’s relationship with the controlling shareholder);
or |
| • |
the total number of shares held by non-controlling shareholders or any one on their behalf that are voted against the election of
the external director does not exceed two percent of the aggregate voting rights in the company. |
Under Israeli law, the initial term of an external director of
an Israeli public company is three years. The external director may be re-elected, subject to certain circumstances and conditions, for
up to two additional terms of three years each, and thereafter, subject to conditions set out in the regulations promulgated under the
Companies Law, to further three year terms, each re-election subject to one of the following:
| • |
his or her service for each such additional term is recommended by one or more shareholders holding at least 1% of the company’s
voting rights and is approved at a shareholders meeting by a disinterested majority, where the total number of shares held by non-controlling,
disinterested shareholders voting for such reelection exceeds 2% of the aggregate voting rights in the company and subject to additional
restrictions set forth in the Companies Law with respect to the affiliation of the external director nominee; |
| • |
the external director proposed his or her own nomination, and such nomination was approved in accordance with the requirements described
in the paragraph above; or |
| • |
his or her service for each such additional term is recommended by the board of directors and is approved at a meeting of shareholders
by the same majority required for the initial election of an external director (as described above). |
An external director may be removed by the same special majority
of the shareholders required for his or her election, if he or she ceases to meet the statutory qualifications for appointment or if he
or she violates his or her fiduciary duty to the company. An external director may also be removed by order of an Israeli court if the
court finds that the external director is permanently unable to exercise his or her office, has ceased to meet the statutory qualifications
for his or her appointment, has violated his or her fiduciary duty to the company, or has been convicted by a court outside Israel of
certain offenses detailed in the Companies Law.
If the vacancy of an external directorship causes a company to
have fewer than two external directors, the company’s board of directors is required under the Companies Law to call a special general
meeting of the company’s shareholders as soon as possible to appoint such number of new external directors so that the company thereafter
has two external directors.
Additional Provisions
Under the Companies Law, each committee authorized to exercise
any of the powers of the board of directors is required to include at least one external director and its audit and compensation committees
are required to include all of the external directors.
An external director is entitled to compensation and reimbursement
of expenses in accordance with regulations promulgated under the Companies Law and is prohibited from receiving any other compensation,
directly or indirectly, in connection with serving as a director except for certain exculpation, indemnification and insurance provided
by the company, as specifically allowed by the Companies Law.
Audit Committee
Companies Law Requirements
Under the Companies Law, the board of directors of any public company
must also appoint an audit committee comprised of at least three directors, including all of the external directors. The audit committee
may not include:
| • |
the chairman of the board of directors; |
| • |
a controlling shareholder or a relative of a controlling shareholder; |
| • |
any director employed by us or by one of our controlling shareholders or by an entity controlled by our controlling shareholders
(other than as a member of the board of directors); or |
| • |
any director who regularly provides services to us, to one of our controlling shareholders or to an entity controlled by our controlling
shareholders. |
According to the Companies Law, the majority of the members of
the audit committee, as well as the majority of members present at audit committee meetings, will be required to be “independent”
(as defined below) and the chairman of the audit committee will be required to be an external director. Any persons disqualified from
serving as a member of the audit committee may not be present at the audit committee meetings, unless the chairman of the audit committee
has determined that such person is required to be present at the meeting or if such person qualifies under one of the exemptions of the
Companies Law.
The term “independent director” is defined under the
Companies Law as an external director or a director who meets the following conditions and who is appointed or classified as such according
to the Companies Law: (1) the conditions for his or her appointment as an external director (as described above) are satisfied and the
audit committee approves the director having met such conditions and (2) he or she has not served as a director of the company for over
nine consecutive years with any interruption of up to two years of his or her service not being deemed a disruption to the continuity
of his or her service.
Nasdaq Listing Requirements
Under the Nasdaq corporate governance rules, we are required to
maintain an audit committee consisting of at least three independent directors, all of whom are financially literate and one of whom has
accounting or related financial management expertise.
Our audit committee consists of Ran Gottfried,
Jerrold S. Gattegno, Sharon Kochan, and Yuval Yanai, Yuval Yanai serves as Chairman of the committee. All members of our audit committee
meet the requirements for financial literacy under the applicable rules and regulations of the SEC and the Nasdaq corporate governance
rules. Our board of directors has determined that each of Jerrold S. Gattegno, Mr. Ran Gottfried and Mr. Yuval Yanai is an audit committee
financial expert as defined by SEC rules and has the requisite financial experience as defined by the Nasdaq corporate governance rules.
Each of the members of the audit committee is “independent”
as such term is defined in Rule 10A-3(b)(1) under the Exchange Act.
Approval of Transactions with
Related Parties
The approval of the audit committee is required to effect specified
actions and transactions with office holders and controlling shareholders and their relatives, or in which they have a personal interest.
See “Item 6. Directors, Senior Management and Employees - C. Board Practices – Duties of Directors and Officers and Approval
of Specified Related Party Transactions under the Israeli Companies Law – Fiduciary Duties of Office Holders.” The audit committee
may not approve an action or a transaction with a controlling shareholder or with an office holder unless at the time of approval the
audit committee meets the composition requirements under the Companies Law.
Audit Committee Role
Our board of directors has adopted an audit committee charter
effective immediately after the pricing of our initial public offering setting forth the responsibilities of the audit committee consistent
with the rules of the SEC and the Nasdaq corporate governance rules, which include:
| • |
retaining and terminating our independent auditors, subject to board of directors and shareholder ratification; |
| • |
overseeing the independence, compensation and performance of the Company’s independent auditors; |
| • |
the appointment, compensation, retention and oversight of any accounting firm engaged for the purpose of preparing or issuing an
audit report or performing other audit services; |
| • |
pre-approval of audit and non-audit services to be provided by the independent auditors; |
| • |
reviewing with management and our independent directors our financial statements prior to their submission to the SEC; and
|
| • |
approval of certain transactions with office holders and controlling shareholders, as described below, and other related party transactions.
|
Additionally, under the Companies Law, the role of the audit committee
includes the identification of irregularities in our business management, among other things, by consulting with the internal auditor
or our independent auditors and suggesting an appropriate course of action to the board of directors. In addition, the audit committee
or the board of directors, as set forth in the articles of association of the company, is required to approve the yearly or periodic work
plan proposed by the internal auditor. The audit committee is required to assess the company’s internal audit system and the performance
of its internal auditor. The Companies Law also requires that the audit committee assess the scope of the work and compensation of the
company’s external auditor. In addition, the audit committee is required to determine whether certain related party actions and
transactions are “material” or “extraordinary” for the purpose of the requisite approval procedures under the
Companies Law and whether certain transactions with a controlling shareholder will be subject to a competitive procedure. The audit committee
charter states that in fulfilling its role the committee is empowered to conduct or authorize investigations into any matters within its
scope of responsibilities. A company whose audit committee’s composition also meets the requirements set for the composition of
a compensation committee (as further detailed below) may have one committee acting as both audit and compensation committees.
Compensation Committee
Under the Companies Law, public companies are required to appoint
a compensation committee in accordance with the guidelines set forth thereunder.
The compensation committee must consist of at least three members.
All of the external directors must serve on the committee and constitute a majority of its members. The chairman of the compensation committee
must be an external director. The remaining members are not required to be external directors, but must be directors who qualify to serve
as members of the audit committee (as described above).
The compensation committee, which consists of Ran Gottfried, Jerrold
S. Gattegno, Mr. Yuval Yanai and Jonathan B. Siegel, assists the board of directors in determining compensation for our directors and
officers. Ran Gottfried serves as Chairman of the committee. Under SEC and Nasdaq rules, there are heightened independence standards for
members of the compensation committee, including a prohibition against the receipt of any compensation from us other than standard supervisory
board member fees. Although foreign private issuers are not required to meet this heightened standard, our board of directors has determined
that all of our expected compensation committee members meet this heightened standard.
In accordance with the Companies Law, the roles of the compensation
committee are, among others, as follows:
| (1) |
to recommend to the board of directors the compensation policy for directors and officers, and to recommend to the board of directors
once every three years whether the compensation policy that had been approved should be extended for a period of more than three years;
|
| (2) |
to recommend to the board of directors updates to the compensation policy, from time to time, and examine its implementation;
|
| (3) |
to decide whether to approve the terms of office and employment of directors and officers that require approval of the compensation
committee; and |
| (4) |
to decide whether the compensation terms of the chief executive officer, which were determined pursuant to the compensation policy,
will be exempted from approval by the shareholders because such approval would harm the ability to engage the chief executive officer.
|
In addition to the roles mentioned above our compensation committee
also makes recommendations to our board of directors regarding the awarding of employee equity grants.
In general, under the Companies Law, a public company must have
a compensation policy approved by the board of directors after receiving and considering the recommendations of the compensation committee.
In addition, the compensation policy requires the approval of the general meeting of the shareholders. In public companies such as our
company, shareholder approval requires one of the following: (i) the majority of shareholder votes counted at a general meeting including
the majority of all of the votes of those shareholders who are non-controlling shareholders and do not have a personal interest in the
approval of the compensation policy, who vote at the meeting (excluding abstentions) or (ii) the total number of votes against the proposal
among the shareholders mentioned in paragraph (i) does exceed two percent (2%) of the voting rights in the company. Under special circumstances,
the board of directors may approve the compensation policy despite the objection of the shareholders on the condition that the compensation
committee and then the board of directors decide, on the basis of detailed arguments and after discussing again the compensation policy,
that approval of the compensation policy, despite the objection of the meeting of shareholders, is for the benefit of the company.
If a company initially offer its securities to the public, like
we recently did, adopts a compensation policy in advance of its initial public offering, and describes it in its prospectus, then such
compensation policy shall be deemed a validly adopted policy in accordance with the Companies Law requirements described above. Furthermore,
if the compensation policy is set in accordance with the aforementioned relief, then it will remain in effect for term of five years from
the date such company has become a public company.
The compensation policy must be based on certain considerations,
include certain provisions and needs to reference certain matters as set forth in the Companies Law.
The compensation policy must serve as the basis for decisions concerning
the financial terms of employment or engagement of office holders, including exculpation, insurance, indemnification or any monetary payment
or obligation of payment in respect of employment or engagement. The compensation policy must relate to certain factors, including advancement
of the company’s objectives, business plan and long-term strategy, and creation of appropriate incentives for office holders. It
must also consider, among other things, the company’s risk management, size and the nature of its operations. The compensation policy
must furthermore consider the following additional factors:
| • |
the education, skills, experience, expertise and accomplishments of the relevant office holder; |
| • |
the office holder’s position, responsibilities and prior compensation agreements with him or her; |
| • |
the ratio between the cost of the terms of employment of an office holder and the cost of the employment of other employees of the
company, including employees employed through contractors who provide services to the company, in particular the ratio between such cost,
the average and median salary of the employees of the company, as well as the impact of such disparities on the work relationships in
the company; |
| • |
if the terms of employment include variable components — the possibility of reducing variable components at the discretion
of the board of directors and the possibility of setting a limit on the value of non-cash variable equity-based components; and
|
| • |
if the terms of employment include severance compensation — the term of employment or office of the office holder, the terms
of his or her compensation during such period, the company’s performance during such period, his or her individual contribution
to the achievement of the company goals and the maximization of its profits and the circumstances under which he or she is leaving the
company. |
The compensation policy must also include, among others:
| • |
with regards to variable components: |
| - |
with the exception of office holders who report directly to the chief executive officer, determining the variable components on long-term
performance basis and on measurable criteria; however, the company may determine that an immaterial part of the variable components of
the compensation package of an office holder’s shall be awarded based on non-measurable criteria, if such amount is not higher than
three monthly salaries per annum, while taking into account such office holder contribution to the company; |
| - |
the ratio between variable and fixed components, as well as the limit of the values of variable components at the time of their grant.
|
| • |
a condition under which the office holder will return to the company, according to conditions to be set forth in the compensation
policy, any amounts paid as part of his or her terms of employment, if such amounts were paid based on information later to be discovered
to be wrong, and such information was restated in the company’s financial statements; |
| • |
the minimum holding or vesting period of variable equity-based components to be set in the terms of office or employment, as applicable,
while taking into consideration long-term incentives; and |
| • |
a limit to retirement grants. |
Corporate Governance Practices
Internal Auditor
Under the Companies Law, the board of directors of a public company
must appoint an internal auditor based on the recommendation of the audit committee. The role of the internal auditor is, among other
things, to examine whether a company’s actions comply with applicable law and orderly business procedure. Under the Companies Law,
the internal auditor may not be an interested party or an office holder or a relative of an interested party or of an office holder, nor
may the internal auditor be the company’s independent auditor or the representative of the same.
An “interested party” is defined in the Companies Law
as (i) a holder of 5% or more of the issued share capital or voting power in a company, (ii) any person or entity who has the right to
designate one or more directors or to designate the chief executive officer of the company, or (iii) any person who serves as a director
or as a chief executive officer of the company. As of the date of this annual report, we appointed Mr. Oren Grupi, CPA, who serves as
partner at KPMG Somekh Chaikin, as our internal auditor.
Duties of Directors and Officers and Approval of Specified
Related Party Transactions under the Israeli Companies Law
Fiduciary Duties of Office Holders
The Companies Law imposes a duty of care and a fiduciary duty on
all office holders of a company. The duty of care of an office holder is based on the duty of care set forth in connection with the tort
of negligence under the Israeli Torts Ordinance (New Version) 5728-1968. This duty of care requires an office holder to act with the degree
of proficiency with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of care
includes, among other things, a duty to use reasonable means, in light of the circumstances, to obtain:
| • |
information on the business advisability of a given action brought for his or her approval or performed by virtue of his or
her position; and |
| • |
all other important information pertaining to such action. |
The fiduciary duty incumbent on an office holder requires him or
her to act in good faith and for the benefit of the company, and includes, among other things, the duty to:
| • |
refrain from any act involving a conflict of interest between the performance of his or her duties in the company and his or her
other duties or personal affairs; |
| • |
refrain from any activity that is competitive with the business of the company; |
| • |
refrain from exploiting any business opportunity of the company for the purpose of gaining a personal advantage 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 fiduciary duty, provided that the office holder acted in good faith, the act or its approval does
not harm the company, and the office holder discloses his or her personal interest a sufficient time before the approval of such act.
Any such approval is subject to the terms of the Companies Law, setting forth, among other things, the appropriate bodies of the company
entitled to provide such approval, and the methods of obtaining such approval.
Disclosure of Personal Interests
of an Office Holder and Approval of Transactions
The Companies Law requires that an office holder promptly disclose
to the company any personal interest that he or she may have and all related material information or documents relating to any existing
or proposed transaction by the company. An interested office holder’s disclosure must be made promptly and in any event no later
than the first meeting of the board of directors at which the transaction is considered. An office holder is not obliged to disclose such
information if the personal interest of the office holder derives solely from the personal interest of his or her relative in a transaction
that is not considered an extraordinary transaction.
Under the Companies Law, once an office holder has complied with
the above disclosure requirement, a company may approve a transaction between the company and the office holder or a third party in which
the office holder has a personal interest. However, a company may not approve a transaction or action that is not to the company’s
benefit.
Under the Companies Law, unless the articles of association of
a company provide otherwise, a transaction with an office holder or with a third party in which the office holder has a personal interest,
which is not an extraordinary transaction, requires approval by the board of directors. Our amended and restated articles of association
provide that such a transaction, which is not an extraordinary transaction, shall be approved by the board of directors or a committee
of the board of directors or any other body or person (which has no personal interest in the transaction) authorized by the board of directors.
If the transaction considered is an extraordinary transaction with an office holder or third party in which the office holder has a personal
interest, then audit committee approval is required prior to approval by the board of directors. For the approval of compensation arrangements
with directors and executive officers, see “Item 6. Directors, Senior Management and Employees - C. Board Practices – Duties
of Directors and Officers and Approval of Specified Related Party Transactions under the Israeli Companies Law – Fiduciary
Duties of Office Holders.”
Any persons who have a personal interest in the approval of a transaction
that is brought before a meeting of the board of directors or the audit committee may not be present at the meeting or vote on the matter.
However, if the chairman of the board of directors or the chairman of the audit committee has determined that the presence of an office
holder with a personal interest is required, such office holder may be present at the meeting for the purpose of presenting the matter.
Notwithstanding the foregoing, a director who has a personal interest may be present at the meeting and vote on the matter if a majority
of the directors or members of the audit committee have a personal interest in the approval of such transaction. If a majority of the
directors at a board of directors meeting have a personal interest in the transaction, such transaction also requires approval of the
shareholders of the company.
A “personal interest” is defined under the Companies
Law as the personal interest of a person in an action or in a transaction of the company, including the personal interest of such person’s
relative or the interest of any other corporate body in which the person and/or such person’s relative is a director or general
manager, a 5% shareholder or holds 5% or more of the voting rights, or has the right to appoint at least one director or the general manager,
but excluding a personal interest stemming solely from the fact of holding shares in the company. A personal interest also includes (1)
a personal interest of a person who votes according to a proxy of another person, including in the event that the other person has no
personal interest, and (2) a personal interest of a person who gave a proxy to another person to vote on his or her behalf regardless
of whether or not the discretion of how to vote lies with the person voting.
An “extraordinary transaction” is defined under the
Companies Law as any of the following:
| • |
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 the company’s profitability, assets or liabilities. |
Disclosure of Personal Interests
of a Controlling Shareholder and Approval of Transactions
The Companies Law also requires that a controlling shareholder
promptly disclose to the company any personal interest that he or she may have and all related material information or documents relating
to any existing or proposed transaction by the company. A controlling shareholder’s disclosure must be made promptly and, in any
event, no later than the first meeting of the board of directors at which the transaction is considered. Extraordinary transactions with
a controlling shareholder or in which a controlling shareholder has a personal interest, including a private placement in which a controlling
shareholder has a personal interest, and the terms of engagement of the company, directly or indirectly, with a controlling shareholder
or a controlling shareholder’s relative (including through a corporation controlled by a controlling shareholder), regarding the
company’s receipt of services from the controlling shareholder, and if such controlling shareholder is also an office holder or
employee of the company, regarding his or her terms of employment, require the approval of each of (i) the audit committee or the
compensation committee with respect to the terms of the engagement of the company, (ii) the board of directors and (iii) the shareholders,
in that order. In addition, the shareholder approval must fulfill one of the following requirements:
| • |
majority of the shares held by shareholders who have no personal interest in the transaction and are voting at the meeting must be
voted in favor of approving the transaction, excluding abstentions; or |
| • |
the shares voted by shareholders who have no personal interest in the transaction who vote against the transaction represent no more
than two percent (2%) of the voting rights in the company. |
In addition, an extraordinary transaction with a controlling shareholder
or in which a controlling shareholder has a personal interest, and an engagement of the company, directly or indirectly, with a controlling
shareholder or a controlling shareholder’s relative (including through a corporation controlled by a controlling shareholder), regarding
the company’s receipt of services from the controlling shareholder, and if such controlling shareholder is also an office holder
or employee of the company, regarding his or her terms of employment, in each case with a term of more than three years requires the abovementioned
approval every three years, however, transactions not involving the receipt of services or compensation can be approved for a longer term,
provided that the audit committee determines that such longer term is reasonable under the circumstances. In addition, transactions with
a controlling shareholder or a controlling shareholder’s relative who serves as an officer in a company, directly or indirectly
(including through a corporation under his control), involving the receipt of services by a company or their compensation can have a term
of five years from the company's initial public offering under certain circumstances.
The Companies Law requires that every shareholder that participates,
in person, by proxy or by voting instrument, in a vote regarding a transaction with a controlling shareholder, must indicate in advance
or in the ballot whether or not that shareholder has a personal interest in the vote in question. Failure to so indicate will result in
the invalidation of that shareholder’s vote.
Disclosure of Compensation of
Executive Officers
For so long as we qualify as a foreign private issuer, we are not
required to comply with the proxy rules applicable to U.S. domestic companies, including the requirement to disclose the compensation
of our chief executive officer and certain other most highly compensated executive officers on an individual, rather than an aggregate,
basis. Nevertheless, regulations promulgated under the Companies Law will require us, after we became a public company, to disclose the
annual compensation of our five most highly compensated office holders on an individual basis, rather than on an aggregate basis. This
disclosure will not be as extensive as that required of a U.S. domestic issuer.
Compensation of Directors and
Executive Officers
Directors. Under the
Companies Law, the compensation of our directors requires the approval of our compensation committee, the subsequent approval of the board
of directors and, unless exempted under regulations promulgated under the Companies Law, the approval of the shareholders at a general
meeting. If the compensation of our directors is inconsistent with our stated compensation policy, then, those provisions that must be
included in the compensation policy according to the Companies Law must have been considered by the compensation committee and board of
directors, and shareholder approval will also be required, provided that:
| • |
at least a majority of the shares held by all shareholders who are not controlling shareholders and do not have a personal interest
in such matter, present and voting at such meeting, are voted in favor of the compensation package, excluding abstentions; or |
| • |
the total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in such matter voting
against the compensation package does not exceed two percent (2%) of the aggregate voting rights in the company. |
Executive officers other than
the chief executive officer. The Companies Law requires the approval of the compensation of a public company’s executive
officers (other than the chief executive officer) in the following order: (i) the compensation committee, (ii) the company’s board
of directors, and (iii) if such compensation arrangement is inconsistent with the company’s stated compensation policy, the company’s
shareholders (by a special majority vote as discussed above with respect to the approval of director compensation). However, if the shareholders
of the company do not approve a compensation arrangement with an executive officer that is inconsistent with the company’s stated
compensation policy, the compensation committee and board of directors may override the shareholders’ decision if each of the compensation
committee and the board of directors provide detailed reasons for their decision.
Chief executive officer.
Under the Companies Law, the compensation of a public company’s chief executive officer is required to be approved by: (i) the company’s
compensation committee; (ii) the company’s board of directors, and (iii) the company’s shareholders (by a special majority
vote as discussed above with respect to the approval of director compensation). However, if the shareholders of the company do not approve
the compensation arrangement with the chief executive officer, the compensation committee and board of directors may override the shareholders’
decision if each of the compensation committee and the board of directors provide a detailed report for their decision. The approval of
each of the compensation committee and the board of directors should be in accordance with the company’s stated compensation policy;
however, in special circumstances, they may approve compensation terms of a chief executive officer that are inconsistent with such policy
provided that they have considered those provisions that must be included in the compensation policy according to the Companies Law and
that shareholder approval was obtained (by a special majority vote as discussed above with respect to the approval of director compensation).
In addition, the compensation committee may waive the shareholder approval requirement with regards to the approval of the engagement
terms of a candidate for the chief executive officer position, if they determine that the compensation arrangement is consistent with
the company’s stated compensation policy, and that the chief executive officer did not have a prior business relationship with the
company or a controlling shareholder of the company and that subjecting the approval of the engagement to a shareholder vote would impede
the company’s ability to employ the chief executive officer candidate.
Duties of Shareholders
Under the Companies Law, a shareholder has a duty to refrain from
abusing its power in the company and to act in good faith and in an acceptable manner in exercising its rights and performing its obligations
to the company and other shareholders, including, among other things, when voting at meetings of shareholders on the following matters:
| • |
an amendment to the articles of association; |
| • |
an increase in the company’s authorized share capital; |
| • |
a merger; and |
| • |
the approval of related party transactions and acts of office holders that require shareholder approval. |
A shareholder also has a general duty to refrain from discriminating
against other shareholders.
The remedies generally available upon a breach of contract will
also apply to a breach of the shareholder duties mentioned above, and in the event of discrimination against other shareholders, additional
remedies may be available to the injured shareholder.
In addition, any controlling shareholder, any shareholder that
knows that its vote can determine the outcome of a shareholder vote and any shareholder that, under a company’s articles of association,
has the power to appoint or prevent the appointment of an office holder, or any other power with respect to a company, is under a duty
to act with fairness towards the company. The Companies Law does not describe the substance of this duty except to state that the remedies
generally available upon a breach of contract will also apply in the event of a breach of the duty to act with fairness, taking the shareholder’s
position in the company into account.
Approval of Private Placements
Under the Companies Law and the regulations promulgated thereunder,
a private placement of securities does not require approval at a general meeting of the shareholders of a company; provided however, that
in special circumstances, such as a private placement which is intended to obviate the need to conduct a special tender offer (see “Item
10. Additional Information— Memorandum of Association – Acquisitions under Israeli Law”) or a private placement which
qualifies as a related party transaction (see “Item 6. Directors, Senior Management and Employees - C. Board Practices – Duties
of Directors and Officers and Approval of Specified Related Party Transactions under the Israeli Companies Law – Fiduciary Duties
of Office Holders”), approval at a general meeting of the shareholders of a company is required.
Exculpation, Insurance and Indemnification of Directors and Officers
Under the Companies Law, a company may not exculpate an office
holder from liability for a breach of the fiduciary duty. An Israeli company may exculpate an office holder in advance from liability
to the company, in whole or in part, for damages caused to the company as a result of a breach of duty of care but only if a provision
authorizing such exculpation is included in its articles of association. Our amended and restated articles of association include such
a provision. The company may not exculpate in advance a director from liability arising due to the breach of his or her duty of care in
the event of a prohibited dividend or distribution to shareholders.
Under the Companies Law and the Israeli Securities Law, 5728-1968,
or the Securities Law, a company may indemnify an office holder in respect of the following liabilities, payments and expenses incurred
for acts performed by him or her as an office holder, either in advance of an event or following an event, provided its articles of association
include a provision authorizing such indemnification:
| • |
a monetary liability incurred by or imposed on the office holder in favor of another person pursuant to a court judgment, including
pursuant to a settlement confirmed as judgment or arbitrator’s decision approved by a competent court. However, if an undertaking
to indemnify an office holder with respect to such liability is provided in advance, then such an undertaking must be limited to events
which, in the opinion of the board of directors, can be foreseen based on the company’s activities when the undertaking to indemnify
is given, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and such
undertaking shall detail the abovementioned foreseen events and amount or criteria; |
| • |
reasonable litigation expenses, including reasonable attorneys’ fees, which were incurred by the office holder as a result
of an investigation or proceeding filed against the office holder by an authority authorized to conduct such investigation or proceeding,
provided that such investigation or proceeding was either (i) concluded without the filing of an indictment against such office holder
and without the imposition on him of any monetary obligation in lieu of a criminal proceeding; (ii) concluded without the filing of an
indictment against the office holder but with the imposition of a monetary obligation on the office holder in lieu of criminal proceedings
for an offense that does not require proof of criminal intent; or (iii) in connection with a monetary sanction; |
| • |
a monetary liability imposed on the office holder in favor of a payment for a breach offended at an Administrative Procedure (as
defined below) as set forth in Section 52(54)(a)(1)(a) to the Securities Law; |
| • |
expenses expended by the office holder with respect to an Administrative Procedure under the Securities Law, including reasonable
litigation expenses and reasonable attorneys’ fees; |
| • |
reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or which were imposed on the office
holder by a court (i) in a proceeding instituted against him or her by the company, on its behalf, or by a third party, (ii) in connection
with criminal indictment of which the office holder was acquitted, or (iii) in a criminal indictment which the office holder was convicted
of an offense that does not require proof of criminal intent; and |
| • |
any other obligation or expense in respect of which it is permitted or will be permitted under applicable law to indemnify an office
holder, including, without limitation, matters referenced in Section 56H(b)(1) of the Securities Law. |
An “Administrative Procedure” is defined as a procedure
pursuant to chapters H3 (Monetary Sanction by the Israeli Securities Authority), H4 (Administrative Enforcement Procedures of the Administrative
Enforcement Committee) or I1 (Arrangement to prevent Procedures or Interruption of procedures subject to conditions) to the Securities
Law.
Under the Companies Law and the Securities Law, a company may insure
an office holder against the following liabilities incurred for acts performed by him or her as an office holder if and to the extent
provided in the company’s articles of association:
| • |
a breach of the fiduciary duty to the company, provided that the office holder acted in good faith and had a reasonable basis to
believe that the act would not harm the company; |
| • |
a breach of duty of care to the company or to a third party, to the extent such a breach arises out of the negligent conduct of the
office holder; |
| • |
a monetary liability imposed on the office holder in favor of a third party; |
| • |
a monetary liability imposed on the office holder in favor of an injured party at an Administrative Procedure pursuant to Section
52(54)(a)(1)(a) of the Securities Law; and |
| • |
expenses incurred by an office holder in connection with an Administrative Procedure, including reasonable litigation expenses and
reasonable attorneys’ fees. |
Under the Companies Law, a company may not indemnify, exculpate
or insure an office holder against any of the following:
| • |
a breach of the fiduciary duty, except for indemnification and insurance for a breach of the fiduciary duty to the company to the
extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
|
| • |
a breach of duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office
holder; |
| • |
an act or omission committed with intent to derive illegal personal benefit; or |
| • |
a fine or forfeit levied against the office holder. |
Under the Companies Law, exculpation, indemnification and insurance
of office holders must be approved by the compensation committee and the board of directors and, with respect to directors or controlling
shareholders, their relatives and third parties in which controlling shareholders have a personal interest, also by the shareholders.
Our amended and restated articles of association permit us to exculpate,
indemnify and insure our office holders to the fullest extent permitted or to be permitted by law. Our office holders are currently covered
by a directors’ and officers’ liability insurance policy. As of the date of this annual report, no claims for directors’
and officers’ liability insurance have been filed under this policy and we are not aware of any pending or threatened litigation
or proceeding involving any of our office holders, including our directors, in which indemnification is sought.
See "Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions
- Directors and Officers Insurance Policy and Indemnification Agreements" for information regarding letters of indemnification to directors
and officers of the Company.
D. Employees
As of December 31, 2023, we had 36 employees, all
of whom are located in Israel.
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As of December 31, |
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2021 |
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2022 |
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2023 |
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Company |
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Company |
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Company |
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Employees |
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Consultants |
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Employees |
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Consultants |
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Employees |
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Consultants |
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Management |
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9 |
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9 |
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8 |
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Research and development and other |
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44 |
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46 |
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28 |
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While none of our employees are party to a collective bargaining
agreement, certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and
the Coordination Bureau of Economic Organizations (including the Industrialists’ Associations) are applicable to our employees by
order of the Israel Ministry of Labor. These provisions primarily concern the length of the workday, minimum daily wages for professional
workers, pension fund benefits for all employees, insurance for work-related accidents, procedures for dismissing employees, determination
of severance pay and other conditions of employment. We generally provide our employees with benefits and working conditions beyond the
required minimums.
We have never experienced any employment-related work stoppages
and believe our relationship with our employees is good.
E.
Share Ownership
For information regarding the share ownership of our directors
and executive officers, please see “Item 7. Major Shareholders and Related Party Transactions – A. Major Shareholders.”
Award Plans
2014 Share Incentive Plan
On December 2, 2014, we adopted the 2014 Share Incentive Plan,
or the Plan, and, in connection with our initial public offering, we amended and restated the Plan which became effective immediately
after the pricing of our initial public offering. The Plan is intended to afford an incentive to our and any of our affiliate’s
employees, directors, officers, consultants, advisors and any other person or entity who provides services to the Company, to continue
as service providers, to increase their efforts on our and our affiliates behalf and to promote our success, by providing such persons
with opportunities to acquire a proprietary interest in us.
The number of shares that may be issued under
the Plan is subject to adjustment if particular capital changes affect our share capital or such other number as our board of directors
may determine from time to time. Ordinary shares subject to outstanding awards under the Plan that subsequently expire, are cancelled,
forfeited or terminated for any reason before being exercised will be automatically, and without any further action, returned to the “pool”
of reserved shares and will again be available for grant under the Plan. As of March 1, 2024, we had an aggregate of 641,914 ordinary
shares available for issuance under the Plan (including ordinary shares underlying outstanding options and restricted share units).
A share option is the right to purchase a specified number of ordinary
shares in the future at a specified exercise price and subject to the other terms and conditions specified in the option agreement and
the Plan. The exercise price of each share option granted under the Plan will be determined in accordance with the limitations set forth
under the Plan. The exercise price of any share options granted under the Plan may be paid in cash, through the surrender of ordinary
shares by the option holder or any other method that may be approved by our compensation committee, which may include procedures for cashless
exercise.
Our compensation committee may also grant, or recommend that our
board of directors grant, other forms of equity incentive awards under the Plan, such as restricted shares, restricted share units, and
other forms of share-based compensation.
Israeli participants in the Plan may be granted options subject
to Section 102 of the Israeli Income Tax Ordinance (New Version), 1961, or the Israeli Tax Ordinance. Section 102 of the Israeli Tax Ordinance
allows employees, directors and officers who are not controlling shareholders (as defined for those purposes under the Israeli Tax Ordinance)
and are considered Israeli residents to receive favorable tax treatment for compensation in the form of shares or options. Our non-employee
service providers and controlling shareholders may only be granted options under another section of the Israeli Tax Ordinance, which does
not provide for similar tax benefits. Section 102 includes two alternatives for tax treatment involving the issuance of options or shares
to a trustee for the benefit of the grantees and also includes an additional alternative for the issuance of options or shares directly
to the grantee. The most favorable tax treatment for the grantees is under Section 102(b)(2) of the Israeli Tax Ordinance, the issuance
to a trustee under the “capital gain track.” However, under this track we are not allowed to deduct an expense with respect
to the issuance of the options or shares.
In addition, any options granted under the Plan to participants
in the United States will be either “incentive stock options,” which may be eligible for special tax treatment under the Code,
or options other than incentive stock options (referred to as “nonqualified stock options” under the Plan). The type of option
granted under the Plan and specific terms and conditions are, in each case, determined by our compensation committee or our board of directors
and set forth in the applicable option agreement.
Our compensation committee will administer the Plan, or if determined
otherwise by our board of directors, the Plan will be administered by our board of directors or other designated committee on its behalf.
Even if the compensation committee or any other committee was appointed by our board of directors in order to administrate the Plan, our
board of directors may, subject to any legal limitations, exercise any powers or duties of the compensation committee or any other committee
concerning the Plan. The compensation committee will, among others, select which eligible persons will receive options or other awards
under the Plan and will determine, or recommend to our board of directors, the number of ordinary shares covered by those options or other
awards, the terms under which such options or other awards may be exercised (however, options generally may not be exercised later than
ten years from the grant date of an option) or may be settled or paid, and the other terms and conditions of such options and other awards
under the Plan. All awards granted under the Plan shall not be transferable other than by will or by the laws of descent and distribution,
unless otherwise determined by our compensation committee.
To the extent permitted
under applicable law, our compensation committee will have the authority to accelerate the vesting of any outstanding awards at such time
and under such circumstances as it, in its sole discretion, deems appropriate. In the event of a change of control, as defined in the
Plan, any award then outstanding shall be assumed or an equivalent award shall be substituted by the successor corporation of the merger
or sale or any parent or affiliate thereof as determined by our board of directors. In the event that the awards are not assumed or substituted,
our compensation committee may, in its discretion, accelerate the vesting, exercisability of the outstanding award, or provide for the
cancellation of such award and payment of cash, as determined to be fair in the circumstances.
Subject to particular limitations specified in the Plan and under
applicable law, our board of directors may amend or terminate the Plan, and the compensation committee may amend awards outstanding under
the Plan. In addition, an amendment to the Plan that requires shareholder approval under applicable law will not be effective unless approved
by the requisite vote of shareholders. In addition, in general, no suspension, termination, modification or amendment of the Plan may
adversely affect any award previously granted without the written consent of grantees holding a majority in interest of the awards so
affected. The Plan will continue in effect until all ordinary shares available under the Plan are delivered and all restrictions on those
shares have lapsed, unless the Plan is terminated earlier by our board of directors. No awards may be granted under the Plan on or after
the tenth anniversary of the date of adoption of the plan unless our board of directors chooses to extend the term.
Any equity award to an office holder, director or controlling
shareholder, whether under the Plan or otherwise, may be subject to further approvals in addition to the approval of the compensation
committee as described above. As of December 31, 2022, options to purchase 2,053,296 ordinary shares, at a weighted average exercise
price of $6.78 per share, were outstanding under our Plan.
F. Disclosure
of a registrant’s action to recover erroneously awarded compensation
None.
ITEM
7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
Major Shareholders
The following table sets forth information with
respect to the beneficial ownership of our ordinary shares as of March 1, 2024 by:
| • |
each person or entity known by us to own beneficially 5% or more of our outstanding ordinary shares; |
| • |
each of our directors, executive officers and director nominees; and |
| • |
all of our executive officers, directors and director nominees as a group. |
The beneficial ownership of our ordinary shares is determined in
accordance with the rules of the SEC. Under these rules, a person is deemed to be a beneficial owner of a security if that person has
or shares voting power, which includes the power to vote or to direct the voting of the security, or investment power, which includes
the power to dispose of or to direct the disposition of the security. For purposes of the table below, we deem ordinary shares issuable
pursuant to options that are currently exercisable or exercisable within 60 days as of March 1, 2023, if any, to be outstanding and to
be beneficially owned by the person holding the options or warrants for the purposes of computing the percentage ownership of that person,
but we do not treat them as outstanding for the purpose of computing the percentage ownership of any other person. The percentage of ordinary
shares beneficially owned is based on 27,857,620 ordinary shares outstanding as of March 1, 2024.
Except where otherwise
indicated, we believe, based on information furnished to us by such owners, that the beneficial owners of the ordinary shares listed below
have sole investment and voting power with respect to such shares.
None of our shareholders has different voting rights from other
shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
Unless otherwise noted below, the address for each beneficial owner
is c/o Sol-Gel Technologies Ltd., 7 Golda Meir St., Weizmann Science Park, Ness Ziona, 7403650 Israel.
|
|
Shares Beneficially
Owned |
|||||||
|
Name of Beneficial Owner |
Number |
Percentage |
||||||
|
5% or greater shareholders |
||||||||
|
M. Arkin Dermatology Ltd. (1) |
18,068,564 |
60.52 |
% | |||||
|
Migdal Insurance & Financial Holdings Ltd. (2) |
1,227,548 |
4.40 |
% | |||||
|
Phoenix Holdings Ltd. (3) |
2,574,922 |
9.24 |
% | |||||
|
|
||||||||
|
Directors and executive officers |
||||||||
|
Moshe Arkin (1) |
18,154,564 |
61.35 |
% | |||||
|
Alon Seri-Levy (4) |
322,722 |
1.15 |
% | |||||
|
Gilad Mamlok |
* |
* |
||||||
|
Ofer Toledano |
* |
* |
||||||
|
Ofra Levy-Hacham |
* |
* |
||||||
|
Karine Neimann |
* |
* |
||||||
|
Itzik Yosef |
* |
* |
||||||
|
Itai Arkin |
* |
* |
||||||
|
Ran Gottfried |
* |
* |
||||||
|
Jerrold S. Gattegno |
* |
* |
||||||
|
Hani Lerman |
* |
* |
||||||
|
Jonathan Siegel |
||||||||
|
Sharon Kochan |
* |
* |
||||||
|
Yuval Yanai |
* |
* |
||||||
|
All directors and executive officers as a group (14 persons)
|
18,186,836 |
62.50 |
% | |||||
|
* Less than 1%. |
| (1) |
Arkin Dermatology directly owns 16,068,564 ordinary shares and 2,000,000 warrants to purchase up to 2,000,000 ordinary shares. Mr.
Moshe Arkin, the chairman of our board of directors, is the sole shareholder and sole director of Arkin Dermatology and may therefore
be deemed to be the indirect beneficial owner of the ordinary shares owned directly by Arkin Dermatology. In addition, Mr. Moshe Arkin
directly owns 86,000 ordinary shares. |
| (2) |
Based on the Schedule 13G/A filed with the SEC on January 31, 2024, the ordinary shares are beneficially owned by, among others,
(i) provident funds, mutual funds, pension funds and insurance policies, which are managed by direct and indirect subsidiaries of Migdal
Insurance & Financial Holdings Ltd, each of which operates under independent management and makes independent voting and investment
decisions, (ii) companies for the management of funds for joint investments in trusteeship, each of which operates under independent
management and makes independent voting and investment decisions, and (iii) their own account (Nostro account). |
| (3) |
Based on the Schedule 13G/A filed with the SEC on February 12, 2024, the ordinary shares are beneficially owned by various direct
or indirect, majority or wholly-owned subsidiaries of the Phoenix Holding Ltd., or the Subsidiaries. The Subsidiaries manage their
own funds and/or the funds of others, including for holders of exchange-traded notes or various insurance policies, members of pension
or provident funds, unit holders of mutual funds, and portfolio management clients. Each of the Subsidiaries operates under independent
management and makes its own independent voting and investment decisions. |
| (4) |
Consists of options to purchase 322,722 ordinary shares exercisable within 60 days of March 1, 2024. The exercise price of these
options ranges between $1.59 and $11.21 per share and the options expire between March 2025 and July 2033. |
Record Holders
As of March 1, 2024, we had one holder of record of our ordinary
shares in the United States, consisting of Cede & Co., the nominee of The Depository Trust Company. That shareholder held, in the
aggregate, 13,667,923 ordinary shares, representing approximately 49.0% of the outstanding ordinary shares as of March 1, 2024.
The number of record holders in the United States is not representative of the number of beneficial holders nor is it representative of
where such beneficial holders are resident since many of these ordinary shares were held by brokers or other nominees.
B.
Related Party Transactions
Private Placement with Our Controlling Shareholder
On January 27, 2023, we entered into subscription agreement with
Arkin Dermatology Ltd., pursuant to which Arkin Dermatology Ltd. agreed to purchase 2,000,000 unregistered ordinary shares and unregistered
warrants to purchase up to 2,000,000 ordinary shares in a concurrent private placement exempt from the registration of the Securities
Act, at a price equal to the offering price of the ordinary shares in the January 2023 registered direct offering. Each of the warrants
issued to Arkin Dermatology is exercisable for one ordinary share, has an initial exercise price of $5.85 per share, is exercisable
beginning six months from the date of issuance and will expire on January 27, 2028 and is subject to certain adjustments.
This private placement closed in April 2023 following shareholder approval.
Directors and Officers Insurance Policy and Indemnification
Agreements
Our amended and restated articles of association permit us to
exculpate, indemnify and insure each of our directors and officers to the fullest extent permitted by the Companies Law. We have obtained
Directors and Officers insurance for each of our executive officers and directors. For further information, see “Item 6 C. –
Board Practices – Exculpation, Insurance and Indemnification of Directors and Officers”.
We entered into agreements with each of our current directors and
officers exculpating them from a breach of their duty of care to us to the fullest extent permitted by law, subject to limited exceptions,
and undertaking to indemnify them to the fullest extent permitted by law, subject to limited exceptions, including, with respect to liabilities
resulting from our initial public offering, to the extent that these liabilities are not covered by insurance. This indemnification is
limited, with respect to any monetary liability imposed in favor of a third party, to events determined as foreseeable by the board of
directors based on our activities. The maximum aggregate amount of indemnification that we may pay to our directors and officers based
on such indemnification agreement is the greater of (1) 25% of our shareholders’ equity pursuant to our audited financial statements
for the year preceding the year in which the event in connection of which indemnification is sought occurred, and (2) $40 million (as
may be increased from time to time by shareholders’ approval). Such indemnification amounts are in addition to any insurance amounts.
Each director or officer who agrees to receive this letter of indemnification also gives his approval to the termination of all previous
letters of indemnification that we have provided to him or her in the past, if any.
Registration Rights Agreement
We were party to a registration rights agreement, pursuant to which
we granted demand registration rights, short-form registration rights and piggyback registration rights to Arkin Dermatology, our controlling
shareholder. All fees, costs and expenses of underwritten registrations are expected to be borne by us. This registration rights
agreement expired on February 5, 2023. Our audit committee and board of directors have approved the renewal of the registration
rights agreement on substantially the same terms as the agreement that expired, and our shareholders approved this renewal at a special
shareholder meeting held on March 30, 2023.
C.
Interests of Experts and Counsel
Not applicable.
ITEM
8. FINANCIAL INFORMATION
A.
Financial Statements and Other Financial Information
The financial statements required by this item are found at the
end of this annual report, beginning on page F-2.
Legal Proceedings
We are not currently a party to any material legal proceedings.
Dividend Policy
We have never declared or paid any cash dividends on our ordinary
shares and we anticipate that, for the foreseeable future, we will retain any future earnings to support operations and to finance the
growth and development of our business. Therefore, we do not expect to pay cash dividends for at least the next several years.
The distribution of dividends may also be limited by the Companies
Law, which permits the distribution of dividends only out of retained earnings or earnings derived over the two most recent fiscal years,
whichever is higher, provided that there is no reasonable concern that payment of a dividend will prevent a company from satisfying its
existing and foreseeable obligations as they become due. Our amended and restated articles of association provide that dividends will
be paid at the discretion of, and upon resolution by, our board of directors, subject to the provisions of the Companies Law.
B.
Significant Changes
Except as otherwise disclosed in this annual report, no significant
change has occurred since December 31, 2022.
ITEM
9. THE OFFER AND LISTING
A.
Offer and Listing Details
Our Ordinary Shares have been trading on The Nasdaq Global Market
under the symbol “SLGL” since February 1, 2018. Prior to that date, there was no public trading market for our Ordinary Shares.
Our initial public offering was priced at $12.00 per share on January 31, 2018.
On March 13, 2024, the last reported closing price of our Ordinary Shares on The Nasdaq
Global Market was $1.055 per share.
B. Plan of Distribution
Not applicable.
C.
Markets
Our Ordinary Shares are listed and traded on The Nasdaq Global
Market under the symbol “SLGL”.
D.
Selling Shareholders
Not applicable.
E.
Dilution
Not applicable.
F.
Expenses of the Issue
Not applicable.
ITEM 10.
ADDITIONAL INFORMATION
A.
Share Capital
Not applicable.
Registration Number and Purposes of the Company
Our registration number with the Israeli Registrar of Companies
is 51-254469-3. Our purpose as set forth in our amended and restated articles of association is to engage in any lawful activity.
Voting Rights and Conversion
All ordinary shares will have identical voting and other rights
in all respects.
Transfer of Shares
Our fully paid ordinary shares are issued in registered form and
may be freely transferred under our amended and restated articles of association, unless the transfer is restricted or prohibited by another
instrument, applicable law or the rules of a stock exchange on which the shares are listed for trade. The ownership or voting of our ordinary
shares by non-residents of Israel is not restricted in any way by our amended and restated articles of association or the laws of the
State of Israel, except for ownership by nationals of some countries that are, or have been, in a state of war with Israel.
Liability to Further Capital Calls
Our board of directors may make, from time to time, such calls
as it may deem fit upon shareholders with respect to any sum unpaid with respect to shares held by such shareholders which is not payable
at a fixed time. Such shareholder shall pay the amount of every call so made upon him. Unless otherwise stipulated by the board of directors,
each payment in response to a call shall be deemed to constitute a pro rata payment on account of all shares with respect to which such
call was made. A shareholder shall not be entitled to his rights as shareholder, including the right to dividends, unless such shareholder
has fully paid all the notices of call delivered to him, or which according to our amended and restated articles of association are deemed
to have been delivered to him, together with interest, linkage and expenses, if any, unless otherwise determined by the board of directors.
Election of Directors
Our ordinary shares do not have cumulative voting rights for the
election of directors. As a result, the holders of a majority of the voting power represented at a shareholders meeting have the power
to elect all of our directors, subject to the special approval requirements for external directors under the Companies Law described under
“Management — External Directors.”
Under our amended
and restated articles of association, our board of directors must consist of not less than five (5) but no more than nine (10) directors,
including any external directors required to be appointed by the Companies Law. Pursuant to our amended and restated articles of association,
other than the external directors, for whom special election requirements apply under the Companies Law, the vote required to appoint
a director is a simple majority vote of holders of our voting shares participating and voting at the relevant meeting. In addition, our
amended and restated articles of association allow our board of directors to appoint new directors to fill vacancies on the board of directors
if the number of directors is below the maximum number provided in our amended and restated articles. Furthermore, under our amended and
restated articles of association, we have only one class of directors. For a more detailed description on the composition of our board
of election procedures of our directors, other than our external directors, see “Item 6. Directors, Senior Management and Employees
— C. Board Practices — Appointment of Directors and Terms of Officers.” External directors are elected for an initial
term of a year, and may be elected for additional terms of a year except in the case of external directors whose terms of office are governed
by the Israeli Companies Law, and may be removed from office pursuant to the terms of the Companies Law. For further information on the
election and removal of external directors, see “Item 6. Directors, Senior Management and Employees — C. Board Practices —
External Directors — Election and Dismissal of External Directors.”
Dividend and Liquidation Rights
We may declare a dividend to be paid to the holders of our ordinary
shares in proportion to their respective shareholdings. Under the Companies Law, dividend distributions are determined by the board of
directors and do not require the approval of the shareholders of a company unless the company’s articles of association provide
otherwise. Our amended and restated articles of association do not require shareholder approval of a dividend distribution and provide
that dividend distributions may be determined by our board of directors.
Pursuant to the Companies Law, subject to
certain exceptions with respect to the buyback by the Company of its ordinary shares, the distribution amount is limited to the greater
of retained earnings or earnings generated over the previous two years, according to our then last reviewed or audited financial statements,
provided that the date of the financial statements is not more than six months prior to the date of the distribution, or we may distribute
dividends that do not meet such criteria only with court approval. In each case, we are only permitted to distribute a dividend if our
board of directors and the court, if applicable, determines that there is no reasonable concern that payment of the dividend will prevent
us from satisfying our existing and foreseeable obligations as they become due.
In the event of our liquidation, after satisfaction of liabilities
to creditors, our assets will be distributed to the holders of our ordinary shares in proportion to their shareholdings. This right, as
well as the right to receive dividends, may be affected by the grant of preferential dividend or distribution rights to the holders of
a class of shares with preferential rights that may be authorized in the future.
Shareholder Meetings
Under Israeli law, we are required to
hold an annual general meeting of our shareholders once every calendar year that must be held no later than 15 months after the date of
the previous annual general meeting. All general meetings other than the annual meeting of shareholders are referred to in our amended
and restated articles of association as special meetings. Our board of directors may call special meetings whenever it sees fit, at such
time and place, within or outside of Israel, as it may determine. In addition, the Companies Law provides that our board of directors
is required to convene a special meeting upon the written request of (i) any two of our directors or one-quarter of the members
of our board of directors or (ii) one or more shareholders holding, in the aggregate, either (a) 10% or more of our outstanding issued
shares and 1% or more of our outstanding voting power or (b) 10% or more of our outstanding voting power.
Under Israeli law, one or more shareholders
holding at least 5% of the voting rights at a general meeting of shareholders may request that our board of directors include a proposal
that relates to the election or removal of a director in the agenda of a general meeting of shareholders to be convened in the future.
One or more shareholders holding at least 1% of the voting rights at the general meeting may request that the board of directors include
a matter in the agenda of a general meeting to be convened in the future, provided that it is appropriate to discuss such any other matter
at the general meeting.
Subject to the provisions of the Companies Law
and the regulations promulgated thereunder, shareholders entitled to participate and vote at general meetings are the shareholders of
record on a date to be decided by the board of directors, which may be between four and 60 days prior to the date of the meeting. Furthermore,
the Companies Law requires that resolutions regarding the following matters must be passed at a general meeting of our shareholders:
| • |
amendments to our amended and restated articles of association; |
| • |
appointment or termination of our auditors; |
| • |
appointment of external directors; |
| • |
approval of certain related party transactions; |
| • |
increases or reductions of our authorized share capital; |
| • |
mergers; and |
| • |
the exercise of our board of director’s powers by a general meeting, if our board of directors is unable to exercise its powers
and the exercise of any of its powers is required for our proper management. |
Under our amended and restated articles of association, we are
not required to give notice to our registered shareholders pursuant to the Companies Law, unless otherwise required by law. The Companies
Law requires that a notice of any annual general meeting or special general meeting be provided to shareholders at least 21 days prior
to the meeting and if the agenda of the meeting includes the appointment or removal of directors, the approval of transactions with office
holders or interested or related parties, or an approval of a merger, or as otherwise required under applicable law, notice must be provided
at least 35 days prior to the meeting. Under the Companies Law, shareholders are not permitted to take action by written consent in lieu
of a meeting. Our amended and restated articles of association provide that a notice of general meeting shall be published by us on Form
6-K at a date prior to the meeting as required by law.
Voting Rights
Quorum Requirements
Pursuant to our amended and restated articles of association, holders
of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote before the shareholders at a general
meeting. Under our amended and restated articles of association, the quorum required for general meetings of shareholders must consist
of at least two shareholders present in person or by proxy (including by voting deed) holding 33 1∕3% or more of the voting rights
in the Company, which complies with the quorum requirements for general meetings under the Nasdaq Marketplace Rules. A meeting adjourned
for lack of a quorum will generally be adjourned to the same day of the following week at the same time and place, or to such other day,
time or place as indicated by our board of directors if so specified in the notice of the meeting. At the reconvened meeting, any number
of shareholders present in person or by proxy shall constitute a lawful quorum, instead of 33 1∕3% of the issued share capital as
required under the Nasdaq Marketplace Rules.
Vote Requirements
Our amended and restated articles of association provide that all
resolutions of our shareholders require a simple majority vote, unless otherwise required by the Companies Law or by our amended and restated
articles of association. Pursuant to our amended and restated articles of association, an amendment to our amended and restated articles
of association regarding any change of the composition or election procedures of our directors will require a special majority vote (662∕3%).
Under the Companies Law, each of (i) the approval of an extraordinary transaction with a controlling shareholder and (ii) the terms
of employment or other engagement of the controlling shareholder of the company or such controlling shareholder’s relative (even
if not extraordinary) requires the approval described above under “Management — Fiduciary Duties and Approval of Specified
Related Party Transactions and Compensation under Israeli Law — Disclosure of Personal Interests of a Controlling Shareholder and
Approval of Transactions.” Certain transactions with respect to remuneration of our office holders and directors require further
approvals described above under “Management — Fiduciary Duties and Approval of Specified Related Party Transactions and Compensation
under Israeli Law — Compensation of Directors and Executive Officers.” Under our amended and restated articles of association,
any change to the rights and privileges of the holders of any class of our shares requires a simple majority of the class so affected
(or such other percentage of the relevant class that may be set forth in the governing documents relevant to such class), in addition
to the ordinary majority vote of all classes of shares voting together as a single class at a shareholder meeting. Another exception to
the simple majority vote requirement is a resolution for the voluntary winding up, or an approval of a scheme of arrangement or reorganization,
of the company pursuant to Section 350 of the Companies Law, which requires the approval of holders of 75% of the voting rights represented
at the meeting, in person, by proxy or by voting deed and voting on the resolution.
Access to Corporate Records
Under the Companies Law, shareholders are provided access to minutes
of our general meetings, our shareholders register and principal shareholders register, our amended and restated articles of association,
our financial statements and any document that we are required by law to file publicly with the Israeli Companies Registrar or the Israel
Securities Authority. In addition, shareholders may request to be provided with any document related to an action or transaction requiring
shareholder approval under the related party transaction provisions of the Companies Law. We may deny this request if we believe it has
not been made in good faith or if such denial is necessary to protect our interest or protect a trade secret or patent.
Modification of Class Rights
Under the Companies Law and our amended and restated articles of
association, the rights attached to any class of share, such as voting, liquidation and dividend rights, may be amended by adoption of
a resolution by the holders of a majority of the shares of that class present at a separate class meeting, or otherwise in accordance
with the rights attached to such class of shares, in addition to the ordinary majority vote of all classes of shares voting together as
a single class at a shareholder meeting, as set forth in our amended and restated articles of association.
Registration Rights
For a discussion of registration rights we granted to our controlling
shareholder please see “Item 7. Major Shareholders and Related Party Transactions – Related Party Transactions — Registration
Rights Agreement.”
Acquisitions under Israeli Law
Full Tender Offer
A person wishing to acquire shares of an Israeli public company
and who would as a result hold over 90% of the target company’s issued and outstanding share capital is required by the Companies
Law to make a tender offer to all of the company’s shareholders for the purchase of all of the issued and outstanding shares of
the company. A person wishing to acquire shares of a public Israeli company and who would as a result hold over 90% of the issued and
outstanding share capital of a certain class of shares is required to make a tender offer to all of the shareholders who hold shares of
the relevant class for the purchase of all of the issued and outstanding shares of that class. If the shareholders who do not accept the
offer hold less than 5% of the issued and outstanding share capital of the company or of the applicable class, and more than half of the
shareholders who do not have a personal interest in the offer accept the offer, all of the shares that the acquirer offered to purchase
will be transferred to the acquirer by operation of law. However, a tender offer will also be accepted if the shareholders who do not
accept the offer hold less than 2% of the issued and outstanding share capital of the company or of the applicable class of shares.
Upon a successful completion of such a full tender offer, any shareholder
that was an offeree in such tender offer, whether such shareholder accepted the tender offer or not, may, within six months from the date
of acceptance of the tender offer, petition an Israeli court to determine whether the tender offer was for less than fair value and that
the fair value should be paid as determined by the court. However, under certain conditions, the offeror may include in the terms of the
tender offer that an offeree who accepted the offer will not be entitled to petition the Israeli court as described above.
If (a) the shareholders who did not respond or accept the
tender offer hold at least 5% of the issued and outstanding share capital of the company or of the applicable class or the shareholders
who accept the offer constitute less than a majority of the offerees that do not have a personal interest in the acceptance of the tender
offer, or (b) the shareholders who did not accept the tender offer hold 2% or more of the issued and outstanding share capital of the
company (or of the applicable class), the acquirer may not acquire shares of the company that will increase its holdings to more than
90% of the company’s issued and outstanding share capital or of the applicable class from shareholders who accepted the tender offer.
Special Tender Offer
The Companies Law provides that an acquisition of shares of an Israeli public company
must be made by means of a special tender offer if as a result of the acquisition the purchaser would become a holder of 25% or more of
the voting rights in the company. This requirement does not apply if there is already another holder of at least 25% of the voting rights
in the company. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a special
tender offer if as a result of the acquisition the purchaser would become a holder of more than 45% of the voting rights in the company,
if there is no other shareholder of the company who holds more than 45% of the voting rights in the company, subject to certain exceptions.
A special tender offer must be extended to all shareholders of
a company but the offeror is not required to purchase shares representing more than 5% of the voting power attached to the company’s
outstanding shares, regardless of how many shares are tendered by shareholders. A special tender offer may be consummated only if
(i) at least 5% of the voting power attached to the company’s outstanding shares will be acquired by the offeror and (ii) the number
of shares tendered in the offer exceeds the number of shares whose holders objected to the offer (excluding the purchaser and its controlling
shareholder, holders of 25% or more of the voting rights in the company or any person having a personal interest in the acceptance of
the tender offer or any other person acting on their behalf, including relatives and entities under such person’s control). If a
special tender offer is accepted, then the purchaser or any person or entity controlling it or under common control with the purchaser
or such controlling person or entity may not make a subsequent tender offer for the purchase of shares of the target company and may not
enter into a merger with the target company for a period of one year from the date of the offer, unless the purchaser or such person or
entity undertook to effect such an offer or merger in the initial special tender offer.
Merger
The Companies Law permits merger transactions if approved by each
party’s board of directors and, unless certain requirements described under the Companies Law are met, by a majority vote of each
party’s shares, and, in the case of the target company, a majority vote of each class of its shares voted on the proposed merger
at a shareholders meeting.
For purposes of the shareholder vote, unless a court rules otherwise,
the merger will not be deemed approved if a majority of the votes of the shares represented at the shareholders meeting that are held
by parties other than the other party to the merger, or by any person (or group of persons acting in concert) who holds (or hold, as the
case may be) 25% or more of the voting rights or the right to appoint 25% or more of the directors of the other party, vote against the
merger. If, however, the merger involves a merger with a company’s own controlling shareholder or if the controlling shareholder
has a personal interest in the merger, then the merger is instead subject to the same special majority approval that governs all extraordinary
transactions with controlling shareholders (as described under “Management — Fiduciary Duties and Approval of Specified Related
Party Transactions and Compensation under Israeli Law — Disclosure of Personal Interests of a Controlling Shareholder and Approval
of Transactions”).
If the transaction would have been approved by the shareholders
of a merging company but for the separate approval of each class or the exclusion of the votes of certain shareholders as provided above,
a court may still approve the merger upon the request of holders of at least 25% of the voting rights of a company, if the court holds
that the merger is fair and reasonable, taking into account the value to the parties to the merger and the consideration offered to the
shareholders of the company.
Upon the request of a creditor of either party to the proposed
merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that, as a result of the merger,
the surviving company will be unable to satisfy the obligations of the merging entities, and may further give instructions to secure the
rights of creditors.
In addition, a merger may not be consummated unless at least 50
days have passed from the date on which a proposal for approval of the merger was filed by each party with the Israeli Registrar of Companies
and at least 30 days have passed from the date on which the merger was approved by the shareholders of each party.
Anti-Takeover Measures under Israeli
Law
The Companies Law allows us to create and issue shares having rights
different from those attached to our ordinary shares, including shares providing certain preferred rights with respect to voting, distributions
or other matters and shares having preemptive rights. As of the date of this annual report, no preferred shares are authorized under our
amended and restated articles of association. In the future, if we do authorize, create and issue a specific class of preferred shares,
such class of shares, depending on the specific rights that may be attached to it, may have the ability to frustrate or prevent a takeover
or otherwise prevent our shareholders from realizing a potential premium over the market value of their ordinary shares. The authorization
and designation of a class of preferred shares will require an amendment to our amended and restated articles of association, which requires
the prior approval of the holders of a majority of the voting power attaching to our issued and outstanding shares at a general meeting.
The convening of the meeting, the shareholders entitled to participate and the majority vote required to be obtained at such a meeting
will be subject to the requirements set forth in the Companies Law as described above in “— Voting Rights.”
Borrowing Powers
Pursuant to the Companies Law and our amended and restated articles
of association, our board of directors may exercise all powers and take all actions that are not required under law or under our amended
and restated articles of association to be exercised or taken by our shareholders, including the power to borrow money for company purposes.
Changes in Capital
Our amended and restated articles of association enable us to increase
or reduce our share capital. Any such changes are subject to the provisions of the Companies Law and must be approved by a resolution
duly adopted by our shareholders at a general meeting. In addition, transactions that have the effect of reducing capital, such as the
declaration and payment of dividends in the absence of sufficient retained earnings or profits, require the approval of both our board
of directors and an Israeli court.
Transfer Agent and Registrar
The transfer agent and registrar for our ordinary shares is Equinity
Trust Company, LLC.
C.
Material Contracts
For a description of other material agreements, please see "Item
4. Information on the Company – B. Business Overview."
D.
Exchange Controls
There are currently no Israeli currency control restrictions on
remittances of dividends on our ordinary shares, proceeds from the sale of the shares or interest or other payments to non-residents of
Israel, except for shareholders who are subjects of certain countries that are considered to be in a state of war with Israel at such
time.
E.
Taxation
Israeli Tax Considerations and Government Programs
General
The following is a summary of the material Israeli tax laws applicable
to us, and some Israeli Government programs benefiting us. This section also contains a discussion of some Israeli tax consequences to
persons owning our ordinary shares. This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular
investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli
law. Examples of this kind of investor include traders in securities or persons that own, directly or indirectly, 10% or more of our outstanding
voting capital, all of whom are subject to special tax regimes not covered in this discussion. Some parts of this discussion are based
on new tax legislation which has not been subject to judicial or administrative interpretation. The discussion should not be construed
as legal or professional tax advice and does not cover all possible tax considerations.
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
THE ISRAELI OR OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES, INCLUDING, IN PARTICULAR, THE
EFFECT OF ANY FOREIGN, STATE OR LOCAL TAXES.
General Corporate Tax Structure in Israel
Israeli resident companies are generally subject to corporate tax
at the rate of 23% in 2023. However, the effective tax rate payable by a company that derives income from a Benefited Enterprise or a
Preferred Enterprise (as discussed below) may be considerably less. Capital gains derived by an Israeli resident company are subject to
tax at the prevailing corporate tax rate.
Under Israeli tax legislation, a corporation will be considered
as an “Israeli resident company” if it meets one of the following: (i) it was incorporated in Israel; or (ii) the control
and management of its business are exercised in Israel.
Law for the Encouragement of Industry (Taxes), 5729-1969
The Law for the Encouragement of Industry (Taxes), 5729-1969, generally
referred to as the Industry Encouragement Law, provides several tax benefits for “Industrial Companies.”
The Industry Encouragement Law defines an “Industrial Company”
as a company resident in Israel and which was incorporated in Israel of which 90% or more of its income in any tax year, other than certain
income (such as from defense loans, capital gains, interest and dividends) is derived from an “Industrial Enterprise” owned
by it and which is located in Israel or in the “Area” (as defined under Section 3A of the Israeli Tax Ordinance). 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 were purchased in good faith and are used for the development or advancement of the Industrial Enterprise, commencing on the
year in which they were first used; |
| • |
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 commencing on the year of the offering.
|
Although as of the date of this annual report, we do not have industrial
production activities, we may qualify as an Industrial Company in the future and may be eligible for the benefits described above.
Tax Benefits and Grants for Research and Development
Israeli tax law allows, under certain conditions, a tax deduction
for expenditures, including capital expenditures, for the year in which they are incurred. Expenditures are deemed related to scientific
research and development projects, if:
| • |
The research and expenditures are approved by the relevant Israeli government ministry, determined by the field of research;
|
| • |
The research and development must be for the promotion of the company; and |
| • |
The research and development are carried out by or on behalf of the company seeking such tax deduction. |
The amount of such deductible expenses is reduced by the sum of
any funds received through government grants for the financing of such scientific research and development projects. No deduction under
these research and development deduction rules is allowed if such deduction is related to an expense invested in an asset depreciable
under the general depreciation rules of the Israeli Tax Ordinance, 1961. Expenditures not so approved are deductible in equal amounts
over three years.
From time to time we may apply to the IIA for approval to allow
a tax deduction for all research and development expenses during the year incurred. There can be no assurance that such application will
be accepted.
Law for the Encouragement of Capital Investments,
5719-1959
The Law for the Encouragement of Capital Investments, 5719-1959,
generally referred to as the Investment Law, provides certain incentives for capital investments in production facilities (or other eligible
assets) by “Industrial Enterprises” (as defined under the Investment Law).
Tax Benefits Prior to the 2005 Amendment
An investment program that is implemented in accordance with the
provisions of the Investment Law prior to an amendment that became effective in April 2005, or the 2005 Amendment, referred to as an “Approved
Enterprise,” is entitled to certain benefits. A company that wished to receive benefits as an Approved Enterprise must have received
approval from the Investment Center of the Israeli Ministry of Economy and Industry, or the Investment Center. Each certificate of approval
for an Approved Enterprise relates to a specific investment program in the Approved Enterprise, delineated both by the financial scope
of the investment and by the physical characteristics of the facility or the asset.
In general, an Approved Enterprise is entitled to receive a grant
from the Government of Israel or an alternative package of tax benefits, known as the alternative benefits track. The tax benefits from
any certificate of approval relate only to taxable profits attributable to the specific Approved Enterprise. Income derived from activity
that is not integral to the activity of the Approved Enterprise does not enjoy tax benefits.
In addition, a company that has an Approved Enterprise program
is eligible for further tax benefits if it qualifies as a Foreign Investors’ Company, or FIC, which is a company with a level of
foreign investment, as defined in the Investment Law, of more than 25%. The level of foreign investment is measured as the percentage
of rights in the company (in terms of shares, rights to profits, voting and appointment of directors), and of combined share and loan
capital, that are owned, directly or indirectly, by persons who are not residents of Israel. The determination as to whether a company
qualifies as an FIC is made on an annual basis. We are currently not entitled to tax benefits for Approved Enterprise.
Tax Benefits Subsequent to the 2005 Amendment
The 2005 Amendment applies to new investment programs and investment
programs commencing after 2004, but does not apply to investment programs approved prior to April 1, 2005. The 2005 Amendment provides
that terms and benefits included in any certificate of approval that was granted before the 2005 Amendment became effective (April 1,
2005) will remain subject to the provisions of the Investment Law as in effect on the date of such approval. Pursuant to the 2005 Amendment,
the Investment Center will continue to grant Approved Enterprise status to qualifying investments. The 2005 Amendment, however, limits
the scope of enterprises that may be approved by the Investment Center by setting criteria for the approval of a facility as an Approved
Enterprise, such as provisions generally requiring that at least 25% of the Approved Enterprise’s income be derived from exports.
The 2005 Amendment provides that Approved Enterprise status will
only be necessary for receiving cash grants. As a result, it was no longer necessary for a company to obtain Approved Enterprise status
in order to receive the tax benefits previously available under the alternative benefits track. Rather, a company may claim the tax benefits
offered by the Investment Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set forth in
the amendment. Companies are entitled to approach the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits
under the Investment Law, as amended.
In order to receive the tax benefits, the 2005 Amendment states
that a company must make an investment which meets all of the conditions, including exceeding a minimum investment amount specified in
the Investment Law. Such investment allows a company to receive “Benefited Enterprise” status, and may be made over a period
of no more than three years from the end of the year in which the company requested to have the tax benefits apply to its Benefited Enterprise.
Where the company requests to apply the tax benefits to an expansion of existing facilities, only the expansion will be considered to
be a Benefited Enterprise and the company’s effective tax rate will be the weighted average of the applicable rates. In this case,
the minimum investment required in order to qualify as a Benefited Enterprise is required to exceed a certain percentage of the value
of the company’s production assets before the expansion.
The extent of the tax benefits available under the 2005 Amendment
to qualifying income of a Benefited Enterprise depend on, among other things, the geographic location in Israel of the Benefited Enterprise.
The location will also determine the period for which tax benefits are available. Such tax benefits include an exemption from corporate
tax on undistributed income for a period of between two to 10 years, depending on the geographic location of the Benefited Enterprise
in Israel, and a reduced corporate tax rate of between 10% and the applicable corporate tax for the remainder of the benefits period,
depending on the level of foreign investment in the company in each year. A company qualifying for tax benefits under the 2005 Amendment
which pays a dividend out of income derived by its Benefited Enterprise during the tax exemption period will be subject to corporate tax
in respect of the gross amount of the dividend at the otherwise applicable corporate tax rate or a lower rate in the case of a qualified
FIC which is at least 49% owned by non-Israeli residents. Dividends paid out of income attributed to a Benefited Enterprise are generally
subject to withholding tax at source at the rate of 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 applied for tax benefits as a “Benefited Enterprise”
with 2012 as a “Year of Election.” We may be entitled to tax benefits under this regime once we are profitable for tax purposes
and subject to the fulfillment of all the relevant conditions. If we do not meet these conditions, the tax benefits may not be applicable
which would result in adverse tax consequences to us. Alternatively, and subject to the fulfillment of all the relevant conditions, we
may elect in the future to irrevocably waive the tax benefits available for Benefited Enterprise and claim the tax benefits available
to Preferred Enterprise under the 2011 Amendment (as detailed below).
Tax Benefits Under the 2011 Amendment
The Investment Law was significantly amended as of January 1,
2011, or the 2011 Amendment. The 2011 Amendment introduced new benefits to replace those granted in accordance with the provisions of
the Investment Law in effect prior to the 2011 Amendment.
The 2011 Amendment introduced new tax benefits for income generated
by a “Preferred Company” through its “Preferred Enterprise,” in accordance with the definition of such term in
the Investment Law, which generally means that a “Preferred Company” is an industrial company meeting certain conditions (including
a minimum threshold of 25% export).
A Preferred Company is entitled to a reduced flat tax rate with
respect to the income attributed to the Preferred Enterprise, at the following rates:
|
Tax Year |
|
Development Region “A” |
|
|
Other Areas within Israel |
| ||
|
2011 – 2012 |
|
|
10 |
% |
|
|
15 |
% |
|
2013 |
|
|
7 |
% |
|
|
12.5 |
% |
|
2014 – 2016 |
|
|
9 |
% |
|
|
16 |
% |
|
2017 and thereafter |
|
|
7.5 |
% |
|
|
16 |
% |
Dividends distributed from income which is attributed to a “Preferred
Enterprise” will be subject to withholding tax at source at the following rates: (i) Israeli resident corporations — 0%, (ii)
Israeli resident individuals — 20% in 2024 (iii) non-Israeli residents — 20%, which may be reduced down to 4% in 2024, subject
to certain conditions under the Investment Law and to a reduced tax rate under the provisions of an applicable double tax treaty.
Under the 2011 Amendment, a company located in Development Region “A” may
be entitled to cash grants and the provision of loans under certain conditions, if approved. The rates for grants and loans shall not
be fixed, but up to 20% of the amount of the approved investment. In addition, a company owning a Preferred Enterprise under the Grant
Track may be entitled also to the tax benefits which are prescribed for a Preferred Company.
The termination or substantial reduction of any of the benefits
available under the Investment Law could materially increase our tax liabilities.
We are currently not entitled to tax benefits for a Preferred Enterprise.
New Tax benefits under the 2017
Amendment that became effective on January 1, 2017.
The 2017 Amendment was enacted as part of the Economic Efficiency
Law that was published on December 29, 2016, and was effective as of January 1, 2017. The 2017 Amendment provides new tax benefits for
two types of “Technology Enterprises”, as described below, and is in addition to the other existing tax beneficial programs
under the Investment Law.
The 2017 Amendment provides that a Preferred company satisfying
certain conditions will qualify as having a “Preferred Technology Enterprise” and will thereby enjoy a reduced corporate tax
rate of 12% on income that qualifies as “Preferred Technology Income,” as defined in the Investment Law. The tax rate is further
reduced to 7.5% for a Preferred Technology Enterprise located in development zone A. In addition, a Preferred Company qualified as having
a “Preferred Technological Enterprise” will enjoy a reduced corporate tax rate of 12% on capital gain derived from the
sale of certain “Benefitted Intangible Assets” (as defined in the Investment Law) to a related foreign company if the Benefitted
Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million, and the sale receives
prior approval from the National Authority for Technological Innovation (previously known as the Israeli Office of the Chief Scientist),
to which we refer as IIA.
The 2017 Amendment further provides that a Preferred company
satisfying certain conditions (including group consolidated revenues of at least NIS 10 billion) may qualify as having a “Special
Preferred Technology Enterprise” and will thereby enjoy a reduced corporate tax rate of 6% on “Preferred Technology Income”
regardless of the company’s geographic location within Israel. In addition, a Special Preferred Technology Enterprise will enjoy
a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Benefitted Intangible Assets” to a related
foreign company if the Benefitted Intangible Assets were either developed by the Special Preferred Technology Enterprise or acquired from
a foreign company on or after January 1, 2017, and the sale received prior approval from IIA. A Special Preferred Technology Enterprise
that acquires Benefitted Intangible Assets from a foreign company for more than NIS 500 million will be eligible for these benefits for
at least ten years, subject to certain approvals as specified in the Investment Law.
Dividends distributed by a Preferred Technology Enterprise or
a Special Preferred Technology Enterprise, paid out of Preferred Technology Income, 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 (subject to the receipt in advance of a valid certificate
from the Israel Tax Authority allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required
to be withheld. If such dividends are distributed to a foreign company and other conditions are met, the withholding tax rate will be
4%.
We currently are not entitled to tax benefits under the 2017
Amendment.
Taxation of Our Shareholders
Capital Gains
Capital gain tax is imposed on the disposition of capital assets
by an Israeli resident, and on the disposition of such assets by a non-Israeli resident if those assets are either (i) located in Israel;
(ii) are shares or a right to a share in an Israeli resident corporation, or (iii) represent, directly or indirectly, rights to assets
located in Israel. The Israeli Tax Ordinance distinguishes between “Real Gain” and the “Inflationary Surplus.”
Real Gain is the excess of the total capital gain over Inflationary Surplus computed generally on the basis of the increase in the Israeli
consumer price index between the date of purchase and the date of disposition. Inflationary Surplus is not currently subject to tax in
Israel.
Real Gain accrued by individuals on the sale of our ordinary shares
will be taxed at the rate of 25%. However, if the individual shareholder is a “Controlling Shareholder” (i.e., a person who
holds, directly or indirectly, alone or together with another, 10% or more of one of the Israeli resident company’s means of control)
at the time of sale or at any time during the preceding 12-month period, such gain will be taxed at the rate of 30%.
Real Gain derived by corporations will be generally subject to
the corporate tax rate of 23% in 2024.
Individual and corporate shareholder dealing in securities in Israel
are taxed at the tax rates applicable to business income —23% for corporations in 2024, and a marginal tax rate of up to 50% for
individuals, including an excess tax.
Notwithstanding the foregoing, capital gain derived from the sale
of our ordinary shares by a non-Israeli shareholder may be exempt under the Israeli Tax Ordinance from Israeli capital gain tax provided
that the seller does not have a permanent establishment in Israel to which the derived capital gain is attributed. However, non-Israeli
corporations will not be entitled to the foregoing exemption if more than 25% of its means of control are held, directly and indirectly,
by Israeli residents, and Israeli residents are entitled to 25% or more of the revenues or profits of the corporation, directly or indirectly.
In addition, such exemption would not be available to a person whose gains from selling or otherwise disposing of the securities are deemed
to be business income.
In addition, the sale of shares may be exempt from Israeli capital
gain tax under the provisions of an applicable tax treaty. For example, the U.S.-Israel Double Tax Treaty exempts U.S. residents from
Israeli capital gain tax in connection with such sale, provided (i) the U.S. resident owned, directly or indirectly, less than 10% of
an Israeli resident company’s voting power at any time within the 12-month period preceding such sale; (ii) the seller, being an
individual, is present in Israel for a period or periods of less than 183 days during the taxable year; and (iii) the capital gain from
the sale was not derived through a permanent establishment of the U.S. resident in Israel.
In some instances where our shareholders may be liable for Israeli
tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at source
at a rate of 25% if the seller is an individual and at the corporate tax rate (23% in 2024) if the seller is a corporation. Shareholders
may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at source at the time
of sale.
At the sale of securities traded on a stock exchange a detailed
return, including a computation of the tax due, must be filed and an advanced payment must be paid on January 31 and July 31 of every
tax year in respect of sales of securities made within the previous six months. However, if all tax due was withheld at source according
to applicable provisions of the Israeli Tax Ordinance and regulations promulgated thereunder, the aforementioned return need not be filed,
provided that (among other conditions) (i) such income was not generated from business conducted in Israel by the taxpayer, (ii) the taxpayer
has no other taxable sources of income in Israel with respect to which a tax return is required to be filed and an advance payment does
not need to be made, and (iii) the taxpayer is not obligated to pay Excess Tax (as further explained below). Capital gain is also reportable
on the annual income tax return.
Dividends
We have never paid cash dividends. A distribution of a dividend
by our company from income attributed to a Benefited Enterprise will generally be subject to withholding tax in Israel at a rate of 20%
unless a reduced tax rate is provided under an applicable tax treaty. A distribution of a dividend by our company from income attributed
to a Preferred Enterprise will generally be subject to withholding tax in Israel at the following tax rates: Israeli resident individuals
— 20%; Israeli resident companies — 0% for a Preferred Enterprise; Non-Israeli residents — 20%, subject to a reduced
rate under the provisions of any applicable double tax treaty. A distribution of dividends from income, which is not attributed to a Preferred
Enterprise to an Israeli resident individual, will generally be subject to withholding tax at a rate of 25%, or 30% if the dividend recipient
is a “Controlling Shareholder” (as defined above) at the time of distribution or at any time during the preceding 12-month
period. If the recipient of the dividend is an Israeli resident corporation, such dividend will not be subject to Israeli tax provided
the income from which such dividend is distributed was derived or accrued within Israel.
The Israeli Tax Ordinance provides that a non-Israeli resident
(either individual or corporation) is generally subject to Israeli withholding tax on the receipt of dividends at the rate of 25% (30%
if the dividends recipient is a “Controlling Shareholder” (as defined above), at the time of distribution or at any time during
the preceding 12-month period); those rates may be subject to a reduced rate under the provisions of an applicable double tax treaty.
Under the U.S.-Israel Double Tax Treaty, the following withholding rates will apply in respect of dividends distributed by an Israeli
resident company to a U.S. resident: (i) if the U.S. resident is a corporation which holds during that portion of the taxable year which
precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10% of the outstanding
shares of the voting share capital of the Israeli resident paying corporation and not more than 25% of the gross income of the Israeli
resident paying corporation for such prior taxable year (if any) consists of certain type of interest or dividends — the rate is
12.5%, (ii) if both the conditions mentioned in clause (i) above are met and the dividend is paid from an Israeli resident company’s
income which was entitled to a reduced tax rate applicable to an Approved Enterprise — the rate is 15% and (iii) in all other
cases, the rate is 25%. The aforementioned rates under the Israel U.S. Double Tax Treaty will not apply if the dividend income was derived
through a permanent establishment of the U.S. resident in Israel.
A non-Israeli resident who receives dividends from which tax was
withheld is generally exempt from the obligation to file tax returns in Israel with respect to such income, provided that (among other
conditions) (i) such income was not generated from a business conducted in Israel by the taxpayer, (ii) the taxpayer has no other taxable
sources of income in Israel with respect to which a tax return is required to be filed, and (iii) the taxpayer is not obligated to pay
Excess Tax (as further explained below).
Dividends are generally subject to Israeli withholding tax at a
rate of 25% so long as the shares are registered with a nominee company (whether or not the recipient is a “Controlling Shareholder,”
as defined above), unless relief is provided in a treaty between Israel and the shareholder’s country of residence and provided
that a certificate from the Israel Tax Authority allowing for a reduced withholding tax rate is obtained in advance.
Excess Tax
Individuals who are subject to tax in Israel are also subject to
an additional tax at a rate of 3% on annual income exceeding NIS 721,560 for 2024 linked to the annual change in the Israeli consumer
price index, including, but not limited to income derived from, dividends, interest and capital gains.
Foreign Exchange Regulations
Non-residents of Israel who hold our ordinary shares are able to
receive any dividends, and any amounts payable upon the dissolution, liquidation and winding up of our affairs, repayable in non-Israeli
currency at the rate of exchange prevailing at the time of conversion. However, Israeli income tax is generally required to have been
paid or withheld on these amounts. In addition, the statutory framework for the potential imposition of currency exchange control has
not been eliminated and may be restored at any time by administrative action.
Estate and Gift Tax
Israeli law presently does not impose estate or gift taxes.
U.S. Federal Income Tax Considerations
The following discussion describes certain material U.S. federal
income tax consequences to U.S. Holders (as defined below) under present law of an investment in our ordinary shares or warrants. This
discussion applies only to U.S. Holders that hold our ordinary shares or warrants as capital assets within the meaning of Section 1221
of the Internal Revenue Code of 1986, as amended, or (the Code, and that have the U.S. dollar as their functional currency.
This discussion is based on the tax laws of the United States,
including the Code, as in effect on the date hereof and on U.S. Treasury regulations as in effect or, in some cases, as proposed, on the
date hereof, as well as judicial and administrative interpretations thereof available on or before such date. All of the foregoing authorities
are subject to change, which change could apply retroactively and could affect the tax consequences described below. This summary does
not address any estate or gift tax consequences, the alternative minimum tax, the Medicare tax on net investment income or any state,
local, or non-U.S. tax consequences. The following discussion neither deals with the tax consequences to any particular investor nor describes
all of the tax consequences applicable to persons in special tax situations such as:
| • |
banks |
| • |
certain financial institutions; |
| • |
insurance companies; |
| • |
regulated investment companies; |
| • |
real estate investment trusts; |
| • |
broker-dealers; |
| • |
traders that elect to mark to market; |
| • |
U.S. expatriates; |
| • |
tax-exempt entities; |
| • |
persons holding our ordinary shares or warrants as part of a straddle, hedging, constructive sale, conversion or integrated transaction;
|
| • |
persons that actually or constructively (including through the ownership of our warrants) own 10% or more of our share capital (by
vote or value); |
| • |
persons that are resident or ordinarily resident in or have a permanent establishment in a jurisdiction outside the United States;
|
| • |
persons who acquired our ordinary shares or warrants pursuant to the exercise of any employee share option or otherwise as compensation;
|
| • |
persons subject to special tax accounting rules as a result of any item of gross income with respect to our ordinary shares or warrants
being taken into account in an applicable financial statement; or |
| • |
pass-through entities, or persons holding our ordinary shares or warrants through pass-through entities. |
INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION
OF THE U.S. FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL, NON-U.S. AND OTHER TAX CONSEQUENCES TO THEM
OF AN INVESTMENT IN OUR ORDINARY SHARES OR WARRANTS.
The discussion below of the U.S. federal
income tax consequences to “U.S. Holders” will apply to you if you are the beneficial owner of our ordinary shares or warrants
and you are, for U.S. federal income tax purposes,
| • |
an individual who is a citizen or resident of the United States; |
| • |
a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in the United
States or under the laws of the United States, any state thereof or the District of Columbia; |
| • |
an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or |
| • |
a trust that (i) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons
for all substantial decisions or (ii) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S.
person. |
If an entity or other arrangement treated as a partnership for
U.S. federal income tax purposes holds our ordinary shares or warrants, the tax treatment of a partner will generally depend upon the
status of the partner and the activities of the partnership. A person that would be a U.S. Holder if it held our ordinary shares or warrants
directly and that is a partner of a partnership holding our ordinary shares or warrants is urged to consult its own tax advisor.
Passive Foreign Investment Company
We believe that we were a passive foreign investment company,
or PFIC, for our 2023 taxable year. A non-U.S. entity treated as a corporation for U.S. federal income tax purposes will generally be
a PFIC for U.S. federal income tax purposes for any taxable year if either:
| • |
at least 75% of its gross income for such year is passive income (such as interest income); or |
| • |
at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable
to cash or other assets that produce passive income or are held for the production of passive income. |
For this purpose, we will be treated as owning our proportionate
share of the assets and earning our proportionate share of the income of any other entity treated as a corporation for U.S. federal income
tax purposes in which we own, directly or indirectly, 25% or more (by value) of the stock.
Because the value of our assets for purposes of the PFIC asset
test will generally be determined by reference to the market price of our ordinary shares, based on the value and composition of our assets
for our 2023 taxable year (including, in particular, the size of our cash and other passive assets) and the changes in the market price
of our ordinary shares during our 2023 taxable year, we expect that we will be treated as a PFIC for U.S. federal income tax purposes
for our 2023 taxable year.
A separate determination must be made after the close of each
taxable year as to whether we were a PFIC for that year. Depending on the market price of our ordinary shares and the composition of our
assets, our status as a PFIC may change in subsequent years. However, if we are or were a PFIC for any taxable year during your holding
period for our ordinary shares (or under proposed U.S. Treasury regulations, our warrants), we generally will continue to be treated as
a PFIC with respect to your investment in our ordinary shares or warrants for all succeeding years during which you hold our ordinary
shares or warrants, and, although subject to uncertainty, potentially our ordinary shares received upon exercise of such warrants. You
are advised to consult your own tax advisor regarding the potential availability of a “deemed sale” election that would allow
you to eliminate this continuing PFIC status under certain circumstances.
For each taxable year that we are treated as a PFIC with respect
to you, you will be subject to adverse consequences under special tax rules with respect to any “excess distribution” (as
defined below) you receive and any gain you realize from a sale or other disposition (including a pledge) of our ordinary shares or warrants,
unless you make a valid “mark-to-market” election or “qualified electing fund” election, each as discussed below,
and each of which may not be available for the warrants. Distributions you receive in a taxable year that are greater than 125% of the
average annual distributions you received during the shorter of the three preceding taxable years or your holding period will be treated
as an excess distribution. Under these special tax rules:
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the excess distribution or gain will be allocated ratably over your holding period; |
| • |
the amount allocated to the current taxable year, and any taxable years in your holding period prior to the first taxable year in
which we were a PFIC, will be treated as ordinary income; and |
| • |
the amount allocated to each other taxable year will be subject to the highest tax rate in effect for individuals or corporations,
as applicable, for each such year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting
tax attributable to each such year. |
The tax liability for amounts allocated to taxable years prior
to the year of disposition or excess distribution cannot be offset by any net operating losses, and gains (but not losses) realized on
the sale of our ordinary shares or warrants cannot be treated as capital gains, even if you hold our ordinary shares or warrants as capital
assets.
If we are or were treated as a PFIC with respect to you for any
taxable year, to the extent any of our subsidiaries are also PFICs, you may be deemed to own a proportionate interest in such lower-tier
PFICs that are directly or indirectly owned by us, and you may be subject to the adverse tax consequences described above with respect
to the shares of such lower-tier PFICs you would be deemed to own. As a result, you may incur liability for any excess distribution described
above if we receive a distribution from our lower-tier PFICs or if any shares in such lower-tier PFICs are disposed of (or deemed disposed
of). You should consult your tax advisor regarding the application of the PFIC rules to any of our subsidiaries.
A U.S. Holder of “marketable stock” (as defined below)
in a PFIC may make a mark-to-market election for such stock to elect out of the tax treatment discussed above. If you make a valid mark-to-market
election for our ordinary shares, you will include in income for each year that we are treated as a PFIC with respect to you an amount
equal to the excess, if any, of the fair market value of our ordinary shares as of the close of your taxable year over your adjusted basis
in such ordinary shares. You will be allowed a deduction for the excess, if any, of the adjusted basis of our ordinary shares over their
fair market value as of the close of the taxable year. However, deductions will be allowable only to the extent of any net mark-to-market
gains on our ordinary shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election,
as well as gain on the actual sale or other disposition of our ordinary shares, will be treated as ordinary income. Ordinary loss treatment
will also apply to the deductible portion of any mark-to-market loss on our ordinary shares, as well as to any loss realized on the actual
sale or disposition of our ordinary shares, to the extent the amount of such loss does not exceed the net mark-to-market gains for such
ordinary shares previously included in income. Your basis in our ordinary shares will be adjusted to reflect any such income or loss amounts.
If you make a mark-to-market election, any distributions we make would generally be subject to the rules discussed below under “—
Taxation of Dividends and Other Distributions on our Ordinary Shares,” except the lower rates applicable to qualified dividend income
would not apply.
The mark-to-market election is available only for “marketable
stock,” which is stock that is regularly traded on a qualified exchange or other market, as defined in applicable U.S. Treasury
regulations, and may not include our warrants. Our ordinary shares are listed on the Nasdaq Global Market. Because a mark-to-market election
cannot be made for equity interests in any lower-tier PFICs we own, you generally will continue to be subject to the PFIC rules with respect
to your indirect interest in any investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes.
The Nasdaq Global Market is a qualified exchange, but there can be no assurance that the trading in our ordinary shares will be sufficiently
regular to qualify our ordinary shares as marketable stock. You should consult your tax advisor as to the availability and desirability
of a mark-to-market election, as well as the impact of such election on interests in any lower-tier PFICs.
Alternatively, if a non-U.S. entity treated as a corporation
is a PFIC, a holder of shares in that entity may avoid taxation under the PFIC rules described above regarding excess distributions and
recognized gains by making a “qualified electing fund” election, or QEF election, to include in income its share of the entity’s
income on a current basis. A U.S. Holder of our ordinary shares can make a QEF election, if we provide the certain necessary information
with respect to our annual ordinary earnings and net capital gain, in the first taxable year that we are treated as a PFIC with respect
to the U.S. Holder. A U.S. Holder must make the QEF election for each PFIC by attaching a separate properly completed IRS Form 8621 for
each PFIC to its timely filed U.S. federal income tax return. We plan to provide upon request or otherwise make available the information
necessary for a U.S. Holder to make a QEF election with respect to us and will use commercially reasonable efforts to cause each lower-tier
PFIC which we control, if any, to provide such information with respect to such lower-tier PFIC. However, no assurance can be given that
such information will be available for any lower-tier PFIC.
If you make a QEF election with respect to a PFIC, you will be
currently taxable on its pro rata share of the PFIC’s ordinary earnings and net capital gain (at ordinary income and capital gain
rates, respectively) for each taxable year that the entity is classified as a PFIC. If you make a QEF election with respect to us, any
distributions paid by us out of our earnings and profits that were previously included in your income as a result of the QEF election
will not be taxable to you. You will increase your tax basis in our ordinary shares by an amount equal to any income you have included
as a result of the QEF election and will decrease your tax basis in our ordinary shares by any amount distributed on the ordinary shares
that you have not included in your income. In addition, you will recognize capital gain or loss on the disposition of our ordinary shares
in an amount equal to the difference between the amount realized and your adjusted tax basis in our ordinary shares. You should note that
if you make QEF elections with respect to us and any lower-tier PFICs, you may be required to pay U.S. federal income tax with respect
to our ordinary shares for any taxable year significantly in excess of any cash distributions received on your ordinary shares for such
taxable year.
A QEF election may not be available for our warrants regardless
of whether we provide the information described above. You are strongly advised to consult your own tax advisors regarding making QEF
elections in your particular circumstances.
A U.S. Holder of a PFIC may be required to file an IRS Form 8621.
If we are a PFIC, you should consult your tax advisor regarding any reporting requirements that may apply to you. You are urged to consult
your tax advisor regarding the application of the PFIC rules to an investment in ordinary shares or warrants.
YOU ARE STRONGLY
URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE IMPACT ON YOUR INVESTMENT IN OUR ORDINARY SHARES OR WARRANTS IF WE WERE TO BE CONSIDERED
A PFIC AS WELL AS THE APPLICATION OF THE PFIC RULES AND THE POSSIBILITY OF MAKING A MARK-TO-MARKET ELECTION OR QUALIFIED ELECTING FUND
ELECTION.
Taxation of Dividends and Other Distributions on our Ordinary Shares
Subject to the PFIC rules discussed above, the gross amount of
any distributions we make to you (including the amount of any tax withheld) with respect to our ordinary shares generally will be includible
in your gross income as dividend income on the date of receipt by the holder, but only to the extent the distribution is paid out of our
current or accumulated earnings and profits (as determined under U.S. federal income tax principles). The dividends will not be eligible
for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations. To the extent
the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles),
such excess amount will be treated first as a tax-free return of your tax basis in your ordinary shares, and then, to the extent such
excess amount exceeds your tax basis in your ordinary shares, as capital gain. We currently do not, and we do not intend to, calculate
our earnings and profits under U.S. federal income tax principles. Therefore, you should expect that a distribution will generally be
reported as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under
the rules described above.
With respect to certain non-corporate U.S. Holders, including
individual U.S. Holders, dividends may be taxed at the lower capital gain rates applicable to “qualified dividend income,”
provided (i) our ordinary shares are readily tradable on an established securities market in the United States (such as the Nasdaq Global
Market), (ii) we are neither a PFIC nor treated as such with respect to you (as discussed above) for either the taxable year in which
the dividend was paid or the preceding taxable year, (iii) certain holding period requirements are met and (iv) you are not under an obligation
to make related payments with respect to positions in substantially similar or related property.
The amount of any distribution paid in a currency other than
U.S. dollars will be equal to the U.S. dollar value of such currency on the date such distribution is includible in your income, regardless
of whether the payment is in fact converted into U.S. dollars at that time. The amount of any distribution of property other than cash
will be the fair market value of such property on the date of distribution.
Any dividends will constitute foreign source income for foreign
tax credit limitation purposes. If the dividends are taxed as qualified dividend income (as discussed above), the amount of the dividend
taken into account for purposes of calculating the foreign tax credit limitation will in general be limited to the gross amount of the
dividend, multiplied by the reduced tax rate applicable to qualified dividend income and divided by the highest tax rate normally applicable
to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income.
For this purpose, dividends distributed by us with respect to our ordinary shares will generally constitute “passive category income.”
If Israeli withholding taxes apply to any dividends paid to you
with respect to our ordinary shares, subject to certain conditions and limitations, such withholding taxes may be treated as foreign taxes
eligible for credit against your U.S. federal income tax liability. Instead of claiming a credit, you may elect to deduct such taxes in
computing taxable income, subject to applicable limitations. If a refund of the tax withheld is available under the applicable laws of
Israel or under the Israel-U.S. income tax treaty, or the Treaty, the amount of tax withheld that is refundable will not be eligible for
such credit against your U.S. federal income tax liability (and will not be eligible for the deduction against your U.S. federal taxable
income). The rules relating to the determination of the foreign tax credit are complex, and you should consult your tax advisor regarding
the availability of a foreign tax credit in your particular circumstances, including the effects of the Treaty.
Constructive Dividends on our
Ordinary Shares or Warrants
If the exercise price of our warrants is adjusted in certain
circumstances (or in certain circumstances, there is a failure to make adjustments or a failure to make adequate adjustments), that adjustment
(or failure to adjust) may result in the deemed payment of a taxable dividend to a U.S. Holder of the warrants or our ordinary shares.
Any such constructive dividend will be taxable generally as described above under “Taxation of Dividends and Other Distributions
on our Ordinary Shares.” Generally, a U.S. Holder’s tax basis in our ordinary shares or the warrants will be increased to
the extent of any such constructive dividend. It is not entirely clear whether a constructive dividend deemed paid to a non-corporate
U.S. Holder could be “qualified dividend income” as discussed above under “Taxation of Dividends and Other Distributions
on our Ordinary Shares.” U.S. Holders should consult their tax advisers regarding the proper U.S. federal income tax treatment of
any adjustments to (or failure to adjust or adjust adequately) the exercise price of the warrants.
We are currently required to report the amount of any constructive
dividends on our website or to the IRS and to holders not exempt from reporting. The IRS has proposed regulations addressing the amount
and timing of constructive dividends, as well as, obligations of withholding agents and filing and notice obligations of issuers in respect
of such constructive dividends. If adopted as proposed, the regulations would generally provide that (i) the amount of a constructive
dividend is the excess of the fair market value of the right to acquire stock immediately after the exercise price adjustment over the
fair market value of the right to acquire stock (after the exercise price adjustment) without the adjustment, (ii) the constructive dividend
occurs at the earlier of the date the adjustment occurs under the terms of the instrument and the date of the actual distribution of cash
or property that results in the constructive dividend and (iii) we are required to report the amount of any constructive dividends on
our website or to the IRS and to all holders (including holders that would otherwise be exempt from reporting). The final regulations
will be effective for constructive dividends occurring on or after the date of adoption, but holders and withholding agents may rely on
them prior to that date under certain circumstances.
Taxation of Disposition of our
Ordinary Shares or Warrants
Subject to the PFIC rules discussed above, upon a sale or other
disposition of our ordinary shares or warrants, you will generally recognize capital gain or loss for U.S. federal income tax purposes
in an amount equal to the difference between the amount realized (including the amount of any tax withheld) and your tax basis in such
ordinary shares or warrants. If the consideration you receive for our ordinary shares or warrants is not paid in U.S. dollars, the amount
realized will be the U.S. dollar value of the payment received determined by reference to the spot rate of exchange on the date of the
sale or other disposition. However, if our ordinary shares or warrants are treated as traded on an “established securities market”
and you are either a cash basis taxpayer or an accrual basis taxpayer that has made a special election (which must be applied consistently
from year to year and cannot be changed without the consent of the IRS), you will determine the U.S. dollar value of the amount realized
in a non-U.S. dollar currency by translating the amount received at the spot rate of exchange on the settlement date of the sale. If you
are an accrual basis taxpayer that is not eligible to or does not elect to determine the amount realized using the spot rate on the settlement
date, you will recognize foreign currency gain or loss to the extent of any difference between the U.S. dollar amount realized on the
date of sale or disposition and the U.S. dollar value of the currency received at the spot rate on the settlement date.
Any gain or loss on the sale or other disposition of our ordinary
shares or warrants will generally be treated as U.S. source income or loss and treated as long-term capital gain or loss if your holding
period in our ordinary shares or warrants at the time of the disposition exceeds one year. Accordingly, in the event any Israeli tax (including
withholding tax) is imposed upon the sale or other disposition, you may not be able to utilize foreign tax credit unless you have foreign
source income or gain in the same category from other sources. There are additional significant and complex limits on a U.S. Holder’s
ability to claim foreign tax credits, and recently issued U.S. Treasury regulations that apply to foreign income taxes further restrict
the availability of any such credit based on the nature of the tax imposed by the foreign jurisdiction. Long-term capital gain of non-corporate
U.S. Holders generally will be subject to U.S. federal income tax at reduced tax rates. The deductibility of capital losses is subject
to significant limitations.
Taxation of Exercise or Expiration
of our Warrants
In general, you will not be required to recognize income, gain
or loss upon exercise of our warrants by payment of the exercise price. Your tax basis in our ordinary shares received upon exercise of
our warrants will be equal to the sum of (1) your tax basis in the warrants exchanged therefor and (2) the exercise price of the warrants.
Your holding period in our ordinary shares received upon exercise will commence on the day after you exercise the warrants.
Although there is no direct legal authority as to the U.S. federal
income tax treatment of an exercise of our warrants on a cashless basis, if required to do so, we intend to take the position that such
exercise will not be taxable, either because the exercise is not a gain realization event or because it qualifies as a tax-free recapitalization.
In the former case, the holding period of our ordinary shares received upon exercise of the warrants should commence on the day after
the ordinary warrants are exercised. In the latter case, the holding period of our ordinary shares received upon exercise of the ordinary
warrants would include the holding period of the exercised ordinary warrants. However, such position is not binding on the IRS, and the
IRS may treat a cashless exercise of the ordinary warrants as, in part, a taxable exchange. U.S. Holders are urged to consult their tax
advisors as to the consequences of an exercise of the ordinary warrants on a cashless basis, including with respect to potential treatment
as a taxable disposition of warrants for PFIC purposes, and the holding period and tax basis in our ordinary shares received.
If the warrants expire without being exercised, you will recognize
a capital loss in an amount equal to your tax basis in the warrants. Such loss will be long-term capital loss if, at the time of the expiration,
your holding period in the warrants is more than one year. The deductibility of capital losses is subject to limitations.
Information Reporting and Backup
Withholding
Dividend payments (including constructive dividends) with respect
to our ordinary shares or warrants and proceeds from the sale, exchange or redemption of our ordinary shares or warrants may be subject
to information reporting to the IRS and possible U.S. backup withholding. Backup withholding will not apply, however, to a U.S. Holder
that furnishes a correct taxpayer identification number and makes any other required certification or that is otherwise exempt from backup
withholding. U.S. Holders that are required to establish their exempt status generally must provide such certification on IRS Form W-9.
You should consult your tax advisor regarding the application of the U.S. information reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld
as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts
withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS and furnishing any required information
in a timely manner.
Information with respect to Foreign
Financial Assets
Certain U.S. Holders may be required to report information relating
to an interest in our ordinary shares or warrants, subject to certain exceptions (including an exception for ordinary shares held in accounts
maintained by certain financial institutions). Penalties can apply if U.S. Holders fail to satisfy such reporting requirements. You should
consult your tax advisor regarding the effect, if any, of this requirement on your ownership and disposition of our ordinary shares.
THE SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES SET OUT ABOVE
IS FOR GENERAL INFORMATIONAL PURPOSES ONLY. INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S. FEDERAL
TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL, NON-U.S. AND OTHER TAX CONSEQUENCES TO THEM OF AN INVESTMENT
IN OUR ORDINARY SHARES OR WARRANTS.
F.
Dividends and Paying Agents
Not applicable.
G.
Statement by Experts
Not applicable.
H. Documents
on Display
We are subject to the information reporting requirements of the
Exchange Act, applicable to foreign private issuers, and under those requirements, we file reports with the SEC. Our filings with the
SEC are available to the public through the SEC’s website at http://www.sec.gov.
As a foreign private issuer, we are exempt from the rules under
the Exchange Act, related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are
exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are
not required under the Exchange Act, to file annual, quarterly and current reports and financial statements with the SEC as frequently
or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we are required to comply with the informational
requirements of the Exchange Act, and, accordingly, file current reports on Form 6-K, annual reports on Form 20-F and other information
with the SEC.
I.
Subsidiary Information
Not applicable.
ITEM
11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks in the ordinary course of our business.
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates.
Our market risk exposure is primarily a result of foreign currency exchange rates, which is discussed in detail below.
Interest Rate Risk
We do not anticipate undertaking any significant long-term borrowings.
At present, our investments consist primarily of marketable securities
and bank deposits. We may be exposed to market price risk because of investments in tradable securities, mainly corporate bonds, held
by us and classified in our financial statements as financial assets at fair value through profit or loss. To manage the price risk arising
from investments in tradable securities, we invest in marketable securities with high ratings and diversify our investment portfolio.
Our investments may also be exposed to market risk due to fluctuation in interest rates, which may affect our interest income and the
fair market value of our investments, if any.
Foreign Currency Exchange Risk
The U.S. dollar is our functional and reporting
currency. Although a substantial portion of our expenses (mainly salaries and related costs) are denominated in NIS, accounting for more
than half of our expenses in the year ended December 31, 2023, all of our financing has been in U.S. dollars and the vast majority
of our liquid assets are held in U.S. dollars. Furthermore, while we anticipate that a portion of our expenses, principally salaries
and related personnel expenses in Israel, will continue to be denominated in NIS, we expect to incur an increasing amount of expenses
in U.S. dollars as we progress in the development and the regulatory processes of our product candidates. Changes of 5% in the U.S. dollar/NIS
exchange rate would have increased/decreased operating expenses by approximately 2.33% during the fiscal year ended on December 31,
2023. We also have expenses, although to a much lesser extent, in other non-U.S. dollar currencies, in particular the Euro.
Moreover,
for the next few years we expect that the substantial majority of our revenues from the sale of our products in the United States, if
any, will be denominated in U.S. dollars. Since a portion of our expenses is denominated in NIS and other non-U.S. currencies, we are
exposed to risk associated with exchange rate fluctuations vis-à-vis the non-U.S. currencies. See “Item 3 – D. Risk Factors —
Exchange rate fluctuations between the U.S. dollar, the New Israeli Shekel and other foreign currencies, may negatively affect our future
revenues.” If the NIS fluctuates significantly against the U.S. dollar it may have a negative impact on our results of operations.
As of the date of this annual report and for the periods under review, fluctuations in the currencies exchange rates have not materially
affected our results of operations or financial condition.
The Company carries out transactions involving foreign currency
exchange derivative financial instruments. The transactions are designed to hedge the Company’s exposure in currencies other than
the U.S. dollar. The derivative does not meet the definition of a cash flow accounting hedge, and therefore the changes in the fair value
are included in financial expense (income), net.
Inflation-related risks
We do not believe that the rate of inflation in Israel has had
a material impact on our business to date; however, our costs in Israel will increase if the inflation rate in Israel exceeds the devaluation
of the NIS against the U.S. dollar or if the timing of such devaluation lags behind inflation in Israel.
ITEM
12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt
Securities
Not applicable.
B.
Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American
Depositary Shares
Not applicable.
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
All proceeds have been applied from our initial public offering
on Nasdaq on February 5, 2018.
ITEM
15. CONTROLS AND PROCEDURES
(a) Disclosure
Controls and Procedures
We performed an evaluation of the effectiveness of our disclosure
controls and procedures that are designed to ensure that information required to be disclosed and filed with the SEC is recorded, processed,
summarized and reported timely within the time period specified in the SEC’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports
that we file or submit under the Exchange Act, is accumulated and communicated to our management, including our principal executive and
principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
There can be no assurance that our disclosure controls and procedures will detect or uncover all failures of persons within the company
to disclose information otherwise required to be set forth in our reports. Nevertheless, our disclosure controls and procedures are designed
to provide reasonable assurance of achieving the desired control objectives. Based on our evaluation, our management, including our Chief
Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report are effective at such reasonable assurance level.
(b) Management’s
Annual Report on Internal Control over Financial Reporting
Our management, under the supervision of our Chief Executive Officer
and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over our financial reporting, as
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act of 1934, as amended. The Company’s internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial
reporting includes policies and procedures that:
| • |
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and asset dispositions;
|
| • |
provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our financial statements in
accordance with generally accepted accounting principles; |
| • |
provide reasonable assurance that receipts and expenditures are made only in accordance with authorizations of our management and
board of directors (as appropriate); and |
| • |
provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of assets
that could have a material effect on our financial statements. |
Due to its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of our internal control over financial
reporting as of December 31, 2023 based on the framework for Internal Control-Integrated Framework set forth by The Committee of Sponsoring
Organizations of the Treadway Commission (COSO) (2013).
Based on our assessment and this framework, our management
concluded that the Company’s internal control over financial reporting was effective as of December 31, 2023.
(c) Attestation
Report of Registered Public Accounting Firm
Not applicable.
(d)
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal control over financial
reporting that occurred during the year ended December 31, 2023 that have materially affected or are reasonably likely to materially affect
our internal control over financial reporting.
ITEM
16. [RESERVED]
ITEM
16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that each of Mr. Jerrold
S. Gattegno, Mr. Ran Gottfried and Mr. Yuval Yanai is an audit committee financial expert. Mr. Gattegno Mr. Ran Gottfried and Mr. Yuval
Yanai, are independent directors for the purposes of the Nasdaq Listing Rules.
ITEM 16B. CODE
OF ETHICS
We have adopted a code of ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. This
code of ethics is posted on our website, http://ir.sol-gel.com/corporate-governance/governance-overview.
ITEM
16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees Paid to Independent Registered Public Accounting
Firm
The following table sets forth, for each of the years indicated,
the aggregate fees billed by our independent registered public accounting firm for professional services.
|
|
Year Ended December 31, |
|||||||
|
Services Rendered |
2023 |
2022 |
||||||
|
|
(U.S. dollars in thousands) |
|||||||
|
Audit Fees (1) |
220 |
189 |
||||||
|
Tax (2) |
7 |
19 |
||||||
|
Other (3) |
2 |
1 |
||||||
|
Total |
229 |
204 |
||||||
|
(1) |
Audit Fees consist of professional services rendered in connection with the audit
of our consolidated financial statements, review of our consolidated quarterly financial statements, issuance of comfort letters, consents
and assistance with review of documents filed with the SEC.
|
|
(2) |
Tax fees relate to tax compliance, planning and advice.
|
|
(3) |
Other fees relate to license fees for use of accounting research tools. |
Audit Committee Pre-Approval Policies and Procedures
Our audit committee’s specific responsibilities in carrying
out its oversight of the quality and integrity of the accounting, auditing and reporting practices of the Company include the approval
of audit and non-audit services to be provided by the external auditor. The audit committee approves in advance the particular services
or categories of services to be provided to the Company during the following yearly period and also sets forth a specific budget for such
audit and non-audit services. Additional non-audit services may be pre-approved by the audit committee.
ITEM
16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM
16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
AFFILIATED PURCHASERS
Not applicable.
ITEM
16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM
16G. CORPORATE GOVERNANCE
Nasdaq Stock Listing Rules
and Home Country Practices
As a foreign private issuer, we are exempt from the rules under
the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders will
be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. Also, we are not
required to comply with Regulation FD, which restricts the selective disclosure of material information. However, we intend to file with
the SEC, within 120 days after the end of each fiscal year, or such applicable time as required by the SEC, an annual report on Form 20-F
containing financial statements audited by an independent registered public accounting firm, and we intend to submit to the SEC from time
to time, on Form 6-K, reports of information that would likely be material to an investment decision in our securities.
As a foreign private issuer, we are permitted to follow certain
Israeli corporate governance practices instead of the Nasdaq corporate governance rules, provided that we disclose which requirements
we are not following and the equivalent Israeli requirement. Pursuant to the “foreign private issuer exemption”:
| • |
the quorum for any meeting of shareholders is two or more shareholders holding at least 33-1∕3% of our voting rights, which
complies with Nasdaq requirements; however, if the meeting is adjourned for lack of quorum, the quorum for such adjourned meeting will
be any number of shareholders, instead of 33-1∕3% of our voting rights; |
| • |
we adopt and approve material changes to equity incentive plans in accordance with the Companies Law, which does not impose a requirement
of shareholder approval for such actions. In addition, we intend to follow Israeli corporate governance practice in lieu of Nasdaq Marketplace
Rule 5635(c), which requires shareholder approval prior to an issuance of securities in connection with equity based compensation of officers,
directors, employees or consultants; |
| • |
as opposed to making periodic reports to shareholders and proxy solicitation materials available to shareholders in the manner specified
by the Nasdaq corporate governance rules, the Companies Law does not require us to distribute periodic reports directly to shareholders,
and the generally accepted business practice in Israel is not to distribute such reports to shareholders but to make such reports available
through a public website. We only mail such reports to shareholders upon request; and |
| • |
we follow Israeli corporate governance practice instead of Nasdaq requirements to obtain shareholder approval for certain dilutive
events (such as issuances that will result in a change of control, certain transactions other than a public offering involving issuances
of a 20% or greater interest in us and certain acquisitions of the stock or assets of another company). |
Otherwise, we intend to comply with the rules generally applicable
to U.S. domestic companies listed on the Nasdaq Global Market. We may in the future decide to use the foreign private issuer exemption
with respect to some or all of the other Nasdaq corporate governance rules. We also intend to comply with Israeli corporate governance
requirements under the Companies Law applicable to public companies.
Controlled Company
As a result of the number of shares owned by Arkin Dermatology,
as of the date of this annual report, we are a “controlled company” under the Nasdaq corporate governance rules. A “controlled
company” is a company of which more than 50% of the voting power is held by an individual, group or another company. Pursuant to
the “controlled company” exemption, we are not required to, and do not expect to, comply with, the requirement that a majority
of our board of directors consist of independent directors, and we are not required to, and do not comply with, the requirement
that we have a nominating committee composed entirely of independent directors with a written charter addressing such committee’s
purpose and responsibilities. See “Item 6. Directors, Senior Management and Employees — C. Board Practices."
ITEM 16H.
MINE SAFETY DISCLOSURE
Not applicable.
ITEM 16I.
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
ITEM 16J.
INSIDER TRADING POLICIES
Pursuant to applicable SEC transition guidance, the disclosure required by Item 16J
will only be applicable to the Company from the fiscal year ending on December 31, 2024.
ITEM 16K.
CYBERSECURITY
Cybersecurity Risk Management and Strategy
We have developed and implemented a cybersecurity risk management
program intended to protect the confidentiality, integrity, and availability of our critical systems and information. Our cybersecurity
risk management program includes a cybersecurity incident response plan.
We design and assess our program based on the best common practice
for our industry, ISO 27001 standards and SOX requirements. This does not imply that we meet any particular technical standards,
specifications, or requirements, only that we use the ISO 27001 and SOX requirements as a guide to help us identify, assess, and
manage cybersecurity risks relevant to our business.]
Our cybersecurity risk management program is integrated into our
overall enterprise risk management program, and shares common methodologies, reporting channels and governance processes that apply across
the enterprise risk management program to other legal, compliance, strategic, operational, and financial risk areas.
Our cybersecurity risk management program includes:
| • |
risk assessments designed to help identify material cybersecurity risks to our critical systems, information, products, services,
and our broader enterprise information technology environment; |
| • |
a team principally responsible for managing (1) our cybersecurity risk assessment processes, (2) our security controls, and (3) our
response to cybersecurity incidents; |
| • |
the use of external service providers, where appropriate, to assess, test or otherwise assist with aspects of our security controls;
|
| • |
cybersecurity awareness training of our employees, incident response personnel, and senior management; |
| • |
a cybersecurity incident response plan that includes procedures for responding to cybersecurity incidents; and |
| • |
a third-party risk management process for service providers, suppliers, and vendors who have access to our critical systems and information.
|
We have not identified risks from known cybersecurity threats,
including as a result of any prior cybersecurity incidents, that have materially affected or are reasonably likely to materially affect
us, including our operations, business strategy, results of operations, or financial condition. For more information, see the section
titled “Risk Factor— General Risk Factors— Our business and operations may suffer in the event of information technology
system failures, cyberattacks or deficiencies in our cyber-security.”
Cybersecurity Governance
Our Board considers cybersecurity risk as part of its risk oversight
function. The Board oversees implementation of our cybersecurity risk management program by management and our external information technology
service provider.
The Board receives periodic reports from management on our cybersecurity
risks. In addition, management updates the Board, as necessary, regarding any material cybersecurity incidents, as well as any incidents
with lesser impact potential.
Board members receive presentations on cybersecurity topics from
our Chief Operating Officer (COO), internal security staff or external experts as part of the Board’s continuing education on topics
that impact public companies.
Our management team, including our COO and external Information
Technologies services provider, are responsible for assessing and managing our material risks from cybersecurity threats. We have outsourced
implementation and day-to-day function of our overall cybersecurity risk management program to our third-party information technology
services provider. Our management team supervises both our internal cybersecurity personnel and our retained external cybersecurity consultants.
Our management team supervises efforts to prevent, detect, mitigate,
and remediate cybersecurity risks and incidents through various means, which may include briefings from internal security personnel; threat
intelligence and other information obtained from governmental, public or private sources, including external consultants engaged by us;
and alerts and reports produced by security tools deployed in the information technology environment.
ITEM
17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18.
FINANCIAL STATEMENTS
The financial statements required by this item are found at the
end of this annual report, beginning on page F-1.
See Exhibit Index on
page 131.
|
Exhibit Number
|
Exhibit Description
|
|
|
|
| 4.13* |
|
The exhibits filed with or incorporated into this Registration Statement are listed
in the index of exhibits below.
SIGNATURE
The Registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
|
|
SOL-GEL TECHNOLOGIES LTD. |
| ||
|
|
|
| ||
|
|
By: |
/s/ Alon Seri-Levy |
| |
|
|
|
Name: |
Alon Seri-Levy |
|
|
|
|
Title: |
Chief Executive Officer and Director |
|
|
|
|
|
|
|
|
|
By: |
/s/ Gilad Mamlok |
| |
|
|
|
Name: |
Gilad Mamlok |
|
|
|
|
Title: |
Chief Financial Officer |
|
Date: March 13, 2024
SOL-GEL TECHNOLOGIES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2023
SOL-GEL TECHNOLOGIES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2023
TABLE OF CONTENTS
|
Page
|
|
|
F-2
|
|
|
CONSOLIDATED FINANCIAL STATEMENTS:
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
F-6
|
|
|
F-7
|
Report of Independent Registered Public Accounting Firm
To the board of directors and shareholders of Sol-Gel Technologies Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Sol-Gel Technologies Ltd. and its subsidiary (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of operations, of changes in shareholders' equity and of cash flows for each of the three years in the period ended December 31, 2023, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting 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.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. We determined there are no critical audit matters.
|
Tel-Aviv, Israel
|
/s/ Kesselman & Kesselman
|
|
March 13, 2024
|
Certified Public Accountants (Isr.)
|
|
A member firm of PricewaterhouseCoopers International Limited
|
We have served as the Company's auditor since 2000.
SOL-GEL TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share and per share data)
The accompanying notes are an integral part of these consolidated financial statements.
SOL-GEL TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. dollars in thousands, except share and per share data)
| Year ended December 31, | ||||||||||||
| 2021 | 2022 | 2023 | ||||||||||
|
COLLABORATION REVENUES
|
23,772
|
-
|
-
|
|||||||||
|
LICENSE REVENUES
|
7,500
|
3,883
|
1,554
|
|||||||||
|
TOTAL REVENUES
|
31,272
|
3,883
|
1,554
|
|||||||||
|
RESEARCH AND DEVELOPMENT EXPENSES
|
20,381
|
12,682
|
23,541
|
|||||||||
|
GENERAL AND ADMINISTRATIVE EXPENSES
|
8,451
|
7,445
|
7,373
|
|||||||||
|
OTHER INCOME, net
|
524
|
-
|
55
|
|||||||||
|
TOTAL OPERATING INCOME (LOSS)
|
2,964
|
(16,244
|
)
|
(29,305
|
)
|
|||||||
|
FINANCIAL INCOME, net
|
257
|
1,321
|
2,067
|
|||||||||
|
NET INCOME (LOSS) FOR THE YEAR
|
3,221
|
(14,923
|
)
|
(27,238
|
)
|
|||||||
|
BASIC EARNINGS (LOSS) PER ORDINARY SHARE
|
0.14
|
(0.65
|
)
|
(1.01
|
)
|
|||||||
|
DILUTED EARNINGS (LOSS) PER ORDINARY SHARE
|
0.14
|
(0.65
|
)
|
(1.01
|
)
|
|||||||
|
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING USED IN COMPUTATION OF BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
|
||||||||||||
|
BASIC
|
23,063,493
|
23,128,722
|
27,087,081
|
|||||||||
|
DILUTED
|
23,566,182
|
23,128,722
|
27,087,081
|
|||||||||
The accompanying notes are an integral part of these consolidated financial statements.
SOL-GEL TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. dollars in thousands, except share data)
|
|
Ordinary shares
|
Additional
paid-
in capital |
Accumulated
deficit
|
Total
|
||||||||||||||||
|
|
Number
of shares
|
Amounts
|
Amounts
|
|||||||||||||||||
|
BALANCE AS OF JANUARY 1, 2021
|
23,000,782
|
635
|
231,577
|
(181,363
|
)
|
50,849
|
||||||||||||||
|
CHANGES DURING 2021:
|
||||||||||||||||||||
|
Net income for the year
|
-
|
-
|
3,221
|
3,221
|
||||||||||||||||
|
Issuance of shares through ATM, net of issuance costs
|
41,154
|
1
|
504
|
-
|
505
|
|||||||||||||||
|
Vesting of restricted share units
|
19,170
|
|
|
|
|
|||||||||||||||
|
Exercise of options
|
65,698
|
2
|
330
|
-
|
332
|
|||||||||||||||
|
Share-based compensation
|
-
|
-
|
687
|
-
|
687
|
|||||||||||||||
|
BALANCE AS OF DECEMBER 31, 2021
|
23,126,804
|
638
|
233,098
|
(178,142
|
)
|
55,594
|
||||||||||||||
|
CHANGES DURING 2022:
|
||||||||||||||||||||
|
Net loss for the year
|
-
|
-
|
-
|
(14,923
|
)
|
(14,923
|
)
|
|||||||||||||
|
Exercise of options
|
2,665
|
|
15
|
-
|
15
|
|||||||||||||||
|
Share-based compensation
|
-
|
-
|
1,527
|
-
|
1,527
|
|||||||||||||||
|
BALANCE AS OF DECEMBER 31, 2022
|
23,129,469
|
638
|
234,640
|
(193,065
|
)
|
42,213
|
||||||||||||||
|
CHANGES DURING 2023:
|
||||||||||||||||||||
|
Net loss for the year
|
(27,238
|
)
|
(27,238
|
)
|
||||||||||||||||
|
Issuance of shares and warrants through public offering, net of issuance costs
|
2,560,000
|
74
|
11,468
|
11,542
|
||||||||||||||||
|
Issuance of shares and warrants through private placement from the controlling shareholder
|
2,000,000
|
56
|
9,944
|
10,000
|
||||||||||||||||
|
Exercise of options
|
168,151
|
6
|
262
|
268
|
||||||||||||||||
|
Share-based compensation
|
1,859
|
1,859
|
||||||||||||||||||
|
BALANCE AS OF DECEMBER 31, 2023
|
27,857,620
|
774
|
258,173
|
(220,303
|
)
|
38,644
|
||||||||||||||
* less than $1 thousand
The accompanying notes are an integral part of these consolidated financial statements.
SOL-GEL TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
|
Year ended December 31,
|
||||||||||||
|
2021
|
2022
|
2023
|
||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net income (loss) for the year
|
3,221
|
(14,923
|
)
|
(27,238
|
)
|
|||||||
|
Adjustments required to reconcile net income (loss) to net cash used in operating activities:
|
||||||||||||
|
Depreciation
|
880
|
562
|
342
|
|||||||||
|
Loss (income) from disposal of property and equipment
|
29
|
-
|
(55
|
)
|
||||||||
|
Changes in accrued liability for employee rights upon retirement
|
(32
|
)
|
20
|
6
|
||||||||
|
Share-based compensation expenses
|
687
|
1,527
|
1,859
|
|||||||||
|
Net changes in operating leases
|
14
|
(194
|
)
|
35
|
||||||||
|
Changes in fair value of marketable securities
|
(125
|
)
|
119
|
(436
|
)
|
|||||||
|
Financial expenses (income), net
|
55
|
(133
|
)
|
89
|
||||||||
|
Changes in operating asset and liabilities:
|
||||||||||||
|
Receivables from collaborative arrangements
|
(18,314
|
)
|
12,609
|
7,858
|
||||||||
|
Accounts receivables
|
-
|
(62
|
)
|
(315
|
)
|
|||||||
|
Prepaid expenses and other current assets
|
274
|
(709
|
)
|
(1,340
|
)
|
|||||||
|
Accounts payable, accrued expenses and other
|
5,620
|
(8,300
|
)
|
1,465
|
||||||||
|
Net cash used in operating activities
|
(7,691
|
)
|
(9,484
|
)
|
(17,730
|
)
|
||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Purchase of property and equipment
|
(143
|
)
|
(171
|
)
|
(134
|
)
|
||||||
|
Proceeds from sale of property and equipment
|
-
|
-
|
74
|
|||||||||
|
Short-term deposits
|
(48
|
)
|
8,948
|
2,488
|
||||||||
|
Long-term deposits
|
(5
|
)
|
10
|
(813
|
) |
|||||||
|
Investments in marketable securities
|
(6,716
|
)
|
(10,006
|
)
|
(23,164
|
)
|
||||||
|
Proceeds from sale and maturity of marketable securities
|
26,784
|
2,918
|
11,807
|
|||||||||
|
Net cash provided by (used in) investing activities
|
19,872
|
1,699
|
(9,742
|
)
|
||||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Proceeds from issuance of shares through ATM, net of issuance costs
|
505
|
-
|
-
|
|||||||||
|
Proceeds from exercise of options
|
332
|
15
|
268
|
|||||||||
|
Proceeds from issuance of shares and warrants through placement from the controlling shareholder
|
-
|
-
|
10,000
|
|||||||||
|
Proceeds from issuance of shares and warrants through public offering, net of issuance costs
|
-
|
-
|
11,542
|
|||||||||
|
Net cash provided by financing activities
|
837
|
15
|
21,810
|
|||||||||
|
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS AND RESTRICTED CASH EQUIVALENTS
|
(55
|
)
|
133
|
(73
|
)
|
|||||||
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH EQUIVALENTS
|
12,963
|
(7,637
|
)
|
(5,735
|
)
|
|||||||
|
CASH AND CASH EQUIVALENTS AND RESRICTED CASH EQUIVALENTS AT BEGINNING OF THE YEAR
|
8,272
|
21,235
|
13,598
|
|||||||||
|
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH EQUIVALENTS AT END OF THE YEAR
|
21,235
|
13,598
|
7,863
|
|||||||||
|
Cash and Cash equivalents
|
20,085
|
12,448
|
7,513
|
|||||||||
|
Restricted cash equivalents
|
1,150
|
1,150
|
350
|
|||||||||
|
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH EQUIVALENTS SHOWN IN STATEMENT OF CASH FLOWS
|
21,235
|
13,598
|
7,863
|
|||||||||
|
SUPPLEMENTARY INFORMATION ON INVESTING AND FINANCING ACTIVITIES NOT INVOLVING CASH FLOWS:
|
||||||||||||
|
Recognition of new operating lease ROU and liabilities
|
253
|
88
|
1,590
|
|||||||||
|
SUPPLEMENTARY INFORMATION:
|
||||||||||||
|
Income taxes paid
|
34
|
-
|
-
|
|||||||||
|
Interest received
|
774
|
392
|
1,261
|
|||||||||
The accompanying notes are an integral part of these consolidated financial statements.
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share amounts)
NOTE 1 - NATURE OF OPERATIONS
Sol-Gel Technologies Ltd. (collectively with its U.S. subsidiary, the "Company") is an Israeli Company incorporated in 1997.
The Company is an innovative dermatology company with a successful track record of two NDA approvals and advanced orphan drugs pipeline. The Company has two approved drugs: (i) Twyneo®, which was developed for the treatment of acne vulgaris and received marketing authorization by the U.S. Food and Durg Administration (the "FDA") on July 27, 2021 and (ii) Epsolay®, a treatment for subtype II rosacea that received marketing authorization by the FDA on April 25, 2022. In June 2021, the Company entered into two exclusive license agreements with Galderma for the commercialization of Twyneo® and Epsolay®, in the United States, see Note 9a. On April 14, 2022, the Company announced that Twyneo® is available for purchase by consumers who obtain a prescription from their physician. On June 2, 2022, the Company announced that Epsolay® is available for purchase by consumers who obtain a prescription from their physician. In addition to the novel products, the Company’s products included the approved generic products Acyclovir, Ivermectin and other generic product candidates. In November 2021, the Company entered into an agreement with Padagis, to sell its rights in relation to ten generic collaborative agreements between the parties, including the agreements for the two aforementioned approved generic drug products. Under the new agreement, the Company has retained collaboration rights to two generic programs related to four generic drug candidates, see Note 8c.
On January 27, 2023 the Company entered into an asset purchase agreement ("APA") with PellePharm, Inc. (hereafter-“PellePharm”), pursuant to which the Company agreed to purchase all of the assets related to the topically-applied patidegib, a hedgehog signaling pathway blocker, for the treatment of Gorlin syndrome (such compound designated as investigational compound SGT-610). On January 30, 2023, upon closing of the transaction, the Company paid an upfront payment (hereafter- "upfront payment") of $4 million to PellePharm. The Company is required to pay an additional amount of $0.7 million, subject to the terms as defined in the APA, 15 months from the closing date. In addition, the Company will be required to pay total development and NDA acceptance milestones of up to $6 million, and up to $64 million in commercial milestones which amount increases to $89 million when sales exceed $500 million as well as single digit royalties which increase to double digit royalties when sales exceed $500 million.
The upfront payment and the additional development milestone payments under the APA represent payments for research and development in-process ("IPR&D") acquired as part of an asset purchase, which has not reached technological feasibility and has no alternative future use. Accordingly, such payments are expensed as incurred and are recognized as research and development expenses.
The Company has a wholly owned U.S. subsidiary - Sol-Gel Technologies Inc. (the "Subsidiary"). The Subsidiary supports the Company with regard to marketing, regulatory affairs and business development relating to its products and technology in the U.S.
In October 2023, Hamas terrorists infiltrated Israel’s southern border and launched a series of attacks against Israel. Following these attacks, Israel’s security cabinet declared war against Hamas and initiated a military campaign. As of the issuance date of this report, there was no material impact on the Company's ongoing operations in Israel. The Company continues to monitor its ongoing activities and will make any needed adjustments to ensure continuity of its business, while supporting the safety and well-being of its employees.
Risk and Uncertainties
Since incorporation through December 31, 2023, the Company has an accumulated deficit of approximately $220,303 and its activities have been funded mainly by its shareholders, collaboration revenues and license agreements, see also Notes 8 and 9. The Company expects to continue to incur significant research and development and other costs related to its ongoing operations.
NOTE 1 - NATURE OF OPERATIONS (continued):
In addition, management is continuing to analyze cash resources and considering raising additional funding from different sources, such as corporate collaborations, public or private equity offerings and/or debt financings. On August 9, 2023, following a recent assessment of partner licensing revenues and the delay in the development of SGT-210, the Company announced a restructuring plan to reduce operating expenses as part of cost-saving measures. The restructuring plan’s cost-saving measures included workforce reductions of about 25 employees, as well as other cost-mitigation measures and was completed during the third quarter.
Management expects that the Company's cash and cash equivalents, deposits and marketable securities as of December 31, 2023 will allow the Company to fund its operating plan through at least the next 12 months from the financial statement issuance date.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
|
|
The Company’s financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).
|
|
a.
|
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates.
As applicable to these consolidated financial statements, the most significant estimates and assumptions relate to the fair value of share-based compensation and the incremental borrowing rate for leases.
|
|
b.
|
Functional and presentation currency
The U.S. dollar (“dollar”) is the currency of the primary economic environment in which the operations of the Company and its subsidiary are conducted. The Company’s financing has been provided in dollars, revenues are primarily in dollars and a significant part of expenses are incurred in dollars. The financial statements are presented in dollars, which is the Company’s functional and presentation currency.
Transactions and balances originally denominated in dollars are presented at their original amounts. Balances in non-dollar currencies are translated into dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. For non-dollar transactions and other items in the statements of operations (indicated below), the following exchange rates are used: (1) for transactions — exchange rates at transaction dates or average rates; and (2) for other items (derived from non-monetary balance sheet items such as depreciation) — historical exchange rates. Currency transaction gains and losses are presented in financial income or expenses, as appropriate.
|
|
c.
|
Cash and cash equivalents
The Company considers as cash equivalents all short-term, highly liquid investments, which include short-term bank deposits with original maturities of three months or less from the date of purchase that are not restricted as to withdrawal or use and are readily convertible to known amounts of cash.
|
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):
|
d.
|
Bank deposits
Bank deposits with original maturity dates of more than three months but less than one year are included in short-term deposits. Such short-term deposits bear interest at an average annual rate of approximately 1.8%-5.9% in 2023. Interest accrued on bank deposits was recorded as interest receivable as part of "Prepaid expenses and other current assets" in the company’s balance sheet.
Bank deposits with maturity of more than one year are considered long-term.
As of December 31, 2023, the Company has a restricted deposit in the amount of $1,167 in order to secure certain transactions with its banks. This amount is presented under restricted long-term deposits and cash.
|
|
e.
|
Marketable securities
Marketable securities consist of debt securities. The Company elected the fair value option to measure and recognize its investments in debt securities in accordance with ASC 825, Financial Instruments as the Company manages its portfolio and evaluates the performance on a fair value basis. Changes in fair value, realized gains and losses on sales of marketable securities, are reflected in the statements of operation as finance expense (income), net. Marketable securities are classified under current assets in the consolidated balance sheet as they represent the investment of funds available for the Company’s current operations.
|
|
f.
|
Derivatives and hedging
The Company carries out transactions involving foreign currency exchange derivative financial instruments. The transactions are designed to hedge the Company’s exposure in currencies other than the U.S. dollar. The derivatives do not qualify for hedge accounting, therefore the changes in the fair value are included in financial expense (income), net.
The currency hedged items are denominated in New Israeli Shekel (NIS). The counterparties to the derivatives are major banks in Israel. |
|
g.
|
Accounts receivables
Accounts receivable are initially recognized at the transaction price and subsequently measured at amortized cost less any allowance for expected credit losses.
|
|
h.
|
Property and equipment
|
|
1)
|
Property and equipment are stated at cost, net of accumulated depreciation and amortization.
|
|
2)
|
The Company’s property and equipment are depreciated utilizing the straight-line method based on their estimated useful life.
Annual rates of depreciation are as follows:
|
|
%
|
|
|
Laboratory equipment
|
10 – 33 (mainly 15 – 25)
|
|
Office equipment and furniture
|
7 – 15
|
|
Computers and related equipment
|
33
|
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):
|
|
Leasehold improvements are amortized utilizing the straight-line method over the shorter of the expected lease term or the estimated useful life of the improvements.
|
|
i.
|
Impairment of long-lived assets
The Company tests long-lived assets for impairment whenever events or circumstances present an indication of impairment. If the sum of expected future cash flows (undiscounted and without interest charges) of the assets is less than these assets' carrying amount, an impairment loss would be recognized. The assets would then be written down to their estimated fair values.
During the three years ended December 31, 2023, the Company did not recognize an impairment loss on its long-lived assets.
|
|
j.
|
Share-based compensation
The Company accounts for employees’ and non-employees' share-based payment awards classified as equity awards using the grant-date fair value method. The fair value of share-based payment compensation is recognized as an expense over the requisite service period.
The Company elected to recognize compensation costs for awards to employee conditioned only on continued service that have a graded vesting schedule using the accelerated method based on the multiple-option award approach.
The Company has elected to recognize forfeitures as they occur.
|
|
k.
|
Research and development expenses
Research and development expenses include costs directly attributable to the conduct of research and development programs, including the cost of salaries, share-based compensation expenses, payroll taxes and other employee benefits, lab expenses, consumable equipment and consulting fees. All costs associated with research and developments are expensed as incurred.
Acquisitions of in-process research and development product candidates, which are not part of a business combination and that have no alternative use, are recognized as an expense as research and development expenses as incurred.
Grants received from Israel Innovation Authority (hereafter — “IIA”), formerly known as the Office of the Chief Scientist of the Ministry of Economy and Industry, or the OCS are recognized when the grant becomes receivable, provided there is reasonable assurance that the Company will comply with the conditions attached to the grant and there is reasonable assurance the grant will be received. The grant is deducted from the research and development expenses as the applicable costs are incurred. See Note 7a(1).
Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. The Company outsources its clinical trial activities utilizing external entities such as clinical research organizations, independent clinical investigators, and other third-party service providers to assist the Company with the execution of its clinical trials. Clinical trial costs are expensed as incurred.
|
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):
|
l.
|
Revenue recognition
The Company applies ASC 606, Revenue from Contracts with Customers. According to the standard, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the performance obligation is satisfied.
An entity only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer, after considering any price concession expected to be provided to the customer, as applicable. At contract inception, the entity assesses the goods or services promised within each contract, determines whether they are performance obligations and assesses whether each promised good or service is distinct. A good or service promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. The entity then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Collaborative Arrangements
The Company entered into collaborative arrangements with partners that fall under the scope of Topic 808, Collaborative Arrangements (“ASC 808”). While these arrangements are in the scope of ASC 808, the Company may analogize to ASC 606 for some aspects of the arrangements. The Company analogizes to ASC 606 for certain activities within the collaborative arrangement for the delivery of a good or service (i.e., a unit of account) that is part of its ongoing major or central operations. Revenue recognized by analogizing to ASC 606 is recorded as “collaboration revenues”.
The terms of the Company’s collaborative arrangements typically include one or more of the following: (i) royalties on net sales of licensed products; (ii) reimbursements or cost-sharing of R&D expenses. Each of these payments results in collaboration revenues or an offset against R&D expense.
Royalties: For arrangements that include sales-based royalties and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes collaboration revenues at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
Under certain collaborative arrangements, the Company has been reimbursed for a portion of its R&D expenses or participates in the cost-sharing of such R&D expenses. Such reimbursements and cost-sharing arrangements have been reflected as a reduction of R&D expense in the Company’s consolidated statements of operations, as the Company does not consider performing research and development services for reimbursement to be a part of its ongoing major or central operations.
For arrangements that include a significant financing component, the company separates the significant financing component from the revenue and interest income is recorded when payments are received. See Note 8.
|
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):
|
l.
|
Revenue recognition (continued):
|
|
|
Licensing agreements
The Company has license agreements with two parties, Galderma and Searchlight.
In its license agreements with Galderma, the Company has identified one performance obligation (see Note 9a): grant of the license and use of its IP. The grant of the license and use of its IP performance obligation is considered to be a right to use IP in accordance with ASC 606. Therefore, revenue is recognized at a point in time, upon transfer of control over the license to the licensee.
In its license agreements with Searchlight (see Note 9b), the Company has identified two performance obligations: grant of the license and use of its IP, as well as continuing support during the regulatory approval process. The grant of the license is recognized at a point in time, upon transfer of control over the license to the licensee, while the services are recognized over time as the services are performed.
ASC 606 defines the ‘Transaction Price’ as the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to a customer. License agreements may contain variable consideration contingent upon the licensee achieving certain milestones, as well as sales-based royalties, in accordance with the relevant agreement. Variable payments, contingent on achieving additional milestones, are included in the transaction price based on most likely amount method. Amounts included in the transaction price are recognized only when it is probable that a significant reversal of cumulative revenues will not occur, usually upon achievement of the specific milestone, in accordance with the relevant agreement. Sales-based royalties are not included in the transaction price. Rather, they are recognized as the related sale occurs, due to the specific exception of ASC 606 for sales-based royalties in licensing of intellectual properties.
|
|
m.
|
Income taxes
|
|
1)
|
Deferred taxes
The Company accounts for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). ASC 740 prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value if it is more likely than not that a portion or all of the deferred tax assets will not be realized, based on the weight of available positive and negative evidence. Deferred tax liabilities and assets are classified as non-current.
|
|
2)
|
Uncertainty in income taxes
The Company follows a two-step approach in recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the available evidence indicates that it is more likely than not that the position will be sustained based on technical merits. If this threshold is met, the second step is to measure the tax position as the largest amount that has more than a 50% likelihood of being realized upon ultimate settlement.
|
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):
|
n.
|
Leases
Right of use ("ROU") assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company’s lease terms may include periods covered by options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option to extend the lease or not exercise the option to terminate the lease.
The Company uses the implicit rate when readily determinable. As the Company’s leases do not provide an implicit rate, the Company uses its estimated incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lease expense for operating lease is recognized on a straight-line basis over the lease term. The Company elected to not separate lease and non-lease components for the leases. The Company elected the practical expedient of the short-term lease recognition exemption for all leases with a term shorter than 12 months.
Additionally, the company applies the portfolio approach to account for operating lease ROU asset and liabilities for certain car leases and incremental borrowing rates.
|
|
o.
|
Concentration of credit risks
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents, bank deposits, marketable securities and certain receivables. The Company deposits cash and cash equivalents with highly rated financial institutions. In addition, all marketable securities either carry a high rating or are government insured. The Company has not experienced any material credit losses in these accounts and does not believe it is exposed to significant credit risk on these instruments.
|
|
p.
|
Earnings (loss) per share
Basic earnings (loss) per share is computed based on net earnings (loss) for the period divided by the weighted average number of ordinary shares outstanding during the period. Diluted earnings (loss) per share is based upon the weighted average number of ordinary shares and of potential ordinary shares outstanding when dilutive. Potential ordinary shares include outstanding stock options and warrants, which are included under the treasury stock method when dilutive.
The calculation of diluted earnings (loss) per share does not include 3,397,834 , 3,900,837 and 7,070,688 options and warrants for the years ended December 31, 2021, 2022 and 2023, respectively, because their effect would be anti-dilutive.
|
|
q.
|
Fair value measurement
Fair value is based on the price that would be received from the sale of an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, the guidance establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described as follows:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers counterparty credit risk in its assessment of fair value.
The fair value of bank deposits approximates their carrying value, since they bear interest at rates close to the prevailing market rates. In addition, due to the short-term nature and/or low-risk nature of the Company's cash and cash equivalents, restricted cash equivalents, accounts receivable, accounts payable and other payables , their carrying amounts approximates their fair value.
|
|
r.
|
Recently issued accounting pronouncement
In November 2023, the FASB issued ASU 2023-07 “Segment Reporting: Improvements to Reportable Segment Disclosures”. This guidance expands public entities’ segment disclosures primarily by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. Public entities with a single reportable segment are required to provide the new disclosures and all the disclosures required under ASC 280. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The amendments are required to be applied retrospectively to all prior periods presented in an entity’s financial statements. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements and related disclosures.
|
NOTE 3 - MARKETABLE SECURITIES:
The following table sets forth the Company’s marketable securities for the indicated period:
|
December 31,
|
||||||||
|
2022
|
2023
|
|||||||
|
Level 2 securities:
|
||||||||
|
U.S government and agency bonds
|
1,494
|
2,583
|
||||||
|
Other foreign government bonds
|
-
|
1,946
|
||||||
|
Corporate bonds*
|
7,184
|
15,942
|
||||||
|
Total
|
8,678
|
20,471
|
||||||
* Investments in Corporate bonds rated A or higher.
The Company elected the fair value option to measure and recognize its investments in debt securities in accordance with ASC 825, Financial Instruments as the Company manages its portfolio and evaluates the performance on a fair value basis.
The Company’s debt securities are classified within Level 2 because it uses quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value.
The cost of marketable securities as of December 31, 2023 is $20,180.
The table below sets forth a summary of the changes in the fair value of the Company’s marketable securities for the years ended December 31, 2022 and 2023:
|
December 31,
|
||||||||
|
2022
|
2023
|
|||||||
|
Balance at beginning of the year
|
$
|
1,709
|
$
|
8,678
|
||||
|
Additions
|
10,006
|
23,164
|
||||||
|
Sale or maturity
|
(2,918
|
)
|
(11,807
|
)
|
||||
|
Changes in fair value during the year
|
(119
|
)
|
436
|
|||||
|
Balance at end of the year
|
$
|
8,678
|
$
|
20,471
|
||||
NOTE 3 - MARKETABLE SECURITIES (continued):
As of December 31, 2023, all the Company’s debt securities had the following maturity dates:
|
Market value
|
||||
|
December 31,
|
||||
|
2023
|
||||
|
Due within one year
|
16,127
|
|||
|
Between 1-2 years
|
4,344
|
|||
NOTE 4 - PROPERTY AND EQUIPMENT
|
|
December 31
|
|||||||
|
|
2022
|
2023
|
||||||
|
Cost:
|
||||||||
|
Laboratory equipment
|
$
|
3,688
|
$
|
3,514
|
||||
|
Office equipment and furniture
|
265
|
288
|
||||||
|
Computers and software
|
428
|
451
|
||||||
|
Leasehold improvements
|
1,993
|
1,985
|
||||||
|
6,374
|
6,238
|
|||||||
|
Less:
|
||||||||
|
Accumulated depreciation and amortization
|
(5,714
|
)
|
(5,804
|
)
|
||||
|
Property and equipment, net
|
$
|
660
|
$
|
434
|
||||
Depreciation and amortization expense totaled $880, $562 and $342 for the years ended December 31, 2021, 2022 and 2023, respectively.
NOTE 5 - LEASES:
The Company leases offices and vehicles under operating leases. For leases with terms greater than 12 months, the Company records right of use assets and lease liabilities at the present value of lease payments over the leases term.
Offices
The Company leases office spaces and research and development facilities under several agreements. These agreements are linked to the change in the Israeli consumer price index and were to expire in . In June 2023, the Company signed on extension to the office lease agreement, for the period starting January 1, 2024 for an additional period of two years, with an option to extend the agreement for another two years, meaning a maximum extension period of four years. These agreements are classified as operating leases and are presented under operating lease right-of-use assets and operating leases liabilities. A restricted deposit of $116 has been deposited in order to secure the agreement.
Vehicles
The Company has entered into operating lease agreements for vehicles used by its employees for a period of 3 years. These contracts are classified as operating leases and presented under operating lease right-of-use assets and operating leases liabilities.
Lease Position
The table below presents the lease-related assets and liabilities recorded on the consolidated balance sheet:
|
As of December 31, |
||||||||
|
2022
|
2023
|
|||||||
|
Assets
|
||||||||
|
Operating Leases
|
||||||||
|
Operating lease right-of-use assets
|
876
|
1,721
|
||||||
|
Liabilities
|
||||||||
|
Current liabilities
|
||||||||
|
Current maturities of operating leases
|
718
|
447
|
||||||
|
Long-term liabilities
|
||||||||
|
Non-current operating leases
|
54
|
1,206
|
||||||
|
Weighted Average Remaining Lease Term
|
||||||||
|
Operating leases
|
0.45
|
3.73
|
||||||
|
Weighted Average Discount Rate
|
||||||||
|
Operating leases
|
6.11
|
%
|
13.3
|
%
|
||||
The table below presents certain information related to lease costs of operating leases:
|
Year Ended
December 31,
|
||||||||
| 2022 | 2023 | |||||||
|
Operating lease cost:
|
797
|
745
|
||||||
The table below presents supplemental cash flow information related to leases:
|
Year Ended
December 31,
|
||||||||
| 2022 | 2023 | |||||||
|
Cash paid for amounts included in the measurement of leases liabilities:
|
|
|||||||
|
Operating cash flows from operating leases
|
989
|
799
|
||||||
Undiscounted Cash Flows
The table below reconciles the undiscounted cash flows under leases as of December 31, 2023 were as follows:
|
Operating
Leases
|
||||
|
For the year ending December 31,
|
||||
|
2024
|
592
|
|||
|
2025
|
539
|
|||
|
2026 and thereafter
|
912
|
|||
|
Total minimum lease payments
|
2,043
|
|||
|
Less: amount of lease payments representing interest
|
(390
|
)
|
||
|
Present value of future minimum lease payments
|
1,653
|
|||
|
Less: Current maturities of operating leases
|
447
|
|||
|
Long-term operating leases liabilities
|
1,206
|
|||
NOTE 6 - EMPLOYEE SEVERANCE BENEFITS:
The Company is required to make severance payments upon dismissal of an employee or upon termination of employment in certain circumstances.
In accordance with the current employment terms starting in August 2014 with all of its employees (Section 14 of the Israeli Severance Pay Law, 1963), the Company makes regular deposits with certain insurance companies for accounts controlled by each applicable employee in order to secure the employee’s retirement benefit obligation. The Company is fully relieved from any severance pay liability with respect to each such employee after it makes the payments on behalf of the employee. The liability accrued in respect of these employees and the amounts funded, as of the respective agreement dates, are not reflected in the Company balance sheet, as the amounts funded are not under the control and management of the Company and the pension or severance pay risks have been irrevocably transferred to the applicable insurance companies (the “Contribution Plan”).
For employees whose employment term began prior to August 2014, the severance payment liability (based upon length of service and the latest monthly salary — one month’s salary for each year employed) is recorded on the Company’s balance sheet under “Liability for employee rights upon retirement". The liability is recorded as if it was payable at each balance sheet date on an undiscounted basis.
This liability is funded in part from the purchase of insurance policies or by the establishment of pension funds with dedicated deposits in the funds. The amounts used to fund these liabilities are included in the balance sheets under “Funds in respect of employee rights upon retirement.” These policies are the Company’s assets.
The amounts of severance payment expenses were $445, $461 and $445 for the years ended December 31, 2023, 2022 and 2021, respectively, of which $389, $405 and $404 in the years ended December 2023, 2022 and 2021, respectively, were in respect of the Contribution Plan.
The Company expects to contribute approximately $401 in the year ending December 31, 2024 to insurance companies in connection with its expected severance liabilities for that year.
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 7 - COMMITMENTS:
|
a.
|
Royalty Commitments:
|
|
1)
|
The Company is obligated to pay royalties to the IIA on proceeds from the sale of products developed from research and development activities that were funded, partially, by grants from the IIA.
Under the specific terms of the funding arrangements with the IIA, royalties of 3.5% to 25% are payable on the sale of products developed with funding received from the IIA, which payments shall not exceed, in the aggregate, 300% of the amount of the grant received (dollar linked), plus interest at annual rate based on the 12-month SOFR rate as published by CME Group on the first day of commerce or any other body certified by the Federal Reserve, or according to an alternative bulletin as published by the Bank of Israel.
Up to December 31, 2023, the Company had recognized and received grants from the IIA in the aggregate amount of $1,430 (no grants were received in the years ended December 31, 2021, 2022 and 2023). Through December 31, 2023, the Company recorded an accumulated royalty expense of $2,170 as royalties to the IIA with respect to revenue recognized through December 31, 2023 ($23, $24 and $37 were recorded in 2021, 2022 and 2023 accordingly, as an expense in the consolidated statements of operations).
|
|
2)
|
The Company has an agreement, that was amended several times (hereafter — the agreements) with Yissum Research Development Company (hereafter — “Yissum”), the technology-licensing arm of the Hebrew University of Jerusalem.
According to the agreements, the Company received from Yissum an exclusive and a non-exclusive license for the commercialization of certain Yissum patents. According to the agreements the Company shall pay Yissum:
Royalties of 1.5% of net sales related to certain patents. 1.5% – 8% of proceeds received by the Company for the sublicense or license of certain patents.
Royalty expenses in immaterial amounts were recorded in 2021, 2022 and 2023 in respect of these agreements.
According to the agreements, the Company may continue commercial use of certain Yissum’s patents in connection with the products and subject to the obligation to pay Yissum the royalties and the sub-license fees.
The Company granted rights to a third party for use and commercialization of certain Yissum patents. |
|
b.
|
As to collaboration agreements, see detailed information in Note 8.
|
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 8 - COLLABORATION AGREEMENTS:
|
a.
|
In 2007, the Company granted rights to a third party for use and commercialization of a product for skin protection. Under this agreement, the Company is entitled to royalties during the years 2016 to 2024. Based on current sales, royalties are not material.
|
|
b.
|
In 2016 through 2020, the Company entered into several collaboration agreements mainly with one third party (the "Partner") for the development, manufacturing and commercialization of several product candidates (including an agreement assumed by the Company in August 2018, following the transfer of an in-process research and development product candidate from a related party).
|
|
c.
|
Under the agreements, the Partner is obligated to conduct regulatory, scientific, clinical and technical activities necessary to develop the product and prepare and file an abbreviated new drug application ("ANDA"), with the FDA and gain regulatory approval. The Company participates in the development of the product candidates, including participation in joint steering committees and is obligated for sourcing the active pharmaceutical ingredient (API) during the development phase.
Upon FDA approval, the Partner has exclusive rights and is required to use diligent efforts to commercialize these products in territories defined under the agreements, including all required sales, marketing and distributing activities associated with the agreements. The Company is entitled to a share of the Partner's gross profits related to the sale of the products, as such term is defined in each of the agreements.
These Agreements are considered to be within the scope of ASC 808, as the parties are active participants and exposed to the risks and rewards of the collaborative activity. The Company recognizes collaboration revenues when the related sales occur.
In November 2021, the Company entered into a new agreement ("New Agreement") with the Partner, to sell its rights to the Partner in relation to ten generic collaborative agreements between the parties in consideration of $21,500 which was paid over 24 months. Under the New Agreement, the Company has retained collaboration rights to two generic programs related to four generic drug candidates, and is no longer entitled to receive its share in profit as detailed above.
In addition, the Company ceased paying any outstanding and future operational costs related to these collaborative agreements.
|
NOTE 9 – LICENSE AGREEMENTS:
|
a.
|
In June 2021, the Company entered into two exclusive license agreements with Galderma for the commercialization of two of the Company's most advanced investigational drug products (Twyneo® and Epsolay®) in the United States. The Company is entitled to amounts of up to $7.5 million per product in upfront payments and regulatory approval milestone payments assuming 2021 approval of each respective product. The Company is also eligible to receive tiered double-digit royalties ranging from mid-teen to high-teen percentage of net sales as well as up to $9 million in sales milestone payments.
According to the agreement, the Company has an option to regain commercialization rights five years following first commercialization.
On July 27, 2021, the Company announced that the FDA approved the Company’s first proprietary drug product, Twyneo®. On April 14, 2022, the Company announced that Twyneo® is available for purchase by consumers who obtain a prescription from their physician, see further details in Note 1. In March 2022, the Company had refunded the $4 million upfront payment to Galderma, since FDA approval for Epsolay® had not been received as of December 31, 2021. On April 25, 2022, the Company announced that the FDA approved the drug product, Epsolay®, which entitled the Company to a $3.5 million milestone payment, as per the license agreement. In May 2022, the Company has received the $3.5 million payment from Galderma. On June 2, 2022, the Company announced that Epsolay® is available for purchase by consumers who obtain a prescription from their physician, see further details in Note 1. During 2023 and 2022, the Company recognized $1,027 and $306, respectively, as revenue from royalties in respect of the license agreement for both products.
|
|
b.
|
On June 6, 2023, the Company and Searchlight Pharma Inc. (“Searchlight”), a private Canadian specialty pharmaceutical company, signed on an exclusive license agreements for Twyneo® and Epsolay® for the Canadian market, over a fifteen-year term that is renewable for subsequent five-year periods. Searchlight will be responsible for obtaining and maintaining any regulatory approvals required to market and sell the drugs in Canada, with support from the Company.
Under the agreement, the Company will receive up to $11 million in upfront payments and regulatory and sales milestones for both drugs, combined. In addition, the Company will be entitled to royalty percentages of all Canadian net sales ranging from low-double-digits to high teens.
In June 2023, the Company received $500 as an upfront payment in connection with the license agreement and related support provided to Searchlight for obtaining the regulatory approval in the Canadian market. The Company is also required to support Searchlight during such period if needed based on agreed upon rates. The Company has identified two performance obligations in the license agreement as follows: (i) the license to market the products in Canada; and (ii) continuing support during the regulatory approval process. Accordingly, the Company recognized $380 as license revenue in the period and recorded $120 as contract liability in respect of the support services.
|
NOTE 10 - SHARE CAPITAL:
|
a.
|
Ordinary shares
Rights of the Company’s ordinary shares
|
|
|
Each ordinary share is entitled to one vote. The holder of an ordinary share is also entitled to receive dividends whenever funds are legally available, when and if declared by the Board of Directors. Since its inception, the Company has not declared any dividends.
|
|
1)
|
In July 2021, the Company entered into an ATM sales agreement ("2021 ATM Agreement") with Jefferies LLC ("Jefferies"), pursuant to which the Company was entitled, at its sole discretion, to offer and sell through Jefferies, acting as sales agent, shares having an aggregate offering price of up to $25.0 million throughout the period during which the ATM facility remains in effect. The Company agreed to pay Jefferies a commission of 3.0% of the gross proceeds from the sale of shares under the facility.
Under the 2021 ATM Agreement, 41,154 shares were sold under the program for total gross proceeds of approximately $0.5 million. On April 2022, the Company terminated the 2021 ATM Agreement, effective on the same date.
|
|
2)
|
On January 27, 2023, the Company entered into a securities purchase agreement (hereafter - “Purchase Agreement”) with Armistice Capital, pursuant to which the Company issued to Armistice Capital (i) 2,560,000 ordinary shares of the Company (the "Ordinary Shares"), par value NIS 0.1 per share in a registered direct offering (the " Registered Direct Offering") at a price of $5.00 per ordinary share and (ii) in a concurrent private placement unregistered warrants to purchase up to 2,560,000 Ordinary Shares (the "Investor Warrants"). Each of the Investor Warrants are exercisable for one ordinary share, have an exercise price of $5.85 and will become exercisable beginning six months from the date of issuance and will expire on January 27, 2028. The sale of the Ordinary Shares in the Registered Direct Offering was made by means of a shelf registration statement. The Offering closed on January 31, 2023. The gross proceeds from the Registered Direct Offering were approximately $12.8 million.
Concurrently with the signing of the Purchase Agreement, the Company also entered into a subscription agreement (hereafter - “Subscription Agreement”) between the Company and M. Arkin Dermatology Ltd., the Controlling Shareholder of the Company, pursuant to which M. Arkin Dermatology Ltd. agreed to purchase 2,000,000 unregistered Ordinary Shares and unregistered warrants to purchase up to 2,000,000 ordinary shares (the “PIPE Warrants” and, together with the Investor Warrants, the “Warrants”) in a concurrent private placement (hereafter- “Affiliate Private Placement"), at a price equal to the offering price of the Ordinary Shares in the Offering. The Affiliate Private Placement agreement was contingent on certain conditions and was approved by the Company’s shareholders in March 2023. The total proceeds of $10,000 were received in April 2023.
|
|
b.
|
Share-based compensation:
|
|
1)
|
Option plan
In December 2014, the Company’s Board of Directors approved a share incentive plan (hereafter — the Plan) and reserved a pool of 629,025 ordinary shares, par value NIS 0.1 each, or such other number as the Board may determine, subject to certain terms and conditions as defined in the Plan. According to the Plan, the Company may issue shares or restricted shares, grant options or restricted share units and other share-based awards (hereafter — the Awards) to the Company's employees, consultants, directors and other service providers.
In March 2023, the Company’s Board of Directors approved an increase of the ordinary shares that may be issued under the Company’s Plan by reserving an additional amount of 1,250,000 ordinary shares.
The Plan is designed to enable the Company to grant awards to purchase ordinary shares under various and different tax regimes including, without limitation: pursuant and subject to Section 102 of the Israeli Tax Ordinance, pursuant and subject to Section 3(i) of the Israeli Tax Ordinance and under Internal Revenue Code Section 422.
The awards may be exercised after vesting and in accordance with vesting schedules which will be determined by the Board of Directors for each grant. The maximum term of the awards is 10 years. The fair value of each option granted under the Plan is estimated using the Black-Scholes option pricing method. Expected volatility is based on the historical volatility of the company and of comparable peer companies.
The risk-free interest rate assumption is based on observed interest rates appropriate for the expected term of the options granted in dollar terms. The expected term of the options is estimated based on the simplified method, as its historical experience for options grants as a public company is insufficient.
In December 2019, the Company’s Board of Directors approved an increase of the ordinary shares that may be issued under the Company’s Plan by reserving an additional amount of 912,230 ordinary shares.
As of December 31, 2023, 641,404 ordinary shares remain available for future grants under the Plan.
|
|
2)
|
Options grants
|
|
a.
|
Option granted to employees and directors
During the twelve months ended December 31, 2023, the Company granted 749,750 options to employees and executive officers: |
|
i.
|
In March 2023, the Company granted a total of 53,092 options to several employees to purchase ordinary shares at exercise prices of either $4.63 or $5.6 per share.
The options vest over a period of 4 years; one quarter of the options vest on the first anniversary of the vesting commencement date (as described in each agreement) and the rest vest quarterly over the following three years. The options expire on the tenth anniversary of their grant date.
|
|
ii.
|
In March 2023, the Company granted a total of 439,314 options to several executive officers to purchase ordinary shares at an exercise price of $4.63 or $5.6 per share.
The options vest over a period of 4 years; one quarter of the options vest on the first anniversary of the vesting commencement date (as described in each agreement) and the rest vest quarterly over the following three years. The options expire on the tenth anniversary of their grant date.
|
|
iii.
|
In March 2023, the board of directors approved and recommended the Company's shareholders to approve a grant of 257,344 options to the Company's CEO to purchase ordinary shares at an exercise price of $5.6 per share. The Company's shareholders approved the grant on July 26, 2023.
The options vest over a period of 4 years; one quarter of the options vest on the first anniversary of the vesting commencement date (as described in each agreement) and the rest vest quarterly over the following three years. The options expire on the tenth anniversary of their grant date.
The weighted average fair value of options granted in 2022 and 2023 was $4.49 and 2.01, respectively. The underlying data used for computing the fair value of the options are as follows:
|
|
|
|
2022
|
2023
|
|||||
|
Value of one ordinary share
|
$4.98-$10.0
|
|
$3.59-$3.8 |
|||
|
Dividend yield
|
0%
|
|
0% | |||
|
Expected volatility
|
57.8%-62.6%
|
|
55%-56%
|
|
||
|
Risk-free interest rate
|
2.5%-4.2%
|
|
3.97%-4.1%
|
|
||
|
Expected term
|
7 years
|
7 years
|
The total unrecognized compensation cost of employee options at December 31, 2023 is $1,497, which is expected to be recognized over a period of 3.19 years.
The following table summarizes the number of options granted to employees under the Plan for the year ended December 31, 2023, and related information:
|
Year ended December 31
|
||||||||||||||||||||||||
| 2022 |
2023
|
|||||||||||||||||||||||
|
Number of options |
Weighted average exercise price |
Weighted average remaining contractual life |
Number of
options
|
Weighted average
exercise price
|
Weighted average
remaining
contractual life
|
|||||||||||||||||||
|
Options outstanding at the beginning of the year
|
1,131,029 | $ | 5.64 | 5.73 | 1,864,377 |
$
|
7.09 | 7.11 | ||||||||||||||||
|
Granted
|
747,488 | $ | 9.31 | 9.21 |
749,750
|
$
|
5.52 | 9.15 | ||||||||||||||||
|
Exercised
|
(2,665 |
) |
$ | 5.69 | - |
(168,151
|
)
|
$
|
2.8 | - | ||||||||||||||
|
Expired
|
(450 |
) |
$ | 9.93 | - |
(57,740
|
)
|
$
|
8.63 | - | ||||||||||||||
|
Forfeited
|
(11,025 |
) |
$ | 7.58 | - |
(67,114
|
)
|
$
|
7.8 | - | ||||||||||||||
|
Options outstanding at the end of the year
|
1,864,377 | $ | 7.09 | 7.11 | 2,321,122 |
$
|
6.57 | 6.54 | ||||||||||||||||
|
Options exercisable at the end of the year
|
1,179,132 | $ | 5.14 | 3.99 | 1,547,237 |
$
|
6.17 | 3.72 | ||||||||||||||||
|
b.
|
Option granted to non-employees
All compensation cost of non-employees' options were fully recognized as of December 31, 2023.
The following table summarizes the number of options granted to non-employees under the Plan as of December 31, 2023, and related information (no options were granted to non-employees in 2023):
|
|
December 31
|
||||||||||||
|
2023
|
||||||||||||
|
Number of options |
Weighted average exercise price |
Weighted average remaining contractual life |
||||||||||
|
Options outstanding at the end of the year
|
198,575 |
$
|
7.70 | 3.84 | ||||||||
|
Options exercisable at the end of the year
|
198,575 |
$
|
7.70 | 3.84 | ||||||||
|
c.
|
Restricted Share Units (RSUs) granted to Directors
In February 2018 and September 2018, the board of directors approved and recommended the Company shareholders to approve a total grant of 46,000 and 11,500 RSUs, respectively, to its independent and external directors that vest annually in equal portions over a three-year period. The fair value of shares as of the date of grant was $495 and $105 respectively. As of December 31, 2023, the RSUs had vested. |
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 10 - SHARE CAPITAL (continued):
|
The following table illustrates the effect of share-based compensation on the statements of operations: |
|
Year ended
December 31 |
||||||||||||
|
2021
|
2022
|
2023
|
||||||||||
|
Research and development expenses
|
$
|
33 |
$
|
665 |
$
|
701 | ||||||
|
General and administrative expenses
|
$
|
654 |
$
|
862 |
$
|
1,158 | ||||||
|
$
|
687 |
$
|
1,527 |
$
|
1,859 | |||||||
NOTE 11 - TAXES ON INCOME:
| a. |
Tax rates in Israel
The Company is taxed in accordance with Israeli tax laws. The corporate tax rates applicable to 2021, 2022 and 2023 is 23%. Capital gain is subject to capital gain tax according to the corporate tax rate in the year the assets are sold.
|
| b. |
Tax rates for the U.S Subsidiary
The subsidiary is taxed according to U.S. tax laws. The Company’s income is taxed in the United States at the federal rate of 21%.
|
| c. |
Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (the “Investment Law”)
Under the Investment Law, including Amendment No. 60 to the Investment Law that was published in April 2005, by virtue of the Benefited Enterprise program for certain of its facilities; the Company may be entitled to various tax benefits.
The main benefit arising from such status is the reduction in tax rates on income derived from a Benefited Enterprise. The extent of such benefits depends on the location of the enterprise. Since the Company’s facilities are not located in “national development zone A,” income derived from Benefited Enterprises will be tax exempt for a period of two years and then have a reduced tax rate for a period of up to an additional eight years.
The period of tax benefits, as described above, is limited to 12 years from the beginning of the Benefited Enterprise election year (2012). As of December 31, 2023, the period of benefits has not yet commenced.
In the event of distribution of cash dividends from income, which was tax exempt as above, the amount distributed will be subject to the tax rate it was exempted from. The Company is entitled to claim accelerated depreciation in respect of equipment used by the approved enterprises during five tax years.
Entitlement to the above benefits is conditioned upon the Company fulfilling the conditions stipulated by the Investment Law and regulations published thereunder.
In the event of failure to comply with these conditions, the benefits may be canceled, and the Company may be required to refund the amount of the benefits, in whole or in part, with the addition of linkage differences to the Israeli consumer price index and interest.
The Investment Law was amended as part of the Economic Policy Law for the years 2011 – 2012 (the “Amendment”), which became effective on January 1, 2011 and was further amended in August 2013 and January 2017.
Under the 2017 Amendment, and provided the conditions stipulated therein are met, income derived by Preferred Companies from ‘Preferred Technological Enterprises’ (“PTE”) (as defined in the 2017 Amendment), would be subject to reduced corporate tax rates of 7.5% in Development Zone “A” and 12% elsewhere, or 6% in case of a ‘Special Preferred Technological Enterprise’ (“SPTE”) as defined in the 2017 Amendment) regardless of the company’s geographical location within Israel. A Preferred Company distributing dividends from income derived from its PTE or SPTE, would subject the recipient to a 20% tax (or lower, if so provided under an applicable tax treaty). The 2017 Amendment further provides that, in certain circumstances, a dividend distributed to a corporate shareholder who is not an Israeli resident for tax purposes would be subject to a 4% tax (inter alia, if the amount of foreign investors in the distributing company exceeds 90%). Such taxes would generally be withheld at source by the distributing company.
|
|
On June 14, 2017, the Encouragement of Capital Investments Regulations (Preferred Technology Income and Capital Profits for a Technological Enterprise), 2017 (the “Regulations”) were published, which adopted Action 5 under the base erosion and profit shifting (“BEPS”) regulations. The Regulations describe, inter alia, the mechanism used to determine the calculation of the benefits under the PTE and under the SPTE Regime and determine certain requirements relating to documentation of intellectual property for the purpose of the PTE. According to these provisions, a company that complies with the terms under the PTE regime may be entitled to certain tax benefits with respect to income generated during the company’s regular course of business and derived from the preferred intangible asset (as determined in the Investments Law), excluding income derived
from intangible assets used for marketing and income attributed to production activity. In the event that intangible assets used for marketing purposes generate over 10% of the PTE’s income, the relevant portion, calculated using a transfer pricing study, would be subject to regular corporate income tax. If such income does not exceed 10%, the PTE will not be required to exclude the marketing income from the PTE’s total income. The Regulations set a presumption of direct production expenses plus 10% with respect to income related to production, which can be countered by the results of a supporting transfer pricing study. Tax rates applicable to such production income expenses will be similar to the tax rates under the Preferred Enterprise regime, to the extent such income would be considered as eligible. In order to calculate the preferred income, the PTE is required to take into account the income and the research and development expenses that are attributed to each single preferred intangible asset. Nevertheless, it should be noted that the transitional provisions allow companies to take into account the income and research and development expenses attributed to all of the preferred intangible assets they have.
Under the transitional provisions of the law, a company is allowed to continue to enjoy the tax benefits available under the law prior to its amendment until the end of the period of benefits, as defined in the law. In each year during the period of benefits as a Benefited Enterprise, the Company will be able to opt for application of the amendment, thereby making available the tax rates discussed above. The Company’s election to apply the amendment is irrecoverable.
As of December 31, 2023, the Company’s management decided not to adopt the application of the Amendment.
There is no assurance that future taxable income of the Company will qualify as benefited or preferred income or that the benefits described above will be available to the Company in the future.
|
| d. |
Tax assessments
Tax assessments filed by the Company through the year 2018 are considered to be final.
|
| e. |
Losses for tax purposes carried forward to future years
As of December 31, 2023, the Company had approximately $187.4 million of net carry forward tax losses which are available to reduce future taxable income with no limited period of use.
|
| f. |
Deferred income taxes:
|
|
December, 31
|
||||||||
|
2022
|
2023
|
|||||||
|
In respect of:
|
||||||||
|
Net operating loss carry forward
|
40,779
|
43,113
|
||||||
|
Research and development expenses
|
3,254
|
4,337
|
||||||
|
Other
|
661
|
462
|
||||||
|
Less – valuation allowance
|
(44,694
|
)
|
(47,912
|
)
|
||||
|
Net deferred tax assets
|
|
|
||||||
| g. |
Reconciliation of theoretical tax expenses to actual expenses
Actual tax expenses are in respect of the U.S. subsidiary. The primary reconciling items between the statutory tax rate of the Company and the effective rate are the full valuation allowance of deferred tax assets and nondeductible expenses in relation to the operations in Israel.
|
| h. |
Roll forward of valuation allowance
|
|
Balance as of January 1, 2021
|
$
|
43,053
|
||
|
Additions
|
2,255
|
|||
|
Balance as of December 31, 2021
|
$
|
45,308
|
||
|
Deductions
|
(614
|
)
|
||
|
Balance as of December 31, 2022
|
$
|
44,694
|
||
|
Additions
|
3,218
|
|||
|
Balance as of December 31, 2023
|
$
|
47,912
|
| i. |
Provision for uncertain tax positions
As of December 31, 2022, and 2023, the Company does not have a provision for uncertain tax positions.
|
NOTE 12 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
Other accounts payables and accruals
|
December, 31
|
||||||||
|
2022
|
2023
|
|||||||
|
Accrued expenses
|
$
|
1,257
|
$
|
2,054
|
||||
|
Employees payables
|
883
|
603
|
||||||
|
APA payable (see note 1)
|
-
|
700
|
||||||
|
Other
|
220
|
564
|
||||||
|
$
|
2,360
|
$
|
3,921
|
|||||
SOL-GEL TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except share and per share amounts)
NOTE 13 - RELATED PARTIES
| a. |
Related parties include the controlling shareholder and companies under his control, the Board of Directors and the executive officers of the Company.
|
| b. |
As to options and restricted shares granted to directors and executive officers, see Note 10b(2)a and Note 10d.
|
| c. |
As to the Subscription Agreement with the controlling shareholder, see Note 9a(2).
|
F-27